The first instalments of interest and sinking fund on these two bond issues were paid from the proceeds of the bonds, then for several months the "regie" supplied funds, and then came the first crash. The government was ever in need of money and to secure the same violated its agreements by seizing certain revenues to pledge them to local merchants for advances, and by conniving at customs irregularities. As a result, after paying the sums for the budget, the "regie" had nothing left for the service of the bonds and they went into default in 1892.
Westendorp was almost ruined by this occurrence and became anxious to draw out of his Dominican entanglements. He applied to Smith M. Weed and Brown and Wells, New York attorneys, to negotiate a sale of his bonds to the United States government, transferring also his right to collect the Dominican customs. The United States government declined, whereupon Weed, Wells and Brown organized the famous San Domingo Improvement Company under the laws of New Jersey, the claim of which was later the prime factor in bringing about American intervention in Santo Domingo. Subsequently two other companies, the San Domingo Finance Company and the Company of the Central Dominican Railway, were incorporated, also under the laws of New Jersey, as auxiliaries of the Improvement Company, but they were all managed by the same persons. The San Domingo Improvement Company took over Westendorp's holdings and was placed in control of the "regie." A fourth bond issue, of £2,035,000 was floated through the agency of the Improvement Company in 1893 for the conversion of the outstanding government bonds. The Improvement Company also completed the railroad from Puerto Plata to Santiago, which was the only improvement it ever effected in the Republic and this it did with Dominican money. It further took from the Republic at rates very favorable to the Company a fifth, sixth and seventh bond issue, in 1893, 1894 and 1895 respectively, aggregating $4,250,000, for the payment of government indebtedness. The obligations paid by the first two of these issues were in considerable part inflated claims against the government, capitalized at excessive interest rates, those satisfied by the 1895 issue arose principally out of indemnity claims made by France for mistreatment of French citizens and for debts due them.
The Dominican government took no warning from previous disasters but continued in its course of reckless debt contraction. In order to equip warships and arsenals it borrowed money right and left at rates of interest which ranged anywhere from 18 to 30 per cent per annum. The loans were guaranteed by customs revenues which the creditors were authorized to collect direct from the importer. Thus the amount collected by the "regie" was not sufficient to provide for the service of the ever increasing bonded debt and in 1897 there was another default.
The old remedy of a new bond issue was to be tried again. The San Domingo Improvement Company undertook to float the eighth bond issue of £2,736,750 in bonds at 2-3/4 per cent and £1,500,000 in bonds at four per cent. With these bonds it contracted to convert all previous bonds then outstanding, to pay overdue interest and to secure for the government over $1,000,000 in cash. President Heureaux issued drafts on this presumption, but it soon became evident that it would be impossible for the Improvement Company to carry out the contract. The company blamed the government and the government the company. The situation quickly became chaotic. Eventually the conversion of the older bond issues was completed, though at enormous cost. Bonds to the value of £600,000 were absorbed during the transaction with at most a cash payment of $250,000 to the Dominican fiscal agent in Europe. In the meantime the government tried the experiment of a large emission of paper money in which the customs dues were partly payable. The paper depreciated as fast as it was issued, the revenues were again insufficient and the new bond issue suffered default in April, 1899.
While plans for further action were under consideration, President Heureaux was shot in July, 1899, and the revolution which followed his death made Jimenez president. The new administration in 1900 entered into a contract with the San Domingo Improvement Company for a different distribution of the customs revenues, but a condition was introduced that the consent of the majority of bondholders be obtained for the funding of interest up to 1903. A large number of Belgian and French bondholders had become dissatisfied with the Improvement Company, however, and repudiated the contract and all connection with the Company. In Santo Domingo, too, there was general hostility towards the Improvement Company which was regarded as an associate of President Heureaux and an incubus on the development of the country. The Company claimed it had secured the consent of a majority of bondholders but the government decided it had not and in January, 1901, President Jimenez issued a decree excluding the Improvement Company from the custom-houses.
The government now made a new contract with the Franco-Belgian bondholders, and for the payment of its obligations pledged its customs revenues, and specifically the income of the ports of Santo Domingo City and San Pedro de Macoris. But if there had been default before, in time of peace, with the "regie" in charge of the custom-houses, there was still less money available for the creditors now, with no control by creditors over collections and the government harassed by constant revolutionary uprisings. Small partial payments were made for two years and then ceased. As the Improvement Company's bond holdings became the subject of a special arrangement, the bonded debt of the Republic was considered to be that held by the French and Belgian creditors. However unsavory the debts which gave origin to the bond issues, and however imprudent most of the bond issues themselves, the great majority of bonds had passed into the hands of small holders, innocent third parties who sustained great loss by the continued suspension of payments.
Liquidated Debt. The liquidated debt, secured by international protocol or formal contract, Prof. Hollander found to be as follows on June 1, 1905:
San Domingo Improvement Company
(American and British)…………….. $4,403,532.71
Consolidated internal debt
(chiefly Spanish, German and American).. 1,737.151.35
Internal debt held by Vicini heirs
(Italian)…………………………. 1,598,876.04
Old foreign debt
(chiefly Italian and Dutch)…………… 365,183.20
Sala claim (American)………………….. 356,314.20
Vicini heirs (Italian)…………………. 242,716.32
Italian protocol………………………. 186,750.36
Spanish-German protocol………………… 100,034.00
B. Bancalari (Italian)…………………. 175,000.00
J. B. Vicini Burgos (Italian)……………. 55,500.00
Ros claim (American)……………………. 39,967.78
Two cacao contracts
(chiefly Dominican and German)…………… 68,296.16
Bancalari, Lample & Co. (Italian)………… 16,733.19
Twenty-eight minor contracts
(chiefly Spanish, American)…………… 249,475.19
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Total……………………………… $9,595,530.40
The claim of the San Domingo Improvement Company was secured by a protocol between the American and Dominican governments. When the San Domingo Improvement Company was ousted from the custom-houses in 1901, it immediately appealed to the State Department in Washington. The State Department counselled a private settlement and negotiations with the Dominican government dragged on for almost two years. The Improvement Company claimed no less than $11,000,000 for the bonds it held or controlled, for its interest in the railroad from Puerto Plata to Santiago, for its shares of the extinct National Bank of Santo Domingo which it had purchased at the government's request, and for the settlement of a long list of minor claims. Arbitration was suggested by the Company, but the Dominican government finally offered a round sum of $4,500,000 and the offer was accepted. It is probable that the Republic fared better under this compromise than if the case had been submitted to arbitration, for though the Improvement Company's demands were greatly exaggerated, its position toward the government was that of a careful creditor who has kept minute account of all transactions as against a spendthrift debtor who has squandered his property with little or no record of his expenditures.
By a protocol signed January 31, 1903, the Dominican government formally agreed to pay the sum of $4,500,000, leaving details to be settled by a board of arbitrators to be designated by the American and Dominican governments. The board met in Washington and rendered its award under date of July 14, 1904. It fixed the interest on the debt at four per cent per annum and designated the custom-houses of Puerto Plata, Sanchez, Samana and Monte Cristi as security for the debt. In the event of failure by the Dominican government to pay any of the monthly instalments specified, a financial agent, appointed by the United States, was authorized to enter into possession of the Puerto Plata custom-house, and if its revenues proved insufficient to take possession also of the other custom-houses designated. The Dominican government never made any payments and the financial agent took possession of the Puerto Plata custom-house in October, 1904. Most of the other claims comprised in the liquidated debt had their origin in advances made to the government—often bearing interest at two or three per cent a month, or even more—and in indemnity claims for revolutionary damages. In making the liquidations, musty credits and a generous amount of compound interest were generally included and it was usually provided that the sums so agreed upon were themselves to bear interest. The greater portion of these claims was held by foreigners, Italian, German, Spanish and American holdings predominating. Payments, more or less feeble, were made in many cases on account of principal or interest up to 1903, but in that year, when the government was reduced to desperate straits in combatting insurrections, practically every item of the debt went into permanent default.