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 its 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 railroad. I was very much inclined to this view myself, and I believe that that is the view of Mr. Wallace; but further investigation satisfied me that it would be exceedingly unwise, with an established line, if we could make the line pay expenses, to abandon an instrumentality that would enable us to control the rates of freight from the United States to Panama. Speaking of this very question, the subcommittee of the Interstate Commerce Committee of the House of Representatives, which investigated the affairs of the Panama Railroad Company in the 58th Congress, strongly recommended the continuance and even extension of the shipping line of the railroad company. I append this report, marked "Exhibit 16."

I became convinced that it would be impossible for us, unless we maintained this line, to escape the result of a combination as to rates among the steamship lines; and in addition it is, of course, a very

great convenience to have the control of our own line in the carriage of employees and in the transportation of our machinery, construction material, and supplies. I consented, therefore, to the purchase by the Canal Commission of the two steamships, the Mexico and the Havana, for $650,000 each, in order to improve the line and make it as useful to us as it ought to be to us in respect to the construction of the canal.

Mr.

These steamships were offered to us at first at $750,000 each. Farnham was sent to Europe for the purpose of finding out what steamers were available there for sale. After he had made his report and had shown what steamships could be purchased, and the prices, it was found that, with the advantage of carrying the American flag, the purchase of the Mexico and the Havana from the Ward Line was really the most advantageous. The purchase was made by Mr. Shonts, through Mr. Vernon H. Brown, of the Cunard Line.

Senator MORGAN. Did you ever consider the question whether Congress had ever made a provision for purchasing those ships?

Secretary TAFT. Yes, sir; I considered it in this light: Exactly in the same way in which we lend money to the Panama Railroad; that there was such wide discretion in the President to build the canal that anything that was regarded as necessary in the building of the canal he could do.

Senator MORGAN. Even without any stipulated appropriation for any purpose whatever?

Secretary TAFT. Yes, sir.

Senator MORGAN. I just wanted to know what your view was on that subject.

Secretary TAFT. The Spooner Act is very broad in the discretion given to the President.

Another question which has been mooted with respect to the railroad is that of rates. The fact in respect to the rates on the railroad is that we have lowered them as much as we feel justified in doing at present, with the present equipment of the railroad and the inability to do the business as economically as we hope to do it. We can not afford to make our charges below what it costs us to run the railroad, and the fixed annual charge of more than $5,000 a mile which we have to pay as a subsidy of course increases the rate of freight which we must charge them.

Mr. Wallace thinks that we ought to make a flat rate of $2 a ton across the Isthmus for everything. He once suggested this to me, and it was very attractive in its simplicity and resemblance to canal tolls on ship tonnage, but one difficulty is that the cost of conveying the freight is $3.06 a ton, as the traffic manager of the road advises me, which would make a loss to us in running the railroad of $1.06 a ton. Instead of that, our average charge is about $3.69 a ton, which does not make an unreasonable profit. We have reduced the freight rate from New York to Panama on most goods 333 per cent or more. We are not much more than paying expenses with our shipping line. The through rates are divided, 45 per cent to the railroad and 55 per cent to the steamship. Two other steamship lines run from New York to Colon, the Royal Mail Line and the Atlas Line, and a line from New Orleans to Colon, all of which connect with us.

Senator MORGAN. Is that line from New Orleans to Colon one of those fruit lines?

Secretary TAFT. Yes, sir.

Senator MORGAN. What is the name of it?

Secretary TAFT. The United Fruit Line.

Senator MORGAN. The United Fruit Company. Yes.

Secretary TAFT. From all of these lines the railroad accepts the same pro rata proportion, 45 per cent, and thus makes no discrimination and attempts no monopoly. When we reduced the rates from New York to Panama, the lines from Europe to Colon had to reduce their rates. We reduced the local passenger fares from 8 and 10 cents a mile, first class, to 5 cents, and from 44 and 5 cents to 3 cents a mile for secondclass passengers. The local rates of freight on the Isthmus have also been reduced about the same percentage. I append the correspondence with Mr. Walker, the traffic manager of the railroad, and his reply to a letter of criticism forwarded to this office, as Exhibit No. 17.

I shall not attempt to describe the congestion in freight which occurred upon the railroad in the spring of 1905, and which was aggravated greatly in the summer of that year by the quarantine which was imposed for yellow fever and for bubonic plague. It has been made the subject of rather acrimonious discussion between Mr. Schwerin on the one hand and Mr. Shonts on the other, and I do not care to take part in it. At my suggestion two weeks ago Mr. Shonts went to the Isthmus with Mr. Schwerin, the agent of the Pacific Mail, there to confer with Mr. Stevens and to see whether their differences could not be so adjusted as to prevent the continuance of complaints that have been made by the agent of the railroad against the Pacific Mail and by the agent of the Pacific Mail against the conduct of the railroad company for many years. I am glad to submit a telegram which I received a day or two ago from Mr. Shonts, which shows that thorough work has been done in cleaning up the congestion and in making the road operate as it should. The telegram is as follows:

Have just completed a personal investigation of the Panama Railroad and terminals. I find that there is not only no congestion, but that every dock is absolutely clean; that all business offered is handled promptly, and with the additional equipment now arriving a larger business can be taken care of without in any way interfering with the canal work. The organization is ample and has every feature of the work in hand.

I am very hopeful that we may be able to still more reduce the rates on the Isthmus, both local and through rates, so that we may benefit the people of the Isthmus, and also those who wish to patronize this method of transportation from New York to San Francisco. On April 24, 1905, in a letter to Mr. James J. Hooker, of Cincinnati, which was published, I expressed the attitude of the Administration with respect to the rates made across the Isthmus. That letter is as follows:

APRIL 24, 1905.

MY DEAR MR. HOOKER: I am in receipt of your letter of April 21, and have read it with interest.

The policy of the Government in managing the Panama Railroad is to charge such rates as will pay, for the carriage of the goods across the Isthmus, a reasonable return on the investment of the Government, and nothing more. It will permit no discrimination against or in favor of any of the connecting steamship lines. It may be that this policy will affect the transcontinental rates as to those classes of freight that can stand the Isthmus trip favorably for the shipper.

However, Mr. Wallace, our chief engineer, and a railway nanager of experience, thinks that the proposed changes will not have much influence on transcontinental rates, because he thinks that but a small proportion of that which goes to make up transcontinental freight can be carried by the Isthmus. The long trip, and the fact

that the merchandise carried is to be a considerable period in the Tropics, exclude the possibility of carrying many kinds.

The Panama Railroad Company owns three steamships, which ply between New York and Colon. We shall make the rate upon these ships as low as possible, consistent with paying a reasonable compensation for the carriage and the investment. We shall run them merely for the purpose of preventing a combination to raise the rates for the delivery of material for the construction of the canal from the United States to the Isthmus.

The Government is not running and does not expect to run a line between New York and San Francisco or between San Francisco and New York; hence the relation of its policy to transcontinental rates is only indirect. The policy of the Panama Railroad Company heretofore, in view of its ownership of the three ships and the docks at Colon, and its resulting ability to exclude from the New York and Colon business any other steamship line, has been to monopolize the trade between New York and Panama on the one side, while its arrangement for exclusive through billing between New York and San Francisco with the Pacific Mail Steamship Company produced a monopoly for the Pacific Mail trade on the other side between Panama and San Francisco on the north and a monopoly for the Chilean and Pacific Steamship companies from Panama to the south. So far as the action of the Panama Railroad Company can break up these monpolies, it is being taken.

The Government's acquisition of the railway lines was not primarily for the purpose of affecting railway or ocean rates, transcontinental or otherwise. It was for the purpose of acquiring an instrument with which to construct the canal-an instrument absolutely indispensable to the accomplishment of our purpose within a reasonable time. The incident that we must hold the railroad under a franchise requiring us to do a commercial business is what imposes upon us the obligation to do what we can to make just rates and prevent discrimination, and this we shall do. If this ameliorates conditions, we shall be very glad. If it does not, it will not be in our power to do more.

The effect of changes in rates and trade conditions is so elusive that it is hardly safe to make a prediction as to the result. One should study the local conditions which prevail at Panama and at the many ports between San Francisco, in Mexico and Central America, and should estimate the exact operation of our coastwise laws, which prevents the intervention of foreign shipping in the trade via the Isthmus between San Francisco and New York, before expressing an opinion as to the effect of the Government's operation of the Panama Railroad upon the trade between our east and west coast. An attempt has been made heretofore to establish an American line competing with the Pacific Mail between San Francisco and Panama, with the assistance of the Panama Railroad Company. It proved to be a disastrous failure, and was therefore followed by a renewal of the discriminating contract which is to terminate in July next.

It is possible that the time is now ripe for the establishment of American competition with the Pacific Mail between San Francisco and Panama. Certainly the Government, in operating the Panama Railroad, will do nothing to hinder it. Nevertheless, it is possible that the position of advantage that the Pacific Mail has with respect to Mexican and Central American trade, and its ownership of a dock at Colon, may enable it to establish lines on both sides which will do all the through business and fix the rates without enjoying any discrimination in its favor by the Panama Railroad. If so, the Government could not prevent this, except by running a line from Panama to San Francisco for the purpose, which it can not do.

Mr. Shonts could hardly have been correctly reported in the interview you send me, because he fully agrees with the policy of the Government, as I have outlined

it above.

Should you have any criticisms to make upon it, my dear Mr. Hooker, I should be glad to hear from you.

Very sincerely, yours,

Mr. JAMES J. HOOKER,

Chairman Executive Committee,

The Receivers and Shippers' Association Company

of Cincinnati, Union Trust Building, Cincinnati, Ohio.

WM. H. TAFT.

After writing this letter I sent Mr. Bristow, the former Assistant Postmaster-General, to New York, New Orleans, San Francisco, and to the ports of Central and South America and to the Isthmus, for the purpose of investigating the question of rates and the management of