THE financial situation in Mexico turns, in the last analysis, on the question of political and social stability. The country possesses excellent natural resources and an adequate supply of good labor. What it can accomplish during a period of order and tranquillity was demonstrated during the thirty-odd years of the Diaz régime. That epoch witnessed a remarkable expansion of production and the development of a comprehensive modern railroad system. During it Mexico's credit in the financial markets of the world rose from practically nothing to a rating so high that Limantour, Diaz's clever finance minister, was able in 1910 to float a 280,000,000 franc issue of 4 percent bonds in Paris at 97.625 percent. Accordingly, while details of the debt, budgetary, currency and other similar positions are of importance, and while economic trends are of much interest, the man with a financial stake in Mexico wants most to know whether the country is progressing toward conditions that make for a contented population and stability in government. Quite possibily this is the most difficult question that can be asked about Mexico, but its importance makes its consideration imperative.

Mexico has now been in touch with European civilization, in some form or other, for 411 years. The first three hundred of these were spent as a Spanish colony. During these years the natural resources were exploited. The Spaniards worked the gold and silver mines; they also developed trade in a limited way. A certain mixing of bloods occurred; Spanish was crossed with the native Indian stock, and a small amount of negro blood also was introduced. But class distinctions were sharply drawn. No real blending of races occurred; and the Spaniards administered the country in accordance with prevailing mercantilist theories for the benefit of Spain and not of the possession. Mexican trade was severely restricted and an extremely centralized form of government, in which the church was integrated, was employed to administer the country. At the end of three hundred years the standard of living of the mass of the people remained miserable, and the power of the ruling classes was resented. No progress had been made toward representative government.

Between 1810 and 1821 the yoke of Spain was cast off and Mexico attained independence. The low estate of the population and its long-sustained hatred of the autocracy made it quick to respond to revolutionary leadership. The ideas of the American and French revolutions probably had their influence, and the Constitution of 1824 created a representative government patterned after that of the United States. The Roman Catholic religion was given the exclusive right to exist in the country, the Church, after first opposing the revolution, having shifted ground when it saw that the Catholic party in Spain would lose control to Napoleon. Meanwhile it was this struggle in Spain that furnished the opportunity for Mexican independence.

But the country was quite unprepared for representative government. The people were poverty-stricken, ignorant and inexperienced. The Spaniard had been dislodged, but a long and troubled period of political, social and economic evolution was to follow. A series of revolutions ensued, in which adventurers and exploiters struggled with one another, and with men of principle and during which the sinister figure of Santa Anna came and went repeatedly. Texas was lost; and after that the war with the United States. Economic progress was slight. The standard of living remained low. The ruling classes continued to exploit the multitude and the multitude remained dissatisfied.

Fresh reforms were established by Juarez. His Law for the Administration of Justice took from the Army and the Church much of their political power; it ended a great deal of special privilege. Shortly after, Juarez gave the country the Constitution of 1857 which embodied similar reforms. Constitutional progress was then interrupted by the struggle over Maximillian, and his passing left the country weakened and in fresh confusion.

Porfirio Diaz next appeared as a major figure. His régime lasted from 1876 to 1910. He restored order, using an extremely centralized form of government to do so. Production of minerals increased in surprising fashion, trade multiplied rapidly and the public revenues expanded many fold. The finances were rehabilitated and the country's credit was established. But the wealth that was generated went into the hands of the few, and the mass of the people continued to live at a low standard and with a sense of exploitation. There was no progress in representative government, as the Federal Government in Mexico City extended its control to all parts of the country. When the break-up came in 1911 the country had profited from the Diaz régime to the extent of having acquired considerable industrial plant and a good railroad system, and therefore much additional earning power; but had gained nothing in experience with those democratic institutions that Americans associate with political stability.

In the years that elapsed between the breaking of Diaz's hold and the advent of Obregon in 1920 the country was in a state of almost constant revolution. Visionaries again struggled with adventurers, and not to their advantage, partly because of their own weakness and partly because they were unable to provide the benefits for which the masses clamored. During this period the destruction of property was tremendous; the financial and currency collapses were complete. A new Constitution, which one observer has characterized as tinged with "tragic humor" -- because of its combination of high aspirations and impracticability -- was devised in 1917. This constitution added to the principles of the earlier ones the doctrines of the 1910 revolution -- which naturally embodied a reaction against abuses of the Diaz régime. It aimed to secure effective suffrage and the redistribution of land and to prevent the reelection of presidents. It espoused the rights of labor and was nationalistic and anti-clerical. It stirred strong objections from foreign countries.

At first glance this summary of one hundred years of Mexican independence seems discouraging. Little progress apparently was made toward stability. Yet through all the disturbance it is possible to discover a thread of progress. Political independence was firmly established during the first fifty years; the primacy of the state as the governing force was equally secured in the second. In addition, and especially during the Diaz régime, a very considerable economic development occurred that provided a foundation for a better standard of living and for a middle class. Quite possibly the greatest contribution that now can be made to stability in Mexico is an improvement in the standard of living. The man who has nothing is a good subject for revolutionary or socialistic propaganda; the man who owns property wishes peace and order. If the redistribution of land, with all its abuses and inefficiencies, gives the peon a better and more satisfied life, it will do much to stabilize political and financial conditions.

Since the inauguration of Obregon in 1920 there is much in which to find encouragement. There has been continuity of government. Two attempted revolutions -- the serious de la Huerta revolt of 1923 and the smaller Serrano-Gomez effort of October, 1927 -- failed, and in so doing furnished a sharp contrast with what had been the usual course of Mexican events. The unfortunate controversy with the Church has at least demonstrated the government's strong hold on the country, and much progress has been made toward a settlement of the controversy itself. Thanks in no small measure to the wisdom and character of Ambassador Morrow, a marked change for the better has occurred in the country's foreign policies and foreign relations. The oil controversy has been satisfactorily disposed of, with companies representing over 90 percent of the total production accepting the basis of settlement. Meanwhile the government has persisted with constructive programs for building roads and irrigation works (financing them out of revenues) and for spreading education through the mass of the people. Much land has been redistributed, and there are signs that the condemnations of fresh lands are coming to an end -- with the removal of this source of potential irritation. Expert testimony is to the effect that the standard of living has been improved and is improving. Altogether it would seem fair to conclude that stronger foundations have been laid for truly representative government and for political and social stability. Fresh disturbances may occur but the country seems to be on the right track. Even the lamentable assassination of President-Elect Obregon has furnished evidence of this fact in the high degree of poise shown by the country under the statesmanlike leadership of President Calles. Emphasis throughout the incident has been laid on recourse to the courts and to constitutional procedure. Leaders of public opinion have shown moderation and a desire to abide by the facts and the law in the matter. They have called on all elements not to give way to hasty action but to hold to and preserve the principles of the revolution.

We now come to the more intimate details of the financial situation. It is gratifying to find that the present government has achieved an efficient budget system. Steady and marked progress in the management of the Treasury's affairs has been made during the Calles administration, first under Secretary Pani and then under the present secretary, Montes de Oca. An effective Controller's office has been built up. The President himself has taken a great interest in this branch of the government and is a stickler for economy of administration. In any event, the budget for the current year was very carefully prepared with a determined effort to pare down expenditures and to force the departments to stay within their estimates and so avoid the necessity for supplementary appropriations. The estimates of revenue also were carefully and conservatively prepared.

The results for the first six months are distinctly satisfactory. On the income side the budget estimate was for 290,000,000 pesos for the year, of which 143,000,000 were to be collected during the first half year. For the six months the receipts have exceeded 153,000,000 pesos, or approximately 10,000,000 more than were budgeted for. Meanwhile it is understood that expenditures are holding within the estimates. While it would not be wise to assume that this surplus can be equalled, or even all held during the second half of the year (as there is always the possibility that some supplementary appropriations may be necessary for unforeseen contingencies) it is evident that the Treasury has acquired a high degree of control over its operations.

Examining the expenditure side of the budget, it may be said that roughly 230,000,000 out of the total of 290,000,000 pesos are for what might be called the running expense of the government. Half of the remaining 60,000,000 is on account of the public debt and the other half on account of public improvements that might be classified as capital expenditures and that might be covered, in ordinary circumstances, by the flotation of loans. In this class of expenditure the present budget includes 19,000,000 pesos for the construction of irrigation works and 9,593,000 pesos for the building of roads. To this extent the budget might be said to be more than balanced. On the other hand, it should be pointed out that compensation for the seizure of land to be redistributed has been made with national bonds and has not been budgeted for. This situation recalls the post-war system of regular and extraordinary budgets employed in France and brings to mind Poincaré's final decision that both budgets needed to be covered by revenue before a balance could be claimed. Sound practice would call for the budgeting of the probable expenditures on account of land seizures.

A very great improvement in the floating debt position of the government also can be reported. When President Calles took office late in 1924 the Treasury was confronted with a mass of unpaid bills which had accumulated, partly as a result of the attempted revolution of 1923-24. The government was heavily in debt to its employees for salaries and to many who had furnished the government with current supplies. Such a situation naturally weakens the prestige and efficiency of a government and, in addition, sets a bad example for private business. By the practice of economy the President was able to make great progress in reducing this debt, but the attempted revolt of October, 1927, and a great drop in oil revenues, gave the Treasury another setback. During the first six months of this year the Treasury has succeeded in paying off all the arrears of salaries and of 1927 supply bills. It is now working on supply bills in arrears for 1926 and in arrears on the 1927 foreign debt payments. The government's ability to pay salaries and supply bills promptly should add materially to the stability of the political situation.

Much progress also has been made in overhauling and modernizing the tax system. An income tax was instituted in 1924 and during the current year was estimated to produce 16,000,000 pesos, or 5½ percent of the total revenue. During the first six months it produced almost 10,000,000 pesos, or 6½ percent. So far the rates under this tax have been kept low and the effort has been to spread it out well and improve its enforcement. The expectation is that ultimately it will furnish about one-third of the government's revenues. Its development is illustrated by a jump from some 82,000 returns in 1926 to over 133,000 in 1927, and by the fact that its yield in the first half of 1928 exceeded the yields from oil taxes. Another new tax is that on the consumption of gasoline. The new taxes that have been instituted and increased revenue from certain of the older ones have been the more useful because of the great decline that has occurred in oil revenues since 1922. Partly because of the controversy between the oil companies and the government over the provisions of the Constitution of 1927 with regard to ownership of oil lands, but quite possibly even more because of economic factors such as the rapid exhaustion of flush oil production in Mexico, the necessity for operating wells at a lower rate, depression in the world oil market, a hugely increased yield in the United States, and competition with Venezuelan oil, output of crude oil in Mexico dropped from 193,000,000 barrels in 1921 to only 64,000,000 in 1927. The production and export taxes realized fell from nearly 86,000,000 pesos in 1922 to only 19,000,000 in 1927. A further decline in oil tax yield was anticipated for this year and the actual results for the first six months fell below the budget estimates. How successful have been the efforts to develop other sources of revenue may be seen from the fact that the total revenue budgeted for 1928 substantially exceeds the total receipts for 1922, the year in which oil revenues were at a maximum.

Among other examples of financial progress during the present régime may be listed the establishment of the Bank of Mexico in 1925 with an authorized capital of 100,000,000 pesos, slightly more than 62 percent of which had been paid in by the end of 1927. This institution was designed to serve as a central reserve bank and as fiscal agent for the government, much after the fashion of our own Reserve Banks. It is empowered to issue bank notes, to rediscount commercial paper, to do a general deposit and discount business and to regulate the currency and the foreign exchanges. So far, due to the general banking and financial situation in the country, the bank has been unable to attract any large volume of deposit or to secure any considerable volume of rediscount business. Nor has there been any real demand for the bank's notes, the public preferring to use the existing gold and silver currency. However, the bank has been useful in other ways, has earned fair profits, and stands ready as an instrument of great potential usefulness awaiting the return of more normal financial conditions. It is the largest bank in Mexico and its management seems to be working along rational lines. Ultimately, it doubtless will prove advantageous to make the bank more independent of the government than it is under its present charter.

Another investment made by the present régime that has not been particularly productive as yet but which is designed to meet a real need in Mexico's economic life is the National Bank of Agricultural Credit, organized in 1926 with an authorized capital of 50,000,000 pesos of which some 40 percent were subscribed at the end of 1927. This institution is designed to work with coöperative agricultural credit associations and in other ways to stimulate the development of credit resources for agriculture. The unsettled credit situation and the limited market for securities in Mexico has prevented the bank from issuing its own bonds and so from making more than a limited volume of loans. The bank, like the whole system of distributing lands, still is in a more or less experimental stage.

It may be noted also that Mexico has enjoyed a relative degree of currency stability since 1917. By that time the various paper currencies floated during the earlier years of the revolution had lost all value. Gold and silver coins again came into use, the value of the silver coins fluctuating rather markedly with respect to gold and the gold fluctuating in less measure but still fluctuating in its foreign value because of the government's restrictions on exports of the metal. Thus while Mexico has not had a real gold standard since the early days of the revolution, it has had during the last ten years a much better currency than many of the former European belligerents in the World War. The maximum depreciation of the gold peso during this period was about 7 percent, but during most of the time the depreciation was less than half that amount. The foreign exchange rate has fluctuated with the state of public confidence, being influenced by Mexico's foreign relations, by the church controversy, and by threats of revolutionary movements. When confidence is more fully restored there probably will be considerable Mexican capital to be repatriated.

All of these developments with regard to Mexican finance are reassuring. The government is paying its way and has been putting its financial house in order. As bearing on the prime need for rehabilitating the country's credit there remains the highly important question of the national debt. Broadly speaking, this may be considered under two headings: first, the funded debt and the arrears in interest payments upon it; and second, the claims that have been set up against the government by other governments on account of losses suffered by their nationals during the revolutionary period. The aggregate of the claims is very large -- approximately a billion United States dollars. In order of magnitude the claims of the different countries are, in round numbers, as follows: United States, $855,000,000; Spain, $100,000,000; France, $30,000,000; Great Britain, $7,500,000; Germany, $3,500,000; and Belgium, $650,000. The bulk of the claims are for damages sustained since 1910. One class of these claims is for damage on account of land seized by the Mexican Government. These constitute an admitted liability; the question is as to the values involved. As already noted, it seems probable that seizures of this kind will be less numerous in the future. Some of the seized land even may be returned, with a consequent reduction in liability. What these land claims will aggregate is extremely difficult to estimate. The government authorized a 50,000,000 peso issue of Agrarian Bonds to pay for land seizures; but few of the bonds have been issued, and some authorities estimate that the total amount needed may reach 200,000,000 pesos.

With regard to claims for revolutionary damages, which perhaps amount to $400,000,000, Mexico has indicated a desire to meet the losses represented by part of them ex gratia. With regard to others the difficult question is whether foreigners were given that degree of protection from disorderly elements that would be proper under the approved practices of international law. It may be recalled in this connection that no government absolutely guarantees order within its limits, just as the United States Government never held itself liable for damage to foreigners by Indians in the west, conditions in the frontier territories being well known. Nor are governments responsible for damages done by revolutionaries when the latter have been recognized as belligerents. However, the Mexican Government was unwilling to have its revolutionaries recognized in this fashion. In the American Civil War the belligerency of the Confederacy was recognized and no damages done by it were recognized by the United States. Foreigners' claims for damages done by the Union forces amounted to $217,661,000; the awards amounted to $2,776,000. Recoveries under international claims settlements generally have been disappointing. The recovery in the 1868 settlement with Mexico amounted to $4,125,000, or 0.9 of one percent of the $470,126,000 claimed. In the present instance many of the claims undoubtedly are weak, fanciful or even duplicated. While estimates are precarious, some intelligent observers believe that the ultimate addition to Mexico's public debt on this account may amount to about 10 percent of the billion dollars now mentioned.

One great step forward in the treatment of these claims would be to substitute for the seven Claims Commissions now being conducted with foreign nations the method of direct settlement between governments similar to that made between England and the United States in the Alabama claims case. In that instance the two governments agreed on a specific sum to cover all damages. When this was paid the United States set up a claims commission of its own before which its citizens could apply for their share of the total award. Such direct settlements are advantageous to all, diminishing expense and hastening payments. As matters stand, the commissions are costing Mexico about one million pesos a year merely for expenses; the procedure is slow; and no claims can be paid until the commissions have completed their work. With the seven claims commissions laboriously plodding through with their work, examining lengthy printed briefs on each claim, it would be years -- perhaps twenty years -- before the matter would be wound up and before anyone could receive his money. The direct settlement would bring awards much sooner and would give greater assurance of having awards actually paid. It would also hasten the restoration of Mexican solvency.

Coming now to the public debt, we find that this, in contrast to the claims liability, can be defined with great precision. As of the end of 1927, it consisted of a floating debt (some of which has since been discharged) amounting to about 161,000,000 pesos, and a funded debt (including accrued interest) of some 1,091,000,000 pesos. The total amounted to slightly more than one and a quarter billion pesos. Of the funded debt, the chief items are the principal of the Government and State Debt, 529,000,000 pesos; the principal of the Railway Debt for which the government is responsible under guarantees, 137,000,000 pesos; accrued interest of 343,000,000 pesos on the Government and State Debt; and accrued interest of 125,000,000 pesos on the Railway Debt. Against these amounts of accrued interest must be deducted 75,000,000 pesos of interest paid during the years 1923 to 1927. Following efforts made in 1918 to get all the foreign bonds and certain of the domestic bonds owned abroad under one control for purposes of negotiation, the International Committee of Bankers on Mexico was formed in 1919. Mr. Thomas W. Lamont, of J. P. Morgan & Co., acted as American chairman of this committee, which succeeded in securing the deposit of over 97 percent of the bonds outstanding, the par value being $502,000,000 (United States). The so-called Lamont-de la Huerta agreement was reached between the committee and the Obregon Government on June 16, 1922. By this accord interest in arrears was covered by receipts to be retired over a forty year period. Sinking funds were suspended for five years and a schedule of minimum payments starting with $15,000,000 in 1923 and increasing gradually to $25,000,000 in 1927 was set up. The proceeds of the oil export tax, 10 percent of the gross revenues of the National Railways, and any net operating incomes of the latter were pledged for interest payments during the period of the agreement. The railways were to be returned to private operation and script given for any current interest charges not met under the agreement. In 1928 full service of the bonds was to be resumed.

After the de la Huerta revolt it was evident that the agreement would have to be modified, and accordingly a fresh one, known as the Lamont-Pani agreement, was signed on October 23, 1925. Barring some delays in payments (which left certain arrears that are being cleared off this year) this agreement was carried through to the end of the five year period, when it became apparent that Mexico could not resume its full obligations under its outstanding bonds. The great and unforeseen drop in oil revenues had occurred during the life of the agreements, the loss on this account amounting to over 65,000,000 pesos a year. As Mexico had shown no inclination to repudiate its debt, and as it was apparent that any fresh agreement should be based on a common understanding of the facts, the Bondholders Committee, at the invitation of the government, early this year sent two financial and economic experts, Mr. Joseph E. Sterrett, who for two years served with Mr. S. Parker Gilbert in Germany as American member of the Transfer Committee, and Dr. Joseph S. Davis, of Leland Stanford University, to make a thorough study of the financial and economic situation. This study was carried out with the full coöperation of the Mexican authorities and a comprehensive report has been prepared which, it is hoped, will furnish the basis for an arrangement that will hasten the restoration of Mexican credit and secure the bondholders their due. Whenever a new agreement may be devised it will have at least one great advantage over its predecessors; it will not be made at the peak of a misleading boom in oil revenues and will start from a more normal base in economic activity.

To attempt to outline a new agreement or to speak definitively on Mexico's capacity to pay would be beyond the scope of this article. Certain observations in the matter may, however, be permitted. The government has various assets that might be used to lighten the debt burden. Chief of these is its controlling interest in the National Railways. As matters stand, the government is responsible for the guaranteed railway funded debt of more than 137,000,000 pesos and for an additional 125,000,000 pesos of accrued interest on these bonds. It also risks an annual deficit on account of operation of the railways. If the latter were returned to unencumbered private operation and placed on a profitable basis the government would be relieved of a heavy burden of interest charges and could also realize on a capital asset of large potential value. The railways have been brought back to a rather good physical condition, but reforms are needed in the matter of operating expenses and traffic rates.

A similar but less valuable asset is the National Telegraph System. This also is operated by the government, as part of the postal system, at a loss. A substantial sum might be realized by its sale to private interests, with a distinct gain in the value of the service rendered. Another valuable asset is the government's controlling interest in the Bank of Mexico. As already noted, the bank's position would be improved if its ownership were in private hands, as is the case with the central banks in the United States and England. Similar comment applies to the National Bank of Agricultural Credit. There are other assets, such as the National Navigation Lines, but these are of minor importance.

As far as Mexico's capacity to pay is concerned, it seems probable that something like the present level of revenues (290,000,000 pesos a year) is a reasonable basis from which to start. Revenues of about 320,000,000 pesos were obtained in 1925 and 1926, but the larger amounts were due partially to the bigger returns from oil and partly to a general wave of prosperity. On the other hand, the present level represents a recession in business due in part to such factors as the period of strained relations with the United States, and the controversies over oil and religion. Through the admirable efforts of Ambassador Morrow and the whole-hearted coöperation of President Calles relations with the United States have become cordial and the oil controversy has been disposed of. There also are grounds for hoping that reasonable views on the religious controversy may prevail. Both psychologically and materially there is basis for believing that Mexican business should improve. Possibly the kind of a debt settlement that should be made would be one that would not burden Mexico unduly during the period of recuperation but that would assure the bondholders a proper participation in any newfound prosperity. In the future it might be wise to budget conservatively on oil revenues and to regard them somewhat as windfalls to be applied against expenditures on capital account. It also would seem wise for the Mexican Government to re-appraise the emphasis given to capital expenditures for such projects as irrigation and roads, on the one hand, and to expenditures for the restoration of the public credit on the other. The first class of expenditures are useful and desirable as laying foundations for greater economic activity and as satisfying the aspirations of the people; the benefits that flow from a reëstablishment of the public credit are, however, manifold and important. Quite possibly the stimulating flow of money back into agriculture and business under the influence of restored public credit would bring the quickest improvement in the standard of living. Still looking at the expenditure side of the budget, one sees that nearly 100,000,000 pesos are allotted to the army and navy and the provision of ordnance. President Calles has publicly advocated a gradual reduction in the size of the army. An increase in public stability that would permit the carrying out of this program obviously would release important amounts of money to be applied to other purposes. Everything considered, the position with regard to government revenues is, granted tranquillity, encouraging.

With regard to the greater question of political and social stability, the record indicates that Mexico is in a better fundamental condition than at any previous stage of its history. Since the establishment of independence the instruments of representative government have been developed, liberal principles have been established and, during the past year, a reaction has set in from the excessive enthusiasms of the revolution of 1910. The surviving leaders of that revolution have acquired enough experience to take a practical view of economic and allied matters; and a great improvement has occurred in the quality of the civil service -- as witness the excellent budgetary practice of the Treasury. The development of skilled labor and of a commercial class, which received a stimulus during the Diaz prosperity, is continuing. Education is being spread on an increasing scale, newspapers and other means of public communication have been multiplying, and the country is becoming acquainted with a higher standard of living as represented by American automobiles and other similar products. The way has been opened for a wider distribution of wealth, and all that seems needed to increase the supply of wealth materially is a period of order and tranquillity. The record of the past hundred years naturally suggests caution with regard to short-range prophecy, and the assassination of Obregon assuredly has complicated the immediate situation badly. However, evolutionary processes have been at work, and if the difficulty of establishing the presidential succession this year is solved satisfactorily, the process of evolution should continue in a normal way. In that event, and always bearing in mind the necessity of being patient and not expecting too great immediate results, the economic and financial progress of Mexico should be such as to satisfy the just dues of the bondholders and the aspirations of the country.

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