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so there again you come into a problem of accounting that I cannot tell you about offhand.

Mr. THOMPSON. That is one of the things we will have to check into.

General STEESE. The records are all available and can be made readily accessible to whoever is to interpret that phase of it. In the beginning of sanitation Panama was a pesthole, and we have made it a most healthy section. None of our big cities can compare with the health record of the Canal Zone. Malaria is a constant menace, and they have to still keep the grass cut and keep the ponds covered with oil, which is a general governmental expense. It is like police and fire protection, one of the costs of existence.

The hospitals do charge for operations; they charge a rate per day and so much for X-rays, plates, and everything of that kind. The rate is held as low as it can be, but it is revised from time to time.

Mr. THOMPSON. I have no desire to shorten this hearing, if we can call it that, but I also do not want to impose on the General. I will tell you this, that we could sit here with him all the balance of the day and he would give us the most interesting kind of information in the world about the Panama Canal and its various ramifications.

Mr. MEADE. It is a wonderful opportunity to get a good background.

Mr. FUGATE. I would say this is the foundation on which we can build.

Mr. Thompson. It certainly is. I am awfully sorry Mr. Miller did not get back, but I am going to suggest to him that he read the record.

General STEESE. As I told you, Mr. Chairman, my time is entirely at your service, and I have been living wiih this Panama Canal for 42 years. It was my first real job down there as a young engineer. I started out as a wiper on the Panama Railroad and worked up to Chief Engineer of the whole business.

Mr. FUGATE. When did you contemplate being back?

General STEESE. I sail on the French Line on the 11th of May, get back to New York about the 19th of May, and will be over here by the 25th of May. Mr. FUGATE. We might well use him again.

Mr. THOMPSON. I do not think there is any doubt about it. I wonder if you would be kind enough to let me know when you return.

General STEESE. Yes, sir. I will have that in mind. I am perfectly free here, either on the record or off the record, to answer any collateral questions that may occur to you. I am sorry time is so short, but it was totally unanticipated on my part.

Mr. THMOPSON. If there are no other questions, gentlemen, I suggest that we adjourn. We certainly do appreciate your coming here.

(Whereupon, at 12 noon, the subcommittee recessed subject to the call of the chairman.)

INVESTIGATION OF PANAMA CANAL TOLLS

WEDNESDAY, APRIL 6, 1949

HOUSE OF REPRESENTATIVES, COMMITTEE ON MERCHANT MARINE AND FISHERIES, SPECIAL SUBCOMMITTEE TO INVESTIGATE PANAMA CANAL TOLLS,

Washington, D. C. The subcommittee met, pursuant to adjournment, at 3:15 p. m., in room 308, House Office Building, Mr. Clark W. Thompson, chair-. man of the subcommittee, presiding.

Present: Messrs. Thompson, Fugate, and Miller.
Mr. THOMPSON. The committee will come to order.

In a previous informal meeting Mr. Frazer Bailey expressed his views to the committee. At the suggestion of the committee he has now written these views and they will be placed in the record at this point.

(The views expressed by Mr. Frazer Bailey were made a part of the printed record at this point.)

STATEMENT OF FRAZER BAILEY, PRESIDENT, NATIONAL FEDERATION OF

AMERICAN SHIPPING

Numerous statements at the time of the construction of the Canal and subsequently indicate that the Canal was constructed for the dual purpose of defense and commerce. Many of these statements indicated that the primary reason for construction was national defense. Notwithstanding the dual purposes of the Canal, no part of the basic expense of its construction or maintenance has been charged to defense. On the contrary, the Canal accounts included computed interest, charged in accordance with policies established by Congress, at the rate of 3 percent on the entire cost of the basic Canal. It is suggested that a reasonable charge to national defense would be the waiving of interest in the future in connection with tolls policy and that, after excluding such interest, tolls should be established at rates which would bear all proper operation and maintenance expense of the Canal for transit purposes together with all overhead properly attributable to such operation and maintenance without profit or loss to the Government or the taxpayer.

The attached statement of the results of operations in 1948 shows that if all present operating costs are offset against tolls and other revenues a basis exists at the present time for a reduction of tolls to the extent of about 20 cents per ton. Certain items of expense included under utilities and services, sanitation and civil government should properly be eliminated in establishing tolls policy, which would result in further reductions.

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STATEMENT OF GEORGE W. MORGAN, PRESIDENT, ASSOCIATION

OF AMERICAN SHIPOWNERS, NEW YORK, AND WASHINGTON, D. C.

Mr. MORGAN. My name is George W. Morgan. I am president of the Association of American Shipowners, 90 Broad Street, New York, and 1713 K Street, Washington.

Our association is composed of the principal intercoastal steamship operators and of other shipowners who are active in the foreign trades, and incident to their operations are users of the Panama Canal. We were concerned last year when the Appropriations Committee in the first instance recommended, and when the President, acting upon that recommendation, ordered an increase in the Canal tolls to the legal dollar limit. It seemed to us that there is a great deal more than we could know than we now know about the accounting of the Canal revenues and the use of the Canal authorities made of the appropriations that are made for the Canal.

One thing that does seem clear is that there is charged as an operating expense of the Canal 3 percent interest on the capital invested in the Canal, and that item of expense, which exceeds $15,000,000 a year, is expected to be borne by the American shipowners and foreign shipowners who use the Canal.

Our investigation of the subject indicates that only about 40 percent of the Canal revenues are contributed by foreign shipowners and about 60 percent by the American shipowners. If it is sound to say that the Canal was not built just as an aid to commerce, but as a — primarily if you like, or largely if you like, or to some extent, if you like-national-defense asset, then it seems that some portion of that interest charge should be charged to national defense and not against shipping, whether it be world shipping or American shipping.

It seems so me that the answers to the problem will become more readily soluble when we have a better understanding of the accounting practices. We did prepare last year a study of the Canal tolls problem which I think is not bad on the basis of the information that was available to the industry.

I have given Mr. Drewry sufficient copies so that they will be able to make available them to the subcommittee. I think the information there is a start, perhaps, in finding out the true facts of the situation. When the true facts are known I think maybe we will be able to see more clearly what the inequities are.

Mr. MILLER. You are going to file those?
Mr. DREWRY. I have already circulated them, Mr. Miller.

Mr. MORGAN. I have one copy in my pocket. This is what it looks like.

[From Shipping Survey, vol. 4, No. 4, April 1948, Association of American Ship Owners, New York 4, N. Y.]

OUR NATIONAL INVESTMENT IN THE PANAMA CANAL The Panama Canal Act of 1937 authorizes the President to set tolls at a rate not to exceed $1 per ton for laden ships and at a lesser rate for ships in ballast. Shortly after the enactment of the legislation, the rate was set at 90 cents per ton for laden ships.

On February 24, 1948, the House Committee on Appropriations recommended that toll charges should be increased to the statutory maximum. Shortly thereafter, the President proclaimed an increase in the laden rate to $1 per ton to become effective in October. Then, on April 23, 1948, the Senate Committee on Appropriations, after long and careful study, urged a review of the President's proclamation "*

* * especially in the light of the adverse effect such an increase will have on American shipping."

From the prominence given commercial tolls in the reports of the Canal's Governor one might infer that the Canal was built and has been operated for the major purpose of aiding commercial shipping. Nothing could be further from the truth. An examination of political developments at the turn of the century will convince any objective observer that the motives behind the Canal project were essentially military and political. Since that time the Canal has bestowed substantial military benefits upon the American people. Any system of accounts which charges practically the full operating cost of the Canal against commercial tolls is bound to give a distorted reflection of the Canal's true operating position.

To increase tolls at this juncture would impose an added burden on our critically pressed intercoastal industry. A good case can be made for the forgiveness of all intercoastal tolls and a reduction of the laden rate on other commercial vessels to 54 cents per ton. Certainly there is no justification for an increase in tolls.

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WHY THE CANAL WAS BUILT

At the close of the nineteenth century the foreign policy of the United States took a new turn. What had been a narrow continental policy, or at most a Western Hemisphere policy, suddenly blossomed into a two ocean policy limited only by the Asiatic shores of the Pacific. The acquisition of Hawaii, Guam, Tutuila, and the Philippines brought us closer to world empire than we had ever been before, or than many Americans were disposed to approve.

The new policy was reflected in the literature of Admiral Mahan on the importance of sea power. The strength of the Mahan hypothesis lay not so much in its scientific basis as in the number of people who believed it. Overnight America became sold on a strong navy.

Peacetime naval appropriations crossed the $100,000,000 mark per annum for the first time at the turn of the century. Shortly thereafter Congress authorized the Wyoming and Arkansas, our first battleships of more than 25,000 tons. Work on the Panama Canal under American auspices was begun in 1903. These and other developments were all part and parcel of the Mahan hypothesis.

The popular conception of the Central American Isthmus as a rugged road block to our major trade routes is vivid analogy but bad economics. Even today only 6.4 percent of our dry-cargo exports moves through the Canal. The plain truth of the matter is that commercial considerations have played a secondary role in our Canal policy of the past 50 years. Much less has our merchant marine been a significant factor in Canal decisions. In 1905, for example, our merchant fleet amounted to 1,300,000 gross tons, or 4.7 percent of the world's total. The motives for building the Canal were clearly political and military, and almost everyone who had anything to do with the Canal has openly supported this position. General Goethals, in the midst of building the Canal, made the following meaningful statement in 1911:

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