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Demystifying Alexander Nahum Sack and the doctrine of odious debt

Eric Tousaint’s study of the odious debt doctrine

by Eric Toussaint

Part 13 - Unilateral debt repudiation by Costa Rica with Washington’s support

In January 1917, the government of Costa Rica, under President Alfredo González, was overthrown by his Secretary of the Army and Navy, Federico Tinoco, who called new elections and established a new constitution in June 1917. The Tinoco putsch was supported by the oligarchy, who rejected the policies of the previous government. For good reason – it had decided to levy a tax on property and a progressive income tax. Tinoco also had the support of the director of the infamous North American transnational United Fruit Company (known since 1989 as Chiquita Brands International), known to have contributed to the overthrow of several governments in Latin America in order to maximise its profits.

The Tinoco government was then recognized by several South American States, as well as by Germany, Austria, Spain and Denmark. The United States, Britain, France and Italy refused to recognize it.

In August 1919, Tinoco left the country, taking with him a large sum of money which he had just borrowed in his country’s name from a British bank, the Royal Bank of Canada. His government fell in September 1919. A provisional government then restored the former constitution and called new elections. Law No. 41 of 22 August 1922 declared null and void all contracts entered into between the executive power and private individuals, with or without the approval of the legislature, between 27 January 1917 and 2 September 1919; it also annulled Law No. 12 of 28 June 1919, which had authorized the government to issue sixteen million colones (the Costa Rican currency) in paper money. It is worth pointing out that the new president, Julio Acosta, at first vetoed the debt repudiation law, arguing that it went against tradition, which was to honour international obligations contracted towards creditors. But the Constitutional Congress, under popular pressure, maintained its position and the President finally rescinded his veto. The law repudiating debts and all contracts entered into by the previous regime constitutes a clear break with the tradition of continuity of obligations of States despite a change of regime. The unilateral sovereign decision by Costa Rica clearly resembles the decisions made in 1861 and 1867 par by President Benito Juárez, supported by the Congress and the people of Mexico, to repudiate the debts claimed by France. It is also in line with the Bolshevik decree repudiating Tsarist debts adopted in 1918.

Great Britain threatened Costa Rica with military intervention if it did not compensate the British companies affected by the repudiation of the debts and contracts. These companies were the Royal Bank of Canada and an oil company. London sent a warship into Costa Rica’s territorial waters.

Costa Rica held to its position of refusing compensation by loudly and clearly proclaiming that: “The nullity of all the acts of the Tinoco regime was definitively settled by a decree of the Constitutional Congress of Costa Rica, which was the highest and ultimate authority having jurisdiction upon that subject, and its decision on that question, made in the exercise of the sovereign rights of the people of Costa Rica, is not open for review by any outside authority.

In order to find a solution, Costa Rica agreed to call in an international arbitrator in the person of William Howard Taft, Chief Justice of the US Supreme Court, to express his opinion on the two main disputes with Great Britain – the Royal Bank of Canada question and that of an oil concession that had been granted by the dictator Tinoco to British Controlled Oilfields Ltd.

By involving Taft, who had been president of the United States from 1909 to 1913, Costa Rica hoped to win its case by taking advantage of Washington’s interest in marginalising Britain in the region. And that is indeed what happened.

Taft’s decision was to reject London’s demands for compensation.

It is important to look closely at Taft’s arguments. Firstly, he clearly establishes the principle that the despotic nature of the Tinoco regime was of no importance.

In his opinion, William H. Taft says: “To hold that a government which establishes itself and maintains a peaceful administration, with the acquiescence of the people for a substantial period of time, does not become a de facto government unless it conforms to a previous constitution would be to hold that within the rules of international law a revolution contrary to the fundamental law of the existing government cannot establish a new government.” Which means that Taft rejects Costa Rica’s argument involving the nature of the Tinoco regime. According to Taft, Tinoco, who de facto exercised control over the State even if he did not respect the constitution, had the right to contract debts in the name of that State. He even adds that Tinoco had the assent of the population.

Taft’s argument, cited above, opens the way to the recognition of revolutionary governments who come to power without respecting the constitution. Taft declares that if we exclude the possibility of an unconstitutional government becoming a regular government, it implies that international law would prevent a people who have carried out a revolution from setting up a new legitimate government – which according to Taft is inconceivable. Of course, in practice, what has happened most often over the last two centuries is recognition (and support by the government in Washington, in particular) of dictatorial regimes who have overthrown democratic regimes, support for these dictatorial regimes in getting financing abroad, and pressure being put on democratic regimes which succeed them to shoulder the debts contracted by the dictatorship. This underscores the difference between the theory, based on the history of the birth of the United States out of rebellion against a constitutional British regime in 1776, and the actual practice and policies of the United States.

Taft’s opinion contains a passage which affirms that the rule of continuity of obligations of States must be respected despite a change in regime: “Changes in the government or the internal policy of a state do not as a rule affect its position in international law. (…) though the government changes, the nation remains, with rights and obligations unimpaired (…). The principle of the continuity of the states has important results. The state is bound by engagements entered into by governments that have ceased to exist; the restored government is generally liable for the acts of the usurper (…)” This clearly shows the conservative nature of Taft’s position.

On the other hand, Taft supports Costa Rica against Britain on the basis of other important arguments. Taft says that the transactions between the British bank and Tinoco are full of irregularities and that the bank is liable for them. He adds that “The case of the Royal Bank depends not on the mere form of the transaction but upon the good faith of the bank in the payment of money for the real use of the Costa Rican Government under the Tinoco régime. It must make out of its case of actual furnishing of money to the government for its legitimate use. It has not done so.

Let’s follow Taft’s reasoning: Tinoco could contract loans even though he took power in violation of the country’s constitution, but he needed to do so in the interest of the State. Taft says that Tinoco contracted the loans from the Royal Bank of Canada for his personal benefit. Taft adds that the bank was fully cognisant of the fact and was therefore a direct accomplice. According to Taft’s reasoning, had Tinoco borrowed money to develop the railway network, the regime that succeeded him would have been under obligation to repay the debt.

Source and references:


[1] [2] [3] [4] [5] [6] [7] [8] [9] [10] [11] [12] [14] [15] [16] [17] [18] [19] [20]

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