The Ambassador in Panama ( Wilson ) to the Chief of the Division of the American Republics ( Bonsal )

Dear Phil: In my letter of yesterday, April 20,29 I mentioned that I am now working along the line of trying to obtain the consent of the Panamanian Government to retention by the United States of control [Page 654] over the water and sewerage systems in New Cristobal, feeling that if this can be done it will go far to remove a potentially important source of friction in the future between the United States community in New Cristóbal and the Panamanian authorities.

One point which has importance in connection with this matter has now come up, of which I desire to inform you in order that you may be posted, in the event the necessity for rapid decision and action by the Department becomes necessary. In a further conversation with Dr. Fábrega30 concerning this question of the special status of the water and sewerage systems in New Cristobal, he mentioned that he was aware that the Panama Canal had collected in water rates in the cities of Panamá and Colón during the past years a sum Over and above the amount applied to expenses and to amortization and interest, of some $500,000. He said that it was his understanding that this sum belonged to Panamá and would be returned to Panamá at the time of transfer of the water and sewerage systems. He said that this amount of money, which had been collected by the Panama Canal as “excess amortization” was almost equivalent to the existing unamortized balance. In other words, if the United States should retain these monies it would mean that Panamá had in fact paid complete amortization up to the date of 1957 on the systems, and Panamá would receive no benefit from the United States beyond advancing the date for transference of all of the systems. He said that it had been generally understood in Panamá, and this had been brought out in the hearings in Washington, that the United States had desired to undertake a generous action towards Panamá as regards the water and sewerage systems, and to waive the unamortized balance which Panamá owed under the 1903 Treaty.31 He pointed out that the rate and rhythm of amortization of these systems was specified in Article VII of the 1903 Treaty, which provided in effect that the United States would collect water rates sufficient to amortize the principal cost of the works within a period of fifty years. Any “excess” amortization over and above the rate specified in the treaty, of course belonged to Panamá and not to the United States. Dr. Fábrega then made the statement that if Panamá were to agree that ownership of the New Cristobal water and sewerage systems should not pass to Panamá but should be retained by the United States, this would be more readily acceptable and understood by Panamanian opinion if it were known that Panamá was in fact receiving the benefit of waiver by the United States of the unamortized balance on the Colón and Panamá City systems. If, on the other hand, the United States should in effect pay itself as of the date of transfer of the systems the [Page 655] total amount of amortization, contrary to the expectations of Panamá, then it would be very difficult to understand why Panamá should be called upon to agree that the New Cristobal systems should remain in the hands of the United States.

Immediately after my conversation with Dr. Fábrega I spoke with Governor Edgerton, who confirmed to me that the Panama Canal had in fact collected a sum considerably in excess of the $500,000 mentioned by Dr. Fábrega from the water rates over and above the amount which had been applied to amortization. In fact, the Governor said that there was on hand today an excess sum of monies collected in water rates which almost equalled the unamortized balance. Governor Edgerton said that he believed there had been a phrase included in the exchange of notes of May 18, 1942, relating to the accounts for the water works and which provided in effect that the books would be closed as of date of transfer of ownership with no refund to Panamá. We looked up the phraseology in the exchange of notes and found the sentence reading:

“It is understood that there will be no refund to Panamá of amortization and interest payments or charges of any kind based on the Convention of 1903 and on the contracts of September 30, 1910.”

It appears, however, that this excess amount collected by the Panama Canal was not applied to amortization or interest, but has been held out as a separate fund. It has not been paid into the Treasury as general receipts, and is still available for disbursement by the Panamá Canal, although the Governor believes that the consent of the Comptroller General would have to be obtained to pay it out.

The Governor states that the contracts of September 30, 1910 provided that water rates collected in excess of the treaty rate of amortization could be applied to additional amortization. In fact, however, the excess monies collected were not so applied, but have been retained, as stated above, as a separate fund.

Under the circumstances, it seems to me clear as a matter of good faith and fair dealing with Panamá, that this sum collected by the United States from the water rates in Panamá over and above the treaty rate of amortization, and which has not been applied to amortization, should be returned to Panamá at the time of transfer of the water and sewerage systems. In fact, I think there can be no doubt, as I am at present advised, that this sum of money belongs to Panamá and always has belonged to Panamá and that there can be no justification for its retention by the United States. Certainly it has been contemplated throughout this negotiation concerning the transfer of the water and sewerage systems, and this is brought out from the hearings on the legislation in Washington, that the United States intended to forgive to Panamá the unamortized balance of approximately [Page 656] $800,000. For the United States now to seek to appropriate to itself a sum belonging to Panamá approximately equal to this unamortized balance, and therefore in effect to make no waiver whatsoever of the unamortized balance would be contrary to the spirit and to the letter of what the United States and Panamá have agreed.

Futhermore, and quite apart from the considerations of right and good faith involved, it is quite obvious that if we should seek to retain this sum of money belonging to Panamá, there would be no possibility whatsoever of obtaining Panamá’s consent to continuing ownership by the United States of the New Cristóbal water and sewerage systems. This latter point is of utmost importance, in my judgment, and, apart from all other considerations, we should make every effort to continue this ownership.

It may be that, during future conversations with the President and the Foreign Minister, the question may be raised definitely in the form that Panamá will agree to continue United States ownership of the New Cristobal systems provided it is clearly understood that no obstacles will be placed in the way of return to Panamá of the excess amount collected in water rates. In such case I may have to telegraph the Department and urge an early and definite reply, and it is with this in mind that I am outlining this question so that you may be giving consideration to it.

With all best wishes,

Yours most sincerely,

Edwin C. Wilson
  1. Despatch No. 3990, not printed
  2. Octavio Fábrega, Panamanian Minister for Foreign Affairs.
  3. Foreign Relations, 1904, p. 543; Treaty Series No. 431; 33 Stat. (pt. 2) 2234.