in the local market had sometimes required nearly, or quite, a month for delivery.

The body of seven Commissioners, with each one an executive, was not well adapted to the growing work. Admiral Walker frequently said to me in the trip which we took to the Isthmus in December, 1904, that some change must be made in the organization of the Commission if the proper results were to be obtained. I think that the admiral felt that if he had the executive power himself he could meet the situation, but that with a clumsy body of seven constantly called upon to exercise executive functions as a unit rapid and efficient action was most difficult to obtain.

Colonel Hecker resigned November 16, 1904, and it was understood at the time from Colonel Hecker that the chief reason for his withdrawal was his feeling that under the present organization the Commission was not likely to accomplish well the purpose for which it was created and appointed.

He

Mr. Parsons and Professor Burr visited the Isthmus in February and March, 1905, and on their return Mr. Parsons advised me of his intention to resign from the Commission on the ground that it was not so organized as to make executive work by it successful. expressed himself in the same way to the President. He sent to me a plan of reorganization which he regarded as one which would work. General Davis under date of January 6, 1905, wrote me as follows: The newspapers have stated that in the special report which you have recently submitted to the President a recommendation is contained for a reduction of the number of members of the Isthmian Canal Commission. I hope the report is true, for I am satisfied that the present body is far and away too cumbersome and ineffective.

In a letter transmitting the annual report of the Canal Commission January 12, 1905, to be found on page 2393 of this evidence, I suggested that the present form of the Commission was not elastic and not well adapted to canal work, and the President sent a message on the same day concurring in my view and recommending a change of the law by reducing the Commission to five or three, and giving him greater discretion in dealing with the Commission.

The committee is familiar with the parliamentary history of the bill passed by the House in view of this recommendation and giving the President complete discretion to select his agents. For convenience I append that bill, marked "Exhibit 14," together with the amended form in which it passed the Senate, and was subsequently carried into conference. The Houses could not agree, and the bill failed.

66

On the adjournment of Congress on March 4, 1905, it became apparent that something must be done by the Executive, and the question was What?" I was inclined to think at the time I transmitted the Commission's annual report, and so expressed myself in the letter of transmittal, that the Spooner Act should be construed to mean that the President must construct the canal through the Commission as an executive body, and that he could not make differences in matter of duties or salary between the different members. Subsequently, however, I reached the conclusion that my first impression was erroneous and that he could do so, provided the Commission was retained as an organized body, and that it confirmed all the acts which were done in its name and under its authority, that the Commission might be treated as the directory of a railway company, and that the executive part of the work might be done through the chairman and

an executive committee, while the remainder of the Commission could be used as a consultative body for engineering purposes, and only as a supervising and confirming body for executive purposes.

In reorganizing the Commission we attempted to follow the suggestions of Mr. Wallace, Mr. William Barclay Parsons, and General Davis. I append the letters and memoranda of Mr. Wallace, Mr. Parsons, and General Davis on this subject marked Exhibit 15.

The order of April 1 specified the duties of the chairman of the Commission, and the other members of the Commission, made the chief engineer a member of the Commission, and the governor of the Zone a member of the Commission, and constituted them an executive committee with power to act. The remaining four were engineers, and were paid a considerably less salary than those which were provided for the chairman of the Commission, the chief engineer, and the governor of the Zone; or, to put it in another way, the salary of each member of the Commission was fixed at $7,500, and the chairman received in addition to that as chairman $22,500, the chief engineer received $17,500 additional, and the governor of the Zone $10,000 additional. The organization is shown on page 4 of the ninety-first meeting of the Isthmian Canal Commission, as follows:

For convenience of executing the work to be done, there shall be constituted three executive departments.

(a) The head of the first department shall be the chairman of the Commission, who shall have direct and immediate charge of-

1. The fiscal affairs of the Commission.

2. The purchase and delivery of all materials and supplies.

3. The accounts, bookkeeping, and audit.

4. The commercial operations in the United States of the Panama Railroad and steamship lines.

5. He shall have charge of the general concerns of the Commission, subject to the supervision and direction of the Secretary of War, and shall perform such other duties as may be placed upon him from time to time by the Secretary of War.

(b) The head of the second department shall be the governor of the Zone, with the duties and powers indicated in the Executive order of May 9, 1904, which includes in general:

1. The administration and enforcement of law in the Zone.

2. All matters of sanitation within the Canal Zone, and also in the cities of Panama and Colon, and the harbors, etc., so far as authorized by the treaty, the Executive orders and decrees of December 3, 1904, between the United States and the Republic of Panama relating thereto.

3. The custody of all supplies needed for sanitary purposes, and such construction necessary for sanitary purposes as may be assigned to this department by the Commission.

4. Such other duties as he may be charged with from time to time by the Secretary of War.

5. He shall reside on the Isthmus and devote his entire time to the service, except when granted leave of absence by the Secretary of War.

(c) The head of the third department shall be the chief engineer. He shall have full charge on the Isthmus

1. Of all the actual work of construction carried on by the Commission on the Isthmus.

2. The custody of all the supplies and plant of the Commission upon the Isthmus. 3. The practical operation of the railroad on the Isthmus with the special view to its utilization in canal construction work.

4. He shall reside on the Isthmus and devote his entire time to the service, except when granted leave of absence by the Secretary of War.

The result of the operations under the old Commission convinced me and convinced the President that it was absolutely essential to have a completely new organization in Washington for the purchase and forwarding of supplies, machinery, and construction material, and also for the procurement of the needed employees. In other words, it was

essential that this work should be attended to by someone who had large experience in the construction of railroads or other important work, and who understood the methods by which the parts of the organization were assembled and made effective. A number of candidates were selected, and after a careful investigation, the President concluded that Mr. Shonts filled the requirements of the position in a most satisfactory way.

I do not hesitate to say that one great difference between the work of the old Commission and of the new is due to Mr. Shonts's experience and energy in effecting and maintaining an organization for the purpose of selecting employees, making proper contracts for the purchase of needed machinery and material, pushing forward the transportation of such equipment and supplies and for instituting a proper system of accounts and records.

The whole office of the Commission in Washington was reorganized. Mr. Benson, an auditor of long experience in railroads, was made the general auditor of the Commission; Mr. David W. Ross, one of the ablest railroad purchasing agents in the United States, was employed to reorganize the purchasing department, and the selection of employees was placed under Mr. Pepperman, who had large experience in civil service, both in this country and in the Philippines.

The organization has, on the whole, worked very well. When Mr. Stevens succeeded Mr. Wallace he was not made a member of the Commission, so that the executive committee now consists only of Mr. Shonts and Governor Magoon. This would have been inconvenient but for the presence of the four engineer members of the Commission in Washington, where Mr. Shonts has been; so that it was possible to do all necessary business through the Commission instead of an executive.committee.

The order contemplated the presence of Mr. Shonts on the Isthmus six months in the year, but it has been absolutely impossible for him to be as much on the Isthmus as was contemplated when the order was made. The organization of the bureaus here, the purchase of material, and the calls for his presence in view of the investigations by appropriation committees and this committee have made it entirely out of the question that he should be on the Isthmus half his time. He has done extraordinarily good work in bringing about the organization at this end, and it has been work which has effected great results upon the Isthmus. Mr. Shonts has himself stated the circumstances with reference to his continuing to hold the office of president of the Clover Leaf Railroad, and I shall not add anything to the state

ment.

THE PANAMA RAILROAD; ITS CONDITION AT THE TIME OF THE TRANSFER; THE ACQUISITION OF THE OUTSTANDING SHARES OF STOCK BY THE GOVERNMENT IN THE SPRING OF 1905; THE QUESTION OF THE CONTINUANCE OF THE STEAMSHIP LINE; THE QUESTION OF RATES; THE CONGESTION OF TRAFFIC AND THE PACIFIC MAIL.

Sixty-eight thousand eight hundred and eighty-eight shares of the 70,000 shares of the capital stock of the Panama Railroad were transferred by the New French Panama Canal Company to Messrs. Day & Russell, agents of the United States, in Paris, on the 7th day of May, 1904, and on the 18th day of May they were transferred to my name

as Secretary of War. This was after the annual meeting held on the first Monday in April, at which the board of directors had been elected for the ensuing year. In the letter of instructions of the President of

May 9, 1904, the President said:

By virtue of the ownership by the United States of about sixty-nine seventieths of the shares of the capital stock of the Panama Railroad, the general policy of the man agers of said road will be controlled by the United States. As soon as practicable, desire that all the members of the Isthmian Canal Commission be elected to the board of directors of the road and that the policy of the road be completely harmonized with the policy of the Government of making it an adjunct to the construction of the canal, at the same time fulfilling the purpose for which it was constructed, as a route of commercial movement across the Isthmus of Panama. If any contracts or other obligations now subsist between the railway company and other transportation companies that are not in accord with sound public policy, then such contracts must be terminated as soon as it is possible to effect that object.

Three of the directors elected in April, were induced to resign on July 14, and in the vacancies were elected by the Board Admiral Walker, Mr. Burr, and Mr. Grunsky. Commissioner Parsons was made a director September 15 and Commissioners Davis, Harrod, and Hecker were made directors on October 27, 1904, and in this way after that date the Commission constituted a majority of the directors, but the election of new officers did not come until April 1905.

At the time the shares of stock came into the hands of the Government the road was being run under an exclusive contract with the Pacific Mail Steamship Company. After a full examination of the contract, I became convinced that it was not one which the Government could afford to continue. It, in effect, by through billing, secured a monopoly of all the business for the Pacific Mail north of Panama to San Francisco. The contract provided for its termination by six months' notice, and accordingly I invited the attention of the board of directors to the question, and after considerable correspondence and discussion as to the validity of the contract, notified them that in my judgment the six months' notice should be given. It was accordingly given on the 12th of January, 1905, which terminated the contract on the 12th of July of the same year.

The Pacific Mail in view of this action threatened to withdraw their steamers from the line between San Francisco and Panama, and this led to correspondence and a final conference with Mr. Schwerin on June 25 in New York City, at which he concluded to run the line, as he said, for an experiment.

When I came to elect the directors at the annual meeting of the railroad company in April, 1905, I selected Mr. Cromwell, for reasons which I shall hereafter explain. I put on to the board the entire Commission-Mr. Parsons, who was a member of the Consulting Board; Colonel Edwards, who at the time was engaged in assisting to reorganize the office of administration of canal affairs in Washington; Mr. Drake, for years vice-president of the company, and more familiar in an executive way with its affairs than any other person; Mr. Farnham, the assistant in Mr. Cromwell's office, who had had large acquaintance with ships and shipping, who was well known on the Isthmus, and who understood the conditions that prevailed there, and who subsequently was selected because of his knowledge of shipping by the executive committee to go abroad to price ships and make a report upon them. I also elected Mr. Obaldia, the Panamanian minister. I did this because I thought it was most important to have the Panamanians

understand that they would have on the board three of their friendsSeñor Obaldia, Mr. Cromwell, and Mr. Farnham-to protect them against the use of the railroad in any way which would be contrary to their legitimate interests. The selection of Señor Obaldia was a courtesy to the people and the Government of Panama, which I have reason to believe was highly appreciated. Matters of this sort go very much farther with a Spanish-American people than they do with an Anglo-Saxon people. Mr. Farnham was recommended for appointment by Colonel Edwards, and Señor Obaldia I appointed without suggestion from anyone.

While the Panama Railroad was able to do the commercial business and had in 1902 completed a large dock at La Boca, on the Pacific side, at a cost of $2,200,000, it has been quite apparent that the road with its equipment and one track and the terminal facilities, even with the La Boca dock, is wholly inadequate to the business which must now be done on it as an instrumentality for the construction of the canal. The Canal Commission has therefore made an arrangement to advance about a million dollars out of their funds to the railroad company to make needed improvements, which include a very great enlargement of the terminal facilities and docks and the double tracking of the road. The equipment of the road is not up to date, and new engines and new cars have been required.

When the transfer from the French Panama Canal Company was made there were outstanding in the hands of private persons 1,112 shares of capital stock. In 1904 Admiral Walker advised me that 100 shares had been offered the Commission, and I directed him to buy them. This made the stock outstanding 1,012 shares. The Government, of course, while it recognized the obligation to discharge the duties of a common carrier under the charter of the railroad company, was anxious that it might use the railroad as it saw fit to aid in the construction of the canal. The interest of the outstanding stockholders, of course, was only in securing dividends from an economical operation of the road and management of its finances. They might very well complain, in equity, if the Government, by reason of its owning sixty-nine-seventieths of the stock, should ignore their interests and devote the road to the construction of the canal without regard to dividends.

Everybody recognized the awkwardness of having the shares of stock owned in this way, and it was proposed in the House bill already referred to to authorize a condemnation of the stock. Another method proposed was to have the road leased by the company to the Government at a fair rental, which should be a proper dividend on the stock, the Government assuming the obligation to discharge the duty of common carrier on the one hand and using the road for the purpose of building the canal on the other. I recommended the latter plan, because with some knowledge of efforts of this kind in other corporations I despaired of being able to buy all the stock down to the last share. However, we made the effort to buy, and by June, 1905, we had succeeded in securing for the Government every single share of stock.

One of the questions presented with reference to the railroad company was the policy of continuing the steamship line. General Davis in his report had recommended that the steamships be sold and that the operations of the Government be confined to the running of the