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TO DEVELOP AN AMERICAN MERCHANT MARINE

PART I. MERCHANT MARINE POLICY

FRIDAY, MARCH 22, 1935

HOUSE OF REPRESENTATIVES,
COMMITTEE ON THE MERCHANT MARINE AND FISHERIES,

Washington, D. C. The committee met at 10 a. m., Hon. Schuyler 0. Bland (chairman) presiding.

STATEMENT OF J. E. SAUGSTAD-Resumed

Mr. SAUGSTAD. Mr. Chairman, yesterday afternoon I had begun some remarks on the Royal Mail Steam Packet Service as a previously important mail contract service for the British Government. Those remarks had not been completed and I wonder if I might repeat that statement from the beginning. The CHAIRMAN. All right.

Mr. SAUGSTAD. Mr. Haag, in testifying, referred to the early contracts of the Royal Mail Steam Packet Co. in the West Indies services and to certain similarities between those contracts and the present contract system in the United States. In view of this reference, I would like to expand the record on this point. Until its final reorganization 4 or 5 years ago, the Royal Mail Steam Packet Co. was considered the largest shipping combine in the world. At that time, the Royal Mail Steam Packet Co. proper was the central organization in a combination of more than 20 shipping companies, controlling the operations of about 2,000,000 tons of shipping

The original charter of the Royal Mail was granted on September 26, 1839, at an authorized capitalization of £1,500,000, equivalent to $7,300,000. It was thought that with closer mail service between the United Kingdom and the West Indies, British interests in the West Indian colonies could be greatly expanded. The charter expressed the opinion that it would be " for the advantage of the public services to organize the company and that vessels should be furnished through the medium of merchants and other persons with capital.”

The first contract was signed in 1840. Under it, 14 steam vessels and 4 sailing vessels were to be constructed under naval inspection and to be capable of mounting the largest guns then used in the British Navy. The contract specified that vessel equipment was to be kept abreast of developments during the life of the contract. The sailings were twice a month from British Channel ports to Barbados by way of Jamaica and Cuba to Mobile, with branch services to Tampico and Vera Cruz and from Habana to New York and Halifax. The annual payment to the company was £240,000, equivalent to $1,168,000. Additional payments were to be made not to exceed £60,000 annually, if insurance rates rose to undue heights due to causes of a public character, if coal freights and insurance on coal rose to too great an extent. By way of explanation, I may say that in the early days British steamers were dependent for their homeward fuel requirements on fuel stations which were stocked by coal carried on the outward voyage or by the sailing fleet.

The original mileage covered by the company in these services was 684.816 miles, which would result in an average subsidy rate of $1.70 per mile sailed. During the first year, the company sustained a loss of approximately, £79,790, equivalent to $388,300, whereupon the Government permitted the operator to reduce the required mileage to 392,973 miles, by which the relative subsidy was increased to nearly $3 per mile. "The net cost to the Government, as represented by the difference between the cost of the subsidy and the mail revenues accruing to the Government, amounted to about £180,000, equivalent to $876,000, during the first year of operation.

By the time the first contract had expired, the economic forces which were to stimulate the immense expansion of the Royal Mail had begun to be effective. Trade increased to such an extent that the company soon declared dividends, which rose from 30 shillings ($7.30) per share in 1844 to £2 ($9.73) in 1848. The gold discovery in California and the consequent stimulation in both cargo and passenger movement to the Isthmus of Panama were factors favorable to the Royal Mail Co. Again, the investigation of routes to Australia resulted in the House of Commons recommending the Panama route in 1849. This, in addition to the Panama railroad, which was then projected in the United States, placed the Royal Mail Co. in a highly strategic position insofar as its future fortunes were concerned. The company advanced £25,480, equivalent to $124,000, toward the building of the Panama railroad.

In 1852, the contract was renewed for £270,000, equivalent to $1,314,000, for a mileage of 547,296 miles and a speed requirement of 9 knots. In 1864, the contract was renewed and subsidy reduced to £172,914, equivalent to $841,485, and speed was increased to 1012 knots. In 1868 came the change from paddle-wheel to screw-propeller propulsion. The company asked an extension of its contract to 1874, which the Government granted, and for which the Government was to receive one-half of all profits above 8 percent, being by way of guarantee that the subsidies should not develop unreasonable profits.

By 1874, contract services had come under direct supervision of the Postmaster General and public tenders were called for under published specifications, due to the Atlantic services which had by this time developed to a point where competitive bidding would result in lowered expenditures for mail services. The Royal Mail Co. bid in the service for £84,750, or equivalent to $412,435.

The final contract between the British Government and the Royal Mail Steam Packet Co. was that of November 4, 1911, under which the company was to receive £62,900, equivalent to $306,100, less receipts from sea postage. The contract of November 4, 1911, was effective retroactive from January 18, 1911, to August 9, 1917, and was to end concurrently with other contracts between the company and Crown agents for the colonies. In 1917, the contracts were not renewed, partly because of war conditions which interfered with operations, but mainly because the company took the position that the obligations imposed on it by the contract involved trouble and expense for which the subsidy was inadequate compensation.

Through acquisition of the White Star Line, the Royal Mail interests expected to maintain branch services from New York to Halifax and to the West Indies, connecting with the White Star Line ships at New York.

That is a brief sketch of the history of the Royal Mail, so far as its service operations were concerned.

The CHAIRMAN. That is still in operation, is it not? Mr. SAUGSTAD. Well, you recall that 4 years ago the Royal Mail group, as a whole, got into difficulties and that the entire operation was placed in liquidation, due to an apparent overexpansion of their interests, and you will recall that 2 or 3 years before that they purchased the White Star Line from the I. M. M. of New Jersey.

The CHAIRMAN. Are they still in liquidation, or in an operating status?

Mr. SAUGSTAD. I have not had time to keep up with the reorganization of the Royal Mail. They have dual organizations at present, as I understand, one of which is to deal entirely with the liquidation features of the combination, and the other of which is to carry on whatever operations they have.

The CHAIRMAN. Do they operate the White Star Line now?
Mr. SAUGSTAD. Yes, sir.

The CHAIRMAN. Well, do you know whether there is any tie-up between the White Star Line and the I. M. M. at this time?

Mr. SAUGSTAD. No, sir.

The CHAIRMAN. Do you mean there is not, or that you do not know! Mr. SAUGSTAD. Well, let me put it this way — The CHAIRMAN. I asked you if you know. Mr. SAUGSTAD. As you know, the Royal Mail has not paid for the White Star Line and that situation has been threshed out in the British chancery courts. Now, if you would like to have inserted in the record, a summary of that action which shows the position, I would be glad to submit that for the record, or I can read it.

The CHAIRMAN. I would be glad to have it submitted for insertion in the record. I was particularly interested in knowing what the relation of the I. M. M. was to the White Star Line at this time. They claim they sold their foreign connections, but I presume they still have their equities.

INTERNATIONAL MERCANTILE MARINE INJUNCTION PROCEEDINGS

Mr. SAUGSTAD. The International Mercantile Marine Co. of New Jersey, which sold the White Star Line to the Royal Mail Co. in 1927, sought an injunction in the Chancery Division of the United Kingdom, restraining the carrying into effect of the Cunard-White

Star merger.

135956-354-15

According to the judgment rendered in the early part of May 1934 motion of the plaintiff was based on the allegations, first, that the merger agreement was, in substance, one of the sale of thé Oceanic Co.'s undertakings and assets (that being the formal name of the White Star Line), and that in the absence from the articles of association of an express power, the company cannot effect such a sale while it is a going concern; second, that even if it be competent for the company, in general meeting, to effect such a sale, it is beyond the powers of the board of directors to do so; third, that even if the agreement had been concluded within the powers of the board and the company, it is a transaction brought about by an improper exercise of the powers of the directors.

The judgment stated that a plaintiff impeaching the conduct of a company's affairs upon the grounds enumerated must be a shareholder in the company, that the plaintiffs admittedly were not shareholders and that 4,958 out of 5,000 shares were registered in the names of the Midland Bank Executor & Trustee Co., Ltd., and the New York Trust Co. The terms of sale covered the whole of the share capital, namely, 5,000 shares of 1,000 pounds each, for 7,000,000 pounds, on the following terms: Two million pounds cash on or before February 1, 1927; 1,250,000 pounds on or at purchaser's option on or before June 30, 1928; 1,250,000 pounds on or at purchaser's option on or before June 30, 1929; 2,500,000 pounds on or at purchaser's option on or before December 31, 1936. All unpaid amounts were to draw interest at 4 percent, and it was agreed that in case of default in payment of any installment of the purchase price or of the interest thereon, the trustees might, and upon the written request of the plaintiffs should, sell all the Oceanic shares and apply the net proceeds of such sale, first, in paying costs and expenses; second, in paying to the plaintiffs the balance of the purchase price and interest then due to them; and, third, in paying to the Royal Mail Co. the surplus, if any, of such proceeds.

The decision stated that no default had been made and the power of sale had not become exercisable. The decision continued :

An appreciation of these documents demonstrates that, so far from the plaintiffs being the only persons interested in the share capital of the Oceanic Co., they are not only not the holders of those shares, but they never can be. They are merely unpaid vendors who, so far, have received all they are as yet entitled to under the contract for sale; they have no lien or charge upon the shares and have agreed to their being vested in trustees upon trust until the power of sale conferred upon the trustees shall have become immediately exercisable to allow the purchasers to receive and enjoy all dividends, bonuses, and income to be declared or become payable in respect of the shares, and to exercise, in relation to the management, operation, and general business of the Oceanic Co., the voting rights conferred by the shares.

The CHAIRMAN. Is the International Mercantile Marine acting as agents now for that company at all, do you know? Mr. SAUGSTAD. I do not know.

The CHAIRMAN. Do you know what the British holdings of the International Mercantile Marine are now?

Mr. Saugstad. The British holdings?
The CHAIRMAN. Yes.
Mr. Sargstad. I have no knowledge.
The CHAIRMAN. You may proceed.

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