7. The Funds and the Conventions, 1838-1848

Public Debt and Private Profit

Why did Martinez del Río Hermanos invest so heavily in Mexican government debt issues? The most plausible explanation for what seems in retrospect to have been foolish, even dangerous, behavior was that the firm responded to the same stimulus that motivated so many others, namely, comparative advantage. As chapters 4 and 5 showed, there were few opportunities elsewhere. Commerce stayed depressed. Business bankruptcies were the rule, not the exception. Mining was unpredictable. Lending to the private sector was problematic. Why make private loans, which more often than not were destined to finance a larger transaction with the government? If the deal was a bust, the lender felt the consequences anyway. If not, then the borrower, not the lender, reaped most of the profits. The state may have been a bad risk, but so were private borrowers. For the agiotista, the government's debility was itself an asset. Pedro summed up this argument as his contribution to an ongoing debate within the family between 1838 and 1844: "It is important that you judge this country as best for a merchant who wishes 'to make large or small fortunes according to the risks. . . . What would become of us if there were a well-established government swimming in money? For us there would remain no recourse except to give up our accounts and become farmers or mortgage our Capital, like the nuns and friars, to live vegetating on our revenue."'

Nothing else promised the 15 percent to 20 percent annual returns the family expected from its investments. Foreign investments had given poor results. Along with other investors, the Martinez del Ríos suffered the reverses occasioned by the banking collapse that began in the United States in 1835. The year 1836 witnessed the coronation of Queen Victoria and the beginning of a commercial panic in London. In 1840 a great depression weighed down the economies of all the industrializing nations.

For the Martinez del Ríos the worst part of investing abroad was that, although profit rates (that is, interest and dividends) were low, risks remained high. Conventional wisdom dictated that the family should return to proven , more traditional investment practices-in Latin America-not in Europe or the United States. Pedro reminded Gregorio José, a promoter of investments in the metropolitan countries, that "your father told me once in Panama that having his money in the strongbox on the 31st day of December, he made 6 percent on it before midnight; I will apply that to what we have in New Orleans; if we had it in our box the 31st of December we could get with it 9 percent, which is the most it could make for us in New Orleans [in a year]."' And in Mexico, the government was the best of all possible clients:

This government is the best repayer that I know, as, with rogues, fools, and honorable men in the Ministry, one needs only the necessary prudence to not become overextended because of ambition and to enter strictly in those deals that can be sustained without having to pay the interest of the plaza [Mexican money market rates]: The proof that it is a repayer is that the old 15 percent [Fund] is already completed; and that none of the funds today that are being paid have paper [credits] that are less-deserving of payment than those of the 15 percent, as you remember that in it were placed a multitude of orders that cost only 18 percent to 22 percent. 3

Pedro's assessment of the history of the funds through 1839 was correct, but he had learned a false lesson. Because the government had met its obligations in the past, this did not mean that it would or could do so in the future. Equally fatal, Martinez del Río Hermanos never demonstrated the self-restraint essential to keeping speculation in government debt issues at a manageable level. As was the case with Miraflores, the defense of established investments led to costly new expenditures. Once ensnared, the struggle to escape only sucked the victim deeper into the quagmire.

The Funds, 1838-1842

The first great surge of agiotaje, speculation in the public debt of Mexico, began in 1827, when the government used up the last installment of the 1.6 million borrowed from London banks in 1824. The Law of 27 January 1827 authorized the president to negotiate a new loan of up to $4 million, with repayment guaranteed by setting aside $100,000 monthly in receipts from the maritime customs houses and $35,000 monthly from tobacco monopoly revenues. As Guadalupe Victoria's government already had defaulted on interest owed to the London loan, foreign banks refused new loans. The government's only recourse for deficit financing lay with agiotistas at home. So began the orgy of speculation, which was doomed to collapse once the state had mortgaged all its revenues and once it had surrendered all its properties to creditors.

Before that eventuality, there was, momentarily, a Golden Age of agiotaje. Incessant political violence, the separatist movement in Texas, and the "war" with France drastically increased the government's need for income in the 1830s. To pay the Treasury's many creditors, the Banco de Amortización, founded to amortize the worthless copper currency, auctioned the properties of the Inquisition and the Jesuits, which the government had inherited from the colonial regime. Acquisition of these properties and access to progressively larger shares of government revenues gave agiotistas excellent returns on their speculations.

What made it possible for the government to pay its obligations even in such stressful times was that new investors, hoping to duplicate the recent successes of notorious agiotistas, lent the government even more money. An additional factor, rarely considered, which helped to keep the government and the agiotistas solvent was that the wars themselves provided a pretext for the cynical manipulation of Mexican chauvinism and patriotism. Successive governments from 1836 to 1844 used forced loans and voluntary fund-raising drives to finance new military campaigns to reconquer Texas and to erase the humiliation of San Jacinto. No serious campaign was ever mounted, nor was there an accounting of the large sums received for the campaigns. These monies simply flowed into the National Treasury, where they were used to cover routine government operations-including payments to creditors.

The first of the several public debt funds that proliferated in the late 1830s was created by the Law of 20 January 1836. This law set aside a 15 percent quota of revenue from the maritime customs houses (aduanas maritimas) to be used to pay off all existing loans and contracts with the government. Creditors no longer could charge their orders against the customs houses separately, as Drusina & Martinez and other speculators had done in the past. Instead, they were obliged to pool their credits into the 15 Percent Fund. An apoderado, chosen from among the creditors, managed the fund and received the libranzas from the customs houses. Periodically, when a large sum had been accumulated, the members of the fund received dividends proportional to their shares in the fund. By 1839 the government had managed to pay off all but $360,000 owed to the 15 Percent Fund. The paper credits that speculators had introduced into this fund (as a part of a loan to the government) usually cost them 20 percent or less. Because dividends on the bonds were paid exclusively in silver, the profits earned from the 15 Percent Fund had been exceptional. After it had redeemed the bonds issued against this fund, the government created a new " 15 Percent Fund" consisting of about $1 million in credits on government salaries and pensions (vales de alcance). With what was to become a favorite device for obliging reluctant creditors to furnish new loans, the government required all creditors of the 15 Percent Fund to pay in 1839 a 15 percent restoration fee (refacción) as the price for receiving dividends from the fund.

The Decree of 20 May 1837 created a 17 Percent Fund, similar in purpose to the 15 Percent Fund, with a principal of $2,534,020. Of this sum, credits for $1,735,030 drew no interest, but the balance of $800,000 earned 2.5 percent to 4 percent monthly interest-giving the whole a nominal interest equivalent to about 8 percent annually. The Ministry of Hacienda required the creditors of this fund in 1839 to pay a refacción totaling $100,000. Aside from these extortions, the 17 Percent Fund, like the 15 Percent Fund, was a good investment because, even in the difficult years 1838 to 1840, the government faithfully paid dividends of 6 percent to 10 percent several times annually. Speculators might reap additional profits as the market value of bonds issued against this fund increased as it became more certain that the fund would be fully repaid. Bonds from the 17 Percent Fund sold at less than 50 percent of face value in 1838, but by January 1839 they were up to 55 percent, and by June 1839 they brought 65 percent. One had to pay 75 percent for these bonds in August 1840.' Two months later, when the principal had been fully amortized, Martinez del Río Hermanos's partners jealously noted the profits their colleagues in commerce had earned with the 17 Percent Fund: "Montgomery & Nicod must have made plenty, as, besides what they had originally, the former made additional purchases, and then at high prices, and calculating today just what can be made on interest, it is a beautiful profit"'

Agiotistas looked hungrily at the quota of customs duties that would become available when payment to the 17 Percent Fund was complete. This time Martínez del Río Hermanos was determined to share in the profits. In early July 1840 the firm joined a syndicate that included the broker (corredor) Juan Rondero, a second British commercial house (Montgomery Nicod & Company), and Antonio Garay (the alcalde of Mexico City), who had been chosen by the group to negotiate an $800,000 loan with the government.' By combining their resources with those of a second group of lenders headed by Ignacio Loperena and Francisco Yturbé, the syndicate arranged in November 1840 to provide Bustamante's government with a much larger $2 million loan, repayable with 17 percent of the revenue from the maritime customs houses. Pedro explained the details:

The business of the two million. . . was finished at last by Rondero with 45 percent in cash and 5~ percent in paper, with 0.5 percent [monthly] interest on the whole; in it we have taken $250 thousand, of which we ceded $30 thousand to Béistegui, who had asked us for it last year; the balance stayed with Dn. G. A y Terán [Gregorio Mier y Terán]; to whom he will divide I do not know. The assessments of coin must be made as 100,000 pesos monthly; for the paper there is a six-month term; these I believe we can obtain at 12 percent [of nominal value].... Montgomery Nicod & Company told me confidentially that they were going to give a share to the French Minister as well as to the English, and in virtue of the law that authorized the Government [to make the loan], they [the ministers] had made this deal.

Experience taught foreign merchants to use their legations as insurance against the arbitrary and often illegal acts of the politicians. In a memorable case, a group of British merchants in Mexico City lent the government a large sum to outfit a punitive expedition against Texas in the autumn of 1836. The loan was repayable as advance payments "entered" into the books of the Veracruz customs house as credit against future imports of merchandise. Later, when the merchants' goods began arriving in the port, the government reneged on its agreement, ordered repayment of the loan through the ordinary funds, and forced the merchants to pay their duties on the spot.'

The lifting of the French blockade of the Gulf ports early in 1839 brought new opportunities for moneylenders. Pedro described a deal being arranged in March 1839:

Now they are trying to deliver weekly to the Government $50,000 in cash, and various English houses have combined for this purpose, and under the recognition and intervention of Mr. Pakenham [the British minister] they propose a deal for 1,350 thousand; for each $100 in cash delivered, they will deliver also one of these three credits: if in cr9ditos antiguos [preindependence credits], $16; in vales de alcance, $20; and in orders of the 58 percent and 68 percent, $30; obliging the government to pay 1 percent monthly for the cash and to deliver payment in libranzas, which incessantly must arrive from Veracruz. The intervention of Mr. Pakenham in this business makes it very secure and for this reason we have subscribed for $150 thousand. I calculate that our disbursement will not reach the half of that, because the unloading of the ships has already begun in Veracruz and within seventy days the first duties will be paid, so that a great part, and in my opinion at least two-thirds of the cash that we have to pay will come from the same that we are receiving.... I have calculated on the capital that we have to disburse, and supposing the half, that will give us 35 percent [profit]. Until now, those involved are Geaves and almost all the English houses, the Echeverrias, and us. Sillem continues doing business in company with Loperena and now is very uncomfortable, because this deal undoes a proposal they had made in league with Carrera, Mier y Terán, Agüero C. [Agüero, Gonzá1ez & Company.

Heroism against French marines cost the general his leg, but restored to him the political reputation lost after the Texas debacle. To make their deal, the British merchants and their Mexican associates were obliged to use Francisco Morphy as a conduit to Santa Anna. After this group had begun delivering their weekly supplements to the government, they found themselves outfoxed by rivals who shared a more intimate relationship with El Cojo. On 30 April 1839, before "retiring" once more from public office to return (heavily laden) to Manga de Clavo (his hacienda near Jalapa), Santa Anna negotiated with Lorenzo Carrera a $300,000 loan to pay the first installment of the indemnity owed to the French. Carrera and his associates furnished the loan as $200,000 in cash and $100,000 in pagas corrientes (orders) on the customs houses. Because this new arrangement jeopardized repayment of their loan, the English merchants retaliated by suspending payments to the government and asking Pakenharn to intervene. That the government paid competitors with Veracruz libranzas promised to the English merchants was serious enough; that these interlopers had secured twice as much interest was intolerable. With Pakenham's mediation the merchants and the government agreed to compromise. The contract of June 1839 was canceled; the $300,000 already disbursed was to draw 2 percent monthly interest until repaid with 10 percent of the revenue from the maritime customs houses."

When Bustamante's government suspended these payments in September 1839 to force the creditors to pay a refacción, the English again sought out their minister. In a note to the Mexican foreign minister on 8 October 1839, Pakenharn warned of the serious consequences of breaking this second agreement and he protested the inclusion of other debts in the 10 Percent Fund, which had been promised exclusively to repay the so-called English Loan. What especially angered foreign creditors was that these new debts originated from transaction, of (more) dubious legality: "In the time of Santa Anna, continuation of Minister Cortina, and afterward Ministers Lombardo & Tornel, were r4ade another series of deals that I will not say were crazy, but infamous, which weighed on 56 percent of the maritime customs houses. After heated discussions, the English merchants agreed to permit the inclusion of these credits in the 10 Percent Fund in exchange for receipt of all the special sales taxes (derechos de consumo) collected from English merchants. The following year, in September 1840, the government reneged on its agreements and diluted the 10 Percent Fund by issuing and marketing additional 10 Percent Fund bonds. Although the obligations of this fund were considerable, these bonds remained highly regarded because they were backed by a mortgage against the Fondos de los Californias, an ensemble of valuable estates once owned by the Jesuits. Since trade was brisk for most of 1839, about one-half of the $300,000 in principal owed to the English Loan had been repaid by July 1840. The fund's apoderado, Pedro Ansoátegui, predicted that the balance would be paid off before the end of the year if the government abolished the 15 percent special sales tax. To avoid paying the tax, merchants in Veracruz refused to ship their goods to the interior and, instead, kept them under bond in the Port's warehouses. The government's heavy-handed attempt to raise revenue by putting the squeeze on merchants had paralyzed commerce and, inadvertently, disrupted its own income sources and those of its creditors in the public debt funds. Even with such setbacks, the government continued to pay dividends, albeit at a slower rate, to the 10 Percent Fund, and the market value of those bonds improved, rising from 35 percent in July 1840 to 55 percent by November 1840.

The 8 Percent Fund originated in credits owed from what observers charged were "loco" transactions approved by Santa Anna's minister of hacienda, José Gómez de la Cortina, during the French blockade. To pay off $2.2 million in contracted debts, Santa Anna set aside 12 percent of customs duties and issued bonds earning monthly interest of up to 2 percent. Unlike the 15 Percent and the 17 percent funds, this 12 percent quota had not been authorized by law. The creditors had collected about 11 percent of the principal when, in September 1839, Bustamante forced them to pay a $40,000 refacción and reduced their quota to 8 percent. The apoderado and principal creditor of the 12 Percent-turned-8 Percent Fund was Agüero, González & Company. Eight Percent Fund bonds sold at about 35 percent of value in July 1840. By November 1840, 37 percent of the $2.2 million in principal had been amortized. Congress created a new 12 Percent Fund in the summer of 1841. The nominal purpose of the fund was to amortize the copper currency. Because Bustamante's government was on the verge of collapse, it was obliged to concede generous terms on this debt issue. The bonds for the 12 Percent Fund, earning 0.5 percent monthly interest, were marketed for 46 percent in cash (three-fourths in copper coin; one-fourth in silver coin) and 54 percent in paper credits of any category.

Considerations apart from a simple profit motive encouraged agiotistas to enter this venture. Pedro reported that Martínez del Río Hermanos had subscribed for $25,000 in cash because "this I have not considered properly as a business deal, and I have entered it only to help nourish this sick one for seven months and to extract in this time all possible from the other funds. Because they rightly feared what might follow, most Mexico City speculators maintained a high regard for Bustamante's government. Although his government had forced creditors to pay refacciones and had reduced the quotas for certain funds, agiotistas generally regarded those acts as a legitimate response to the excesses of the previous administration and as essential to the government's survival. Bustamante and his minister of hacienda, Echeverría, were well liked because, under difficult circumstances, they had repaid many credits. Table 34 is a summary of the 8 Percent, 10 Percent, 15 Percent, and 17 Percent funds, showing payments applied to principal as of July 1840. Table 35 lists Martínez del Río Hermanos's holdings in the funds as of July 1840.

In 1840 government debt issues accounted for $68,268 of Martínez del Río Hermanos's combined assets, which totaled $691,284. Although these credits made up only 9.8 percent of the firm's assets, they produced $37,878 (44.9 percent) of the gross profits of $85,798 reported by the firm. It was with these numbers in mind that Martinez del Río Hermanos began a new round of aggressive speculations after 1840. Table 36 lists public debt issues owned by the firm between 1839 and 1843. What the firm's partners failed to appreciate, however, when they began these new investments in public debt issues, was that the political economy of agiotaje might change radically in the years to come.

The problem all agiotistas would have to face sooner or later was that government debt after independence had continued to increase more rapidly than income. Estimates of the government's disposable income for 1838 to 1842 are listed in table 37. Revenue from the maritime customs houses constituted the government's primary source of income. When the total amount of duties declined after 1840 and when the government began forcibly after 1841 to expropriate progressively larger shares of mortgaged customs quotas, creditors were obliged to war on one another for control of those dwindling resources. Nor were the agiotistas in Mexico City the only group dependent on the state. To pay its creditors the Bustamante government reduced the size of the army and the civil service. These groups waited impatiently, along with out-of-favor power brokers like Morphy, for a chance to recoup their losses.

The Mexico City empresarios were the backbone of the Bustamante regime; many of its principal figures, like the Echeverrias, were themselves merchants and moneylenders. Even so, when in the summer of 1841 it was apparent that the old regime could no longer sustain itself, an important faction of the Mexico City group abandoned Bustamante to begin making an accommodation with Santa Anna. The most prominent defectors were the powerful empresarios who owned the Empresa del Tabaco and who were desperate to return the monopoly to government administration under favorable terms. In the spring of 1841 their several attempts to persuade Bustamante's government to buy back the monopoly had failed. The devaluation of the copper currency that consumers used to buy tobacco products, the inability of the Bustamante government to implement an effective plan to amortize copper, and the prospect of being bankrupted if they could not cancel their five-year contract with the government encouraged the company's shareholders to betray an administration that had treated them kindly in the past. Observers described the empresarios' antics in the summer of 1841:

Our Minister of Hacienda [Manuel Canseco] was placed in the chair by the E. de Tabacos, as it believed he was the most convenient, and in little more than a month he gave it $514,000; such that in the first six weeks of his Ministry he spent nearly a million pesos, with which D. Javier [Echeverrial could have managed four months; Now, the E. is draining the corpse and far from helping is trying to squeeze out the $300 thousand it has left there; our man [Cansecol is now in the worst fix and has not stopped making his blunders. The past week he called the apoderados of the fundsand asked them for alms and they gave him $100,000, which they divided in fourths between each of the funds and which will come out of the first libranzas that arrive; this will retard the dividends a little more. This occasion gave me an opportunity to deal for the first time with S. E. [Canseco] who seems to me a poor man, very good as a mayordomo of a convent, but in no way fit for the position he occupies.

The 25 Percent/26 Percent Fund and the British Conventions, 1842-1848

The reaction that agiotistas feared might accompany Santa Anna's return to power was quick to materialize. The strongman from Veracruz assumed the presidency on 10 October 1841. The following day he ordered the suspension of payments to the 8 Percent, 10 Percent, 12 Percent, 15 Percent, and 17 Percent funds. The Decree of 14 October 1841 lifted the suspension temporarily, but reduced the quota of import duties for each fund by one-half. At the same time, Santa Anna began to increase dramatically the size of the army and the bureaucracy.

Apart from the army and established corporate interests such as the church, the dictator's political coalition for the 1841 revolt incorporated other diverse and heterogeneous forces. Staunch supporters of the old order, Veracruz planters wanted protection for sugar, cotton, and tobacco. Import merchants in Gulf ports were liberals and advocates of free trade, but they joined the conservative movement to protest profiteering in the public debt. Normally, the port merchants paid customs duties with libranzas. The government endorsed these libranzas to the creditors of the funds. Importers viewed the funds as a fraudulent device used to enrich rival merchants and empresarios in Mexico City.

The last important block in the Santanista movement of 1841 consisted of regional interests committed to changing the pattern of government expenditures to shift the flow of resources away from the center and toward themselves. Once Santa Anna had taken power, the coalition began to dissolve--but not before launching a virulent attack on the public debt speculators. Before Santa Anna's return, port merchants had been required to write separate libranzas for each of the funds according to the prescribed quotas. Afterward, they won a reform of this procedure. Santa Anna's government required the funds to select an apoderado general to receive all the libranzas from the customs houses. Apoderados for each fund accepted their share of libranzas from the apoderado general and distributed the proceeds among the individual creditors. Because the apoderados already charged a 1 percent commission and now the apoderado general charged a 0.5 percent commission, the new procedure slowed down the payment process and increased overhead costs for the creditors.

Santa Anna intended to keep his regime solvent by reducing payments to the national debt. Since the 16.67 percent quota for the foreign debt owed to Great Britain could not be set -aside except at grave political risk, that left the public debt funds as the only targets of opportunity. Fearing Santa Anna's designs, the apoderado general, Gregorio Mier y Terán, and the apoderados-Agustín Prado for the 15 Percent, A. J. Atocha for the 12 and Pedro Ansoátegui for the 10 Percent--published on 9 February 1842 a protest denouncing any scheme to set aside the mortgages on the "maritime customs houses or to alter the "method and practice" the government itself had established for the funds.

Ignoring those protests, Santa Anna suspended payments to the funds on 19 February 1842. The suspension continued unrelieved for the next few months. Under such strains, the delicate consensus that united the agiotistas began to splinter. Rivalry and petty jealousy always characterized the agiotistas behavior, yet they had in the past manifested a rudimentary collective consciousness, confronting the government as a bloc and benefitting as a whole from the unanimity of purpose. Predictably, the split occurred along lines of nationality. The more powerful native creditors began to make separate deals for themselves. They could bargain efficiently with Santa Anna; family connections, political promises, and appropriate gifts brought favorable resolutions from politicians at the highest levels. The cooperation of the career civil servants who managed routine government affairs was secured through other arrangements. By law, appointees to posts involving fiscal responsibilities had to have a fiador guarantee their good behavior in office. Empresarios like the Rubios, the Escandóns, and the Fagoaga4, put up fianzas (bonds) for dozens of officials, ranging from the head of the customs house in Tampico to the tax administrator of Tlalpam. In contrast to the proven Mexican model, foreign merchants like the Martinez del Ríos failed to develop useful relations with either the politicians or the bureaucrats, trusting instead that their legations would look after their interests.

Santa Anna announced in July 1842 that payments to the funds would be returned--under certain conditions. The combined 8 Percent, 10 Percent, 15 Percent and 17 Percent funds might receive 15 percent of customs duties if each agreed to pay a $40,000 refacción. Because the new quota would not provide enough revenue even to pay interest on the principal owed, the creditors listened to the proposal without enthusiasm. Many of them were shocked to learn three days later of a new decree that lifted the suspension of Payments to the 15 Percent Fund. Only after this fund had been paid in full, were the other funds to receive payments from that quota, according to the order of their seniority. The special deal for the 15 Percent Fund was the work of Ignacio Loperena and Antonio Garay, agiotistas who had intimate associations with Santa Anna and who had invested heavily in that fund.

Through the ubiquitous Morphy, Santa Anna made it known to the others that a $360,000 refacción would be the price fixed for returning to them a 31 percent share of the maritime customs duties. In late September 1842 Pedro described the inconclusive negotiations being carried on between the creditors and the government:

Eight days ago, by invitation of the government, the creditors of the funds met in the Lonja; here the apoderado general read to them an offer from the Min. of Hacienda, which amounted to a request for a 10 percent refacción in exchange for 16 percent of the customs duties to pay the 8, 10, 12, and 17 percent; It was decided to name a commission; that was composed of Mr. Rosas, Yturbé, and Berruecos, authorizing that they offer for the 8, 10, and 12 Percent funds the sum of $100,000 in order that half the quota of Hacienda and made its offer in those terms, but nothing was resolved. Nicod, as representative for the 17 Percent, told the Junta he would give nothing; he has the hope Mr. Pakenham will receive some instructions about this fund.

Unable to reach a collective agreement with the government, the last vestiges of cooperation between creditors vanished, to be replaced by heated confrontations and controversies. In early October 1842 Martinez del Río Hermanos, along with many other foreign firms, called on the British minister for help: "The Prior [senior partner] in our firm having become a naturalized British subject, we have the honor to solicit your protection.... A large portion of our capital having been placed in jeopardy by the President's decree ... which suspends for an indefinite period the payments on the different funds. The company reported that it had paid weekly subscriptions for the $300,000 loan to Bustamante's government (the 17 Percent Fund) until Santa Anna's revolt in the summer of 1841 reduced its share of dividends. When Martinez del Rio Hermanos tried to withdraw from this commitment, "the head of the Mexican government obliged us to pay the full amount that we had originally agreed on."" Now that same authority refused to pay back the sums owed. Unjustly, "claims of foreign creditors [were] wholly disregarded" while Santa Anna's government made payments to "the Mexican holders of the same bonds and of other paper less formally guaranteed.

At first Pakenharn was loath to support such claims and he suggested that creditors like Martinez del Rio Hermanos should seek recourse from the courts of Mexico. Although he agreed to seek instructions from the Foreign Office, he insisted that Martinez del Río Hermanos must first provide official evidence of Gregorio José's naturalization. Put off by Pakenham, the Martinez del Ríos tried their hand at arranging a Mexican solution. Pedro suggested that "by giving Morphy a good share in which he can interest El Cojo, we can get out of everything at once. The newcomers were slow to appreciate that however useful bribes might be, empresarios needed other, more indispensable resources to ensure the successful execution of such complex maneuvers. When their overtures to Morphy failed, the Martínez del Rios had no alternative except to plead for Pakenham's intervention.

The favored of Mexico needed no legation to intercede for them. Gregorio Mier y Terán paid an $80,000 refacción to secure a private 8 percent quota of customs duties to pay off his $800,000 investment in public debt bonds. Rosas and Yturbé also made private arrangements. Although Pakenham declined Pedro's request that he secure a similar arrangement for Martinez del Río Hermanos's bonds, the show of favoritism by the Mexican government did stimulate the British minister to seek a diplomatic solution for the claims of his nationals.

On 15 October 1842 the ministers of hacienda and foreign relations signed an agreement with Pakenharn that pledged the Mexican government to pay British citizens' claims that had been pending since the 1830s. The three major claims were those represented by Manning & Marshall (assumed by Manning & MacKintosh), J. P. Penny & Company, and Martinez del Rio Hermanos. The claims of J. P. Penny & Company originated with forced loans and the seizure of the company's goods by government troops in Zacatecas in 1836. Martinez del Rio Hermanos represented the investors in the English Loan of 1839. The $250,000 principal of the Pakenharn Convention was payable with a quota of 2 percent on the Veracruz customs house and 1 percent on the Tampico customs house. The apoderado of this fund, the 2 Percent and 1 Percent funds, was Pedro Ansoátegui. After the convention was signed, Martínez del Rio Hermanos rushed to buy credits that could be included in the new fund. As late as December 1842 this paper sold at less than 50 percent of face value. Referring to the convention, Pedro exclaimed, "This business is better than ever ... because this is more secure, signed as it is as a covenant with the Minister of S.M.B. [Great Britain] and as it is between Government and Government. Mr. Pakenharn has told me that he will not give protection for the other funds and if he does it now for the 17 Percent, it is only for the past denigration of justice, this will serve as a counsel for me in the future."

With Pakenham's intervention, the Mexican government pledged in a second convenio signed on 21 January 1843 to repay the $2.2 million loan of 1840, which formerly had been part of the 17 Percent Fund. To cover the principal, interest, and a 6 percent refacción, the government issued new bonds earning 1 percent monthly interest to replace 17 Percent Fund bonds, which had drawn only 0.5 percent monthly interest. The new bonds were repayable with libranzas endorsed to Montgomery Nicod & Company against an 8 percent share of the maritime customs house. As of January 1843, Martinez del Rio Hermanos's share in the $2.2 million loan and in the 17 Percent Fund and, hence, in the new arrangement was $220,000 in principal and $75,904 in interest. In March 1843 the firm acquired additional 17 Percent bonds by putting up 2 percent of the 6 percent refacción owed by Montgomery Nicod & Company. Nicod, who masterminded the original speculation with the 17 Percent Fund, had by this late date lost patience with the constant intrigues that after 1841 were synonymous with operations in the public debt. José Pablo reported from Paris, "According to what Mrs. Lubervieille has told me, Nicod has gone mad as a result of all the disgusts he has had in his dealings with the government: I suppose in other words this means the 17 Percent.

The 25 Percent/26 Percent Fund, 1843-1849

Nicod was not the only one disturbed by the handling of the 17 Percent Fund. Santa Anna had retired to Manga. del Clavo in late October 1842, perhaps to escape association with the capitulation to British pressures. In early March 1843 he rushed back to Mexico City and reassumed the presidency, a position that his subordinate, Nicolás Bravo, had occupied. Creditors of the funds reported that" Santa Anna has come back furious with all the acts of his substitute ... so that the arrangement of the 17 Percent also enters into this . . . he has given a secret order to suspend it."

Santa Anna and his partisans also looked with disfavor on Bravo's decision to lift the suspension of payments to the 8 Percent, 10 Percent, and 15 Percent funds in December 1842. The caudillo had hoped to pry more cash from the creditors as the price for such action. The best the Bravo government had gotten from them was their acquiescence to another 50 percent reduction of the funds' quotas. But because the British government had forced Mexico to increase its quota for the foreign debt from 16.67 percent to 20 percent of maritime customs duties, the surrender of even $456,000 annually from the fund quotas was not enough to cover the government's deficit. In returning to Mexico City, Santa Anna's intention was to consolidate all the internal debt into a single fund and to finance this with a small quota of customs duties. For that purpose, the Law of 11 May 1843 created a 25 Percent Fund (later 26 Percent) and ordered that the 8 Percent, 10 Percent, 12 Percent, 15 Percent, 17 Percent and all other classes of public indebtedness be paid with a 25 Percent quota of customs duties. As the price of admission into the new fund, all credits were required to pay an additional 6 percent refacción. The alternative to not entering the 25 Percent Fund was an indefinite suspension of payments. Aggregated to the 25 Percent Fund (but exempt from the refacción were $5 million in tobacco debt bonds issued to the Empresa del Tabaco in January 1842. Allegedly, the tobacco empresarios had purchased this preferential treatment for the tobacco bonds (and won a separate concession that transferred to the Empresa the government's shares in the Fresnillo mines) by favoring Santa Anna with an $80,000 bribe.

Most creditors had no choice but to go along with the onerous conditions decreed by the Law of 11 May 1843. Santa Anna did not attempt to force the 2 Percent and I Percent Fund, protected by the Pakenham Convention, into the 25 Percent Fund, but he did challenge the arrangement of Montgomery Nicod & Company's $2.2 million in the 17 Percent/8 Percent funds. Despite strenuous objections from Pakenham, the suspension of payments to the $2.2 million debt (the 8 Percent Fund) continued until mid1844, when the government reorganized it as the 5 Percent Fund. Although Martinez del Río Hermanos looked to the British to defend their interests against Santa Anna's schemes, José Pablo clung to the delusion that the family might yet be able to arrange its own deal. He wrote Pedro from Paris in March 1843 to suggest that:

"if Morphy returns to Mexico could you interest him in [securing] payment of the 17 Percent-The knowledge I have of the people and things of that place make me believe that it would not be so difficult to obtain the payment of this fund under some pretext, singing the mandarins a lullaby, that is to say, giving them a share of the dividends. Santa Anna knows how to squeeze blood from stones and he who knows how to manage Santa Anna will always be able to do business."

Corruption was commonplace. To arrange the consolidation of Mexico's foreign debt in London, the Lizardis bribed Santa Anna with $125,000 and Morphy with $60,000 in October 1843. When his collusion with the Lizardis was detected, Morphy was forced to give half his share to the minister of war, José María Tornel, and to pay lesser amounts to the British consuls in Great Britain. In April 1844 the minister of hacienda, Ignacio Trigüeros, ordered the payment of $214,000 in pagas corrientes at full face value. This class of government debt issues was nearly worthless (selling in the market for less than 7 percent of nominal value), so this transaction gave privileged speculators (and their political patrons) a minimum 93 percent return.

How were Santa Anna and his group spending the profits of public office? José Pablo described their antics: "Los Santos just had another round of gaming and cockfights at the Hacienda del Encero and it is said that the Gang won some $80 D [thousand]!! Morphy was losing an equal sum and finally succeeded in dropping everything; Escandón left winning with 30 to 40,000 [gold ounces].

Meanwhile, the lot of many agiotistas was grim. The combined principal of the 25 Percent Fund in 1843 was about $13.5 million. This extraordinary dilution of the historical ratio between credits and quotas was reflected in the market price for its paper. Early sales of 25 Percent Fund bonds yielded up to 37 percent of face value. By August 1843, no buyer could be found at 35 percent. That stood in sharp contrast to the 60 percent to 65 percent prices for various classes of bonds in 1841. And the situation only worsened. In August 1844 the 25 Percent bonds dropped to 23 percent. In 1846 and 1847 they sold at 18 percent. Declining further in the next decade, their value fell to 7 percent by 1856.

British protection enabled Martinez del Río Hermanos and other creditors with foreign connections to escape total submersion in the 25 Percent Fund. For their holdings in the 8 Percent, 10 Percent, and 12 Percent ftinds there was no alternative but to convert them. Table 38 lists the principal and interest owed the firm in May 1843 for bonds nominally valued at $228,534 (representing a real investment of $94,200). The performance of bonds backed by a British guarantee (the 2 Percent and 1 Percent, and 5 Percent funds) contrasted vividly with the 25 Percent bonds: higher interest rates (12 percent annual versus 6 percent annual), higher market value (80 percent versus 18 percent), and regular dividends large enough to pay principal and interest.

The reaction of Martinez del Río Hermanos to these circumstances was predictable. It made new investments in the 2 Percent and I Percent, and 5 Percent funds, and it tried to get rid of its 25 Percent bonds. José Pablo explained these operations to Gregorio José in 1844:

I am confident that this business [the 5 Percent Fund] will continue very good and that the results will be satisfactory to you.. . because the English Legation does not lose sight of it. For the same reasons I am not in accord with your idea of buying in preference the credits of this government that are less expensive [that is, 25 Percent bonds]: these today are trash and the trash heap is growing every day, in contrast the English guarantee is very well sustained so that John Bull will make of it an exceptional and privileged fund. 42

The Laws of 2 March 1845 and I May 1845 rechristened the 25 Percent Fund as the 26 Percent Fund, but set aside only a 6 percent quota of the maritime customs duties to amortize the fund. Pedro was outraged at this development:

I do not believe that the government had the right to make the law that created the 26 Percent Fund.... Certainly, I was opposed to the majority of those who attended, as they were compinches [sic] of Dn. Francisco [Yturbé, the minister of hacienda] and such hypocrites ... his way [Yturbé] is to work concealed ... all the rest that concurred were not working for more than their own special interests and in no way for the well-being, or peace, or community of creditors.

The following year the government issued more bonds on the 26 Percent Fund, depressing its value still further. In March 1846 Martínez del Río Hermanos tried to sell $100,000 in 26 Percent bonds, but it could find no buyer even at 18 percent. Prominent native agiotistas like Yturbé were not powerless to defend their interests, but given the government's lack of resources it was unrealistic to expect the state to liquidate the public debt--no matter who controlled the government. Therefore, the strategy native creditors adopted was to maximize their share of whatever payments the state did make. Necessarily, that entailed a sustained attack on the privileged status of foreign creditors. José Pablo complained:

Having entered recently as Minister of Hacienda, Yturbé ... enemy of the 5 Percent, the first measure he took was to decree the suspension of monthly payments; this has been sustained until now with the greatest obstinacy; there is no doubt that in doing so his principal object has been to harm that fund and all that is foreign. That is, also suspended are the payments, corresponding to the old English debt!!--that of the 1 Percent & 2 Percent, etc., in a word all--all payments ... as also the Minister of War, Tornel, has found his powder contract suspended, etc., it will not be strange if he [Tornel makes some mischief to rid himself of so vexatious a colleague ... in spite of [Yturbé's] having said to his friends that he would hang before abandoning the post. The extra-avaricious genius of Yturbé is recognized, and his judaism [sic] is so notorious that naturally the whole world believes he will care for his own interests before the public good; and as he has a large sum ($800,000) in the 26 Percent, it is probable that his measures in regard to this fund will not harm that in the least."

As the United States army marched toward Mexico City in the summer of 1847, well-placed agiotistas took advantage of the confusion to cut their losses in public debt speculation. While Santa Anna was instructing his army to retreat, the minister of war, Ignacio Gutiérrez (described by José Pablo as "a cursed and vile creature of Santa Anna"), the minister of foreign relations, Manuel Baranda, and the minister of hacienda, Juan Rondero, were using the $1.5 million church loan of 1847 as a vehicle to rid themselves of the useless 26 Percent Fund bonds. This loan consisted entirely of libranzas drawn against agencies of the church. Rondero, Mier y Terán, Rosas, Yturbé, and other officials skimmed off the choicest of these libranzas, paying 50 percent in cash and 50 percent in 26 Percent bonds. Less-privileged persons paid 67 percent in cash and 33 percent in 26 Percent bonds, without being able to choose their libranzas. Selection was an advantage because libranzas drawn on the poorer church agencies were virtually worthless.

Xenophobes and Xenophiles

With the government's credit rating with the agiotistas impossibly low after 1841, forced loans became a universal solution to the problem of deficit financing. Like other foreign merchants, the Martínez del Ríos used their nationality to win exemptions from the forced loans. When Mexican officials threatened to embargo Miraflores after Martínez del Río Hermanos refused in April 1843 to pay its share of a new forced loan, the British Legation interceded, the matter was conveniently forgotten, and the company was left unmolested for a time.

With the coming of war, a new urgency was added to the state's relentless search for revenue sources. The Decree of 17 June 1847, which announced the imposition of another forced loan, assigned Martinez del Río Hermanos a quota of $2,250--a sum presumably based on the amount of capital that the firm employed in Mexico. Edward Thornton, representing the British Foreign Office, wrote the Mexican foreign minister, José Maria Pacheco, on 7 July 1847 to suggest that this assessment was too high. He pointed out that most of the firm's capital was invested in Miraflores, where it had produced few profits. The remainder of its capital was tied up in government debt issues. Since payments to the public debt had been suspended, those assets could not be counted as capital in circulation.

Despite Thorton's intervention, a detachment of soldiers appeared at the firm's doors two weeks later and announced that Martinez del Río Hermanos had been embargoed and that its properties would be seized and sold. In a panic, Pedro rushed back to see Thornton, who ordered the Mexican foreign minister and the military commander of Mexico City to suspend those proceedings. Pedro gleefully confided in November 1847 that, according to the instructions of the British foreign minister, Lord Palmerston, the firm would be exempt from any forced loan. For Pedro it was a personal triumph: "I am very happy, as much for the savings of money as for the blow dealt to Yturbé and his friends, who were very vainly boasting of having won the principle that the foreigners should not escape.

Given the institutional context of these desperate times, neither the strategies of Yturbé and other native creditors to use personal influence and public office to promote their private interests nor the plans of the Martinez del Rios to protect their investments with British power were unusual or immoral. To stay in business everyone needed insurance against the arbitrary, capricious, and frequently illegal exactions of the government. What was new and dangerous was that public debt speculation had become a zero-sum game. If native creditors prevailed, then foreign merchants who had invested heavily in public debt issues would be ruined, and vice-versa. Initially, creditors with foreign connections were the more successful group, as demonstrated by the higher returns of the conventions in the 1840s. But the battle was far from over. Foreign merchants became favored targets for political harassment by nationalist interests. Decrees in 1842 and 1843 imposed a 4.5 percent tax on foreign capital employed in Mexico, outlawed foreign participation in the retail trade, and restricted the use of public debt issues to pay import duties. There were other proposals to expel foreigners from the interior and to restrict them from the coast. These reprisals were visible evidence that a "community of creditors" no longer existed in Mexico. Inevitably, as the rift dividing the monied class widened, native creditors would join other interest groups in a general offensive to realign Mexico's politicized economy.