GRACE CONTRACT: HISTORICAL CONTEXT, PARTICIPANTS, CONSEQUENCES - HISTORY - 2025

The Grace contract, also known as the Aspíllaga-Donoughmore contract after the surname of its signatories, was an agreement between Peru and the English Committee of Bondholders of the External Debt of Peru, which brought together the creditors of the Peruvian state.

After the War of the Pacific, which had ended with the Peruvian defeat against Chile, the country was in a very precarious economic situation. Its greatest source of traditional wealth, guano, was no longer sufficient to sustain the national economy.

Michael Grace. Source: Reproduction of an engraving from the end of the 19th century, by an unspecified author, undefined

The previous governments of Peru had requested numerous loans to build infrastructure, especially the railway line. Without the revenue from the guano, the foreign debt became unsustainable and the creditors, through Michael Grace, offered a pact to the government.

This agreement, called the Grace Contract, offered the cancellation of the debt in exchange, mainly, for control of the country's railways. Despite the fact that the agreement encountered strong opposition among some sectors, the government agreed to sign it in order to cancel the debt and try to reactivate the economy.

Historic context

The War of the Pacific, which pitted Chile and an alliance between Bolivia and Peru, ended in 1884 with the Chilean victory. As of that date, Peru begins the period called "National Reconstruction". The objective was to recover from the human, social and economic losses that the war had left behind.

Economic situation

The Peruvian economy had been severely weakened by the conflict. After the defeat, Chile had annexed territories rich in natural resources and the main Peruvian industries had been destroyed, as well as many roads.

The authorities tried to improve the situation by exporting raw materials, especially sugar, rubber and cotton. Likewise, it began to sell coal and oil abroad.

This export base was totally different from the one it had before the war. Until that date, the star product, and almost unique, was guano, a natural fertilizer widely used and valued at that time.

For more than forty years, guano had sustained public finances, although even before the war it had begun to show signs of weakness in international trade.

Debt

For decades, Peru had borrowed heavily from the British. The first dated back to 1825 and remained unpaid for almost 20 years. The apparition, whose main destination was Great Britain, allowed the Peruvian government to negotiate a way out.

Thus, he reached an agreement with the Gibbs House. Peru granted him control of the guano trade in exchange for income so that he could pay off the debt. As the Peruvian state paid what it owed, it was requesting new loans from London, so it always remained in debt.

According to historians, between 1850 and 1870, Peru became the Latin American country to which the most money had been loaned. The figure was 33,535,000 pounds sterling.

Thanks to loans requested in 1869, 1870, and 1872, the country was able to build a modern railway network. However, the debt continued to grow until, again, it became unpayable. The war in Chile only aggravated the situation.

Creditors began to threaten the country with embargoing its exports, while the railroad deteriorated due to lack of maintenance.

It was Michael Grace who proposed a solution: cancel the debt in exchange for control of the railroads for 75 years, in addition to other economic measures.

Opposition to the agreement

Grace's proposed plan met with opposition from Peruvian society. Given this, he varied his proposal a little and reduced from 75 to 66 the years during which they would control the railway.

The government was favorable to the agreement. Experts say it was not so much because they were totally convinced, but because they did not see another feasible way out of the debt problem.

On February 19, 1887, Peru accepted Grace's proposal, albeit with some conditions.

Approval

As had happened years before with the Dreyfus contract, the approval of the new contract divided Peruvian society and politicians.

During three legislatures (1887 -1889) the terms of the agreement were discussed in parliament. Opponents claimed that the contract turned Peru into a kind of foreign colony. Proponents, on the other hand, pointed out that it was the only way to improve the economy.

In 1889, the opponents of the agreement chose to lengthen the debates so that they could not vote. Some speeches lasted up to three hours. Finally, they chose to leave the Chamber so that the two-thirds quorum required for approval could not be reached.

Congress declared that 30 of those absent had resigned from their positions and proceeded to call elections to replace them. With the new representatives, the Extraordinary Congress convened on October 25, 1889, approved the Grace Contract.

Participants

The signatories of the Grace Contract were, on the one hand, the Peruvian government and, on the other, the English Committee of Bondholders of the External Debt of Peru. The agreement is also known as the Aspíllaga-Donoughmore contract, the surnames of the representatives of both sides.

Michael Grace

Michael Grace was part of a group of Irishmen who came to Peru in the mid-19th century to seek a better life. Although many of them returned to their country, others like Grace managed to achieve a good social and economic position.

His brother, William, got into the guano export business and called in Michael to work with him. Within a few years, they both became the owners of the company WR Grace & Company.

From that position, Michael Grace became, in 1886, the representative of the English Committee of Bondholders of the External Debt of Peru. As such, he was the one who presented the Peruvian government with a proposal to cancel the debt.

Although the first proposal was modified during negotiations, it was the basis for the contract to be signed in 1889.

Aspíllaga Antero

Ántero Aspíllaga was a Peruvian businessman and politician born in Pisco in 1849. He held the position of Minister of Finance between 1887 and 1889, just when the proposal to cancel the foreign debt was presented.

Aspillaga was one of the representatives of the government of General Andrés A. Cáceres during the Grace Contract negotiations and was one of the signatories of it.

John Hely-Hutchinson, 5th Earl of Donoughmore

Donoughmore belonged to a wealthy Irish family and was a member of the House of Lords. In 1888 he was appointed representative of the British creditors during the negotiations with the Peruvian government.

The result was the signing of the Grace Contract, also called Aspíllaga - Donoughmore after the name of the signatories.

Objectives and content

During the decades prior to the war with Chile, Peru had requested various loans to improve its infrastructure. In this way, it requested loans in 1869, 1870 and 1872 to be able to develop the railroad in the country.

After the war, Peru was not able to pay the debt contracted, since its industrial fabric had been destroyed and it had lost some of its traditional sources of wealth: saltpeter and guano.

With the only thing that Peru could respond to its creditors was, precisely, with the railway network built with the borrowed money.

Provisions of the Grace Contract on railways

The most important part of the Grace Contract referred to the Peruvian railways. British debt holders agreed to cancel the foreign debt in exchange for control of all the state's rail lines for 66 years.

In addition, the agreement stipulated the obligation of the creditors to build two new sections of the railway network: from Chicla to la Oroya and from Marangani to Sicuani. In total, about one hundred and sixty kilometers of line.

Likewise, they became responsible for the maintenance of all the railways included in the agreement.

Guano

Although the guano industry was showing signs of exhaustion, it was also part of the Grace Contract. The government of Peru gave the Bondholders three million tons of guano. In addition, it gave them a part of the extracted in the Lobos Islands, affected by the peace treaty with Chile.

Other concessions

In addition to the above, the Contract established other concessions to Debt Bondholders. Among them, it allowed free navigation on Lake Titicaca.

Likewise, it granted total freedom of use of the piers of Mollendo, Pisco, Ancón, Chimbote, Pacasmayo, Salaverry and Paita, for all maritime transport related to the expansion of the railways.

On the other hand, an article of the agreement included the obligation of the Peruvian state to pay the creditors 33 annuities of 80,000 pounds each.

Lastly, the Committee had to form a company based in London to which the concessions and properties included in the agreement would be transferred.

Consequences

Experts point out that the Grace Contract brought both advantages and disadvantages for Peru. Among the first, it stands out that the country managed to cancel an unpayable foreign debt. In addition, it allowed him to regain the confidence of foreign markets, being able to request more loans.

At that time, after the destruction caused by the war, money from abroad was essential to rebuild the country.

On the other hand, the creditors had committed to make investments that were essential to improve the infrastructure, something that would have been impossible to achieve with the State's own means.

Disadvantages

On the other hand, historians highlight an important disadvantage: Peru lost control of its rail network, handed over to foreign hands. The railroad was essential to communicate the mining areas with the coast and, therefore, with the commercial ports.

Along with the previous point, one of the problems of the Contract was the non-compliance of the creditors when it came to maintaining the rail network. In practice, he left many lines abandoned.

Creation of the Peruvian Corporation

As part of the agreement, the British creditors created The Peruvian Corporation to manage the goods delivered by Peru. The national railroads passed into his hands in July 1890. The Contract stipulated that this control should last 66 years.

The negative part, as has been pointed out, is that the Peruvian did not comply with all the agreed points. Thus, they only expanded the Central and South railways, leaving the rest of the tracks abandoned.

References

1. Pereyra Plasencia, Hugo. Cáceres and the Grace Contract: their motivations. Recovered from magazines.pucp.edu.pe
2. From Peru. Signature of the Grace Contract. Obtained from deperu.com
3. Whose Vera, Ricardo. The Grace Contract. Obtained from grau.pe
4. The Editors of Encyclopaedia Britannica. The War of the Pacific (1879–83). Retrieved from britannica.com
5. Dall, Nick. War of the Pacific: Bolivia & Peru lose territory to Chile. Retrieved from saexpeditions.com
6. Wikipedia. Michael P. Grace. Retrieved from.wikipedia.org
7. Cushman, Gregory T. Guano and the Opening of the Pacific World: A Global Ecological History. Recovered from books.google.es