1942. He reviews the transactions as referred to in the files and states:

These vessels were bought for the urgent, even critical, north Russia service. It appears from the files that none of the private operators were willing to time charter their vessels for this service. The Commission did not have sufficient vessels of its own so was compelled to purchase additional vessels." In retrospect, this appears to have been the logical time to have exercised the option under the June 8, 1940, contract, and repossess the five old vessels. A search of the files does not reveal a reason for not doing it.

The conclusion was that the five old vessels sold to Waterman should be requisitioned under that provision of the contract of June 8, 1940.

Mr. CULKIN. That memorandum was dated when?

Mr. BARGER. September 14, 1942.

Mr. CULKIN. Was not that all after the event?

Mr. BARGER. Yes; it was after the event, but I mention that in this connection, Mr. Congressman, as near as we can make out from the files the dispute arose as to the source of the fund Waterman should use in making the down payment for these new vessels they were to buy. In various places they refer to them as two vessels, and in other places it is four. The contract of June 8, 1940, calls for four, and that was the dispute referred to Mr. Carmody, as I stated a moment ago. It was July 1942, and he reported in September on the dispute.

I mention this matter here for the purpose of showing that as late as September 14, 1942, there probably had not been any agreement as to the payment of a construction subsidy on those vessels, and as I understand it even the new vessels had been taken over by the Navy Department prior to that time, and the yard as well. If I may, Mr. Chairman, I would like to offer in evidence a copy of Admiral Land's letter of October 15, 1942, addressed to the Honorable Schuyler O. Bland, chairman, the Merchant Marine and Fisheries Committee, House of Representatives, on the Comptroller's report dated August 8, 1942.

The CHAIRMAN. Without objection it may be incorporated. (The letter referred to is as follows:)

UNITED STATES MARITIME COMMISSION, Washington, October 15, 1942. Re Comptroller General's report dated August 8, 1942, relating to certain transactions between Maritime Commission and Waterman Steamship Corporation. Hon. SCHUYLER O. BLAND,

Chairman, Committee on the Merchant Marine and Fisheries,

House of Representatives.

DEAR JUDGE BLAND: This letter is in reply to your request that the Commission make a report to your committee upon the report of the Comptroller General of the United States dated August 8, 1942, and entitled as follows:

"Report of the sale by the United States Maritime Commission to Waterman Steamship Corporation of five obsolete vessels from the Commission's laid-up fleet, with option to repurchase said vessels, and the subsequent purchase from said corporation of five other similar and older vessels at greatly enhanced prices, instead of exercising said option."

The report submitted by the Comptroller General contains a number of statements as to matters of fact which are wholly or partially inaccurate, and the legal discussion therein involves important misconceptions with respect to the statutes under which the Commission operates. It is regrettable that the Comptroller General's representatives did not consult with me or the other Commis

sioners or with the responsible officials of the United States Maritime Commission with a view to ascertaining the factual situation or as to the Commission's legal powers and rights in connection with this matter, since, if this had been done, the preparation of this report would have been much simplified.

Soon after the Maritime Commission was established, it began to dispose of its vessels in a manner directed by Congress in the Merchant Marine Act, 1936, as amended. As to the regular lines previously operated by the Government and the vessels employed thereon, such lines were sold to established operators or the vessels chartered to operators who agreed to maintain regular service. The vessels then in lay-up, so far as practicable, were handled in the same manner, that is to say, they were put in condition and then sold or chartered to operators who were maintaining or agreed to maintain regular service. There were certain other vessels in the laid-up fleet which were either unsuitable as to type and size or in poor condition. These vessels were disposed of for scrap or sold alien under suitable trading restrictions.

Thereafter, there remained another class of vessels in the laid-up fleet which could be put into condition but at a cost which the Commission felt would not justify the expenditure by the Government in view of uncertain shipping conditions. Early in 1940 it was decided that these vessels should be offered on an "as is" basis. As an essential part of the consideration for the sale, the purchaser was required (a) to recondition the vessels, (b) to specify a regular service which had already been considered by the Commission to be an essential foreign trade route or which might, prior to award, qualify as such, (c) to maintain such service with the vessels, and (d) to replace the old vessels. Four of the vessels were offered on these terms to established lines under a proposal issued March 26, 1940. The Commission's proposal indicated that applications for an operating-differential subsidy and a construction-differential subsidy would be entertained, and a replacement program was made a condition of the bidding.

Upon the opening of the bids on April 17, 1940, bids were received from Ocean Dominion Steamship Co. and Waterman Steamship Corporation. The Ocean Dominion bid was considered inadequate, while Waterman did not in its bid offer to maintain regular service on an essential trade route. For this reason, the General Counsel of the Commission ruled that the Waterman bid was unresponsive to the proposal. Accordingly, both bids were rejected by the Commission.

Since no operator would undertake to maintain regular service on an established trade route with the advertised vessels, the Commission decided that it was not warranted in reconditioning the vessels at the Government's expense. This left as the only alternatives (a) abandoning all attempts to dispose of the vessels, or (b) inviting further bids upon terms which did not require an undertaking on the part of the operator to maintain regular service on an established foreign trade route. Alternative (a) was obviously undesirable in the public interest and the Commission thereupon worked out terms of a proposal which, while not requiring such regular service, would, nevertheless, put the vessels in operation as part of our merchant marine, and, at the same time, provide for their replacement with new vessels. The Commission considered it proper in this connection not to offer a construction-differential subsidy for the construction of new vessels, but it did agree to entertain applications for financial aid under section 509 of the Merchant Marine Act, 1936, which section provides for loans amounting in the case of vessels of the type proposed, to not more than 872 percent of the full domestic construction cost. This was a fair and proper basis on which to dispose of these four old vessels and one other old vessel that was included in the new proposal. In effect, the operator wanted ships; we wanted the ships in service, but in accordance with the statute and with adequate protection to the Government.

Since Waterman had submitted a bid in connection with the earlier proposal, it was thought likely that it would be a bidder in connection with a second offer, but there was a possibility that other American operators might be interested. Accordingly, a new proposal was issued on May 10, 1940, along the foregoing lines and containing two additional conditions for the protection of the Commission's interests. The first was that if any vessel was sold within 2 years from the date of award, the buyer or its affiliates would pay to the Commission 80 percent of the amount by which the selling price exceeded the sum of the purchase price plus the cost of improvements and repairs made by the buyer subsequent to delivery of the vessel but prior to its first voyage. The second condition was that the buyer agreed that "if the United States shall acquire ownership of any vessel through purchase or requisition under the provisions of section 902 of the act, after deliv

ery to the buyer, the amount to be paid to the buyer or any succeeding owner of such vessel shall in no event exceed the depreciated cost of the vessel to the buyer or such succeeding owner, or the fair and reasonable scrap value of such vessel as determined by the Commission, whichever is the greater."

This agreement with regard to the rights of the United States to acquire vessels under section 902 of the act has been rather loosely referred to as an "option to purchase" in records of the Commission which the representatives of the Comptroller General examined in connection with this matter, and the same phrase has been used by the Comptroller General in his report. As a matter of law, there was no option to purchase. The language of the agreement on this point follows rather closely that of section 802 of the Merchant Marine Act, 1936, which is not considered by the Commission to confer an unqualified option to purchase. The purpose and intent of the agreement, which was similar in scope to that of section 802 (which relates to vessels constructed with the aid of a construction-differential subsidy) was that if it became necessary, in case of emergency, pursuant to a Presidential proclamation as provided in said section 902, to requisition a particular vessel subject thereto, the price formula set forth in such special agreement would in such event govern, and that the same result would obtain if, because of a voluntary purchase arrangement, requisition proved to be unnecessary. As a practical matter, once the requisition powers of the Commission came into effect by virtue of the Presidential proclamation of an unlimited emergency of May 27, 1941, it did have the right to acquire the vessels at the agreed price, and the term "option to purchase" was not entirely inappropriate in connection with nontechnical discussions on the subject. However, the intent and spirit of the agreement obviously raised a serious question as to whether or not such power of requisition should be exercised in the absence of a general requisition for title. I mention this matter for its bearing upon the action later taken by the Commission in acquiring other vessels by way of purchase.

When the bids were opened on May 22, 1940, Waterman Steamship Corporation was the only bidder. A careful analysis of the bidding was made in order to determine how the total of the bid price and the estimated cost of repairs compared with the aggregate of the same items in connection with other sales made by the Commission. It appeared, even on the Commission's estimate of the cost of repairs, which were lower than those of Waterman, that the prices for the vessels were in line with those involved in such contemporaneous sales. (The actual cost of repairs as now reported by Waterman of $783,097.32 is close to its then estimate of $806,000.)

Since the carrying out of the replacement program was of prime importance to the Commission, it imposed several conditions to the acceptance of the award, among which were requirements that the replacement contract be entered into within 6 months rather than 1 year as contained in the proposal, that the liquidated damages for failure to carry out the replacement program be set of $550,000, and that in order to assure the due carrying out of the agreement a joint account be established, in which was to be deposited $1,500,000-$50,000 immediately and the balance in 6 equal monthly installments.

In accordance with the foregoing, the sales agreement was executed, dated as of June 8, 1940, and the sale of the five vessels to Waterman was consummated. As I read the Comptroller General's report, he does not criticize this phase of the matter except by the statement that the invitation was "framed to meet Waterman's desires," and that rejection of the Corporation's bid was recommended as inadequate. It should be observed (a) that, as shown above, the vessels were offered the second time under terms which could be met by a greater number of operators than could qualify under the terms and conditions of the earlier proposal, (b) that the spirit and intent of the law with respect to competitive bidding was fully carried out, (c) that the reference to the inadequacy of the bid is based upon the opinion of one member of the Commission's staff out of a considerable number who made recommendations to the Commission on this matter, and (d) that such dissenting recommendation was not concurred in by the Commission. The Commission has always encouraged the full expression of views by members of the staff, but the ultimate responsibility is with the Commission itself, and no proper objection lies to action by the Commission because such action is not that recommended by one or more members of the staff. After the consummation of the sale of the five old vessels to Waterman, the company proceeded to make the required deposits aggregating $1,500,000 in a joint account and entered into construction contracts with the Gulf Shipbuilding Corporation for the construction of four vessels of the modified C-2 de

sign. These contracts were entered into in November 1940 and approvals of the Commission obtained during the following 2 months. Waterman, in the meantime, had filed an application under section 509 for aid in financing the acquisition of these four vessels. This application was withdrawn when Waterman decided it did not then require Government financial aid.

In August 1941, the Commission, in furtherance of its expanded shipbuilding program, entered into contracts with Gulf Shipbuilding Corporation for the construction of 14 vessels similar to the vessels covered by the yard's contract with Waterman.

This series of Maritime Commission contracts, together with some Navy work undertaken by the yard in the interests of national defense, made it impossible for the yard to complete the construction of the last two of the foregoing vessels. Accordingly, the Commission agreed that Waterman's obligations under the sales agreement with respect to the construction of these two vessels be extended to December 31, 1944, which date was approximately 1 year after the estimated date of completion of the Maritime Commission contracts with the yard, thus enabling the Commission to carry on its own construction program without being hampered by the previous commitments of the yard, and, at the same time, insuring completion of the Waterman new construction program at the earliest practicable date thereafter.

In September 1941, Waterman initiated discussions with the Commission looking toward the disposal of certain of its old vessels with the intent of acquiring additional new tonnage. Coincident thereto, the Commission desired to obtain a number of vessels to participate in the Russian-aid program, particularly on the hazardous northern route. Discussions with the steamship companies with the object of chartering vessels for this service were unsuccessful. Their unwillingness to make such charter was based on the risks involved, the greater earnings available in other trades, and certain legal difficulties arising from the fact that the vessels had to be placed under foreign flag. The Commission was thus faced with the alternative of purchasing additional vessels or obtaining them by requisition.

The question of requisitioning the privately owned merchant marine was the subject of considerable discussion by the Commission during the summer and fall of 1941. The Commission had determined as a matter of policy that it was not yet prepared to adopt this procedure. Until general control of freight and charter rates had fully taken effect, it was considered possible that the just compensation which an owner might receive under section 902 would of necessity reflect the more lucrative employment available to American-flag vessels under then existing conditions, and that, based on these factors, such just compensation might be substantially in excess of the price at which it was felt Waterman was prepared to sell these vessels.

The original proposal of Waterman Steamship Corporation contemplated a trade-in of the old vessels under the provisions of section 510 of the Merchant Marine Act of 1936. The enactment of this section had been urged by the Commission prior to the outbreak of war and was designed to facilitate the acquisition of new tonnage by operators in domestic trades, which, at that time, were overtonnaged. Under section 510, as originally passed, the Commission was required to immobilize old tonnage obtained thereunder, but this restriction was suspended on May 14, 1940. About a year later, Congress, under Public, 101 (77th Cong., approved June 6, 1941), extended the Commission's power to purchase vessels. In view of the fact that the removal of the immobilization requirement made the value of vessels, if determined under section 510, substantially the same as if they were purchased under Public, 101, the acquisition of the vessels under the last-mentioned statute was adopted as the more convenient procedure.

While preliminary negotiations were being conducted by Waterman with the Commission, and prior to any formal action thereon, the requirements of the Russian-aid program made it imperative that additional vessels be placed in this service. As indicated above, the Commission's policy at this time was against vessel requisition. This was the only procedure whereby the specific vessels covered by the sales agreement could have been acquired by the Commission pursuant to and at the price stipulated under section 7 of that agreement. The Commission, therefore, felt free to acquire other vessels required to meet specific needs at prices fair and reasonable and in the public interest. In so doing, its rights under the sales agreement with respect to the five vessels covered thereby were not in any way affected in the event that the Commission should later determine upon their requisition.

In connection with the previous negotiations for the sale of some of these old vessels, the appraisal committee of the Commission determined the figure of $79.25 per deadweight ton as being a fair and reasonable value for the vessels, The Commission had previously placed an insurance valuation of $100 per deadweight ton on similar vessels, but it was then considering whether or not such insurance valuation should not be reduced to $75 per deadweight ton in order to avoid any question of "enhancement due to causes necessitating the taking." It was therefore decided that it would not acquire these vessels by voluntary purchase for more than $15 per deadweight to. Such figure thus represents a fair and reasonable price and excludes any element of "enhancement due to causes necessitating the taking."

Snortly after the acqu.sition of these 5 vessels pursuant to Commission action taken in November and December 1941, Waterman filed a new application under section 509 for aid in the construction of 7 new vessels. These 7 vessels were out of a total of 14 covered by the Commission's contract with the Gulf Shipbuilding Corporation, which, together with the 2 vessels under direct contract between Waterman and Gulf, would make a total of 9 new vessels.

In the course of consideration of this matter, an analysis of the financial situation of the company indicated that while the company could make the necessary down payments, it was a matter of grave doubt whether, over a period of years, the prospective earnings would be sufficient to meet amortization and interest requirements on such a large number of new vessels. Since the fall of 1941 the Commission, in the interests of national defense, had taken action toward reducing charter rates and freight rates which necessarily affected the earning power of the company during the war years. The post-war prospects were, of course, purely a matter of conjecture. In January 1942, Waterman made a proposal whereby the Commission would rely on the vessels alone for payment after 50 percent of the mortgage debt had been paid. This suggestion was presented to the Commission on February 6, 1942, and rejected. Thereupon, Waterman amended its section 5.9 application by reducing the number of vessels with respect to which financial aid was requested, from 7 to 2. They coupled this action with a renewal of the suggestion that the liability of the company for a deficiency judgment be limited, modifying the form of proposal, however, so as to increase such personal liability from 50 to 65 percent of the full construction cost of the vessels. The company stated in this connection that if the proposal was acceptable to the Commission, additional vessels would be contracted for. This modified proposal was submitted to the Commission on March 10, 1942, and was rejected for both policy and legal reasons.

In April 1942 Waterman proposed to the Commission that its outstanding contracts with the Gulf Shipbuilding Co. for the construction of two vessels be taken over by the Commission and the vessels then sold to Waterman under section 509 of the act. Since under the original sales agreement of June 8, 1940, the Commission had agreed to give financial aid under section 509 for four new vessels, this proposal was accordingly approved by the Commission. Waterman, following this action by the Commission, amended its 509 applications so as to include four new vessels. As a result of this action by the Commission, Waterman, in effect, would, upon carrying out the proposed acquisition of four new vessels financed under section 509, carry out the replacement requirements of the sales agreement. Two questions, however, still remained open: (a) Whether or not Waterman, in connection with the acquisition by the Commission of the five old vessels in the latter part of 1941, had obligated itself to acquire new vessels in addition to the four new vessels which were the required replacements under the sales agreement, and (b) if the answer to the first question was in the affirmative, whether Waterman should be permitted to use its construction reserve fund under section 511 of the Merchant Marine Act, 1936, as amended (in which the proceeds from the five vessels sold to the Commission had been or were about to be placed), for the replacement vessels, or whether such fund should be held for the purpose of acquiring additional new tonnage.

Because of the fact that Waterman had originally offered to trade in these vessels under section 510 of the act and after sale of 5 vessels to the Government had filed an application for financial aid under section 509 for 7 vessels, there was some basis for the opinion held by certain members of the Commission's staff that Waterman had undertaken to use the proceeds from the sale of the old vessels for additional new tonnage. Waterman denied the existence of any binding commitment, and the General Counsel felt that, regardless of the equities involved, there was no sufficient legal basis for the Commission enforcing the

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