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pressure, maintained its position and the President finally rescinded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:
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