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reports at regular intervals, and that the industry be permitted to present its suggestions in the interest of effectively carrying out the provisions of H. R. 8677 and of congressional intent.

I have some proposed amendments to H. R. 8677, and I would like to submit them for the record.

Mr. O'TOOLE. Without objection, they will become a part of the record.

(The matter referred to is as follows:)


1. Delete sections 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, and 23.

2. Amend section 19 (p. 16) by inserting at line 7 between the words "for" and "the" the words "a fair and reasonable portion of".

3. Amend section 19 (p. 16) by adding a paragraph lettered (f) after the paragraph lettered (e), reading as follows:

"(f) Charges for services and facilities provided by the Corporation or the Canal Zone government for any Government agency or agencies, individual or other person shall be made and set at rates designed to cover, as nearly as practicable, the fully distributed cost (including depreciation and, except in the case of services and facilities provided by the Canal Zone government, interest) of providing such services and facilities."

4. Amend section 25 by striking the words on page 21, lines 8-9, "exclusive of the cost of commodities resold".

5. Amend section 25 by adding the following three paragraphs:

"The capital investment in the building and improvement of the Panama Canal and its ancillary facilities and equipment for vessel-transit purposes shall be reduced by one-half as representing their fair and proportionate value for national-defense purposes and as a military asset.

"Any capital investment in facilities and equipment which are not required for the operation of the Canal and its ancillary facilities and equipment for commercial-vessel-transit purposes shall not be included in the capital base for computing interest to be included in the toll rate.

"There shall be included as an element of the toll-rate interest charges upon only the capital investment base of the Canal and its ancillary facilities and equipment remaining after the deductions and exclusions prescribed by the preceding two paragraphs at the average rate of interest, computed at the time of prescribing or changing the toll rate borne by all interest-bearing long-term public issues of the United States then forming a part of the public debt."

Mr. BAILEY. I am very grateful to you, Mr. Chairman.

Mr. O'TOOLE. In accordance with the rules of the House, the committee will stand in recess until tomorrow morning at 10 o'clock. At that time, Mr. Bailey, would it be possible for you to return, as Mr. Fugate would like to ask you some questions?

Mr. BAILEY. I shall be very happy to, Mr. Chairman.

Mr. O'TOOLE. We will stand adjourned until 10 o'clock tomorrow morning.

(Whereupon, at 12 noon, the committee adjourned, to reconvene the following day, Tuesday, June 27, 1950, at 10 a. m.)


TUESDAY, JUNE 27, 1950



Washington, D. C.

The committee met at 10 a. m., the Honorable Donald L. O'Toole (subcommittee chairman) presiding.

Mr. O'TOOLE. The committee will come to order.

At this point I would like to read into the record a letter from the Secretary of the Army received this morning.

(The letter read is as follows:)


Chairman, Subcommittee on the Panama Canal,
Committee on Merchant Marine and Fisheries,

House of Representatives.

Dear Mr. O'TOOLE: I have your letter of June 14 advising that your subcommittee may wish to consider severing from H. R. 8677 certain codifying provisions not covered specifically by the report of the Bureau of the Budget on Panama Canal organization.

The provisions in question are regarded as necessary by the Department of the Army to provide complete legislative coverage for the organizational changes recommended in the report of the Bureau of the Budget and all provisions of the bill cover matters embraced directly or indirectly in that report. While I believe it desirable to have the bill enacted in its present form, I shall of course accept the judgment of your committee as to what deletions may be necessary to insure the passage at this session of the provisions specifically covered by the report of the Bureau of the Budget and in the President's recommendations. I should like to point out, however, that none of the codifying provisions to which you refer are essentially new and all are of such nature that they could take effect on the same date as the remainder of the bill, since they are considered to be necessary to effectuate completely the transfer of the Canal operations to the Corporation. Since these provisions are comparatively simple and noncontroversial, I believe that the Governor of the Canal Zone in his testimony before your committee on June 26 can explain their necessity and why they should not materially delay the enactment of the bill.

Sincerely yours,

FRANK PACE, Jr., Secretary of the Army.

The committee will decide that in executive session.

Mr. Bailey, yesterday morning it was necessary for us to adjourn because the House went into session. Mr. Fugate, of Virginia, expressed a desire to ask several questions.


Mr. FUGATE. You are familiar with the operation of the Canal and its receipts and disbursements over the years?

Mr. BAILEY. Yes, Mr. Fugate; generally speaking, I am.

Mr. FUGATE. Are you familiar with the report that was made by Mr. Jordan, of the General Accounting Office, in 1949 for the committee? It was a committee appointed by Judge Bland.

Mr. BAILEY. No; I do not know that I am.

Mr. FUGATE. As a matter of fact, he worked for some 90 days for the committee and compiled certain information, which information was made available to us and we have it.

In your statement yesterday you indicated that you had no serious objection to the bill which is presently under study, with the possible exception of three items.

Mr. BAILEY. That is correct, sir-three items, plus the division of the capital investment.

Mr. FUGATE. Regarding the division of capital investment, I would like to interrogate you.

Mr. BAILEY. Yes.

Mr. FUGATE. In the report that I have just referred to, which covered the entire operation of the Canal from 1921 to 1948-that is, from the time that the actual capitalization was set up-it shows that the capital was about $522,000,000, and there are various other figures according to the authorities that set them up.

Mr. BAILEY. That is the amount stated in the Governor's report for 1949.

Mr. FUGATE. During that period the tolls for the entire operation were $636,000,000 plus.

Mr. BAILEY. I do not attempt to carry the figures in my head, sir.
Mr. FUGATE. The yearly average, as we show it, was $22,000,000.
Mr. BAILEY. That is approximately my understanding.
Mr. FUGATE. That includes tolls, both commercial and free.
Mr. BAILEY. No free tolls, according to my understanding.
Mr. FUGATE. They are shown in this report.

Mr. BAILEY. You have the report.

Mr. FUGATE. He projected for us the operation of the Canal for the year 1949. He shows tolls for that period of $20,000,000; and, since we know what the tolls were, he was substantially correct. There were free tolls of $2,462,000.

Mr. BAILEY. Yes.

Mr. FUGATE. That makes a total of $22,686,000.

Mr. BAILEY. Yes.

Mr. FUGATE. Then there are civil revenues of $121,189, which gives a gross revenue of $23,000,000.

The expenses, as he shows them here for the Canal operation, would be $19,000,000.

Mr. BAILEY. We say approximately $20,000,000.

Mr. FUGATE. His figures are approximately $20,000,000.

Mr. BAILEY. I have not seen his report.

Mr. FUGATE. He shows salaries paid to the Army and Navy of $429,000. I want you to take particular notice of that figure "$429,000," because I want to ask you some questions about that.

That shows total expenses of $20,000,000.

Earnings before interest, $3,524,000.

Interest on Canal bonds paid by the Treasury, $1,494,000, which leaves a net, before interest is charged, of $2,000,000.

Calculating the interest on the capitalization of $522,000,000 would show interest in the amount of $13,000,000. I am using round figures. Mr. BAILEY. I understand.

Mr. FUGATE. With $2,000,000 to be applied to that as net from the operation. That shows an interest deficiency for 1949 of $11,000,000. Mr. BAILEY. I have no doubt that his report shows that. I have never seen it, but I have no doubt.

Mr. FUGATE. That is substantially the way the 1949 report of the Governor of the Canal Zone stands up. The point that I want to make is this: You say that the operation of the Canal, if you have a 50-50 division of the capitalization at 2.3 percent, would give relief to the shipping industry; is that true?

Mr. BAILEY. Yes. Not that alone. If I may say so, because of the manner in which they have kept the accounts and the manner in which they have charged civil government and military government to the accounts, I would not be surprised at any amount of deficit they may be able to show.

Mr. Jordan was a former employee of the Canal Zone and made the report. I think it is fair to say that he was relying on a continuation of past practices of management and accounting at the Canal.

Mr. FUGATE. As a matter of fact, over the period from 1921 to 1948, they showed an average deficit of $3,000,000 for the entire period. Mr. BAILEY. On their method of accounting, yes; but we are talking about a new method of accounting, and a new method of management. Mr. FUGATE. Is it your opinion that a division of the capitalization on a 50-50 basis would put it on a balanced operation?

Mr. BAILEY. Yes.

May I say, in round figures, that the interest charge today on the full capital base that they are talking about, at 3 percent, would be approximately $15,000,000 per year in interest. If you reduce the interest rate to 2.3 percent, which is the cost to the Treasury, as recommended by the Bureau and approved by the President, the annual interest rate would be $11,500,000 per year. If we divide the capital base, we reduce the interest charge one-half, which gives you an interest charge of $5,750,000.

If to that you add approximately $20,000,000 operating expenses, you get $25,000,000, or $25,750,000; and if you deduct them from the dual services the proper charge to the military and civil governments you will take off about $4,000,000, which will give you $21,000,000, or approximately the revenue at the present rate of tolls. That is how it works out, sir.

Mr. FUGATE. Under the provisions of this bill, there are certain mandatory features. One is that the revenue from the operation of the Canal must pay first the cost of the Canal Zone Company.

Mr. BAILEY. As I understand the bill, after the charges have been made which are proper against the users of these facilities, then the remaining deficit which represents what they term "net civil government cost" will be paid by the business enterprises which will be incorporated into one corporation-namely, the Panama Canal Com

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pany-and the Panama Canal Company will then distribute that net residue of civil government expenses, including sanitation, between the operation of the Canal, the railroads, the steamship companies, the commissary, and whatever other business activities are conducted by the Panama Canal Company.

We pay that under the theory stated by the Bureau of the Budget as "in lieu of taxes." Presumably, under their theory, business activities pay for the cost of government.

Now, the net cost of government would be distributed under their philosophy over all the business actiivties which in turn would be incorporated in the Panama Canal Company, and there distributed on a gross revenue basis. That is my understanding of it.

Mr. FUGATE. It says in section 19, page 16 of the bill:

The Corporation is further obligated to pay into the Treasury as miscellaneous receipts amounts sufficient to reimburse the Treasury, as nearly as possible (1) for the annuity payments under article XIV of the convention of November 18, 1903, between the United States of America and the Republic of Panama, as modified by article VII of the treaty of March 2, 1936, between the said Governments *

Mr. BAILEY. That is the rental which goes to the Republic of Panama for the use of the Isthmus.

Mr. FUGATE (reading):

(2) for the net costs of operation of the agency known as the Canal Zone Government.

Mr. BAILEY. That is the net cost, sir, and the net cost is after there has been a user charge made to the various users of these facilities to the extent that it is proper to make them.

The then residue of civil government costs, which they term "net"and I think that is the meaning of the term "net"; and the Bureau of the Budget will confirm that-but, when that net amount is arrived at, it must be paid by the Canal Company to reimburse the civil government corporation, or body, for their total costs, they having had appropriations to cover the cost, and this is a reimbursement.

Then the Canal Company takes the net cost of civil government, and, upon the theory it is in lieu of taxes which business activities would otherwise pay, they distribute it over the business activities of the Canal Company comprising transit operations, the operation of the railroad, the operation of the steamship company, the commissary, and any other business activities that are carried on by the Canal Company.

Do I make myself clear?

Mr. FUGATE. I do not quite follow you.

Mr. BAILEY. In what respect, sir?

Mr. FUGATE. If there is profit from the operation of the Canal, or if the revenues from the Canal are greater than the cost of the Canal Zone government, then it must be paid.

Mr. BAILEY. If the Canal Zone government, which comprises the civil government functions-sanitation and the like-runs at a deficit, they cannot make user charges sufficient to cover those costs. They will then have a deficit. That deficit is to be paid by the Panama Canal Company, which operates the Canal, the railroad, the steamship company, and the commissary. They, in turn, distribute that cost against those business activities.

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