for 24 additional vessels of 277,000 gross tons. It is with these 179 vessels that the Merchant Marine Act is primarily concerned.

The financial condition of the subsidized lines is, generally speaking, depressing. While some of the lines appear to be in good shape, the condition of others is dubious. Some apparently have little chance of survival. The Commission has just denied the application of the Baltimore Mail Line for a permanent subsidy to replace the temporary subsidy now being paid.

The outstanding weakness of American shipping, in all categories, is its high degree of obsolescence. This is especially true of the subsidized fleet, 85 percent of which will become 20 years old within the next 5 years. The majority of vessels in this fleet were built during the war period. They will obsolesce practically as a unit. Someone must replace these vessels. With the amendments contained in this bill, we hope to enable the private operators to carry a substantial portion of this burden. The only alternative is construction for Government account. The greatest stumbling block to private construction at this time is the hesitancy of private capital with regard to shipping.

Before going into the proposed amendments, I desire to discuss briefly reasons why the United States needs a merchant marine. The principal reasons, of course, are commerce and defense. Were the world organized on a basis of perpetual peace, we might be justified in entrusting our goods to those who could carry them at the lowest rates. Unfortunately the world is not at peace, and a merchant marine of some proportions is a necessary precaution against the disruption of our trade through the withdrawal of foreign carriers. The Commission's survey found little to substantiate the claim that American vessels reduce rates or prevent discrimination. The survey did find, however, that American vessels in a trade tend to improve the service given to our goods, and that, in the final analysis, we have no other insurance against a repetition of the situation confronting us in the early part of the World War. .

It must also be pointed out that the United States is maintaining, as a defense measure, one of the largest navies in existence. That Navy would be greatly handicapped without a plentiful supply of efficient, modern merchant vessels.

The policy of the United States with regard to shipping should be, we believe, to maintain the smallest merchant fleet consonant with the needs of commerce and defense. We are now carrying about 35 percent of the cargo entering and leaving our shores. Subsidized vessels carry slightly less than half of this cargo, or 16.6 percent. It would not seem to be the part of wisdom to entrust to foreign vessels any more of our goods than they now carry.

These general facts were recognized by Congress in 1936 and were written into the Merchant Marine Act, 1936, which states, in section 101 [reading]:

It is necessary for the national defense and development of its foreign and domestic commerce that the United States shall have a merchant marine (a) sufficient to carry its domestic water-borne commerce and a substantial portion of the water-borne export and import foreign commerce of the United States and to provide shipping service on all routes essential for maintaining the flow of such domestic and foreign water-borne commerce at all times, (b) capable of serving as a naval and military auxiliary in time of war or national emergency, (c) owned and operated under the United States flag by citizens

of the United States insofar as may be practicable, and (d) composed of the best equipped, safest, and most suitable types of vessels constructed in the United States and manned with а trained and efficient citizen personnel.

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The Commission is in thorough accord with this declaration of policy. It has been forced to conclude, however, that these objectives are more likely to be achieved if certain changes are made in the present law.

The amendments recommended do not alter the basic philosophy of the act. The Commission is suggesting only such changes as are believed to be necessary to accomplish the purposes for which the act was passed. A few of the proposed amendments contained in the bill, S. 3078, are of major importance. It is these amendments which I shall undertake to discuss first.

The present law indicates that the Congress desired to preserve private ownership "insofar as practicable." The act also recognizes that the cost to the taxpayer is not to be regarded as a gratuity, but as an investment by the Government to assure the flow of its domestic and foreign water-borne commerce and the immediate availability to the Nation of an auxiliary fleet in time of trouble. However, without a successful program of ship construction, we cannot hope to have an adequate merchant marine. Of fundamental importance, therefore, is the suggestion of the Commission that the requirement of a down payment of 25 percent of the domestic construction cost be changed to 25 percent of the foreign cost. This modification is necessary if we are to get any building. Practically none of the companies is in a financial condition to meet the present requirement. Unless the down payment is reduced, there is little likelihood that the private operators will be able to build the vessels necessary for the replacement of the subsidized fleet.

The philosophy of the Merchant Marine Act, 1936, is to place American steamship operators upon a parity with their foreign competitors. In this respect the act operates unrealistically. Foreign operators can obtain new vessels in foreign yards with down payments of not more than 25 percent of the construction cost; in many cases the initial payment required is not more than 10 percent. Therefore the American flag operator, at the very beginning, is placed under a handicap not suffered by his foreign competitor, and which, in almost every case, he is unable to meet.

The requirement of an initial payment of 25 percent of the cost of the vessel to the operator is more nearly in line with the usual commercial practice with respect to purchases of both rail and truck transportation equipment.

I have no hesitancy in asserting to these committees that if any substantial portion of the subsidized fleet is to be replaced under private ownership, the requirements of the law with respect to the down payment will have to be changed.

The amendments to title VI of the act relate, for the most part, to financial provisions of the law. They are designed to improve the condition of the subsidized lines and to encourage the investment of private funds in the steamship business. Every reasonable effort should be made to attract private capital-not only the capital of those who are under some pressure to protect investments already made in shipping, but also new capital from the public. Unless we

induce new capital to come into the shipping business, ship construction by private companies will be unimpressive.

Section 606 (5) of the law now provides that if the operator's profits exceed 10 percent a year over a 5-year period, one-half of the excess is to be recaptured by the Government. Under the proposed amendment this would be changed to a 10-year period. This recommendation is based on the belief that a 10-year period is likely to cover the average business cycle in the steamship business, whereas a 5-year period may fall entirely within a period of slump or prosperity. For example, if the 5-year recapture provisions had been nade effective in 1925, the amount of recapture would have been determined by the boom-time earnings of the period from 1925 to 1930. On the other hand, the succeeding 5-year period would have coincided with depression conditions existing in this business from 1930 through 1934. As a result, the Government might have recaptured profits earned during the first period which, in accordance with sound business practice, should have been conserved to provide for disastrous losses incurred in the ensuing depression. A 10-year recapture period would have accomplished this result.

A study of the financial history of the steamship business indicates that such incidents are characteristic of the industry. Profits, while large in some instances, and in others enormous, during prosperous periods, are usually counterbalanced by equally large or enormous losses in depression years. The proposed amendment recognizes this fact and adapts the recapture provisions to the cyclical nature of the industry.

The

Two new subsections are proposed for section 607 of the act. first provision, subsection (f), is clarifying in nature and merely makes definite what we now believe to be the law, that upon the termination of any subsidy contract the reserve funds belong to the operator, except as otherwise provided in the subsidy agreement. The elimination of doubt on this point may encourage new investment in the industry.

The second provision, subsection (g), permits the operator to increase his capital or special reserve funds by depositing therein any part of the net earnings available for distribution. This is believed to be an important provision. The act now contemplates that profits up to 10 percent a year will be distributed to shareholders. In a very few cases, where the operator's working capital is adequate, such a policy may be sound. But in most instances this would not be the case in view of the urgent need for additional working capital and the inability to secure outside capital investment at this time. Consequently, most operators will have to look to earnings for replacement funds. This makes a conservative dividend policy necessary. The suggested provision encourages such a policy by permitting operators to deposit all or any part of the first 10 percent of profits in the capital reserve fund, where they could be used to finance replacements. An inducement for this policy is found in the fact that the moneys deposited in the capital reserve fund automatically escape undistributed profits and other taxes.

Section 607 (f) of the act is renumbered 607 (h), and is further clarified by the addition of a provision to the effect that earnings withdrawn from the special reserve fund shall be taxable as if earned during the year of withdrawal rather than the year when earned.

This provision will bring the act into harmony on this point and will eliminate a potential tax hazard.

The amendments also provide for the addition of a new section, to be numbered 611 (a), which is intended to protect the operator against arbitrary cancelation of his contract or default thereunder. The enactment of this provision is believed to be of paramount importance. In view of the history of merchant marine legislation in this country, there is today a lack of confidence in the stability of the Government's shipping policy. Congress might at some future time completely change its policy, refuse to appropriate moneys for subsidy payments, or even cancel the contracts in favor of some new system, thereby making the subsidy contracts worthless.

Under these circumstances, operators and investors are reluctant to risk large sums of money in construction of new vessels when the Government could at any time discontinue their operating subsidy and leave them to compete with low-cost foreign lines under impossible conditions.

We believe that the suggested legislation will afford all of the protection necessary to the industry in this respect and at the same time allow the Government complete freedom of action as to future policy. This is accomplished by the simple expedient of giving the operator permission to transfer his vessels to foreign registry if his contract is canceled without just cause or if the Government fails to perform, by reason of a change in policy or otherwise, unless such failure is cured within a specified period after it has been established and determined by judicial action. Such transfer is to be permitted only upon payment of all indebtedness to the Gov

ernment.

This will protect the investor against the danger that at some future time he may be forced to compete against low-cost foreign competitors without Government aid. At the same time, it does not tie the hands of the Government, nor does it obligate us to pay any damages. It merely assures the operator that the Government will deal fairly with him in case of a future change of policy.

Other amendments which the Commission deems of importance relate to the dealings of a contractor with affiliate or associate companies, and to the salaries of officers and employees of the contractor. The Commission, as the law now stands, is given discretion to permit a contractor to utilize the services of a wholly owned subsidiary company, provided the profits of such subsidiary shall become a part of the earnings of the contractor and be accounted for in the recapture provisions. Based upon its experience so far in administering the act, and upon its business judgment, the Commission believes that in many cases it would be in the public interest to grant the same permission where a contractor owns less than the whole of any concern supplying the services mentioned in section 803provided, of course, that such concern agrees to pay over to the operator any profits resulting from the performance of such services. On the other hand, the Commission is of the opinion that the discretion to make blanket waivers is not necessary. The proposed amendment to this section of the act will provide appropriate standards for the guidance of the Commission in granting the exemption, and, since it may be granted only upon the affirmative vote of four members of the Commission, it would seem that the interest of the Government is properly safeguarded.

The same general situation exists with respect to the provisions limiting the salaries of officers and employees of the contractor. Under the present act, such officers and employees may not receive more than $25,000 per year from a contractor. There are cases where, because of the extent and character of shipping operations carried on by the contractor, it is difficult to obtain the best executives at this salary. I should like to point out that other industries are under no such handicap. The shipping industry, as long as this provision remains unchanged, is not in a position to compete for the services of qualified executives. Since good management by qualified executives is essential to the success of any business, the Commission believes that the average investor would feel better satisfied with his company in the hands of a business leader whose services might not be obtainable for $25,000 a year. Likewise, the taxpayer's interest is safeguarded by competent management. The present provision does not really protect the Government or the inventor, if that was its purpose, because it is possible to employ any number of officials at $25,000 per year, all of whom might not be necessary to the efficient operation of the company and some of whom might be utterly incapable. The proposed amendment to section 805 (c) will, we believe, provide sufficient safeguard to accomplish the intent of Congress.

Construction costs, and amendment to permit building abroad: The provisions of the act (title V) are designed to make possible the construction of vessels in domestic yards at the same cost to the operator as if he built his ship in a foreign yard. Under certain circumstances, however, these provisions may fail to accomplish their purpose. There is a specific prohibition against granting a construction-differential subsidy of more than 50 percent of the domestic cost. Consequently, whenever foreign shipyard costs are less than half of American costs the construction-differential will be insufficient to place the American operator on a parity with his foreign competitor with respect to capital costs. It will then be cheaper to build abroad even after making allowance for the maximum construction subsidies provided by the act.

When this situation arises, there can be no new construction under the present act, because the Commission cannot pay the actual difference between domestic and foreign costs, and because the vessel is not eligible for an operating-differential subsidy if built abroad. This is a very important problem and one for which some solution must be found.

One solution would be the granting of construction-differential subsidies to whatever extent might be necessary to achieve parity. The wisdom of this procedure is doubtful, however. It would increase the burden to the National Treasury and to the taxpayer; it would grant a tariff protection of over 100 percent; it would continue the existing virtual embargo on foreign-built vessels, thereby eliminating entirely any influence of international competition upon American costs.

A less expensive and more desirable manner of meeting this problem was the one suggested in the Commission's recent economic survey; that is, to permit construction abroad in any case in which the foreign costs are less than half the American costs, registry here being required as soon as practicable, and the ship so built and registered being eligible for an operating-differential subsidy as if built here.