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tion and operation under American flags, as compared to the cost in foreign countries. After negotiation with the Shipping Board and Post
Office Department and agreements having been reached as to the type of construction, the route would be advertised with the usual short-time service initiation and with immediate building requirements, which would not allow time even for the making or drawing of plans. The rate of pay had already been agreed upon in an amount which the Government officials and ship operators had determined to be a fair estimate of such differential. This matter will be discussed later.
The Shipping Board still had a large number of vessels on hand, so there was created an interdepartmental committee composed of a representative of the Shipping Board, a representative of the Department of Commerce, a representative of the Navy, and a representative of the Post Office Department. When the Shipping Board desired to sell the remaining vessels, a prospective purchaser would negotiate with this interdepartmental committee, or members thereof, and would enter into an agreement to purchase vessels with the expectation of executing the usual trade-route agreements and bonds, and then getting mail contracts.
In some instances there were direct contingent agreements to purchase the vessels dependent upon the prospective purchaser securing a mail contract. Such was one contract entered into February 21, 1933, whereby a contractor agreed to purchase vessels, which vessels would not have been purchased except for the mail contract. It is estimated that the contractor will have received more than $27,000,000 in mail-contract pay during the term of the contract, as contrasted to a price of about $2,500,000 for the ships purchased.
It may be said that in spite of the fact that authority had been taken away from Government officials to negotiate mail contracts, by the act of 1928, and imposed upon them the duty to award the contracts by competitive bidding, nevertheless they continued to make private agreements and negotiate private contracts. Their advertisement was a mere sham and matter of form.
The practice of having no actual competitive bidding was admitted by former Postmaster General Brown, who testified at the hearing before the House Committee on Merchant Marine and Fisheries, on H. R. 8715, January 22, 1930, as shown on page 44 of the report, as follows:
I think that some of the specifications were prepared so that it was practically impossible for more than one line to bid. At page 54 he said:
Mr. KADING. One other question. You stated, I believe, that in some cases your Department prepares specifications for public work, for bids on public work, that are drawn so that it is practical or possible, in substance, for only on bidder to bid. What kind of a specification would that be?
Mr. BROWN. Well, that is not the practice now, and has not been since the 4th of last March. I am not criticizing the practice before, because it was for the purpose, frankly, of giving a contract to the operator of the line then in existence and so the time for the beginning of the service was fixed so close to the date of the advertisement that only one person, the fellow who was already on the line, could get together a fleet to go into operation.
CLASSIFICATION OF VESSELS
Section 408 (b) of the Merchant Marine Act of 1928, relating to the classification of vessels, provides that, the classification of a vessel may be based upon its speed without regard to its tonnage if the Postmaster General is of opinion that speed is especially important on the particular route on which the vessel is to be emplored, and that a suitable vessel documented under the laws of the United States of a higher classification is not available on reasonable terms and conditions, or, on account of the char. acter of the ports served or for other reasons, cannot be saíely or economically employed on such route.
It appears that invariably the contracts provided for classification into a higher class under the pretense that speed was important, thereby giving the contractors additional mail pay. To illustrate, the lowest class (class 7) are vessels capable of maintaining a speed of 10 knots at sea in ordinary weather and having a gross registered tonnage of not less than 2,500 tons. The rate of pay for this class of vessels is a maximum of $1.50 per mile. The next class are vessels which are capable of maintaining the same speed of 10 knots at sea in ordinary weather and which have a gross registered tonnage of not less than 4,000 tons. The rate of pay for this class is a maximum of $2.50 per mile.
There are a large number of ships employed with a tonnage of less than 4,000 tons and capable of maintaining a speed of only 10 knots. These are all classified at least as class 6 vessels. There are no vessels classified as class 7, and all 10-knot vessels of less than 4,000 tons should have been and should now be classified as class 7 at a much lower rate of pay.
This improper and arbitrary classification is without justification or excuse. It has been most difficult to make a general accurate compilation of the amount paid out and to be paid out under such circumstances, but it is safe to say that this action on the part of Post Office Department officials under prior administrations has cost the Government millions of dollars. This is mentioned in each of the enclosed reports when the question arises.
Mail pay has constantly increased since the enactment of the 1928 act. The mail contracts for the fiscal year 1929 amounted to approximately $9,000,000; in 1930 they were $13,000,000; in 1931 they were $18,000,000; in 1932 they amounted to $22,000,000; in 1933, $26,000,000; and in 1934 they were $29,000,000. For 1935 they are estimated at $28,850,000. For 1936 the amount would have been $32,851,954 if the contractors were to receive the amounts due by reason of reclassification of ships, new ships, and full performance of the service, but the Budget Director disapproved of the increased allowance and recommended that the appropriation be continued as for the fiscal
If the present contracts continue there will have been paid thereunder the approximate total of $308,095,160.30. There has already been paid by the Post Office Department under these contracts the sum of $119,257,756.63 up to June 30, 1934, leaving the estimated amount for the balance of the terms of the present contracts at $188,837,403.67.
If the mail had been carried on a foreign poundage basis up to June 30, 1934, the cost would have been $6,802,434.90 and, if carried at the American poundage rate the cost would have been $15,534,509.10. The difference between the American poundage rate and the amount actually paid could be called nothing except a direct subsidy paid with the expectation that it would be properly used in the building of a merchant marine. This has already amounted to more than $100,000,000 and during the life of the contracts the excess cost, or subsidy, will amount to around $268,000,000.
CONSTRUCTION AND RECONDITIONING OF VESSELS
Thirty-one new vessels (29 are under mail contract service) have been constructed at a cost of $137,642,789.86, and 41 reconditioned at a cost of $15,911,436.60 thus far under the provisions of the mail contracts, or a total of $153,554,226.46.
The United States Shipping Board has loaned the following sums, in connection with the above construction program, to mail contractors at rates of interest varying from one-eighth of 1 percent to 37 percent: Construction loans to contractors on 31 new vessels spread over a period of 20 years by U. S. Shipping Board....
$97, 848, 775. 90 Reconditioning loans to contractors on 26 vessels spread over a period of from 8 to 20 years by U. S. Shipping Board.
9, 745, 181. 42 Total.--
107, 593, 957. 32 Briefly, the mail contractors have invested of their own money in new vessels and in the reconditioning of vessels the following amounts: Initial payments on the construction of new vessels..
$39, 794, 013. 96 Initial payments on reconditioning of 41 vessels, on 16 of which no loans were granted by the U. S. Shipping Board...
6, 166, 255. 18 Total...
45, 960, 269. 14 Repayments on loans referred to above to U. S. Shipping Board: Construction..
$12,064, 983. 08 Reconditioning
1,097, 994. 31
13, 162, 977. 39
Total cash investment of contractors in new vessels and
vessels reconditioned by them up to June 30, 1934... 59, 123, 246. 53
Total Government aid already given contractors:
Discount in ship sales from book value for a consideration of operating on established route..
23, 561, 229. 90 Mail pay up to June 30, 1934, in excess of American poundage rates...
103, 723, 247. 53 Differential in interest rates on Shipping Board loans (rates
from Ys of 1 percent to 342 percent and differential
34, 855, 511. 68
162, 139, 989. 11 The total cash paid by contractors on vessels purchased from the Government and for new construction and for reconditioning of vessels is shown herein before. If we take the total amount of cash invested by the mail contractors from the total amount of Government aid, and it should be conceded that the above statement of aid fairly reflects the amount of aid given to the mail contractors, then we would have the following result: Total amount of Government aid...
$162, 134, 989. 11 Less total cash payments on vessels purchased from Government..-
$24, 475, 887. 35 Less total cash investment on new and reconditioned vessels..
59, 123, 246. 53
83, 599, 133. 88
78, 535, 855. 23
INDEBTEDNESS TO SHIPPING BOARD
The Shipping Board has loaned to mail contractors for the construction and reconditioning of vessels $107,593,957.32. The interest rate on these loans varies from one-eighth of 1 percent to 3% percent per annum. Careful calculation inserted into the record by the Director of the Shipping Board Bureau shows that if the interest rate had been the ordinary commercial rate of 5 percent, additional interest would amount to $34,855,511.68. The following sums remain unpaid by the ocean-mail contractors to the Shipping Board as of June 30, 1934:
It cannot be disputed that the Government aid estimated up to June 30, 1934, is as herein. before set forth, and that the balance remaining after the mail contractors have received all of their investments back is more than $78,000,000. At least a very substantial portion of this sum should have been applied toward the unpaid balances due, and certainly there is no excuse for there being any sums past due.
The following amounts on the hereinbefore-mentioned loans will fall due during the life of the mail contracts: Construction loans.
$27, 875, 759. 54 Reconditioning loans.
4, 809, 255. 53 Ship sales notes-
14, 079, 661. 24 Total...
46, 764, 676. 31 Therefore, it will be seen that without any calculation of interest whatever the Shipping Board will have indebtedness outstanding against old ships and new ships constructed, of approximately $65,000,000 when all the mail contracts expire, and during this time the contractors will have received about $189,000,000 from mail pay, or $142,000,000 more than the amount they will be required to pay on the construction loans, reconditioning loans, and ship sales notes.
The above calculations are based on the accounts just as they stand today. They have taken into consideration only the ship sales notes, construction loans for 31 vessels, and the reconditioning of some old ships. There have not been considered any future advances necessary to replace the old and worn-out fleet, nor even to construct any of the 21 vessels definitely required to be constructed under the contracts.
OPERATIONS UNDER MAIL CONTRACTS When the Merchant Marine Act of 1928 was passed by Congress, the principal argument urged was that it was necessary to establish a permanent merchant marine on a sound basis. Congress assumed that this would be done, and that the enormous sums advanced as mail pay, the general provision for loans by the Shipping Board at low rates of interest, and the low sales price of Shipping Board vessels would result in the establishment of a strong merchant marine for the United States. The recent investigation has shown that comparatively little of the enormous grants has gone into the building of a permanent merchant marine on a sound basis.
The liberal treatment accorded to the operators under the oceanmail contracts has resulted in much waste and extravagance. Too many of the contractors have diverted these grants or subsidies, or by whatever name this aid may be called, to other than sound ship, ping operations. Many of them have employed lobbyists and special representatives at enormous fees. They have paid high salaries and excessive dividends. In order to pipe these funds away from the mail contracting company, they have organized holding companies, operating companies, terminal companies, agency companies, stevedoring companies, repair companies, towboat companies, and supply companies, thus freezing out independent firms.
They have also formed corporations to operate intercoastal and coastwise vessels in competition with nonsubsidized American lines, contrary to the spirit of the law, which does not permit the award of mail contracts or subsidies to operators engaged in the coastwise and intercoastal trade. By this means millions of dollars of mail pay has been diverted from use in foreign trade and used to operate in intercoastal and coastwise trade, resulting in unfair competition with nonsubsidized American lines in the same trade. In some cases mail contracts have actually been awarded directly to favored intercoastal and coastwise operators without the necessity of them having to organize subsidiaries to so unfairly compete with other nonsubsidized American lines.
Some of the largest contractors are engaged in commercial and industrial enterprises and employ ships receiving mail pay largely in transporting their own cargoes. Some of the contractors, up to this very time, have their principal interest in foreign flag ships and have diverted millions of dollars of mail pay into foreign flag operations.
The effect of the actions of officials of the Shipping Board and Post Office Department under prior administrations has been to give every dollar available, or that could be extracted by appropriation from Congress, to the contractors and permit them to expend as little of it as they cared to toward reconstruction or n w construction.
FINANCIAL CONDITION OF THE CONTRACTORS
It has been pointed out that the contractors are definitely required under the contracts to construct only 21 additional new vessels. Their financial statements show that they do not have the money in reserve to construct even these few vessels, and many of them are even in default to the Shipping Board. Therefore, if the vessels are