BEFORE the occurrence of the revolution which is still disturbing the country, the Mexican Government was making substantial headway in the ordering of its financial affairs. Its budget estimates were carefully drawn and in the main realized, despite the almost complete fading away of the yield of the taxes on petroleum. Current budgetary procedure was improved in several important respects. Up to the end of 1927, through a combination of necessity and laxity, the Government was in arrears in paying its own employees and was heavily in debt to the tradesmen and merchants who sold it the supplies necessary for the conduct of its daily tasks; debts of this type have often been the prelude to financial and political disorganization in Latin-American countries. When the revolt broke out on March 3, 1929, all sums due to government employees had been paid to date, and many of the overdue supply bills accrued in previous years had been cleared off the books. In fact it was only because of the progress made in these matters that the Federal Government was able to meet the revolt so effectively and promptly without extraordinary financial measures.

Payments on funded and other debts, it is true, were not being made in accordance with contracts signed. Still, there was much reason to hope, perhaps to expect, that within the next few years the Treasury would clear away certain types of indebtedness and begin payments on the rest. This prospect was beclouded, however, by various features of the debt, and by the manner in which the process of debt payment was being approached. The debt was made up of numerous independent items held by creditors acting independently. Some items were of undetermined amount and no effective measures were being formulated for quickly fixing their amount. No agreement existed between the Government and the creditors, nor between the creditors themselves, as to the relative precedence or equity of the several forms of debt. Furthermore, new types of debt were being brought into existence, while old ones were being discharged, irrespective of the possible injury to neglected creditors. The Government allotted payments intermittently, without any clear sense of direction, in response to the negotiating strength or skill of the separate creditors, or groups of creditors. These features of the situation all contributed to keep the public credit weak and to make all government financial contracts shaky. The best use was not being made of the Government's limited power to meet its debts, and no clear path was being marked out as to how they should be met when means allowed.

There was lacking, in short, a unified Treasury plan which took account of all classes of debt, drawn up with full appreciation of all the obligations, needs and policies of the Mexican Government.

The question of debt settlement is certain to become pressing again as soon as the Mexican Government is in a position to enter into new discussions of the subject. It may serve a useful purpose to indicate why a comprehensive plan is necessary and what main principles must be given consideration if it is to be a sound one. This is an essay in circumstances and principle, rather than in figures.

The chief elements of the Mexican public debt are as follows:

1. The funded debts covered by agreements with the International Committee of Bankers in Mexico. This includes government and state debts, and the railway debt for which the government is responsible under guarantees. It makes up five-sixths of that part of the government debt which has been precisely defined in amount. Contrary to a rather general notion, only a minor part of it is held in the United States. Of all the bonds deposited under the Bankers Agreements, 19.9 percent were recorded in American possession, 34.6 percent in British, 22.9 percent in French.

2. A small funded debt, not included in the Bankers Agreements.

3. A floating debt made up of various groups of obligations:

a. Specie debts due to the local banks.

b. Short time notes due under various contracts or agreements with different banking groups, the Southern Pacific Railroad, etc.

c. Accounts due for services or goods from large enterprises, such as the Mexican Railways (privately owned), the Mexican Power and Light Company, the Mexican Land and Colonization Company, etc.

d. Accounts due to smaller creditors for supplies furnished the government. These were substantially reduced in 1928, and in the beginning of 1929 a start was made with the practice of paying all such supply bills in cash.

e. Small sums due to state governments.

The amount of these debts is fixed. As of July 1928, the debts totaled (including accrued interest on the funded debt up to December 31, 1927) as follows:

Millions of Pesos
1. Funded debts covered by agreements with International Committee
  of Bankers 1,061
2. Other funded debts (omitting Agrarian Bonds) 21
3. (a) Specie debts, etc., due to local banks 60.7
(b) Short time notes, etc 20.4
(c) Current accounts with large creditors 43.8
(d) Smaller supply bills 23.7
(e) Small sums due state governments 5.1
Total combined funded and floating debt 1,236

4. In addition to these debts which were fixed in amount, Mexico faces two important liabilities of which the eventual burden is still unsettled:

a. The Agrarian Bonds in payment for the lands taken by the Government from large holdings for distribution to communities, under the agrarian reform program embodied in the 1917 Constitution. Up to the present only a small amount of these bonds have been issued, but a vast amount of land has been expropriated and the potential volume of debt that may be created is very large. Even on the assumption that the method and principles of valuation now being enforced are pursued to the end, the final debt will not be less than 200 million pesos, and may be double that amount. Of those entitled to receive these bonds under the laws, only a small number have applied for them. They contend that the basis of valuation (assessed value plus 10 percent) is unjust, and they fear that in view of its financial situation the Government will default on the interest and principal.

b. Unsettled Claims. A great number of claims are outstanding against the Mexican Government for compensation for injuries suffered by persons and property during the revolution. These claims have been presented by people of numerous nationalities, though those of Americans outweigh the others. Under official agreements these claims are in process of adjudication by Claims Commissions; so far the work of adjudication has been costly, slow and intermittent. The volume of claims presented will be close to a billion and a half pesos even after making allowance for duplications, which would be a greater sum than all the rest of the Mexican debt. But it is generally recognized that the volume of valid claims ultimately established in fact and recognized in law will be only a small fraction of that total.

The Mexican Government has pursued no pre-arranged and fixed policy in the attempt to meet this assortment of debt obligations. No priorities have ever been established, nor is there any scheme for the distribution of available funds between the various categories. From 1923 on the Government has made small payments first on one account then on another. From 1923 to 1927 an effort was made to meet payments due under the two debt agreements with the bankers (the De la Huerta-Lamont Agreement of 1923, and the Pani-Lamont agreement of 1925), and to discharge some of the sums owed to the railroads. While this was being done, a new floating debt was being accumulated in the form of overdue governmental salaries, unpaid bills for supplies, and short-time loans. During 1928 the Government caught up on salaries, and paid off many of the smaller supply bills and some other minor obligations, in the meantime falling behind on the interest on its funded debt and acquiring a few new creditors. Always the Treasury was surrounded by the group of wearied creditors, each of whom felt compelled to push his own case and seek attention in or out of turn.

So long as this situation lasts budget-making (even when the estimates are met, as they were in 1928) must remain misleading, and the public credit of the country cannot be restored. As between the Treasury and the creditors, room is left for the application of pressure. The payment of any specific obligation becomes something of a gamble even though revenues may permit it, and each payment takes on the appearance of favoritism. Moreover, the path is left open for a weak government to settle with single creditors in order to get fresh credit without facing the whole debt situation.

Up to the present, however, the various creditors have shown little disposition to urge the Mexican Government to adopt a unified plan of dealing with its debt obligation. Most of them have preferred to put forward their own claims and try to win preference for them; they have sought independent contracts for payment in the hope that these might secure prior recognition. This has been due partly to the fact that this procedure promised the successful creditor fuller and more prompt payment than he could obtain under a general scheme covering the whole of the debt. But in even greater measure it probably goes back to the belief that no scheme of unification and gradual repayment over a period of years could be worked successfully, coupled with skepticism as to whether the Mexican Government could or would ever meet the whole of its debts. Each creditor, then, has fought for himself.

But this competitive and haphazard process of debt settlement has turned out disappointingly in the past, and is almost certain to be even more disappointing in the future. Separate agreements, contracts made between the Mexican Government and the possessors of the various types of government obligations, have repeatedly gone into default. In the years ahead, even under stable conditions, the Government will have a dozen proposals for using any public revenue in excess of that required for its most urgent and primary tasks. Those in power will have to be convinced of the benefits to be gained, and firm in that conviction, if any continued effort to make payments on all the public debt is to be carried through. The necessary firmness can only be hoped for if a clear path leading to a definite goal is marked out in advance.

The speedy determination of the amounts due under the Agrarian Laws and Claims arrangements must obviously be a part of any comprehensive plan of financial settlement. If such a plan could be devised those who have hitherto refused to receive bonds in payment for lands already taken might be prevailed upon to do so, thereby closing an issue which continually disturbs relations between Mexico and other countries. The Government would be well advised to pay for further expropriations in cash, and the other creditors would be well advised not to impede such action. No plan of financial rehabilitation can be successful while the nation continues to acquire new debts in large and indeterminate amounts. Payment in cash would also probably lead to a more measured and careful application of the law. It would tend to relieve land owners from the fear that if they develop and cultivate their property it will be taken from them as soon as the improvements are finished and the crops grown. An important source of antagonism to the government would be sealed up; a needed increase in production would result.

As for the Claims, there is a growing conviction that the present system of adjudication, case after case, by International Claims Commissions should be put aside in favor of lump settlements between the Mexican Government and the governments of the claimants. The process of adjudication is dragging itself out and is proving expensive for all interested groups despite the excellent efforts of the American Agent. The cost to Mexico for the years 1925 to 1928 was over two million pesos. Eight mixed commissions now are engaged in hearing cases. The General Claims Commission between the United States and Mexico, which began operations in August 1924, will last to August 1929. Up to the present time only a minor portion of the outstanding and potential claims have been decided, and these have included few of the important ones. Prolonged difficulties have been encountered in agreeing upon the neutral third judge, and are likely to be met again if the life of the Commission is again renewed. Over and beyond the delays and difficulties, remains the fact that no provision has been made for paying claims that are approved. It is difficult to see how the necessary funds are to be found without agreement with other creditors. These unheard and unpaid claims are a continuous source of animosity, and a change in procedure is advisable. The plan of lump settlements by treaty between governments seems the most promising. Mexico has already made one such settlement with Belgium. If our government followed suit it would have to establish a tribunal to decide upon the distribution of the sums obtained among the American claimants.

The determination of the amounts of these two sets of obligations -- payment for land and claims -- is an essential element of any general plan for the settlement of Mexican indebtedness. The other basic elements are simple in character, though their execution in practice would necessarily require the exercise of good will and compromise on the part of both the Mexican Government and the creditors. The amounts or proportions to be paid each type of creditor, as funds became available, must be decided; only such preferences as were determined in advance, for reasons of equity or expediency, would be granted. During the years immediately ahead payments might be small; yet the plan should arrest all further accruals of interest. The prompt payment of all supply bills and government salaries would be part of the plan, as also a stipulation limiting governmental borrowing for a given period. Account would have to be taken of the serious need of carrying forward the Government's program of education, public health and public improvement. Finally, the execution of any agreement would have to rest solely upon the voluntary action of the Mexican people, responsive to the revealed benefits of the plan. In the event of failure, the creditors might always resume their rights.

Of course there is some doubt about the possibility of working a unified scheme of financial settlement successfully in a land so given to financial and political upsets. But the absence of a scheme does nothing to lessen these vicissitudes. On the contrary it increases them by adding to the uncertainty of financial calculations and by keeping alive a reason for seeking a change of government. In other countries the adoption of a comprehensive plan has proved an indispensable preliminary to financial stability and progress. Like Argentina, Venezuela and Colombia (as pre-war examples), like Austria, Hungary, Greece and France, Mexico needs to stop creating new floating debts, needs to end rivalry between separate creditors and lenders, and needs to determine the amount of all liabilities, before its public credit can be restored. In Mexico, the process of credit improvement would be hastened, once it was begun, by the return of capital sent out of the country for safety, by foreign capital newly attracted. It would not be difficult then, if it proved advisable, to borrow to clear away the floating debt. As in all the instances of recent experience, the first steps, particularly that of reaching agreement on policy, would be the hardest. Economic events usually conspire to help an improving debtor.

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  • HERBERT FEIS, an economist now engaged in a study of Mexican investments for the Columbia University Committee on Latin America
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