Mr. TAYLOR. You don't know definitely, Mr. Chairman. Under the proposal, there is nothing in there whatsoever that determines the factor of overhead or determines the factor of capital.

Senator OVERTON. Why not? Can the Commission not determine in advance and state in the advertisement for bids just what the overhead will be?

Mr. TAYLOR. I don't think that they can, for this reason, and that exactly illustrates what we have in mind in asking for the negotiation, because those factors must necessarily be discussed. They simply cannot be put up for a blind competitive bid, either in respect to the charter hire or the charterer's capital, and while the Commission has the final veto power and the decision as to what they will consider to be those two factors, they, in their equitable consideration of the successful bidder, would naturally exchange views with him or negotiate, if you want to call it that, and arrive at what they consider to be a reasonable overhead, and consider what is to be the capital.

Senator OVERTON. The 10 percent to be allowed on the charterer's capital is not subject to the negotiation? That is fixed?

Mr. TAYLOR. Take a company like the United States Lines, that has a corporate capital of $2,500,000-the Commission might, and perhaps would say, that that entire $2,500,000 of capital is not necessary for the operation of these two or three small lines, and they are not going to allow them the full 10 percent on that entire $2,500,000 capital to be deducted from the profits before they share in them. Senator OVERTON. They would allow only the capital employed in the operation?

Mr. TAYLOR. Only what they considered to be properly applicable to this particular operation.

Senator OVERTON. That would not apply to your case, because all of your capital would be employed?

Mr. TAYLOR. No, sir; it would apply to our case, because if we took these ships over, naturally we would have to increase our capital to the requisite amount to meet the capital requirements, and of course we would expect to do that. Not knowing how much capital would be necessaray for that operation, either the requirement by the Commission or ourselves, there would be no point in accumulating it before knowing how much capital would be required.

Senator OVERTON. The Commission cannot determine that item in advance and give notice to the bidders?

Mr. TAYLOR. It would be possible to do so, but I doubt whether they would undertake to do so, because they would certainly want, and I am sure they would be willing to exchange ideas with the other man and get his opinion on it too, and arrive at that figure, or those two figures, by discussion rather than by mandate, and those discussions would be in our mind, negotiations.

Senator GUFFEY. When you file your bid on your overhead, or file with them a list of the salaries, that is, you say, your shore expenses? Mr. TAYLOR. Yes, sir; that is all subject strictly to Maritime Commission order. Nothing is allowed us at all that has not been approved by them and by the Accounting Department in Washington. If our understanding is correct, the return to the Government on these lines in return for the operating-differential subsidy will neces

sarily depend upon those other two factors, as well as on the basic charter hire, and since negotiation is necessary or advisable at least. on those two factors, it seemed to us that negotiation on the third factor of the basic charter hire would also be in order. That in turn is based on our assumption that Congress has said through the shipping acts that they would prefer to have these lines operated by their present operators, those who have gone into the business and have good enough to maintain the operation up to the time of the sale or the charter.

I would like to say here that if there is anybody in the world that should be afraid of negotiation with the Maritime Commission, it should be us operators and not the Commission. I have had some experience in negotiating with them. They were charming on the one hand, and they take the shirt off your back with the other and give it to the Government. They have carried Yankee trading to the limit, and they have nothing to fear so far as we are concerned, and if it would be possible to put it all in the one basket, I would rather say that I would rather do that than take my chances with the Maritime Commission. The question of inordinate profits does not enter into this discussion at all, because under section 709 there is a definite limit placed on that 10 percent of the operative capital, and an equal division if any above that. On the other hand, there is a very definite risk involved on the part of the charterer, who has to assume that risk alone, because if there is any loss from the operation, the charterer himself and not the Commission would have to bear that.

The reason that we were not able to bid was that under present operations of the line, applying the operating differential subsidy that the Commission would allow, we could only figure that even if present results were maintained without set back over a period of 1 year, there would be at most $19,000 margin out of an operation that involves $3,500,000 of investment in the matter of expenses of the voyages.

Senator GUFFEY. What would be the gross receipts?

Mr. TAYLOR. The gross receipts and the expenses just about balance each other, $3,500,000.

Senator GUFFEY. What is your capital investment on that amount of business?

Mr. TAYLOR. On $3,500,000 the question of the amount of capital would be indeterminate. We would have to have enough of course, to pay the current bills.

Senator GUFFEY. The cash capital-how much of your own investment would there be-two or three or four million dollars?

Mr. TAYLOR. There would be no occasion for two or three or four million dollars, because I am sure that the Commission would not recognize that amount of capital as being properly employed in this operation.

Senator GUFFEY. I was trying to find out what would be the proper amount?

Mr. TAYLOR. I would think, and this is entirely again subject to negotiation-it depends largely on what the Commission thinks you should have I should think that on an operation of this size, where the charter hire if we were the successful bidder, and of course we have a $200,000 bond filed with the Commission, a bond that we

would protect their assets and pay the bills and save them harmless from any expense, but as to the result of it, there is a constant turn-over, of course, of revenues and expense, and I should think that perhaps $250,000 on the part of the charterer would be sufficient for that purpose, and perhaps as much as the Commission would allow to be considered as the capital necessarily employed. That is entirely ex parte. I have no idea what the Commission's

views are.

Senator GUFFEY. What is the total invested capital that the Government has in the eight ships, approximately?

Mr. TAYLOR. The total amount that the Government has invested in these ships

Senator GUFFEY (interposing). Is it eight or four?

Mr. TAYLOR. In the case of our two lines, it would be 12 ships that are presently employed. The capital value of that as determined by the last outright sale that the Government had made of identically the same ships under restricted trading rights such as would apply in the case of this charter, was $50,000 a ship. That would amount to about $600,000.

Senator GUFFEY. How much did those ships cost the Government originally?

Mr. TAYLOR. What they cost the Government originally in 1918 was perhaps $250 per dead-weight ton.

Senator GUFFEY. What would they cost now?

Mr. TAYLOR. To build?

Senator GUFFEY. Yes.

Mr. TAYLOR. I don't know as to this particular type. The ships that the Government is building now, the new ones, run about $2,000,000 apiece.

Senator GUFFEY. How much is that a deadweight ton?

Mr. TAYLOR. I suppose about $60.

Senator GUFFEY. It is more than that, is it not? You cannot build a ship of that type today at $60 a deadweight ton.

Mr. TAYLOR. Pardon me. About $250 a deadweight ton. Of course, if it cost the Government $250 a ton to build them, the Government holds itself out to sell them at anytime for a substantially less sum than that by applying the construction differential subsidy to them. I imagine that that reduces their sales value.

Senator GUFFEY. Of course, it would.

Mr. TAYLOR. To as much as half of that figure. But, Senators, in the chartering of a ship, the charter price cannot depend upon the cost of construction of the ship, unfortunately. It can only depend upon its utility value and its earning power in the given trade in which it is to be employed. You cannot pay any more for the chater hire, certainly, than you can realize from operating the ship, so that the intrinsic value of the property itself has very, very indirect relationship to its charter value. The charter value even in unrestricted trading, would not be fixed by the American cost of construction, but will be fixed by the going charter rates, and the fixed cost of the foreign construction.

Senator GUFFEY. In these bids which were asked, did the advertisement give you the right to buy the ships outright?

Mr. TAYLOR. Yes, sir. They were alternate bids.

'Senator GUFFEY. You could buy them or charter them? Mr. TAYLOR. Yes, sir; buy them or charter them.

Senator GUFFEY. What did it cost the Government last year to operate your two companies-the 12 ships? I mean the net loss to the Government last year?

Mr. TAYLOR. If you are willing to take the current returns as being the latest thing that we have the cost to the Government for operating the line was from the ship's operations themselves-was just about $19,000 less for the year than it would be by awarding the operating differential subsidy that they offered to award under the proposal.

Our difficulty in not being able to bid was this: Nineteen thousand dollars a year of margin based on the current results is a very, very small factor of safety, when you consider that we would have during that period, $3,500,000 put at risk in amounts of $45,000 per sailing, for 52 sailings.

Senator GUFFEY. How do you have to risk $3,500,000 if you only have $250,000 invested? I do not see how you are risking $3,500,000 in 52 sailings. You may risk the gross income of the 52 sailings, but you do not risk $3,500,000, because you have only got $250,000 of your money invested, according to your own statement. What I am trying to get at is, where the Government is coming out financially. Whether it is cheaper to charter or cheaper to give them up?

Mr. TAYLOR. I think it is cheaper for the Government to keep them. But your question is a very shrewd one, and I can understand exactly what you mean. Before we had lost the entire $3,500,000 we would have gone broke long since, there is no doubt about that. What I mean to say is that everytime you sail a ship, and this requires us to sail one every week on the one line and every 2 weeks on the other, you have to sail the ship, and you have to incur the expenses of that voyage, which we will say average about $45,000. Naturally, we are doing business, so that the entire $45,000 is not lost. You get some revenue to apply against that. I was merely using $3,500,000 as a measure of the aggregate that is put at risk in these separate voyages, which may or may not turn in a marginal profit or a marginal loss, and out of the total of $3,500,000, I merely say that $19,000 is an awfully small margin of safety, and of course involves a very definite and desperate risk.

Senator GUFFEY. Pardon me. Go ahead in your own way. I am through.

Mr. TAYLOR. Even if it were so, we would have then only $20,000 to cover the cost of our shore organization that is necessary to perform the operation-the shore organization. That is again the same salaries and the expenses and so forth that we have ashore. That comes to the amount of $160,000. We would be then, on the basis of those estimates, about $40,000 short of what is necessary to pay out the bare running expenses. Being optimists, or else we would not be in the business as long as we are in the business, we might be willing to take a chance or able to take a chance, or might be able to advise our stockholders that things look so much better-although they do not that we might be able to make up that difference, but here we have this peculiar factor, and that is that the proposal of the Commission as put out asks for bids on ships that they do not intend to use. They ask the bidders to bid on one set of ships by the

names, that are now in service, and at the same time reserving to themselves the right of substituting the newly constructed ships when they are available for service, on terms which are acceptable to themselves and in accordance with existing law, and if the charterer does not accept that substitution, he will have to pay liquidated damages in the sum of 122 percent of the subsidy that he has received to enable the operation.

Even on this basis, the liquidated damages will come to about $80,000. So that we would have $80,000 prospective liquidated damages, plus $140,000 overhead expense that is not being paid out of the estimates of the operation, and that is a total of about $220,000 apparent loss staring us in the face; and frankly, it is just a little bit too much for me to ask anybody to put their money in for that particular purpose. The particular jeopardy-and it has never happened before in any proposal-when we bid in 1937 we did not have to face that menace at least of substituting other ships than those you are bidding upon, and it is due to this fact, that as the law stands now, as we understand it, at least, it is that these newly constructed ships when they come out, that the Commission itself is bound by the act of Congress that they cannot accept a less charter hire than 5 percent of the American cost of construction, although they are willing to sell them at half of the American cost of construction. If the Commission is willing to pay the subsidy it would mean that we would have to face the contingency of paying $600,000 a year charter hire for those new ships, and that not being in the cards under any conceivable circumstances, we can only figure on the alternative, which would be to terminate the charter and pay the liquidated damages, and as I say, leave the net result nothing but a deficit.

Senator GUFFEY. Will the new ships be cheaper in operation?

Mr. TAYLOR. Very much so. Nobody knows, because they have not actually been in service, how much cheaper they will be in operation and how much more traffic they will draw, and how much they will improve the picture.

Senator GUFEY. What tonnage are the ships that they are building? Mr. TAYLOR. The cubic tonnage is about 550,000 cubic feet against from 360,000 to 420,000 cubic feet that we have in the present ships. They will be magnificent ships; they will have more earning power. Senator GUFFEY. What does it cost the Government to build that new type of ship?

Mr. TAYLOR. $2,000,000.

Senator GUFFEY. Under the present charter law, they can sell them to you at what price?

Mr. TAYLOR. They can sell them to us on the basis of the foreign cost, whatever that might be determined by them to be. I think that they can allow a subsidy against that cost of construction up to 50 percent in some cases, but it would be entirely their determination.

As I say, these new ships have everything; they are most attractive to substitute, and certainly I am all with the Commission in their desire to substitute them, and the only way we could be in the picture when that time comes, however, is that we know that