REPORT OF SPECIAL PANAMA CANAL COMMISSION WITH LETTER FROM THE GOVERNOR, OF THE PANAMA CANAL TO THE SECRETARY OF WAR, DATED SEPTEMBER 17, 1921 AND LETTER FROM THE SECRETARY OF WAR TO THE GOVERNOR OF THE PANAMA CANAL DATED OCTOBER 18, 1921 IjmI Gift of the Panama Canal Must m WASHINGTON GOVERNMENT PRINTING OFFICE »22 .- . , '.'.••;•■ -''r ■/.;'■ : 0-%i4 : REPORT OF SPECIAL PANAMA CANAL COMMISSION WITH LETTER FROM THE GOVERNOR OF THE PANAMA CANAL TO THE SECRETARY OF WAR, DATED SEPTEMBER 17, 1921 AND LETTER FROM THE SECRETARY OF WAR TO THE GOVERNOR OF THE PANAMA CANAL DATED OCTOBER 18, 1921 1921 ■J* WASHINGTON GOVERNMENT PRINTING OFFICE 1922 Digitized by the Internet Archive in 2011 with funding from University of Florida, George A. Smathers Libraries with support from LYRASIS and the Sloan "Foundation http://www.archive.org/details/reportofspecialpOOunit INDEX. [APPENDICES ACCOMPANYING REPORT HAVE NOT BEEN PRINTED.] Page. Plan of the report 5 Objects of the canal 6 Future policy, reference shops and dry docks 7 Basis of operation of canal 7 Capital'account to be stated 8 Tropical labor 9 Rents and other perquisites 10 Bases for rates of pay 11 Leave privileges 11 Open-shop policy Separation of Panama Railroad 13 Encouragement of agriculture 13 New auditing system 14 Executive versus operative pay 15 Division of schools 15 Police and tire division 16 Division of civil affairs 17 Courts 17 Municipal division 17 Relations with Panama . 18 Relations with the military 20 Health department 21 Hospital division 22 Sanitation division 23 Quarantine division 24 Accounting department 24 . Supply department : 25 Commissary division 25 Miscellaneous activities of supply department 26 Restaurants and hotels 26 Electrical division 27 Bureau of clubs and playgrounds 28 Record bureau : 28 Personnel bureau 29 Property and requisition bureau 29 Bureau of statistics 29 Washington office 29 Division of lock operation 30 Dredging division 30 Marine division 31 Mechanical division 31 Steamboat-inspection service i 32 Meteorological and hydrographic section 32 Panama Railroad 33 Panama Railroad Steamship Line 35 Conclusion 37 Letter from Governor The Panama ('anal to Secretary of War. September 17, 1921 _, . 38 Letter from Secretary of War to Governor The Panama Canal. October IS, 1921 53 3 REPORT OF SPECIAL PANAMA (ANAL COMMISSION. Washington, D. C, Septe??iber 15, 1921. The Secretary of War, Washington, D. C: Sir: The Special Panama Canal Commission appointed by your letter of June 6, 1921 (see Appendix No. 1), to "investigate and report upon existing conditions relating to the care, maintenance, sanitation, operation, and government of The Panama Canal and Canal Zone, including all matters affecting the Panama Railroad and the Panama Railroad Steamship Line, and to make recommendations relative to any changes in such conditions affecting the organization, government, and operation of The Panama Canal and Canal Zone, and the operations of the Panama Railroad Company," has the honor to submit the following report : The chairman of the commission, Commissioner Pry, Commissioner Molitor, and Secretary L. H. Van Fossan sailed from New York on the Army transport Uantigny June 10, 1921, arriving at Cristobal on June 18, 1921. Commissioner Wilson sailed from New Orleans on June 22, 1921. arriving at Cristobal June 27, 1921. Commissioner Molitor sailed from Cristobal July 8, 1921, arriving at New York July 16, 1921, where he continued his survey of the Panama Rail- road Steamship Co. The remainder of the commission, with other personnel, reached Xew York July 31, 1921. In accordance with your instructions, the commission made a thorough investigation into all phases of the activities of The Pan- ama Canal and the Panama Railroad, including the steamship line. Immediately upon its arrival on the isthmus the entire commission made a general inspection of the Canal Zone to give the members a proper perspective of the major activities and the general problems involved. Thereafter, the individual commissioners made detailed investigations of the divisions falling within the allocations made to each based upon his technical qualifications. Numerous conferences were held with the governor and other prin- cipal officials of the Canal Zone, Panama Railroad, and Panama Rail- road Steamship Line. These officials met the commission in a spirit of cooperation and at all times accorded ever} 7 assistance to the com- mission in its endeavor to arrive at correct conclusions as to present conditions. In the majorit} r of cases the Government representatives in the Canal Zone are men of ability and of undoubted loyalty to its best interests, and we feel that in whatever policy may be decided upon, you will have the support of the canal executives. Most of the recommendations contained in this report were fully discussed with the governor and his principal assistants and have received their concurrence. Immediately upon the arrival of the commission on the Isthmus public notice was given through the newspapers, setting forth the reasons for the commission's visit and stating that full information 6 REPORT OF SPECIAL PAX AM A C'AXAL COMMISSION. was desired, and that public hearings would be given to any and all who desired to be heard on subjects within the jurisdiction of the commission. Hearings were granted to all groups of employees and other persons requesting same. The commission desires to add its testimony to that of all others who have viewed this work of American genius and energy and to record its unfeigned admiration for the foresight, courage, and abil- ity of those who conceived and successfully accomplished this gigantic task. It is an enduring monument to the ability of the American nation to achieve that which it purposes, and as such all Americans may justly take pride in the accomplishment. The idea is prevalent in the Canal Zone that our Government is on trial in the eyes of the traveling public by the way that it admin- isters the canal, and this idea permeates through all decisions affect- ing the upkeep and operation of the canal. To a certain extent the commission agrees with this, and it is not believed that any recom- mendations contained in this report will lower the United States in the opinion of the traveling" public. On the other hand, the com- mission does not feel that gratuitous services should be performed at the expense of the United States, or that too much money should be expended merely for show purposes. It has been thought desirable that this report should be made as brief as is consistent with clearness and thoroughness, and to that end it was decided to confine the main body of the report to : (a) Full recommendations on certain questions of policy which the commission regard as of fundamental importance. (7j) A brief statement regarding each activity that summarizes the commission's views thereon and contains only general recommenda- tions. The reports of the individual commissioners which are attached as appendices, give the personal views of the commissioner writing the report, but at the end of each appendix is a concise summary of the recommendations contained therein which express the views of the commission as a whole. Wherever a difference in wording exists between the recommendations in the individual reports and those in the summary attached thereto, the wording of the latter should be taken as the official recommendation of the commission, although owing to the brevity of some of the recommendations, reference to the individual reports should be made to obtain the full spirit. The decisions of the administration on the fundamental questions of policy are conditions precedent to the approval of the more de- tailed recommendations of the commission. Broadly speaking, most of the recommendations stand or fall with the Government's decision as to the future policy a^ to how The Panama Canal shall be re- garded and operated. OBJECTS OF THE CANAL. The Panama Canal was constructed for two purposes (a) as a com- mercial enterprise and (J>) as a measure of national defense. The first of these purposes can be measured in dollars and cents and should form the measure upon which the commercial operating cost is justified and upon which amount the Government can justly look for an adequate return. The second purpose can not be measured in REPORT OF SPECIAL PANAMA CANAL COMMISSION. 7 money and hence should constitute a sum from which the Government can not look for any financial return^ and which will be a continuing source of expense. In entering upon its duties the commission early considered the object for which the canal was built, and came to the conclusion that there was probably no single primary object. In the minds of some legislators this primary object was undoubtedly that of national defense: whereas in the minds of others it was probably justified as a commercial enterprise. There is no doubt, however, but that the military needs were fully considered in the design and equipment of the canal, and that the canal to-day is, amongst other things, a splen- didly equipped naval repair and coaling base. Assuming that this was the intention in the design and equipment of the canal, the com- mission has been unable to find anything that justifies the continued expenditure of canal funds to maintain a naval base at this place. Congress has not appropriated money therefor, the Navy Department has made no allotment to it for that purpose, and has not used it as such except for the occasional naval vessels that pass through thp canal. Notwithstanding these facts, the maintenance of the facilities and of the force of operatives has in the past to a very great degree been influenced by the belief that the canal must be maintained as a naval base, ready to do any class of work for which it is equipped. This opinion is believed by the commission to be one of the funda- mental causes of unwarranted expense, and one of the stumbling blocks to an adequate reduction in working force and in overhead. Recommendations. — The commission regards the continued opera- tion of the shops, dry docks, or any other part of the Panama Canal plant as potential naval activities to be unjustified and an unneces- sary burden on the canal appropriations. We recommend that the maintenance of any such activities as naval auxiliaries cease imme- diately, and that hereafter the canal be operated entirely as a com- mercial agency until Congress shall otherwise indicate and appro- priate therefor or until the Xavy Department can provide the funds necessary for the proper operation and maintenance. The commission further recommends that any part or parts of the canal activities not necessary for the ordinary commercial and canal activities be closed up, the employees be discharged, and the machinery and other material or equipment be laid up and prepared for prolonged idleness, except as provided for in the preceding para- graph. BASIS OF OPERATION. The Panama Canal, the Panama Railroad, and steamship line are- now all on an operating basis, and they should be treated as great commercial or business enterprises in which operations must justify costs, and those in charge should be held to strict accountability for successful, efficient, and economical management. Further recom- mendations are based on this assumption. The most obvious criticism of the administration of The Panama Canal and its allied activities during the past few years is that economy of operation has not been given sufficient consideration and it has never been placed on a sound operating basis. It has been treated apparently as a public improvement in the United States where no direct return is expected and where the benefits derived 8 REPORT OF SPECIAL PANAMA CANAL COMMISSION. are in the form of an indirect return only. The Panama Canal is not such a public work; it is used by the world at large and not solely by our own people. It was constructed by one nation for the use of all nations and we therefore have the right to expect the users to pay for its maintenance and operation plus a reasonable return upon the investment therein. Our people are actually paying these amounts now and any policy that does not work toward reim- bursing them for such expenses is fundamentally erroneous and un- sound. The only way that this can be accomplished is to establish a capitalization upon which the Government ultimately expects an adequate return, and for this purpose, what may be called the " com- mercial value " of the canal ought to be established. In consider- ing this matter it immediately became manifest that the value of the canal as a military asset could not be estimated in dollars and cents. A great part of the cost of the canal is for things that are admittedly military, and in capitalizing the canal for commercial purposes these must, of course, be omitted. But in addition to them there is a great part of the cost that must be written off. for the canal would not have been constructed as it is purely for commercial purposes, and the question now arises as to how much of the cost of the canal proper ought to be set up as the amount upon which a return ought to be demanded. The Panama Canal represents an expenditure of $485,000,000. The figure thus arrived at includes the actual cost of construction plus a carrying charge, or interest on the investment, of approxi- mately 3 per cent up to the official date of opening, July 15, 1920. Add to that the deficit of last year of approximately $12,000,000 (if interest had been computed), and the canal to-day represents an in- vestment of approximately $500,000,000. This sum, however, does not represent the amount that would have been necessary to build a commercial canal, and it is not the sum upon which the Government should expect a return. Recommendations. — The commission doubts very much whether any fraction of the above sum could be arrived at which would represent the correct commercial value, but it recommends that a careful study be made of this matter and that a definite sum be determined upon as the cost of the canal as a commercial enterprise. The actual cost of the canal may have to be written down to obtain this figure, and if so, it should be so written down and an arbitrary figure should be established as the commercial value of the canal, and thereafter that figure should be used in the operation and official reports as the capital account upon which returns and expenditures should be justified. Having arrived at this figure, the commission further recommends that the same be subdivided and that an allocation be made to each activity under the canal administration, and that thereafter the sum allotted to each of these activities shall be the one that must be used in justifying the continued existence of the activity concerned. There are certain activities, such as sanitation, hospitalization, fire and police protection, which obviously are not activities from which commercial returns can be expected. These and other similar ones should be attached to the canal operation proper and the cost thereof borne by the canal operations. By capitalizing the canal and its vari- REPORT OF SPECIAL PANAMA CANAL COMMISSION. 9 ous subdivisions, as herein suggested, it is believed that many desir- able results will obtain, for thereafter not only the canal as a whole but each of its allied activities will be given a measure by which the efficiency of their operation may be determined. TROPICAL LABOR. One of the greatest causes of expense in the operation of the canal is the continued employment of United States white citizens instead of the use of natives of Panama or adjacent islands. In pursuing this policy we have bodily transplanted an American community to a tropical country and are using American workmen in all except the very lowest grades of labor. This is contrary to the policy of any commercial concern operating in tropical countries and contrary to the policy pursued by any other Government that is known. The ordinary policy in all such cases is to utilize the native laborer to the extent of his ability and to educate him to take over positions of greater responsibility, using white employees from the home country to the minimum possible percentage. This plan not only reduces the cost of the operation and the call upon the man power of the home country, but it is also a benefit and a blessing to the tropical country concerned in that it employs its nationals and edu- cates them in the arts and trades. Our citizens are accustomed to a temperate climate, and as such are physically unsuited to labor under conditions that exist in Panama. To obtain employees who are will- ing to go to the Tropics and follow their trades there we are forced to pay exorbitant wages and to bear many additional expenses as bonuses for things that are necessary for a citizen of the United States in the Tropics but which would be unnecessary if local labor were employed. There are many positions for which local labor is manifestly un- fitted, due to lack of skill, and others on which it ought not to be employed inasmuch as they are aliens. But. on the other hand, there are a great number of positions that can be filled by native tropical labor without any sacrifice of efficiency and at a tremendous saving to the Government. During the construction days the policy of employing our citizens was justified in a far larger measure than it is under the period of operation because time was very essential and because during con- struction many positions were far more important when the time element was considered than a similar position is to-day under oper- ating conditions. We would be justified to-day in training tropical labor to fill the various positions, whereas in construction days the time element did not permit the administration to delay the work loner enough to attempt the instruction of local labor. Recommendations. — The commission therefore recommends that the governor be informed that conditions have now changed to such an extent that it is desired that he employ tropical labor and artisans to the maximum extent possible, taking into consideration the fact that the canal is. to a certain extent, an element of national defense and that there may be certain positions in which aliens ought not to be emploved. but that in all other positions he employ local labor to the maximum, and that he institute a system of apprenticeships 76736—22 2 10 REPORT OF SPECIAL PANAMA CANAL COMMISSION. and training by which he can build up a larger force of skilled tropi- cal labor. It is believed that this alien labor can be employed in much greater numbers and in much higher positions than they now are, and it is further believed that after the policy above enunciated is carried out that within a few years most of the positions, including those of oper- ators of mechanical contrivances, can be filled almost wholly with tropical labor. It is further recommended that the pay authorized to this class of labor be increased in due course to meet their increasing capacity. RENTS AND OTHER PERQUISITES. The white employees of The Panama Canal enjoy many perquisites which materially reduce expenditures from their salaries and in effect constitute a material increase in such salaries over what they officially receive. These perquisites are as follows : Free housing, heavy furniture, water, garbage collection, grass cutting, gardening, electricity for light and heat, other necessary fuel, and. for bachelors only, free janitor service. Exclusive of electrical service, these perquisites cost the Govern- ment approximately $5o 0.000 per year in actual outlay, an expendi- ture which the commission does not believe is contemplated by their contracts or is justifiable in view of the high pay they receive. The argument is made by them that all American firms operating in tropical countries furnish such service to their employees, and this of itself is the truth, but on the other hand, the commission is con- vinced that no commercial corporation pays in addition thereto the high wages that the United States pays its operators on the Isthmus, nor are conditions in other places comparable with those existing in the Canal Zone. Recommetuhifions. — It is therefore recommended that rental be charged for quarters occupied in all cases where such quarters do not form a part of the basic wage, and that the rent be determined as follows: First, write down the book value of the quarters to its present depreciated value of $3,435,076, and upon this value charge 5 per cent for amortization and interest. Add to that amount the cost of repairs due to ordinary wear and tear, plus the cost of garbage disposal and other services necessary from a sanitary point of view, and prorate the resulting amounts among the houses according to the amount of floor space, including porches, in each set of quarters. The result will be the rental for housekeeping quarters. For bachelor quarters and nonhousekeeping quarters, add certain fixed sums for janitor service, light, and water as set forth more in detail in Appendix Xo. 1. page 40. It is further recommended that the repairs to furniture, repairs to stoves, and care of grounds at the cost of the Government be entirely stopped, and that they be paid for when desired by the in- dividual concerned. It is further recommended that a charge be set up for water used by the employees at a rate comparable with rates in the United States, and proportioned to cover the amount of water used. Meters are not recommended on account of their cost. REPORT OF SPECIAL PANAMA CANAL COMMISSION. 11 It is further recommended that electrical service for light and heat be charged for in married quarters, according to consumption, and that all such quarters be metered, the charge to be 5 cents per kilo- watt hour, as elsewhere recommended. BASES FOR RATES OF PAY. The rates of pay among canal employees are to a certain extent fixed by law. which provides that they shall not receive to exceed 25 per cent more than is paid by the Federal Government to similar employees in the United States. This provision has been found not to cover all classes of employees, for there are certain positions on the Isthmus for which there are no similar positions in the govern- mental service in the United States. It is fairly easy to handle the class of positions comparable with Government positions in the United States and determine the rate of pay, but in the class where no such comparison can be made it is not so easy, and the commis- sion found several instances where men were glaringly overpaid in the canal service. In most of these instances the employee had been carried over from the construction days, and his pay is based upon the pay he received in the construction service, and although his ability is the same as it formerly was, the work on which he is now employed does not justify either the employment of a man of his ability or the payment of the wage he is now receiving. In certain other cases the commission is convinced that precedents were used which ought not to have applied, and that the bases were adopted either through lack of knowledge of the special conditions governing that class of service or through negligence. Recommendation. — It is recommended that the bases upon which canal wages are determined be gone over carefully and that they be readjusted, both with respect to the qualifications for the actual posi- tions, which are often too high, and as to the basic rates upon which the canal wages are fixed, and that care be taken that there is a dis- interested person on the board at all times thoroughly conversant with the class of employment under consideration. That in deciding on the basis for rates of pay when the wage is per hour consideration be given to the fact that in most cases in the United States, especially in the Xorth, the hourly rate is fixed on such a basis as to give the man a suitable w T age per year, taking into account the fact that he can not work during certain consider- able portions of the year on account of inclement weather. LEAVE PRIVILEGES. It is believed that the existing leave privileges are greater than are necessary or advisable. They were established as an inducement and a health conservation measure during construction days under conditions which no longer exist. Recommendations. — It is therefore recommended that the present annual leave policy be entirely changed and that hereafter leaves be granted as follows : (a) Thirty days' annual leave, cumulative for three years only. (b) At the end of one year no travel time to be allowed. (c) At the end of two years. 7 days' travel time in addition to the ordinary leave to be allowed. 12 REPORT OF SPECIAL PANAMA CANAL COMMISSION. ((/) At the end of three years, 14 days' travel time in addition to the ordi- nary leave to be allowed. (e) The present policy of allowing sick leave to be computed into ordinary leave to be discontinued and an employee to be allowed full pay for days sick under the same rules as laid down for similar employees in the civil service in continental United States. (f) Leaves to. be allocated among the employees so as to distribute them evenly over the year and not be given so as to concentrate all leaves, during any short period of the year. (//) For employees going on leave an allowance of $37.50 for himself and each member of family to be allowed each way only in case the leave is taken at the end of two or three years and the employee spends his leave in the United States. Member of family within this meaning to be wife or children only. OPEN-SHOP POLICY. In theory the open-shop policy is followed on the canal, hut in some departments it is only a theory and the employees are com- pletely unionized. The commission fully believes in collective deal- ing between the operatives and the executives on the canal and be- lieves that thereby misunderstandings will be obviated and cordial relations will be maintained, but it is absolutely opposed to having the policy on the canal dictated by labor organizations of the United States or elsewhere, and it is equally opposed to outside agencies coming into the Canal Zone and fomenting dissatisfaction. The Government should be willing to pay wages which, when all things are taken into account, compare favorably with the wages paid by private agencies for the same service, but it should pay no more. Wages paid in the United States should form the basis for the wage scale in the Canal Zone, and it is intolerable that any group of em- ployees should be able to force higher wages or better conditions by political methods. Recommendations. — The commission recommends that the gov- ernor be directed to make no agreements nor to have any under- standings with the canal employees or an}^ class thereof, for any period of time, but that the wages be adjusted from time to time in accordance with the law, which bases the canal wages on the paj^ of similar employees in the Government service in the United States. It is further recommended that for positions for which there is no corresponding position in the Government service of the United States, wage boards of the canal fix an average wage based upon the wages actually paid for similar services in various representative parts of the United States, and that it be not based upon any arti- ficial rate known as the " union rate " which is not actually in effect and in operation. It is further recommended that the governor be directed not to deal with labor organizations as organizations, but that he may deal with committees of employees. It is further recommended that the open-shop principle be actually put into effect on the Isthmus and that in all departments a substan- tial proportion of nonunion men be employed. It is further recommended that all agreements limiting the use of tropical labor be abrogated and that hereafter no such agreements be entered into or followed and that this include all understandings, such as the edged-tool understanding and the Ford-car understand- ing, the canal administration hereafter retaining complete freedom REPORT OF SPECIAL PANAMA CANAL COMMISSION. 13 of action as to its policy in the employment of union, nonunion, or tropical labor. PANAMA RAILROAD CO. Notwithstanding the fact that the Panama Railroad Co. is an in- corporated company chartered under the State of New York, the operation of the railroad and the steamship line has been so merged into the operation of the canal that they have lost their identity. Due to this merger many of the railroad company's activities have been absorbed by the canal and are being operated by the canal ad- ministration more to its benefit than the railroad. The commission believes that the present deficit is largely attributable to this merger and is convinced that if all railroad activities be returned to the rail- road management that the road will show a profit under the present tariffs and that in all probability can do so even with reduced tariffs. Recommendations. — It is recommended that the operations of the Panama Railroad Co. be entirely divorced from those of the canal, and that in the future the railroad and steamship line of the Panama Railroad Co. be operated and accounted for as are similar commercial activities in business. ENCOURAGEMENT OE AGRICULTURE. Under the present policy the Canal Zone has practically been de- populated, and generally speaking there is no agriculture or truck gardening encouraged. It is believed that this is an undesirable condition from three points of view : (a) The local food supply on the canal is very deficient in quantity and quality. It is believed that as a military measure the Canal Zone should be as nearly self-supporting as possible and that agriculture should be encouraged in every possible way. (6) The prices charged for food supplies that could be raised locally are exorbitant and the amount of produce raised is very small. This operates as a hardship on the employees and is a ridiculous situation in a tropical country, where local food products should be plentiful and cheap. (c) It is exceedingly desirable for many reasons to have a large force of common labor available for use on the canal, and a great number of West Indians have been encouraged to remain in the zone in order to have this pool of labor. The number desired is far greater than can be given continuous employment, and as a result these West Indians are employed only about half the time. The hourly wages that they are paid are better than those paid anywhere else around the Caribbean, but notwithstanding this the total amount received per family is not sufficient to support the aver- age family. This was the conclusion of the British board that inves- tigated the subject, and is the conclusion of the commission. The West Indian is naturally a farmer, although a poor one, and is used to having a small plot of ground upon which he can raise his essen- tial food requirements. If, in addition to the food he can raise on a small plot of ground, he is able to earn a small amount in money, he can live comfortably on a far smaller salary than is now paid him. In the Canal Zone he has no land and no opportunity to do the little farming necessary for his food requirements, and the total amount of money he receives from the canal is insufficient for his needs under the present high cost of urban living in the zone. 14 EEPOET OF SPECIAL PANAMA CANAL COMMISSION. For the reasons above set forth, it is considered highly essential that the Canal Zone be thrown open to truck gardening and farming along the line of the railroad. There can be no objection to this from a military point of view, for the methods of warfare have so changed in the past 10 years that the cleared ground along the railroad is not a military danger. The commission was informed b}^ tlie chief health officer that if the natives' houses are grouped in small villages around which their farms are located, there would be no objection from a sanitary point of view. Recommendations. — It is therefore recommended that the Canal Zone, and especially that part along the railroad and lake, be thrown open to agriculture immediately, and that agriculture and truck gardening be encouraged in every way. It is further recommended that the Panama Railway be the agency through which the natives' houses are constructed and the neces- sary land cleared to start this agriculture. It is further recommended that the open pasture lands near the railw T ay stations be the first lands opened up. It is further recommended that a farm demonstration bureau be established to help the native farmers, both as to what they can best raise and as to how they can obtain the best results. It is further recommended that to such extent and under such and similar regulations as the public domain in continental United States is. available to beneficial use through private agencies that the Canal Zone be thrown open to the public not only for agriculture but also for other purposes. NEW AUDITING SYSTEM. In its investigations of the canal, the commission, on account of the auditing system in vogue, obtained only with great difficulty the in- formation that it desired in regard to the financial condition of the various activities. The auditor performs very few of the real func- tions of an auditor, but is rather a sort of general manager of the canal administration, without having the name, and without having a proper organization to perform those functions. The auditing system as at present installed does not give a correct view of the financial standing of the various activities, and the commission re- gards the establishing of a proper auditing system as one of the prime requisites to the economical operation of the canal. Recommendations. — That the present auditor's office be totally re- organized as set forth in greater detail elsewhere in this report, and that a recognized firm of chartered accountants be employed to set up a modern system of business accounting, including such specific accounts as are desired for the use of Congress, and to reorganize the entire auditor's office in conformity therewith, including such changes as will carry out such recommendations of the commission as may be directed by' the Secretary of War. It is further recommended that if the preceding recommendation be not approved that the duties of the auditor be entirely revised and restated, and that in the future he be an auditor pure and simple and be divested of the many other miscellaneous functions that he now exercises, and that as auditor he install a modern system of business accounting recommended in the preceding paragraph. REPORT OF SPECIAL PANAMA CANAL COMMISSION. 15 It is further recommended that there be set up in the canal adminis- tration, an executive officer whose time shall be devoted to the detailed examination and coordination of the various activities of which the canal organization is made up. This executive officer should be a man who, in commercial life, would correspond with the general manager of a private corporation. lie should relieve the governor of all executive details, and for this purpose we recommend that the services of a man with wide experience in large business undertak- ings be obtained. EXECUTIVE VERSUS OPERATIVE PAY. The commission desires to invite attention to the fact that the modern business policy, and particularly the policy of business agencies conducting operations in tropical countries, is to employ high-grade executives, pay them well, and hold them responsible for results. They employ as few of these executives as possible, and trust to their energy and ability to bring about results with low-grade employees, and they do not spend the larger sums that would be necessary to fill other minor positions with highly paid operatives. On The Panama Canal the policv is apparently the opposite. The operatives are individually exceedingly skilled, and their pay is cor- respondingly high, whereas the executives are not paid salaries com- mensurate with their responsibility, and in many cases the results show in the poor return to the Government. The commission believes that the first-mentioned practice is not only the best, but is the most economical. Recommendations. — It is therefore recommended that the salaries of the canal executives be increased wherever necessary to obtain and keep the services of high-class men competent to handle the large affairs for which they are responsible to the Government. The pay of the governor ought to be increased 50 per cent, and similnr increases made for such of his chiefs of divisions as prove competent to handle the large affairs in their charge, and wherever necessary under the reorganization, new men should be employed especially fitted for the positions. The foregoing recommendations are those which the commission considers as fundamental, and to them it invites your first considera- tion. Our report will now take up in detail the various divisions of the canal administration, giving for each a brief summary of condi- tions as we found them, and following each with general recom- mendations in regard thereto. No particular arguments nor de- tailed recommendations will be made in this part of the report, the support for them will be found in all cases in the individual reports of the commissioners in the appendices attached hereto, and in the detailed recommendations at the end of each appendix. DIVISION OP SCHOOIS. The public school sj^stem of the zone consists of grade schools for the colored children and grade and high schools for the white chil- dren. There are 63 white teachers employed in the white grammar schools and 24 colored teachers in the colored grammar schools. There are 17 high-school teachers in the white high schools. There are 1,711 white pupils in the grammar schools, or approximate!} 7 27 16 REPORT OF SPECIAL PANAMA CANAL COMMISSION. pupils per teacher. There are 1.199 colored pupils enrolled in the colored grammar schools, or an average of about 50 pupils per teacher. There is an average of 16 pupils per teacher in the high schools. After a very thorough inspection of the school situation in the Canal Zone the commission is convinced that in so far as the white schools are concerned they are superior in practically every way to any with which we are familiar in similar localities in the United States. The qualifications for the teachers are higher and the physi- cal condition of the schools is considerably better than in the United States. The schools are not crowded and the number of teachers is sufficient to give proper instruction. The pupils, as a rule, seem to be brighter, better dressed, and more alert than are those in similar schools at home. Conditions in the colored schools were not so satisfactory and it was found that they were overcrowded and had a decided deficiency in teachers. The commission is of the opinion that good schools for the colored children are very necessary and recommends that the colored-school facilities be somewhat improved and that the salaries of the teachers be slightly increased. Detailed recommendations to accomplish these results are set forth fully on page -16, Appendix 1. POLICE AND TIRE DIVISION. The fire and police protection in the Canal Zone are combined in a single service under the chief of fire and police. The police force consists of 10 officers, 15 sergeants, 115 privates, and 35 second-class privates. The rates of pay of the police are based on the rates paid in the District of Columbia, but in no case are they given more than 14 per cent increase over the rate for the District of Columbia. The colored policemen are paid from $720 to $960 per annum. Approximately 74 men are on what is called " special duty " in connection with activities not properly pertaining to municipal po- lice work, such as in charge of prisoners in penitentiary, or of work- ing parties of prisoners, watchmen in public buildings, watchmen at piers, and on lake patrols. The local prisons and the penitentiary were found to be well kept and not overcrowded. Ultimately provision must be made for a new and modern penitentiary, but it is not believed to be necessary until the transcontinental road is completed. The fire department consists of the chief, deputy chief, 2 captains, 6 lieutenants, 2 sergeants, and 32 privates. The entire department is white and the personnel and equipment reflect great credit on the administration. The department is organized on the one-platoon system, and the members are therefore on duty three days in four. It was ascer- tained that of 610 cities in the United States having paid fire de- partments approximately 60 per cent are organized on the two- platoon basis. The pay of the firemen is based on that of firemen in the District of Columbia, but in no case do they receive more than 11 per cent over the base pay. The number of fire calls in the Balboa District during the fiscal year 1921 was 71, or approximately 6 per month. EEPOET OF SPECIAL PANAMA CANAL COMMISSION. 17 The number of calls in the Cristobal District was 44, or less than 4 per month. The commission believes there should be an increased use of silver employees in both the police and fire departments, and that suffici- ent saving can thereby be made to permit the establishment of the two-platoon system in the fire department and to improve the colored schools as recommended, without any increase in the total cost of these divisions. Detailed recommendations to accomplish this result are set forth on page 47, Appendix 1. DIVISION OF CIVIL AFFAIRS. This division includes the bureau of post, customs, shipping com- missioner, and administration of estates, which in our opinion are neither necessary nor proper activities of the Canal Zone govern- ment. The commission believes that all the functions of this division should be transferred to the departments of the Government by which they are controlled in the United States proper, and that, after these transfers are effected, this division should be abolished. Detailed recommendations to effect these changes will be found on page 18, Appendix 1. COURTS. The court system of the Canal Zone consists of one district court and two magistrate courts. There is a United States district attorney and a United States marshal, who has a deputy marshal. After full consultation and consideration the commission is of the opinion that the duties of marshal can be performed by the present chief of police. It was found that there is no court now constituted to hear the cases of juvenile delinquents, of which there is a considerable num- ber. It is believed that provision should be made for such a court. Detailed recommendations to accomplish these results will be found on page 48, Appendix 1. MUNICIPAL DIVISION. The municipal engineer has charge of what would correspond to the city engineer's work in a municipality in the United States. He performs these functions not only for the Canal Zone, but also for the municipalities of Panama and Colon. His force consists of 90 gold employees and 770 silver employees. This division has recently had consolidated with it practically all of the division known as the Building Division, and as a result reor- ganization was in progress. The municipal engineer has made and is planning to make within the next few months a considerable re- duction in force and a consolidation of the activities which are now operated as separate sections of his work. In our recommendations it will be treated as though no reorganization were in progress or contemplated by the municipal engineer himself. The commission found that this division was very much over- organized and that empk>3 T ees were in many instances overpaid for the work that they were actually performing. In some cases the num- 76736—22 3 18 REPORT OF SPECIAL PANAMA CANAL COMMISSION. ber of employees is much in excess of present needs and, in general, a very considerable reduction in force can be made. This is especially true if this and several other small divisions can be consolidated. Detailed recommendations to accomplish these results are shown on pages 49-51, Appendix 1. RELATIONS WITH PANAMA. Matters concerning the relations between the canal administration and the Republic of Panama are handled through the executive sec- retary to the governor. There is no other special personnel engaged exclusively on this work. There are several matters which have formed continual bases for argument between the canal authorities and those of the Republic for some time and which will be separately considered. The Republic of Panama has taken the stand that the commis- saries ought to sell only necessities to employees of the canal. In the opinion of the commission they have ignored the word " convenient " in section 13 of the treaty. It is believed that their contention is without foundation and that the canal authorities are absolutely justified in bringing in free of duty and selling to the employees any- thing that good policy dictates. It is further complained that the commissaries sell certain supplies to ships transiting the canal or touching at Cristobal. This custom arose in the early days of the canal and was undertaken because there were no firms in Panama or Colon organized and equipped to furnish this service to ships. In the opinion of the commission the supplying of ships transiting the canal is not a proper function of the Federal Government except in so far as supplies can not reason- ably be otherwise obtained. It is believed that this Government should encourage rather than hamper by unnecessary rules and regu- lations the practice of allowing representatives of local firms to go aboard ships and solicit business and that every encouragement should be given to the development of private sources of supply. The Panaman representatives urged that certain lands in the cities of Panama a;nd Colon should be turned over to the Panaman Govern- ment. It is not believed that there is any basis for this contention, inasmuch as the treaty specifically provides that these lands in the cities of Panama and Colon shall become the property of the United States. They further contended that in the debt set up against the Re- public of Panama for municipal improvements in Panama and Colon is included the cost of paving, sewers, and water service for certain lands belonging to the Panama Railroad. This is true as far as the property existing at the time of the treaty is concerned, but- is not true with regard to the conditions that have obtained since in the addition of land to the city of Colon by the reclaiming of swamp land. The tots in the old cities of Panama and Colon belonged to the railroad at the time the treaty was written and therefore the cost of these improvements was certainly contemplated by the treaty. The cost of improvements in the newly reclaimed land has been borne by the Panama Railroad and The Panama Canal and has not been added to the debt of the Panaman Government. REPORT OF SPECIAL PANAMA CANAL COMMISSION . 19 It was claimed that the freight rates to the canal commissaries were less than those to merchants iii* the city of Panama. This may or may not be true, as the commissary pays a lump sum to the Pan- ama Railroad regardless of the amount of freight curried. Elsewhere in this report it is recommended that this practice be discontinued and that the commissary be charged exactly what other patrons of the road are charged for similar service. The committee representing the Panaman Government desired that the United States determine definitely its needs as regards land for fortifications and other purposes in the Republic of Panama. To do this the Federal Government would be giving up certain just rights for which it paid the sum of $10,000,000 and for which it is paying annually the sum of $250,000 to the Republic of Panama. Similarly the committee desired that in case the United States wishes further territory for any purpose, such as the island of To- bago for fortification purposes, this Government should not only pay the Republic of Panama for surrendering its sovereign rights but should pay the owners as well. This contention is believed to be entirely without merit, as it is fully covered in the treaty, and the right to acquire such further lands as might be needed was purchased, among other things, at the cost of $10,000,000. The Panama committee also claimed that the treaty in article 10 does not exempt from Panaman taxes certain property of the Panama Railroad existing in Panama and Colon inasmuch as the activities exempted were only those " appertaining to the railroad." This is an involved question the determination of which depends entirely upon the terms of charter and the concession under which the rail- road operates as well as on the terms of the treaty itself and is not of such a nature as the commission feels qualified to handle. An examination of the financial relations between the Republic of Panama and the canal shows that the annual installments on the debt of the Panaman Republic for the construction of public works in the cities of Panama and Colon are not being fully paid, although the rates charged for water rents are very high. The part of this debt arising from the city of Colon is gradually being paid, but the part arising from the city of Panama is growing, until the total now amounts to $62,256.12 for Panama and $11,592.05 for Colon. In spite of this fact the United States Government is paying the Republic of Panama $250,000 per annum promptly and regularly. A local attorney came before the commission and submitted an argument to the effect that the proceedings and decisions of the joint commission provided for in the canal treaty did not give a clear title to the United States for the lands in the Canal Zone, his argument being that the proceedings were entirely in personam whereas they should have been in rem. He contends that the Federal Govern- ment should, through the district court, institute condemnation pro- ceedings and that the action of the joint commission should be con- sidered only as that of a board of appraisal. In this matter the com- mission is advised that such legal tests as have been made of the powers of the joint commission have resulted in upholding its juris- diction. Furthermore it would seem to be a matter in which the United States should not take action which might be 'construed as an admission of a defect in its title. As representative of local land- 20 REPORT OF SPECIAL PANAMA CANAL COMMISSION. holders, this attorney is not believed to be without personal interest in the matter. Considerable consideration has been given by the commission to the question of the advantage to the United States of making Cris- tobal a port of entry to the United States. This matter has been under discussion in various quarters for some time and much has been urged in favor thereof. It has been suggested that this can not be accomplished without the abrogation of the so-called Taft agree- ment. The canal authorities believe, and the commission concurs in the belief, that the time has arrived when both the treaty with the Republic of Panama and the Taft agreement should be revised and rewritten in the light of present-day conditions. The commission is convinced that direct action between the canal administration and the Panaman Government leads to friction rather than to the adjustment of difficulties and it is further convinced that the matters now pending between the Panaman Government and the United States relative to questions arising from the administration of the Canal Zone should be taken up and settled in the immediate future in order that both parties may know where they stand and that the present conditions shall not be aggravated by uncertainty as to what the final decision will be or by whom it will be made. Detailed recommendations which, if put into effect, will improve the relations with the Panaman Government are given on pages 51-53, Appendix 7. RELATIONS WITH THE MILITARY. The personal relations between the officials of the canal and the officers of the military garrison are as cordial as usually obtain between officers of the different branches of the service, but officially there is much to be desired. The military authorities lay undue stress on the necessity of certain things from a military point of view, basing their arguments on what might happen in case of war. On the other hand, the canal authorities emphasize too strongly the necessity that no ship be delayed a minute in its transit of the canal beyond the time physically necessary to put it through. It is be- lieved that if both parties would give and take to a greater extent there would be no question arising that could not be settled to the satisfaction of all concerned bj^ the authorities in the zone. The question of most immediate importance between the canal authorities and the military authorities is that of a bridge across the locks in the neighborhood of Pedro Miguel. There is at present a garrison of about 2,500 persons on the west side of the canal. There is no general means for wheeled vehicles to cross the canal. An agreement was reached between the commanding general and the Governor of the zone looking to the construction of a swinging bridge at this point, but its use was to be limited to time of war and to a short period annually in time of maneuvers. In the first place the cost of this bridge is estimated as something over one-half a million dollars, which puts its construction far into the future, and in the second place the limitation on its use would not serve the garrison on the west side of the canal. At the present time there is a means of passage for foot passengers, animals, and small vehicles as large as a Ford car across the top of the lower guard gates of the lock. A REPORT OF SPECIAL PANAMA CANAL COMMISSION. 21 posted sign prohibits the passage of vehicles weighing more than G tons, but inasmuch as the 3-ton truck will ordinarily not exceed this weight when loaded, this passage can be made suitable to all the present transportation needs in time of peace. We believe that the lower guard gates of the Pedro Miguel locks should be adapted for use as a bridge for general highway traffic. There is a constant demand for a road across the Isthmus, but up to the present time its construction has been impossible owing to the fact that it was assumed that such a road would have to go around the east end of Gatun Lake and that the resulting road would be over 100 miles in length. It is believed that no such length is necessary, but that the present road from Panama to Gamboa can be extended to Monte Lirio and thence can parallel the railroad across the lake, using the railroad embankment over the critical points in the lake where large fills would be necessary for the construction of an inde- pendent roadbed. This has already been proposed by the military and rejected bj the canal authorities. The need for this road is great enough so that the slight inconven- ience to the Panama Railroad ought to be accepted by the" War De- partment and the use of the railroad embankment approved wher- ever necessary to cross a sheet of water. The roadbed is built for a double track and has a sufficient shoulder on which to support the carriers for the electric transmission line. Without disturbing the present roadbed, it is believed that sufficient room can be obtained for a suitable highway merely by moving the transmission poles nearer to the railway track and setting them at an angle. The venereal situation, not only in the Arm} 7 but among the em- ployees of the canal, is far worse than it ought to be under existing conditions. Panama City is a part of the Panaman Republic, and as such it is impossible to do more than the local government will agree to. In Colon, however, a different situation exists in that all the land # in the city is owned by the Panama Railroad and that company can dictate in its leases any uses for which the property must? not be used. Many houses of prostitution undoubtedly will continue to exist for a long time under the old leases made by the railroad, but the use of the Panama Railroad property, which in effect is United States Government property, for this purpose ought to be stopped where possible and all future leases should have an explicit proviso that the land in question can not be used for such purposes. Detailed recommendations to accomplish these results are set forth on pages 53-54. Appendix 1. HEALTH DEPARTMENT. The health department of the Canal Zone consists of the fol- lowing three divisions : Hospital division, sanitation division, quar- antine division. t The work of these divisions is done in a splendid manner and the results obtained are beyond criticism, unless it be that the work is too thoroughly done. This is exceedingly difficult to prove, inas- much as a great deal of it is preventive work and no one can say whether a less amount of prevention would accomplish reasonable results because what would be reasonably satisfactory is always a matter of opinion. 22 REPORT OF SPECIAL PANAMA CANAL COMMISSION. There are, however, certain changes in organization and opera- tion that can be made which will greatly lessen the net cost to the United States for the operation and maintenance of these activities. HOSPITAL DIVISION. The hospital division includes hospitals at the following places : Ancon. Corozal (insane and helpless asylum), Colon, Santo Tomas, and Palo Seco (leper as}"lum), and dispensaries at Ancon, Balboa, Pedro Miguel, and Gatun. The Ancon Hospital, which is the principal hospital of the zone, is one of the most perfect and well appointed hospitals that has come within the observation of the commission. The hospital operating cost during the calendar year 1919, was $492,366 and in the calendar 3 r ear 1920, $592,691. The revenue during the same two years was $228,367 and $318,776. respectively; the net cost to the Government during the two years being $263,979 and $243,915, respectively, with- out counting interest or depreciation. The average number of patients treated in the hospital daily was 438 during 1919 and 427 during 1920; and during the same years 5,100 operations and 5,092 operations were performed in addition to 314 and 289 confinement cases, respectively. The .average cost per patient during the same years was $3.08 and $3.80, respectively. The cost of food is approximately $1.05 for white patients and $0.53 for colored patients. The increase in cost during the year 1920 over that of 1919 is practically all due to increase in salaries and increase in the cost of food supplies. The salaries of the subordinates are based upon the wages of per- sons similarly employed in the United States and are correspond- ingly high. The salaries of the officials are not what they ought to be compared with wages paid to artisans in the Canal Zone. There are 21 doctors on duty in this hospital besides the superin- tendent, as against 22 doctors in January, 1919, when the total force employed was about 33 per cent larger than it now is. It is under- stood that no medical officer of the Army or Navy is permitted to operate in this or any other hospital of the Canal Zone. In this con- nection, attention is called to the surprising fact that all the doctors as well as the nurses are members of labor unions affiliated with the American Federation of Labor. The eight-hour law is applied to the nurses and hence the large number of nurses, but even on this basis the number is excessive. The cost of operation of this hospital has been compared with that of other hospitals in various parts of the United States and it is found that the Ancon Hospital compares very favorably in practi- cally all cases. The laboratory of the Ancon Hospital corresponds to the munici- pal laboratory in a large city, and it is believed that all chemi- cal laboratory work of the zone should be concentrated in this laboratory. At the present time no charge is made either for consultations at dispensaries of which there are an abnormally large number, or for board for employees while in hospital. It is not believed that either of these free services is justified or should be continued. REPORT OF SPECIAL PANAMA CANAL COMMISSION. 23 The commission believes that employees should be charged for their subsistence while in hospitals,-' that the Panama Railroad Co. should pay for the hospital and sanitary services rendered on ac- count of its employees, and that there should be a reduction in per- sonnel actually employed in the hospitals. We are also strongly of the opinion that civilian doctors and surgeons in the hospitals should be replaced by medical officers of the Army and that serious consideration should be given to turning over the hospitals to the Army Medical Corps for operation. Detailed recommendations to accomplish the desired results are given on pages 54-56. Appendix 1. SANITATION DIVISION. This division is in charge of a sanitation or health officer and its duties consist in the collection and disposal of garbage, mosquito prevention, rat extermination and street cleaning. The personnel consists of 28 gold and 348 silver employees. The work of this service is beyond criticism so far as the thorough- ness and the quality of the work is concerned. We know of no city in the United States that is as clean as Panama, nor where the flies and mosquitoes are so scarce. The measure of this is the markets which are unscreened and in which food is openly exposed for sale and yet practically no flies exist. The alleys and yards are as clean as the main streets. These same statements in general apply to the towns of the zone. The city of Colon is generally very clean for a central American town, but it does not compare with Panama, nor are its alleys as clean as they ought to be. The results of this service are shown in the percentages of sick, the number of malarial cases being negligible when the character of the surrounding country is considered. The work is preventive to a very large degree, the activities being centered on eliminating the. breeding places of the pests rather than on exterminating them after birth. By the terms of the treaty with Panama the supervision of the sanitation of the cities of Colon and Panama is under the jurisdic- tion of the health officer of the Canal Zone and each city contributes a certain amount toward its sanitation. It is found, however, that of a total of $158,000 spent for prevention and sanitation $123,000 was contributed by the United States; while of the street cleaning and garbage collection costs, $81,300 was contributed by the United States, making a total of $205,100 contributed by the United States out of a total cost of $324,000. While it would be presumptuous for laymen to advance their opin- ion agains that of a medical officer skilled in sanitary matters, it is the opinion of the commission that a condition of super-sanitation exists as regards malaria and that greater precautions are now be- ing taken than are necessary reasonably to protect the health of the inhabitants of the Canal Zone. The commission believes that a very considerable reduction can be made in the sanitary activities without materially affecting the health and welfare of the residents of the zone and with a material reduc- tion in expenses. 24 EEPORT OF SPECIAL PANAMA CANAL COMMISSION. Detailed recommendations to accomplish this result are given on page 56. Appendix 1. QUARANTINE DIVISION. The quarantine service consists of the port quarantine officers and quarantine stations at Cristobal and Balboa. There are 5 gold and 16 silver employees at Balboa and 6 gold and 15 silver employees at Cristobal. The service at each place is the ordinary quarantine serv- ice performed by the Public Health Service in the United States. The number of ships examined by the quarantine officers during the year was approximately 11 plus per day. This naturally is larger than the number of ships transiting the canal, because it includes all ships touching at either port. In regard to the silver employees it is believed that the reductions of force do not follow rapidly enough the reduction in activities. Xo specific recommendation is made as to the size of force to be employed, but it is believed that the quarantine division should be turned over to the Public Health Service and operated under that service as is the quarantine work in any port of the United States. ACCOUNTING DEPARTMENT. The nature of the accounting system and the general condition observed in this department have been commented upon in an earlier part of this report. The recommendations that follow are discussed fully in Appendix No. 2. In general terms, it may be stated that the accounting department is not a modern business organization; does not reflect the real financial condition and embraces too many unrelated and illogical functions. The accounting department consists of three main divisions, desig- nated as the " auditor's office," the " paymaster's office," and the " collector's office." The auditor is the head of the accounting divi- sion, but exercises only general supervision over the paymaster's and collector's offices. The combined force of the three divisions consists of 224 gold and 9 silver employees, with an annual expense of approximately $556,- 000. This does not include the accounting department of the "Wash- ington office, with 25 employees at an annual expense of $44,000, nor the New York office, with 28 employees, and an annual expense of $55,800. This total outlay is out of all proportion to the volume of business done, and even under the present methods is susceptible to substantial reductions. At present, the term " auditor " is largely a misnomer. He neither audits in the general acceptance of the term, nor exercises complete control over the accounting department. He has no direct responsi- bility for the actual handling of funds, this function being performed by the collector and the paymaster, both of whom are, however, in a measure his subordinates. He is the financial arbiter of the Panama Railroad, in so far as the availability of funds for its uses is concerned. Similarly, he has practical direction of all business operations of the canal organization, and while technically responsible to the governor, as a matter of fact he dictates the policy of every business operation, fixes prices, rates, service charges, allocations of labor, expense and REPORT OF SPECIAL PANAMA CANAL COMMISSION. 25 overhead. In brief, he performs every function of an executive, but without responsibility therefor. • -. The commission is convinced that there should be an entire re- organization of the office of the auditor with a redistribution of the duties between the auditor and a treasurer, and that a modern ac- counting system should be installed which will permit of accurate cost keeping in the several departments and divisions. Detailed recommendations to accomplish these results are set forth on pages 116 and 117, Appendix 2. SUPPLY DEPARTMENT. In volume of business the supply department ranks first of all activities on the Canal Zone. All supplies of every kind and nature are provided by it, and in addition thereto it directs the operations of practically' eveiw business industry other than the canal and railroad. The commission believes that the supply department should be transferred in its entirety to the Panama Railroad Co. ; that the officer in charge should immediately reduce the present large stocks and thereafter operate the department on modern commercial lines, consolidating his activities, keeping accurate records of uses and scrutinizing carefully requisitions for additional materials. In this connection it is believed that civilians should be encouraged to come into the zone and establish stores for supplying the ordinary neces- sities of life, and that the commissary should be confined to the sale of staples or other articles not locally obtainable. Detailed recommendations to accomplish these results are set forth on pages 117-118, Appendix 2. COMMISSARY DIVISION. The commissary division is the most important division of the supply department and operates the wholesale and retail stores of the zone, and supplies the residents thereof and shipping with practically every commodity entering into the requirements of living. Operating under the general policy that seems to permeate the or- ganization, its object primarily has been to promote the popularity of* the canal and to provide the employees thereof with all the necessities and many of the luxuries of life without profit to itself. Notwithstanding the fact that it has rendered a distinct service to the residents of the zone, it has, in the words of the governor, " as many adverse critics as it has customers." In the opinion of the com- mission most of these criticisms are unfounded and arise from the unreasonable expectations of the employees for superservice. This division operates a large number of manufacturing plants, supplying various elements of food. At present purchases are made by the use of coupon books, no sales being made for cash. The coupon-book system is a source of great expense, and gives rise to much criticism from the residents of Panama, it being claimed that large quantities of supplies are bought and subsequently resold in the adjoining cities of Panama and Colon. The commission is of the opinion that the commissary should be operated as a division of the supply department under an officer of 76736—22 4 26 EEPORT OF SPECIAL PANAMA CANAL COMMISSION. the Panama Railroad; that the system of cash payments should be adopted; and that the stores and warehouses should be conducted exactly as commercial enterprises, the manager of each store being- charged with responsibility for successful and profitable operation, prices being fixed accordingly. We are also convinced that the Government should take steps to dispose of many of the present activities of this division, such as the cattle industry, the hog. farm, and the dairy farm. Detailed recommendations to accomplish these results are set forth on pages 119 and 121, Appendix 2. MISCELLANEOUS ACTIVITIES OF THE SUPPLY DIVISION. There are a number of minor operations and activities of the supply department which came to the attention of the commission regarding which it makes specific recommendations, but which are not of sufficient importance to discuss in detail at this place. Detailed recommendations in regard thereto are set forth on pages 122 and 123, Appendix 2. RESTAURANTS AND HOTELS. The subsistence division of the supply department with a personnel of 1 superintendent, 1 hotel inspector, 21 gold and 217 silver em- ployees, operates the restaurants throughout the zone, of which there are 11. In addition thereto, the Hotel Tivoli at Ancon, and the Washington at Cristobal, with 17 gold and 169 silver employees, are operated by this division. I£ is found that, due to the fact that no capital investment is taken into consideration, and that only nominal depreciation charges have been set up, and no provision made for replacements, that every meal served at these restaurants and hotels is at an actual loss to the Government. It is believed that this is an unjustifiable expenditure of public funds, and that it should be immediately discontinued. The charges for meals obtaining in these restaurants are in prac- tically all cases lower than that obtaining in the restaurants of the United States of much lower grade. The character of service ren- dered and products sold are excellent in every case. Figures were not available showing the actual total investment in these restaurants, but it was learned that the Hotel Tivoli represents a cash investment of over $400,000, while the Hotel Washington rep- resents a capital investment of approximately $1,000,000. The prices charged to the traveling public for rooms at these hotels are lower than equal accommodations can be secured for elsewhere or in the United States, and in addition thereto, Government employees and members of the Army and Navy are granted a rate of approximately 40 per cent less than the public rate. The commission believes that certain of these restaurants should be closed; that those that are continued and the Hotel Tivoli should be operated on a strictly commercial basis with equal charges to all classes of patrons and at prices sufficient to insure profitable opera- tion. The commission believes the Hotel Washington should be leased for private operation. Detailed recommendations to accomplish these results are set forth on pages 122 to 125, Appendix 2. REPORT OF SPECIAL PANAMA CANAL COMMISSION. 27 ELECTRICAL DIVISION. The power system of The Panama Canal consists of one hydro- electric and one steam-generating station and six substations, all interconnected with overhead high-tension transmission lines. The total capital investment in the generating and distributing facilities on June 30, 1921, was $0,361,104.59. During the fiscal year ending June 30, 1921, the combined generator output of both plants was 71,603,830 kilowatt hours. Of this total, 99 per cent was obtained from the hydroelectric station and 1 per cent from the Miraflores steam station. The hydroelectric installation and the transmission system throughout are the best equipped and the most permanent form of construction. Under reasonable care and intelligent operation, it may be depended upon to give the highest character of service pos- sible to obtain, and from the standpoint of continuous output is far more dependable than any steam equipment can ever be expected to be. During certain periods of the year, for the conservation of water for lock purposes, a certain steam stand-by generating capacity would seem to be essential. The present steam station, however, is of anti- quated design and equipment, and will, in the natural course of events, have to be replaced within two years at the outside. At the present time the Miraflores steam plant is kept in practi- cally continuous operation. A few boilers are kept .banked at a slightly reduced steam pressure, so that in the event of an emergency load coming on, the generators can be put in full operation in the minimum of time. The commission can see no necessity for this constant precaution, as it is admitted by the canal authorities that any interruption that might involve even the entire power supply of the zone for a period as long as 30 minutes would result in no ill effect, with the one exception of the possible flooding of one chamber of the Miraflores locks. During the last fiscal year there were only four interruptions in the service of the hydro-electric station, the longest being 6f minutes and the minimum 2-J minutes. With reference to the possible flooding of one chamber of the Mira- flores locks, due to the loss in control of the elevation of the water surface of Miraflores Lake, it has been ascertained that a cheap type of gasoline wrecking pump w T ould be adequate to meet this emer- gency. It was found that 30 per cent of the total output of power is con- sumed for lighting and cooking, while 70 per cent is used for power purposes. No charge is made for power furnished for lighting and cooking and there is, immediately apparent, the grossest extrava- gance in the use of current for these purposes. Insufficient consideration has been given to the regulation of the power load throughout the zone, with the result of an excessive number of peaks in the power demand. The commission is of the opinion that the auxiliary steam generat- ing plant should be closed during most of the year and that addi- tional economies can be effected by reductions in the operating force and by installing a dispatcher of electrical power to regulate the load to the various consumers. We are also of the opinion that a 28 REPORT OF SPECIAL PANAMA CANAL COMMISSION. reasonable charge should be made for current used by employees for lighting and cooking, and that there should be a revision in the charges for use of telephones. Detailed recommendations to accomplish these results are set forth on pages 125 to 127, Appendix 2. BUREAU OF CLUBS AND PLAYGROUNDS. The function of this bureau is to provide recreation and entertain- ment for residents of the zone, including a considerable number of service men of the Army and Navy. It maintains and operates 10 clubhouses, 9 playgrounds, 18 tennis courts, 5 baseball fields. 2 cricket fields, 1 athletic field, 1 swimming pool, 10 motion-picture halls, and 5 bathing beaches. The appraised value of clubhouses, buildings, and playgrounds, exclusive of equipment other than soda fountains, is $290,444.81. No records were available of the value of other equipment. The organization of this bureau consists of 68 gold and 129 silver employees, at an annual pay-roll cost of $183,822. A nominal fee is charged for the use of billiard and pool tables, bowling alleys, etc., and for certain of the entertainment, such as moving pictures. The accounting methods are such that it is difficult, if not im- possible, to ascertain the exact financial status of the bureau. The actual operations for the past fiscal year, which, however, is nothing more than a record of receipts and expenditures, without account of capital invested, depreciation, or provision for replacement of either structures or equipment, would seem to indicate an excess of ex- penditures over receipts of $25,481. If to this be added certain ap- propriations not appearing in the operating records, amounting to $205,000, we have a net cost to the Government last year for account of playgrounds and clubhouses of $230,000, with interest on approxi- mately $300,000 of invested capital yet to be added. Notwithstanding the fact that 80 per cent of the business done by the clubhouses is in the afternoon and evening, the clubs are operated at full complement from 7 a. m. until midnight. The commission is convinced that the services of this bureau may properly be somewhat curtailed, thereby effecting considerable econ- omy in cost of operation and that the entire bureau should be put on a self-sustaining basis with charges for articles and entertain- ment furnished and for other privileges sufficient to insure this result. Detailed recommendations to accomplish these results are set forth on page 127, Appendix 2. RECORD BUREAU. This bureau has the function of sorting and filing correspondence passing through the administration headquarters, except that of the accounting department, which is handled by that department itself. It consists of 32 gold and 27 silver employees, with an annual pay roll of $35,579.92. The bureau also indexes and files general records, maps, drawings, etc., in charge of mail, supervises the mes- senger service and the Canal Zone free circulating library system. REPORT OF SPECIAL PANAMA CANAL COMMISSION. 29 Although it was urged that this concentration of files was desir- able and necessary, it is believed that with the exception of maps, drawings, and similar construction data, the present system leads only to duplication of work and unnecessary expense, and should be discontinued, the functions being distributed among the several divisions. Detailed recommendations are made on page 128. Appendix 2. PERSONNEL BUREAU. This bureau keeps records of transfers, promotions, reductions, and terminations, applications for living quarters, leaves of absence, issues orders for transportation, and performs other similar functions for the entire gold personnel of the canal, and for silver employees receiving compensation in excess of $80 per month, or $0.40 per hour. The organization consists of 13 gold emplovees, at an annual cost of $33,372. This bureau apparently is performing at additional cost duties properly belonging to the various departments and divisions, and in the opinion of the commission should be discontinued and its func- tions distributed to the several divisions. Detailed recommendations are found on page 128, Appendix 2. PROPERTY AND REQUISITION BUREAU. This bureau has charge of the preparation of requisitions and property invoices covering transfers of property and equipment from one department to another, inventories property, and segregates the charges therefor. Under the present canal organization it. performs a necessary and useful function. The organization consists of 14 gold employees, at an annual cost of $31,908. Should the recom- mendation for the transfer of the supply department to the juris- diction of the Panama Railroad be approved, this bureau will auto- matically pass out of existence. In the event that said recommenda- tion is not approved, it is believed that the personnel of the bureau is susceptible of a reduction of 50 per cent without loss of effective- ness or efficiency (p. 128, Appendix 2). BUREAU OF STATISTICS. This bureau is the general publicity and vital statistical bureau of the canal. It prepares statements and reports covering every ac- tivity on the zone, compiles annual reports for the departments, prepares advertising matter, including articles for magazines and newspaper press of the world, and is in fact the work of highly trained specialists. The organization consists of eight gold em- ployees, at an annual cost of $20,628. None of these employees ap- pear to be overpaid, and this organization is performing a service of great value to the Government. Should the recommendation that the publication of the Canal Eec- ord be discontinued be approved, it is possible that the services of one man might be dispensed with (p. 128, Appendix 2). WASHINGTON OFFICE. This office was conducted during the fiscal year ending June 30, 1921, at a total cost of $319,987. The organization consists of a pur- 30 REPORT OF SPECIAL PANAMA CANAL COMMISSION. chasing department, an accounting department, and an administra- tive department consisting of a total of 132 employees. It is recognized that in the earlier days when much material was being forwarded for construction purposes the functions of the Washington office were highly important. It is believed, however, that in view of the small amount of construction work contemplated, and of other recommendations made in this report, such as a revision of the accounting department and the transfer of the purchasing department to New York, there will be little occasion for the main- tenance of so large a force in the Washington office. It seems to the commission that this office should be reduced to that of a sort of liaison headquarters between the canal and the Secretary of War, and that all other functions should be transferred or dis- continued. Detailed recommendations appear on page 129, Appendix 2. DIVISION OF LOCK OPERATION. The very large number of employees and the great amount of the annual pay roll led to a careful consideration of the lock forces to see if they could be reduced. At present they are divided into two shifts of eight hours each, and the first obvious suggestion was to see if it was practicable to operate the locks and properly accommodate traffic on one 8-hour shift, the crews working either continuously or with a swing of, say. three hours interposed at sometime during the 8-hour period. One shift, if practicable, might save in pay at least $200,000 a year, although the estimate of the canal authorities was about $101,000. This question was discussed at length with the governor, with the superintendent of the marine division, and finally with the acting engineer of maintenance and operation. These officials, and also the captain of the port of Balboa, accumulated much data bearing on the matter, and the consensus of opinion, in which the commission agrees, was that it is impracticable to operate the locks with one 8-hour shift, even with a swing or split, unless grave chances be taken of serious delay to traffic through the canal if more than seven ships bound north and eight ships bound south present themselves for passage on any one clay, and such delay to traffic would ultimately probably result in a serious loss of tolls to the canal. A new system of dispatching, however, which has been under con- sideration for some time by the canal authorities is shortly to be put into operation, and it is believed will make possible considerable economies. The lock force is somewhat overstaffed, and after a careful study it is believed that considerable reduction can be made with no loss of efficiency. Detailed recommendations appear on page 112, Appendix 3. DREDGING DIVISION. It was found that generally all of the dredging division equipment in actual use is in good condition and well maintained, and this would apply to that held in reserve. The excellent organization of the dredging division and the need of keeping sufficient equipment ready for immediate use is instanced by the slide at the east barge repair REPORT OF SPECIAL PANAMA CANAL COMMISSION. 31 station that occurred about 3 p. m., July 14. This slide was reported to the superintendent of the dredging division at about 3.45 p. m., and at 5.15 p. m.-the large dipper Paraiso was actually working on its removal from canal prism, and the work of removal was so effi- ciently carried on that the passage of the battleships Oklahoma, Ae rati a, and Wisconsin, on July IT, was not delayed. Except for the suction dredge Culebra, which should be transferred to the Engi- neer Department, United States Army, and dredge No. 83, which should be rented, it is not believed that the equipment is in excess of reasonable needs. Considerable study is needed in the matter of salaries of employees of this division, for some are out of coordination with wages for similar employment in the United States. Detailed recommendations are made on pages 112-113, Appendix 3. MARINE DIVISION. The functions of the marine division consist of the maritime ad- ministration of the ports of Cristobal and Balboa, the control of the salvage section, of the board of local inspectors and steam vessels, of the board of admeasurement, which deals with the measurement of ships using the canal to determine the amount of canal tolls to be paid by them, the supervision of harbor craft owned by the canal, and the control of the lighthouse establishment. The scheme of organization appears good, the officers in control from a nautical standpoint are most competent, and, generally speak- ing, the personnel efficient. The floating equipment is in good con- dition and is well manned. However, some reductions in the per- sonnel employed are practicable at the present time because of the diminished use of the floating equipment incident to the falling off in shipping activities. A thorough study made of the operation of the floating equipment resulted in the conclusion that certain of the equipment should be disposed of. The commission is of the opinion that the ratings of the tug officers should be revised and certain other economies effected in operating personnel. We also believe that a reasonable pilotage fee should be charged vessels transiting the canal, and that the pilot- ing should not be turned over to the proposed pilots' association. Detailed recommendations to accomplish these results are set forth on pages 113, 115. Appendix 3. MECHANICAL DIVISION. The mechanical division operates the Balboa shops and dry dock, and the Cristobal shops and dry dock. It does commercial and naval work, performs all the repairs for the Panama Railroad, and much for the steamship company. It also performs mechanical work for practically all the divisions of the canal, and manufactures material which is turned into stores. The total investment in these plants and dry docks is $8,364,000. The pay roll for June showed 6T6 gold employees and 1,093 silver employees, with a monthly pay roll of $220,439. For the fiscal year ending June 30, 1920, the gross revenue pro- duced by the mechanical division is reported at $7,552,106. The volume of business for the past fiscal year has not yet been reported, 32 REPORT OF SPECIAL PANAMA CANAL COMMISSION". but is less than the previous 3'ear. Operating statements submitted for the nine months ending April 1, 1921, show a total deficit for the division's operations of $56,138, without any allowance for interest on the capital investment of $8,354,000. If usual fixed charges at 5 per cent on the investment are added, it would be necessary to increase the above deficit by the amount of $417,000. As a commercial operating proposition, therefore, the mechanical division is a serious burden to the Government and presents for deter- mination a question of policj^. The commission regards the continued operation of these shops and dry docks of the mechanical division as auxiliary naval activities to be unjustified by anything that we have found in legislation. Every- thing that we have found appears to regard them as commercial auxiliaries to the canal. We are of the opinion that the shops and dry docks should be operated entirely as commercial agencies until Congress shall otherwise indicate and appropriate therefor, and that certain of the shops should be closed and large reductions made in operating personnel. Detailed recommendations appear on pages 115. 117, Appendix 3. STEAMBOAT-INSPECTION SERVICE. It was found that there has been considerable criticism by masters, mates, pilots, and marine engineers as to the form of organization of the board of local inspectors in the steamboat-inspection service. As at present constituted, the board consists of the captain of the port of Cristobal, the captain of the port at Balboa, the naval officer detailed as supervisor of harbor craft, and the inspector of hulls and boilers. It will be observed that under this organization, the captain of the port of either Balboa or Cristobal might be called upon, as has actually been the fact, to sit as a member of the board of inspectors in a case in which an accident has occurred to a vessel that has been operating under orders from the same person acting as captain of the port. It is believed that this steamboat-inspection service should be turned over to the Department of Commerce. In event there is legal difficulty involved in accomplishing this transfer, or pending the transfer, if approved, certain changes should be made in the present organization. Detailed recommendations appear on pages 117, 118. Appendix 3. METEOROLOGICAL AND HYDROGRAPHIC SECTION. The meteorological and hydrographic section has charge of the installation and maintenance of all meteorological, hydrographic, and seismological equipment; the compiling and summation of obser- vational and automatic data relative to the same; and the prepara- tion and furnishing of reports based on such data. It is believed that under present conditions considerable of the work now being carried on by this section can be discontinued with- out inconvenience or loss to the Government, and the personnel con- siderably reduced. Detailed recommendations appear on pages 118, 119, Appendix 3. REPORT OF SPECIAL PANAMA CANAL COMMISSION. 33 PANAMA RAILROAD. The Panama Railroad was built and operated for a period of 50 } 7 ears as a successful commercial enterprise, earning dividends that ranged from 4 per cent to 26 per cent per annum. In the last five years before the United States acquired the property the railroad handled an average of 375,000 tons of freight per annum, compared with 250,000 tons handled in 1920. The net earnings of the railroad and steamship company during this period ran from $750,000 to $1,000,000 per annum. When the railroad was relocated and rebuilt by the Isthmian Canal Commission, first-class modern standards of railroad construction were used, resulting in a complete and first- class railroad not exceeded anywhere in the Tropics. The old track gauge of 5 feet was maintained in the relocation, ample depth of first-class gravel r ballast is found throughout, and the entire main line is protected by automatic, three-position signals. In a word, every detail is of the best. Mention is made of the previous earnings and history of the property for comparative purposes with its un- fortunate operating and financial condition to-day. The physical condition of the property is here mentioned to show that the railroad to-day should be operated and maintained at a minimum cost. While the railroad was built and operated for purely commercial purposes prior to our treaty with the Republic of Panama, it has, since the construction of the canal and its opening to commerce in 1915, become an important adjunct to the canal itself. The future policy of the railroad must, therefore, be controlled to some extent by the canal policy and military necessities. It has been found, however, that to-day the railroad and its out- side operations are carrying a larger personnel than would be neces- sary for purely commercial operation of the railroad. It now has approximately twice as many employees as are necessary to efficient operation. The Panama Railroad Co. is an incorporated company, and al- though the Government is the sole stockholder, we do not believe that its treasury should, in the future, be used for other than purely railroad purposes. Considering the mileage involved, the capital account of the railroad company seems high, but in view of the cost of relocation and rebuilding in accordance with the very best stand- ards, the capitalization is actually not excessive, and by reason of the excellent construction, future maintenance expenses will be com- paratively light. The operating ratio of expenses to revenues for 1919 was 91.4 per cent; for 1920, 99.1 per cent for nine months ending March 31, 1921, 109 per cent ; and estimated for the year ending June 30, 1921, 125 per cent. The ever increasing operating ratio ending in the excessive ratio now'existing shows that no effort has been made to reduce the operating expenses to conform to reduced traffic. The company enjoys high freight tariff rates which have recently been increased. The average receipts per ton-mile are now $0,096; the average passenger receipts per mile $0,033. These are reflected in the gross earnings, which amount to $42,000 per mile. With proper operation and management, this income is ample to return a reasonable profit on net operation. Highly paid gold employees are 34 REPORT OF SPECIAL PANAMA CANAL COMMISSION. being used in many positions which could be filled equally well by native labor at much lower rates of pay, and in all departments there is a surplus of personnel. The power and equipment is being maintained by the mechanical division of the canal, and the railroad company has no immediate jurisdiction or responsibility therefor. Even the roundhouses and engine crews are under the mechanical division jurisdiction. The high cost of maintenance of equipment is probably due in part to this cause. The freight train service is run in an uneconomical manner, and not in accordance with the principles of American railroad oper- ation. Some crews make no more than 50 miles per day and accom- plish it in from three to four hours. These crews are paid on a monthly basis without regard to service performed or mileage made. There is no traffic department such as usually exists on even the smallest railroads all over the world. Bates are made by the auditor of The Panama Canal, and claims for loss and damage are settled by him. There is no concerted or well-directed effort to solicit and build up the traffic that the railroad now needs. Under its original concessions the company owns valuable real estate, some of which is in the business centers of Panama and Colon. This real estate is leased at nominal rentals only, and the income therefrom is susceptible of great increase when the old leases mature within the next few years. The real estate is carried as an asset in the balance sheet at but slightly over $1,000,000, whereas its present estimated value is $13,000,000. - We are confident that the property can be made to realize a fair return on a new valuation approximating this figure. It is believed that some of the property not necessary for railroad purposes in Panama City should be sold, thereby obtaining much naaded funds. The harbor terminals which have previously been revenue pro- ducers are showing a deficit for the year 1921. Economies can be effected, however, sufficient to wipe out this deficit in future years of operation. The coaling operations represent a capitalization of about $7,- 000,000, of which about $1,000,000 only is carried in the capital account of the Panama Eailroad Co. The coaling plants have been revenue producers, and will probably show a profit for 1921. The plants are heavily manned, however, and are run in an expensive manner. If the force is not materially reduced and placed upon a one eight-hour per day shift, it is feared that deficits will shortly occur. At the time of writing there were about 225,000 tons of coal on hand, equivalent to seven months' supply at present rate of use. If the one collier which is at present in operation between Norfolk and the Isthmus were laid up until the supply of coal is c*ut in half better results would be reflected. The coal operations are purely commercial, and if they can not be made to meet operating expenses and fixed charges the}' should be leased or sold. The commission is of the opinion that the Panama Railroad should be thoroughly reorganized to conform to standard railroad practices in the United States and should henceforth confine its operations to recognized railroad functions. A nmnber of business men of wide experience should be placed on the board of directors and a competent REPORT OF SPECIAL PANAMA CANAL COMMISSION. 35 general manager should be employed. Its force should be largely reduced, and. in many positions colored labor should replace white. The maintenance of equipment, at present performed by the me- chanical division, should be turned over to the railroad, and all equip- ment not actually needed should be sold or scrapped. All outside operations such as the harbor terminals and coaling plants should be operated so as to insure an adequate return on the investment. The commission feels that the present method of railroad opera- tion is one of the greatest sources of loss to the Government, and estimates that if the new methods recommended are put into effect a saving of about $1,120,000 per annum can be made. Detailed recommendations to accomplish these results are set forth on pages 81-87, Appendix 1. PANAMA RAILROAD STEAMSHIP LINE. The Panama Steamship Co.'s operations started in 1893, and may be regarded as the marine department of the Panama Railroad. Until the purchase of the Panama Railroad by the United States Gov- ernment the operations of the steamship company were financially successful and served an important commercial trade between New York, Colon, and Pacific coast ports. During the period of con- struction of the canal the commercial operations were subordinated, of course, to the necessities of the Government, the line giving pref- erence to the handling of construction materials and American em- ployees going to or from the Canal Zone. For the purposes of analysis the operations of the company from 1900 to 1921 may be divided into three periods, to wit : The five years prior to the beginning of the construction of The Panama Canal, in which the steamship company was engaged solely in commercial business; second, the period of construction of The Panama Canal; and third, the five years since the opening of the canal. During the last period above-mentioned it may be assumed that the steamship line had returned to commercial operations, although it is believed that the handling of Panama Canal employees has been given too much weight in the policy of the operation of the steam- ships. During this period also, the Panama Co., as well as all other steamship companies, profited by the abnormal conditions due to the war. Similarly in the past year the Panama Steamship Co. has met the same adverse conditions experienced throughout the marine world. It would have experienced no difficulty in meeting these adverse conditions if the surplus they had previously earned was intact and cash resources were available. It is believed that the Panama Steamship line, like other steam- ship companies, must meet the new conditions that point to low freight rates and comparatively high operating expenses for at least two years to come. Some economies will be effected through the re- adjustment of the pay of all classes of steamship employees, and in decreased cost of fuel, supplies, and administration expenses. Not- withstanding, wages will be higher than in the prewar period, and all of the economies will not wipe out the operating deficit for 1922. The company at present is experiencing difficulty in obtaining pier space at New York, and is now paying large rentals for such space 36 REPORT OF SPECIAL PANAMA CANAL COMMISSION. as it is using. If relief from the present pier situation can not be secured through the influence of the War Department, it alone is sufficient reason for the abandonment ■ of the steamship company's operations as hereafter recommended. So far as the handling of freight on the piers, crews, and straight seamanship expenses are concerned, we are of the opinion that the company is being handled as efficiently and economically as labor conditions will permit. This company is constantly called upon to carry official delegations to and from the Canal Zone and West Indian points, and to trans- port employees of the Government at less than actual cost of trans- portation. At the present time, the company is facing an operating deficit for the year ending June 30, 1921, of about $700,000, and with the fixed charges at 4 per cent the income deficit becomes $887,000. The management forecasts that for the year 1922 it will be able approxi- mately to break even and that for 1923 the operating revenue will be between $350,000 and $400,000. With this forecast we can not agree, and are of the opinion that the year 1922 will show an operating deficit of possibly $350,000 and that if all suggested economies and re- ductions are made in the year 1923 it is possible that the operating revenue will equal the expenses. The above forecasts are all predicted upon increasing the tonnage carried from commercial sources. From a broad economic point of view, it is manifest that it is not to the best public interest to have a Government owned and operated steamship line in competition with privately owned American steamship lines. The commission is con- vinced that, from a point of view of governmental policy, as well as from a financial and commercial standpoint, the operation of the Panama Railroad Steamship Line should be discontinued. The com- mission realizes that there are reasons advanced for maintaining this line which have had a predominating influence up to the present time. Some of these reasons are the prompt and regular transportation of supplies to the Isthmus, the transportation of canal employees when on leave, and to a certain extent the stabilization of rates charged to American customers between the United States and Latin-Ameri- can countries. The commission feels that these reasons no longer exist since ample private commercial facilities now operate between the United States and the Isthmus, and because the Shipping Board is the agency through which the United States handles its shipping matters and rates. In case it is decided to continue the line, the commission is certain that this decision must be made in the face of an almost certain continued financial loss. This decision must also contemplate thel continuance of the steamship line in commercial business, without which it can not possibly survive. With reference to the alleged stabilizing of rates through the operation of the Panama Railroad Steamship Line, it is believed that in this, as in other commercial affairs, the inexorable law of supply and demand will apply, and if excessive freight rates are charged by existing steamship lines for service to and from South American ports, fresh competition will be introduced and rates quickly made reasonable. REPORT OF SPECIAL PANAMA CANAL COMMISSION. 37 After giving careful consideration to the questions involved the commission is convinced that the steamship line of the Panama rail- road should be liquidated. Its fleet is obsolete, its operations are being conducted at great loss, and it can hope to survive only by aggressively and success fully competing with privately owned ship- ping. In the event the administration elects to continue the steam- ship line, certain large economies are possible which it is believed will cut the present operating deficit in half for the next year. Detailed recommendations to accomplish these results are set forth on pages 88, 89, Appendix 4. The foregoing recommendations have been made by the commis- sion after thorough study and long deliberation. We approached the investigation with the deliberate intention of considering each activity as though we were going to be charged personally with the conduct of that division under the recommendations that we would, make, and with the expressed decision that under no circumstances would we recommend a change simply in the spirit of criticism or with the idea that we had been sent to Panama to effect changes. Our fixed opinion is that the canal administration has never been given a definite mission or what might be called a target at which to aim. The conditions that we found are the results of the lack of a definite policy or target and the outgrowth of many decisions taken more or less without consideration of their effect upon future policy. Xo definite policy of operation was ever set up independently of the policy of construction, and therefore construction policies still obtain in the period of operation. In other cases, it would appear that decisions affecting the proper operation of the canal had been subordinated to greater matters during the war, while in others it appears as though the easiest solution had been taken in order to settle the matter for the moment. If the recommendations of the commission are adopted it is be- lieved that the total annual saving to the Government will be about $5,000,000. This saving does not all come from a reduction in oper- ating cost, but is made up of a saving from that source and an in- come derived from repayment to the Government for certain services that have heretofore been gratuitous. The commission firmly be- lieves that its recommendations can be put into effect not only with- out injuring the service of the canal in any way but with an actual improvement in the service, and that the resulting cost of operation will hereafter increase at a slower rate than the rate of increase in the number of ships transiting the canal. It is also believed that if the recommendations are adopted the returns to the Government will increase year b}^ year and that within a period of 10 or 15 years the canal will return a fair income on the investment of the Federal Government therein. Respectfully submitted. Wm. D. Connor. Alfred Brooks Fry, H. P. Wilson, F. A. Molitor. Letter from the Governor of the Panama Canal to the Secretary of War, making preliminary comments upon the Report of the Special Panama Canal Commission. At Sea. on SS. Santa Elisa, September 17, 1921. The honorable, the Secretary of War, Washington, D. C. Sir : In this, 1113^ first comment on the report of the special com- mission, I shall attempt brevity, as in the main report of the com- mission, supplementing it later, if desired, in the manner of their appendices, with each comment in more expanded form. By way of preface, I desire to record the fact that the visit of the commission has already been of great benefit to the administration, and there are recommendations in this report not brought to my attention during their visit which also will be of benefit; but there are some of their recommendations in which I can not concur. In the preparation of this memorandum I can not cover the entire field, but hope to touch on most of their recommendations which are of major importance. COST AND VALUE. There are certain features of the canal, aside from itself, that have been largely designed as military and naval features. The most important of these are the big shops and dry dock at Balboa, the two coaling plants, the cattle pastures and abattoir, and to some extent the oil supplies, stores, and commissaries. All of these are more extensive than they would be if the canal were not a Govern- ment owned and operated facility. It is entirely a misapprehension to assume that these facilities were constructed without careful con- sideration by responsible committees of Congress under advice of military and naval authorities aside from canal officials, or to assume that their operating charges were fixed in ignorance of the ordinary accounting practices. As a matter of fact. Governor Goethals fixed the principle on which mechanical division account- ing was established, on the sound theory that amortization and de- preciation charges on all the plant would deprive the shops of com- mercial business and throw a heavier charge on Government for the maintenance of a plant which fulfils three functions, as follows : The necessary function of maintenance of canal and railroad equipment : The highly desirable function of a repair yard for commercial ships ; The reserve function of a military and naval base. The same principles which directed this decision apply to the others and parallel cases, and it may be stated that annually sums (88) REPORT OF SPECIAL PANAMA CANAL COMMISSION. 39 have been deposited in the Treasury from all of these and other activities. If we were approaching this question as for a decision as to whether these facilities should be installed, the matter might be debatable. But a decision to scrap any or all of them as installed, or to arbitrarily reduce them to a point whence they could not be restored, for no other reason than that no part of their cost happens to be charged off to national defense, or because an annual sum is not transferred from Navy appropriations to the Panama Canal appropriations, would be a Governmental policy against which I must enter a strong protest. I concur in the commission's doubts as to the possibility of arriv- ing at a written down cost of the canal ; and I have further doubts as to the value of such a study even were it capable of accurate solution. I should certainly object to any policy that would attempt to make each detailed subdivision of activity self-supporting. TROPICAL LABOR. I am in accord with the basic idea of this recommendation, but I believe the commission's view is much more radical than would be safe. There is doubtless some point between their recommen- • dations as I read them and our present system, to which this plan can be safely carried, and I would favor undertaking a gradual transfer. I confess myself hopeless of reaching any such goal as they probably contemplate. We have here a highly efficient plant; we must have nationals to give a reasonable assurance of operation in a national crisis. Many operators require consider- able training even after apprenticeship and mastery of some craft I would strongly recommend against any attempt to replace any such men by aliens. Nor do I believe the adoption of such a policy, except to a limited extent, would be wise. Our present excellent force would become at once demoralized, and many of them would leave us at the first available opportunity, and this would be the case whether they were union men or not. If the commission's recommendation in this matter be considered to cover the unim- portant positions in the service, I concur. RENTS, ETC. The commission made cable recommendation to you on this matter and advised my concurrences. You may have noted that their recom- mendation went somewhat further than the recommendation I had made in April. It now goes slightly further than that with which I concurred. I believe water and light should be furnished approxi- mately at cost, but even at this these charges may turn out to be somewhat higher than would be fair to our employees. Since my concurrence with their cable recommendation the Navy Yard sched- ule has been announced and its reduction is somewhat greater than I anticipated. Also, I have supplemented my approval by a sepa- rate recommendation as to those officials whose compensation has not risen in years. I am loath to recommend action which may eat into our force rapidly through the operation of the law of supply and demand after the present industrial depression has passed, and I do not desire to be unfair to men who have given their best, who remain 40 REPOKT OF SPECIAL PANAMA CANAL COMMISSION. the survivors of a long- competition, and who have demonstrated, their loyalty and efficiency even though at times subject to criticism for improper union activities. I am, however, able to concur in the commission's recommendation subject to the changes as to water and light as I have indicated, and subject to the recommendation as to officials elsewhere made', though if I Ave re to fix it myself I would return to a plan which would give charges approximating those which would result from my original recommendation. WAGES. I find myself practically in agreement with this, though it might be clearer and I might be in disagreement if my attention were called to the specific cases of high wages referred to. I believe we have a good organization for assembling wage data, and in the 25 per cent rule a good basis to adhere to, and in most cases the adjustments have been made with more care and greater accuracy than in most wage adjustments during the same period in the States. LEAVE. I can not concur in this. Our leave privileges have been tested by •time and in my opinion are not excessive for the white man in the Tropics. And I am convinced that it is not unreasonable for our employee to get, for himself and dependent members of his actual family, transportation to and from his home land at approximately cost. OPEN SHOP. AVith some of the tenets of union labor I am not in accord, and I agree that our employees have not been as free of these practices as I could have wished. At the same time, I do not believe they have differed from American labor as a whole, and they have certainly de- livered the return for what may possibly be designated as liberal treatment, and have done it with less industrial friction than else- where. I know of no way to prevent an American citizen from be- longing to an organized union if he so desires, nor of any practical way to insure that we shall have any specified proportion of non- union men in our employ. I believe that if our treatment of em- ployees is fair it will be so recognized by them whether they are union or nonunion (even though they may not admit it) ; that they will hesitate to use the strike weapon, as a fair proportion of them recognize the fact that a strike following administrative action that is not unfair, may well bring a law or Executive order requiring em- ployees to renounce the right to strike or to leave until their places can be filled. But I do not believe the way to get this is along the lines recommended by the commission, as I believe it would start off under a handicap which I personally would not care to incur. It shall be my effort, while governor, to accord the employees a square deal, so far as the law and available funds permit, dealing with them openly, whether union or nonunion, making reasonable con- cessions, and using the power of the office to force a square deal where the men refuse to agree to it. If such a policy fails to avoid labor troubles, which nobody wants to see, the power of public opin- ion on a work like ours will be a tremendous asset, one which I am not willing to discard by subscribing to any policy other than out- lined. REPORT OF SPECIAL PANAMA CANAL COMMISSION. 41 I am in accord with the recommendation as to dealing with em- ployees' committees, and agree that agreements limiting the use of tropical labor should be considerably revised; but I can see nothing of value in the Governor being prohibited from other such agree- ments, as such agreements may be helpful to both sides. We are now in a period of industrial depression. Even assuming the policy as recommended by the commission to be entirely fair, its adoption now would subject the Government to the criticism that it • is a reactionary doctrine enforced at a time when labor is almost powerless to retaliate. I should hesitate to do this, and I am also desirous of avoiding the charge of doing it. which would tend to set back the final solution of the labor question everywhere — a long process at best. PANAMA RAILROAD SEPARATION PROM CANAL. I can not agree with this. The Panama Railroad has been a useful servant of the canal during construction, and was in addition a com- mercial organization prior to the opening of the canal. Xow its main and almost sole function is that of an adjunct to the canal. As such its Isthmian operation must be kept directly under the control of the Governor. This can be done without interfering with possible development of traffic, which is bound to be a slow matter. ENCOURAGEMENT OF AGRICULTURE. This involves a definite change of policy but seems particularly urgent at the present time as the only possible way out of an im- pending distressing situation. I concur in so far as native labor is involved. I am not yet prepared to recommend the broader opening up referred to in the closing paragraph of the commission's recom- mendation. NEW AUDITING SYSTEM. I believe the commission's criticism of the auditor's functions are based on misapprehension, due principally to the fact that Mr. Wilson arrived at the canal a week later than' the other members of the commission and during his stay the auditor's office was excep- tionally busy not only with the allotments for the new fiscal year, with the preparation of estimates for 1923, and with collection of data for annual report, but also with the special work called for by the' recently created Budget Bureau. Panama Canal auditing differs from both governmental auditing and business auditing and accounting, partaking of the nature of both. It is difficult to mix two such different systems, and } T et both are required. We must comply with the laws and regulations de- signed for the control of solely disbursing agencies, and yet handle business operations involving receipts and disbursements and profit and loss accounts. It required special legislation to establish the present system, relieving us of much detailed reporting. The sys- tem in vogue had the expert advice of an accountant, Mr. Francis Oakey, in 1914, and it has been modified and changed only as ex- perience and changing conditions advised it. If it is defective (which I do not believe), it can be changed. But it is certain that the commission's recommendations will not result in any economy, rather the reverse ; and I am convinced that the additional labor re- 42 REPORT OF SPECIAL PANAMA CANAL COMMISSION. quired after the separation from the auditor of some of his work would not give returns commensurate with the expense, nor would the Governor be able to as closely control operations as he now does through centralization of practically all of this work under one head. As to the criticism of the executive functions of the auditor, these are of exactly the same nature as the criticisms that have been ad- vanced against the new office of Director of the Budget, but on a smaller scale and with much less force, as the Governor is far more able to give individual attention to protests from his division heads than Avould be the President. The auditor has no executive func- tions except in his own division. Many of his acts appear so, but none of them are performed without either the written or oral ap- proval of the Governor. There is bound to be a certain amount of vexation on the part of other division heads (who. by the way, some- times obtain the decision), but these are only signs of health, and give proof of the fact that the control is where it belongs, in the hands of the Governor. I find myself unable to concur in any of these recommendations, though the matter is one which may require additional study. EXECUTIVE OFFICER. I can not concur in this recommendation. The Governor's pay is fixed by law. Such an official, if secured from civil life, would have to be paid more, an intolerable situation. The operation of the canal is essentially a big engineering and business proposition. So long as the system of the past is retained and a Governor and engi- neer of maintenance are selected from the Corps of Engineers, the solution will be satisfactory enough, as when both are present the engineer of maintenance to a large extent is chief advisor and chief coordinator on the Governor's staff. It was unfortunate that during the visit of the commission the engineer of maintenance was present only a few days, a fact which prevented their seeing the adminis- trative system operating as designed, and also prevented my giving their work as much individual attention as it should have had. EXECUTIVE AND OPERATIVE PAY. We have in this recommendation a comment on an inherent. de- fect in Government service. The statement is unassailable, yet a change is probably impossible. The recommendation I have made as to rental and other charges for officials may help a little, but it ought to be apparent to anyone that authority of Congress for any increase in pay of officials at the present time would be impossible, and I myself would deem them unwise under our political system. SCHOOLS. Efforts will be made along the lines suggested, but it is not ex- pected that much can be accomplished with available funds. Nor have I much hope of any accomplishment along the lines of ap- prenticeship in trades. REPORT OF SPECIAL PANAMA CANAL COMMISSION. 43 POLICE AND FIRE. I am in general accord with this, but not as to all details. It may be possible to make some changes, but the funds saved would be better applied in other civil government functions than in installing the two-platoon system, this latter idea also apparently being the view of the commission. CIVIL AFFAIRS. This recommendation if followed would strike a vital blow at efficiency in Canal Zone Government. The canal has, largely through its own experience in construction days, and with full cooperation of responsible legislative committees, emerged with a government in which, the President, being responsible, has decided that, with the single exception of the courts, everything is governed by the Secre- tary of War, and through him by the Governor, who acts under laws and executive orders. It can be demonstrated that the changes herein recommended, while in some cases saving expense to the canal, will in all cases greatly add to the expense to the United St'ates. But above all they will vastly decrease efficiency in government and service, and in particular will greatly hamper the one thing we are mainly down here for, viz, the safe, expeditious, and satisfactory handling of commerce between the two oceans. The Canal Zone, above all other places in the world, is a government reservation with one broad mission, viz, to serve the world's commerce expeditiously and well, and to bend all governmental functions to this end along practical and economical lines. This can only be hampered by diffusion of responsibility; and I must recommend most strongly that we do not revert to a policy which our experience has rightly led us to discard, and to abandon a correct policy which we have evolved. COURTS. I can concur with this recommendation. MUNICIPAL DIVISION. Much of this has been done and is proceeding. (The report errs in statement that former building division went to this division; it went to the quartermaster section of the supply department.) There are, however, many recommendations with which I can not concur, at least without further study. RELATIONS WITH PANAMA. These matters have been fairly fully covered by recent correspond- ence. I can not agree with the commission that supply should be left to individuals or corporations, for the principal reason that it would not be done if it was. If the commission were as familiar as our officials are with Panaman character and with efforts of Ameri- can firms to do business in this country, its members would appreciate that service would be vastly inferior and more expensive, and there would be instant and strong clamor for a return to our present sys- tem. All of the questions, however, in this subhead of the report only confirm my recommendations for revocation of the Taft Agree- ment and entering into a new treaty. As to direct action between the Governor and Panama this also has been properly settled, and should stay settled. Since the com- 44 BEPOBT OF SPECIAL PANAMA CANAL COMMISSION. mission presented its report to .yon, we have had one instance in which it worked and worked well, where the so-called proper action of the State Department was not getting anywhere. The Governor is charged with the responsibility of taking over police protection on Panama soil when necessary for the protection or operation of the canal. Is the Governor going to have to do this by cabling to the State Department for a notice to be served, or even by asking the American Minister in Panama to deliver this notice (which would not be State Department action unless the Minister were authorized to do so) % This certainly will not be effective in heading off riots or revolutions, and will not be clone while the undersigned holds any such responsibility as Governor. RELATIONS WITH THE MILITARY. Most of these matters are matters that have been threshed out sev- eral times, and the canal government has made so many concessions to the military authorities in the interest of harmony that I am safe in saying we have fulfilled- all the requirements of- cooperation. We can not, however, expend funds appropriated for one purpose for another, and we can not agree that the universal rule of right of way for the ship shall be abrogated on a waterway of the supreme im- portance of the canal. Aside from the military transportation there is not now' any necessity for traffic crossing the canal that can not be accommodated on the lock gates as they are. When this necessity exists a means will be found, but it would be a great mistake to install a bridge, at least until this land traffic has assumed such size as to justify the cost and risk, which will be far in the future. The question as to a roadway from Gatun to Gamboa can be taken up when there is any reasonable probability of obtaining funds for its construction. It may be desired as a military asset. The Panama Canal does not need it, but would be entirely willing to use prisoners on it. HEALTH DEPARTMENT. There are some detailed recommendations here that may well be made the subject of further inquiry. I am not opposed to the recommendation to charge for dispensary service except to employees, and have already recommended a charge for subsistence in hospitals. I am not in favor of dispensing with civilians and substituting Army surgeons unless the time comes that we lose some of our present excellent staff. The question of turning Ancon Hospital over to the Army has been given serious consideration (every two or three years). Its work for the Army now is about 10 per cent of its work. The superintendent and assistant superintendent are officers of the Army and probably will continue so, as is also the chief health officer, who is responsible for general health conditions and should certainly not be deprived of control of one of his principal assets in this work, as would be the case if Ahcon Hospital were transferred to the Army. SANITATION DIVISION. The securing of full payment for sanitary work done for Panama in the terminal cities is another question which may be taken up in negotiating the new treaty. The canal has attempted to obtain more REPORT OF SPECIAL PANAMA CANAL COMMISSION. 45 equitable payments, but without success. The alternative is to re- quire Panama to do its own sanitation which, while agreeable to Panama, would probably not produce necessary results, or if pro- duced, would result in much friction. The sanitation of the two cities, besides, is worth something to the canal, though probably not as much as the annual deficit. As to our own sanitary work, it may be said to be lessening annually, as more and more permanent drains are completed. There have been economies introduced already, and as time goes on there will be more. I am unalterably opposed to the transfer of our quarantine service to the Public Health Service. Cost would be greater, service far less efficient through inherent difficulties of cooperation, and canal traffic would be impeded. ACCOUNTING DEPARTMENT. This is touched on elsewhere except as to the proposed consolida- tion of the offices of paymaster and collector. This was given con- sideration in formulating the Panama Canal Act. The proposal looks attractive as indicating a saving, but the saving would be small, prob- ably $7,500 a year. This would be a small saving to effect for the surrender of the additional safeguards thrown around the handling of some $20,000,000 a year in each office by the separation of collect- ing from disbursing functions. I am unable to concur in the pro- posed change. I am unable to concur in a separate auditing force for the railroad, or to pay-roll preparation by each division, as making for expense rather than for saving ; nor can I .concur in injecting capital cost and depreciation charges in all cases, nor that any saving can be made or greater accuracy commensurate with cost secured by setting up an instrumentality to secure it in more detail. SUPPLY DEPARTMENT. The idea of transferring purchases, supply and storekeeping to the Panama Railroad looks attractive, though it hardly agrees with an earlier recommendation for divorce of activities. There is no question but that official red tape handicaps efficient business and The Panama Canal suffers exceptionally in this respect, and may possibly suffer more as the supply service of the Budget Bureau grows. I would emphatically favor this plan except that it doubtless will require legislation which will be difficult to secure, while we might much more easily obtain legislation which will relieve us of some of our troubles under the existing system. Also I can foresee endless complaints reaching our office through the Secretary of War, backed by high officials of the Government service. There would be complaints of not having goods considered, of not being asked for bids, charges of graft and incompetency. Before embarking on this plan all higher officials (Governor, Secretary, and President) should contemplate a continued resistance to all kinds of political pressure for at least two or three years until the system had proven itself. With the necessary legislation and this resolution to give it a fair trial, it would doubtless effect considerable savings. Doubt- less then a time would come when some official were caught in 46 REPORT OF SPECIAL PAXA.MA CANAL COMMISSION. "graft." and the whole scheme would come back to the usual and exceedingly hampering system now in use. As to throwing the Zone open to private business, I am convinced of the impracticability of this at the present time. Many questions are involved, as will appear in the negotiation of the new treaty with Panama. Steps have already been taken looking toward a reduction of stocks, and toward stricter control along lines recommended. Four months, however, is too short a period to cover. Other recommendations should be given further study. COMMISSARY DIVISION. These detailed recommendations are worthy of consideration and study. I can not see how cash sales will lessen Panama's complaint. This is a problem with which the canal has worked for j^ears. There is no solution that, has not some objections. I can but report that we are prepared to give the greatest weight to this recommendation, in further consideration and study of a difficult problem. As to transfer of activities (cattle, hog, and dairy) to private busi- ness, this might be accomplished if desired, and economies might thereby be effected. All of the businesses, however, are valuable assets to the supply, and the dairy, though carried on at high costs, is practically indispensable from the health viewpoint. ■ I can not concur in many of the minor recommendations referred to ; in some I concur, and some have already been accomplished. RESTAURANTS AND HOTELS. The basis for the main criticism here stands or falls with the rent question. As soon as rent to gold employees is authorized, the service at these places will carry corresponding charges. The principal ob- jection against leasing the Hotel Washington is the desire to main- tain at each terminus at least one first-class hotel under direct con- trol. A lease of this plant to an individual would almost certainly result in all sorts of criticism from many distinguished visitors. Other minor recommendations are worthy of study ; some few have already been adopted. ELECTRICAL DIVISION. The statement of the emergency use of the steam plant which is floating on the power line is not quite accurate. The one most dan- gerous place under power failure is at the lower lock at Miraflores, but the danger is more than the mere flooding of the lower chamber. When tide is high at Pacific entrance water has to be passed from the upper chamber past the lower chamber and wasted in order to avoid flooding lower chamber when equalized. If the power were to fail while these valves are open a heavy vessel might be set down on the floor of the upper chamber before the valves could be closed by hand. Such an incident is of course remote, but if it came it would be ex- ceedingly expensive, and if it were to come while the opposite cham- ber were under overhaul the canal would be closed for several days, while the mere flooding of chamber would close the canal only a few hours. REPORT OP SPECIAL PANAMA CANAL COMMISSION. 47 The output of the steam plant during the fiscal year just dosed was considerably less than 1 per cent of the total power, due to the small number of interruptions in transmission. It is believed that, in view of the fact that in a very few years a steam plant is going to be necessary in the dry season for economizing water, and also as the floating- of a steam unit on the line gives the valuable insurance referred to above, and also performs a valuable function as syn- chronous condensers for power factor improvement and voltage regulation, the present use of this plant should be continued and its gradual replacement effected, though it is quite possible that very considerable economies in operation can be effected. Studies along this line were started some months ago. It may also be that further study will bring my views and those of the commission into closer parallel. Other recommendations are worthy of further study, though I must confess my doubts as to being able to furnish dependable service with the full cuts recommended. CLUBS AND PLAYGROUNDS. The matters herein presented have been given study since the visit of the commission, and one large clubhouse is being run on one shift as an experiment. The statement that 80 per cent of business is done in afternoon and evening is inaccurate, even if the eleven after noon hours are covered. The percentage as between the two shifts (before and after 3 p. m.) are more nearly 40 and 60. The commission may not have considered the fact that charges adjusted as recommended might operate to decrease revenues in greater pro- portion than expenses, or force the closing of the clubhouses, which would be most unfortunate, as manj^ employees would thereby be forced into the surroundings of Panama and Colon, extremely unde- sirable for many of them. However, the matter is well worthy of study, but the changes should not be too precipitate. RECORD AND PERSONNEL BUREAUS. The Panama Canal has learned by experience that a dissemination of the duties as recommended would not only greatly hamper the transaction of the involved business operations of the canal and railroad, but would add very greatly to the expense. I can not concur in either of these recommendations. PROPERTY AND REQUISITION BUREAU. This is worthy of study, but I doubt if much saving can be effected should the bureau not be merged into a purchasing department as elsewhere suggested. BUREAU OF STATISTICS. Incidental to the words of commendation of this office, I venture the mild suggestion that this is the one function of the canal organi- zation with which the commission became extremely familiar, and that it is possible that a similarly close study of other sections might have eliminated some of the critical impressions formed. 48 REPORT OF SPECIAL PANAMA CANAL COMMISSION. As to The Panama Canal Record, I should vote most strongly against its discontinuance. It performs an advertising function for the canal which in my opinion is worth at least ten times its annual cost — which has been reduced from $17,000 to about $11,000 since the visit of the commission. WASHINGTON OFFICE. These recommendations are dependent on others. There is no doubt that economies in the force of this office can be effected with the decline of construction and purchasing duties which confront us for the next two or three years. The matter is well worthy of study. LOCK OPERATION. The new system of dispatching gives all promise of success and will in all probability be adopted. It may, however, fail with the increase of traffic that may come to us in a year or two. It will effect considerable economies. Some economies may also be effected in the supervisorv force, but I have no hope of reaching all the cuts suggested by Captain Fry. DREDGING DIVISION. . Efforts have been made to loan the dredge Culebra to the Engi- neer Department, U. S. Army, and if the operations of that Depart- ment warrant it the dredge will be permanently transferred, and hired back when required for our occasional work. We also expect to lease a pipe-line dredge to Ecuadorian or Colombian in- terests, and had started negotiations to that effect six months ago. I might here again be pardoned for venturing another mild sugges- tion. The slide of July 14th, which occurred while the commission was at the canal, was the only considerable emergency that con- fronted canal operations during their stay. It was handled effi- ciently, under their observation. (They are, however, slightly in error, as the big battleships passed on the 16th, not the 17th.) This occurrence undoubtedly elided from their report a recommendation to eliminate a stand-by tug for the dredging division. It is sug- gested that other emergencies might have caused other elisions or at least have impressed the commission more than is apparent with the practical difficulties of conducting work so far from the nearest port from which assistance may be obtained. MARINE DIVISION. The Panama Canal, unfortunately, is not in a position to meet anything but a reasonably permanent change in volume of business, nor can it, as practically all other port works could do, place equip- ment in reserve with a view to suddenly recommissioning it, or de- pend for any peak of its service on hire of tugs. What we have is all there is, not only for our own service, but for occasional service to neighboring ports. Such a service as that of our marine divi- sion can not at the present time be self-sustaining except by charges that would be criticized the world over as exorbitant. I can not con- cur in all the reductions of equipment recommended, though some of REPORT OF SPECIAL PANAMA CANAL COMMISSION. 49 the minor recommendations have already been accomplished. Other recommendations are worthy of consideration and are receiving study. I must again here record my absolute negative against the recom- mendation to transfer the Steamship inspection Service to the simi- lar service in the Department of Commerce, as this will but add ex- pense and hamper service. MECHANICAL DIVISION. This division, in the fiscal year 1921, performed about $6,800,000 worth of work, of which over $2,600 5 000 was performed for outside agencies, $2,350,000 for the canal, about $1,400,000 for the Panama Kailroad, and about $400,000 for other governmental agencies. Ex- cept for the fact that overheads do not include amortization or de- preciation charges (except in minor instivices), the work was not done at a loss. The shops get some outside business, as indicated above. It is prac- tically certain that much of this would be lost if our charges were to be fixed to carry this overhead. Carrying no such charges they can more than pay their way if the shipping world is busy. It is quite true that this condition will be slow in returning and unfortunate retrenchments may be necessary unless the shops can be given some governmental work other than that of the canal. These retrench- ments may involve the temporary closing down of some facilities for repair of shipping, but I am positive that no far-seeing executive, keeping the national value of this utility in mind, would be justified in going to the extreme recommended by the commission. The detailed recommendations are certainly worthy of Report.} Among the recommendations of the commission the following appears : It is further recommended that there be set up in the Canal Administration. an executive officer whose time shall be devoted to the detailed examination and coordination of the various activities of which the canal organization is made up. This executive officer should he a man who. in commercial life, would cor- respond with a genera! manager of a private corporation. He should relieve the Governor of all executive details, and for this purpose we recommend that the services of a man with wide experience in large business undertakings be obtained. It is believed impracticable to obtain an executive officer from civil life at a salary properly coordinated with that of the Governor. The engineer of maintenance, however, forms an excellent substitute, and can perform the functions of an executive officer if relieved of direct charge of various divisions under his control ; and this is directed. EXECUTIVE VERSUS OPERATIVE PAY. [Page 15 of Report.'] The Governor shall be allowed from Panama Eailroad funds for entertainment expenses so much as may be necessary up to $4,000 per annum, provided that this use of Panama Eailroad funds be authorized by Congress. DIVISION OP SCHOOLS. [App. No. 1 of Report.] The number of colored teachers shall be increased by eight. The colored schools shall be enlarged at Paraiso, Red Tank and Cristobal (or Mount Hope) by two rooms, at Gatun by three, and at Empire by one. The principals of the various colored schools shall be paid $960 a year and the other teachers from $750 for the first year to $900 after three years' service. The silver schools should be extended to ten months, inasmuch as the children are accustomed to going to school practically the entire year. Additional buildings needed should be set aside from existing structures, or if necessary they should be immediately constructed. The preceding five directions should be made effective from funds which may be made available from economies effected in other ac- tivities under the civil government. Xo fee shall be charged for children of employees residing out- side of the Canal Zone. A manual-training school shall be established in connection with a system of apprenticeship in the useful trades. REPORT OF SPECIAL PANAMA CANAL COMMISSION. 57 COURTS. | A pp. No. J of Report.] Steps should be taken to turn over the duties of the Canal Zone Marshal to the Chief of Police, securing-, if possible, a change in the law. MUNICIPAL DIVISION. [App. No. 1 of Report.] The subdivisions of the northern and southern districts shall be reduced in number to three each. The wages of the foreman and superintendents shall be thor- oughly gone into and fixed in relation to the class of work on which these men are now employed and not upon what their former work was or what their capacity may be. After present commitments in the cities of Panama and Colon are fulfilled, municipal work for these cities shall be undertaken only when funds are actually set aside and available therefor. The number of subforemen should be reduced. After the completion of the work on the Santo Tomas Hospital no additional work of this kind shall be undertaken except when funds are actually set aside and made available therefor. RELATIONS WITH PANAMA. [App. No. 1 of Report.] The canal administration is directed not to handle matters (ex- cepting those arising from the exercise of the Governor's executive functions) directly with the Panaman Government, but that other matters shall be dealt with through the regular channels of the State Department. The Panaman Government should be informed that the canal authorities are within their rights under the treaty in purchasing and selling supplies of whatever nature to the employees of the Canal Zone. The present practice of allowing representatives of local firms to go on board ships and solicit business should be kept entirely free and unhampered and it should be encouraged rather than im- peded by unnecessary rules and regulations. The Panaman Government should be advised that in the opinion of the Department the property in the cities of Panama and Colon is properly held" by the railroad and that there has been no violation of the Treaty in connection with the improvements made thereon. The Panaman Government should be advised that the Department can not concur in their contention in reference to the designation of land that may be later required for fortification or other purposes, or in their claim that the United States should pay the Republic of Panama for surrendering its sovereign rights in any lands hereafter required. The question presented as to the exemption from Panaman taxes of certain property of the Panama Railroad shall be referred to the proper legal advisers of the Secretary of War for determination and draft of a suitable answer. 58 RKPORT OF SPECIAL PANAMA CANAL COMMISSION. The sum of money now due the United States for the construction of public works in the cities of Panama and Colon shall be divided in two equal parts and deducted from the next two annual payments due to the Panaman Republic and thereafter any debts incurred shall be deducted from the next succeeding annual payments, provided this can be done satisfactorily under the Treaty obligations. Mr. C. P. Fairman should be informed that the Secretary of*War will take no action in the matter of title to lands such as he recom- mends and that he or his clients have recourse to the District Court if they feel that justice has not been done them. VENEREAL SITUATION. [App. No. 1 of Report.] The Governor of the canal shall be directed to have his legal ad- viser examine into the leases under which the Panama Railroad Co. has rented land in the city of Colon and wherever possible by an}' just interpretation of the law the lessee shall be informed that the property can not be used for houses of prostitution under penalty of losing his lease, and he shall further be instructed that all future leases shall contain a definite proviso under which the leases can be immediately canceled in case the property is used for such purpose. TRANSCONTINENTAL ROAD. [App. No. 1 of Report.] The use of the railroad embankment for this purpose shall be authorized, provided it can be done without widening the embank- ment. The cost of moving the transmission poles and the construc- tion of the road to be borne by the military authorities, said authority to give the right to adapt the bascule bridge near Monte Lirio so as to carry the highway traffic and the canal administration shall cooperate in this work and assist it by the free use of prisoners for the construction of the road wherever practicable. HEALTH DEPARTMENT. [App. No. 1 of Report.] Hospital Division. — Employees shall be charged for subsistence at a rate to cover the actual cost of food served. These cost figures should be adjusted every three months. The Panama Railroad should pay for the hospital and sanitary services furnished to its employees on the same basis that any other corporation would be obliged to pay : said charges to be the same, hoAvever, as those to other employees of the canal, paid by the rail- road and collected by it from its employees. Approximately 10 per cent of all the silver employees in the hos- pitals should be dispensed with, to be released where they can best be spared. Sanitation Division. — The amounts expended for sanitation in the Zone shall be reduced as much as possible consistent with maintain- ing the necessary sanitary precautions requisite for the preservation of the health of American employees in tropical service. REPORT OF SPECIAL PANAMA CANAL COMMISSION. 59 The cost to the United States for sanitation in the cities of Colon and Panama should .not exceed the amounts provided by the cities themselves: provided that not to exceed half the expense for sanita- tion in areas in Panama or Colon occupied exclusively by United States employees may be borne, by the United States. Householders in Panaman and Canal territory shall be obliged to clean and keep clean their own property under penalty of having it done for them at their expense by our sanitary squads, and of paying a fine for repeated offenses. ACCOUNTING DEPARTMENT. [App. No. 2 of Report.] In the system of accounting there shall be provision made for a ■complete and independent showing by each separate business activity throughout the Zone, and invested capital (subject to the revised set-up value as elsewhere directed) shall be set up as a direct charge thereto, the accounts showing the actual results of each unit. The Coupon Accounting Section shall be abolished in connection with establishing a system of cash purchases. SUPPLY DEPARTMENT. [App. No. 2 of Report.] A careful inventory and appraisement should be made of all stocks in warehouses. All materials shall be in accordance with standard specifications wherever possible, and in case the purchase of non-standard material or supplies is authorized, such specifications will be prepared in the department where material or supplies are required, but such special non-standard materials will only be purchased upon the approval of the Governor. Encouragement shall be given to civilians to come into the Zone and establish stores to supply the ordinary necessities of life and the commissaries shall confine themselves thereafter to the sale of staples or other articles not locally obtainable ; this should be started first in the silver communities and extended as rapidly as conditions justify. The price of ice to employees on the Canal Zone shall be fixed at cost. COMMISSARY DIVISION. The commissary division henceforth shall be operated as a separate and independent unit of the general establishment under the direction and management of the proposed Vice President of Panama Rail- road in Charge of Purchases and Supplies. An immediate inventory should be taken of all merchandise in stock to the end that current and salable goods only be retained, charging same at a figure representing present fair market value, the balance to be written off as a loss against prior operations less immediate salvage value. All stores shall be operated on a strictly cash basis. 60 REPORT OF SPECIAL PANAMA CANAL COMMISSION. A system of cards shall be established in lieu of the present coupon system, and monthly purchases shall be limited to approximately 75 per cent of the monthly compensation received, one card to serve both identification and limit purposes. MISCELLANEOUS DIVISIONS. [Api). Xo. 2 of Report.] The Ancon planing mill gold employees shall be replaced by silver employees. The operation and maintenance of all motor transportation of the Zone shall be turned over to the supply department and consolidated with the work now being performed by that department; the man- ager of that department shall be authorized to employ silver labor wherever it can be used to advantage. Free transportation of employees to and from their vrork shall be discontinued, except in special cases where quarters are not available reasonably contiguous to the work, and the issuance of free passes for the use of motor vehicles shall be reduced to the lowest possible point consistent with the actual needs of the service. The green house at Ancon shall be either leased to private parties or discontinued and liquidated. RESTAURANTS AND HOTELS. [App. Xo. 2 of Report.] The restaurants shall be treated in the same manner as the com- missary stores, and each plant shall be immediately inventoried, a capital charge representing the fair market value of the equipment shall be set up : the management shall be instructed to add 5 per cent on account of such capital investment to the cost of its operation, the manager to report directly to the Vice President of the Railroad in Charge of Purchases and Supplies, each unit to be operated sepa- rately and distinctly from the other units; the purchase of materials from the commissary and elsewhere shall be at a price including percentage of profit allocated by the Governor to the various com- missaries, and the charges for meals served shall cover all costs of operation of the restaurants, including interest and amortization at the rate of 5 per cent on the capital charge, full maintenance of the quarters occupied, depreciation and obsolescence, plus such rate of profit as may be authorized by the Governor to be set aside as a fund for replacement and renewals and for such other purposes as the Vice President in Charge of Purchases and Supplies may direct ; if it is found under the new plan of operation that any particular restaurant does not at least fully sustain itself, it should after six months' trial be discontinued, and its stocks and equipment be liqui- dated: provided, unless as previously directed, there exist sufficient reasons for its continuing. HOTEL ASPINWALL. [App. No. 2 of Report.] Instructions shall be issued to begin at once the liquidation of this hotel, either by lease or by sale, to private capital, or failing in that, by salva