operation and maintenance. In the annual report for 1948, these expenses are listed in detail in table 27, pages 146-7. Mr. Bailey extracts from this table the following groups of expenses, and includes them in his tabulation of dual-purpose expenses, although he sets them up according to his own and somewhat different classification: Management_ Utilities and services (excluding air-terminal expense). Sanitation. Civil government_ Annual payment to Republic of Panama. Total_ $110, 722. 94 2, 625, 948. 95 3, 411, 316. 50 2, 856, 867. 17 430, 000. 00 9, 434, 855. 56 Mr. The last item in this list, the "Payment to the Republic of Panama,' is classified in the annual report as a Canal operating cost. Bailey, however, shifted the payment to his group of dual-purpose expenses. And, by the way, that annual payment to the Republic of Panama, according to the Canal authorities, is part of the cost of the Canal, and Mr. Bailey extracts that and takes only one-half of the sum and charges it to the cost of the Canal. Similar adjustments were made by Mr. Bailey in the net expenses for all years back to and including 1922, and the results are shown in his schedule, page 2. One-half of these dual expenses, derived by Mr. Bailey according to the methods I have described, are charged by him to commercial users, ard one-half for defense purposes. That is, of course, a purely arbitrary apportionment, and bears no relation whatever to the fact that in normal times three to four commercial ships transit the Canal for each Government ship that uses it. I do not mean to imply that the ratio of Government to commercial use should be applied. These use factors, as I have shown in my direct statement, are fully taken care of by crediting Canal operations with the amount of toll exemptions. 3. Forgiven tolls: Mr. Bailey also credits commercial operations with the so-called forgiven tolls, or amounts which Government vessels would have paid, were they not exempted from tolls. Having already cut the capital investment by almost one-half, as an offset to the military use of the Canal it is a definite duplication of credits to make allowance, also, for the toll exemptions. Commercial users are thus relieved of a carrying charge on about one-half of the investment of capital in a facility constructed and maintained for their benefit, and at the same time the Government is charged with one-half of the so-called dual-purpose expenses, which are an integral part of the cost of operating the whole Panama Canal activity. 4. Interest charge: Mr. Bailey concedes that interest should be charged against the Canal investment, and accepts the 3-percent rate utilized in the annual reports of the Panama Canal. But he applies that interest charge only to the greatly reduced capital investment claimed by him. That investment, as I have already stated, is taken by him as being no greater than $275,000,000 in 1921. No additions are made for subsequent improvements, and he amortizes the investment claimed by him by applying against it the annual profits as he calculates them. Inasmuch as a profit is derived for almost every year by his optimistic method of reducing the investment and the expenses and at the same time crediting Canal operations with the toll exemptions, the investment shows a rapid rate of amortization in his schedule. Inas much as he computes interest each year on only the unamortized balance at the beginning of the year, the interest shows a correspondingly rapid decrease year by year. This is shown by reference to column 5 of page 1 of schedule A. The interest charge for 1922 is $8,250,000, that being an interest rate of 3 percent on the written-down investment of $275,000,000. A net deficit was earned in 1922, the only year in the whole period from 1922 to 1948 in which, according to Mr. Bailey's calculations, there was a deficit. Mr. Bailey adds that deficit to the "amortized capital" shown in column 7, and utilizes $277,866,000 as the investment for 1923. In that year-that was 1923-and in each succeeding year Mr. Bailey arrives at a net profit, deducts that profit from the amortized capital at the beginning of the year, and applies an interest charge to the remaining unamortized capital for the next succeeding year. By this means, the interest charge decreases steadily from 1923 to 1948. The annual charge drops below $8,000,000 in 1925, below $7,000,000 in 1928, below $6,000,000 in 1931, below $5,000,000 in 1934, below $4,000,000 in 1936, below $3,000,000 in 1939, below $2,000,000 in 1941, and below a $1,000,000 in 1947. Mr. Bailey claims that during the present fiscal year it will have been wholly eliminated. 5. Amortization of capital: I have already described, in connection with my explanation of the interest charges set up by Mr. Bailey, the method by which he gradually amortizes the investment in the Canal. As I have stated, the investment which Mr. Bailey adopts as his 1921 base, or starting point, is much too low. He submits a figure without comment, saying in his footnote 7 that it was the value of Canal transit property established by the Special Canal Commission of 1921, plus subsequent additions to 1927. He also cites the annual report of the Panama Canal for 1927. It is true that in the annual Canal reports for the years 1921 to 1931, as I have previously pointed out, the Canal authorities shifted more than $110,000,000 from the Canal investment account to a special account headed "National defense capital investment." In 1931, however, that adjustment was specifically labeled a mistaken one by the Bureau of Efficiency, and was reversed by Executive order. The Canal accounts since 1931 have reshifted that item to the Canal investment, and have regarded it as a part of the commercial investment in the enterprise. Mr. Bailey has wholly overlooked this change in the policy of the Canal authorities, adopted in 1931 only after careful study and carried into effect by order of the top officials of the Government. The obvious and natural investment total to use is not a synthetic figure which 18 years ago was discredited and discarded by the policy makers for the Canal. The proper figure is the amount carefully worked out by the Canal authorities themselves, exclusive of defense expenditures, and carried regularly in the annual reports. Thus, the correct investment is not $275,000,000, whether amortized or unamortized, but the latest figure of $516,000,000, and the somewhat similar amounts, ranging in the neighborhood of $500,000,000, from 1922 to 1948. Summarizing Mr. Bailey's calculations, which offer the semblance of a carefully developed system of accounting, turns out to be little. 92239-49- -9 more than a series of arithmetic exercises. He adopts an investment figure too low by about one-half, arbitrarily cuts annual expenses in half, and takes credit for all forgiven tolls. On these bases, all of which unduly favor the commercial user of the Canal, it is a simple matter to conclude that all the investment has now been amortized, no interest charges remain to be applied, and the Canal has now become a highly profitable commercial enterprise. The facts, as we have clearly shown, lead to exactly the opposite conclusion. I thank you very much, Mr. Chairman, for your patient attention to the statements which I have presented, both the direct statement and this statement in rebuttal of the presentation by Mr. Bailey. Mr. THOMPSON. All right, gentlemen. If it is agreeable with all of you we would like to have all of you back again at 2 o'clock. (Whereupon, at 11:50 a. m. the subcommittee recessed until 2 p. m. of the same day.) AFTER RECESS (The subcommittee reconvened at 2 p. m., pursuant to the recess adjournment.) STATEMENT OF J. H. PARMELEE Resumed Mr. THOMPSON. Dr. Parmelee, do you have anything further to say? Mr. PARMELEE. No, Mr. Chairman. I put in all of my material this morning but I would like to raise one question. You asked while Mr. Prince was on the stand, you asked him how as an accounting proposition the so-called forgiven tolls can be included in the account. If I might offer a suggestion on that point I would say the basic table which the Governor of the Panama Canal publishes in his annual report and in his report for 1948, at page 142 is completely shown all of the expenses and revenue of the Canal for the complete period 1914 to 1948. In that statement the next to the final column shows the capital interest at 3 percent. That, of course, is a computed figure, and it seems to me that these forgiven tolls which also constitute a computed. figure, could very easily be added to and included in this statement, perhaps in a column next to the one showing the interest. In other words, as kind of a statistical proposition the forgiven tolls could very easily be worked into that table. Mr. THOMPSON. That would be purely for the information of someone with an accounting turn of mind. Mr. PARMELEE. The answer is yes, but I think it would be very helpful to the Members of Congress and this committee in arriving at a conclusion as to the actual financial results of the operation. Mr. THOMPSON. That is what I was trying to develop this morning. Suppose we should find there was a certain amount of forgiven tolls and we have that all set up in one column, at what stage of the game in our accounting practice are we going to apply those figures and make use of the totals? Mr. PARMELEE. The important and significant figure, Mr. Chairman, in my opinion is the one that appears for each year in the final column of this table which is labeled "Computed surplus.' It is a computed figure, as I pointed out a moment ago, but if this column of forgiven tolls were brought into the picture and a revised computed surplus or deficit were derived from its use the committee and the Congress and the public would know exactly what the financial returns of the operations had been in that year or any particular year on the Panama Canal. That does not mean entirely cash transactions. However, these forgiven tolls are tolls which are being charged in theory against Government vessels for the use of the Canal. The interest charge is a charge on money that has actually been put up by the citizens of the country in constructing the Canal, and that statement would constitute in my opinion a fair picture of the financial results. Mr. THOMPSON. Of course we have that now. Mr. PARMELEE. Except for this forgiven tolls item; yes. The point I am making is that the statement did carry every year in the Canal report what they called as a computed interest charge, and my suggestion is that you add a credit to the operation a computed forgiven tolls item and then the story will be complete. Mr. FUGATE. That would have to be done for each year in order to arrive at a correct total, would it not? Mr. PARMELEE. Yes, sir. Mr. FUGATE. And that would apply to each year? Mr. PARMELEE. Yes, and the figures are available in each year's report. For example, at page 43 of the 1948 report, using that as an example, you will find a very carefully worked out table showing how they arrive at the so-called forgiven totals for that year. They show it by citing the number of vessels that moved, the tonnage, the net Panama Canal tonnage, the displacement tonnage, and the approximate value of the tolls. There is the story as it appears in every year's report. Mr. THOMPSON. Well, all I was trying to figure out was at what stage of the game that set of figures including the forgiven tolls, would affect the future charges. Mr. PARMELEE. The future charges would be significant, Mr. Chairman-would be this final result of the so-called computed surplus or computed deficit as the case may be. Mr. FUGATE. Doctor, has interest been charged against the deficit each year? Mr. PARMELEE. Oh, no, Mr. Fugate. The interest charge is simply computed on the actual investment and nothing is added to the investment because of past deficits. It is simply the money actually put into the facilities, the physical facilities connected with the Canal. Mr. THOMPSON. Any questions? (No response.) Mr. THOMPSON. All right, sir. Thank you very much, doctor. Mr. THOMPSON. All right, the next witness is Mr. George W. Morgan, representing the Association of American Ship Owners. Will you come around, Mr. Morgan? FURTHER STATEMENT OF GEORGE W. MORGAN, PRESIDENT, ASSOCIATION OF AMERICAN SHIP OWNERS, NEW YORK, N. Y. Mr. MORGAN. My name is George W. Morgan. I am an attorneyat-law and am president of the Association of American Ship Owners with offices at 90 Broad Street, New York 4, N. Y., and 1713 K Street, NW., Washington 6, D. C. Our association is composed of some of the oldest and best-established American flag shipping companies engaged in both foreign and domestic trades. None of them has been subsidized under the Merchant Marine Act, 1936. Last year Brigadier General Mehaffey, then Governor of the Panama Canal, told the subcommittee of the Appropriations Committee handling the Civil Functions appropriations bill that Deficits in operating expenses which we have estimated for this year (1947) and next year (1948) are some $300,000 for this year and perhaps $600,000 for next year. He therefore recommended increases in Canal tolls, and the committee in its report on the bill adopted his suggestion and made what amounted to a similar recommendation to the President. The President on March 26, 1948, issued a proclamation increasing the rate to the full $1 authorized under the Panama Canal Act of 1937. The effective date of the rate increase has, however, been twice deferred. It is now ordered to become effective September 1, 1949. During the fiscal year 1947, in accordance with Canal accounting practices, there was a net deficit in Canal operations proper of about $322,000. But even so, the Canal had a profit of a little more than $820,000 for the year since it earned net revenue of over $1,142,000 from incidental business operations. During fiscal 1948, on the other hand, Canal operations resulted in net revenue of about $1,063,000 instead of the deficit which General Mehaffey had estimated would be "perhaps $600,000." The over-all profit for the year was more than $2,622,000. The reason for the improvement appears from the annual report of the Governor of the Panama Canal for the fiscal year 1948, which recorded an "improved showing in new revenues resulting largely from an increase of over $2,000,000 in tolls collected." It is significant, we submit, that this improvement occurred without any increase in toll rates. It resulted from a healthy increase in tolls-paying business that General Mehaffey did not foresee when he made the gloomy prediction upon which the Appropriations Committee based its recommendation for a toll rate increase. Actual experience has demonstrated that an increase in the current rate of tolls is not needed to meet operating expenses. This year Brig. Gen. F. K. Newcomer, the new Canal Governor, testified that a toll rate increase was necessary, not to cover operating costs, but to earn 3 percent on the Government's investment in the Canal. He opened his testimony before the Appropriations Subcommittee by saying, "The Panama Canal is essentially an international public utility." We do not agree with that generalization. We do not think that the Canal was ever intended to be a public utility, nor do we think it is so treated by the Government, which uses the Canal, toll-free, for ships in Government service. If it were a utility, surely the Government would pay a fair price for its use as it does for utility services such as telephone, electric power, and transportation which it purchases. It seems clear to us that the primary function of the Canal is service to the Nation as a military facility that is of vital strategic importance. Surely it is no less a military facility than the battleships, carriers, |