to be constructed, they must be built with Shipping Board loans. If the construction cost is relatively as great as for those which have been constructed, and the money is loaned, we may assume an additional 50 or 60 million dollars of loans, at least. This would make the Government practically the owner of the shipping companies because it would reduce their net worth ratio to where their capital, collectively, would only be about one-third of their fleet valuation, or less than one-half of the Government's equity. Even this would include all such items as goodwill and other intangibles on the contractors' books, which would be absolutely valueless to the United States as security.

This takes into consideration only the small construction program of 21 vessels, and even the construction of some of these is long past due under the terms of the contracts.

It is a futile hope that the entire fleet of old vessels will be replaced by new construction because the companies, generally, are simply not in financial condition to do it and will not be with the past system of operating and present capital.

The financial statements of the corporations holding mail contracts showed, with few exceptions, a very unsound condition common to all. Many companies organized with insufficient paid-in capital to undertake the necessarily heavy investment in properties, to provide liquid working assets and to maintain a reasonable surplus to meet the fluctuating profit and loss that is inherent to the industry. Consequently, too much reliance had to be placed upon current income (including mail contract pay) to overcome this deficiency in paid-in capital, and liberal credit had to be obtained from the United States Shipping Board. As a further consequence, the companies were without surplus to overcome a cycle of reduced revenues, resulting in further weakening of financial condition and, in several cases, inability to reimburse the United States Shipping Board in accordance with original liberal terms. The startling undercapitalization of almost every company, as herein before mentioned, precludes not only an adequate, but even an appreciable replacement program, even with a continuance of Government loans amounting to 75 percent of the total construction cost. And a merchant marine must replace itself continually if it is to remain a factor in national defense and international trade.

To determine the extent of the unsound condition on the 32 mail contracting companies as a whole, a tabulation has been prepared from the latest available financial statements (in most cases dated Dec. 31, 1933), to show the net worth of the corporations, the book value of all vessels owned (whether operating on mail routes or not) and amounts owing to the United States Shipping Board. The totals of such tabulation are found as follows:

The United Fruit Co. has been shown individually in the above tabulation because it is primarily an industrial corporation of which its ship ownership and operation is an important but not principal adjunct.

The companies' indebtedness to the United States arising from ships sold on liberal installment plans at purchase prices is in many cases below market, and from cash reconditioning and construction loans, not only are secured by ships that are rapidly depreciating in value, but seven contractors have been unable to meet installments when due, the aggregate of past-due notes amounting to $4,541,404.95. A fair value of the vessels owned by contracting companies is not readily determinable, but the book values shown are a maximum appraisal since it has been observed that some contractors have not provided even reasonable depreciation while others have appreciated values over cost for stock-floating purposes. It is conservatively estimated that book values should be reduced not less than $15,000,000 because of such appreciation alone.

The net worth of the companies as shown is real only to the extent that realization on assets would exceed liabilities, and in addition to the inftion of ship values above mentioned, net worth must also be reduced for intangibles such as good-will and investments of a "frozen" or very doubtful value. It is conservatively estimated that such reduction should be not less than $30,000,000.

After consideration of these facts we find the relative investments of contractors and the Government to be as follows:

It appears, therefore, that with the exception of one particular mail contractor (the United Fruit Co.) the total stockholders' investment ($80,558,000) is considerably less than the Government's "investment" ($112,514,000) in such companies. Not only is the Government's "investment" 1.39 times the stockholders' interest in all assets, but the Government's fixed lien on certain of the vessels is equivalent to 60 percent of the maximum value of all vessels.

Examination of the individual companies reveals that in many instances the net worth to a large degree arose from profits earned through agency agreements to operate Government-owned ships prior to purchase, rather than from capital-stock sales, and further, in certain companies, the unsound relationship of net worth to ship assets would not be so great had the companies been required to provide ship construction capital through the sale of capital stock rather than through interest-bearing bank loans and borrowings secured by second mortgages.

The United States Shipping Board spent many millions of dollars after the World War in developing most of the overseas trade routes covered by these mail contracts in an effort to place them on a profitable basis so that they might be turned over to private interests. During these development or pioneering stages the vessels were operated by agents (in most cases now the present owners), who acquired the ships at reduced prices and on generous terms.

DIFFERENTIALS IN CONSTRUCTION, WAGES, SUBSISTENCE,

MAINTENANCE, REPAIR

The arguments of those who have sought to secure contributions from this Government to shipping companies, have been that it costs a great deal more to construct vessels in American yards and to operate them under the American flag that it would if constructed in foreign countries and operated under foreign flags.

Some of the contracts were negotiated between the prospective mail contractor, the Shipping Board, and the Post Office Department with the understanding that ships would be constructed, and that the mail pay would be sufficient to offset the differential cost of construction of the ships. For illustration, one mail contractor proposed that if it were given 3 separate contracts over trade routes in which it was then operating, it would construct 3 vessels each for 2 of the routes and 2 for the other, making a total of 8 in all. A forecast of the program was very carefully prepared by the contractor. It estimated that the cost of the vessels, if constructed in American yards, would be on the ratio of $3 in the United States against $2 in foreign shipyards. The contract was awarded as prearranged, and the company has already built 6 new vessels at a cost of approximately $20,000,000. It borrowed some of the construction costs from the construction loan fund and now owes about $13,000,000; and the contract was admittedly negotiated for the purpose of securing the building of these ships in the United States, although the route was perfunctorily advertised according to law.

All of the contractors claim a wage, maintenance, and subsistence differential. The true amount of differentials is, of course, uncertain. It varies from day to day and among different countries according to the economic conditions in countries where ships are built. The Director of the Shipping Board Bureau, through the Research Division of that Bureau, has furnished this Department with such information as is available there. This includes report no. 103, relating to construction differentials. This report lists the type of ship and estimated increased percentage of cost for building in the United States rather then in foreign yards. Taking 100 percent for foreign yards, the cost of cargo ships is estimated at 61 percent more in this country; passenger ships, 32 percent more; and combination passenger and cargo ships, 43 percent more than in foreign yards.

The Shipping Board lists all vessels constructed under Shipping Board loans (and now in service on mail routes) as passenger cargo vessels, seventeen of which are employed in the trans-Atlantic, South American and trans-Pacific trade, constructed at a total cost of $87,626,000; and twelve, miscellaneous service, in the protected intercoastal and coastwise, and semiprotected and nearby foreign trade at a total cost of $46,842,000.

In addition, there were 41 vessels reconditioned; and while, of course very few shipowners would take vessels abroad to repair or recondition them, yet for the purpose of comparing the differential with mail grants, we will take them into consideration. These vessels were reconditioned at a cost of about $15,912,000.

The total amount paid for building new ships and reconditioning old ships amounts to about $150,380,000. Of this amount, the Government had loaned approximately three-fourths, but for the

purpose of discussing the construction differential we will say that a differential could be claimed on the construction of vessels in the protected trade, and for the reconditioning of old vessels, and that the contractors have paid every cent of the cost themselves. If this were true, and if the same conditions prevail now as existed in 1932 (when the Shipping Board report was prepared), and if the estimates at that time were correct, the differential would have amounted to about $64,663,400, or about $54,600,000 less than has already been paid to these contractors up to June 30, 1934, as mail pay. Attention is again called to the fact that notwithstanding a payment of $54,600,000 more than a theoretical amount of such differential, there is an estimated amount of $188,800,000 payable under the terms of the present mail contracts within the next 5 or 6 years, if the system is not changed. The contractors also claimed an excessive amount of operating differentials. The Shipping Board Bureau has advised this Department that it has computed the operating differential between American and foreign flag vessels, including "wage, subsistence, and maintenance of repair costs of the 282 American flag vessels certified for operation upon ocean mail routes which made one or more voyages during the fiscal year ended June 30, 1934" (estimating American cost at 100 percent), as follows:

1 Figures shown are based on full-time employment of crew for the year.

It will be observed that the present mail contract pay of $28,850,000 is more than all the combined annual wages, subsistence, maintenance, and repair costs of the operation of all of the American flag vessels on ocean-mail routes, which amount to $28,460,000 per year based on full-time employment for the crew. The estimate for the amount of wages, subsistence, maintenance, and repairs having been obtained from the ship operators, it is certainly very reasonable to assume that they have not underestimated their expenses.

With all the wages, subsistence, maintenance, and repair costs having been met with mail-contract pay, the operators would only have to meet the expense of fuel, incidental expenses, and overhead. The difference between these expenses and the amount of all cargo and passenger revenues accounts for some of the enormous profits earned by the mail contracting ship operations.

The actual results obtained, as stated above, show that the need for differential allowances has been, in many cases, very greatly exaggerated.

CONDITION OF FLEET AND NEED FOR NAVAL AUXILIARIES

There have been constructed 29 vessels that are now in Ocean Mail Service. They have an aggregate deadweight tonnage of 226,218 tons. There have been definitely required to be constructed under

the contracts 21 more vessels. Their construction is uncertain for various reasons but, assuming that they are constructed, there will have been 50 vessels constructed and put into service under the terms of the Merchant Marine Act of 1928.

Evidence before the Department at this time shows that if all of these new ships are constructed and the old vessels in the service now remain in the service, the total number of vessels in service under 17 years of age when the contracts expire will be 65. There will be 268 that range in age from 17 to 35 years old, and of this total 112 that will be 17, 18, or 19 years old. Most of the 268 vessels were built during or immediately after the war. It is considered that the useful commercial life of a vessel is 20 years. Therefore, few vessels will be of use in commerce or as naval auxiliaries.

In addition, there have been reconditioned 41 ships at a cost of $15,911,436.50. The life of the old vessels that have been reconditioned is purely speculative. All of the ships reconditioned are the old war-time vessels, which have been reconditioned in various ways. Because of the uncertainty as to whether they will remain serviceable for 1, 5, or more years, they are not taken into consideration in determining the condition of the fleet.

It might be interesting to briefly quote Admiral George A. Rock, United States Navy, former Chief Constructor of the Bureau of Construction and Repair of the Navy Department. He stated that the newer ships were very valuable as naval auxiliaries and that the reconditioning of a ship extended its economic life "perhaps 3 or 4 years. Admiral Rock also stated that

* * *

We need large numbers of cargo ships of from 14 to 18 knots. We need a large number of high-speed tankers, on top of which we would have to have to carry on any kind of campaign at sea. it would be reasonably near the fleet speed. * * * One other nation (Japan) is buldiing a large number of cargo carriers at the present time, since the last 2 years, all from 15 to 18 knots. We do not have our own supply of cargo ships, only a very few very old ships. We depend on the merchant marine for taking such ships over in time of we must have large numbers of dependable cargo ships which can be depended upon to carry supplies to the ships at the time when it is vital that they should have those carriers. That was the first reason why I mentioned the high speed, because the slow cargo ships are much more liable to be attacked and lost * * * I feel our cargo ships must be reasonably near the fleet speed.

war

*

* *

* *

* ** *

*

Regarding the present 10-knot ships that comprise most of the merchant fleet, Admiral Rock stated:

They would be woefully deficient, they are woefully deficient.

Under date of October 3, 1934, the Secretary of the Navy, in writing to the Department, stated that all vessels under mail contracts were considered as potentially more or less valuable as naval auxiliaries

although many of them are comparatively old and slow. The United States merchant marine does not include a sufficient number of relatively new, fast vessels to make improbable having to use old, slow vessels such as these in the event of a grave national emergency.

He then inclosed a list of 58 of the vessels that are declared to be capable of "economical conversion into an auxiliary naval vessel." Since this letter, the Secretary of the Navy has given out statements to the press commenting on the need of newer and faster vessels as naval auxiliaries.