The external trade of the Philippine Islands for 1934 showed a gratifying increase, being $194,010,747 as compared with $173,132,516 for the previous year. This represents a 12-percent increase in value. Imports increased 24 percent and exports 43 percent. There was an increase both in volume and value for all products exported except coconut oil and leaf tobacco. As usual, the islands had a substantial balance of trade in their favor resulting entirely from a favorable balance with the United States in the amount of $37.467,916. The islands' trade with foreign countries had an unfavorable balance of $10,671,391, thus leaving a net favorable trade balance of $26,796,525.

The finances of the insular government continued in excellent condition. Income exceeded expenditures. The insular government has met all its bonded obligations both as to sinking funds and interest. There were called for redemption in the course of the year $2,556,000 of outstanding bonds. The Independence Act provides that after the acceptance of the act by the people of the Philippines there shall be no obligation on the part of the United States to meet the interest or principal of bonds or other obligations of the Philippine Government issued thereafter during the continuance of United States sovereignty in the Philippine Islands, and that such bonds shall not be exempt from taxation in the United States or by authority of the United States. No new issues of bonds were made during the calendar year 1934. The outstanding bonded debt is well below the limit authorized by Congress, the total amount outstanding, as of December 31, 1934, being $67,422,700, consisting almost entirely of bonds held in the United States and payable, both as to interest and principal, at the Treasury of the United States.

Currency reserves are maintained at a level in excess of the maximum required by law.

This Department has consistently taken the position that Congress ought not to enact laws tending to infringe the implied agreements of the Independence Act since its acceptance on May 1, 1934, by the Philippine Legislature, without a mutual understanding. Certain laws having this effect, enacted by the Seventy-third Congress, were referred to in my report of last year. During the first session of the Seventy-fourth Congress there was enacted Public, No. 137, approved June 14, 1935, entitled "An act to protect American and Philippine labor and to preserve an essential industry, and for other purposes." This act in effect amends section 6 (c) of the Philippine Independence Act by increasing the amount of cordage that may enter the United States annually from the Philippine Islands duty free from 3,000,000 pounds to 6,000,000 pounds. It is more restrictive in its effect than is contemplated in section 6 (c) of the Independence Act in that the quota limitation becomes effective as of May 1, 1935, instead of on the date of the inauguration of the Commonwealth government, and further, the stated quota may not be exceeded in amount under any conditions.

The Tydings-McDuffie Act provides for the allocation of quotas, under export permits issued by the government of the Commonwealth of the Philippine Islands, to the producers or manufacturers "proportionately on the basis of their exportation to the United States in the preceding year ", whereas Public, No. 137, Seventy

fourth Congress, places the responsibility for equitable suballocation of the cordage quota on the insular government where it properly belongs. As the Commonwealth government will be inaugurated before the end of the current year, the advantages as regards the amount of the quota appear to outweigh the disadvantages, and as the act is the result of an agreement between the United States cordage interests, the Philippine cordage interests, and the Philippine political leaders who were in the United States at that time, the War Department interposed no objection to the legislation as finally enacted.

The government of the islands has been ably conducted under the administration of Governor General Frank Murphy. As a fitting recognition of his spendid service the President has appointed him as the first United States High Commissioner to the Philippines, to take office upon the inauguration of the Commonweath government under the provisions of the Independence Act.

DOMINICAN CUSTOMS RECEIVERSHIP

The annual inspection of the Dominican customs receivership was made in December 1934. The receivership continues to maintain a high degree of efficiency and the accounts were in satisfactory condition.

The customs collections for 1934 amounted to $3,189,200.12, an increase of $189,622.19, or 6.32 percent, over the customs collections for 1933. Contributing to the gain in customs revenue were the advances in value of imported merchandise and a gradual betterment of commerce in general.

Internal revenue taxes, independent of customs duties, but collected at the custom houses under administration of the receivership by virtue of a special agreement with the Dominican Government, produced the sum of $2,040,972.75, an increase of $351,518.94, or 21 percent, compared with 1933.

The cost of operating the receivership was well within the 5 percent allowance provided in the convention, being 4.19 percent of the customs receipts for the year. The cost of internal revenue collections made through the receivership was 2.89 percent of the gross collections, the allowance under the agreement with the Dominican Government being 4 percent. The combined cost of the services was 3.68 percent of the total receipts.

PANAMA CANAL

The Panama Canal is an independent establishment of the United States Government. The Governor of the Panama Canal exercises complete executive and administrative authority and jurisdiction over Panama Canal activities, subject to the order of the President of the United States exercised through the Secretary of War.

In carrying out its primary function of passing vessels through the waterway as expeditiously and as safely as possible, the Canal organization, of necessity, engages in many related activities, diverse in kind and intricate in detail.

An essential factor in the operation and maintenance of the Canal is the function of providing various supplies and services to ships and to the personnel engaged in Canal operation and defense. For this purpose, and also for caring for Canal equipment, the Panama Canal and Panama Railroad Co. maintain and operate a considerable number of business enterprises of a character which in the United States would be left to private initiative. Some of the more important of these are marine and railroad repair shops; drydocks; coal and fuel-oil plants; storehouses carrying supplies essential to shipping; wholesale warehouses and retail stores supplying fresh meats, dairy products, and other food supplies, clothing, etc.; hotels and restaurants; terminal facilities such as wharves, piers, etc., for the transfer and storage of cargo; a railroad line across the Isthmus and serving the two ports of the canal; a steamship line operating between New York and the Isthmus to transport supplies and employees; generating stations to provide electricity for industrial, lighting, and general uses on the Canal Zone; and other essential

services.

The above-mentioned business enterprises and the important functions of administration and government such as public health, quarantine, immigration service, customs, post office, schools, police and fire protection, construction and maintenance of roads and watersupply systems, hydrographic and meteorological observations, steamship inspection, aids to navigation, control of commercial aircraft, etc., are all under coordinated, centralized control, which makes for economical and efficient operation.

The Panama Canal has been open to the commerce of the world for approximately 21 years. During this period, exclusive of 7,687 transits of vessels of the United States Government which passed through the canal without the payment of tolls, transits of large, ocean-going commercial vessels passing through the Canal have totaled 82,221, of which 36,657 were of American registry.

Our policy with respect to the Panama Canai was enunciated by President Cleveland when he stated that it would not be merely a national asset but that "it must be for the world's benefit, a trust for mankind, to be removed from the chance of domination by any single power." Thus, in the interest of world commerce, existing treaties

have neutralized it under our sole guaranty and we have been given the right to do those things deemed by us necessary for the construction, operation, maintenance, sanitation, and protection of the Canal. Our special interest is not merely based on our great capital investment amounting to over $500,000,000 but by our responsibility to the world in maintaining this trade route. The operation of the Canal is therefore the dominant feature of our relations with the Republic of Panama. Although this fact has at times been obscured, it nevertheless is clear and should be self-evident to our nationals.

Relations with Panama.-In the Treaty of 1903, the Republic of Panama granted to the United States in perpetuity the use, occupation, and control of the present Canal Zone. Within this zone, it was given all rights, power, and authority which it would possess and exercise if it were sovereign therein. The United States was further granted in perpetuity the use, occupation, and control of any other lands which might be required for canal purposes. The Canal, though completed and opened to use in the sense that initial construction is finished, will in the more distant future again be the scene of large construction activities in the widening of Gaillard Cut and the construction of the third set of lock chambers. Such large-scale construction may require the diversion of water from adjacent watersheds outside the limits of the present Canal Zone which may make necessary the exercise of the rights referred to above. Defense of the Canal may also require the occupation and control of additional lands. These rights have not been abused and there is no reason why there ever will be temptation to do so.

In 1850 when the concession was made by the former Republic of New Granada to the corporation constituted to build the Panama Railroad, there was included the marsh island of Manzanilla for the establishment of an Atlantic terminal. In the course of its operations the Panama Railroad filled in a great part of this marsh and as time went on the city of Colon was formed. With the continued growth of the city and particularly after the United States began construction, this development was continued.

It is difficult to ascertain the total amount of money which has been expended in the project but the total is large. During the past 15 to 20 years the street, sewer, water connections, and sidewalks in the newly developed areas have been put in at the sole expense of Canal adjuncts. Moreover, inasmuch as the Panama Railroad owns or controls the land on which the Panamanian city of Colon is located, it has set aside or permitted the use of considerable areas within the city of Colon as public parks and playgrounds and for other Governmental purposes.

While practically the entire island of Manzanilla is owned by the Panama Railroad, the United States exercises no political jurisdiction over any part of the city of Colon. However, in the post-war period, due to the increased needs of the Canal and the unavailability of other suitable sites, in one part of the city of Colon, known as "New Cristobal", houses were built for Canal employees and municipal improvements and public buildings were erected.

The Panamanian city of Colon is physically separated from the rest of the Republic of Panama by a portion of the Canal Zone. The Republic is now desirous of constructing a transisthmian highway

connecting the city of Colon with the city of Panama on the Pacific side of the Isthmus. Refore the Republic can construct such a highway, however, it must secure a waiver on the part of the Panama Railroad, due to the latter's exclusive right to construct, maintain, and operate any system of communication between the two oceans.

During the past year, the prohibition law applicable to the Canal Zone was repealed and regulations relating to the control of alcoholic beverages were published. In general, these regulations prohibit manufacture within the Canal Zone; authorize sales by clubs, hotels, commissaries, and other similar licensed agencies; and require that imports be made through the Republic of Panama in order that that nation may benefit from the revenues thus derived. Although there is no question as to our right to import liquors into the Canal Zone without payment of duty thereon to Panama, in these regulations the United States has attempted to handle this difficult problem in a manner calculated to produce the best results to the many interests involved.

Panama Canal traffic.-The Panama Canal not only is proving to be of great benefit to the world's commerce but is important as an agency of national defense. During the year the United States Fleet was passed through the canal from the Atlantic to the Pacific Ocean in a total elapsed time of 40 hours. The transit of the fleet without major incident again demonstrated the ability of the canal organization to meet unusual demands made upon it.

Work under the contract for the construction of Madden Dam was finished during the year, the work being formally accepted as completed on February 9, 1935. Some work on the project, such as the completion of the power plant, was unfinished at the close of the fiscal year, but this will be completed by Government forces. This structure dams the Chagres River at Alhajuela and provides a reserve storage of approximately 22,000,000,000 cubic feet of water, which will be available for use in maintaining the level of Gatun Lake during the 4 months of the dry season each year when the inflow into Gatun Lake is greatly below the demands made upon the lake for water to be used for lockages, municipal purposes, hydroelectric power, and the loss through evaporation. Completion of this project increases the dry-season water supply sufficiently to insure a depth of water in the Gaillard Cut of 42 to 43 feet, and will control exceptional floods that heretofore have been a menace to navigation, and will obviate the necessity of operating the Diesel electric-power plant during the dry season for the purpose of conserving water.

The number of transits of ocean-going commercial vessels passing through the Canal during the year was 5,180, as compared with 5,234 in 1934, and 4,162 in 1933. There was a slight decrease in the number of transits of tolls paying vessels, and also a small decline in the amount of revenue received from tolls; there was an increase of approximately 21⁄2 percent in the volume of cargo carried through the Canal during the year.

The more important trade routes served by the Canal, and the tons of cargo moving over these routes during the past fiscal year, were: Between the Atlantic and Pacific coasts of the United States, 7,963,410 tons; between the United States and the Far East, including the Philippine Islands, 3,599,706 tons; between Europe and South Amer