Act No. 749 of the Commission, enacted toward the close of the fiscal year, affords an adequate recourse in cases where an officer is willfully negligent in rendering his accounts and in depositing his balances, by imposing a fine not to exceed $2,000 and making a failure to account for money received prima facie evidence of embezzlement of the sums received and not accounted for.

THE INSULAR SALARY AND EXPENSE FUND.

From July 1, 1902, the traveling expenses of insular employees from the United States and in taking station, and their salaries for the same periods, as provided by Acts Nos. 80, 136, and 338, theretofore paid by the disbursing officer of the Commission and other disbursing officers, were made payable by settlement warrant on the insular treasury upon certification by the auditor, pursuant to appropriations made.

Payment of accrued leave due deceased employees was made a charge against this fund by Act No. 490, and rewards for information leading to the capture and conviction of brigands or criminals or leading to the capture of escaped convicts were made chargeable to this fund by Act No. 595.

In this connection attention is invited to the danger of duplicate payments for the same service, one by the province under the provisions of Act No. 671 and another by the auditor on executive direction; and it is recommended that all such payments of rewards be made by the provinces, the boards of which are likely to have more accurate knowledge of the facts and which can then claim reimbursement under the provisions of the act last cited.

Since July 1, 1902, there have been settled and certified for payment 419 claims for salary and traveling expenses, 34 claims for accrued leave due estates of deceased employees, 7 claims for rewards offered, and 2 unclassified claims.

Act No. 643, effective June 1 last, provides that the appointment of persons from the United States to the Philippine civil service shall be under a contract stipulating that such employees shall serve for a period of two years unless released by competent authority. Half salary for the time necessarily consumed in traveling from San Francisco to Manila, and reimbursement for actual and necessary traveling expenses from place of residence to San Francisco are guaranteed to each employee at the expiration of his contract, provided that if any part of such traveling expenses is borne by the Government at the outset 10 per cent of such employee's monthly salary shall be retained until the Government is fully reimbursed. A circular letter instructing the disbursing officers as to the procedure covering the deduction and return to the Treasury of this 10 per cent of monthly salaries of such cmployees has been prepared and sent to all concerned. In many cases it is impossible to determine the exact amount due the Government until the accounts of the disbursing agent at Washington have been received, due to the fact that railway and Pullman transportation to San Francisco is furnished in the majority of cases and that claims therefor are not promptly presented by the transportation companies for payment in the United States. This advance of transportation should be discouraged as much as possible.

Every person appointed to the insular service under the provisions of act No. 643 should immediately upon arrival in Manila file with the

auditor his traveling-expense account and supporting vouchers, so that the account may be passed upon while all of the facts are clearly in mind. The account will then be filed for certification and payment by warrant, as provided by the law, at the end of two years' satisfactory service.

THE NEW PHILIPPINES CURRENCY.

During the fiscal year 1903 two appropriations, amounting to $3,000,000, United States currency, were made for the purchase of bullion and alloy for coinage into the new Philippine currency authorized by the United States Congress. This money was withdrawn for the purpose specified, and before the close of the fiscal year 3,200,000 pesos, equivalent to $1,600,000, United States currency, had been received and taken into the account of the treasurer.

To November 1 a total of 14,547,166 pesos of the new currency, including subsidiary coinage, had been received and taken into the treasurer's account. It is not now possible to state the amount of the seigniorage, exclusive of the mintage charges, insurance, and transportation, as complete reports have not been received from Washington. The new currency was put into circulation promptly after its receipt, and the very large balance of the United States currency in the insular treasury at the close of the fiscal year enabled the insular government to resume payment July 1, 1903, in a gold-standard currency without a ripple of disturbance.

All appropriations were made withdrawable after June 30 in. Philippine currency or United States currency at the option of the treasurer, and disbursements were ordered paid in the same currencies, except in cases especially otherwise authorized, according to the nature of the contract.

In order that the new Philippine currency might be substituted for local or Mexican currency as rapidly as possible, each and every disbursing officer of the insular government was directed by executive order to deposit in the insular treasury any local or Mexican currency in his hands which was not required for disbursement before June 30, 1903, and close his Mexican currency accounts as of that date.

In order to promote and expedite the circulation of the new money in the provinces the treasurer, by Executive Order No. 62, was authorized and directed to exchange, in his discretion, with any provincial treasurer, pursuant to a resolution of the provincial board, Philippine currency for Mexican and Spanish-Filipino currency at the authorized ratio at the time such provincial funds were received at the insular treasury for such exchange. Likewise all officers of the government were directed to make all contracts payable in Philippine or United States currency, at the option of the government, and all existing contracts otherwise payable were directed to be adjusted to the new basis as soon as practicable.

The accounts for the fiscal year 1904 will be rendered and settled as far as practicable in Philippine currency, with the previous approval of the civil governor and the Secretary of War. To effect this result auditor's circular No. 30, approved by the civil governor, was issued for the information and guidance of all concerned, and is here quoted:

The act of Congress of March 3, 1903, known as "An act to establish a standard of value and to provide for a coinage system in the Philippine Islands," makes the Philippines peso, of the value of fifty cents, United States currency, the unit of value.

All revenue and disbursing accounts which have heretofore carried United States currency will be hereafter expressed in Philippines pesos, regardless of whether United States currency or Philippines currency was actually received or paid. On account of the stability of ratio between the new Philippines currency and United States currency these currencies may be exchanged at the value stated without affecting the actual value of the money on hand, and such exchanges by disbursing officers are authorized when funds in hand permit. Exchanges of Philippines or United States currency for Mexican or Spanish-Filipino currency will not be made by any officer, except with the insular treasurer, as authorized by law. It will be necessary, therefore, to carry accounts in but two currencies-Philippines currency (which will embrace also United States currency) and Mexican currency (which will include the Spanish-Filipino currency, or all funds heretofore known as local currency). Receipts and invoices, as heretofore, will be expressed in the kinds of currencies actually involved, but in the accounts the expression of all United States currency vouchers will be doubled to convert the same to peso value. Office books and records need be kept in only two currencies, in harmony with these instructions.

The most encouraging feature in the accounting work is the early adoption in full of a stable currency. That the Government will be able to eliminate Mexican and Spanish-Filipino currency from official circulation after December 31 next is a foregone conclusion, and that this will be done without injury to any interest is apparent, due largely, however, to the very great volume of United States currency injected into the circulating medium of the islands since American occupation.

CERTIFICATES OF INDEBTEDNESS.

Under authority of section 2 of the act of Congress of March 2, 1903, the Philippine government was authorized to issue certificates of indebtedness for the purpose of maintaining the parity of the new Philippine currency. An issue of these certificates was placed on sale in the United States pursuant to the additional provisions of Act No. 696 of the Commission, with most satisfactory results.

The following report of the Secretary of War to the auditor relative to this bond issue is herewith submitted:

WAR DEPARTMENT, BUREAU OF INSULAR AFFAIRS,

Washington, D. C., May 18, 1903.

SIR: In accordance with the provisions of section 3 of enactment No. 696 of the Philippine Commission, authorizing the issue of $3,000,000 of certificates of indebtedness under and by authority of section 6 of the act of Congress entitled "An act relating to currency for the Philippine Islands," approved March 2, 1903, said section reading as follows:

"SEC. 3. The Secretary of War shall report to the auditor and the treasurer of the Philippine Islands the amount of such certificates of indebtedness as are described in the previous section which he has issued under the authority thereof, the numbers and denominations thereof, the rate of interest to be paid thereon, the time when payable, the premium, if any, at which they were issued, and the total proceeds therefrom, and the same shall be made a matter of record in the offices of the auditor and treasurer of the Philippine Islands"

by direction of the Secretary, I have the honor to render the following report:

In pursuance of the authority contained in section 2 of this enactment, the Secretary of the Treasury was requested to submit a form of temporary certificate of indebtedness that would meet the requirements, which form was immediately submitted by him with the statement that it embodied the terms set forth in section 6 of the enactment of Congress providing for a standard of value in the Philippine Islands.

With a view to placing the certificates of indebtedness to the best advantage, the matter was taken up with the Secretary of the Treasury, who authorized the statement that they would be accepted by the Treasury Department as security for deposits of the public money of the United States in national banks whenever further deposits were made, and that they could at any time be substituted for

United States bonds now held as security for deposit, on condition that the Government bonds thus released be used as security for additional bank-note circulation. On April1 the Bureau of Insular Affairs issued a circular which was widely circulated through the mails and in the public press inviting subscriptions for $3,000,000 of the certificate of indebtedness to be issued on coupon form of the denomination of $1,000, dated May 1, 1903, with interest at the rate of 4 per cent per annum, payable quarterly, such certificates to be redeemable in one year after date of issue in gold coin of the United States at the office of the Guaranty Trust Company of New York.

The bids for subscriptions for these temporary certificates of indebtedness were opened in the office of the Chief of the Bureau of Insular Affairs on the afternoon of April 20, 1903, with the understanding, as set forth in the circular referred to above, that the award would be made to the bidder or bidders most advantageous to the government of the Philippine Islands, as a result of which the entire award was made to the firm of Fisk & Robinson, 35 Cedar street, New York, whose bid for the same was $102.513 per one hundred.

On account of the exorbitant charges demanded by the express company, the certificates of indebtedness were conveyed to New York by special messengers of the Department, at considerable saving, and placed in the custody of the Guaranty Trust Company of New York. These certificates were issued in the denomination of $1,000, dated May 1, 1903, numbered from 1 to 3000, inclusive, each bearing three coupons, dated August 1, 1903, November 1, 1903, and February 1, 1904, for interest at the rate of 4 per cent per annum, payable quarterly and due on the dates above shown, with interest due for the last quarter with the principal after maturity and upon presentation of the certificate.

On May 1, 1903, these certificates of indebtedness as described above were placed in the hands of the firm of Fisk & Robinson, the successful bidders, by the Guaranty Trust Company of New York, the said Fisk & Robinson, in consideration thereof and in accordance with their bid, depositing with the Guaranty Trust Company the sum of $3,075,390, which was duly accepted and placed to the credit of the treasurer of the Philippine Islands.

From the second paragraph above it will be seen that by August 1 it will become necessary to have available by appropriation of the Philippine Commission the sum of $30,000 for the use of the Guaranty Trust Company of New York in meeting the interest due for the first quarter ending on that date on these temporary certificates of indebtedness, and that a like amount for the same purpose will become necessary on November 1, 1903, and on February 1, 1904, and that on May 1, 1904, the face value and interest for the last quarter on these certificates, amounting to $3,030,000, it will also become necessary to permit the retirement of this issue of certificates. Very respectfully,

CLARENCE R. EDWARDS, Colonel, U. S. Army, Chief of Bureau.

In connection with the fact that the insular government receives 3 per cent on its deposit in New York, it is quite apparent that with the premium realized on these certificates of indebtedness and the interest on the deposit of the proceeds this loan will be without cost to the insular government.

CHANGES IN RATIO BETWEEN MEXICAN OR LOCAL CURRENCY AND UNITED STATES CURRENCY.

At the beginning of the fiscal year 1903, or June 30, 1902, the ratio between Mexican and United States currency was $2.27 of the former to $1 of the latter, which ratio had been in effect from April 1, 1902. July 7, 1902, the ratio was fixed at 2.35 to 1; September 23, at 2.40 to 1; October 26, at 2.46 to 1; November 12, at 2.50 to 1; November 23, at 2.60 to 1; January 25, 1903, at 2.66 to 1; March 11, at 2.60 to 1; April 4, at 2.55 to 1; May 1, at 2.50 to 1; May 14, at 2.45 to 1, which continued to be the ratio to June 30, 1903, the end of the fiscal year.

ACCOUNTING BY CURRENCIES AUTHORIZED.

In my last annual report it was stated that it was not deemed practicable to continue the rendition and settlement of accounts in United States currency expression, in view of the fact that the greater part of the financial transactions of the government were in Mexican or local currency, of unstable value, changing commercially almost every day. Steps were taken at the beginning of the fiscal year to introduce separate accounting according to the actual currencies involved, this method having received the advance approval of the Secretary of War and the Philippine Commission.

It was not found possible to get into the hands of the officers concerned the instructions and blanks necessary to carry this arrangement into complete effect until several months of the fiscal year had passed. Accounts were in the meantime settled as rendered. Under the former system of accounting in United States currency expression regardless of the currency involved, it was necessary in balancing accounts to consider the gains and losses, or differences arising in the accounts by reason of the official changes in ratio between the two currencies. This made it easily possible to state definitely the net losses to the government by reason of the depreciation in value during the fiscal year 1902 of its silver currency. Under the separate accounting almost completely employed during the fiscal year these losses do not find expression to any great extent in the accounts as stated, but the losses occurred nevertheless in the debt-paying power of the silver money. At the beginning of the fiscal year 1903 the treasurer's cash balance, expressed in gold, of $5,995,006.49 really consisted of $1,256,850.90 in United States currency and $10,755,613.15 in Mexican and Spanish-Filipino dollars, worth a little over 44 cents each at the official ratio at the time of $2.27 of Mexican currency to $1 United States currency. At the close of the fiscal year the treasurer's cash balance consisted of $10,853,803.09 in United States currency, with an overdraft in Mexican currency of $539,269.39, which had been temporarily met by the treasurer from other funds in his hands. Reducing the United States currency balance by the amount of this overdraft converted at the then ratio of 2.45 to 1 left a net cash balance in the treasury at the close of the fiscal year of $10,633,693.13, wholly in United States currency. The treasurer's cash balance at the beginning of the fiscal year, three-fourths in Mexican currency, had shifted to a balance wholly in United States currency at its close. This was the result of a policy deliberately adopted of undervaluing the Mexican currency to such a degree in fixing the official ratio that it was not offered to any considerable extent in payment of public dues, United States currency being paid in preference. On the other hand, almost all of the insular appropriations, except those for the purchase of bullion, were withdrawn and disbursed in Mexican currency, in accordance with the provisions of the appropriation acts. This policy of taking in the stable currency and paying out the unstable currency paved the way to the adoption of the gold standard at the close of the fiscal year.

The government, in protecting its revenue collections against the unstable currency by undervaluing it, was compelled, however, to pay its obligations in the same undervalued medium. This caused a loss to the government fully as great as that which found expression in the accounts of the previous fiscal year.