As before stated, the delimitation agreement was signed on June 16, and the following day a telegram was sent to the chairman of the Commission in Washington, requesting legislation by the Commission or by the President, as follows:

"1. Governor authorized to appoint collector of all revenues and subordinates, and fix salaries.

"2. Collection districts of Zone to be named Ancon, west half; Cristobal, east half.

"3. Free or dutiable goods coming by sea or rail, except in transit across Zone, to be entered Ancon or Cristobal, otherwise forfeited: Provided, Governor may regulate subject Commission ratification, entering otherwise than by sea or rail.

"4. Governor authorized to make reciprocal or other arrangements with Republic to safeguard revenues.

"5. Products of Republic, except spirits, enter Zone free if Republic reciprocates.

"6. Governor shall apply Colombian customs administration laws when practicable.

"7. Tariff on canal, railroad, machinery, boats, materials, supplies, Dingley rates, except coming from States; then free. Other goods from everywhere Panama Republic tariff.

"8. Governor authorized to place on free list or reduce rates on articles dutiable Panama tariff, subject ratification Commission.

"If above granted I would make extensive free list on necessaries, reduce rates on many other articles, not including tobacco and spirits. President Amador has full power from his legislature to adapt Panama rates to Zone rates, and ready to do so. Present Panama rates uniform, about 15 per cent ad valorem, except spirits, tobacco, and a few others, which are high."

On the morning of the 26th of June the press dispatches published in Panama contained the statement that the President had, by executive order, announced as a law for the Zone that the Dingley tariff rates would apply to all importations from foreign countries into the Zone, and that goods from the United States would enter the Zone free.

On July 1 the governor publicly announced that vessels arriving at the ports of Ancon and Cristobal would be entered and cleared by the Zone collector of customs. Same notification stated that the treasurer of the Zone had been appointed collector of customs at both ports, and that rates of customs tariff, tonnage, light-house dues, etc., would be those required to be imposed or collected under the laws of Panama. In the announcement the port of Ancon was thus described: "Which embraces the landing place at La Boca, the canal channel entrance thereto, and the steamship anchorage adjacent to the islands of Culebra, Naos, Perico, and Flamenco, all these waters and islands being within the jurisdiction of the United States."

The press item above referred to, announcing that the Dingley tariff rates had been made applicable to the territory on the Isthmus for the government of which the United States was responsible caused some excitement among the merchants of the Zone, who thought they saw in the application of such a measure the establishment within the canal territory of commercial establishments stocked with goods for sale at prices far below those at which the Panama

merchants could sell them, the reason being obvious, to wit, merchandise from the United States would come to the Zone free of any impost or tariff, while the same goods imported by merchants of Panama or Colon would be taxed, as provided by the local laws. They thought they would not only lose the expected profits to flow from the vast trade of the United States employees and canal followers, but they also feared the loss of the legitimate trade of their own cities of Colon and Panama, for they argued that the inhabitants of the city of Panama, by crossing the street or going a few hundred yards to a neighboring store within the Zone where free-trade goods were sold, could supply their wants, and the most rigid surveillance by the customs authorities could not prevent the smuggling that would inevitably result.

As soon as the governor, received the full text of the order of the President of June 24, which was received on July 5, an exact copy of the document was transmitted to the minister of foreign affairs of the Republic. In the letter of transmittal the Government of the Republic was informed that a collector of customs had been appointed for the ports of Ancon and Cristobal. The following is a quotation from the same letter:

"Your excellency will observe certain provisions therein which look to the arrangement of details concerning matters affecting your excellency's Government and that of the Canal Zone. I shall have the honor at an early day of asking a conference regarding these matters."

On July 5 Mr. Arias, the minister of foreign affairs, acknowledged receipt of the referred-to letter and its inclosure. Respecting the letter he said: "I will study it with special attention and duly submit same to His Excellency the President of the Republic for his information."

The details referred to by the governor, concerning which a conference was suggested as desirable, consisted of sections 8 and 9 of the President's order, as follows:

"SEC. 8. The governor of the Canal Zone is authorized to enter and carry out an agreement with the President of the Republic of Panama. for cooperation between the customs service of the Canal Zone and that of the Republic of Panama to protect the customs revenues of both Governments and to prevent frauds and smuggling.

"SEC. 9. The governor of the Canal Zone is hereby authorized to enter upon negotiations and make a tentative agreement with the President of the Republic of Panama respecting reciprocal trade relations between the territory and inhabitants of the Canal Zone and appurtenant territory and the Republic of Panama; also a readjustment of customs duties and tariff regulations, so as to secure uniformity of rates and privileges and avoid the disadvantages resulting from different schedules, duties, and administrative measures in limited territory subject to the same conditions and not separated by natural obstacles. The governor shall report as to such negotiations and proposed agreement to the chairman of the Isthmian Canal Commission for submission and consideration by the Commission and such action by competent authority as may be necessary to render said agreement effective in the Canal Zone. This order will be proclaimed and enforced in the Canal Zone at Panama."

On July 5 the governor, by proclamation, announced, as he was required to do by the Secretary of War, the issuance by the President of the Executive order of June 24, and he published the exact text of the same in the local papers, except sections 8 and 9. These were omitted because it was thought a possible embarrassment to the authorities of the Republic might result from the publication at that time of these sections, so important to the Republic as it was believed-i. e., the two sections that contained instructions looking to the arrangement by the authorities of the Republic and of the Zone of a tentative agreement respecting reciprocal trade, also to "secure a readjustment of customs duties and tariff regulations, so as to secure uniformity of rates and privileges and avoid the disadvantages resulting from different schedules, duties, and administrative measures in limited territory subject to the same conditions and not separated by natural obstacles." Receipt of this letter was promptly acknowledged by Mr. Arias and without comment as to its subject-matter.

On the 2d of July the Chilean steamer Loa, then within the jurisdiction of the authorities of the port of Panama, was cleared from said port and the clearance was presented to the collector of customs at the port of Ancon, where the steamer actually was lying, and the same day the Zone authorities of said port cleared her for her homeward journey. By the 6th of July three other vessels, two American and one foreign, were also cleared for their destination, each having previously presented clearance papers from the port authorities of the Republic.

It does not appear that any objection was made to this proceeding by the Government of the Republic until the 5th of July, when the minister of foreign affairs politely requested to be furnished with the facts in the case of clearance of the S. S. Loa. These were supplied on the same day.

On July 9 the captain of the port of Panama, an officer of the Republic, stated in writing that he knew of no port of the Republic named Ancon, and that if it existed it would be a port of the Isthmus. On the same day the governor received a long letter from the Panama minister of foreign relations, acknowledging receipt of the governor's response respecting the clearance from Ancon of the steamship Loa, and appealing to the undersigned to suspend the orders for the clearance of vessels from La Boca wharf without the knowledge of the authorities of the port and Panama laws on the subject.

To this letter a reply at considerable length was sent on the 11th of July. Respecting the request for suspension of these orders for La Boca clearances, the undersigned remarked:

*

"I find myself without the power to give the orders respecting clearances of vessels from La Boca which your excellency asks me to issue. * * On the 24th of June the President of the United States gave me instructions to publicly proclaim the law respecting the establishment of ports at Ancon and Cristobal and the application of customs rules and regulations to the Canal Zone. I am sorry to say, as I have already intimated, that this is impossible, because this is an order based entirely on instructions from my superiors."

* * *

In respect to the provisions of the President's above-referred-to order of June 24, authorizing the governor to discuss and arrange a provisional reciprocal agreement, the undersigned remarked:

"You have not failed to observe the provisions looking to reciprocity provided for in the President's order, a feature of this law which I am sure you will concede has been prompted by the most kindly feeling toward the Republic, and all that now remains in that connection is that we should draw up the agreement upon the tentative basis that is referred to by the President of the United States." Copies of same were forwarded to the chairman of the Canal Commission in Washington on the 12th of July (pp. —).

The reason for the remarkable change in attitude of the Government of the Republic, manifested toward the government of the Zone as respects the fiscal policy of the latter, has never been stated or ever referred to by the officers of that Government, but that a very radical change occurred soon after the publication of the President's order establishing customs ports on the Zone, the Dingley tariff rates, and free trade with the United States is very easily demonstrated.

Before July 5 not an expression of wish or suggestion of the Panama authorities had been brought to the notice of the authorities of the Zone government indicating any other desire than an earnest one that the fiscal policy of the United States respecting the Zone might be harmonized with the existing economical and fiscal system of the Republic. Great was the astonishment of the governor of the Zone to learn that the Government of Panama objected to the exercise over arriving and departing vessels within the waters and jurisdiction of the Zone of the supervision and control that is always exacted by nations exercising the powers of sovereignty within the subject territory.

Before the 11th of July the views of the authorities of Panama, as expressed in personal and official utterances, were in complete harmony with the United States policy inaugurated by the President's legislative enactments, made in pursuance of the law of Congress, and also in harmony with the administrative and executive dispositions of the government of the Canal Zone that have been observed up to the present.

Attention is invited to the following facts:

First. The Junta de Gobierno prepared a document dated February 1, 1904, with title, "Personal Memorandum to the Hon. W. J. Buchanan, minister from the United States.

A copy of that document was handed to the chairman of the Isthmian Canal Commission in Panama about April 10, 1904, by Mr. Ricardo Arias. The following is a quotation from the memorandum: "The impuesto comercial (25 per cent Colombian silver duty on the gold valuation of merchandise, as per sworn invoices) is one of the chief sources of fiscal income. We can not continue running the Government without it or its equivalent in some other revenue. Therefore until we have found some other means to replace it we can not part with it. This is the fiscal view of the case. Those who have given more thought to this subject suggested that the tax should be lowered to a point where it would not interfere with the object in view, say, 5 per cent gold, and the difference should be raised on the impost on liquors, tobacco, opium, and perfumery, which should previously, to give it larger yield, be declared as not necessary or convenient for the officials and men in the employ of the United States on the canal."

Second. In official interviews the President and the minister of foreign affairs of the Republic more than once stated to the undersigned in effect the same ideas that are expressed in the memorandum handed to Minister Buchanan, and on one occasion Mr. Ricardo Arias stated that they would go even further and reduce the ordinary impuesto comercial below 5 per cent gold, or even abolish it altogether, so that the tax on liquors and tobacco was made recoup the loss.

Third. On the day when the delimitation agreement was signed the governor, not being then aware of the existence of law No. 65, quoted above in part, asked the President of the Republic if, now that the Assembly had adjourned, it would be possible for his Government to enter into an arrangement that would result in harmonizing the fiscal system of the two governments. The President replied that the Assembly had, he thought, conferred upon him the requisite power to effect this object, and the next day, the 17th of June, the following letter was received by the governor of the Zone from the President of the Republic, viz:

"DEAR SIR: I have the pleasure to inform you that I am fully authorized by law recently enacted by the National Assembly to reduce or increase our duties and taxes accordingly with the rates which your Government shall establish at the Canal Zone.

"Yours, truly,

"M. AMADOR GUERRERO."

Fourth. The laws Nos. 65 and 88, enacted on June 6 and July 5, 1904, vest the President of the Republic with authority" to abate in a convenient manner those duties which, if still levied in accordance with the existing laws, will be prejudicial to commerce and to the public, because said laws are very different from those which the Government of the United States will establish in the Canal Zone," and also "to reduce the slaughterhouse duty on cattle killed in the districts of Panama, Colon, and Bocas del Toro, when the fiscal system to be introduced in the Zone ceded to the United States, in his opinion, requires it."

Fifth. On the 17th of June the governor of the Zone received the following communication from the minister of foreign affairs, Republic of Panama:

"GENERAL: I have the honor to inform you that all the officials and public employees in the Canal Zone have been instructed, through their respective superiors, that since yesterday their functions as members of the Government of the Republic of Panama have terminated, because of the fact that the districts on the line of the railroad over which they have jurisdiction have been separated from the national territory by virtue of the agreement signed by you and the undersigned on the day mentioned.

With sentiments of distinguished consideration, "Your obedient servant,

"TOMAS ARIAS."

Sixth. In a memorandum draft of the proposed delimitation agreement, which draft was prepared by the minister of foreign affairs of the Republic, and handed to the governor of the Canal Zone on the 28th of May, 1904, the treaty between the United States