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the building commences. The U. S. Government to pay the 75 percent of the contract price direct to the shipbuilder in installments to be agreed upon.

In cases where U. S. Government owns any part of financing of vessels for shipowners that they appoint an independent commercial chartered accountant to make regular audits for the shipowning company and submit same to the Department of Commerce, and he also will report any excessive expenditure or high salaries that are out of proportion to the business transacted.

With reference to no. 2, it will be necessary that the design of the U. S. steamer should not be for too large, too fast, or too elaborate a type, but a good, efficient, safe, and suitable vessel capable of having an efficient life of 20 years.

With reference to no. 3, it will be necessary to compel the shipowner to carry his vessel on his books at the cost to him (i. e., after the U. S. Government has paid as a subsidy the difference in cost for building his vessel in the U. S. as compared with the cost abroad), This is for arriving at capital of shipowning company and on which dividends or other distribution will be calculated and upon which interest on capital will be paid and also upon which depreciation will be figured.

With the Government assistance, viz, subsidy for differential in cost of building and subsidy for differential in operating, it should be possible for the shipowning company to depreciate the vessel 5 percent per annum, pay all expenses, and make a profit. Out of this proñt a reserve fund to be built up for lean years, a payment made to U. S. Government for loan and a dividend or other distribution paid, the division of said reserve, loan payment, and dividend, or other distribution to be decided by the board of directors of the shipowning company and with the approval of the U. S. Government representative.

It must be a condition of assistance to shipowners by means of a direct subsidy that vessels must be depreciated and the amount of the depreciation set aside in a separate account and not used for any purpose, but to allow obsolete vessels of their fleet to be scrapped and replaced by new and up-to-date vessels embodying the latest improvements in hull and machinery.

The existing arrangements of mail subsidy (March 1935) are now under consideration and may be changed and a direct subsidy arranged along the lines described in the foregoing 9 paragraphs.

Mutual Shipping Corporation: The following proposition is suggested as an efficient and easily applied method of carrying out the provisions of the foregoing paragraphs 1 to 9 inclusive.

To organize a corporation similar to that formed by a mutual insurance company. There will be no stockholders nor undue capitalization, and therefore no dividends to be distributed. There will be a board of directors composed of merchants, exporters, importers, and so forth, in good standing, who will guide the general policy of the corporation in the interests of manufacturers, exporters, importers, and so forth. The directors will be advised and assisted by executives experienced in all branches of the shipping business.

In order to start this mutual shipping corporation, a loan might be arranged with a banking institution after preliminary arrange,

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ments are agreed to with the U. S. Government regarding subsidies and agreements with the various U. S. foreign trade associations or arrangements made with the various U. S. foreign trade associations for a loan to start the mutual shipping corporation and this would be a further incentive for U. S. shipping to use U. S. bottoms or it might not be too much to expect from the U. S. Government, a loan sufficient to start the Mutual Shipping Corporation.

The management must be composed of experienced shipping men who have had training in general shipping office routine, obtaining freight, insurance, accounting, physical upkeep of machinery and hull, and so forth. As foreign shipping competitors all have such experienced men it is imperative that equally experienced men are engaged for the proposition of making a success of the U. S. merchant marine.

The first step in obtaining tonnage would be from the U. S. Gov. ernment. There are at present several shipping companies engaged in the oversea trade that have defaulted in their agreement with the U. S. Government as regards paying interest and installments on the vessels bought from the U. S. Government and have not carried out their part of the agreement as regards building new steamers and have no prospect of doing so.

Mr. CULKIN. How many boats would be subject to that procedure, if you know?

Mr. DONALD. I do not suggest that this thing could be carried out by applying it to all the ship companies existing at the present time.

Mr. CULKIN. That is what you said.

Mr. Donald. No; I did not say that. I said, “ There are at present several shipping companies."

Mr. CULKIN. Oh, “ several”?

Mr. Donald. I said “several.” And I suggest that they turn them over to this mutual corporation.

Mr. CULKIN. Just as a matter of discipline on the whole group? Mr. Donald. Well, you could go on building it up.

Mr. CULKIN. What is your present capacity in the shipping business?

Mr. Donald. My present capacity ?

Mr. Culkin. What is your present capacity in the shipping business?

Mr. Donald. I am a consulting naval architect at the present time. I have been 10 years operating ships, as well as a naval architect. I was 14 years naval architect for the New York Shipbuilding Co., so I think I know something about the design of ships and operating, too.

The U. S. Government should make a settlement with one such defaulting company and then take back the steamers involved and then after an appraisal and after they are found to be suitable for the trade that they were operating in they could be sold at an agreed price to the Mutual Shipping Corporation payable over a certain number of years and operated in the same trade as the defaulting company was engaged in.

The United States Government would then come to an agreement with the Mutual Shipping Corporation as to the amount of differential to be paid as a direct subsidy to the Mutual Shipping Corpora

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tion so as to overcome the increase in cost of operating under the United States flag compared with the cost of operation under the foreign flag in the same trade. The amount of this subsidy to be arrived at by three independent reliable ship appraisers engaged in this business.

The United States Government would pay the Mutual Shipping Corporation the agreed amount of subsidy for each steamer for the year. As the shipping company is only receiving the differential over the foreign steamer, the Mutual Shipping Corporation would only employ as many steamers as were required for the cargo offer. ing and have a regular schedule of sailings. There would be no inducement to operate steamers lightly loaded at long intervals as the more freight the shipping company transports the more revenue is received

The Mutual Shipping Corporation would be able to make a profit owing to the following advantages:

No overcapitalization.
No extravagant overhead.
No stockholders' dividends.

No inducement for speculators to buy the corporation in a depressed security market, reorganize and sell to the public on an increased capitalization.

The CHAIRMAN. That is really a Government-ownership proposition.

Mr. Donald. Well, in a way, but you turn it over gradually, as they make the money, to this mutual, the same as you do with an insurance company.

The corporation would receive the direct subsidy from the United States Government for the differential in operation.

In the event of building new tonnage, the corporation would receive the differential in first cost for their payment to the shipbuilder.

The corporation would build up increasing shipments by United States shippers in United States bottoms with the efficient service rendered and the inducements offered.

After you have made some profit you pay your installment to the Government and you have a profit left over, and rebate that back to the manufacturer or the exporter, and in that way you induce more capital to come into the American business.

The CHAIRMAN. Where is your replacement coming in there?

Mr. Donald. You have a depreciation account. After you have been operating and you have built up a depreciation fund, and you are ready to build new ships, why, you could be replacing them at the end of every 15 years.

The CHAIRMAN. The Government would have to replace them, would it?

Mr. Donald. You would go on the same way as you are doing now. You would pay your 25 percent and the Government would lend you 75 percent, and you would go on with your building up in the same way. But you would have the efficiency.

I am only making the suggestion to see how it is possible to get away from the fact that we are not building up and replacing the merchant marine steamers. We are not doing it.

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again?

Mr. CULKIN. That was part of the contract of these lines; they were to replace as time went on?

Mr. Donald. Yes; they have to build up the services.

Mr. CULKIN. And that has not been done, of course, and cannot be done, you say!

Mr. DONALD. Are they making money? Are they putting money away for depreciation now!

Mr. Culkin. I am asking you; do you know?

Mr. DONALD. I am not in a position to give away any of the companies' information, but I understand that they are. It is not a healthy proposition the way it is now as far as I can see. I may say that it occurs to me that the subsidy is not being applied in such a way as to rebuild the merchant marine. I don't think so. I think you would agree with me.

Mr. CULKIN. Each 20 years you would have to start all over again!
Mr. DONALD. Beg your pardon?
Mr. Culkin. Each 20 years you would have to start all over
Mr. DONALD. No.
Mr. Culkin. What is the life of these ships?

Mr. DONALD. Well, a ship's life is 20 years, but why not replace them every 15 years and get a modern ship! Some of the British ships are replaced every 12 years. They sell them for scrap and replace them in 12 or 15 years. I had to do with the design and building of the Texas, and she is still running, and she was built in 1902.

Mr. CULKIN. The City of New York was built in 1884. She is going yet. That is Byrd's ship.

Mr. Donald. After this mutualization proceeded it would be found that you could have three of this. Ỹou could have one for the Pacific coast, one for the Gulf, and one for the Atlantic coast. I am not talking about the oversea trade, because that is where you are going to pay the subsidy.

What is the trouble now with the intercoastal trade? We do not have a subsidy in the intercoastal trade, but we have a tremendous amount of competition. If you had these fellows in the intercoastal trade mutualized you don't think they would be cutting each other's throats and putting on 50 steamers where 25 would do for it. They would be running the thing at the least possible expense and most efficiently and putting on the number of steamers to take care of the business. That is the thought that I am trying to give the committee. If you can use it in any way, all right.

The only objection that we are going to have is from the present shipowners. The shipyards are not going to object to this or the ship repair people or the labor people. They are going to build up and make profits, and rebuild for the merchant marine and have more steamers and encourage the exporters to ship in your bottoms. And after you had built this all up you would have a modern merchant marine as an auxiliary to the United States Navy in time of war, and a merchant marine that would carry your goods when the other fellow was at war. The CHAIRMAN. All right. Thank you. Does anyone else have a statement ? All right, Mr. Saugstad.

STATEMENT OF J. E. SAUGSTAD-Resumed

GREAT BRITAIN

Mr. SAUGSTAD. The contract subsidies to British shipping takes the form of a mail contract, known officially in Great Britain as the “ packet services.” The contracts are made between the steamship lines and the Postmaster General of Great Britain--and, by the way, I am now confining my remarks to the United Kingdom, not the British Empire.

The CHAIRMAN. You say you are confining them?

Mr. SAUGSTAD. Confining my remarks to the United Kingdom, the home government, not to colonies or dominions.

The principle underlying the British mail-contract system is officially stated to be that of compensation for the carriage of a certain volume of mail. It has not always been measured in that way, but that is the current procedure. The contracts are quite closely drawn, based upon the estimated movement of the mails, and are changed from time to time apparently as that volume increases or decreases.

The first contract in the British system, and the most important contract service possibly in the whole world, based upon seniority, upon the equipment used and the political principles involved due to colonial and empire requirements, is that of the Peninsular & Oriental Steam Navigation Co., known in the trade as the “P. & 0. Co."

That company was organized as a commercial enterprise in 1837, and concluded its first contract with the British Government on the 22d day of August of that year. In other words, the company has been under contract continuously with the British Government in its operations for 98 years.

Last year's grant to that line was £341,000. At a par value of that pound, that would be about $1,650,000. The total payments for 1934 for contract services under the British system were £730,000, equal to $3,550,000. The amount for the previous year for this line was £1.000 greater, and the amount for 1932 was £348,000. I cite these figures to show that they change slightly each year.

The last contract of the P. &0. Co. with the British Government is dated August 15, 1907, and was to be for 7 years from February 1, 1908, and to January 31, 1915, and if not then terminated the contract was to continue thereafter until 24 months' notice had been given by either party to the contract. We have no official information showing that that contract has ever been changed. I have not seen all sessional papers for the last year or 2 years for the British Parliament.

In the 70 years which lapsed between the original contract, 1837, and the final contract in 1907 of the P. & 0. Steam Navigation Co. power development and ocean speed development were practically doubled over that particular run. The original vessels made 81% knots on an average. The vessels at the time of signing the 1967 contract made about 16 knots. I have not checked the individual vessels to show the speed now that obtains on the routes. If the committee desires I will be very glad to submit it.

The CHAIRMAN. We will be very glad to have it. (See p. 265.)

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