(b) That the governor of the Zone on his part understands that the measures adopted by him have a justification in the rights which the same dispositions stipulate for the Government of the United States and in the orders received by him from Washington;

(c) That such a difference of opinion arises from the interpretations which each party gives to the said stipulations; and

(d) That, as in similar emergencies which have occurred in diplomatic intercourse, in order to obtain the true interpretation of the stipulations they will agree upon, as a measure of prudence, the following modus vivendi :

SECTION 11. (a) Pending the settlement of the questions in controversy by diplomatic means, not to violate the existing state of affairs growing out of the emergency referred to; and

(b) To accept the adjustment of the situation as outlined in the attached memorandum.

In faith whereof they sign the present document in Panama, in triplicate, August, 1904.

Secretary of State for the Department of
Government and Foreign Affairs.

Envoy Extraordinary and Minister Plenipotentiary.

Governor of the Canal Zone.

MEMORANDUM.

1. Vessels arriving at the customary anchorage near the islands of FlamencoNaos, having clearance for the port of Panama, which may be discharged at the railroad wharf or at the English wharf east of the city of Panama, will be received and dispatched by the Panama authorities without molestation or intervention by the authorities of the Canal Zone.

2. Vessels arriving at the customary anchorage near the islands of FlamencoNaos, having clearance for the port of Panama, which vessels are to discharge their cargoes at La Boca wharf in the port of Ancon, will be cleared by the Panama authorities for the port of Ancon; when discharged and ready to depart they will be cleared from the port of Ancon by the authorities of the Canal Zone.

3. Vessels arriving at the customary anchorage near the islands of FlamencoNaos, having clearance from the last port to the port of Ancon, will be entered at said port, and when discharged will be cleared and dispatched to their home ports by the authorities of the Canal Zone.

4. Vessels arriving at the customary anchorage, near the islands of FlamencoNaos, cleared from last port for the port of Ancon, but unable to obtain a berth for discharging cargo at the La Boca pier, which therefore must discharge at the old wharf of the Panama Railroad or at the English wharf in the harbor east of the city of Panama, will be cleared for the port of Panama by the authorities of the Canal Zone, and when such vessel shall have finished discharging will be cleared and dispatched to her destination by the authorities of the Republic of Panama.

5. The parties to this modus vivendi hereby declare that the use of the anchorage near the islands of Flamenco-Naos shall be free to ships discharging either at the old landing places, at the Panama Railroad wharf and at the English wharf east of the city of Panama, or at the La Boca wharf; and the authorities of the Republic of Panama on the one hand and of the United States on the other do not and will not admit that such acts establish a prece dent to the prejudice of the rights of the respective parties.

DEPARTMENT OF REVENUES,
DIVISION OF CUSTOMS,

Ancon, Canal Zone, October 29, 1904. SIR: I have the honor to transmit herewith statement of transactions had in the customs department for the quarter ending Sepember 30, 1904. Acting under your instructions (communicated to my predecessor in office under date July 15, 1904), there has been no collections of duties, fines, custom

fees, tonnage tax, or other miscellaneous custom collections in the Canal Zone since the department of customs was organized. Entrance of all vessels with proper papers has been permitted at the ports of Ancon and Cristobal and clearances have been granted them. The ordinary services to vessels and seamen, which are by law a part of the duty of a collector, have been performed by your custom authorities.

Wherever it has been possible to safeguard the revenues of the Republic of Panama by notifying them of cargoes of merchandise consigned to ports in the Canal Zone, but for ultimate consumption in the Republic of Panama, it has been done.

I have also attached a statement of the shipping entering the port of Colon, vessels from which cargo is received into and through the Canal Zone.

While there has been very little done in the customs department up to the present time, owing to the differences of opinion between the authorities of the Government of the Republic of Panama and those of the United States, I anticipate, upon the settlement of these differences, a much larger amount of work and a reasonable amount of revenues.

Owing to the situation which at present exists in regard to customs affairs, I have the honor to report that no employees have been appointed, with the single exception of a deputy collector.

Very respectfully,

Maj. Gen. GEORGE W. DAVIS,

Governor Canal Zone, Ancon.

TOм M. COOKE, Collector of Customs.

Movement of vessels at the port of Colon for the months of August and September, 1904.

Movement of vessels at the port of Ancon, Canal Zone, for the quarter ended September 30,

Vessels remaining in port, 1; American; tonnage, 1,040.

Services rendered to seamen for quarter ended September 30, 1904:

No. 12.]

Reply of Secretary of State to Señor de Obaldia.

DEPARTMENT OF STATE, Washington, October 24, 1904. MR. MINISTER: I have the honor to acknowledge the receipt of your communication dated August 11, 1904, advising this Department that you have received instructions from the Republic of Panama "to take steps looking toward the obtaining of a satisfactory settlement of the difficulties which have unexpectedly arisen between the authorities of the Republic and the governor of the Canal Zone, owing to the interpretation given by the latter to some of the clauses of the agreement concerning the isthmian canal concluded between the two countries on November 18 last."

The action of the Zone authorities, of which complaint is made, was taken pursuant to orders, copies of which are herewith transmitted, issued by direction of the President of the United States, and therefore it is inaccurate to attribute said orders to the governor of the Canal Zone.

I have read with the care and consideration its importance required the argument set forth in your communication in support of the contention that the United States is acting in excess of its authority (1) in opening the territory of the Canal Zone to the commerce of friendly nations; (2) in establishing rates of customs duties for importations of merchandise into the Zone; (3) in establishing post-offices and a postal service in said Zone for the handling of foreign and domestic mailable matter.

The right of the United States to adopt and enforce the provisions of said orders is dependent upon its rights to exercise the powers of sovereignty as to the territory and waters of the Canal Zone, and whether or not the United States is authorized to exercise sovereign powers in that territory is to be determined by the terms of the convention of November 18, 1903, between the Republic of Panama and the United States, referred to in your communication as the Hay-Varilla convention.

The United States can not accede to the proposition advanced by you as follows:

"As an indispensable antecedent of the Hay-Varilla convention must be regarded the Hay-Herran treaty, concluded January 22, 1903."

Whatever could or would have been the effect of the stipulations of the proposed treaty with Colombia, known as the Hay-Herran treaty," is rendered unimportant by the fact that said treaty was not concluded, but was rejected by Colombia.

I note your reference to the provisions of said proposed treaty with Colombia (Art. IV):

"The Government of the United States

disclaims any intention

to increase its own territory at the expense of Colombia or of any of the sister republics of Central and South America; it desires, on the contrary, to strengthen the power of the republics on this continent, and to promote, develop, and preserve their prosperity and independence."

The policy thus announced did not originate with the proposed treaty with Colombia. It is the long-established policy of the United States, constantly adhered to; but said policy does not include the denial of the right of transfer of territory and sovereignty from one republic to another of the Western Hemisphere upon terms amicably arranged and mutually satisfactory, when such transfer promotes the peace of nations and the welfare of the world. That the United States may acquire territory and sovereignty in this way and for this purpose from its sister republics in this hemisphere is so manifest as to preclude discussion.

The Government of the Republic of Panama having seen fit to object to the exercise by the United States within and over the Canal Zone of the ordinary powers of sovereignty, this Government, while it can not concede the question to be open for discussion or the Republic of Panama to possess the right to challenge such exercise of authority, considers it fitting that the Republic of Panama should be advised as to the views on the subject entertained by the United States and the reasons therefor.

The United States acquired the right to exercise sovereign powers and jurisdiction over the Canal Zone by the convention of November 18, 1903, between the Republic of Panama and the United States.

The character and extent of the grant of governmental powers to the United States and the resulting right and authority in the territory of the Zone are set forth in a separate article, as follows:

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"ARTICLE III. The Republic of Panama grants to the United States all the rights, powers, 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 foreign rights, power, or authority." Let us test the existing controversy by the provisions of this article. "If the United States * were the sovereign of the territory," would it possess the right and authority to regulate commerce therewith, establish customs-houses therein, and provide postal facilities therefor? This question must be answered in the affirmative.

If it were conceded that the abstract, nominal "rights, power, and authority of sovereignty in and over the Zone" are vested in the Republic of Panama, there would still remain the fact that by said Article III the United States is authorized to exercise the rights, power, and authority of sovereignty "to the entire exclusion of the exercise by the Republic of Panama of any such sovereign rights, power, or authority."

If it could or should be admitted that the titular sovereign of the Canal Zone is the Republic of Panama, such sovereign is mediatized by its own act, solemnly declared and publicly proclaimed by treaty stipulations, induced by a desire to make possible the completion of a great work which will confer inestimable benefit upon the people of the Isthmus and the nations of the world. It is difficult to believe that a member of the family of nations seriously contemplates abandoning so high and honorable a position in order to engage in an endeavor to secure what at best is a "barren scepter."

Under the stipulations of Article III, if sovereign powers are to be exercised in and over the Canal Zone, they must be exercised by the United States. Such exercises of power must be, therefore, in accordance with the judgment and discretion of the constituted authorities of the United States, the governmental entity charged with responsibility for such exercise, and not in accordance with the judgment and discretion of a governmental entity that is not charged with such responsibility and by treaty stipulations acquiesces in the entire exclusion of the exercise by it of any sovereign rights, power, or authority" in and over the territory involved.

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Article II of the convention provides that "the Republic of Panama grants to the United States in perpetuity the use, occupation, and control of a zone of land and land under water for the construction, maintenance, operation, sanitation, and protection of said canal."

66

The Panaman authorities now contend that the words "for the construction, maintenance, operation, sanitation, and protection of said canal," constitute a limitation on the grant; that is to say, that the grant is confined to the purposes so stated. The position of the United States is that the words for the construction, maintenance, operation, sanitation, and protection of the said canal" were not intended as a limitation on the grant, but are a declaration, and appropriate words of conveyance. The compensation for the grant A document evidencing a grant or transfer usually sets forth a description of the property granted, the inducement leading up to the grant, the compensation, and appropriate words of conveyance. The compensation for the grant under consideration is set forth in Article XIV of the treaty, as follows:

"As the price or compensation for the rights, powers, and privileges granted in this convention by the Republic of Panama to the United States, the Government of the United States agrees to pay to the Republic of Panama the sum of ten million dollars ($10,000,000) in gold coin of the United States

*

Article I of the treaty provides that "the United States guarantees and will maintain the independence of the Republic of Panama."

It would undoubtedly be offensive to the Republic of Panama to be placed before the world as having been induced to consent "to the entire exclusion

of any sovereign rights" in the territory of the Canal Zone by the payment of money or because of a want of ability to maintain its independence. It would, however, be highly honorable and entirely justifiable to consent to such exclusion of sovereign right when the moving cause or inducement is "the construction, sanitation, maintenance, operation, and protection" of a work of such stupendous magnitude and world-wide importance as the isthmian canal.

The grant to the United States provided for in said treaty included also property other than the territory of the Zone. Article VIII stipulates that—

"The Republic of Panama grants to the United States all rights which it now has or hereafter may acquire to the property of the New Panama Canal Company and the Panama Railroad Company, as a result of the transfer of sovereignty from the Republic of Colombia to the Republic of Panama over the Isthmus of Panama

*

If the grant is subject to the condition and limitation contended for by the Panaman authorities, and the United States is not entitled to the revenues or benefits of the territory of the Zone, or to regulate its commerce with foreign nations, or to control its international relations, it also follows that the United States, while it may use the Panama Railroad "for the construction, maintenance, operation, sanitation, and protection of said canal," is not at liberty to regulate the use of said railroad by foreign commerce, and such revenue as is received by virtue of the rights conferred by the treaty, excepting for local traffic, belongs to the Republic of Panama. The proposition refutes itself.

The great object sought to be accomplished by the treaty is to enable the United States to construct the canal by the expenditure of public funds of the United States-funds created by the collection of taxes and moneys derived from the revenue measures of the United States. For many years after the adoption of our Constitution the belief prevailed that the funds of the National Government could not be expended in the construction of public improvements, excepting those required for the use of the National Government, such as the Capitol, Executive Department buildings, arsenals, forts, custom-houses, postoffices, etc. The construction of highways, railroads, etc., the improvement of rivers and harbors, etc., the protection and improvement of water powers, construction of canals, and similar undertakings for the use and convenience of the general public and private enterprises was considered to be outside the competency of the National Government, although said works were to be constructed in territory subject to the national sovereignty.

Finally it was established that the National Government had the authority to enter upon the construction of public works of the character referred to, and to devote the public funds of the nation thereto; and the reasons inducing such determination are all predicated on the fact that such public works are to be situated in territory subject to the national sovereignty. It is quite probable that this phase of the situation is not considered by the Panaman authorities, and that they do not distinguish the difference between the Government of the United States and the French canal company. The French company was a private enterprise and derived its funds from individuals who voluntarily devoted their private means to promoting the endeavor. Such funds could be expended anywhere and for any purpose sanctioned by the contributors.

But the Government of the United States in building the canal does not expend private funds, but public moneys derived by public taxation for public purposes. Moneys so realized may be used for national purposes outside the territory subject to the national sovereignty, such, for instance, as the promotion of a war in foreign territory, for in time of war the war powers of the nations are called into activity, and those powers are coextensive with the nation's necessities, and the conduct of war is especially enjoined upon the National Government by our Constitution; so also these funds may be expended for the purchase of ground for the erection of embassies, coaling stations, etc., for those are instrumentalities of the National Government; but the isthmian canal is an instrumentality of commerce, a measure for the promotion of the purposes of peace. Commerce is the life of a nation, but it is conducted by individual citizens in a private capacity and not as a governmental institution.

That the plain and obvious meaning of Article III was the one originally intended by the parties to the treaty is further shown by the provisions of Articles IX, X, XII, XIII.

For the proper understanding of the provisions of said articles it is necessary to bear in mind that the city of Colon, on the Atlantic, and the city of Panama, on the Pacific, each has a harbor in which are constructed wharves and piers suitable for landing cargoes and passengers. Both of these cities are in territory of the Republic of Panama. On the Pacific side the canal pierces the Isthmus at a point nearly 5 miles distant, following the shore line, from the ships landing in the harbor at Panama, and about 2 miles distant straight across the peninsula. On the Atlantic side the canal pierces the Isthmus at a point half a mile across the bay from the piers in the harbor of Colon.

At the Pacific entrance to the canal the French company erected a large pier and dredged out a channel, so that vessels of deep draft might come up to this pier. This point is called La Boca. A branch of the Panama Railroad con