1938: Mexico

Oil Expropriation.

Acute developments in the year 1938 in the land and oil situations were the logical outcome of the 1910 Revolution, which marked the break with the Mexico of Porfirio Diaz and the fulfillment of the much disputed Articles XXVII and CXXIII of the Constitution of 1917. The struggle to rid Mexico of foreign capital exploitation and to recover the country's land and petroleum resources culminated in the oil expropriation decree of March 18, 1938 and the subsequent diplomatic exchanges with the United States over what Secretary Hull termed the 'unadulterated confiscation' of American land holdings. It was in regard to the agrarian controversy that the United States chose to present a show-down, although the investment involved was considerably smaller and the interests concerned far more obscure than in the case of the oil dispute. Possibly for this very reason the problem of land expropriation was first brought to issue, for charges of imperialism and the domination of monopoly and capitalism would less surely follow in the wake of a protective policy regarding relatively small, individual landholdings. At the same time, from this diplomatic tussle might emerge a precedent applicable to the oil situation. On the other hand, the United States State Department has maintained that it could not take any steps with respect to American oil properties until legal recourse within Mexico had been exhausted. This point was reached on Oct. 8 when the Mexican Supreme Court, on a technicality, rejected the petition of the United States and British oil companies for an amparo or injunction against expropriation. Any diplomatic action of the United States is apt to involve a severe test of the Good Neighbor policy.

Regarding the situation in Europe, diplomatic relations between Mexico and Great Britain were suspended in May, following an exchange of notes, in which the British demanded restoration of the properties of El Aguila, producer of about 60 per cent of Mexico's current oil output, and characterized the expropriation as 'essentially arbitrary in character.' The Netherlands, in October, after a series of notes on the oil seizures, demanded either prompt and effective compensation for the Royal Dutch Shell properties or their return. The demand was based upon Mexico's failure to acknowledge a fundamental rule in the case of expropriation of private property, viz., that the properties be exactly defined and that just and prompt indemnity be immediately and effectively guaranteed.

The efforts of Chile, Mexico and Argentina to get a ruling adopted by the Eighth Pan American Conference at Lima, denying diplomatic protection to foreign investors, were defeated when it was decided to refer the question back to the committee of experts on international law for report to the next conference to be held in 1943. (See PERU.)

The Mexican proposal for the waiving of diplomatic protection by foreigners would have meant recognition of the Calvo Doctrine, which has always been opposed by the United States on the ground that the right of diplomatic intervention resides in the State and not in its citizens, and cannot be signed away by any such waiver. Chile's project provided that foreign interests in a country should have no recourse that was not available to nationals of that country (i.e., civil action before the local courts). Argentina presented to the Conference a draft convention by which the American republics would pledge themselves, without reservation, not to use armed force or diplomatic intervention either for collecting public or contractual debts or for supporting pecuniary claims of their nationals. By the decision to sidestep debate on this highly controversial question, which Mexico's oil and land expropriation policies have brought to focus, all attempt to implement the Good Neighbor policy in its most significant aspect, or to make it a matter of international law, was temporarily abandoned.

Expropriation of Land.

Prosecution of the agrarian reform program, fundamental to Mexico's social revolution and involving extensive seizure of American-owned properties, led to a series of diplomatic notes, beginning in March, which indicated the course the United States might be expected to follow in the future with respect to expropriation of the foreign holdings of its nationals. In its note of July 21, the State Department admitted Mexico's right to seize property for purposes of social betterment, provided that prompt and adequate compensation was made. Otherwise, it contended, expropriation was confiscation and was contrary to international law and to the Good Neighbor policy. It proposed arbitration of the issues raised by an inter-American agency, under the Inter-American Arbitration Treaty of 1929, thus indicating a desire to employ legal means rather than diplomatic or economic pressure to defend the rights of its citizens abroad. The note revealed that between 1915, when land seizures began, and 1927, some 161 'moderate-sized' American properties had been expropriated, without adjustment or payment of a single claim, and that since 1927 additional landholdings of medium size, valued by the American owners at $10,132,388, had been confiscated.

Settlement of the Land Controversy.

On Aug. 3 the Mexican Government denied any international obligation to compensate for the seized properties, and refused to arbitrate or to admit the principle that prompt payment should be made, maintaining that the amount and methods of payment were matters within its own discretion, to be determined solely by Mexico's domestic law. Its counter-proposal of direct negotiations proved unacceptable to the United States which, on Aug, 22, in an answering note, regretted Mexico's denial of its international obligation and proposed two alternative solutions; (1) outright arbitration; (2) submission of claims to a commissioner appointed by each government, with an arbitrator selected in accordance with the Gondra Treaty of 1923 to settle points of disagreement. In the latter case it was proposed that Mexico should put aside monthly sums in escrow, for the satisfaction of claims, pending adjudication, and that further land seizures should cease. The Mexican Government's reply of Sept. 2, which was anticipated by President Cárdenas the day before in his opening address to the Congress, denied the legal arguments of Secretary Hull's note, invoking the Calvo Doctrine approved by the Pan-American Conference of 1902, and rejected the accompanying provisos to the second alternative proposal. Matters remained thus deadlocked until November, when an exchange of notes was made public, which marked the settlement of the agrarian controversy. Under the terms of this agreement, contained in Secretary Hull's note of Nov. 9 and the Mexican Government's reply of Nov. 12, Mexico will pay the United States $1,000,000 (United States currency) in May 1939, and at least as much each year until the obligation is discharged. Valuation of the land expropriated since 1927 is to be determined by a commission, as proposed in the Hull note of Aug. 22. This face-saving settlement provides for compensation, although delayed, but expressly denies the establishment of a precedent. This last would seem a vain stipulation, in view of the still unsettled problem of the expropriated oil properties. Nevertheless, the agreement was hailed in the Mexican press as a diplomatic victory for Mexico. The tone of the correspondence was conciliatory throughout, but the real feeling of the Mexican administration towards the attitude of the United States may be sensed from President Cárdenas' criticism at the opening of the International Congress against War and Fascism in Mexico City Sept. 10, when he recommended a 'holy war' against the 'theory of blind imperialism.'

Distribution of Seized Land; Agrarian Expenditures.

The land agreement has since been ratified by the Mexican Senate, and the commissioners have been appointed, both the American, Lawrence M. Lawson, and the Mexican, Gustavo P. Serrano, being members of the International Boundary Commission. The annual land indemnities are expected to be paid from the proceeds of the new export tax on minerals, which, it is estimated, will yield a minimum of $6,000,000 a year. Meanwhile, the expropriation of American-owned properties continues. Shortly before the conclusion of the agreement, President Cárdenas promised to postpone seizure of further properties pending negotiations, this order applying especially to the large holdings of the United States Sugar Company in Sinaloa. Division of some 40,000 acres of these, however, was reported Dec. 8. Other recent land seizures of note were the 4,000-acre holdings of the Hon. William Lemke, member of the House of Representatives, and the 17,980 acres belonging to William Randolph Hearst. Distribution of these, and of smaller Mexican holdings, is made to communal farmers in accordance with the policy of restoring the ejidos. The extent of the land distribution program may be inferred from the report contained in the President's message to the Congress of Sept. 1, 1937. A total of 44,267,921 acres has been distributed among 1,324,759 farmers, 24,127,190 acres having been apportioned during the thirty-three months of the Cárdenas administration. Agrarian reform, calling for large financial outlay for irrigation and other agricultural projects, represented a very substantial item in the budget of expenditures for the fiscal year 1938; 47,640,000 out of total of 431,109,870 pesos being earmarked for agriculture and the agrarian department. At present, it is estimated that, through the ejidos, 1,700,000 peasants have 17 per cent of the cultivable land in Mexico.

Financial Aspects of Oil Expropriation.

The draining of the public treasury for agrarian reform and associated public works made unpropitious the expropriation of the oil properties, necessarily entailing severe revenue losses. The decree of expropriation affected seventeen foreign-owned petroleum corporations, principally the large British-Dutch Mexican Eagle Company (El Aguila, controlled by the Royal Dutch Shell interests), the Standard Oil Company of New Jersey's subsidiary, Huasteca, and the Sinclair oil interests. The total valuation of the British and American properties was estimated at from $350,000,000 to $450,000,000, of which approximately two fifths was American. Expropriation followed the failure of the oil companies to meet the Federal labor Board's award in the wage dispute which has been going on since 1936. The award recommended increases in wages and welfare benefits totalling 26,000,000 pesos, or $7,200,000 at the pegged rate of exchange, thus scaling the workers' demands down from their 65,000,000 pesos but exceeding the net increase of 20,000,000 pesos over 1936 levels previously offered by the oil companies. That it was not the wage increases so much as Labor's demands regarding personnel and management that was the real-stumbling-block to agreement is indicated by their acceptance later of the full 26,000,000. Following the formal refusal of the companies to comply with the labor clauses, on March 18 the labor contract between the companies and the union was ended and work in the oil fields was ordered suspended immediately. The expropriation decree which followed was based on the Expropriation Law of November 1936, which authorized seizure of private property on the broad ground of 'public and social welfare.' The companies were to receive payment within ten years from a certain percentage of the petroleum and by-products extracted from the expropriated wells, the indemnity to be calculated on the basis of the taxable value of the properties. The Mexican Government has estimated total investments in the oil industry at approximately $100,000,000 in United States currency. Yearly (principal) payments on the oil debt would amount, therefore, according to this estimate and arrangement, to $10,000,000, which is equivalent to at least one-tenth of the national budget.

Problems of Production and Marketing.

Moreover, two difficult problems here confront the Mexican Government: those of production and marketing. The oil industry is now being operated by the National Petroleum Board with reasonable efficiency although properly trained native technicians and executives are few in number. Yet output has declined considerably; reports for June being at about 65 per cent of the pre-expropriation output. But even if the 1934-37 production level could be maintained, there seems little possibility of securing the yearly payments on the oil debt from petroleum exports, for British and American markets, with one slight exception, are closed to Mexican oil by boycott measures of the ousted companies. Moreover, marketing presents a serious problem of transportation, since tankage is largely controlled by subsidiaries of the petroleum corporations. A limited amount of oil has begun to move, however, mostly in Japanese tankers and to the trade-barter countries of Europe. The earlier barter agreements negotiated with Germany, Italy and Sweden provided a price well under the world market level and 60-per cent payment in credits for machinery, rayon yarn, newsprint, electrical equipment, and other products. On Dec. 8 a contract was reported signed with W. R. Davis, an international oil broker with a refinery in Hamburg, for $17,000,000 of oil to be bartered during 1939 for German merchandise and machinery. Part-cash arrangements have also been made with the German navy for Mexican gas oil in 1939. By an agreement with Uruguay, Mexico is to supply the National Petroleum Board's entire requirements for crude oil for the next year, receiving 30 per cent of the price in Uruguayan products.

These barter agreements suggest the adverse effect on United States-Mexican trade relations produced by expropriation. American business interests finding their sales to Mexico curtailed because of them. Moreover, to ease the foreign-exchange situation and to adjust the trade balance, which had been upset by heavy food imports due to crop failures in 1937, prohibitive increases in tariff levels, amounting to from 100 to 200 per cent on major imports from the United States, were temporarily imposed in January. Although seven months later the earlier rates were restored, the tariff change and stringent terms of American exporters regarding cash payment caused a sharp decline in Mexican purchases from the United States. For all these reasons American exports to Mexico in July 1938 had fallen to $3,000,000, compared with a total of $10,000,000 in the corresponding month in 1937, and United States trade with its southern neighbor has dropped to less than one-third of its former level.

Foreign Trade.

Yet from 60 to 75 per cent of Mexico's entire foreign trade is with the United States, and even if the totalitarian countries of Europe took all of Mexico's oil, this fact would not be materially altered, since Mexico relies on the United States as an outlet for its precious metals, and to secure dollar exchange to cover its imports. In 1937 the net export of Mexican gold and silver to the United States totalled $38,500,000 and $30,200,000 respectively. Silver is the basis of Mexico's prosperity, and the United States is the sole purchaser of Mexican silver. Thus, when the United States Treasury discontinued its silver-purchase agreement of December 1937, directly following the oil expropriation decree, the world silver price dropped and the Mexican peso collapsed from 3.60 to the dollar, at which it had been pegged since 1934, to as low as 5.50, or about 22 per cent of its 1929 value. It now stands at about 20 cents. For a while the United States purchased Mexican silver in the world market, via London, but it has now resumed direct purchases from Mexican silver companies. The monthly purchase arrangement has not been resumed, however, so that an assured market for a specific amount of newly-mined silver is gone. Yet the United States Department of Commerce reported increased gold and silver purchases from Mexico in the first eight months of 1938 compared with 1937, a jump from $48,000,000 to $70,000,000. In addition, the New York Federal Reserve Bank, in January 1938, agreed to take 35,000,000 ounces of silver accumulated by the Bank of Mexico, the gold received for this purchase to strengthen the Mexican Bank's reserves. The metallic reserves of the Bank of Mexico dropped between August 1937 and June 1938 from 194,000,000 to 85,000,000 pesos, or 15,000,000 pesos below the legal limit. The Government is now issuing fiat money in increasing amounts, through the government land banks, to finance the wheat and cotton crops and to loosen credit restrictions. The Administration's attempts to Mexicanize industry have caused the withdrawal of foreign companies' cash balances from Mexico, thus reducing tax receipts, lowering funds for the agrarian program and almost freezing commercial credit.

Economic Situation.

The major depression, of which the drop in the peso is indicative, is only in part attributable to the expropriation of the oil properties. Foreign exchange has been adversely affected, of course, by the curtailment of oil shipments, which have hitherto constituted 11 per cent of Mexican exports, and the Treasury is suffering severe revenue losses from the taxes on the oil companies, until now the third largest source of revenue. The crop failure in the autumn of 1937, which meant heavy imports of foodstuffs, and the large expenditures on the elaborate public works program and agrarian reforms had already created crisis conditions. The confiscation of agrarian holdings had further reduced revenues, since the liquidated hacendados no longer paid taxes on their estates.

The 12-per cent ad valorem tax on exports, effective Aug. 10, is expected to furnish considerable additional revenue, but this levy will chiefly affect the mining industry, which represents over three-fourths of Mexico's export trade and is already sore pressed by increased freight rates on the National Railways and by Labor's growing demands. The fact that this industry is 75 per cent American-owned lends weight to the suspicion frequently voiced by mining operatives that it will be the next point of attack in the program to Mexicanize industry. The effect of a fifty-per cent reduction in the tax on silver exports, by appraising the value of the exports at one-half the world market price, is offset somewhat by Labor's drive against the United States Smelting Company, largest single silver-producing unit in Mexico. These direct challenges to foreign capital must be expected to cause considerable economic dislocation, even in as relatively unindustrialized a country as Mexico. In the last year a sharp rise in domestic prices has occurred, real wages have decreased, and there is unemployment following the suspension of a large part of the public works program. (See also INTERNATIONAL BANKING.)

Public support of the Cárdenas policies has not shown any signs of serious weakening, however, in spite of at least temporary losses to oil workers in wages and welfare benefits and the economic sacrifices exacted from the general public. Demonstrations in favor of the petroleum policy were held on March 23 throughout the country, at the call of the Confederation of Mexican Workers (CTM). In response to a popular appeal for a 'national cooperation' fund, labor unions voted one day's pay per month, women offered their jewels and silverware, and even the Church leaders ordered collections in the churches and urged gifts by Catholics. The most serious anti-Cárdenas element in the country, led by General Saturnino Cedillo, which had long been threatening revolt, subsided after an abortive rebellion in May was promptly put down. In November, General Cedillo was indicted in Texas, charged with conspiracy and violation of the Neutrality Act of 1937. In the spring a new official party was formed, to succeed the Partido Nacional Revolucionario (PNR). The leader of this Party of the Mexican Revolution is General Avila Camacho, Secretary of Defense, who, it is rumored, will be the candidate of the army in the next presidential campaign. In February President Cárdenas announced that he would not be a candidate for reelection when his term expires in 1940.

Labor Situation.

The CTM continues to be the dominant labor organization in Mexico, under the vigorous leadership of Vicente Lombardo Toledano, while the CROM, led by Luis Morones has declined in power. At a meeting in Mexico City of a Latin American Labor Congress, held in September under the auspices of the CTM, a permanent Latin American Labor Confederation was established to replace the defunct Pan-American Federation of Labor which had ceased to be active since the death of Samuel Gompers. The Congress was attended by John L. Lewis, chairman of the C.I.O., and by the French labor leader, Leon Jouhaux, but was denounced by William Green of the A.F. of L. The labor truce following the expropriation of the oil properties was short-lived. In May a strike occurred in the Ford Motor Company for a collective labor contract, the first strike permitted by the Mexican Government since March. In June a general strike was called in the State of Puebla, in sympathy with the textile workers' strike. Strikes in the electrical and mining fields, postponed because of the oil situation, broke out in November. A number of mining properties were reported taken over in July for operation by the workers, but not expropriated, and a drive of Labor to take over the large Real del Monte mine of the United States Smelting Company has been rumored. A law granting public servants the right to strike was promulgated Dec. 5, although the Chamber of Deputies had earlier defeated this administration measure by an overwhelming majority. The army is not included among the Government employees who are privileged to strike 'when the general policy of the State is against the fundamental rights that this law concedes to State workers.'

Religious Affairs.

Church-State relations have improved considerably since Archbishop Luis M. Martínez, a close friend of President Cárdenas, was made head of the Mexican Church a year ago. In Chihuahua and Campeche, where church persecution had been general, there have been great gains in religious freedom, and an oppressive situation still prevails only in Tabasco and Chiapas. In the former State, public services are not yet permitted but the authorities are not interfering with masses or religious celebrations in private homes. Just as the killing of a Catholic woman at the time of a police raid of a service in Orizaba led to the removal of religious bars in parts of the State of Vera Cruz, several Catholic casualties in a clash with the police in Tabasco over the rebuilding of a church on the site of a razed one led the Federal Government to take cognizance of the situation there. The Cárdenas government has not been willing to take the initiative in removing State restrictions, but has ordered an end of church persecution and has gradually modified the execution of the anti-church laws. On June 19 a tacit accord is said to have been reached between State and Church officials for the amicable discussion of all difficulties.