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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.

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[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.

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:

“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 is 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 disquicting.

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

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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-PAUNCEFOTE 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 wa 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 “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

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