In other words, the element, the civil government of the Isthmus, goes into the pricing of the affairs on the railroad, of the affairs of the shipping companies, of the tolls that go through the Canal and of the sales price of items sold for the commissary. So, it is distributed over that, and it is borne by those activities in proportion to their gross revenue.

Mr. FUGATE. How did you arrive at the figure of 50 percent?

Mr. BAILEY. I arrived at it, sir, by the meat-ax theory. The report of the Bureau of the Budget says, in determining national-defense value and commercial value, they were not able to say which was primary. Now, if it is so equally balanced that you cannot say which is the greater, or primary, I think there is justification for saying it is 50-50. If it is not 50-50, I have no way of determining. I do not think there is any scientific mathematical method of arriving at it, but I have arrived at it on this basis-if you cannot tell which is primary, it is pretty well evenly balanced.

Mr. FUGATE. You are cognizant of the fact that there have been charge-offs made heretofore?

Mr. BAILEY. And restored.

There are no charge-offs that have not been restored when the Canal Company showed a profit. They put back the items that had been written off.

Mr. FUGATE. At the time of the construction of the Canal, or immediately thereafter, was there not a charge-off of some $100,000,000 plus?

Mr. BAILEY. And a restoration of it later, sir, including a capitalization of $129,000,000 for interest during the course of construction, which apparently they had not thought of before.

Mr. FUGATE. What effect would a reduction in tolls have on shipping?

Mr. BAILEY. It would help shipping. It would not be a decided factor. It would be one of many factors which we hope to accomplish in the restoration of our domestic shipping. Today we have a very small service between the Atlantic and the Pacific ports because of the small margin, if any, between operating costs and revenues.

The toll equalization, in addition to being a pure matter of equity, would help us in the restoration if we can make other economies for which we are striving. The other economies are in cargo handling, in terminal operations, and many others that the owners themselves are striving for. But that would be one factor of cost that would be lowered, which would be helpful, in addition to the pure factor of equity, as we see it. We are perfectly willing to pay all the cost that are directly chargeable to the transit. We just do not want to pay any of the civil government costs or the military costs beyond the necessity for commercial transit.

Mr. FUGATE. Of course, you are cognizant of the fact that any changes in rates affect all shipping-foreign-flag shipping.

Mr. BAILEY. That is quite correct, and that is in accordance with the treaty that the Government of the United States has made.

Mr. FUGATE. What is your view on reduction of tolls and the effect that it would have on foreign-flag shipping in relation to American shipping?

Mr. BAILEY. As it would apply equally to both, I do not see it would disturb the competitive position, sir.

Mr. FUGATE. Would it not be a form of subsidy to foreign shipping? Mr. BAILEY. Not if we are doing what we propose to do-put the Canal on a pay-as-you-go basis for the cost of transit purposes and eliminate these other costs which we think would never go into the Canal account.

Mr. FUGATE. Putting the Canal on a pay-as-you-go basis can be done only by a reduction in the capitalization.

Mr. BAILEY. That is correct, I believe.

Mr. FUGATE. There would be no other way.

Mr. BAILEY. Unless we can in some manner reduce these operating costs. We are in no position to say how much reduction could be made in operating costs. We think perhaps some can be made. We believe good efficient management will result in some reduction in operating costs, but we are in no position to say what that will amount to.

Mr. FUGATE. Certain changes in accounting have already been effected?

Mr. BAILEY. At the Canal?

Mr. FUGATE. Yes.

Mr. BAILEY. I am not familiar with any. There may have been

some.

Mr. FUGATE. Was not that statement made in reply to my question yesterday by Mr. Seidman? He said that changes had already been made; that there was a new system of accounting which affected the returns from the operations; did he not?

Mr. BAILEY. Mr. Seidman would know more about that than I, and I certainly hope that some have been made.

Mr. FUGATE. In the event no changes are made in the capitalization and this bill becomes law, where would American-flag shipping be? Mr. BAILEY. I think that we would have an increase in the tolls unless there can be a compensating decrease in operating costs.

Mr. FUGATE. Do you see any place that you could decrease, deduct, or change the operating costs in any item?

Mr. BAILEY. The only items I see about which I am competent to talk is where they charge military and civil government expenses to the Canal tolls. I do not know enough about operating canals to make suggestions to those gentlemen about efficiency and reductions in their costs.

Mr. FUGATE. Well, it has been shown over the years from the very beginning that an average of $300,000 has been paid by the Army and the Navy to the Canal Zone in the way of salaries, and in 1949, $429,000. Under the provisions of this bill, that would not obtain.

Mr. BAILEY. I believe the bill says they will pay the military salaries that are connected with the transit operations of the Canal. That is my understanding of it. They will pay that part of the military salaries that are necessarily connected with the transit operations of the Canal.

Mr. FUGATE. It will show a balance of sometihng over $350,000 as of 1949 in favor of the Canal.

Mr. BAILEY. I do not quite understand you.

Mr. FUGATE. Let me put it this way: The Canal pays something over $400,000.

Mr. BAILEY. To the military for the use of military officers.

Mr. FUGATE. And the military pays approximately $60,000.

Mr. BAILEY. $60,000?

Mr. FUGATE. Yes.

Mr. BAILEY. For what purpose?

Mr. FUGATE. For services presumably rendered by them.

Mr. BAILEY. Which we contend is a very small part of the services they really obtain.

Mr. FUGATE. There would be a difference there of about $340,000 or $350,000.

Mr. BAILEY. On those figures there certainly would.

Mr. FUGATE. That would be a further charge against the operation of the Canal.

Mr. BAILEY. I understand the philosophy, Mr. Fugate, is to divide the commercial operations from the military operations-let the military pay for the services they get and let the Canal Company pay to the military for the services the military renders to the Canal, and the same thing in reverse. If the Canal Company gets services from the military, it should compensate the military for those services. If the military gets services from the functions that are operated by and at the expense of the Canal, then the military compensates the Canal Company for those services. It is an effort to put each on its own sound basis. That is the philosophy of the Bureau of the Budget's report, with which we concur.

As I said, we concur, with minor exceptions. The bill does not follow the recommendations of the Bureau of the Budget, and then there is the simple case of dividing your capital.

Now, if you are going to divide expenses between the functions they serve, I cannot see how you can avoid dividing the interest, and that means dividing the capital. After all, interest is nothing but expense. I am in the banking business, as you are, and we know that interest is

expense.

Mr. FUGATE. True enough.

What is the situation with reference to intercoastal shipping now? Mr. BAILEY. The intercoastal shipping is somewhere around 30 percent of its normal amount. I know that you are familiar, sir, because it has been talked of here in the committee. When we have difficulty the Home Fleet is the first fleet thrown into the breach as military support vessels, and the international situation does not look too well this morning.

Mr. FUGATE. An increase in tolls would be injurious to the operation of the intercoastal service?

Mr. BAILEY. It certainly would. It is hanging on by its eyelashes right now.

Mr. FUGATE. There are some 60 or 65 ships in operation.

Mr. BAILEY. Approximately that.

Mr. O'TOOLE. Mr. Bailey, you appear as a representative of the National Federation of American Shipping?

Mr. BAILEY. Yes.

Mr. O'TOOLE. Would the National Federation of American Shipping be in favor of the ceding or selling the actual waterway of the Panama Canal to a private corporation with the idea of having something similar to the Suez Canal set-up, a private corporation taking care of the actual operation and maintenance and assuming the obliga

tions for the waterway itself and its incidentals and charging the military, naval, and commercial vessels of the world tolls? Would you people be in favor of that?

Mr. BAILEY. Mr. Chairman, as you say, I represent a large segment of people, and no such proposition as that has ever been considered by them. What we are talking about here is the effect of dividing the commercial completely from the military and civil government functions, which I take it you think would happen if the Canal were sold and operated by a commercial company.

Now the experience at Suez has not been too happy, and I do not know what the views of the industry would be on a question of that kind. It would take more thought than I could give here at this table, and it would take a conference with more people than I have available in order to answer that question intelligently.

Mr. O'TOOLE. I still do not hear you say whether you would be in favor of it or opposed to it.

Mr. BAILEY. My answer is that I cannot answer it here, as I represent a large section of people, and I would have to confer with them. I take it that you believe the effect would be approximately the same if the commercial company operated it but, very frankly, we are asking only for a division of the Government and civil government and the military from the commercial operation, and that the commercial operations pay for themselves and for nothing else.

Mr. O'TOOLE. Do you think their tolls could be lowered and it could be more cheaply operated under such a set-up?

Mr. BAILEY. I could not say at the moment.

Mr. O'TOOLE. There was a lot of talk yesterday about the military and naval vessels going through the Canal without tolls. Every bit of insurance on every ton of shipping that goes through the Canal is paid by the shipper or the steamship company. Do the steamship companies consider the military and naval forces of this country as a sort of insurance?

Mr. BAILEY. Yes; they are insurance of a character. Of course, going back to your first question, the Suez Canal last year paid dividends last year equal to about 40 percent on the original sales value of their shares. There is a big argument about Suez. That is a commercial enterprise operated for profit, and there is a big controversy over that situation now.

Mr. O'TOOLE. Do you not think that the average steamship company receives in the long run more protection from the Army and the Navy than the average citizen of Sioux City?

Mr. BAILEY. He might receive more than the citizen in Sioux City, but maybe not the citizen in San Francisco, New York, Galveston, or Brooklyn.

Mr. THOMPSON. Mr. Bailey, the allocation of the various different expense items continues to confuse me. Do you have a copy of the bill there?

Mr. BAILEY. Yes.

Mr. THOMPSON. In section 25, page 20, there is this language:

(b) Tolls shall be prescribed at a rate or rates calculated to cover

Regarding the meat ax system of taking 50 percent of the cost of operation, how does that theory jibe with the theory written into the bill?

Mr. BAILEY. Of course, Mr. Thompson, the way the bill is drawn interest on the total investment at the Canal would be charged against the whole account. That is the large question that we are propounding here. There has been no recognition of the national-defense value of the Canal in the capital account, and tolls at 2.3 percent would be charged against the whole capitalization, whetever it is determined to be, and that would be a part of the toll base. Therefore, there would be an increase in the toll base if they maintained the same system. But they are not maintaining the whole system, according to the Bureau of the Budget. They are now ready to separate these dual service accounts which have heretofore been charged against tolls. They are prepared to divide those. We say that they should go one step further and divide the other item of expense, namely, interest which accrues from the capital investment, being all charged against the commercial toll operations of the Canal.

Mr. THOMPSON. In this section (b) to which we are referring, the only thing that you are at variance with is the amount of interest that is to be charged. Do you know on what capital account interest is charged?

Mr. BAILEY. On the total net investment of the Canal, according to my understanding. We say all of these costs that you mention here; that is, the operating costs of the Canal, for transit purposes. Mr. THOMPSON. Do you know what the investment, subject to interest, would be?

Mr. BAILEY. We have an account as of last year which said that the net investment cost of the Canal, the way they figured it, is $522,000,000.

Mr. THOMPSON. Is there any difference of opinion on that?

Mr. BAILEY. I think that there are some items in that account that the budget feels do not belong in that account and should be deleted. We will come to some other figure-maybe $500,000,000; maybe $475,000,000, but taking $500,000,000, $500,000,000 at 3 percent is $15,000,000 a year.

Mr. O'TOOLE. In this intricate system of bookkeeping that our Government runs, has any allowance ever been made for transformation of that territory from a jungle to a salable piece of real estate?

Mr. BAILEY. There are certain charges for sanitation and such included in the Canal account. I do not know what other expenditures there have been, Mr. Chairman.

Mr. THOMPSON. There is a little difference of opinion about the investment figure.

With the permission of the chairman, I would like to ask the Governor if we have an exact figure on what the investment subject to interest would be under the formula laid down under H. R. 8677 and Public Law 808?

Governor NEWCOMER. My recollection is the interest would be based on an investment of $534,000,000, less about $20,000,000-the investment in what is referred to as the civil-government part of the plant. It would be in round numbers $500,000,000.

Mr. THOMPSON. $534,000,000, less the civil-government investment? Governor NEWCOMER. The investment in the plant devoted to the civil-government functions-approximately $20,000,000.

Mr. THOMPSON. It would come out $514,000,000-the capital subject to interest.