The Chief of the Division of Latin American Affairs ( Wilson ) to the Assistant Secretary of State ( Welles )
Dear Mr. Welles: I attach memorandum of my conversation with Dr. Alfaro, Minister of Panama, on January 17, 1934.28 In brief, Dr. Alfaro requested, under instructions from President Arias, that the Canal annuity of $250,000, due to be paid on February 26, 1934, should be paid on a gold basis. Dr. Alfaro read me a letter he had received from President Arias, in which the latter stated that he had discussed the matter with President Roosevelt when the two Presidents conferred in Washington in October, last, and that President Roosevelt had agreed that the payment should be made on a gold basis because it was an obligation of an international character. Dr. Alfaro then raised a second point, namely, that if payment is made on a gold basis, [Page 614] only the sum of $250,000 legal tender money should be paid over by the United States Government to Mr. William Nelson Cromwell, as Fiscal Agent of the Republic of Panama, and the balance representing the difference between the annuity on a legal tender basis and on a gold basis should be paid direct to the Republic of Panama for its own uses.
I also attach a memorandum29 regarding the situation of Panama’s foreign debt, and the provisions of the pertinent loan contracts, et cetera.
Briefly, my views regarding the Panamanian request are as follows: Article 14 of the 1903 Treaty provides that the annuity shall be paid in gold coin of the United States. It appears, from papers attached hereto, that on November 10, 1933, we wrote the Secretary of the Treasury30 requesting that arrangements be made for payment at the Mint par rate of exchange of certain international obligations of the United States payable abroad in gold currency. The Treasury took the matter up with the President, who approved the request. The principle applicable to the Panamanian case, therefore, seems to have been settled.
The second point, however, raised by the Panamanian request, that the “velvet” represented by the amount in gold in excess of the legal tender value should accrue directly to Panama, cannot, I believe, be decided favorably. On June 8, 1923, the Panamanian Minister addressed a letter to the Secretary of State31 advising of arrangements for the issuance of the 1923 bonds; stating that the Republic had irrevocably conferred exclusive authority upon William Nelson Cromwell, as Fiscal Agent of the Republic, to receive payment for a certain part of the $250,000 annually until the earlier satisfaction of the Trust Indenture of November 2, 1914, under which the Farmers’ Loan and Trust Company was Trustee, for a Panamanian bond issue, “or in the event of the satisfaction of said Trust Indenture of November 2, 1914, prior to February 26, 1944, to receive and give acquittance for the entire amount falling due on each February 26th subsequent to the satisfaction of said Trust Indenture; and we hereby irrevocably authorize and request that Your Excellency’s Government pay over said several sums to said William Nelson Cromwell, as Fiscal Agent, or his successors, during the periods and as above provided. You may accept as conclusive evidence of the satisfaction of said Trust Indenture of November 2, 1914, prior to February 26, 1944, a certificate executed by the Farmers’ Loan and Trust Company of New York, as trustee, certifying to such satisfaction”.[Page 615]
On February 27, 1929, Sullivan and Cromwell forwarded to the Department32 a certificate executed by the Farmers’ Loan and Trust Company of New York as Trustee, certifying to the satisfaction of the Trust Indenture of November 2, 1914. It would therefore seem clear that under the terms of the Panamanian Minister’s letter of June 8, 1923, the State Department is “irrevocably” authorized and requested by the Panamanian Government to pay over “the entire amount” falling due on February 26. If we decide that the Canal annuity should be paid on a gold basis, then it would appear that the Department is obligated to pay over the entire amount of the annuity to Mr. Cromwell.
The 1928 loan is secured, in addition to certain pledged revenues, by a second charge, subject to the 1923 loan, on the income from the constitutional fund and the $250,000 annuity. Service in full is being paid on the 1923 loan. On the 1928 loan, however, sinking fund payments have not been met, and interest is being paid only to the extent that funds are available from the balance of the income from the constitutional fund and the annuity after prior satisfaction of the 1923 loan requirements. This means, in effect, that about 33% of the interest requirements of the 1928 loan are being paid. If the additional amount represented by payment of the annuity on a gold basis is turned over by Mr. Cromwell to the Fiscal Agents for the 1928 loan, as appears to be required under the Fiscal Agency contract, then the interest payments on the 1928 bonds will be by that much increased. This would mean that the benefit derived from payment of the annuity on a gold basis would in fact inure to the Republic of Panama, since it would be applied to the payment of the Republic’s outstanding obligations.
My recommendations in the matter are:
- That we should request the Treasury to have the annuity paid on a gold basis. This point, I believe, should be referred first to Mr. Carr33 for his approval;
- That upon an affirmative decision as to the foregoing, we should so advise Dr. Alfaro, but at the same time inform him that in view of the irrevocable instructions comprised in the Panamanian Legation’s letter to the Department of June 8, 1923, we are obligated to pay over the entire amount to the Fiscal Agent of the Republic. This point, I suggest, should be referred to Le34 for an opinion.