Chapter XI: The Intervention of the United States in Nicaragua (1)

The Revolution of 1909--Attitude of the United States--Victory of the Conservatives--Financial and Political Difficulties Confronting the New Government--The Dawson Agreement and the Loan Treaty--Reform of the Currency, Establishment of the Customs Collectorship, and Reorganization of the Foreign Debt by the American Bankers--The Joint Claims Commission--Failure of the Loan Treaty--The Revolution of 1912 and the Intervention of the United States--Support of the Government Since 1912 by American Marines--New Loans and Purchase of the Railroad and Bank Stock by the Bankers--The Election of 1916--The Canal Treaty--Objections of Costa Rica and Salvador--Decision of the Central American Court--Opposition to Our Policy in Nicaragua and the Influence of Our Policy on Our Relations with the Other Central American States.

In October, 1909, a band of Nicaraguan Conservatives started a revolution at Bluefields. They won over Juan J. Estrada, the governor of the province of which that city is the capital, by proclaiming him provisional president, and thus secured control of most of the East Coast of the Republic. Money and supplies were obtained from some of the other Central American countries, and also from the foreign colony on the Coast, whose interests had been injured by certain concessions which President Zelaya had recently granted. This assistance, and the protection afforded by the wild country which separated Bluefields from the rest of the Republic, enabled the revolutionists to raise a considerable army and to organize a _de facto_ government before the constituted authorities were able to attack them.

The uprising was from the first regarded with sympathy throughout Central America and in Washington, for Zelaya’s continual encouragement of revolutions in other countries had made him obnoxious to all of his neighbors, and had led to a general belief that his administration was the principal obstacle to the establishment of peace in the Isthmus. The relations between Nicaragua and the United States had been strained for some time, because of the friction caused by Zelaya’s violations of the Washington Conventions, and because there had been a number of unpleasant diplomatic incidents, including the prolonged dispute over the so-called Emery claim,[57] which had culminated in the withdrawal of the American minister from Managua. Nevertheless, both the United States and the other Central American countries remained at first ostensibly neutral in the contest. In November, however, the execution by Zelaya’s troops of two American soldiers of fortune, who held commissions in the revolutionary army, caused President Taft to break off diplomatic relations with the Liberal administration entirely, and to give the revolution his open, if indirect, support.

The attitude of the American government was set forth in a note addressed by Secretary of State Knox to the Nicaraguan Chargé d’Affaires at Washington. “Since the Washington Conference of 1907,” it stated, “it is notorious that President Zelaya has almost continuously kept Central America in tension and turmoil.” The Liberal administration was described as “a regime which unfortunately has been a blot upon the history of Nicaragua.” The murder of American citizens was but the culmination of a series of outrages which had made friendly relations between the two governments impossible. Moreover, the United States was convinced “that the revolution represents the ideals and the will of a majority of the Nicaraguan people more faithfully than does the Government of President Zelaya.” The revolution, the Secretary said, had already attained serious proportions on the East Coast, and new uprisings were reported in the West. This tended to produce “a condition of anarchy which leaves, at a given time, no definite, responsible source to which the Government of the United States could look for reparation for the killing of Messrs. Cannon and Groce, or indeed, for the protection which must be assured American citizens and American interests in Nicaragua. In these circumstances, the President no longer feels for the Government of President Zelaya that respect and confidence which would make it appropriate hereafter to maintain with it regular diplomatic relations, implying the will and the ability to respect and assure what is due from one state to another.” Both factions were to be held responsible for the protection of American life and property in the sections under their control. The United States would wait, before demanding reparation for the murders, until it saw whether or not the government which was in power after the revolution was “entirely dissociated from the present intolerable conditions.” Meanwhile it reserved the liberty to take such action as it saw fit to preserve its interests, and the State Department would continue to receive unofficially both the former Chargé d’Affaires and the representative of the revolution.[58]

This note brought about Zelaya’s fall, for he realized that he could not hope to maintain himself against the open opposition of the United States. After vainly attempting to come to an understanding with Secretary Knox, the Nicaraguan ruler yielded to the advice of President Díaz of Mexico and to the pleas of his friends at home, and resigned his position to Dr. José Madriz, one of the most distinguished citizens of Leon. The Liberals had hoped to placate the United States by making president a civilian of known ability and honesty, but their expectations were disappointed, for President Taft refused to recognize the new executive.[59] The revolutionists also declined his offer to open peace negotiations.

For a time, nevertheless, it appeared probable that President Madriz would be able to restore order. On February 22, 1910, a revolutionary army which attempted to invade the lake region was defeated and almost destroyed, and Estrada and the other leaders, with the remnants of their troops, were forced to retire to Bluefields. The government at once prepared to attack that city vigorously by land and by sea, proclaiming a blockade of the port, and occupying the Bluff, where the customs house was situated. The final reduction of the rebel army, however, proved impossible. The officers of the American warships, which had been sent to the port at the outbreak of the war, refused to allow the blockading squadron to interfere with American ships or ships carrying American goods, and denied the right of the Government officials to collect customs duties at the Bluff, permitting Estrada to establish a new customs house in the territory under his control. When the Liberal commanders, thus prevented from cutting off the supplies or the revenues of the insurgents, prepared to take the town by assault, the American commander forbade them to attack it from the land side, and threatened to sink the gunboats if they shelled the rebel trenches. This action, taken on the ground that a bombardment or fighting in the streets would destroy the property of Americans and other foreigners, rendered certain the defeat of the Government army, which could not long remain encamped far from its base of supplies in the hot and unhealthful coast district outside of the city. Within a few weeks the besiegers were forced to withdraw into the interior.

The Liberals in control at the capital, who had already lost the sympathy of many of Zelaya’s former supporters by their wholesale political arrests and their partisan policy, were completely discredited by their failure to take Bluefields, and their government collapsed entirely when Estrada again approached the interior with a reinforced army. There were new outbreaks at several points in the lake region which it was impossible to suppress. Madriz left Managua on August 20, 1910, and the revolutionists entered the city on the following day.

The revolutionary forces were composed mainly of adherents of the wealthy Conservative families of Granada, but there were also many Liberals, some of whom had been prominent leaders in the revolt, who had joined the uprising either from personal hostility to Zelaya or from the hope of gaining something for themselves. The new provisional president, Juan J. Estrada, was a member of the artisan class of Managua, who had been raised by Zelaya to the position of governor of the East Coast province, and whose leadership had been accepted by the Conservatives only because the success of their plot at the beginning depended upon his betraying his patron and turning over to them the garrison at Bluefields. Another Liberal, General José María Moncada, who had for several years been an opponent of Zelaya, became minister of _gobernación_ in the new government, and was one of the most trusted advisors of the provisional president. The minister of war, General Luís Mena, had formerly been a follower of the Chamorro family, but his military exploits during the recent struggle and his influence with the army had given him a prestige which threatened to eclipse that of his former patrons, and had made him the most powerful figure in the administration. None of these men were liked or trusted by the old Granada aristocracy, who had hoped through the success of the revolution to regain the power which they had enjoyed during the thirty years before Zelaya became president. Even the _Granadinos_, however, were not entirely united among themselves, for there was no little jealousy between some of the great families. General Emiliano Chamorro, who had for many years been the leader of Conservative revolts against Zelaya, had a strong following among the members of his party in all sections of the Republic, but he was opposed by a faction headed by the Cuadra family, who subsequently became very powerful through their alliance with President Adolfo Díaz. It is necessary to bear in mind these rivalries between the different leaders and groups in the new administration, in order to understand the political difficulties which confronted it during the two years following its accession to power.

The agreement by which the Liberals had turned over the government to the revolutionary leaders had provided for a general amnesty, for a free election to be held within one year, and for the recognition of the debts contracted by both parties during the struggle. Little or no attention was paid to the two former articles, but the debts of both parties,--to members of the revolutionary forces,--were fully recognized, and, in so far as the condition of the treasury permitted, paid. Each person who had taken part in the revolt received fifty hectares (about 123 acres) of the national lands, and vast sums were awarded to prominent members of the Conservative party who had suffered under the Zelaya regime from confiscation or forced loans, or even from “moral” injuries, such as the death of a close relative. A large sum which had been left in the treasury by Dr. Madriz was soon exhausted, and new issues of unsecured paper money were resorted to. By April, 1911, the government admitted that the already depreciated currency had been further inflated to the extent of 15,000,000 pesos, and in the autumn of the same year 10,000,000 pesos more were secretly put into circulation.[60] Some of this money was necessarily used to meet the current expenses of the government, for the revenues had suffered a serious decline since the revolution, but the greater part seems to have gone to those in power and to their friends and relatives.

The emptiness of the treasury, accompanied by the inflation of the currency to twice its former quantity, made worse the already desperate economic situation of the country. The revolution had paralyzed agriculture and commerce, not only by taking thousands of workers away from their fields and shops, but also by the actual destruction of cattle and crops, and by the complete disorganization of the transportation system. The discontent caused by these conditions made the position of the new government very precarious, for the Liberals, who outnumbered the Conservatives in the country at large, had no intention of accepting their defeat as final. They felt that they had been beaten, not through the superior strength of their enemies, but by the intervention of the United States; and they were encouraged to keep up an active opposition to the government by the hope of returning to power through the dissensions which soon appeared among the different chiefs of the Conservative party. The opposition press, which for a few months enjoyed and abused an unwonted liberty, kept party feeling at the boiling point, and the bitterness between the two factions was greatly intensified by a bloody clash between government troops and the members of a peaceful Liberal parade at Leon in November, 1911. The Conservative administration, bankrupt and divided within itself, seemed for a time utterly unable to cope with the situation.

The Republic was saved from falling into a condition of complete anarchy only by the assistance rendered to the new government by the United States. In October, 1910, the State Department sent Mr. Thomas C. Dawson to Managua to study the situation and to bring about an understanding between the Conservative leaders. Through his good offices, the so-called Dawson agreement was signed on November 5 by the principal leaders of the revolution. This arrangement provided for the continuance of Estrada at the head of the government, for the appointment of a commission containing American members to pass on all claims against the government arising out of the recent war and out of the cancellation of concessions granted by Zelaya, and for the negotiation of a loan treaty in the United States.[61] A constitutional convention which met on December 31 elected Estrada provisional president for two years, and Adolfo Díaz vice-president. The new administration was at once officially recognized by the United States.

Estrada’s position was by no means an easy one. He could rely neither upon the military power, which was entirely in the hands of General Mena, nor upon the Constitutional Convention, which was composed chiefly of followers of Emiliano Chamorro. The rival ambitions of the different leaders soon broke down the political arrangements established by the Dawson agreement. When the Convention framed a constitution which would have made itself rather than the president the actual authority in the state, Estrada dissolved it, thus breaking with Chamorro, who left the country. Estrada later attempted to remove from office and imprison General Mena, who had used his control of the army to fill a new constituent assembly with his personal followers. The military leaders remained loyal to their chief, and prepared to secure his release by force. Only the intervention of the United States minister averted fighting in the streets of Managua. Estrada and Moncada, the minister of _gobernación_, resigned, and Díaz succeeded to the presidency, with the consent of Mena. The minister of war was for some months the real head of the government.

Meanwhile the plans for the financial reorganization of the Republic, which had also been a part of the Dawson agreement, had assumed definite form. Early in 1911, a study of the situation had been made by a financial advisor appointed by Estrada at the suggestion of the State Department. The pecuniary difficulties which confronted the new government were growing very serious. Foreign creditors, supported by their governments, were urgently demanding the payment of interest on the bonded debt, and several claimants were seeking compensation for concessions which the revolutionists had cancelled or violated. The treasury was practically empty, and the repeated issues of paper money which had been resorted to to provide funds had disorganized the currency to such an extent that fluctuations in the rate of exchange made foreign commerce almost impossible.[62]

On June 6, 1911, a treaty was signed with the United States, by which that country agreed to assist Nicaragua in securing a loan from American bankers for the consolidation of its internal and external debt and for other purposes. The loan was to be secured by the customs duties, which were to be collected, so long as the bonds remained unpaid, by an official appointed by Nicaragua from a list presented by the fiscal agent of the loan and approved by the President of the United States.[63] The treaty was similar in every way to that signed in January of the same year by the United States and Honduras, and, like it, was never ratified by the United States Senate. On September 1, while it was still under consideration by the Senate, contracts were signed by which Brown Brothers and Company and J. and W. Seligman and Company, of New York, agreed to lend the Republic fifteen million dollars when the treaty went into effect. The bankers were to purchase the Republic’s bonds, bearing five per cent interest, at 90¹⁄₂ per cent of their face value, and the money thus received was to be employed for the reform of the currency, the construction of railroads from the interior to Matagalpa and to the Atlantic Coast, and the refunding of the external and the internal debts. As there was little hope of immediate action on the loan treaty, for the United States Congress had adjourned, the bankers agreed to purchase of the Republic six per cent treasury bills to the amount of $1,500,000, in order to provide funds for the most needed reform, an immediate reorganization of the currency. These were guaranteed by the customs revenues, which were to be administered until the notes were retired by a collector general designated by the bankers. The Republic agreed that any dispute relating to this contract should be referred to the Secretary of State of the United States for final decision. The treasury bills were to be retired at once if the fifteen-million-dollar bond issue took place.[64]

The product of this loan was spent by the bankers for the benefit of the Republic. The reorganization of the monetary system was intrusted to the National Bank of Nicaragua, an institution incorporated in the United States with capital supplied from the loan. This was to be managed by the bankers until such time as the treasury bills should be paid. On March 20, 1912, a new currency law was passed by the Nicaraguan Congress, putting into effect a plan which had been worked out by two distinguished American financial experts, who had been sent by the bankers to report on the situation.[65] A unit called _Córdoba_, equal in value to one dollar United States currency, was instituted, and the National Bank was authorized to issue paper and silver money of the new denominations in such quantities as it might consider expedient. This was to be exchanged for the old _billetes_ at a rate to be fixed by agreement between the President of Nicaragua and the bankers. The bank-notes which were to form the greater part of the new circulating medium were to be kept at par by the sale of drafts against a reserve fund maintained in New York by the Republic with its own money, but managed by the National Bank. The latter was to have full control of the currency reform as the agent of the Republic, and was to have an exclusive right to issue paper money.

Meanwhile it had been found that additional funds would be necessary if the currency reform were to be carried out, because the secret issues of paper money made during the autumn of 1911, even after the signature of the treasury bills agreement, had greatly increased the probable expense of the reform. The bankers therefore agreed to open a credit of $500,000 to provide the reserve fund contemplated in the plan of reorganization, and agreed also to lend the Republic an additional $255,000 in small monthly amounts for current expenses. Both of these advances were to bear interest at the rate of six per cent, and were to be repaid when Nicaragua received the money which was due to it, as will be explained below, from the Ethelburga Syndicate. Payment was due on October 15, 1912, but the bankers agreed to grant an extension of time both for these loans and for the treasury bills, if the Republic were then unable to pay them. In return, the Republic agreed to cut down its budget and to raise the customs duties by collecting them at a new rate of exchange. At the same time, it granted the bankers an option on fifty-one per cent of the stock in the National Railway, the management of which was to be turned over to a corporation formed in the United States. This company was to be entirely controlled by the bankers until they had received all money due them from the Republic.

As soon as the plan for the currency reform was completed the government began to purchase and destroy the old paper money, in order to reduce the rate of exchange, for the expert commission had decided that a conversion at the prevailing rate of twenty to one would work a serious injustice to some classes in the community in view of the rapidity with which the rate had risen during the past twelve months. This proceeding, although justifiable from a broad social point of view, involved a heavy expense to the government, and at the same time proved extremely profitable to those who had shared in the distributions of paper money which had taken place since the victory of the revolution. The National Bank was established in the summer of 1912, and early in 1913 the new money was in circulation. The old _billetes_ were gradually retired, being exchanged at a fixed rate of 12¹⁄₂ to one. In November, 1915, they ceased to be legal tender.

Meanwhile the Customs Collectorship had been installed in December, 1911, under the direction of Colonel Clifford D. Ham. This gentleman has administered the service ever since, in accordance with the terms of the treasury bills contract and of the later agreement with the holders of the Republic’s foreign debt. The Collector General, in his own words, has regarded himself not so much as an employee of the Nicaraguan Government as a “trustee, with obligations to four parties--the Republic of Nicaragua, the Secretary of State of the United States, certain citizens of the United States, and certain citizens of England.”[66] In accordance with this view, he has declined to recognize the right of the Tribunal of Accounts and other governmental agencies to exercise any authority over him, and he has been in the main supported in this position by the higher Nicaraguan officials. By the terms of its arrangements with the bankers, the Republic is debarred from reducing its tariff without the latters’ consent, or from taking any other action which might lessen the value of the guarantee afforded by the customs revenues. The collectorship, and the readjustment of the foreign debt which its establishment made possible, may perhaps be said to be the one conspicuously successful feature of the American bankers’ operations in Nicaragua. The Collector General, who has entire power to appoint and remove his subordinates, has reorganized and reformed the service, and has succeeded in eliminating most of the corruption and inefficiency which had prevailed under native administration. Foreign importers and customs agencies who had enjoyed special privileges or improper exemptions have in some cases opposed the new regime very bitterly, but the majority of the business men of the country have had good reason to welcome the substitution of a fair system for one which exposed them to continual extortion and fraud. The amount of revenue secured, in proportion to the imports, has been greatly increased, although the paralyzation of trade during the war of 1912 and the commercial stagnation which has prevailed since the beginning of the European war have prevented the receipts from reaching an amount much greater than that secured in the days of Zelaya. Nevertheless, the collections during 1913, the only year since the establishment of the new system in which normal conditions prevailed, were the largest in the history of the Republic.[67]

Negotiations with the holders of the Republic’s foreign debt were completed in the first months of 1912, when an arrangement highly beneficial to both parties was brought about by the American bankers, acting on behalf of the Nicaraguan Government. Zelaya had refunded the then existing foreign debt in 1909, by placing bonds to the amount of £1,250,000 at seventy-five per cent of their face value, bearing six per cent interest, with the Ethelburga Syndicate in London. As the service of this loan had been suspended after the revolution, and the British Government had already intervened diplomatically on behalf of the bondholders, the need for a readjustment had been pressing. A contract was signed on May 25, 1912, between the American bankers and the Corporation of Foreign Bondholders, by which the latter agreed to a reduction of the interest on the loan to five per cent, on condition that the interest and amortization charges be made a first lien on the customs receipts of the Republic, and that those receipts should continue to be collected under the control of the bankers. This agreement not only effected a saving in money and an improvement in the credit of the Republic, but it also secured for the government the use of a sum of £371,000, representing part of the proceeds of the sale of the 1909 bonds, which had been held in London when the service of the loan had been suspended. About one-third of this money was used for the payment of interest already due, but the remainder was available, in accordance with an agreement made on the same date between the American bankers and the Republic, for the fortification of the currency reform and the repayment of a part of the obligations of the government to the bankers.

The Claims Commission provided for by the Dawson agreement began its sessions on May 1, 1911. It was authorized by legislative decree to adjudicate without further appeal all unliquidated claims against the government, including especially those arising from the late war and from the cancellation of concessions and other contracts made by former administrations. Of the three commissioners, one was a Nicaraguan citizen appointed by the Nicaraguan Government and the other two were Americans, one named by the Republic on the recommendation of the United States and the other designated by the State Department. The commission continued its labors until late in 1914, and passed on 7,908 claims for a total of $13,808,161 gold. Its awards amounted to $1,840,432.31, about two-thirds of which was for small claims presented by natives. The American holders of concessions, who demanded $7,576,564.13, received only $538,749.71. The original intention had been to provide for the payment of these awards with the money received from the proposed fifteen-million-dollar bond issue. It was impossible after the failure of the loan treaty for the government to do this, but a sum of $158,548 was nevertheless provided from the customs receipts for the payment of 4,116 of the smallest claims, which were mainly for losses of livestock and similar property by poor persons during the civil wars of 1909-10 and 1912.[68] Even though the plan for the refunding of the internal debt could not be carried out, it was a decided advantage both for the government and for the holders of the claims to have them passed on by an impartial tribunal, in order that the former might know definitely how much it owed, and that the latter might secure the recognition of their claims as acknowledged obligations of the treasury.

These measures had been carried out by the State Department, and by the bankers at the request and with the co-operation of the State Department, in anticipation of the ratification of the loan treaty by the United States Senate. Their effect was practically to put into operation the most important features of that agreement,--the customs collectorship, the adjustment of the external debt, and the reform of the currency,--despite the opposition to the State Department’s policy which defeated the treaty in the Senate. The rejection of the treaty, however, made it impossible to secure money for the complete execution of the reforms which had been inaugurated by the Treasury Bills Agreement, for the bankers were naturally unwilling to make the large loan which had been planned for without an adequate guarantee of the protection of their government. Their situation and that of the Republic was thus made very difficult. The foreign debt remained in English and French hands; the creditors of the government at home remained unpaid; the projected railroads could not be built; and the general improvement in the condition of business and agriculture, which had been expected to result from the solution of the government’s financial difficulties and the payment of its obligations to planters, merchants, and officials, did not take place. The poor credit of the Republic made it impossible for it to secure additional loans from the bankers except on onerous terms, while its pressing necessities forced it to embark on a hand-to-mouth policy of mortgaging or selling all of its available resources in order to secure funds. The bankers, on the other hand, had been drawn into a business which promised little profit or credit to themselves, but from which they could not well withdraw. Instead of underwriting a large bond issue, and aiding in an ambitious project for the economic regeneration of Nicaragua, as they had expected to when they first entered into the contracts of September, 1911, they have become involved deeper and deeper in the financial support of a virtually bankrupt government.

While these financial operations were being carried out, the political situation had become more threatening than ever. General Mena had caused the Assembly to elect him President of the Republic, in October, 1911, for the term beginning January 1, 1913, notwithstanding the protests of the United States Minister and of the Granada Conservatives, who asserted that this action was a violation of the Dawson agreement. The strength of the opposition to this proceeding encouraged President Díaz to attempt to throw off the control of the minister of war. On July 29, 1912, he summarily removed the latter from office, and appointed Emiliano Chamorro general-in-chief of the army. Mena fled to Masaya, with a large part of the troops and of the city police of the capital. Most of the national stores of artillery and ammunition had been gathered in Masaya and in Granada, where Mena’s son was in command of the barracks. The revolutionists were reinforced by a large number of Liberals, for Benjamín Zeledón, formerly minister of war under Zelaya, assumed the leadership of one of their armies, and the people of Leon revolted and seized control of that city and of the neighboring provinces. Mena’s distrust of his old enemies, however, and his refusal to send arms and ammunition to the Leon leaders, prevented effective co-operation between the two factions, and probably saved the government from defeat.

As it was, the government could not expect to hold out long, with little ammunition and few troops, while the rebels controlled practically all the approaches to the capital. The United States, however, could hardly permit the overthrow of the Conservative authorities. Mena, who had fallen seriously ill, had been forced to let the leadership of the revolution pass almost completely into the hands of Zeledón and the Leon chiefs. If Zelaya’s followers regained control of the government, all of the efforts of the State Department to place Nicaragua on her feet politically and financially would have been useless, and the interests of the New York bankers, who had undertaken their operations in the country at the express request of the United States Government, would be seriously imperiled. The American Minister, therefore, demanded that President Díaz guarantee effective protection to the life and property of foreigners in the Republic. The latter replied that he was unable to do so, but asked the United States to assume this responsibility itself. In compliance with this request, American marines landed at Corinto, and assumed control of the National Railway, which ran from that port through Leon, Managua, and Masaya to Granada. This, as we have seen, was the property of the government, but was held and operated by the bankers as a partial guarantee of their loans. By September 8, traffic had been resumed between Corinto and Granada, although the rebels still held all of the more important cities along the route with the exception of Managua. On September 18, the United States Minister, Mr. Weitzel, made public an official declaration that the United States intended to keep open the routes of communication in the Republic and to protect American life and property. His government, he said, had been opposed to Zelaya not only as a person but as a system, and it would exert its influence, at the request of President Díaz, to prevent a return to that system and to uphold the lawful authority. This pronouncement disheartened the revolutionists and caused many to withdraw from the uprising. On September 25, General Mena surrendered at Granada to Admiral Sutherland, the commander of the American forces, and the rebels were confined to their positions at Masaya and Leon. A few days later, Admiral Sutherland ordered Zeledón to evacuate the Barranca Fort, overlooking Masaya, on the ground that his position threatened the railway. When the Liberal leader refused, American troops stormed and took the position. The war soon afterwards came to an end with the surrender of Leon to another American officer. Seven American marines and bluejackets had lost their lives.[69]

After the revolution, it was necessary to decide upon the election of a president for the term 1913-1917. The greater part of the Conservative party supported the candidacy of General Chamorro, but Díaz, who controlled the machinery of the administration, desired to succeed himself in power. An agreement was effected through the intervention of Mr. Weitzel, who insisted that the _Chamorristas_ accept Díaz, while Chamorro was given the position of minister at Washington. At the election, which was held while a large part of the American marines were still in the country, the three or four thousand voters who were allowed to participate unanimously approved the official ticket, which was the only one in the field.

Since 1912, the Government of Nicaragua has practically been maintained in office by the support of the United States, for a legation guard of one hundred marines is kept in one of the forts at Managua and a warship is stationed at Corinto as reminders that the United States will not permit another uprising against the constituted authorities. One hundred well-trained and well-equipped soldiers are in themselves no inconsiderable force in a country like Nicaragua, and their influence is increased by the recollection of the events of 1912. Without their moral backing, the administration could hardly have remained in power. Although President Díaz dealt with his opponents more justly and humanely than has been customary in Nicaragua, and showed great liberality in his attitude towards the expression of political opinion in the press and in private conversation, his administration did not have the whole-hearted adherence of any of the larger political groups, and was for this reason decidedly unpopular. Not only the Liberals and the friends of General Mena, but even most of the Conservatives, were dissatisfied. General Chamorro himself co-operated loyally with the president, but he was unable to prevent many of his followers from conspiring to place their own faction in power. There were, therefore, continual intrigues and frequent petty revolts, which lessened the government’s prestige and exhausted its energy and resources. The outbreak of another civil war was prevented, apparently, only by the determined attitude of the United States.

Two of the causes which contributed most to the weakness of the Díaz government were its inability to meet its current expenses and the increasing unpopularity of its relations with the New York bankers. At the time of Mena’s revolt, the difficulties confronting the treasury had seemed in a fair way to solution, but the expense and the loss of revenue due to the war made matters worse than ever. The government was forced to ask further advances from the bankers, and to turn over to them, as security, and in the hope of improving its financial situation thereby, the collection of all of its internal revenues.[70] These were administered by the National Bank for a year, after which the arrangement was abandoned as unsatisfactory, because of the difficulties encountered by the American administrators in obtaining the enforcement of the fiscal laws and the prevention of the clandestine manufacture of _aguardiente_. It was reported in October, 1916, however, that the internal revenues had again been taken over by the bankers.

As there was no improvement in the financial condition of the Republic, contracts providing for further assistance by the bankers were signed on October 8, 1913. The latter agreed to purchase another issue of treasury bills to the amount of one million dollars, bearing interest at six per cent, and at the same time bought fifty-one per cent of the stock of the National Railway for one million dollars, thus becoming the owners of property which they had in fact held and operated for more than a year. The Republic agreed to employ a part of the two million dollars thus received in the payment of all its outstanding obligations to the bankers and to the National Bank, including the sums still due on the 1911 treasury bills and the supplementary loans, and in the addition of $350,000 to the currency reserve. At the same time it was to subscribe $47,000, while the bankers subscribed $153,000, for an increase in the capital of the National Bank, which was to be raised from $100,000 to $300,000. The remainder of the money, amounting approximately to three quarters of a million dollars, went to the Republic for its current expenses. Since the bankers acquired fifty-one per cent of the stock of the National Bank as well as of the Railway by these contracts, it was arranged that they should name six, the Nicaraguan Minister of Finance two, and the United States Secretary of State one, of the directors of both corporations.

Before these new treasury bills fell due, the outbreak of the European war put an end to all hope for the immediate financial rehabilitation of the Republic. The economic situation of the country at large was already very bad before this final disaster occurred. The exhaustion and demoralization which had resulted from two unusually destructive civil wars, combined with the reduction of military forces in the rural districts from motives of economy, had led to a great increase in highway robbery and crime, which caused general unrest and discouraged internal commerce. Matters were made worse by the continual political agitation. The crops, moreover, had been severely damaged by droughts and by a plague of grasshoppers, and in many districts the agricultural population had been reduced to a pitiable state of want. The merchants in the cities had suffered great losses from the failure of the Government to pay for large amounts of supplies purchased or requisitioned by it, and from the inability of the treasury to meet the salaries of the public employees, who made up a large part of the city population. When the outbreak of the war cut off the European credits upon which both the coffee growers and the merchants had depended, foreign and domestic commerce came almost to a standstill. The income of the national treasury was greatly reduced, for the receipts from the customs duties declined from $1,730,603.22 in 1913 to $1,237,593.33 in 1914 and $789,716.76 in 1915, and the other revenues decreased at the same time to an alarming extent. It was manifestly impossible for the government to meet even the most necessary of its current expenses, if it had to discharge its obligations to foreign creditors at the same time, and it would have faced absolute bankruptcy had not the bankers again come to its assistance. The payment of interest on the treasury bills was suspended, by contracts made in October, 1914, and the bankers used their good offices to secure a similar suspension of charges on the English debt, in order that the Republic might use all of the reduced customs revenue for its own needs. These arrangements have since been renewed from time to time for short periods, always on condition that the Republic should so far as possible resume the service of the loans if it should receive the three million dollars due to it in accordance with the canal treaty with the United States.

The conditions created by the war put a severe strain upon the new currency system. The replenishment of the reserve fund became well-nigh impossible just at the time when the disorganization of international credit, which forced exchange upon European centers to an unprecedented figure throughout the Western Hemisphere, caused an abnormal drain upon it. The National Bank, therefore, was forced to suspend the sale of the drafts by which the par value of its notes had been maintained. At the same time there was a strong popular demand for new issues of money to supply funds for the government and to finance the coffee growers, who were unable to secure the usual advances from abroad for moving their crop. As a result of this, a contract was signed on December 2, 1914, by which a new issue of 1,500,000 Córdobas was provided for,--C1,000,000 to be used for making loans to agriculturalists and exporters, and C500,000, which was to be guaranteed by the proceeds of a new capital tax collected by the National Bank, for the payment of salaries and other obligations of the government. At the same time, the Bank was authorized to pay its depositors with additional notes, secured by mortgages and other securities. All of these issues were to be retired as rapidly as the loans were repaid and the profits of the capital tax were received. The interest upon the loans to planters and merchants, which was to be at the rate of twelve per cent, was divided between the government and the Bank,--an arrangement highly profitable to the latter, considering that the notes were exclusively obligations of the Republic. So long as these issues were still in circulation, the Bank was not to sell drafts against the reserve fund, and the government was to be relieved of its obligation to maintain that fund at the amount required by previous contracts. The new issues of paper and the suspension of the sale of exchange constituted of course a temporary abandonment of the gold standard. The premium on New York drafts rose to thirty per cent during the first months of 1915, but in May of that year it was greatly reduced by the operations of an English bank in Managua. Some months later, the National Bank itself resumed the sale of drafts with its own funds, thus raising its notes again to their par value.

Early in 1916, all parties in the Republic turned their attention to the coming presidential election. In the campaign which preceded this, the various political groups enjoyed a very unusual amount of freedom in carrying on their propaganda, and each one founded clubs and published numerous newspapers to support its candidate. The chief factions which took part in the campaign were: the government party, which had few friends outside of official circles; the old Conservatives, with their chief strength in Granada, who were in the main enthusiastic followers of Emiliano Chamorro; and the Liberals, who, though by no means entirely at harmony among themselves, were nevertheless united in their determination to regain control of the government. There were also one or two lesser groups, which had hopes of coming into power as the result of a compromise between the more extreme parties. The Liberals, with the support of the great city of Leon, and with a strong following in each of the other important cities except Granada, were probably more numerous than all of their opponents together. It was clear from the beginning, however, that the outcome of the election would depend not so much upon the will of the majority as upon the attitude assumed by the United States. The administration, which had made Dr. Carlos Cuadra Pasos the official candidate, obviously intended to perpetuate its own regime, relying on the support of the American marines to prevent armed opposition to its plans. The Chamorristas, on their side, believed that the United States would insist that the Government accept their candidate, who had won general respect during his service as minister at Washington. The security of American interests in Nicaragua was in very large measure dependent upon the continuance in power of the Conservative party, of which Chamorro was undoubtedly the most popular leader; and the latter had strong additional claims to consideration because of his loyal support of the constituted authorities, after the disappointment which he had suffered in 1913, and despite the discontent of his own followers with the Díaz administration.

The Liberals, on the other hand, believed that any fair solution of the situation would restore them to power. They unquestionably constituted a majority of the people of the Republic, and they were on the whole more united than their Conservative opponents. For several years they had been endeavoring to secure the withdrawal of the marines from Nicaragua, believing that they would easily obtain control of the government as soon as the existing administration should be deprived of foreign support; and they had been carrying on an extensive campaign in Central America and in political circles in Washington with a view to arousing sentiment against the intervention of the United States in the internal affairs of Nicaragua. Their leaders desired first of all to secure the withdrawal of the American marines, but many were willing, if this proved unobtainable, to accept American supervision of the presidential election, which would have reduced somewhat the possibility of the exercise of pressure and the employment of fraud by the government. Whatever chance the Liberals might once have had to secure the recognition of their right to participate on equal terms in the election, however, was forfeited when they nominated as their candidate for president Dr. Julián Irías, Zelaya’s most trusted minister, who had been closely associated with the dictator in all of the acts which had aroused the hostility of the United States between 1906 and 1909. Although Irías was one of the ablest and most popular leaders of the Liberal party, it was hardly possible that a man whose election would mean a restoration of the old regime should become president of Nicaragua with the consent and assistance of the United States.

The United States could not well escape the responsibility for deciding which of the three candidates should become president for the ensuing term. A policy of non-intervention except to prevent disorder would have meant the election of Dr. Cuadra, against the wishes of the great majority of both parties. A supervised election, on the other hand, supposing that it could have been conducted with any fairness, which seemed unlikely, would probably have placed in office a president whose avowed object was to expel the American bankers from the Republic and to terminate American influence in the government. It was almost inevitable under such circumstances that the Conservative party should receive the open support of the American minister. By the time of the election, it was evident that General Chamorro was to be the next president. Dr. Irías had been prevented from entering Nicaragua when he came home to conduct his campaign in August, and the Liberals had been warned that no candidate who had been associated with the Zelaya regime would be recognized by the United States if elected. Somewhat later Dr. Cuadra withdrew his candidacy. The election was held in October, and the new president, General Chamorro, was inaugurated in January, 1917.

After the attempt to secure the ratification of the loan treaty had been finally abandoned, the hopes of the Nicaraguan Government for the eventual solution of its financial problems were centered upon a new agreement signed in February, 1913, which provided for the payment by the United States to Nicaragua of three million dollars in return for an exclusive right to construct a transisthmian canal through the San Juan River and the Great Lake and for the privilege of establishing a naval base in her territory on the Gulf of Fonseca. After Mr. Bryan assumed office as Secretary of State, this treaty was modified by the addition of an article by which Nicaragua agreed not to declare war without the consent of the United States, or to enter into treaties with foreign governments affecting her independence or territorial integrity, or to contract public debts beyond her ability to pay, and by which she recognized the right of the United States to intervene in her affairs when necessary to preserve her independence or to protect life and property in her domain. This so-called protectorate plan failed of ratification in the United States Senate, and a new treaty, without it, was signed on August 5, 1914. Despite the strong opposition which this also encountered in the Senate, it was finally ratified with some amendments, and was proclaimed on June 24, 1916. The principal provisions of the treaty as ratified were as follows:

I. “The Government of Nicaragua grants in perpetuity to the Government of the United States, forever free from all taxation or other public charge, the exclusive proprietary rights necessary and convenient for the construction, operation, and maintenance of an interoceanic canal by way of the San Juan River and the Great Lake of Nicaragua, or by way of any route over Nicaraguan territory....

II. “... The Government of Nicaragua hereby leases for a term of ninety-nine years to the Government of the United States the islands in the Caribbean Sea known as Great Corn Island and Little Corn Island; and the Government of Nicaragua further grants to the Government of the United States for a like period of ninety-nine years the right to establish, operate and maintain a naval base at such place on the territory of Nicaragua bordering upon the Gulf of Fonseca as the Government of the United States may select....

III. “In consideration of the foregoing stipulations and for the purposes contemplated by this Convention and for the purpose of reducing the present indebtedness of Nicaragua, the Government of the United States shall ... pay for the benefit of the Republic of Nicaragua the sum of three million dollars ... to be applied by Nicaragua upon its indebtedness or other public purposes for the advancement of the welfare of Nicaragua in a manner to be determined by the two high contracting parties....”

Even before this treaty had been made public, unofficial reports revealing its provisions had led Costa Rica and Salvador to protest vigorously to the United States and to Nicaragua against what each considered to be a grave infringement of its own rights. Their opposition had led the United States Senate to add to the treaty a proviso declaring that nothing in the Convention was intended to affect any existing right of Costa Rica, Salvador, or Honduras. This, however, did little to conciliate those states, and the efforts of the State Department to secure their approval of the new condition of affairs created by the treaty by an offer to make similar agreements with them, to safeguard their rights and to indemnify them with pecuniary compensations, proved unavailing. After the treaty had been proclaimed, Costa Rica and Salvador took their protests to the Central American Court of Justice, requesting that tribunal to enjoin Nicaragua from carrying out its provisions. The Court decided to take cognizance of the matter, despite Nicaragua’s refusal to be a party to any action before it.[71]

Costa Rica’s case was a simple one, based upon treaty provisions. By the boundary treaty between her and Nicaragua, signed in 1858, she had been given perpetual rights of free navigation in the lower part of the San Juan River, and the Nicaraguan Government had agreed to consult her before it entered into any contract for the construction of an interoceanic canal. There had been some dispute about the terms of this treaty, which had led in 1888 to the submission of the questions at issue to the arbitration of President Cleveland. The latter had held the treaty valid, and had expressly declared in his award that: “The Republic of Nicaragua remains bound not to make any grants for canal purposes across her territory without first asking the opinion of the Republic of Costa Rica.” Costa Rica asserted that the construction of the proposed canal would interfere with her navigation of the San Juan River, thus infringing her rights under the convention of 1858 and also under those provisions of the Washington Conventions of 1907 which granted to each Central American Republic the free navigation of the waters of the others; that it would injuriously affect her own territory on the banks of the San Juan; and finally that the Canal Treaty had been signed and ratified before she had even been informed of its provisions, and without her assent being asked at any stage of the proceedings. Nicaragua refused to answer the complaint of Costa Rica, and declared that she would neither recognize the competence of the Court to assume jurisdiction in the matter nor abide by its decision when rendered. She denied that the treaty was either a concession for the construction of a canal, or an agreement for the sale of the San Juan River, saying that it was only an option granting to the United States the privilege of building a canal, under an additional contract, at some future time.