The American taxpayer, I believe, is ready and willing to help any legitimate ship operator expand foreign trade and to aid him in making ships available to the country in time of war, but he is not willing that his hard-earned money shall be dissipated. Hence, it is the duty of the Congress and administrative officials to see that no loopholes are left open so that the taxpayer may be wronged in future subsidy operations.

Another proposal made by the interdepartmental committee, which I heartily endorse, proposes the establishment of a Naval Reserve to be manned by members of the merchant marine. If this suggestion is adopted, young men would be given training in sea duty on merchant vessels in peace times and stand in readiness to serve their country in emergency periods. This not only would create a new line of defense for the United States, but it also would give employment and invaluable training to many young men who are now without employment or who may have a real desire to make the sea a career.

Throughout my public life I have always advocated a strong merchant marine, and it has been a pleasure to reiterate my faith in it tonight. President Roosevelt has, I believe, laid down a splendid program for our merchant marine, and I for one shall do my utmost to bring about its adoption.

SHIP SUBSIDIES

RADIO ADDRESS OF HON. DANIEL C. ROPER, SECRETARY OF COMMERCE, MARCH 5, 1934

A guiding principle of democratic government in the United States has been and is the welfare and progress of the human element in life. This has not been a haphazard development. It is a definite principle and has grown out of the very essence of democracy. We have a Government founded upon the fully conceived and thoroughly stated proposition that the people are capable of ruling themselves and that the people as human beings, should be given primary consideration in the objectives and functions of such government.

This philosophy has worked naturally toward higher standards of living, and we pride ourselves as a nation in believing that human interest in the United States has reached a higher plane of development than in any other country. It is only natural that these concepts and purposes, fulfilled in our high standards of living, should bring us into keen competition with other nations where working and living standards are lower than ours. This condition applies as much to ocean trade and commerce as it does to strictly internal or national aspects of our economic lives. Hence, due to higher standards of living and wage scales, the shipbuilding and ship-repair costs in the United States and ship-operation costs under the American flag are higher than in other countries.

For instance, the construction and operation costs of British ships are nearest to the American scale or average, but shipbuilding costs in American yards are, on the average, considerably higher than British costs. The higher American costs are largely in labor and materials. Any greater efficiency which may be present in the operation of American vessels is not sufficient to offset the lower costs of living in other countries.

As long as we were chiefly an agricultural country, interested primarily in marketing raw materials abroad, it didn't matter so much whether raw materials were transported in American or foreign bottoms. Foreign countries needed these raw materials, and the United States encountered scarcely no competitive problem in selling such raw materials. But, as the United States advanced to its present status of development in manufacturing, our quest for markets abroad was naturally increased and the competition in the sale of manufactured goods became an active and primary consideration. Today, therefore, there exists the necessity of marketing large quantities of manufactured goods in our own shipping bottoms. As an economic necessity the foreign-trade development of the United States depends largely upon the use of American ships for carrying American goods. It is essential that we maintain an American flag tonnage on important trade routes, to serve the needs of our commerce, and to safeguard against war and other emergencies which might disturb the normal flow of American commerce.

But it is not alone from the competitive and essential economic standpoint that we must view the development of our merchant marine. The merchant marine is an important and, we may safely say, an indispensable factor in our national defense. Obviously, it is not practicable to maintain within the Navy all the

vessels which might be necessary in event of war. To do so would require a huge outlay of taxpayers' money and might tend to encourage unnecessary defense expenditures.

Speaking generally, the same types of ships which are necessary from the commercial standpoint in time of peace are required from the defense standpoint in time of war. Our World War experience is a striking testimony to the value of anfadequate and efficient merchant marine and conclusive proof of the handicaps imposed and excessive expenses incurred through the lack of an adequate merchant marine. Upon the entrance of the United States into the World War we had to depend to a great extent upon foreign ships for transport and military purposes and for the import and export of raw materials and manufactured products. Much of this transportation had to be done at an excessive cost to the American Government and also was a severe handicap to naval and military operations. Thus, from both the commercial and defense standpoints, it would seem that for the economic self-respect, the military self-respect, and the pride of the Nation, an adequate and proper development and maintenance of an American merchant marine is a fundamental necessity.

The practical question in view of these conditions, which early arose and is still before us, is the way in which the labor and other extra cost inequalities, as previously described, can be met or equalized so as to permit the building and sustaining of a requisite merchant marine. An equally important aspect of this question is the necessity of fixing the amount of the subsidy at a point where it will equalize these differentials and stimulate rather than discourage private initiative.

We can readily see that nationality determines the political and economic conditions under which a ship operates. The owner of an American vessel buys his repairs, employs part of his labor, and in some cases all of it, part of the supplies and frequently the ship itself, in the protected domestic market characterized by the costs incidental to a high living standard. His stock in trade is ship's space, which he sells in an unprotected, competitive world market. Naturally the ship operator looks to the nationl interest which may be inherent in his business to neutralize any resultant handicaps.

We all insist that we must maintain our standard of living as against the lower living standards of other countries, and by so doing we automatically impose a handicap upon American shipowners. The best answer that Congress has worked out to this problem of meeting differential costs and expenses is to have the Federal Government supplement the larger costs for our country with money from the Federal Treasury. The question then arose: What is the safest and most effective manner of putting this principle into practicable operation? Congress decided to let this excess cost represent service rendered by the American shipping lines in carrying the mail and has seen fit to designate this financial aid as ocean-mail pay or a subsidy. Funk & Wagnall's Standard Dictionary defines as subsidy as "Pecuniary aid directly granted by government to an individual or commercial enterprise deemed productive of public benefit." Webster's New International Dictionary defines subsidy as "A grant of funds or property from a government to a private person or company to assist in the establishment or support of an enterprise deemed advantageous to the public." Applying these definitions to the merchant marine we may say that the subsidy in this case is a payment of funds from the Government to American ship operators to offset the lower costs of ship construction and operation in foreign countries, so that American vessels may be placed on a sounder competitive basis in the world market. Merchant-marine subsidies take the form of ocean-mail pay and Government financing of shipbuilding and shipping operations to the extent that private business is unable to supply or provide.

* * *

Unfortunately, the Federal Government has not been industrious enough in its efforts to enlighten the people on the subject of subsidies and this use of public funds; and many people probably think that the subsidy is nothing more than the compensation which transportation lines get for carrying the mail. It is not that, but rather a method for actually building a competitive American merchant marine.

Even with the much lower costs existing in other maritime nations, our chief competitors have found subsidies necessary in order to build and maintain their merchant marines. Great Britain, France, and Japan, with their much lower costs, have found subsidies necessary to maintain their commercial fleets for both economic and national defense purposes. It should not be difficult to understand, therefore, that a subsidy policy is essential in the building and maintenance of our merchant marine, at least until a better method is developed.

When we have accepted the necessity for a merchant-marine subsidy, we then face the question of how this money is to be most wisely spent, how the Treasury is to be safeguarded in these expenditures, and just what form these subsidies: should take. When public funds are to be expended in as large quantities as those needed to maintain our merchant marine, the public is entitled to know what policy the Government has adopted and why such a policy is necessary. The question of subsidies comprehends, therefore, a study of the complete scope of the shipping and foreign-trade activities of the United States.

The designation of payments made to ship operators by the Government as "ocean mail pay" is somewhat misleading. "Mail pay" is a misnomer, for payments are not made primarily as compensation for carrying the mail. If they were, these payments would only be a fractional part of what they are at present. Hence it would seem to me that there would be less misunderstanding if these payments were clearly and frankly designated as direct subsidies.

A private company operating an essential trade route under the American flag would require a capital investment and a continuing cost which, against foreign competition, would give no hope of a reasonable return over a period of years, but which would result in heavy losses instead. Consequently the Government of the United States determines essential trade routes and agrees to assist the ship operator by sharing in the venture through a "contract service" or subsidy payment.

What does this subsidy include and how is it determined?

First, as already explained, we have the excess cost of construction in this country as one of the items which the Government might seek to amortize partially. In the second place, we have the considerably higher cost of seamen and other labor as compared with foreign countries. Then we have the third factor of the subsidies given by foreign countries to their ship operators. After these facts are carefully weighed, the differential costs determined, and an agreement reached that the trade route is an essential one, the Government then, in effect, says to the ship operator, "We are absorbing a part of these additional costs in order that you may operate and develop this essential trade route.' The payments made by the Government for this purpose are subsidies.

Since the transfer of the Shipping Board to the Department of Commerce as a regular bureau of the Department, the Secretary of Commerce is charged with the responsibility of fostering the development of our merchant marine. After a study of the country's shipping policy in effect during the post-World War period, I am convinced that we must initiate a sounder and more adequate merchant marine and subsidy program. To accomplish this objective, there are several major considerations which it seems to me deserve careful attention.

We all stand for fair and equitable competition in all lines of trade and commerce, but we all know that competition can be carried to such extremes as to destroy the purpose for which proper competition is designed. For instance, when the Government supports one line of ships on an essential trade route through subsidy payments, it is very foolish and destructive to make loans to enable other lines to build ships and engage in commerce in competition with the very lines which the Government is already supporting, and through which it is trying to build a merchant marine. Such a policy is like the man who would defend himself with one hand and commit suicide with the other hand. Inasmuch as Government aids to shipping have as their objective the establishment of an efficient and ultimately a self-sustaining merchant marine, the essential trade routes to be served should be determined by analyzing the flow and volume of traffic with due consideration to such other factors as defense. requirements, trade policies, and industrial and agricultural needs. When theserequirements are determined, Government aid should be given to ship lines. necessary to fulfill these requirements and aid should be withheld from any other domestic operators seeking to enter into direct competition with the line already receiving Government aid.

It seems to me that the present system of aid in the form of compensation for the carrying of ocean mails might properly be replaced by specific subsidies granted for the maintennce of essential services. The subsidies granted should be based on differentials in building and operating costs, but should be flexible enough to permit adjustments as changes in conditions and circumstances may warrant. Furthermore, subsidies should not be granted to more than one line competing in the same trade route.

In order to facilitate the proper handling of subsidies, two broad classifications of subsidies might be made: First, a subsidy to cover the differences in ship

135956-35--79

building costs, so long as governmental policy provides for compensation for this differential; and, second, a subsidy to offset the difference in operating costs with competing foreign companies. The governmental agency administering the subsidy should also have discretionary authority to make allowances in the national interest to meet exceptional trade developments. With these factors as a basis, subsidy payments could be made with maximum equality, because some operators would have the major requirement of a construction subsidy, others an operating subsidy, and another, perhaps under certain conditions, a trade-development subsidy.

The application of this subsidy policy must take into consideration present conditions in the merchant-marine industry and a proper audit and check-up on merchant marine as a safeguard to Government expenditures. In respect to the latter requirement, the Government should have authority to examine books at frequent intervals of the creditor companies, establish uniform accounting, and scrutinize carefully all items of cost. On such data readjustments of the direct subsidies or cost differentials can and should be made at annual intervals.

In a special study of shipping trends conducted by the Transportation Division, Bureau of Foreign and Domestic Commerce, in connection with its economic survey of a proposed ship canal. the following facts were developed.

The fleet of sea-going steamers under American registry in the World War era was expanded from 2,000,000 gross tons in 1914 to 13,500,000 gross tons in 1921. Most of this additional tonnage was constructed during that period, part of it was acquired by purchase of American and foreign ships, and part of it through seizure of interned enemy vessels. Not all of the tonnage acquired was suitable for commercial use and a considerable portion of it was never so employed. A considerable amount is either laid up or sold. Even at the time it was built, this war-time tonnage was not up-to-date in type. At the time, quantity of production was the primary consideration.

This war-time fleet, far from modern at the time it was acquired, is still the backbone of our American merchant marine and constitutes te great bulk of our sea-going tonnage.

Since the war period there have been additions to the American tanker fleet and a number of American combination-type vessels have been built, largely with Government assistance. But, with only one or two exceptions, the American freighter fleet was built during the war construction period.

Since the war, rapid strides have been made in ship construction, particularly with regard to more economic propulsion, coupled with a definite trend toward increased speed. For instance, when compared with the general run of machinery installed during the war period, a modern high-pressure, superheated steam engine installation would operate, if at the same speed, on 35 to 40 percent less fuel.

Tonnage acquired in the war period cannot be estimated to last more than 8 to 10 years more, and may be retired much faster if faced with competition of many ships of the newer types.

Unless provision is made for progressive replacement of most of our concurrently operated vessels, the passing of American shipping from foreign trade appears certain from one or both of the following causes:

The end of the present economic depression and attendant world trade revival will see the constitution of a number of modern-type vessels under foreign flags, with which our tonnage cannot compete on equal terms. Also,at the end of 8 or 10 years, our war-built tonnage will be so obsolete that it will be retired very rapidly and its business pass into foreign hands.

It seems clear to me that the subsidy is only a part of the problem of developing an adequate merchant marine. The shipping acts reflect the intent of Congress that the shipping industry should be properly regulated. Without such regulation, no subsidy, however well administered, can accomplish its intended purpose. The subsidy must not be used to cloak inefficiency. The communities served by American shipping lines must supplement governmental aid and support by doing everything within their power to encourage and promote business on these American lines. In the past many of our seaport communities have failed to do their rightful share in supporting and maintaining the merchant marine.

The United States can expect to attain the highest degree of efficiency and progress in our merchant-marine activities only if the ship operators and the communities served by our shipping lines fulfill in every sense their responsibilities, which are fully as great as those of the Government.

What is needed here as elsewhere is complete cooperation among the agencies affected in attaining results for the common good. Our shipping bottoms are

entitled to have proper consideration in transportating goods made possible through the new agencies for the development of trade with Russia and other countries where our Government is providing special credit assistance.

From these facts we can readily determine the scope of the merchant-marine problem which faces the United States today. At the same time the United States, as a member of the world family of nations, is eager to fulfill its responsibilities for the development and maintenance of desired international trade and commerce. We approach, therefore, the solution of these problems on the broadest possible basis, determined to meet our national responsibility, while bringing our best efforts to bear upon cooperative international aspects as well. To these ends I solicit the cooperative thinking and cooperative action of all concerned, particularly those definitely related to shipping and marine activities, in promoting our commerce and thus helping to build a greater United States.

О