Memorandum by the Panamanian Minister (Alfaro), Handed to the Department of State, March 1, 1934

Conference Held at the State Department, February 28th, 193439

Propositions Maintained by the Minister of Panama in Connection With the Payment of the Canal Treaty Annuity due by the Government of the United States on February 26th, 1934.

The juridical relations of Panama with the United States arising out of the Canal treaty are governed by international law.
An obligation arising out of an international treaty cannot be changed, altered, diminished or impaired by the act of one of the parties to the treaty.
The United States cannot discharge its obligations towards the Republic of Panama by applying to the form of payment laws enacted by the United States whereby the treaty rights of Panama are diminished, impaired, prejudiced or in any manner affected.
A treaty or a contract is the expression of the will of the two parties. Therefore, the mind of the two parties necessarily must contemplate the things existing at the time of the contract. The mind of the parties cannot contemplate things not existing or the existence of which is not foreseen.
When the Canal treaty stipulated in 1904 that the United States would pay in perpetuity to the Republic of Panama an annuity of $250,000 in gold coin, in compensation for rights granted by Panama also in perpetuity, that “gold coin” necessarily meant the coin existing at the time the treaty was signed, not the coin which existed thirty or a hundred years before or the coin which might exist or be created thirty or a hundred years later.
The gold existing in 1904 had certain weight and fineness which determined its value and hence, the value of the compensation agreed upon and stipulated in perpetuity. That value may change for causes independent from the will of the parties, but it cannot be changed by the will of only one of the parties to the Canal treaty.
The value stipulated as a perpetual compensation to be paid annually by the United States to the Republic of Panama was the value represented by the sum of 250.000 coins named dollars and having a gold contents of 25.8 grains, 900 thousandths fine.
The above stated value cannot be diminished to the prejudice of the Republic of Panama by reason of a law enacted by the Congress of the United States, whereby it is decreed that the coin named dollar shall henceforth have a gold contents of 15.3 grains of the same fineness.
The Congress of the United States might likewise and with indisputable right enact some other law by which the gold contents of the dollar be reduced to five grains or to one grain; and if dollars of such a weight could legitimately be used in discharge of the treaty annuity, the right of Panama to the compensation agreed upon in 1904 would be virtually wiped out. This possibility would be so palpably contrary to the most elementary principles of justice and right that to enunciate it is equivalent to a refutation of the proposition.
The right of Panama to receive in discharge of the Canal annuity the gold coin stipulated in the treaty or its equivalent is not dependent upon the use to which the money may be or must be destined or upon considerations that Panama will not be benefited by such payment in gold.
The existence of a right does not cease or vary by reason of the fact that the person vested with the right is or is not benefited by its exercise.
The obliger in a stipulation to give or pay something is not vested with the power of deciding whether the discharge of his obligation will benefit his creditor or not.
Whatever disposition may be given to the proceeds of the Canal annuity, the Republic of Panama will be benefited one way or other by the enhanced value of gold with respect to present American “lawful currency”. This is stated as a fact but it is maintained that this consideration has no bearing on the question of the treaty obligation of the United States with regard to the Republic of Panama.
Consideration of the question of benefit or no benefit would make compliance with the annuity clause of the Canal treaty contingent upon conditions of fact presumably determinable by the United States, viz; if Panama is benefited, the annuity will be paid in gold coin of 1904 or its equivalent; if she is not benefited, payment will be made in “lawful currency” of such value as may be determined by act of Congress.
The juridical relations of Panama with the bondholders of her foreign debt in the United States are governed by the laws of the United States.
The Republic of Panama has an indisputable right to discharge its obligations in the United States in accordance with the laws of the United States.
Payment in gold of 1904 cannot be objected to on the ground that Panama is discharging its debt obligations in the United States in “lawful currency”. Panama does so and legitimately can do so because the United States in the exercise of its sovereignty has decided that it is for the good of the country to devaluate the dollar, to abolish the gold coins, to abolish the gold clause in contracts and to make “lawful currency” legal tender in all sorts of obligations, and has so decreed by law.
The Republic of Panama has not been the only entity or person benefited by the reduction in the value—not the amount—of her debt, produced ipso facto by the devaluation of the dollar. Every debtor in the United States, whether a citizen of the United States or an alien, whether a natural or a juridical person, has been equally benefited.
The fact that this reduction in the actual value—not the amount—of its debt has taken place by the devaluation of the dollar, cannot be adduced as a reason for not making the payment of the Canal annuity as provided by the treaty. An international obligation cannot be affected by the effects of a given legislation in a Nation party to a treaty.
Panama owes in the United States a debt amounting to about $15,000,000.00. At the same time Panama has invested in mortgages in the city of New York since 1904 the so-called Constitutional Fund of $6,000,000.00. The abolition of the gold clause and the devaluation of the dollar work both ways with regard to Panama. In her favor, with regard to her outstanding loans. Against her, with regard to her investment.
Whether the debts of Panama in the United States are larger than her credits or vice versa and whether Panama had no debt at all or no credit at all in the United States, these facts are immaterial with regard to the international obligation of the United States towards Panama. Such obligation exists and is immutable. It cannot be affected or varied. Except by agreement of the two parties, it remains and will remain exactly the same whether Panama happens to have contracted loans in the United States or in case she had contracted the same loans in France and had now to buy francs at the rate of 6.56 for the service of the debt.
Panama has not “sold” or “assigned” in perpetuity to the bondholders of its debt the treaty payment. Panama has temporarily [Page 623] “charged”, “pledged”, and “allocated”, as security for the service of its debt, the said treaty payment to the extent that is necessary to cover the amortization and interest stipulated in the Loan Indentures of 1923 and 1928.
The loan pledge is temporary. The treaty payment is perpetual. The parties to the treaty, in accordance with international law, are eternal. Temporary agreements cannot disturb the essence of a perpetual right and the nature of its correlative obligation.
The Loan Indenture of 1928 provides:

Sixth. The Republic covenants and agrees that: “(1). It will not at any time, while any of the bonds issued hereunder are outstanding, enter into any agreement or understanding or do any act or thing whereby the obligation of the United States of America to make the Treaty Payments, shall or may be in any manner released, affected or impaired.

The Republic of Panama would allow the treaty payment obligation of the United States to be affected and impaired if she would agree or acquiesce in the proposition that payment may be made not in gold coin of 1904 but in any other “lawful currency” of a lesser value than that gold coin.
  1. See supra.