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 FINANCE

THE BASICS

Now in its third edition, Finance: The Basics is a clear and practical
introduction to the world of finance. It thoroughly explains
essential financial statements, tools, and concepts; fundamental
financial instruments and transactions; and global financial
participants, markets, and systems. This fully revised third edition
captures the most important aspects of a changing financial
landscape, including:
l updates on key areas of the financial system, including default
experience, corporate finance trends, growth in dark pools,
hedge funds, foreign exchange, and derivatives, and changes to
the international regulatory and central banking framework;
l further real-world examples/studies that introduce, or expand
upon, a range of practical topics; 12 updated studies are supple-
mented by new cases related to reinsurance, central bank
quantitative easing, and digital currency and payments;
l a comprehensive glossary containing key terms discussed in
the book.
Each chapter is accompanied by an overview and summary,
illustrations and tables, real life case studies, and recommended
reading. Finance: The Basics is essential reading for anyone
interested in the fascinating world of finance.

Erik Banks is an experienced practitioner and regular contri-

butor to the literature in the field of financial risk management,
traded markets, banking, and regulation. He has spent over
25 years in international banking, working at major financial
institutions in New York, London, Tokyo, Hong Kong, and
Munich, and is the author of over 20 books on risk, derivatives,
markets, and governance.
THE BASICS
ACTING DANCE STUDIES
BELLA MERLIN JO BUTTERWORTH

AMERICAN PHILOSOPHY EASTERN PHILOSOPHY

NANCY STANLICK VICTORIA S. HARRISON

ANCIENT NEAR EAST ECONOMICS (THIRD EDITION)

DANIEL C. SNELL TONY CLEAVER

EDUCATION
ANIMAL ETHICS
KAY WOOD
TONY MILLIGAN
ENERGY
ANTHROPOLOGY MICHAEL SCHOBERT
PETER METCALF
EUROPEAN UNION (SECOND EDITION)
ARCHAEOLOGY (THIRD EDITION) ALEX WARLEIGH-LACK
CLIVE GAMBLE
EVOLUTION
ART HISTORY SHERRIE LYONS
GRANT POOKE AND DIANA NEWALL
FILM STUDIES (SECOND EDITION)
ARTIFICIAL INTELLIGENCE AMY VILLAREJO
KEVIN WARWICK
FINANCE (THIRD EDITION)
THE BIBLE ERIK BANKS
JOHN BARTON
FOOD ETHICS
BIOETHICS RONALD SANDLER
ALASTAIR V. CAMPBELL
FREE WILL
BODY STUDIES MEGHAN GRIFFITH
NIALL RICHARDSON AND ADAM LOCKS
GENDER
BUDDHISM HILARY LIPS
CATHY CANTWELL
GENOCIDE
CHRISTIANITY PAUL R. BARTROP
BRUCE CHILTON
GLOBAL MIGRATION
THE CITY BERNADETTE HANLON AND THOMAS
KEVIN ARCHER VICINIO

CONTEMPORARY LITERATURE GREEK HISTORY

SUMAN GUPTA ROBIN OSBORNE

CRIMINAL LAW HUMAN GENETICS

JONATHAN HERRING RICKI LEWIS

CRIMINOLOGY (SECOND EDITION) HUMAN GEOGRAPHY

SANDRA WALKLATE ANDREW JONES
INTERNATIONAL RELATIONS RACE AND ETHNICITY
PETER SUTCH AND JUANITA ELIAS PETER KIVISTO AND PAUL R. CROLL

ISLAM (SECOND EDITION) RELIGION (SECOND EDITION)

COLIN TURNER MALORY NYE

JOURNALISM STUDIES RELIGION AND SCIENCE

MARTIN CONBOY PHILIP CLAYTON

JUDAISM RESEARCH METHODS

JACOB NEUSNER NICHOLAS WALLIMAN

LANGUAGE (SECOND EDITION) ROMAN CATHOLICISM

R.L. TRASK MICHAEL WALSH

LAW SEMIOTICS (SECOND EDITION)

GARY SLAPPER AND DAVID KELLY DANIEL CHANDLER

LITERARY THEORY (THIRD EDITION) SHAKESPEARE (THIRD EDITION)

HANS BERTENS SEAN MCEVOY

LOGIC SOCIAL WORK

J.C. BEALL MARK DOEL

MANAGEMENT SOCIOLOGY
MORGEN WITZEL KEN PLUMMER

MARKETING (SECOND EDITION) SPECIAL EDUCATIONAL NEEDS

KARL MOORE AND NIKETH PAREEK JANICE WEARMOUTH

MEDIA STUDIES SPORT PSYCHOLOGY

JULIAN MCDOUGALL DAVID TOD
METAPHYSICS
STANISLAVSKI
MICHAEL REA
ROSE WHYMAN
THE OLYMPICS
SUBCULTURES
ANDY MIAH AND BEATRIZ GARCIA
ROSS HAENFLER
PHILOSOPHY (FIFTH EDITION)
SUSTAINABILITY
NIGEL WARBURTON
PETER JACQUES
PHYSICAL GEOGRAPHY
TELEVISION STUDIES
JOSEPH HOLDEN
TOBY MILLER
POETRY (SECOND EDITION)
TERRORISM
JEFFREY WAINWRIGHT
JAMES LUTZ AND BRENDA LUTZ
POLITICS (FIFTH EDITION)
THEATRE STUDIES (SECOND EDITION)
STEPHEN TANSEY AND NIGEL JACKSON
ROBERT LEACH
PUBLIC RELATIONS
WOMEN’S STUDIES
RON SMITH
BONNIE SMITH
THE QUR’AN WORLD HISTORY
MASSIMO CAMPANINI PETER N. STEARNS
This page intentionally left blank
 FINANCE
THE BASICS
THIRD EDITION

Erik Banks
Third edition published 2016
by Routledge
2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN
© 2016 Erik Banks
Routledge is an imprint of the Taylor & Francis Group, an informa business
The right of Erik Banks to be identified as author of this work has been asserted in
accordance with the Copyright, Designs and Patent Act 1988.
All rights reserved. No part of this book may be reprinted or reproduced or utilised
in any form or by any electronic, mechanical, or other means, now known or
hereafter invented, including photocopying and recording, or in any information
storage or retrieval system, without permission in writing from the publishers.
Trademark notice: Product or corporate names may be trademarks or registered
trademarks, and are used only for identification and explanation without intent to
infringe.
First edition published by Routledge 2007
Second edition published by Routledge 2011
British Library Cataloguing in Publication Data
A catalogue record for this book is available from the British Library
Library of Congress Cataloging in Publication Data
Banks, Erik.
Finance : the basics / Erik Banks. — Third Edition.
pages cm
Revised edition of the author’s Finance, 2011.
Includes bibliographical references and index.
1. Finance. I. Title.
HG173.B3363 2015
332—dc23 2015009251

ISBN: 978-1-138-91976-1 (hbk)

ISBN: 978-1-138-91978-5 (pbk)
ISBN: 978-1-315-68767-4 (ebk)

Typeset in Aldus
by Keystroke, Station Road, Codsall, Wolverhampton
 CONTENTS

List of “Finance in action” cases ix

List of illustrations xi
Preface to the third edition xvii
List of abbreviations xix

PART 1
Concepts and tools 1
1 The world of finance 3
2 The financial statements 20
3 Financial concepts and tools 47

PART 2
Instruments and transactions 81
4 Common and preferred stock 83
5 Loans and bonds 108
6 Investment funds 135
7 Derivatives and insurance 155
8 Corporate finance 190
viii CONTENTS

PART 3
Participants and marketplaces 209
9 Financial participants 211
10 The global financial markets 235

Appendix: Internet resources 265

Glossary 269
Bibliography 294
Index 298
 FINANCE IN ACTION CASES

2.1 The benefit and curse of operating leverage 37

3.1 Defaulting sovereigns 59
3.2 From BBA LIBOR to ICE LIBOR 62
4.1 Evolution of electronic trading 102
4.2 Dark pools 104
5.1 The complex world of securitization 127
6.1 The rise of the hedge funds 148
7.1 Growth of the OTC derivatives market 176
7.2 Even insurers need insurance 186
8.1 Challenges of corporate finance deals 206
9.1 A cashless society 218
9.2 The world of Islamic finance 223
9.3 Different regulatory models 226
10.1 The 24-hour global foreign exchange market 237
10.2 The age of quantitative easing 249
10.3 The Credit Crisis of 2007–2009 254
This page intentionally left blank
 FIGURES

1.1 The three-stage cycle of the financial process 14

1.2 The complete financial picture 16
1.3 Three pillars of finance 18
2.1 The financial reporting process 22
2.2 Sample US balance sheet 27
2.3 Sample UK balance sheet 28
2.4 ABC Co.’s US balance sheet 28
2.5 ABC Co.’s UK balance sheet 29
2.6 Sample income statement (before tax effects) 31
2.7 ABC Co.’s income statement 31
2.8 Sample statement of cash flows 33
2.9 Common sources and uses of cash 33
2.10 ABC Co.’s statement of cash flows 34
3.1 Risk and return 50
3.2 High- and low-risk projects 51
3.3 Probability distributions 51
3.4 Diversifiable and non-diversifiable risks 55
3.5 A stock’s beta 56
3.6 Hypothetical yield curve 65
3.7 Sample yield curves 65
3.8 IRR, NPV, and decision rules 76
3.9 IRR, NPV, and WMCC 77
xii FIGURES

4.1 Income statement, balance sheet, and net income 86

4.2 Equity accounts on the corporate balance sheet 97
4.3 Impact of shares on paid-in capital 101
5.1 Base yield curve scenarios 115
5.2 ABC Co.’s borrowing costs 118
5.3 Loans and bonds on the corporate balance sheet 120
5.4 Structural cash flows of a CDO 128
6.1 Risk, return, and efficient portfolios 138
6.2 General fund balance sheet 141
6.3 General fund categories 143
6.4 Open-end fund legal vehicles/participants 145
6.5 Onshore/offshore hedge fund structure 147
6.6 Process of creating/trading an ETF 152
6.7 Secondary trading activity in funds 152
7.1 Risk management options 157
7.2 The risk management framework 160
7.3 Derivative classes 163
7.4 Forward contract flows 166
7.5 Long forward 167
7.6 Short forward 167
7.7 Long forward/short asset hedge position 168
7.8 Interest rate swap flows 170
7.9 ABC Co.’s fixed/floating swap hedge 170
7.10 Call option flows: initial and exercise 171
7.11 Put option flows: initial and exercise 172
7.12 Long call option 173
7.13 Short call option 173
7.14 Long put position 174
7.15 Short put position 175
7.16 Insurance classes 183
7.17 Converting full insurance to partial insurance 185
7.18 Structure of a captive 186
8.1 Earnings cycles and earnings stability 193
8.2 Horizontal and vertical acquisitions 196
8.3 Leveraged buyout (LBO) structure 198
9.1 Sample financial regulatory models 227
9.2 The complete picture of financial participants 229
9.3 Disintermediation of select financial functions 232
10.1a Tools to slow economic growth/inflation 248
 FIGURES xiii

10.1b Tools to expand economic growth 249

10.2 US Investment grade credit spreads 258
10.3 Forces of change and market impact 262
This page intentionally left blank
 TABLES

2.1 Operating leverage example 39

2.2 ABC Co.’s historical, current, and industry ratio data 42
2.3 Cash budgeting framework 45
3.1 Standard deviations of Projects 1 and 2 49
3.2 Risk/return trade-offs 1 52
3.3 Risk/return trade-offs 2 53
3.4 Sovereign defaults since 1975 60
3.5 LIBOR contributor data 63
3.6 Sample projects, NPVs, and IRRs 75
5.1 Debt- and equity-financed income statements 110
5.2 ABC Co.: leveraged and unleveraged results 113
5.3 ABC Co.’s borrowing costs 118
5.4 Impact of the risk-free rate and risk premium
on bond prices 133
7.1 Risk decision framework 159
7.2 Long/short forward relationships 167
7.3 ABC Co.’s net cost of debt 171
7.4 Long/short options relationships 175
7.5 Futures options positions 178
7.6 Primary differences between exchange-traded
and OTC derivatives 179
8.1 Company estimates 203
xvi TABLES

10.1 ABC Co. foreign currency exposures 239

10.2 Interest rates and financial market impact 242
10.3 Inflation and financial market impact 243
10.4 GDP and financial market impact 245
10.5 Sample of key economic measures 246
A1 Selected Internet listings 265
 PREFACE TO THE THIRD EDITION

The topic of finance is dynamic in its evolution and important

in its application. To be sure, much of the foundation of finance
is well established, providing a stable framework for decision-
making: basic financial concepts such as financial statement con-
struction and analysis, time value of money, risk versus return,
diversification, short- and long-term financial management, and
capital-raising, for instance, are all part of well-accepted daily
financial practice.
But much of the financial landscape continues to change around
us. The continued innovation taking place in the financial markets,
the growing accumulation of wealth around the world, the
increasingly global movement of capital and assets, the advent of
advanced communications, networks, and computing, the chang-
ing views of regulators, and the periodic onset of financial crises
necessarily mean that certain dimensions of finance are also
subject to change. Our goal in this third edition is to capture the
most important of these changes and discuss them in a clear and
practical manner. Readers of this edition will benefit from a series
of additions and improvements:

l updates on key areas of the financial system, including default

experience, corporate finance trends, growth in dark pools,
xviii PREFACE TO THE THIRD EDITION

hedge funds, foreign exchange, and derivatives, and changes to

the international regulatory and central banking framework;
l further real-world examples/studies (“Finance in action”
studies) that introduce, or expand upon, a range of practical
topics; joining previous studies are new examples centered on
reinsurance, central bank quantitative easing, and digital
currency and payments;
l additional worked examples and explanations in each chapter;
l expanded and updated chapter readings and external references
for further consultation on individual topics;
l a concise and comprehensive glossary containing key terms
discussed in the book;
l an updated Appendix listing Internet resources that provide
valuable information on different aspects of the financial
topics discussed in the book.

As in the first two editions, this version attempts to convey the

fact that financial markets and concepts are quite universal;
although some practical and definitional differences may arise
between the USA, the UK, Germany, France, Japan, Singapore,
Australia, and so forth, the fundamentals can be applied in any
jurisdiction. To that end, we have tried to mix into our examples
a range of countries, currencies, and terms, so that this book can
be seen as truly cross-border in nature.
 ABBREVIATIONS

ATS Alternative trading system

BA Bankers’ acceptance
BBA British Bankers’ Association
BP Basis point
CAPM Capital asset pricing model
CD Certificate of deposit
CDO Collateralized debt obligation
CF Cash flow
CP Commercial paper
EBIT Earnings before interest and taxes
ECP Euro commercial paper
EFT Electronic funds transfer
EMH Efficient market hypothesis
EMTN Euro medium-term note
EPS Earnings per share
ETF Exchange-traded fund
EURONIA Euro Overnight Index
FV Future value
FX Foreign exchange
GAAP Generally Accepted Accounting Principles
GDP Gross domestic product
GP General partner
xx ABBREVIATIONS

IFRS International Financial Reporting Standards

IPO Initial public offering
IRR Internal rate of return
LBO Leveraged buyout
LIBOR London Interbank Offered Rate
LP Limited partner
M&A Mergers and acquisitions
MBO Management buyout
MTF Multilateral trading facility
MTN Medium-term note
NASDAQ National Association of Securities Dealers
Automated Quotations
NAV Net asset value
NPV Net present value
NYSE New York Stock Exchange
OTC Over-the-counter
P&C Property and casualty
P&I Principal and interest
PP&E Property, plant, and equipment
PV Present value
ROA Return on assets
ROE Return on equity
SG&A Selling, general, and administrative
SPE Special-purpose entity
UIT Unit investment trust
WACC Weighted average cost of capital
WMCC Weighted marginal cost of capital
XOL Excess of loss
 1
P A R T

CONCEPTS AND TOOLS

This page intentionally left blank
 1

THE WORLD OF FINANCE

CHAPTER OVERVIEW
In this chapter we will consider the basic definitions and concepts
of the financial world, the meaning and scope of finance, and how
it impacts daily activities. We will then consider the goals of
finance, which center on how a firm maximizes value, ensures
proper liquidity and solvency, and manages risks. With this
background in hand we will then discuss the financial process, a
cycle based on financial reporting, planning, and decision-making,
and consider how market factors can impact the cycle. We will
conclude with a brief overview of the book, describing in general
terms the concepts/tools, instruments/transactions, and markets/
participants discussed in subsequent chapters.

DEFINITION AND SCOPE OF FINANCE

Finance is the study of concepts, applications, and systems that
affect the value (or wealth) of individuals, companies, and coun-
tries over the short and long term. The study is both qualitative
and quantitative, and we shall consider both dimensions in this
book. Once we understand the essential elements of finance, we
can identify the motivations and goals that drive specific actions
and decisions.
4 CONCEPTS AND TOOLS

Finance affects the daily activities of people, organizations,

and entire nations. Though financial dealings have existed for
centuries, their presence and importance have become even more
apparent in an era characterized by growing wealth accumulation,
consumption, and investment. Indeed, the penetration of finance
is so thorough that we needn’t look far to see its impact: consider
that on any given day many of us are likely to be aware of eco-
nomic growth, unemployment and inflation estimates, stock
prices and deposit quotes, oil and gold price trends, credit and
mortgage loan offers, corporate earnings announcements, and
takeovers and bankruptcies. A financial transaction occurs every
time we place savings into a deposit account or the stock market,
make a purchase with a credit card, or take out a loan to buy a car
or a house. A financial transaction also occurs when a company
borrows money from its bankers or issues bonds to investors or
acquires a competitor. And a financial transaction occurs when a
government agency issues bonds to finance its budget require-
ments, sells state-owned assets to the private sector, or changes its
interest rate or tax policies. It’s easy to imagine that, when each
one of these individual transactions is multiplied by thousands or
millions of similar transactions, asset prices and capital flows can
change and affect the fortunes of individuals, companies, and
countries.
While finance can obviously affect a whole range of participants
– from countries to companies, to individuals – we will focus our
discussion on companies. The corporate focus is useful because
companies drive much of the financial activity that impacts all
other participants.

THE GOALS OF FINANCE

A company exists to produce goods and services, and doing so
successfully leads to the creation of an enterprise with value. In
fact, a company operating in a capitalistic free market economy
aims to maximize the value of its operation. Naturally, this is just
one primary goal – we can easily imagine that a company may
also try to pursue other goals, such as building market share, deli-
vering top quality customer service, establishing competitive lea-
dership, creating an international presence, developing brand
 THE WORLD OF FINANCE 5

name recognition, introducing new and exciting products, pro-

moting employee/community support, and so forth. Ultimately,
however, a company seeks to create a maximum level of enduring
enterprise value. As we shall see, this overarching goal can be
accomplished by maximizing profits, managing liquidity and sol-
vency, and taking proper account of financial and operating risks.

MAXIMIZING PROFITS
Companies seek to maximize value (wealth) while adhering to
certain social, legal, and regulatory constraints. When markets
are left to their own devices – under a laissez faire system, where
free markets dominate and government involvement is at an
absolute minimum – companies can produce goods/services at
will, and consumers can freely select which ones to buy. In such
free market systems companies try to attract consumers in order
to produce and sell more goods/services as efficiently as possible.
How can a company become stronger and increase its wealth?
The obvious answer is by increasing its profits, or the income that
remains after expenses have been paid: a company that makes
more money is more valuable than one that makes less money, all
other things being equal, and if it can do so continuously, over a
long period of time, it becomes stronger.
Let’s consider a simple example to help frame the discussion.
Assume that a hypothetical company, ABC Co. (which we shall
revisit throughout the book), produces certain goods, which it
sells to its customers. In order to produce these goods it has a staff
of workers, sources raw materials locally, and owns a factory
(which it depreciates, or reduces in value, on a regular basis as a
result of normal “wear and tear”). The purchase price of the
factory is paid by taking out a loan from a local bank. The rest of
the company’s assets (i.e. items that it owns) are kept in a short-
term bank deposit. The revenues earned by selling the goods are
used to buy raw materials from abroad, repay the interest and
principal on the loan, and pay the salaries of the employees, the
rent on the office space, and taxes to the government. The
remaining balance, net income (or net profit), is then reinvested
in the business or paid out to the owners. This simple example
raises a number of important questions about how the company
6 CONCEPTS AND TOOLS

operates and how it attempts to maximize its profits. For instance,

does the company maximize profits by:

l Buying raw materials from abroad rather than locally?

l Borrowing from the local bank rather than issuing bonds or
stock?
l Purchasing the factory instead of leasing it?
l Depreciating the factory on an accelerated basis rather than a
straight-line basis?
l Renting the office space instead of buying it?
l Keeping its remaining assets in short-term bank deposits
rather than long-term securities?
l Reinvesting net profits rather than paying them out to the
owners?

The correct answers are not immediately apparent, mainly

because we need to understand more about the company, its
financial structure, its operating environment, and the competi-
tive marketplace. And, of course, we need a proper suite of finan-
cial concepts and tools so that we can evaluate the issues and
alternatives; we shall consider these concepts and tools in subse-
quent chapters.
Let’s now extend the example one step further, to demonstrate
that the scope of finance is very broad. Assume that ABC Co.
wants to expand its operations and decides to buy a competing
firm. To arrange the acquisition, it borrows from its local bankers.
Once the acquired company is fully integrated, the firm invests in
factories located around the world, which allows it to source raw
materials in each local marketplace, produce goods in a local
setting, and then sell them to the local consumer base. Half of any
profits it earns are reinvested in the local operations, while the
other half is repatriated to the home office.
Once again, we can ask whether ABC Co. maximizes profits by:

l Acquiring a competitor instead of growing only through

internal resources?
l Using loans instead of stock to buy the competitor?
l Making a series of long-term investments in local markets
instead of concentrating production in the home market?
 THE WORLD OF FINANCE 7

l Sourcing raw materials in each local market rather than

arranging a single centralized purchase agreement for all
markets?
l Retaining 50 percent of its local profits in each local operation
and repatriating the other 50 percent to head office?

The correct answers are still uncertain because we again lack the
necessary tools and information.
So, how does a company actually create profits? Broadly
speaking, it can do so by investing, speculating, or restructuring.
Let’s consider each one.
Generating revenues and profits is accomplished primarily by
investing in productive resources – plant and equipment, tech-
nology, intellectual property, human resources, and financial
assets. We can define investing as the commitment of capital in a
venture, project, asset, or security in order to create more value.
Investment may be focused on physical assets, like the purchase
or construction of a factory, the development of a power plant, or
the purchase or lease of a fleet of ships. Automobile manufacturers,
airlines, energy companies, steel companies, and others regularly
invest in such physical assets. In other cases investment is based
on the purchase of securities, such as stocks and bonds that are
also designed to generate a return. This is an “indirect” form of
investment in productive assets, as the company buying securities
(perhaps for its investment or retirement benefits portfolio) is
actually contributing its capital to the firms that have issued the
securities; those firms, in turn, are likely to be using the proceeds
to invest in the hard assets and projects we have just mentioned.
Some firms try to make profits by speculating. Speculating,
like investing, is a method of committing capital in order to
generate a satisfactory return. Speculative activities are generally
centered on a company’s purchase or sale of securities, finan-
cial contracts, or select physical assets (commodities, real estate),
rather than the direct purchase of productive assets used to
create goods and services. In fact, specialized institutions like
banks and investment funds are actively involved in speculative
activities.
A firm can also create or expand profits by restructuring cor-
porate operations. It may do so by changing its business through
8 CONCEPTS AND TOOLS

a corporate finance transaction such as a merger, acquisition, or

joint venture, or by selling a subsidiary no longer considered
essential to corporate strategy. It can also do so by restructuring
its balance sheet, perhaps repaying some of its debt by issuing
stock. A company pursuing such strategies hopes to expand the
revenue base, lower costs, and/or increase operating efficiencies
– any, or all, of which can help generate profits.

MANAGING LIQUIDITY AND SOLVENCY

While a company may wish to maximize its profits and its value,
it must first be in sound financial condition. A company that has
been weakened by bad decisions or a difficult operating environ-
ment is interested primarily in surviving from month to month
and is unlikely to be thinking about ways of expanding its earn-
ings power and value. Accordingly, it must make sure that its
foundation is strong. In financial terms this relates primarily to
two key areas: liquidity and solvency.
Liquidity is defined as a sufficiency of cash (or assets that can
be quickly converted to cash) to pay bills and cover any surprises
or emergencies. In fact, managing liquidity is critically important,
as any mistake can turn a company’s fortunes almost immediately.
Firms that lack enough cash to cover their short-term outflows
and those that rely on only a few sources of external funding that
can be withdrawn by the providers are at greater risk of financial
distress than those that keep a prudent amount of cash on hand
and arrange external financing across a broad range of markets,
instruments, investors/lenders, and maturities.
Companies manage liquidity by spacing their liabilities (or
amounts owed) over time (so that not everything comes due at
once), keeping some portion of their assets in the form of cash or
short-term securities (such as government treasury bills), and
establishing proper financing arrangements. For instance, if ABC
Co. has a £10 million credit line with its bank and is presented
with unexpected payments of £5 million, it can pay the charges
using the credit line and carry on with its operations. Naturally, it
will have to repay the money it has borrowed to meet the
emergency payment, but it will have more time to do so (perhaps
up to several years). Or, instead of using the bank facility, ABC
 THE WORLD OF FINANCE 9

Co. may sell £5 million of short-term treasury bills that it holds

in its portfolio expressly for emergencies. The result is the same:
avoiding a liquidity squeeze by arranging in advance the right
mechanism to deal with any potential anticipated or unanticipated
problem. Naturally, proper management of liquidity raises certain
questions:

l What is the best type of liquidity credit facility for a company?

l Should liquidity be accessed by preserving more cash and
short-term assets on the balance sheet (internal), arranging
more bank credit lines (external), or both?
l If assets are to be used, is a discount to the value of those assets
necessary in order to provide a better reflection of the cash
liquidation value?
l Do liquidity needs change during a given season or do they
fluctuate according to the broader economic cycle?
l How much enterprise value is lost by being too liquid, i.e.
holding too much non-earning cash on the balance sheet?

The finance framework helps a company answer these questions

and develop the right kind of program to ensure a liquidity crisis
is avoided. While liquidity planning is an essential process for all
companies, it is especially critical for small- and medium-sized
companies that often lack the resources and credit access enjoyed
by large firms.
Solvency, the second major element of a sound financial foun-
dation, is defined as a sufficiency of capital (or permanent/
semi-permanent funds) to meet unexpected losses. Companies
generally operate their businesses with a certain amount of
equity capital and retained earnings (and certain classes of long-
term debt) to protect against potentially large and unexpected
losses that consume its resources. By preserving this buffer, a
company tries to ensure that it can operate as a “going concern,”
even under dire circumstances. For instance, if ABC Co. has a
capital base of £250 million that supports £1 billion of assets and
it generates a loss of £150 million as a result of negative judg-
ments on a lawsuit, a portion of its capital base will be depleted,
i.e. the buffer falls from £250 million to £100 million. While this
is clearly a dangerous situation and ABC Co. will need to rebuild
10 CONCEPTS AND TOOLS

its financial position as quickly as possible, it can still continue

operating. If the company didn’t have enough capital funds to
absorb the loss, it would become technically insolvent and have to
file for bankruptcy. In order to manage solvency properly a
company must consider the following:

l How much of a capital buffer is needed to protect the firm

under various normal and stress scenarios?
l Should that buffer be expanded through internal resources,
externally, or both?
l What is the best mix of capital and how much will it cost to
raise each portion?
l Do regulators demand a minimum level of capitalization?

Once again, the finance framework helps answer these questions

in a manner that is rational and consistent.

MANAGING RISK
Since finance is concerned with a series of fluctuating variables
and dynamic decisions, it is keenly focused on risk – which we
define as the uncertainty or variability surrounding a future
event. In a risky world a company must weigh all of the costs and
benefits arising from a short-term or long-term action designed
to boost profits and value. If a firm absorbs too much risk, it may
suffer losses or financial distress, or even failure. Conversely, if a
firm takes too little risk, it may miss the opportunity to create
profits or accumulate market share. While taking risk can help a
company achieve its goals, at some point incremental risk-taking
may not be sensible. The marginal benefit gained from each
incremental risky project or investment may decline, to the point
where risk and return are misbalanced.
Risk comes in many different forms, including operating risk,
financial risk, legal risk, and environmental risk; each of these can
be decomposed into even more granular classes.
Risk can be managed through hedging (i.e. neutralizing), risk
reduction, and risk diversification; some risks can also be mitigated
by loss controls, which are pre-emptive behaviors that reduce the
likelihood that perils will occur.
 THE WORLD OF FINANCE 11

Before creating a risk management strategy, ABC Co. must

again resolve various questions:

l How much risk should the company take in each class?

l Is this risk core or ancillary to the business?
l Is the company being properly compensated for taking risk?
l Should the risk be transferred, reduced or eliminated, or
should it be preserved?
l How much does it cost the company to shift or eliminate
particular classes of risk?

The definitive answers to these questions will again depend on a

company and its operations, its comfort and experience with risk,
and the nature of the markets/opportunities.

THE FINANCIAL PROCESS

A company trying to maximize the value of its operations faces
many financial decisions. Financial decisions depend on a standar-
dized process that provides continuous feedback. The process can
be viewed as a three-stage cycle that is driven by the financial
goals that a firm hopes to achieve. It begins with a review of the
company’s financial position (financial reporting/analysis) and is
followed by the development of short- and long-term plans
(financial planning), which leads to the execution of certain
actions (financial decisions). These decisions will yield results
that affect the firm’s financial position, allowing the cycle to begin
anew. The process is thus continuous.

FINANCIAL REPORTING/ANALYSIS
Financial reporting/analysis relates to the structure and trend of
a company’s financial position, most often conveyed through
three key financial statements (or accounts) that are prepared and
distributed every quarter or year:

l Balance sheet: a point-in-time reflection of a company’s assets,

liabilities, and capital.
l Income statement (or profit and loss statement): a cumulative
reflection of a company’s revenues, expenses, and profits.
12 CONCEPTS AND TOOLS

l Cash flow statement: a cumulative reflection of the cash

flowing into, and out of, a company.

These key statements are supplemented by other information,

including financial footnotes and detailed management discus-
sion and analysis. This reporting/analysis is done via established
accounting rules, such as the International Financial Reporting
Standards promulgated by the International Accounting Stan-
dards Board, which inject uniformity into the process. Through
the reporting mechanism, internal and external stakeholders can
determine how a firm, such as ABC Co., has performed over time
(and versus its competitors) and what its financial position is at a
particular moment. We will review these key financial statements
in more detail in Chapter 2.

FINANCIAL PLANNING
Financial planning is the second phase of the financial process. It
helps define the actions that a firm needs to take over the short
term and long term to meet its goals.
Some aspects of financial planning deal with an immediate
time horizon, generally 1 week to 1 year. These issues center on
daily management and progress of corporate operations, such as:

l Working capital (or liquidity) management: managing cash,

short-term assets and liabilities.
l Hedge management: rebalancing financial/operating risks
through the use of various types of instruments intended to
protect against losses.
l Funding management: arranging financing through a loan or
capital markets.

Other dimensions of financial planning are based on longer-term

actions. Such strategic financial management is critical to the
methodical expansion of corporate operations and the long-term
creation of enterprise value. Issues in this category relate to:

l Capital investment: managing long-term investment projects,

research and development, and capital expenditures.
 THE WORLD OF FINANCE 13

l Capital structure: identifying the optimal blend of debt, equity,

and off balance sheet funding.
l Mergers and acquisitions: creating opportunities through
corporate combinations or restructuring.
l Tax planning: optimizing operations to reduce the tax burden.
l International strategies: managing operations in, and expand-
ing into, offshore markets.
l Dividend policy: developing a proper policy to pay dividends
to investors.
l Risk management: creating a consistent, long-term, approach
to the management of financial, operating, and legal risks.

While short- and long-term planning are essential to the con-

tinued success of any company, they can lead to different goals:
plans (and subsequent decisions) that are based on the short term
tend to focus on near-term profitability; those of a longer-term
nature center on sustainable enterprise value creation over mul-
tiple reporting periods.

FINANCIAL DECISIONS
A company can make decisions once its financial position is well
understood and its tactical/strategic plans have been formulated.
Decisions are made by using specific financial concepts and tools,
such as risk/return trade-off, risk diversification, cost of capital,
time value of money, net present value, and investment rules, all
of which we will discuss in Chapter 3. Concepts and tools help a
company objectively understand the impact of translating plans
into actionable decisions.
The three dimensions of the financial process are thus part of a
continuous cycle: a firm examines its financial position, develops
short-term and long-term plans and makes decisions to put the
plans into motion. The next set of financial statements will reflect
some aspects of decisions that have been taken, and can be used as
the basis for further short-term and long-term financial plans
and decisions. Figure 1.1 summarizes this cycle. Naturally, a
company must make its short- and long-term financial actions
meaningful and must also be flexible enough to adapt to changing
circumstances.
14 CONCEPTS AND TOOLS

Figure 1.1 The three-stage cycle of the financial process

EXTERNAL AND INTERNAL FACTORS

External and internal forces impact the financial actions and acti-
vities of a firm operating in a complex economic world. Every
company is influenced, directly or indirectly, by macro-economic
factors: economic growth, productivity, employment, inflation,
interest rates, currency rates, commodity/input prices, consumer
confidence, and so forth. It may also be impacted by the state of
the industry in which it operates, competitive pressures, avail-
ability of substitutes, and regulatory restrictions. A company must
generally react or adapt to these external forces: since they are so
powerful and pervasive, they are typically beyond the control or
influence of any single company (or industry) and must therefore
be viewed as factors that shape the operating environment.
Assume, for instance, that ABC Co. is operating in a macro envi-
ronment characterized by healthy growth, strong consumer con-
fidence, and robust demand; all other things being equal, ABC
 THE WORLD OF FINANCE 15

Co.’s ability to sell products will be greater than if the economy is

in recession. Similarly, if several new competitors have entered
the same industry, ABC Co. may feel heightened pressures that
force it to change its pricing or marketing tactics. It can react or
adapt to, but cannot change, the competitive environment.
Internal forces are equally important in dictating a company’s
path to success. These may include a company’s financial strength
and resources, its access to cash and financing, its approach to
strategic ventures, its ability to respond to pricing/costing changes
in the face of fluctuating supply and demand, and the quality and
experience of its leadership. Each one of these factors is within a
company’s control and can be changed over the short or medium
term, generally unilaterally. For example, ABC Co. may believe
that raising additional capital to expand its operations or purchas-
ing a smaller rival may give it the competitive edge it requires.
Or, the company may believe that it needs a stronger marketing
team in order to boost its sales, so it may choose to hire top sales
producers from a competitor. It can take these actions on its own,
hopefully improving its fortunes as a consequence.

THE COMPLETE FINANCIAL PICTURE

We’ve now introduced several theoretical elements of the financial
world: definition/scope, goals, and process, along with the impact
of internal/external forces. Assembling these gives us a complete
picture of the financial world.
To review, we know that finance is the study of how companies
(and individuals and countries) can increase value or wealth. By
using financial concepts and tools in a three-stage financial
process, a company attempts to achieve its financial goals in a
disciplined manner. Maximizing profits and managing liquidity,
solvency, and other risks helps a firm operating in a free market
economy achieve the overarching goal of value maximization.
But the financial process is dynamic and subject to the effects of
internal and external factors, so any process that is implemented
to fulfill financial goals must take account of these factors and
adapt to them through a continuous feedback process. This
financial picture is summarized in Figure 1.2.
16 CONCEPTS AND TOOLS

Figure 1.2 The complete financial picture

OUTLINE AND STRUCTURE OF THE BOOK

Finance is clearly vital to the activities of companies, individuals,
and sovereign nations. The question is how to deal with the topic
in a manner that is comprehensive – but also manageable, rele-
vant, and interesting. To accomplish this goal, we will approach
the subject by focusing on three broad areas, or “pillars”: concepts
 THE WORLD OF FINANCE 17

and tools, instruments and transactions, and participants and

markets. By exploring finance in this way, we’ll be able to cover
the key micro and macro dimensions in a logical manner.
We begin by considering concepts and tools. This provides the
essential background needed to understand the mechanics of
finance and helps clarify the company-wide issues that we’ll
consider in subsequent portions of the book. We will start with an
examination of corporate financial statements, focusing on:

l Financial structure and reporting: the nature and use of the

balance sheet, income statement, and statement of cash flows.

With an understanding of financial statements and how they can

be used as part of the decision-making process, we will then turn
our attention to fundamental financial tools. There are many well-
established principles and tools that can be used in quantifying and
evaluating many of the issues that companies face:

l Risk considerations: the nature of risk and return, risk

diversification, and value maximization.
l The price of capital: the determination of interest rates/yield
curves, stock prices, and the weighted cost of capital.
l Time value of money: the use of present value and future value.
l Investment decisions: the use of net present value, internal
rate of return, and decision rules.

Once we’ve assembled this financial “toolkit,” we’ll explore the

nature of financial instruments and transactions that let compa-
nies achieve particular goals. Our intent in this second pillar is to
demonstrate how specific assets, liabilities, off-balance-sheet con-
tracts, and restructuring transactions are used to advance the pro-
gress of companies and their stakeholders. Our discussion will
focus on:

l Common and preferred stock: the nature and use of equity-

related instruments.
l Loans and bonds: the nature and use of debt-related instruments.
l Investment funds: the nature and use of investment mecha-
nisms that incorporate multiple assets.
18 CONCEPTS AND TOOLS

Figure 1.3 Three pillars of finance

l Derivatives and insurance: the nature of risk management and

the use of instruments to manage, transfer, hedge, or assume
risk.
l Corporate finance: the nature and use of corporate restructuring
transactions.

We will then examine the third pillar of finance – the macro

picture. Specifically, we will consider how key participants and
markets support, and are supported by, activities at the micro
level. We shall do this by describing:

l Financial participants: intermediaries, end-users, and regulators.

l Global financial markets: macro-structure of the markets,
macro variables, monetary policy, and the nature of the twenty-
first-century marketplace, including financial crises, which can
sometimes disrupt the plans and goals of companies.

The three pillars that constitute the world of finance are

summarized in Figure 1.3.

CHAPTER SUMMARY
Finance, which is the study of factors that impact the wealth or
value of participants, is an essential component of daily life in the
business world. Financial dealings and transactions are prevalent
throughout modern society, affecting individuals, companies, and
 THE WORLD OF FINANCE 19

entire countries. A company’s overarching goal of increasing

value can be achieved by meeting a series of important financial
goals, including maximization of profit, prudent management of
liquidity and solvency management, and rigorous management
of financial and operating risks. The standard three-stage financial
process, which is based on financial reporting, short- and long-
term financial planning, and financial decision-making, allows a
company to work towards its goals in a methodical fashion. Any
decisions taken by financial managers must take account of a
series of internal and external market forces; companies are
generally required to react to external factors, but can more
readily influence internal factors.

FURTHER READING
Banks, E., 2010, Dictionary of Finance, Investment and Banking,
London: Palgrave Macmillan.
Brealey, R., Myers, S., and Marcus, A., 2013, Fundamentals of
Corporate Finance, 11th edn., New York: McGraw Hill.
Fama, E., 1972, The Theory of Finance, New York: Holt, Rinehart
and Winston.
Melicher, R. and Norton, E., 2011, Introduction to Finance, 14th
edn., New York: John Wiley & Sons.
 2

THE FINANCIAL STATEMENTS

CHAPTER OVERVIEW
A company attempting to maximize profits, maintain proper levels
of liquidity and solvency, and prudently manage risks must first
understand the state and trend of its financial position. In this
chapter we consider the process of standard financial reporting,
analyze the structure and use of the three main financial statements
(balance sheet, income statement, and statement of cash flows), and
discuss how financial statement ratio analysis can be used to
decipher the financial strengths and weaknesses of a firm. We will
conclude by considering how financial statements are used in the
decision-making process.

FINANCIAL REPORTING
Financial reporting – the process by which a company prepares and
presents its accounts – is a key element of the modern accounting
framework. Reporting leads ultimately to the creation of financial
statements that let managers, investors, creditors, credit rating
agencies, regulators, and other stakeholders evaluate financial
strength or weakness. Naturally, a degree of uniformity in approach
and presentation must exist in order for statements to be useful. If
no standards existed, then every company would simply do as it
 THE FINANCIAL STATEMENTS 21

pleased, making it impossible to compare performance across com-

panies – or, indeed, within a company, if it decided to change its
standards every year.
Regulators and industry bodies have developed and refined
standards of financial reporting over the years. Though these
can vary across some national systems, the essential process of
financial reporting and presentation is the same: every com-
pany posts transactions that affect its daily operations to relevant
ledger accounts according to pre-defined rules or guidelines. The
major guidelines are set forth via Generally Accepted Accounting
Principles (or GAAP, promulgated in the USA by the Financial
Accounting Standards Board) and International Financial Report-
ing Standards (IFRS, managed on a global basis by the International
Accounting Standards Board). These accounts are then aggregated
into unaudited trial statements over certain common reporting
periods. An external auditor independently audits (or examines)
statements to ensure conformity to established standards. The end
goal is the uniform preparation and distribution of the financial
statements that we discuss below every 3, 6, and/or 12 months.
Figure 2.1 summarizes the financial reporting process.

KEY FINANCIAL STATEMENTS

We can capture the essence of a company’s financial position
through:

l The balance sheet: a “point-in-time” representation of assets,

liabilities, and capital.
l The income statement: a cumulative record of the firm’s profits
and losses.
l The statement of cash flows: a cumulative record of the firm’s
cash inflows and outflows.

Let’s consider each in greater detail.

THE BALANCE SHEET

A company that is in business to produce goods or services

requires assets (items of value that are legally owned by the
Figure 2.1 The financial reporting process
 THE FINANCIAL STATEMENTS 23

company), which it funds through liabilities (amounts that are

owed by the company to others) and some form of equity
(amounts representing an ownership interest in the company);
let us note that the terms capital, shares, and stock can also be
used to refer to equity. These three broad categories, presented in
a statement known as the balance sheet, are linked together by an
important accounting relationship, which says that:

assets = liabilities + equity [2.1]

If this equation holds true, then the balance sheet “balances.” The
relationship makes intuitive, as well as financial, sense. If a
company possesses some asset, it has either purchased that asset
using its own capital resources (i.e. equity) or external resources
(i.e. a bank loan, which is a liability) – or both. For instance, if ABC
Co. has a computer (an asset) worth £10,000, it may have borrowed
£10,000 to buy the computer (a liability), it may have purchased
the computer outright from its own capital (equity), or it might
have used some combination of the two (i.e. it has paid off half
of the computer’s value – £5,000 of equity – and borrowed to
finance the difference – £5,000 of liabilities). This example
balances, per [2.1]. It is relatively easy to see that we can extend
this process to include all of ABC Co.’s assets.
We can also rearrange the equation above to gain some under-
standing about the equity (or net worth), of the firm:

equity = assets – liabilities [2.2]

This tells us that the actual value or worth of the company is the
difference between its assets and liabilities. Thus, if ABC Co. has
borrowed £5,000 to buy the £10,000 computer, its equity (or net
worth) in the asset is equal to £5,000 (i.e. £10,000 – £5,000). Again,
we can extend this across all accounts to find the equity value of the
firm. A critical point to note is that, when assets are worth less than
liabilities, the firm has “negative equity” and is considered in-
solvent. Thus, if the computer is really worth £2,000 and the
company borrowed £5,000 to buy it, its equity is equal to –£3,000.
Not surprisingly, financial managers are heavily focused on ensur-
ing that the value of assets always exceeds the value of liabilities.
24 CONCEPTS AND TOOLS

Though the actual number of asset accounts in a large firm can

reach into the hundreds or thousands, we can condense them into
a smaller group of key accounts:

l Cash and short-term securities: accounts that form the com-

pany’s asset-based liquidity (i.e. cash and cash equivalents), which
is an important part of liquidity management. A company needs
to keep a certain amount of liquid assets on hand to pay bills as
they come due, or to meet unexpected payments.
l Accounts receivable: a form of credit extended by the company
to its customers. For instance, while customers might receive
goods/services from the company immediately, they may take
30 to 180 days to pay for them; this is precisely equal to the
company making short-term loans to its customers.
l Prepayments: payments made by a company for goods/services
to be received at a future time. For instance, a company might
prepay all of its property and casualty insurance premiums at
the beginning of the year, even though it receives the benefits of
insurance coverage throughout the year. Other kinds of accounts
can be prepaid, such as rent, taxes, and so forth.
l Inventories: accounts comprising the items needed to manu-
facture physical goods that are ultimately sold to customers.
Inventories are generally classified according to their stage
in the production process, such as raw material, work-in-
progress, and finished goods. Inventories have to be managed
smoothly so that there is no disruption in the production
process and enough finished goods are available for sale.
l Property, plant, and equipment (PP&E): all of the physical infra-
structure that a company needs to run its business, such as com-
puters, office buildings, trucking fleets, factories, assembly lines,
and so forth. Since PP&E declines in value through normal
“wear and tear” and obsolescence, its value is reduced through
depreciation, which is a non-cash expense. Accumulated depre-
ciation may be shown as a “contra-account,” or deduction, to
the PP&E accounts.
l Intangibles: all assets that cannot be physically seen or touched,
but which add value to the firm. This includes items such as
trademarks, patents, and intellectual property, as well as good-
will, which is excess value paid when acquiring another firm.
 Another Random Document on
Scribd Without Any Related Topics
 CHAPTER V.
Admiral Davis’s Report—Table of the Tunnels of the different Isthmean Routes—
Altitude of Ridge at Darien—Comparative Cost of Canals with and without
Tunnels—Lift Locks and Thorough Cut—Tide in the Atlantic and Pacific—
Moderate Lockage can not Obstruct the Navigation—Gisborne on Thorough
Cut—His Error as to Velocity of Water—Objections to Strait—Tabular
Statement of the Cost of Tunnels, English, French, German, and American—
Tunnel of Mont Cenis—Hoosac Tunnel—Profiles of Mont Cenis and Hoosac
Tunnels—Dimensions of Ship Tunnel—Cost of Open Canal—General Michler’s
Report—Guard Locks Necessary—Cost of System of Lift Locks—Conclusions
Supported by Garella and Michel Chevalier.

I
ncompliance with a resolution of the Senate, dated March 19, 1866, we have an admirable
report from Admiral Davis. In this report the relative merit of different lines is exhibited;
carefully prepared tables, showing the amount of freight which would pass the Isthmus; a list
of ninety publications and fourteen maps, are appended. Ten of these maps, based on recent
surveys, supply much valuable information.
“It is to the Isthmus of Darien,” says Admiral Davis, “that we must look for a solution of the
question of an interoceanic ship canal.” And he quotes from Airian, “who has made a careful
study of this subject,” the assertion that, “with regard to the Cordillera, in proportion as it
advances, proceeding from the base of the Isthmus, it descends a good deal, and is only, so to
speak, a range of hills or isolated peaks, the bases of which are intersected by ravines, which
point out to engineers the true route of the canal. The Indians in the neighborhood of
Caledonia Bay make use of these passages. One of them is elevated fifty metres (164 feet),
and is covered with a luxuriant growth of mahogany, palm, ebony, and other trees.” “This
description,” Admiral Davis remarks, “is not based on actual measurement, but from
probabilities deduced from M. Garella’s survey of another part of the Isthmus, and from data,
equally conjectural, drawn from the published statements of Messrs. Cullen and Gisborne.”
A thorough exploration may justify this conjecture, but no data exists for fixing the absolute
altitude at 164 feet. The value of the statements of Messrs. Cullen and Gisborne may be
contested.
It will be seen from the altitude given in the table below, that however correct in point of
fact these opinions may be, they are not sustained by the figures taken from the maps
accompanying the Admiral’s report:

Table showing the length of Railroads and Canals, length of Tunnels, altitudes of Summits, estimated cost of some
of the lines proposed for uniting the two Oceans, from actual surveys:

LENGTH LENGTH ALTITUDES CANAL AUTHORITIES

ESTIMATED
ROUTES. LENGTH. TO BE OF OF OR AND
COST.
CONSTRUCTED. TUNNELS. SUMMIT. RAILROAD. REMARKS.
MILES MILES MILES FEET
$
Tehuantepec 190 855 Canal. M. Moro.
16,900,000
 LENGTH LENGTH ALTITUDES CANAL AUTHORITIES
ESTIMATED
ROUTES. LENGTH. TO BE OF OF OR AND
COST.
CONSTRUCTED. TUNNELS. SUMMIT. RAILROAD. REMARKS.
MILES MILES MILES FEET
J. J.
“ 843 7,847,896 Railroad.
Williams.
Honduras 234 234 2956 Canal. Trautwine.
Nicaragua to Napoleon
298 160 174 20,000,000 “
Realijo III.
O. W.
“ “ Brito 194 600 32,000,000 “
Childs.
M. N.
Panama 3.7 459 27,000,000 “
53⅔ Garella.
Col. G. W.
“ 48 48 280 50,000,000 “
Hughes.
San Blas 30 7 1500 “ McDougal.
Darien to San
42 7 to 8 980 65,000,000 “ Gisborne.
Miguel
Prevost &
“ “ 1020 “
Strain.
“ Lara to
610? “ Bourdial.
Sucubti
Atrato to
126 3½ 145,000,000 “ Kennish.
Humboldt Bay
Lt.
“ “ “ 149⅔ 52⅔ 2½ 970 134,450,154 “ Michler,
U.S.A.
“ to Cupica 325,000,000 “ Trautwine.

From the above table it would appear that the altitude of the dividing ridge falls off toward
the two extremities of the Isthmus, viz.: near the Tehuantepec and the Atrato routes, but the
greatest depressions have been found between Aspinwall and Panama, and on the line by the
way of Lake Nicaragua and Lake Managua.
At the Isthmus of Darien altitudes of from one to two thousand feet are found. Cullen’s
pass of 150 feet proved to be estimated at one-ninth of its true height. The least elevation of
the divide is that given by M. Bourdial. This engineer did not cross the Isthmus, and his
statement is so vague, the reader is left in doubt whether he actually reached the summit.
Notwithstanding this uncertainty, there still exists a faint hope that “it is to the Isthmus of
Darien we must first look for a solution of the question of an interoceanic canal.”
From another statement in this very valuable report, we feel reluctantly compelled to
dissent. By imposing unnecessary conditions in the statement of the problem, its solution may
be indefinitely postponed.
“The interoceanic canal,” it is affirmed, “in width, depth, in supply of water, in good
anchorage and secure harbors at both ends, and in absolute freedom from obstruction by
lifting-locks, or otherwise, must possess, as nearly as possible, the character of a strait.”
To insist that the canal must possess the character of a strait, may give rise to the necessity
for a thorough-cut of such extreme depth, or a tunnel of so great length, as to render the work
practically impossible. A line suitable for a thorough-cut may possibly be found, but so
important a project should not be endangered by limiting its practicability to a communication
of that nature.
If, by the employment of “lift-locks,” the cost of the canal can be materially reduced, the
question to be considered is, to what extent such structures would obstruct navigation? This
question depends upon the amount of trade drawn to the Isthmus by the canal.
The relative cost of the two methods for piercing the Isthmus can be best determined by a
comparison of the cost of a canal in an open country with one by means of tunnels. These
considerations, since they afford criteria for judging of the merits of different routes, may be
considered more minutely. Let us assume the trade passing over the Isthmus—were the canal
now completed—to increase one hundred per cent. in ten years; there would then be 2,066
tons in transitu daily, requiring seven ships of about 300 tons burthen each.[5] The progressive
increase in the size of ships will raise this average to between 500 to 1,000 tons; reducing the
number of ships arriving at the Isthmus daily, to five and three respectively. But, assuming the
smaller average, giving the larger number of seven ships daily passing through the canal; an
increase of four hundred per cent. in the trade would be equivalent to fourteen ships, or to
seven ships leaving opposite extremities of the canal, and passing each other daily upon
homeward and outward voyages.
Locks of four hundred feet long by ninety feet wide can be filled or emptied in twenty
minutes; and this time can be reduced for smaller vessels by additional lock-gates, and for
larger vessels by an increase in the size and number of filling valves.
The entire trade likely to seek this route, increased four hundred per cent. of its present
amount, could be passed through one lock in about four hours and forty minutes. As the
vessels come from opposite directions, one-half of the number would be waiting for lockage at
the same point, which would reduce the time required for this purpose to two hours and
twenty minutes. Eight locks, having an average lift of twelve and one-half feet, would delay the
increased commerce eighteen hours and forty minutes, and would raise the level of the canal
fifty feet; while to raise the level one hundred feet the delay would not exceed two days.[6]
As a summit level may be a necessary part of any Isthmean canal, it is manifest that the
resulting lockage can not seriously obstruct navigation. The design of an artificial strait may
therefore be reasonably abandoned, if, by so doing, the extraordinary cost of tunneling is
excluded by the employment of a small number of lift-locks.
On account of the rise of the tide on the Pacific coast guard locks, not much less costly than
lift-locks, must be an essential part of any canal from ocean to ocean.
The mean tide of the two oceans is about the same.

Table of tides, according to observation, from Col. Totten’s Report.

PACIFIC AT PACIFIC AT ATLANTIC AT

PANAMA. PANAMA. ASPINWALL.
MAY & JUNE NOV. & DEC. AUG. & SEPT.
FEET. FEET. FEET.
 PACIFIC AT PACIFIC AT ATLANTIC AT
PANAMA. PANAMA. ASPINWALL.
MAY & JUNE NOV. & DEC. AUG. & SEPT.
FEET. FEET. FEET.
Greatest rise of tide 17.72 21.30 1.60
Least rise of tide 7.94 9.70 0.62
Average 12.08 14.10 1.16
Mean tide of Pacific above
mean tide of Atlantic 0.759 0.14

Mr. Lloyd found a difference of 27.44 feet between high and low water at Panama. The Red
Sea is 3 inches higher than the Mediterranean. The Atlantic at Brest is 3½ feet higher than the
Mediterranean at Marseilles.
The small variation in the mean tide at Panama of the two oceans is probably due to the
action of winds and the Gulf Stream. At Panama the highest flood tide rises about ten and one-
half feet above the level of the mean tide of the Atlantic, and the extreme ebb falls about the
same number of feet below it. The alternate currents through the new strait, caused by the
rise and fall of the tide, would prove a serious inconvenience to navigation.
The Pacific tide, piling up at the head of the new cut, and entering the strait with
considerable violence, would be propelled toward the Gulf in a manner analogous to the
progression of the tidal wave in a river. Upon the ebb of the tide a reverse current would
prevail. Navigation would not only be obstructed by these alternate currents, but the channel
would be choked by drifting timber washed into the canal during the rainy season. Silt and
sand would be deposited in bars at the outlet of the canal, or swept inward to form shoals
where the current could no longer transport it.
Mr. Gisborne, in his report, devotes some space to speculations on these results. “There can
be no doubt,” he remarks, “that at high water there will be a current from the Pacific to the
Atlantic, and that during the ebb tide there will be a current in the opposite direction. The
extent of these currents, and the place of their greatest effect, depends on the comparative
sectional area of different portions; and if the cross-section is uniform throughout, will be some
time after high tide in the Pacific and at the Atlantic end of the canal. The phase of the tide
wave (or the appreciable effect of the tide) will take one and one-half hours to reach from one
end to the other, and presuming the current to be uniform in the whole length”——“the
question may be examined as a maximum, i. e., what will be the surface velocity of a canal
thirty miles long, having a fall of eleven feet, or with a horizontal bottom having at one end
twenty-eight feet, and at the other thirty-nine?”
Employing Du Buat’s formula, with the following quantities:
Mean depth 35.50 feet.
Mean width 183.50 “
Mean border 244.80 “
Area water section 6,147.255 “
Hydraulic mean depth 25.11 “
Fall per mile 0.33 “
he deduces a maximum surface velocity of three miles per hour. The assumed average fall per
mile is strictly a variable function, and at its maximum would give a result greatly in excess of
that deduced by Mr. Gisborne.
There is no reason for this assumption of a fall of 0.33 of a foot per mile. It directly involves
the question to be determined, since the velocity depends upon the inclination of the surface.
The value deduced by the formula is not the maximum but the minimum velocity attained in
the canal upon the assumed fall per mile.
There is another error in Mr. Gisborne’s statement. “The tide,” he remarks, “would take one
and one-half hours to reach from one end to the other, presuming the current to be uniform;
what,” he asks, “will be the surface velocity in a canal thirty miles long?”
This statement contradicts his calculations, and involves also the question at issue. If the
tide travels to the end of a canal thirty miles long in “one and one-half hours,” it is evident that
it must move at the rate of twenty miles per hour, a velocity which renders Mr. Gisborne’s strait
impracticable for navigation.
In fact, neither assumption is tenable. The problem is very complex, or, rather, with the
data given, indeterminate. It is well known that the tide is propagated up the channel of a river
in a succession of long waves, or swells, and that when the tidal wave is entering the mouth of
the river, the waves which have reached the head are returning. The same movement is
observed, on an exaggerated scale, in the successive breakers which roll in to meet the one
which is returning, after it has expended its force upon the beach.
In the case of the Isthmean Canal, the rising tide, after having passed the mean, will have
a downward slope into the canal. In rivers, notwithstanding the local rise of the water, the
slope is never reversed, but is simply reduced in its angle of inclination.
The problem involves the inclination of the surface, or the determination of the limits of
tidal action at successive stages of the tide. While the head of water increases, there is also a
constant increase of the retardation of the flow of water into the canal. The outflowing water
will run more rapidly than the inflowing, on account of the indefinite area over which it will
spread and the diminution of the retarding influences. Both outflowing and inflowing current
will seriously obstruct navigation. The banks of the canal will wash away, and bars will
accumulate about the mouth.
While these objections are valid against a thorough-cut canal without locks, they do not
apply to a strait of a quarter of a mile in width. As the cost of a canal is the chief difficulty in
the way of its construction, it is necessary to abandon the idea of a strait, and to adopt that of
a thorough-cut with guard-locks, as the only known means of protecting the canal from the
injurious effects of the tide.
In order to form a correct opinion of the cost of canals with and without tunnels, attention
is called to the expense incurred in the execution of this kind of work.

Dimensions and Cost of some English Tunnels.

 THICKNESS LENGTH KIND YEAR
COST PER MATERIAL CUT
HEIGHT. WIDTH. OF IN OF TOTAL COST. WHEN
YARD. THROUGH.
ARCHING. YARDS. MASONRY. BUILT.
FT.IN. FT.IN. FT.IN. DOLLARS. DOLLS.
Chalk,
1 Thames &
39.0 35.6 ... 3960 BR’K ... 145.00 1800 Fuller’s
Med. Canal
earth.
2 Islington,
London
Regents 21.6 20.6 1.6 900 “ ... ... 1812
clay.
Can.
3 Tetney,
16.2 17.0 1.2 “ 563,405 192.50 1827 Various.
Haven Canal 2962½
4
Walford, 26.6 27.0 1.6 1830 “ ... ... 1838 Chalk.
N.W.R.R
5 Box
Tunnel, 36.0 36.0 2.3 3121 “ 1,561,500 500.00 1838 Freestone.
G.W. “
6 Littleboro’,
27.6 27.0 2860 “ 4,255,000 440.00 1841 Various.
M.& L. “ 1.10½
7 Thames,
London
Foot 2.3 37.6 2.6 400 “ 2,273,570 5,685.00 1842
clay.
Passage
8
Bletchingly, 30.0 30.0 1324 “ 486,185 351.00 1842 Shale.
1.10½
S.E.R.R.
9
Lower
Saltwood, 30.6 30.0 2.3 954 “ 562,710 590.00 1843
greensand.
“ “

Canal tunnels are rarely larger than 16½ feet by 18 feet high. Supposing the same
dimensions to obtain in French tunnels, the cost per lineal yard of the following named tunnels
will furnish a basis for comparison:

LENGTH COST PER

NAMES OF TUNNELS.
IN YARDS. YARD.
Norieu, St. Quinten Canal 13,128 $ 14.00
Pouilly, Canal de Bourgoyne 3,660 393.75
Soussay, Canal de Bourgoyne 3,852 45.50
Maurages, Canal de Marne 5,320 325.00
St. Argnan, Canal d’Ardennes 288 200.00
 [Click image to enlarge.]

Among railroad tunnels, the following are selected from different parts of the continent:

HEIGHT NUMBER SECTION COST PER

NAMES OF TIME IN
LENGTH. WIDTH. ABOVE OF ABOVE RUNNING MATERIAL.
TUNNELS. CONSTRUCTION.
RAILS. SHAFTS. RAILS. YARD.

SQ.
YDS. FT. FT. DOLS. MO’S.
FT.
Chezy 496 24.27 18.04 0 365.84 411 32 Sand and clay.
Arschwiller 2928 24.27 18.04 6 374.77 176 95 Sandstone.
Alouette 1350 25.58 20.00 21 428.68 305 23 Clay.
Clay, marl,
La Motte 279 24.92 21.98 ... 519.71 180 30
sandstone.
Nerthe 5072 26.24 24.60 24 ... 412 36 Limestone.
St. Martin 1509 25.25 19.35 10 415.34 475 60 Porphyritic rock.
Blaisy 4483 26.24 24.60 20 ... ... ... Limestone.

The cost of the Thames tunnel was greatly increased by a shield, designed by Brunel, to
keep out the water. Omitting this tunnel from comparison the English works exceed the French,
or Continental, in cost of construction.
The boldest work of the kind yet undertaken is the Mt. Cenis tunnel, to connect France and
Italy by a continuous railway. In length it is seven miles, with a width of 26′ 6″ and a height of
20′ 8″. Its completion is anticipated in April, 1871.
The monthly advance by hand-labor was twenty-two and a-half yards. The progress is
doubled by machinery, and during the past year has averaged 330 feet per month. Air,
compressed by water power, is conveyed inside to give motion to chisels, which form cavities
for blasting by gunpowder. The average progress per day in 1865, with the machinery, was
about 9 feet.
The estimated cost was $550 per running foot, but the rate was increased to $640; the
entire cost of the tunnel being estimated at $9,200,000. The use of machinery at Mt. Cenis was
found to expedite the work, but at an increase of expense.
 The trial of machinery at the Hoosac tunnel, upon the Troy and Greenfield Railroad, has not
been favorable to its employment. This tunnel will be four and three-quarter miles long.
Originally projected with a width of 24 feet, and a height of 20 feet, it has been contracted to
14 feet wide, and 18 feet high. The estimated cost was $2,696,229. The rate first assumed
was $137 per running foot. The rate per cubic yard varies from $5 to $22, and $30, for the
excavation of shafts.
The contract prices for the Hoosac tunnel, in 1869, were as follows:

Tunnel enlargement, per yard $ 16.00

Heading enlargement, east end, per yard 9.00
Heading enlargement, west end, per yard 9.75
Full size tunnel extension, east end, per yard 11.00
“ “ west end, per yard 12.00
“ “ central section, per yard 14.00
Central drain, with air and water pipes complete, per lineal foot 13.00
Sinking shaft (27 × 15), per foot, depth 395.00
Pipes (10 inch), set in shaft 6.00
Arching (in brick at $9 per M), per M 22.00
Excavating and constructing 50 lineal feet of stone arch, and filling 23,000.00

Although more than two hundred railroad tunnels have been constructed in the United
States, and an unknown number of canal tunnels, facts in regard to them are difficult of
access. Recent bids for tunnel work upon United States railroads have been offered at $5.40
per cubic yard for excavations. Canal tunnels, of the ordinary dimensions of 297 square feet
area, would cost $113.20 per running foot.
The uncertainty of the nature of tunnel excavation, the unexpected difficulties to be
overcome, baffle all anticipatory estimate. The variable rates in the preceding tables establish
this fact. The average cost per running yard upon French canals is about $152, which sum
probably includes arching. Rates of labor in the United States would increase the cost about
four times this amount.
Comparing the contract price of American tunnels, as given above, with the table of English
tunnels, and bearing in mind that the cost of arching is included in the latter, we find in Nos. 3,
6, and 9, the cost of English tunnels is in excess; number 3 being nearly double, and number 9
one-tenth more, while, in every other case, the cost at American rates is greater, varying from
one-third to five and one-half times more.
The shale, schist, and trachyte of the Isthmean ridge is of variable consistence. Many
places exhibit friable, seamy strata, disintegrating upon exposure to the atmosphere. A tunnel
of the dimensions to admit the passage of ships, when carried through rock of this character,
will require a lining of masonry to prevent falling material from obstructing the way.
To pass ships with the topmast struck, the intrados of the arch should be 100 feet above
the surface of the water. A semi-ellipse with semi-transverse, and conjugate diameters of 100
feet, added to the canal prism of thirty feet in depth, will give an area of tunnel equal to
10,104 superficial feet, or to 1,976,263 cubic yards per mile.
 [Click image to enlarge.]

Assuming that the cost of tunneling through the Isthmus can be executed at $10 per cubic
yard, we shall have 19,762,630 dollars as the cost of one mile of tunnel. Estimating the
excavation alone at present contract price, $5.40 per cubic yard for small tunnels, one mile of
ship tunnel will cost $10,670,820. An open canal upon the line of the canal proposed by
General Michler, uniting the Atrato with Humboldt Bay, will cost, according to the estimate of
that officer, $1,792,202 per mile.
This amount, taken from the careful and elaborate estimates contained in General Michler’s
report, may be assumed as a basis of comparison of the two proposed methods of intermarine
communication, viz.: by uniting the two oceans upon one level by a tunnel, or by means of a
moderate number of “lift-locks.” Eight locks, four at each end of the canal, or sixteen locks,
eight at each end of the canal, will raise the summit fifty feet above tide in the first case, and
one hundred in the second, and will cost eight millions, and sixteen millions respectively. Since
two guard locks will be requisite for either method of communication (i. e. by “strait,” or canal
with lift-locks), their cost should be excluded from the above sums, which are thereby reduced
to six millions, and fourteen millions of dollars. These sums are fixed as the probable limits of
the cost of a system of lift-locks sufficient to overcome the divide of the Isthmus, and also to
supply the reader with a standard, by which he may judge of the merits of different routes.
The construction of a ship tunnel is, as has been said, “a herculean task,” and it is not
apparent that “the prejudice against it will be removed by the operations at Mt. Cenis.” A
moderate number of lift-locks seems preferable to a tunnel of one mile in length, which, in
turn, would be more economical than an excessive number of locks. A greater number than we
have mentioned may be deemed excessive.
A thorough-cut upon the level of the ocean would be a desirable method of canalization,
but it seems like hampering the important design of an intermarine highway for the commerce
of the world, with an impracticable condition, to insist that it should possess “absolute freedom
from obstruction by lifting locks,” or that it should possess, in any degree, the “character of a
strait.”
In this statement I find I have the support of M. Garella and Michel Chavalier. The
opposition to the system of lift-locks appears to have originated in the objection expressed in
Mr. Wheaton’s letter to Mr. Buchanan, to the large number of these structures, recommended
in M. Moro’s plan for the canalization of the Isthmus of Tehuantepec.
 CHAPTER VI.
Our Geographical Knowledge of the Isthmus—The Value of Early
Narratives and Histories—Projects for Uniting the two Oceans
by Canals and Railroads—Criteria for Assisting the Judgment—
Tunnels, Harbors, Locks, Dimensions of Canal—Tehuantepec—
The Garay Grant—Moro’s Survey—Barnard’s Survey—
Honduras—A Better Route Practicable—Nicaragua—Louis
Napoleon’s Scheme—Col. Childs’ Report—Variations of Route
—Advantages of this Line—Chiriqui—St. Clair Morton—No
Information Extant—Costa Rica—Railroad Practicable—Great
Altitude of Ridge—Panama—Information Abundant—Garella’s
Route—Hughes’s Route—Advantages—Cost of Canal on this
Route—Mexican Desagues—Panama and Aspinwall—Harbors
Easily Improved—Panama Railroad Company—San Blas and
Bayano River—F. W. Kelly—McDougal’s Survey—Fine Harbors
—Tunnel Seven Miles Long—Darien—Between Caledonia Bay
and the Gulf of San Miguel—Baron Humboldt—Vasco Nunez—
Paterson’s Colony—Causes of Its Failure—Dr. Cullen and
Savana River—Reports the Ridge 150 Feet—English Company
—Concessions of the Granadian Government—Mr. Gisborne
Sent to Darien—His Speculations—Delayed at Carthagena—
Stopped by the Indians—Supposed Success—
Misunderstanding with Dr. Cullen—Returns to England—
Provisional Directory Organized—Controversy Between Sir
Charles Fox and the London Times—Combined Expedition of
Four Governments—Lieut. Strain’s Misfortunes—Fails to Find a
Pass—Dr. Cullen and Mr. Gisborne’s Failure—Captain Prevost
Fails to Cross—Dr. Cullen Changes His Opinion—French
Expedition under Bourdiol—Fails to Cross—Granadian
Expedition Fails—Condensed Statement of the Results of all
the Expeditions—Captains Prevost and Parsons see Evidences
of a Pass—Darien Not Yet Explored—San Miguel to the Gulf of
Urabá—The Atrato Route—Successful Survey—
Representations of Unprofessional Persons—Gorgoza and De
La Charme—Their Route—Trautwine —Mr. Porter and
Kennish’s Routes—Lieut. Michler’s Route —Extracts from
Michler’s Report—Tunnel Two and One-Half Miles—Cost too
Small—Barometric—Levels—Humboldt’s Opinion.

H
avinghastily sketched the relation of the proposed canal to the commerce
of the world, its importance is sufficiently apparent to justify a careful
consideration of the condition of our knowledge of the geography of the
Isthmus. The facts and reasoning of previous chapters will furnish a standard,
in the absence of a better, for trying the merits of the routes about to be
described, and will indicate the nature of the deficiency to be supplied by
future explorations.
The American Isthmus extends in length about twelve hundred miles, from
the Coazacoalcos River, in Mexico, to the valley of the Atrato, in Columbia. It
includes the Mexican States of Tehuantepec, the Republics of Yucatan,
Guatemala, Belize, Honduras, San Salvador, Nicaragua, Costa Rica, the
Mosquito Kingdom, and the State of Panama, one of the States of Columbia.
Embracing a varied and salubrious climate; a rich soil, clothed with the
luxuriance of tropical vegetation; ruins of an ancient people, consisting of vast
and silent cities, whose impressive but grotesque architecture, embodying a
civilization unique and insular, is overgrown with forest of flor de robles,
mahogany, and palm; divided throughout its entire length by a volcanic dyke,
rising to altitudes of five to six thousand feet, and sinking into depressions
two hundred and eighty feet above the level of the sea; concealing in its
strata the matrices of gold and precious stones; expanding in Yucatan to a
width of six hundred and fifty miles, and contracting at San Blas and Darien to
thirty or forty miles—this connecting link, the result of a submarine
endogenous movement subsequent to the elevation of the continents which it
unites, opposes a solitary but not insurmountable barrier to the commercial
union of the two oceans.
The narratives of Dampier, Wafer, the adventures of the Spanish
Buccaneers who infested the South Sea, and the descriptions of Las Casas,
Fonseca, Don Andres de Ariza, however interesting historically, add but little
to the physico-geographical knowledge of the country. These histories contain
accounts of earthquakes as terrific as that which has recently visited the
coast; of sieges notable for bold assault and gallant defense; of gold mines
opened and abandoned; of strange fauna, birds of splendid plumage, and a
tropical flora of gorgeous colors; but the reader will seek in vain for
information of practical value in determining the question of a practicable
route for an interoceanic ship canal.
Recent explorers have supplied much accurate information of special
routes. The following table exhibits the different projects for uniting the
Atlantic and Pacific:

1. Tehuantepec, by the Coazacoalcos and Chicapa.

2. Honduras.
3. Nicaragua, from San Juan de Nicaragua and Lake Nicaragua,
five variations, viz.:
 R. San Carlos, G. de Nicoya,
R. Nino, Tempisque, G. de Nicoya,
R. Sapoa, B. Salinas,
San Juan del Sud,
and Brito.
From San Juan de Nicaragua, by way of Lake Nicaragua and
Managua,
three variations, viz.:
R. Tamarinda.
B. Realejo.
B. Fonseca.
4. Panama, four distinct routes, viz.:
Gorgona, Panama.
Trinidad, Caymito.
Navy Bay, R. Chagres, R. Bonito, R. Bernardo.
San Blas, R. Chepo.
5. Darien, including the old province of Chócó; the different
routes and the variations are five in number, viz.:
B. Caledonia, G. San Miguel.
Rs. Arguia, Paya, Tuyra, G. San Miguel.
B. Napipi, Cupica.
R. Truando, Kelley’s Island.
R. Tuyra, G. Urabá or R. Atrato.

The above lists include canal projects; the following list enumerates the
projected railroads:
I. Coazacoalcos, Tehuantepec.
II. B. Honduras to G. of Fonseca.
III. R. San Juan, Nicaragua, Managua.
IV. Port Limon to Caldera, Costa Rica.
V. Chiriqui inlet to Golfo Dulce.
VI. Aspinwall, Panama, (railroad finished.)
VII. Gorgon B., Realijo
Nicaragua
VIII. Gorgon B., San Juan del Sur.
Before describing the routes above enumerated, some criteria for assisting
the judgment may be brought together, as follows:
1. The Isthmean Canal may be a thorough-cut, with guard-
locks.
 2. It should be without a tunnel.
3. It may have a summit-level and moderate lockage, to
avoid excessive tunneling and cutting.
4. Great advantages in other respects—viz.: shortness of
line and fine harbors—may compensate for a short tunnel.
5. The route should possess good harbors, or such as can
be easily improved.
6. Dimension of the canal and size of the locks. The canal
should be sufficiently wide to permit ships to pass easily, or it
should have convenient turn-outs.
The width of the intermarine canal proposed by Mr. Kennish, to unite the
Atrato and the Pacific, is estimated to have 200 feet. General Michler assumes
a width of 100 feet, and states that vessels can pass alternately from one end
to the other, employing tug-boats and telegraphic signals to avoid confusion.
The canal now in process of construction, under the direction of General
Wilson, around the Des Moines rapids on the Mississippi, has a width of 250
feet in embankment.
The Engineer in charge of the canal around the falls of the Ohio at
Louisville, proposes a width of 120 feet, which is the same as that of the
Caledonia Canal.
The Suez Canal has a minimum width at water surface of 190 feet. This
last dimension, with a sufficient number of turn-outs, would be suitable for
the canal across the American Isthmus.
The locks of the Des Moines Canal are 380 feet between gates, by 80 feet
wide. General Weitzel proposes, for the Louisville Canal, locks 400 feet
between gates, and 100 feet wide. The Isthmean locks may be 400 feet
between gates, and 90 feet wide.
Locks of these dimensions, if all unnecessary dressing of the stone is
dispensed with, may probably be erected for one million of dollars.
It is unnecessary to mention other ship canals and locks, built for the
accommodation of ships of less tonnage than those which would make the
intermarine transit.
The following description, commencing at Tehuantepec, will treat of each
route in succession:
 TEHUANTEPEC.
In March, 1842, Santa Anna, “for the purpose of aggrandizing the nation
and rendering the people happy,” granted certain privileges to Don Jose de
Garay, to enable him to open a line of communication between the Atlantic
and Pacific oceans, through the Isthmus of Tehuantepec. The route was to be
neutral to all nations at peace with the Mexican Republic. The “negotiation”
was permitted to hold for public use all unoccupied land, not more than one-
fourth of a league on either side of the line, which was conceded to them in
fee simple. The right of collecting dues was conceded for fifty years, and the
exclusive privilege of freight, by steam vessel or railroad, for sixty years.
The survey was intrusted to Sr. Moro, an Italian engineer of distinction.
The distance from sea to sea was ascertained to be 135 miles in a straight
line. Wide plains and table land adjacent each ocean were found to be broken
by the Andes, rising to the height of 650 feet above the level of the sea.
Thirty miles of the Coazacoalcos River, after passing the bar, is navigable
for ships of the largest class, and fifteen miles for vessels of light draught,
leaving 115 miles of railroad to be made.
Sr. Moro, taking the dimensions and cost of the Caledonia Canal as a
standard, estimates the cost of a similar ship canal across the Isthmus[7] at
$17,000,000. He includes in his estimate the cost of one hundred and sixty-
one (161) locks, which may be reduced to one hundred and twenty. These
results were not deemed satisfactory.
The privileges granted to Mr. Garay were secured by P. A. Hargous and
Major (now Brevet Major-General) Barnard, Corps of Engineers. W. H. Sidell
and others were employed to survey the route of a railroad. Of this survey we
have the very interesting report of J. J. Williams, containing information of the
statistics, geology, and topography of the country. The summit is 855 feet
above tide; the entire length of the line is 190 miles. A summit-level and
tunnel would be necessary to carry a canal across the ridge. Com’d Perry and
Lieut. Temple, U. S. N., found about twelve feet water on the Coazacoalcos
bar. The bar is supposed to be composed of hard clay, admitting of a
permanent improvement. Capt. Basil Hall, R. N., and Com. Shubrick, U. S. N.,
speak of the Pacific terminus at Ventosa Bay as exceeding boisterous and
unfavorable for anchorage.
The merits of this route have been minutely described by Col. J. J. Abert,
Chief Corps Topographical Engineers, and Col. G. W. Hughes, of the same
corps; and by common consent the route is regarded as possessing “little
merit as a practicable line for the construction of a ship canal.”

HONDURAS.
A barometric survey was made of this route. With excellent harbors, it is
obstructed by an elevated dividing ridge. The topographical features of the
country indicate the probable existence of a more favorable pass. A better
route may be found by starting from the Gulf of Dulce, and proceeding toward
the town of Guatemala; or by starting from the same point, a more southerly
direction appears to possess advantages. Inference from maps of this region
must be received with caution. The route is condemned by Admiral Davis.

NICARAGUA.
With the exception of the Panama route, no Isthmean project has received
so careful an examination as the lines passing through Lake Nicaragua. This
part of the Isthmus widens into continental proportions of great fertility. The
productive and industrial development of this country, by means of railroad or
canal, would supply a material addition to the commerce of the world. With
the growth of Central America, our gulf ports—Galveston, New Orleans,
Mobile, Appalachicola, Pensacola, Tampa Bay, and Key West—would increase
in military and commercial importance.
This line possesses additional interest for the political reasons adduced by
the Emperor Napoleon III, in a memoir prepared by him when a prisoner at
Ham. Arranged with method and prepared with care, this pamphlet bears the
impress of a sagacious judgment. “In order,” says the writer, “that the canal
should become the principal element of the advancement of Central America,
it must be cut, not through the narrowest part of the tongue of land, but
through the country which is most populous, the most healthy, and the most
fertile, and which is crossed by the greatest number of rivers, in order that its
activity may be communicated to the remotest part of the interior. England
will see with pleasure Central America become a flourishing and powerful
State, which will establish a balance of power by creating in Spanish America
a new center of active enterprise, powerful enough to give rise to a feeling of
nationality, and to prevent, by backing up Mexico, any further encroachment
from the North.”
 The line selected by Louis Napoleon (although he errs in his statement of
distance), has not been improved by the changes in location proposed by
subsequent engineers. All these routes commence at San Juan de Nicaragua,
and follow the San Juan river to the Lake Nicaragua. From this lake three
other routes pass through Lake Managua to Realijo, and to the Gulf of
Fonseca. Lake Managua is about twenty feet above the level of Lake
Nicaragua. The dry season suspends the flow of water between the lakes, and
the question arises whether, even by the aid of a dam, sufficient water can be
stored in the smaller lake to feed the summit level on each side of it during
the dry season.
Col. Childs’ route terminates at Brito; a fifth at San Juan del Sud, and
three other variations of route near the same point of the Pacific coast. Col.
Childs’ report, which is very complete, was submitted to a Board of English
Engineers, and to Colonels Abert and Turnbull, of the Corps of Topographical
Engineers, U. S. A. Although the survey was thoroughly and scientifically
executed, the route was condemned by these officers, because of the
insufficiency of the harbors of Brito, and the small dimensions of the canal
proposed by Colonel Childs.
The length of the canal was divided into sections, for the convenience of
description and estimation of the cost:
MILES. FEET.
Western division, from Brito to the Lake 18 588
From Lake Nicaragua to head of San Juan 56 500
Slack water of seven dams on the San Juan 90 800
Canal to San Juan del Norte 28 505
Total distance 194 393
The maximum width of the canal was designed to be 118 feet, and the
depth 17 feet. The descent from the lake to Brito was accomplished by
fourteen locks.
The following table exhibits the distances from sea to sea of the proposed
lines originating at San Juan del Norte:
 ROUTES DIST.
LENGTH
FROM THE FROM LAKE FROM LAKE BETWEEN LENGTH
OF DISTANCE DISTANCE
PORT OF SAN NICARAGUA NICARAGUA LAKE OF TOTAL
THE RIO ON LAKE INLAKE
JUAN TO THE TO LAKE MANAGUA ACTUAL LENGTH.
SAN NICARAGUA. MANAGUA.
TO THE PACIFIC. MANAGUA. AND THE CANAL.
JUAN.
PACIFIC. PACIFIC.

MILES. MILES. MILES. MILES. MILES. MILES. MILES. MILES.

To Brito 119 57 18 137 194
Fonseca,
119 120 4 50 16 139 309
Tamarinda
Realijo 119 120 4 50 45 168 338
Fonseca,
Estero 119 120 4 50 20 143 313
Real

The ports on the Bay of Fonseca, and at Realijo, are good, but the other
ports designated as terminal points upon the Pacific are not so favorable for
shipping. San Juan del Norte, the initial point upon the Atlantic of all these
routes, will not admit ships of large draught, and the harbor is rapidly
deteriorating. All harbors of Central and South America receiving rivers, and
opening to the northward, are decreasing in depth. The incessant wave-beat,
caused by the trade-winds and northers, acts like a ponderous hammer,
wielded by an irresistible force, whose unceasing efforts, for six months of the
year, are exerted to force the sand into the entrance of the harbors, and to
arrest the sediment brought down by the rivers. The result is a tortuous and
variable channel, and a shifting and shoaling bar.
The deterioration of the harbor of San Juan de Nicaragua, or Greytown,
has been minutely discussed by a board of scientific officers of the United
States Corps of Engineers, and of the Coast Survey Department. Their
conclusions were unfavorable to the improvement of the harbor.
Where the Cyane lay during the bombardment of Greytown a luxuriant
grass marsh is now growing. It has not been many years since this harbor
afforded refuge for shipping of ordinary draught, but it is not unusual, at the
present time, to find the harbor so completely closed during a storm that a
pedestrian may walk dry-footed across the former entrance. Upon such
occasion the harbor of Greytown is converted into a lagoon until after the
storm, when the accumulating water of the San Juan erodes for itself a new
outlet to the ocean.
 It is apparent some other initial point must be found before this route can
be seriously considered as a suitable terminus for interoceanic
communication. Monkey Point is said to supply a good anchorage, and has
been suggested for this purpose. Monkey Point affords anchorage for ships
drawing rather more than three fathoms. By joining the island with a
breakwater of pierre perdu, of the length of about twelve hundred feet, a
good harbor, affording five fathoms water, can be obtained.
The writer is not aware that any surveys have ever been made for
connecting this point with the San Juan river, or with the lakes. It is therefore
unnecessary to mention other reports upon the same route, or to do more
than to refer to the plans, profiles, and details of the “Interoceanic Canal of
Nicaragua,” submitted at the Paris exhibition by L. J. Thome de Gamond. The
report of M. de Gamond is not at hand.
A healthy and productive country; two lakes affording an inexhaustible
supply for a summit level; a divide easily overcome at an altitude represented
as 174 feet, and the convenient channel of the San Juan, through which the
waters of Lakes Managua and Nicaragua find their way from an amphitheater
of hills to the Atlantic ocean, are advantages which engineers and capitalists
are loath to abandon, and which the reader relinquishes with regret. We may
expect, therefore, to find the question continually revived. But its advantages
have been overestimated.
The San Juan river has cut an outlet for the canal through the ridge,
separating Lake Nicaragua from the Atlantic; but to pierce the divide on the
opposite side, which separates the lake from the Pacific, a tunnel of about six
miles in length will be requisite. The altitude of the divide is six hundred feet
above the level of the lake. The singular omission in Colonel Childs’ report
may have led Admiral Davis to overlook so important an objection, or perhaps
he may have thought it unnecessary to multiply objections to a route which
appeared impracticable upon other grounds.

CHIRIQUI.
The so-called Isthmus of Chiriqui, lying between Panama and Nicaragua,
was explored by the late Lieut. St. Clair Morton, who was killed in the siege of
Petersburg. Lieut. Morton crossed the Isthmus twice, and pronounced the
route practicable for a railroad. As no notes of this survey are extant, curiosity
in regard to this route must remain unsatisfied. Lieut. Jeffers, U. S. N., speaks
favorably of the harbors. Mr. Evans, the geologist, discovered an inferior kind
of coal. Another reconnoissance may develop some important information.

COSTA RICA.
A railroad has been projected from Port Limon, near the tenth parallel of
latitude on the Atlantic, to Caldera, in the Gulf of Nicoya. Rising to an altitude
of 5,100 feet the route passes through a salubrious climate, and over a
productive soil. A macadamized road, 134 miles long, with five stone bridges,
has been completed along this line. As a route for a ship canal the altitude of
the summit appears to exclude it from further consideration.

PANAMA.
As the passenger route and highway of the trade between the Atlantic and
Pacific States of America, the mention of this line arrests attention.
Information in regard to it is full and accurate. Here, alone, in all Central
America, a railroad unites the two oceans. Confining his remarks to the
project of M. Garella, Admiral Davis pronounces his condemnation of the
route.
M. Garella’s route, starting from the Bay of Limon, on the Atlantic,
following the valley of the Chagres, ascending with 17 locks to the summit,
which it passes with a tunnel 17,500 feet in length, at an altitude of 135 feet
above high water in the Pacific, and descending with 18 locks, terminates at
the Bay of Vaca del Monte, on the Atlantic. The altitude of the ridge to be
pierced is 459 feet. The commission of the “Ponts et chaussés” appointed to
report upon Garella’s project, object to the expense of tunneling, and to the
absence of evidence of the sufficiency of the mountain streams to feed the
summit level.
But a tunnel is not a necessary plan of piercing the Isthmus at this point,
nor is a summit level 135 feet above high water an unavoidable necessity. The
Panama railroad passes the divide without a tunnel, at an altitude of 280 feet
above tide. The fact that a route possessing such advantages should be found
so near the line of M. Garella, encourages the belief that a more critical
examination of other prescribed routes may be rewarded with the same good
fortune.
The merits above mentioned justify a more attentive consideration. The
advantages of the route may be enumerated as follows:
 1. A divide 280 feet above tide.
2. Distance between oceans 48 miles.
3. The Chagres river, emptying into the Atlantic, and the
Rio Grande, flowing into the Pacific, together with the smaller
rivers, Maraboso, Obispo, Dominica, Mandingo, which can be
made tributary to the summit level of the canal. The rainfall in
this region varies from 90 to 100 inches, being three times the
amount which ordinarily falls in the United States.
4. The harbors at the termini, Panama and Aspinwall, have
accommodated the trade of California and the Atlantic States,
and are far superior to those of Port Said and Suez.
5. Tunnel unnecessary.
Possessing such advantages, the objections which have led to the ignoring
of this route should be noticed.
The objection of the Commission of French Engineers to M. Garella’s
project has been mentioned. “The river Chagres,” it was observed, “was
gauged at Cruces and Gorgona, but the river is to be tapped above these
points.”
The summit upon Garella’s line is 459 feet above tide, while upon the line
of the Panama railroad it is but 280 feet. Garella proposes to pierce the ridge,
at 135 feet above tide, with a tunnel three and four-tenths miles in length. No
tunnel is required upon the other line.
Estimating the tunnel of M. Garella at the present contract
price in the United States, this part of the work alone will cost $57,623,380.
Add 47 miles of open canal 84,232,491.
Total cost of canal $141,855,871.
A canal by the aid of locks can be constructed between the two seas, upon
the line proposed by Col. Hughes, at a much less cost.
Assuming the same dimensions of canal—100 feet wide by 30 feet deep—
and the same prices as above, taken from General Michler’s report upon the
survey of the canal for joining the Atrato and the Pacific, and we obtain the
probable cost of constructing a canal upon this line, as follows:
For 50 miles of open canal $ 89,610,150
12 locks raise the summit level 75 feet 12,000,000
Breakwater, ship basin, and contingencies 8,000,000
 Total cost of canal $ 109,610,150
This diminution of cost of $32,245,721, due to the absence of a tunnel,
upon this route, allows of a margin more than can be required for increasing
the number of the locks, or for building, graving docks, and other auxiliary
conveniences in the harbors.
The execution of this work would require a cut of less dimensions than the
famous Mexican Desague of Huehuetoca, referred to by Humboldt, and
described by Admiral Fitzroy as “200 feet deep and 300 feet wide for nearly a
thousand yards, and above 100 feet deep through an extent of nearly a
thousand yards, (making altogether two miles of distance in which the vast
excavation would be capable of concealing the mast-head of a first-rate man-
of-war, executed in the last three centuries in Central America,) should induce
us to listen respectfully to the plans of modern engineers, however startling
they may appear at first.”
Another objection remains to be considered: “Navy Bay is an insecure
anchorage, and the harbor upon the Pacific is altogether insufficient for
vessels of even moderate draught.” “M. Garella is obliged to include in his
estimate the sum of a million and a quarter dollars for the improvement of
this harbor.”
On account of the rise of the tide, which varies as much as 22 feet, vessels
are compelled to anchor two and one-half miles from Panama, and the
passengers and freight are transported in light-draught steamers. These
difficulties may be converted, by the use of docks, as in English harbors, into
an advantage. The withdrawal of 20 to 23 feet of water at extreme tides
affords extraordinary facilities for constructing ship basins and docks upon the
natural pavement of rock which covers the bottom of the bay in front of the
City of Panama.
On the other side, Limon Bay possesses sufficient depth of water, but is
open to “northers.” The entrance of these dangerous winds may be prevented
by a stone breakwater, or one composed of screw piles, driven sufficiently
near to support iron or flanged plates, sliding vertically into position, one
above another, until the requisite height is attained, and braced strongly at
the back.
Notwithstanding northers, steamships arrive and depart regularly. The
Royal Mail Steamship Company are building wharves of stone and iron, and
the railroad company has projected a breakwater for the protection of
shipping.
 Colonel G. W. Hughes, in a letter to the Hon. J. M. Clayton, at that time
Secretary of State, makes the following observations in regard to this route:
“The line I have traced for a railroad is, I think, more favorable for a ship
canal than that suggested by M. Garella. If we adopt the same depth of
cutting he suggests for an open cut, it will leave the bottom of the canal 44
feet above the level of the Pacific at high tide. This would be about ten feet
lower than the bed of the river at Gorgona. An open cut two hundred feet
deep would obviate all difficulty in crossing the Chagres at Gorgona, while the
Rio Grande, the Obispo, and the Mandingo might be converted into an
immense reservoir for supplying the summit-level with water, and the Rio
Chagres above Cruces, and the Pedro, Miguel, Camero, etc., would furnish the
lower level. A spacious tide basin might be constructed at the mouth of the
Rio Grande, a few miles west of Panama.”
For this project, so favorably recommended, it is necessary to obtain the
consent of the Panama Railroad Company to the use of land belonging to
their reservation.

SAN BLAS AND BAYANO RIVER.

This route is one of several surveyed under the generous patronage of F.
W. Kelly and others. The map of Mr. McDougal, the surveyor and engineer,
and the report of Admiral Davis, furnish some interesting facts. The narrowest
part of the Isthmus is found here, being thirty miles from ocean to ocean, and
here the tide of the Pacific is said to approach within fifteen miles of the
Atlantic coast.
Mr. McDougal proposes to pierce the ridge, which has an altitude of 1500
feet, at a height of 93½ feet above mean tide, by a tunnel seven miles long.
The harbor of San Blas is deep and spacious. The channel leading into the
Bay of Panama has not less than eighteen feet of water at mean low tide,
while the rise of the water is sixteen feet. This result, Admiral Davis observes,
does not agree with the admiralty charts.
The map indicates the probable existence of a better route to the north-
west, and the surveyors were satisfied they saw evidences of a depression in
that direction.
Admiral Davis quotes the well-merited compliment of Sir R. Murchison, to
the zeal and energy with which Mr. Kelly has pursued “this great and
philanthropic object,” in which “all civilized nations are deeply interested.”
 DARIEN.
Between Caledonia Bay and the Gulf of San Miguel every effort to make a
thorough exploration has resulted in failure. Disappointed expectations,
arduous but fruitless labors, conflicting reports, failure, starvation, and death
have stamped with ill omen every attempt to cross this part of the Isthmus.
Baron Humboldt has directed public attention to Darien, and Admiral Davis
expresses his deliberate conviction that to this part of the Isthmus we must
look for a solution of the question of interoceanic ship communication.
The history of so many attempts, proving so unexpectedly disastrous,
supplies much curious and valuable information. From the Paterson
colonization scheme to the unfortunate expedition of Lieut. Strain, one word
will characterize every attempt. The first settlement of Vasco Nunez, in 1510,
after eight years of calamitous trial, was abandoned.
Paterson’s colony was remarkable in the causes which led to its inception;
in the ability and statesman-like views of him who conceived a design so vast
and benevolent; in the governments enlisted in its favor; in the sufferings of
the colonists, and in its final abandonment.
William Paterson, a Scottish clergyman, of fertile resources, and great
political sagacity, the original designer of the Bank of England, conceived the
magnificent design of establishing a colony upon the shores of Darien, based
on principles of religious toleration and free trade, which, occupying the
highway of commerce, “grasping the riches of both the Indies, and wresting
the keys of commerce from Spain,” should build up, on the shores of two
oceans, cities surpassing his own Edinburgh, and rivaling ancient Alexandria.
With experience drawn from long study and patient observation, he organized
his scheme upon liberal commercial principles, and an enlightened political
policy. Scotland, Hamburg, and Holland, contributed the sum of $4,500,000.
This large amount surprised London merchants, and spread panic in the
board of the East India Company. The unfriendly feeling of this great
corporation proved, in the end, fatal to the scheme. Aided by Spanish
intrigue, and Dutch rivalry, and bringing their vast machinery to bear against
the colonists, by argument and misrepresentation, they induced William III. to
issue an edict, forbidding all English colonies in the West Indies from sending
provisions, arms, or ammunition to the Scottish colony of Darien.
Of 1,200 colonists, three hundred of whom represented the best blood of
Scotland, thirty only returned to tell the story of their sufferings. Dissension,
disease, and starvation, had accomplished the usual results. Thus, this design
for the union of two great oceans failed; this effort to form a nucleus of a new
system of beneficent wealth, and commerce, came to an untimely end.
The Caledonia Bay was no longer frequented by the ships of England,
Holland and Scotland, The gold mines of Cana, worked by one thousand men,
under the Spanish domination, were destined to remain to the present day,
unmolested. The north-western slopes, and the head waters of the
Chuquanaqua, reverted to the undisputed possession of the Indians, while,
between the lower part of this river and along the Savana, and the Bay of San
Miguel, a mongrel population of 1,200 souls cultivate bananas, and impose
upon strangers.
Dr. Cullen justly claims to have recalled public attention to the merits of
this route. The fine harbors of San Miguel on the Pacific, and of Caledonia Bay
and Port Escocés on the Atlantic, taken in connection with the narrowness of
the Isthmus, would attract a casual observer. The favorable opinion of
Humboldt has led many to look hopefully to this region. The advantageous
situation of the Savana River was pointed out by Dr. Cullen, who claims to
have “crossed, and recrossed, between Caledonia Bay, and Port Escocés
alone, during the rainy season, cutting and marking his way with a machete.
From the head of the Savana,” he continues, “a ravine, three leagues in
length, extends to Caledonia Bay, and there a canal might be cut with less
difficulty than elsewhere, if it were not for the opposition of the natives. From
the sea shore (at Caledonia) a plain extends to the base of a ridge, which
runs parallel to the coast, and whose summit is 350 feet. This ridge is not
quite continuous and unbroken, but is divided by transverse valleys, through
which the Aglasenique and Aglatomente, and other rivers have their course,
and whose highest elevations do not exceed 150 feet.”
Impressed by these favorable representations, and believing Dr. Cullen’s
statement of the existence of large gold deposits near Esperitu Santu, and in
the diggings of Veraguas, the distinguished capitalists, Sir Charles Fox, John
Henderson, and Thomas Brassy, uniting with Dr. Cullen, obtained, by a decree
of the Granadian Congress, dated Bogotá, June 1st, 1852, the concession of
the exclusive privilege of cutting a ship canal across the Isthmus of Darien,
between the Gulf of San Miguel on the Pacific, and the Bay of Caledonia on
the Atlantic, with the liberty of selecting any other point on the Atlantic coast
between Puerto de Mosquitoes, and the west mouth of the Atrato, for the
entrance of the canal; and were granted, besides the lands necessary for the
canal and its works, 2,000,000 acres of land, to be selected in any part of the
Republic. All the ports of Darien were declared free and neutral.
 Notwithstanding these favorable conditions, it was deemed prudent, by
the distinguished capitalists above mentioned, to send out a competent
engineer to verify the statements of Dr. Cullen. Mr. Lionel Gisborne was
selected for the purpose, and was accompanied by Dr. Cullen, to point out the
way.
Before arriving in South America Mr. Gisborne, assuming the data supplied
by Dr. Cullen to be correct, enters into some interesting speculations. “Let us
suppose,” he observes, “the summit level to be 150 feet above the level of the
sea. The Atlantic rise of tide is only 3 feet (1′ 5″); that of the Pacific is 25 feet
(22 to 23), therefore, the difference in the level, at high and low tide is 11
feet (this, although suppositious, will, I anticipate, not be far from the truth).
In such a case I would propose to cut a canal through from ocean to ocean
without any locks,” etc.
Proceeding on the supposition of certain “circumstances likely to coexist in
a country whose chief geological formation is igneous,” he proposed a second
plan. “By embankments placed in the most advantageous position” two lakes
are to be formed upon each side of the ridge, which, being cut through, ships
can pass from lake to lake, and lock down to either ocean from the opposite
extremities. “The only objection” to this plan, is, he thinks, “the loss of land
inundated.” “I hope,” he adds, “a tract of country will be found where one or
the other of these cases is applicable.” It is very remarkable that Mr. Gisborne
found a country adapted to this plan.
This expedition was long delayed in Cartejena, awaiting Dr. Cullen, who
was occupied with business connected with the survey before the Congress of
Bogotá. “I determined to wait for the English mails,” writes Mr. Gisborne, “due
here the 25th, otherwise I should certainly not spend three weeks waiting for
Dr. Cullen.” On another day, “an instrumental survey,” he prognosticates,
“seems to be out of the question, so that our levels, theodolites, sextants,
and chains, will probably remain in the same box Troughton and Simms
consigned them to on our departure from England.”
Again, “I have read and listened about Darien Indians, their cruelty and
jealousy, until I am callous and unbelieving; but it frets me to remain in
doubt, ebbing out an existence in Cartejena. I have determined,” he says, “to
wait ten days longer—then D. V. Cullen, or no Cullen, I shall try what can be
done with these ungovernable Indians.”
Waiting impatiently, he speculates upon the Aurora Borealis, geology,
magnetic observations; ingeniously proposing, by the automatic action of
appropriate machinery, to make all meteorological phenomena register its
name and mission in a room selected for that purpose. This he calls a
“meteorological loom in which the web of time is spun with the present for a
pattern.”
“May 29th—The Bogotá mail has come, but no letter from Dr. Cullen. Every
thing here is mañana (to-morrow).”
He again takes to speculating on fortifications, and the beauty of the
senoritas. A reasonable man would have been contented. But he leaves this
primrose path to write, “Dr. Cullen has neither written, nor appeared in
person, and I am beginning to have my doubts whether he will do so.” In the
meantime Cullen was hammering at the “mañana” Congress at Bogotá.
After waiting six weeks he left Cartejena in disgust, and landed, without
the indefatigable Doctor, in Caledonia Bay. Here he spent two days wandering
among the hills with his barometer, his spirits going down as the mercury
went up.
He was arrested by three half-naked Indians, who, in an unintelligible
language, but plainly to be understood gestures, commanded him to follow.
This he prudently acquiesced in, but not until he had, as he thought,
ascertained the dividing ridge between the Atlantic and the Pacific to be 272
feet above tide. Falling asleep, with a contented mind, he thought he heard
the roar of the surf of the Pacific, but his companion, Ford, very shrewdly
suggested that they were still within hearing of the Atlantic. With a gentle
admonition that they must never be caught there again they were permitted
to return to their boat.
Naturally, he could not forbear another fling at the helpless Dr. Cullen. “I
had not much faith in Dr. Cullen’s map, as his descriptions of land south-west
of Port Escocés were directly contrary to the fact.”
The comment, on his failure may puzzle the reader. “I am far more
satisfied at having failed in crossing from Port Escocés than to have crossed
and returned (supposing that was possible with safety), and reported a
summit 275 feet, when, within a few miles, one of 40 is to be got further
inland.”
“It is dangerous to argue by induction,” observes Mr. Gisborne, and he
gives 238 pages in illustration of this truth.
Nothing daunted by his failure to effect a transit from the Atlantic side of
the Isthmus, he determines to proceed to Panama, and to make another
attempt from San Miguel on the Pacific. Proceeding up the Savana river he
disembarked with his Asst. Ford, who had charge of the mountain barometer,
and penetrating two days’ journey into the interior, he is warned by a log over
a stream that he had reached the country of his enemies, the Caledonia
Indians. Remembering their parting injunction he returned.
“A dreamy hope of success,” he writes, “is strengthened by inductive
argument, the cause of former failures leads to generalizations of geological
theories, and topographical analogy, and it was this conviction that cheered
me under all difficulties, making suffering an indispensable appendage of
success.”
Consoling himself with such reflections he met Dr. Cullen at Panama, in
high dudgeon. The Doctor reproached him with having broken his
instructions, and required that he should return to San Miguel. Gisborne was
recalcitrant. “Feeling satisfied that a ship canal could be made across Darien,
he urged Dr. Cullen to come to England, and, as he said he was without
money, I offered to advance the passage money.”
This generous offer was accepted. Having found, as he believed, a summit
of 150 feet above tide, corresponding with Dr. Cullen’s statement, he submits
two plans to his employers. One for a thorough-cut without locks; the other
by the junction of two lakes, for which he had found a suitable physical
conformity, in remarkable harmony with his prophetic speculations before
reaching Cartejena.
The first plan was estimated to cost £12,500,000, or about $62,500,000.
The friends of the measure in London were elated by the representations
of the expeditionists.
The Atlantic and Pacific Junction Company was incorporated by royal
charter, or act of Parliament. The capital, limited to £15,000,000, was
disposed of in shares of £100 each. A deposit of ten shillings on each share
was to be made without further liability, forming a sum of £75,000 for
preliminary expenses.
A provisional directory was organized, with Lord Wharncliffe as chairman.
Upon the publication of their prospectus, a lively correspondence sprang up
between the London Times and Sir Charles Fox. The writer of the Times is
charged with want of appreciation of the merits of the Darien route, and
retorts, that if no one is to question Sir Charles Fox’s views, or even speak of
their inaccuracies, there must be an end of discussion.
While this controversy was raging, another expedition was being
organized, in numbers and appliances far exceeding any previous attempt,
with the same object. England, France, and the United States coöperated with
New Granada. Not since the landing of Paterson had so formidable an
expedition appeared in that region.
When the Virago entered the Bay of San Miguel, the Scorpion and
l’Espeigle, with Mr. Gisborne and Dr. Cullen on board, anchored in Caledonia
Bay. The French ship, La Chimere, and the American corvette, Cyane, Lieut.
Strain, at the same time joined the expedition, raising the united crews to the
number of 700 men.
The Granadian Government, in furtherance of the object of the expedition,
had established a depot near the junction of the rivers Savana and Lara. It
was confidently believed that the practicability of the Darien route was about
to be set at rest forever.
Relying on Mr. Gisborne’s and Dr. Cullen’s reports, Lieut. Strain, with a
party of twenty-seven men, two Granadian Commissioners, and ten days’
provisions, pushed forward up the bed of the Caledonia River. Here, taking
advantage of an opening among the trees, he examined, with a spy-glass, the
range of Cordillera, to find a semi-circular chain 1500 to 2000 feet in height.
He concluded that this route could not be that alluded to by Mr. Gisborne and
Dr. Cullen. He still pushed forward up arduous ascents. A seaman of the
Cyane climbed a tree to reconnoiter the country, and reported nothing but
hills and mountains in every direction. For a pathetic account of this
unfortunate expedition, the reader is referred to Harper’s Monthly, Vol. X.
After forty days of wandering, subsisting for the time chiefly on sour
palmetto berries, emaciated with hunger, lacerated with thorns, sick, and half
naked, Strain, having hastened ahead of his party, sought succor in Yvisa.
Proceeding to the Savana, he presented himself to the English agent, who,
receiving him with every kindness, shed tears at the sight. Securing
assistance, which was reluctantly granted, at Yvisa, he hastily returned to find
the remnant of his party, feebly struggling back toward Caledonia Bay, having
lost five of their number, among whom were the two Granadian
Commissioners.
Strain, mistaking the Chuquanaqua for the Savana, reached the Pacific by
the longest route. He claims that his expedition “has disproved a magnificent
preconceived theory,” and that instead of a summit-level of 150 feet, it is at
least 1000 feet.
Three days after the departure of Strain, “another party, composed of
English and French together, under the guidance of Dr. Cullen and Mr.
Gisborne, set out from the same point, and endeavored to follow in his track.”
“Gisborne and Cullen could not follow their own maps,” and after having
“penetrated not more than six miles in all, returned.” Mr. Gisborne, observes
the narrator in the Nouvelles Annales des Voyages, “dementait complétement”
his former statements. They failed to confirm the first statements, and the
London company, organized with such high hopes, was dissolved.
On the heels of Gisborne and Cullen, the Granadian expedition, under the
command of Codazzi, made a cotemporaneous essay. “How far,” says Strain,
“it penetrated is not known; but, struggling over the space of a mile, it was
broken up, and returned after having lost several men.”
While failure and misfortune was befalling the exploring parties starting
from the Atlantic coast, another attempt was made at the same time to effect
a transit from the now notable Savana. Capt. Prevost, of the Virago, after
advancing twenty-six miles, at the rate of one and one-half miles per day,
returned again to the Savana, followed, says Mr. Gisborne, by two hundred
hostile Indians. Four sailors, left to guard a depot of provisions, were found
murdered.
Capt. Prevost failed to find a practicable pass. Crossing valleys which
probably led to the Pacific, the altitude of which is not given, he terminated
his survey at a summit of 1080 feet above the level of the ocean. “L’execution
de canal interoceaneque était devenue á peu pris impracticable,” remarks the
reviewer.
After an examination of the maps of Gisborne, Prevost, Strain, and
Codazzi, there seems to be a general agreement in placing the summit of the
ridge at not less than one thousand feet above the level of the tide. The
united maps of Prevost and Gisborne exhibit their routes, proceeding from
opposite points and intersecting, and the continuous profile between the two
oceans fails to solve the question of a practicable route. As one of these
parties had the advantage of Dr. Cullen’s personal guidance, it is but fair to
allow him to supplement his first statement by an explanation of the causes
which led to a failure so complete and unexpected.
Speaking of the party from the Virago, he observes that Capt. Prevost
“directed his explorations too far to the north-west.” That when it stopped he
was but thirty miles from the point where the line should pass.
Strain, on the other hand, erred by going “too far to the south-west.” In a
word, the true line is to be found in the golden mean in which Aristotle places
all virtue.
But he has so far modified his first statement that he now thinks a line,
“with tunneling,” may be found between Sucubti and Port Escocés. Under nine
heads, he enumerates the advantages of this route.
The reader has, perhaps, concluded that, like Pantagruel’s army, this
subject is pretty well covered with tongue, and he may even adopt the
conclusion of a distinguished attorney-general upon the fallibility of this unruly
member. But one or two of the nine may be quoted. Under No. 7 Dr. Cullen
states the land rises to nine hundred and thirty feet, and that here a tunnel
will be required. No. 8 states that between this point and the Pacific no
obstacle is to be found. The divide of one hundred and fifty feet, first
discovered by Dr. Cullen, expanded to ten times that altitude.
If men of intelligence and education can so err, all statements of persons
whose previous habits and studies have not fitted them for passing judgment
upon the relative merits of different canal routes should be received with
caution.
The failure of this formidable effort of four Governments to discover a
practicable route for a ship canal between Caledonia Bay and the Gulf of San
Miguel, while it disappointed reasonable expectation, stimulated public
curiosity. The French, in nowise discouraged, determined to make another
effort. The Granadian Minister, Francisco Martin, and Senator F. Barrow,
signed, at Paris, a treaty embodying certain concession.
According to agreement, the survey was to be conducted from the head of
the Chuquanaqua toward the village of Monti, where Codazzi represented a
summit of 460 feet.
M. Bourdiol, Civil Engineer, with a party of fifteen persons—afterward
increased to twenty by the addition of some natives—proceeded carefully,
cutting their way, and chaining and leveling at the rate of about a mile a day.
Reaching the Chuquanaqua below the junction of the Sucubti, he was
compelled to desist, by the approach of the rainy season. He returned to
Panama after an absence of sixty days.
The nearest approach to a determination of a pass by M. Bourdiol appears
in the rather equivocal statement, that the origin of the valley of Monti is one
hundred and eighty-two metres (about 597 feet).
If all of these explorers had left some permanent mark at the termination
of their surveys, succeeding parties could have taken up the line where the
former left off, and the determination of a practicable route could have been
made in one-half the time now required.
M. Bourdiol affirms that he verified the height of the Sucubti, as given by
Codazzi and Gisborne, but it is not apparent how he found the same points
determined by these engineers.
Where so many failed, with every accessory and advantage likely to assure
success, the pertinent inquiry suggests itself, Is there any one fact in common
which may serve to explain failures so universal? All find difficulties in cutting
the way, requiring natives accustomed to the use of the machete; all are
misled by imperfect maps, which fail to give the altitude of the passes and the
true course of the rivers. While one party is turned back by the rainy season,
another is stopped by the Indians, another by want of time. But one party
succeeded in crossing from sea to sea, but under such circumstances that
each day was a struggle for existence, to the exclusion of the scientific
objects of the expedition.
The hostility of the Indians, although not always stated, appears to have
been the chief obstacle to a careful exploration; and internal dissension
concurred to bring failure upon the best appointed of these expeditions.
The following table presents, at one view, all that is known of the Darien
routes:

SUMMIT
NAMES. LOCALITY. REMARKS.
REPORTED
FEET.
Savana, Port
Cullen 150? “Crossed and recrossed?”
Escocés
Gisborne Saw across to former
“ “ 150?
position?
Cullen Started at Second attempt and
980!
Gisborne Caledonia Bay. failed to cross over.
Lost his way on the
Strain Caledonia Bay. 1000+
Chuquanaqua.
Prevost Savana River. 1080 Did not see the Pacific.
Bourdiol “ “ 597? Turned back by rain.
It would appear, at the first glance, that the question of a practicable route
across the Isthmus of Darien was settled by these explorers.[8] Dr. Cullen,
notwithstanding the unfortunate result of his early prognostications, still
remains sanguine, and opines that the valleys of the Aglatomente and
Aglasenaca afford levels favorable to a canal; but Gisborne’s map represents
the water-shed of the Aglasenaca at 1,020 feet above the level of the sea,
and supplies no indications of a lower summit. But Capt. Prevost gives some
important testimony. In a letter to Admiral Moresby, written after the return of
his expedition, he speaks of valleys at a lower level than any yet discovered,
leading to the Pacific. His map confirms this statement. Capt. Parsons, R. N.,
of the Scorpion, testifies to the same effect. From the deck of his vessel he
could discern a very decided break in the ridge, which appeared continuous
when viewed from other points.
These estimates we have learned to receive with caution. “A dreamy hope
of success is strengthened by inductive argument,” observes Mr. Gisborne,
“the cause of former failures leads to generalizations,” etc., and such faint
lights have so far proved veritable will-o’-the-wisps. In the present instance,
concurrent opinion is highly favorable. The appearance of isolated summits,
and disjointed and dislocated character of schistose and trychitic rock; the
testimony of Prevost and Parsons, to the appearance of a break in the ridge;
the fact that Col. Hughes found at Panama a summit of two hundred and
eighty feet above the sea, at two miles north of the line, upon which Garella
could not find less than four hundred and fifty-nine feet above the same level;
all these facts, if not “confirmations strong as proofs of Holy Writ,” are more
than “trifles light as air,” and go far to confirm the opinion that the Isthmus of
Darien has not been sufficiently explored.

SAN MIGUEL TO THE GULF OF URABÀ.

Sr. Gorgoza, a Granadian, represents that he has passed over this line, and
found an altitude of one hundred and ninety feet. How this elevation was
determined without a barometer or spirit-level is not clear. This part of the
Isthmus is referred to in general terms by Humboldt, Fitzroy, and Trautwine,
but as these authorities echo each other, the inference derives little additional
strength from their concurrence.

ATRATO.
Taking leave of the Darien surveys, the explorations in the province of
Chócó come next in order. Under this head are included the surveys made in
the valley of the Atrato. Success appears to have accompanied these
operations, as disaster followed the Darien expeditions. The hopes centering
in any one Isthmean route have been in the inverse ratio of the information
concerning them.
 The indispensable desiderata of a summit of moderate elevation, and deep
harbors, have not yet been found existing conjointly together. The volcanic
agency which hollowed out deep basins where ships may securely anchor,
has, at the same time, given unusual altitude to the dividing ridge. Shallow
harbors and low divides, and deep harbors and great altitudes, accompany
each other with the persistence of a law.
As the explorations dissipated the hope of one route, another was taken
up. Vague rumors continually reach us similar to those we have already
encountered. One of the latest of these is this: A Mr. or Sr. Gorgoza, a
resident of New Granada, has found a short and easy transit across the
Cordillera, between the Gulf of San Miguel and Urabà (or Darien), by
ascending the Tuyra, and crossing the valley of the Atrato. According to his
statement, the depression in the divide is not more than 190 feet above the
mean tide, and the distance between head waters, navigable by canoes, is
not more than three miles.

DE LA CHARME ROUTE—BY THE WAY OF TUYRA,

PAYA, AND CAQUARRI TO THE ATRATA.
The March number of Putnam’s Monthly contains a description of a route
surveyed by M. De La Charme, which occupies a position between the Darien
routes, and the line between Humboldt Bay and the Atrato, surveyed by Lieut.
Michler.
The article referred to gives an account of what appears to be the latest
reconnoissance made in that region, and claims for its author, M. De La
Charme, “the right of discovery.” Of this survey Sr. De Gorgoza is the patron
and prime mover.
The attention of Sr. De Gorgoza was called to this route by certain
“documents” containing “hints about passages used by the Indians in crossing
the Cordilleras.” These documents consisted of “reports by the civil and
ecclesiastical authorities about the province of Balboa, which was, at that
time, of great importance, from its rich gold mines,” and are probably as
reliable as any other civil and ecclesiastical reports of the pious marauders of
that period. These reports were accompanied by “a map,” which seems, from
a reference upon page 133, to have been that remarkable specimen of
puzzling topography, known as Arisa’s map, a copy of which may be found
appended to the report of Admiral Davis. The usual reference is made to
those unconscious pioneers of interoceanic canal routes, the filibusters, “who
carried off quantities of gold, to the great detriment of the Spanish treasury,”
etc., etc.
This reliable evidence is further corroborated by the flight of birds. Some
Pissisi ducks providentially appear to lead our explorer upon the right path,
and M. De La Charme is so convinced that the route will be found in the
direction taken by these web-footed engineers, that he confidently affirms
“there remained to me no doubt but at this place I should find the desired
passage. So persuaded,” he “prosecuted his work with confidence.”
Many immaterial facts are circumstantially related, but we are not told by
what method the survey was conducted, nor whether M. De La Charme was
assisted in his work by professional engineers. Without such assistance, his
duties must have been complicated and laborious. As mention is made of
bogas and laborers only, we must conclude that this arduous duty was
performed without any intelligent assistance.
He states that strict attention was given to barometric measurements. The
notes should have been supplied in proof of the accuracy of his conclusions.
The irregularities of the barometer along the dividing ridge of the Isthmus
and in South America have been noticed by Moro, Hughes, Herndon, Maury,
Michler, and other observers. Used with extreme care, and according to the
method recommended by Lieut. Col. Williamson, U. S. A., the results obtained
with this instrument are affected by discrepancies and anomalies, which,
along the Andes, vitiate the most careful observations, and elude the grasp of
the best formulæ.
A favorable reconnoissance with the barometer, in this region, should
receive a careful verification with more accurate instruments, but it can not be
regarded as establishing the feasibility of a route.
The map of M. De La Charme, like that of Dr. Cullen, is made up from old
maps. The additional topographical information is not laid down.
Two parties were sent to the Isthmus to verify this route. One, composed
of French engineers, was under the charge of M. Flacat; the other, composed
of American engineers, was under the direction of Mr. Spooner. With both the
principals Sr. De Gorgoza quarreled, and the parties returned without
accomplishing the work for which they had made so long a journey.
The following paragraphs contain all that M. De La Charme claims to have
established. If correct, he is justly entitled to the right of discovery, in the
furtherance of which claim “he considers it his duty to publish the present
memorandum.”
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