The Merchant Marine and National Defense
On May 28, 1864, Congress enacted a subvention law authorizing regular ocean mail service between the United States and Brazil. This was an operating subsidy, the first under a policy of Federal aid for American shipping that has endured to this day.
This venture in Federal paternalism was based on claims that the proposed mail service would help to open markets in Brazil for American exports and generally encourage the flow of trade to South America. The contract went to the United States and Brazil Mail Steamship Company, the only bidder, at the maximum annual allowance of $150,000. Service began m 1865.
In ten years the subsidy expired, and with it the United States and Brazil Mail Steamship Company. Given a million and a half dollars, private enterprise had failed to develop sufficient trade with South America to continue under its own steam.
This case is significant because the claims upon which the appeal for the subsidy was made were to be one of the major arguments of subsidy-pressure groups for the next 50 years.
We are embarked today on a subsidy policy more ambitious than any peacetime program we have ever tried before. The Merchant Marine Act of 1936 represents the most comprehensive effort the United States has yet made to assist in the building up of a merchant marine.
The American shipping program today embraces a twofold purpose: (1) To develop a merchant marine that will augment the Navy as an instrument of national defense. (2) To develop a merchant marine that will enable it to carry on a “reasonable share” of the nation’s foreign trade. These are the dual demands our present shipping policy is designed to meet.
This policy is basically unsound because its two purposes are not parallel purposes.
From the point of view of national defense we can and we should achieve a measure of security against invasion unquestionably superior to the forces that may endanger us at any time. Should not the relation of the merchant marine to national defense, then, be the main objective of our shipping policy? If so, it is important that we do not permit the essentially slow evolution of a peace-time trade fleet to impede the possibly faster development of whatever merchant ships are needed to strengthen the naval arm. We should insist that the conflict between defense uses and trade needs be clearly recognized.
Let us face the question that has dogged us since shipping ceased to be a self-sustaining unit in our once-free economy of foreign trade: Ships for what?
Ships for ocean trade. But are ships trade? That is what we asked ourselves in 1865, when Congress voted the Brazil Mail subsidy. Ten years later we found the answer written in red ink across the ledgers and manifests of the United States and Brazil Mail Steamship Company. In 1875 we learned trade does not consist of ships alone. But the delusion still persists. “The American people are faced today, as they have been faced for the past 75 years, with the perennial problem of shipping.” Why? Because we have failed to see that more cargoes, not more subsidies, are essential to the development of foreign trade.
It is futile to speculate on the course public opinion might have taken regarding subsidies had not the World War conspired to completely overthrow the world economic order.
Can those who today assert that a large merchant marine is essential to any nation which lays claim to being a great maritime power ignore the position of the United States in this respect directly before the World War? At that time the American Merchant Marine had dwindled to an insignificant place among the world’s trade fleets. Less than 10 per cent of our commerce was being carried in American ships. Yet we were a growing sea power. And our foreign trade was increasing steadily year by year.
What, then, has brought about this maritime nationalism which demands for American shipping an “adequate” share of its foreign commerce? Is it not largely the result of an emotional aftermath to the World War with its chaotic demand for American ships?
A few years ago a popular weekly magazine carried an article on behalf of a subsidized merchant marine, entitled “We Need Ships.” Illustrating the article were pictures of massed ships, part of America’s cast-off, war-time fleet. This of itself seemed highly contradictory. But we were told America needed new ships to compete with those of other nations, not these obsolete, war-time relics.
The author did not say that we had already spent millions of dollars to help private interests modernize and operate a great many of these ships. The article merely insisted that we needed a new trade fleet to compete with other nations, and that America must never again be without a great merchant fleet lest in time of war American goods should again clog our wharves and warehouses waiting in vain for foreign ships to come and get them.
Those who define an “adequate” merchant marine as a fleet large enough to carry on our trade with other countries in the event foreign merchant services are involved in a war overlook several important factors. We must bear in mind that if we carry out our present neutrality laws, “the American Navy will not be asked to defend American commerce on the high seas or uphold neutral rights asserted by the United States in the past.”
Public opinion has been unduly susceptible to propaganda directed toward it by pressure groups within the shipping field. But public sentiment is a highly unstable factor. At the time Congress was debating the Neutrality Act and the proposed Ludlow Amendment, public opinion was • highly isolationist. Editorial comment in the American press confirmed this at the time of the Panay bombing. Since then, however, it has veered again.
Observers who have remarked on the changed outlook since the Munich settlement in September, 1938, especially in the traditionally isolationist Midwest, have seen their judgment confirmed in the Fortune poll.6 But it is still too early to say how far this change in favor of collective action has gone or what form of collective action public opinion would support.
Shipping interests are sailing in uncertain waters in building their case for an adequate” merchant marine on war-insurance grounds. Freedom of the seas has become an outmoded doctrine. Public opinion will have to undergo a more definite change than even the Fortune figures show for the American people to reconcile themselves, in the event of war abroad, to seeing American ships go all the way to France again, or all the way to the Orient. For that is what subsidizing an “adequate” merchant marine implies.
Those who insist that we need a merchant marine equal to emergencies such as the World War brought about are really arguing for a standing merchant marine. It is axiomatic that ships earn money only while their propellers are turning. What is to keep them turning—more subsidies, or more cargoes? Ever since the war-time inflation in ocean services, private shipping interests have insisted that “we need ships.” But in view, of the steady increase in laid-up tonnage everywhere during these last few years, can we not rightly ask: Ships for what?
Our costly attempts to achieve an “adequate” trade fleet are due to our failure to consider that question. The Merchant Marine Act of 1936, aside from national defense aspects, offers tangible proof of our one-track approach to a problem dating back to 1865 when Congress granted the Brazil Mail subsidy, the first attempt to nullify by uneconomic means the effects of our change from a natural to an artificial cargo-carrying nation.
The basic weakness of the 1936 law is that its authors repeat the mistake of regarding ships as an end rather than a means. This line of reasoning was quite generally evidenced in the study the United States Naval Institute made possible in the special Merchant Marine issue of its Proceedings in April, 1938. It is unfortunate that little was submitted on the other side to balance the views so ably presented by the articulate supporters of our present policy.
The arguments advanced at that time were mainly old and familiar. Again we were told that the United States needs ships, a great trade fleet to regain her position as a maritime power; that the shipping “industry” is anxious to acquire the ships, and that such a fleet is an economic necessity, not an extravagance.
It is trade, not alone ships, which makes a nation a maritime power. A thousand first-class ships will not make us any more prosperous if we cannot find cargoes, and markets to absorb them, in this hard- pressed economic world. Is it not a form of overstatement, too, to regard the Merchant Marine as an industry? Shipping is only a stage in the complex processes of modern industry. It is simply the means of carrying goods across the seas. Shipping is a service rather than an industry.
Those who strongly favor an “adequate” merchant fleet cannot, indeed, do not try to, justify it on the basis of economic realities alone. They argue that these ships are of themselves the rib and rivet of national maritime greatness. But they cannot prove this in dollars and cents because subsidies quite obviously are a device to permit shipping interests to sell their services below cost.
We have spent millions of dollars of public money to build and maintain a privately-managed merchant marine. But the effort has failed. Is it because the government has not given private interests time enough? Is it because the government has not given them money enough?
Starting with the historical episode of the Brazil Mail subsidy, exponents of federal aid have had 75 years in which to prove that the practice of paying American shipbuilders and ship operators for their relative inefficiency will inevitably have the effect of increasing that inefficiency. In the Brazil Mail venture, we spent a little money without getting even a little benefit. The remedy has been to increase federal spending. The result has been to enlarge the shipping problem.
We hear many reasons why our subvention policy has failed to produce an efficient merchant marine. Some believe it is due to economic depression and its attendant shrinkage in world trade.
Economic nationalism—of which ship subsidy is an aggressive symptom—has beset all nations in recent years. Overseas markets have melted away. Even Great Britain, traditional exponent of free trade, could not escape this restrictive trend. Dominion preference, keystone of the Ottawa Conference, become an insurmountable symbol of barriers liberal nations had thrown up against the old order.
If that is a reason why the American Merchant Marine has failed to develop the way successive subsidy-voting Congresses have hoped it would, it is also a reason why it cannot develop until the barriers against world trade are again lifted. Spending through federal subsidies will not bring this about. Spending will get us the ships. But ships for what?
That is the key to this study of our shipping problem. To answer it we must go back to its beginning. Back to the Civil War. Back to the change from sail to steam, from wood to iron, from whale ships to petroleum, from the seaboard migration inland to the west frontier.
What would have happened had the merchants of our eastern states insisted on recapturing the maritime glory that was ours in the fabulous days of the Yankee clipper? How long could American enterprise have held out in free competition against the advantages foreign enterprise had long since assumed in lower costs of iron and labor? How long before the demand for protection—for subsidy—would have been raised against the remorseless efficiency of low-cost ships and services of other nations? The building-up of the American frontier; the deflection of American enterprise and American capital to internal expansion; the economic balance that came into play between the eastern factory and the western farm and range, postponed that question for many years.
Not until the empire builders reached the end of the frontier did American industry really feel the pressures of foreign competition. As homesteading and railroad building dwindled, the pressure went up. We started tinkering with the tariffs. Protection became the pivot in our seesaw economy of industrial east and agrarian west, our economic safety valve, so to speak. About this time the writings of a great scholar, an officer in our Navy, named Mahan, began to appear in the leading intellectual periodicals of the day, shedding strange fight on such nebulous subjects as the strategy of the Caribbean islands in relation to that remote dream of a transisthmian waterway somewhere across Nicaragua or maybe Panama.
All the time, the pressure was going up. After the explosion of ’98, we found ourselves on new frontiers, far beyond our continental limits, far beyond even those strategic points at which history pauses to acknowledge the prophecies of Mahan.
By the turn of the century, the pressure had gone down. American shipping languished in the sidewash of other things. The Navy meanwhile was undergoing a belated renaissance. We had been grow- mg gradually in economic prosperity and naval strength to the stature of a great world power—a sea power, without a merchant marine such as Admiral Mahan had said was the thing in which sea power had its roots.
Proponents of a subsidized trade fleet tell us that this was a weakness in our national entity which, they contend, the World War demand for American shipping was to prove. We are told that the United States must never again be caught in such a position, that to avoid it we must rebuild our Merchant Marine and then maintain it on a strict replacement basis.
This implies that we should have a merchant fleet sufficient to carry on a foreign war, a merchant fleet as large as that which supplanted the depleted tonnage of our principal seafaring allies in the World War.
Can we afford to build a fleet like this, and then maintain it in a highly-modernized, highly-efficient state of idleness? Is there a useful place for such a war-insurance merchant marine in a world market already glutted with good ships?
Plainly there is not enough business today for even all the best ships of all the competing nations. Why then should the United States aggravate this state of costly oversupply?
The American people have been paying a twofold price for their shipping services. First, they pay the prevailing ocean freight rates. Second, they pay the difference between foreign and American shipbuilding and ship-operating costs so that domestic shipping interests can compete in this world business by selling their services below cost. That is what it means in effect for the United States to compete with foreign nations which can build and run ships for nearly half what it costs American shipbuilders and operators.
Can we not dispense with a subsidized Merchant marine, then, beyond what is deeded to serve essential, noncompetitive trade routes and beyond what the Navy requires as the nucleus of an auxiliary for the national defense needs as laid down in a clearly defined naval policy? After 75 years of failure in ship subsidization, the American people might well ask that question—not in the despairing attitude of what can we lose, but from the positive approach of how much we stand to gain.
We are enmeshed in a merchant marine policy based in part on the premise that ships are essential to our foreign trade; and, that since they cannot demonstrate their need on a self-supporting basis, we must build and run them with subsidies. That is a point on which the Act of 1936 is based.
Would doing away with our Merchant Marine do away with our trade? Proponents of subsidies say it would tend to. This presupposes that subsidies help to build up trade. Actually they do not. Let us take a practical example of what too frequently happens in cases where American shipping is being subsidized in direct competition with cheaper and better foreign services. On the West African trade route, for example, we have a not uncommon case in which unsubsidized foreign shipping takes the bulk of the trade away from the subsidized American line. Time and again I have seen a British motor ship, which left the African coast several days after her American competitor, come to our ports deep on her marks while, days afterward, her subsidized rival made her landfall half-laden. It would be something if subsidies had encouraged the American line to acquire the kind of ships that could get a fair share of this palm-oil trade. But subsidies have not worked that way. “Incentive to cut costs and to furnish a better product or a better service for less money is largely removed since Government makes up the difference.”
Supporters of subsidies argue that we cannot entrust development of our foreign markets to foreign interests. This pre-supposes that ship operators are mainly responsible for the development of markets. Far from impeding the growth of our markets, abandonment of our ship subsidies would be an advantage to our foreign trade. It would cease to enrich private recipients of federal aid. But it would help to stimulate trade. To see why this is so, it is necessary to again underscore the distinction between shipping and trade. Shipping is a service, the carrying of goods from one port to another. It is not buying and selling. It is not even distribution. It is only a facet of distribution.
Shipping is a “commodity” we are trying to produce in competition with other nations. It is something industry buys and sells. Shipping is a highly competitive product. Because that is true, nations protect it (with subsidies) just as they protect certain home industries with tariffs.
The world today is beset by conflicting trade theories. On one side is the closed economy of barter and internal currency arrangements of which Germany is the leading exponent. On the other side is the so-called free system, in which the United States is playing the principal part. Whether both can survive—whether world trade can continue half-free, half-closed—is outside the scope of this study. What concerns us is the free system which the United States is promoting mainly among members of the democratic bloc.
The reciprocal trade agreements sponsored by Mr. Cordell Hull, United States Secretary of State, are helping to break down trade barriers between nations. Tariffs are being lowered in an effort to revive a normal flow of world trade. National protection is giving way to international co-operation.
Ship subsidies are the antithesis of this peaceful purpose. On the basis of economic considerations alone, the United States— so far as its shipping policy is concerned— is the most stubborn exponent of the old order.
One of the main arguments on behalf of federal aid has been that an American Merchant Marine will stabilize ocean freight rates and safeguard American shippers against exploitation from foreign ship monopoly. This claim was used effectively in the debates leading up to the enactment of the Merchant Marine Act of 1928. Actually subsidies only served to thwart this purpose. American ship operators took advantage of the opportunities which the Act gave them, by joining in pool arrangements with foreign lines to keep up freight charges on American ocean trade. Freight rates increased to the point where two large Chicago concerns (Cudahy Packing and International Harvester) protested that rates on their products were much higher after the subsidies went into effect than before.
Far from exposing American shippers to unbridled exploitation from abroad, entrusting our overseas carrying services to foreign countries would tend to stabilize rates at a reasonable level. (1) Because foreign lines can carry our goods more economically and more efficiently than American ships. (2) Because entrusting our goods to foreign carriers induces an element of competition which makes for lower costs and better service.
Neither is it likely that foreign carriers will give foreign goods unfair preference in the world markets. It would be to the advantage of foreign carriers to assist in finding outlets for our trade because the greater the trade, the more shipping services we will buy. And to carry this argument to its logical conclusion, the more we spend for foreign shipping the more American dollars these carrying nations will have with which to buy in the American market.
The administration of the Merchant Marine Act of 1936, as recorded thus far, emphasizes the futility of trying to meet the conflicting requirements of its basic policy. Its private beneficiaries have charged up their failure to develop American shipping services to a general public willingness to believe that we must have the ships anyway for national defense. Our inclination to regard our twofold shipping policy as the embodiment of parallel purposes has been its fatal weakness. The result is that today we have neither a good merchant marine nor the best possible nucleus of a naval auxiliary for national defense.
The Act of 1936 should be radically revised; not, as shipping interests strongly advise, to liberalize its benefits to private owners and operators; but rather that it may conform to economic realities. This does not mean we should dispense with essential, noncompetitive services, nor perhaps with subsidies in our North Atlantic passenger trade, where some concessions could understandably be made to maintain a fleet of the Manhattan-Washington type for the sake of that costly imponderable we too often mistakenly regard as “national prestige.” Nor should we in any way impair its vital relationship to national defense.
Keeping in mind these reservations, let us then revise our present policy of paying money to private interests for ships which at best duplicate a service our competitors will furnish much more efficiently at a much lower cost. We will not weaken our national defense thereby. On the contrary, to dissociate these right-angle parallels of our present policy will strengthen that prime factor in a national shipping policy ■—naval defense needs.
Need we document this case against subsidized private operation? Need we cite the graft, waste, and incompetence that blots the record of our adventures in ship subsidies? Could anything be blacker than the Black Report? Could anything be more prophetic of the futility of pursuing this fatal course than the feeling of frustration which already has provoked the Maritime Commission several times in its short tenure to warn the beneficiaries of federal aid that they must in effect “pull their weight on the oars”; that they must put their internal affairs in order, straighten out their labor troubles, or give way to government ownership; that American shipbuilders must co-operate or face the fact that the United States may have to build its ships in foreign yards?
We have spent millions of dollars to achieve that mythical thing we call an “adequate” merchant marine. But we do not have it yet. Today we sit back and watch in fear and admiration the advancements our competitors are making in ocean transportation. The 20-knot silk ships and oil carriers of Japan pass in and out of our ports while we flounder in subsidies that leave us far in their wake. We have spent millions for a merchant marine which in the event of war would be a barnacle on the mobility of our cruisers and our battle fleet. For the sake of national defense—the need against which primarily a subsidized merchant fleet is charged—can we afford to ignore the futility of this policy?
Knowing the history of our efforts to develop a privately-owned-and-operated merchant marine by federal aid, knowing, therefore, that when shipping interests are forced to choose between private profit and the public good, they invariably place private profits before the public good, what reason have we to fear the alternative? Can we permit the self-discredited appeal for a government-financed merchant marine, run for private profit, to endanger any unit of our naval security?
Let us sound the middle ground between these opposite choices of subsidizing private owners or abandoning our nonessential, nonsupporting shipping services. What about government ownership, that much- maligned alternative governmental authorities time and again have held over the heads of those strangely recalcitrant recipients of federal largess, the thing subsidized shipping interests naturally have opposed ever since government paternalism first went to sea back in the side-wheeling days of the old Brazil Mail?
Our history gives us but one example of government ownership at work, the World War miracle of the Emergency Fleet. Supporters of subsidized private ownership still scoff at the peace-time epilogue to this stupendous drama of American industry at war.
The charges of waste and inefficiency which assailed the Shipping Board at the time when private interests were trying to force the government to get out of the shipping business have left an unwarranted stigma on the government’s wartime venture in shipping. This fact traces back to the intensity of efforts inspired by its contemporary chairman to turn the Emergency Fleet over to private interests on a bargain-counter basis. Freight rates had soared to fantastic heights soon after the war and private interests were eager to get in on the boom.
Under the experienced direction of the chairman whom President Harding drafted from a Chicago advertising agency, a nation-wide publicity campaign was carried on to discredit public ownership. So deeply was this propaganda, purporting to show that government ownership was wasteful and inefficient, instilled into public consciousness that its misleading effects are evident to this day.
The result was to turn public opinion against government ownership. The wartime ships were sold to private bidders on the basis of subsidized loans for as low as ten cents on the dollar and American shipping policy had embarked once more on its subsidy course.
How did American operators really feel about this “wasteful” and “inefficient” system of government ownership which they helped to sabotage? This editorial excerpt from their monthly trade periodical should enlighten us on that score:
The great danger of continued Government ownership and operation is, that with the increasing efficiency now being shown by the Shipping Board and with advancing freight and passenger rates, there soon will be no apparent loss to the Federal Treasury.
Presidential elections were coming up in the autumn of that year, and government ownership was becoming a national political issue. The editorial continues:
While this in itself is to be commended, there is but little question that the radical element would seize upon this fact as a strong argument for governmental ownership and operation. . . . Such action would be fraught with very serious consequences, as none but those of socialistic tendencies will admit that public operation . . . would be for the best interests of the people, at least during the present generation.
Thus it is a matter of record that— crude and inexperienced as was our only venture in public ownership—the government’s showing “is to be commended.”
In this brief outline we have traced the national shipping problem all the way back to the time when shipping became a national problem, back to the days of the 10-year grant to the ill-fated Brazil Mail, the first effort in subsidies, the first failure of subsidies. We have examined some of the reasons advanced to justify this special form of federal aid, and we have seen some of the reasons why subsidies have failed. The cumulative impact of this study should impress upon us the need for a radically different approach to our shipping problem. It is imperative that we do so if we are to reconcile the two conflicting purposes defined in the Act of 1936. First, we must look to the merchant fleet in the light of our needs for naval preparedness. Second, we must reexamine our subsidy policy in relation to its effects on the Hull program of freer trade.
Some will contend the conclusions drawn from this study show a defeatist attitude. But let us hark back once more to the beginning; back to the Civil War; to the time of change in the basic structure on which was founded our commercial supremacy on the sea; to the sudden growth of our internal economy with its attendant rise in the domestic standard of living to a point where we could no longer compete with cheaper foreign labor in industries and services where labor is the major part of the cost.
Was it defeatist for our eastern merchants to divert the wealth amassed in the days of the China-Cape Horn trades to the more productive ventures mainly in the railroad empires of the west? Was it defeatist for the whaling industry of New Bedford, when oil was discovered in Pennsylvania, to divert its capital into a new industry that was to make the once- thriving whaling port of New Bedford one of the great cotton manufacturing centers of the world?
We submit, to have resisted these basic changes in our national economy would have been defeatist; to have held on to the old order by appeals for public protection through federal subsidy, would have been unrealistic, uneconomic, and un-American.
We who are concerned with the shipping problem stand where our forefathers stood in the embers of our sailing supremacy in 1865. The molders of national shipping policy are still faced with that persistent question:
Ships for what?
Do we want more ships or more trade, national “prestige” or international prosperity? That is the basis on which our choice must be made.