Mr. Reilly, I present to you a copy of what is alleged to be the complaint of Ivan Francis Cox and also the telegram which I had from the chief of police of Beverly Hills, Calif. I wired him on February 5 as follows: Commerce Committee of United States Senate has 12-page statement purporting to be that of Arthur Kent which recites his experiences with Communist Party. Is it probable copy we have is a..thentic? Thanks. He replied: Re your telegram February 5 Arthur Kent did dictate a statement regarding his experiences with officials of Communist Party. CHARLES C. BLAIR, Chief of Police, Beverly Hills, Calif. I return to you, also, Mr. Reilly, the letter you have received from Mr. Bonham, together with the papers which you had submitted to us as coming from him. Mr. REILLY. Yes. The CHAIRMAN. I give you also a copy of the report that Mr. Fish presented on January 17, 1931. I do not know what there is in it. I have not read it, but there may be something in there. I am very anxious that you shall look up that statement made by Mr. Cox in his complaint relative to the testimony of Earl Browder. That would seem to me to be very significant if it is true. Mr. REILLY. Yes, sir. The CHAIRMAN. I think that is all, Mr. Reilly. We are very much obliged to you. Mr. REILLY. Senator, did you wish to give me the names of those witnesses? The CHAIRMAN. In giving you these names, Mr. Reilly, I should say that Mayor Carson telephoned me last night that he is just as anxious to have those names kept under cover as the other names which you gave. I am willing to give you the telegram which I received this morning from Mayor Carson. What I have from General Markham was merely an endorsement. Senator CARAWAY. Mr. Chairman, will you yourself have a copy of those names? They have been stricken from the record. Mr. REILLY. There are only two new names on the list. I have the two new names. The CHAIRMAN. All right. You have two new names? Mr. REILLY. Yes. The CHAIRMAN. You have never had any statement from Mr. Norene, but you would not need that, because that is embodied in Mr. Bonham's report. Mr. REILLY. That is correct. In fact, he actually drafted the report. The CHAIRMAN. I think that is all I need to give you. Senator BILBO. Mr. Chairman, Senator Overton has introduced Senate bill 3354, an act to amend the act for control of floods on Mississippi distributaries. I hope he will not call it up immediately, but in case he decides to call it up for consideration by the committee I would like to have a time certain fixed, because I want to bring here Mr. Whittington, from the House of Representatives. The CHAIRMAN. What bill is that? Senator BILBO. S. 3354, which provides for the immediate prosecution of work on the Morganza floodway. The CHAIRMAN. What is it that you want to have done? Senator BILBO. I want to have a time certain fixed for hearing in case it is decided to call it up, so that I can have Mr. Whittington present. Senator OVERTON. I should state, perhaps, that it is not my intention to call it up until I receive a report on the bill from the War Department; then I shall certainly request an early opportunity to bring it up. Senator BILBO. I just make this statement in order to keep the record straight. The CHAIRMAN. You mean, Senator, that you do not want us to do anything in the dark? Senator BILBO. I just want to have a hearing on it. Senator CARAWAY. I want to have Mr. Miller come too, at that time. The CHAIRMAN. I assume that you will confer with Senator Overton about that. Senator OVERTON. We may possibly have to refer the matter to the full committee, unless you want a subcommittee to handle it. The CHAIRMAN We have a regular subcommittee on flood control. Senator OVERTON. That consists of Senator Gibson and Senator Sheppard, does it not? The CHAIRMAN. It consists of Messrs. Sheppard, Bilbo, and Gibson. So, Senator Bilbo, I guess you will be perfectly safe if you can get Senator Gibson to go along with you. The committee will stand adjourned until 10 o'clock tomorrow morning. (The chairman submitted the following matter for the record:) Hon. ROYAL S. COPELAND, United States Senate, Washington, D. C. DEAR MR. CHAIRMAN: I am enclosing copy of a statement which I made before the Merchant Marine and Fisheries Committee of the House of Representatives, on January 13, 1938, on H. R. 8532. This deals principally with conditions existing in the intercoastal trade, and I would appreciate it if you would incorporate this statement in the record of your hearings on S. 3078. Sincerely yours, DONALD S. MORRISON, Vice President. American Hawaiian Steamship Co. and its predecessor have operated ships between the Atlantic and Pacific coasts of the United States since about 1855. At the present time, we own 39 cargo carriers with a dead-weight capacity of about 400,000 tons, most of which are operating in the intercoastal trade, maintaining a regular and frequent service between the principal Atlantic coast ports from Boston, Mass., to Jacksonville, Fla., inclusive, and the principal ports on the Pacific coast from San Diego, Calif., to Seattle, Wash. During 1937 our ships carried more than 1,500,000 tons of intercoastal cargo. Our operations are confined very largely to the intercoastal trade and have been conducted entirely without Government subsidies. In recent years the development of an adequate American merchant marine in foreign trade has required so much attention that we sometimes lose sight of the relative importance of our domestic fleet, both from the point of view of its value in national defense and as an essential facility to industry and agriculture. It might be recalled that at the outbreak of the World War, ships operating in the domestic trades represented more than 80 percent of the ocean-going tonnage under the American flag, and today, notwithstanding the large expenditures by the Government during the war and since the war to develop and build up a merchant marine in foreign trade, the privately owned American merchant fleet in domestic trades still constitutes about two-thirds of the American merchant marine. In the Economic Survey of the American Merchant Marine, published by the United States Maritime Commission under date of November 10, 1937, the statement is made that "the backbone of any overwater military operation is the general supply or cargo vessel." Approximately 160 large ocean-going cargo carriers, with a gross registered tonnage well over 1,000,000 tons, are now operating in the United States intercoastal trade and represent the most valuable and important part of the fleet of supply ships that is available today for overseas operation in time of national emergency. The value of these ships as an arm of our national defense, is strikingly illustrated by the use to which the ships of our company were put during the World War. Within a few months after the entry of the United States into the war, the American-Hawaiian fleet was commandeered for war duty. In June of that year, the American-Hawaiian freighters Dakotan and Montanan were part of the first convoy of American ships that carried American supplies and troops to France. Before the war was over, American-Hawaiian vessels had made some 150 round trips through the submarine zone and had transported more than 125,000 troops and 625,000 tons of war materials without a single delay or break-down. Notwithstanding large increases in intercoastal traffic since the war, intercoastal shipping operations have not been profitable. Notwithstanding a net expenditure of more than $20,000,000 by our own company in additions to its fleet since 1920, our intercoastal operations during this period have shown a loss. Apparently the record of other lines operating in the trade is similar. Under date of May 16, 1936, the Secretary of Commerce reported to the Senate (74th Cong., S. Doc. 224) that the American lines operating in the intercoastal trade suffered a net loss of approximately $14,000,000 during the 5 year period ending December 31, 1934, and, although the results for 1935 and 1936 have not yet been published by the Commission, it is estimated that the intercoastal lines have probably lost an additional $4,000,000 during these 2 years, making total losses of about $18,000,000 on intercoastal operations for the 7-year period ending December 31, 1936. In this connection, I wish to refer to the testimony of Mr. Otis N. Shepard before your committee on Thursday, December 9, 1937. In response to a question from a member of the committee as to whether the intercoastal lines were operating profitably, Mr. Shepard is recorded as replying as follows: "The Journal of Commerce published the earnings of the American-Hawaiian Steamship Co. about a week or 10 days ago for the month of November, I think it was-it might have been for the month of October-which showed that they made a profit of $250,000 for the month, or approximately that. That profit, however, was before they charged off depreciation." Doubtless, Mr. Shepard was referring to the report of our operations for the month of October 1937, which indicated an operating profit of $224,000 before charging depreciation or interest on the $20,000,000 invested in our fleet, and bef ore Federal income taxes. I think it relevant to point out that the month of October is usually the most profitable month in the year so far as our operations are concerned, and that the report to which Mr. Shepard referred also reflected net earnings for the 10 months ending October 31, 1937, before Federal income taxes, of about $17,000. This makes no allowance for interest on our investment in the business. I refer to this so that the committee may not get a misleading impression of the operating results of the lines in intercoastal trade from a partial and incomplete reference to the results of one such line for the most profitable month of the year. This condition has been strikingly called to the public's attention during the last few months by the withdrawal, or contemplated withdrawal, of two of the principal lines in the trade because of the losses involved in continued operation. These large losses in any intercoastal operations over this period of years are very largely due to the sale of Government vessels at a small fraction of their construction cost and the operation of such ships in competition with established lines which have either built their ships in American yards or purchased them at higher prices. As a result, the intercoastal trade suffered from a series of rate wars which drained the resources of all of the lines. In an endeavor to correct this situation, the Intercoastal Shipping Act, 1933, was enacted, requiring the carriers to file actual rates with the United States Shipping Board, and conferring upon the Shipping Board, now the Maritime Commission, the power to suspend rates pending an investigation into their lawfulness. The history of the intercoastal trade, both before and since the enactment of the Intercoastal Shipping Act, 1933, shows clearly that additional legislation is urgently needed to clarify and strengthen the regulatory authority of the Mari time Commission so as to authorize specifically the prescribing of minimum, as well as maximum, rates. This object is accomplished in section 43 of H. R. 8532. In our judgment, the enactment of this provision is essential to the further development of the intercoastal trade, and we see no hope for the replacement of existing ships in this trade with new and improved tonnage unless protection is afforded from destructive cut-rate competition which, in the past, has made it impossible to earn a reasonable return on the investment involved in new construction. That the clarification and stengthening of the regulatory authority of the Commission with respect to intercoastal rates is urgently required so as to prevent the repetition of disastrous rate wars is evident from the fact that Mr. H. S. Brown, the chairman of the United States Intercoastal Steamship Freight Association, appeared before this committee yesterday on behalf of our company and on behalf of every intercoastal operator, with the exception of the Shepard Steamship Co., urging the enactment of these provisions. Mr. Brown's clear and forceful statement in support of section 43 of the pending bill, makes it unnecessary to discuss this further. In addition, I think a few cargo ships will be built for the intercoastal trade while there is the possibility of the sale of additional Government ships for operation in this trade. Two such vessels were sold by the Commission for operation in the intercoastal trade a few months ago at a price of less than $9 a deadweight ton. Obviously, no prudent owner would build new cargo ships for this trade at today's cost of construction if it is going to be the policy of the Government to add to the already overtonnaged condition in the trade by such sales as those referred to. However, I am glad to say that the policy of the Maritime Commission with respect to the sale of vessels for the domestic trades has been modified since the sale of the two vessels referred to above, and the Commission has announced that it does not proposed to make further sales of vessels in its laid-up fleet for domestic or foreign operation. Clearly, however, the intercoastal operator is entitled to further protection in this respect other than the announcement by the Commission of the policy which it proposes to pursue before he invests large sums in new construction. This policy has been changed many times in the past and may be modified from time to time as the membership of the Commission may change. We therefore request that there be included in H. R. 8532 a provision prohibiting the sale of vessels in the Government's laid-up fleet for operation in the domestic trades except under conditions where an equivalent amount of tonnage is permanently withdrawn from such trade either by scrapping or by sale abroad. In connection with the replacement of vessels in our domestic trades, sufficient emphasis has not been placed on the direct connection between the disposal of the older and less desirable units in their fleets and the acquisition of new and improved types of ships. This process of replacement will be greatly impeded unless the American owner is permitted to dispose of his older and less desirable units to the best possible advantage in the world market. To place restrictions on such sales not only deprives the domestic operator of funds which would be available for investment in new equipment, but also results in the retention of the older units in the domestic trade where they are an important factor in continuing competitive conditions which make replacement inadvisable. During the past year the sale abroad of a number of older American flag ships has been approved upon condition that the vessel sold would not be operated in the foreign commerce of the United States for a period of years. In our judgment such restrictions, while tending greatly to reduce the sale value of American ships, does not correspondingly protect American vessels now engaged in foreign trade, as the placing of these ships in other trades makes other similar foreign tonnage available for operation to or from the United States. Other maritime nations, after studying this problem, have reached the conclusion that the removal of restrictions on the transfer of ships to other flags was essential to the proper development of their merchant marine as it made possible the replacement of the older ships with improved and more valuable types of ships. In this connection I would like to call your attention to the reports of the departmental committee appointed by the British Board of Trade to consider the position of the shipping and shipbuilding industries after the World War. This report contains much interesting and valuable information bearing on this subject, and the conclusions reached with respect to removal of restrictions on transfer of registry are summarized in the following paragraph 372, appearing at page 124: "Sales of vessels to foreign (other than enemy) flags.-The transfer of vessels from the British register to foreign flags formed an important feature of our mari time development before the war, and was incidentally an index of the relative efficiency of the British merchant fleet as compared with the fleets of other countries. We consider it most important that the conditions underlying this process should be restored as soon as possible after the war. If, owing to irksome restrictions of one kind or another, British shipowners showed signs of wishing to sell their ships in order to go out of the business, it is difficult to see how such a process could be averted, and not merely postponed, except by the removal of the restrictions. We believe that when the bulk of the privately owned British tonnage on direct Government service has been returned to the owners, it will be desirable to relax considerably the stringency of the licensing system, imposed by the British Ships Transfer Restriction Acts, with a view to the establishment of free licensing as soon as possible." The subject of the sale of older ships naturally brings up the question of the Federal taxes on profits resulting from these sales. Mr. Ernest Bull, president of A. H. Bull Steamship Co., made a very able statement to your committee yesterday, forcefully calling attention to the deterring effect present Federal income taxes have on the reinvestment in new construction of profits either from the sale or operation of existing ships. In his statement yesterday Mr. Bull urged, "that tax exemption now accorded subsidized lines might properly be extended as proposed, but that such exemption should further be extended to include all operators whether or not subsidized, so that all the earnings and profits of the shipping industry reinvested in new construction should be exempt from all Federal taxes.' We endorse Mr. Bull's recommendation in this matter and request that serious consideration be given at this time to removing this barrier to the reinvestment of profits from the sale of older ships in new and improved types of tonnage. Obviously, such proceeds cannot be used for this purpose where Federal taxes ranging up to 54 percent are applied. I wish particularly to call the committee's attention to the provisions of existing law (secs. 112 (f) and 113 (a) (9)) of the Revenue Act of 1936, which exempt from Federal taxation profits arising from the involuntary conversion of property, such as insurance proceeds from vessels that are lost, provided such proceeds are used for replacement purposes or set aside for this use under regulations prescribed by the Commissioner of Internal Revenue with the approval of the Secretary of the Treasury. In all fairness, this procedure should be extended to the proceeds from the sale of ships where such proceeds are used for the acquisition of shipping property with the approval of the Maritime Commission. This procedure does not in fact exempt such profits from Federal taxation but merely defers the tax until profits are realized on the replacing ships, as under the Treasury regulations now applicable to involuntary conversion, depreciation is not allowed on assets acquired from profits previously exempted. The equity of this procedure is obvious as I think it is clear that the profit is not actually realized until and unless profits are earned on the replacing property. The various steps I have suggested would, I feel, go a long way toward putting intercoastal water transportation on a more secure basis and would encourage eventual replacement of existing fleets. Nevertheless, it must be admitted that with the present high cost of new construction the building of faster ships of types that are especially desirable from the point of view of national defense probably cannot be entered upon without some form of construction aid. Should such construction be deemed necessary and desirable, then in our judgment it should be extended under conditions requiring the permanent withdrawal from this trade of an equivalent amount of older tonnage. UNITED STATES SENATE, SENATOR ROYAL COPELAND, Senate Commerce Committee, Senate Office Building, Washington, D. C. MY DEAR SENATOR: The enclosed communication from Mr. Reilly should be made a part of the Commerce Committee hearings because it is submitted to me in response to the request which I submitted to Mr. Reilly when he was on the witness stand yesterday. With warm personal regards and best wishes, Cordially and faithfully, A. H. VANDENBERG. |