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governmental, and military vessels of the United States and foreign nations; the military activities of the United States in and connected with the Canal Zone; the United States civil government, including but not limited to sanitation, public schools, playgrounds, hospitals, and so forth; business operations conducted under the supervision of the Governor General of the Panama Cai and various business units of the Panama Canal and the Panama Railroad Company; and to recommend to the Congress concerning what elements of cost should be properly used in the future as a basis of a policy to be followed in establishing and levying tolls for the use of the Panama Canal for transit purposes.

General, I wonder if you would like to suggest to us just where we would start.

General STEESE. Well, sir, if the past policy of the Canal is to be followed, which roughly has been to capitalize the cost of the Canal as a commercial enterprise and then charge tolls that would pay the cost of maintenance and operation of the Canal as a commercial enterprise, plus 3-percent return on the capitalization set-up. I might explain that briefly, as I did to you, Mr. Chairman, on Saturday.

The Canal cost about $382,000,000 of appropriated funds. It opened for traffic in 1915, but was not officially declared open under the Panama Canal Act until 1921. World War I intervened and upset the celebration they were going to have at the formal opening.

So in 1921 a board made a study of the costs, and threw out something over $100,000,000 of what were classified as military or defense items, which made the Canal cost $382,000,000 of appropriated funds, and to that was added the interest on that money throughout the construction period, which, by 1921, amounted to $128,000,000, so the total capitalization was a little over $500,000,000.

Now, as a credit against that had been all the tolls that had accrued since 1915, and against the tolls were maintenance and operating expenses year by year subsequent to the appropriations that were made for the construction itself.

That was kept going to 1939, the last normal year of operation, during which period over 100,000 big ships had gone through the Canal and paid tolls. The military and naval traffic was very small and it went through free. There has always been a controversy about that, but it was not a large item. The Canal always kept track of it and in their own minds took credit for those tolls that it did not get, but figuring just the commercial receipts against the actual cost of operation and maintenance, as of 1939, after 25 years of successful operation the tolls aggregated over $500,000,000 by that time.

Aggregating over $500,000,000, they paid all the operating expenses throughout and left a return on the half billion of capitalization, as I recollect-these can be verified from various Government reportsof 2.85 percent interest. In that 25 years the Canal missed paying the full 3 percent by about $26,000,000, or just about 1 year's tolls.

These figures were all revised along about '36 or '37, when this same question came up about revising the toll structure. The tolls had never been satisfactory, and the matter was finally adjusted satisfactory to the Canal management, at least, in about '36 or '37. At that time a new board was organized, including a Treasury Department man, a General Accounting Office man, an internationally known accountant from one of the commercial firms of certified public accountants, and, of course, Canal representatives, and they reviewed the 1921 capitalization and agreed to make no changes. It had actually thrown out the military items, which were one of the contentions of the steamship lines who were opposing an increase in the tolls.

There was only one item that might be questioned, and that was the cost of increasing the width of the locks, which was done at the request of the Navy. The original project called for a 100-foot width, and the Navy asked that they be made 110, and that was done, and it added about $5,500,000 to the cost of the Canal, or about a 1-percent increase in the capitalization. The board reported that that did not seem worth while to upset the accounts structure, just for that one item.

The report further stated that no provision had yet been made for amortization of this investment, but that probably in the next 10 years the 3-percent requirement would have been fully met as our tolls were increasing year by year.

Mr. FUGATE. You are speaking as of 1936?

General STEESE. 1936 or 1937, yes. The 3-percent requirement, which was purely voluntary on the part of the Canal, would have been fully met. They wanted to keep their books on a commercial basis. This money all went into the United States Treasury. According to the United States Treasury the Canal has been threefourths paid out, but they have figured that nothing has been paid out and they have paid interest on that capitalization. They figured that within another 10 years the 3-percent account should have been amply met, and then the question would come up for serious consideration of adding 1 percent more to amortize the investment over the next 100 years.

I had quite a discussion with the Governor at one time when that was up in connection with some other matters, and I said, “Well, all this third locks emergency construction and the amount of extra cost you are put to for military reasons, and so forth, must be computed. As soon as this smoke clears away we are going to have to have another board to review these accounts, throw out what should be chargeable to national defense, and increase the capitalization only by the improvements that were made of value as a commercial enterprise.”

Your resolution, as I understand it, takes the place of that. We would have had to do that for our own protection, but you are making it an official matter in Congress, which of course is the ideal way to handle it. What you are doing is what we anticipated we would have to do when this war was over.

I might say that the tolls, up to 1939, for a number of years--tolls and other minor revenues-had been running about $27,000,000 a year, all of which went into the Treasury of the United States, but against which Congress had to appropriate back for maintenance and operation around 8 or 9 million dollars. That left a net to the Treasury of about $16,000,000, which was 3 percent on the $500,000,000 capitalization. We were making the 3 percent the last year or two, but we averaged over the entire period a scant 3 percent.

So that is the point we have now reached, that your resolution calls for that reappraisal of the whole situation.

To go back to your original question, Mr. Chairman, from which I seem to have gone around in a way-if that principle or if that policy

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is going to be the policy adopted or recommended by your subcommittee, then you have got to make that reappraisal of all the moneys that have been spent, throw out all the stuff that is chargeable to national defense because it was not necessary as a commercial enterprise to get the ships from one ocean to the other, and then decide what interest gives a fair return to the Government.

Those original Panama Canal bonds were issued at 2 percent. During World War I the cost to the Government was 4% percent to peddle its bonds. Recently they have been getting Treasury notes for seven-eights of 1 percent. We consider 3 percent as a fair average over that entire period. It was set at the time we were contrasting the original 2-percent bonds with the 474-percent Liberty bonds that we were all holding after World War I.

Mr. FUGATE. The entire issue covering the original construction cost is still outstanding? There have been no retirements with reference to the original cost? General STEESE. I don't know whether there are

any bonds outstanding. The Treasury actually appropriated something like $382,000,000. To that we add $128,000,000 interest, which they never appropriated, which would be half a billion dollars. Now, more than half of that money has been returned to the Treasury in tolls, but also an extra couple of hundred million dollars has been appropriated for operating expenses, so that on a cash basis, as of 1939, understandthis war stuff is all mixed up and has to be straightened out-just the cash that went out of the Treasury and the cash that went in, if you strike a balance you will find that about three-fourths of that original $382,000,000 has been returned to the Treasury in cash, but as an accounting matter we consider that that was just interest on the money and not amortization. In the Treasury, on a cash basis, they have gotten three-fourths of their money back as of 1939, and when these additional accounts are classified it will add, I believe, very little to that half billion dollar capitalization. In stead of making it 3 percent and over $100,000,000 in the hole on the basis of the 3 percent, with all this extra military cost in 3 years they did not make their operating costs, and last year they barely made their operating expenses, because the operating expenses, which used to be 8 or 9 million dollars, are now 18 or 19. That may come down a little bit as things get straightened out.

So that is a purely technical accounting proposition.

Mr. THOMPSON. Apparently that will be one of our jobs, to figure out a proper accounting method.

General STEESE. Your job is primarily an accounting job.

The United States Treasury never sets up amortization. When the money is gone it is gone, and on that basis the Treasury has gotten back about three-fourths of its original cost. On a commercial accounting basis they have gotten nothing back, but they have had almost 3 percent on the total amount, not only on what they appropriated but on the interest that accumulated during the construction program, which they never appropriated.

I do not know whether I have confused you.
Mr. THOMPSON. Not in the least.

General STEESE. There are those two standpoints, which are a technical matter for the accountants.

Mr. THOMPSON. I am very much interested in setting up some kind of recommendation that will hold for all time to come. As I gather from, I guess, previous conversations with you and some others, there will have to be some rather extensive improvements to that Canal and they should be contemplated right away. One school of thought holds that it can be done for, oh, perhaps another half billion dollars, and that includes the widening and simplifying of the lock system on the Pacific end.

General STEESE. The third locks project, of course, was to build a third set of locks merely bypassing the present locks. After further studies of that it seemed desirable that the Pedro Miguel locks be abandoned and all three locks be put at Miraflores with a high-level anchorage basin there similar to what we have at Gatun. If that were done, a large part of that, of course, would be for the benefit of commercial shipping, and would add to the capitalization.

Mr. THOMPSON. Where is the new terminal lake?

General STEESE. That is the present Miraflores Lake raised 30 feet higher. The Pedro Miguel lock would be taken out after the third lift had been put in at Miraflores. That would lift the Miraflores Lake up 30 feet.

Mr. THOMPSON. That is the one I am thinking about.

Now, whatever plan we finally recommend ought to take into consideration that the capitalization of the Canal is going to be materially increased in the next 10 years, so whatever we do should be flexible enough to take that into consideration.

Then there is the other plan, the so-called sea-level-route plan, which, as I understand it, is strictly a national defense project.

General STEESE. Yes, sir.

Mr. THOMPSON. It is not necessary to have a sea-level canal to handle the commercial traffic now or in the foreseeable future, is that correct?

General STEESE. That is correct; yes, sir.

Mr. THOMPSON. Then let me just suggest this, that if they ever go to a sea-level canal, it should be done as a national defense project, and not as a commercial canal to handle the ocean traffic.

General STEESE. Yes. In fact, the Governor, in his last recommendation of conversion to sea level states in there that all of that except a very small amount is for national defense, and should be so considered.

If you retain a lock canal, there are certain improvements that can be made to the existing locks that will shorten the overhaul period and thereby greatly increase its traffic and postpone to some extent the time at which a third lock will be absolutely required by the commercial traffic. The third lock was being built not only in anticipation of the needs for commercial traffic around 1960 and 1970, but also to get a wider lock, to give a little more margin for the fleet. That would have to be evaluated. Part of that is for commercial use and part of it is purely for the convenience of the fleet. So that would be a question of division. In your capitalization you would not want to set it all up against the steamship lines, to make the tolls pay the interest on that. That would be a question to be determined after the fact, when you have the figures in.

Now, if a couple of generations later they needed a fourth lock, that would be a mere matter of moving over and putting a fourth lock in.

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When I say a fourth lock, I mean a fourth flight of locks. We at present have two flights of locks. The third lock is a complete flight, making one more channel, It would be three lifts, but only one right-of-way.

Of course in later studies they have been planning on a two-lift lock; instead of three lifts averaging 28 feet each to get up to 85, have two 'lifts of about 42 feet. But those are engineering technical details that do not concern you at all.

Mr. FUGATE. They concern us only to the extent of their cost, do they not? If we contemplate any change in the policy, that is their concern to us?

General STEESE. The cost would have to be analyzed and divided into two parts.

Mr. FUGATE. They would concern us to that extent.

Mr. THOMPSON. That is true, but not whether it is a three-lift or a two-lift set of locks.

General STEESE. At least to the extent of setting forth your formula according to the policy that you believe should govern.

The Panama Canal is a great military asset, of course, it is like the highways and railroads of the United States, but its immediate function is to get ships from one ocean to the other, and its defense, like the defense of the railroads or the city of Washington, is an over-all governmental responsibility.

Mr. MEADE. General, is it the idea of the sea-level canal to take the place of

the present Panama Canal, or to add as an auxilitary canal? General STEESE. To replace it.

Mr. MEADE. And in the event it were built, the present canal would not be used as such for commercial purposes?

General STEESE. No. The Gatun Lake would be drained, and ships would go through at sea level. The existing canal would be maintained in operation while the conversion to sea level was taking place. That introduces a lot of difficulties, but they have been solved. Then the lake would have to be lowered. It could be lowered in stages, but the recommended project is to lower it all at once, after getting the full depth for the new canal or for the converted canal. The converted canal would utilize parts of the existing project eventually, but at the low level. Culebra Cut would be greatly deepened and greatly widened.

Mr. MEADE. But in the final analysis there would be only one canal in operation and only one canal capable of operation?

General STEESE. One canal, and that so-called sea-level canal calls for a tidal lock on the Pacific end, on account of the great disparity in tides. There is a 22-foot tide on the Pacific, and a 22-inch tide on the Atlantic, so there is a maximum difference of level of about 12 feet up one time and down again, so there would be currents running through there if it were an open waterway. There would be currents running in one direction for a while, and then reverses four times a day.

Mr. DREWRY. You would have to have at least one lock.

General STEESE. A good many engineers have figured that they could operate with an open channel. Full powered ships could stem that current. But I do not think they would want to risk some of the big battleships and aircraft carriers, and some of the underpowered warcraft. It could be used as an open canal for a considerable part of the time, especially when the tides were not excessive at certain

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