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pose of building new ships for foreign trade. It has, in addition, appropriated large annual sums under the guise of payments for ocean-mail contracts.

This lending of money for shipbuilding has in practice been a failure. Few ships have been built and many difficulties have arisen over the repayment of the loans. Similar difficulties have attended the granting of ocean-mail contracts. The Government today is paying annually about $30,000,000 for the carrying of mails which would cost, under normal ocean rates, only $3,000,000. The difference, $27,000,000, is a subsidy, and nothing but a subsidy. But given under this disguised form it is an unsatisfactory and not an honest way of providing the aid that Government ought to give to shipping.

I propose that we end this subterfuge. If the Congress decides that it will maintain a reasonably adequate American merchant marine I believe that it can well afford honestly to call a subsidy by its right name.

Approached in this way a subsidy amounts to a comparatively simple thing. It must be based upon providing for American shipping Government aid to make up the differential between American and foreign shipping costs. It should cover first the difference in the cost of building ships; second, the difference in the cost of operating ships; and finally, it should take into consideration the liberal subsidies that many foreign governments provide for their shipping. Only by meeting this threefold differential can we expect to maintain a reasonable place in ocean commerce for ships flying the American flag, and at the same time maintain American standards.

In setting up adequate provisions for subsidies for American shipping the Congress should provide for the termination of existing oceanmail contracts as rapidly as possible and it should terminate the practice of lending Government money for shipbuilding. It should provide annual appropriations for subsidies sufficiently large to cover the differentials that I have described.

I am submitting to you herewith two reports dealing with American shipping: A report of an interdepartmental committee known as the Committee on Shipping Policy", appointed June 18, 1934, by the Secretary of Commerce, and a report to me from the Postmaster General on ocean-mail contracts prepared pursuant to an Executive order of July 11, 1934.

Reports which have been made to me by appropriate authorities in the executive branch of the Government have shown that some American shipping companies have engaged in practices and abuses which should and must be ended. Some of these have to do with the improper operating of subsidiary companies, the payment of excessive salaries, the engaging in businesses not directly a part of shipping, and other abuses which have made for poor management, improper use of profits, and scattered efforts.

Legislation providing for adequate aid to the American merchant marine should include not only adequate appropriation for such purposes and appropriate safeguards for its expenditure, but a reorganization of the machinery for its administration. The quasi-judicial and quasi-legislative duties of the present Shipping Board Bureau of the Department of Commerce should be transferred for the present to the Interstate Commerce Commission. Purely administrative functions, however, such as information and planning, ship inspection, and the maintenance of aids to navigation should, or course, remain in the Department of Commerce.

An American merchant marine is one of our most firmly established traditions. It was, during the first half of our national existence, a great and growing asset. Since then it has declined in value and importance. The time has come to square this traditional ideal with effective performance.

Free competition among the nations in the building of modern shipping facilities is a manifestation of wholly desirable and wholesome national ambition. In such free competition the American people want us to be properly represented. The American people want to use American ships. Their Government owes it to them to make certain that such ships are in keeping with our national pride and national needs.




JANUARY 11, 1935. To the PRESIDENT:

Pursuant to your Executive order of July 11, 1934, hearings have been conducted by the Post Office Department on 9 foreign air-mail contracts, and 43 foreign ocean-mail contracts. Notice was given to the contractors as provided by law in the Executive order, and they all appeared by their officers and attorneys with the exception of Seatrain Lines, Inc., which did not appear. Mail service has been discontinued over the route held by this company, and it has a suit in the Court of Claims against the United States.

The foreign air-mail contracts are not covered by this report. With the exception of one very short line, they are all held by the Pan American Airways, Inc., and affiliated companies, and are covered by a report which embraces all of these contracts.

The hearings began on October 4, 1934; by my direction they were conducted principally by Assistants Postmaster_General W. W. Howes and Harllee Branch, and the Solicitor, Karl A. Crowley. They continued uninterrupted until January 3, 1935, when they were concluded. The transcript of evidence contains more than 34,000 pages, and copies thereof are available for use in connection with any study hereafter given the matter.

A report has been made covering each contract, and these reports are submitted herewith.

In connection with the reports on the ocean-mail contracts, I think it advisable to present to you, in a general way, some of the most important facts that were developed at the hearings on ocean-mail contracts, and some of the Department's conclusions resulting from & consideration of these facts.


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All of the present ocean-mail contracts were awarded under the Merchant Marine Act of 1928.

It was provided by the Merchant Marine Act of 1928 that

The policy and primary purposes declared in section 1 of the Merchant Marine Act of 1920 are hereby confirmed.

Section 1 of the act of 1920 reads, in part, as follows:

That it is necessary for the national defense and for the proper growth of its foreign and domestic commerce that the United States shall have a merchant marine of the best equipped and most suitable types of vessels sufficient to carry the greater portion of its commerce and serve as a naval or military auxiliary in time of war or national emergency,

*; and it is hereby declared to be the policy of the United States to do whatever may be necessary to develop and encourage the maintenance of such a merchant marine

*. The only reference to ocean-mail contracts and authority to award them under the act of 1928 is contained in title IV, headed “Ocean Mail Service”. Section 401 provides that, All mails of the United States

shall, if practicable, be carried on vessels in respect of which a contract is made under this title.

Section 402 provides that,
As soon as practicable after the enactment of this Act

it shall be the duty of the Postmaster General to certify to the United States Shipping Board what ocean-mail routes, in his opinion, shall be established and/or operated for the carrying of mails of the United States between the ports between which it is lawful under the navigation laws for a vessel not documented under the laws of the United States to carry merchandise, distribuied so as equitably to serve the Atlantic, Mexican Gulf, and Pacific coast ports, the volume of mail then moving over such routes and the estimated volume thereof during the next five years, the times deemed by him advisable for the departure of the vessels carrying such mails, and other requirements necessary to provide an adequate postal service between such ports.

Section 403 requires the Shipping Board to determine and certify to the Postmaster General the type, size, speed, and other characteristics of the vessels which should be employed on each such route, the frequency and regularity of their sailings, and all other facts which bear upon the capacity of the vessels to meet the requirements of a service stated by the Postmaster General, and that it take into consideration the desirability of having the mail service performed by vessels constructed in accordance with the latest and most approved types, with modern improvements and appliances.

Section 404 authorizes the Postmaster General

To enter into contracts with citizens of the United States whose bids are accepted, for the carrying of mails between ports

Section 405 specifies the general character of the vessels that might be accepted.

Section 406 provides that,

Before making any contract for carrying ocean mails under this title the Postmaster General shall give public notice by advertisement once a week for three weeks in such daily newspapers as he shall selectin the territory from which the service shall originate.

Section 407 provides that

Each contract for the carrying of ocean mails under this title shall be awarded to the lowest bidder, who, in the judgment of the Postmaster General, possesses such qualifications as to insure proper performance of the mail service under the contract.



It must be borne in mind that the only official of the United States who has authority to execute these contracts is the Postmaster General, and their validity depends upon title IV of the act. This has been construed in only one case, and in that case the court said:

As the act gives the Postmaster General no power beyond that of making contracts to carry the mail, it does not as we think, extend to payment for voyages made for other purposes (American West-African Line, Inc., v. U. s., 76 C. Cl. 235, rendered Nov. 14, 1932, certiorari denied by Supreme Court October 16, 1933).

Under section 24 of the Merchant Marine Act of 1920, the Shipping Board and the Postmaster General were authorized to provide for the maintenance and expansion of the foreign or coastwise trade of the United States and of a satisfactory postal service in connection therewith; and shall from time to time determine just and reasonable rate of compensation to be paid for such service, and the Postmaster General is hereby authorized to enter into contracts within the limits of appropriations made therefor by Congress to pay for the carrying of such mails in such vessels at such rate

This act authorized the awarding of ocean-mail contracts by private negotiation of the Postmaster General and the Shipping Board without advertisement or competitive bidding.

This law was repealed by the Merchant Marine Act of 1928, and thereafter the Postmaster General had no authority whatsoever to award ocean-mail contracts without competitive bidding.

Section 409 (a) fixes the maximum rate that may be paid for oceanmail service according to classification of the vessels and provides for maximum compensation of $1.50 per nautical mile for vessels of class 7, which is a vessel capable of maintaining a speed of 10 knots at sea in ordinary weather and of a gross registered tonnage of not less than 2,500 tons, and provides for maximum compensation of $12 per nautical miles for class 1 vessels, which are vessels capable of maintaining a speed of 24 knots at sea in ordinary weather and of a gross registered tonnage of not less than 20,000 tons.

The act of 1928 in section 402 was amended by the act of April 17, 1930, to add after the words "volume of mail” the words “and commerce”, this having the effect of requiring the Postmaster General to certify to the Shipping Board the volume of mail and commerce then moving over such routes.

Notwithstanding the above declarations, the authority of the Postmaster General to award these contracts is limited within the confines of title IV headed “Ocean mail service." That provision of the act requires:

1. Establishment of routes to "furnish an adequate postal service between the ports.”

2. The contracts are to be contracts for "carrying the mails."
3. Advertisement.
4. Award of contracts to the lowest responsible bidder.


The Merchant Marine Act of 1920 provided for the sale of vessels then being operated by the Shipping Board under managing-operator agreements, and for the establishment of trade routes.

There were 220 vessels sold to operators by the Shipping Board that are being used in mail-contract services. They originally cost $516,174,249.48. They were appraised in 1923 and subsequently


depreciated on the books of the Shipping Board to $64,972,895. They were sold to purchasers on long terms for $41,411,665.10. This is $23,561,229.90 less than the value of the vessels after they had been written down almost 90 percent of their original cost and during this time they were kept in excellent repair by the Shipping Board at the expense of the Government.

These vessels were mostly sold in what was known as "restricted trades”, which meant that at the time of the sale of the vessels the Shipping Board entered into an agreement with the purchaser that it would not dispose at reduced prices any of its ships to any competitor, operating over the same line, for a period of 5 years. This meant that the operator was protected in his trade routes so far as the Shipping Board was concerned for that period of time. In turn, the purchaser had to convince the Shipping Board that it had adequate capital, and it also agreed to operate the vessels purchased, exclusively between the ports on the route for a period of 5 years. The performance of these agreements was guaranteed by bonds which ranged as high as $2,500,000.


As soon as the Merchant Marine Act of 1928 was passed, the ship operators, especially those who were operating over established trade routes and more especially those who had purchased vessels from the Shipping Board with a contract of guaranteed service, began their efforts to secure ocean mail-contracts. It is pointed out that in every case, the purchasers of Shipping Board vessels operating over exclusive trade routes were awarded mail contracts. Practically all of them were let at the maximum rates permitted by law, notwithstanding the fact that they had already entered into solemn and binding agreements with the Shipping Board, and supported their agreements with bonds, to operate the vessels purchased, over the identical route for periods of 5 or more years. There was no valid reason, therefore, for awarding mail contracts to those who had entered into such agreements with the Shipping Board and made such bonds, and already were well established and entrenched in their trade routes.

The course generally pursued by those desiring to secure mail contracts was for them to send their representatives to the Post Office Department and Shipping Board and have the Post Office Department establish a so-called "mail route" over their identical trade route, beginning at the same ports and ending at the same ports then served by the trade route. In every case there was the formality of an advertisement, but in fact it was a mere formality because it was so worded as to the ports to be served, the type of vessels to be used, and the length of time within which service might be required, that without exception the contract was awarded to the bidder favored by the Post Office Department and the Shipping Board, and with few exceptions, at the highest rates allowed by law. In fact, with the exception of a very few cases, there was only one bidder for the route, and always the favored bidder got the contract.

After the first contracts were awarded to the existing lines, two other kinds of bidders entered the picture. One was the prospective contractor who agreed to build new ships. In that case an estimate was made as to a so-called “differential” between the cost of construc

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