convinced them." One of the objectives of the present hearings was to ascertain the nature of that evidence. Mr. William L. Dawson, chairman of the House Committee on Expenditures in the Executive Departments, stated that objective to Mr. Grenville Mellen, Vice Chairman of the Commission, in the following language:

You are not given a blank check to say, "I believe this is convincing, and upon this I am going to do as I please with the Government money." After all, Congress passed the law, and we expect to have you to use good judgment; * * We want to know upon what set of facts you used your judgment to go above the 33% percent. You based it upon something, and we want you to tell us upon what you based it. Now, tell us.

Commissioner Mellen, who supervised the drafting of the Commission's statement, testified that he did not rely solely on the recommendations of the Commission staff. Speaking specifically of the American President Lines case, he admitted that the figure suggested by the staff "happened to be coincident" with the Commission's final determination, but he regarded the staff's recommendations as "restraining influences" which prevented him from granting a larger subsidy. While he could recall only vaguely the procedures involved in the staff's calculations, he claimed to have detected in them mathematical errors which he failed to correct because they "were all recited, they were in the record."

The outside evidence considered by Commissioner Mellen was extremely general. He referred to information which he had obtained on trips to Europe and from periodicals which he had read. He attached great importance to his knowledge of foreign exchange, especially as it related to the disparity between the official dollarpound exchange rate, which the staff uniformly employed in computing British costs in dollars, and the unofficial, economic exchange rate, which Commissioner Mellen considered more realistic.

Commissioner Joseph K. Carson, Jr., who stated that he subscribed unconditionally to the Commission's statement, testified that he placed confidence in the calculations of the staff, but like Commissioner Mellen, he took into consideration additional evidence obtained from outside sources. Items of evidence included annual Commission reports to Congress during the period 1939 through 1943; excerpts from the Senate and House reports on the Ship Sales Act of 1946, which placed prewar domestic construction costs at twice the foreign construction costs; facts about British secretiveness in divulging information and about British business methods, “learned in the 18 months I spent in Great Britain during the war"; and data submitted by technical members of the Commission's staff and highranking naval officers. These considerations, plus the belief that American costs have increased more rapidly since the war than have foreign costs, convinced Commissioner Carson that the differential was at least 50 percent; but he acquiesced in the specific recommendations of the staff because shipping companies "were willing to accept a lesser figure."

On August 7, 1948, while Commissioner Carson was in Portland, Oreg., he was requested to return to Washington to participate in a determination of the subsidy to be granted American President Lines.

The special report charged that Commissioner Carson replied by telegram, stating that he was convinced that the differential exceeded 50 percent, and adding:

If necessary wire to me the evidence presented by the staff of the Commission so that I may comment with respect to each relevant factor and add thereto any additional factors which convinced me.

Commissioner Carson testified that he had sent the reply on the advice of the general counsel; that he had previously seen "much of the memoranda that had been prepared" in the case; and that he "had discussed the entire situation with a number of members of the staff

Commissioner David J. Coddaire testified that he was appointed to the Commission on July 12, 1948, after some of the preliminary determinations under consideration had been made, and was influenced to an extent by the fact that the four senior Commissioners were convinced as to the evidence.

While he knew of no yardstick employed by the Commission to measure "convincing evidence," he stated that in his own opinion as a lawyer it would have "to satisfy me almost beyond any reasonable doubt," and that this was the measure he used regardless of the size of the subsidy. The evidence which he had considered included letters to the Commission from ship operators; the report of the President's Advisory Committee with respect to the need for a larger merchant marine; and the testimony of outside experts. He relied on the staff's calculations, but he did not investigate the calculating methods employed and was not aware of the assumptions made. Nevertheless he felt confident that they had a reasonable basis. Furthermore, findings made on a recent European trip had borne out their reasonableness. These findings resulted from visits to shipyards, machine shops, and prefabrication and joiner plants.

Commissioner Raymond S. McKeough, who was the sole dissenter in the superliner case and who refused to subscribe to the Commission's statement, testified that in the American President Lines and the American Export Lines cases he relied solely on the recommendations of the staff, the ability of which he had no reason to doubt at that time. His dissent in the superliner case was, in many respects, as sharply worded as was the special report of the Comptroller General. He charged that in that case a sales price to the United States Lines of $25,000,000 was the predetermined objective, and in the effort to reach it there was "a reckless abandonment of an orderly, systematic approach to the required determinations" and a "neglect of an objective, unprejudiced, and uninfluenced professional search for the correct answer." Furthermore, he did not choose to attack the General Accounting Office's criticisms of the American President Lines and the American Export Lines determinations, for while he voted with the Commission for those determinations, the criticisms coincided with "the increasing apprehension" which he felt about them. He pointed out that in the latter case, the staff's estimates of the proper subsidy, when brought before the Commission, were attacked not only by the ship operator but also by elements within the Commission as being too low rather than too high. The final figure was reached through three

deviations from established procedures, to which both he and the General Accounting Office strongly objected. Commissioner McKeough testified that, had he known at the time of the determinations the facts which were revealed at the hearings, he would have dissented in the cases of the American Export Lines and of the American President Lines.

Gen. Philip B. Fleming, the present Chairman of the Commission, testified that he was not a member when the determinations in question were made, and consequently did not feel qualified to discuss Commission actions prior to his appointment.

Construction-differential subsidies

The special report of the Comptroller General, in charging that the Commission acted without convincing evidence, alleged that such evidence was not even in the hands of the staff, since the computations were based on unproved assumptions, improper selection of data, mathematical errors, and inconsistencies, to such an extent that they were virtually worthless. Thus, even if the Commissioners had acted with full knowledge of all calculations, the evidence required by the statute would have been lacking. In attempted substantiation of this allegation the special report analyzed at some length the calculations employed by the staff. While these data do not readily lend themselves to a nontechnical summary, certain general observations can be drawn with respect to the evidence adduced at the hearings.

In each case the task of the staff was to determine the difference between shipbuilding costs in America and in a representative foreign shipping center. The resulting figure represented the percentage of domestic cost to be borne by the United States Government.

American President Lines, Ltd.-In this case the representative shipbuilding center selected was Holland. The unadjusted foreign cost determined by the Commission was the result of an arithmetical average of four calculations, a device described by the person responsible for it as "the poorest way to take an average dumbest and most brute force way of doing it."

the

Of the four calculations, the basis for one was subsequently lost and could not be recalled with any accuracy. Of the remaining three, the first involved such steps as a division of the cost of machinery equally between material and labor, in support of which the Commission's statement offered a 1935 report which in fact did not justify such a break-down; a ratio for higher productivity of labor in the United States based solely on the respective times required to deliver a vessel in Holland and the United States, respectively; an assumption that foreign and domestic material costs were the same, despite information that the cost of ships plates in Holland exceeded the American cost by 60 percent; and a figure for profit and overhead reached by averaging two figures, one of which apparently included only overhead and the other clearly included only profit; and a mathematical error.

While the Commission did not deny these facts, it maintained that the assumptions were reasonable in the development of an estimate and were not properly subject to an accounting audit. A Commission estimator testified that the 50-50 labor-material break-down was based in part upon subcontractors' reports; that, given reported mark-ups from foreign costs to foreign sales prices, it

was irrelevant whether the latter figures included profit and overhead; and that ships plates were a minor item, percentagewise, in ship construction and a generalization from their relative costs was therefore unjustified. It should be noted that no such generalization had been suggested.

The second calculation was based on an incomplete report in a British publication of the costs of the Dutch-built ship being compared with the American ship; the result was increased by 221⁄2 percent to bring the cost up from that of a ship built to foreign standards to that of a ship built to the higher American standards. Finally, the break-down of costs of the American, rather than the foreign, ship was accidentally employed, and the estimator multiplied when he should have divided. At the hearings a Commission spokesman maintained that the choice of the wrong ship made little difference, since the break-down of costs in the two ships would have been similar.

The third-calculation estimated the cost of the Dutch-built ship by averaging a figure given in a British publication and one supplied by the Commission's foreign representative; the latter figure did not include hotel equipment. Among adjustments which were made was an increase, this time of 5 percent, to bring the costs up to those of American standards of construction.

The adjustments which were applied to the average of the four calculations included a deduction of 8 percent to lower construction costs from those of American standards to those of foreign standards. Thus a factor incorporated in two of the calculations at 221⁄2 and 5 percent, respectively, was removed from the average at 81⁄2 percent. The only explanation offered for this procedure was that the calculations were made independently in different divisions of the Commission.

Another adjustment to the average was a deduction to reduce the percentage of profit included in the foreign sales price, a percentage which had been uniformly applied in previous Commission determinations. This departure from precedent, for which no sound justification could be offered, was criticized both by Commissioner McKeough and by the chief estimator of the Division of Cost Analysis. The latter testified that he concurred in the change only after he was threatened by a superior. The two adjustments above discussed resulted in a substantial decrease in the estimate of foreign costs and consequently a substantial increase in the subsidy granted American President Lines.

American Export Lines, Inc.-The subsidy percentage of 45 percent approved in the case of American Export Lines was the result of two different subsidy figures recommended by two divisions of the Commission.

The former was based solely on the American President Lines case. Among estimates not used was one based on the Dutch-built ship Willem Ruys; another estimate based on this ship had been rejected at the outset as unreasonable and was not even included among the six considered estimates. Yet the memorandum in which the recommended estimate was presented to the Commissioners identified it as being based on the Willem Ruys, on which "considerable published

H. Rept. 1423, 81-1- -3

information * * was available." It appeared that the American President Lines were not even mentioned in explanation of the recommendation.

Consideration of the basis of the estimate by the other division was complicated by the existence of two sets of calculations, both reaching approximately the same result, one supplied by the Commission to the General Accounting Office early in 1949 and the other produced at the hearings. The bodies of these calculations differed considerably in details, but in both it was assumed without tangible evidence that the Netherlands and the United States followed similar shipbuilding practices and were on a par in labor productivity. This latter assumption was at variance with the assumption made in the case of American President Lines.

As in the American President Lines case, the final subsidy was based on an estimate of foreign costs which included a decreased profit, despite evidence that Dutch shipyards were booked up for work until 1952, a situation scarcely conducive to "hungry" bids. An adjustment, 9 percent in this case, was made to convert from the American to the lower foreign standards of construction.

The Commission's announcement of approval of a 45-percent subsidy in this case caused the State Department's adviser on shipping for northern Europe to send the Commission a sharply critical memorandum which insisted that

No information secured by the Embassy or by the Maritime Commission's research representatives here will substantiate a differential of 45 percentand referred to information which would place the differential at a considerably lower figure. At the hearing a Commission spokesman stated that the data cited in the memorandum were not utilized because they had to be evaluated in the light of their author'sknowledge, background, his attitude, and his understanding of just how those figures are used to produce the results * *. He is not a technical man. Earlier in the hearings this informant had been described by Commissioner Mellen as a "so-called foreign shipping adviser to the State Department" who was

*

under the aegis and atmosphere of foreign merchant marines and under the aegis and atmosphere particularly of the British merchant marine and all British atmosphere aspects.

Yet in other instances reliance had been placed upon information obtained from this same source.

United States Lines Co.-In calculating the construction-differential subsidy in the case of the superliner, the procedure followed was unprecedented, since national defense features in the superliner were considered to be so extensive that a "commercial equivalent" devoid of such features was designed and its domestic cost of construction estimated before a comparison of foreign cost was made. The representatives of the Commission themselves differed as to the method by which the domestic cost was reached. The chief estimator of the Division of Cost Analysis insisted that the figure used was estimated by Newport News Drydock & Shipbuilding Co., and was in fact $500,000 higher than it was thought to be when it was introduced into further calculations by the Commission. On the other hand, the Chief of the Interdepartmental Office of Liaison maintained that the estimate was made by one of the divisions of the Commission