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Mr. FUGATE. Suppose we reduce the tolls from 90 to 65, reduce it 25 cents a ton. Wouldn't that increase the competition from foreignflag vessels very materially in the transporting of cargo?

Mr. BAILEY. I don't think so, Mr. Fugate.

Mr. FUGATE. It seems to me that you would put yourself relatively in a more difficult position.

Mr. BAILEY. You have the same reduction to both American and foreign shipping, and if the American shipping, under contract with the Commission to operate these lines in the foreign trade, are given an economic parity, then we are still on an economic parity. That is the way

I see it, sir. I don't think it would disturb the relativity, if that is what you mean, sir.

Mr. FUGATE. It occurs to me it might.

Mr. Bailey. If we give the same figure we are talking about to all of them, it seems to me that that maintains the status quo.

Mr. FUGATE. Let us take the other view. Suppose we increase them to the maximum of $1. All ships transiting the Canal would have to pay it, of course, under the present plan. Wouldn't that further complicate the problem of continuing American-flag ship operation, particularly with reference to intercoastal trade?

Mr. BAILEY. Well, the intercoastal trade now is a different situation. We are speaking about the difference between the toll charged on water transportation and the charges paid by the competing land services. Any reduction would be a considerable help to the waterborne domestic carrier that uses the Canal, because the competing land carrier would not have the benefit of such a reduction. So that would be relatively an advantage to him, but when we go into the foreign field, where the toll is effective on both the American shipping and the foreign competitor, then it doesn't seem to me that the relativity is disturbed. I may be wrong, but I have been unable to see where that would disturb the relativity.

Mr. FUGATE. How many of the present 67 vessels that are operaitng in the intercoastal trade are chartered?

Mr. BAILEY. The last figure I saw is about 50 of them.
Mr. FUGATE. About 50 of the 67?

Mr. BAILEY. That is right, sir. About 50 are chartered ships, the other 15, or approximately that, represent the privately owned ships that fought their way back into the trade.

Mr. FUGATE. Why does that large percentage obtain; is it because of unprofitable operations?

Mr. BAILEY. Because of unprofitable operations. The Commission, as you are aware, sir, has given them an especially low charter rate in order that they might operate at all. They lost so much money trying to operate on the full charter rate and the Commission itself lost so much money when it tried to operate for its own that in order to have any service there to serve the public, they made them an especially favorable rate, which they were authorized by law to make. By that means, we have even 65 ships in the trade.

Mr. FUGATE. Do you recall what percentage of the operation was chartered ships prior to the war?

Mr. Bailey. That was nearly all private. There wasn't any Government operation; I can't recall any. If there was any, it was unimportant, sir.

Mr. FUGATE. That is all.

Mr. THOMPSON. We have this morning a witness that I suppose is the greatest living authority, if there is anyone greater than all others, on the Panama Canal. I refer to General Steese, who is sitting over yonder.

I learned yesterday that the general was in town and asked him if he wouldn't come up and sit with us and, perhaps after he had heard our deliberations, shed some light on them.

For the benefit of those who don't know it, the general not only worked as an engineer on the construction of the Canal, but he has had much to do with the operation of it from the business end, in more recent years.

General, you have heard those who preceded you. Can you shed any light on this problem that perplexes us this morning?

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General STEESE. Well, sir, I would like to make the record clear that my intermittent service on the Canal extends over nearly 40 years, but I was terminated just 2 years ago, so that at the moment, I have not only no official connection with the Canal or any responsibility for it, but I have no other job. So that if I appear in any capacity at all, it is merely, as with the rest of you gentlemen, in the capacity of a taxpayer. One or two points came up that I might just comment on.

This question of the intercoastal shipping, which in normal times amounted to about 25 percent of the total traffic through the Canal, the total American traffic being about 40 percent, that intercoastal traffic was relieved of tolls by Congress in the first act setting up the proposed operation of the Canal after construction.

That was immediately protested by the British Embassy under the HayPauncefote Treaty, and Congress was forced to reverse itself, so that from the beginning of the Canal, American shipping has paid the same as foreign shipping, which the treaty required to correct that situation, which is not just a matter of policy set by this Government. It required a revision of the treaty, and I think I am safe in saying that inasmuch as Congress once reversed itself on it, they could hardly go back now and try to do it over again without some understanding with Great Britain. As to that situation, I have no opinion or information.

With respect to the tolls themselves, if you take the list of the tolls in any year and divide it by the number of tons actually transported, you will find that the ships do not pay 90 cents a ton for actual cargo. The 90 cents is based on their carrying capacity in Panama Canal measurement, which is 100 cubic feet to the ton, and actual freight does not average 100 cubic feet to the ton. So that the actual rate being paid today is considerably less than the 90 cents, and if you will put it up to $1, as the President's proclamation did, they would still not be paying the full dollar. There is quite a differential there between the official toll levied and the actual toll paid in tons of revenue cargo.

The capitalization of the Canal was first set up by a board in 1921, Mr. Bailey has stated. That board threw out something over $100,000,000-$136,000,000. I am merely giving round figures from

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The matter is all in the record. Something like over $100,000,000 of national defense items were thrown out, leaving the capitalization as carried in the successive reports, which were considered in the cost of the Canal as a public utility, devoted to commercial traffic, getting the ships from one ocean to the other.

When the tolls question came up again in 1936, a joint board of the Treasury Department, the General Accounting Office, a prominent civilian firm of accountants and the Panama Canal people—there may have been one or two others on the board-reviewed this whole question of capitalization, reviewed the work of the 1921 board, reviewed all the additions that had been made since then, and they found that the capitalization as it then stood was a fair charge against the commercial traffic in which the Canal was engaged. They did point out one item, which was the cost of increasing the width of the locks back in the beginning from 100 feet to 110 feet. Commercial shipping has never needed that 110 feet. That, according to Colonel Goethel's figures at the time, added 5% million dollars to the capital cost of the Canal. With the interest subsequently added, that figure today stands at between 12 and 15 million dollars, as near as I can make an offhand guess. That, however, was such a small percentage of the total capitalization that the board did not recommend its removal. That would be the first item subject to criticism in case this committee should decide to reduce the capitalization.

The capitalization figure used in the Governor's report in 1948 is substantially the same, with some small additions, as it was before the war, although there have been several hundred million dollars of additional expenditures, partly capital and partly increased expenses due to war activities, which the Governor has disregarded in setting up this interest charge. The report shows something over 700 million dollars in the job, but only 516 million or something like that is used in computing that. That is substantially correct, isn't it?

Mr. BURDICK. The present figure is 523 million.

General STEESE. That was a matter I had discussed with the Governor while I was still serving as his assistant down there some 3 years ago. Just as was done in 1936, when the smoke clears away on all this war service, we should have a board made up similar to the previous board, from outside people to review all those figures and either accept this tentative set-up or modify it according to their best judgment. Well, before the Governor reached the point to call for such a board, why, you gentlemen came along and have been ordered substantially to do that, and, of course, that is your difficult task.

Mr. THOMPSON. Well, General, we have run into a question that we never dreamed of when we were first assigned these duties. They deal with the future and what is going to happen to the Canal, how long before it will have to be materially improved, and if it reaches the saturation point, what steps should then be taken. We took the position at first that that wasn't our affair, that it was up to the expert engineers, you expert engineers, to say and also for national defense to say what part, if any, of the improvement would be in the interest of national defense solely and what would be necessary for commercial traffic. So that opened, then, this new field. We are supposed to consider the whole thing as a commercial enterprise.

Getting back to this engineering question, and I think that I am repeating the question I asked you when you were kind enough to

come up and sit with us at our first meeting, when do you think that the Canal is going to reach the saturation point?

General STEESE. The prognostication review from time to time, last reviewed about '39 or possibly '41, before we got into the war, was that the saturation point would be reached between 1960 and 1970. Of course, the war set that back undoubtedly some years. The third locks as a commercial enterprise were to be ready in time to meet that saturation point for the present Canal.

Mr. THOMPSON. That is the one that now stands with the excavation virtually completed on both the Pacific and the Atlantic sides, and is almost ready for the concrete?

General STEESE. They had the concrete contracts let when the suspension came, but they had a cancellation clause, fortunately, which let them get out pretty well.

Mr. THOMPSON. That work was hastened because of the war, wasn't it?

General STEESE. Yes, sir. That was hastened solely because of the war, and none of those expenditures are included by the Governor in his present capital set-up.

Mr. THOMPSON. If the third locks project were completed, I wonder how long it would then be before the Canal would reach the saturation point?

General ŠTEESE. The year 2,000.
Mr. BURDICK. I don't know.

General STEESE. That was not specifically covered, but what they were providing for was at least until the year 2000.

Mr. THOMPSON. The balance of this century?

General STEESE. Yes, sir, the balance of this century. The war has undoubtedly set that back, but we have this information on it. During the war, our tolls were over $25,000,000 a year; 1939 was the last normal year-something over $25,000,000. During the war, it dropped down to a little over $5,000,000. They are now back. In the last five years, they have come back to $19,000,000, which is a very, very substantial recovery. Just how fast that is going to go ahead, of course, I have no idea. I mean I have never done any work with that angle to it and I am not sufficient with the general trends. Our shipping experts ought to be able to give you some enlightenment on that, at least what their guess is. I couldn't, but it certainly has shoved it beyond 1960, 1970.

Now on the question of operating expenses, it is very simple if you just take round figures. In '39, the cost of operating the Canal was a little less than $10,000,000. We took in a little better than $25,000,000, leaving a net of a little over $15,000,000, which was not quite 3 percent. I think Mr. Burdick said it was 2.8, but it was very close to 3 percent. If now we have a cost of about $18,000,000, nearly double, with no hope of there being very much reduced, when we get back up to that $25,000,000 in tolls, we have a net of about $7,000,000, which would be about 1% percent, and I fully believe we will get to that $25,000,000 within a measurable time.

Now, as to throwing out the capitalization entirely as national defense and thereafter operating it merely at the actual cash, out-ofpocket expenses, plus something for replacements, you are then wiping out actual facts. We taxpayers have our money in that Canal, and labor being worthy of its hire, it seems as though the taxpayers should

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have something on that. If 3 percent is too great, reduce it to 2 or even 2 or something below. It would give us something. Now I am not urging that but stating that as a possible taxpayers' reaction to the proposition.

The war was, of course, won to a large extent by the industrial might of the United States. A great many cement mills, steel mills and what not fully justified themselves during the war, bụt we are not talking about giving people free steel and free cement from now on because they paid for them in the war. I mean there is some dividing line in there which is the difficult job of your committee to determine. It still comes back to you, Mr. Chairman.

Mr. THOMPSON. Yes. · Unfortunately, I can't get anybody to advise us what to do.

General STEESE. Those are roughly the high points as the previous testimony appeared to me and I am just giving you off-hand comments on it, not as an advocate, but in the interest of getting all the facts into the record.

Mr. THOMPSON. Do you remember having this same question up before in your experience, to charge off the entire capital structure? General STEESE. No, sir. That is new.

. That is new. Also, the war has exaggerated another angle. All during the construction of the Panama Canal, and in the subsequent years, we never heard anything about national defense. The Canal was purely a commercial institution. Of course, its construction was speeded up by the experience of the Oregon getting around the Horn, but it was primarily a commercial institution. We never thought of any war or anything like that. It is a great military asset, just as our railways and highways and any other utilities are, but they are self-supporting on the basis of commercial business. Also, up until World War II, the Army-Navy business was negligible, a very, very small percentage of the total business, and whether we carried them free or charged them, we kept a record of it for our own purposes as a talking point, but we never considered it any important item at all. As I say, after World War I, we in the Canal from a commercial outlook were always careful to soak the Army and the Navy for everything they got and were careful that none of it got into our capital account. We were watching that. As I say, in '21, we threw out 136 million or so.

Mr. THOMPSON. I think that all comes about from the three big war years.

General STEESE. Yes, sir.
Mr. THOMPSON. '44, '45 and '46, of course.
General STEESE. Yes. The war has distorted the whole perspec-

. tive. That free traffic is a serious item if it continues. It is quite a large item still. Of course, if you make them actually pay, it just takes it out of one pocket and puts it into the other, but it would strengthen the toll situation, both under the treaty and in fairness to our own shipping interests to include all of that free service as revenue for the purpose of determining tolls. Instead of making the commercial tolls pay the whole load, as we were doing until just before the war, include these free tolls as a basis of calculation and then adjust your interest rate to whatever seems fair, so that the shipping will get the credit in that calculation for this free business we are giving, and we would also be in a stronger position for the treaty.

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