in the domestic trade on calls to a foreign area (hearings on H.R. 7521, 74th Cong., 1st sess., p. 678; see also to same effect hearings on S. 2582, 74th Cong., 1st sess., p. 228).

The present sections 805 (a), 605(a), and 506 constitute safeguards meeting Mr. Bull's objection to the lack of protection against the competition of subsidized operators in the domestic trade.

The Black committee report (preliminary report of a Senate Special Committee To Investigate Air-Mail and Ocean-Mail Contracts, S. Rept. No. 898, 74th Cong., 1st sess., May 13, 1935) described and strongly condemned the abuses referred to in the Farley and Interdepartmental Committee reports (pp. 14, 15, 42). It pointed up the need for limiting the marine activity of Government-aided shipping companies to bona fide foreign-trade shipping operations to avoid competition with unsubsidized American enterprise (p. 18), and the advisability of not paying benefits to any operator whose financial or corporate structure permitted diversion of subsidy into activities other than foreign-trade shipping (p. 43). The Black committee recommended against subsidies for any operator in the domestic trades (pp. 42–43).

The Shipping Board Bureau of the Department of Commerce favored allowing operation of construction-subsidized vessels in joint domestic and foreign voyages, with payment of operating subsidy, subject to obtaining permission from the agency administering the act and making a proportionate reduction in subsidy. House hearings on H.R. 7521, 74th Congress, 1st session, page 381 (J. C. Peacock, Director, U.S. Shipping Board Bureau), page 801 (Alfred H. Hoag, Chief, Division of Shipping Research, U.S. Shipping Board Bureau), Senate hearings on S. 2582, 74th Congress, 1st session, pages 33, 34, 99, 103 (J. C. Peacock).

A representative of part of the steamship industry suggested allowing new vessels built under contract with the Government to operate wholly or partially in domestic trade (1) to replace a vessel engaged in domestic trade or (2) to serve the needs of the domestic trade when vessels were not otherwise available. House hearing on H.R. 7521, page 676 (Ira A. Campbell). The industry did not wholly support this suggestion. Opposition arose from certain companies which operated in joint domestic and foreign services (Senate hearing on S. 2582, p. 152).

No final action was taken by the Senate in 1935. The House passed H.R. 8555 on June 27, 1935, without inserting in it the proposed prohibition against coastwise-intercoastal relationships (79 Cong. Rec. 10,289). The minority in the House Merchant Marine and Fisheries Committee expressed the view that H.R. 8555 permitted continuation of the unsound policy of subsidies to intercoastal operators who go through the subterfuge of merely stopping at a foreign port en route. The minority were also of the opinion that the Moran bill (H.R. 7981) with its prohibition against domestic trade relationship (see sec. 511(a) above, proposed by Senator Black to S. 2582) was necessary to enable domestic operators to compete among themselves without any one being in unfair advantage over the other (H. Rept. No. 1277, 74th Cong., 1st sess. to accompany H.R. 8555, June 20, 1935, p. 37). Mr. Wearin's proposal to amend H.R. 8555 so as to include a domestic trade prohibition was rejected by the House on June 25, 1935 (79 Cong. Rec. 10,122).

After Congress reconvened in 1936, four merchant marine bills were introduced in the Senate. On January 6, Senator Copeland introduced S. 3500, which would have permitted operation in domestic trade exclusively or on a joint foreign and domestic voyage, with permission and with proportionate refund of construction subsidy (sec. 506(b)) and operating subsidy (sec. 522(e)). The second bill (S. 4110) was introduced by Senator Guffey on February 24, 1936. It prohibited, except with written consent of the Maritime Commission, ownership, operation, or chartering in domestic trade and direct or indirect ownership of a vessel so employed, not only by the subsidized operator but also by its holding company, affiliate or associate, or any officer, director, or executive of the subsidized operator or company so related (sec. 56(a)).

Senator Guffey made the following statement about section 56(a), S. 4110: “Section 56(a): The purpose of the provision in this subsection is to concentrate the contractor's efforts and the aid extended into the channel for which the aid is intended. If U.S.-flag services are to be developed and maintained in competition with foreign-flag service engaged in parallel foreign services, the operator's efforts and finances must be concentrated in this direction in order to avoid siphoning out of freight and passenger revenues into the

pockets of individuals through subsidiary, affiliated, and holding companies engaged in various and kindred other ventures" (Senate hearings on S. 3500, S. 4110 and S. 4111, p. 137).

The third bill (S. 4111) introduced by Mr. Gibson of Vermont was soon followed by the fourth, which was the result of a compromise of the diverse views held by the Post Office and Commerce Departments.

Testifying before the Senate Committee on Commerce on May 9-10, 1936, in reference to an early version of section 506, the following statement was made by Mr. Karl A. Crowley, Solicitor of the Post Office Department:

"This suggested provision * * would not allow a ship constructed for foreign trade, and for which a subsidy is made, to be transferred into the coastwise and intercoastal trade without the consent of the Authority, and without the Authority collecting from that operator the amount of the subsidy. In other words, it would protect the intercoastal and coastwise operator from unfair competition in securing new vessels. A concern might come in and apply to the Authority for a ship, to purchase a ship to be used in foreign trade, a fine ship, and after having secured that ship he could operate it for a little while and then make application to the Authority to operate it in competition with nonsubsidized intercoastal and coastwise operators.

"This is intended to prevent any such unfair discrimination, as I say" (Senate hearings on S. 3500, S. 4110, and S. 4111, pp. 57-58).

And later the same witness testified:

"But the plan that we have suggested and proposed would certainly keep an operator from coming in and saying, 'I want to build a ship to operate in foreign service; I want you to give me 40 or 50 percent of the cost of construction as a differential, and take notes for the rest excepting the downpayment,' and then allow that fellow to come along later and transfer it into the coastwise trade in competition with the operator who is not able to pay that 25 percent of the total cost down to start with."

At this point the Chairman interrupted to ask:

"You think it is in the interests of justice?"

To which Mr. Crowley replied:

"It is in the interests of justice. There is another thing that you will find. If you go to subsidize construction of ships, and that is what this is indirectly— in the way it is-you will find that the railroads of the country will be objecting to it. The railroads will urge that the Government is in the business of building ships to operate in the coastwise and intercoastal trade under the pretense that they are built for foreign trade." (Ibid. pp. 64-65.)

The conflicting views and opinions with regard to permitting any domestic operation by a subsidized operator are summarized in Senate Report 1721, 74th Congress, 2d session, April 3, 1936, which accompanied S. 3500:

"LIMITATIONS AS TO TRADE

"In S. 3500 the granting of a construction subsidy has been limited to vessels to be engaged only in foreign commerce. It has been urged with insistence that a construction subsidy should also be authorized for ships to be used in the joint coastwise and foreign trade. It has been urged that under some circumstances the combination of coastwise and foreign trade might permit the construction of larger and faster ships than would be justified for either of these trades separately. It is stressed, too, that these larger and faster ships might be more efficient, not only in developing our foreign commerce, but also more desirable as naval auxiliaries. If such joint coastwise and foreign trade should be authorized, it was suggested that the construction subsidy should be reduced in the same proportion that the revenues derived from the coastwise trade bear to the total revenues in the joint coastwise and foreign trade. While recognizing the merit of these contentions, your committee has felt that for the present a construction subsidy should not be authorized for the joint coastwise and foreign trade.

"The bill makes an exception to cover the case of American vessels engaged in what would otherwise be foreign trade, but which call at ports of our island possessions, Hawaii and Puerto Rico. Likewise, exception is made for vessels engaged in the intercoastal trade but which are also engaged in foreign trade between intermediate foreign ports. In the latter case, however, they could be permitted to carry passengers and mail, but could not carry cargo between American ports. In each of such exceptional cases the construction subsidy would be reduced in proportion to the amount of the revenues derived from the domestic or protected part of such trade, as compared with the entire revenue.

"It has been suggested that in addition to the well-known divisions of 'foreign trade' and 'doméstic trade,' there is a third class called the semiprotected trade, which is said to be trade with Canada, Mexico, Central America, and the West Indies. Upon the theory that there is some sort of 'semiprotection' to our shipping industry engaged in this trade, these suggestions of S. 4110 would prohibit the granting of an operating subsidy for ships in service to these nearby countries. "The proponents of such a classification and restriction have utterly failed to explain the nature, extent, or even the existence of the 'semiprotection' about which they talk. There is no law or practice which either creates or grants any protection, favor, or privilege of any kind for American ships in this trade. Foreign-flag vessels suffer from no disadvantage in their competition with American ships, and American ships enjoy no preferential treatment. The suggestion that barriers should be erected against American ships in trade with our nearest neighbors is incomprehensible. On the contrary, if there is any field in foreign shipping where our own ships should predominate it is here. The geographical, commercial, and political importance to the United States of commerce with Canada, Mexico, Central America, and the West Indies, impels and counsels the adoption of every measure which would encourage the building and operation of American ships and more American ships for this trade. We cannot let our commerce with these countries depend upon foreign-flag ships which may at any time be withdrawn from service, nor should our country be subjected to the uncertainties or exactions which might come from such dependence (pp. 15–16).

"GOVERNMENTAL SAFEGUARDS

"7. Ownership of any interest whatever in the coastwise business is prohibited, except that the Authority after public hearing, if it find that the public interest and convenience so require, may grant permission to engage in the coastwise trade, if it does not cause unfair competition to any person operating exclusively in the coastwise or intercoastal service. In order to prevent great injustice, a provision similar to that in the Motor Carrier Act is inserted to protect those companies already interested in the coastwise or intercoastal service." (P. 19.)

Congress ultimately merged these various concepts in the Merchant Marine Act, 1936, approved June 29, 1936 (80 Congressional Record 10896). In the final version it is manifest that Congress intended three results: (a) The domestic operator, who was denied a subsidy, was to be protected from the operator who received a subsidy; (b) the subsidized offshore operator would be required to concentrate his resources and efforts on foreign trade operations; and (c) a strictly limited relationship between domestic trade and foreign trade would be permitted only when the agency administering the law assured itself that the domestic operator would not be hurt and the American merchant marine would be strengthened. A survey of administrative agency decisions will now reveal that the congressional mandate has been followed by the agencies concerned in the face of unremitting efforts of the subsidized operators to invade the domestic trade.

b. Decisions under pertinent provisions of the Merchant Marine Act protect domestic operators from subsidized offshore operators

Section 506 of the Merchant Marine Act, 1936, has never been a storm center of litigation between subsidized and nonsubsidized operators. Expressions of agency attitudes toward encroachment on the domestic trades by offshore operators will therefore have to be sought in cases arising under section 805 (a), dealing with operating-differential subsidy, rather than construction-differential subsidy. That expressions of policy with respect to the one type of subsidy are reasonably to be considered valid with respect to the other type follows from the great similarity in the two types. This viewpoint was expressed in the hearings before the Committee on Commerce of the U.S. Senate on S. 3500, S. 4110, and S. 4111 on March 9-10, 1936, by J. C. Peacock, Director, Shipping Board Bureau, Department of Commerce:

(T) he division of the subsidy into a construction subsidy and operating subsidy is more a matter of mechanics ***. New construction cost, capital cost, and current operating cost are of exactly the same nature. That is the fundamental principle of accounting. I do not see that there is any very fundamental consideration as to one form of subsidy and the other. The cost which the operator looks forward to is his capital cost, which is prorated over the years, and his operating cost, which comes during the years" (p. 76).

21-512-6310

Section 805 (a) makes unlawful the award of operating-differential subsidy to one engaged in the domestic intercoastal or coastwise service except on written permission from the Commission, and such permission cannot be granted if the Commission finds that it will result in unfair competition to anyone operating exclusively in the coastwise or intercoastal service or that it would be prejudicial to the objects and policy of the act. If such an application is allowed, it is unlawful to divert any money or property used in subsidized foreign trade operations into the domestic trade.

1. The safeguard of section 805(a) was designed to protect domestic operators. The principle that section 805 (a) was designed to protect domestic operators from subsidized offshore operators was announced by the Board and the Administrator the first time they had before them the request of a subsidized operator to provide a domestic service in conjunction with a nonsubsidized offshore service. Their report states:

"In adopting the Merchant Marine Act, 1936, Congress manifested a special concern for the protection of coastwise and intercoastal operators, who are not eligible for subsidy, against the competition of subsidized lines (secs. 506, 605 (a), 805 (a)). The great importance to our Merchant Marine of its domestic fleet and the serious difficulties that have attended the reestablishment of domestic shipping in the period since World War II should prompt us to resolve all doubts against activities of subsidized companies whose operations might tend to impede the development of domestic transportation by sea." Docket S-17, 3 FMB-MA 457,470.

This principle was reaffirmed in a subsequent decision by the Board and Administrator involving a request by the same subsidized operator to provide a domestic service in conjunction with a subsidized offshore service to Guam and foreign ports. The report stated:

"In American President Lines, Ltd.-Unsubsidized operation, Route 17, supra (docket S-17), it was established that the Board and Maritime Administrator, in order to carry out the intent of Congress as expressed in section 805(a), must be alert to protect coastwise and intercoastal operators against competition from subsidized offshore operators for cargoes which the intercoastal carriers need, have the capacity to carry, and to which they are entitled" (docket S-33, ± FMB-MA 488,504).

(See also docket S-36, 4 FMB-MA 436,400.)

2. Permission will be withheld from the subsidized operator to engage in domestic trade if it would result in prejudice to the objects and policy of the Merchant Marine Act.-A subsidized operator will not be granted permission to engage in a domestic trade if it would result in prejudice to the objects and policy of the Merchant Marine Act of 1936.

The objects and policy of the act are contained in the following preamble and section of the act:

"AN ACT To further the development and maintenance of an adequate and well-balanced American merchant marine, to promote the commerce of the United States, to aid in the national defense, to repeal certain former legislation, and for other purposes

"TITLE I-DECLARATION OF POLICY

"SECTION 101. 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 waterborne 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 waterborne 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 a trained and efficient citizen personnel. It is hereby declared to be the policy of the United States to foster the development and encourage the maintenance of such a merchant marine" (49 Stat. 1985, 46 U.S.C. 1101).

Activities by a subsidized operator which result in unfair competition to a domestic operator render even more difficult the already heavy burden borne by nonsubsidized domestic operators in attempting to carry out the objects and policy of the act. The following examples illustrate how the operation of a domestic service by a subsidized operator may result in prejudice to the objects and policy of the act:

(a) Domestic operation will divert subsidized operators from their primary obligations.

The primary obligation of a subsidized operator is the maintenance of and development of adequate, frequent, and regular service on essential foreign trade routes (docket S-18 (sub. No. 1) 4 FMB 146, 149). Performance of a nonsubsidized domestic service may in some measure divert the officials and employees of the subsidized operator from full devotion to the offshore trade in contravention of the objects and policy of the act in relation to the foreign commerce of the United States. Such prejudice can arise from detriment to the subsidized operators' foreign trade operations as well as detriment to the domestic trade competitor. By reducing the price the subsidized operator will pay for domestic revenue, H.R. 6813 will make more attractive to him any opportunity he may find to engage in domestic trade and tend to divert more of his attention to that area.

(b) Vessel replacement must be considered.

Consideration must be given to the age of existing tonnage. Subsidized operators will tend to withdraw their older vessels from subsidized operations and place them in the domestic trade if section 2 of H.R. 6813 is enacted. The result of such a program will be to prevent or seriously hinder or delay the vessel replacement program of the domestic operator, which would be prejudicial to the objects and policy of the act. Where there is no need for additional vessels in a domestic trade, their entry by a subsidized operator would overtonnage the trade. Continuance of such overtonnaging would further dampen the enthusiasm of the domestic operator for replacing his vessels and ultimately eliminate him.

The effect on domestic trade operators would be immediate and drastic. Although vessels now operated in subsidized services will not reach 25 years of age in any great numbers for several years, a domestic operator would have to scrutinize his replacement program carefully in view of the low-cost competition he will ultimately face if H.R. 6813 is passed.

Mr. PESSEL. As to the issue of the total payback of the construction subsidy at the end of the so-called life of the vessel, if we had a computer here I think it would be interesting to put the mathematics into the computer because the possibility that any subsidized operator can ever pay back 100 percent of construction-differential subsidy under present section 506 is out of the question.

The CHAIRMAN. Where are you reading?

Mr. PESSEL. I will merely state that if an operator consistently earned domestic revenue at the rate of 50 percent of total revenue, it would take him 50 years under 506 to pay back all of his constructiondifferential subsidy. He cannot possibly reach that point where he is going to pay the Government all of his construction subsidy so that the point as to whether this will be paid out is a mathematical formula to be worked out and I suggest that it be worked out.

Also, Mr. Ewers made the statement that there were no 506 vessels operating at the present time. I think there are. I think the record will indicate that APL has vessels subject to 506 operating at the present time which, after a 25-year life, could be put in the domestic trade in competition to our own and we think that is unfair. That is really all I have to add aside from my own statement, Mr. Chairman. If there are any other questions, I would be glad to answer them. Mr. DOWNING. I do not quite understand your basic objection to this bill.

Mr. PESSEL. It is sections 2 and 3, sir. We don't care about section 1 at all.

Mr. DOWNING. What are your principal objections to those sections? Mr. PESSEL. Sections 2 and 3 would permit a vessel after a 25-year life to stop paying refunds on domestic portions of a foreign voyage and to be in direct competition with an unsubsidized domestic operator