England's interest in the canal, on the other hand, was rather a prospective one, but farsighted as usual, she had provided for future contingencies by occupying several years before, under the guise of a protectorate over the Mosquito Indians, Greytown at the mouth of the San Juan river, the Atlantic terminus of the canal. In addition to the Mosquito coast, England at this time held the Bay Islands and Belize, or British Honduras. The United States, it is true, had never recognized the claims of Great Britain to dominion over the Mosquito coast. These claims, which dated back to the eighteenth century, when British wood-cutters in search of mahogany, and smugglers entered the territory occupied by the Mosquito Indians and established cordial relations with them, had been abandoned by the treaty of 1786 with Spain, but were revived in 1841, when a ship of war was sent to San Juan del Norte to announce the protection of England over the lands of the Mosquito king and to raise the Mosquito flag.[154] In 1848 the English and Indians drove the Nicaraguans out of the town and changed the name to Greytown.

The United States uniformly denied the rights of the Mosquito king to sovereignty over the district, and consequently the pretensions of the inhabitants of Greytown to political organization or power derived in any way from the Mosquitos. In his instructions to Mr. Hise soon after the occupation of Greytown, Secretary Buchanan said:

The object of Great Britain in this seizure is evident from the policy which she has uniformly pursued throughout her history, of seizing upon every available commercial point in the world whenever circumstances have placed it in her power. Her purpose probably is to obtain control of the route for a railroad or canal between the Atlantic and Pacific oceans by way of Lake Nicaragua.... The government of the United States has not yet determined what course it will pursue in regard to the encroachment of the British government.... The independence as well as the interests of the nations on this continent require that they should maintain an American system of policy entirely distinct from that which prevails in Europe. To suffer any interference on the part of the European governments with the domestic concerns of the American republics, and to permit them to establish new colonies upon this continent, would be to jeopard their independence and ruin their interests. These truths ought everywhere throughout this continent to be impressed upon the public mind; but what can the United States do to resist such European interference whilst the Spanish-American republics continue to weaken themselves by civil divisions and civil war, and deprive themselves of doing anything for their own protection.

Whatever the rights of the case, Great Britain was in actual possession of the Atlantic terminus of the proposed canal, and the United States was not prepared forcibly to oust her, even if such a course had been deemed advisable. The United States had no rights in the case at this time by treaty with Nicaragua or otherwise, none of the statesmen of that day having been broad enough in their views or bold enough to consider the territory of Nicaragua as "a part of the coast-line of the United States." All that could be opposed to England's de facto possession was the Monroe Doctrine, and England held that her claim antedated the declaration of that principle of American diplomacy. Mr. Clayton cannot, therefore, be justly charged with a violation of the Monroe Doctrine, for the effect of the treaty was to leave England weaker territorially on this continent than she was before.

The Clayton-Bulwer treaty left open several minor questions that required adjustment before the canal enterprise could be pushed forward with success. Chief among these were the dispute between Nicaragua and Costa Rica in regard to their boundary line and the controversy between Great Britain and Nicaragua in regard to the territory claimed by the Mosquito Indians. In April, 1852, Mr. Webster and Sir John Crampton agreed upon a basis for the settlement of Central American affairs, and drew up and signed a proposal to be submitted to Nicaragua and Costa Rica.[155] This proposed basis for a treaty was rejected by Nicaragua, which left the questions involved in the same unsettled position.

A much more serious obstacle to the accomplishment of the objects of the Clayton-Bulwer treaty than the failure of the above proposal arose from the wide divergence of opinion between the British and American governments in regard to its interpretation. The discussion involved two principal points: (1) Whether the abnegatory clauses of the first article were merely prospective in character and directed against future acquisitions in Central America, or whether they required Great Britain to abandon her protectorate over the Mosquito coast at once; and (2) whether the Bay Islands came within the purview of the treaty. It was expressly stipulated that Belize or British Honduras was not included in Central America and therefore not affected by the treaty one way or the other. A declaration to this effect was filed at the state department by the British minister, Sir Henry Bulwer. In reply, Mr. Clayton, after conference with the chairman of the Senate committee on foreign relations, acknowledged that British Honduras did not come within the scope of the treaty, but at the same time carefully refrained from affirming or denying the British title to that settlement or its alleged dependencies.[156] This left open the question as to whether the Bay Islands were dependencies of Belize or of the Republic of Honduras.

Shortly after the failure of the Crampton-Webster proposals, Great Britain took advantage of the uncertainty that existed in regard to the status of the Bay Islands and by a formal proclamation, issued July 17, 1852, converted her settlements on those islands into "The Colony of the Bay Islands." When the United States government expressed its surprise at this proceeding, the British government replied that the Bay Islands were dependencies of Her Majesty's settlement at Belize and therefore, by explicit agreement, not within the scope of the Clayton-Bulwer treaty.[157]

In 1856 an effort was made to terminate the difficulties arising out of the different constructions put upon the Clayton-Bulwer treaty by the negotiation of a supplementary convention. On October 17 of that year a treaty was signed in London by the American minister and Lord Clarendon, known as the Dallas-Clarendon treaty. It provided (1) for the withdrawal of the British protectorate over the Mosquito Indians; (2) it regulated the boundaries of the Belize settlements on the basis of a compromise; and (3) it provided for a cession of the Bay Islands to Honduras, upon condition of the ratification of a treaty already negotiated between Great Britain and Honduras, which virtually erected an independent state of the islands, exempt in many particulars from the sovereignty of Honduras, and under the protectorate of Great Britain.

The first two clauses were acceptable to the United States Senate, but it was deemed proper to amend the third by striking out all that part of it which contemplated the concurrence of the United States in the British treaty with Honduras, and simply to provide for a recognition by the two governments of the sovereignty of Honduras over the islands in question.[158] Great Britain rejected this amendment and the Dallas-Clarendon treaty fell through. Great Britain and the United States were thus thrown back upon the Clayton-Bulwer treaty with its conflicting interpretations.

In October, 1857, the President was notified informally that the British government had decided to dispatch Sir Wm. Ouseley, a diplomatist of well-recognized authority and experience, to Central America to make a definite settlement of all matters in dispute between the United States and England; that the efforts of the new plenipotentiary would be directed to those objects which had been dealt with in the Dallas-Clarendon treaty of 1856, viz., the cession of the Bay Islands to Honduras, the substitution of the sovereignty of Nicaragua for the protectorate of England over the Mosquitos and the regulation of the frontiers of Belize; that it was the intention of Her Majesty's government to carry the Clayton-Bulwer treaty into execution according to the general tenor of the interpretation put upon it by the United States, but to do so by separate negotiation with the Central American republics, in lieu of a direct engagement with the federal government.[159]