Following the policy which it was announced by the Vatican would be pursued, the bishops who were Spanish friars in all the dioceses of the islands have been allowed to resign and their places have been filled by American Catholic bishops. I can not state with too much emphasis the satisfaction I feel in this change. It means, in my judgment, the beginning of a new era in the islands. It is to be expected that a large part of the people of the islands will continue to be communicants of the Roman Catholic Church, and it can not but have a liberalizing effect upon them that their bishops shall be Americans with the American ideas of a separation of church and state, and with the American respect for individual rights and individual liberties. The powerful influence of a Roman Catholic bishop in his diocese, exercised over the priests of his diocese, can not but be productive of good and full of cooperation in our purpose to educate these people. A comparatively small number of Spanish friars remains in the islands, and it is to be expected that the American bishops shall use them for the benefit of the Church, though it is hoped that there will be no departure from the policy of the Church announced by Cardinal Rampolla in his letter to me, in which he said that it was not the intention of the Roman Catholic authorities to send back the Spanish friars to any parishes in which the majority of the people were opposed to their coming.

I am officially informed by the apostolic delegate that in 1898 the number of friars in the islands was as follows:

That, by December 1, 1902, they had been reduced as follows:

And that, by December 1, 1903, they have been still further reduced, so that the number in the islands is as follows:

That many of the monks are old and infirm, incapable of doing parish or any other work, and that the Dominicans have renounced before the Holy See all their former parishes and dedicate themselves exclusively to teaching.

Whatever may happen during the first few months of the coming of the American bishops, it is certain that the spirit of the American Catholic Church is so different from that of the Spanish church from a political standpoint, that the influence of the Spanish friars will gradually wane and that of the American bishops become controlling. The purchase of the friars' land, the division of the proceeds, the application of a large part thereof for the benefit of the Philippine church, the establishment of the American hierarchy here, and the gradual withdrawal of the Spanish friars, all will bring about what we so much desire-the Americanizing of the Roman Catholic Church in the Philippines. The attitude of the Government has been very much criticised by some American Catholic priests and bishops, and it has been charged that we have withheld from Spanish friars the protection assured to them by the treaty of Paris, and that we have been neglectful in not protecting the interests of the Roman Catholic Church when they were unjustly or unlawfully attacked by schismatics under Aglipay. These charges are wholly unfounded, as may be seen by an examination of the records taken from the executive files showing the executive decision and action with respect to religious matters, which is hereby appended as a part of this report and marked "Exhibit I." We have known that the great majority of the people of these islands were strongly opposed to the return of the Spanish friars to their parishes, and we have felt certain that if such a policy were adopted and the friars were sent back there would necessarily follow disturbances of the peace and discontent among the people; that the people would not be able to distinguish between a government which protected friars going back of their own volition and a government which sent the friars back and maintained them in their pastorates. Therefore the Government has deprecated and still deprecates the return of the friars to their parishes, and has made representations to the church authorities in these islands and to the Vatican, urging that the Spanish friars be not sent back, but when a friar has been sent back, the Government has never refused to protect him in his rights and to punish those who have violated his rights. There is the utmost religious freedom enjoyed in these islands, and no one, whether Roman Catholic, Filipino Catholic, or Protestant, is disturbed in worshipping God as he chooses. The instances in which one sect has interfered with another are comparatively few, but in every case the Government has sought to punish the offender and to prevent a recurrence of the trouble.

BUSINESS CONDITIONS.

Business conditions in Manila, if the general report from American merchants can be trusted, have not been good during the year. The change in the currency from a silver to a gold standard has been in progress. The demand for Mexican silver in this business, up to the time of writing this report, in other places has been sufficiently great to drain the islands of Mexican silver, though there are indications, as this is written, that it may become profitable to import Mexican silver again. Of course the great difficulty in getting into circulation the new coinage grows out of the fact that Mexican silver is worth less than the Philippine peso, as established by act of Congress, by about 10 per cent, and everyone, business men or not, in paying his debts and making his purchases, naturally prefers to use the poorer currency when it will go as far as the more valuable, because of the ignorance of the people as to the real difference in value. The steps taken to maintain the parity, the laws passed, and the accumulation of a reserve fund, I shall not dwell upon because they will all be contained in the report of the secretary of finance and justice. It is only necessary to remark here that the advantages of the new coinage will not be apparent until some time in the future; not until January 1, 1904, can the Mexican coin be demonetized and denied a legal-tender value. The policy of the government is to purchase the Spanish-Filipino coins, of which there are some ten or twelve millions of dollars in the islands, and recoin them into Filipino pesos.

Notwithstanding the statement that business conditions in the islands have been exceedingly unfavorable, and in spite of the very depressing agricultural condition, so far as rice, corn, and other food products are concerned, the statistics as to exports and imports into the islands show a considerable improvement for the better over last year and a substantial increase in the production and exportation of hemp and copra. In the fiscal year ending June 30, 1902, the total imports were $41,072,738, but of this $8,652,648 was silver coin. The total exports for the fiscal year ending June 30, 1902, were $27,157,087, of which exports the silver coin amounted to $2,423,200. Excluding silver coin and gold to the value of $278,248 the total merchandise imported for the fiscal year ending June 30, 1902, amounted to $32,141,842, whereas the total merchandise exported, aside from silver coin, already mentioned, and gold valued at $806,208, amounted to $23,927,679. In other words, the balance of trade against the islands last year was $8,214,163. For the year ending June 30, 1903, the total imports were $35,099,241, the silver coin in which amounted to $2,077,137, and gold valued at $50,222. The total imported merchandise, therefore, for the year ending June 30, 1903, was $32,971,882, or a gain in the entire year of $830,040. The total exports for the year ending June 30, 1903, amounted to $39,668,366,

of which $6,366,106 was silver and $180,480 gold, leaving a balance of merchandise exported of $33,121,780, which makes a balance of trade in favor of the islands for the year ending June 30, 1903, of $149,898. It will be seen that there is an increase in the exports for the year ending June 30, 1903, over those of 1902, of $9,194,101. The total foreign business of the islands, excluding coin, for the year ending June 30, 1902, was $56,069,521, while the total foreign trade for the year ending July 30, 1903, was $66,093,662, or a gain of $10,024,141. It should be borne in mind in respect to all these statements that they do not include any importations for the Army of the United States which pay no duty and are not included in the statistics. The comparative amounts of the various commodities exported during the two years are shown by the following table:

The decrease in tobacco was due to increase of duties on tobacco in Australia, Java, and Japan. The business of the United States exports and imports is also shown by the following table, excluding always the United States Government importations:

Imports from United States, excluding United States Government imports.
Exports to United States....

Total business, exclusive of United States Government imports.. Increase total business.

The imports of rice show the depressed condition of the rice culture in the islands. For the fiscal year ending June 30, 1900, the amount of rice imported was $3,113,423; for the next fiscal year, 1901, it was $5,490,958; for the fiscal year of 1902, $6,578,481, and for the fiscal year of 1903, it was $10,061,323. It is hoped that this abnormal importation of rice will be unnecessary next year, and that the balance of trade in favor of the islands will increase.

Some reason for the complaints in respect to business conditions in the islands which come from the American merchants, may be found in certain especial circumstances with respect to the American trade in the islands that are not a legitimate cause for complaint. When the Americans first entered the islands, enterprising business men followed the army and established what were called trading companies, which naturally catered to the demand caused by the presence of the

army and the Americans that followed in its wake. The army was rapidly increased, until during the year 1900 there were in the Archipelago upward of 70,000 troops distributed through the islands in 600 posts. This presented an opportunity for the sale of liquors and other goods likely to be purchased by soldiers, which continued for two years or more. The army has now been reduced from 70,000 men to a little more than 15,000 Americans, and the number of posts has been reduced from 600 to a few more than 100. In addition to this the Commission has passed an act forbidding the sale of liquor within 2 miles of an army reservation, which it is said has much interfered with the canteen trade. The enormous profits which were reaped by the American trading companies (of which there are some half a dozen in Manila), growing out of the demand produced by the presence of 70,000 soldiers, fell off rapidly as the changes which I have indicated took place, and to this, more than any other one cause, is due the interference with large returns upon much of the American capital invested in the islands. I venture to say that the opportunities which the American merchants have had for making quick and large profits out of the American soldier has had a bad effect upon American methods of doing business and upon the attitude of most of the American merchants in these islands. It has made them feel independent of the Filipino demand for American commodities. It has lessened the necessity for effort on their part to create a demand among the Filipino people for those articles which the United States can make and ought to sell in these islands. The natural hostility of the American business men growing out of the war was not neutralized by a desire and an effort to win the patronage and good will of the Filipino. The American business men controlled much of the advertising in the American papers, and the newspapers naturally reflected the opinions of their advertisers and subscribers in the advocacy of most unconciliatory measures to the native Filipinos and in decrying all efforts of the government to teach Filipinos how to govern by associating the more intelligent of them in the government. One of the first principles of good business success is not to antagonize unnecessarily those whose patronage you seek and must depend on for the building up of your business. The number of Americans that the American merchants or any merchants in these islands can count upon for business demands is never likely to exceed 20,000. The number of Filipinos whose trade might make a most lucrative business in these islands is 7,000,000. It would seem to be the wiser policy on the part of the American merchant to cultivate the good will of those potential patrons rather than through the press and in society and in all other ways to antagonize them, to give the impression of bitter hostility and racial prejudice toward them too deep to be overcome. Neither the German nor the English nor even the Spanish merchants have allowed WAR 1903-VOL 5- -4