Monday, October 05, 2015

A Man, A Plan, A Fraud…Panama!

If history has taught us anything…it’s that it's hard to build an isthmian canal across Central America.

That’s a lesson Chinese telecom entrepreneur Wang Jing is probably taking to heart now that 80% of his paper wealth evaporated in the PRC stock market unpleasantness, and he has to take a long hard look at how to come up with the $50 billion needed to build his canal through Nicaragua.

Reuters recently tossed Wang another anvil, running a dire report that the social and ecological impact statement commissioned by HKND, the Chinese developers for the current project, concluded that the project was "fraught with risks." 

I must say that the actual report is 11,000 pages in 14 volumes and, as far as the article is concerned I wonder if the conclusions were "fed" rather than "read" if you get my drift; and the inevitably hedged takeaway is that the canal "was likely to have an overall positive impact on Nicaragua, the second-poorest country in Latin America, but only if it follows international standards."

Don't make the complacent judgment that the good canal got built in Panama, and the PRC is getting the booby prize in Nicaragua.

I think a close study of history is also trying to teach us that…an isthmian canal really should be built in Nicaragua!

The Panama Canal is a tribute to the energy, integrity, and skill of the US engineering, construction, and sanitary team, which overcame a host of dire problems and erected one of the great monuments of modern civil engineering.

But in its intellectual, moral, strategic, and technical foundations, in its conception, marketing, and remembrance, the Panama Canal is a masterpiece…of BS.

The official narrative, enshrined for general audiences in David McCullough’s The Path Between the Seas, is the Panama Canal as a triumph of American can-doism, especially the will and vision of Theodore Roosevelt.  As president, Roosevelt engineered legislation in favor of the Panama route over Nicaragua, managed the secession of the province of Panama from the Colombian republic, and drove the titanic project to completion.

The cornerstone assumption of this narrative was that Roosevelt was the ultimate straight shooter, he saw the superiority of the Panama route, and he made it happen.

Not quite so, as two very interesting but relatively obscure books tell us.

The first book, How Wall Street Created a Nation by Ovidio Diaz Espino lays out the financial machinations coordinated by William Cromwell, the Panama Lobby’s fixer, to produce an immense payday for Wall Street speculators in Panama stocks.

The second book, The Cowboy and the Canal: How Theodore Roosevelt Cheated Colombia, Stole Panama, and Bamboozled America by J.M. Carlisle, lays out the evidence that a key member of the Panama ring was Douglas Robinson, Roosevelt’s financial adviser, personal fixer…and his brother-in-law.

Both of them draw on a forgotten classic of investigatory journalism, The Untold Story of Panama, by Earl Harding, the journalist who unearthed the story for Joseph Pulitzer 100 years ago.

Interesting stuff. 

Scandal has burbled around the selection of Panama from the beginning thanks to the well-advertised disappointment and resentment of the powerful Nicaraguan faction in the US Senate.   Opponents of the Panama scheme held congressional hearings and their objections (before approval of the Panama project) and accusations (afterward) of skullduggery received an extensive airing in sympathetic press outlets.  

Joseph Pulitzer’s papers pushed the story and Pulitzer and a number of other newsies were indicted for libel for challenging the honesty and integrity of the Panama crowd.  According to Diaz Espino, Roosevelt suspected his own VP, Douglas Fairbanks, of leaking the story, tapped his phone (yes, there were apparently phones in 1909), and had the Secret Service tail him for months.

But the massive evidence of profiteering and skullduggery has been shrugged off since it was believed Teddy made the right call, put that ditch in Panama where it oughta be, made the dirt fly and took no guff!

Well, let me take issue with that. The advantages of the Nicaraguan route had been recognized ever since the 1850s, when it served as a vital link between the eastern and western United States a) during the Gold Rush and b) before the construction of the transcontinental railroad.

Cornelius Vanderbilt, the sharpest knife in the robber baron toolkit, staked his bets on the Nicaragua route over the Panama route for two good reasons.

First, the Nicaraguan route was 300 miles closer to the United States on the Atlantic side alone, and shaved 500 miles off the voyage to San Francisco from the Pacific side as well.  Transit across Nicaragua was a major time and money saver for travelers anxious to hit the goldfields, and for the steamship operators that carried the passengers, freight and, on the return, the gold (a few days  gained in depositing specie in New York and collecting interest was a serious deal).

Second, a natural transitway almost completely across Nicaragua already existed, making it possible to cross to the Pacific side with reduced muss, fuss, and capital expenditure if little comfort.

The San Juan River empties into the Caribbean on Nicaragua’s east coast.  Vanderbilt’s boats were able to navigate up the San Juan—albeit via some nasty rapids—up to Lake Nicaragua.  On the west bank of Lake Nicaragua, it was a 12-mile descent overland to the Pacific Ocean.

Let me repeat that.  In 1855, only 12 miles of the Nicaraguan route was not water-accessible.

Vanderbilt obtained an exclusive transit concession from the Nicaraguan government, including rights to construct a canal.  Vanderbilt was unable to pull off British financing for the canal, which was something of a pipe dream at the time, and concentrated his efforts on dominating and milking the extremely profitable transit traffic until a host of political and commercial aggravations-- including multiple filibustering expeditions by William Walker that targeted Vanderbilt’s Nicaraguan interests--caused the tycoon to turn elsewhere to augment his fortunes.

Panama, on the other hand, mainly attracted people who looked at a map and saw that the isthmus at that point was very, very skinny.

Ferdinand de Lesseps, the builder of Suez, liked what he saw on the map and staked his reputation, prestige, and the savings of thousands of loyal stockholders on the idea that money, will, and French elan could carve a notch through Panama in the form of a sea-level or “tide water” canal.

The story ended miserably in 1889.  De Lesseps’ equipment, technology, and engineers were unable to make much of a dent in the Panamanian jungle and the workforce was decimated by yellow fever and malaria.  The Panama company had been intentionally underfunded to generate market excitement through a limited issuance of shares, and then desperately Ponzi’d up in a series of stock schemes to keep the dividends flowing and confidence up while the project floundered.  Finally, the bad news and bad management caught up with de Lesseps, resulting in bankruptcy, a titanic scandal over influence peddling, fraud, and misrepresentation, and a jail term for his son, Charles.

The Panama debacle further strengthened the hand of the Nicaraguan faction in the U.S., led by Senator John Morgan of Alabama, who saw the project as a ticket to economic rejuvenation for the Gulf ports of his beloved Dixie (he had been a Confederate general and, more recently, the Grand Dragon of the Alabama Ku Klux Klan), as well as a payday for himself.

In 1902, the US government’s Isthmian Canal Commission, as expected, recommended the Nicaragua route.  However, in a major surprise, Roosevelt met with the commissioners and told them to reverse themselves.  The stage was set for a big, expensive, and dirty lobbying/speechifying battle in Congress between the Nicaragua and Panama outfits, which the Panama faction won thanks to the superior finances, organization, wits, and energy of William Cromwell.

But more help from T.R. was needed.

The shorthand for the key legislation, the Spooner Act, was that it gave the project to Panama.

Actually, it gave first dibs to Panama, but if the Colombian government didn’t grant the U.S. the concession it desired, then it would be Nicaragua.

Colombia, of course, tried to make use of this leverage to extract a good deal, too good a deal as far as the US was concerned. The US government, instead of throwing up its hands and moving on to Nicaragua, facilitated the secession of the province of Panama, recognized it as an independent state, and negotiated a favorable deal for the canal zone with Panama’s newly minted Envoy Extraordinary and Minister Plenipotentiary to the United States —who happened to be the French leader of the Panama ring.  A sleazy, oft-told story, but recounted in new depth and detail by Diaz Espino.

There are quite a few indicators that the fix was in for Panama despite its disadvantages.

First, consider the $40 million paid to the Compagnie Nouvelle, the French outfit that was successor to the rights of de Lesseps’ busted company, by the US government to acquire its Panama rights and property.

The $40 million price tag was pretty dubious and was itself a pure product of deal engineering.  The leaders of the Ring told the French—who had optimistically put a figure of over $100 million on their overgrown cuttings, rundown buildings, and abandoned equipment—they had to come in at $40 million so the aggregate price estimate for the Panama project would be $5 million less than Nicaragua.

More significantly, the French rights were a wasting asset.  They expired in 1904 (a legally questionable extension to 1910 could complicate matters, I guess, but the Colombian government would have been happy to repudiate it), so if the US had decided to wait out the French, they could have negotiated with the Colombian government for all the rights—which Colombia was apparently prepared to offer for $25 million, which is a bargain of at least $15 million if you just consider the discount off the French number and a lot more than that when you realize it included the Colombian rights as well .  

And of course, if the Colombian negotiations hadn’t worked out the US could grab Panama anyway—as the US eventually did—and pay zero to the Colombians.

As it finally worked out, the US government paid $10 million to the new government of Panama for the canal rights, something of a bargain.

At the same time the US paid $40 million to Compagnie Nouvelle for the company's derelict and dubious rights, rights whose legal standing with Colombia--which, on top of everything else had lost sovereignty over the territory in which the concession was granted--were extremely tenuous and, as far as the newly minted government of Panama was concerned, would seem to be ripe for repudiation or renegotiation, one might think.

Not quite a bargain at $40 million.  Add the $10 million paid to Panama, and the cost basis for Panama was now $5 million more, instead of less, than the Nicaragua estimate.

So a key component of the rush for Panama was paying out, apparently quite unnecessarily, $40 million to the stockholders of a French company, of whom a large number were reasonably suspected of being American speculators.  For his services to the Compagnie Nouvelle in securing the US government payday, William Cromwell demanded over $800,000 (multiply by 24 to get current dollars), reportedly the highest legal fee in US history to that time.  How much eventually ended up in his pocket and how much was distributed elsewhere is unclear, but Cromwell’s lobbying efforts were both effective and extremely expensive.

Beyond the financial/legal issues, the Panama route had two other signal disadvantages compared to Nicaragua.  First, Panama was notoriously unhealthy, considered a death trap compared to what was known of Nicaragua, and the US medical team had to expend enormous scientific and institutional resources during construction to avoid duplicating the massive die-off of workers and staff experienced by the French.

And there was the awkward matter of the Culebra Cut (known as the “Gaillard Cut” during the period of US control)—an excavation of an inconvenient mountain at the continental divide near the Pacific end of the canal and a challenge that had vanquished de Lesseps.  Inconvenient not just because it was there, and it was a bit high, but because it was a massive pile of gooey clay that often slid catastrophically into the cut after rainstorms, carrying machines and people with it.  

It is standard procedure to wax rhapsodic over the immense amounts of dirt removed from the Culebra Cut by the Bucyrus excavators during the US construction effort, over 100 million tons.  It should be also noted that thanks to the need to drastically widen the banks of the cut beyond the original estimate to keep them from slumping, the actual amount excavated during the project was two times the estimate, and included 23 million tons of uninvited material that had slid into the cut during landslides.  And the headaches weren’t over when the canal was built.  Over the life of the canal, there have been 60 documented landslides in the Culebra area and the canal has been shut down two dozen times, most recently in 1986.  Landslide dirt removed from the canal since it entered into operation: another 45 million tons.

Fact is, the entire mountain is moving continually into the canal in a leisurely fashion, like a glacier of clay crap.

The full arsenal of rhetorical devices was deployed selling the Panama canal while denigrating the Nicaraguan route (and the obverse was completely true as well, to be sure); but most of the exercise was a parade of dubious assertions masquerading as fact.

On the important issue of costs, George Morison--the member of the Isthmian Canal Commission characterized by McCullough as the paragon of technical integrity and foresight who convinced President Roosevelt of the superior merits of Panama--extoled the rigor that went into the Panama cost calculations that had produced the vital talking point that the Panama canal would come in at $5 million less than Nicaragua, as opposed to the wild-and-wooly pig in the pokery guesses of the Nicaragua camp.

I fully believe that the Panama Canal…will cost a great deal less than the Nicaragua Canal…that the difference will be very much greater than has been estimated even in the report of the Isthmian Commission…The Commission, in an effort to put everything on an even basis, has perhaps overstepped the mark…The same percentage has been added for contingencies …although at Panama a very large portion of these contingencies have already been met and provided for in the work already done, and although the opportunities for investigation and examination are very much greater at Panama than at Nicaragua.  (The Isthmian Canal, Address by George S. Morison to the Massachusetts Reform Club, April 24, 1902)

In the end, the Panama Canal came in at twice the estimate in the enabling legislation, which relied on the figures worked up by Morison and his fellows in the Commission (but, it should be said, about $23 million under the construction budget calculated by the engineers during the actual execution of the project).

Perhaps the most boondoggling element of the 1902 debate was the marketing of Panama as a “tide water” canal i.e. a straight, Suez style cut coast to coast without locks per de Lesseps’ original concept.

As a matter of philosophy the sea level canal—wide as you want, with no restrictive and accident-or sabotage-prone lock bottlenecks—was considered the beau ideal of canal building.

And a very convenient, perhaps essential, truth, at least for the Panama group, was that a sea level canal was considered impossible in Nicaragua.

As Thomas Morrissey wrote in Donegan and the Panama Canal:

Many congressmen had preferred the Panama site to Nicaragua because only Panama could have a sea level canal.  Ferdinand de Lesseps had wanted a sea level canal; Roosevelt wanted a sea level canal; Wallace [the first Chief Engineer] wanted a sea level canal; Secretary of War Taft wanted a sea level canal; Stevens [the second Chief Engineer] wanted a sea level canal; Bunau-Varilla [the French leader of the Panama ring] believed that the United States should first build a lock canal, and later convert it into a sea level canal.  Roosevelt appointed an international commission to advise him.  It also recommend a sea level canal.

George Morison, pretty much alone of the Panama camp, did state a preference for a lock canal at Panama, but merely on the grounds of the extra time it would take to build a tide water canal, not cost or technical issues.  In a 1902 address, Morison stated:

The best possible solution would be the tide water canal when it is done…But the difficulty in building the tide-water canal is principally one of time.  It would probably take at least 20 years to build a tide-water canal at Panama.  It might take 25 or 30.  This is a very serious thing…

In actuality, a tide water canal was a completely impractical approach because of the factor of the Chagres River, a sizable, unruly stream given to unnerving overnight rises of a dozen feet during flash floods.  It criss-crossed the planned path of the canal several times on the way to the Caribbean and presented major, perhaps insoluble problems for a tide water canal, basically a ditch at sea-level. 
Two years into the actual construction of the canal, in 1906, after much debate and hesitation and in response to the determined advocacy of the Chief Engineer, John Stevens (who changed his mind after arriving at the job site and confronting the Chagres River and Culebra Cut challenges), Congress acknowledged reality and the insistence of the engineers and specified a lock canal in legislation.

Even so, the sea level canal idea refused to die.  In the 1930s, the United States spent $75,000,000 constructing a set of locks in the Canal Zone as part of a stealth program to build a sea level canal--and then abandoned them.

At the end of the World War II, conversion of the Panama Canal to a sea level canal idea received another airing as a measure to secure it against atomic attack.  This gambit foundered on the grounds of its military and scientific absurdity, and because it was now understood a sea level canal would cost on the order of $2.5 billion dollars--in 1947 dollars, when a dollar was, as they say a dollar, or you might say, ten 2015 dollars.  

Well, the lobbyists for the project said $2.5 billion.  But it might have been $4.7 billion (that was the revised estimate in 1956); or maybe it was actually $10 billion, as some civil engineers estimated in the 1950s.

Eventually, the tide turned and in 1956  Maurice Thatcher, a member of the Isthmian Canal Commission, who also served as civil governor of the Canal Zone, told Earl Harding that:

"...of all the engineers then living, who had experience in building or operating the canal, not one approved the Panama sea-level project."

The sea-level canal--a killer argument for the Panama route in 1902--looks like a technical and financial dog.

My theory, and it isn’t unreasonable, is that persistent advocacy of the tide water canal during the Congressional debate was not only based on the fantasy that a sea level canal could be built only in Panama and not in Nicaragua; but also the fact that a lock-based Panama canal looked…too much like Nicaragua.

Since de Lesseps’ time it was accepted that Nicaragua was a superior site for a lock-based canal, so suggesting a lock-based canal was needed in Panama might have sounded the death knell for the hopes of the “Panamaniacs.”

But that’s what we ended up with after the Nicaraguan route was decisively squelched, the Panama ring had gotten its payday, and it was time to actually build the canal.

A look at some maps illustrates the point.

Panama originally looked like this:

With the adoption of the lock scheme, it now looks like this:

That big lake that now takes up much of the Canal Zone is Gatun Lake, created by throwing up a massive dam on the troublesome Chagres River.  It serves as the “top tier” of the passage, the water supply for the lock systems on either side, and a buffer against extreme fluctuations in river flows…

…just as Lake Nicaragua serves as the main reservoir/transit artery/buffer for the Nicaraguan route.


So, think of the Panama Canal as a clone of the Nicaragua scheme…but 300 miles further away from New York.

If you can’t spare a thought for Nicaragua getting sidelined, Colombia getting hosed, Panama enduring 100 years of colonial occupation, the French shareholders getting reamed, or the possibility that several hundred West Indian laborers might have lived if they were working in healthier conditions in Nicaragua…

…consider that John Q. Taxpayer got hooked for millions of dollars that ended up in the pockets of a few Wall Street financiers who had bought up Compagnie Nouvelle stock…

…and O! the market inefficiencies as shippers spent millions on unnecessary fuel, time, and interest to lug their goods to American markets all the way from Panama over a century instead of having access to the closer, cheaper Nicaragua route.  An eyecatching statement in T.J. Stiles’ biography of Cornelius Vanderbilt, The First Tycoon, declared that the Commodore’s costs per voyage in 1856 were $5000 less than the Panama route on the Pacific side alone.  

The Panama Canal has more than a whiff of “expensively managed engineering kludge founded on nationalist posturing and surrounded by a miasma of corruption” somewhat similar to China's boondogolicious Three Gorges Dam.

In fact, it kinda smells like a rip-off that put a canal in Panama instead of Nicaragua where, quite possibly, it really should've been.

Espino Diaz tells the story of how the depredations of the Panama ring were executed, covered up, disclosed, suppressed, and almost forgotten over 50 years.

Suffice to say it’s clear now that the ring spent years and hundreds of thousands of dollars setting up their payday from the U.S. government purchase of the Compagnie Nouvelle interest at an inflated price.

And the ring was composed of Wall Street insiders, including J.P. Morgan, who had the closest connection to Washington and the Roosevelt administration.

One wonderful story about the winding down of the ring is how the US government was persuaded to hand over the $40 million dollar Compagnie Nouvelle payout—to that date, the largest payout ever made by the US government-- to J.P. Morgan, himself the leader of the ring, instead of to the French company.  I suspect it was engineered that way so that Morgan would be spared the awkwardness of presenting himself and his Wall Street associates to the French banks as the primary beneficiaries of the payout, and could instead discretely handle the distributions himself.

No smoking gun directly implicates Theodore Roosevelt in the Panama profiteering scheme.  However, Douglas Robinson’s involvement, and how much he may have benefited, is well documented.  He was a signer of the original secret covenant that formed the ring in 1900, and ponied up $200,000 to fund the careful, under-the-radar purchase of outstanding French Panama shares at somewhere for 3 cents to 20 cents on the dollar, often from peasants who had risked and lost their entire savings on de Lessep’s patriotic folly.  Assume that Roosevelt’s brother-in-law made at least a million dollars.   Don’t assume TR didn’t at least have an inkling. 

T.J. Carlisle points out that William Taft’s brother, Charles, was also part of the ring, which gives an idea of what a colossal insider sh*t show this was. 

Given the storm of opposition and resentment Roosevelt had aroused with his Panama grab, the shaky technical and legal foundations of the enterprise, and the dubious family angle, it’s not surprising that TR sometimes seemed nervous and defensive beneath the bully bluster.

Espino Diaz records Roosevelt anxiously rehearsing the defense of his Panama adventure for his January 1904 State of the Union address and asking his cabinet, “Well, have I answered the charges?  Have I defended myself?”

Defense Secretary Root “sardonically” replied, “You certainly have, Mr. President.  You have shown that you were accused of seduction and you have conclusively proved that you were guilty of rape.”

When the U.S. colonial presence in Panama became a big nationalist issue after World War II, the Nicaraguan alternative received another look.

Anastasio Somoza--remember him?--immediately phoned Washington to offer his cooperation.  The Hearst papers, which had pushed a Nicaragua canal for decades, even after Panama was built (as a spare!), took up the cause and editorialized:

The Nicaragua Canal, if built, would be accorded every facility for its defense by the Nicaraguan Government, which has proved itself utterly unreceptive to Communist infiltration, and apparently unsusceptible to Communist propaganda..."

Heh ironic heh.

It was probably a good thing for Nicaragua that the U.S. didn't take up Somoza on his offer.  The US was persistently interested in a new canal...and obsessed with the idea of building it using nuclear explosives.

In the 1960s, the US government studied the feasibility of performing the necessary excavations for a new canal on the  the isthmus with, natch, nuclear explosives.  According to a published contemporary report, nuclear explosives could do the job for $1.3 billion, as opposed to over $5 billion for conventional construction.  Proof of concept was demonstrated by the detonation of a buried string of five one-kiloton devices in Nevada in 1968 producing a 900-foot long, 80 foot deep ditch in a test somewhat disturbingly named “Project Buggy”. (Lewis, Richard S. Panama Junction, Bulletin of the Atomic Scientists May 1968)

In his book Emperors in the Jungle: The Hidden History of the U.S. in Panama, John Lindsay Poland describes the isthmian "nuclear canal" as the keystone of the AEC's Plowshares peaceful nukes program for almost a decade.

It was the subject of detailed studies by the Army Corps of Engineers "Nuclear Cratering Group" and Lawrence Livermore Laboratories, Oval Office palaver with Eisenhower, Kennedy, and Johnson, field research in Central America, test shots in the Nevada desert...and negotiations with an understandably wary Panamian government that resulted in a provisional treaty for the nuclear project.

The Nicaraguan route was the cheapest route among five alternatives the existing Panama Canal studied by the United States if conventional excavation techniques were employed, by at least a billion dollars; but, if nuclear excavation was employed, for some reason it came in next to last.

An interesting mighta been scenario.

If the United States had built a canal in Nicaragua, radioactive or otherwise, Somoza would probably still be in power...and the PRC would be thinking about having to tunnel through the earth's core to get its ships to East Coast ports.

Picture credits:

Panama Compagnie Nouvelle Stock Certificate:
Old Panama: Wikipedia
Current Panama Canal: BBC
Planned Nicaragua Canal: Havana Times


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