by General Davis, but were submitted to the President and cabinet of Panama for the purpose of bringing about the suitable negotiations.

I have no hesitation in saying that this order of June 24, 1904, putting into effect the Dingley tariff in the Zone, was a mistake, and until matters were subsequently adjusted in December following, it led to passive resistance by Panama to the making or carrying out of any agreement between the United States and the Panamanian authorities necessary in the progress of our work.

Doctor Amador was President of the Republic. He was the head of the Conservative party. Pablo Arosemena was vice-president and the head of the Liberal party. In the era of good feeling between all parties succeeding the revolution they were elected on the same ticket. The parties soon divided again when the patronage came to be distributed. The moment the people understood the effect of the introduction of the Dingley tariff between the Zone and the Republic, they resented the act as an indication of a desire on the part of the United States to grab the land of the Zone for its commercial purposes, and to exclude all Panamanians from the profitable business which they had expected to do with the people of the Zone, gathered there by the United States for the great work. The opposition party-the Liberal party was quick to seize upon this as a ground for attacking the conservative administration on the theory that the Government had vielded to the United States and had sacrificed the interests of the Republic. The attitude of the Liberal party, of course, reacted upon the course of the conservative administration, and both parties were at once driven into hostility to any proposition of the United States looking to the operation of its governmental control over the Zone at those many points where it came in close contact with the jurisdiction of the Republic.

Another source or irritation, which, but for the primary source, would not have constituted any cause of bad feeling, was the introduction of the American postal system into the Zone and the use of domestic postage for letters between the Zone and the United States. The Republic needed all its postal revenue to sustain its post-offices, but the adoption of the 2-cent rate for letters between the Zone and the United States was alleged to deprive it of considerable revenue which it otherwise would have received from mail carried by it to the United States for the reason that its postage rate to the United States was 5 cents-that of the Universal Postal Union. Cristobal, the town at the northern end of the canal in the Zone, is really a part of Colon, while Ancon, the town at the Pacific end of the canal, is really a part of Panama. Everyone who wished to write a letter to the United States from Colon or Panama would step across the street and purchase United States stamps in Cristobal or Ancon and mail his letters for 2 cents apiece instead of paying 5 cents to the Panamanian Government.

Again, the opening of the ports of the United States at the termini of the canal, Cristobal and Ancon, promised to deprive the officials of Panama of revenue derived from vessels which might arrive in their port, and this was made the subject of fierce discussion. It was contended that for the United States to open independent ports next door to Colon and Panama was to destroy their importance and their business and greatly to diminish the dignity of the Republic and to affect her honor.

Letters from General Davis, from Judge Magoon, who was on the Isthmus, and from many other persons, gave the President and me much concern as to the conditions prevailing there. The correspondence between Minister Obaldia and Mr. Hay on this subject is shown in the record, in the report of General Davis, on pages 2334, 2352, and 2378. About this time Mr. William Nelson Cromwell, who was acting as counsel for the Panamanian minister, Mr. Obaĺdia, visited the President and confirmed the President's previously formed opinion that the situation on the Isthmus was not what it ought to be politically, and that something ought to be done to remove the conviction of the Panamanian people and government that the United States had gone into the Isthmus to build a rival state or colony rather than a canal. He referred Mr. Cromwell to me, and after a conversation I went to the President and suggested that a personal visit to the Isthmus might assist in smoothing out the trouble.

This was in October, and the President accordingly wrote me a letter, which will be found on page 2394 of the evidence before this committee. The letter directed me to visit the Isthmus with those persons whom I might wish to take with me, and expressed the most friendly feelings toward the people of Panama, and assured them that they were wrong in supposing that we intended to exercise any powers in the Zone and Isthmus except those we deemed necessary and convenient in constructing and maintaining the canal. The publication of the letter brought appreciative expressions of pleasure from the Panamanian minister at Washington and from the President of the Republic. A short time thereafter, at an interview between Mr. Obaldia and Mr. Hay, at which I was present, Mr. Hay renewed the expression of good will contained in the President's letter, but assured Mr. Obaldia that it was not intended thereby to concede that what we had done was in any way beyond our rights, as was clearly shown in Mr. Hay's letter of October 24, then just delivered.

Matters were then allowed to remain in the state in which they were, the Panamanian Government still declining to put in force the delimitation agreement, still protesting against the opening of the independent ports by the United States at the mouths of the canal, and still complaining of the postal arrangements. I ought to say that so great had been the objection on the part of the Panamanians to the order of June 24 that General Davis did not begin its execution, although it was proclaimed, but postponed it until November 18. (See letter from General Davis to Admiral Walker, marked Exhibit 4.) At that time we were on our way to the Isthmus, and my understanding is that the order was never enforced, and no duties were ever collected under it.

In order to secure as much harmony as possible, and to give the Panamanians to understand that we wished as full a discussion as possible, with the concurrence of the President, I invited Minister Obaldia, Mr. Cromwell, and Mr. Farnham, in Mr. Cromwell's employ, to accompany me on the trip in order that they might assist at the conference in Panama on the Panamanian side. I also took with me Admiral Walker, chairman of the Commission, and Judge Magoon, its general counsel. I have here, and append as Exhibit No. 5, a steno-graphic report of the first conference held between President Amador and myself. By the request of Doctor Amador, the conferences were held in executive session. After the first meeting, the course was this: Mr.

Cromwell, representing the Panamanian authorities, brought to me their complaints, and the negotiations were really conducted between Mr. Cromwell and me. Mr. Cromwell would return to consult President Amador and his cabinet and I would hold conferences with Admiral Walker, General Davis, Judge Magoon, and Mr. Wallace, the chief engineer, in whose house I was staying.

The Executive order or modus vivendi of December 3, 1904; the reasons for its necessity and adoption.

The negotiations involved many questions, but finally resulted in the order of December 3, which met the views of my colleagues with the exception, possibly, that General Davis was not inclined to yield as much as I did yield in respect to the construction of a road from the Zone into Panama, and was rather inclined to question the wisdom of adopting the Panamanian stamp rather than the stamp of the United States. The stenographic account of our first conference, already appended, shows quite clearly the attitude which I felt under the instructions of the President it was proper for me to take, namely, that I was there not to construe the treaty, not to assert the full powers of the United States, but to make a modus vivendi which should bind neither party to any permanent construction of the treaty. I did not intend to give up any right which the Government had, and might in the future wish to exercise, but I was quite willing to make any concessions not affecting those rights and not interfering with the power and convenience of the Government in constructing the canal, which would soothe the amour propre of the Panamanian people or of the Government, and which should convince them that we were not in the midst of their country for the purpose of excluding them from a prosperous business. Article III of the treaty provides as follows:

The Republic of Panama grants to the United States all the rights, power, and authority within the zone mentioned and described in Article II of this agreement and within the limits of all auxiliary lands and waters mentioned and described in said Article II which the United States would possess and exercise if it were the sovereign of the territory within which said lands and waters are located, to the entire exclusion of the exercise by the Republic of Panama of any such sovereign rights, power, or authority.

It is peculiar in not conferring sovereignty directly upon the United States, but in giving to the United States the powers which it would have if it were sovereign. This gives rise to the obvious implication that a mere titular sovereignty is reserved in the Panamanian Government. Now, I agree that to the Anglo-Saxon mind a titular sovereignty is like what Governor Allen, of Ohio, once characterized as a "barren ideality," but to the Spanish or Latin mind poetic and sentimental, enjoying the intellectual refinements, and dwelling much on names and forms it is by no means unimportant. Therefore, when the question of the form of stamp was to be determined, I had not the slightest hesitation in yielding to the view that we should adopt the system which for a time General Davis had himself adopted before he got United States stamps, of merely purchasing the Panamanian stamps and crossing them with the words Canal Zone." I do not know that it is necessary for me to go through the various provisions of the order of December 3. have discussed them at length in my letter transmitting the annual report of the Commission for 1904, and it is printed on pages 2392 to 2410 of this record.

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The order, in effect, required that all importations into the Isthmus of merchandise, except those admitted free of duty for the Government of the United States or its employees under the treaty, should be entered at the Panamanian ports instead of at the United States ports in order that the Panamanians might collect duty on them and thus maintain their revenues. This, however, was on condition that they should reduce their duties from 15 per cent ad valorem to 10 per cent ad valorem. I deemed it of great importance that the Panama Republic should be self-supporting. Free trade between the Zone and the Republic was declared. The existence of the terminal ports of the canal as ports of the United States for clearing and entering by foreign vessels was recognized. Without waiting to determine whether the Government of Panama would fail in its duty to enforce the sanitary ordinances in Panama and Colon prescribed by the United States as was probable, the Republic turned over to the United States authorities immediate right to enforce the same. The postal rate from Panama to the United States and from the United States to Panama was made 2 cents, the stamp in the Zone being the Panamanian stamp crossed with the words "Canal Zone."

In order to induce the Panamanian Government thus to reduce the rate of postage, it was agreed that these stamps should be purchased at 40 per cent of their face value by the Zone Government from the Panamanian Government. The remainder, that is 60 per cent of the face value of the stamps, was retained by the Zone Government for the purpose of paying its own postal expenses. Another part of the order secured the carrying out of the currency agreement made between the Secretary of War and the fiscal commissioners of Panama in Washington, June 20, 1904. Detailed reference will be made to this agreement at another place.

The Panamanian merchants felt great alarm lest the United States might use the clause of the Hay-Varilla treaty which permits the United States to import free of duty into the Isthmus all machinery, equipment, material, and supplies needed by it or its employees in the construction of the canal to break up their normal business in native supplies in the Zone. After a conference with General Davis and Mr. Wallace I became convinced that there was no present probability of a scarcity of food for the tropical laborers, save under exceptional circumstances, and that it would be much less burdensome to the Government to have this class of laborers furnish themselves with food from the local markets. As part of the arrangements made when I was on the Isthmus, therefore, on January 7th I issued an order to carry out Section XIII of the treaty. The order provides for the free importation of many classes of articles and merchandise, including everything which is necessary and convenient for the officers, employees, workmen, and laborers in the service and in the employ of the United States, and for their families. The order provided how and on what certificate these goods should be admitted, and classified what they should be, and contained the following clause:

This order contemplates the exclusion from the benefits of the commissaries established and maintained by the Commission of all employees and workmen who are natives of tropical countries wherein prevail climatic conditions similar to those prevailing on the Isthmus of Panama, and who therefore may be presumed to be able to secure the articles of food, clothing, household goods and furnishings, of the kind and character to which they are accustomed, from the merchants of Panama, Colon,

and the towns of the Canal Zone, and whose ordinary needs may be supplied without recourse to the Government commissaries. Should it develop hereafter that said merchants charge prices in excess of legitimate profit, or practice other extortion, the United States, for the protection and assistance of all its employees, whether from the Tropical or Temperate Zone, will supply its commissaries with such staple articles as are required and desired by the inhabitants of tropical countries, and permit all its employees and workmen and those of its contractors to avail themselves of the benefits and privileges afforded by said Government commissaries.

The operation of this order has never given rise to any difficulty, except as you have heard from Mr. Shonts and Governor Magoon. At one time in the Zone, after a sudden influx of laborers, in June and July, 1905, the merchants of the Zone were apparently quite short of provisions, or else they attempted to make a corner upon them. The commissaries and boarding houses were then opened to the native laborers. This opening of the commissaries was not in violation of the order, but was in express compliance with its proviso. The commissaries and boarding houses for native laborers have been open ever since, under the auspices of the Commission or the Panama Railroad, but the native laborers do not patronize them. They prefer to supply themselves from the native merchants in the Zone, and the Panamanian merchants. This seems to show the wisdom of the distinction between the American employees and the native laborers in the matter of importation of food supplies.

Regarding the question of the order of December 3, I invite attention to section 12, which specifically provides that the making of the order, or a compliance with its conditions by the Panamanian authorities, could not operate as a restrictive or enlarging construction of the treaty, making the arrangement purely a modus vivendi. Attention has been called to the provisions of the order which enable the Panamanian residents, without obstruction by the Zone authorities, to vote at the elections held in the Panamanian Republic. It is not understood what objection there could be made to this provision. There is no requirement of law that the residents of the Zone should be citizens of the United States, or should part with their privileges as citizens of Panama, if they choose to exercise those privileges and the Republic of Panama sees fit to allow them to do so.

I omitted to say that before the order was signed I cabled the substance of it to Secretary Hay, to be submitted to the President, and by cable received approval of the same. I append my dispatch and that of Secretary Hay as Exhibit No. 6. When the order was made public on the Isthmus it was received with approval by both parties, and the arrangements made under it have proved, so far as I am advised, to be satisfactory.

THE CURRENCY AGREEMENT OF JUNE 20, 1904, AND THE BANKERS' AGREEMENT OF APRIL 9, 1995; THE NECESSITY FOR THEM; THEIR EFFECT, AND THE PROPER COURSE TO BE TAKEN WITH RESPECT TO THE FUTURE FINANCIAL OPERATIONS OF THE GOVERNMENT ON THE ISTHMUS.

In March, 1904, before the adjournment of Congress, Mr. Conant and Mr. Hanna, of the International Monetary Commission, came to see me in respect to the currency of Panama. The currency of Panama was then the Colombian silver. In the days of De Lesseps and the old Panama Canal Company there was great gambling in exchange on