WAR DEPARTMENT, Richmond, September 6, 1864.

His Excellency the PRESIDENT:

SIR: In the matter of the accompanying paper I have the honor to submit the following report:

Some time in March last the resolutions of the Virginia Legislature mentioned in the communication of Mr. Grice were sent to me by Governor Smith, with an indorsement calling my attention to them. I referred them to the Honorable Secretary of War, stating that the proper course of proceeding where outrages were committed upon our citizens living within the enemy's lines was a subject of great difficulty with me, and asking instructions on the matte. The Honorable Secretary directed me to make inquiry into the facts and remonstrate against the injustice and cruelty of the proceedings against Messrs. Bain and Hodges.

Shortly after this instruction I proceed to Fort Monroe and remonstrated with General Butler against the orders which he had given in the cases of those two gentlemen. His reply was to the following effect, to wit, that Messrs, Bain and Hodges were citizens of Portsmouth, a garrisoned and patrolled town within the limits and near the headquarters of his military command; that those two gentlemen were cashiers of savings banks, many of the depositors of which were the daily beneficiaries of the United States Government, receiving gratuitously from the Federal authorities provisions, &c. ; that many of those depositors desired to get their funds from those banks, but could not, owing to the fact that the assets had been removed; the he called Messrs. Bain and Hodges before him and after informing them that he would not ask or expect them to criminate themselves, demanded to know what had become of the funds of those institutions; that those gentlemen utterly refused to ann, and did not excuse their silence by any allegation that their reply would criminate themselves, which he informed them would be a valid excuse; that he had a right to summon them before him as Portsmouth was by military declaration and possession under martial law, and that he regarded their refusal as a contempt of his authority, and therefore gave an order for their commitment to prison at Hatteras until they would consent to make answer.

I urged that the act of which he completed was done before his military occupation of Portsmouth; that those gentlemen were citizens of Virginia and not subject to his authority, at least to the extent claimed by him, and then even if they were so subject, the punishment was harsh and cruel in the extreme. He replied that under the circumstances he did not think he had exceeded his rightful powers, and in this connection stated that both of the gentlemen had taken the oath of Federal allegiance. I am entirely satisfied from subsequent inquiries that this latter statement is entirely untrue.

Upon my return form Fort Monroe I stated verbally to the Honorable Secretary of War the substance of my conversation with General Butler on this subject, and reiterated the difficulty I had in recommending any course to be pursued. I received no instructions in the case and the matter has so lain from that time to the present. One reason of my difficulty, independent of the fearful horrors that center in retaliation, was that I felt that the arrest and confinement in Northern prisons of loyal men residing in Culpeper, King William, Hanover, Henrico, and other counties of Virginia similarly situated with reference to the enemy's lines, was a great outrage than the sentence which had been pronounces against Messrs. Bain and Hodges. I therefore thought if