Papers Relating to the Foreign Relations of the United States, With the Address of the President to Congress December 5, 1916

File No. 819.77/232

The Minister of Panama to the Secretary of State

[Translation]

No. 235

Legation of Panama,
Washington, February 28, 1916.

Excellency: Ever since the Government of the United States undertook to build the canal across the Isthmus under the treaty concluded with the Republic of Panama on November 18, 1903, and acquired by purchase all the shares of the transportation company organized in the State of New York under the name of the Panama Railway Company, the legal existence of and the rights and privileges claimed by that company have been, directly and indirectly, the source of differences between the two Governments. My Government deems it expedient, in order to prevent a continuation of a condition of things that has been going on for ten years and more, that the two Governments should bring to a final discussion all the questions related with the Panama Railway Company and arrive, through the diplomatic channel if possible, or by arbitration, at a clear determination of the legal status of the company, of the rights and privileges that it still possesses, and of the obligations it owes to the Republic of Panama.

The Railway across the Isthmus was built by the Panama Railway Company under the concessions granted in 1849 by the Government of the Republic of New Granada, modified and extended by the United States of Colombia in 1867.

Panama’s secession in 1903 transferred to the new Republic the rights held over the Panama Railway by Colombia in accordance with the contracts then in force, and on that account, when the Canal Treaty was concluded between Panama and the United States, Panama had a perfect right to agree that the Government of the United States could purchase the railway establishment that the Canal building operations demanded.

The Government of the United States acquired the railroad by purchasing all the shares of the company and thus was the management of the concern turned into the hands of the Canal authorities. This last is the circumstance that gave rise to all existing difficulties and differences. As the directors of the Panama Railway Company hold the same high office in the Panama Canal and are public officers of the Government of the United States so great a confusion has been injected in the relations and interlocking of the two administrations that it is difficult at times to tell in which capacity the said officials are acting.

The concrete questions that have thus far arisen between the Government of the Republic and the Panama Railway Company are in the domain of law, revenue and economics and I will relate a few of them simply to emphasize the necessity of reaching some agreement between the two Governments touching the legal status of the company.

The railway company claims the right to engage in any line of business within the Republic of Panama and accordingly runs steamers between Colon and New York, had fitted up and is conducting hotels at Colon and Panama, has established and is operating public laundries and livery stables; has an ice factory in operation and would build a seltzer water factory, and, lastly, as the latest reports have it, is also about to have pasture grounds for the fattening of cattle.

The question springing from these facts is: Does the Panama Railway Company hold, under the contracts made with the Republic of Colombia and conformably to the charter granted it by the Legislature of the State of New York in 1849, the right to engage in business that is not strictly transportation appertaining to a railroad company?

My Government contends that it does not. My Government contends that the Panama Railway Company is not authorized by its contracts and privileges to invade the field of business other than that of transportation over the road it owns, and above all, contends that the said company shall not be permitted to avail itself of the advantages derived from its monopoly of the transportation business to enforce discriminating tariffs which enable it to crush competition in any line of business it may choose to enter. Numberless are the instances that my Government could cite to prove that the railway company is taking undue advantage from its status of common carrier to ruin the business that some private parties have built up and take possession of it; but the case of ice manufacturing will suffice as an instance for the present. The Panama Railway Company, as a common carrier, charges the Panama Railway Company, as an ice manufacturer, sixty cents, American currency, for carrying one ton of that product, and charges another ice manufacturing company in Colon ten dollars a ton.

My Government regards the attitude of the Panama Railway Company as one that is wholly inadmissible. A railway company is a common carrier but not the only concern monopolizing all the economic activities of a country. The arguments now advanced by the said company in support of its launching into the lines of business above mentioned at Panama and Colon would also warrant it in extending its field of operation to the cities and towns of the Republic of Panama; in opening a steamship line between our ports on the Pacific; in bringing thither automobiles for passengers and freight; in opening hotels, theaters and even gambling houses; in establishing laundries and stables; in erecting plants for the manufacture of Seltzer waters and liquors; in keeping pasture grounds, fattening cattle, and erecting slaughter houses. All this could be done if the right which it claims to enjoy were admitted, but my Government denies that right and feels sure that the foregoing statement of facts will suffice to secure from Your Excellency’s Government recognition of the justice of our position.

But this is not all. If the Panama Railway Company would offer to engage in any line of business within the Republic on the same conditions as private merchants and concerns, that is to say without advantage or favor, the evil would not be so great from the standpoint of economics. But as a matter of fact the company, in its hotel, steamship, laundry, stable and other business claims the same favors and exceptional franchises that the Government of Colombia granted, solely and exclusively, to the common carrier, that is to say, claims that it may import without payment of duties to the Republic, all the appliances and raw material needed in its new trade and refuses to pay the national and municipal taxes that are paid by the concerns or merchants in that trade. It opens, for instance, a large hotel in the city of Colon, where guests are admitted as in any other hotel in the city and in which it uses supplies imported for the Government of the United States duty free. Is there any reason why that hotel, open to the public, should refuse to pay the same taxes as the other hotels of Colon? Is there any reason why that hotel which runs a public billiard room should refuse to pay the municipal tax levied on all the others in the city? Is it fair, on the other hand, that the said company should engage in the laundry and stable business, without paying taxes of any kind when all other private persons in that business pay for their respective license?

The Panama Railway Company is relieved from the payment of two classes of duties under Articles 17 and 18 of the contract of 1867 entered into with the Government of Colombia. Those articles read as follows:

• Art. 17. The company may freely import into the Isthmus, without payment of duties or taxes of any kind, all the implements, machinery, iron work, material, supplies and manufactured articles intended for the building, operation and maintenance of the railroad and the feeding of its employees.
• Art. 18. The company is exempted from the payment of national, municipal, state or any other duties or taxes on the railroad, its warehouses, wharves, engines and other works, things and effects of any kind belonging to it which, in the judgment of the Executive Power, are needed for the operation of the said railroad and its dependencies.

As will be seen, absolute exemption from the payment of duties covers the railway, that is to say, the track, warehouses, wharves and engines, and in addition, those works, things and effects of any kind belonging to the Company which in the judgment of the Executive Power are needed for the operation of the railroad and its dependencies.

In spite of this, the railway company refuses to pay any kind of taxes to the Republic and city governments of Panama and Colon, arguing in some cases that it is exempted from payment by the contract of 1867 and declaring in other cases that the company is in reality the Government of the United States and as such is exempted from the payment of duties by the Canal Treaty. This anomalous situation must not endure. If the railway company actually exists as a lawful corporation, its existence must rest on the charter granted by the Legislature of the State of New York on April 7, 1849, and consequently the company must confine itself to the business and pursuits enumerated in the articles of incorporation. The first section of the said instrument reads as follows:

William H. Aspinwall, John L. Stephens, Henry Chauncey, James Brown, Cornelius W. Lawrence, Gouverneur Kemble, Thomas W. Ludlow, David Thompson, Joseph B. Varnum, Samuel S. Howland, Prosper M. Wetmore, Edwin Bartlett, and their partners, heirs and assigns, are by these presents constituted into a corporation styled the Panama Hail Road Company with the object of building and maintaining a railroad with one line or more and all the buildings, equipment, machinery and accessories, across the Isthmus of Panama, in the Republic of New Granada, in accordance with the concession granted by the said Republic to the said William H. Aspinwall, John L. Stephens and Henry Chauncey and of purchasing and operating all steam or sailing vessels that may be adequate and appropriate for use in connection with the said railway. * * *

The mere reading of that charter of the company is enough to prove that it has no right to engage in any business on the Isthmus other than that of transportation over its railway line and by sea, in connection with the railway. All the other undertakings of the company from 1904 to date are in violation of its charter but even assuming that it may engage in such activities the company as a corporation owing its existence to concessions of the Government of Colombia is held to pay the national and municipal taxes from which it has not been exempted by Articles 17 and 18 of the contract of 1867.

The refusal of the company to pay taxes on the ground that it is not in reality a company but the Government of the United States complicates the condition of affairs to the utmost and makes it rather difficult frankly to discuss the matter.

There is no doubt that the United States Government owns all of the seventy thousand shares that constitute the company’s capital, and it may be asserted that the Government, being the only stockholder, is master absolute of the concern.

My Government is inclined to believe that this very circumstance carries the complete undoing of the so-called Panama Railway Company as a corporation in the strict meaning of the law. My Government holds that under the articles of incorporation it is impossible to keep up the fiction of a company whose sole stockholder is the Secretary of War of the United States who in order to keep up the fiction and appoint the 13 directors of the company has to go through the semblance of turning over shares that are not really his to various persons who likewise do not really get them.

From the standpoint of the Republic’s interests in matters of economics, industries and revenues, my Government is highly concerned in having that situation cleared up by diplomatic methods if possible or adjusted by arbitration.

I have dealt in this note with the differences arising from the expansion of the commercial and industrial activities of the company and connected with its reluctance to pay any kind of taxes, but there are other matters of exceptional consequence that call for consideration and settlement along with those.

One of these is seriously affecting Colon, the second city of the Republic, and I take the liberty of submitting it as briefly as possible to the consideration of your excellency’s enlightened Government.

The Government of Colombia gave the railway company various land grants; some were given outright, others were to revert to the full ownership of the Republic at the expiration of the privilege that is to say in the year 1966. Manzanillo Island on which the city of Colon is built was one of those grants; but on the plea that the concessions did not include the whole island but only that part required for the railroad, General Rafael Reyes instituted an action at law which was finally decided by the decree of the Supreme Court of Justice of Colombia declaring that the Panama Railway Company had usufructuary rights over the whole island, except four hectares, during the whole life of the privilege.

The decree settled with precision two points of the greatest importance at this time.

• First. It declared that the lands of Manzanillo Island were public lands belonging to the Nation (Colombia).
• Second. It finally determined the character of mere usufruct of the land on the island held by the Panama Railway Company.

And so, when, as a consequence of its secession from Colombia, the Republic of Panama concluded with the United States the Treaty of November 18, 1903, for the construction of the Canal, the land of Manzanillo Island was public land over which the Panama Railway Company possessed usufructuary rights only, and therefore that land is included with the lands that are to revert to the Republic’s full ownership as provided by Article VIII of the Treaty which reads as follows:

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 and authorizes the New Panama Canal Company to sell and transfer to the United States its rights, privileges, properties, and concessions, as well as the Panama Railroad and all the shares or part of the shares of that company; but the public lands situated outside of the Zone described in Article II of this treaty now included in the concessions to both said enterprises and not required in the construction or operation of the Canal shall revert to the Republic of Panama except any property now owned by or in possession of said companies within Panama and Colon or the ports or terminals thereof.

The greater part of Manzanillo Island is outside of the Canal Zone and as they are public lands they must revert at once to the full ownership of the Republic.

The railway company has nevertheless remained in possession of the island exercising there the power conferred upon it as lessee of nearly all the building lots in the city of Colon, and that situation has been the indirect cause of the fires that have ravaged the city periodically. In fact, with the exception of two or three lots held in fee simple by private persons who owned them through purchase from the former sovereign State of Bolivar and of those which the Government reserved to itself by the contract of 1867, all the other lots in the city are leased to private persons to build on, by reason of the fact that the railway company was before and is all the more unable now to give any one full title to any building lot in the island. The result is that house owners in Colon do not own the land; they merely lease it under so precarious conditions that they were always constrained to build frame houses for fear of losing their capital, if they invested it in substantial fire proof buildings, from a whim of any high official of the railway who might cancel the contract and order the removal of the building. Such a situation must clearly be brought to an end if the city of Colon is to develop and prosper.

My Government sees but one solution: the sale of the city lots to the inhabitants so that they may feel safe and will no longer fear to build valuable property.

I have laid before your excellency the main questions pending between my Government and the Panama Railway Company. Owing to the nature of those questions, and convinced as it is that it stands on clear clauses of the Canal Treaty and of the contracts between the Republic of Colombia and the Panama Railway Company my Government doubts that they can be solved otherwise than by arbitration and considering that both countries are signatories of the Convention for the pacific settlement of international disputes signed at The Hague in 1907, it regards reference of those questions to arbitration as the wisest course.

For greater clearness I beg leave to submit to your excellency an outline of the questions that may be referred to arbitration.

first main question

Does the Panama Railway Company exist as a legal corporation conformable to the charter granted it by the Legislature of the State of New York on April 7, 1849?

Subsidiary questions flowing from the main question

(a) If the railway company does exist, are the contracts and concessions awarded to it by the Republic of Colombia in force, or no?

(b) May the Company engage in industrial or commercial business other than that of transportation by land and by sea?

(c) What are the taxes and duties from which the said company is exempted by the existing contracts and concessions?

(d) If the Company does not exist, what are the obligations under which the Republic of Panama lies toward the Government of the United States, sole owner of the railway?

second main question

Is it, or not, the right of the Republic of Panama, under Article VIII of the Canal Treaty, immediately to recover full ownership of the land in Manzanillo Island lying outside of the Canal Zone and on which there stands no building belonging to the Canal or the railway?

Notwithstanding this proposal of arbitration, if the enlightened Government of your excellency believes that the two countries can, without resorting to arbitration, find a friendly and satisfactory mode of settlement of the above-stated questions my Government is ready to enter into negotiations to that end.

I avail [etc.]

Eusebio A. Morales