The Acting Secretary of State to the Panaman Minister (Alfaro)

Sir: I have received your note of December 17, in which you state that the Government of Panama is deeply interested in the realization of important and costly public works which the development of the country imperatively demands, but that in the endeavor to carry out its desires it meets with an obstacle in the limited pecuniary resources at its disposal.

You add that in connection with the conversations which you have held recently with the Department regarding the manner in which Article II of the Treaty of July 28, 1926, should be fulfilled, your Government desires to offer the following suggestion to the Government of the United States:

Panama will release the Government of the United States from the compensation which Article II of the new Treaty imposes on it, regardless of the agreement concerning the transfer of jurisdiction in the area north of the City of Colon, provided that the Government of the United States will make or see that there is made to the Republic of Panama a loan of $30,000,000 for a term of not less than fifty years and at an interest rate not greater than four per cent, the loan to be used for the total redemption of the present external debt of the Republic and for the construction of roads and for public works of vital importance, which program could be a matter for separate agreement. The Republic of Panama would guarantee the fulfillment of this obligation with its excise taxes, especially with the revenues pledged for the loans which would be redeemed, and for this purpose [Page 863] it would seek authorization from the National Assembly now in session.

The contents of your note and the nature of the proposal have been given my most careful attention and study with a view to approaching the wishes of your Government in a spirit of friendly cooperation. I am nevertheless obliged to inform you that, to its regret, my Government cannot see its way clear to enter into any agreements such as are proposed in your note.

Accept [etc.]

Joseph C. Grew