Combine 2 T. butter, sugar, peaches, salt, cinnamon and water in heavy skillet or saucepan. Bring to boiling, reduce heat and simmer gently about 5 minutes.
Sift together flour, baking powder, 1/2 t. salt and 1/4 c. sugar. Cut or rub in butter until mixture is crumbly.
Add vanilla to milk and add that to flour mixture to make a soft dough, stirring only until flour is well moistened.
Drop by spoonfuls into simmering sauce. Cook, uncovered, 5 minutes. Cover and steam gently 15 minutes longer.
Serve dumplings warm with the sauce. Makes 4 servings.