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INVESTIGATION OF PANAMA CANAL TOLLS

MONDAY, MAY 23, 1949

HOUSE OF REPRESENTATIVES,
COMMITTEE ON MERCHANT MARINE AND FISHERIES,
SPECIAL SUBCOMMITTEE ON PANAMA CANAL Tolls,

Washington, D.C. The subcommittee met, pursuant to notice, in the committee hearing room, 219 Old House Office Building, at 10 a. m., the Honorable Clark W. Thompson, chairman of the subcommittee, presiding.

Mr. THOMPSON. Suppose we introduce the first witness this morning, Mr. Bailey, who will identify himself for the record.

STATEMENT OF FRAZER BAILEY, PRESIDENT, NATIONAL

FEDERATION OF AMERICAN SHIPPING-Resumed

Mr. BAILEY. Mr. Chairman and gentlemen of the committee; my name is Frazer Bailey. I am president of the national Federation of Americn Shipping, who represent two-thirds of all the privately owned deep-water dry-cargo vessels under the American Hag, and approximately one-half of the tanker fleet.

On February 28 the House of Representatives passed House Resolution 44. I will not take the committee's time to read it. You gentlemen, I know, are thoroughly familiar with it. It calls for a report by June 30 on the policy that should be used in the future in establishing and maintaining the toll system at Panama.

The passage of House Resolution 44 grew out of the fact that in response to a suggestion contained in the report of the Appropriations Committee on the Army civil functions appropriation bill for the fiscal year ending June 30, 1949, in the House of Representatives there was a suggestion that Panama Canal tolls should be increased, and as the Chairman said a moment ago, the question of an increase arose due to an increase in what appear to be the operating costs in the Canal Zone.

The President, in response to a recommendation from the Department of the Army, issued a proclamation, No. 2775, on March 26, 1948, increasing the applicable tolls from 90 cents to $1 per Panama Canal net ton for laden vessels. When this appropriation bill, H. R. 5524, was before the Senate, representatives of the shipping industry and Members of the Congress appeared before the Senate Appropriations Committee and pointed out that no testimony was made available to the Appropriations Committee of the House. They further testified as to the effect of such a tolls increase upon American shipping, the lack of justification therefor, and other matters relating to this subject.

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The report of the Senate committee, No. 1167, of April 23, 1948, contained the following statement on the subject:

Shortly after the committee hearings, and prior to its publication, the committee was advised that the Department of the Army submitted to the Chief Executive a proclamation, which was signed by the Chief Executive, increasing Panama Canal tolls for laden vessels from 90 cents to $1 per ton, to become effective October 1, 1948.

In view of the additional information and evidence on this matter developed at the committee's hearings, which was not available to the House committee, the committee strongly urges that the proclamation increasing the Panama Canal tolls be reviewed, especially in the light of the adverse effect such an increase will have on American shipping.

On September 8, 1948, the President issued a proclamation in which he deferred the effective date of the toll increase previously authorized until April 1, 1949, and on March 14, 1949, the President again postponed the effective date of such a proposed increase in Panama Canal tolls by a similar proclamation until September 1, 1949.

In the President's proclamation on this subject he stated:

Whereas, by House Resolution 44 of the Eighty-first Congress adopted February 28, 1949, the Committee on Merchant Marine and Fisheries

(1) is authorized to make a full and complete study and analysis of the financial operation of the Panama Canal, and to recommend to the Congress concerning what elements of cost should be properly used in the future as the basis of a policy to be followed in establishing and levying tolls for the use of the Panama Canal for transit purposes; and

(2) is directed to report its findings, together with its recommendations for such legislation as it may deem advisable to the House at the earliest practicable date, but not later than June 1949; and

Whereas the President is requested by said resolution to defer until after submission of the committee's report any change in tolls currently levied for the use of the Panama Canal; and

Whereas it appears consistent with the public interest to postpone the effective date of the said Proclamation No. 2775 until September 1, 1949, so as to permit continuance of the present tolls until the Congress shall have had adequate opportunity for consideration of the committee's report.

The Federation greatly appreciates the opportunity of appearing before

your committee to suggest what in its opinion would constitute a fair and equitable basis or policy to be followed in the future in establishing and levying tolls for the use of the Panama Canal for transit purposes.

My presentation is confined to the operation of the Canal as it presently exists.

The shipping interests which we represent believe that the Panama Canal should be placed upon a pay-as-you-go basis, after full consideration of its military and its commercial characteristics.

We do not believe that the American taxpayer should be called upon to provide funds for the operation of the Panama Canal for transit purposes. We believe the Canal should be self-sustaining from its toll receipts as to all expenses incurred in its operation for transit purposes.

For the reasons we will show, we believe there should be a recognition of the military value of the Canal in such a toll policy, and thereafter it should operate without profit and without loss.

We respectfully suggest to your committee for its consideration the following fundamental principles as a basis for a future toll policy of the Panama Canal:

(a) Recognizing that the Canal is a dual-purpose establishment for national defense and for commercial transits, and that no part of the cost of its construction or of its operation has heretofore been charged to national defense, we suggest that in the future the minimum contribution which may be equitably made on account of its national defense characteristics is that there should be no further charge for interest on capital provided for its construction or improvement by the United States Government.

(6) The future toll schedule at Panama should reflect rates sufficient to pay all operating expenses properly allocable to transit operation, including maintenance, depreciation of all expendable parts, and a proper charge for the expense of providing all facilities and services necessary to the operation of the Canal and for its employees and for their families.

(c) There should be no preference or exemption to toll computation for ships, but all ships of all types, commercial and military, of all nationalities, should be treated equally.

(d) In determining the allocation of expenses for multiple-purpose services, functions or facilities, such allocation to be upon the basis of one arbitrary one-half thereforfor some other logical division, such multiple services and facilities to include school, police, fire, physical education, libraries, license bureaus, civil affairs, hospitals, clinics, sanitation, highways, sewers, public buildings and grounds, office of paymaster and collector, accounting offices, offices in the United States, personnel administration, office of general counsel, and general correspondence and records, such arbitrary allocation being assumed to represent that portion of the services necessarily a part of the Canal operation and of its employees and their dependents as compared with the military and civil personnel who similarly use these services and these facilities.

The expenses of air terminals, post offices, quarantine and immigration, and cemeteries not to be charged against the operation of the Canal. We think it is obvious that they are public facilities furnished by all communities.

Any business functions operated by Canal personnel which perform at a profit to be credited against the operating expenses of the Canal in order to reach a net expense item.

(e) The rental charge paid to the Republic of Panama for the area represented by the Canal Zone, in an amount of $430,000 per year, should be allocated on the basis of the areas utilized for military purposes, for Canal purposes, and for other purposes.

The Panama Canal Zone is an area extending 5 miles on both sides of the Canal between the Atlantic and the Pacific. The land area is 372 square miles. It is used in part, 95 square miles, for defense installations of the Army, Navy, and Air Force, and 13.6 square miles for the operation of the Canal and ancillary activities. The remaining land is cither assigned to cattle pastures, commercial licensees, forest preserves, swamps, and so forth.

The 10-year period preceding the granting of authority for the construction of the Canal witnesses difficulties with Great Britain over the Venezuela-British Guiana boundary, the dispute with Germany over Venezuelan debts, the Spanish-American War, the race of the battle

ship Oregon around Cape Horn, the long voyage of Dewey out to Manila, and the Boxer Rebellion, as well as strained relations with Japan over immigration. In each of these critical periods, the United States Navy was divided between the Atlantic and Pacific stations, and lack of a canal at Panama rendered any naval force behind Panama in each instance of little immediate value.

Considerations of this sort led Theodore Roosevelt to say in his message to Congress on January 4, 1904:

Long acknowledged to be essential to our commercial development, it has beoome as a result of the recent extension of our territorial dominion more than ever essential to our national defense. In the light of our present situation, the establishment of easy and speedy communication by sea presents itself not simply as something to be desired but as an object to be positively and promptly attained. Reasons of convenience have been superseded by reasons of vital necessity.

That is President Teddy.

Numerous statements made by the Canal authorities the time of the construction of the Canal and subsequently show that national defense considerations provided a major justification for the construction of the Canal. Colonel Harry Burgess, former Governor of the Canal Zone, writing in the Military Engineer of July and August, 1929, said:

The French company failed disastrously in executing the project. These facts being known, it seems improbable that the United States would have decided on the construction of the Canal solely from commercial considerations. The deciding factor was the value of the Canal as an element of national defense.

And General Goethals said in 1911:

Assuming that the Panama Canal is a military necessity of the United States, I naturally take the military point of view that it is for the use of the fleet. I have always felt that the cost of building the Canal should be charged off the books as against the military defenses of the Union.

And in 1929 Governor Burgess said:

In other words, for the United States to obtain without a Canal the naval power, national safety insurance equal to that of the present fleet with the Canal, would require an increase of the naval force by 50 or 60 percent, with an increase in annual cost of about 40 percent. The naval expenditures in the fiscal year 1928 were about $320,000,000, and it would be fair to evaluate the defense insurance of the Canal at at least $120,000,000 per year.

It is interesting that at this point the naval appropriation in 1928 was $320,000,000. Today it is a little less than one-third of $15,000,000,000. So the dollar value apparently goes up.

Experience has borne out the wisdom of the Canal's construction as a defense facility. In his report the Governor of the Canal in 1947 wrote:

Based on the volume of military traffic that transited the Panama Canal during the war years an approximation has been made by the military of the monetary saving that has accrued to the United States from its use.

This saving, which is estimated to be 172 billion dollars, is in shipping costs only, and does not represent the lives and materials that were saved by shortening of the war.

Now, concerning the financial operation of the Canal, the Governor General said in his report to Congress in 1947:

During the period from 1914 to 1947, tolls and other revenues amounting to $587,000,000 were deposited in the Treasury of the United States, while the net appropriation expense for the same period was $315,900,000. If tolls at the prescribed rates had been paid on tolls-free vessels of the United States, it is estimated that the additional revenue would have amounted to not less than $64,000,000. Thus

he says

the Panama Canal has returned to the United States in money or in free services the entire cost of maintenance and operation since its completion, and in addition all but $74,000,000 of the interest at 31 percent annually on the net capital investment.

In 1947, appearing before the Appropriations Committee of the House of Representatives, the Governor General said:

The Canal is a great international public utility serving the maritime commerce of the world. From its opening in 1914 to 1946 its revenues had been sufficient to pay all costs of operation and maintenance, including the costs of sanitation and civil government, and in addition the return of approximately 2 percent of the net capital investment. These figures disregard the value of the Canal to national defense. It is safe to say that the services rendered by the Canal to the recent war effort were more than enough to repay the entire cost of maintenance and operation, but because of the revenues of the Canal as a commercial enterprise its cost as an adjunct to the national defense has been negligible.

The total investment of the United States in the construction and improvement of the Panama Canal to date amounts to approximately $500,000,000 so far as can be ascertained by published Government accounts. This figure appears to include interest payments, or accruals, of more than $100,000,000 during the period of construction, which were capitalized, and further very substantial payments made by the Department of State to the Republic of Panama in the period 1914 to 1920 under the Hay-Bunau-Varilla treaty. This is the treaty under which the United States concession to build the Panama Canal was obtained from the Republic of Panama.

There is some question concerning whether the capital account of the Panama Canal does or does not also include certain military expenses connected with its defense during World War I.

We think it is interesting to review other canals and waterway policies. The Panama Canal is not the only canal project for the transit of vessels which has been constructed and is being operated by the United States Government. Without going into the question of maintenance of harbors and rivers and other navigable waters there may be cited as representing substantial investment by the United States in canal projects for vessel transit purposes the attached list of canals built and maintained by the United States, the aggregate cost of which, it is noted, is in excess of $208,000,000. We will put that in the record, Mr. Chairman, with your permission. It includes the Cape Cod Canal, Soo Canal, and many others.

Mr. THOMPSON. Very well. (Tabulation of chief Federal canals in the United States follows:)

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