waged and drastic changes made in our shipping, which we must take into consideration now because we are reviewing the situation as of

now.

The question I ask specifically is: In discussing it with the present Secretary of the Army, does he have any observations?

Mr. BURDICK. The extent I could say on that, Mr. Fugate, is that he has concurred in these statements that the Governor of the Panama Canal has made, and he has written this letter to the committee, which I suggest you put in the record at this point. He has written a letter to the chairman of this committee, dated May 19, 1949, and with that he encloses a copy of a report of the study by the Governor of the Panama Canal.

(Letter submitted by Mr. Burdick follows:)

Hon. CLARK W. THOMPSON,

DEPARTMENT OF THE ARMY,

House of Representatives, Washington, D. C.

May 19, 1949.

DEAR MR. THOMPSON: Reference is made to your letter to the Secretary of Defense in which you request information relating to the Panama Canal for your use as chairman of a special subcommittee of the Merchant Marine and Fisheries Committee which has been directed to study various matters in connection with Panama Canal tolls. Your communication was referred to me by the Secretary

of Defense for reply.

At my request, the Governor of the Panama Canal has considered the inquiries contained in your letter and has submitted to me a memorandum of May 16, 1949, in response thereto. Copies of the Governor's memorandum are enclosed for your information.

Sincerely yours,

GORDON GRAY, Acting Secretary of the Army.

THE PANAMA CANAL,

Balboa Heights, C. Z., May 16, 1949.

Memorandum to Acting Secretary of the Army: Subject: Inquiry from Congressman Clark W. Thompson concerning future plans for the Panama Canal and/or alternate canals.

1. In response to your request, I submit the following comments on the letter from Congressman Clark W. Thompson to the Secretary of Defense of April 5, 1949, in which Mr. Thompson, as chairman of the special subcommittee of the Merchant Marine and Fisheries Committee, requests certain information for use in the study of Panama Canal tolls. Mr. Thompson's inquiry pertains to the military and to the engineering and operational aspects of the Canal.

2. With respect to the military point of view, I know that Mr. Thompson is aware that the report of the Governor dated November 21, 1947, prepared and submitted to the Congress pursuant to Public Law 280, Seventy-ninth Congress, first session, which recommended that the present Panama Canal be converted to a sea-level canal, was reviewed by the local military authorities in the Canal Zone, by the Department of the Army Staff, by the Navy General Board, and by a special committee of the Joint Chiefs of Staff, and that all of those reviews resulted in general concurrence in the conclusions and recommendations of the Governor's report, from the military point of view. It is my understanding that the Joint Chiefs of Staff, at the request of the Bureau of the Budget, are now considering the relative military importance of the Canal project as compared with other large projects of military significance but have not yet completed their study. In view of those circumstances, it appears to me that at this time no officials of the National Military Establishment are in a position to furnish authoritatively any information on the military aspects which would materially aid the committee in forming an estimate of the future of the Canal other than that already available to the committee in the Governor's report.

3. The questions of whether or not "the Panama Canal is now approaching the saturation point so far as traffic handling is concerned," and "if so, how soon it is expected,” involve a very complex subject and are being answered on the basis of the comprehensive studies made in connection with the investigations under Public Law 280, Seventy-ninth Congress. Those studies considered: world trade patterns and trends; commodity tonnage, sources, and traffic; the

trend of ship sizes, which has a bearing on the frequency of double lockages and resultant average number of ships per lockage; and annual, seasonal, and daily variations between average days and peak days of 60 percent above the daily average number of ships. They indicate that by about 1955 the Canal will have had to change from the present 16 hours to 24 hours per day operation. Then, about 1960, during the lock overhaul periods when one lane of a set of locks is out of service for approximately 4 months and all the traffic must be handled through the other lane, it is estimated that, even with 24-hour operation, approximately 100 vessels of the approximately 3,800 predicted for transit during the 4-month period will be delayed varying numbers of hours, but none over 1 day. Correspondingly, about 1970, approximately 370 of the 4,350 vessels predicted for transit during the 4-month overhaul period will be similarly delayed, some up to 2 days. The estimated money losses to commercial shipping due to the predicted delays are: for the period 1961 to 1970, inclusive, $5,300,000; for the period 1971 to 1980, inclusive, $203,600,000. Consequently, the studies indicate that, based on ship operating economics, the transiting capacity of the present Canal facilities will be inadequate for the traffic after 1970.

4. With respect to the practicability of increasing the capacity of the present Canal, the studies under Public Law 280 developed that, "If considerations of security and the need for transiting the largest naval vessels are disregarded, the existing Canal could be modified at an estimated cost of $130,000,000 to provide for the needs of interoceanic commerce until the year 2000." That project is presented as lock plan I in the Governor's report and could be accomplished gradually over a period of 10 to 12 years. However, the sea-level conversion was recommended by Governor Mehaffey because of the conclusion that "a sea-level canal constituted the only means of meeting adequately the future needs of interoceanic commerce and national defense and such a canal can be obtained most effectively and economically by converting the present Panama Canal to a canal at sea level." That conclusion holds good at the present time.

5. With reference to the basic problem of the committee, that is, the determination of policy with respect to tolls, and the quotation from the report of the Governor for 1936 and the extract from House Resolution 44, it appears that the committee, in drafting a tolls policy for the future, may give consideration to providing for the allocation of a part of the costs of new construction, especially for a sea-level canal, to defense purposes. That possibility presents a question which it is believed should be considered from both the military and Canal operation points of view. It would appear that, from the viewpoint of the National Military Establishment, there would be no objection, provided, of course, that direct defense appropriations are not adversely affected. From the viewpoint of the Panama Canal, I perceive no objection to allocating to national defense those costs that may be incurred in excess of those required to provide adequately for future commercial use of the Canal, since there would thus be maintained the present policy of covering by tolls the cost of operation, maintenance, and interest on the investment of the United States in the Canal as an international public utility. The financial base of the present Canal, upon which interest is computed, excludes all sums which are properly chargeable to defense, and the appropriateness of excluding costs contributory to defense in future modifications of the Canal, particularly if the modification is such that a large part of the cost is due to defense considerations, is recognized. Further, it is believed that that provision can be incorporated in the tolls policy of the Congress, even though the future of the Canal is not determinable at this time.

F. K. NEWCOMER, Governor.

Mr. FUGATE. I don't recall having seen that statement. Is there any paragraph in it you recall, Mr. Burdick, that you can point out which would deal with that question?

Mr. BURDICK. Not specifically, Mr. Fugate.

In that memorandum, they do refer to improvements in the future. They state as follows:

It would appear that, from the viewpoint of the National Military Establishment, there would be no objection, provided, of course, that direct defense appropriations are not adversely affected. From the viewpoint of the Panama Canal, I perceive no objection to allocating to national defense those costs that may be incurred in excess of those required to provide adequately for future commercial use of the Canal, since there would thus be mainteined the present policy of covering by tolls the cost of operation, maintenance, and interest on the investment of

the United States in the Canal as an international public utility. The financial base of the present Canal, upon which interest is computed, excludes all sums which are properly chargeable to defense, and the appropriateness of excluding costs contributory to defense in future modifications of the Canal, particularly if the modification is such that a large part of the cost is due to defense considerations, is recognized.

Mr. FUGATE. Do you believe that the present system of accounting is equitable, with reference to that which has been charged against the operation and the management of the Canal and that charged to national defense or for defense?

Mr. BURDICK. I believe that our accounting reflects the cost of the improvements, the cost of the investment in the Canal, and I believe. it reflects the cost of operations. Whether you consider it equitable is a question of policy, whether you want to make it self-supporting or whether you don't. It seems to me that if we render service for less than what it is costing the Government-whether we want to call is that or not-it is a subsidy, and the point we make about that is that 60 percent of the vessels using the Canal are foreign vessels, roughly about 58 percent at present-I believe it runs as high as 65 percent. So if we have $10 to give, it has always seemed to us that the $10 should be given to American vessels and not give $6 to foreign vessels for the sake of giving $4 to American vessels.

Mr. THOMPSON. Apparently our problem is going to finally resolve itself into one of deciding whether or not to recommend that the national defense investment be charged off and that we proceed on a basis of expenditures plus reserve for future improvements. The fact we have been directed to study it with the future in mind indicates to me there has been some little feeling that perhaps a new basis should be worked out. That is the reason we keep prodding into the background of it, Mr. Burdick.

Mr. BURDICK. I understand that, Mr. Chairman. I can also understand why some would want another study of it now. If we were charging still less than what we are today, we probably would be urging you to make another study. If it were based on the immediate future, we would say our tolls rate must be greatly increased in order to cover all costs, but looking at it from a long-range viewpoint, we realize it isn't necessary to have that extremely high toll rate at the present time, which would be needed to make the Canal completely self-supporting during the next year or two.

Mr. THOMPSON. Have you projected any figures to see what the effect of the increase to a dollar will have?

Mr. BURDICK. It would give us a little more than $2,000,000,000 increase in tolls and we would still be operating at a considerable deficit.

Mr. THOMPSON. How long to you expect that deficit will last? Mr. BURDICK. That is a matter of being able to predict the future traffic of the Canal, Mr. Chairman, and in my opinion, with the high operating costs, it would be many years.

Mr. FUGATE. As a matter of fact, don't you think it would extend indefinitely, the deficit, if you take the charges for interest into consideration?

Mr. BURDICK. I don't think it would extend indefinitely, no, sir. I take the same view that the Tolls Committee did in 1937. Mr. FUGATE. Have the revenues ever equaled the cost of operation?

Mr. BURDICK. The nearest it has come, I believe, since the present toll rates were set and the present rules of measurements applied was in 1939, when the amount above operating costs was 2.8 percent. That is the nearest it has come to the 3 percent.

Mr. FUGATE. Three percent on a $500,000,000 investment is $15,000,000.

Mr. BURDICK. Yes, sir.

Mr. FUGATE. And according to the report of the Governor last year, you showed, including credits given for ships that were transmitted free, about $4,000,000 before interest; is that not right? Mr. BURDICK. I think so.

Mr. FUGATE. Well, then, you ran a deficit of about $11,000,000 last year, 1948.

Mr. BURDICK. Yes, sir. Actually, it is running a little higher than that during the current year. I think your committee just got a statement from the Director of Finance this morning showing an operating deficit during 10 months of the current year of roughly $11,833,000.

Mr. FUGATE. As a matter of good business, Mr. Burdick, don't you think that any policy this committee should finally decide on ought to be one that would eliminate that continuing deficit? In other words, it certainly ought to be, by all means, pay-as-you-go. I think it ought to maintain itself definitely. You are constantly year after year running in deficit because you are charging an interest on the investment.

Mr. BURDICK. There were several years when the deficit was very, very small. Actually, in some of the very early years between 1920 and 1930, we made a little more than the costs including interest on the investment, but I still take the view that the Tolls Committee did in 1937, that you can't set toll rates on the basis of a 5- or a 10-year period. You have got to look at it from the long-range point of view. Mr. FUGATE. I think that is sound.

Mr. BURDICK. And I think with the increase in traffic which is to be expected over the next few years, that that deficit will be greatly reduced, if not eliminated. I don't think it can be eliminated if operating costs remain as high as they are without an increase in toll rates.

Mr. FUGATE. I believe, if I remember correctly, that you had 165 American intercoastal ships in 1939 as against 67 today. Instead of increasing your tolls, they are being decreased because of the number of ships operating intercoastal. Certainly that is not going to balance out with prewar shipping. Do you believe that that situation will balance itself in the near future?

Mr. BURDICK.. Well, I think that the intercoastal trade, somewhat like the rest of the trade, is dependent on world conditions, world

commerce.

Mr. FUGATE. Certainly.

Mr. BURDICK. I am certainly optimistic enough to believe that more than 20,000,000 tons will go through there in the years to come. I think that the long-range trends indicated are fairly accurate.

Mr. FUGATE. I am thoroughly in accord with your statement that no advantage should be given to foreign shipping, but, at the same time, I am thinking in terms of what we are going to do for our merchant marine.

Mr. THOMPSON. Of course, that is limited. I mean any differential there is prohibited by treaty, as I understand it.

Mr. BURDICK. Yes. We will have to give the foreign vessels the same rate that we give the Americans. That is the reason it has always been our view that we ought to find some other way of giving financial aid to American ships instead of giving more than half of it to foreign ships.

Mr. THOMPSON. Well, Mr. Burdick, I realize we have sort of put you on the spot this morning; I haven't intended to at all. I didn't ask you to make a prepared statement, but you certainly answered our questions very helpfully, and I appreciate it.

Mr. BURDICK. Well, thank you, Mr. Chairman. I am perfectly willing to do anything I can to bring information to the committee. Mr. THOMPSON. Well, you have always been very helpful.

We have Commissioner Mellen here from the Maritime Commission. We would like very much to have your views, Mr. Commissioner. STATEMENT OF HON. GRENVILLE MELLEN, VICE CHAIRMAN, MARITIME COMMISSION, WASHINGTON, D. C.

Mr. MELLEN. I regret that I was unable to attend the last hearing you had on this issue. As I explained to you at the time, with all the other matters before us and with numerous other bills and the preparation of reports on them to your whole committee, I haven't had much time to read much of the prior testimony, but I have glanced over it from time to time in the last week and have gathered the impression that Mr. Bailey, president of the National Federation of American Shipping, had touched upon a rather wide range and much historical background. In order to avoid repetition, I wouldn't seek at this time to add what may be duplicate statements.

I would like to point this out, though, Mr. Chairman, that the issue in the main as it affects the economy of the United States with respect to transportation in the United States and matters related thereto is something apart from the mere desire to obtain a reduction in the Panama Canal tolls, as that reduction might relate to all ocean commerce regardless of flag. It is understandable that business interests, whether they be American business interests or British business interests or business interests of any foreign country, in the conduct of their ships in commercial activities, of course, are desirous of having anything done that can contribute to a reduction their over-all costs of operations.

I particularly would like to focus the attention of yourself and the committee on the issue with respect to intercoastal operations. I would like to point out and emphasize that a cost resulting from an application of a toll at the Panama Canal increases the cost in our intercoastal operations-shall I say, add to numerous increases in cost in intercoastal operations. I am conscious of the fact that long historical background, running into treaties and international law, tied in with the precedents that have been established in and about the Suez Canal, have an important bearing when you are required to consider the factors and the aspects in the area of international trade, international commerce, and international shipping. But let me point out, with respect to that which we know and frequently refer to here as the domestic shipping area services, that foreign-flag