infringement of the sovereignty of the borrower the method employed to safeguard the national revenues, or to maintain service on the debt.1

It is perhaps unimportant whether such contentions are sound or false. It is significant, however, that at times they have found sympathy in high official quarters in the United States. This circumstance raises the question whether increasing popular opposition to the lender and to acts designed for its protection is not to be anticipated as a normal consequence of the transfer of the control of public revenues when those acts manifest a relinquishment of functions of government commonly retained by independent states; and whether also such opposition may not serve to impair service or weaken the security. If such a possibility is reasonable and not remote, the prospective lender ought to anticipate it. As a result, it may conclude that the very provisions which serve to render pledges of revenue really advantageous as security are inherently dangerous, save under exceptional circumstances when the status of the borrower as a ward of the United States and the sanction of the government of the latter unite in producing special safeguards. The pledging of public revenues as security presents, therefore, a dilemma. If those revenues remain under the control of the borrower there is insufficient assurance that they will be applied for the service of the debt and the full benefit of the lender; if, on the other hand, they are surrendered either to the lender or to a trustee in its behalf, popular opposition may suffice to jeopardize the safety and success of the transaction however valid.

The alternative is a mortgage the essential nature of which is familiar in America and England, and of assets which fairly lend themselves to hypothecation, without inspiring the contention that the transfer of control thereof betokens an improper delegation of power. In utilizing, however, the mortgage idea of theory, care must be taken, as in any case of hypothecation, to protect duly the lender by processes clearly understood by the parties to the agreement. Some Chinese agreements have disclosed attempts of the parties thereto to express with exactness their understanding. Thus in one case a "specific and first mortgage" of a railway and equipment thereof was to be construed and treated as equivalent in purport and effect "to a mortgage customarily executed in England." In another, a "first trust mortgage" upon certain railroads was to be executed "in accordance with the forms of the American law which are customary and usual in such cases to secure payment, etc." Prior to the execution of the mortgage, the provisions of the agreement in respect thereto were to be "construed and treated as of the same purport and effect as a mortgage customarily executed and delivered in the United States to a trustee, for the purpose of securing loans to and bonds issued upon railway properties." In still an

19 See, for example, the Manifesto of the National Congress to the Honduran People, signed by most of the deputies February 14, 1911, giving reasons for the action of the Congress of Honduras in disapproving the convention with the United States, signed January 10 of that year. United States Foreign Relations, 1912, p. 577.

other a "special guaranty" of the Chinese Government was to constitute a first mortgage on a railway. The lender, in case of default, was to have full power "to exercise all the rights accruing from this special guaranty according to the laws in force on this subject in the countries of Europe, such as Russia, France or England." While these are steps in the right direction, they seem to fall short of the end desired. Whenever a mortgage is utilized as security, it is believed important that the agreement specify whether the title to property so encumbered is to be transferred to the mortgagee or to a trustee in its behalf, or is to remain in the mortgagor. In an external bond agreement the understanding of the parties should be made clear. When title and control remain in the governmental mortgagor, difficulty may confront the lender in case of default, in causing the former to place within its reach the asset or the fruits thereof designed to safeguard it in such a contingency. It may be doubted whether the lender can be fully protected upon default, unless arrangement is made whereby at once upon that occurrence the lender or some agency in its behalf not only acquires the right, but also is enabled thereupon automatically, by virtue of what it already possesses, and without the further aid of the borrower, to utilize fully the benefits of the mortgage.20 Such freedom of action by the lender or an agency in its behalf is practically and usually incompatible with the retention of title and control by the borrower. In some instances, however, elaborate provision has been made to protect the lender (even where title remained in the borrower) by devices placing within its reach valuable assets connected with the property encumbered, such as title deeds, embracing a right of disposition in case of default. While the surrender of such documents to the lender or its agent may, according to the law of the particular borrower, serve to perfect the encumbrance or enhance the formality of the transaction, or restrain default by inducing fidelity to the undertaking, it hardly affords an equivalent to that kind of protection which, under the law prevailing in America, the lender habitually obtains as against a private borrower. Such protection is oftentimes the peculiar need of the lender to a foreign government from which security is demanded.

The safety of the lender is better assured through the transfer of title and control over the mortgaged property to the lender as mortgagee, or to a trustee.21 As between these alternatives, the latter may at times appear advantageous. It is equitable to both parties; it enables an entity with representatives in the territory where the encumbered property is located

20 Much less difficulty presents itself where the property pledged and relinquished to the possession of the lender or a trustee assumes the form of bonds or of shares of stock duly transferred to it, with a full power of disposition in case of default, and without necessitating further action by the borrower in that event. When the asset sought to be hypothecated consists of immovable property it is highly desirable and may, in the particular case, prove of utmost importance to place the pledgee in no less favorable a position.

21 This was effectively accomplished by the terms of a certain agreement negotiated in 1920, between an American state and the lending banks.

to function and operate directly upon the occurrence of an event when its services are properly requisitioned; it tends to remove dangers of interruption of service. If it is reasonable and lawful to encumber through a mortgage the particular property pledged as security, it is equally reasonable to utilize the services of a trustee for the success of the transaction. If the local laws present a definite obstacle, dangers of invalidity may compel abandonment of such an agency. If they do not, it is obviously desirable to place the trustee in a position where it may fully and freely conserve every asset constituting security, and thereby assist the borrower in the performance of its duties as such. To that end the question may present itself in a particular case as to the desirability of utilizing as trustee an entity strongly represented if not resident within the place where the security is located, especially if the latter be immovable property.

Irrespective of the nature of the security given, it may be of concern to the lender that the proceeds of a loan be so conserved and so expended as either to increase generally the power of the borrower to repay interest and principal, or to enhance definitely by some specific means assurance of faithful service. Opportunity for so doing may not be apparent when funds are wanted for the general purposes of the borrower. Again, the known character and stability of the borrower may be such as to demand no external watchfulness over its expenditures. On the other hand, where the purpose of a loan is for a particular outlay in a specified place, as, for example, an industrial development, the lender may be enabled, and may deem it necessary to provide through the terms of its agreement, that dangers of wastefulness or extravagance or cupidity be minimized or eliminated; and in some cases that the funds loaned be rendered productive of an income adequate for service. Devices appropriate to such an end are not open to practical objections oftentimes raised against certain forms of security. It is in no sense in derogation of the rights of the public borrower that the lender should exercise a degree of oversight or control over the expenditure of funds furnished by itself. Methods of so safeguarding the lender are various and familiar. A few may be noted. Where, for example, a loan is negotiated for the construction of a railway in the territory of the borrower, it may be of highest importance that the proceeds be deposited in a bank designated by the lender and subject to withdrawal solely under warrants issued under the approval or inspection or oversight of the lender or its agent. In certain cases it may become important to have methods of accounting fixed according to an accepted standard and in a particular language, and perhaps under the management of an accountant of the nationality of the lender and to be appointed with its approval. Again, it may be highly desirable to provide for an audit by an auditing officer appointed with the approval of the lender. Finally, the entire matter of expenditure may need to be subjected not merely to the oversight of the lender, but to the actual control of some agency in its behalf, such as a trustee; or ar

rangement may be required for service (at least contingently) out of the very proceeds of the loan. In a word, whenever unfamiliarity on the part of the borrower with European or Western civilization and the business methods thereof, or insufficient experience with large industrial developments, or other kindred considerations so dictate, the conservation of the proceeds of the loan, in furtherance of the design of the parties, by the lender or a trustee must be regarded as beneficial to the interests of both parties to the transaction. The appropriateness of the method of conservation to be utilized in the particular case will depend largely upon the nature and record of the borrower. That requiring adoption may serve to harmonize conflicting equities, by establishing safeguards for the benefit of the lender, and by avoiding dangers of resentfulness to be anticipated from injury to the pride of the borrower.22

By way of summary, the following points in relation to security deserve emphasis:

First, if security is needed, it should, regardless of its form or nature, be placed, whenever possible, wholly beyond the reach of the borrower and within the control of the lender or a trustee.

Secondly, except under special conditions rarely if ever present when the borrower is an independent state recognized for all purposes as a full-fledged member of the society of nations, the security should not assume a form such that utilization of it by the lender or a trustee involves the exercise of public functions locally deemed subversive of the sovereignty of the borrower and offensive to its national pride.

Thirdly, some degree of control or oversight by the lender or a trustee of the expenditure of proceeds of a loan must operate, whenever agreed upon, to conserve the strength of the borrower and proportionately safeguard the interests of the lender.

CERTAIN MISCELLANEOUS MATTERS

A few miscellaneous matters merit attention. In order to eliminate dangers of conflicting interpretations, it is obviously wise to make provision that one version of the agreement in a specified language be controlling.23 To the same end it may be deemed wise to announce that the contract is to be construed as one concluded in pursuance of, and with a view to the operation of the laws of, a particular state. Controversy between the parties during the life of the loan should be anticipated; and especially issues concerning which agreement between them proves to be incapable of attain

22 It may be observed that while no consideration can ever outweigh the value of a safeguard essential to the protection of the lender at all times during the life of the loan, an unnecessary precaution which roughly ignores the feelings of the borrower and is contemptuous of its pride is not likely to prove beneficial to the transaction or really advantageous to the lender.

23 Instances are numerous.

ment. To meet that contingency there should be arrangement for some mode of adjustment outside of the exclusive control of the borrower. The right of the lender to invoke and utilize in case of need the diplomatic interposition of its own government should be appropriately acknowledged in case the borrower is known to be disposed to object to such procedure. The lender and its government should not be exposed to the contention of the borrower, under any circumstances, that diplomatic interposition is premature or unreasonable or at variance with common practice. A loan agreement may provide that in case of controversy, the issue shall be referred to the Secretary of State for adjustment by him.

The known approval of the government of the lender is of value, partly because of the removal of grounds of possible conflict between that government and the lender, should it become important for the latter to invoke the interposition of the former, and also because of the influence of such approval and cooperation upon the mind of the borrower. Frequently American lenders have voluntarily submitted the terms of proposed agreements to the Department of State. At times, as has been seen, American loans have been conditioned upon the cooperation of the Government of the United States." Again, international banking arrangements between groups representative of several states have announced governmental undertakings to support those groups. 25 Recently, the Department of State has announced a desire that American concerns contemplating foreign loans inform it in due time of the essential facts and of subsequent developments of importance; and it has manifested a readiness to endeavor to say, in response to the inquiry of a prospective lender, in the light of information in its possession, whether or not there exists ground for objection to a proposed loan. Moreover, it has expressed belief that "in view of the possible national interests involved," it should have opportunity of saying to the underwriters concerned, should it appear advisable to do so, that there is or is not objection to any particular issue.26 The reasonableness of this 24 This was true in the case of a proposed loan to Honduras in 1911.

25 See, for example, Text of China Consortium Agreement of October 15, 1920, this JOURNAL, January, 1922, Vol. 16, p. 4. See also note of Secretary Hughes to Messrs. J. P. Morgan and Company, March 23, 1921, declaring that the principle of cooperative effort for the assistance of China, through the operations of the Consortium, had the approval of the Government. Pamphlet No. 40, Division of International Law, Carnegie Endowment for International Peace, p. 74.

26 See Department of State, Statement for the Press on Flotation of Foreign Loans, March 3, 1922. In this statement it was declared: "but it should be carefully noted that the absence of a statement from the Department, even though the Department may have been fully informed, does not indicate either acquiescence or objection.

"The Department of State can not, of course, require American Bankers to consult it. It will not pass upon the merits of foreign loans as business propositions, nor assume any responsibility whatever in connection with loan transactions. Offers for foreign loans should not, therefore, state or imply that they are contingent upon an expression from the Department of State regarding them, nor should any prospectus or contract refer to the attitude of this Government."