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Board was directed "in the administration of the shipping laws (to) keep always in view this purpose and object as the primary end to be obtained ", but holds this is a mere declaration of policy on the part of Congress and is not a carte blanche authority to disregard established law controlling the conduct of the public business. He emphasizes, however, the provisions of section 5 of that act which authorizes the sale of vessels consistent with good business methods, and the objects and purposes to be attained by the act, at public or private competitive sale, after appraisement and due advertisement, and is apparently of the opinion that when the old United States Lines, Inc., defaulted in 1931 the Shipping Board should have repossessed the vessels and sold them pursuant to the provisions of section 5.

The Shipping Board did not own the vessel when it made the October 30, 1931 agreement, and that agreement did not cover the sale of the vessels from the Board to the United States Lines Co. of Nevada. This company purchased the vessels from the United States Lines, Inc., of Delaware. The Shipping Board only consented to the sale of the vessels upon the conditions set forth in that agreement. The Board held the notes given by the old company to evidence the deferred payment of the purchase price of the vessels, and a mortgage on the vessels to secure the payment of the notes which the Board agreed to surrender under certain conditions for a note and mortgage in a lesser amount from the new company. The effect of the Board's action under the October 30, 1931 agreement was to sell notes of face value in excess of $8,000,000 for $3,170,000 and other considerations.

The Comptroller General conspicuously omits any reference to the provisions of section 7 of the Merchant Marine Act, 1920, which directed the Shipping Board to determine what steamship lines should be established and put in operation, and to sell the vessels comprising such lines to responsible citizens who agree to establish and maintain such lines upon such terms and conditions as the Board may deem just and necessary to secure and maintain the service desired. This section relates specifically to the sale of lines, and the United States Lines was sold in 1929 pursuant to the provisions of this section. He also omits reference to several pertinent directions contained in section 1 of the 1920 act. That part quoted by the Comptroller General "in the administration of the shipping laws (to) keep always in view this purpose and object as the primary end to be obtained" is not the only direction contained in section 1. The complete directions are:

66 * * * insofar as may not be inconsistent with the express provisions of this act, the United States Shipping Board shall, in the disposition of vessels and shipping property as hereinafter provided, in the making of rules and regulations, and in the administration of the shipping laws keep always in view this purpose and object as the primary end to be obtained."

66

Neither is section 13 of the 1920 act mentioned. This section provides: That the board is further authorized to sell all property other than vessels transferred to it under section 4 upon such terms and conditions as the board may determine and prescribe."

Notes and mortgages are property other than vessels. It is not claimed that the disposition by the Board of the notes and mortgage covered by the October 30, 1931 agreement was inconsistent with any express provision of the Merchant Marine Act, 1920. This act delegated wide discretionary powers to the Board to accomplish the declared purposes of the act, and an examination of all the facts and circumstances surrounding the October 30, 1931 agreement does not warrant the conclusion that the Board abused that discretion in the disposition of the notes and mortgages given by the United States Lines, Inc.

The Comptroller General insists that the reduction in price of over $5,000,000 in the agreement of October 30, 1931 constituted a subsidy of more than $600,000 a year for the continued operation of the Leviathan during a 5-year period with a certain number of voyages per year, and that the United States Lines Co. is obligated to construct or acquire two vessels under one of its mail contracts, and the agreement, therefore, on the part of the company to pay the Government $500,000 and to construct a new vessel of the ManhattanWashington type as contained in the March 18, 1935 agreement, is not a real consideration, and that agreement is also prejudicial to the interests of the United States. It would seem that a contract is either valid or invalid and it is difficult for me to understand how the Comptroller General can at the same time treat a contract as valid for certain purposes and invalid for cer

tain other purposes. If the October 30, 1931 agreement is invalid, the United States Lines Co. of Nevada is not obligated to operate the Leviathan or the other vessels covered by that contract any number of voyages or to pay liquidated damages for failure to do so. How then does the supplemental agreement of March 18, 1935, which permits the lay-up of the Leviathan further surrender the rights of the United States as claimed by the Comptroller General if the contract requiring the company to operate the Leviathan is invalid? His whole computation of damages in the gross amount of $2,220,000 rests solely on his interpretation of provisions found only in the October 30, 1931 agreement.

The Comptroller General states in the third paragraph from the end of his letter that " your committee will note from the enclosed copies of said agreement that liquidated damages continued to run during the nonoperation of the Leviathan ", and that there thus accrued a total of $2,220,000 in successive years. I cannot understand how a responsible official, be he lawyer or layman, can persist in such a statement. The agreement speaks for itself and is unambiguous to the contrary. For convenient reference I attach to this letter as exhibit A a copy of article 11 of that agreement.

Neither can I understand the Comptroller General's position that the writeoff of over $5,000,000 on the ship sale notes covered by the October 30, 1931, agreement is in effect a subsidy to the company and if not a subsidy for the operation of the Leviathan, there is unquestionably additional reason why the United States Lines Co. should be required to pay to the United States the $5,286,500 which the Shipping Board assumed to write off in that agreement. The United States Lines Co. was under no obligation to perform any part of the agreements undertaken by the United States Lines, Inc., of Delaware prior to the October 30, 1931, agreement. The new company acquired the assets of the old company upon a competitive basis and agreed with the Shipping Board to perform certain of the agreements undertaken by the old company. The Comptroller General in his letter of March 12, 1935, stated that if the United States Lines Co. withdrew the President Roosevelt and President Harding from operation on ocean-mail route no. 43 for operation on ocean-mail route no. 44, it would be required to construct a new vessel under article 10 of the October 30, 1931, agreement. That contract contains no such requirement. He states, however, in his letter of July 6, 1935, that the company would be required under its mail contracts to either acquire or construct two vessels for operation on ocean-mail route no. 43 if the President Roosevelt and the President Harding were withdrawn from that route. While it is not within my province to interpret the ocean-mail contracts, it is clearly not my understanding that the company had an obligation under any contract with the Government to construct a new vessel prior to the March 18, 1935, agreement.

As you know, the agreement of March 18, 1935, was given thorough consideration before it was made. The Government derived no pecuniary benefit from the operation of the Leviathan. It does receive a pecuniary benefit, however, under the March 18, 1935, agreement. In other words, the company has made a firm agreement to pay to the United States the sum of $500,000 for the privilege of discontinuing the operation of the Leviathan, and in addition to construct a new vessel to take the place of the Leviathan. Is an agreement to pay to the United States $500,000 in lieu of performing a service which would not be of any advantage to the United States, pecuniary or otherwise, prejudicial to the interests of the United States?

I make at this time just one more comment. The Comptroller General in his letter of March 12, 1935, takes the position that all payments made by the Government in accordance with the terms of the supplemental agreement of September 16, 1932, were unauthorized, and yet he totally ignores the eight additional voyages made by the Leviathan between September 16, 1932, and May 1933. If that contract was unauthorized, then the five of those voyages which were made during the contract year 1933 would necessarily have to be credited under the original contract of October 30, 1931, and there would have been no total default in 1933. The total damages accruable, even under his view that the contract of May 5, 1933, must be ignored, would thus only be $20,000 for failure to make two voyages instead of $900,000.

Very sincerely,

J. C. PEACOCK, Director.

EXHIBIT A

EXTRACT FROM AGREEMENT OF OCTOBER 30, 1931, BETWEEN THE UNITED STATES OF AMERICA AND THE UNITED STATES LINES CO., A NEVADA CORPORATION

ART. 11. In the event that default shall be made in the operation of said vessels during the full stipulated period as provided in article 9 hereof, unless such default is caused by said excepted causes or in the event default shall be made in the maintenance of said service and the operation of said vessels, for any extension of the period as provided in article 9 hereof, or if any said vessels are operated other than as hereinbefore provided, without the prior consent of the United States Shipping Board, or if the company shall fail to complete, outfit, and equip and operate said two new vessels designated Hulls 405 and 406, respectively, as aforesaid, the company agrees that the Board will be greatly damaged and that such damages cannot be ascertained with any degree of definiteness or certainty, and in order to protect itself against such indefiniteness and uncertainty of the liability and as and for liquidated damages and not a penalty, the company covenants and agrees

(1) If default shall be made in any one year in making any one or two of the voyages hereinbefore required to be made with the Leviathan, or if default shall be made in any one year in not making more than five voyages as hereinbefore required to be made by vessels described in section 2, article 9, above, the company shall pay to the Board the sum of $10,000 as liquidated damages for every voyage so defaulted.

(2) If default shall be made in any one year in making at least five voyages by the Leviathan, or if default shall be made in any one year in making as many as 10 of the voyages hereinbefore required to be made with the vessels described in section 2 of article 9 hereof at the time or times and in the manner herein before set forth, or if any of such vessels are operated other than as hereinbefore provided, or if default shall be made by the company in completing, outfitting, and equipping, as aforesaid, said two new vessels designated Hulls 405 and 406, respectively, or if default shall be made in the payment of the amount due for principal or interest upon any of the promissory notes given by the company to the Board to evidence the deferred payments on account of said sum agreed to be paid as per article 8 hereof, at the time and in the manner set forth in said promissory notes, and the mortgage or mortgages given to secure the same, and the Board declares all the principal sum of said notes mentioned in article 6 then outstanding to be due and payable immediately, there shall be a total default, and the company shall—

(a) Forthwith pay to the Board:

(aa) The sum of $1,000,000 in case such default happens during the first year of said stipulated period.

(bb) The sum of $900,000 in case such default happens during the second year of said stipulated period.

(cc) The sum of $800,000 in case such default happens during the third year of said stipulated period.

(dd) The sum of $700,000 in case such default happens during the fourth year of said stipulated period.

(ee) The sum of $600.000 in case such default happens during the fifth year of said stipulated period.

(ff) The sum of $500.000 in case such default happens during the sixth year of said stipulated period.

(gg) The sum of $400,000 in case such default happens during the seventh year of said stipulated period.

(hh) The sum of $300,000 in case such default happens during the eighth year of said stipulated period, or for any extended period as provided in article 9 hereof: Provided, however, That there shall be deducted from any such sums to be paid pursuant to this subsection (a) of section 2 any sums which may have been paid as liquidated damages for default in making voyages pursuant to section (1) of this article 11 occurring in the year in which such total default occurs, but not otherwise; and also

(b) Forthwith surrender the actual possession of all of said vessels described in article 5 hereof in the same state and condition as when delivered to the company from the said United States Lines, Inc., ordinary wear and tear excepted, and any and all substitutes made for such vessels or any of them, and the trade name and goodwill of the United States Lines, Inc., or any other trade name under which said vessels or any of them may hereafter be operated with the consent of the United States Shipping Board and the goodwill thereof,

immediately upon the written demand of the Board and pursuant to the requirements of the preferred mortgages on said vessels hereinbefore mentioned and the Board shall be entitled to operate and sell the said vessels as more fully set forth in the said preferred mortgage, and be entitled to take proper proceedings at law, in equity, or in admiralty for the recovery of the said vessels in the event that they or any of them are not delivered as above mentioned, and also for the performance by the company of its obligations to pay the said notes and/or the said sums for liquidated damages and/or for the performance of all the covenants and stipulations referred to in the said notes, this agreement, and the preferred mortgage or mortgages made and executed to secure the same.

The company hereby authorizes and empowers the chairman of the United States Shipping Board who is now in office, or who may hereinafter be in office, and/or any acting chairman of the United States Shipping Board and/or any Commissioner of the United States Shipping oBard and/or the successors or assigns of any thereof in the name of the Board to take possession of any or all of said vessels wherever the same may be, and the company further authorizes and empowers the same individuals above named or any of them through a duly authorized attorney or in such manner as he or they may deem proper to appear in the name of the company, its successors and assigns in any court, in any country or nation of the world, in which a possessory libel or proceeding may be filed by the Board with respect to any or all of said vessels and to consent to the entering of a decree therein directing the surrender of said vessels or any of them to the said Board.

In the event of default by the North Atlantic Steamship Corporation, and/or the Trans-Atlantic Steamship Corporation, the United States Lines, Inc., P. W. Chapman & Co., Inc., and/or the company in making of payments of principal and/or interest, and/or in the performance of any of the covenants and agreements contained in the notes and/or mortgages given or to be given to secure payment of the construction loans, and the interest at the time or in the manner mentioned in said notes and/or said mortgages, or in case default shall be made in the operation of said vessels, as set forth in section 38 of the aforesaid construction loan agreements dated May 24, 1930, the Board, without limitation of any other and further rights, to which it may be entitled in the premises, shall have all the rights and remedies more fully set forth in said loan agreements, the said notes and the said mortgages executed or to be executed securing the payment of the same and the operation of said vessels as herein provided."

WASHINGTON, D. C., July 2, 1935.

Hon. ROYAL S. COPELAND,

Chairman Commerce Committee,

United States Senate.

DEAR MR. CHAIRMAN: Unfortunately I was unable to attend the meetings of the Commerce Committee during the hearings of Mr. E. Y. Mitchell, so have had to rely on reading the record of these hearings to learn of his charges against me.

There is attached to the record of his hearing of June 19, 1935, a letter making certain general charges concerning my action while a member of the former Shipping Board and the advisory committee of the Shipping Board Bureau after the Shipping Board had been abolished. This letter is dated February 4, 1935, and in its text is addressed to me, although Mr. Mitchell did not do me the honor of sending me a copy or in any way informing me of his charges. In like manner, I knew nothing of his stated efforts to force me out of office until I read it in the newspapers and in the record of the committee. His charges are evidently the result of a careful search of the record of my actions on both the Board and advisory committee over a long period, and as I am without facilities to search these old files and records, it is not possible for me to reply in as great detail as I could have done had I known of the complaints at the time they were made. It is difficult for me to understand the failure to have informed me of these charges contained in a letter dated as far back as February 4, 1935. In the interest of square dealing and fair administration, it would seem to have been the natural thing for him to have given me a copy of his charges in order that I might defend myself when facilities for such were available to me.

A large number of the charges may be grouped under two general headings, those to do with lump-sum operating agreements and those concerning the transfer of the United States Lines to the present owners. The enclosed memorandum has been prepared from memory and from reference to the few files I have available, but it covers the questions involved in more detail than is possible in this letter.

The transfer of the United States Lines from the Chapman interests to the group now in control was initiated by Mr. Chapman himself. The action of the Board in directing me to accompany Chairman O'Connor to New York and endeavor to interest other shipping interests in the line was taken upon receipt of the letter dated July 6, 1931, from P. W. Chapman, mentioned in attached memorandum. This letter informed the Board of his inability to continue the operation or complete the Manhattan and Washington then on the stocks. This placed before the Board an acute situation from every standpoint, with the alternative of abandoning the line or seizing the ships and attempting to operate it by the Government with obsolete vessels.

Another and even more urgent situation was the completion of the two new vessels Manhattan and Washington, which were both on the ways. Arresting construction on these ships at that time would have thrown several thousand man out of employment and would also have seriously involved the solvency of the New York Shipbuilding Co. This at a time (July 1931) when the question of unemployment was most acute. The law did not permit a construction loan greater than 75 percent of the cost of building, and this was not sufficient to complete the vessels.

The lump-sum operating agreement was adopted in an effort to place the operating managers in a more responsible position, and thus better equip them to become owners as well as operators, and at the same time save the Government in operating cost and overhead by a drastic reduction in personnel employed by the Fleet Corporation. While the agreement was found to be faulty in some particulars, it is believed to be far preferable to the agreement it replaced, and the result has been a great saving to the Government.

The old agreement required a duplication by the Fleet Corporation of the staff of the managing operator and the employment by the Government of an expensive auditing force. On the other hand, the lump sum is in the nature of a bare boat charter, a form of agreement between owner and operator tested by long experience in the shipping industry.

I believe that one of the reasons for opposition to this agreement was the fact that it would eliminate many of the jobs in the Fleet Corporation, especially in the auditing branch, and it is natural that the employees affected would oppose such a proposition.

As to the legality of my acts in voting on different questions before the Shipping Board, I always consulted and advised with the general counsel and believe that this is the correct way to obtain responsible advice. On all important questions, written opinions were obtained from the general counsel, and it is to be regretted that Mr. Mitchell's search of the records of my actions did not disclose these opinions.

Secretary Roper has disposed of Mr. Mitchell's estimate that his activities forced my resignation, which was tendered of my own free will at a time when I knew nothing of his charges.

It is requested that this letter and the enclosed memorandum be made a part of the record of the hearing.

Sincerely yours,

H. I. CONE.

MEMORANDUM COMMENTING ON CHARGES OF E. Y. MITCHELL, DATED

FEBRUARY 4, 1935

To properly consider some of the criticisms which have been recently leveled at the Shipping Board, its subsidiary, the Merchant Fleet Corporation, and its personnel, in the administration of the affairs of the Government, and to properly appraise the worthiness of these criticisms, it is necessary and essential to briefly review its history and the events and causes which led to the various actions taken by the Board.

Notwithstanding mistakes of commission and errors of judgment, it will be found that the Shipping Board has been in a constant process of evolution since the days of 1919 and that it has ever constructively moved forward as the result of its experience affecting policy matters. Without such experience and

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