TO DEVELOP AN AMERICAN MERCHANT MARINE

PART II, MERCHANT MARINE ACT, 1935

TUESDAY, APRIL 30, 1935

HOUSE OF REPRESENTATIVES,

COMMITTEE ON THE MERCHANT MARINE AND FISHERIES,

Washington, D. C.

The committee met at 10 a. m., Hon. Schuyler O. Bland (chairman) presiding.

The CHAIRMAN. This is really a continuation of the hearings we had some time ago on the merchant-marine policy, based on the message of the President and also the interdepartmental committee's report. Opportunity was given many witnesses to appear before us at that time. If they did not appear it was their own fault, and we are going to push these hearings along to a conclusion. I want to get them through this week. There is no use to be putting off and delaying appearance, and persons who want to be heard can come up and be heard.

We will necessarily have to proceed a little out of the usual orderly way for the reason that tomorrow the hearings will begin again on the Senate side. There have been two hearings on the Senate side; but they have gone but little beyond the scope that we have already covered in our hearings, and we must proceed as rapidly as possible this week to dispose of these hearings, as we have hearings set on another matter for next week.

Now, there will be before the members of the committee, and also those present, committee prints of the bill on which the hearings will be based, this committee print being dated April 26, 1935. It may not be identically the same, but is practically the same as was used in the Senate at its last hearing and consists very largely of the elimination of the ocean-mail contracts, which do not appear in the Senate committee print, and also the Assistant Secretary of Commerce. That is not in the original committee print. There will doubtless be before the Senate committee another committee print which will contain suggestions-which will also be considered by this committee later-which have been worked on by Senator Copeland and myself. We have been cooperating in the preparation of these measures and constantly new questions arise, new problems and new amendments, and we are working them in as much as possible, in an effort to have the bills as nearly identical as possible, in order to save time.

We have also finished the hearings on all or most of the seamen's bills, and the safety of life at sea, except the limitation of liability and, if there are any shipowners here, I will say hearings will be

arranged on that bill soon. They have had ample time in which to study their wishes and formulate their suggestions as to that bill, and the bill is not going to be shelved.

(The bill under discussion will be found in the appendix.)

REQUISITION OF VESSELS

SEC. 1004. Section 702 of the Merchant Marine Act, 1928, is hereby amended to read as follows:

REQUISITION OF VESSELS

"SEC. 702. (a) The following vessels may be taken over and purchased or used by the United States for national defense or during any national emergency declared by proclamation of the President:

"(1) Any vessel in respect of which, under a contract heretofore or hereafter entered into, a loan is made from the construction-loan fund created by section 11 of the Merchant Marine Act, 1920, as amended-at any time until the principal and interest of the loan have been paid; and

"(2) Any vessel in respect of which an ocean-mail contract has been heretofore or is hereafter entered into-at any time during the period for which the contract is in effect.

The CHAIRMAN. Now we will be very glad to hear first Mr. Peacock, Director of the United States Shipping Board Bureau, who, I believe, has several amendments to offer. You can just incorporate those in the hearings and point out such of them as you want to. Mr. Peacock. You sent up a memorandum yesterday with a number of amendments, some of which are being taken care of, I may say, in this new committee print that will be out in the Senate tomorrow. The draftsmen could not get it together in time for me to send to the Printing Office last night, or we would have had the new committee print here today.

STATEMENT OF HON. J. C. PEACOCK, DIRECTOR, UNITED STATES SHIPPING BOARD BUREAU, DEPARTMENT OF COMMERCE

Mr. PEACOCK. Mr. Chairman and members of the committee, in response to the request of the committee to the Secretary of Commerce to have a representative present from the Department, the Secretary has asked me to attend the hearing and, as I have already stated before the Senate committee, the Department is, of course, generally in favor of this bill.

There are a number of detail suggestions and a few major suggestions which we have to make with respect to it. Most of the more important ones I have already mentioned in the testimony before the Senate committee and have incorporated all of those and a number of minor suggestions in a memorandum which I sent to you a few days ago, and which you have already referred to.

The CHAIRMAN. And which will be incorporated at this point in the record. I may say, in fact, I have a galley proof on my desk of your testimony before the Senate committee, and many of the sugges tions in this galley proof, I find, were suggestions that are outlined in this mimeographed memorandum. We have not sufficient mimeograph copies for everyone, but we are going to incorporate these in the hearings, and I will ask that the mimeograph copies that came from the Department of suggestions to this bill will be distributed to the members.

(The paper above referred to is as follows:)

DEPARTMENT OF COMMERCE,

UNITED STATES SHIPPING BOARD BUREAU,

Washington, April 25, 1935.

INFORMAL MEMORANDUM ON IDENTICAL BILLS S. 2582 AND H. R. 7521

The page and line reference in this memorandum are to Committee Print No. 2 of S. 2582 (with corresponding references in parentheses to the original print of H. R. 7521 as introduced).

The bill will be discussed under principal headings relating to subsidies, regulation, organization, and administration, in the order named, with a final section in which will be included a number of minor comments of a miscellaneous or verbal nature. This memorandum is a composite of suggestions from all of the principal officials of this Bureau. No effort has been made to suggest major changes in policy except in a few instances where administrative experience indicates that the policy expressed in the bill is undesirable. The entire effort has been to make the memorandum constructive in its nature and to confine it to those comments which should assist in perfecting the general scheme set up in the pending bill.

SUBSIDIES

Sections 301-308 as originally introduced: This Bureau strongly reaffirms the recommendation of the President and the Interdepartmental Committee on Shipping Policy that any indirect subsidy through postal contracts should be discontinued and entirely replaced by direct subsidies such as are provided for in the pending bill. Therefore it is in thorough accord with the redraft as set forth in Committee Print No. 2, whereby these provisions relative to postal contracts are eliminated from the bill and the ocean-mail contract provisions of the Merchant Marine Act, 1928 are repealed.

Section 301 as revised in Committee Print No. 2: In connection with the proposed repeal of sections 401 and 413 of the Merchant Marine Act, 1928, attention is directed to section 414 of that act which amended or repelead various provisions of prior law in order to accord with the new occan mail contract system. Even the inclusion of section 414 in the list of sections to be repealed would not remedy the situation because Revised Statutes section 12 (U. S. C. A., title I, sec. 28) expressly provides that the repeal of a repealing act does not effect a reenactment of the original law which had been repealed. Section 414 of the 1928 act should therefore be revised to accord with the repeal of the ocean-mail contract system which is now proposed. It is suggested that a report be secured from the Post Office Department as to the precise manner in which section 414 should be revised.

Section 501: There is in many instances a wide range both of domestic costs of construction and foreign costs. In order to lay down a more precise and definite standard it is suggested that the words "difference between the domestic and foreign construction cost" in section 501 (a) (3) be amended to read "difference between the fair and reasonable domestic and foreign construction cost" and that the corresponding provision in section 501 (b) (2) be amended to read "the difference between the fair and reasonable cost of construction of the said vessels in an American shipyard and the fair and reasonable cost

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Section 501 (b) (2): The provision found near the end of this section for an increased subsidy equivalent to the estimated increased cost of operating such vessel by reason of such naval provisions should probably be transferred to part II of this title. This is an operating subsidy rather than a construction subsidy, but this provision, when read in connection with section 502 (a), would seem to provide for its payment to the shipbuilder rather than to the operator.

Section 501 (c): It might be well to add a proviso to make sure that under no circumstances would any penalty imposed under the regulatory provisions or any other law be included as a factor in computing the cost of operation.

Section 502 (b): It is not clear whether the first sentence is meant as a limitation or as a right. In either case is there any reason why it should apply only if no construction loan is applied for? It would seem that this provision should apply equally regardless of whether a construction loan is or is not applied for. Section 504: In order to cover all cases it is suggested to strike out beginning with the word "During" to the end of the section and insert the following: "When such vessel is operated on a voyage in foreign trade but makes intermediate stops at ports within the United States for the loading or the unloading of cargo, mail, or passengers between ports within the United States, or is oper

ated in the joint domestic and foreign trade, the owner shall refund only a proportion of the repayments for such period equal to the ratio of the revenue derived from domestic trade to the revenue derived from the foreign trade."

It is also suggested that at the end of section 505 (c) a similar proviso be added to the following effect:

"Provided, That in the case of vessels engaged in foreign trade but making intermediate stops at ports within the United States for the loading or unloading of cargo, mail, or passengers between ports within the United States, there shall be no operating differential subsidy for that proportion of the operation that is in such domestic trade."

Section 505 (c): This paragraph provides for an "operating differential subsidy." It states that the basis shall be "an amount per voyage for the operation and maintenance of said service, route, line, vessel, or vessels, based on the difference in cost of insurance, maintenance, repairs, and the wages and subsistence of officers and crews", etc.

The experience of both the Shipping Board and the Shipping Board Bureau argue strongly that this is a most impractical and undesirable basis on which to predicate the payment of the operating subsidy, especially when read in connection with section 507 (b) which prohibits readjustment of the amount of the subsidy any more often than once a year. It is too similar to the so-called "lump sum operating agreement which is probably the most unsatisfactory form of operating agreement the Shipping Board has ever had. Some of the principal faults in such a system may be briefly mentioned:

1. Maintenance.-It is almost impossible to determine a fixed sum per voyage for maintenance costs, as such costs cannot be ascertained on a voyage basis. The Shipping Board and the Shipping Board Bureau have in connection with the so-called "lump-sum agreement' of maintenance made extensive studies of the costs of various types of vessels in various services for the purpose of fixing an amount of lump-sum compensation per voyage, and it has been found impossible to create a reserve for maintenance which would cover with any degree of accuracy the probable maintenance costs of a vessel for the voyage periods. As an illustration, certain damage repairs are recoverable from insurance underwriters if they exceed the franchise (usually $4,850) on selected voyages. The amount of such repairs is not determined upon a round voyage, but upon any two consecutive legs of such selective voyages. If damage repairs do not exceed the franchise, they are treated as either maintenance repair or voyage repair.

2. Repairs. The objections in case of repairs are primarily the same as in the case of maintenance. In the shipping business, repairs are divided into two groups, namely, maintenance repairs and voyage repairs, and studies made have disclosed that it is impracticable to allocate a fixed sum per voyage to cover either maintenance or voyage repairs.

3. Subsistence of officers and crews.- -It is impracticable to determine a subsistence differential on a voyage basis for the reason that the domestic and foreign cost ratio could not be readily obtainable on such a short period of service.

Periodic contracts affecting subsistence, stores, and wage agreements may change within the voyage, and in some instances may be retroactive and affect prior voyages. The differential with respect to subsistence should be predicated upon at least a year's operation.

The Shipping Board Bureau, out of its experience and that of the Shipping Board with the so-called "lump-sum contracts," etc., has found that forecasts made on operating costs fluctuate extensively. There is such a constant variation in costs that the Bureau has been unable, in its attempts to fix a compensation equitable alike to the Government and to the operator, to allocate operating costs on a voyage basis. The studies made indicate that typical voyages do not serve as guiding measures in the fixing of a lump sum compensation per voyage. This condition also applies to wages, food, and stores. If a vessel incurs insurance damage, a certain portion of subsistence, wages and stores is recoverable from the underwriters, provided the loss is due to the mari e accident and subject to the franchise. While the franchise is usually $4,850 for the consecutive legs of the voyage, some shipping companies have a franchise which apply to the accident instead of the voyage.

The above applies especially to companies who are not self-insurers. In the event that companies are self-insurers, the question presents itself as to who would determine the amount of such charges that should be borne by the operator out of the insurance funds created by such operator. This also presents the question whether the insurance rate used by the self-insurer is comparable with the rates quoted by insurance companies for similar risks.

The experience of this Bureau with lump-sum contracts suggests that the only safe and practical provision for an operating subsidy of this sort would be that it represents the difference between the items specified, that it should be based on final accounting for such periods not longer than 1 year as the Authority shall prescribe, and that the administrative agencies should be authorized and directed to make from time to time reasonable payments on account. The qualification "fair and reasonable" should also be made with respect to the term "cost" as used in section 505 (c). It will be noted that the basis here suggested for computing the operating subsidy is consistent and in accord with the method in which the shipping trade promotion aid is to be computed under section 513. It may be that, regardless of whether this section is revised as here suggested, some limitation should be added similar to the limitation provided in that section. Section 507 (c): This provision for appeal to a statutory district court and from it to the Supreme Court of the United States suggests serious question as to both_expediency and constitutionality Cf. Williamsport Wire Rope Co. v. United States (277 U. S. 537); Old Colony Trust Co. v. Commissioner of Internal Revenue (279 Ü. S. 716); United States Navigation Co. v. Cunard Co. (284 U. S. 474).

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The Williamsport case arose out of a somewhat similar provision of the Excess Profits Tax Act which provides for determination of the tax in special cases by comparison with the regularly determined tax of representative corporations. The question was one of statutory interpretation as to whether the Court of Claims had concurrent jurisdiction with the Board of Tax Appeals to review such a determination by the Commissioner of Internal Revenue. The nature of the comparison was of a very similar nature to that called for in the determination of the proposed operating subsidy. In support of its decision that Congress did not intend that such a determination should be reviewable by the courts, the Supreme Court emphasized that "The task * was one that could only be performed by an official or a body having wide knowledge and experience with the class of problems concerned"; that "The soundness of the judgment exercised by the individual or body to whom the task was confided would depend largely upon the extent both of the knowledge of the special subject possessed and of the experience had in dealing with this particular class of problems"; that "the considerations * * are facts concerning the situation of a large group of taxpayers which can only be known to an official or a body having wide experience in such matters and ready access to the means of information"; and that it would tend to defeat rather than promote the quality of administration sought by the statute if the administrative determinations "in this delicate and complex phase of revenue administration would be subjected to review by a large number of courts, none of which have ready access to the information necessary to enable them to arrive at a proper conclusion in revising his decisions." While that case related to a tax statute and the proposed bill relates to subsidies, both involve much the same sort of comparison of facts and figures, and the reiterated and positive expressions just quoted from the opinion of the Supreme Court in the Williamsport case are significant and very much in point. The whole trend of recent legislation has been to relieve the Supreme Court of cases not involving issues of general or widespread effect; and the present proposal would seem to be a distinct step backward.

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The Old Colony case, however, is even more directly in point. There the Supreme Court on its own initiative expressly raised the question as to whether there was power in Congress to confer jurisdiction upon the courts to review the action of an administrative agency such as the Board of Tax Appeals and set the case down for reargument on that precise question. The Constitution in effect limits the jurisdiction of the Supreme Court and the lower Federal courts to proceedings which involve a "case or controversy". Section 507 (c) relates rather more to a proposed revision of a contract, which revision is contemplated from the outset, than to a case or controversy as to the effect of an existing contract. While in the Old Colony case the Supreme Court sustained its jurisdiction to review decisions of the Board of Tax Appeals its opinion suggests very grave doubt as to whether it would sustain the jurisdiction now sought to be conferred.

While it is recognized that an operator who enters into a subsidy agreement is entitled to some assurance of permanence and stability yet after all the subsidy is an outright bounty which cannot be successfully administered without the fullest exercise of discretion on the part of those administering it. If the Authority can be trusted to make the entire contract at the outset, it would seem that by the same token it should be trusted to make such adjustments as may be necessary from time to time. If it grossly abuses it discretion, the regular processes of law would ordinarily afford sufficient protection.