reason been led to make false assertions. Oftentimes, therefore, governmental representations need to be checked up by every available means. There is never removed from the lender the serious responsibility of assuring itself beyond possibility of reasonable doubt that no undertaking on the part of the borrower is void or even voidable, constituting an abuse of power through excessive yieldings of rights or prerogatives not to be relinquished under the local law.

The question of validity concerns both the form and substance of the borrower's undertaking. Technically, it embraces generally the two-fold inquiry: first, whether the borrower has the right under its own laws to undertake to do what is sought to be done; and secondly, whether in its undertakings it has pursued the course prescribed by those laws. Practically there is another and perhaps a larger question involved in the first inquiry, and which is never to be overlooked: whether for any reason and regardless of the approval of the local law, intelligent or unintelligent opinion within the territory controlled by the borrower and affected by the loan, challenges the obligations assumed, or protests against powers conferred on the lender as subversive of rights of sovereignty and as manifesting an abuse of governmental functions by the borrower.

A few of the matters which pertain to validity may be noted and regardless of the order in which they may be expected actually to arise.

With respect to the matter of security, there is involved an inquiry touching the kind or nature of the asset sought to be pledged. Does, for example, the local law permit the mortgaging or hypothecation of the public domain or its appurtenances such as a harbor or a court house or any other thing fulfilling an essentially public function and necessarily incidental to the administration of government or the exercise of political independence? Again, does the local law permit the use and control of the particular kind of pledged public property by or for the benefit of a foreign lender, as by a trustee in its behalf, so as to enable it directly upon default, to utilize freely the security for the loan? More broadly, does the local law permit the borrower to divest itself of possession and control of the particular thing sought to be utilized as security? Does the local law forbid mortgage agreements serving to vest title to public property in a mortgagee or trustee? Do any general prohibitions of the alienation of state property render illegal attempts to utilize it freely as security for public loans? Are pledges of public revenues to be derived from any particular sources locally deemed better or worse in point of legality than the hypothecation of existing tangible property, whether movable or immovable?

1914, MacMurray, Treaties and Agreements with and concerning China, Vol. II, p. 1172; also Article II of Chinese agreement with Lee, Higginson and Co., of April 7, 1916, ibid., p. 1279.

'A Chinese loan agreement with French bankers, January 21, 1914, for the construction of a railway, purported to pledge by way of guaranty, the Port of Yamchow, its materials and appurtenances.

Such inquiries suggest the question which may recur when pledges of public property are utilized as security, whether the lender may not in a particular case go too far, and jeopardize the safety of a loan by exacting and obtaining the control and use of something by way of security which the laws of the borrower forbid it to alienate or pledge, or which, regardless of the law, popular opinion within the territory of the borrower deems to be inalienable.

Whether general or special legislation, or executive decrees purporting to authorize the provisions of a loan agreement accord with the fundamental law or constitution of the borrower must always demand, as has been observed, rigid examination. In the course of it the lender must take heed of the known reluctance of local advisers of high repute to denounce as illegal or unconstitutional steps taken by the governmental borrower, within whose domain they reside, to procure desired credit. The lender must ever be on its guard to ascertain by some process whether executive or legislative approval, however freely given, is such as not to encourage attempts to repudiate what the borrower has undertaken to do or permit, the moment a new administration takes the reins of government and essays to frustrate the work of its predecessor.

Again, the ostensible purposes of an agreement may run counter to what the law of the borrower permits; or the validity of pledges of particular assets may impose as a condition subsequent the expenditure of the proceeds of the borrowed funds for an essentially public end local to or peculiarly connected with the community or district within which the security is found. Such requirements demand rigid scrutiny and full respect.

The foregoing inquiries indicate roughly the scope of the task confronting the lender, and to be accomplished by it before it can announce with assurance the conclusion of a valid agreement, and one which later administrations conducting the affairs of the borrower will have little or no reason to oppose as invalid. With that initial problem out of the way, others equally complex arise for solution.

EFFECTS OF CHANGE OF SOVEREIGNTY

In external bond issues the question must frequently arise, according to the nature of the borrower: What state or government, if any, will be responsible for service, in case the territory to which the loan directly pertains undergoes a change of sovereignty? Suppose, for example, the Government of the Republic of Mexico issues external bonds, related through the nature of the security or otherwise, to the State of Sonora. Suppose Sonora revolts and attains its independence, uniting possibly with a successful confederacy in the neighboring State of Chihuahua. What entity is in such event to be regarded as responsible to the lender? Does the Republic of Mexico retain the burden; or does the new confederacy assume it; or is there apportionment? Again, is the correct result dependent upon

the purpose of the loan, or upon the place where the proceeds have been expended, or upon the nature of the security, or upon the mode by which sovereignty was shifted? While the true solution is doubtless to be found in the principles of international law, there has been some diversity of opinion as to what they ordain. Nevertheless, American diplomatic discussions and other official documents shed much light and offer useful guidance. They indicate, for example, purposes to be avoided, types of securities likely to prove unstable, and the possible value of definite contractual provisions by way of safeguard. Without entering upon a full discussion of the legal principles involved or of American interpretations thereof, attention is called to a few pertinent considerations which both appear to fortify.

The true theory justifying the burdening of particular territory with any part of a debt, in case of a change of sovereignty, is believed to depend upon whether that debt is to be deemed advantageous rather than detrimental to that territory. This principle is fairly applicable to the general as well as the so-called local debts of the original borrower. Where a debt is shown to have been incurred for purposes to be fairly deemed hostile to the purposes of a particular district or territory, that territory, in case of a change of sovereignty wrought, for example, by revolution, is not likely to be regarded as burdened with the fiscal obligation, irrespective of the design of the original debtor. Such is the case where, for example, a debt is sought to be charged against a particular area or district of the borrower of which the sovereignty is subsequently lost, as a means of obtaining funds in order to retain control by force over such district, and the revenues thereof are pledged as security for the loan." A like result might under certain conditions be anticipated, even where a mortgage had been duly impressed upon a particular area, if it could be shown that the purpose of the obligation was essentially hostile to the welfare of the inhabitants thereof. It should be observed in this connection that the Department of State has at least on one occasion-in discussions of the Cuban debt following the Spanish-American War-not been disposed to regard a pledge of future revenues controlled by the debtor, as the equivalent of a mortgage, or as constituting a like encumbrance upon the territory from which such revenues were to be derived after it had undergone a change of sovereignty."

The American Commissioners (to whom Prof. John Bassett Moore was Secretary and Counsel) negotiating a treaty of peace with Spain in Paris in 1898, in denying that the socalled Cuban debt previously incurred by the Spanish Government constituted a burden which passed to the successor to the sovereignty of Cuba or to the United States declared: "The debt was contracted by Spain for national purposes, which in some cases were alien and in others actually adverse to the interests of Cuba; that in reality the greater part of it was contracted for the purpose of supporting a Spanish army in Cuba; and that, while the interest on it has been collected by a Spanish bank from the revenues of Cuba, the bonds bear upon their face, even where those revenues are pledged for their payment, the guarantee of the Spanish nation." (Moore, International Law Digest, I, 367.)

7 "No more in the opinion of the Spanish Government, therefore, than in point of law,

In view of the foregoing considerations, a bank lending funds to a foreign government should anticipate the possibility or likelihood that the sovereignty over territory of which the revenues or other assets are utilized as security may be transferred to another or a new state, and endeavor to safeguard itself accordingly. Certain modes of so doing suggest themselves.

The purpose of a loan should be so definitely and accurately described in the agreement as to discourage if not preclude contention by a succeeding sovereign (or by a subsequent government of the same state) that the design of the borrower was hostile to the interests of its territory or to any part thereof peculiarly connected with the debt, either as the place of expenditure of the proceeds, or as the locus of an asset pledged by way of security. Again, if a particular asset in one section is utilized as security for a general rather than a local debt of the borrower, the benefit of the section or district furnishing the security should be set forth in the agreement, and local approval made mention of, and if possible secured, as a means of fortifying a subsequent claim to apportionment, in case of the transfer of the district from the control of the borrowing state. The state which today secures a foreign loan for a military purpose, with the special design of holding in subjection and strenthening its grip upon a valuable and substantial section of its territory which furnishes through its material resources the sinews of credit, is incapable of assuring the lender that that section will, in case it revolts successfully and constitutes a new state, feel itself bound, can it be maintained that that Government's promise to devote to the payment of a certain part of the national debt revenues yet to be raised by taxation in Cuba, constituted in any legal sense a mortgage. The so-called pledge of those revenues constituted, in fact and in law, a pledge of the good faith and ability of Spain to pay to a certain class of her creditors a certain part of her future revenues. They obtained no other security, beyond the guaranty of the 'Spanish Nation,' which was in reality the only thing that gave substance of value to the pledge, or to which they could resort for its performance." (Memorandum of American Peace Commission, Paris, 1898, Senate Document No. 62, 55 Cong., 3 Sess., Part II, 201, Moore, International Law Digest, I, 384).

In numerous cases the possibility of such a change of sovereignty is so remote as to be purely fanciful. In such instances the lender may obviously dismiss from consideration some of the problems above noted.

For a singular instance where a railway concession granted by the Spanish Government for a line in the island of Luzon, was regarded by the Attorney General of the United States as not wholly beneficial to the territory traversed, see opinion of Mr. Griggs, July 26, 1900, 23 Op. Attys. Gen. 181.

Chinese loans of the past decade have commonly adverted to the purposes thereof in the original agreements. Possibly at times the professed designs have disguised the actual aim of the borrower. See W. W. Willoughby, Foreign Rights and Interests in China, Baltimore, 1920, 509-510.

A Chinese loan agreement of May 13, 1916, with the American International Corporation, adverted in the preamble to the works of great humanitarian benefit to be undertaken by the borrower, which in this case embraced a canal improvement. See MacMurray, Treaties and Agreements with and concerning China, II, 1304.

or become legally bound, to bear the burden sought by the lender to be impressed upon it.10

If there be any reason to anticipate during the life of a loan such a change of sovereignty as may affect the interests of the lender, the original agreement should make provision therefor, setting forth definitely the understanding of the contracting parties as to the effect of such an event. No instance is recalled where this precaution has been taken by a lending bank. The principle appears, however, to have been utilized in public agreements or treaties between states." Thus if it is designed to hold the original borrower, even in case a substantial part of its territory embracing assets pledged as security be transferred from its sovereignty, the fact should be stated in terms.12 Again, if it is designed to impress irrevocably on that part of the territory of the borrower affording security for the debt the full burden of payment of interest and principal, and irrespective of the nature or place of expenditures of the proceeds of the loan, the contract should announce the fact. In this connection, however, a preliminary question akin to one of validity might in the particular case supervene and demand consideration: as to the extent of the power of the borrower to burden territory with a debt by any process, beyond the time when the borrower retains its control thereof, unless that territory may be fairly deemed to gain from the loan a benefit proportional to the load placed upon its resources.

Still again, it may be the actual design of the contracting parties, in event of a change of sovereignty, and perhaps regardless of the location of the particular security, to apportion the burden of service. Such an understanding should find clear expression in the agreement.

It is believed that, in case a loan is concluded by or for the benefit of a colonial possession rather than for that of the parent state, contemplating the exclusive use of the proceeds within the colony, and possibly secured by the pledge of assets therein, the colonial government should be made the direct obligor and with the approval and perhaps through the instrumentality of the parent state. In such case, that approval, while possibly 10 The contentions of the United States in the negotiation of a treaty of peace with Spain in 1898 would hardly encourage a different view.

11 Thus Article XXIV of the treaty between the United States and Panama of November 18, 1903, declares: "No change either in the Government or in the laws and treaties of the Republic of Panama shall, without the consent of the United States, affect any right of the United States under the present convention, or under any treaty stipulation between the two countries that now exist or may hereafter exist touching the subject matter of this convention.

"If the Republic of Panama shall hereafter enter as a constituent into any other Government or into any union or confederation of states, so as to merge her sovereignty or independence in such Government, union or confederation, the rights of the United States under this convention shall not be in any respect lessened or impaired." (Malloy's Treaties, II, 1356.)

12 Whether such an undertaking would be valid, should engage the attention of counsel as a problem incidental to that of ascertaining the scope of the powers of the borrower.