For over thirty years, Porfirio Diaz ruled Mexico with such an iron hand that the people of Mexico began referring to him as Don Perpetuo.
Before Diaz, President Juarez had forsworn business dealings with his rich neighbor to the north, fearing that such dealings would inevitably lead to American economic domination of Mexico. "Between the weak and the strong, there should always be a desert." said Juarez.
After Juarez died of a heart attack, Diaz had seized the country and changed the country's foreign policy. He told the people of Mexico to look at a map—Mexico was shaped like a cornucopia spilling its riches towards the United States.
And, for decades, that is exactly what Mexico did. The United States bought up the resources that Mexico sold it, with Diaz raking in a hefty percentage of everything. Copper, oil, silver—American industries flourished. While some grew rich, most of the people of Mexico lived in such poverty, they would have been better living under the rule of the Aztecs, some 400 years earlier.
When the Mexicans began chanting, "Mexico for Mexicans," the remark angered President Theodore Roosevelt. "Mexico for Mexicans? I would like to know for who else it would be for, if not the Mexicans." thundered our president.
The sad truth was that foreign industries were simply not playing fair. They routinely undervalued property in order to avoid paying taxes, they paid Mexican workers less than foreign workers, and rarely promoted Mexican workers regardless of experience. The foreign corporations could do this because of the bribes and kickbacks that they regularly paid to Diaz.
By 1910, the excesses of Porfirio Diaz at long last touched off a horrendously violent revolution that killed a million Mexicans and drove another million to emigrate. Remember that Mexico was a small country that shrank from 14 million to 12 million due to this violence. By the time that the revolution was over, Mexico had a new constitution that gave ownership of all subsoil riches—whether ore, mineral, or petroleum—to the Mexican government. However, since the only source of hard currency the struggling government received was from foreign corporations, Mexico continued to honor the leases held by the foreign corporations.
This should have been the end of the story, but of course it wasn't. All the foreign corporations had to do was simply play fair and they might still be operating in Mexico today. Or even play just close to fair, for the presidents of Mexico after the revolution rather quickly became just as corrupt and easy to bribe as Porfirio Diaz had been—at least, until Lazaro Cardenas became president in 1934.
Lazaro Cardenas was a different kind of president, who took a lot of the ideals of the revolution seriously—including the new constitution. Cardenas began by preparing for the day when Mexico would control its own resources, by first taking an inventory of Mexico's most valuable asset—the talented workers of the Mexican oil fields.
This step was brilliant, because Cardenas needed to know who his future leaders in the industry would be. There is an old story—possibly apocryphal—about J.P. Morgan: When the famous financier was asked what his most valuable asset was, the reporter probably expected to hear about a bank, a railroad line, or possibly a factory. Instead, Morgan answered, "My good men. Take away everything else, but leave me my good men and in five years, I will have it all back."
After inventorying his human capital, Cardenas helped organize a union--The Petroleum Workers Union of Mexico. This union presented a list of demands to the petroleum companies, asking for equal pay with that of foreign workers, safer working conditions, and an 8-hour workday. Despite the fact that the demands were entirely modest, the companies refused to either negotiate or to even realistically recognize the workers' right to collective bargaining, so the unions promptly went on strike.
Declaring that the petroleum sector was essential to the Mexican economy, Cardenas promptly exercised the right given to him under the new constitution to refer the matter over to binding arbitration. (This is essentially the same thing as an American Taft-Hartley Injunction.) The arbitration board was composed of three members, with the union, the oil companies, and the government each appointing one member. (Naturally, the arbitration board sided with the union.)
The Oil Companies refused to comply and took the matter to the Mexican Supreme Court, which rather quickly ruled to uphold the arbitration board's decision. The Oil Companies still refused to comply—obviously, they were doubling down on stupid, but evidently believed they were so powerful that Mexico would be powerless to stop them.
On March 18, 1938, President Cardenas promptly cancelled the oil companies’ leases, effectively nationalizing the holdings of all of the foreign oil companies.
It is impossible to overemphasize the oil companies' absolute fury. They demanded that President Roosevelt—not Teddy, but the other one—go to war with Mexico. Unfortunately, FDR had just announced a new foreign policy initiative for Latin America called "The Good Neighbor Program". It would have been rather awkward to work a war into being a good neighbor.
The oil companies, for their part, had crippling power to refuse to buy, transport, or refine Mexican oil, and they could help organize an economic boycott on all Mexican goods (including the silver that the US government used to mint money). This threatened to collapse the entire Mexican economy.
Meanwhile, Mexico had to pay for the assets it had nationalized. According to the constitution, the payment had to be prompt, effective, and adequate. The problem was how to interpret those words.
The foreign oil companies were eager to help. By prompt, they demanded an immediate payment. Effective meant dollars, gold, or pounds sterling. And adequate? It took the oil companies a little time to add up all the costs of the equipment, the pumps, the dock facilities, the holding tanks, and the buildings...call it $450 million. (Those are meaningless 1938 dollars from back when you could have bought half of Arkansas for $3.50, so just pretend I said "All the money in the world.")
Mexico had a slightly different interpretation. "Prompt" meant 10 years of payments, with 3% interest. "Effective" meant....you think I'm getting ready to say Pesos, don't you? No, effective meant some dollars, but mostly Mexico would pay with oil. And "adequate"?
Here, Mexico did something completely unexpected. It paid the amount the oil companies had been reporting as the basis of property taxes—$24 million. If you listen very carefully, you can still hear the oil companies screaming.
As Penn Jillette says, "There is nothing worse than cheating, and still losing."
Naturally, the oil companies refused the settlement. They were determined to bankrupt Mexico. With Mexico's lack of adequate refineries and oil tankers, and its total dependence on the United States as a trading partner—the oil companies would eventually win and Mexico would surely lose this contest, unless someone saved it.
And someone did. Hitler invaded Poland September 1, 1939, touching off World War II. Suddenly, there was a severe shortage of petroleum. Sinclair was the first of the oil companies to accept the settlement and within a year, all of the American oil companies had accepted. Within ten years, Mexico had paid off the entire settlement, with interest.
It has been said that Lazaro Cardenas gambled the entire Mexican revolution and won.