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The Empire TrapThe Rise and Fall of U.S. Intervention to Protect American Property Overseas, 1893-2013$

Noel Maurer

Print publication date: 2013

Print ISBN-13: 9780691155821

Published to Princeton Scholarship Online: October 2017

DOI: 10.23943/princeton/9780691155821.001.0001

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Falling Back In

Falling Back In

Chapter:
(p.245) Seven Falling Back In
Source:
The Empire Trap
Author(s):

Noel Maurer

Publisher:
Princeton University Press
DOI:10.23943/princeton/9780691155821.003.0007

Abstract and Keywords

This chapter explores how the United States' return to the empire trap played out, starting with Franklin Roosevelt in Mexico through Eisenhower in Guatemala and faraway Iran. Under Franklin Roosevelt, the United States began to provide foreign aid (in the form of grants and loans) and rolled out perhaps the first case of modern covert action against the government of Cuba. Both tools were perfected during the Second World War, which saw the creation of entire agencies of government dedicated to providing official transfers and covertly manipulating the affairs of foreign states. In addition, the development of sophisticated trade controls allowed targeted action against the exports of other nations. For example, after 1948 the United States could attempt to influence certain Latin American governments by granting or withholding quotas for sugar.

Keywords:   empire trap, United States, Franklin Roosevelt, Eisenhower, foreign aid, Cuba, Second World War, trade controls, Latin American governments

Every observing person must by this time thoroughly understand that under the Roosevelt Administration the United States government is as much opposed as any other government to interference with the freedom, the sovereignty, or other internal affairs or processes of the governments of other nations.

—Secretary of State Cordell Hull, December 22, 1933

Though it was Herbert Hoover who coined the phrase “good neighbor” to describe the United States’ ideal relationship with Latin America, the Good Neighbor policy ultimately became associated with his successor, Franklin Roosevelt. In his inaugural address, Roosevelt strove to distance himself from Hoover’s more ambiguous public statements about America’s informal empire: “In the field of world policy I would dedicate this nation to the policy of the good neighbor, the neighbor who resolutely respects himself and, because he does so, respects the rights of others, the neighbor who respects his obligations and respects the sanctity of his agreements in and with a world of neighbors.”1

Roosevelt’s words are typically taken as an earnest reconsideration of U.S. relations with Latin America. “The Good Neighbor policy was a policy; it was not simply rhetoric,” historian Bryce Wood has written. Behind the policy was a genuine reorganization of priorities. In Wood’s words, the Good Neighbor (p.246) policy meant that the United States “curbed its finance capital” and downgraded the protection of American overseas private investments.2 The high point is typically located in Roosevelt’s temperate reaction to the 1938 dispute between the foreign oil companies and the Mexican government. Washington, concerned with the high politics of building coalitions to contain the rise of the Axis powers, decided to conciliate Mexico. Bryce Wood again: “The solution of the … oil disputes with the United States, which were negotiated by equals and not determined by arbitral tribunals, were good examples of ‘the mild-mannered methods’ of the Good Neighbor policy. … Diplomats of this period did not differentiate between nonintervention and noninterference; both were regarded as prohibited.”3

The only problem with the standard narrative is that it does not fit the facts. The Roosevelt administration took a hard line with the Mexican government over the expropriation. Roosevelt employed sanctions, and the Mexican government eventually paid compensation worth more than the companies’ market value. Rather than representing the epitome of the Good Neighbor policy, the Mexican oil expropriation represented its end. American-owned overseas interests rediscovered their ability to steer policy in Washington, and the United States fell right back into the empire trap.

The empire trap that emerged in the late 1930s differed in three important ways from its pre-Depression predecessor. First, the United States abandoned direct attempts to reform foreign institutions. The reason, simply put, was that the tactics of dollar diplomacy—customs receiverships, fiscal advisers, and government-backed private loans—had not worked. The Depression-era defaults put the last nail in their coffin. The fiscal receivership in the Dominican Republic would limp along into the 1940s, but outside the occupations in Germany, Korea, and Japan the United States would not again attempt to place Americans inside the governmental structures of foreign nations until 2003.4 Even in South Vietnam, U.S. officials would not be (p.247) an official part of the local government’s chain of command—something that frustrated Ambassador Henry Cabot Lodge to no end.

Second, private creditors were no longer a factor. Because Roosevelt had to deal with the owners of the defaulted debt from the pre-1929 era, his administration created institutions designed to insulate the government from the (politically weakened) bondholders. Once these institutions had served their purpose vis-à-vis the pre-1929 debt, Roosevelt’s successors faced no serious pressure from bondholders for the simple reason that the Depression had destroyed the private market for sovereign debt. There were no substantial creditors to foreign sovereigns to clamor for protection. The sovereign debt market would not revive until the great wave of syndicated bank debt in the 1970s, and a market for sovereign bonds wouldn’t be re-created until the 1990s. The empire trap of the 1930s and beyond concerned direct investors.

Third, new technologies of foreign intervention replaced the old techniques. These developments occurred in two forms: foreign aid and covert action. During the 1930s, U.S. state-to-state lending became routine, but after 1945 the United States began to grant large-scale aid as part of its Cold War strategy. Once intergovernmental loans and grants became routine, the United States could influence foreign governments by credibly threatening to cut them off. Similarly, covert action had been used before 1945, but it took the Second World War to create an entire agency of government dedicated to it.

The end result was that the United States found itself back in the business of protecting the property rights of Americans overseas before the end of Roosevelt’s second term. Of course, U.S. foreign policy had many other concerns besides the protection of American investments. That said, as an empirical matter, the Roosevelt, Truman, and Eisenhower administrations never failed to protect American interests when they were threatened by Third World governments. The only exceptions were in the (p.248) Eastern European countries that fell under the sway of the Red Army.5 Investors found ways to persuade U.S. administrations to support them against foreign governments. Administrations varied, of course, in how much they needed to be pushed (Roosevelt quite a bit, Eisenhower rather less), but when push came to shove, they acted, and acted successfully. This “second American empire,” inasmuch as the peculiar mix of aid, sanctions, and covert action used to protect American property rights could be called an empire, worked from the point of view of American investors.

The Economic Policy of Good Neighborliness

The first step in the Good Neighbor policy was relatively costless for the Roosevelt administration. On December 26, 1933, at the Seventh Pan-American Conference in Montevideo, the United States signed the Convention on the Rights and Duties of States. As written, the convention was a strong statement of the equal rights of states. Article 8 proclaimed, “No state has the right to intervene in the internal or external affairs of another.” Article 9 stated, “The jurisdiction of states within the limits of national territory applies to all the inhabitants. Nationals and foreigners are under the same protection of the law and the national authorities and the foreigners may not claim rights other or more extensive than those of the nationals.”

The United States was, however, one of three signatories that appended reservations to the convention. Upon his arrival in Montevideo, Cordell Hull privately told the U.S. delegation, “There are a number of situations that justify a state in intervening in the affairs of another state.” Hull also, however, realized that “the demand for unanimous affirmative vote was very vociferous and more or less wild and unreasonable.”6 Neither Hull nor Roosevelt was willing to wreck the conference or anger the Latin American delegations over what was, in essence, a declaration of intent with little practical force. Hull limited himself to (p.249) adding a somewhat cryptic reservation to the convention, which implied that he did not interpret its wording in quite the same way as the other delegates.

I think it unfortunate that during the brief period of this Conference there is apparently not time within which to prepare interpretations and definitions of these fundamental terms that are embraced in the report. Such definitions and interpretations would enable every government to proceed in a uniform way without any difference of opinion or of interpretations.

Although Hull assured the other delegates that they need not fear intervention on the part of the Roosevelt administration, he also pledged the United States to “the doctrines and policies which it has pursued since March 4 which are embodied in the different addresses of President Roosevelt since that time and in the recent peace address of myself on the 15th day of December before this Conference and in the law of nations as generally recognized and accepted.”7 Hull did not want to spoil the party, but neither did he wish to tie his hands.

Staying Out of Debt Enforcement

Once the Montevideo convention was signed, President Roosevelt’s second order of business was to ensure that the U.S. government would not be drawn into negotiations over the rescheduling of defaulted Latin American debt. The solution was to give a public imprimatur to a private body: the Foreign Bondholders Protective Council (FBPC). Roosevelt created the organization by executive order in October 1933. The FBPC was chartered as a Maryland nonprofit corporation, with a board of fifteen appointed by the president.8 The theory was that negotiations between a debtor and a unified block of creditors would (p.250) produce a better outcome for everyone involved. The creditors would gain more negotiating power, since they could (in theory) coordinate credit boycotts and other punishments. The debtors, meanwhile, would be freed of the “holdout” problem, in which key creditors refused to restructure their loans, knowing that they might be able to get a better deal if enough other creditors agreed to restructure first.

The ostensible reason for the FBPC, however, was not the real reason. The real reason was to protect the Roosevelt administration from any political pressure the bondholders could muster. Herbert Feis, the State Department economic adviser, stated so explicitly: “The Department of State would not be committed to any action in regard to any situation. In fact, it was hoped that the existence of the council would perhaps lessen the necessity under which the Department of State might have to take cognizance of default situations.”9

As a means of protecting bondholders, the FBPC was a failure. Its president and vice president, J. Reuben Clark and Francis White, invariably took an unproductively hard line. “A believer in the sanctity of contracts, Clark’s approach consisted of arguing why debtors should adhere to the letter of their loan contracts, which left little room for negotiation.”10 In December 1935, Clark went so far as to publicly blast debtor countries for such “extravagances” as schools, hospitals, and jails. He went on to call the practice of debtors buying up their own debt “immoral.” In 1936, the FBPC’s annual report announced that it would now officially resist any restructuring: no interest rate cuts, no alteration in terms, no haircuts on principal. The organization claimed that any debtors who kept up their interest payments would be able to refund their debts at lower rates on the market.11 Of course, this hard line did nothing to resolve the problems of countries in default. Moreover, it was deucedly odd for an organization created to facilitate renegotiation to refuse to renegotiate. The FBPC took credit for the decisions by the Brazilian and Dominican governments to resume debt service, but that was the limit of its success, and it was not at (p.251) all clear that the organization made any difference in either case. In negotiations with Cuba in 1936–37, the FBPC managed to antagonize both Chase Bank and the State Department.12

As a means of circumventing investor pressure on the U.S. government, however, the FBPC was a full success. The State Department routinely referred inquiries directly to the FBPC’s offices. The Depression had gotten the U.S. government out of the business of defending the creditor rights of American bondholders, and FBPC served the purpose of helping the government to stay out of that business. The failure of sovereign debt markets to revive only made it easier to resist the entreaties of the remaining creditors. The U.S. government’s disinvolvement was not total, of course. The Roosevelt administration actively helped renegotiate Cuba’s debts in 1937–38. In addition, with the establishment of the Export-Import Bank the U.S. government began to make direct loans to foreign governments. In general, however, the FBPC kept Washington out of the debt enforcement business. A key feature of the first American empire was no more.

Ending the Protectorates

Roosevelt understood that the Good Neighbor policy would never be viewed as credible unless the United States could regularize its relationship with its formal protectorates in Panama and Cuba. Both countries owed their independence to American intervention, and both countries’ constitutions gave the United States extraordinary rights that were popularly resented. In Cuba, the second and third clauses of the Platt Amendment, appended to the end of the Cuban Constitution of 1902, read as follows:

  1. II. That said government [Cuba] shall not assume or contract any public debt, to pay the interest upon which, and to make reasonable sinking fund provision for the ultimate discharge of which, the ordinary revenues of the island, after defraying the current expenses of government shall be inadequate. (p.252)

  2. III.That the government of Cuba consents that the United States may exercise the right to intervene for the preservation of Cuban independence, the maintenance of a government adequate for the protection of life, property, and individual liberty, and for discharging the obligations with respect to Cuba imposed by the treaty of Paris on the United States, now to be assumed and undertaken by the government of Cuba.

In Panama, Article 136 of the Constitution of 1904 was equally sweeping:

The government of the United States of America may intervene, in any part of the Republic of Panama, in order to re-establish public tranquility and constitutional order in the event that they have been disturbed, providing that said nation shall assume or have assumed by treaty the obligation of guaranteeing the independence and sovereignty of this Republic.

Discussions began first over Panama. President Arnulfo Arias met Roosevelt in Washington in October of 1933. One of the biggest bones of contention between the two countries was a Panama Canal Zone agency known as the “Commissary.” The Commissary held a monopoly over imports of consumer goods into the zone and the sale of provisions and services to transiting vessels. It also controlled the docks on both sides of the canal and received subsidized rates on the Panama Railroad. At the meeting, Roosevelt personally pledged that he would curb the Commissary’s excesses and maintain the value (in gold) of the Panama canal annuity. The subsequent devaluation of the U.S. dollar in January 1934 violated that pledge and deeply embarrassed the American president. Secretary of State Cordell Hull suggested that the need to renegotiate Panama’s annuity could form the basis for a new treaty. Negotiations began in April 1934.13

(p.253) The toughest part of the talks often appeared to be between Washington and the administration of the Panama Canal Zone, rather than between Washington and the Panamanian government. The Canal Zone’s governor, for example, insisted that the United States take over the town of New Cristóbal (which bordered the Atlantic side of the Zone) in the face of Panamanian protests. The legal authority for this derived from Article 2 of the treaty establishing the Canal Zone, which read:

The Republic of Panama further grants to the United States in perpetuity the use, occupation and control of any other lands and waters outside of the zone above described which may be necessary and convenient for the construction, maintenance, operation, sanitation and protection of the said Canal.

The Roosevelt administration supported the Panamanians in the dispute over New Cristóbal despite protests that American women in New Cristóbal were “subjected to the grossest indecencies and physical handlings by hoodlums.”14 When it leaked that the proposed treaty (which coincided with the end of Prohibition) would impose American excise taxes on beer, the local army commander had to warn that such taxes “might result in unfortunate incidents.” The chief labor union in the zone, meanwhile, protested that any agreement would require Americans “to contribute to the welfare of a foreign nation to whom they are not in any sense obligated.” Roosevelt himself had to cram through a compromise that left low-alcohol beer and light wines untaxed but required the zone to purchase supplies of all stronger drink from Panama. “Liquor is luxury,” wrote the president, “and I see no reason for the government to supply it in the Zone as though it were a food necessity.”15

American officials in the Canal Zone feared—and rightly so—that their privileged position would be considerably diminished by the new agreement. The Canal Zone’s general counsel, Frank (p.254) Wang, worried that Roosevelt had accepted the principle that the United States did not have sovereignty within the zone. For his part, Canal Zone governor Julian Schley resented the implication in the treaty drafts that there was “a partnership between the United States and Panama in the pecuniary profits from the Canal.”16 Schley, for his part, managed to pressure Washington into rejecting a Panamanian proposal to grant Panama a share of the canal’s gross revenues in lieu of a fixed annuity. President Roosevelt, in turn, cut Schley out of the talks as much as possible: during his visit to Panama in October 1935, he instructed the American legation to keep all treaty amendments private and refused to communicate with Schley about the “informal” talks.17

Though the United States retained a number of rights and privileges relating to the canal, they were overshadowed by those it relinquished. The treaty was signed on March 2, 1936. The nominal value of the canal annuity rose from $250,000 to $430,000. Panamanian merchants gained the right to sell goods directly to passing ships and bid on supply contracts within the zone.18 The treaty permitted the Panamanian government to begin construction on the Trans-Isthmian Highway between Panama City and Colón, which the Canal Zone administration had previously vetoed. Finally, the treaty revoked the U.S. right to intervene, although Article 136 remained part of the Panamanian Constitution until 1941.19

The treaty with Panama had been hard; tying up loose ends with Cuba would prove harder. A new Treaty of Relations on May 29, 1934, formally abrogated the Platt Amendment.20 Since the Cubans had never officially recognized the Platt Amendment as anything more than an “appendix” to their constitution, that ended the U.S. symbolic right to intervene. The task of ending the American protectorate in Cuba, however, could not be addressed by symbolic action alone. Roosevelt had faced a tough enough battle in regularizing U.S. relations with Panama, where the only interest group was the residents of the Canal Zone. In the Cuban case, the sugar industry needed to be brought (p.255) on board. The American owners of Cuban properties wanted greater access to the American market. Without greater access, the Cuban economy would continue to stagnate—worsening the political instability on the island and leading to a repeat of the uncomfortable events of 1933. Domestic sugar producers, on the other hand, wanted continued protection, or at least some sort of guarantee that Cuba’s ability to produce nearly unlimited amounts of low-cost sugar would not cause prices to collapse.

The effects of the 1929 Smoot-Hawley Act on the Cuban sugar industry were worse than feared. An internal memorandum of the U.S. Trade Commission dated April 6, 1933, stated: “The tariff on sugar has not been effective either as a price protection to domestic producers, or as an encouragement to expansion in production, but has primarily served on the one hand to destroy the Cuban industry, and on the other hand to bring about continuous and very rapid expansion in Puerto Rico and the Philippines.” (By April 1933 sugar prices were 20% lower than three years earlier.) Five days later, Trade Commission chairman Robert O’Brien explained to the president, “The situation in Cuba … is such that the higher the American tariff may be the lower are the costs of producing sugar in Cuba. … The result is that the price is gone down to a point which is disastrous both for American and for Cuban producers. It is evident that no increase of the American tariff can relieve the resulting situation in this country or in Cuba.”21

Why did Smoot-Hawley fail to protect American mainland sugar? First, Cuban wages (and other domestic costs) were extremely flexible downward. When the Depression began, in 1929, Cuban nominal wages were on par with those in the southern United States. Inasmuch as Smoot-Hawley drove down the nominal price of Cuban sugar, it also drove down the nominal value of Cuban wages. Nominal daily wages during the sugar harvest fell from $1.80 in 1929 to $1.09 in 1933.22 (Collapsing prices meant that real wages dropped “only” 20% over the same period.) Other costs also declined: raw cane costs in Cuba (p.256) dropped by half in 1930–32, and the total production cost of raw sugar fell 15%.23 Cuba remained the lowest-cost sugar supplier to the U.S. market despite the tariff. Cuba, therefore, retained more of its cost advantage than mainland producers had hoped—albeit at the price of widespread hardship on the island. Second, whatever benefits Smoot-Hawley did generate went to Hawaii, the Philippine Islands, and Puerto Rico. All three areas produced sugar at a higher cost than Cuba, but at less cost than most domestic producers.

In theory, Congress had the power to apply tariffs to Puerto Rican and Philippine exports to the continental United States. In practice, doing so was politically impossible. Puerto Rico was entirely populated by American citizens, who would emigrate en masse if the island’s economy collapsed.24 In addition, Puerto Rican sugar plantations and mills were owned by mainland investors and vertically integrated into mainland refining operations: unlike their Cuban equivalents, they sold little production on the open market.25 Deliberately impoverishing American citizens and breaking up vertically integrated U.S. operations to aid Cuba would be politically problematic, to say the least.

Puerto Rico in fact enjoyed particularly effective congressional representation in the persons of Santiago Iglesias Pantín and Vito Marcantonio. As “resident commissioner,” Iglesias did not have a vote on the House floor, but he did have a full vote in committee. Elected in 1933 on a somewhat counterintuitive pro-statehood Republican-Socialist fusion ticket, he obtained seats on the Agriculture and Insular Affairs committees, which had oversight over any bills affecting the Puerto Rican sugar industry. Moreover, Iglesias had a long-standing relationship with the Roosevelt family, and he was highly connected with the American Federation of Labor.26 In addition, New York’s growing Puerto Rican population meant that Representative Vito Marcantonio of East Harlem (R–New York) became known as the “Congressman from Puerto Rico.”27 Marcantonio had the support of much of the rest of New York’s congressional delegation, since the big sugar firms were headquartered in Manhattan (p.257) and many jobs in the northern suburbs and Brooklyn depended on Puerto Rican sugar. (The National Sugar Refining Company’s plant on Buena Vista Avenue in Yonkers, New York, which processed the company’s Puerto Rican production, is still in operation under different owners.)28

The Philippine Islands, meanwhile, were still an American possession in 1934. Imposing tariffs on the Philippines would have been easy in terms of domestic politics. The problem was that allowing the Philippine economy to collapse before formal independence could have provoked unrest, which American forces would then have needed to contain. Roosevelt was determined to avoid that result. Two other factors made it impossible to exclude the Philippines. First, the Philippine legislature needed to approve separation: it was unlikely that it would do so unless it retained access to the American market for at least some period of time. Second, a study by R. I. Nowell of the Federal Farm Board concluded that “a tariff on Philippine sugar would have a negligible effect on sugar prices in the United States but would represent welcomed protection for the Cubans.”29

Roosevelt, then, faced a multipronged problem. He needed to help rescue the Cuban economy in order to reduce instability on the island and protect the value of American investments. He also needed to satisfy the domestic sugar interests. And he needed to avoid selling out the Philippines and Puerto Rico. The solution was to impose quotas on Cuban sugar while cutting the tariff. That would aid Cuba while easing fears that expanded Cuban production would drive other producers out of the market.

Determining the optimal size of the quota, however, was not easy. In the summer of 1933, the sugar producers tried to hash out a voluntary quota system under the Agricultural Adjustment Act of 1933. The sugar producers came up with a system that would give the mainland and Puerto Rico quotas well above current production. Hawaii would receive a quota equal to 97% of current production. The burden of adjustment would fall on Cuba and the Philippines. Cuba would receive a quota (p.258)

Table 7.1 Quotas under the U.S. Sugar Act of 1934, thousands of tons

1934

1935

1936

1937

1938

1939

1940

Mainland beet

Final adjusted quota

1,556

1,550

1,342

1,417

1,584

1,567

1,550

sugar

Actual deliveries

1,562

1,478

1,364

1,245

1,448

1,809

1,550

Mainland cane

Final adjusted quota

261

260

392

472

429

425

420

sugar

Actual deliveries

268

319

409

491

449

587

406

Hawaii

Final adjusted quota

916

926

1,033

984

922

948

938

Actual deliveries

948

927

1,033

985

906

966

941

Puerto Rico

Final adjusted quota

803

788

909

897

816

807

798

Actual deliveries

807

793

907

896

815

1,126

798

Philippines

Final adjusted quota

1,015

899

1,001

998

991

1,041

982

Actual deliveries

1,088

917

985

991

981

980

981

Cuba

Final adjusted quota

1,902

1,822

2,103

2,149

1,954

1,932

1,749

Actual deliveries

1,866

1,830

2,102

2,155

1,941

1,930

1,750

Full-duty foreign

Final adjusted quota

17

17

26

27

27

27

27

Actual deliveries

17

25

29

115

81

27

24

Total consumption

Final adjusted quota

6,470

6,262

6,806

6,944

6,723

6,747

6,464

Actual deliveries

6,556

6,289

6,829

6,878

6,621

7,425

6,450

Source: Alan Dye and Richard Sicotte, “The Origins and Development of the U.S. Sugar Program, 1934–59,” paper prepared for the 14th International Economic History Conference, 2006, p. 3.

of 1.7 million tons. A State Department official called Cuba’s proposed quota a “residual quota, being what remained after the demands of all other sugar groups had been satisfied.”

President Roosevelt rejected the “voluntary” plan.30 The resulting Sugar Act of 1934 brought sugar under the Agricultural Adjustment Act but made the domestic beet sugar quota effectively nonbinding.31 Cuba received a quota of 1.9 million tons (see table 7.1). In March 1934, the president used his executive authority under existing legislation to cut the tariff on Cuban sugar to 1.5 cents (down from 2.0 cents). A little over two months later, on May 29, 1934, the United States and Cuba signed a treaty that brought rates down to 0.9 cents.

The new arrangement was far from perfect, but it succeeded in its two main goals. First, it stabilized the Cuban economy (and the value of U.S. sugar investments) at minimal domestic cost. The nominal value of Cuban sugar exports to the United (p.259)

Falling Back In

Figure 7.1 Nominal sugar prices (cents per lb.) and the value of Cuban exports, 1925–39

Source: Calculated from data in Alan Dye and Richard Sicotte, “The Interwar Turning Point in U.S.-Cuban Trade Relations: A View through Sugar-Company Stock Prices,” paper for “The Origins and Development of Financial Markets and Institutions” conference, April 28–29, 2006, p. 41; Dye and Sicotte, “The Origins and Development of the U.S. Sugar Program, 1934–59,” paper prepared for the 14th International Economic History Conference, 2006, p. 37; and Historical Statistics of the United States, Millennial Edition, series Da1433–1435.

States jumped in 1934 and 1935 (see figure 7.1). Second, it limited the damage that Cuban sugar could inflict on the American sugar industry. Finally, it allowed the United States to abrogate its formal protectorate over Cuba without seeming to extract a quid pro quo, thus preserving the form of the Good Neighbor policy. It failed, however, to resuscitate the Cuban economy. Cuban wages never recovered relative to the United States.

Reciprocal Trade Agreements

The last element of Roosevelt’s approach involved opening the U.S. market to Latin American exports from outside the U.S. customs area. The legislative cornerstone of the strategy was (p.260) the Reciprocal Trade Agreements Act of 1934. The act empowered the president to enter into mutual tariff reductions with foreign countries, subject only to the limitation that “no proclamation shall be made increasing or decreasing by more than 50 per centum any existing rate of duty.”32 The passage of some sort of liberalizing trade bill was a foregone conclusion after the 1932 elections: lower tariffs had been a Democratic plank for some time.33 On March 20, 1934, the House approved the reciprocal trade bill on a party-line vote, with 96% of Democrats in favor and 98% of Republicans against. The Senate vote was almost as partisan: 93% of Democrats in favor and 85% of Republicans opposed.34

The new trade policy was a partial success. Roosevelt managed to secure agreements with many of the countries that formed part of the former American intervention sphere: Cuba (1934), Honduras (1935), Colombia (1936), Guatemala (1936), Costa Rica (1936), and El Salvador (1937). The trade agreements clearly improved the tone of relations with the countries that signed them. The Colombian foreign minister, for example, effusively praised the “new criterion in the diplomatic sphere, and commercial relations based on liberal principles which consecrate the operation of the most favored nation clause.”35 On the other hand, the United States was unable to sign agreements with the countries that had been in its outer sphere (Ecuador, Peru, and Bolivia) or outside its sphere altogether (Argentina, Brazil, Chile, and Uruguay) despite intensive efforts.

The Bolivian Oil Nationalization

The Good Neighbor policy faced its first serious challenge in Bolivia. In 1937, the Bolivian government nationalized properties belonging to Standard Oil of New Jersey (aka Jersey Standard). The putative reason was unpaid taxes. Jersey Standard’s 1922 concession stated that the land tax would jump from 2.5 centavos per hectare to 10 centavos after production started, and (p.261) then rise to 50 centavos over seven years. The government and Jersey Standard immediately began to argue over whether the contract’s definition of “production” meant that the higher rate would kick in when oil was struck or when commercial sales began. In 1928, the parties agreed that the higher rates would start in 1930, but in 1931 the government of President Daniel Salamanca rescinded the agreement and demanded back taxes through 1924—a total of 1.4 million bolivianos, or $447,284 at current exchange rates. The dispute went into the black hole of the Bolivian legal system and remained there, during which Jersey Standard continued to pay current imposts but refused to meet the demand for back taxes.

By 1937, Jersey Standard was marking time with its Bolivian operation. The company had invested in Bolivia with the aim of exporting oil to Argentina. In 1925, however, Argentina denied permission to run a pipeline from Bolivia. In 1927, it imposed prohibitive tariffs on oil imports. In 1931, Jersey Standard capped the Bermejo well and began shipping equipment back to the United States.36 The next year, it stopped drilling new wells.37 Production rose during the Chaco War (1932–36), owing to demand from the Bolivian military, but only by more intensive working of existing fields.

Jersey Standard’s marginal operation became, in essence, a victim of Bolivian internal instability and external rivalry. In 1932, the Bolivian Army attacked Paraguayan forces in the disputed Chaco region. Public opinion commonly held the war to be about oil, since the region was (incorrectly) viewed to be rich in petroleum deposits. Jersey Standard’s fields were actually located in Tarija and Santa Cruz. Paraguayan forces didn’t reach them until 1935, and were unable to hold the area after General Germán Busch’s successful counteroffensive.38

During the war Jersey Standard made a number of missteps that alienated Bolivian public opinion. First, in 1933 the government asked Standard to increase production of aviation fuel at its refinery. Standard agreed, but at a price it set and only if the government bought all ancillary products from the refinery (p.262) that it did not need for the war effort … also at prices set by the company. The military responded by temporarily taking over the refinery but soon decided that the middle of a war was a bad time to try to figure out how to produce aviation fuel. Jersey Standard got its way.39 The Bolivian government then requested a $5 million loan from the company to finance the war effort—which Jersey Standard refused.40 (The loan would have come to $68.3 million in 2011 dollars.)

Right after the war ended in 1936, Colonel David Toro came to power with the avowed aim “to implant state socialism with the aid of the parties of the left.” Jersey Standard offered to sell its properties for $3 million.41 This was not charity on Jersey Standard’s part: at a conservative 5% discount rate, a value of $3 million implied an average profit margin of 52% of revenues. Considering Jersey Standard’s internal complaining about the unprofitability of its Bolivian venture, it is highly unlikely that it was anywhere near that profitable—or worth anywhere near $3 million. In fact, it was far from clear that Jersey Standard’s properties in Bolivia had any market value. No investments had been made since 1932, and production was low and declining.

Toro agreed to the offer but did not sign a deal—and on March 13, 1937, he reversed himself and confiscated Jersey Standard. Toro decided to expropriate for two reasons, one domestic and one foreign. The domestic reason was his rivalry with the hero of the Chaco War, Germán Busch. Busch was rather more radical than Toro—Toro feared that he would be overthrown unless he moved to put meat on the bones of Bolivia’s “military socialism.”42 (Busch overthrew Toro anyway on July 13, 1937.)43 Toro in fact began preparing the expropriation in December 1936, in order to ensure that the Bolivian government could run the properties once it took them over.44 The foreign reason for the expropriation was that the Argentine government told the Bolivian foreign minister, Enrique Finot, that Buenos Aires would guarantee Bolivia’s security against Paraguay on the condition that the oil fields be confiscated and turned over to Yacimientos Petrolíferos Fiscales Argentinos (YPF), the Argentine (p.263) state-owned oil company. YPF, in turn, would give Bolivia a 14% royalty on production (in addition to the land tax) instead of the 11% paid by Jersey Standard.45 Ironically, the official reason the Bolivian government gave for the nationalization was Jersey Standard’s unregistered sale of oil to Argentina in 1926–27.46

Bolivia did not hand the properties over to Argentina, but it did lay the groundwork for exporting to that country. The Bolivian government formed its own oil company—Yacimientos Petrolíferos Fiscales Bolivianos (YPFB)—which then signed barter agreements with Argentina and Brazil to export excess production. In April 1937, La Paz announced the Yacuiba–Santa Cruz railway project to link the Bolivian fields with Argentina.47

The U.S. government had few tools with which to pressure Bolivia. Military intervention was as logistically infeasible in 1937 as it had been in 1931; the United States lacked even plans to intervene. Nor could the Americans feasibly prevent Bolivia from exporting to Argentina. Paraguay acceded to a U.S. request to embargo Bolivian oil (and Peru might have proved amenable to U.S. suasion), but the Argentine government bluntly refused a “polite request” from the U.S. embassy.48 In February 1938, Assistant Secretary of State Sumner Welles advised the Bolivian government to go to arbitration. His explanation to Bolivian officials was that “the only way in which public opinion in this country was going to support the ‘Good Neighbor’ policy as a permanent part of our foreign policy would be for the policy to be recognized throughout the continent as a completely reciprocal policy and not one of a purely unilateral character.”49

Both the Bolivian government and Jersey Standard, however, resisted arbitration. Bolivia argued that its action was fully legal under local law. Jersey Standard argued that going to arbitration to ask for compensation would mean recognizing the validity of Bolivia’s right to confiscate its assets. Moreover, it was far from clear that Standard wanted compensation. Rather, in the words of John Muccio, the American chargé d’affaires, “The Standard Oil Company prefers to accept financial loss than to allow these countries to get the impression (p.264) that it can be forcibly expulsed.”50 The end result was that the U.S. government took little action in 1937 or 1938. Welles, in fact, had to pressure Jersey Standard to file suit in Bolivian courts.51 Unsurprisingly, the Bolivian Supreme Court rejected the claim a year later.

The Mexican Oil Expropriation

It was a second expropriation, in Mexico, that provoked the United States to act on behalf of American-owned private property. Mexico expropriated the foreign oil companies in 1938, a year after Bolivia. The Mexican expropriation, however, was neither encouraged by nor an imitation of the Bolivian action. Rather, it was the unfortunate result of a series of miscalculations on the part of the oil companies and Mexican labor unions.

The Mexican oil industry was not doing well by the late 1930s. Three traded companies—Mexican Eagle, Mexican Petroleum (a subsidiary of Jersey Standard), and Penn-Mex—produced almost all their oil in Mexico. A fourth, Mexican Seaboard, produced 62% of its oil in Mexico until the late 1930s.52 Together, these companies produced 78% of all oil in Mexico in 1937. Their share prices had been in decline since the 1920s (see table 7.2). Mexican Eagle shares fell 89% (in real terms) between 1920 and 1930. Share prices briefly rallied when the company’s Poza Rica fields came on line in 1933 but soon began to decline once again. With some vertiginous ups and downs, Mexican Seaboard shares collapsed by half in 1922 and then lost almost all their remaining value between 1925 and 1931 before recovering somewhat. The recovery, however, coincided with a monotonic decline in Mexico’s share of the company’s production from 57% in 1931 to 20% in 1936 and 1937—in other words, the market rewarded Mexican Seaboard’s ability to transform itself from a Mexican oil company into a Californian oil company.53 Penn-Mex shares slid in value because of a 1932 decision by its owner, the South Penn Oil Company, to (p.265)

Table 7.2 Real share price index of Mexican oil companies, adjusted for splits, 1921 = 100

Mexican Eagle

Mexican Petrolem

Penn- Mex

Mexican Seaboard

Standard Oil of N.J.

Sinclair Consolidated

Texas Company

1912

87

82

86

1913

54

71

99

1914

59

66

79

104

1915

42

132

525

106

217

180

1916

37

358

408

79

301

146

1917

43

213

297

69

117

62

1918

47

105

266

70

145

73

1919

80

126

271

71

138

86

1920

103

82

133

55

63

60

1921

100

100

100

100

100

100

100

1922

70

250

85

47

89

101

92

1923

34

224

42

38

119

84

1924

32

159

115

43

20

77

87

1925

37

188

89

41

22

73

82

1926

36

92

23

21

84

114

1927

31

214

177

189

23

195

136

1928

30

267

164

15

30

96

136

1929

205

5

36

64

113

1930

11

146

99

3

27

32

66

1931

10

98

68

2

18

19

28

1932

10

72

43

7

22

19

38

1933

19

79

20

11

34

37

66

1934

12

72

8

9

30

26

54

1935

7

89

11

13

35

31

75

1936

7

9

16

46

51

137

1937

7

7

7

29

26

94

1938

8

1

8

35

27

119

Source: 1924 and 1925 Mexican Petroleum from Moody’s; it is the annual average. 1921 Mexican Seaboard from Moody’s. Mexican Eagle data from Alberto de la Fuente, “El desplazamiento de México como productor de petróleo en los años veinte,” B.A. thesis (ITAM: Mexico City, 1998), p. 98, Moody’s, and the Times of London. Mexican Eagle share prices were converted to dollars at the market exchange rate and deflated using the U.S. producer price index. 1915–35 Penn-Mex from the Wall Street Journal and Moody’s thereafter. Other data are from the Wall Street Journal and Wharton Research Data Services, http://wrds-web.wharton.upenn.edu.

(p.266) liquidate most of the enterprise. South Penn (which owned 55% of Penn-Mex) arranged to swap the company’s existing stock, with a par value of $25, for new shares with a par value of $1. It then authorized Penn-Mex’s directors to “pay dividends out of any available funds … regardless of whether or not the excess was created through net earnings.”54 The directors immediately paid a special dividend of $5.18. Four days later, South Penn sold its remaining stake in the company to Sinclair Consolidated for $1 per share immediately plus an additional $18.75 to be paid out over an unspecified period of time.55

Mexican Petroleum’s share price was rescued from oblivion through negotiations by Jersey Standard and Standard Oil of Indiana (later Amoco) over the latter’s overseas assets. Indiana Standard owned 97.3% of the Pan-American Petroleum and Transport Company, which in turn owned 96% of Mexican Petroleum. Mexican Petroleum (which was separately traded) made up 21% of Pan-American’s assets by market value, the rest of which were located in Venezuela and the Dutch Antilles. (Pan-American refined Venezuelan crude in Aruba.) In April 1932, with the U.S. Congress debating oil import tariffs, Indiana agreed to sell Pan-American to Jersey Standard. Jersey Standard possessed a distribution network in South America and Europe, and thus could more easily divert Latin American production to those markets than could Indiana Standard. Jersey Standard wanted only the Venezuelan assets, but Indiana Standard refused to sell Pan-American’s properties separately.56 The deal closed at the end of 1932, and Jersey Standard acquired Indiana Standard’s stake in Pan-American. In 1935, Jersey Standard decided to buy up the remainder of “Mexican Pete” at par and delist the stock.57

Data from the companies’ published financial statements bear out the verdict of the stock market (see table 7.3). Mexican Eagle’s return on assets declined from 9% in 1921 to nil by 1928 and remained low until the Poza Rica discoveries boosted it back to 7%. Mexican Petroleum steadily lost money over the 1930s. (p.267)

Table 7.3 Returns on assets, Mexican oil companies

Weighted average

Mexican Eagle

Mexican Petroleum

Sinclair Pierce

California Standard

Imperio

Mexican Seaboard

Stanford

Penn-Mex

Agwi

Consolidated

1921

11%

9%

12%

34%

2%

1922

15%

8%

22%

53%

–7%

1923

6%

2%

9%

5%

6%

1924

3%

2%

3%

33%

5%

1925

11%

2%

16%

22%

1926

12%

2%

18%

16%

1927

6%

2%

8%

4%

1928

5%

0%

8%

0%

1929

7%

7%

7%

2%

1930

4%

5%

3%

7%

4%

1931

0%

–1%

0%

10%

0%

1932

–4%

2%

–9%

7%

0%

1933

–2%

5%

–7%

10%

1934

3%

7%

–2%

3%

3%

16%

8%

1%

5%

29%

4%

1935

4%

7%

0%

1%

6%

25%

7%

13%

2%

18%

2%

1936

3%

8%

–1%

–5%

0%

18%

7%

11%

1 %

22%

–3%

1937

5%

9%

–1%

8%

Source: Annual reports of Mexican Eagle, Pan-American Foreign, Standard Oil of New Jersey, and Mexican Petroleum; Moody's for Mexican Seaboard and Penn-Mex, Mexico's Oil for the other companies, and Mexican Petroleum in 1934–36. Author's estimate for 1937 using production and price data from Standard Oil of New Jersey.

(p.268)

Falling Back In

Figure 7.2 Mexican crude oil production, new wells drilled, and success rate, 190136

Source: Stephen Haber, Noel Maurer, and Armando Razo, “When the Law Does Not Matter,” Journal of Economic History (March 2003).

Note: 1901–16 is an annual average.

Did Mexican policy contribute to the oil companies’ parlous financial state? The answer appears to be no. First, the oil companies continued to prospect for oil during the 1920s and 1930s (see figure 7.2) Production peaked in 1921, five years before exploration began to decline. When the companies found oil, as in Poza Rica in 1930, they invested.

Second, the tax burden on the industry fell consistently after 1921. It is true that gross receipts from petroleum taxes as a percentage of the value of crude oil production rose from a low of 15% in 1925 to more than 30% by 1931. By the 1930s, however, production charges, export duties, royalties, and income taxes made up less than a third of government oil revenue. The remainder came from oil import duties and excises on domestic sales of refined products. The burden of import duties, obviously, did not fall on oil producers. Gasoline excise taxes might have fallen on crude producers but for the fact that the United States imposed no tariffs on oil or gasoline imports until 1932. (p.269)

Falling Back In

Figure 7.3 Mexican taxes (including royalties) as percent of the gross value of crude oil production, 1910–37

Source: Stephen Haber, Noel Maurer, and Armando Razo, “When the Law Does Not Matter,” Journal of Economic History (March 2003), p. 10; Luz María Uhthoff, “Fiscalidad y Petróleo, 1912–1938,” paper presented at the Segundo Congreso de Historia Económica, Asociación Mexicana de Historia Económica, October 2004; and Wendell Gordon, Expropriation of Foreign-Owned Property in Mexico (Washington, D.C.: American Council on Public Affairs, 1941), p. 80.

If a foreign-owned Mexican refinery could not pass along the burden of excise taxes to consumers, it would export instead. In fact, most of Mexico’s production of refined products was exported. The maximum burden of Mexican refined product taxes on producers was therefore equal to the cost of transporting refined products to the United States, which a congressional report estimated to be 28 cents ($3.90 in 2011 dollars) per barrel in 1931.58 The tax burden on the companies fell almost monotonically after 1922 (see figure 7.3).

Government action did reduce the value of the Mexican oil companies—but the government in question was not Mexico’s. Mexican production competed with output from producers in Texas, California, and Oklahoma—which together produced 84% of American output—and smaller fields in Kansas (4%), Arkansas (3%), Louisiana (2%), Wyoming (2%), and Pennsylvania (1%). In all, nineteen states produced oil in commercial (p.270) quantities by 1930.59 As the Depression set in, protectionist pressures built. In 1930, Congress reported that refineries using imported oil earned a profit of 26 cents per barrel while refineries using domestic oil earned only 11 cents. Despite the opening of the Panama Canal, which made it feasible for the first time to export Californian oil to the East Coast, Mexican and Venezuelan oil was still often cheaper in eastern markets. The independent producers and refiners therefore claimed that the “Big Four” oil companies used their access to foreign oil as a club to “coerce the independents and to break American markets.” Moreover, they presented evidence that the Big Four did not fully pass along lower crude oil prices to consumers. In 1931, the governors of Oklahoma, Texas, Kansas, and New Mexico urged President Hoover to impose “voluntary” import quotas on the oil companies. Jersey Standard, Standard Oil of Indiana, Gulf Oil, and Sinclair agreed to reductions of a quarter, and Shell cut imports by half. The voluntary quota did not satisfy the protectionists.

The U.S. Congress passed a bill imposing tariffs on imported oil on June 6, 1932. The rates were 21 cents per barrel on crude oil, $1.05 per barrel on gasoline, and $1.68 per barrel on lubricants.60 Hoover, of course, gladly signed the bill. The result was a doubling of the gap between the export price of Mexican crude and the New York price for oil of the same grade. Unlike Cuban sugar producers, however, the oil companies in Mexico exported relatively little of their crude to the United States. (The companies mostly refined their product in Mexico and exported to Europe.) The tariff, therefore, had little direct effect on their bottom lines. Rather, it raised the differential between the U.S. oil price and the Mexican oil price. Since the ability to export surplus production to the American market effectively kept a lid on the ability of the Mexican government to directly tax crude production in the home market, the U.S. policy had the perverse effect of giving Mexico City more leeway in taxing the industry while having little effect on the U.S. market.

(p.271) The Labor Disputes

The parlous state of oil company finances was on collision course with the increasing militancy of the oil unions. Strikes hit the Mexican Eagle refineries in Tampico in Minatitlán in April 1915, followed by a second set in 1916 and 1917. In May 1917 the labor unrest spread to Pierce’s operations in Tampico and Mexican Petroleum’s refinery in Mata Redonda.61 The government of the state of Tamaulipas stepped in and settled the Pierce strike, mandating a 25% wage increase.62 In June, Mexican Petroleum conceded the same benefits.63 Mexican Eagle gave in to a 1924 strike, conceding an eight-hour workday and the first collective bargaining agreement in the history of the Mexican industry.64 Other companies signed similar contracts.65 The strikes were violent: a Mexican government report stated, “Most workers do not agree with the [labor] movement and on various occasions told us that if most of them didn’t return to work, it was from fear of becoming victims of the violence committed against the persons of some other workers.”66

Follow-up strikes met a more determined response from the companies, with the support of the Mexican government. Mexican Petroleum, for example, conceded a collective bargaining agreement with the Huasteca union after a 1925 strike. When workers from a competing union killed a Huasteca member in 1925, the union declared a second strike. With government support, management fired the striking workers. It then rehired only a third of them.67 Mexican Eagle ended a refinery strike that same year by paying $123,000 to the leadership of the national Confederación Regional de Obreros Mexicanos, who in turn convinced the government to declare the strike illegal.68 Nevertheless, overall wage rates rose from 6 cents (U.S.) per hour in 1913 to 16 cents per hour in 1934.69 (In 2011 dollars, this was the equivalent of a rise from $1.40 per hour to $2.68 per hour, although that calculation does not take into account (p.272) changes in the relative cost of living in Mexico or the overall lower cost of living in that country relative to the contemporary United States.)

The final wave of labor disputes began at Mexican Eagle in 1934. The company’s union wanted a larger share of the returns from the new Poza Rica fields. The Mexican president, Abelardo Rodríguez, stepped in to mediate a settlement.70 In the wake of the settlement, the various oil unions united into the Sindicato de Trabajadores Petroleros de la República Mexicana (STPRM).71 A new set of strikes hit Mexican Petroleum in January 1935. According to U.S. government observers, the company preferred to close its facilities “rather than compromise with the workers.”72 The Federal Labor Board (Junta Federal de Conciliación y Arbitraje) declared the strikes legal, but the Mexican Supreme Court reversed the decision and ordered the workers back to their posts.

The imposed labor peace did not last. On November 3, 1936, the STPRM demanded a $2.3 million wage hike, eighteen paid holidays, twenty to sixty days paid vacation, health insurance, twenty-five days of severance pay for each year of service in the case of voluntary separation, and ninety days of severance in the case of involuntary separation. The union leaders were not naïve—they understood that the companies would react to increases in labor costs by reducing their workforces. The union leaders also understood that most Mexican oil fields were in decline and the Poza Rica finds were unlikely to generate enough new jobs to compensate for layoffs elsewhere. The STPRM therefore also demanded control over all hiring and firing decisions, leaving only 110 positions across the entire industry under management control. Union negotiators requested a response by November 17, 1936.73

The oil companies rejected the deadline. “The union draft contains over 250 clauses, covers 165 pages of legal-size script of which almost 40 embrace the wage schedule and took several months to formulate, and yet the companies were to ‘discuss’ and ‘approve’ the document in the peremptory period of (p.274) (p.273) 10 days,” said company representatives. The companies also refused to give up control over hiring and firing. “Owing to the present restricted number of supervisory positions, the industry is already suffering the consequences of lack of control and discipline.”74

The problem was that the STPRM rank and file wanted job security even more than they wanted higher wages. The one benefit that the companies could not concede under any circumstances was also the one benefit that the union considered nonnegotiable.75 Talks dragged on until May. On May 28, 1937, the unions called a strike.76 President Cárdenas personally intervened to head it off. In August, Cárdenas again intervened to avert a second strike.

In an attempt to bring labor peace, President Cárdenas then appointed a special commission to look into the companies’ finances. On August 14, 1937, the commission reported that the companies could afford a settlement of $7.3 million—in other words, everything the union was demanding (see table 7.4). A wildcat strike immediately broke out at Poza Rica.77 Cárdenas ordered it stopped.78 A second wildcat hit Mexican Eagle in September. An exasperated Cárdenas accused the workers of helping “capitalist interests” by turning the country against the labor movement.79 The strike ended when the company agreed to pay the workers 75% of lost wages and gave the union leadership an additional $6,944.80 (The payment to the leadership was worth $103,744 in 2011 dollars, using the CPI.)

On December 18, 1937, the Federal Labor Board published its initial award. The award granted the union its full $7.3 million. The companies would be allowed to reduce the number of personnel, as long as they made their reductions in order of seniority and paid severance worth three months’ pay plus ten additional days’ wages for every six months of service.81 The companies could fire workers for cause, but only after an investigation by a newly created National Mixed Commission of the Oil Industry. The companies, of course, appealed. On

Table 7.4 1936 demands of Mexican oil workers’ union, annual costs, dollars

Government estimate

Company estimate

Wage increases

$2,265,492

$3,438,506

Overtime

$333,431

$993,148

Holidays

$92,496

$311,434

Vacations

$334,139

$428,145

Savings funds

$636,077

$902,370

Medical service

$277,778

$463,512

Housing benefits

$901,217

$1,115,105

Other

$2,474,024

$3,097,312

TOTAL

$7,314,654

$10,749,533

Source: Wendell Gordon, Expropriation of Foreign-Owned Property in Mexico (Washington, D.C.: American Council on Public Affairs, 1941), p. 112.

March 2, 1938, the Federal Labor Board denied the appeal. The Supreme Court upheld the decision the next day.

Mexican Petroleum reacted by closing twenty-three wells, moving oil stored in the fields to the port of Tampico (presumably for quick export), shutting down the Mata Redonda refinery, and sending a letter to every employee stating that it would be unable to comply with the board’s order.82 The STPRM called for a national strike. The March 7 deadline fixed by the Federal Labor Board came and went. On March 14, the Labor Board warned that it needed a response from the companies by the following day. On March 15, the companies reported that they could not comply. The Federal Labor Board responded by suspending all contracts.83 With their pay contracts suspended and a strike deadline looming, workers began to seize loading terminals and shut down pipelines.84 The oil industry began to shut down.

President Cárdenas faced the imminent collapse of Mexico’s most important industry. By 1938, Mexico depended on petroleum for energy. As early as 1925, 63 percent of Mexico’s (p.275) thermal energy consumption derived from petroleum (as opposed to coal).85 Mexican railroads had mostly switched to oil burners—by 1932 the railroads used 73 percent of all the fuel oil consumed in Mexico. Moreover, a road-building spree made trucking ever more important: the number of cargo trucks on Mexico’s roads jumped from 7,999 in 1925 to 33,746 by 1937. Finally, oil provided a small but significant part of Mexico City’s electrical supply: the eighty-megawatt Nonoalco plant consumed 2,000 barrels of fuel oil a day.86 If the oil industry shut down, so would the Mexican economy.

Cárdenas could not allow that to happen. On March 18, 1938, he nationalized the companies. “Under such conditions, it is urgent that the public authorities take adequate measures to prevent grave domestic disturbances due to the paralysis of transportation and industry, which would make it impossible to satisfy collective needs and supply the consumer goods needed by our population centers.”87 The companies’ properties were placed under the control of a state-owned oil company called Petróleos de México, or Pemex. The oil workers went back to work, and Mexican avoided economic disaster.

Could the companies have afforded the settlement? Table 7.5 presents two estimates of the annual burden of the wage settlement: one using data from the Federal Labor Board and one from oil company accounts. According to company figures (taken from annual reports for Mexican Eagle, Mexican Petroleum, and Penn-Mex, and figures compiled by the Mexican government for the remainder), the oil companies earned $3.7 million in 1936. Eliminating depreciation and depletion expenditures implies a net cash flow of $7.0 million, less than the official estimate of the settlement. The first row in the table shows the government’s estimate of the cost of the labor settlement as a percentage of profits and cash flow; the second row repeats the exercise using company estimates.

The Mexican government accused the companies of transfer pricing, and estimated their profits at $15.4 million (see table 7.6). (p.276)

Table 7.5 Burden of the 1937 Mexican oil industry labor settlement

Percent of cash flow

Percent of profits

Federal Labor Board

39%

47%

Oil company accounts

153%

288%

Source: See text.

Mexican Eagle accounted for most of the difference between the companies’ reported profits and the Mexican government’s estimate. Mexican Eagle was profitable by any measure. The lowest estimate of the burden on Mexican Eagle would have been 31% (using the government’s figures) and the highest 102% (using the company’s). Even the low figure, however, would have been a substantial hit to the company’s bottom line, and the high figure would have put the company into the red. For the other companies, the burden would have been higher.

The companies had three additional reasons to go to the mat over the union demands. First, they did not want to lose the ability to hire and fire at will. If the union prevailed on this issue, it would gain greater leverage to make future demands, and management’s ability to cut costs would be greatly reduced (or even eliminated). Second, the companies had not expected the Mexican government to nationalize. After Cárdenas issued his decree (in response to the threatened shutdown of the industry), they expected the government to place their properties into some sort of temporary receivership. President Cárdenas, however, decided against receivership because he feared the consequences of “interminable legal proceedings.”88

Finally, many of the companies had profitable assets—but also militant workforces—in the West Indies, Venezuela, and California. They wanted to maintain a reputation of refusing to give in to labor demands. Jersey Standard, in particular, was losing money on its Mexican properties but had hugely profitable operations in Venezuela, where it faced very real labor (p.277)

Table 7.6 Mexican oil company profits, 1936, millions of dollars

Profits

Cash flow

Gov’t estimate

Company estimate

Gov’t estimate

Company estimate

Mexican Eagle

$11.9

$3.9

$13.2

$5.2

Mexican Petroleum

$1.9

($0.8)

$2.7

($0.0)

Pierce-Sinclair

$0.6

($0.2)

$1.1

$0.3

California Standard

$0.1

($0.0)

$0.5

$0.4

Agwi

$0.2

$0.1

$0.2

$0.1

Penn-Mex

$0.0

$0.1

$0.0

$0.1

Stanford

$0.1

$0.1

$0.2

$0.2

Richmond

$0.0

$0.0

$0.0

$0.0

Imperial

$0.1

$0.1

$0.1

$0.1

Cía. de Gas y Combustible

$0.3

$0.3

$0.3

$0.3

Sábalo

$0.1

$0.1

$0.1

$0.1

Source: Mexico’s Oil: A Compilation of Official Documents in the Conflict of Economic Order in the Petroleum Industry, with an Introduction Summarizing Its Causes and Consequences (Mexico City: Government of Mexico, 1940), pp. 293–95, 317–19, 331–33, 347–49, 365–67, 381–84, 390–92, and 433; Moody’s Manual of Investments, various.

threats. After twenty-seven years of rule, Venezuelan President Juan Vicente Gómez died on December 17, 1935. After his death, riots wracked the Maracaibo oil zone. The violence became so bad that foreign oil executives and their families were forced to flee aboard oil tankers. Gómez’s successor, Eléazar López Contreras, calmed the crisis via the “February Program,” which promised wage hikes and improvements in working conditions for the oil workers. He then passed the Labor Act, which allowed collective bargaining and mandated profit-sharing, and introduced a new constitution that allowed for export taxes. On December 11, 1936, a forty-three-day strike hit the oil zone, cutting production 39% before President López intervened to end it.89 The López administration then sued the companies, accusing them of owing unpaid royalties and taxes.90 In June 1937, López altered the buoy tax (p.278) on ships transiting Lake Maracaibo from one calculated on tonnage to one based on the value of the crude they carried, in effect raising its burden.91 In a January 1938 meeting with American officials, a Venezuelan representative stated, “[The] government had no desire to tangle with the companies and become involved in a protracted fight [but] if the companies did not appear more responsive, the government will have no other recourse.”92 The government also announced its attention to revoke the companies’ exemption from import tariffs.93 When the companies protested, the government reopened the lawsuits. In April 1938—scarcely two weeks after President Cárdenas ordered the expropriation of the Mexican industry—the Supreme Court of Venezuela ordered the Mene Grande Company to pay $4 million in back taxes.94

In short, the oil companies in Mexico made rational gambles. They gambled low-value assets against the probability that the union or the government would refuse to back down. For them, it was a good bet. First, the assets they gambled with were relatively low value. Second, the union demands were unaffordable. Third, they had not expected the government to nationalize. Finally, several of the companies had a reputation to maintain in other jurisdictions.

The unions and government also behaved rationally. The primary union interest was not a wage increase. Rather, it was job security. Union members rejected any attempt by the leadership to trade job security for higher wages.95 Similarly, the Mexican government’s goal was not higher revenue (or even a symbolic nationalist victory) but the need to keep the oil-burning domestic economy running. Combine that with the need to maintain the existing stream of tax revenues generated by the oil industry, and it is clear that once the unions took steps to shut down the industry, the government had little choice but to act. Nationalization was the easiest way to ensure that the industry would remain open—the political benefit was merely icing on the cake.

(p.279) The Oil Companies Respond

President Franklin Roosevelt had little regard for the oil companies. The Good Neighbor policy eschewed intervention, and Roosevelt was ideologically sympathetic to labor and state control over natural resources. The oil companies, however, had a number of tools at their disposal to involve the American administration and rearm the empire trap. After several years of disuse, however, its hinges were rusty, and there would be a few failed attempts before the oil companies succeeded in moving the United States to action.

The first move was to mobilize public opinion. The U.S. ambassador to Mexico, Josephus Daniels, complained that the companies quickly “started to build propaganda fires under the government to compel a return of the properties.”96 Jersey Standard, in particular, financed a large-scale publicity campaign. It distributed a wide array of free publications, from short press releases to full-length books. Editorial cartoons distributed by Standard portrayed the expropriation as a direct assault on American interests.97 The New York Times reproduced Jersey Standard press releases almost verbatim. The paper’s editorial page consistently called for “punitive” action against Mexico.98 Moreover, the companies’ propaganda highlighted “terrorist” incidents aimed at Americans and called for U.S. tourists to stay away.99 The companies also resorted to selective leaking, in an attempt to tie the American government’s hands. For example, on March 28, 1938, Secretary of State Cordell Hull delivered a private note to the Mexican government requesting “fair, assured and effective compensation.” To Hull’s dismay, the key phrase appeared in the next day’s papers, where Hull’s demand was described as “forceful.”100

The propaganda campaign had little success. Unverified reports indicated that Mexico’s tourism receipts dropped by 33% in 1938.101 Harder data showed a 21% drop in the number of tourist visas issued by the Mexican government. The problem (p.280)

Falling Back In

Figure 7.4 Tourist entries to Mexico, 1929–46

Source: Instituto Nacional de Estadística y Geografía.

was that 1937 was a particularly good year for Mexican tourism: the number of entries in 1938 was still higher than it had been in 1936 and rapidly resumed its upward trend (see figure 7.4). Moreover, the U.S. recession that began in May 1937 did not end until June 1938, and the drop in tourist entries was as likely due to poor economic conditions as to the efforts of the oil companies.

The American public did not take much notice of events in Mexico. In December 1938, Gallup asked the following question: “Which (1938) news story do you consider most interesting?” The answers included the invasion of Czechoslovakia (23%), Nazi persecution of Jews (12%); Republican gains in Congress (10%), Corrigan’s flight (7%), the Fair Labor Standards Act (6%), the New England hurricane (5%), the recession (5%), the New York Yankees World Series sweep of the Cubs in four games (5%), the Japanese invasion of China (4%), and labor unrest (4%). The oil expropriation did not make the cut.102 This is not to say that Mexico’s action enjoyed public support in the United States. It is to say that public outrage was insufficiently large to force the Roosevelt administration to take action.

(p.281) The oil companies then tried to boycott Mexico’s oil exports. Only the United Kingdom gave official support. (It could afford to do so because, by 1938, Mexico provided only 2.1% of British oil imports, down from 10.1% in 1935.)103 Courts outside the United Kingdom blocked attempts to extend the boycott. A U.S. federal district court dismissed a case accusing the Eastern States Petroleum Company of importing $1.7 million worth of oil claimed by Mexican Eagle. Belgian and Dutch courts decided similarly. In France, Mexican Eagle won a lower court decision, but an appellate court overturned it and forced Mexican Eagle to pay damages to distributors who had been unable to take possession of their oil. A state judge in Alabama went so far as to order sheriffs to prevent Mexican Eagle from taking possession of expropriated tankers.104 The legal basis behind these decisions was Mexico’s sovereign immunity.

The fundamental problem with the boycott was not that it lacked government support—although that didn’t help—but that it was ultimately self-defeating. With domestic demand for fuel skyrocketing, Pemex made up for lost export revenues by selling more to the domestic market.105 Before 1938, Mexico simultaneously exported and imported refined oil products. (Such a pattern was not at all unusual in the 1930s and is not at all unusual in the 2010s.) By 1940, however, the Mexican industry had reoriented itself around the domestic market. Sales recovered to 1936 levels because of a rise in domestic sales from around 75 million pesos to 150 million pesos.106 (See figure 7.5.) Real revenues didn’t surpass their 1937 peak until 1947, but the Mexican oil industry survived the boycott.107

Rousing the Americans

Private attempts to coerce the Mexican government having failed, the oil companies devised a political strategy to drag the U.S. government into the dispute. Doing so was an uphill battle. Not only had many of the Good Neighbor–era policy (p.282)

Falling Back In

Figure 7.5 Domestic and export sales of Mexican petroleum products, 1934–48

Source: Export sales from J. Richard Powell, The Mexican Petroleum Industry, 1938–50 (Berkeley: University of California Press, 1956), p. 118. Domestic sales, 1934–36, from Mexico’s Oil: A Compilation of Official Documents in the Conflict of Economic Order in the Petroleum Industry, with an Introduction Summarizing Its Causes and Consequences (Mexico City: Government of Mexico, 1940), pp. 293–95, 317–19, 331–33, 347–49, 365–67, 381–84, 390–92, and 433. Domestic sales, 1938–48, from Powell, The Mexican Petroleum Industry, appendix table 17.

changes blunted the political influence of private interests in American foreign policy, but also there was a strong current in Washington against confronting Mexico. The most hostile official (from the companies’ point of view) was Interior Secretary Harold Ickes. “If bad feelings should result in Central and South America as a result of the oil situation that exists just now with Mexico,” wrote Ickes, “it would be more expensive for us than the cost of all the oil in Mexico.”108 Moreover, Ickes feared that sanctions could cause the Mexican government to collapse, which would be far worse for American interests than the loss of some oil fields.109 Josephus Daniels, the U.S. ambassador to Mexico, shared Ickes’s hostility toward the companies.110 Ickes and Daniels were joined by Treasury Secretary Henry Morgenthau. Morgenthau worried that economic instability in Mexico might push the Mexican government into allying with the Axis or turning toward communism.111

(p.283) Secretary of State Cordell Hull provided the oil companies the opening that they needed. Hull was no fan of the oil industry, but he did want to get a reciprocal trade agreement from the Mexican government. He was angry about a Mexican decision to increase tariffs, and he was easily persuaded of “the need to punish Mexico economically to gain its respect for American business before closer economic ties with the country could be achieved.”112 The oil companies therefore lobbied the secretary of state to craft a plan that would unite a divided executive branch around sanctions.113

The plan hinged on exploiting political divisions over the Silver Purchase Act of 1934. The Silver Purchase Act committed the Treasury to buying a fixed quantity of silver every year until silver stocks reached 25% of its total specie reserves or the price reached $1.29 an ounce. This was an enormous boon for Mexico, which became the United States’ third-greatest silver supplier after Hong Kong and China. The demand for Mexican silver increased employment in the mining sector and provided tax revenue. In 1936, the Mexican government earned 24% of its revenue from silver, twice what it earned from oil.114 By focusing on silver rather than oil, he United States could hit Mexico where it hurt.

Moreover, the Silver Purchase Act was far from universally popular. Morgenthau was ambivalent about the act. It allowed the Treasury to build up specie reserves that it could use to counteract Federal Reserve policy, but the concurrent Gold Stabilization Act of 1934 provided ample resources for that purpose. The Silver Purchase Act, in this view, was just a waste of money.115 There was also opposition to U.S. purchases of Mexican silver in Congress, most notably from Senator Key Pittman (D-Nevada), who had authored the original bill but was unhappy with the extent to which it was used to buy silver from overseas rather than domestic producers—most of which were located in his home state.

Hull focused his energies on these two pressure points: Congress and Morgenthau. As his opening salvo, Hull sent a note to (p.284) Mexico on March 26, 1938, denouncing expropriation without compensation. In Congress, Hull’s allies introduced bills threatening to take the initiative on sanctions away from the White House—thus maintaining pressure on the executive to act. In January 1939, Samuel McReynolds (D-Tennessee), the chairman of the House Foreign Affairs Committee, introduced a bill calling for an end to the silver purchases that subsidized Mexico’s economy.116 (Hull had served in Congress with McReynolds, and both had been judges back in Tennessee.)117 Other congressmen, notably Martin Kennedy (D–New York) and Hamilton Fish (R–New York) also introduced anti-Mexico resolutions. Hull ensured that the bills would not pass, since they would interfere with the negotiations between the Mexican government and the oil companies, but they served as a useful cudgel against opposition to sanctioning Mexico inside the Roosevelt administration.118

Hull also convinced Morgenthau that the oil expropriation was a convenient excuse to suspend the Silver Purchase Act.119 (In this, Hull had the support of Treasury economist Harry Dexter White.) Because halting purchases would lower the price of silver and devalue years of accumulated reserves, Morgenthau carefully designed the policy to make it appear as though his hand was being forced by events in Mexico. First, the State Department announced the suspension, not the Treasury. (State and Treasury played a deliberate game of buck-passing, depending on the audience: State announced the suspension to domestic audiences, while pinning responsibility on Morgenthau in a letter to President Cárdenas.) Second, Morgenthau well knew that suspending silver purchases would do little to harm Mexico unless the United States also cut the official support price, since Mexico could sell silver on the open market at the U.S.-supported price. He also knew, however, that other countries would immediately start dumping their silver stockpiles in the world market once the rumors of the new policy got out, in the fear that the United States would try to punish Mexico by lowering the price. Of course, if enough countries started to (p.285) dump their silver reserves, the United States would be forced to lower the silver price or see taxpayers’ money flow away to foreign central banks. Leaking the possibility of a support-price cut, then, could create a situation where Morgenthau would have to cut the support price.120 Spain fulfilled Morgenthau’s prediction when its ambassador to the United States announced the sale of 56 million ounces of silver. Feigning indignation, Morgenthau called that “the last straw” and lowered the silver price from 45 cents to 43 cents an ounce.121

Morgenthau’s plan had an additional legislative component designed to win President Roosevelt’s support. At the time of the Mexican oil expropriation, the Fair Labor Standards Act was bottled up in a House committee. Once released and passed on the House floor, it would then go to a conference committee where it would face hostile Democratic senators from the silver-producing state of Nevada. Once Morgenthau cut the support price for silver—ostensibly to sanction Mexico—Roosevelt could hold out a promise to reinstitute price supports for domestic silver as a way to keep recalcitrant Nevadan legislators inside the New Deal coalition.122 Morgenthau was hesitant to explicitly commit Roosevelt to the strategy, so he sent a letter to the president while he was on vacation in Warm Springs, New York, stating simply that Morgenthau would interpret a lack of communication from Roosevelt as consent.123

Final Settlement

The silver sanctions got Mexico to the table, but what Hull failed to anticipate was that the oil companies wanted to delay resolution as long as possible to cause Mexico as much pain as possible. After all, they knew that their Mexican properties were worth little. They wanted to set a precedent that would discourage other countries from attempting to alter oil concessions. This was not an abstract fear. Spain nationalized Jersey Standard’s properties in 1927. (The U.S. companies received full (p.286) compensation in 1928.)124 In 1931, Uruguay established a state-owned oil-refining and retailing company that drove down the private share of the market from 100% in 1931 to 50.2% by 1937.125 In 1932, Chile threatened expropriation, the advent of which was headed off only by a well-timed military coup.126 In March 1937, as we have seen, the Bolivian government nationalized Jersey Standard’s concessions, and the Argentine junta was openly hostile to foreign oil companies.127 In 1939, Chile under President Pedro Aguirre again proposed nationalization, but the Chilean Congress demurred.128 None of these areas were particularly important, but the companies felt they needed to draw a line before nationalization threatened something lucrative—such as, as we have also seen, their assets in Venezuela.

The result was a long and drawn-out drama, the end result of which was known by all the parties in advance. The oil companies demanded a long-term contract to operate the expropriated properties, after which they would turn them over to the Mexican government. They also insisted on compensation for lost revenues and wanted the agreement enshrined in a treaty with the United States.129 Needless to say, the Mexican government did not find this acceptable.130 President Cárdenas proposed compensation for the properties as they were valued in 1938. Alternatively, he suggested the formation of multiple oil consortia, in which the companies would have a financial interest equal to their interest in the expropriated properties, but over which Mexico would exercise control by appointing a majority of the directors.131 (The initial draft of Cárdenas’s second proposal seemed to offer the companies double compensation: payment for property and a financial stake in the new consortia.) The Mexicans also wanted a short contract, because they feared that new technologies would reduce oil consumption in the future.132

Roosevelt attempted to break the logjam by suggesting that the oil companies accept Cárdenas’s proposal on a temporary basis with boards split between the companies and the government, but both sides demurred.133 The United States then tried (p.287) to suggest that the companies use the 1929 General Treaty of Inter-American Arbitration to settle their claims. The companies refused, since the treaty provided for state-to-state arbitration, and not investor-state arbitration; the companies would therefore be reliant on the Roosevelt administration to select the arbiters and represent the companies’ interests.134

In 1940, Sinclair Oil broke with the other companies. It accepted an offer of $8 million in cash compensation plus 20 million barrels sold at a 25 cents per barrel discount off market prices.135 Negotiations with the other companies continued to drag. By the middle of 1941, the Roosevelt administration had run out of patience and effectively imposed a settlement.136 Under an agreement made with Mexico on November 19, 1941, the two governments appointed a two-person committee consisting of Morris Cook and Manuel Zevada, both trained engineers. The two spent five months researching, and presented their outline of a final settlement on April 17, 1942. The Mexican government immediately credited $9 million to the United States. The two governments approved the payment schedule for the rest of the compensation, including interest, in September 1943. The lion’s share of the settlement was paid by 1947; Mexico made additional small interest payments through 1953.137 Ultimately, the compensation payments exceeded the agreed-upon amount by almost $6 million in nominal terms.138

Did the American companies receive fair compensation? It is possible to compute the price Jersey Standard paid to acquire Mexican Petroleum in 1932.139 Jersey Standard purchased Pan-American for $47.9 million in cash and 1,778,973 Jersey Standard shares. Pan-American owned 97% of Mexican Petroleum, which was traded separately on the NYSE. At market value, Mexican Petroleum made up 21% of Pan-American.140 Jersey Standard’s shares were valued at $26.13 at the time of the deal: both the cash and shares were delivered in four annual payments. The discounted 1932 value of the deal (using the interest rate on corporate debt) came to 21% × 97.3% × 96% × ($44.3 million in cash + $43.0 million in shares) = $17.5 million.141 (p.288) Adjusted for inflation, that figure was $17.9 million in 1938 dollars. Adding in the value of the outstanding shares bought at par in 1935 raises the total price that Jersey Standard paid for its Mexican assets to $19.2 million (see table 7.7). By that standard, the Mexican government fairly compensated Jersey Standard. It should be noted that the settlement allowed Jersey Standard to retain most of Mexican Petroleum’s liquid assets and the company’s tanker fleet.

It is unlikely that Jersey Standard’s Mexican assets were worth more in 1938 than in 1932. First, Mexican Petroleum paid no dividends after 1932. Second, it lost money every year, save a brief moment of breakeven in 1935. It is possible that Jersey Standard used transfer pricing to extract value, but that begs the question of why the company would transfer income from a jurisdiction with no corporate income taxes to one with a 19% rate on all corporate income above $25,000.142 Third, the fields controlled by the American companies (most of which were owned by Mexican Petroleum) were in decline and continued to decline after 1938, unlike the Poza Rica fields (see figure 7.6).

Did the Mexican government compensate Mexican Eagle fairly? There are reasons to believe that it might not have. First, the British government, unlike the American one, had no levers to use against Mexico once the oil boycott failed. Moreover, London could not credibly promise to end the boycott that it had started, because of fears that ending it to conciliate Mexico would anger its allies in Venezuela and Iran. The British ambassador to Caracas reported that the government there would be “most disturbed if they had any reason to believe that [Britain] might resume oil buying in Mexico to the detriment of Venezuela.”143 London feared that an angry Venezuela might be tempted to try “squeezing us over the condition on which we purchase their oil.”144 Britain also worried about Iran, enough to make extra royalty payments of $6.6 million in 1939 and $17.7 million in 1940 and 1941 in order to compensate Tehran for a decision to maximize tanker use by restricting its (p.289)

Table 7.7 Value of Mexico’s final settlement with foreign oil firms, dollars

Company

Nominal compensation

1938 net present value

Market value

Mexican Eagle

$132,769,721

$43,552,824

$12,233,340

Jersey Standard

$23,138,947

$19,371,222

$19,188,049

Sinclair

$9,643,827

$8,602,638

Socal

$4,515,602

$3,780,325

Sábalo

$1,129,381

$945,483

Conoco

$792,807

$663,714

Seaboard

$613,171

$513,328

Source: In addition to the sources mentioned in the text, see U.S. Department of State. “Compensation for Petroleum Properties Expropriated in Mexico.” The Department of State Bulletin, Vol. 6, April 18, 1942, p. 351, Tables 5 and 10.

Note: Compensation was valued by converting all payments into 1938 dollars using the U.S. GDP deflator and discounting them back to 1938 using the 3.2% rate at which the U.S. government lent to Mexico in 1943. (This rate was approximately equal to a 3.1% rate on 10-year corporate bonds in the United States.) The second column assumes that the additional payments were divided among the receiving corporations in proportion to their share of the original deal.

exports to markets west of Suez.145 The situation was a problem for London: after all, if the United Kingdom could not credibly offer to lift the sanctions, then Mexico had no reason to offer compensation. Foreign Secretary Anthony Eden was not happy—“I do not like giving the Shah and Venezuela a veto on our relations with anybody.”146

Second, Mexican Eagle’s Poza Rica oil fields were most emphatically not in decline at the time of nationalization (see figure 7.6). They were expected to produce significant income in the future. Mexican Eagle risked losing a substantial option value on those properties.

Third, in 1938, the U.S. government had few reasons to care about protecting British investors in Mexico—in fact, rather the opposite. In 1941, the United States weakened Britain’s bargaining position by explicitly requesting that the United Kingdom reestablish relations with Mexico. Eden decided not to ask for anything from the Americans in return. The reason was that (p.290)

Falling Back In

Figure 7.6 Mexican oil production by field, 1927–49

Source: J. Richard Powell, The Mexican Petroleum Industry, 1938–50 (Berkeley: University of California Press, 1956), p. 56.

Eden wanted to secure future American cooperation against Hitler. The United States, he believed, would be more amenable if Whitehall refrained from bargaining over Mexico.147 The United Kingdom therefore reopened relations with Mexico on October 21, 1941. Charles Bateman, the new British minister to Mexico City, privately wrote that Eden had made a grave mistake, since it would now be impossible (he believed) for the Mexican government to make a better offer to a British company than it had made to American ones.148

Bateman turned out to be wrong—with American support, Mexican Eagle secured compensation from Mexico far in excess of the market value of its assets. Paradoxically, the decline in Britain’s position during World War II strengthened the country’s bargaining position against Mexico. In 1938, the United States had no desire to help the business interests of a potential rival. Nor did the United States have strategic reasons to help London, which did not need Mexican oil. By 1946, on the other hand, the United Kingdom had been transformed from a potential U.S. rival to an important junior partner facing substantial balance of payments problems. Under the new circumstances, Washington reacted differently to British requests for help. The United States had leverage over Mexico (p.291) stemming from Mexico’s need for official U.S. capital: in 1943, Mexico negotiated a $10 million loan from the U.S. Export-Import Bank for the construction of a new refinery at Azcapotzalco and production facilities at Poza Rica. In 1946, it began discussions over new credits, worth potentially $150 million. When London asked Washington to refrain from extending any loans to Pemex pending a settlement, the United States tacitly agreed.149 The United States then signaled Antonio Bermúdez, who would later become the general director of Pemex, that a rapid settlement of outstanding British claims was the only way to receive the credit.150 The Mexican government responded: talks between Mexico and the United Kingdom began in January 1947.

The British representative, Professor Vincent Illing, opened with a demand of $257 million. Antonio Bermúdez countered with an offer of $42.9 million. The two sides settled for $81.5 million. Payments began in 1948, and with interest totaled $132.8 million through 1962. Mexican accounts portrayed the settlement as a great nationalist triumph. Historians have generally agreed with that assessment. For example, Lorenzo Meyer wrote, “The way in which El Águila [Mexican Eagle] was compensated meant, among other things, that Mexico did not pay the full value of the oil deposits claimed as its own by the company. In fact, by compensating only a third of total property value … the last vestiges of the Calles-Morrow agreement were destroyed and the original spirit of Paragraph 4 of Article 27 of the 1917 Constitution at last came into effect.”151

Sadly for the nationalist view, the available data indicate that the British (thanks to the Americans) ran away with the store. The ex ante 1938 net present value of the payments came to an astronomical $82.6 million. The postwar inflation in the United States drove the 1938 net present value of the deal down to a still rather high $43.6 million (see table 7.7). Mexican Eagle’s market capitalization in 1936, right before the outbreak of labor unrest, was only $12.2 million. The book value of the company’s assets in 1937 came to only $16.5 million. Considering (p.292) that the settlement came to almost five times the former amount, it would be hard to argue that the company was under-compensated for its properties.

Resolving the Bolivian Impasse

The U.S. response to the Mexican expropriation had the additional side effect of prompting the State Department to intervene on behalf of Jersey Standard in its ongoing dispute with Bolivia. After all, once the Roosevelt administration had made the decision to back the oil companies in Mexico, it become difficult to do otherwise in Bolivia. Moreover, in 1939 the United States had a tool that it had lacked two years earlier: state-to-state loans from the U.S. Export-Import (Exim) Bank.

The Exim Bank had been created by Roosevelt in 1934 under the National Industrial Recovery Act. Its original purpose, clear from the name, was to help finance foreign trade. (The Depression had destroyed trade credit along with other sorts of credit.) The Exim Bank was not originally intended for use in commercial relations with the financially unstable nations to the south. In fact, its original policy was to avoid loans to states or state-owned entities, especially if those states were in default on their debts to private American creditors.

In 1937, however, a Treasury official named Herbert Feis ran into unexpected resistance from American direct investors when he rejected loans to countries that were in default on their private foreign debts. Feis rejected loans to Peru, Ecuador, the state-owned Central Railways of Brazil, and the Chilean State Railways because he believed that those countries were not trying to resolve their outstanding debt issues. In an earlier time, Feis’s position would have been uncontroversial. In 1937, however, Feis’s decisions annoyed major industrial companies, such as Westinghouse, at a time when American financiers retained little political power. Feis had to back down over the Chilean deal almost immediately.152 In March 1938, Sumner Welles intervened (p.293) to approve the loan to Brazil’s railway company.153 In June, the engineering firm of J. G. White approached Exim to discount $5 million in 4% notes issued to it by the Haitian government. Morgenthau and Harry Dexter White supported the rediscount, arguing that Haiti was cruising toward another default, and might abandon the dollar and restrict imports if Exim refused. Welles worried that the loan might raise cries of “imperialism,” but he ultimately changed his mind, going so far as to insist that the credit be tied to U.S. exports.154 Soon thereafter, Exim began to lend directly to Latin American governments.

In Bolivia, the government desperately wanted Exim credit. Its leaders also desperately wanted to stay in office. They feared that any appearance of caving in to Jersey Standard might lead to their overthrow by more radical elements.155 This fear was far from groundless. President Germán Busch committed suicide on August 23, 1939, and his successor, Carlos Quintanilla, handed power over to Enrique Peñaranda after an obviously rigged election. Peñaranda faced opposition from Busch’s socialist base of support.

The United States denied Bolivia access to official credit unless it compensated Jersey Standard. In September, the heads of the Exim Bank and the RFC told the U.S. Senate that it would refuse loans to “a country that is confiscating our property.”156 On December 26, 1939, the Bolivian government formally requested an American development loan. The State Department responded with a list of potential projects, but included a somewhat long-winded caveat:

In view of the fact that satisfactory achievement of this economic cooperation in all respects must depend upon assurance that the undertakings will rest on a secure basis, and in order to secure the necessary support and cooperation of American private interests, it is believed to be essential before American financial assistance is given that a settlement will have been reached of the unfortunate (p.294) controversy that has arisen in regard to the cancellation of concessions of American oil properties in Bolivia. If the plans for economic cooperation are to be fruitful, it is believed that this difficulty must be gotten out of the path.157

President Peñaranda could not persuade the Bolivian Congress to give him the authority to negotiate with Jersey Standard, but the foreign minister privately told American officials that he was willing to talk. The rub was that Jersey Standard no longer wanted to talk to Bolivia. “It might indicate that confiscations by a foreign government are merely private matters between the government and its victim, although such confiscations materially impair the interests of all American citizens in the confiscating country and in others.”158 Jersey Standard wanted the U.S. government to negotiate on its behalf. In keeping with this position, the company agreed to allow a negotiating board to propose—or better yet, impose—a settlement.159

Finally, at the beginning of 1942, with the Bolivian Congress out of session, Bolivia desperate to receive American loans, and the U.S. government impatient to secure Bolivian support in World War II, the Peñaranda administration proposed $1 million in compensation for Jersey Standard. On January 27, the Bolivians upped their offer to $1.7 million. Jersey Standard accepted, and the State Department communicated that American aid was contingent on the Bolivian Congress’s approval of the offer. Said approval came in April, and Jersey Standard received a check for $1,729,375. In return, Bolivia received $25 million in various development loans from the United States.160 In a sense, Washington provided the cash to compensate Jersey Standard, but it should be noted that Bolivia repaid its loans from the U.S. government in full and on time.

Did Jersey Standard receive fair compensation? The book value of the company’s investment was roughly $17 million, but that is not a good estimate of value. Jersey Standard stopped exploring in 1932 and concentrated on developing its existing (p.295)

Falling Back In

Figure 7.7 Bolivian oil production (thousands of barrels, left axis) and gross revenues (millions of 2011 dollars, right axis), 1926–41

Source: Statistics Norway and Comercio exterior de Bolivia (various years).

fields. It is likely that the market value of the company’s investment was significantly less than its book value. We do not have market prices against which we can benchmark the compensation. We do know, however, that between 1927 and 1936, Jersey Standard’s operation in Bolivia generated gross revenues around $760,000 (see figure 7.7). At a discount rate of 10%, the company would need to have been enjoying margins above 68% to justify a price of $1.7 million. Margins that high are not consistent with Jersey Standard’s reluctance to invest.

Additional evidence that Jersey Standard’s Bolivian properties were not profitable comes from the industry’s postnationalization experience. The new state-owned company, Yacimientos Petrolíferos Fiscales Bolivianos (YPFB), retained most of Jersey Standard’s technical employees. YPFB expanded production by more intensively working Jersey Standard’s properties; the company drilled only five exploratory wells between 1939 and 1949.161 Finance was not an issue: $8.5 million of Bolivia’s $25 million 1942 U.S. loan package went to the construction of a small refinery at Cochabamba and a crude pipeline to link the refinery to the Camiri oil field.162 In order to ensure a market for its production, YPFB signed barter agreements with Brazil and (p.296) Argentina. The Brazilian agreement forced YPFB to buy pipeline equipment from Brazilian suppliers, and its revenues from Brazilian sales could only be used to purchase Brazilian goods. The same stipulations applied to the Argentine agreement.163 As disadvantageous as the agreements were, however, Jersey Standard would not have accessed either market at all.

Despite higher production, new markets, and plentiful capital, YPFB in its first decade earned most of its profits from the duty-free importation of petroleum products. It lost money on the domestic production of oil.164 Government revenues rose postnationalization, but they did not come from YPFB. In fact, the government does not appear to have received the 11% royalty that it was supposed to receive from YPFB.165

In short, the evidence indicates that Jersey Standard received fair compensation, courtesy of the Roosevelt administration. With the oil expropriations in Mexico and Bolivia, American-owned foreign producers rediscovered their political clout, and the empire trap was back in operation.

The Empire Trap Strikes Back

America’s informal empire of the late 1930s and beyond was a mixture of old and new. On the one hand, the political pressures that drove the U.S. government—the demands of American-owned overseas interests threatened by local political or financial instability—were virtually unchanged despite a decade-long pause. The mechanisms, however, were considerably changed, enough to warrant a distinction between a first and second American empire. For one thing, the coalition of bondholders and direct investors that powered the empire trap during its first iteration was wholly absent during its second. With the demise of the private market in foreign debt came the near-total collapse in the existing bondholders’ political clout. There were still Americans who held sovereign loans made years and decades ago, but their ability to lobby Washington was tiny. For (p.297) another, the dollar diplomacy that was so prominently a feature of America’s pre-Depression relations with Latin America and Liberia—the receiverships, the fiscal advisers, the government-backed private loans—disappeared completely.

The second American empire was a different beast. It relied on institutions such as the Export-Import Bank, the promise of whose loans was wielded to such effect in Bolivia in the early 1940s. The growing anxiety over the spread of communism also radically changed the politics of intervention, while the increasing reliance on covert action after World War II opened up a whole new set of possibilities.

The interventions of the early 1950s display this mix of old and new. An intervention in Bolivia demonstrates the extent of the continuity in America’s informal empire across the first-second divide: to ensure compensation in an expropriation dispute, the Eisenhower administration in 1951–52 exercised the same leverage that Roosevelt had used more than a decade earlier. And though the global spread of communism radically changed the calculus of intervention, it was less of a driver than the received wisdom suggests: during the early years of the Cold War, the Department of State was not so preoccupied by the Sino-Soviet threat that it ignored the demands of American interests abroad, at least in Latin America. Meanwhile, the increasing deployment of covert action changed the face of U.S. intervention across Latin America and beyond.

Bolivia Redux

Political instability in Bolivia touched off a classic crisis that would not have been out of place half a century earlier. In May 1951, the Bolivian Movimiento Nacional Revolucionario (MNR) won a plurality of votes for its presidential candidate, Víctor Paz Estenssoro, then in exile in Argentina. The Constitution, however, required a candidate to win an outright majority to take office. A military junta subsequently took control. On (p.298) April 9, 1952, the MNR struck back, overthrowing the junta and destroying the Bolivian military as an effective fighting force in a matter of days. President Paz Estenssoro, at the urging of his leftist minister of mines and petroleum, Juan Lechín Oquendo, nationalized the Aramayo, Hochschild, and Patiño tin companies on October 31.166 The signing of the decree symbolically took place in Catavi, where a government massacre of striking Patiño mine workers in 1942 had catalyzed the rise of the MNR. Bolivia offered compensation of $21.75 million ($157 million in 2011 dollars), with $7.5 million to Patiño, $9.25 million to Hochschild, $0.5 million to Aramayo, and the remainder to their subsidiaries. The companies, meanwhile, claimed their properties were worth $60 million.167

Secretary of State Dean Acheson paid close attention to the Bolivian Revolution. Bolivia controlled the Western Hemisphere’s largest supply of tin, a strategic resource. Additionally, Acheson feared nationalization not “out of sympathy for the Patiño and Hochschild interests,” who were “in large part responsible for their present predicament,” but because of “the unsettling effect which any confiscatory action would have on private investment in Latin America, including U.S.-owned copper companies in Chile and petroleum interests in Venezuela.”168 In addition, the companies themselves actively lobbied the Eisenhower administration. Hochschild and Aramayo retained former Senator Millard Tydings (D-Maryland) to express their position to the State Department.169 Tydings told Acheson that some form of “apportionment of ores” would be acceptable compensation.170

The State Department was only concerned about compensating American investors. It was not concerned with foreign interests, unless those interests were in countries of strategic importance to the United States (such as the United Kingdom). In the Bolivian case, State’s Deputy Legal Adviser Jack Tate counseled that “the United States obligation to secure just compensation was limited to American citizens affected by the nationalization decree.”171 Deputy Assistant Secretary of State Thomas Mann recommended that “an exchange of notes be arranged wherein (p.299) the Bolivian government agrees to submit the settlement of prompt, adequate and effective compensation for bona fide U.S. stockholders in nationalized Bolivian companies to a joint arbitration committee.”172 Secretary of State Acheson and Bolivian ambassador Andrade agreed with Mann. The agreement would be enforced by the automatic withholding of revenues from Bolivian tin sales to the United States.173

The rapid decline of world tin prices in 1953 caused the Paz Estenssoro government to panic. Facing fiscal and economic collapse, it accused the Eisenhower administration of “economic imperialism” and trying to destabilize Bolivia. Quick diplomacy on the part of the Eisenhower administration and “free and easy” communications between La Paz and Washington averted a crisis.174 With active involvement by the State Department, on June 13, 1953, the Bolivian government reached a “Definitive Agreement on Retentions” with the mining companies, in which the companies would retain a portion of the proceeds from tin exports, provided the price remained above 80 cents a pound. When the price was between 80 cents and 90 cents, Bolivia would pay 1.0% of gross revenues. When the price was between 90 cents and $1.06, that proportion would rise to 2.5%. For a price between $1.06 and $1.215, the rate would be 5%, and then increase a further 1% for every 6 cents above $1.215.175 This formula was remarkably close to the Tydings proposal.176

Was Eisenhower’s apparent leniency toward Bolivia the last stand of the Good Neighbor policy, as Bryce Wood suggests?177 The evidence suggests not. In fact, the Eisenhower administration employed the same sort of carrot- and-stick strategy as had Roosevelt and Truman with Mexico. First, the United States had market power over Bolivian tin, and made it clear that it was willing to use it. Bolivian concentrate could only be processed in Britain, at a Patiño-controlled facility, or in the United States at a Texas City tin smelter operated by the Reconstruction Finance Corporation. The RFC clearly stated that it would not purchase Bolivian tin without a clear settlement of the question of legal ownership.178 The State Department supported the (p.300) RFC.179 Second, the Exim Bank was in the process of making developmental loans to the Bolivian government. These could be turned off if the United States believed that Bolivia was obstructing a settlement—just as they had been in Mexico. The revolutionary Bolivian government knew this. During the negotiations, the Bolivian government went out of its way to emphasize it would use the Exim Bank loans exclusively “to increase [tin] production.”180

It is true that the United States made considerable emergency grants to Bolivia. The collapse in world tin prices left Bolivia without enough foreign exchange to meet its food import needs. The CIA believed this would cause “economic chaos” in Bolivia.181 The State Department was even more pessimistic: it believed that Bolivia faced “actual starvation.”182 The Eisenhower administration considered aiding Bolivia by ordering the RFC to purchase Bolivian tin at long-term contract prices rather than at collapsing spot prices, but congressional opposition caused Eisenhower to hold off on that idea. (The GOP disliked the RFC in general, which was losing millions of dollars a year on its Texas City tin smelter.) Instead, the United States extended a balance-of-payments loan. The U.S. government realized Bolivia would find the loan extremely difficult to repay. Therefore, at the urging of Secretary of State John Foster Dulles, the Eisenhower administration in September 1953 allotted Bolivia $9 million ($63 million in 2011 dollars) in grants through the Mutual Security Act of 1951.183 Total aid in fiscal 1954 came to $15.8 million ($109 million in 2011 dollars), all in grants, up from $1.3 million the year before.184

While the United States certainly viewed its grants to Bolivia as humanitarian aid, they were also understood by both sides as a quid pro quo for following American financial and anticommunist policies. In fact, the Eisenhower administration used the hostile U.S. domestic reception to its aid policy as additional leverage against the Bolivian government. Assistant Secretary of State for Inter-American Affairs John Cabot told the Bolivian ambassador that the administration “had to be mindful of this (p.301) criticism, and we should be less capable of helping Bolivia in proportion as any actions of the Bolivian government might give rise to an increase in such criticism.”185 After another extension of aid to Bolivia, Cabot’s successor, Henry Holland, met personally with President Paz Estenssoro in La Paz. Holland “asked him if he felt that his government could adopt fiscal revisions suggested by the IBRD [International Bank for Reconstruction and Development] or the Exim Bank and designed to increase Bolivia’s borrowing capacity. He assured me that he would try to follow any suggestions. I asked him if he felt confident of his ability to control the Communist problem in Bolivia. He said that he did.”186

Ultimately, Truman and Eisenhower used the same combination of carrots and sticks in Bolivia that Roosevelt had used in Mexico. Even if the United States failed to establish effective compensation from the Bolivian government for all shareholders187—the MNR felt little affection for the Patiño or Hochschild families—the total amount of American investment in the expropriated companies was small.188 This made proper American compensation an acceptable goalpost for both parties during negotiations. In fact, Bolivian negotiators up to and including President Paz Estenssoro himself quickly agreed to give American investors precedence in compensation even before the expropriation decree was signed.189 The Cold War context had little changed the dynamics of American empire.

Covert Action and Communism

One of the major distinguishing characteristics of the second American empire was its reliance on covert action. Such operations are typically associated with the fight against communism, but they were also deployed in the protection of American property. In fact, there is evidence that communism was not a cause but an excuse for interventions on behalf of private investors.

(p.302) Covert action was one of a number of new technologies that enabled the United States to fulfill the role of the world’s first global superpower. These included the better-known advances in scientific technology, such as radar or the atomic bomb, but advances in organizational technologies were equally important. For example, American advances in logistics developed for the invasion of Western Europe and the western Pacific fed directly into the success of the Berlin Airlift in 1948–49 that broke the Soviet blockade of the city. This is not to say that covert action—defined as an operation, such as the subversion of a hostile government, designed to enable the responsible government to plausibly deny involvement—was invented in the 1940s.190 The U.S. government’s actions in Cuba in 1933–34 were straight out of what later became the CIA playbook, to say nothing of Secret Service operations dating back to the Revolutionary War. But prior to World War II, the United States had no centralized intelligence service, relying instead largely on scattered reports collected by the State Department, the FBI, the armed forces, and other groups on an ad hoc basis. The personnel who carried out the operations were also scattered among various agencies, primarily the diplomatic corps. These earlier efforts, moreover, were halting and uncoordinated compared with the techniques that the United States developed to use against the Germans in their occupied territories.

The agency that played the greatest role in U.S. relations with Latin America (and other parts of what became called the “Third World”) was the Central Intelligence Agency (CIA), which started life as the World War II–era Office of Strategic Services (OSS). After the United States entered the war in 1941, the OSS quickly became the United States’ chief covert arm against the Axis. The OSS conducted wide-ranging anti-Japanese operations in mainland Asia and significant clandestine intelligence operations in occupied Europe, including Germany itself. By the end of the war, the OSS had become the leading agency for covert paramilitary operations and played a key role in the collection of secret intelligence. Though President Truman formally (p.303) disbanded the OSS less than two months after the Japanese surrender in August 1945, its covert operational and intelligence divisions formed the core of a new, cabinet-level agency: the CIA. This agency was charged by the National Security Council in 1948 with conducting not only espionage and counterespionage activities but also covert operations, defined as:

All activities (except as noted herein) which are conducted or sponsored by this Government against hostile foreign states or groups or in support of friendly foreign states or groups but which are so planned and executed that any U.S. Government responsibility for them is not evident to unauthorized persons and that if uncovered the U.S. Government can plausibly disclaim any responsibility for them [italics added]. Specifically, such operations shall include any covert activities related to: propaganda, economic warfare; preventive direct action, including sabotage, anti-sabotage, demolition and evacuation measures; subversion against hostile states, including assistance to underground resistance movements, guerrillas and refugee liberation groups, and support of indigenous anti-communist elements in threatened countries of the free world.191

President Truman first used the CIA’s capacity for covert operations in Italy, where the CIA funneled $10 million ($78 million in 2011 dollars) in captured funds to the Christian Democrats during the 1948 general elections.192 “We had bags of money that we delivered to selected politicians, to defray their political expenses, their campaign expenses, for posters, for pamphlets,” recounted F. Mark Wyatt, the CIA official in charge of the operation.193 The purpose was to limit the electoral success of the Communist-led Popular Front, which Truman feared might, if brought into the government, seize control of the Italian government and take it into the Communist bloc.194 This was no idle fear: the Communists had done exactly that in Czechoslovakia (p.304) in February 1948, where they held 38% of the parliamentary seats. In Italy, the Communists held 19% of Parliament before the election (to the Christian Democrats’ 37%), and they seemed primed to gain more. It is impossible to know if the CIA campaign was the key in holding off the Communist electoral threat—the United States also made it quite clear that Italy would not receive any Marshall Plan aid (or the territory of Trieste) if the Communists won—but the operation was considered a success when the Christian Democrats won 55% of the seats and the Communists were held to 33%.195

The Italian operation was almost entirely strategic in motivation, but soon enough the U.S. government found itself employing covert action to protect private interests. On March 15, 1951, the Iranian parliament unanimously voted to nationalize the Anglo-Iranian Oil Company. Britain responded by blockading the port of Abadan, Iran’s major oil export hub. Despite the resulting collapse in Iranian oil revenue, the nationalization made Prime Minister Mossadegh immensely popular at home. Britain therefore turned to the United States for help. President Truman, however, strongly opposed “the use of force or the threat of the use of force” against Iran. Truman judged that Britain was in a better position than it had been during the dark days of 1942.196 Moreover, no American-owned assets were involved.

The incoming Eisenhower administration, however, was not as reticent as Truman to aid its junior partner in the Cold War. The U.K. government realized that part of U.S. reluctance to intervene in Iran stemmed from its unwillingness to step into another country’s investment disputes. British intelligence officials, therefore, pulled no stops in trying to convince their American counterparts that Mossadegh was too weak to stave off Communist influence.197 The Americans were an easy sell, for entirely understandable and legitimate reasons: the United States had just held off genuine Soviet threats in Berlin, Greece, Turkey, and Italy; and it was engaged in a hot war against Communist expansion in Korea. In 1946 the United States had come close to war with the Soviet Union over Stalin’s refusal to withdraw (p.305) troops from northern Iran. The Soviets had gone so far as to establish two puppet governments before withdrawing under pressure. With this sort of recent track record, the U.S. government was understandably inclined to believe that paranoia in pursuit of anticommunism was no vice.

The Eisenhower administration lacked the economic tools to lever Iranian policy the way it had managed the outcome in Bolivia. It consequently turned to its covert arm. The CIA under its new director, Allen Dulles—the brother of Eisenhower’s secretary of state—came to believe that Iran represented “the building up of a situation where a Communist takeover” was becoming “more and more of a possibility.”198 The State Department and the CIA convinced a reluctant Eisenhower that the United States could not “make a successful deal with Mossadegh … it might not be worth the paper it was written on, and the example might have very grave effects on United States oil concessions in other parts of the world.”199 Once Eisenhower agreed to the broad-brush outlines of covert action, he let his advisers hash out its details. On June 25, 1953, Eisenhower’s staff approved the plan to overthrow the Iranian government, codenamed Operation Ajax.200 Ajax involved the judicious application of bribe money to military officers, members of the Iranian parliament, and paid demonstrators to create a strong antigovernment atmosphere in the capital, in which military elements could depose Mossadegh. The plan probably would not have worked in a country with strong political institutions. Iran, however, did not have strong political institutions. The coup began on August 15, 1953. On August 19, after a fierce gun battle, Mossadegh was captured in the steel-lined bedroom of his Tehran house.201

The Eisenhower administration also used its covert arm to resolve an investment dispute in Guatemala. On June 17, 1952, President Jacobo Árbenz and the Guatemalan National Assembly passed the Agrarian Reform Act. This law designated uncultivated land, rented land, and land not directly cultivated for its owner as available for redistribution. The Guatemalan government (p.306) would compensate the owners for such lands at their declared tax value with twenty-five-year bonds offering 3% interest.202 Under the Reform Act, the United Fruit Company stood to lose a minimum of 450,000 acres—over 700 square miles, 1.6% of Guatemala’s land area.203 United Fruit argued before the Guatemalan agrarian commissions that the book values of their property were far too low, and that Guatemalan bonds would be heavily discounted if cashed soon after issue.204 (The latter argument had the advantage of being true: ten-year U.S. federal bonds yielded only 2.96% at the time.) United Fruit also protested that the law prevented disputes from going through the Guatemalan civil court system. Rather, the law mandated that such disputes could be appealed only through the Guatemalan Department of Agriculture, with the Guatemalan president as the final authority. Finally, United Fruit complained that even if the law were reformed to allow appeals to the civil courts, the Árbenz administration had staffed the Supreme Court with pro-expropriation judges.205

All of United Fruit’s objections were legitimate, but the company presented its case to the Eisenhower administration as one of Communist subversion. This was not a particularly difficult case to make. Árbenz had in fact secretly asked the (outlawed) Communist Party leadership in 1951 for their input into the draft of the agrarian reform law.206 Then, in December 1952, Árbenz legalized the Guatemalan branch of the Communist Party under the name of the Guatemalan Labor Party.207 The name change derived from Árbenz’s concern that the CIA had drawn up a contingency plan during the Truman administration—which was generally reluctant to intervene—to overthrow or even assassinate him because of his Communist connections. That plan in fact existed. Truman chose to mothball it because Secretary of State Dean Acheson believed that should it be discovered, the damage to U.S. credibility would outweigh the benefits from ousting Árbenz.208 Acheson’s successor in the Eisenhower administration, John Foster Dulles, had few such doubts. Dulles had worked for United Fruit as a lawyer during the Depression, (p.307) and his brother Allen was a former board member of United Fruit—and the head of the Central Intelligence Agency.209

United Fruit did not place all its hopes on sympathetic administration officials—it also roused U.S. public opinion. It hired the public relations guru Edward Bernays to create a propaganda campaign against Communist subversion in Guatemala. Bernays, a longtime friend of the United Fruit Company, took up the task wholeheartedly. Soon, pro–United Fruit or anti-Árbenz articles started appearing in the New York Times, the New York Herald-Tribune, the Atlantic Monthly, Time, and Newsweek. In Bernays’s proudest success, The Nation, the most widely read left-liberal weekly in the United States, ran anti-Árbenz articles.210 United Fruit used Bernays’s campaign to build a base of voters to pressure their representatives in Washington, who in turn pressured Eisenhower.

In the face of growing public, private, congressional, and executive branch concerns about Communist infiltration in Guatemala, the National Security Council authorized covert action against Árbenz on August 12, 1953—three days before the CIA launched its Iranian coup attempt. On December 9, CIA director Allen Dulles approved the plan to overthrow Árbenz—the infelicitously named Operation PBSUCCESS—allocating $3 million to the project. In March 1954, Operation PBSUCCESS graduated its first class of Guatemalan saboteurs; in April, its first paramilitary leaders; and in May, its first communication specialists. On June 15, the operation’s sabotage teams infiltrated Guatemala, while a small exile force assembled in Honduras. On June 18, at 8:20 p.m., Colonel Carlos Castillo Armas and his force crossed the Honduran border. The CIA provided air support, including strafing and bombing runs against Guatemalan positions. Árbenz surrendered on June 27, 1954, after nine days of fighting.211

A skeptical reader might question whether investor disputes really played a significant role in the Eisenhower administration’s overthrow of the Iranian and Guatemalan governments. After all, Eisenhower was elected on an anticommunist platform, (p.308) and the standard story of American international relations highlights the very real fear of the expansion of Soviet power as the overwhelming foreign policy concern of the period. Worries about Communist subversion by itself might have caused the United States to intervene in Iran and Guatemala, regardless of pressure from investors.

Stock price movements suggest otherwise. Arindrajit Dube, Ethan Kaplan, and Suresh Naidu estimated the effect of secret U.S. coup authorizations on the stock price of expropriated companies.212 The stock values of both United Fruit and the Anglo-Iranian Oil Company showed a cumulative abnormal return (e.g., price rise) of 2.4 to 2.6% over the three days following the secret coup authorizations. The secret authorizations, in fact, engendered greater gains than the coups themselves. Clearly, investors in the expropriated companies were plugged in to the highest levels of the decision-making process. A purely anti-Soviet strategy would have left the nationalizations in place (or ignored compensation): after all, the United States was willing to ally itself with plenty of nominally socialist governments in Europe, and it ignored the interests of non-American investors in Bolivia.

Ironically, the expectations of Anglo-Iranian investors were not met. The United States was now the primary stakeholder in the Iranian political situation. As such, the U.S. government was going to act on behalf of American interests. Unlike the 1946 situation in Mexico, where the Truman administration pressured Mexico into compensating (indeed overcompensating) British-owned Mexican Eagle, American firms in Iran in 1953 stood to gain from British losses. The Iranian regime and the U.S. government proposed that an international consortium take over the Iranian concessions. Both governments also agreed that the share for British companies should not exceed 50%, and that Anglo-Iranian itself should be limited to a minority interest.213 Such an outcome had not been imaginable in Mexico eight years earlier: the Mexican government was vulnerable to American economic pressure, but it was not an American client. All sides (p.309) knew that that Mexico was not going to return the properties to the British, let alone transfer them to American owners.

In September 1953, President Eisenhower appointed Herbert Hoover, Jr., to oversee the negotiations creating the new oil consortium through the State Department.214 At a meeting of the National Security Council, Hoover called the result “perhaps the largest commercial deal ever put together.”215 The Justice Department, under pressure from the State Department, the Department of Defense, the Joint Chiefs of Staff, and President Eisenhower himself, created an antitrust exemption so that multiple American companies could participate in the reorganized “National” Iranian Oil Company.216

Anglo-Iranian still believed that it could obtain compensation from the Americans. It demanded $1.27 billion from the consortium and 110 million tons of free oil from the Iranian government ($1.27 billion in 1954 came to $8.8 billion in 2011 dollars; 110 million tons of oil was worth $2.3 billion at the time, or $15.8 billion in 2011 dollars). The U.S. government objected.217 The non-British companies then offered $1 billion to Anglo-Iranian for its share in the consortium. Secretary of State Dulles warned the British that the offer was “one billion dollars more than [they] have now—which is nothing.”218 The British Foreign Office, for its part, realized that $2.3 billion from the Iranian government was a nonstarter. It suggested lowering Iranian compensation to Anglo-Iranian to $280 million.219 The U.S. State Department thought even that was too high, instead proposing a settlement of $5 million.220 On July 28, 1954, Iran agreed to pay Anglo-Iranian $28 million for its distribution facilities and $42 million for “the damage done to AIOC’s business between 1951 and 1954.” In addition, Anglo-Iranian received a tax break worth $56 million. The settlement also specified that Anglo-Iranian would pay $140 million to Iran under the terms of the 1949 Supplemental Oil Agreement. (Anglo-Iranian had earlier dismissed the agreement.) The net was that Anglo-Iranian ended up paying Iran $14 million as a result of the settlement.221

(p.310) The final agreements were signed in Tehran on September 2, 1954, and in London and New York on September 20—the foreign signatories did not want to risk making the agreement subject to Iranian law by signing it in Iran.222 At the conclusion of the deal, Anglo-Iranian held only 40% of the shares in the new consortium. Five American companies—Jersey Standard, Socony-Vacuum, Texas, SoCal, and Gulf—held another 40%. The Compagnie Française de Pétroles held 6%, and Royal Dutch Shell took the remaining 14%. (The end result did not bring the share of British companies above 50%, since Royal Dutch Shell had 60% Dutch ownership.)223 The Iranian government received 50% of the net profits, but it was not allowed to audit the consortium’s books and had no say in management.224 The Eisenhower administration, armed with the tools of covert action, completed the slide back into the empire trap that had begun toward the tail end of Franklin Roosevelt’s second term.

Conclusion

The Mexican oil expropriation of 1938 is often viewed as the harbinger of two defining characteristics of the modern age. The first is the end of empire. In this view, the United States chose not to employ all elements of its national power in defense of its economic interests. Rather, it respected the rights of a fellow sovereign nation to control its own economic policies. What could have been decided by force or sanctions was instead worked out through negotiations inside the ambit of international law. The second is resource nationalism. Mexico took over not only the rights to its subsoil resources; it established the first of the great national oil companies that would come to dominate the world’s energy scene. Moreover, the country seized control of a large-scale source of rents that it could use to develop the country—and in turn ushered in an era of weakened property rights across what would become known as the Third World.

(p.311) As with most historical memories, the above has a core of truth. The Roosevelt administration was in fact hesitant to intervene against Mexico. The Mexican government did in fact establish the first of the great national oil companies. But beyond that, the actual historical record diverges substantially from the accepted view. The U.S. government ultimately intervened to defend the property rights of American (and allied) companies. The Mexican government, in turn, compensated the companies for their properties at more than their market value. The nationalization itself was the product of an out-of-control labor dispute, rather than a grand plan, and the companies were not particularly profitable. Neither the Mexican government nor the oil workers benefited much from the nationalization. Once the United States had brought its economic power to bear against Mexico, there was little reason for it to avoid using the same tools against Bolivia. In the Bolivian case, Washington relied more on low-cost carrots—bilateral official credits that Bolivia would be very reticent to default upon—rather than sticks, but the end result was the same. American power ensured that American (and allied) investors received compensation for their nationalized investments greater than their fair market value or their value as a going concern.

None of this is to say that the Good Neighbor policy was merely a veil—quite the opposite, in fact. The Roosevelt administration went out of its way to tie up the remaining loose ends of empire and to institutionalize U.S.-Latin American (and U.S.-Philippine) relations on a new, more equitable footing. It ended the protectorates over Cuba and Panama. It completed the withdrawal of American troops from Haiti. It partially succeeded in ending unfair commercial discrimination against Panama. It opened American markets to Honduras, Colombia, Guatemala, Costa Rica, and El Salvador. It granted political independence to the Philippines. In short, with a few small exceptions, it effectively wound up the first American empire.

But it did not eliminate the empire trap itself. Many of the new policies, procedures, and institutions of the Good Neighbor (p.312) policy were made possible by Depression-era changes in the domestic influence of overseas interest groups. Depression austerity split the coalition of bondholders and direct investors that had powered the pre-Depression empire trap. Moreover, financially squeezed American domestic producers mobilized against long-standing special provisions for U.S. protectorates. The politics of scarcity declawed the empire trap, and as that scarcity eased it was only a matter of time before American overseas interests would find new ways to flex their political muscle.

Despite the accomplishments of the Good Neighbor era, and despite Roosevelt’s deep-seated aversion to intervention and coercion, business interests succeeded in lobbying the executive branch to protect their interests when push came to shove. The oil companies were not left to the mercy of the decisions of the Mexican government. The United States mobilized state power to protect the property rights of its citizens overseas. The Mexican expropriation of 1938 was not the harbinger of a new age. Rather, it was a sign of the United States slipping back into an old one.

America’s victory in the Second World War, and the development of an entire agency of government dedicated to covert action, would create a de facto second American empire, even without the benefit of an official “Roosevelt Corollary”–like declaration. In Western Europe and Japan, this would be an “empire by invitation,” dedicated to stopping Soviet expansion and (mostly) respectful of national sovereignty. Elsewhere, however, private interests rapidly learned that they could mobilize this new global America to protect their private interests, just as they had before the war. The American preoccupation with containing communism changed the rules of the game but did not overrule the concerns of overseas investors. At times, as in Bolivia, Iran and Guatemala, Cold War politics could even provide a pretext for private interests to demand intervention. After a brief escape, the empire trap was once again closing.

Notes:

(1.) Franklin Delano Roosevelt, First Inaugural Address, Washington, D.C., March 4, 1933.

(2.) Bryce Wood, The Dismantling of the Good Neighbor Policy (Austin: University of Texas Press, 1985), pp. 344 and 360.

(4.) In 1995, in the aftermath of the Bosnian War, NATO installed a High Representative to exercise executive power in Bosnia and Herzegovina. The High Representative was not an American, however, and he was chosen by a Peace Implementation Council with representatives from Canada, France, Germany, Italy, Russia, Japan, the United Kingdom, the United States, two separate European Union bodies, and the Organization of Islamic Cooperation.

(p.495) (5.) A pedantic reader will note that Eastern Europe was not considered part of the Third World as the term was originally conceived. Rather, it was in the Second World, which consisted of the Communist countries.

(6.) Cited in Lars Schoultz, Beneath the United States: A History of U.S. Policy towards Latin America (Cambridge, Mass.: Harvard University Press, 1998), p. 304.

(7.) The entire text of the Montevideo Convention, including Hull’s reservations, can be found at http://www.cfr.org/sovereignty/montevideo-convention-rights-duties-states/p15897, accessed September 30, 2012.

(8.) The FBPC was modeled on the British Corporation of Foreign Bondholders. See Michael Adamson, “The Failure of the Foreign Bondholders Protective Council Experiment, 1934–40,” Business History Review (Autumn 2002).

(9.) Feis to Secretary of State, March 15, 1933, FRUS, 1933, vol. 1, p. 934.

(11.) FBCP, Annual Report for 1936 (New York, 1937), pp. 6–11.

(13.) John Major, “F.D.R. and Panama,” Historical Journal, vol. 28, no. 2. (June 1985), pp. 357–77, 359–60.

(18.) Bonded warehouses stored goods for which no duties had been paid. Their presence allowed shippers to transfer goods inside the Zone, or engage in additional work to prepare goods for their final destination.

(19.) The United States implemented the Hull-Alfaro Treaty slowly and halfheartedly. In 1937, for example, Congress finally agreed to let the Panama Railroad sell its properties in Colón to the Panamanian government, but only in return for the annexation of New Cristóbal to the Canal Zone. Treaty ratification had to wait until 1939. When Panama asked for restrictions on the subsidized sale of U.S. consumer goods to Canal Zone employees, the United States rejected out of hand “the amazing proposition that the cost of living of all militaty and Canal Zone personnel be increased for the benefit of the Republic of Panama.” In December 1939, the United States went further and prohibited the importation of Panamanian meat, eggs, butter, cheese, and potatoes. Finally, Roosevelt in late 1939 signed—under protest—a bill reserving high-paid Canal jobs for American citizens.

(p.496) (20.) Article I of the Treaty of Relations between the United States and Cuba abrogates the 1903 Treaty of Relations. Article II ratifies the actions of the U.S. occupation government in 1898–1902. Article III continues the U.S. lease on Guantánamo. Article IV allows each signatory to close its ports to commerce from the other in the event of an outbreak of contagious disease. Article V states that the treaty shall be ratified by both countries according to their respective constitutions.

(22.) Calculated from data in Jeffrey Williamson, “Real Wages, Inequality, and Globalization in Latin America before 1940,” Revista de Historia Economica, vol. 17, special number (1999), pp. 101–42.

(24.) The Jones-Shafroth Act of 1917 explicitly did not eliminate the category of Puerto Rican citizen, which Congress had created under the Puerto Rico Organic Act of 1900. Rather, section 5 of the act extended American citizenship to all Puerto Rican citizens unless they actively chose to reject it. Puerto Ricans who chose to reject U.S. citizenship were allowed to do so by taking an explicit oath reading: “I, __, being duly sworn, hereby declare my intention not to become a citizen of the United States as provided in the Act of Congress conferring United States citizenship upon citizens of Porto Rico and certain natives permanently residing in said island.” The text of the Jones-Shafroth Act can be found in “An Act to Provide a Civil Government for Porto Rico and for other Purposes,” The American Journal of International Law, vol. 11, no. 2, Supplement: Official Documents (April 1917), pp. 66–93.

(25.) César Ayala, American Sugar Kingdom: The Plantation Economy of the Spanish Caribbean, 1898–1934 (Chapel Hill: University of North Carolina Press, 1999), pp. 117–18.

(26.) Cited in William Whittaker, “The Santiago Iglesias Case, 1901–1902: Origins of American Trade Union Involvement in Puerto Rico,” The Americas, vol. 24, no. 4 (April 1968), pp. 378–93.

(27.) See Gerald Meyer, Vito Marcantonio: Radical Politician, 1902–1954 (Albany, N.Y.: SUNY Press, 1989), p. 145. After losing reelection to James Lanzetta in 1936, Marcantonio switched his allegiance from the Republicans to the American Labor Party. He went on to regain his seat in 1938. Lanzetta, in a sign of the close ties between New York and Puerto Rico, went on to work as a lobbyist for the Puerto Rican government in Washington, D.C. Marcantonio’s seat in East Harlem passed back to the Democrats in 1950, and he was succeeded by James Donovan, Alfred San-tangelo, Adam Clayton Powell, Jr., and Charlie Rangel.

(p.497) (28.) The plant now belongs to the American Sugar Refining Company and no longer processes Puerto Rican sugar. Puerto Rico, in fact, no longer produces sugar in any appreciable quantity. Wages have risen too high.

(29.) R. I. Nowell, “Probable Effects of a Duty on Philippine Sugar,” Journal of Farm Economics, vol. 14, no. 4 (October 1932), pp. 599–604: 604.

(32.) Abraham Berglund, “The Reciprocal Trade Agreements Act of 1934,” The American Economic Review, vol. 25, no. 3 (September 1935), pp. 411–25: 416.

(33.) Douglas Irwin, “From Smoot-Hawley to Reciprocal Trade Agreements: Changing the Course of U.S. Trade Policy in the 1930s,” in Michael Bordo, Claudia Goldin, and Eugene White, eds., The Defining Moment: The Great Depression and the American Economy in the Twentieth Century, a National Bureau of Economic Research Project Report (Chicago: University of Chicago Press, 1998), pp. 325–52: 338.

(35.) Cited in Peter Smith, Talons of the Eagle: Dynamics of U.S.-Latin American Relations (New York: Oxford University Press, 2000), p. 73.

(36.) George Philip, Oil and Politics in Latin America: Nationalist Movements and State Companies (Cambridge: Cambridge University Press, 1982), p. 194.

(38.) Herbert Klein, A Concise History of Bolivia (Cambridge: Cambridge University Press, 2003), pp. 175 and 182.

(40.) John Finan, “Foreign Relations in the 1930s,” in Harold Eugene Davis, John Finan, and Frederic Peck, eds., Latin American Diplomatic History: An Introduction (Baton Rouge: Lousiana State University Press, 1977), pp. 191–221: 207.

(42.) Herbert Klein, “David Toro and the Establishment of ‘Military Socialism’ in Bolivia,” Hispanic American Historical Review, vol. 45, no. 1 (February 1965), pp. 25–52: 49.

(43.) Herbert Klein, “German Busch and the Era of ‘Military Socialism’ in Bolivia,” Hispanic American Historical Review, vol. 47, no. 2 (May 1967), pp. 166–84: 168.

(45.) Muccio to Secretary of State, January 14, 1937, FRUS, 1937, vol. 5, p. 276.

(p.498) (46.) Executive resolution of March 13, 1937, Cancelling concession of the Standard Oil Company of Bolivia and confiscating its property, FRUS, 1937, vol. 5, pp. 277–78.

(52.) Moody’s Manual of Investments, 1938, pp. 792–94.

(53.) Moody’s Manual of Investments, various issues.

(54.) “Penn Mex Cash Aids South Penn,” Wall Street Journal, October 3, 1932, p. 5.

(55.) “Consolidated Oil in Deal in Mexico,” New York Times, October 5, 1932, and “Acquires Penn Mex Fuel,” Wall Street Journal, October 6, 1932, p. 2. The smaller company paid dividends of 50 cents in 1932; 75 cents in 1933, 1934, and 1935; 50 cents in 1936; and 30 cents in 1937. Moody’s Manual of Investments, various issues.

(56.) “S.O. N.J. Acquiring Foreign Properties,” Wall Street Journal, April 20, 1932.

(57.) “Mexican Petroleum and Utah Copper to Leave Exchange,” Wall Street Journal, July 12, 1935.

(58.) Data from U.S. House of Representatives, “Production Costs of Crude Petroleum and of Refined Petroleum Products,” House Document no. 195, 72nd Congress, 1st session (Washington, D.C.: GPO, 1932), p. 49.

(60.) Brian McBeth, “Venezuela’s Nascent Oil Industry and the 1932 U.S. Tariff on Crude Oil Imports, 1927–1935.” Revista de Historia Económica, vol. 27, no. 3 (2009): 427–62.

(61.) Jonathan Brown, “Ciclos de sindicalización en las compañías extranjeras,” working paper (University of Texas, 2004), p. 39.

(62.) Warren to H. C. Pierce, May 8, 1917, 812.504/97, Record Group 59, NA.

(63.) McHenry to Secretary of State, June 17, 1917, 812.504/110, Record Group 59, NA.

(64.) Dawson to Secretary of State, April 20, 1924, 850.4, Record Group 84, Tampico post records, NA.

(65.) Dawson to Secretary of State, April 20, 1924, 850.4, Record Group 84, Tampico post records, NA.

(p.499) (66.) H. R. Márquez, “Memorandum al C. Presidente,” October 27, 1924, Fondo Obregón-Calles, 407-T-13, anexo II, AGN.

(67.) Araujo to Jefe, May 13, 1925, AGN Depto. de Trabajo, box 725, file 2; and Bay to Secretary of State, May 26, 1925, 850.4, Record Group 84, Tampico post records, NA.

(68.) “Conflicto: La Compañía Petrolera El Águila y sus empleados, 1925–26,” AGN Depto. de Trabajo, box 772, file 1.

(69.) J. Rennow to Luis Rodríguez, December 15, 1934, AGN Fondo Lázaro Cárdenas, box 432, file 1.

(70.) J. Rennow to Luis Rodríguez, December 15, 1934, AGN Fondo Lázaro Cárdenas, box 432, file 1.

(71.) “Extractos,” August 4, 1935–September 3, 1935, AGN Fondo Lázaro Cárdenas, box 437.1/37.

(72.) R. Henry Norweb to Secretary of State, June 29, 1934, 812.45/212, Record Group 59, NA.

(73.) “Proyecto aprobado en la primera Gran Convención Extraordinaria del Sindicato de Trabajadores Petroleros de la República Mexicana,” AGN, Archivo Histórico de Hacienda, C1857-117.

(74.) Brown, “Labor and State in the Mexican Oil Expropriation.” Texas Papers on Mexico 90-10 (University of Texas, Austin, 1990), p. 19.

(75.) In early 1938, the companies basically capitulated, offering a $6.5 million wage hike as long as they could retain control over staffing. The unions realized that the implication of a settlement on those terms would be large-scale layoffs. Brown, “Labor and State,” pp. 26–27.

(76.) Government of Mexico, Mexico’s Oil: A Compilation of Official Documents in the Conflict of Economic Order in the Petroleum Industry, with an Introduction Summarizing its Causes and Consequences (México, DF: Gobierno de México, 1940), p. 707.

(77.) James Steward to Secretary of State, August 17, 1937, 812.00-Tamaulipas/307, Record Group 59, NA.

(78.) Pierre de Boal to Secretary of State, August 10, 1937, 812.45/495, Record Group 59, NA.

(80.) Jack Neal to Secretary of State, September 30, 1937, 812.00-Tamaulipas/320, Record Group 59, NA.

(p.500) (85.) Calculated from data in Mauricio Folchi y María del Mar Rubio, “El consumo de energía fósil y la especificidad de la transición energética en América Latina, 1900–1930,” III Simposio Latinoamericano y Caribeño de Historia Ambiental, Carmona (Sevilla) (4–6 de abril de 2006), Cuadro 2, p. 27.

(86.) Luz María Uhthoff López, “La industria del petróleo en México, 1911–1938: del auge exportador al abastecimiento del mercado interno. Una aproximación a su estudio,” América Latina en la historia económica, no. 33 (Ene/Jun 2010), pp. 7–30: 17–18, 20, 22.

(88.) Wendell Gordon, The Expropriation of Foreign-Owned Property in Mexico (Washington, DC: American Council on Public Affairs, 1941), p. 120.

(89.) Kelvin Singh, “Oil Politics in Venezuela During the López Contreras Administration (1936–1941),” Journal of Latin American Studies, vol. 21, no. 1 (1989), pp. 89–104: 95.

(90.) Department of State Memorandum, 2 June 1937, 831.6363/976, Record Group 59, NA.

(91.) Department of State Memorandum, 2 June 1937, 831.6363/976, Record Group 59, NA.

(92.) Department of State Memorandum of Conversation, January 24, 1938, 831.6363/1011, Record Group 59, NA.

(93.) Department of State Memorandum, 4 October 1938, 863.6, Record Group 59, NA.

(94.) Nicholson/Secretary of State, April 11, 1938, 831.6363/1028, Record Group 59, NA.

(96.) Josephus Daniels, Shirt-Sleeve Diplomat (Chapel Hill: University of North Carolina Press, 1947), p. 231.

(97.) Robert Huesca, “The Mexican Oil Expropriation and the Ensuing Propaganda War,” Texas Papers on Latin America, No. 88-04 (University of Texas, Austin, 1988), p. 3.

(99.) Lorenzo Meyer, Mexico and the United States in the Oil Controversy, 1917–42 (Austin: University of Texas Press, 1977), p. 204.

(103.) Brian McBeth, British Oil Policy, 1919-1939 (London: Frank Cass, 1985), p. 127.

(p.501) (104.) México, Secretaria de Relaciones Exteriores, Memoria, pp. 83, 93–94, 114–19, 135–39, 148.

(105.) Jack Powell, The Mexican Petroleum Industry, 1938-1950 (Berkeley: University of California Press, 1956), p. 116.

(108.) Harold Ickes, The Secret Diary of Harold Ickes, Vol. 2 (New York: Simon & Shuster, 1954), p. 352.

(110.) Daniels to Roosevelt, August 31, 1938, in the Josephus Daniels Papers #203, Southern Historical Collection, Wilson Library, University of North Carolina at Chapel Hill.

(111.) Catherine Jayne, Oil, War, and Anglo-American Relations (Westport, Conn.: Greenwood Press, 2001), p. 48.

(114.) Nominal Mexican government income from silver seigniorage of $30.5 million from Jayne, Oil, p. 48. Total government income calculated from figures in Luz María Uhthoff, “Fiscalidad y Petróleo, 1912–1938.” Working Paper, Universidad Autónoma Metropolitana-Iztapalapa, 2004, table 5.

(115.) Morgenthau’s most famous statement about the power the Gold Stabilization Act gave him went as follows: “The way the Federal Reserve Board is set up now they can suggest but have very little power to enforce their will. … The Treasury’s power has been the Stabilization Fund plus the many other funds that I have at my disposal and this power has kept the open market committee in line and afraid of me.” Blum, Diaries, p. 352.

(116.) Samuel McReynolds, Senate Resolution 72, 76th Congress, 1st session, February 1, 1939.

(118.) Frank Kluckhohn, “House Rules Out Inquiry on Mexico,” New York Times, February 8, 1939.

(119.) The Silver Purchase Act committed the Treasury to buying a fixed quantity of silver every year until silver stocks reached 25% of its total specie reserves or the silver price reached $1.29 an ounce. (In 1936, the U.S. began to purchase silver directly from the Mexican government.) (p.502) Morgenthau was initially ambivalent about the Silver Purchase Act, because it allowed the Treasury to build up specie reserves that it could use to counteract Federal Reserve policy, but the concurrent Gold Stabilization Act of 1934 provided ample resources for this purpose. Conversation with Taylor and Lochhead, March 28, 1938, Morgenthau Diary #117, Presidential Diaries of Henry Morgenthau, Jr. 1938–1945, Lamont Library, Harvard University. Morgenthau’s most famous statement about the power the Gold Stabilization Act gave him went as follows: “The way the Federal Reserve Board is set up now they can suggest but have very little power to enforce their will … The Treasury’s power has been the Stabilization Fund plus the many other funds that I have at my disposal and this power has kept the open market committee in line and afraid of me.” John Blum, From the Morgenthau Diaries: Years of Crisis, 1928-1938 (Boston: Houghton Mifflin, 1959), p. 352.

(120.) Conversation with Taylor and Lochhead, March 28, 1938, Morgenthau Diary #117, Presidential Diaries of Henry Morgenthau, Jr. 1938–1945, Lamont Library, Harvard University.

(121.) Conversation with Taylor and Lochhead, March 28, 1938, Morgenthau Diary #117.

(122.) Morgenthau believed that Senator Key Pittman, the author of the Silver Purchase Act of 1934, cared only about the domestic industry. Conversation with Taylor and Lochhead, March 28, 1938, Morgenthau Diary #117.

(124.) The Spanish government nationalized mainly refining and distribution assets, since Spain and its small African territories produced little crude. Bucheli, “Multinational Corporations, Business Groups, and Economic Nationalism: Standard Oil (New Jersey), Royal Dutch-Shell, and Energy Politics in Chile 1913–2005,” Enterprise and Society, vol. 11, no. 2 (2010): 350–99: 357.

(129.) “Memorandum of the Oil Companies,” April 3, 1939, FO (Foreign Office) 371 22774 [A3723/4/26], Public Record Office, London.

(130.) Raymond Daniell, “No Retreat on Oil, Cardenas Pledges: Mexico Inferentially Rules Out a Treaty-Guaranteed Deal with Americans,” New York Times, February 28, 1939.

(p.503) (131.) Castillo to Welles, March 21, 1939 and July 5, 1939, 812.6363/5636, Record Group 59, NA.

(132.) Daniels to Secretary of State, March 11, 1939, 812.6363/5569, Record Group 59, NA.

(133.) Memorandum of a conversation between Welles and Castillo, August 10, 1939, 812.6363/6014, Record Group 59, NA, and Roosevelt to Cárdenas, August 31, 1939, in the Josephus Daniels Papers #203, Southern Historical Collection, Wilson Library, University of North Carolina at Chapel Hill. See also Jayne, Oil, pp. 111–12.

(134.) Hackworth to Farish, February 6, 1940, Farish to Secretary of State, February 6, 1940, and Farish to Secretary of State February 13, 1940, 812.6363/6502 1/2 and 6504 1/2, Record Group 59, NA. See also the text of the General Treaty of Inter-American Arbitration, in American Journal of International Law, vol. 23, no. 2, Supplement: Official Documents (April 1929), pp. 82–88.

(138.) Pemex, “Rendición de la deuda petrolera en pesos M.N.,” El Petróleo (Mexico, 1970), p. 174. Payments converted to dollars at the prevailing market exchange rate.

(139.) Jersey Standard first entered the Mexican market when it purchased the Transcontinental Petroleum Company for $2.5 million in 1917. Transcontinental production declined precipitously after 1923. It fell from 21.4 million barrels in 1923 to 1.7 million in 1930. Transcontinental then basically exited the Mexican market, closing its Tampico refinery and transferring its remaining production and transportation facilities to Mexican Petroleum. Ironically, Jersey Standard would buy back the assets that remained when it bought Mexican Petroleum in 1932. See Jonathan Brown, Oil and Revolution (Berkeley: University of California Press, 1993), pp. 152, 160–61, and Jonathan Brown, “Why Foreign Oil Companies Shifted Their Production from Mexico to Venezuela during the 1920s.” American Historical Review, vol. 90, no. 2 (1985), pp. 362–85: 372.

(140.) Wall Street Journal, “N. J. Standard ’32 Net 1Cent a Share,” May 19, 1933.

(141.) The interest rate on long-term corporate bonds was 5.1%. Lawrence Officer, “What Was the Interest Rate Then?” MeasuringWorth, 2008. http://www.measuringworth.org/interestrates/.

(p.504) (142.) In 1938, U.S. corporate income tax brackets ran as follows: $0–$5,000, 12.5%; $5,001–$15,000, 14%; $15,001–$25,000, 16%, and 19% for all income over $25,000. See Jack Taylor, “ Corporation Income Tax Brackets and Rates,1909-2002.” Working Paper, Internal Revenue Service, 2002, p. 287.

(143.) Gainer to Foreign Office, January 17, 1941, FO (Foreign Office) 371 26061 [A364/47/26], Public Record Office, London.

(144.) Scott, Minute, May 12, 1941, FO (Foreign Office) 371 26062 [A3341/47/26], Public Record Office, London.

(146.) Eden, Minute, January 15, 1941, FO (Foreign Office) 371 26061 [A218/47/26], Public Record Office, London.

(148.) Bateman to Foreign Office, January 23, 1943, FO (Foreign Office) 371 33980 [A930/113/26], Public Record Office, London.

(149.) Lorenzo Meyer, “The Expropriation and Great Britain,” in The Mexican Petroleum Industry in the 20th Century, ed. Jonathan Brown and Alan Knight (Austin: University of Texas Press, 1992), pp. 154–72: 164.

(150.) Antonio Bermúdez, The Mexican National Petroleum Industry (Palo Alto: Institute of Hispanic American and Luso-Brazilian Studies, Stanford University, 1963), p. 177.

(152.) Michael Adamson, “‘Must We Overlook All Impairment of Our Interests?’ Debating the Foreign Aid Role of the Export-Import Bank, 1934–41,” Diplomatic History, vol. 29, no. 4 (September 2005), pp. 589–623: 604–5.

(154.) Adamson, “Foreign Aid,” p. 612–13, and Frederick Adams, Economic Diplomacy: The Export-Import Bank and American Foreign Policy, 1934–1939 (Columbia: University of Missouri Press, 1939), p. 202.

(155.) Bryce Wood, The Making of the Good Neighbor Policy (New York: W.W. Norton, 1961), p. 189.

(159.) Ingram, Expropriation, p. 119. This position would presage the creation of the International Centre for the Settlement of Investment Disputes, which would institutionalize the creation of arbitration panels along the lines desired by Jersey Standard.

(161.) Carmen Sandoval, Santa Cruz: Economía y Poder, 1952–93 (La Paz: Fundación PIEB: 2003), p. 24.

(162.) The term of the loan was for eight years. Frank Keller, “Institutional Barriers to Economic Development—Some Examples from Bolivia,” Economic Geography, vol. 31, no. 4 (October 1955), pp. 351–63: 361.

(165.) Author’s calculations.

(166.) FRUS, 1952–54, vol. 4: The American Republics, pp. 490–93, 510.

(167.) “Bolivia Nationalizes Tin Mines, Sets Tentative Indemnity Figures,” Wall Street Journal, November 1, 1952, p. 2.

(168.) FRUS, 1952–54, vol. 4, p. 492.

(169.) Secretary of State to the Embassy in Bolivia, September 25, 1952, FRUS, 1952–54, vol. 4, p. 507.

(170.) Secretary of State to the Embassy in Bolivia, September 25, 1952, FRUS, 1952–54, vol. 4, p. 507.

(171.) Memorandum of Conversation by the Secreatary of State, October 7, 1952, FRUS, 1952–54, vol. 4, p. 510.

(172.) Memorandum by the Deputy Assistant Secretary of State for Interamerican Affairs (Mann) to the Undersecretary of State (Bruce), December 17, 1952, FRUS, 1952–54, vol. 4, p. 516. Italics added.

(173.) Secretary of State to the Embassy in Bolivia, December 23, 1952, FRUS, 1952–54, vol. 4, pp. 516–18.

(174.) FRUS, 1952–54, vol. 4, pp. 527–28; Bryce Wood, The Dismantling of the Good Neighbor Policy (Austin: University of Texas Press, 1985), p. 151.

(175.) Ingram, Expropriation, p. 132; FRUS, 1952–54, vol. 4, p. 526; “Bolivia Sets Scale for Tin Investors,” New York Times, June 13, 1953, p. 3.

(176.) “Holders to Weigh Patino Settlement,” New York Times, July 28, 1961, p. 29. The payments lasted until 1962.

(178.) FRUS, 1952–54, vol. 4, p. 498.

(179.) FRUS, 1952–54, vol. 4, pp. 503–4.

(180.) FRUS, 1952–54, vol. 4, p. 501.

(181.) FRUS, 1952–54, vol. 4, p. 548.

(182.) FRUS, 1952–54, vol. 4, p. 563.

(183.) FRUS, 1952–54, vol. 4, pp. 566–67.

(p.506) (184.) USAID Green Book, http://gbk.eads.usaidallnet.gov/, accessed February 21, 2013.

(185.) FRUS, 1952–54, vol. 4, p. 539.

(186.) FRUS, 1952–54, vol. 4, p. 535.

(189.) FRUS, 1952–54, vol. 4, pp. 505, 509.

(190.) U.S. Department of State, FRUS, 1945–50, Emergence of the Intelligence Establishment, document 292, National Security Council Directive on Office of Special Projects, NSC 10/2, Washington, D.C., June 18, 1948, http://www.state.gov/www/about_state/history/intel/290_300.html.

(191.) U.S. Department of State, FRUS, 1945–50, Emergence, document 292.

(192.) Stephen Krasner, Sovereignty: Organized Hypocrisy (Princeton, N.J.: Princeton University Press, 1999), p. 207.

(193.) Tim Weiner, “F. Mark Wyatt, 86, C.I.A. Officer, Is Dead,” New York Times, July 6, 2006.

(194.) Zachary Karabell, Architects of Intervention: The United States, the Third World, and the Cold War, 1946–1962 (Baton Rouge: Louisiana State University Press, 1999), pp. 37–49.

(196.) Mostafa Elm, Oil, Power, and Principle: Iran’s Oil Nationalization and Its Aftermath, Contemporary Issues in the Middle East (Syracuse, N.Y.: Syracuse University Press, 1994), pp. 161–65.

(197.) Stephen Kinzer, All the Shah’s Men: An American Coup and the Roots of Middle East Terror (Hoboken, N.J.: J. Wiley & Sons, 2003), pp. 150–53.

(198.) FRUS, 1952–54, Iran, pp. 689–91.

(199.) FRUS, 1952–54, Iran, pp. 711–14.

(202.) FRUS, 1952–54, Guatemala, pp. xxv–xxvi.

(203.) FRUS, 1952–54, Guatemala, p. 73.

(204.) FRUS, 1952–54, Guatemala, pp. 73–74.

(205.) FRUS, 1952–54, Guatemala, pp. 74–75.

(206.) FRUS, 1952–54, Guatemala, p. xxv.

(207.) Nicholas Cullather, Operation PBSUCCESS: The United States and Guatemala, 1952–1954, CIA History Staff document, 1994, p. 99, http://www.gwu.edu/~nsarchiv/NSAEBB/NSAEBB4/. The party was called the “Partido Guatemalteco del Trabajo” in Spanish.

(p.507) (208.) Robert L. Beisner, Dean Acheson: A Life in the Cold War (Oxford: Oxford University Press, 2006), pp. 580–85.

(209.) Don Coerver and Linda Hall, Tangled Destinies: Latin America and the United States (Albuquerque: University of New Mexico Press, 1999), p. 113.

(210.) Larry Tye, The Father of Spin: Edward L. Bernays and the Birth of Public Relations (New York: Henry Holt, 2002), pp. 167–68.

(212.) Arindrajit Dube, Ethan Kaplan, and Suresh Naidu, “Coups, Corporations, and Classified Information,” working paper, June 26, 2009.

(213.) Mary Ann Heiss, Empire and Nationhood: The United States, Great Britain, and Iranian Oil, 1950–1954 (New York: Columbia University Press, 1997), p. 196.

(214.) FRUS, 1952–54, Iran, p. 789n2.

(215.) FRUS, 1952–54, Iran, p. 1009.

(217.) FRUS, 1952–54, Iran, pp. 949–50.

(219.) FRUS, 1952–54, Iran, pp. 968–69.