"...the thought of war between Chile and the United States on its face made little sense. The Union dwarfed Chile in size both geographically and in terms of population, resources and manpower. They were on clear opposite sides of the hemisphere and shared no land border nor any historical dispute over borders, which were generally the cause of major South American conflicts. Both had amicable relations with South America's hegemon Brazil, to the point that the US Navy's South Atlantic Squadron harbored in Rio de Janeiro. Digging deeper, though, the origins of the hostilities become clearer. Chile had emerged as the continent's - perhaps the hemisphere's - pre-eminent Pacific power after the Saltpeter War. In addition to its cutting edge Esmeralda, a ship so advanced that it could sink most vessels of most foreign navies on its own with nary a scratch and could bombard foreign ports out of range of most coastal batteries, the Chilean Navy had a depth of experience from the recent combat, had captured or confiscated effectively the entire well-armed Peruvian Navy, and her officer corps had trained at the advice of the Royal Navy, whom they had an informal partnership with. Economically, Chile's control of the Southern Cone, via the Strait of Magellan, Beagle Channel and Drake Passage, made her ports profoundly wealthy, and lent her tremendous prestige. The rise of a United States with a two-ocean navy, and of a trans-isthmian crossing more convenient than Mexico's isolated and expensive Tehuantepec Railway - which was largely controlled by British interests, who were also wary of other powers, particularly France either alone or in partnership with the United States having a route similar to Suez through the Americas - was thus directly anathema to Chile's vital national interests, now burgeoning thanks to their considerable stake in the world nitrates supply.
For Chile, then, defending Panama's much-feared "annexation" via gunboat diplomacy was thus a gamble they had to take, and once it was clear that their provocation had drawn substantial American blood, including a sloop now at the bottom of Panama City's harbor, they were, as one would say, in for a penny, in for a pound. Domingo Santa Maria's government was now committed as word rapidly traveled south; the elephant had been poked with a hot stick and it was better to press Chile's advantage, particularly on the naval technology front, than to wait. Asserting herself now, while America was recoiling, was the only way for Chile to build enough leverage for when the war inevitably ended with a conference or arbitration when one of the Great Powers - in all likelihood Britain, further to Chile's benefit - intervened after growing tired of two major Western naval powers at war.
That a small country like Chile managed the logistical and rapid mobilization that the war required is still a minor miracle, but the Chilean military had never truly left war footing. Hundreds of men of the Army were given to the Navy to serve in potential land fighting, trained by Chilean Marines on the fly. Two battle groups were formed, one led by the Esmeralda, and the other by the Huascar, the grand prize of the Saltpeter War captures. The Esmeralda by early May had escorted a small fleet of vessels to Ecuador, which officially declared neutrality but - as a longtime enemy of both Peru and Colombia, sympathized with the Chilean position - and then sailed with the steamer Itata, torpedo boats Tucapel and Colo Colo and a convoy of merchant ships to Magdalena Bay in Mexico, which was also officially neutral. Magdalena Bay, isolated at the tip of Baja California from the rest of Mexico, would be the site of an impromptu coaling station, in case the Esmeralda and Itata could not coal at neutral ports in the event of other nations being pressured by the United States to withdraw support. Within months, Confederate coal was being sold across Panama to Ecuador, which could then transfer the fuel to Chile surreptitiously. An anti-Union bloc was secretly forming as the Esmeralda and Itata embarked on their missions - interdicting American shipping in the Pacific as commerce raiders. The Itata mostly focused on commercial vessels that were within easy range of the coaling depot, while the Esmeralda, captained by Saltpeter War hero Arturo Prat [1] braved deeper waters, seizing American-flagged vessels and impressing crewmen, dumping cargo overboard, and damaging the merchant marine ships to the point that they would have to turn back to San Francisco - the only major Pacific port for the Union - for repairs. By the time the ships of the Pacific Squadron in port at Mare Island had set out in early June after receiving much delayed word from Washington, hundreds of thousands of dollars of damage had been done.
The Huascar's battle group, considerably larger and better armed, took position closer to home, in the islands of the Tierra del Fuego. Torpedo boats were set in the Beagle Channel, the Blanco Encalada and Covadonga were placed at the mouth of the Strait of Magellan, and the Huascar herself set about patrolling the Drake Passage along with the Abtao. The strategic goal was to prevent the South Atlantic Squadron of the US Navy - and, indeed, the rest of the Atlantic squadrons - from rounding Cape Horn and threatening the Chilean mainland. President Santa Maria and his war cabinet were confident in the Esmeralda's ability to intercept and sink the US Pacific Squadron, and that the US Far East Squadron was too far away, harbored in Port Hamilton and Hongkong, to be able to effectively respond across the Pacific.
Though it took well into early July for the South Atlantic Squadron to assemble and attempt to move against Cape Horn, the Esmeralda under Prat saw earlier engagements with the Pacific Squadron. As predicted by worried US Navy officers, the Esmeralda could indeed sink essentially any ship sent against it, and did so twice, and so badly damaged four others that they too had to make haste back to San Francisco. Prat tailed them and launched cannon shells into the mouth of the Golden Gate as a demonstration of the range of his ship's guns; the American artillery at the Presidio fell well short. From there, he returned to Magdalena Bay to refuel, sinking a number of merchant vessels along the way, earning him the branding "Prat the Pirate," and leading to later accusations in Washington that Chile's navy was "merely corsairs under a republic's flag." Prat was being followed, however, by a grouping of Pacific Squadron vessels led by Admiral Lewis Kimberly, who had come south from patrolling Alaskan waters for Canadian rogue fishermen, who sought to attack the Esmeralda in force, and perhaps find where she was getting her coal from..."
- The Lion in Latin America: Britain's Role in the Spanish New World
[1] Here having successfully seized the Huascar at Iquique rather than dying, which of course is the major POD of TTL's Saltpeter War