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"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 defense of the Union.

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THE RETURN ON OUR INVESTMENT

Most attempts to calculate the profit on our national investment in the Canal become loss in the maze of accounting problems. In addition to the function of transiting vessels through the Isthmus, the accounts embrace all phases of life in the Canal Zone from the hospitals at childbirth to the cemeteries at the other end of life's span. This wide range of functions is inextricably snarled up with the parallel functions for the military personnel and, while the military authorities have attempted to segregate the costs directly attributable to the Military Establishment, the record does not indicate complete success.

In spite of the accounting hurdles the fiscal records of the Canal are kept as if it were one gigantic public utility. All commercial tolls, which are the major source of revenue, are covered directly into the Treasury but, in the Canal's books, these tolls are treated as gross revenues. Annual appropriations from the Congress, which are really income to the Governor of the Canal, are, after adjustment for other income, treated as net operating expenses in the Canal's books. Then, to carry the parallel of the public utility to its ultimate end, a fictitious interest item of more than $15,000,000 per annum is charged against net income. This interest charge, which is 3 percent of the capitalized cost of the Canal during the construction period and of the subsequent capital additions, is by far the major cost item charged against commercial tolls.

One barrier to a clear understanding of the Canal's books is that only the barest of accounting abstractions are available in the annual reports of the Governor. For reasons of national security and administrative propriety, the Army has frowned upon attempts of private citizens to scrutinize the primary records. But such is not the real problem. The real problem lies in the Governor's attempt to treat the Canal as a private investment. In no real sense is the Canal a private enterprise and any attempt to force its finances into the accounting patterns of private enterprise can only befog the major issues.

Take commercial tolls as the most vivid illustration. In the Canal's accounts these tolls are treated as the basic income, but any schoolboy knows better. The real and substantial return on the Canal investment consists of the military and political benefits that the American Nation has derived from it. These benefits are both positive and negative. Since the construction of the Canal, America has fought two wars in which the Canal investment has been just as essential as the rest of our military investments and, in the truest sense, the positive military contribution of the Canal has already justified the cost to the Nation. On the negative side the Canal has made another substantial contribution in permitting a lower operating and capital expense for our Naval Establishment. It has frequently been said in military circles that the Canal has cut in half the cost of our Navy. In light of the obvious benefits of the Canal, such military overenthusiasm is pardonable and, in any event, the savings can be estimated at no less than 10 percent of our total naval budget. With annual appropriations of the Navy running in excess of $3,000,000,000, the computed annual savings would then be no less than $300,000,000. Compared with this figure, annual net operating expenses of less than $20,000,000 are small indeed.

Many attempts have been made to treat the military and commercial investments in the Canal as separable entities, but these attempts have been even less successful than the separation of the Canal costs from the costs of the Military Establishment. The extra width to the locks, the extra depth, the cost of the drydocks—these and scores of other Canal items have long been recognized as having an essentially military purpose. After the First World War the Secretary of War appointed a special commission to investigate Canal affairs and, on the recommendations of this commission, more than $100,000,000 of the investment in the Canal proper was charged off to a special account called national defense expenditures. This action was taken during a brief but lucid period in the Canal's fiscal management when it was assumed that a part of the Canal's cost should be charged to the national welfare. In subsequent years, however, the Canal's operations, contrary to even the more optimistic expectations, began to show large commercial surpluses. In 1932 the national defense charge-offs were reinstated, thus throwing back the burden of the Canal's military investment onto commercial shipping.

But, even if we should accept the absurd assumption that the entire investment in the Canal proper should be borne by commercial tolls and related enterprises, the Canal must still be rated as a partial investment success. The 1947 annual report of the Governor of the Canal shows the following results from 1914 to the end of fiscal 1947: Gross revenues: Tolls.-

$554, 800, 000 Civil revenues.

6, 900, 000 Business profits.

25, 400, 000 Total..

587, 100, 000 Net appropriation expense..

316, 000, 000 Net operating earnings--

271, 100, 000 Hypothetical interest (3 percent) on investment..

409, 500,000 Hypothetical deficit -

138, 400, 000 Note that only on the application of a hypothetical interest charge can the Canal be said to have lost money and even this hypothetical charge currently at a substantially higher rate than the 2.5-percent average cost of long-term money to the Treasury. In any case the application of the hypothetical interest charge against that part of the Canal investment of military value makes even less sense than would the application of a similar interest charge against the river and harbor projects of the Corps of Engineers, the cost of our Navy's battleships or any other construction project of our Government. If anyone had told Theodore Roosevelt or General Goethals that their Canal would be expected to yield an average commercial return of 3 percent, he would have received a practical lecture on the hard facts of our political objectives. He would be given even more direct treatment if he were to add that the transiting cost of not a single Government ship would be charged against the Canal's investment.1

Not only has the Canal been a good investment from the start, but there is nothing in the immediate outlook indicating any change for the worse. On the basis of the 1947 annual report of the Canal's Governor, his statements to the Congress and the position taken by the House Committee on Appropriations, the level of recent and prospective earnings is as follows:

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The estimated net appropriation expenses for fiscal 1948 and 1949, while they do not continue the sharply upward trend of the past several years, are reasonable approximations of the costs that may be charged against gross revenues. Net appropriation expenses have almost doubled from the prewar level, but it is profoundly to be hoped that the trend has been checked. Since so much of the Canal's expenses consists of relatively fixed capital charges, the long-term cost increase is not explainable in customary inflationary terms. Much of the cost increase appears to have been due in the first place to the wartime build-up of the Military Establishment, the overhead cost of which was added in some measure to the Canal's cost. Then, as the military tide receded, it is apparent that a still further proportion of the wartime overhead had to be absorbed by the Canal.

Whatever may be the minor errors in the earnings projection, the figures do suggest a reasonable policy that might be adopted with respect to future Canal tolls. At the outset it should be clear that commercial tolls cannot cover any hypothetical interest charge, and there is no reason why the fiction of an invest

1 According to the records of the Canal's Governor, the tolls forgiven on government ships to the end of fiscal 1947 amounted to $61.5 million.

ment return should be continued in the future. The Canal simply was not built for such a purpose. Furthermore, if a part of the future net appropriation expense should be attributed to national defense, there could be a substantial reduction in commercial tolls.

Just how the operating expenses of the Canal should be divided between commercial and national defense categories can never be determined by scientific principles. Probably the fairest way would be to make an arbitrary 50-50 split on the pragmatic ground that the Canal serves well its dual military and commercial purpose. Since the current level of net appropriation expenses is almost exactly the same as the level of revenues from commercial tolls, it follows that the tolls could be cut 40 percent and still leave a wide operating margin for contingencies.

While on this point it should also be accepted as a matter of principle that no expansion of the Isthmian facilities should be capitalized as an investment to be carried by future tolls. It is a curious but understandable fact that whenever anyone proposes some new Canal investment-a third set of locks, a sea-level route or an alternative Nicaraguan route, the shipping industry is always deeply concerned, for the industry has learned from hard experience who will be asked to bear the added investment. The Canal today is perfectly adequate for commercial needs and, through normal capital replacement should remain so. Nor is there any assurance that the annual rate of transits will ever be restored to the peak prewar level to say nothing of growth beyond that level. If it should be found necessary to expand the transiting facilities on military or political grounds, then the cost should be borne by the Treasury.

INTERCOASTAL SHIPPING

Probably the most persuasive argument for higher Panama Canal tolls is that foreign shipowners will be forced to bear a major part of the added cost. Worthy of note is the fact that in fiscal 1947 fully 51.7 percent of the commercial tolls were paid by American-flag ships. In one curious sense, the argument that foreigners will bear the additional toll cost may have real meaning. Our intercoastal shipping industry, which before the war accounted for one-fourth of all toll receipts, may be destroyed by the cumulative effects of higher Canal transiting costs together with other impending cost increases.

The plight of the domestic shipping industry has been so often repeated that we need give it only passing mention here. Before the war, there were approximately 150 vessels of 1,400,000 dead-weight tons employed in our intercoastal trade. Even then the operators of these vessels were finding it difficult to maintain their services. The records of the Maritime Commission show that in the 5-year period 1935–39 the intercoastal operators suffered an aggregate operating loss of $4,000,000 as compared with their payments of $25,000,000 in Canal tolls.

The war demanded for obvious reasons the conscription of the intercoastal vessels. These 150 vessels all had the necessary range and carrying power for overseas services. What is more, they were available for immediate transfer to our allies and to our own military authorities. At the war's end, however, most of them were gone, and worse still, the railroads had enjoyed the tremendous competitive advantage of exclusive transcontinental traffic over a 4-year period.

In order to redress the necessary wartime competitive wrongs, the Maritime Commission placed its own vessels in the intercoastal service late in 1945, employing the prewar intercoastal companies as agents. Chiefly because of a discriminatory rail rate structure, it was found that the Government ships could operate only at large losses before charging the large capital items that would be necessary on privately owned vessels. After a futile 19 months of such operations, the Maritime Commission withdrew and today there are only 60 vessels in the intercoastal service or 40 percent of the prewar number. Almost 50 of the vessels in service are chartered from the Government at special charter terms and ony 12 are privately owned. Whether the privately owned vessels are now earning money is difficult to say since they are all part of industrial enterprises and their accounts involve the familiar intracorporate intricacies. The Governmentchartered vessels, however, are losing money and the recent trend has been particularly disquieting.

There is no point in belaboring the obvious fact that we must have a substantial intercoastal fleet if our Government is to carry out its avowed policy of a large merchant marine. It is now abundantly clear that the range of United Statesflag possibilities in the foreign trades is so circumscribed that only a moderate increase in our foreign trade fleet from the prewar level is possible. To make matters worse, we can at the most hope that the domestic merchant marine may ultimately be restored to something like the prewar level, but even that limited objective will be possible only on the basis of assistance from the Federal Government. The administrative process of establishing nondiscriminatory transcontinental rail rates has been in motion for almost exactly 2 years. While there have been numerous rail rate increases, none of the action to date has been effective in eliminating transcontinental discrimination and, through the imposition of "hold-downs” on long-haul rail rates, some of the action has been harmful.

Many people have suggested Federal aid for intercoastal shipping but there have been few concrete proposals. Probably the most effective assistance could be provided through the elimination of all tolls on transits of intercoastal vessels. On the basis of existing rates, the intercoastal round voyage Canal toll for a C-3 vessel is $15,000 or almost as much as the entire monthly wage bill on a C-3 vessel, including overtime and all other supplemental payments. The forgiveness of the tolls would be a start in the direction of solving the intercoastal problem.

On one point we should, however, be clear. The forgiven tolls should be treated as Canal revenue in much the same way as some analysts treat the forgiven tolls on Government vessels. Since the object is to give assistance to a vital segment of the merchant marine, the forgiven tolls should be recognized frankly as a cost to the United States Government. They should not be allowed to act as a burden on other vessels using the Canal.

HAY-PAUNCE FOTE TREATY

Whenever anyone suggests the forgiveness of intercoastal tolls, special interests invariably cite the alleged obstacle of our Hay-Pauncefote Treaty with Great Britain. The treaty is supposed to make a specific guaranty that our intercoastal vessels will never be exempt from tolls. Through constant repetition even the originators of this canard probably believe it is so.

The Hay-Pauncefote Treaty can be fully understood only in its political background. The Clayton-Bulwer Treaty preceded the Hay-Pauncefote Treaty by 50 years and was the basic Anglo-American agreement on an Isthmian Canal. Among other things, the Clayton-Bulwer Treaty provided that neigher signatory should ever obtain "exclusive control" of the Canal or erect fortifications at or near the Canal. The march of events which made the Canal so much more strategically important for the United States than for Great Britain led inexorably to the amending Hay-Pauncefote Treaty.

After another half century, the continuity of events has left the Hay-Pauncefote Treaty as politically outmoded as was the Clayton-Bulwer Treaty in 1901. The Hay-Pauncefote Treaty, for example, provides that the United States may ticipate. It follows then that any toll concessions granted in this trade could not possibly be discriminatory to the vessels of other nations nor could the concessions in any way harm other foreign nations. Congress took the same view in passing the Panama Canal Act of 1912 which specifically exempted our intercoastal vessels from tolls. While these exemptions were rescinded in the Panama Canal Act of 1914, it is worthy of note that Congress took pains to reserve all treaty rights in future toll legislation.

maintain such military police along the Canal as may be necessary to protect it against lawlessness and disorder.” Anyone who believes that such is the purpose of our Military Establishment in the Canal Zone is not likely to be persuaded by anything else that may be found in this document. The Treaty also provides that the vessels of all nations shall be treated on the basis of equality and without discrimination. Wholly aside from the technicality of the question of exemption from tolls of United States Government vessels, the exemption of Government vessels of Panama and Colombia has never been justified by anyone over the strong protest of Great Britain.

What the Hay-Pauncefote Treaty sought to accomplish was the maintenance of certain neutrality principles as embodied in the Suez Convention of Constantinople of 1888. Indeed the relevant neutrality provisions of the Constantinople Convention were repeated in the Hay-Pauncefote Treaty. Without passing judgment on our obvious drift from these neutrality principles, one must in any case wonder why the clause allegedly referring to intercoastal shipping is in some quarters considered inviolate. The position is the more extraordinary since no such clause exists.

Article III of the Hay-Pauncefote Treaty is customarily cited as bearing on the intercoastal toll position. This article, which has been largely forgotten in a half century of vague generalizations, is as follows:

“The Canal shall be free and open to the vessels of commerce and of war of all nations observing these rules on terms of entire equality, so that there shall be no discrimination against any such nation, or its citizens or subjects in respect of the conditions or charges of traffic, or otherwise. Such conditions and charges of traffic shall be just and equitable.”

Only a strained interpretation of article III would disallow free intercoastal transits. The intercoastal movement of cargoes is exclusively an internal transportation affair in which only American-flag vessels are allowed by law to par

CONCLUSIONS

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In considering the future of Panama Canal toll policy, the following three principles may be accepted as a useful guide:

1. We should accept the obvious fact that the Canal is at least as much military as commercial. On this basis a 40-percent cut in tolls to a rate of 54 cents per ton for laden vessels would still leave a safe margin to cover commercial operating costs.

2. The Canal today is adequate to meet the needs of commercial transits. Any additional investments in the military and political national interest should be clearly earmarked so that they will not become a future burden on commercial transits.

3. Unlike other United States transportation industries, the intercoastal industry is heavily burdened with the carrying cost of a large Federal project. For reasons of equity and national self-interest, intercoastal tolls should be forgiven.

Mr. MILLER. I have one on my desk.

Mr. MORGAN. I might add this, if I may: We do suggest in there the thought that insofar as the intercoastal trades are concerned, there certainly would be no violation of any treaty if the tolls were to be forgiven. That, I think, would be one way to assist the intercoastal trade.

For a C-3 type vessel, I think the tolls on a round trip would amount to $15,000, which in the light of the competitive situation with the railroads would not be insignificant and a help.

Mr. THOMPSON. I have an idea you would get a terrific howl from the railroads.

Mr. MORGAN. Maybe there is nothing in it.

Mr. THOMPSON. I think you will find that when that had been proposed before, one of the strongest objections and perhaps the one that has moved Congress to refrain from giving free passage to intercoastal ships, is the objection that has come from the railroads.

Mr. MORGAN. Of course, there is the problem of the domestic shipping industry, which is perhaps more important than what the railroads may think about it at one moment or another.

Maybe that is not the solution. Maybe it is something else.

Mr. MILLER. In that connection, if you can supply the committeethis might not properly be in the record at this point, or as a part of your testimony-I believe we would be very much interested in a legal opinion, you might say, as to whether or not a different rate could be charged to American-owned coastwise shipping than that which is charged to seagoing foreign shipping, without violating treaty rights.

Personally, we had the impression - I think I have that the treaty left it very doubtful as to whether we would not be violating an international agreement if we made a special rate for American coastwise shipping; and if we could do it without violating international law, it is something that I think we should certainly explore, even though I would not at this time want to say I was for it or against it.

It occurs to me that there is no reason why the American taxpayer should bear the whole burden of letting a foreign ship go from one

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