PART I

This message is the first of several which I shall send to Congress during
the interval between the opening of its regular session and its adjournment
for the Christmas holidays. The amount of information to be communicated as
to the operations of the Government, the number of important subjects
calling for comment by the Executive, and the transmission to Congress of
exhaustive reports of special commissions, make it impossible to include in
one message of a reasonable length a discussion of the topics that ought to
be brought to the attention of the National Legislature at its first
regular session.

THE ANTI-TRUST LAW-THE SUPREME COURT DECISIONS.

In May last the Supreme Court handed down decisions in the suits in equity
brought by the United States to enjoin the further maintenance of the
Standard Oil Trust and of the American Tobacco Trust, and to secure their
dissolution. The decisions are epoch-making and serve to advise the
business world authoritatively of the scope and operation of the anti-trust
act of 1890. The decisions do not depart in any substantial way from the
previous decisions of the court in construing and applying this important
statute, but they clarify those decisions by further defining the already
admitted exceptions to the literal construction of the act. By the decrees,
they furnish a useful precedent as to the proper method of dealing with the
capital and property of illegal trusts. These decisions suggest the need
and wisdom of additional or supplemental legislation to make it easier for
the entire business community to square with the rule of action and
legality thus finally established and to preserve the benefit, freedom, and
spur of reasonable competition without loss of real efficiency or
progress.

NO CHANGE IN THE RULE OF DECISION-MERELY IN ITS FORM OF EXPRESSION.

The statute in its first section declares to be illegal "every contract,
combination in the form of trust or otherwise, or conspiracy, in restraint
of trade or commerce among the several States or with foreign nations," and
in the second, declares guilty of a misdemeanor "every person who shall
monopolize or attempt to monopolize or combine or conspire with any other
person to monopolize any part of the trade or commerce of the several
States or with foreign nations."

In two early cases, where the statute was invoked to enjoin a
transportation rate agreement between interstate railroad companies, it was
held that it was no defense to show that the agreement as to rates
complained of was reasonable at common law, because it was said that the
statute was directed against all contracts and combinations in restraint of
trade whether reasonable at common law or not. It was plain from the
record, however, that the contracts complained of in those cases would not
have been deemed reasonable at common law. In subsequent cases the court
said that the statute should be given a reasonable construction and refused
to include within its inhibition, certain contractual restraints of trade
which it denominated as incidental or as indirect.

These cases of restraint of trade that the court excepted from the
operation of the statute were instances which, at common law, would have
been called reasonable. In the Standard Oil and Tobacco cases, therefore,
the court merely adopted the tests of the common law, and in defining
exceptions to the literal application of the statute, only substituted for
the test of being incidental or indirect, that of being reasonable, and
this, without varying in the slightest the actual scope and effect of the
statute. In other words, all the cases under the statute which have now
been decided would have been decided the same way if the court had
originally accepted in its construction the rule at common law.

It has been said that the court, by introducing into the construction of
the statute common-law distinctions, has emasculated it. This is obviously
untrue. By its judgment every contract and combination in restraint of
interstate trade made with the purpose or necessary effect of controlling
prices by stifling competition, or of establishing in whole or in part a
monopoly of such trade, is condemned by the statute. The most extreme
critics can not instance a case that ought to be condemned under the
statute which is not brought within its terms as thus construed.

The suggestion is also made that the Supreme Court by its decision in the
last two cases has committed to the court the undefined and unlimited
discretion to determine whether a case of restraint of trade is within the
terms of the statute. This is wholly untrue. A reasonable restraint of
trade at common law is well understood and is clearly defined. It does not
rest in the discretion of the court. It must be limited to accomplish the
purpose of a lawful main contract to which, in order that it shall be
enforceable at all, it must be incidental. If it exceed the needs of that
contract, it is void.

The test of reasonableness was never applied by the court at common law to
contracts or combinations or conspiracies in restraint of trade whose
purpose was or whose necessary effect would be to stifle competition, to
control prices, or establish monopolies. The courts never assumed power to
say that such contracts or combinations or conspiracies might be lawful if
the parties to them were only moderate in the use of the power thus secured
and did not exact from the public too great and exorbitant prices. It is
true that many theorists, and others engaged in business violating the
statute, have hoped that some such line could be drawn by courts; but no
court of authority has ever attempted it. Certainly there is nothing in the
decisions of the latest two cases from which such a dangerous theory of
judicial discretion in enforcing this statute can derive the slightest
sanction.

FORCE AND EFFECTIVENESS OF STATUTE A MATTER OF GROWTH.

We have been twenty-one years making this statute effective for the
purposes for which it was enacted. The Knight case was discouraging and
seemed to remit to the States the whole available power to attack and
suppress the evils of the trusts. Slowly, however, the error of that
judgment was corrected, and only in the last three or four years has the
heavy hand of the law been laid upon the great illegal combinations that
have exercised such an absolute dominion over many of our industries.
Criminal prosecutions have been brought and a number are pending, but
juries have felt averse to convicting for jail sentences, and judges have
been most reluctant to impose such sentences on men of respectable standing
in society whose offense has been regarded as merely statutory. Still, as
the offense becomes better understood and the committing of it partakes
more of studied and deliberate defiance of the law, we can be confident
that juries will convict individuals and that jail sentences will be
imposed.

THE REMEDY IN EQUITY BY DISSOLUTION.

In the Standard Oil case the Supreme and Circuit Courts found the
combination to be a monopoly of the interstate business of refining,
transporting, and marketing petroleum and its products, effected and
maintained through thirty-seven different corporations, the stock of which
was held by a New Jersey company. It in effect commanded the dissolution of
this combination, directed the transfer and pro rata distribution by the
New Jersey company of the stock held by it in the thirty-seven corporations
to and among its stockholders; and the corporations and individual
defendants were enjoined from conspiring or combining to restore such
monopoly; and all agreements between the subsidiary corporations tending to
produce or bring about further violations of the act were enjoined.

In the Tobacco case, the court found that the individual defendants,
twenty-nine in number, had been engaged in a successful effort to acquire
complete dominion over the manufacture, sale, and distribution of tobacco
in this country and abroad, and that this had been done by combinations
made with a purpose and effect to stifle competition, control prices, and
establish a monopoly, not only in the manufacture of tobacco, but also of
tin-foil and licorice used in its manufacture and of its products of
cigars, cigarettes, and snuffs. The tobacco suit presented a far more
complicated and difficult case than the Standard Oil suit for a decree
which would effectuate the will of the court and end the violation of the
statute. There was here no single holding company as in the case of the
Standard Oil Trust. The main company was the American Tobacco Company, a
manufacturing, selling, and holding company. The plan adopted to destroy
the combination and restore competition involved the redivision of the
capital and plants of the whole trust between some of the companies
constituting the trust and new companies organized for the purposes of the
decree and made parties to it, and numbering, new and old, fourteen.

SITUATION AFTER READJUSTMENT.

The American Tobacco Company (old), readjusted capital, $92, 000,000; the
Liggett &amp; Meyers Tobacco Company (new), capital, $67,000,000; the P.
Lorillard Company (new), capital, $47,000,000; and the R. J. Reynolds
Tobacco Company (old), capital, $7,525,000, are chiefly engaged in the
manufacture and sale of chewing and smoking tobacco and cigars. The former
one tinfoil company is divided into two, one of $825,000 capital and the
other of $400,000. The one snuff company is divided into three companies,
one with a capital Of $15,000,000, another with a capital of $8,000,000,
and a third with a capital of $8,000,000. The licorice companies are two
one with a capital Of $5,758,300 and another with a capital of $200,000.
There is, also, the British-American Tobacco Company, a British
corporation, doing business abroad with a capital Of $26,000,000, the Porto
Rican Tobacco Company, with a capital of $1,800,000, and the corporation of
United Cigar Stores, with a capital of $9,000,000.

Under this arrangement, each of the different kinds of business will be
distributed between two or more companies with a division of the prominent
brands in the same tobacco products, so as to make competition not only
possible but necessary. Thus the smoking-tobacco business of the country is
divided so that the present independent companies have 21-39 per cent,
while the American Tobacco Company will have 33-08 per cent, the Liggett &amp;
Meyers 20.05 per cent, the Lorillard Company 22.82 per cent, and the
Reynolds Company 2.66 per cent. The stock of the other thirteen companies,
both preferred and common, has been taken from the defendant American
Tobacco Company and has been distributed among its stockholders. All
covenants restricting competition have been declared null and further
performance of them has been enjoined. The preferred stock of the different
companies has now been given voting power which was denied it under the old
organization. The ratio of the preferred stock to the common was as 78 to
40. This constitutes a very decided change in the character of the
ownership and control of each company.

In the original suit there were twenty-nine defendants who were charged
with being the conspirators through whom the illegal combination acquired
and exercised its unlawful dominion. Under the decree these defendants.
will hold amounts of stock in the various distributee companies ranging
from 41 per cent as a maximum to 28.5 per cent as a minimum, except in the
case of one small company, the Porto Rican Tobacco Company, in which they
will hold 45 per cent. The twenty-nine individual defendants are enjoined
for three years from buying any stock except from each other, and the group
is thus prevented from extending its control during that period. All
parties to the suit, and the new companies who are made parties are
enjoined perpetually from in any way effecting any combination between any
of the companies in violation of the statute by way of resumption of the
old trust. Each of the fourteen companies is enjoined from acquiring stock
in any of the others. All these companies are enjoined from having common
directors or officers, or common buying or selling agents, or common
offices, or lending money to each other.

SIZE OF NEW COMPANIES.

Objection was made by certain independent tobacco companies that this
settlement was unjust because it left companies with very large capital in
active business, and that the settlement that would be effective to put all
on an equality would be a division of the capital and plant of the trust
into small fractions in amount more nearly equal to that of each of the
independent companies. This contention results from a misunderstanding of
the anti-trust law and its purpose. It is not intended thereby to prevent
the accumulation of large capital in business enterprises in which such a
combination can secure reduced cost of production, sale, and distribution.
It is directed against such an aggregation of capital only when its purpose
is that of stifling competition, enhancing or controlling prices, and
establishing a monopoly. If we shall have by the decree defeated these
purposes and restored competition between the large units into which the
capital and plant have been divided, we shall have accomplished the useful
purpose of the statute.

CONFISCATION NOT THE PURPOSE OF THE STATUTE.

It is not the purpose of the statute to confiscate the property and capital
of the offending trusts. Methods of punishment by fine or imprisonment of
the individual offenders, by fine of the corporation or by forfeiture of
its goods in transportation, are provided, but the proceeding in equity is
a specific remedy to stop the operation of the trust by injunction and
prevent the future use of the plant and capital in violation of the
statute.

EFFECTIVENESS OF DECREE.

I venture to say that not in the history of American law has a decree more
effective for such a purpose been entered by a court than that against the
Tobacco Trust. As Circuit judge Noyes said in his judgment approving the
decree:

"The extent to which it has been necessary to tear apart this combination
and force it into new forms with the attendant burdens ought to demonstrate
that the Federal anti-trust statute is a drastic statute which accomplishes
effective results; which so long as it stands on the statute books must be
obeyed, and which can not be disobeyed without incurring far-reaching
penalties. And, on the other hand, the successful reconstruction of this
organization should teach that the effect of enforcing this statute is not
to destroy, but to reconstruct; not to demolish, but to re-create in
accordance with the conditions which the Congress has declared shall exist
among the people of the United States."

COMMON STOCK OWNERSHIP.

It has been assumed that the present pro rata and common ownership in all
these companies by former stockholders of the trust would insure a
continuance of the same old single control of all the companies into which
the trust has by decree been disintegrated. This is erroneous and is based
upon the assumed inefficacy and innocuousness of judicial injunctions. The
companies are enjoined from cooperation or combination; they have different
managers, directors, purchasing and sales agents. If all or many of the
numerous stockholders, reaching into the thousands, attempt to secure
concerted action of the companies with a view to the control of the market,
their number is so large that such an attempt could not well be concealed,
and its prime movers and all its participants would be at once subject to
contempt proceedings and imprisonment of a summary character. The immediate
result of the present situation will necessarily be activity by all the
companies under different managers, and then competition must follow, or
there will be activity by one company and stagnation by another. Only a
short time will inevitably lead to a change in ownership of the stock, as
all opportunity for continued cooperation must disappear. Those critics who
speak of this disintegration in the trust as a mere change of garments have
not given consideration to the inevitable working of the decree and
understand little the personal danger of attempting to evade or set at
naught the solemn injunction of a court whose object is made plain by the
decree and whose inhibitions are set forth with a detail and
comprehensiveness.

VOLUNTARY REORGANIZATIONS OF OTHER TRUSTS AT HAND.

The effect of these two decisions has led to decrees dissolving the
combination of manufacturers of electric lamps, a southern wholesale
grocers' association, an interlocutory decree against the Powder Trust with
directions by the circuit court compelling dissolution, and other
combinations of a similar history are now negotiating with the Department
of justice looking to a disintegration by decree and reorganization in
accordance with law. It seems possible to bring about these reorganizations
without general business disturbance.

MOVEMENT FOR REPEAL OF THE ANTI-TRUST LAW.

But now that the anti-trust act is seen to be effective for the
accomplishment of the purpose of its enactment, we are met by a cry from
many different quarters for its repeal. It is said to be obstructive of
business progress to be an attempt to restore old-fashioned methods of
destructive competition between small units, and to make impossible those
useful combinations of capital and the reduction of the cost of production
that are essential to continued prosperity and normal growth.

In the recent decisions the Supreme Court makes clear that there is nothing
in the statute which condemns combinations of capital or mere bigness of
plant organized to secure economy in production and a reduction of its
cost. It is only when the purpose or necessary effect of the organization
and maintenance of the combination or the aggregation of immense size are
the stifling of competition, actual and potential, and the enhancing of
prices and establishing a monopoly, that the statute is violated. Mere size
is no sin against the law. The merging of two or more business plants
necessarily eliminates competition between the units thus combined, but
this elimination is in contravention of the statute only when the
combination is made for purpose of ending this particular competition in
order to secure control of, and enhance, prices and create a monopoly.

LACK OF DEFINITENESS IN THE STATUTE.

The complaint is made of the statute that it is not sufficiently definite
in its description of that which is forbidden, to enable business men to
avoid its violation. The suggestion is, that we may have a combination of
two corporations, which may run on for years, and that subsequently the
Attorney General may conclude that it was a violation of the statute, and
that which was supposed by the combiners to be innocent then turns out to
be a combination in violation of the statute. The answer to this
hypothetical case is that when men attempt to amass such stupendous capital
as will enable them to suppress competition, control prices and establish a
monopoly, they know the purpose of their acts. Men do not do such a thing
without having it clearly in mind. If what they do is merely for the
purpose of reducing the cost of production, without the thought of
suppressing competition by use of the bigness of the plant they are
creating, then they can not be convicted at the time the union is made, nor
can they be convicted later, unless it happen that later on they conclude
to suppress competition and take the usual methods for doing so, and thus
establish for themselves a monopoly. They can, in such a case, hardly
complain if the motive which subsequently is disclosed is attributed by the
court to the original combination.

NEW REMEDIES SUGGESTED.

Much is said of the repeal of this statute and of constructive legislation
intended to accomplish the purpose and blaze a clear path for honest
merchants and business men to follow. It may be that such a plan will be
evolved, but I submit that the discussions which have been brought out in
recent days by the fear of the continued execution of the anti-trust law
have produced nothing but glittering generalities and have offered no line
of distinction or rule of action as definite and as clear as that which the
Supreme Court itself lays down in enforcing the statute.

SUPPLEMENTAL LEGISLATION NEEDED--NOT REPEAL OR AMENDMENT.

I see no objection-and indeed I can see decided advantages-in the enactment
of a law which shall describe and denounce methods of competition which are
unfair and are badges of the unlawful purpose denounced in the anti-trust
law. The attempt and purpose to suppress a competitor by underselling him
at a price so unprofitable as to drive him out of business, or the making
of exclusive contracts with customers under which they are required to give
up association with other manufacturers, and numerous kindred methods for
stifling competition and effecting monopoly, should be described with
sufficient accuracy in a criminal statute on the one hand to enable the
Government to shorten its task by prosecuting single misdemeanors instead
of an entire conspiracy, and, on the other hand, to serve the purpose of
pointing out more in detail to the business community what must be
avoided.

FEDERAL INCORPORATION RECOMMENDED.

In a special message to Congress on January 7, 1910, I ventured to point
out the disturbance to business that would probably attend the dissolution
of these offending trusts. I said:

"But such an investigation and possible prosecution of corporations whose
prosperity or destruction affects the comfort not only of stockholders but
of millions of wage earners, employees, and associated tradesmen must
necessarily tend to disturb the confidence of the business community, to
dry up the now flowing sources of capital from its places of hoarding, and
produce a halt in our present prosperity that will cause suffering and
strained circumstances among the innocent many for the faults of the guilty
few. The question which I wish in this message to bring clearly to the
consideration and discussion of Congress is whether, in order to avoid such
a possible business danger, something can not be done by which these
business combinations may be offered a means, without great financial
disturbance, of changing the character, organization, and extent of their
business into one within the lines of the law under Federal control and
supervision, securing compliance with the anti-trust statute.

"Generally, in the industrial combinations called 'trusts,' the principal
business is the sale of goods in many States and in foreign markets; in
other words, the interstate and foreign business far exceeds the business
done in any one State. This fact will justify the Federal Government in
granting a Federal charter to such a combination to make and sell in
interstate and foreign commerce the products of useful manufacture under
such limitations as will secure a compliance with the anti-trust law. It is
possible so to frame a statute that while it offers protection to a Federal
company against harmful, vexatious, and unnecessary invasion by the States,
it shall subject it to reasonable taxation and control by the States with
respect to its purely local business. * * *

"Corporations organized under this act should be prohibited from acquiring
and holding stock in other corporations (except for special reasons, upon
approval by the proper Federal authority), thus avoiding the creation under
national auspices of the holding company with subordinate corporations in
different States, which has been such an effective agency in the creation
of the great trusts and monopolies.

"If the prohibition of the anti-trust act against combinations in restraint
of trade is to be effectively enforced, it is essential that the National
Government shall provide for the creation of national corporations to carry
on a legitimate business throughout the United States. The conflicting laws
of the different States of the Union with respect to foreign corporations
make it difficult, if not impossible, for one corporation to comply with
their requirements so as to carry on business in a number of different
States."

I renew the recommendation of the enactment of a general law providing for
the voluntary formation of corporations to engage in trade and commerce
among the States and with foreign nations. Every argument which was then
advanced for such a law, and every explanation which was at that time
offered to possible objections, have been confirmed by our experience since
the enforcement of the antitrust, statute has resulted in the actual
dissolution of active commercial organizations.

It is even more manifest now than it was then that the denunciation of
conspiracies in restraint of trade should not and does not mean the denial
of organizations large enough to be intrusted with our interstate and
foreign trade. It has been made more clear now than it was then that a
purely negative statute like the anti-trust law may well be supplemented by
specific provisions for the building up and regulation of legitimate
national and foreign commerce.

GOVERNMENT ADMINISTRATIVE EXPERTS NEEDED TO AID COURTS IN TRUST
DISSOLUTIONS.

The drafting of the decrees in the dissolution of the present trusts, with
a view to their reorganization into legitimate corporations, has made it
especially apparent that the courts are not provided with the
administrative machinery to make the necessary inquiries preparatory to
reorganization, or to pursue such inquiries, and they should be empowered
to invoke the aid of the Bureau of Corporations in determining the suitable
reorganization of the disintegrated parts. The circuit court and the
Attorney General were greatly aided in framing the decree in the Tobacco
Trust dissolution by an expert from the Bureau of Corporations.

FEDERAL CORPORATION COMMISSION PROPOSED.

I do not set forth in detail the terms and sections of a statute which
might supply the constructive legislation permitting and aiding the
formation of combinations of capital into Federal corporations. They should
be subject to rigid rules as to their organization and procedure, including
effective publicity, and to the closest supervision as to the issue of
stock and bonds by an executive bureau or commission in the Department of
Commerce and Labor, to which in times of doubt they might well submit their
proposed plans for future business. It must be distinctly understood that
incorporation under Federal law could not exempt the company thus formed
and its incorporators and managers from prosecution under the anti-trust
law for subsequent illegal conduct, but the publicity of its procedure and
the opportunity for frequent consultation with the bureau or commission in
charge of the incorporation as to the legitimate purpose of its
transactions would offer it as great security against successful
prosecutions for violations of the law as would be practical or wise.

Such a bureau or commission might well be invested also with the duty
already referred to, of aiding courts in the dissolution and recreation of
trusts within the law. It should be an executive tribunal of the dignity
and power of the Comptroller of the Currency or the Interstate Commerce
Commission, which now exercise supervisory power over important classes of
corporations under Federal regulation.

The drafting of such a Federal incorporation law would offer ample
opportunity to prevent many manifest evils in corporate management to-day,
including irresponsibility of control in the hands of the few who are not
the real owners.

INCORPORATION VOLUNTARY.

I recommend that the Federal charters thus to be granted shall be
voluntary, at least until experience justifies mandatory provisions. The
benefit to be derived from the operation of great businesses under the
protection of such a charter would attract all who are anxious to keep
within the lines of the law. Other large combinations that fail to take
advantage of the Federal incorporation will not have a right to complain if
their failure is ascribed to unwillingness to submit their transactions to
the careful official scrutiny, competent supervision, and publicity
attendant upon the enjoyment of such a charter.

ONLY SUPPLEMENTAL LEGISLATION NEEDED.

The opportunity thus suggested for Federal incorporation, it seems tome, is
suitable constructive legislation needed to facilitate the squaring Of
great industrial enterprises to the rule of action laid down by the
anti-trust law. This statute as construed by the Supreme Court must
continue to be the line of distinction for legitimate business. It must be
enforced, unless we are to banish individualism from all business and
reduce it to one common system of regulation or control of prices like that
which now prevails with respect to public utilities, and which when applied
to all business would be a long step toward State socialism.

IMPORTANCE OF THE ANTI-TRUST ACT.

The anti-trust act is the expression of the effort of a freedom-loving
people to preserve equality of opportunity. It is the result of the
confident determination of such a people to maintain their future growth by
preserving uncontrolled and unrestricted the enterprise of the individual,
his industry, his ingenuity, his intelligence, and his independent
courage.

For twenty years or more this statute has been upon the statute book. All
knew its general purpose and approved. Many of its violators were cynical
over its assumed impotence. It seemed impossible of enforcement. Slowly the
mills of the courts ground, and only gradually did the majesty of the law
assert itself. Many of its statesmen-authors died before it became a living
force, and they and others saw the evil grow which they had hoped to
destroy. Now its efficacy is seen; now its power is heavy; now its object
is near achievement. Now we hear the call for its repeal on the plea that
it interferes with business prosperity, and we are advised in most general
terms, how by some other statute and in some other way the evil we are just
stamping out can be cured, if we only abandon this work of twenty years and
try another experiment for another term of years.

It is said that the act has not done good. Can this be said in the face of
the effect of the Northern Securities decree? That decree was in no way so
drastic or inhibitive in detail as either the Standard Oil decree or the
Tobacco decree; but did it not stop for all time the then powerful movement
toward the control of all the railroads of the country in a single hand?
Such a one-man power could not have been a healthful influence in the
Republic, even though exercised under the general supervision of an
interstate commission.

Do we desire to make such ruthless combinations and monopolies lawful? When
all energies are directed, not toward the reduction of the cost of
production for the public benefit by a healthful competition, but toward
new ways and means for making permanent in a few hands the absolute control
of the conditions and prices prevailing in the whole field of industry,
then individual enterprise and effort will be paralyzed and the spirit of
commercial freedom will be dead.

PART II.

The relations of the United States with other countries have continued
during the past twelve months upon a basis of the usual good will and
friendly intercourse. ARBITRATION.

The year just passed marks an important general movement on the part of the
Powers for broader arbitration. In the recognition of the manifold benefits
to mankind in the extension of the policy of the settlement of
international disputes by arbitration rather than by war, and in response
to a widespread demand for an advance in that direction on the part of the
people of the United States and of Great Britain and of France, new
arbitration treaties were negotiated last spring with Great Britain and
France, the terms of which were de signed, as expressed in the preamble of
these treaties, to extend the scope and obligations of the policy of
arbitration adopted in our present treaties with those Governments To pave
the way for this treat with the United States, Great Britain negotiated an
important modification in its alliance with Japan, and the French
Government also expedited the negotiations with signal good will. The new
treaties have been submitted to the Senate and are awaiting its advice and
consent to their ratification. All the essentials of these important
treaties have long been known, and it is my earnest hope that they will
receive prompt and favorable action.

CLAIM OF ALSOP &amp; CO. SETTLED.

I am glad to report that on July 5 last the American claim of Alsop &amp; Co.
against the Government of Chile was finally disposed of by the decision of
His Britannic Majesty George V, to whom, as amiable compositeur, the matter
had been referred for determination. His Majesty made an award of nearly
$1,000,000 to the claimants, which was promptly paid by Chile. The
settlement of this controversy has happily eliminated from the relations
between the Republic of Chile and the United States the only question which
for two decades had given the two foreign offices any serious concern and
makes possible the unobstructed development of the relations of friendship
which it has been the aim of this Government in every possible way to
further and cultivate.

ARBITRATIONS--PANAMA AND COSTA RICA--COLOMBIA AND HAITI.

In further illustration of the practical and beneficent application of the
principle of arbitration and the underlying broad spirit of conciliation, I
am happy to advert to the part of the United States in facilitating
amicable settlement of disputes which menaced the peace between Panama and
Costa Rica and between Haiti and the Dominican Republic.

Since the date of their independence, Colombia and Costa Rica had been
seeking a solution of a boundary dispute, which came as an heritage from
Colombia to the new Republic of Panama, upon its beginning life as an
independent nation. Although the disputants had submitted this question for
decision to the President of France under the terms of an arbitration
treaty, the exact interpretation of the provisions of the award rendered
had been a matter of serious disagreement between the two countries, both
contending for widely different lines even under the terms of the decision.
Subsequently and since 1903 this boundary question had been the subject of
fruitless diplomatic negotiations between the parties. In January, 1910, at
the request of both Governments the agents representing them met in
conference at the Department of State and subsequently concluded a protocol
submitting this long-pending controversy to the arbitral judgment of the
Chief justice of the United States, who consented to act in this capacity.
A boundary commission, according to the international agreement, has now
been appointed, and it is expected that the arguments will shortly proceed
and that this long-standing dispute will be honorably and satisfactorily
terminated.

Again, a few months ago it appeared that the Dominican Republic and Haiti
were about to enter upon hostilities because of complications growing out
of an acrimonious boundary dispute which the efforts of many years had
failed to solve. The Government of the United States, by a friendly
interposition of good offices, succeeded in prevailing upon the parties to
place their reliance upon some form of pacific settlement. Accordingly, on
the friendly suggestion of this Government, the two Governments empowered
commissioners to meet at Washington in conference at the State Department
in order to arrange the terms of submission to arbitration of the boundary
controversy.

CHAMIZAL ARBITRATION NOT SATISFACTORY.

Our arbitration of the Chamizal boundary question with Mexico was
unfortunately abortive, but with the earnest efforts on the part of both
Governments which its importance commands, it is felt that an early
practical adjustment should prove possible.

LATIN AMERICA. VENEZUELA.

During the past year the Republic of Venezuela celebrated the one hundredth
anniversary of its independence. The United States sent, in honor of this
event, a special embassy to Caracas, where the cordial reception and
generous hospitality shown it were most gratifying as a further proof of
the good relations and friendship existing between that country and the
United States. MEXICO.

The recent political events in Mexico received attention from this
Government because of the exceedingly delicate and difficult situation
created along our southern border and the necessity for taking measures
properly to safeguard American interests. The Government of the United
States, in its desire to secure a proper observance and enforcement of the
so-called neutrality statutes of the Federal Government, issued directions
to the appropriate officers to exercise a diligent and vigilant regard for
the requirements of such rules and laws. Although a condition of actual
armed conflict existed, there was no official recognition of belligerency
involving the technical neutrality obligations of international law.

On the 6th of March last, in the absence of the Secretary of State, I had a
personal interview with Mr. Wilson, the ambassador of the United States to
Mexico, in which he reported to me that the conditions in Mexico were much
more critical than the press dispatches disclosed; that President Diaz was
on a volcano of popular uprising; that the small outbreaks which had
occurred were only symptomatic of the whole condition; that a very large
per cent of the people were in sympathy with the insurrection; that a
general explosion was probable at any time, in which case he feared that
the 40,000 or more American residents in Mexico might be assailed, and that
the very large American investments might be injured or destroyed.

After a conference with the Secretary of War and the Secretary of the Navy,
I thought it wise to assemble an Army division of full strength at San
Antonio, Tex., a brigade of three regiments at Galveston, a brigade of
Infantry in the Los Angeles district of southern California, together with
a squadron of battleships and cruisers and transports at Galveston, and a
small squadron of ships at San Diego. At the same time, through our
representative at the City of Mexico, I expressed to President Diaz the
hope that no apprehensions might result from unfounded conjectures as to
these military maneuvers, and assured him that they had no significance
which should cause concern to his Government.

The mobilization was effected with great promptness, and on the 15th of
March, through the Secretary of War and the Secretary of the Navy, in a
letter addressed to the Chief of Staff, I issued the following
instructions: It seems my duty as Commander in Chief to place troops in
sufficient number where, if Congress shall direct that they enter Mexico to
save American lives and property, an effective movement may be promptly
made. Meantime, the movement of the troops to Texas and elsewhere near the
boundary, accompanied with sincere assurances of the utmost goodwill toward
the present Mexican Government and with larger and more frequent patrols
along the border to prevent insurrectionary expeditions from American soil,
will hold up the hands of the existing Government and will have a healthy
moral effect to prevent attacks upon Americans and their property in any
subsequent general internecine strife. Again, the sudden mobilization of a
division of troops has been a great test of our Army and full of useful
instruction, while the maneuvers that are thus made possible can occupy the
troops and their officers to great advantage.

The assumption by the press that I contemplate intervention on Mexican soil
to protect American lives or property is of course gratuitous, because I
seriously doubt whether I have such authority under any circumstances, and
if I had I would not exercise it without express congressional approval.
Indeed, as you know, I have already declined, without Mexican consent, to
order a troop of Cavalry to protect the breakwater we are constructing just
across the border in Mexico at the mouth of the Colorado River to save the
Imperial Valley, although the insurrectos had scattered the Mexican troops
and were taking our horses and supplies and frightening our workmen away.
My determined purpose, however, is to be in a position so that when danger
to American lives and property in Mexico threatens and the existing
Government is rendered helpless by the insurrection, I can promptly execute
congressional orders to protect them, with effect.

Meantime, I send you this letter, through the Secretary, to call your
attention to some things in connection with the presence of the division in
the Southwest which have doubtless occurred to you, but which I wish to
emphasize.

In the first place, I want to make the mobilization a first-class training
for the Army, and I wish you would give your time and that of the War
College to advising and carrying out maneuvers of a useful character, and
plan to continue to do this during the next three months. By that time we
may expect that either Ambassador Wilson's fears will have been realized
and chaos and its consequences have ensued, or that the present Government
of Mexico will have so readjusted matters as to secure tranquillity-a
result devoutly to be wished. The troops can then be returned to their
posts. I understood from you in Washington that Gen. Aleshire said that you
could probably meet all the additional expense of this whole movement out
of the present appropriations if the troops continue in Texas for three
months. I sincerely hope this is so. I observe from the newspapers that you
have no blank cartridges, but I presume that this is an error, or that it
will be easy to procure those for use as soon as your maneuvers begin.

Second. Texas is a State ordinarily peaceful, but you can not put 20,000
troops into it without running some risk of a collision between the people
of that State, and especially the Mexicans who live in Texas near the
border and who sympathize with the insurrectos, and the Federal soldiers.
For that reason I beg you to be as careful as you can to prevent friction
of any kind. We were able in Cuba, with the army of pacification there of
something more than 5,000 troops, to maintain them for a year without any
trouble, and I hope you can do the same thing in Texas. Please give your
attention to this, and advise all the officers in command of the necessity
for very great circumspection in this regard.

Third. One of the great troubles in the concentration of troops is the
danger of disease, and I suppose that you have adopted the most modern
methods for preventing and, if necessary, for stamping out epidemics. That
is so much a part of a campaign that it hardly seems necessary for me to
call attention to it.

Finally, I wish you to examine the question of the patrol of the border and
put as many troops on that work as is practicable, and more than are now
engaged in it, in order to prevent the use of our borderland for the
carrying out of the insurrection. I have given assurances to the Mexican
ambassador on this point.

I sincerely hope that this experience will always be remembered by the Army
and Navy as a useful means of education, and I should be greatly
disappointed if it resulted in any injury or disaster to our forces from
any cause. I have taken a good deal of responsibility in ordering this
mobilization, but I am ready to answer for it if only you and those under
you use the utmost care to avoid the difficulties which I have pointed
out.

You may have a copy of this letter made and left with Gen. Carter and such
other generals in command as you may think wise and necessary to guide them
in their course, but to be regarded as confidential. I am more than happy
to here record the fact that all apprehensions as to the effect of the
presence of so large a military force in Texas proved groundless; no
disturbances occurred; the conduct of the troops was exemplary and the
public reception and treatment of them was all that could have been
desired, and this notwithstanding the presence of a large number of Mexican
refugees in the border territory.

From time to time communications were received from Ambassador Wilson, who
had returned to Mexico, confirming the view that the massing of American
troops in the neighborhood had had good effect. By dispatch of April 3,
1911, the ambassador said: The continuing gravity of the situation here and
the chaos that would ensue should the constitutional authorities be
eventually overthrown, thus greatly increasing the danger to which American
lives and property are already subject, confirm the wisdom of the President
in taking those military precautions which, making every allowance for the
dignity and the sovereignty of a friendly state, are due to our nationals
abroad.

Charged as I am with the responsibility of safeguarding these lives and
property, I am bound to say to the department that our military
dispositions on the frontier have produced an effective impression on the
Mexican mind and may, at any moment, prove to be the only guaranties for
the safety of our nationals and their property. If it should eventuate that
conditions here require more active measures by the President and Congress,
sporadic attacks might be made upon the lives and property of our
nationals, but the ultimate result would be order and adequate protection.
The insurrection continued and resulted In engagements between the regular
Mexican troops and the insurgents, and this along the border, so that in
several instances bullets from the contending forces struck American
citizens engaged in their lawful occupations on American soil.

Proper protests were made against these invasions of American rights to the
Mexican authorities. On April 17, 1911, I received the following telegram
from the governor of Arizona: As a result of to-day's fighting across the
international line, but within gunshot range of the heart of Douglas, five
Americans wounded on this side of the line. Everything points to repetition
of these casualties on to-morrow, and while the Federals seem disposed to
keep their agreement not to fire into Douglas, the position of the
insurrectionists is such that when fighting occurs on the east and
southeast of the intrenchments people living in Douglas are put in danger
of their lives. In my judgment radical measures are needed to protect our
innocent people, and if anything can be done to stop the fighting at Agua
Prieta the situation calls for such action. It is impossible to safeguard
the people of Douglas unless the town be vacated. Can anything be done to
relieve situation, now acute? After a conference with the Secretary of
State, the following telegram was sent to Governor Sloan, on April IS, 1911
9 11, and made public: Your dispatch received. Have made urgent demand upon
Mexican Government to issue instructions to prevent firing across border by
Mexican federal troops, and am waiting reply. Meantime I have sent direct
warning to the Mexican and insurgent forces near Douglas. I infer from your
dispatch that both parties attempt to heed the warning, but that in the
strain and exigency of the contest wild bullets still find their way into
Douglas. The situation might justify me in ordering our troops to cross the
border and attempt to stop the fighting, or to fire upon both combatants
from the American side. But if I take this step, I must face the
possibility of resistance and greater bloodshed, and also the danger of
having our motives misconstrued and misrepresented, and of thus inflaming
Mexican popular indignation against many thousand Americans now in Mexico
and jeopardizing their lives and property. The pressure for general
intervention under such conditions it might not be practicable to resist.
It is impossible to foresee or reckon the consequences of such a course,
and we must use the greatest self-restraint to avoid it. Pending my urgent
representation to the Mexican Government, I can not therefore order the
troops at Douglas to cross the border, but I must ask you and the local
authorities, in case the same danger recurs, to direct the people of
Douglas to place themselves where bullets can not reach them and thus avoid
casualty. I am loath to endanger Americans in Mexico, where they are
necessarily exposed, by taking a radical step to prevent injury to
Americans on our side of the border who can avoid it by a temporary
inconvenience. I am glad to say that no further invasion of American rights
of any substantial character occurred.

The presence of a large military and naval force available for prompt
action, near the Mexican border, proved to be most fortunate under the
somewhat trying conditions presented by this invasion of American rights
Had no movement theretofore taken place, and because of these events it had
been necessary then to bring about the mobilization, it must have had
sinister significance. On the other hand, the presence of the troops before
and at the time of the unfortunate killing and wounding of American
citizens at Douglas, made clear that the restraint exercised by our
Government in regard to this Occurrence was not due to lack of force or
power to deal with it promptly and aggressively, but was due to a real
desire to use every means possible to avoid direct intervention in the
affairs of our neighbor whose friendship we valued and were most anxious to
retain.

The policy and action of this Government were based upon an earnest
friendliness for the Mexican people as a whole, and it is a matter of
gratification to note that this attitude of strict impartiality as to all
factions in Mexico and of sincere friendship for the neighboring nation,
without regard for party allegiance, has been generally recognized and has
resulted in an even closer and more sympathetic understanding between the
two Republics and a warmer regard one for the other. Action to suppress
violence and restore tranquillity throughout the Mexican Republic was of
peculiar interest to this Government, in that it concerned the safeguarding
of American life and property in that country. The Government of the United
States had occasion to accord permission for the passage of a body of
Mexican rurales through Douglas, Arizona, to Tia Juana, Mexico, for the
suppression of general lawlessness which had for some time existed in the
region of northern Lower California. On May 25, 1911, President Diaz
resigned, Senor de la Barra was chosen provisional President. Elections for
President and Vice President were thereafter held throughout the Republic,
and Senor Francisco I. Madero was formally declared elected on October 15
to the chief magistracy. On November 6 President Madero entered upon the
duties of his office.

Since the inauguration of President Madero a plot has been unearthed
against the present Government, to begin a new insurrection. Pursuing the
same consistent policy which this administration has adopted from the
beginning, it directed an investigation into the conspiracy charged, and
this investigation has resulted in the indictment of Gen. Bernardo Reyes
and others and the seizure of a number of officers and men and horses and
accoutrements assembled upon the soil of Texas for the purpose of invading
Mexico. Similar proceedings had been taken during the insurrection against
the Diaz Government resulting in the indictments and prosecution of persons
found to be engaged in violating the neutrality laws of the United States
in aid of that uprising.

The record of this Government in respect of the recognition of constituted
authority in Mexico therefore is clear.

CENTRAL AMERICA-HONDURAS AND NICARAGUA TREATIES PROPOSED.

As to the situation in Central America, I have taken occasion in the past
to emphasize most strongly the importance that should be attributed to the
consummation of the conventions between the Republics of Nicaragua and of
Honduras and this country, and I again earnestly recommend that the
necessary advice and consent of the Senate be accorded to these treaties,
which will make it possible for these Central American Republics to enter
upon an era of genuine economic national development. The Government of
Nicaragua which has already taken favorable action on the convention, has
found it necessary, pending the exchange of final ratifications, to enter
into negotiations with American bankers for the purpose of securing a
temporary loan to relieve the present financial tension. III connection
with this temporary loan and in the hope of consummating, through the
ultimate operation of the convention, a complete and lasting economic
regeneration, the Government of Nicaragua has also decided to engage an
American citizen as collector general of customs. The claims commission on
which the services of two American citizens have been sought, and the work
of the American financial adviser should accomplish a lasting good of
inestimable benefit to the prosperity, commerce, and peace of the Republic.
In considering the ratification of the conventions with Nicaragua and
Honduras, there rests with the United States the heavy responsibility of
the fact that their rejection here might destroy the progress made and
consign the Republics concerned to still deeper submergence in bankruptcy,
revolution, and national jeopardy. PANAMA.

Our relations with the Republic of Panama, peculiarly important, due to
mutual obligations and the vast interests created by the canal, have
continued in the usual friendly manner, and we have been glad to make
appropriate expression of our attitude of sympathetic interest in the
endeavors of our neighbor in undertaking the development of the rich
resources of the country. With reference to the internal political affairs
of the Republic, our obvious concern is in the maintenance of public peace
and constitutional order, and the fostering of the general interests
created by the actual relations of the two countries, without the
manifestation of any preference for the success of either of the political
parties.

THE PAN AMERICAN UNION.

The Pan American Union, formerly known as the Bureau of American Republics,
maintained by the joint contributions of all the American nations, has
during the past year enlarged its practical work as an international
organization, and continues to prove its usefulness as an agency for the
mutual development of commerce, better acquaintance, and closer intercourse
between the United States and her sister American republics.

THE FAR EAST.

THE CHINESE LOANS.

The past year has been marked in our relations with China by the conclusion
of two important international loans, one for the construction of the
Hukuang railways, the other for carrying out of the currency reform to
which China was pledged by treaties with the United States, Great Britain,
and Japan, of which mention was made in my last annual message.

It will be remembered that early in 1909 an agreement was consummated among
British, French, and German financial groups whereby they proposed to lend
the Chinese Government funds for the construction of railways in the
Provinces of Hunan and Hupeh, reserving for their nationals the privilege
of engineering the construction of the lines and of furnishing the
materials required for the work. After negotiations with the Governments
and groups concerned an agreement was reached whereby American, British,
French, and German nationals should participate upon equal terms in this
important and useful undertaking. Thereupon the financial groups, supported
by their respective Governments, began negotiations with the Chinese
Government which terminated in a loan to China Of $30,000,000, with the
privilege of increasing the amount to $50,000,000. The cooperative
construction of these trunk lines should be of immense advantage,
materially and otherwise, to China and should greatly facilitate the
development of the bountiful resources of the Empire. On the other hand, a
large portion of these funds is to be expended for materials, American
products having equal preference with those of the other three lending
nations, and as the contract provides for branches and extensions
subsequently to be built on the same terms the opportunities for American
materials will reach considerable proportions.

Knowing the interest of the United States in the reform of Chinese
currency, the Chinese Government, in the autumn of 1910 sought the
assistance of the American Government to procure funds with which to
accomplish that all-important reform. In the course of the subsequent
negotiations there was combined with the proposed currency loan one for
certain industrial developments in Manchuria, the two loans aggregating the
sum Of $50,000,000. While this was originally to be solely an American
enterprise, the American Government, consistently with its desire to secure
a sympathetic and practical cooperation of the great powers toward
maintaining the principle of equality of opportunity and the administrative
integrity of China, urged the Chinese Government to admit to participation
in the currency loan the associates of the American group in the Hukuang
loan. While of immense importance in itself, the reform contemplated in
making this loan is but preliminary to other and more comprehensive fiscal
reforms which will be of incalculable benefit to China and foreign
interests alike, since they will strengthen the Chinese Empire and promote
the rapid development of international trade.

NEUTRAL FINANCIAL ADVISER.

When these negotiations were begun, it was understood that a financial
adviser was to be employed by China in connection with the reform, and in
order that absolute equality in all respects among the lending nations
might be scrupulously observed, the American Government proposed the
nomination of a neutral adviser, which was agreed to by China and the other
Governments concerned. On September 28, 1911, Dr. Vissering, president of
the Dutch Java Bank and a financier of wide experience in the Orient, was
recommended to the Chinese Government for the post of monetary adviser.

Especially important at the present, when the ancient Chinese Empire is
shaken by civil war incidental to its awakening to the many influences and
activities of modernization, are the cooperative policy of good
understanding which has been fostered by the international projects
referred to above and the general sympathy of view among all the Powers
interested in the Far East. While safeguarding the interests of our
nationals, this Government is using its best efforts in continuance of its
traditional policy of sympathy and friendship toward the Chinese Empire and
its people, with the confident hope for their economic and administrative
development, and with the constant disposition to contribute to their
welfare in all proper ways consistent with an attitude of strict
impartiality as between contending factions.

For the first time in the history of the two countries, a Chinese cruiser,
the Haichi, under the command of Admiral Ching, recently visited New York,
where the officers and men were given a cordial welcome.

NEW JAPANESE TREATY.

The treaty of commerce and navigation between the United States and Japan,
signed in 1894, would by a strict interpretation of its provisions have
terminated on July 17, 1912. Japan's general treaties with the other
powers, however, terminated in 1911, and the Japanese Government expressed
an earnest desire to conduct the negotiations for a new treaty with the
United States simultaneously with its negotiations with the other powers.
There were a number of important questions involved in the treaty,
including the immigration of laborers, revision of the customs tariff, and
the right of Americans to hold real estate in Japan. The United States
consented to waive all technicalities and to enter at once upon
negotiations for a new treaty on the understanding that there should be a
continuance throughout the, life of the treaty of the same effective
measures for the restriction of immigration of laborers to American
territory which had been in operation with entire satisfaction to both
Governments since 1908. The Japanese Government accepted this basis of
negotiation, and a new treaty was quickly concluded, resulting in a highly
satisfactory settlement of the other questions referred to.

A satisfactory adjustment has also been effected of the questions growing
out of the annexation of Korea by Japan.

The recent visit of Admiral Count Togo to the United States as the Nation's
guest afforded a welcome opportunity to demonstrate the friendly feeling so
happily existing between the two countries. SIAM.

There has been a change of sovereigns in Siam and the American minister at
Bangkok was accredited in a special capacity to represent the United States
at the coronation ceremony of the new King.

EUROPE AND THE NEAR EAST.

In Europe and the Near East, during the past twelve-month, there has been
at times considerable political unrest. The Moroccan question, which for
some months was the cause of great anxiety, happily appears to have reached
a stage at which it need no longer be regarded with concern. The Ottoman
Empire was occupied for a period by strife in Albania and is now at war
with Italy. In Greece and the Balkan countries the disquieting
potentialities of this situation have been more or less felt. Persia has
been the scene of a long internal struggle. These conditions have been the
cause of uneasiness in European diplomacy, but thus far without direct
political concern to the United States.

In the war which unhappily exists between Italy and Turkey this Government
has no direct political interest, and I took occasion at the suitable time
to issue a proclamation of neutrality in that conflict. At the same time
all necessary steps have been taken to safeguard the personal interests of
American citizens and organizations in so far as affected by the war.

COMMERCE WITH THE NEAR EAST.

In spite of the attendant economic uncertainties and detriments to
commerce, the United States has gained markedly in its commercial standing
with certain of the nations of the Near East. Turkey, especially, is
beginning to come into closer relations with the United States through the
new interest of American manufacturers and exporters in the possibilities
of those regions, and it is hoped that foundations are being laid for a
large and mutually beneficial exchange of commodities between the two
countries. This new interest of Turkey in American goods is indicated by
the fact that a party of prominent merchants from a large city in Turkey
recently visited the United States to study conditions of manufacture and
export here, and to get into personal touch with American merchants, with a
view to cooperating more intelligently in opening up the markets of Turkey
and the adjacent countries to our manufactures. Another indication of this
new interest of America in the commerce of the Near East is the recent
visit of a large party of American merchants and manufacturers to central
and eastern Europe, where they were entertained by prominent officials and
organizations of the large cities, and new bonds of friendship and
understanding were established which can not but lead to closer and greater
commercial interchange.

CORONATION OF KING GEORGE V.

The 22d of June of the present year marked the coronation of His Britannic
Majesty King George V. In honor of this auspicious occasion I sent a
special embassy to London. The courteous and cordial welcome extended to
this Government's representatives by His Majesty and the people of Great
Britain has further emphasized the strong bonds of friendship happily
existing between the two nations.

SETTLEMENT OF LONG-STANDING DIFFERENCES WITH GREAT BRITAIN.

As the result of a determined effort on the part of both Great Britain and
the United States to settle all of their outstanding differences a number
of treaties have been entered into between the two countries in recent
years, by which nearly all of the unsettled questions between them of any
importance have either been adjusted by agreement or arrangements made for
their settlement by arbitration. A number of the unsettled questions
referred to consist of pecuniary claims presented by each country against
the other, and in order that as many of these claims as possible should be
settled by arbitration a special agreement for that purpose was entered
into between the two Governments on the 18th day of August, 1910, in
accordance with Article 11 of the general arbitration treaty with Great
Britain of April 4, 19o8. Pursuant to the provisions of this special
agreement a schedule of claims has already been agreed upon, and the
special agreement, together with this schedule, received the approval of
the Senate when submitted to it for that purpose at the last session of
Congress. Negotiations between the two Governments for the preparation of
an additional schedule of claims are already well advanced, and it is my
intention to submit such schedule as soon as it is agreed upon to the
Senate for its approval, in order that the arbitration proceedings may be
undertaken at an early date. In this connection the attention of Congress
is particularly called to the necessity for an appropriation
to cover the expense incurred in submitting these claims to arbitration.

PRESENTATION TO GERMANY OF REPLICA OF VON STEUBEN STATUE.

In pursuance of the act of Congress, approved June 23, 1910, the Secretary
of State and the joint Committee on the Library entered into a contract
with the sculptor, Albert Jaegers, for the execution of a bronze replica of
the statue of Gen. von Steuben erected in Washington, for presentation to
His Majesty the German Emperor and the German nation in recognition of the
gift of the statue of Frederick the Great made by the Emperor to the people
of the United States.

The presentation was made on September 2 last by representatives whom I
commissioned as the special mission of this Government for the purpose.

The German Emperor has conveyed to me by telegraph, on his own behalf and
that of the German people, an expression of appreciative thanks for this
action of Congress. RUSSIA.

By direction of the State Department, our ambassador to Russia has recently
been having a series of conferences with the minister of foreign affairs of
Russia, with a view to securing a clearer understanding and construction of
the treaty of 1832 between Russia and the United States and the
modification of any existing Russian regulations which may be found to
interfere in any way with the full recognition of the rights of American
citizens under this treaty. I believe that the Government of Russia is
addressing itself seriously to the need of changing the present practice
under the treaty and that sufficient progress has been made to warrant the
continuance of these conferences in the hope that there may soon be removed
any justification of the complaints of treaty violation now prevalent in
this country.

I expect that immediately after the Christmas recess I shall be able to
make a further communication to Congress on this subject. LIBERIA.

Negotiations for the amelioration of conditions found to exist in Liberia
by the American commission, undertaken through the Department of State,
have been concluded and it is only necessary for certain formalities to be
arranged in securing the loan which it is hoped will place that republic on
a practical financial and economic footing.

RECOGNITION OF PORTUGUESE REPUBLIC.

The National Constituent Assembly, regularly elected by the vote of the
Portuguese people, having on June 19 last unanimously proclaimed a
republican form of government, the official recognition of the Government
of the United States was given to the new Republic in the afternoon of the
same day.

SPITZBERGEN ISLANDS.

Negotiations for the betterment of conditions existing in the Spitzbergen
Islands and the adjustment of conflicting claims of American citizens and
Norwegian subjects to lands in that archipelago are still in progress.

INTERNATIONAL CONVENTIONS AND CONFERENCES.

INTERNATIONAL PRIZE COURT.

The supplementary protocol to The he Hague convention for the establishment
of an international prize court, mentioned in my last annual message,
embodying stipulations providing for an alternative procedure which would
remove the constitutional objection to that part of The Hague convention
which provides that there may be an appeal to the proposed court from the
decisions of national courts, has received the signature of the governments
parties to the original convention and has been ratified by the Government
of the United States, together with the prize court convention.

The deposit of the ratifications with the Government of the Netherlands
awaits action by the powers on the declaration, signed at London on
February 26, 1909 of the rules of international law to be recognized within
the meaning of article 7 of The Hague convention for the establishment of
an International Prize Court.

FUR-SEAL TREATY.

The fur-seal controversy, which for nearly twenty-five years has been the
source of serious friction between the United States and the powers
bordering upon the north Pacific Ocean, whose subjects have been permitted
to engage in pelagic sealing against the fur-seal herds having their
breeding grounds within the jurisdiction of the United States, has at last
been satisfactorily adjusted by the conclusion of the north Pacific sealing
convention entered into between the United States, Great Britain, Japan,
and Russia on the 7th of July last. This convention is a conservation
measure of very great importance, and if it is carried out in the spirit of
reciprocal concession and advantage upon which it is based, there is every
reason to believe that not only will it result in preserving the fur-seal
herds of the north Pacific Ocean and restoring them to their former value
for the purposes of commerce, but also that it will afford a permanently
satisfactory settlement of a question the only other solution of which
seemed to be the total destruction of the fur seals. In another aspect,
also, this convention is of importance in that it furnishes an illustration
of the feasibility of securing a general international game law for the
protection of other mammals of the sea, the preservation of which is of
importance to all the nations of the world.

LEGISLATION NECESSARY.

The attention of Congress is especially called to the necessity for
legislation on the part of the United States for the purpose of fulfilling
the obligations assumed under this convention, to which the Senate gave its
advice and consent on the 24th day of July last.

PROTECTION OF INDUSTRIAL PROPERTY UNION.

The conference of the International Union for the Protection of Industrial
Property, which, under the authority of Congress, convened at Washington on
May 16, 1911, closed its labors on June 2, 1911, by the signature of three
acts, as follows:

(I) A convention revising the Paris convention of March 20, 1883, for the
protection of industrial property, as modified by the additional act signed
at Brussels on December 14, 1900;

(2) An arrangement to replace the arrangement signed at Madrid on April 14,
1891 for the international registration of trade-marks, and the additional
act with regard thereto signed at Brussels on December 14, 1900; and

(3) An arrangement to replace the arrangement signed at Madrid on April 14,
1891, relating to the repression of false indication of production of
merchandise.

The United States is a signatory of the first convention only, and this
will be promptly submitted to the Senate.

INTERNATIONAL OPIUM COMMISSION.

In a special message transmitted to the Congress on the 11th of January,
1911, in which I concurred in the recommendations made by the Secretary of
State in regard to certain needful legislation for the control of our
interstate and foreign traffic in opium and other menacing drugs, I quoted
from my annual message of December 7, 1909, in which I announced that the
results of the International Opium Commission held at Shanghai in February,
1909, at the invitation of the United States, had been laid before this
Government; that the report of that commission showed that China was making
remarkable progress and admirable efforts toward the eradication of the
opium evil; that the interested governments had not permitted their
commercial interests to prevent their cooperation in this reform; and, as a
result of collateral investigations of the opium question in this country,
I recommended that the manufacture, sale, and use of opium in the United
States should be more rigorously controlled by legislation.

Prior to that time and in continuation of the policy of this Government to
secure the cooperation of the interested nations, the United States
proposed an international opium conference with full powers for the purpose
of clothing with the force of international law the resolutions adopted by
the above-mentioned commission, together with their essential corollaries.
The other powers concerned cordially responded to the proposal of this
Government, and, I am glad to be able to announce, representatives of all
the powers assembled in conference at The Hague on the first of this
month.

Since the passage of the opium-exclusion act, more than twenty States have
been animated to modify their pharmacy laws and bring them in accord with
the spirit of that act, thus stamping out, to a measure, the intrastate
traffic in opium and other habit-forming drugs. But, although I have urged
on the Congress the passage of certain measures for Federal control of the
interstate and foreign traffic in these drugs, no action has yet been
taken. In view of the fact that there is now sitting at The Hague so
important a conference, which has under review the municipal laws of the
different nations for the mitigation of their opium and other allied evils,
a conference which will certainly deal with the international aspects of
these evils, it seems to me most essential that the Congress should take
immediate action on the anti-narcotic legislation to which I have already
called attention by a special message.

BUENOS AIRES CONVENTIONS.

The four important conventions signed at the Fourth Pan American Conference
at Buenos Aires, providing for the regulation of trademarks, patents, and
copyrights, and for the arbitration of pecuniary claims, have, with the
advice and consent of the Senate, been ratified on the part of the United
States and the ratifications have been deposited with the Government of the
Argentine Republic in accordance with the requirements of the conventions.
I am not advised that similar action has been taken by any other of the
signatory governments.

INTERNATIONAL ARRANGEMENT TO SUPPRESS OBSCENE PUBLICATIONS.

One of the notable advances in international morality accomplished in
recent years was an arrangement entered into on April 13th of the present
year between the United States and other powers for the repression of the
circulation of obscene publications.

FOREIGN TRADE RELATIONS OF THE UNITED STATES.

In my last annual message I referred to the tariff negotiations of the
Department of State with foreign countries in connection with the
application, by a series of proclamations, of the minimum tariff of the
United States to importations from the several countries, and I stated
that, in its general operation, section 2 of the new tariff law had proved
a guaranty of continued commercial peace, although there were,
unfortunately, instances where foreign governments dealt arbitrarily with
American interests within their jurisdiction in a manner injurious and
inequitable. During the past year some instances of discriminatory
treatment have been removed, but I regret to say that there remain a few
cases of differential treatment adverse to the commerce of the United
States. While none of these instances now appears to amount to undue
discrimination in the sense of section 2 Of the tariff law of August 5,
1909, they are all exceptions to that complete degree of equality of tariff
treatment that the Department of State has consistently sought to obtain
for American commerce abroad.

While the double tariff feature of the tariff law of 1909 has been amply
justified by the results achieved in removing former and preventing new,
undue discriminations against American commerce it is believed that the
time has come for the amendment of this feature of the law in such way as
to provide a graduated means of meeting varying degrees of discriminatory
treatment of American commerce in foreign countries as well as to protect
the financial interests abroad of American citizens against arbitrary and
injurious treatment on the part of foreign governments through either
legislative or administrative measures.

It would seem desirable that the maximum tariff of the United States should
embrace within its purview the free list, which is not the case at the
present time, in order that it might have reasonable significance to the
governments of those countries from which the importations into the United
States are confined virtually to articles on the free list.

RECORD OF HIGHEST AMOUNT OF FOREIGN TRADE.

The fiscal year ended June 30, 1911, shows great progress in the
development of American trade. It was noteworthy as marking the highest
record of exports of American products to foreign countries, the valuation
being in excess of $2,000,000,000. These exports showed a gain over the
preceding year of more than $300,000,000.

FACILITIES FOR FOREIGN TRADE FURNISHED BY JOINT ACTION OF DEPARTMENT OF
STATE AND OF COMMERCE AND LABOR.

There is widespread appreciation expressed by the business interests of the
country as regards the practical value of the facilities now offered by the
Department of State and the Department of Commerce and Labor for the
furtherance of American commerce. Conferences with their officers at
Washington who have an expert knowledge of trade conditions in foreign
countries and with consular officers and commercial agents of the
Department of Commerce and Labor who, while on leave of absence, visit the
principal industrial centers of the United States, have been found of great
value. These trade conferences are regarded as a particularly promising
method of governmental aid in foreign trade promotion. The Department of
Commerce and Labor has arranged to give publicity to the expected arrival
and the itinerary of consular officers and commercial agents while on leave
in the United States, in order that trade organizations may arrange for
conferences with them.

As I have indicated, it is increasingly clear that to obtain and maintain
that equity and substantial equality of treatment essential to the
flourishing foreign trade, which becomes year by year more important to the
industrial and commercial welfare of the United States, we should have a
flexibility of tariff sufficient for the give and take of negotiation by
the Department of State on behalf of our commerce and industry.

CRYING NEED FOR AMERICAN MERCHANT MARINE.

I need hardly reiterate the conviction that there should speedily be built
up an American merchant marine. This is necessary to assure favorable
transportation facilities to our great ocean-borne commerce as well as to
supplement the Navy with an adequate reserve of ships and men It would have
the economic advantage of keeping at home part of the vast sums now paid
foreign shipping for carrying American goods. All the great commercial
nations pay heavy subsidies to their merchant marine so that it is obvious
that without some wise aid from the Congress the United States must lag
behind in the matter of merchant marine in its present anomalous position.

EXTENSION OF AMERICAN BANKING TO FOREIGN COUNTRIES.

Legislation to facilitate the extension of American banks to foreign
countries is another matter in which our foreign trade needs assistance.

CHAMBERS OF FOREIGN COMMERCE SUGGESTED.

The interests of our foreign commerce are nonpartisan, and as a factor in
prosperity are as broad as the land. In the dissemination of useful
information and in the coordination of effort certain unofficial
associations have done good work toward the promotion of foreign commerce.
It is cause for regret, however, that the great number of such associations
and the comparative lack of cooperation between them fails to secure an
efficiency commensurate with the public interest. Through the agency of the
Department of Commerce and Labor, and in some cases directly, the
Department of State transmits to reputable business interests information
of commercial opportunities, supplementing the regular published consular
reports. Some central organization in touch with associations and chambers
of commerce throughout the country and able to keep purely American
interests in closer touch with different phases of commercial affairs
would, I believe, be of great value. Such organization might be managed by
a committee composed of a small number of those now actively carrying on
the work of some of the larger associations, and there might be added to
the committee, as members ex officio, one or two officials of the
Department of State and one or two officials from the Department of
Commerce and Labor and representatives of the appropriate committees of
Congress. The authority and success of such an organization would evidently
be enhanced if the Congress should see fit to prescribe its scope and
organization through legislation which would give to it some such official
standing as that, for example, of the National Red Cross.

With these factors and the continuance of the foreign-service establishment
(departmental, diplomatic, and consular) upon the high plane where it has
been placed by the recent reorganization this Government would be abreast
of the times in fostering the interests of its foreign trade, and the rest
must be left to the energy and enterprise of our business men.

IMPROVEMENT OF THE FOREIGN SERVICE.

The entire foreign-service organization is being improved and developed
with especial regard to the requirements of the commercial interests of the
country. The rapid growth of our foreign trade makes it of the utmost
importance that governmental agencies through which that trade is to be
aided and protected should possess a high degree of efficiency. Not only
should the foreign representatives be maintained upon a generous scale in
so far as salaries and establishments are concerned, but the selection and
advancement of officers should be definitely and permanently regulated by
law so that the service shall not fail to attract men of high character and
ability. The experience of the past few years with a partial application of
civil-service rules to the Diplomatic and Consular Service leaves no doubt
in my mind of the wisdom of a wider and more permanent extension of those
principles to both branches of the foreign service. The men selected for
appointment by means of the existing executive regulations have been of a
far higher average of intelligence and ability than the men appointed
before the regulations were promulgated. Moreover, the feeling that under
the existing rules there is reasonable hope for permanence of tenure during
good behavior and for promotion for meritorious service has served to bring
about a zealous activity in the interests of the country, which never
before existed or could exist. It is my earnest conviction that the
enactment into law of the general principles of the existing regulations
can not fail to effect further improvement in both branches of the foreign
service by providing greater inducement for young men of character and
ability to seek a career abroad in the service of the Government, and an
incentive to those already in the service to put forth greater efforts to
attain the high standards which the successful conduct of our international
relations and commerce requires.

I therefore again commend to the favorable action of the Congress the
enactment of a law applying to the diplomatic and consular service the
principles embodied in section 1753 of the Revised Statutes of the United
States, in the civil-service act of January 16, 1883, and the Executive
orders of June 27, 1906, and of November 26, 1909. In its consideration of
this important subject I desire to recall to the attention of the Congress
the very favorable report made on the Lowden bill for the improvement of
the foreign service by the Foreign Affairs Committee of the House of
Representatives. Available statistics show the strictness with which the
merit system has been applied to the foreign service during recent years
and the absolute nonpartisan selection of consuls and diplomatic-service
secretaries who, indeed, far from being selected with any view to political
consideration, have actually been chosen to a disproportionate extent from
States which would have been unrepresented in the foreign service under the
system which it is to be hoped is now permanently obsolete. Some
legislation for the perpetuation of the present system of examinations and
promotions upon merit and efficiency would be of greatest value to our
commercial and international interests.

PART III.

THE WHITE HOUSE, December 20, 1911. To the Senate and House of
Representatives:

In my annual message to Congress, December, 1909, I stated that under
section 2 of the act of August 5, 1909, I had appointed a Tariff Board of
three members to cooperate with the State Department in the administration
of the maximum and minimum clause of that act, to make a glossary or
encyclopedia of the existing tariff so as to render its terms intelligible
to the ordinary reader, and then to investigate industrial conditions and
costs of production at home and abroad with a view to determining to what
extent existing tariff rates actually exemplify the protective principle,
viz., that duties should be made adequate, and only adequate, to equalize
the difference in cost of production at home and abroad.

I further stated that I believed these investigations would be of great
value as a basis for accurate legislation, and that I should from time to
time recommend to Congress the revision of certain schedules in accordance
with the findings of the Board.

In the last session of the Sixty-first Congress a bill creating a permanent
Tariff Board of five members, of whom not more than three should be of the
same political party, passed each House, but failed of enactment because of
slight differences on which agreement was not reached before adjournment.
An appropriation act provided that the permanent Tariff Board, if created
by statute, should report to Congress on Schedule K in December, 1911.

Therefore, to carry out so far as lay within my power the purposes of this
bill for a permanent Tariff Board, I appointed in March, 1911, a board of
five, adding two members of such party affiliation as would have fulfilled
the statutory requirement, and directed them to make a report to me on
Schedule K of the tariff act in December of this year.

In my message of August 17, 1911, accompanying the veto of the wool bill, I
said that, in my judgment, Schedule K should be revised and the rates
reduced. My veto was based on the ground that, since the Tariff Board would
make, in December, a detailed report on wool and wool manufactures, with
special reference to the relation of the existing rates of duties to
relative costs here and abroad, public policy and a fair regard to the
interests of the producers and the manufacturers on the one hand and of the
consumers on the other demanded that legislation should not be hastily
enacted in the absence of such information; that I was not myself possessed
at that time of adequate knowledge of the facts to determine whether or not
the proposed act was in accord with my pledge to support a fair and
reasonable protective policy; that such legislation might prove only
temporary and inflict upon a great industry the evils of continued
uncertainty.

I now herewith submit a report of the Tariff Board on Schedule K. The board
is unanimous in its findings. On the basis of these findings I now
recommend that the Congress proceed to a consideration of this schedule
with a view to its revision and a general reduction of its rates.

The report shows that the present method of assessing the duty on raw
Wool--this is, by a specific rate on the grease pound (i. e., unscoured)
--operates to exclude wools of high shrinkage in scouring but fine quality
from the American market and thereby lessens the range of wools available
to the domestic manufacturer; that the duty on scoured wool Of 33 cents per
pound is prohibitory and operates to exclude the importation of clean,
low-priced foreign wools of inferior grades, which are nevertheless
valuable material for manufacturing, and which can not be imported in the
grease because of their heavy shrinkage. Such wools, if imported, might be
used to displace the cheap substitutes now in use.

To make the preceding paragraph a little plainer, take the instance of a
hundred pounds of first-class wool imported under the present duty, which
is 11 cents a pound. That would make the duty on the hundred pounds $11.
The merchantable part of the wool thus imported is the weight of the wool
of this hundred pounds after scouring. If the wool shrinks 80 per cent, as
some wools do, then the duty in such a case would amount to $11 $11 on 20
pounds of scoured wool. This, of course, would be prohibitory. If the wool
shrinks only 50 per cent, it would be $11 on 50 pounds of wool, and this is
near to the average of the great bulk of wools that are imported from
Australia, which is the principal source of our imported wool.

These discriminations could be overcome by assessing a duty in ad valorem
terms, but this method is open to the objection, first, that it increases
administrative difficulties and tends to decrease revenue through
undervaluation; and, second, that as prices advance, the ad valorem rate
increases the duty per pound at the time when the consumer most needs
relief and the producer can best stand competition; while if prices decline
the duty is decreased at the time when the consumer is least burdened by
the price and the producer most needs protection.

Another method of meeting the difficulty of taxing the grease pound is to
assess a specific duty on grease wool in terms of its scoured content. This
obviates the chief evil of the present system, namely, the discrimination
due to different shrinkages, and thereby tends greatly to equalize the
duty. The board reports that this method is feasible in practice and could
be administered without great expense. The scoured content of the wool is
the basis on which users of wool make their calculations, and a duty of
this kind would fit the usages of the trade. One effect of this method of
assessment would be that, regardless of the rate of duty, there would be
an increase in the supply and variety of wool by making available to the
American market wools of both low and fine quality now excluded.

The report shows in detail the difficulties involved in attempting to state
in categorical terms the cost of wool production and the great differences
in cost as between different regions and different types of wool. It is
found, however, that, taking all varieties in account, the average cost of
production for the whole American clip is higher than the cost in the chief
competing country by an amount somewhat less than the present duty.

The report shows that the duties on wools, wool wastes, and shoddy, which
are adjusted to the rate Of 33 cents on scoured wool are prohibitory in the
same measure that the duty on scoured wool is prohibitory. In general, they
are assessed at rates as high as, or higher than, the duties paid on the
clean content of wools actually imported. They should be reduced and so
adjusted to the rate on wool as to bear their proper proportion to the real
rate levied on the actual wool imports.

The duties on many classes of wool manufacture are prohibitory and greatly
in excess of the difference in cost of production here and abroad.

This is true of tops, of yarns (with the exception of worsted yarns of a
very high grade), and of low and medium grade cloth of heavy weight.

On tops up to 52 cents a pound in value, and on yarns of 65 cents in value,
the rate is 100 per cent with correspondingly higher rates for lower
values. On cheap and medium grade cloths, the existing rates frequently run
to 150 per cent and on some cheap goods to over 200 per cent. This is
largely due to that part of the duty which is levied ostensibly to
compensate the manufacturer for the enhanced cost of his raw material due
to the duty on wool. As a matter of fact, this compensatory duty, for
numerous classes of goods, is much in excess of the amount needed for
strict compensation.

On the other hand, the findings show that the duties which run to such high
ad valorem equivalents are prohibitory, since the goods are not imported,
but that the prices of domestic fabrics are not raised by the full amount
of duty. On a set of 1-yard samples of 16 English fabrics, which are
completely excluded by the present tariff rates, it was found that the
total foreign value was $41.84; the duties which would have been assessed
had these fabrics been imported, $76.90; the foreign value plus the amount
of the duty, $118.74; or a nominal duty of 183 per cent. In fact, however,
practically identical fabrics of domestic make sold at the same time at
$69.75, showing an enhanced price over the foreign market value of but 67
per cent.

Although these duties do not increase prices of domestic goods by anything
like their full amount, it is none the less true that such prohibitive
duties eliminate the possibility of foreign competition, even in time of
scarcity; that they form a temptation to monopoly and conspiracies to
control domestic prices; that they are much in excess of the difference in
cost of production here and abroad, and that they should be reduced to a
point which accords with this principle.

The findings of the board show that in this industry the actual
manufacturing cost, aside from the question of the price of materials, is
much higher in this country than it is abroad; that in the making of yarn
and cloth the domestic woolen or worsted manufacturer has in general no
advantage in the form of superior machinery or more efficient labor to
offset the higher wages paid in this country The findings show that the
cost of turning wool into yarn in this country is about double that in the
leading competing country, and that the cost of turning yarn into cloth is
somewhat more than double. Under the protective policy a great industry,
involving the welfare of hundreds of thousands of people, has been
established despite these handicaps.

In recommending revision and reduction, I therefore urge that action be
taken with these facts in mind, to the end that an important and
established industry may not be jeopardized.

The Tariff Board reports that no equitable method has been found to, levy
purely specific duties on woolen and worsted fabrics and that, excepting
for a compensatory duty, the rate must be ad valorem on such manufactures.
It is important to realize, however, that no flat ad valorem rate on such
fabrics can be made to work fairly and effectively. Any single rate which
is high enough to equalize the difference in manufacturing cost at home and
abroad on highly finished goods involving such labor would be prohibitory
on cheaper goods, in which the labor cost is a smaller proportion of the
total value. Conversely, a rate only adequate to equalize this difference
on cheaper goods would remove protection from the fine-goods manufacture,
the increase in which has been one of the striking features of the trade's
development in recent years. I therefore recommend that in any revision the
importance of a graduated scale of ad valorem duties on cloths be carefully
considered and applied.

I venture to say that no legislative body has ever had presented to it a
more complete and exhaustive report than this on so difficult and
complicated a subject as the relative costs of wool and woolens the world
over. It is a monument to the thoroughness, industry, impartiality, and
accuracy of the men engaged in its making. They were chosen from both
political parties but have allowed no partisan spirit to prompt or control
their inquiries. They are unanimous in their findings. I feel sure that
after the report has been printed and studied the value of such a
compendium of exact knowledge in respect to this schedule of the tariff
will convince all of the wisdom of making such a board permanent in order
that it may treat each schedule of the tariff as it has treated this, and
then keep its bureau of information up to date with current changes in the
economic world.

It is no part of the function of the Tariff Board to propose rates of duty.
Their function is merely to present findings of fact on which rates of duty
may be fairly determined in the light of adequate knowledge in accord with
the economic policy to be followed. This is what the present report does.

The findings of fact by the board show ample reason for the revision
downward of Schedule K, in accord with the protective principle, and
present the data as to relative costs and prices from which may be
determined what rates will fairly equalize the difference in production
costs. I recommend that such revision be proceeded with at once.

PART IV.

THE WHITE HOUSE, December 21, 1911. To the Senate and House of
Representatives:

The financial condition of the Government, as shown at the close of the
last fiscal year, June 30, 1911, was very satisfactory. The ordinary
receipts into the general fund, excluding postal revenues, amounted to
$701,372,374.99, and the disbursements from the general fund for current
expenses and capital outlays, excluding postal and Panama Canal
disbursements, including the interest on the public debt, amounted to
$654,137,907-89, leaving a surplus Of $47,234,377.10.

The postal revenue receipts amounted to $237,879,823,60, while the payments
made for the postal service from the postal revenues amounted to
$237,660,705.48, which left a surplus of postal receipts over disbursements
Of $219,118.12, the first time in 27 years in which a surplus occurred.

The interest-bearing debt of the United States June 30, 1911, amounted to
$915,353,190. The debt on which interest had ceased amounted to
$1,879,830.26, and the debt bearing no interest, including greenbacks,
national bank notes to be redeemed, and fractional currency, amounted to
$386,751,917-43, or a total of interest and noninterest bearing debt
amounting to $1,303,984,937.69.

The actual disbursements, exclusive of those for the Panama Canal and for
the postal service for the year ending June 30, 1911, were $654,137,997.89.
The actual disbursements for the year ending June 30, 1910, exclusive of
the Panama Canal and the postal service disbursements, were
$659,705,391.08, making a decrease Of $5,567,393.19 in yearly expenditures
in the year 1911 under that of 1910. For the year ending June 30, 1912, the
estimated receipts, exclusive of the postal revenues, are $666,000,000,
while the total estimates, exclusive of those for the Panama Canal and the
postal expenditures payable from the postal revenues, amount to
$645,842,799.34. This is a decrease in the 1912 estimates from that of the
1911 estimates of $1,534,367-22.

For the year ending June 30, 1913, the estimated receipts, exclusive of the
postal revenues, are $667,000,000, while the total estimated
appropriations, exclusive of the Panama Canal and postal disbursements
payable from postal revenues, will amount to $637,920,803.35. This is a
decrease in the 1913 estimates from that of the 1912 estimates of
$7,921,995.99.

As to the postal revenues, the expansion of the business in that
department, the normal increase in the Post Office and the extension of the
service, will increase the outlay to the sum Of $260,938,463; but as the
department was self-sustaining this year the Postmaster General is assured
that next year the receipts will at least equal the expenditures, and
probably exceed them by more than the surplus of this year. It is fair and
equitable, therefore, in determining the economy with which the Government
has been run, to exclude the transactions of a department like the Post
Office Department, which relies for its support upon its receipts. In
calculations heretofore made for comparison of economy in each year, it has
been the proper custom only to include in the statement the deficit in the
Post Office Department which was paid out of the Treasury.

A calculation of the actual increase in the expenses of Government arising
from the increase in the population and the general expansion of
governmental functions, except those of the Post Office, for a number of
years shows a normal increase of about 4 per cent a year. By directing the
exercise of great care to keep down the expenses and the estimates we have
succeeded in reducing the total disbursements each year.

THE CREDIT OF THE UNITED STATES.

The credit of this Government was shown to be better than that of any other
Government by the sale of the Panama Canal 3 per cent bonds. These bonds
did not give their owners the privilege of using them as a basis for
bank-note circulation, nor was there any other privilege extended to them
which would affect their general market value. Their sale, therefore,
measured the credit of the Government. The premium which was realized upon
the bonds made the actual interest rate of the transaction 2.909 per cent.

EFFICIENCY AND ECONOMY IN THE TREASURY DEPARTMENT.

I In the Treasury Department the efficiency and economy work has been kept
steadily up. Provision is made for the elimination of 134 positions during
the coming year. Two hundred and sixty-seven statutory positions were
eliminated during the last year in the office of the Treasury in
Washington, and 141 positions in the year 1910, making an elimination Of
542 statutory positions since March 4, 1909; and this has been done without
the discharge of anybody, because the normal resignations and deaths have
been equal to the elimination of the places, a system of transfers having
taken care of the persons whose positions were dropped out. In the field
service if the department, too, 1,259 positions have been eliminated down
to the present time, making a total net reduction of all Treasury positions
to the number of 1,801. Meantime the efficiency of the work of the
department has increased.

MONETARY REFORM.

A matter of first importance that will come before Congress for action at
this session is monetary reform. The Congress has itself arranged an early
introduction of this great question through the report of its Monetary
Commission. This commission was appointed to recommend a solution of the
banking and currency problems so long confronting the Nation and to furnish
the facts and data necessary to enable the Congress to take action. The
commission was appointed when an impressive and urgent popular demand for
legislative relief suddenly arose out of the distressing situation of the
people caused by the deplorable panic of 1907. The Congress decided that
while it could not give immediately the relief required, it would provide a
commission to furnish the means for prompt action at a later date.

In order to do its work with thoroughness and precision this commission has
taken some time to make its report. The country is undoubtedly hoping for
as prompt action on the report as the convenience of the Congress can
permit. The recognition of the gross imperfections and marked inadequacy of
our banking and currency system even in our most quiet financial periods is
of long standing; and later there has matured a recognition of the fact
that our system is responsible for the extraordinary devastation, waste,
and business paralysis of our recurring periods of panic. Though the
members of the Monetary Commission have for a considerable time been
working in the open, and while large numbers of the people have been openly
working with them, and while the press has largely noted and discussed this
work as it has proceeded, so that the report of the commission promises to
represent a national movement, the details of the report are still being
considered. I can not, therefore, do much more at this time than commend
the immense importance of monetary reform, urge prompt consideration and
action when the commission's report is received, and express my
satisfaction that the plan to be proposed promises to embrace main features
that, having met the approval of a great preponderance of the practical and
professional opinion of the country, are likely to meet equal approval in
Congress.

It is exceedingly fortunate that the wise and undisputed policy of
maintaining unchanged the main features of our banking system rendered it
at once impossible to introduce a central bank; for a central bank would
certainly have been resisted, and a plan into which it could have been
introduced would probably have been defeated. But as a central bank could
not be a part of the only plan discussed or considered, that troublesome
question is eliminated. And ingenious and novel as the proposed National
Reserve Association appears, it simply is a logical outgrowth of what is
best in our present system, and is, in fact, the fulfillment of that
system.

Exactly how the management of that association should be organized is a
question still open. It seems to be desirable that the banks which would
own the association should in the main manage it, It will be an agency of
the banks to act for them, and they can be trusted better than anybody else
chiefly to conduct it. It is mainly bankers' work. But there must be some
form of Government supervision and ultimate control, and I favor a
reasonable representation of the Government in the management. I entertain
no fear of the introduction of politics or of any undesirable influences
from a properly measured Government representation.

I trust that all banks of the country possessing the requisite standards
will be placed upon a footing of perfect equality of opportunity. Both the
National system and the State system should be fairly recognized, leaving
them eventually to coalesce if that shall prove to be their tendency. But
such evolution can not develop impartially if the banks of one system are
given or permitted any advantages of opportunity over those of the other
system. And I trust also that the new legislation will carefully and
completely protect and assure the individuality and the independence of
each bank, to the end that any tendency there may ever be toward a
consolidation of the money or banking power of the Nation shall be
defeated.

It will always be possible, of course, to correct any features of the new
law which may in practice prove to be unwise; so that while this law is
sure to be enacted under conditions of unusual knowledge and authority, it
also will include, it is well to remember, the possibility of future
amendment.

With the present prospects of this long-awaited reform encouraging us, it
would be singularly unfortunate if this monetary question should by any
chance become a party issue. And I sincerely hope it will not. The
exceeding amount of consideration it has received from the people of the
Nation has been wholly nonpartisan; and the Congress set its nonpartisan
seal upon it when the Monetary Commission was appointed. In commending the
question to the favorable consideration of Congress, I speak for, and in
the spirit of, the great number of my fellow citizens who without any
thought of party or partisanship feel with remarkable earnestness that this
reform is necessary to the interests of all the people.

THE WAR DEPARTMENT.

There is now before Congress a Dill, the purpose of which is to increase
the efficiency and decrease the expense of the Army. It contains four
principal features: First, a consolidation of the General Staff with the
Adjutant General's and the Inspector General's Departments; second, a
consolidation of the Quartermaster's Department with the Subsistence and
the Pay Departments; third, the creation of an Army Service Corps; and
fourth, an extension of the enlistment period from three to five years.

With the establishment of an Army Service Corps, as proposed in the bill, I
am thoroughly in accord and am convinced that the establishment of such a
corps will result in a material economy and a very great increase of
efficiency in the Army. It has repeatedly been recommended by me and my
predecessors. I also believe that a consolidation of the Staff Corps can be
made with a resulting increase in efficiency and economy, but not along the
lines provided in the bill under consideration.

I am opposed to any plan the result of which would be to break up or
interfere with the essential principles of the detail system in the Staff
Corps established by the act of February 2, 1901, and I am opposed to any
plan the result of which would be to give to the officer selected as Chief
of Staff or to any other member of the General Staff Corps greater
permanency of office than he now has. Under the existing law neither the
Chief. of Staff nor any other member of the General Staff Corps can remain
in office for a period of more than four years, and there must be an
interval of two years between successive tours of duty.

The bill referred to provides that certain persons shall become permanent
members of the General Staff Corps, and that certain others are subject to
re-detail without an interval of two years. Such provision is fraught with
danger to the welfare of the Army, and would practically nullify the main
purpose of the law creating the [missing text].

In making the consolidations no reduction should be made in the total
number of officers of the Army, of whom there are now too few to perform
the duties imposed by law. I have in the past recommended an increase in
the number of officers by 600 in order to provide sufficient officers to
perform all classes of staff duty and to reduce the number of line officers
detached from their commands. Congress at the last session increased the
total number of officers by 200, but this is not enough. Promotion in the
line of the Army is too slow. Officers do not attain command rank at an age
early enough properly to exercise it. It would be a mistake further to
retard this already slow promotion by throwing back into the line of the
Arm a number of high-ranking officers to be absorbed as is provided in the
[missing text].

Another feature of the bill which I believe to be a mistake is the proposed
increase in the term of enlistment from three to five ears I believe it
would be better to enlist men for six years, release them at the end of
three years from active service, and put them in reserve for the remaining
three years. Reenlistments should be largely confined to the
noncommissioned officers and other enlisted men in the skilled grades. This
plan by the payment of a comparatively small compensation during the three
years of reserve, would keep a large body of men at the call of the
Government, trained and ready for [missing text].

The Army of the United States is in good condition. It showed itself able
to meet an emergency in the successful mobilization of an army division of
from 15,000 to 20,000 men, which took place along the border of Mexico
during the recent disturbances in that country. The marvelous freedom from
the ordinary camp diseases of typhoid fever and measles is referred to in
the report of the Secretary of War and shows such an effectiveness in the
sanitary regulations and treatment of the Medical Corps, and in the
discipline of the Army itself, as to invoke the highest commendation.

MEMORIAL AMPHITHEATER AT ARLINGTON.

I beg to renew my recommendation of last year that the Congress appropriate
for a memorial amphitheater at Arlington, Va., the funds required to
construct it upon the plans already approved.

THE PANAMA CANAL.

The very satisfactory progress made on the Panama Canal last year has
continued, and there is every reason to believe that the canal
will be completed as early as the 1st of July, 1913, unless something
unforeseen occurs. This is about 18 months before the time promised by the
engineers.

We are now near enough the completion of the canal to make it imperatively
necessary that legislation should be enacted to fix the method by which the
canal shall be maintained and controlled and the zone governed. The fact is
that to-day there is no statutory law by authority of which the President
is maintaining the government of the zone. Such authority was given in an
amendment to the Spooner Act, which expired by the terms of its own
limitation some years ago. Since that time the government has continued,
under the advice of the Attorney General that in the absence of action by
Congress, there is necessarily an implied authority on the part of the
Executive to maintain a government in a territory in which he has to see
that the laws are executed. The fact that we have been able thus to get
along during the important days of construction without legislation
expressly formulating the government of the zone, or delegating the
creation of it to the President, is not a reason for supposing that we may
continue the same kind of a government after the construction is finished.
The implied authority of the President to maintain a civil government in
the zone may be derived from the mandatory direction given him in the
original Spooner Act, by which he was commanded to build the canal; but
certainly, now that the canal is about to be completed and to be put under
a permanent management, there ought to be specific statutory authority for
its regulation and control and for the government of the zone, which we
hold for the chief and main purpose of operating the canal.

I fully concur with the Secretary of War that the problem is simply the
management of a great public work, and not the government of a local
republic; that every provision must be directed toward the successful
maintenance of the canal as an avenue of commerce, and that all provisions
for the government of those who live within the zone should be subordinate
to the main purpose.

The zone is 40 miles long and 10 miles wide. Now, it has a population Of
50,000 or 60,000, but as soon as the work of construction is completed, the
towns which make up this population will be deserted, and only
comparatively few natives will continue their residence there. The control
of them ought to approximate a military government. One judge and two
justices of the peace will be sufficient to attend to all the judicial and
litigated business there is. With a few fundamental laws of Congress, the
zone should be governed by the orders of the President, issued through the
War Department, as it is today. Provisions can be made for the guaranties
of life, liberty, and property, but beyond those, the government should be
that of a military reservation, managed in connection with this great
highway of trade.

FURNISHING SUPPLIES AND REPAIRS.

In my last annual message I discussed at length the reasons for the
Government's assuming the task of furnishing to all ships that use the
canal, whether our own naval vessels or others, the supplies of coal and
oil and other necessities with which they must be replenished either before
or after passing through the canal, together with the dock facilities and
repairs of every character. This it is thought wise to do through the
Government, because the Government must establish for itself, for its own
naval vessels, large depots and dry docks and warehouses, and these may
easily be enlarged so as to secure to the world public using the canal
reasonable prices and a certainty that there will be no discrimination
between those who wish to avail themselves of such facilities. TOLLS.

I renew my recommendation with respect to the tolls of the canal that
within limits, which shall seem wise to Congress, the power of fixing tolls
be given to the President. In order to arrive at a proper conclusion, there
must be some experimenting, and this can not be done if Congress does not
delegate the power to one who can act expeditiously.

POWER EXISTS TO RELIEVE AMERICAN SHIPPING.

I am very confident that the United States has the power to relieve from
the payment of tolls any part of our shipping that Congress deems wise. We
own the canal. It was our money that built it. We have the right to charge
tolls for its use. Those tolls must be the same to everyone; but when we
are dealing with our own ships, the practice of many Governments of
subsidizing their own merchant vessels is so well established in general
that a subsidy equal to the tolls, an equivalent remission of tolls, can
not be held to be a discrimination in the use of the canal. The practice in
the Suez Canal makes this clear. The experiment in tolls to be made by the
President would doubtless disclose how great a burden of tolls the
coastwise trade between the Atlantic and the Pacific coast could bear
without preventing its usefulness in competition with the transcontinental
railroads. One of the chief reasons for building the canal was to set up
this competition and to bring the two shores closer together as a practical
trade problem. It may be that the tolls will have to be wholly remitted. I
do not think this is the best principle, because I believe that the cost of
such a Government work as the Panama Canal ought to be imposed gradually
but certainly upon the trade which it creates and makes possible. So far as
we can, consistent with the development of the world's trade through the
canal, and the benefit which it was intended to secure to the east and west
coastwise trade, we ought to labor to secure from the canal tolls a
sufficient amount ultimately to meet the debt which we have assumed and to
pay the interest.

THE PHILIPPINE ISLANDS.

In respect to the Philippines, I urgently join in the recommendation of the
Secretary of War that the act of February 6, 1905, limiting the
indebtedness that may be incurred by the Philippine Government for the
construction of public works, be increased from $5,000,000 to $15,000,000.
The finances of that Government are in excellent condition. The maximum sum
mentioned is quite low as compared with the amount of indebtedness of other
governments with similar resources, and the success which has attended the
expenditure of the $5,000,000 in the useful improvements of the harbors and
other places in the Islands justifies and requires additional expenditures
for like purposes. NATURALIZATION.

I also join in the recommendation that the legislature of the Philippine
Islands be authorized to provide for the naturalization of Filipinos and
others who by the present law are treated as aliens, so as to enable them
to become citizens of the Philippine Islands.

FRIARS' LANDS.

Pending an investigation by Congress at its last session, through one of
its committees, into the disposition of the friars' lands, Secretary
Dickinson directed that the friars' lands should not be sold in excess of
the limits fixed for the public lands until Congress should pass upon the
subject or should have concluded its investigation. This order has been an
obstruction to the disposition of the lands, and I expect to direct the
Secretary of War to return to the practice under the opinion of the
Attorney General which will enable us to dispose of the lands much more
promptly, and to prepare a sinking fund with which to meet the $7,000,000
of bonds issued for the purchase of the lands. I have no doubt whatever
that the Attorney General's construction was a proper one, and that it is
in the interest of everyone that the land shall be promptly disposed of.
The danger of creating a monopoly of ownership in lands under the statutes
as construed is nothing. There are only two tracts of 60,000 acres each
unimproved and in remote Provinces that are likely to be disposed of in
bulk, and the rest of the lands are subject to the limitation that they
shall be first offered to the present tenants and lessors who hold them in
small tracts.

RIVERS AND HARBORS.

The estimates for the river and harbor improvements reach $32,000,000 for
the coming year. I wish to urge that whenever a project has been adopted by
Congress as one to be completed, the more money which can be economically
expended in its construction in each year, the greater the ultimate
economy. This has especial application to the improvement of the
Mississippi River and its large branches. It seems to me that an increase
in the amount of money now being annually expended in the improvement of
the Ohio River which has been formally adopted by Congress would be in the
interest of the public. A similar change ought to be made during the
present Congress, in the amount to be appropriated for the Missouri River.
The engineers say that the cost of the improvement of the Missouri River
from Kansas City to St. Louis, in order to secure 6 feet as a permanent
channel, will reach $20,000,000. There have been at least three
recommendations from the Chief of Engineers that if the improvement be
adopted, $2,000,000 should be expended upon it annually. This particular
improvement is especially entitled to the attention of Congress, because a
company has been organized in Kansas City, with a capital of $1,000,000,
which has built steamers and barges, and is actually using the river for
transportation in order to show what can be done in the way of affecting
rates between Kansas City and St. Louis, and in order to manifest their
good faith and confidence in respect of the improvement. I urgently
recommend that the appropriation for this improvement be increased from
$600,000, as recommended now in the completion of a contract, to $2,000,000
annually, so that the work may be done in 10 years.

WATERWAY FROM THE LAKES TO THE GULF.

The project for a navigable waterway from Lake Michigan to the mouth of the
Illinois River, and thence via the Mississippi to the Gulf of Mexico, is
one of national importance. In view of the work already accomplished by the
Sanitary District of Chicago, an agency of the State of Illinois, which has
constructed the most difficult and costly stretch of this waterway and made
it an asset of the Nation, and in view of the fact that the people of
Illinois have authorized the expenditure Of $20,000,000 to carry this
waterway 62 miles farther to Utica, I feel that it is fitting that this
work should be supplemented by the Government, and that the expenditures
recommended by the special board of engineers on the waterway from Utica to
the mouth of the Illinois River be made upon lines which while providing a
waterway for the Nation should otherwise benefit that State to the fullest
extent. I recommend that the term of service of said special board of
engineers be continued, and that it be empowered to reopen the question of
the treatment of the lower Illinois River, and to negotiate with a properly
constituted commission representing the State of Illinois, and to agree
upon a plan for the improvement of the lower Illinois River and upon the
extent to which the United States may properly cooperate with the State of
Illinois in securing the construction of a navigable waterway from Lockport
to the mouth of the Illinois River in conjunction with the development of
water power by that State between Lockport and Utica.

THE DEPARTMENT OF JUSTICE.

Removal of clerks of Federal courts.

The report of the Attorney General shows that he has subjected to close
examination the accounts of the clerks of the Federal courts; that he has
found a good many which disclose irregularities or dishonesty; but that he
has had considerable difficulty in securing an effective prosecution or
removal of the clerks thus derelict. I am certainly not unduly prejudiced
against the Federal courts, but the fact is that the long and confidential
relations which grow out of the tenure for life on the part of the judge
and the practical tenure for life on the part of the clerk are not
calculated to secure the strictness of dealing by the judge with the clerk
in respect to his fees and accounts which assures in the clerk's conduct a
freedom from overcharges and carelessness. The relationship between the
judge and the clerk makes it ungracious for members of the bar to complain
of the clerk or for department examiners to make charges against him to be
heard by the court, and an order of removal of a clerk and a judgment for
the recovery of fees are in some cases reluctantly entered by the judge.
For this reason I recommend an amendment to the law whereby the President
shall be given power to remove the clerks for cause. This provision need
not interfere with the right of the judge to appoint his clerk or to remove
him.

French spoliation awards.

In my last message, I recommended to Congress that it authorize the payment
of the findings or judgments of the Court of Claims in the matter of the
French spoliation cases. There has been no appropriation to pay these
judgments since 1905. The findings and awards were obtained after a very
bitter fight, the Government succeeding in about 75 per cent of the cases.
The amount of the awards ought, as a matter of good faith on the part of
the Government, to be paid.

EMPLOYERS' LIABILITY AND WORKMEN'S COMPENSATION COMMISSION.

The limitation of the liability of the master to his servant for personal
injuries to such as are occasioned by his fault has been abandoned in most
civilized countries and provision made whereby the employee injured in the
course of his employment is compensated for his loss of working ability
irrespective of negligence. The principle upon which such provision
proceeds is that accidental injuries to workmen in modern industry, with
its vast complexity and inherent dangers arising from complicated machinery
and the use of the great forces of steam and electricity, should be
regarded as risks of the industry and the loss borne in some equitable
proportion by those who for their own profit engage therein. In recognition
of this the last Congress authorized the appointment of a commission to
investigate the subject of employers' liability and workmen's compensation
and to report the result of their investigations, through the President, to
Congress. This commission was appointed and has been at work, holding
hearings, gathering data, and considering the subject, and it is expected
will be able to report by the first of the year, in accordance with the
provisions of the law. It is hoped and expected that the commission will
suggest legislation which will enable us to put in the place of the present
wasteful and sometimes unjust system of employers' liability a plan of
compensation which will afford some certain and definite relief to all
employees who are injured in the course of their employment in those
industries which are subject to the regulating power of Congress.

MEASURES TO PREVENT DELAY AND UNNECESSARY COST OF LITIGATION.

In promotion of the movement for the prevention of delay and unnecessary
cost, in litigation, I am glad to say that the Supreme Court has taken
steps to reform the present equity rules of the Federal courts, and that we
may in the near future expect a revision of them which will be a long step
in the right direction.

The American Bar Association has recommended to Congress several bills
expediting procedure, one of which has already passed the House
unanimously, February 6, 1911. This directs that no judgment should be set
aside or reversed, or new trial granted, unless it appears to the court,
after an examination of the entire cause, that the error complained of has
injuriously affected the substantial rights of the parties, and also
provides for the submission of issues of fact to a jury, reserving
questions of law for subsequent argument and decision. I hope this bill
will pass the Senate and become law, for it will simplify the procedure at
law.

Another bill 11 to amend chapter II of the judicial Code, in order to
avoid errors in pleading, was presented by the same association, and one.
enlarging the jurisdiction of the Supreme Court so as to permit that court
to examine, upon a writ of error, all cases in which any right or title is
claimed under the Constitution, or any statute or treaty of the United
States, whether the decision in the court below has been against the right
or title or in its favor. Both these measures are in the interest of
justice and should be passed.

POST OFFICE.

At the beginning of the present administration in 1909 the postal service
was in arrears to the extent Of $17,479,770.47. It was very much the
largest deficit on record. In the brief space of two years this has been
turned into a surplus Of $220,000, which has been accomplished without
curtailment of the postal facilities, as may be seen by the fact that there
have been established 3,744 new post offices; delivery by carrier has been
added to the service in 186 cities; 2,516 new rural routes have been
established, covering 60,000 miles; the force of postal employees has been
increased in these two years by more than 8,000, and their average annual
salary has had a substantial increase.

POSTAL-SAVINGS SYSTEM.

On January 3, 1911, postal-savings depositories were established
experimentally in 48 States and Territories. After three months' successful
operation the system was extended as rapidly as feasible to the 7,500 Post
offices of the first, second, and third classes constituting the
presidential grade. By the end of the year practically all of these will
have been designated and then the system will be extended to all
fourth-class post offices doing a money-order business.

In selecting post offices for depositories consideration was given to the
efficiency of the postmasters and only those offices where the ratings were
satisfactory to the department have been designated. Withholding
designation from postmasters with unsatisfactory ratings has had a salutary
effect on the service.

The deposits have kept pace with the extension of the system. Amounting to
only $60,652 at the end of the first month's operation in the experimental
offices, they increased to $679,310 by July, and now after 11 months of
operation have reached a total of $11,000,000. This sum is distributed
among 2,710 banks and protected tinder the law by bonds deposited with the
Treasurer of the United States.

Under the method adopted for the conduct of the system certificates are
issued as evidence of deposits, and accounts with depositors are kept by
the post offices instead of by the department. Compared with the practice
in other countries of entering deposits in pass books and keeping at the
central office a ledger account with each depositor, the use of the
certificate has resulted in great economy of administration.

The depositors thus far number approximately 150,000. They include 40
nationalities, native Americans largely predominating and English and
Italians coming next.

The first conversion of deposits into United States bonds bearing interest
at the rate of 2.5 per cent occurred on July 1, 1911, the amount of
deposits exchanged being $41,900, or a little more than 6 per cent of the
total outstanding certificates of deposit on June 30. Of this issue, bonds
to the value of $6,120 were in coupon form and $35,780 in registered form.

PARCEL POST.

Steps should be taken immediately for the establishment of a rural parcel
post. In the estimates of appropriations needed for the maintenance of the
postal service for the ensuing fiscal year an item of $150,000 has been
inserted to cover the preliminary expense of establishing a parcel post on
rural mail routes, as well as to cover an investigation having for its
object the final establishment of a general parcel post on all railway and
steamboat transportation routes. The department believes that after the
initial expenses of establishing the system are defrayed and the parcel
post is in full operation on the rural routes it will not only bring in
sufficient revenue to meet its cost, but also a surplus that can be
utilized in paying the expenses of a parcel post in the City Delivery
Service.

It is hoped that Congress will authorize the immediate establishment of a
limited parcel post on such rural routes as may be selected, providing for
the delivery along the routes of parcels not exceeding eleven pounds, which
is the weight limit for the international parcel post, or at the post
office from which such route emanates, or on another route emanating from
the same office. Such preliminary service will prepare the way for the more
thorough and comprehensive inquiry contemplated in asking for the
appropriation mentioned, enable the department to gain definite information
concerning the practical operation of a general system, and at the same
time extend the benefit of the service to a class of people who, above all
others, are specially in need of it.

The suggestion that we have a general parcel post has awakened great
opposition on the part of some who think that it will have the effect to
destroy the business of the country storekeeper. Instead of doing this, I
think the change will greatly increase business for the benefit of all. The
reduction in the cost of living it will bring about ought to make its
coming certain.

THE NAVY DEPARTMENT.

On the 2d of November last, I reviewed the fighting fleet of battleships
and other vessels assembled in New York Harbor, consisting of 24
battleships, 2 armored cruisers, 2 cruisers, 22 destroyers, 12 torpedo
boats, 8 submarines, and other attendant vessels, making 98 vessels of all
classes, of a tonnage Of 576,634 tons. Those who saw the fleet were struck
with its preparedness and with its high military efficiency. All Americans
should be proud of its personnel.

The fleet was deficient in the number of torpedo destroyers, in cruisers,
and in colliers, as well as in large battleship cruisers, which are now
becoming a very important feature of foreign navies, notably the British,
German, and Japanese.

The building plan for this year contemplates two battleships and two
colliers. This is because the other and smaller vessels can be built much
more rapidly in case of emergency than the battleships, and we certainly
ought to continue the policy of two battleships a year until after the
Panama Canal is finished and until in our first line and in our reserve
line we can number 40 available vessels of proper armament and size.

The reorganization of the Navy and the appointment of four aids to the
Secretary have continued to demonstrate their usefulness. It would be
difficult now to administer the affairs of the Navy without the expert
counsel and advice of these aids, and I renew the recommendation which I
made last year, that the aids be recognized by statute.

It is certain that the Navy, with its present size, should have admirals in
active command higher than rear admirals. The recognized grades in order
are: Admiral of the fleet, admiral, vice admiral, and rear admiral. Our
great battleship fleet is commanded by a rear admiral, with four other rear
admirals under his orders. This is not as it should be, and when questions
of precedence arise between our naval officers and those of European
navies, the American rear admiral, though in command of ten times the force
of a foreign vice admiral, must yield precedence to the latter. Such an
absurdity ought not to prevail, and it can be avoided by the creation of
two or three positions of flag rank above that of rear admiral.

I attended the opening of the new training school at North Chicago, Ill.,
and am glad to note the opportunity which this gives for drawing upon young
men of the country from the interior, from farms, stores, shops, and
offices, which insures a high average of intelligence and character among
them, and which they showed in the very wonderful improvement in discipline
and drill which only a few short weeks' presence at the naval station had
made.

I invite your attention to the consideration of the new system of detention
and of punishment for Army and Navy enlisted men which has obtained in
Great Britain, and which has made greatly for the better control of the.
men. We should adopt a similar system here.

Like the Treasury Department and the War Department, the Navy Department
has given much attention to economy in administration, and has cut down a
number of unnecessary expenses and reduced its estimates except for
construction and the increase that that involves.

I urge upon Congress the necessity for an immediate increase of 2,000 men
in the enlisted strength of the Navy, provided for in the estimates. Four
thousand more are now needed to man all the available vessels.

There are in the service to-day about 47,750 enlisted men of all ratings.

Careful computation shows that in April, 1912, 49,166 men will be required
for vessels in commission, and 3,000 apprentice seamen should be kept under
training at all times.

ABOLITION OF NAVY YARDS.

The Secretary of the Navy has recommended the abolition of certain of the
smaller and unnecessary navy yards, and in order to furnish a complete and
comprehensive report has referred the question of all navy yards to the
joint board of the Army and Navy. This board will shortly make its report
and the Secretary of the Navy advises me that his recommendations on the
subject will be presented early in the coming year. The measure of economy
contained in a proper handling of this subject is so great and so important
to the interests of the Nation that I shall present it to Congress as a
separate subject apart from my annual message. Concentration of the
necessary work for naval vessels in a few navy yards on each coast is a
vital necessity if proper economy in Government expenditures is to be
attained.

AMALGAMATION OF STAFF CORPS IN THE NAVY.

The Secretary of the Navy is striving to unify the various corps of the
Navy to the extent possible and thereby stimulate a Navy spirit as
distinguished from a corps spirit. In this he has my warm support.

All officers are to be naval officers first and specialists afterwards.
This means that officers will take up at least one specialty, such as
ordnance, construction, or engineering. This is practically what is done
now, only some of the specialists, like the pay officers and naval
constructors, are not of the line. It is proposed to make them all of the
line.

All combatant corps should obviously be of the line. This necessitates
amalgamating the pay officers and also those engaged in the technical work
of producing the finished ship. This is at present the case with the single
exception of the naval constructors, whom it is now proposed to amalgamate
with the line.

COUNCIL OF NATIONAL DEFENSE.

I urge again upon Congress the desirability of establishing the council of
national defense. The bill to establish this council was before Congress
last winter, and it is hoped that this legislation will pass during the
present session. The purpose of the council is to determine the general
policy of national defense and to recommend to Congress and to the
President such measures relating to it as it shall deem necessary and
expedient.

No such machinery is now provided by which the readiness of the Army and
Navy may be improved and the programs of military and naval requirements
shall be coordinated and properly scrutinized with a view of the
necessities of the whole Nation rather than of separate departments.

DEPARTMENTS OF AGRICULTURE AND COMMERCE AND LABOR.

For the consideration of matters which are pending or have been disposed of
in the Agricultural Department and in the Department of Commerce and Labor,
I refer to the very excellent reports of the Secretaries of those
departments. I shall not be able to submit to Congress until after the
Christmas holidays the question of conservation of our resources arising in
Alaska and the West and the question of the rate for second-class mail
matter in the Post Office Department.

COMMISSION ON EFFICIENCY AND ECONOMY.

The law does not require the submission of the reports of the Commission on
Economy and Efficiency until the 31st of December. I shall therefore not be
able to submit a report of the work of that commission until the assembling
of Congress after the holidays.

CIVIL RETIREMENT AND CONTRIBUTORY PENSION SYSTEM.

I have already advocated, in my last annual message, the adoption of a
civil-service retirement system, with a contributory feature to it so as to
reduce to a minimum the cost to the Government of the pensions to be paid.
After considerable reflection, I am very much opposed to a pension system
that involves no contribution from the employees. I think the experience of
other governments justifies this view; but the crying necessity for some
such contributory system, with possibly a preliminary governmental outlay,
in order to cover the initial cost and to set the system going at once
while the contributions are accumulating, is manifest on every side.
Nothing will so much promote the economy and efficiency of the Government
as such a system.

ELIMINATION OF ALL LOCAL OFFICES FROM POLITICS.

I wish to renew again my recommendation that all the local offices
throughout the country, including collectors of internal revenue,
collectors of customs, postmasters of all four classes, immigration
commissioners and marshals, should be by law covered into the classified
service, the necessity for confirmation by the Senate be removed, and the
President and the others, whose time is now taken up in distributing this
patronage under the custom that has prevailed since the beginning of the
Government in accordance with the recommendation of the Senators and
Congressmen of the majority party, should be relieved from this burden. I
am confident that such a change would greatly reduce the cost of
administering the Government, and that it would add greatly to its
efficiency. It would take away the power to use the patronage of the
Government for political purposes. When officers are recommended by
Senators and Congressmen from political motives and for political services
rendered, it is impossible to expect that while in office the appointees
will not regard their tenure as more or less dependent upon continued
political service for their patrons, and no regulations, however stiff or
rigid, will prevent this, because such regulations, in view of the method
and motive for selection, are plainly inconsistent and deemed hardly worthy
of respect.