How Diplomacy Serves Investments

THE services of governments to the interests of their citizen-investors abroad are of two main types: 1) those which assist in the placement of capital, as by finding opportunities for profitable investment and removing obstacles to the exploitation of such opportunities when found; and 2) those which assist in the protection of capital once it has been invested.



Many modern governments facilitate the establishment of contacts which lead their investors to profitable placements abroad. Organized services gather information about trade and investment opportunities and the relevant economic and political conditions in other parts of the world and make them available to business men at home. Each year the stream of information which flows in from consular and commercial agents of the important industrial countries issues in hundreds of leaflets and bulky volumes of reports. Much of this material is highly specialized and serves only a particular export or import industry; other portions are routine statistical reports; probably only a small proportion of it is serviceable to those who place capital abroad as distinguished from those who conduct trade. Nevertheless, these promotional agencies of government do increase considerably the amount of information available to prospective enterprisers and investors, not only through publications, but through direct answers to inquiries. Business men contemplating investment in an unfamiliar country characteristically turn to their nation's diplomatic or commercial agents, also, for introductions to public officials with whom they may have to deal and for general information.

The Bureau of Foreign and Domestic Commerce of the United States Department of Commerce, which expanded tremendously after the war under the guidance of Secretary of Commerce Herbert Hoover, is probabably the outstanding example of organized governmental facilitat ion of foreign economic contacts. It sent commercial agents all over the world to supplement, and sometimes to duplicate, the work of the State Department's consular agents. Some of its hundreds of publications: "Abyssinia, Present Commercial Status of Country, with Special Reference to Possibilities for American Trade," "Market Methods and Trade Usages in London," "Peruvian Markets for American Hardware," "Conduct of Business with China," "Foreign Capital Investments in Russian Industries and Commerce," "American Direct Investments in Foreign Countries," "Financial Developments in Latin America During 1929," "Finland: Economic Review," "French Experience with Defaulted Foreign Bonds," "Cattle Raising in Argentina," "Italian Chemical Industry."

The foreign policy of governments has often been exerted to establish certain indispensable bases of capitalistic enterprise in countries lacking them, thus performing a service to investors. These obviously include tolerable order and security, in particular, security to property rights, and the inauguration of certain capitalistic legal forms without which business can hardly be carried on. The habits of thinking and doing expressed in the laws of Morocco, Persia, and China, for instance, when foreigners began to acquire important interests, there were not the ways of Europe and America, nor were they adapted to the complicated transactions of Europeanized industry and trade. The foreigners demanded the type of security to property and protection of contract rights to which they were accustomed at home, and they looked to their governments for aid. The outside critic maintains that the British merchant is able to take care of himself in Turkey and Persia, wrote an advocate of vigorous government support to private enterprise abroad, "just as if a private merchant were able to press reforms on the Turkish or Persian Government."(1)

Indeed, the export of capital to countries previously untouched by capitalistic industrialism necessitates the simultaneous "export" of specialized governmental forms and institutions, such as commercial law, and specialized economic institutions, such as the wage system. Out of this fact, as we shall see in Part II, a deep and inevitable conflict emerges between capital-importing and capital-exporting countries when their social institutions are radically different. Governments facilitate this export of capitalistic institutions, so necessary to the interests of investors, when they encourage chartered colonial companies to introduce forts, roads, taxes, and European law into darkest Africa. They do the same when by protectorate, as in Morocco, or by financial protectorate and occasional military intervention, as in Haiti and Nicaragua, or by a mixture of friendly advice, threats, diplomatic pressure, and extraterritoriality, as in Persia and China, they establish "law and order" (as understood in the capitalistic West) and encourage reform. Examples follow.

Persian correspondence in the Kölnische Zeitung of February 2, 1929, advised German business men not to found manufacturing establishments in Persia at that time, even though Germans and Americans were building a railway from the Caspian to the Gulf Special difficulties confronted enterprises in the fields of banking, transportation, mining, or agriculture, because all these could be carried on only under concession, and as there was no good registration system for concessions overlapping rights were always leading to conflicts with other concessionaires. Law in Persia was backward. There was no written code, only the Koran. Judgments were a rarity; judges sought to smooth cases over by compromise.

The whole Chinese conception of law has been fundamentally different from that of the modern West, for "the Chinese cannot conceive of law as impersonal." The Chinese judge thinks of himself as an administrator or arbitrator. To sue for enforcement of a contract is an insult; respectable people do not go to law. "The practice of test cases for the definition of principle and the setting of precedent was, therefore, until recently, absolutely unheard of. . . Law as, the epitome of community experience, law positive regulatory in its character, law the tool for setting precedent or standard, such law was formerly unknown, and is now seldom understood; certainly, it is not generally accepted." Chinese governments have been laboring for many years in an effort to build up codes of law suitable for the modern China arising out of contact with the West. These must be an intricate composite of old Chinese codes and customs and European legal systems. The difficulties of this task are immense. The new codes, for example, must provide for new ideals of individual liberty in a social sense and individual property rights, both of which are contrary to all Chinese tradition. These difficulties illustrate why foreign business communities in China have perforce brought their own legal systems with them, through the institution of extraterritoriality and foreign leased areas maintained by their governments, not to speak of the demand for these devices arising out of distrust of Chinese tax systems or unwillingness to trust Chinese government to afford personal security to foreigners. It is a fact that even native Chinese business enterprises, such as banking and import-export houses, have not developed to any great extent except in the special foreign areas where these indispensables of capitalistic organization are available.(2)

The foreign powers interested in Morocco provided at the Algeciras Conference of 1906 that the Sultan's government should adopt and promulgate a modern mining law drawn on the model of European laws then in existence. The purpose was to bring some order out of the confusion of conflicting mineral concessions already granted and to make such rights more certain in the future. The political jealousies of the European powers and the economic rivalries of some of their citizens prevented agreement on a Moroccan mining law for many years) however, and by that time the French protectorate was about to be established.(3)

Likewise in China the powers desired modern mining laws under which their citizens could invest their capital with some security.

These desires were embodied in treaties like that between the United States and China in 1903:

". . . China will with all expedition and earnestness go into the whole question of mining rules; and selecting from the rules of the United States and other countries regulations which seem applicable to the conditions of China, will recast its present mining rules in such a way as, while promoting the interest of Chinese subjects, and not injuring in any way the sovereign rights of China, will offer no impediment to the attraction of foreign capital, nor place foreign capitalists at a greater disadvantage than they would be under generally accepted foreign regulations. . . ."(4)

In addition to (1) facilitating contacts and (2) establishing some of the conditions without which capitalistic enterprise cannot be carried on, the governments of capital-exporting countries endeavor (3) to secure particular advantages for the benefit of their investors abroad. These endeavors include assistance to private business men (a) in getting concessions, (b) in arranging subsidies or guarantees or other special favors from foreign governments, (c) in establishing monopolies, (d) in breaking the monopolies of rivals or preventing them, and (e) in removing restrictions on the investment of capital or the transaction of business.

Where business is carried on under general commercial laws, as in the advanced industrial countries of Europe, foreign capital has commonly been invested freely in most types of enterprise with no more than the routine sanction of the state to articles of incorporation, leases, and similar legal instruments. The situation is much different, however, in the less industrialized countries of the world, where institutions for the routine regulation of capitalistic enterprise are undeveloped and where the government may also be weak and unstable. When foreign enterprise undertakes to build railway lines, sink mine shafts, establish banks, and bore for oil in these countries it has to do so under special grants of privilege, and political support may be helpful or even necessary in obtaining such concessions.

The aggressiveness with which governments have supported the quests of their contractors and concessionaires for opportunities abroad has varied greatly from time to time and place to place, according to the particular doctrines of the party in power, the political characteristics of the country where the concession was sought, and the political issues tied up with any particular concession. While Lord Lyons was ambassador of Great Britain at Constantinople he rejected an application to support a concession which Mr. Brassey was seeking for the construction of a railway from Constantinople to Adrianople, explaining that he was constantly being asked to support all sorts of concessions for railways and similar undertakings and that his practice was to reply that it was not his business to meddle in such matters unless instructed to do so by the Foreign Office. "The fact is that there is often much dirty work connected with the management of such matters at the Porte," he said, "and I wish to be clear of them."(5) This was in the late 1860's, however, and the attitude of diplomacy toward business has undergone changes. In 1898 Lord Salisbury authorized the British minister in China to offer Great Britain's military assistance should China be attacked by another power because of granting concessions to British firms.(6) Sir Edward Grey stated the views which actuated his policy in the Foreign Office as follows in 1914:

"I regard it as our duty, wherever bona fide British capital is forthcoming in any part of the world, and is applying for concessions to which there are no valid political objections, that we should give it the utmost support we can, and endeavor to convince the foreign Government concerned that it is to its interest as well as to our own to give the concessions for railways, and so forth, to British firms, who carry them out at reasonable prices and in the best possible way."(7)

Still he was criticized by groups Who found British governmental aid more restrained than that of other countries.

In general, the exertions of the British government on behalf of concession-seekers before the war "adapted themselves to the strength and character of other governments, and to the ruling political relationships which existed in different areas. Where strong and orderly governments existed, which might resent any display of pressure---as in the larger Latin-American countries, Japan, Spain, and the Scandinavian countries---government action rarely went beyond friendly recommendation, promotion of British interest where it was apparent that a common interest would be served. In the smaller states of Latin America, where governments were often in the hands of self-enriching groups, and the play of wits and force rather than normal competitive considerations shaped decisions, government representation became more pointed. But here the existence of the Monroe Doctrine and American policies were restraining influences. . . . It was in the undeveloped, disorganized Chinese Empire, in the lands on the road to India, Turkey, Persia, and Egypt, and in the continent of Africa that the government stepped to the fore, strove with, by, and for British private groups." Likewise in the case of France and Germany, "The manner and extent of the government exertions in behalf of concession opportunity differed . . . according to the character and strength of the government and people within whose domain the concession was sought."(8)

In 1896 United States Minister Denby wanted to know how far he should go in support of American concession-seekers in China, and Secretary Olney replied that, while he should be careful not to assume responsibility in the name of the government for any American enterprise seeking to establish itself there,

"the Department thinks that you should use your personal and official influence and lend all proper countenance to secure to reputable representatives of such concerns the same facilities for submitting proposals, tendering bids, or obtaining contracts as are enjoyed by any other foreign commercial enterprise in the country."

The Minister was left great latitude in the application of this policy:

"It is not practicable to strictly define your duties in this connection, nor is it desirable that any instructions which may have been given should be too literally followed. Your own judgment and experience, the standing of the firms who seek your assistance and of their agents, must all be given due weight and your action shaped accordingly. Broadly speaking, you should employ all proper methods for the extension of American commercial interests in China, while refraining from advocating the projects of any one firm to the exclusion of others."(9)

This differed considerably from the instructions which Secretary Bayard had given the same Minister in 1887, for then he had been told to abstain "from the furtherance of individual plans and contracts connected with foreign governments, until they have been submitted to this Department and received its approval."(10) The aggressive diplomatic support of American enterprisers abroad continued to develop until it reached the authority of a positive official creed in the conception of dollar diplomacy under President Taft and Secretary Knox. (11) "While our foreign policy should not be turned a hair's breadth from the straight path of justice," said President Taft, "it may well be made to include active intervention to secure for our merchandise and our capitalists opportunities for profitable investment which shall inure to the benefit of both countries concerned."(12) There was a partial setback to this attitude during the Wilson administration, but it returned to active, open application in the promotional activities of the Republican administrations after the war.

It is illuminating to observe in a particular case of concession-seeking what United States Minister Denby considered to fall within the "all proper methods" he was authorized to employ for the extension of his countrymen's interests in China. The quotations are from his own report to the Department of State on an interview which he had with Chinese government officials regarding an application by the American China Development Company:(13)

"I stated that . . . while I was not authorized by my Government to demand of the Chinese government contracts to build railroads or to do any other work, yet it was, as I conceived, my duty to see that the rights of my compatriots should be protected. . . ; that my Government had not demanded any compensation, direct or indirect, for its services to China, though ... to the Department of State belonged the honor of having made peace for China [presumably after the Sino-Japanese War, 1894-5]; that the services rendered by other powers were made possible only by our proposal of and conducting to a successful termination the adoption of peace negotiations; that other powers had demanded and received rewards for their action; that to one power a large strip of territory on the Mekong was ceded; that to another the right to build railroads in Manchuria was granted; that with another a contract was made to buy ships; that with all three powers advantageous loans were made ..."

After this appeal on the ground of compensation for services rendered, the Minister turned to political arguments, including what might be interpreted by the Chinese as covert threats:

". . . that from a political point of view it was conceded on all hands that the work of developing China should be conceded to Americans, because the United States had and could have no ulterior designs on Asiatic territory; that to refuse now to grant contracts to Americans might develop a bad feeling among our people at home and make them less friendly than they always had been to China; . . . that at the instance of Sheng Taotai and other distinguished persons (meaning Li Hung Chang) well known experts and financiers had come to Shanghai; that they were there in consultation with Sheng and they had represented to me that Sheng was not disposed to treat them fairly; that it would be a breach of good faith to fail to make a contract with these representatives of American interests, and I had to demand that they wire to Shen to contract with the American company for the building the Hankow-Pekin line. . . ."(14)

It is not only over against the governments of capital importing countries that diplomacy has rendered important service to concession-seekers. Sometimes the opposition of other powers must be set aside.

The first Bagdad Railway concession had to be seen through the Sultan's court at Constantinople by German diplomats against the obstructive tactics of all the other powers. Without vigorous support from their Embassy the German private promoters would have had no chance at all. As it was, the going was hard enough, with the English threatening a naval demonstration, the Russians holding an indemnity claim over the Sultan's head, the French showing their displeasure through fiery articles in the press, and the Anglo-French Ottoman Bank agitating among the Turkish populace to make it impossible for the Sultan to accept the German project.(15) One of the diplomatic moves by which the German government sought to remove British opposition was withdrawal of its already announced consent to an increase desired by Great Britain in the Anglo-Egyptian army.(16)

Diplomacy has not only helped its nationals to obtain concessions, but to obtain them on advantageous terms. Thus, the Bagdad Railway concessions guaranteed the company a substantial sum from the Turkish government for each kilometer of track laid down, and similar guarantees have been common in the history of railway enterprise abroad. In China most of the railways have been financed by direct loans to the Chinese government, the foreign companies advancing the capital and contracting for the construction. A tendency has been noted for the powers to apply the doctrine of most-favored-nation treatment to these concessions in China; insisting, that is, that their citizens shall receive contracts in all respects as favorable in terms as those accorded in the past or future to the citizens of any other power.(17) Governments have also by their diplomatic policies helped to build up monopolies or partial monopolies for investment undertakings of their citizens in particular regions. Thus, the spheres of interest staked out by France in southern China, by Great Britain in the Yangtze valley, by Germany in Shantung, and by Japan and Russia in Manchuria gave a preferential position to their nationals in applying for concessions. A tendency of United States diplomacy to oppose European concessions of certain types in the Caribbean region, illustrated when American official influence was exerted to keep the Cowdray oil interests from getting privileges in Mexico, Costa Rica, and Colombia,(18) and when the Dziuk railway concession in Panama, backed by British and German capital, was cancelled to please the United States,(19) has similarly improved the bargaining position of American applicants by limiting European competition. Though these policies may be initiated for political and strategic reasons, their effect is nevertheless to monopolize investment opportunities for citizens of one nationality, and sometimes for one particular concern. A few concrete instances follow.

When a Belgian group (undoubtedly representing French and Russian interests) obtained a concession in 1898 for the construction of a railway from Peking to Hankow, thus infringing on the British Yangtze sphere, Lord Salisbury saw in it "a political movement against the British interests in the region of the Yangtze," and the British ambassador informed the Chinese that "Her Majesty's Government cannot possibly continue to coöperate in a friendly manner in matters of interest to China, if, while preferential advantages are conceded to Russia in Manchuria and to Germany in Shantung these or other foreign Powers should also be offered special openings or privileges in the region of the Yangtze," Britain demanded as compensation that several other railway concessions be made available to British nationals immediately. "Unless they agree at once," the Ambassador's instructions read, "we shall regard their breach of faith concerning the Peking-Hankow Railway as an act of deliberate hostility against this country and shall act accordingly. After consultation with the Admiral, you may give them the number of days or hours you think proper within which to send their reply."(20)

The German treaty of 1898 leasing Kiaochow provided that in case China should need foreign assistance in the form of capital, personnel, or material in Shantung, application should first be made to German merchants and industrialists. When the German mining company surrendered its general privileges in Shantung in 1911 for certain specified rights it was agreed that should the Chinese government later wish foreign capital to carry on mining operations in the surrendered zones the German banks should be resorted to.(21)

In 1901-2 Russia attempted to obtain preferential or exclusive mining and railway privileges in Manchuria, and in 1910 objected to the building of the Chinchow-Aigun Railway, for which American interests had obtained a concession, on the ground of a secret agreement obtained from China in 1899 that China would not build railways to the north of Peking with foreign capital other than Russian. The Japanese likewise claimed that they must be consulted about railway projects in Manchuria, and by a secret protocol attached to the Sino-Japanese Treaty of 1905 prevented a British firm from extending the North China Railway.(22)

Sometimes an exclusive sphere of economic influence for one power means in practice monopoly rights and profits for a particular firm, not merely for the nationals of that power collectively. Such was the case, for example, with the Hongkong and Shanghai Bank through its affiliated British and Chinese Corporation, which became the official railway constructor for the British government in China. "The monopoly exercised by the syndicate within the British sphere and under Government support was a monopoly of rights to contract railway construction at the exclusion of non-British as well as other British interests."(23) The bank originally worked actively in favor of the policy of pegging out an exclusive sphere for Great Britain in the Yangtze region, thinking thereby to make more money through lessened competition. Its leaders later came to regard this mixture of politics and finance as having proved itself a bad practice---doubly bad, for not only did it lead to dangerous international conflict and political corruption, but it resulted in wasteful finance and was not even profitable.(24)

Governments have assisted their investors to gain admission to regions and opportunities where they were being threatened with exclusion by the monopolistic ambitions of rival powers, and this type of assistance has been given by some of the same governments that have shown a desire to establish similar monopolistic privileges in favor of their own investors elsewhere. The slogan of the open door has frequently been used as the diplomatic spearhead for governmental efforts to squeeze its nationals into concession privileges from, which forehanded rivals seemed likely to bar them. Examples follow.

The German government's opposition to the extension of French influence over Morocco in the decade before 1911 was expressed in a policy which proclaimed the purely economic nature of Germany's interest, emphasizing its desire to maintain the open door so that German firms might be free to trade and invest. The principle of the open door was mainly a convenient slogan under which to do diplomatic battle for greater consideration to German political and economic wishes in Morocco. It was readily abandoned after the accord of 1909 with France, which contemplated the encouragement of joint undertakings by their nationals to the partial exclusion of citizens of third powers from investment opportunities.(25)

The open-door policy of the United States in China was at first applied only to trade; no specific demand was made for the open door in regard to permanent investments, and the preferential railway and mining privileges were in no way disturbed.(26) Later, however, the United States protested against Russian attempts to monopolize the economic development of Manchuria, mentioning mines and railways specifically (1902); the Knox neutralization plan for Manchurian railways was advanced as the most effective means of maintaining the principle of the open door (1909); and in the plan for the new Consortium to finance Chinese developments after the war the United States laid stress on the desirability of preventing spheres of influence in the future in order to avoid international jealousies, though it was proposed to respect the vested interests of existing railways.(27) In supporting the Federal Telegraph Company against the claims of certain Japanese, British, and Danish companies to monopolistic communications rights in China, the United States government has maintained that such monopoly is not valid under treaties recognizing the open-door principle.(28)

During the years from 1920 to 1923 the Department of State provided some of the most striking examples of assistance in capital placement abroad through its support of American oil companies.(29) The situation was peculiar in that the recent experience of the war, in which the Allied armies had "floated to victory on a sea of oil," had made this fluid a prime factor in military and naval power, while estimates of existing supplies and consumption had raised the specter that the oil resources of the United States might be used up within a few years. All over the world statesmen and military strategists, their friends in private business, and publicists who formed opinion were experiencing a nervousness almost akin to hysteria regarding future sources of the "black gold." In these circumstances Washington showed official indignation over reports of restrictions and discriminations which barred American companies from some of the prized fields abroad. Both the State Department and the Federal Trade Commission made investigations and published their findings.(30) The opinion expressed by a French writer was not unrepresentative of a view which prevailed at this time among public officials, certain congressmen, officers of oil companies, and some journalists:

"If the United States does not succeed in acquiring new oil fields in the rest of the world, the position will become so serious that they will only be able to avoid war at the price of economic vassalage."(31)

During and after the war British military and political strategy and British capital had succeeded in gaining control over important future sources of supply to an extent which led Americans to allege that they were being shut out. The Department of State began diplomatic representations to Great Britain. In the correspondence which ensued the British government took the position that Britain was not trying to preëmpt the world's oil supply, that there were no restrictions against Americans except in certain British territories where the production was not great, and that the great bulk of current petroleum output was that of the United States itself. In reply, Secretary of State Colby emphasized potential resources instead of current production from supplies which might one day be exhausted, and the greatest share of these seemed to be in the hands of the British.

The State Department directed its attack particularly against certain arrangements affecting the rich Mesopotamian fields. In 1914, just before the war, the Turkish government had promised to grant a concession for these fields to the Turkish Petroleum Company, an international group owned by the Anglo-Persian Oil Company (50 per cent), the Deutsche Bank (25 per cent), and the Royal Dutch Shell (25 per cent). The British invaded Mesopotamia as far as Bagdad in 1917 and advanced to Mosul after the armistice. Great Britain was allotted a mandate over the territory at the San Remo Conference in 1920, and at this same conference a secret agreement was also concluded between Britain and France with regard to oil. This provided that in case a private company should be used to develop the Mesopotamian fields the British government should place a 25 per cent share in such company at the disposal of the French. The company, however, was to be under permanent British control. In other words, the French received the right to purchase the share of the Deutsche Bank in the Turkish Petroleum Company, which the British government had expropriated during the war. In return, France was to permit the construction of pipe lines across Syria. "On May 12 [1920], in ignorance of the oil agreement at San Remo but aware of the mandate allotment, the American government presented through Ambassador Davis at London a note expressing the hope that no exclusive concessions would be granted in the mandated territory and that the principle of treatment in law and fact equal to that accorded to the nationals or subjects of the Mandatory power should be guaranteed to the nationals or subjects of all nations. This note was prompted by the belief that the British authorities were quietly preparing for a monopolistic development of the oil resources in Mesopotamia. When in July, 1920, the news of the San Remo Agreement was published, the United States was prompt to file a protest with the British Foreign Office and the discussion continued for several years." The United States claimed that the mandate principle demanded equality of economic treatment to the nationals of all countries, no monopolistic concessions, and reasonable publicity in the matter of concessions; that the preferential treatment shown to France was not in consonance with the principle of equality of treatment; and that the promise given the Turkish Petroleum Company in 1914 could not be treated as a definite and binding agreement. After several years of negotiations, in which the governments discussed principles of mandatory trusteeship and the open door while the oil companies dickered, it was announced that a group of American companies (Standard Oil of New Jersey, Standard Oil of New York, Gulf Refining, Atlantic Refining, Pan-American Petroleum and Transport) was to have the privilege of purchasing 25 per cent of the shares of the Turkish Petroleum Company from those held by the Anglo-Persian. "This arrangement was hailed by the Standard Oil officials as the first instance in history of the development of oil fields according to a 'practical open-door policy.'"(32)

American diplomacy also sought to secure a place for American companies in the exploitation of the Djambi oil fields in the Dutch East Indies-particularly coveted by Standard Oil because of the proximity to its distribution systems in the Far East, and also interesting to the Sinclair Oil Company. When the matter of a contract was under consideration by Holland the United States made diplomatic representations urging that Americans should be permitted a share in the development. This plea was disregarded, and the Dutch government turned over the richest field in the Dutch East Indies to a subsidiary of the Royal Dutch, representing Dutch and British capital. "The United States government took the view that the award to the Royal Dutch subsidiary amounted to closing the door in the face of American capital and that the act was particularly unfair because the United States had made no discrimination against Dutch or British capital in the development of the oil resources of this country. The Roxana Petroleum Company and the Shell Company of California are among some of the important Royal Dutch-Shell companies established in American territory, and through its various subsidiaries the combination holds large leases in the public domain and in Indian lands. The United States informed the Dutch government that it was very greatly concerned over the granting of a monopoly to a company in which foreign capital other than American [namely, British] is so largely represented." Threats were made to retaliate, and retaliation was actually begun. "On September 12, 1922, Albert Fall, Secretary of the Interior, refused the request of the Shell Company of California for a lease on public lands in Utah and gave them sixty days in which to file evidence that the government of The Netherlands would permit similar concessions to citizens of the United States. The company withdrew its application. In March, 1923, the Secretary refused to permit the assignment of Indian leases to the Roxana Petroleum Corporation. This decision was later reversed by the successor of Mr. Fall.... After several years of negotiations the State Department announced that the two governments had settled their differences over oil exploitation by a friendly understanding. The Netherland government assured the United States that its laws and policies were such as would permit participation by Americans in the development of oil lands in the Dutch East Indies. The United States in turn agreed to consider The Netherlands as a reciprocating country under the terms of the 1920 mineral leasing act, which construction restores to Dutch nationals the privilege of leasing public mineral lands."(33)

Diplomatic pressure has also been used by various governments to remove restrictions imposed by prospective capital-importing countries upon the investment of capital, or upon ownership of land or rights to do business which are bound up with investment. Recall the instance of the Haitian land laws in Chapter 5. The good offices of the State Department were used from 1895 to 1899 in favor of certain American life insurance companies that had been prohibited from doing business in Prussia through allegedly unreasonable requirements imposed upon them, and in the course of the negotiations the State of New York retaliated by excluding Prussian companies from its jurisdiction.(34) United States diplomacy also endeavored to better the legal position of American life insurance companies in France,(35) and added its representations to those of other powers against obstructions experienced by foreign insurance companies in Turkey.(36)



The protection which established investments abroad receive from the diplomacy of the investor's home government may be conveniently divided into protection 1) against violence and disorder at the scene of the investment, 2) against revocation of privileges or breach of contract, 3) against legislative or constitutional measures adverse to foreign investment interests.

Unstable government and civil turmoil often cause serious losses to investors, who frequently turn to their home governments in hope of relief. The foreign policy of the investor's government in such cases can be directed to the immediate protection of life and property, to the reimbursement of its citizens through claims for indemnity on account of damage suffered, and to long-run prevention of disturbances. These methods of protection against violence and disorder are so familiar and appear so often in the cases narrated throughout this book that only a few examples of the thousands that might be cited are necessary.

In 1885 a revolution was in full swing in Colombia, and the State of Panama was soon involved. "On January 18 General Ramón Santo Domingo Vila, recently installed president of this state, notified the commander of a war vessel of the United States at Colón that he was unable to protect the property of the Panama Railroad Company at that place. A small party of Marines was at once landed to protect the buildings, safes and vaults of the company. It was soon revealed, however, that the property was in no immediate danger and the President had made the request with a view to its moral effect upon certain lawless elements on the Isthmus. Early the next morning the Marines returned to the vessel, which remained in striking distance of the town for some time." Two months later the situation again became acute. Insurrection broke out and Colombian troops went from Colón to suppress it. "In their absence General Pedro Prestán, a mulatto originally from Haiti, rose in revolt. Two weeks later Colombian troops returned. Prestán's situation soon became desperate, and he set fire to Colón while making his escape. A detachment of American Marines apparently did nothing except fight the fire. The conflagration demolished most of the town, destroying a large amount of property belonging to citizens of the United States. It was not until the last of April that the revolt in the State of Panama was subdued, and United States Marines did not withdraw from the Isthmus until May. Their efforts were confined largely to keeping the railroad open to traffic and protecting American property. If it had not been for their presence Panama City and some of the small towns along the line of the railway might have suffered the fate of Colón."(37)

It is interesting to observe what some of the United States citizens whose property the Marines were unable to save from the fire expected or demanded from their government in the way of protection. They presented claims against Colombia to the amount of more than $3,000,000, and some of them even thought that reimbursement might be forthcoming from the United States government itself. But let them speak for themselves:

"S. L. Isaacs thought first of selling his vacant lots to the United States for an army camping ground or a coaling station or a fortification. With reference to the losses of his firm he remarked: 'We hope, and have reason to expect, that the United States Government will compel the Colombian Government to restore our property and pay for our stocks of merchandise which were destroyed.'

"Tracy Robinson said: 'We are not likely to recover insurance, and our only hope ... is in the interference of our Government in securing an indemnity from the Government of Colombia.... Permit me to add that I am delighted to see the activity of the present moment in regard to Isthmian affairs, and hope to see before the present crisis is ended the Isthmus under American protection.'"

The Boston Ice Company inquired "whether we have any cause for a claim on the United States Government or whether we can ask our Government to present a claim in our behalf on the United States of Colombia," and counsel for the Panama Railroad Company served notice on the Department of State that the company would present a formal claim against Colombia, which it desired the United States to support, "and the railroad company desires also to reserve all its right to claim restitution for all the aforesaid losses and damages from the Government of the United States for the failure to fulfill its treaty obligations to keep the transit across the Isthmus open for commercial intercourse, in accordance with the terms of the treaty relating thereto, and it now gives this notice of such claim so that the Government of the United States may .... by action on its part on the Isthmus, and by notice to the United States of Colombia, be enabled to save itself from the liability aforesaid."(38)

Sometimes in weak countries the protection afforded to foreign subjects by their governments puts them and their property in a position so much more secure than that of the native that association with one entitled to such protection is a privilege to be coveted---and purchased for a consideration. Thus arises what a French writer on Morocco called "the industry of extraterritoriality," or what in modern vernacular might be designated as the protection racket. The presentation of claims for damage also becomes a racket in countries subject to more or less chronic disorder, especially where the political ambitions of an outside power produce an aggressive diplomacy ready to seize all pretexts and hence to push all claims.

In Morocco before France assumed its protectorate the extraterritorial rights of foreigners and the scandalous partiality of consular courts produced a class of speculators who fattened on the readiness of European governments to accord aggressive protection. Europeans could hold land only by indirect means, through a native protégé. These protégés were registered at the legation and automatically came under the jurisdiction of the extraterritorial courts. The privilege of being a protégé was much sought after by well-to-do natives, for it sheltered them from the vexations and extortions of the Sultan or his retainers; hence, it acquired a pecuniary value, on which some Europeans based a regular traffic. For some in Morocco it constituted almost the sole means of support.(39) Europeans and natives would also "associate" for the raising of cattle or sheep in order to evade the restrictions of Moroccan law and in order to mulct the Moroccan government through claims for damages in case anything went wrong. If there were a theft or a raid of brigands the native could release himself from responsibility by proving, on the testimony of a dozen witnesses, that the occurrence was not due to his lack of surveillance. Then it would be the government of Morocco which would be obligated toward the European associate, on account of its failure to maintain order in the country. A claim for damages would be paid at the time of the next loan, with a generosity which rarely made the claimant regret the misfortune of which he had been the victim.(40) The situation was notorious and did not escape the Sultan. Noticing a building under construction during his visit to a certain town he inquired and learned that it was being put up by a Frenchman for commercial purposes. "Don't allow it," he said, "for his enterprise will be damaged and then we shall have to pay a big indemnity."(41)

"Nor would it be possible," wrote Lord Milner in his England in Egypt(42)"to give any idea of the unscrupulousness with which foreign Diplomatic Agents, especially during the reign of Ismail, used their influence to obtain from poor, weak Egypt the payment of even the most preposterous demands. The great object of securing a concession in those days was, not to carry on a useful enterprise, but to invent some excuse for throwing it up, and then to come down upon the government for compensation. Moreover, almost any loss which befell a foreigner . . . even if due entirely to accident or to his own fault, was made the occasion for demanding an indemnity. If his property was stolen the government was to blame for not keeping sufficient police. If his boat ran ashore in the Nile, the government was to blame for not dredging the river. 'Please shut that window,' Ismail Pasha is related to have said to one of his attendants during an interview with some European concessionaire, 'for if this gentleman catches cold it will cost me £10,000.'"

Though the soldier of fortune, the speculative concessionaire and the claim racketeer may sometimes prosper in a state of disorder, aided by occasional vigorous protection and support of damage claims from a home government, the interests of investors abroad usually call for more than assistance in emergencies. Armed protection against bands of marauders and energetic prosecution of claims are gladly received, but the permanent investor of bona fide capital wants a long-run promotion of stability, a strong government which can guarantee tranquillity and the security of property. The speculator---who has bought land, for example--- also stands to profit from increased assurance that order will be maintained. This may lead to pressure upon the government of the investors for annexation or the assumption of a protectorate---recall the Samoan case---or, short of an actual colonial policy, it may help to produce a policy of active diplomatic interference in the affairs of nominally independent states with the purpose of preventing chronic revolution and fostering security of property. The best example of this latter sort is the "anti-revolutionism" which has characterized United States diplomacy in the Caribbean countries and Central America.

Until the end of the 19th century the United States maintained an attitude of neutrality toward the factional uprisings which so frequently caused turmoil in the smaller Latin-American countries. This policy was in accord with the traditional doctrine of international law and suited to the memory of the revolutionary origins of the United States itself as well as to the non-interference which had been so insistently demanded from other governments during the American Civil War. Recognition was extended to revolutionary regimes whenever they succeeded in establishing themselves clearly and firmly in power. In recent decades, however, the time-honored policy of neutrality and non-intervention was abandoned. The United States, except in rare instances, frowned upon revolutions and often took a positive stand in support of governments beset by revolutionists. Through discriminatory application of arms embargoes and its recognition policy it helped to defeat insurrectionary movements. President Wilson's idealistic desire to discourage the use of force and the wish to avoid all occasions for European intervention which might bring complications under the Monroe Doctrine were undoubtedly important in shaping the policy of anti-revolutionism. The development of that policy, however, was coincident with the growth of American investments and American financial and other controls in Latin-America, and it seems clear that its continuance was due in no small measure to the large economic stake of United States citizens in these countries. "American oil companies whose pipe lines have been cut and whose properties have been occupied, American railway companies whose locomotives and cars have been seized, mining men who have been forced to abandon their mines, wood-cutting firms whose river steamers have been taken---all of these and a great variety of other American concerns have deluged Washington in times of disorder with requests for protection which the native government has been unable to afford against revolutionists." The concept of a pax Americana for unstable countries in the Caribbean and Central America has rightly been called, in large part, an investment policy.(43)

A few quotations revealing the attitude of foreign business interests in China during a period of disturbance will show how quick are men with property holdings in weak, unstable countries to lose patience at the impediments to their enterprises which are almost sure to occur, and thereupon to demand that their home governments procure for them even in far-distant lands the blessings of security and stability which they so ardently desire. In June, 1923, the American Chamber of Commerce in Shanghai telegraphed a request to the Department of State for a vigorous and crushing policy which would include forcible disarmament of Chinese troops, foreign supervision of Chinese finances, imposition of foreign control over all means of communication, suspension of Boxer indemnity returns to China, suspension of benefits to China resulting from the Washington Conference of 1922, and coöperation with Great Britain to remedy existing conditions. Again in 1927 the same body urged military intervention:

"We believe that immediate concerted action by the Powers to restore a condition of security for foreign lives and property in all treaty ports and to recover all foreign properties which have been destroyed or confiscated will have a far-reaching influence throughout China to the ultimate benefit of the Chinese people. This result should not be difficult to attain with the naval forces now in Chinese waters."

An American steamship man whose business on the Yangtze had suffered was disposed to advocate the mailed fist even more emphatically. He suggested a policy of reprisals through the bombardment of Chinese towns:

"The Chinese see in our kindness only weakness. If we would reply to continual firing on American vessels by cleaning up a town or two and taking it over, the air would clear immediately."(44)

Thus far we have been considering only those risks to foreign investments which arise out of disorders of one kind or another on the scene of operations, and the assistance rendered by diplomacy in such cases. There is another important type of risk in which investors frequently desire the assistance of their national diplomacy. Sometimes concessions are revoked, concessions withdrawn, contracts violated, or some other adverse administrative action taken by the government of a capital-importing country. In such cases diplomacy may come to the support of vested rights and interests.

For example, when Bulgaria in 1896 undertook the construction of a railway parallel to the lines of the Oriental Railways Company operating within its borders, the Company protested and was supported by the Austrian and German governments and banks, which cut off credits to the Bulgarian government.(45) When the Chinese government endeavored to reduce the rights of the Chinese Engineering and Mining Company in the Kaiping Basin the British government made its opposition effective.(46) The French government secured improved terms for the bondholders of the Royal Portuguese Railways when they were unfairly treated in reorganization proceedings directed by the Portuguese government.(47) The United States supported the Champerico and Northern Transportation Company when Guatemala granted a concession to another firm in violation of a clause in the Champerico Company's contract which provided that no other railroad should be allowed within fifteen leagues on either side of its line for twenty-five years, and the offending concession was withdrawn.(48)

A Russian ukase of May, 1887, directed foreign landowners in the western provinces of Poland to dispose of their properties within a certain time. The Germans who had estates there regarded the requirement as indirect confiscation, for they felt that it would be impossible to sell on good terms. This, combined with existing political irritations, led Bismarck to forbid the acceptance of Russian government securities as collateral for loans at the Reichsbank.(49)

With the assistance of Minister Denby described earlier in this chapter, a powerful American syndicate known as the American China Development Company acquired a concession in 1898-1900 for the construction of a railway between Canton and Hankow. This took place in the face of strenuous opposition from French and Belgians. One of the motives which moved the Chinese officials to prefer the American company was their desire to secure the coöperation of capitalists whose government had no political or territorial ambitions in China; so the contract specified that the railway rights could never be transferred to non-Americans. Unfavorable financial conditions developed in the United States, however, and it was not long before it appeared that a Belgian group had quietly bought up the founders' shares and obtained a controlling influence in the company. American engineers in China on the railway line were replaced by Belgians, and the American president of the company was deposed. Thereupon the Chinese government annulled the concession.(50) The United States refused to acquiesce in this procedure and a long diplomatic controversy ensued. The banking firm of J. P. Morgan and Company, acting for the American participants in the company, bought back the shares held by the Belgians. The Department of State informed China that the United States could not "tolerate such an act of spoliation as the forfeiture of the concession would be," and the Chinese government was finally persuaded to buy out the American interests at a price of $6,750,000.(51) This, according to W. W. Willoughby, was $3,750,000 more than the Americans had spent.(52)

The preservation of a monopoly position in the navigation of the Shat-El-Arab below Bagdad from Basra to the Persian Gulf was the service which the British firm of Lynch Brothers desired of their government, and because they were influential at home and their undertaking had considerable strategic political importance they were able to obtain much diplomatic support. Their service was poor and their rates were high, and their fear that the navigation and harbor projects of the Bagdad Railway might set up ruinous competition was probably justified. They became leaders in the British opposition to the Bagdad Railway. When it was proposed in 1903 to internationalize the railway in order to remove Britain's political objections against a project that would be a decided economic benefit to the empire as a whole, the Lynch Brothers exerted a quiet but effective pressure on Downing Street in opposition to the plan. One member of the firm was a member of Parliament. "In defense of their interests they wrapped themselves in the Union Jack and called upon their home government for protection; they were patriotic to the last degree. . . . Overcharge their countrymen they might; surrender this prerogative to a German railway they would not!"(53) Diplomatic maneuvering to promote and to retard the Bagdad Railway continued down to 1914, with the Lynch Brothers continually alive to the threatened infringement upon their preserves and pressing their viewpoint upon British diplomacy through the press and by personal influence. The German negotiators found the government of Great Britain so dogged and persistent concerning the navigation rights of this firm that they realized they must make concessions on the point or see the entire negotiations fail.(54) The various agreements on the Bagdad Railway question which were initialed in 1913-14 contained reaffirmations of the Lynch interests and finally a compromise which absorbed them into a larger navigation scheme.(55)

A somewhat similar case, but less important in its international ramifications, was the Clyde steamship monopoly in Santo Domingo. "In 1878 the Government of Santo Domingo had granted it freedom from all duties and port charges, and 3 1/2 per cent of the duty on the imports and exports it carried. This was never paid, and the Clyde Line kept remitting the balance due in exchange for extensions of its concession. In 1895 it gave up the right to this 3 1/2 per cent and forgave the arrears in compensation for the provision that all other companies were to pay the tonnage and port charges, which were not to be lowered. Thus Clyde could charge the most exorbitant rates because he was exempt from the heavy Government charges that his competitors had to pay. The celebrated Cherokee case of 1903, in which under American naval guns the rights of the Clyde Line were placed above the right of the Dominican Government to protect its existence, broke off all friendly relations between the steamship company and the country on which it lived. In 1906 the Dominican Minister of Finance attempted to reduce the port charges in an effort to remove some of the handicap to foreign trade. He argued that the rates had originally been fixed in Mexican silver, and therefore had been automatically doubled by the change to gold. The Clyde Company answered that. this doubling was merely a part of the consideration they received for canceling their 3 1/2 per cent subsidy, and the American Minister backed their position. Since there were suits pending against two other American concerns at the same time, Dawson [American Minister] suggested to the Dominican President that it would be unadvisable to let the impression become general that the Government was adverse to all American enterprise, and the matter was dropped. The monopoly disappeared when the 1907 Convention went into force."(56)

A third type of peril against which diplomacy sometimes comes to the aid of private investment is that raised by unfavorable legislative or constitutional changes in the country of investment. This raises very delicate questions, for diplomatic representations on such matters touches upon the cherished rights of sovereignty and independence of states. Yet foreign offices in protecting their citizens abroad frequently have maintained, most vigorously against the least powerful countries, that there are certain rights of alien property owners which must be regarded, even if they interfere with domestic policies determined upon by the constituted authorities of an independent state. Some of the issues involved here were suggested in the preceding chapter in connection with the brief statement of the controversy which developed around provisions of the Mexican constitution of 1917, and they will be further discussed in Chapter 14. Just now it is enough simply to take note that investors do invoke the protection of their governments against legislative and constitutional measures contrary to their interests, and to illustrate, by concrete instances, some of the types of measures which have produced objection on the part of foreign investors.

The principal sources of complaint have been found in tax laws, in laws designed to break up large landed estates for the benefit of a landless peasantry, and in laws to regulate the exploitation of natural resources, especially oil and minerals. The attitudes which produce the policies objectionable to foreign investment interests are most commonly associated with nationalistic movements, or with social movements of the types known as agrarian reform or revolution, or general social reform or revolution. These latter are ordinarily complicated by a nationalistic movement with considerable anti-foreign bias. The anti-foreign emotion is likely to be intensified when domestic measures affecting alien investors meet with diplomatic opposition from abroad. The economic purpose of much discriminatory, anti-alien legislation is to conserve native resources for native exploitation, either for the benefit of the country as a whole or for the benefit of a ruling class or clique. The political purpose is generally to safeguard the independence of the country, based on the not unfounded fear that foreign capital in a weak country may bring political subjection in its train. No matter for what purpose enacted, such legislation is bound to impress foreign investors unfavorably. They feel their prospects of profit lessened. They not only find opportunities for future investment restricted, but the value of placements already made under the old conditions, and perhaps in perfect good faith, is likely to be impaired. Naturally, they call this confiscation and turn to their home governments for protection of rights that, to their way of thinking, are the basis of society and the essence of law and order. Where a complete and drastic social revolution occurs, as in Russia after 1917, the conflicts centering around vested foreign property rights in a situation of social change are at their maximum and most apparent. Where slower shifts occur, similar conflicts also arise, but they are less evident and less acute.

There is no doubt that the roots of much of the antagonistic propaganda which appeared against the U.S.S.R. during its first decade were in the foreign interests that had suffered from the confiscation of all private industrial property, especially oil wells and mines, and from the non-payment of Tsarist bonds. An interesting instance of the reaction of foreign capitalists has been recorded by a British diplomatic agent who traveled through Sweden on a venturous mission to Russia during the height of the revolution. He found foreign owners, and native Russian ones, inclined to prefer German rule in Russia to social revolution, even though Germany was the arch-enemy. The Swedish capitalist, Nobel, "Like all foreigners who had property in Russia ... was anxious for a general peace and an Allied-cum-German intervention against the Bolsheviks!"(57) The Association of British Creditors of Russia and similar organizations in some other Countries have been tireless in their efforts to keep alive public distrust of the Soviet regime and to stimulate an unrelenting public policy which they hope may lead to payment of their claims.(58) The extent of the actual influence of foreign investors who lost property at the hands of the Soviet government upon the policy of other governments towards it, and the manner in which that influence has been exerted, is a large question which cannot be examined here, but it would be a most interesting subject for further investigation.

In the matter of tax legislation, governments have generally sought by commercial treaty to prevent more onerous taxation on their citizens in a foreign country than is imposed on natives of the country, though in the absence of a treaty taxes on aliens which seem reasonable and apply uniformly to all aliens have been recognized as legal. "A discrimination against the nationals of one or more countries alone would be an unfriendly act, and give rise to diplomatic or more forceful measures."(59) Haiti has at various times imposed discriminatory taxes and other irksome burdens on foreign business. The United States protested against these discriminations on numerous occasions (1876, 1893, 1897, 1903, and others), particularly as the treaty of 1864 provided for equality in taxation. The United States also made a protest of the same sort after abrogation of this treaty, however.(60) Many protests have been made on behalf of American citizens against discriminatory or confiscatory taxes and forced contributions in Mexico. In 1915, when General Obregon exacted a capital levy of three-fourths of one per cent on corporations and individuals in Mexico City, the United States took the view that since the tax was not discriminatory against Americans and its amount was insufficient to be confiscatory no protest was justified on these grounds. Only a few days were allowed for payment, however, with penalties of confiscation, appointment of receivers, and imprisonment for non-compliance. A protest was entered by the United States and other powers against these unreasonable conditions, and the tax decree was annulled so far as Americans and other foreigners were concerned.(61) In 1916 the local authorities of Vera Cruz sought to raise $500,000 for the purchase of cereals to feed the poor and sent out a circular letter soliciting contributions. Arbuckle Brothers were requested to contribute $10,000, the Pan-American Coffee Company $10,000, and the Pierce Oil Corporation $5,000. A statement that the authorities would "be disposed to require, by other means, the aid of such persons who give signs of not preoccupying themselves for the public welfare" was regarded as a threat, and the American consul was instructed to protest. The United States suggested that if funds were necessary for the relief of the poor they should be raised by regular taxation as provided by law. Many other protests have been made by the United States against contributions and forced loans which various factions in Mexico have attempted to impose upon American firms.(62) In 1915 the military governor of Jalisco, having been dissuaded by vigorous protests from demanding contributions especially from foreigners, attempted to collect a tax levied upon mercantile, industrial, and commercial establishments. The Department of State protested that as establishments of this character were largely owned by foreigners the tax discriminated against them. Carranza issued a decree on March 1, 1915, imposing greatly increased taxes on mining property, payable in gold instead of in the depreciated currency, and with loss of property as penalty for non-payment. The United States held that this decree would inevitably result in the confiscation of many properties, the American owners of which were unable to work them because of disturbed conditions which also rendered it impossible to pay the increased tax, and the American diplomatic representative was instructed to "request immediate and material modification of this confiscatory decree."(63)

A summary of some of the provisions of laws and decrees of foreign governments, mainly in Latin America, against which United States diplomacy has raised objection includes the following:

"1. The breaking up of large mining properties by requiring the owner to work each five contiguous pertenencias.

2. The accomplishment of the same object by a progressive tax bearing more heavily on the larger properties.

3. The forfeiture of mines not continuously operated.

4. The retroactive impairment of title of petroleum land owners or lessors by requiring, in case of those who have performed positive exploitation acts, the acceptance of a fifty-year concession in exchange for former titles.

5: The impairment of title of those who have not performed positive acts by giving them only a preferential right to a concession in exchange for former titles.

6. The provision compelling foreign corporations owning 50 per cent or more of the stock of companies holding rural lands for agricultural purposes in Mexico to dispose of the same within ten years.

7. The exclusion of foreigners from acquiring concessions, or an interest in corporations owning land or concessions in Mexico, unless they agree not to invoke the protection of their governments.

8. The impairment of the obligation of contracts by compelling the payment of debts in depreciated currency.

9. The payment for expropriated lands by bonds on the basis of the value fixed by landholders for purposes of taxation.

10. The taking of land without adequate provision for compensation further than an unenforceable right to annual payments from the new occupant.

11. Taxation at a rate which is too high to permit of the profitable operation of the property.

12. Taxes or forced loans levied upon special persons or companies.

13. Heavy taxation of special industries which are largely in the hands of foreigners.

14. Taxation of petroleum lands, both upon the soil and the production, thus indicating to the Department of State an intention to nationalize petroleum through taxation."(64)

The most conspicuous illustrations of agrarian reform movements which have raised diplomatic difficulties are afforded by Mexico (see the preceding chapter) and Rumania.

During the most somber days of the World War, while the army fought helplessly to resist the German invasion, while famine threatened the country, and while Bolshevist revolution seemed likely to spread to Rumania from Russia, the Rumanian parliament resolved to satisfy the long-standing demands of the agricultural population for land reforms. Thus it was that the parties of the propertied classes themselves modified the constitution and passed drastic legislation to break up large estates and divide them among the peasants. The first law for the purpose was promulgated in 1918 and went into application the following spring. It was much more sweeping than had been contemplated by the leaders of the peasant movement before the war. "The economic life of a whole country was transformed. Rumania passed at a stroke, without friction and without disorder, from a quasi-feudal regime to a modern system of small properties---a fact unique in the history of peoples.(65)

Holders of large estates were expropriated. Compensation was paid to them, but it was calculated on the basis of the 1913 gold-lei income from their properties and actually paid in currency which soon had a value only one-fortieth of its former gold value. Furthermore, even this currency payment was in fifty-year state bonds on which the market quotation had soon fallen to less than one-half the face value. Thus, actual compensation was in many cases less than one per cent of the value of the property expropriated. There were no foreign agricultural estates in old Rumania, since a provision of the constitution of 1860, renewed in the constitution of 1923, prohibited aliens from owning rural land.(66) But complications arose when the agrarian reform was applied to the new territories ceded to Rumania at the end of the war---Bessarabia, Transylvania, etc.---for there citizens of foreign countries owned lands. In Bessarabia, formerly Russian territory, the French and British governments exacted compensation for their expropriated subjects many times greater than that accorded to Rumanian nationals.(67) In Transylvania, acquired from Hungary under the Treaty of Trianon, particularly acute conflicts arose, for 87 per cent of the land was owned by Hungarians. The Treaty of Trianon provided that Hungarians in the ceded territory might opt to keep their nationality, but if so they must move to Hungary; these optants were, however, "entitled to retain their immovable property" in Transylvania. The Rumanian law of 1921 which applied the agrarian reforms to Transylvania provided that the estates of absentees should be subject to expropriation in their entirety,(68) and that persons who were out of the country from 1918 to 1921 should be considered absentees. As the Hungarians had quite generally been forced out or had fled at the approach of Rumanian troops after the armistice and had been refused permission to return, this applied particularly to them. Thus the issue of expropriation of property and compensation for vested interests held by foreigners was mixed with one of the emotionally-charged minorities problems created by the peace treaties. Hungary made direct diplomatic representations to Rumania in 1922-3 but got nowhere, then took the problem to the League of Nations and to the Mixed Tribunals set up by the Treaty of Trianon. Hungary contended that it was not protesting against an agrarian reform carried out in good faith, but against confiscations which were unjust and contrary to the provisions of international treaties. Rumania took the ground that the Hungarian demands brought into issue more than a controversy of law, but also "the political and social transformation of a nation." For years the thorny question of the "Hungarian optants" resisted the best efforts of League conciliators and confronted students of international law with vexed questions upon which a whole literature has developed.(69)

The methods which governments have used to render their investors the types of protection described in this chapter include practically all of the various means customarily employed by governments to attain their ends in international intercourse. They range, that is, from the most friendly "good offices," which means courteous representations on behalf of the interests of citizens, through official protests and many special varieties of diplomatic pressure (including the withholding of recognition, reminders of war debts or other pending claims, an embargo on loans, trade retaliation), to threats and parades of armed force and actual use of armed force. Outright annexation or the declaration of a protectorate have in some cases helped to provide elements of protection useful to investors; in other cases such indirect methods as financial supervision, customs receiverships, collection of pledged internal revenues, control through economic and financial advisers, have proved sufficiently effective in dominating weaker countries without depriving them of nominal independence.

Friendly good offices are perfectly exemplified in the attitude of the British government toward difficulties that have arisen over English investments in the dominions. The land tax policy of New Zealand appeared unjust and iniquitous to foreign investors. The power development activities of the Province of Ontario were regarded by British interests who financed the Electrical Development Company of Ontario to be an unjust use of governmental power. British investors in the Grand Trunk Railway of Canada fought long and bitterly the treatment accorded them by the Canadian government. In such disputes the British government did what it could to see that the point of view of the investors was appreciated by the other side, but for the most part it left matters to be settled by negotiation between the parties or through the law courts.(70) The sympathetic attitude of Ambassador Dwight Morrow during his incumbency in Mexico was an outstanding example of the diplomacy of tact and understanding applied between two countries of unequal power in the solution of problems that had previously evoked bitter dispute and rougher methods. The visits of the Prince of Wales to various parts of the world and the trip of President Hoover across South America between his election and his inauguration may be classed as attempts to apply the diplomacy of friendship and good feeling in the interests of business.

The German government announced in 1908 that it would not recognize Bulgaria's recently won independence from Turkey until Bulgaria had settled the claims of German owners, chiefly the Deutsche Bank, for property taken over from the Orient Railway.(71) The United States refused for more than fifteen years to recognize the Soviet government of Russia, partly because of the confiscation of American-owned property under the revolution. The weapon of recognition or non-recognition has frequently been used by the United States in putting pressure upon the smaller Latin-American states to protect investors.

The United States and Great Britain not only applied a financial boycott as a means of pressure on Ecuador, but the United States, through the War Industries Board, restricted the importation of Ecuadorean cocoa and thus forced the government to give way in a long-standing dispute with an American company which, using British capital, had constructed the Guayaquil and Quito Railway.(72)

Active negotiations for a loan from American capitalists were under way with the government of Mexico in 1918 when the Department of State informally reminded the bankers that it would be desirable for Mexico to guarantee American vested property interests against the anticipated effects of the new constitution of 1917 and to agree to the establishment of a tribunal for the settlement of claims. The French government had earlier suggested, through its ambassador in Washington, that apprehension was felt in Europe as well as in the United States regarding the effect of the 1917 constitution, and that since Mexican officials were known to be seeking loans in the United States "it would be highly desirable, in the event of financial assistance being extended to President Carranza, to stipulate guarantees as to (inter alia) the provisions inconsistent with international law that are found in the new constitution."(73) Other instances of the use of financial pressure of this type will be found in Chapter 10.

"Practical diplomatists have long appreciated the protective value to peaceful commerce of a mere demonstration of naval force," says a recent publication of the United States Navy Department.(74) "Oftentimes simply the movement of a fleet a few hundred miles up or down a foreign coast proves effective without any sinister implication of aggression." The United States maintains naval patrols in three principal areas: in Chinese waters, in the Central American and Caribbean region, and in the eastern Mediterranean. The Naval Intelligence Office said concerning the Caribbean patrol in 1923: "The special service squadron in the Caribbean consists of five small second-class cruisers of little or no use in the line of battle. They are under the command of a rear admiral and are active in protecting our nationals and our tremendous fruit, sugar, and hemp trades, as well as oil and mining interests. The islands of the West Indies and the Central-American Republics are so often the scenes of revolutions, many of which lose their threatening aspect soon after the mere arrival of a cruiser flying our flag, though sometimes it is necessary to send a landing force ashore."(75)

The policies of the United States in Santo Domingo, Haiti, Nicaragua, Liberia, Salvador, and Cuba, and of other nations in Persia, Egypt, China, Turkey, Albania, etc., illustrate the use of financial controls and various other types of "veiled protectorate" as a technique of outside influence over nominally independent states. Such methods of providing protection for investments have the advantage, as compared with outright conquest, that they are less damaging to the pride of the weaker country, cost less than the maintenance of armies of occupation in hostile lands, and are more flexible, even to the point of being capable of quiet abandonment when new conditions arise. The protection afforded to investments in colonies and protectorates is a source of difficulty when political developments, such as the rise of a nationalist movement, raise the question of freeing the colony from the mother country. Investment interests are likely to oppose the step. Thus, British capital invested in India makes a solution of the Indian problem harder to find, American capital in the Philippines helped to postpone the granting of Philippine independence, promised many years ago, and British capital in the Sudan seems to have complicated the problem of Egypt's relation to Great Britain.

Chapter Seven

Table of Contents