It is recommended therefore that section 507 (c) be omitted entirely. Section 509: There should be no ambiguity as to whether the prohibition of this section extends to agreements, etc., for management. It is suggested that in lines 9, 15, and 21 on page 22 (lines 5, 11, and 17 on p. 24) the word "management" be added in commas after word "maintenance".

Section 511. It is suggested that in order to more effectually accomplish its obvious purpose this section should be amended to read substantially as follows: "No contractor under a contract in force under this part shall suffer or permit any insurance, stevedoring, terminal, ship repairing, towboat, management, operating, or other services of like character to be supplied vessels operated under such contract by any affiliate subsidiary or holding company connected with or directly or indirectly controlling or controlled by such contractor except with the written consent of the Authority and upon such terms as the Authority may prescribe.

Management and operating services are among the commonest types of services handled in this way and it is most essential that there should be no ambiguity as to their inclusion within the scope of this provision. Such services are also at times rendered by affiliates or holding companies as well as by subsidiaries and it is most desirable that the phraseology in this respect should be made as broad as that used in section 515 (a) (1).

Considerable dissipation of indirect subsidy payments in the past has occurred through such practices as are here sought to be controlled. On the other hand it is often entirely legitimate for services to be rendered in this manner. It is therefore desirable to give the Authority a sufficiently flexible degree of control such as is permitted by the words which it is suggested be added at the end of the section.

There are, of course, many instances in which the existence of a group of affiliated companies is proper and perhaps even necessary. On the other hand, it should not be overlooked that such set-ups have in the past been perhaps more responsible than any other single contributing cause for the seeping away of Government aid to shipping and the failure of each dollar of such aid to yield a full dollar's worth of results. The mere requirement of uniform accounting is not in itself sufficient to prevent continuance or repetition of such conditions. It is impractical, however, to prescribe in legislation the exact extent to which a corporate set-up of this sort would be permissible in any particular case. A single dollar of subsidy money, however, leavens the recipient's entire income from all sources, and every effort should be made to insure that in such cases any group of affiliated corporations is compact enough to permit quick and convenient audit of income and expenses. It is suggested, therefore, that after the word "consent" on page 24, line 7 (p. 25, line 24) there be inserted the words "and upon such conditions as may from time to time be prescribed by".

Section 513: Attention is directed to the fact that this section relates to the development of the merchant marine only as that is incidental to the development of the foreign commerce of the United States. It is possible that this may expand the functions of and the demands upon the Authority to an extent which may embarrass or conflict with the work of other agencies of the Government which are directly charged with the promotion of foreign commerce. The implied guaranty of a return upon capital up to 6 percent if an operator can bring himself within this provision may also have certain undesirable results. This Bureau is not prepared to make a final recommendation with regard to this section but feels that it should note that there exists a very wide degree of difference of opinion as to the advisability of certain of its provisions.

Section 514: It is believed that the form of the corresponding provision in the Securities Act is preferable. It is therefore suggested that in line 18 on page 26 (line 11 on p. 28) there be inserted after the word "financial" the words "and other"; that in line 20 (line 13) there be inserted after the words "shall be" the words "under oath or affirmation and"; and that lines 21 through line 2 on page 27 (lines 14 to 19) be amended to read:

"Any person who willfully in an application for financial aid under this title or in any statement required to be filed therewith, makes any untrue statement of a material fact or omits to state any material fact necessary to make the statements not misleading, shall upon conviction be fined not more than $5,000 or imprisoned not more than five years or both."

Sections 515-516: One of the most important reasons for requiring uniform accounting, etc., is as an essential safeguard to the administration of subsidies. But that is not the only need or reason for such a provision. It is also needed in connection with the investigation and promotion duties imposed by the bill and

with the administration of the regulatory powers. The bill, as it stands, does not provide adequate powers over accounting of all persons subject to the jurisdiction of the proposed act. These powers should extend to all persons under the jurisdiction of the new agency, including all American-flag common carriers and possibly other persons (American) subject to the Shipping Act of 1916. Furthermore, the power to prescribe methods of accounting and to require statements in the case of contractors should not be limited to the contract transactions, as without complete statements or examination of the complete accounts the correctness of such statements, etc., cannot be ascertained. The need for a single dollar of subsidy cannot be verified without examination of the entire income and expense accounts. In this connection it is suggested that on page 27, lines 8-10 (p. 28, line 25 to p. 29, line 2) the words "relating to such contract and the maintenance and operations of the vessels, services, routes and lines covered by the contract" be omitted, and that in line 15 (line 7) after the word "Authority" there be inserted the words "balance sheets, profit and loss and surplus statements covering all of the transactions of the contractor and such other." It is also suggested that the description of affiliated, etc., companies in section 515 (a) (1) be made to correspond exactly with that suggested with respect to section 511.

In order that the Authority may be in a position to properly carry out even the limited list of duties hereinafter proposed, it would appear that should also have the power and duty of prescribing the uniform accounting requirements even though much of the auditing, etc. might continue for the time being to be performed under the Department of Commerce. The exact dividing line between the functions of the two agencies in this respect had not been fully developed at the time of the preparation of this memorandum. It might perhaps be well to include a provision that the Secretary of Commerce is authorized and directed to furnish the Authority with such accounting and other information as it may call for.

Section 517 (c): In its original form this section would probably have to be construed to require that these funds be kept on deposit in cash. The revision of this section found in Senate Committee Print No. 2 is believed to be much more practical. Investment should at least be permitted in Government bonds. Section 517 (d). It is suggested that this section be amended to provide substantially as follows:

"It shall be unlawful for any contractor, its subsidiary, holding company, or affiliate, or the officers or directors thereof to own, operate, charter, or act as agent for foreign vessels or foreign interests, unless and until permission is first obtained from the Authority in accordance with regulations and orders prescribed by the Authority."

Section 517 (e) (New): While section 11 (g) of the Merchant Marine Act, 1920, as amended, provides for insurance protection for amounts advanced as construction loans it is doubtful if that provision would extend to the construction differential subsidy. It is suggested therefore that at the end of section 517 there be added a new subdivision to the following effect:

"(e) The owner of any vessel constructed under the provisions of this title shall be required to carry insurance payable to the United States in addition to insurance required to be carried by section 11 (g), of the Merchant Marine Act of 1920, in an amount equal to the amount of any construction differential subsidy paid on such vessel."

In this connection, the question also arises whether the performance of the obligations incurred by a recipient of a construction subsidy, e. g., agreement to operate the vessel in a certain service for a certain period, etc., are sufficiently secured. A reference to this matter found in the first sentence of section 503 of the bill as originally introduced has been omitted in Senate Committee Print No. 2. The bond provided for in section 504 is apparently for a limited purpose. It is suggested that a provision be included authorizing and directing the Authority to require proper security, in the form of a bond, lien, etc., to be given to protect the Government's interest in this matter.

Section 601. The new construction subsidy provided for in this bill is expressly limited to ships for foreign trade, but there exists considerable doubt under the present law as to whether a construction loan should be granted in aid of service on a line engaged in domestic commerce. This doubt is one of policy rather than as to legal power and it may be desirable to remove it in connection with the reenactment of section 11 of the Merchant Marine Act, 1920. On the one hand it is frequently argued that all domestic commerce is a protected trade, and within that trade our operation should not be favored over another by additional Govern

ment aid. On the other hand a deep sea coastwise ship is just as valuable as any other in time of national emergency and in the interests of both safety and of replacements there is much to be said for the policy of making the construction loan fund available in the domestic trade.

Section 602: While section 302 of the Merchant Marine Act, 1928, authorized enlargement of the constrction loan fund to a total amount of $250,000,000, the amount actually in the fund at present is only $150,500,000, of which $39,392,150.35 is now available in cash and the balance is represented by unpaid construction loans. This blance may well prove inadequate for the increased demands which will be made upon the fund under the terms of the present bill. It is suggested therefore that proceeds from sales of ships and surplus property and/or interest on construction loans be authorized to be added to the construction loan fund subject to the total limitation provided in section 302.

REGULATION

Section 701: Subdivision (1) gives the Authority specific power to prescribe minimum rates in interstate commerce. Subdivision (3) gives it specific power to prescribe minimum rates in intercoastal commerce but only in connection with suspension proceedings. The proposed change in section 18 of the Shipping Act, 1916, fails to require the filing of actual rates and the change in the Intercoastal Shipping Act fails to specifically say that minimum rate power can be exercised in complaint proceedings as well as in suspension proceedings. Great confusion will result if these two additional provisions are not specifically enacted and it is highly improbable that failure to put such provisions in the bill is intentional. The simplest way to accomplish this appears to be the following: On page 32, line 3, (p. 33, line 18) strike out the words "the last paragraph of" and strike out all of lines 5 to 11 (p. 33, line 20, to p. 34, line 2). In lieu thereof insert the first paragraph of section 18 of the present Shipping Act, 1916, omit the remaining paragraphs, and add a new paragraph to read as follows:

"The provisions of the Intercoastal Shipping Act, 1933, as amended, shall also apply to all interstate transportation engaged in by any common carrier by water in interstate commerce as defined in section 1 of the Shipping Act, 1916, and every such carrier is hereby made subject to the provisions of said Intercoastal Shipping Act, 1933, as amended."

On page 33, line 18 (p. 35, line 9) the words "and may prescribe" should be struck out and on the same page in line 23 (line 14) the word "and" should be changed to "or." In lieu of the words "and may prescribe" in line 18 (line 9) put a period after "effective" and insert "Such orders, whether issued in suspension proceedings or under section 22 of the Shipping Act, 1916, as amended, may in appropriate cases prescribe."

Some question has arisen under section 19 of the Merchant Marine Act, 1920, as it reads today, as to our power to enforce obedience to any rules and regulations. Section 29 of the Shipping Act, 1916, provides a method of enforcing orders and it therefore seems best to have section 19 provide for the fixing of rates, regulations, rules, etc., by orders. This can be done by making the following changes on page 32: In line 14 (line 5) strike out the word "make" and insert in lieu thereof "prescribe and order enforced" and in line 22 (line 13) after the word "prescribe" insert "and order enforced the."

A number of apparent typographical errors appear in this section 19 as amended on page 32 (page 34). These can be corrected by the following: In line 14 (line 5) change the word "a" to "the". In line 18 (line 9) insert the word "in" after the word "or". In line 23 (line 14) strike out the words "rules and practices." In line 24 (line 15) strike out the words "and enforced" and insert in lieu thereof "and rules and practices to be observed".

Section 702 (c): The question arises whether purely advisory powers conferred upon the Joint Transportation Board are sufficient, or whether that Board should have authority to make a controlling decision in the event of conflict between rail and water policies or between decisions of the two agencies. It is difficult to answer such a question a priori. Under all the conditions it is perhaps unnecessary to do so because if a few months' experience shows the desirability of giving the Board greater power that can readily be done by subsequent legislation. Section 1005: It is recommended, be rewritten to give the Authority discretion as to when it should participate in conference discussions and negotiations, for the reason, among other things, that it would be practically impossible to have sufficient personnel to sit in on every such meeting held. This section should also be amended so that such representatives would not be voting upon con

ference decisions. The actions taken as a result of such decisions will frequently come before the Authority in its regulatory duties to decide whether or not such action violates the law. It is believed that a proper penalty for the refusal by a conference to permit representatives of the Authority to sit in on discussions would be disapproval of the agreement. The first change has already been made in Senate Committee Print No. 2 and can be effected in H. R. 7521 by striking out the words "and directed" (page 48, lines 16-17). The other change can be effected by substituting the word "negotiations" for the word "decisions" in two places on page 46, lines 14 and 20 (page 48, lines 18 and 24), and by striking out lines 21 and 22 on page 46 (lines 1 and 2 on page 49) and substituting in lieu thereof the words "be deemed sufficient reason for the disapproval of such pool, conference, or association agreement".

Section 1006: This section should be amended to cover receivers of freight as well as shippers. In view of the use of the word "contract" in section 1009 it may prove confusing to use the word "contract" in section 1006. It is also believed that this section should be limited to conferences in foreign trade.

These changes can be effected by striking out in line 24, page 46 (line 4, p. 49), the words "enter into contracts" and substituting "agree in writing", by striking out the words in line 25 (line 5) "providing for a" and inserting in lieu thereof "or receivers of freight in foreign trade to", by striking out the first word "of" in line 24 (line 5), and by inserting the words "or receiver of freight" twice in line 12 (line 6), each time after the word "shipper." As so amended the section would read as follows:

"The Authority shall have the power to permit members of conferences to agree in writing with shippers or receivers of freight in foreign trade to return a stipulated part of freight moneys to the shipper or receiver of freight in consideration of the shipper or receiver of freight confining his shipments to lines and vessels which are members of the conference."

In its present form, this section may prove ambiguous as to whether it goes to the extent of authorizing deferred rebates as prohibited in section 14 of the Shipping Act of 1916. This Bureau is not prepared to recommend such a relaxation of the prohibition now found in section 14. It is also suggested that it might be well to clarify this section and remove possible ambiguity by adding an appropriate proviso.

Section 1009: In view of the prohibition in section 14 against fighting ships and that to permit American-flag fighting ships to operate while prohibiting foreign flagships to so operate might be in violation of treaties, it is believed that this section should be substantially modified. It is suggested that this be done by striking out all of the section appearing after the word "vessel" in line 3, page 48 (line 6, page 50), and by inserting in line 1 (line 4) between the words "give" and "aid" the following: "in such manner as it deems advisable".

Section (new): A new section should be written prohibiting false billing by shippers. This is something which carriers are unanimous in desiring and which no shipper or anyone else can properly oppose. False billing by shippers is a vicious practice widely used today. It is suggested that a section similar to that contained in the Eastman bill introduced by Mr. Wheeler (S. 1632) should be added. This provision is found on page 47 of that bill, section 221 (c). Section (new): One of the weaknesses of the present situation is the fact that there is no specific penalty for a violation of an order issued by the Shipping Board. It is suggested that section 32 of the Shipping Act of 1916 should be amended to read as follows:

"That whoever violates any provision of this Act or any order promulgated by the United States Maritime Authority, except where a different penalty is provided, shall be guilty of a misdemeanor, punishable by a fine not to exceed $5,000.”’

ORGANIZATION AND ADMINISTRATION

Up to this point the comments have related to the proposed new substantive provisions. The bill provides also for major changes in organization and administration, most important of which is the creation of a United States Maritime Authority. Our comments on this phase of the bill are prefaced with a brief statement as to the widely varying nature of the functions to be administered. This Bureau (which is now at the same time charged with administration of regulatory matters, with administration of some but not all of the existing subsidies, and with administration of the Government's business interests as owner, operator, mortgagee, and/or insurer, etc., of vessels) feels that it should briefly refer to some of the considerations bearing on the question whether all of these several classes of functions should be exercised by the same agency. This ques

tion becomes even more important if the new direct subsidies proposed in the pending bill are enacted.

The exercise of the sovereign power of regulation should ordinarily be separated as completely as possible from all conflicting influences. There is an incongruity in a Government agency in its regulatory capacity passing in a quasi-judicial manner on the possibly conflicting interests of several lines, one of which may be independent or foreign whereas another may be Government owned and operated, or subsidized by, mortaged to, and/or insured by that same agency.

But the regulation of deep-sea carriers by water is a very different matter from regulation of domestic carriers and public utilities with which we are so familiar in this country. Its occasion and purpose are not merely the protection of shippers and users, but, especially with the addition of the minimum rate provisions now proposed, extend also to the protection of carriers (both Americanflag and foreign) against each other, to the protection of American-flag carriers against lower cost foreign carriers, and finally to the protection of the taxpayer who, in the last analysis, pays the subsidy. There is an inevitable relation between subsidy and regulation which cannot be ignored, whether the two functions are in the same or in different agencies.

There is little question that the same agency should not administer regulation and also administer the Government's business interests as owner, operator, mortgagee, and/or insurer, etc. The experience of the former Shipping Board also indicates that one would almost inevitabley be subordinated to the other. On the other hand, as has just been seen, there is a relation between regulation and subsidies which from one standpoint would justify the administration of the one and the granting of the other being handled by the same quasi-judicial agency. This was recognized in the report of the Interdepartmental Committee on Shipping Policy transmitted to Congress with the President's message of March 4, 1935. That report contemplated the merging of these two functions in a single agency and the retention in the Department of Commerce of the administration of all the Government's business interests as well as the day-by-day detail of administering the subsidy contracts.

This Bureau questions the advisability of merging all three of these classes of functions in the same agency, as is proposed to a greater or less extent by the pending bill. Concretely, it believes that the proposed Maritime Authority should in any event not be burdened with the latter group of what may for want of a better term be referred to as the Government's business interests. It is recognized that there are arguments both ways as to whether the first two groups should be united in the same agency.

Probably the best immediate solution would be to transfer to the Maritime Authority at this time a limited list of functions, viz:

1. Administration of the regulatory powers;

2. Authority to adjust and settle all existing contracts between shipping companies and the Government (including Shipping Board as well as postal contracts);

3. Award of new subsidies (including construction loans) and possibly

4. Conducting all or some of the studies and investigations called for in sections 202 and 203 of the bill.

The seemingly short list of functions just mentioned can well employ the full time and attention for the first 10 or 12 months of the highest-caliber Maritime Authority that could be assembled.

We feel that the best results toward upbuilding a merchant marine will be accomplished if the Authority is not burdened from the outset with multitudinous and time-consuming administrative duties.

We therefore suggest that only the above-mentioned duties be transferred to the Authority at this time. Congress will be in session again the first of the year, and further adjustment of functions, if found advisable, can then be made. It would appear that this suggestion substantially conforms with both the spirit and letter of Senate Committee Print No. 2, with a few exceptions, the most notable of which are the provisions of sections 602 and 603 transferring to the Authority the administration of construction loan notes and mortgages, etc., and the administration of the insurance fund. In accordance with the suggestions just made, it would seem that these functions should for the time being remain in the Department of Commerce.

Specific changes in the bill necessary to effect these suggestions would be to omit entirely sections 602, 603, and 901. The latter section would appear to be unnecessary because all the power and authority therein referred to and not transferred to the new Authority are now already vested in the Department of Com