I have deemed it proper to communicate the facts to you, which are, as you will perceive, wholly inconsistent with the maintenance and enforcements in good faith of the blockade.

Very respectfully, &c.,

GIDEON WELLES,

Secretary of the Navy.

[Indorsement.]

AUGUST 8, 1863.

Respectfully referred to Major-General Banks, to return with report.*

H. W. HALLECK,

General-in-Chief.

[Inclosure.]

U. S. FLAG-SHIP SAN JACINTO,

Key West, July 24, 1863.

Honorable GIDEON WELLES,

Secretary of the Navy:

SIR: The schooner Sea Lion was lately captured coming out of the port of Mobile, loaded with cotton, and sent to this port for adjucation. She exhibited at the time of her capture a license to bring cotton to New Orleans from a Mr. Denison, who appears to be a special agent of the Treasury Department. I send herewith inclosed a copy of this paper. I am credibly informed that Mr. Denison has answered, in reply to the question whether this license was intended to apply to blockaded ports as well as to bringing the cotton through the military lines by land, that the license was granted in pursuance of an order of General Banks, and that he did not think it necessary to inquire how the property should come to New Orleans. Under this license, it seems the favored parties at New Orleans sent their agent to Mobile, bought the cotton, had it shipped in the name of a Mobile firm, and consigned by the papers to a Mobilian at Havana. When captured, it was claimed that the vessel was really going to the mouth of the Mississippi River, or to New Orleans, for the orders of Brott, Davis, and Shonn, the parties named in the license.

This is not only trading with the enemy pure and simple, but it is trading with the enemy through a closely blockaded port. It seems to me that, if this action is sustained, it amounts to a virtual abandonment of the blockade of all the ports to which these or other favored parties may choose to trade, and that it possibly has some importance in connection with our foreign relations. I have thought it a matter proper to be referred to you.

I am, very respectfully, your obedient servant,

THEODORUS BAILEY,

Acting Rear-Admiral, Commanding East Gulf Blockading Squadron.

[Sub-inclosure.]

CUSTOM-HOUSE, COLLECTOR'S OFFICE,

New Orleans, February 16, 1863.

The United States military and other authorities at New Orleans permit cotton to be received here form beyond the United States military lines, and such cotton is exempt from seizure or confiscation. An order is in my hands from Major-General Banks, approving and directing this policy. The only condition imposed is that cotton or other

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* See Banks to Halleck, August 29, p. 702.

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