themselves to be put in this attitude. Indeed, there are a few Americans who have pursued a different policy with respect to the Filipinos, to their profit. I venture to predict that as the American business men of these islands become more conservative, as more capital comes in, the utter fatuousness of the present attitude of a majority of the American business men of to-day of these islands will become apparent. There is an immense field here for the sale of American goods. The Filipinos are imitative, take quickly to new things, may easily be taught, as their wealth shall grow, to regard American products, which are now luxuries to them, as necessities. The sale of cotton goods is almost wholly with the English houses to-day. The handling of hemp, which is the largest export of these islands, is almost wholly confined to foreign houses. There is not the slightest reason why this business should not be done largely by Americans, especially in view of the fact that the United States is the largest purchaser of hemp in the world. It requires the investment of a very considerable capital, the construction of warehouses in the various hemp provinces, and the establishment of friendly relations with the hemp growers and buyers in each province. The American business man in the islands has really, up to this time, done very little to make or influence trade. He has kept close to the American patronage and has not extended his efforts to an expansion of trade among the Filipinos. Until this is done and more American capital is brought here for the purpose, we can not hope that the imports from the United States to the islands will be increased in very large proportion. PROPOSED OFFICIAL INSPECTION AND CLASSIFICATION OF HEMP. About the beginning of this year complaints reached the Commission that the hemp being exported from the islands was of very inferior quality and that there was fraud in its packing. The Secretary of Agriculture of the United States recommended investigation and action, suggesting that if the Manila hemp continued to be of such poor quality, purchasers and users of fiber would be driven to other fibers and countries. It was recommended that the hemp exported be officially inspected and classified and carry the mark of the Government upon it to indicate its quality. A bill was drawn providing for official inspection and classification, and it was submitted to discussion in a public session. The public discussion satisfied the Commission that little if any good could be brought about by such legislation. Everyone who came to discuss the bill was opposed to it as it was drawn. It was insisted that the only thing possible was to have an inspection which should prevent false packing, but that governmental classification would be not only impracticable but a serious obstacle to business. It further developed that so far as fraud was concerned the purchasers in America were completely protected by the ordinary terms of purchase which enabled them to reject the hemp or to recoup at once from the price for any failure in quality. When the amended bill was drawn providing only for the inspection into the packing and for the punishment of false packing and of fraud in baling, a representative of the American hemp purchasers stated that the bill would do them no good because it was not radical enough. So far as we were able to determine, the bill which was desired by the American merchants was a bill which should forbid the exportation of hemp of poor quality, and should impose such restrictions on the method of raising and cleaning hemp as to insure the production of only good fiber at a reasonable price. The discussion showed that much poor hemp was exported for use in making paper and hats in Japan and in other countries. Because of the high prices paid for poor hemp, the faulty cleaning of hemp was much more profitable than the preparation of the finer qualities. Inferior qualities of hemp are produced by using a serrated knife in stripping the fiber. Men, women, and children can use a serrated knife for hemp cleaning, whereas the knife with the even blade requires the strength of an adult man. A law forbidding the use of a serrated knife in cleaning hemp, or preventing the export of hemp thus cleaned, would deprive many people of a means of livelihood in the islands and would savor much of paternalism; nor is a law of this kind necessary if purchasers use proper discretion in buying the quality which they desire. The object of the persons asking legislation, when analyzed, seems to be rather to secure a law which shall hold the price of good hemp down. The bill proposed has, therefore, been allowed to lie on the table, and it is unlikely that any further action will be taken in the matter. The high price of hemp always increases the production of inferior quality. This is a natural economic result; if the dealers do not desire to pay high prices for the inferior quality, their refusing to do so will soon bring up the quality of hemp. The report of the committee on the bill, consisting of General Wright, is hereto appended, and marked Exhibit J. SUGAR. It will be observed that the value of the sugar exports from the islands for the fiscal year ending June 30, 1903, was $3,955,568, an increase of $1,194,136 over the value of the exports of sugar for the fiscal year ending June 30, 1902. This increase was the natural result of a betterment of conditions as to tranquillity. More than that, the planters of Negros, where the increase chiefly was, had used greater efforts than the landowners of the other parts of the islands to import carabao to take the place of the carabao destroyed by the rinderpest. The increase in the exports, however, should not be taken as an evidence of prosperity in sugar production. I append a petition of the Agricultural Society of Panay and Negros, marked "Exhibit K,” in respect to the production of sugar in the Philippines, together with a statement made by the collector of customs at Iloilo, Colonel Colton, who has looked into the matter with great thoroughness, and whose opportunities for exact information are great, because Iloilo is the port through which almost all the sugar in the islands is exported. The statement of Colonel Colton is marked "Exhibit L." I also append a statement made by Governor Wright from data furnished him on the same general subject, marked "Exhibit M.” It may be deduced from these sources of information that the sugar production was first introduced into the Philippine Islands in the year 1856, and that the first official record of exportation is of the year 1859, when 5,427 tons of raw sugar were exported from Iloilo. In 1869, 7,344 tons were exported; in 1879, 47,625 tons; in 1889, 112,007 tons; in 1899, 154,462, and the largest exportation in any one year was in 1892, when 165,897 tons of sugar were exported. In 1901 the exportation fell to 34,500 tons. In the early years the sugar production was carried on by the use of wooden rolling mills worked by cattle, a process resulting in a loss of from 40 to 50 per cent of the sugar. Some of these mills are still in use, but most of them have been supplanted by steam mills which extract from 3 to 7 tons of juice per day with a loss of from 20 to 40 per cent of sugar. The sugar produced is classified as follows: Class No. 1 contains 88 per cent of saccharine; No. 2 contains 85 per cent; No. 3, 81 per cent, and damp 70 per cent. The various qualities of sugar are produced in about the following proportions: No. 1 quality, one-fourth; No. 2, three-sixteenths; No. 3 and damp, nine-sixteenths. Sugar polarizing as bigh as 92 per cent is produced by the old wooden mills in some localities of Panay. The expense of production was a very large percentage. Under ordinary circumstances Negros should produce 150,000 tons and Panay 50,000 tons of sugar annually on land now under cultivation. Those who have had experience in the business assert that with suitable machinery, transportation facilities and capital, the production could be doubled without extending the area of land under cultivation; that at present there are no means of transportation in Negros except for sugar brought to the market by lighters from the estates of the owners, from 5 to 14 miles, depending solely upon the condition of the roads, which is usually bad. The actual cost of producing sugar which is marketed at Iloilo, per ton, is as follows: Tilling and planting, $22; cutting and carrying to mill, milling, bagging and shipping, $18, and delivering, $6, making a total of $56 Mexican. These figures exclude material items like interest, investment, taxes, or rents, which are hard to estimate. The present selling price of sugar in the Iloilo market, based on the price in foreign markets, is about $64 Mexican per ton, which allows little or no profit on the sugar from the most favorably located estates, and is considerably less than the cost of production on the interior estates. The following table shows the quantity and value of sugar exported through the port of Iloilo, by fiscal years, since American occupation: At first glance it would seem from the returns of 1893 that the sugar planters were subject to congratulations upon the substantial increase both as to price and quantity of their product, and the apparently improved conditions. As a matter of fact, however, owing to the increased cost of labor and the extraordinary expenditure for animals to replace those killed by the rinderpest, the planters are more deeply in debt at the close of the 1903 season than at any previous time in their history, and if it had not been for the low-ruling rate of exchange enabling buyers to pay more in Mexican currency on practically the same gold prices as last year, a large percentage of the planters would have been entirely ruined and compelled to abandon their estates. The planters have been steadily losing ground since 1899, and have only been encouraged to continue the operation of their estates by the hope each year that their products would be admitted to the markets of the United States at a much more favorable rate of duty than is now imposed. The shipments to the United States have been very small; 71,000,000 pounds of sugar were exported last year in vessels which cleared for the Delaware Breakwater "for orders." A very small proportion of this was shipped into the United States, the larger portion being carried into Canada or England, and all the sugar entering the United States, except one cargo which was allowed to enter free during the brief period when there was no import tax on imports from the Philippine Islands, resulted in a heavy loss to the shippers. The islands of Panay and Negros are among the most thickly populated, and the inhabitants and business interests depend directly or indirectly upon the sugar industry, which is at this time in an exceedingly precarious condition, and unless something is done by Congress to relieve the situation there must be a total industrial collapse in those provinces. Were there admitted to the United States three or four hundred thousand tons-and there is no likelihood that in the near future the exports of sugar from the islands to the United States will reach any such sum-it would not have any effect upon the price of sugar in the United States, but it would greatly increase the prosperity of the two important provinces named. Sugar is also raised in Pampanga, Cavite, and Laguna, but not so successfully as in Negros and Panay. The conditions prevailing in the islands of Negros and Panay are typical of those throughout the islands. The growth of sugar in Formosa is apt to interfere very largely with the sugar trade of Japan, which already is hampered by a heavy duty. TOBACCO. The falling off in the production of leaf tobacco has already been alluded to, as well as the causes for the same. I can not too strongly urge the necessity for the reduction of the Dingley tariff in its application to goods imported from the Philippine Islands to 25 per cent of the rates therein imposed. I am confident that neither in the sugar market nor in the tobacco market will the effect of the amount to be introduced be materially injurious to any interest in the United States, while at the same time it will be of the greatest importance to the prosperity of the islands, and will be a most convincing argument with the people of the Archipelago to show the real interest that the people of the United States feel in the welfare of the Filipino people. THE LABOR QUESTION. American and foreign business men continue to complain of the difficulty in securing good labor. This question was discussed in my last annual report, and nothing has occurred since that time to change my views. I think it would be a great political mistake to admit the Chinamen freely into these islands as laborers. I am convinced that the Filipino, as conditions settle, can be made a good laborer; not so good as the American, not so good as the Chinaman, but one with whom it will be entirely possible to carry on great works of construction. We are now employing 2,500 Filipino laborers on the Benguet road, and our engineer reports that, wages considered, they are doing good work. We had an unfortunate experience in obtaining labor for this road, due to a misunderstanding with the proposed laborers, and to the fact that the men were obtained from an undesirable class in Manila and the neighboring provinces. It was fairly inferable from the facts that the persons who agreed to furnish the laborers, either intentionally or unintentionally, misled the laborers as to the terms upon which they should be employed. I append hereto, as Exhibit N, the report of the investigation made by the supervisor of fiscals concerning the failure of the first attempt to employ large numbers of laborers on the Benguet road. Since that time, however, the superintendent has been able to get Filipino laborers from all over Luzon, and, as already stated, the number is 2,500 and it is growing. The Atlantic, Gulf and Pacific Company, which is engaged in building the great Manila port works, needing in its employ from 500 to 1,000 men, has adopted the system of making the laborers comfortable and at home, and now can procure more labor than it needs, and good |