States does not possess this absolute sovereignty, which would carry the right of establishing its own fiscal system.

(P. 11.) It has never entered the mind of either party [to the treaty] that the United States should turn the Canal Zone into a source of revenue by enforcing high customs tariffs, even against the Republic of Panama, which is the lord of the territory, and still holds over it rights that it has not relinquished.

(P. 11.) If any customs tariffs can be established at the ports of Panama and Colon-that is to say, the entrances of the canal on the importation of articles of trade destined for use or consumption in the Zone, it is for the Republic of Panama, and not the United States, to do so. * Any importations made, not by the United States, but by persons that are not in the employ of the canal, may be taxed by the Republic of Panama,

*

*

(P. 11.) The object of the convention is not the cession by one party, or the acquisition by the other, of areas of territory or of fiscal or other public revenues.

(P. 11.) My Government holds that the United States may conduct a domestic mail service within the Zone, but can not forward to foreign countries, as this right belongs to the Republic of Panama.

(P. 6.) The Republic still retains part of its judicial powers of the Canal Zone.

From these declarations it is easily seen that the Panama Government does not willingly accept, or finds difficulty in adapting herself to, the condition of affairs that has come about through her own act— a condition of incapacity-" to the exercise by the Republic of Panama of any such sovereign rights, power, or authority," a renunciation which includes all the rights, power, and authority within the Zone mentioned and described in article 11 of the canal treaty, "which the United States would possess and exercise if it were the sovereign of the territory."

Mr. Arias declares that the Republic has not parted with her fiscal and economic sovereignty within the Zone, and will steadfastly claim the right to exercise the same, not only because the said rights have been reserved to the Republic, but because "its future and its existence depend upon it."

The United States Government, by its legislative measures and by the dispositions made in pursuance with the statutes and by its orders to the governor of the Canal Zone, has apparently proceeded on the basis that all the rights, powers, and privileges which the sovereign of the territory could possess and exercise have been ceded to the United States by Panama, but Mr. Arias considers that the future and the very existence of the Republic depend upon the abandonment by the United States of the claim that such delegation of power actually resulted from the canal treaty.

The proofs have already been cited in this presentation, showing that the Government of Panama was formerly of the same opinion as that entertained by the United States respecting this transaction, and so expressed itself through its constituted authorities on many occasions from the time the treaty was negotiated down to the early part of July of the present year.

This inference is deducible from the treaty itself. from the opinion expressed by the special envoy extraordinary who for Panama assisted in the making of the treaty and signed it, as to the meaning intended

to be expressed by that instrument in defining " the harbors adjacent to Colon and Panama, and from the official utterances of its President, its minister of foreign relations, its Junta de Gobierno, its National Assembly, and minister of justice.

That the condition of affairs expected to result from the cession would be analogous to that which exists in many other states and provinces, where similar acts have produced similar results, is notably shown by the following:

In 1841 the Sultan of Turkey granted to the Khedive of Egypt all the rights, powers, and privileges that he could have exercised if he was sovereign in Egypt, except that he was obligated to pay to the Sultan an annual tribute of $3,750,000, he could not have an army of more than 18,000, he could not build or own any war vessels of the type of battle ship, he could not float a foreign loan without the Sultan's permission, and he could not make treaties with foreign powers that were in contravention with Turkish political treaties. Yet the nominal sovereignty remained in the Sultan, while the Khedive was practically an absolute monarch in Egypt.

In 1878 the Sultan of Turkey granted to the Emperor of Austria the entire control of all governmental functions in the Turkish provinces of Bosnia and Herzegovina, and all the rights, powers, and privileges which a sovereign could exercise, yet the nominal sovereignty of these two provinces still remained in Turkey.

In 1878 the Sultan of Turkey granted to Great Britain all the rights, powers, and privileges that a sovereign could exercise in and over the island of Cyprus.

In 1898 the Emperor of China granted to Great Britain, by lease for so long as Russia should remain in possession of the Port Arthur peninsula, the town and district of Weihaiwei. Under this lease Great Britain exercises all the rights, powers, and privileges that a sovereign could exercise in the said town and district of Weihaiwei.

In 1898 China granted to Russia for the period of twenty-five years, with right of extension, all rights, powers, and privileges that a sovereign could exercise, of and to, the Port Arthur promontory and adjacent territory.

In 1898 China granted to Germany, by lease for ninety-nine years, all the rights, powers, and privileges which a sovereign could exercise, in and to the port of Kia-Chau and adjacent territory.

There are probably other instances of like delegation of power equivalent to sovereignty, yet, in every one of the cases cited, the actual nominal sovereignty is still in the Sultan of Turkey in the one case and in the Emperor of China in the other, just as the nominal sovereignty of the Canal Zone is still in the Republic of Panama.

A door is open into which Panama may enter when so minded, and so secure the adoption of fiscal and economical measures that will protect her treasury, secure to her very comfortable fiscal and economical conditions, if not sovereignty, and when she no longer repels the tender she may secure an arrangement for establishing and controlling and harmonizing the fiscal systems of the Republic and the Zone, an object or result that seems to have been earnestly desired by the Government of the Republic a few weeks ago.

For the realization of its herculean task, the United States needs all the treaty gives it, i. e., all the rights, powers, and privileges that sovereignty could confer within this narrow strip of land where the

interoceanic canal must be, and no part of such authority can be properly and safely relinquished. Ocean steamers come and go at Colon, and the United States has no wish or thought to interfere with them. After a few years the United States will have improved the harbor at the entrance to the canal, already available for small steamers, and where the trade and commercial movement should be as untrammeled as it is now at Colon.

The Zone authorities have not interfered with and will not molest the ocean steamers that use the old harbor of Panama, but the United States should not tolerate any interference with similar vessels that make use of the harbor owned absolutely as property of the United States, and which is within United States jurisdiction by agreement with Panama. Can the United States permit Panama customs officials to dictate her customs and port measures within the harbor of Ancon?

After the necessities of the United States for land for canal purposes are better known it will probably be found that considerable areas of agricultural land, now in the Zone, can be receded to Panama, for it is understood that the United States does not wish to control an acre of territory that is not essential for canal purposes.

According to the opinion of the Panama minister of foreign affairs, the postal system of the Republic was wrongly displaced. The Government of the United States can hardly assent to this proposition, nor that letters going and coming across the ocean must be passed through Panama post-offices. For example, are the employees of the canal from the United States to be required to affix to their letters to friends and relatives at home the Panama 10-cent silver stamp instead of the 2-cent United States stamp?

When an agreement is reached respecting the control of interstate trade (Zone-Republic) on the principles of reciprocity of advantage or favor, goods will freely pass in bond through the ports of the Republic to the Zone and through the ports of the Zone to the Republic. The customs tariff or commercial taxes in the Zone should be such that all importations of liquor, tobacco, etc., will come in through the Republic's ports exclusively, while the Republic should so lower her "impuesto comercial" that the products of the United States, other than liquor and tobacco, may come into the Republic and the Zone and enter into use or be consumed, paying a very small tax, if any at all.

That the people of Panama may consider that the trade and business of the Zone, so confidently counted upon, is essential to their prosperity and necessary to the realization of their dreams of exploitation, is well illustrated by a provision of the gambling concession referred to below, and by the claim presented and arguments in support of it by the grantee for the existing lottery concession.

The gambling concession (a copy of which has been published in the Official Gazette of the Government) was granted on January 4, 1902, by the governor of the department of Panama to Mr. Charles E. Pratt, an American. The grantor was the governor, Alban, a Colombian general then exercising the functions of the chief executive of the department (now Republic) of Panama, who a few months later was killed in a revolution. Adolfo Aleman, a Panaman, was his secretary of finance.

The amount agreed to be paid annually for three years for the exclusive privilege of operating gambling establishments throughout the country or of subletting the privilege was $51,000. The last part of section 111 of the concession is as follows:

"In case the Government of the United States of America, or any respectable company or enterprise of a formal and permanent character, undertakes the interoceanic canal works, the employment of 4,000 laborers and employees on the said works being considered as giving to the companies such a character, the grantee undertakes to pay to the government the sum of $75,000 over and above the sum stipulated to be paid for the gambling privilege, or he shall cede to the government, at its option, three-fourths of the amount of net benefits received from these establishments in the Province of Panama, to take effect on the day on which the canal works are recommenced."

The Government promised the timely support of the police for the preservation of order, to facilitate which the games were required to be carried on in places of easy access to the police and Government agents, but not to be visible from the street. The grantee renounced his right to claim, by judicial process, the recovery of gambling debts. by minors, soldiers, and public employees. He also agreed not to have recourse to diplomatic assistance in differences or disputes regarding the interpretation of or compliance with the conditions of the contract. The grantee to be held to pay the full amount agreed, no matter what may be the condition as to peace or disorder. While the then existing state of war continued the gambling shops were to be closed at 10 p. m.

This contract is still in force, and the stipulated payments continue to be made to and are received by the treasurer-general of the Republic of Panama. The amount reported as received into the central treasury since August 1 is $19,125 silver.

On the 24th of October, 1883, there was granted to a company to be organized by the grantee the exclusive privilege of conducting lottery drawings in what is now the Republic of Panama for the period of twenty-five years, to date from January 1, 1884. The number of drawings to be held each month or each year is not specified. The number of tickets for each drawing was required to be one or ten or one hundred thousand, as the management decided, and it was required that at least 64 per cent of the value of the tickets which comprise the drawing be paid out as prizes. Four per cent of the value of all the tickets in each drawing was to be paid into the treasury, and 3 per cent of the value of the tickets was also to be paid over to the general treasury to be shared by the asylums and hospitals of the country. All the officials who took part in the making of the contract were Panamanians. The grant was ratified at Bogota by the officials of the Government of the Republic of Colombia.

On June 3, 1901, the period of the grant was extended for ten years in consideration of a cash payment of $100,000 (silver), and the date of expiry of the present monopoly is December 31, 1918.

Recently the grantee under the original contract, who is now the manager of the lottery company, made a claim against the Republic in the sum of $3,750,000 (silver) for indemnification, because the United States authorities in the Zone had enacted laws prohibiting

the holding of lotteries and the sale of lottery tickets. In his appeal to the President of the Republic appears the following statement:

"So that your excellency may appreciate the magnitude of the damage caused, I make bare the following: Now, there are only a few laborers working on the line of the canal, and the enterprise pays to the Government the percentage corresponding to it, amounting to $83,000 annually, and gains a net profit of $160,000 annually, it being easy to deduct that when the number of laborers is increased and the work on the canal is in full blast. The net profit of the enterprise should be from $800,000 to $1,000,000, and the proportion pertaining to the Government from $100,000 to $500,000. Now that the drawings are reduced to fifty-two (52) annually, the proportion of the Government will be $11,000, and the net profit of the enterprise $80,000. I am in a position to prove that during the years 1887 and 1888 the enterprise earned more than $600,000."

Recently the Isthmian Canal Commission enacted a law making the holding of a lottery or the sale of lottery tickets in the Canal Zone a crime, punishable with fine or imprisonment or both, and a similar law forbidding, and providing a similar punishment for gambling.

Several arrests have been made for violation of these laws, and the trials will soon take place before the circuit court, which has recently been created. In one of the cases habeas corpus proceedings were had, but the judge denied the petition and held the accused for trial. In the hearing of the petition the plea was set up that the United States is not sovereign in the Zone, and therefore not competent to interfere with the holder of a franchise which was regularly granted by the sovereign power, of which power the Republic of Panama is the regular and legal successor.

THE PRESENT SITUATION.

In response to an invitation of the American minister to Panama, the undersigned prepared, the last of July, a scheme for a modus vivendi, which was submitted by Mr. Barrett to Mr. Arias, but was not accepted formally, although the entrance and clearance of vessels is now being managed practically in conformity with the principles stated in this draft.

Notwithstanding the numerous assertions to the contrary, the authorities of the United States have not to the present moment collected any customs duties whatever in the Zone. The fear that goods imported by Panama merchants would be held for duties passing from the Zone port of Ancon to the territory of the Republic have not been realized, and the goods are handled now just as before the signing of the treaty. Goods imported into the Zone from the cities of Panama and Colon that have been already taxed as if for consumption in the Republic are not impeded in any way by the tax collectors of the Zone. The functions of the Panama Railroad as an international transit route are performed as before. Goods destined for Pacific ports or coming thence bound for Atlantic ports, beyond the Isthmus in both cases, are moving as usual, but the railroad people decline to issue bills of lading-for merchandise bought in the United States, for example-through to destination in the Zone, and as a necessary result the tax collectors of the Republic at Colon levy on these goods when landed at the Panama port above named. This