FOR THE HALF CENTURY prior to 1914 the importance of the American Merchant Marine was seldom recognized by the American public. As a matter of fact, a comparatively small percentage of our population was sufficiently interested to acquaint itself with this important element of our national life.
For the several years prior to and during our participation in the World War the American people came into full realization of the imperative necessity of having a merchant marine of their own, and no industry assumed greater importance in the United States than did the shipbuilding and shipping industries. Since then constant attention has been focused on the American Merchant Marine both in America and throughout the world. Four shipping laws have been enacted by Congress during the last 20 years, all of which provided for the establishment and maintenance of an adequate American Merchant Marine. Between three and four billion dollars have been spent in the building and acquisition of vessels during this period, but even this huge expenditure failed to produce for America an adequate merchant marine.
The 1916 Shipping Act was passed by Congress to meet the acute situation which confronted our nation by the shortage of vessels to transport our foreign commerce. For 20 years prior to the World War 90 per cent of our foreign trade had been carried by foreign vessels. Most of these ships were no longer available and with our entry into the World War, in less than a year after the passage of the Act, the demand for ships became increasingly acute. The organization created by the 1916 Shipping Act to build up a peacetime merchant marine was transformed overnight to a huge war-time activity, and within less than two years the American shipbuilding industry, which for so many years had played an inconspicuous part in the production of the world’s transoceanic merchant vessels, was expanded and equipped with launching ways of more than double the number owned by Great Britain and the rest of the world. Within 20 months contracts were placed for nearly 3,300 vessels costing about three billion dollars. By way of contrast it may be of interest to point out that this sum represented twice the value of all the ocean-going ships in the world in 1914 and the tonnage ordered within that brief period was equivalent to that owned by seven countries at the outbreak of the World War—the United States, Germany, France, Japan, Italy, Holland, and Sweden—and equalled the entire tonnage destroyed during the war by submarine, mine, and raider warfare, which totaled about 12 ½ million gross tons. These figures are formidable from the standpoint of dollars and tons but not so impressive in results achieved, since the money expended by the United States failed to produce an adequate peace-time merchant marine as originally contemplated by the Shipping Act, 1916. Within a few years after the signing of the Armistice hundreds of vessels, costing hundreds of millions of dollars, acquired as a result of our wartime activity, were found to be unsuited for peace-time use and were scrapped. The rest of the fleet consisted of slow-speed freighters, a few vessels converted from troopships to combination passenger and freight vessels, and a small number of former enemy passenger vessels. From this fleet vessels were drawn to form the nucleus of our post-war merchant fleet.
The Merchant Marine Act, 1920, provided for the promotion and maintenance of the American Merchant Marine by several kinds of indirect aid, one of which —preferential rail rates to American ships —was never put into effect; also for the repeal of certain emergency legislation, and the disposition, regulation, and use of property acquired thereunder. Under the provisions of this Act, most of our American flag services in the foreign trade were established. Because of our weak shipping position prior to the war, extensive pioneering work was necessary in the establishment of our shipping lines which were required to meet the keen competition of foreign lines long intrenched in such services.
It was in the latter part of 1920 that the demand for tonnage began to fall off rapidly and world shipping encountered the severest depression in its history. From 1922 to 1928 not a ship was constructed in the United States for service in the transoceanic trade, while millions of tons of vessels were built abroad, notwithstanding the great excess of idle tonnage in the world. The introduction of these modern and faster foreign vessels in competition with our slow and outmoded war- acquired fleet made our problem increasingly difficult.
The Merchant Marine Act, 1928, was passed by Congress in order to more effectively carry out the policy declared in the Act of 1920, to have a merchant marine
of the best equipped and most suitable types of vessels sufficient to carry the greater portion of its commerce and to serve as naval or military auxiliary in time of war or national emergency, ultimately to be owned and operated privately by citizens of the United States.
The aid rendered American shipping in this legislation was provided for under the title of Ocean Mail Service, which authorized the payment of compensation on the basis of gross registered tonnage and speed of vessels.
At this point, it may be well to explain the purpose of this compensation, which has frequently been referred to as payments for carrying mail. The actual cost of carrying mail is a relatively small item, except in a few instances. There are other considerations of major importance which the compensation for the so-called ocean mail service includes, such as the reimbursement to the American shipowner for the higher capital investment in his American-built ship and the higher cost of operating it under American registry, compared with the lower capital and operating costs of a corresponding foreign vessel, which lower costs he could avail himself of if he builds his ship abroad and operates it under a foreign flag.
In drafting the 1928 Act, the committees in Congress which investigated American and foreign ship costs, aware of the fact that such handicaps existed, fixed the maximum compensation on a mileage basis to include these items which were the main consideration in the payments received for ocean mail service. Under this Act, 43 foreign ocean mail contracts were negotiated by the government with private shipping companies, nearly all of which contracts were of ten years duration. Most of these contracts required the building of new ships or the reconditioning of others. For the 5-year period following the passage of the 1928 Act, 33 new ships were constructed and 40 reconstructed or reconditioned, with a total investment of 162 million dollars. The new ships built under this Act are as efficient, economical, and safe as any ships of their respective types in the world. While this new construction was not effective in modernizing the entire fleet, American lines fostered under the Act of 1928 are well intrenched on most of our important trade routes and occupy a predominant position on some. Even where no ships were built, substantial progress has been made in the further intrenchment of these lines. There were several hundred government-aided vessels placed on trade routes throughout the world on fixed schedules, calling regularly at hundreds of foreign ports. The maintenance and operation of this fleet has increased our knowledge of navigation and trading conditions in waters where the American flag was seldom seen before the war, and has produced an experienced American seafaring personnel, indispensable for national defense purposes.
Under Executive Order of June 19, 1933, the functions of the Shipping Board and the Merchant Fleet Corporation were transferred to the Department of Commerce and the shipping board was abolished. In the same year a resolution was passed by Congress to investigate ocean mail contracts and in the following year hearings were conducted by the Postoffice Department on foreign ocean mail contracts, with a view to modifying or canceling them.
On March 4, 1935, the President of the United States transmitted a message to Congress expressing his views on the American Merchant Marine, in which he recognized the necessity for extending government aid to overcome the handicaps confronting American shipping operating in the foreign trade. He pointed out that
Government aid must be provided for American shipping to make up the differential between American and foreign shipping costs. It should cover first the difference in the cost of building ships; second, the difference in the cost of operating ships; and finally, it should take into consideration the liberal subsidies that many foreign governments provide for their shipping. Only by meeting this threefold differential can we expect to maintain a reasonable place in ocean commerce for ships flying the American flag, and at the same time maintain American standards.
The President indicated a preference for direct aid instead of the indirect aid now given for ocean mail service, and recommended that Congress should provide for the termination of existing ocean mail contracts as rapidly as possible.
Shortly after the receipt of the President’s message by Congress, hearings were held by the Merchant Marine and Fisheries Committee in the House and the Committee on Commerce in the Senate to consider new legislation to provide a direct method for aiding American shipping. A bill passed the House on June 27, 1935, but was not acted upon by the Senate during that session. Soon after the reconvening of Congress in January, 1936, the bill came up for consideration by the Committee on Commerce in the Senate, and during the following months it was the topic of frequent discussion, resulting in numerous amendments. It was finally passed by the Senate on June 19, by the House on the following day, and was signed by the President on June 29.
In the new Act, the declaration of policy is substantially the same as prescribed in the two previous acts. The Act provides for the creation of an agency to be known as the United States Maritime Commission, comprised of five members, to administer the law. The aid rendered by the government to private American shipping is of a direct nature, the government absorbing the construction and operating differentials.
In the plan adopted for the building of ships, citizens of the United States may make application to the commission for the construction of new vessels to be used on essential services. The commission is authorized to enter into a contract with a shipbuilder for the construction of the vessel and the payment to the shipbuilder of the cost. Concurrently with entering into such a contract with the shipbuilder, the commission is authorized to enter into a contract with the applicant for the purchase of the vessel at a price corresponding to the estimated cost (exclusive of military features) of building such a vessel in a foreign shipyard. The applicant is required to pay one-fourth the American construction cost (exclusive of military features) to the commission, which payments are to be made at the time and in the same proportion as provided for the payment of the construction cost in the contract between the shipbuilder and the commission. The balance of the purchase price is to be paid by the applicant within 20 years after delivery of the vessel, in not to exceed 20 equal annual installments, the first of which is to be paid one year after the delivery of the vessel to the applicant. Interest at the rate of 3 ½ per cent per annum is to be paid on all installments of the purchase price remaining unpaid.
If the commission finds that the objectives set forth in the declaration of policy and its long-range replacement program cannot be fully realized within a reasonable time, it is authorized to have ships constructed in domestic yards to carry out the purposes of the Act and to have old vessels reconditioned or remodeled. The commission may charter or sell vessels under certain conditions. All vessels transferred to the commission and now being operated by private operators on lines in foreign commerce of the United States may be operated temporarily for the commission’s account by private operators, upon such terms as the commission may deem advantageous. The commission shall arrange as soon as practicable to offer all such lines or vessels for charter and all operation of the commission’s vessels by private operators under the present operating agreements shall be discontinued within one year after the passage of the Act. As soon as practicable after the passage of the Act, and continuing thereafter, the commission shall arrange for the employment of its vessels in shipping lines on such trade routes exclusively serving the foreign trade of the United States as the commission shall determine are necessary and essential for the development and maintenance of the commerce of the United States and national defense, provided that such routes are not being adequately served by private American shipping lines. It shall be the policy of the commission to encourage private operation of each essential shipping line now owned by the United States, by selling such lines or by demising its vessels on bare-boat charter to citizens of the United States.
The commission may enter into a contract with any charterer of its vessels for the payment of an operating differential upon the same terms as payments of such differentials are made to operators of privately-owned vessels. If the commission shall find that any essential trade route cannot be successfully developed and maintained, and that the long-range replacement program cannot be achieved under private operation, it is authorized to have constructed, in private yards or navy yards, vessels of the types deemed necessary and to demise such vessels on bare-boat charter, without advertisement or competition, to the American-flag operator established on such trade route upon an annual charter hire of not less than 5 per cent per annum of the construction cost of such vessels. Such charter hire may contain an option to the charterer to purchase such vessels from the commission within five years, upon the same terms and conditions as provided for in the purchase of new vessels from the commission, with credit on the purchase price for all charter hire paid by the purchaser.
Whenever the profits are in excess of 10 per cent net on government-aided vessels, whether privately operated or chartered, the government will share in such profits. In the case of privately-operated vessels, the government recaptures half of the profits in excess of 10 per cent, but at no time is the amount recaptured to exceed the amount paid by the government to equalize the operating differential. In the case of vessels chartered by the commission, one-half of the profits in excess of 10 per cent must be paid by the charterer as additional charter hire.
The profits of shipbuilders are limited to 10 per cent. Anything in excess of this amount is recaptured by the government.
Limitations are also placed on salaries in both the shipbuilding and shipping industries. In the case of shipyards, no salaries in excess of $25,000 per annum can be included as an item of cost in the building of a vessel. In the case of shipping companies, no salaries in excess of $25,000 are permitted to be paid employees or officials, either directly or indirectly connected with such companies.
Books of both the shipbuilding and shipping companies are subject to inspection by the commission.
All foreign ocean mail contracts made by the Postmaster General under the provisions of the Merchant Marine Act, 1928, will be terminated on June 30, 1937. The holders of such contracts may within 90 days after the passage of the Act file an application with the commission to adjust and settle all the rights of the parties under such contract and to substitute in whole or in part a contract for direct aid for the operation of existing vessels and for the construction of new vessels. If the holder of any ocean mail contract terminated under the provisions of the Act does not enter into and execute a settlement agreement, such holder may sue the United States in the Court of Claims.
Authorization is given to investigate employment and wage conditions on ocean-going ships. All licensed officers of American vessels must be citizens of the United States, native-born or completely naturalized, and on cargo vessels aided by the government all the crew shall also be full citizens of the United States. For a period of one year after the effective date of the Act, licensed officers of passenger vessels aided by the government shall be citizens of the United States, and not less than 80 per cent of the crew, including all employees of the ship other than officers, shall also be American citizens, native- born or completely naturalized, and thereafter the percentage of citizens shall be increased 5 per cent per annum until 90 per cent of the entire crew, including all licensed officers, shall be citizens of the United States.
It is hoped that the Merchant Marine Act, 1936, will prove fruitful in achieving the constructive objectives set forth in the declaration of policy. There are many who feel that this Act is not a perfect piece of legislation. However, the consensus of opinion is that it provides the instrumentalities to set in motion a law of paramount importance to the welfare of the nation, both from an economic, a commercial, and a military standpoint. Ways and means will doubtless be found to improve the Act if it does not accomplish its objectives.
A number of intricate problems face the Maritime Commission. Perhaps the most pressing problem of all is that of working out the long-range replacement program, of extreme importance at this time, owing to our greatly inferior position in the transportation of our foreign trade, as an examination of the records will disclose.
Figures show that from the standpoint of tonnage in January, 1936, Great Britain outranked us more than 4-1, with Japan owning about the same as the United States.
In ships with speeds of 12 knots and over we stood fourth, with Great Britain outranking us better than 5-1, Germany owning over 400,000 tons more, and Japan about 50,000 tons more.
In ships 10 years of age and under the United States stood at the foot of the list, outranked by Great Britain 11-1, by Germany 2-1.
The foregoing figures conclusively demonstrate the weakness, in both carrying power and efficiency, of that part of the American Merchant Marine which operates in the international trade. Such deficiencies are also apparent in our domestic and tanker fleets.
A further analysis shows that ships with speeds between 10 and 11 knots predominate in our foreign trade fleet of 3,037,000 tons. Over 85 per cent of the total tonnage is 14 years old or over, averaging 17 years, with nearly 11 per cent, or 281,000 tons, 20 years old or over.
In our domestic trade fleet, which consists of somewhat over 2,000,000 tons, ships with speeds between 10 and 11 knots again predominate, even to a greater extent than in our foreign trade fleet. Over 91 per cent of the total tonnage is 14 years old or over, averaging 19 years, with nearly 27 per cent, or 489,000 tons, 20 years old or over.
In our tanker fleet of 2,377,000 tons, 92 per cent are vessels with speeds of less than 12 knots; 88 per cent of the total tonnage is 14 years old or over, averaging 18 years, with 14 ½ per cent, or 303,000 tons, 20 years old or over.
These figures disclose the imperative need for the prompt modernization of our foreign, domestic, and tanker fleets, of which nearly 88 per cent, or about 6,527,000 gross tons, is 14 years old or over, and of which nearly 16 ½ per cent, or over 1,000,000 tons, is already 20 years old or over.
This will require an annual replacement program amounting to 433,000 tons in the foreign trade fleet, 305,000 tons in the domestic trade fleet, and 349,000 tons in the tanker fleet, or a total of nearly 1,088,000 gross tons per annum during the next 6 years, in order to replace by 1942 the 6,527,000 tons of vessels which will then be 20 years old or over.
While the foreign trade fleet is drawn upon most heavily for naval and military auxiliaries during a national emergency, there are also heavy demands made upon both the domestic and tanker fleets for national defense purposes.
The foregoing figures illustrate the high percentage of old and slow ships and the lack of modern and suitable types to serve as efficient commercial, naval, and military units.
The prime purpose of government financial aid to American shipping is to place it upon an economic parity with our foreign competitors whose capital and operating costs are on a lower level. The rendering of such aid will not accomplish the purpose for which it is intended unless our ships are on an equality in type, speed, and economy of operation with those of our competitors. It is the only way we may hope to get a fair share of the business. Five million dollars a year could be saved in fuel consumption alone if the present obsolete ships operating on foreign ocean mail routes were replaced with modern types. We cannot expect to meet competition successfully with such severe handicaps.
The last of the ships contracted for by the United States government during the war were delivered in 1922. Since then and up to June, 1935, nearly 13 million tons of ocean-going ships, 2,000 gross tons and over, were built for the 6 principal maritime nations, including the United States, Great Britain, Germany, France, Italy, and Japan. Of these 13 million tons, the United States built only about 800,000 tons, of which 376,000 tons have been built for operation in the foreign trade, or an average of approximately 30,000 tons per annum.
Not one cargo ship has been built or contracted for in the United States for the over-seas foreign trade in over 13 years, nor have any combined freight and passenger, or passenger vessels, been built or contracted for during the past 3 years for the foreign trade. During the past 3 years 5 of the principal maritime countries have built or are building over 1,500,000 gross tons of cargo, combination cargo and passenger, and passenger vessels, including 5 superliners.
Before concluding these remarks, it may be well to clarify a matter on which there seems to be some doubt in the public mind. The term “ship subsidy” usually carries with it the impression that funds are paid from the public treasury in the nature of a gratuity to the shipbuilding and shipping industries. There are instances where this is correct, for example, when a subsidy is a simple gift, or when it consists in the payment of an amount in excess of the usual charges for a service rendered. Government aid, provided for in the Merchant Marine Act, 1936, is not in the nature of a gift, nor does it consist in the payment of an amount in excess of the usual charges for a service rendered. The service rendered by the American shipping industry to the government in the operation of ship lines in essential American trade routes is predicated on the cost of building ships in the United States and operating them under American registry, which items of cost are determined according to American standards and not the standards prevailing in foreign countries. Government aid, therefore, is confined to equalizing these standards to bring them to a common level. As an illustration, if it costs $1,000,000 to build a ship in an American yard and $600,000 to build a sister-ship in a foreign yard, the $400,000 higher cost for the American-built ship reflects the difference between American and foreign labor and material costs. Obviously the $400,000 of the million dollars paid by the government is the amount required to maintain American standards and is not a construction differential subsidy paid to the shipbuilder. The Act provides for the purchase of the vessel by the American shipowner at a price corresponding to the cost of a sister-ship built in a foreign yard. A ship costing $1,000,000 in the United States, therefore, would be sold to the American purchaser for $600,000, the purpose being to place the American shipowner on a capital parity with his foreign competitor, giving him precisely the same advantage he could have availed himself of had he built his ship abroad.
We now come to the question whether the shipowner is paid a subsidy in the operation of his vessel. For purposes of illustration, let us say that it costs $30,000 more per year to operate the million-dollar ship under American registry than it does under foreign registry, such higher costs resulting from the higher insurance, higher wages paid the American crew, and higher subsistence and repair costs. This $30,000 is the amount required to equalize the operating differential. Here, again, the American shipowner could avail himself of the advantage of a $30,000 lower operating cost by registering his ship under a foreign flag. When the government absorbs or equalizes this operating differential by paying the shipowner $30,000, the amount required to maintain American standards, in reality the government merely reimburses the shipowner for the money he has advanced during the course of a year over and above that which he would have paid had he operated his ship under a foreign flag. Therefore, this operating differential payment by the government is in the form of a reimbursement to the shipowner and is not a subsidy.
The equalization or absorption by the government of the ship construction and operating differentials is the sum the government invests and is necessary for the preservation of American standards. It must be obvious, though contrary to the general belief, that neither the shipbuilder nor the ship-operator receives any benefit in the form of a gratuity from the public treasury. The payments do not constitute a subsidy to any one. They chiefly benefit American labor and industry and are paid by the government to uphold and preserve the American standard of living.
This statement may leave a doubt as to whether the maintenance of a privately- owned and operated American Merchant Marine is a sound national economic policy. My answer is in the affirmative. Why? The price of parity, or the annual cost to the government in equalizing the construction and operating differentials for a modern merchant marine of the present size, would average about 30 million dollars annually. The total invested in the building of such a merchant marine would be approximately 500 million dollars. Allowing 20 years for the useful life of a ship, the cost of replacements would average 25 million dollars a year. Such replacements would provide employment for American capital and labor in this amount annually, benefiting virtually every state in the Union.
In the operation of vessels, American labor and industry would again benefit by the payment of wages to American crews, the repairing of vessels in the United States, and by the purchase in America of food and stores, such items aggregating upwards of 30 million dollars annually. In other words, the amount by which American labor and industry would benefit would be nearly twice the sum which the government would invest to provide capital and operating parity for American ships. Furthermore, the possession of such a competitive merchant marine would prove advantageous in the promotion of our foreign trade, affording equal opportunity in the world’s markets for the sale of American products by having under our control over-seas transportation facilities with which we can deliver the goods—literally and figuratively speaking—as cheaply and expeditiously as any of our foreign competitors. Several hundred millions of dollars are paid annually for the transportation of our foreign water-borne commerce. With a highly efficient merchant marine, American ships, obviously, will carry a substantial portion of this commerce. Such earnings by American ships are a factor in the conservation of our national wealth and constitute an important item toward a favorable balance of trade.
This brief outline pointing out the direct and indirect benefits to the nation will justify my previous assertion that it is a sound national economic policy for the government to maintain an adequate privately-owned and operated merchant marine. The possession of such a merchant marine serves a dual purpose. On the one hand, as previously pointed out, it is a strong factor in both the economic and commercial security of the nation. On the other hand, it is an indispensable factor in time of peril—such as a war or national emergency—when the government is able to come into immediate possession of naval and military auxiliaries without additional cost, since ships equipped with the necessary national defense features become automatically available once the government has rendered the aid necessary to secure commercial equality. Naval strategists are agreed that the sea strength, or sea power, of any nation includes as one of its important elements its merchant marine. The United States of America ranks near the top in world trade and is a naval power of the first rank. It must be apparent to all sound thinkers that we cannot long remain either a high ranking commercial nation or a first-class naval power without a first-class merchant marine.