C. A share of the net costs of operation of the civil government of the Canal Zone proportionate to the ratio which gross Canal tolls bears to the net revenues from all other business operations of the Panama Canal Company. Although H. R. 8677, in lines 5 through 11, page 21, refers to gross revenues from tolls and also to total gross revenues of the corporation, it provides that in computing gross revenues from other business operations the cost of commodities resold and revenues arising from transactions within the corporation and from transaction with the Canal Zone government shall be deducted. That has the effect of reducing the revenues from business operations other than the Canal to a net rather than a gross basis. The result would be to load almost the entire cost of civil government onto Canal tolls and exempt residents of the Canal Zone from paying more than a very nominal part of the cost of civil government.

3. Transit tolls on vessels owned or operated by the United States, which now transit the Canal free, would be computed and treated as part of Canal revenues in fixing commercial tolls, but the President would be given discretion to decide whether such vessels actually would pay tolls.

Heretofore in Canal bookkeeping, as the subcommittee knows, revenues from commercial tolls (no allowances has been made for free transits of the Canal), civil revenues, and net earnings of business enterprises have been lumped together and balanced against net appropriation expenses to determine net revenues, which have ranged all the way from $18,000,000 annually to a deficit of over $5,000,000 in 1944. Then the accountants have deducted an interest charge of 3 percent annually on capital (now figured at $516,000,000). Whereas net revenues since the Canal was first opened for operation in 1914 totaled nearly $274,000,000 to June 30, 1949, the 3 percent interest charge changed this into a net deficit of nearly $167,000,000 on that date.

To revert for a moment to the Budget Bureau Report: that report on page 8 correctly points out:

The most controversial aspects of tolls policy are (1) the interest charged on the capital investment; and (2) the question of whether any of the costs of construction, operating, and maintaining the Canal should be allocated to national defense.

The Budget Bureau study resolves the question of capital allocation cost between national defense and commercial use with a very brief discussion concluding that none of the capital cost should be allocated to national defense. It does recommend that the cost of currently free transits of Government vessels should be included in revenue of the Canal and enter into determination of toll rates.

The Budget Bureau study makes no mention whatever nor does H. R. 8677 make any allowance for a factor which we believe is worthy of consideration by Congress in fixing policy on this issue. That factor is the tremendous value of the Canal in serving the foreign and domestic commerce of the United States. The Federal Government has spent hundreds of millions of dollars improving our rivers and harbors, even building canals, to serve the commerce of the United States. No Federal tolls are charged to vessels using harbor facilities in New York, Boston, Baltimore, New Orleans, Savannah, San Francisco, and our other ports where the Army engineers at the direction of

Congress have spent many hundreds of millions of dollars improving the harbors. Congress adopted this policy and authorized these expenditures, without levying a direct charge to those using them, on the theory that all of the commerce of the United States benefits from them and that therefore the benefits of such improvements were general enough so that their costs equitably could be spread over all the taxpayers. These harbors, incidentally, are open on the same terms to American-flag ships and foreign shipping, the thinking again being that it was the commerce of the United States, and not the ship operators, which benefited from the improvements.

In the discussion of the Canal tolls problem, much has been made of the fact that half or more of the shipping using the Canal is of foreign registry and that, therefore, foreign-ship operators would derive at least half the benefit of any lowering of tolls that might result from changes in the present formula on which toll charges are based.

But that argument overlooks the very important fact that approximately two-thirds of the total commercial tonnage transiting the Canal either originates in the United States, is destined for the United States, or both. If the transits by Government vessels of the United States were included, the percentage of tonnage transiting the Canal directly serving the commerce or defense of the United States would be more than 70 percent.

The percentage I have just mentioned is derived from tables in the 1948 and 1949 reports of the Governor of the Panama Canal. The figures are shown in exhibit A attached to my statement, which I ask to have included in the record. These tables show that of the total of 24,000,000 tons plus transiting the Canal in 1948, 16,000,000 tons either originated in the United States, was destined for the United States, or both. In 1949, the proportion was 17,000,000 out of a total of 25,000,000 tons. I cite these figures to show that, to the extent of at least two-thirds of the total tonnage moving through the Canal, that improvement serves the over-all commerce of the United States, just as directly as do the many harbors on the east and west coasts which have been improved with Federal funds. That seems to our association a fact which Congress could well take into account when writing into legislation the formula by which tolls in the future should be fixed.

The questions of how much of the capital cost of the Canal should' be allocated to national defense, and the interest charged during construction and since, also seem to us to be issues that Congress should decide in legislation rather than leaving them to executive determination, as does existing law, which would be unchanged by H. R. 8677. The way in which these questions are resolved will affect directly not only our domestic merchant marine but also our whole foreign trade and commerce, and they should be decided by Congress.

The history of Canal accounting practices in itself demonstrates that this is a field of controversy where there is room for honest differences of opinion. The original construction cost of the Canal was $385,000,000. A Government commission in 1921 found that, of that cost, approximately $113,000,000 properly should be allocated to national defense. Subsequent commissions in 1931 and 1937 reversed that decision and found that the entire cost of $385,000,000 plus $129,000,000 interest during construction, plus $12,000,000 in payments to

the Republic of Panama, all should be included in the capital base on which commercial tolls should be fixed so as to pay all operating costs plus 3-percent interest on this capitalization. In recent years the 3percent interest has been charged on around $516,000,000 to $525,000,000 of capitalization.

That the Canal is of tremendous value to national defense cannot be denied. If it were not there, the additional cost of the Navy due to lack of mobility of its Pacific and Atlantic fleets probably would run annually into several times the total cost of the Canal at our present rate of defense expenditure. One could make a logical argument that the savings in naval and war-shipping costs during World War II alone would justify writing off the entire investment in the Canal as a national-defense expenditure.

On the other hand, it could be argued that Canal tolls might be doubled or quadrupled without destroying completely the use of the Canal and thereby a very large profit returned annually to the Treasury. Presumably as long as tolls were substantially below the cost of taking a ship around the Horn, ships would use the Canal and pay the toll. Our domestic intercoastal trade undoubtedly would be liquidated by such a course of charging all the traffic would bear, but in 1948 the intercoastal shipping accounted for only 15 percent of the total tonnage going through the Canal, and even less in 1949, so that as a strictly profit-making enterprise the Canal could increase its revenues to the maximum by raising tolls to the limit traffic would bear. United States commerce, of course, would pay two-thirds of the additional cost.

But it is perfectly apparent that the Panama Canal is not that kind of purely commercial enterprise. For one thing, no commercial concern could have negotiated the various treaties with Panama under which the Canal Zone was ceded to the United States and the Canal constructed. I might interpolate there to say that if a commercial company were to run the Canal I doubt whether all of these expensive costs of civil government would ever have run anywhere nearly as high as they have.

Somewhere between these two extremes of charging off the Canal completely to national defense or treating it as we do our river and harbor improvements, and a purely commercial approach aimed at making the maximum profit to the Federal Treasury lies the sound solution.

As has been pointed out, it is a fruitless undertaking to attempt to go back 40 years and determine whether commercial or defense considerations were uppermost in the minds of those who were responsible for the Canal project. Furthermore, it is not necessary. The Canal has demonstrated its tremendous value in our defense in two wars. Its value to our over-all commerce is shown in the annual reports of the Governor. It is for Congress to determine what portion of the cost of the Canal properly should be charged off to those two purposes. Different persons undoubtedly can arrive at different conclusions from the same set of facts, but our association believes that a minimum of half of the capital cost of the Canal should be so allocated.

Our association strongly urges this subcommittee, and the full committee, to rewrite the new subsections 412 (b) and (c) proposed by H. R. 8677, beginning on line 24 of page 20, so as to do five things: 1. Require that a fair proportion of the cost of operating and maintaining the Canal be allocated to national defense, preferably specifying a minimum percentage to be so allocated in the law. The proportion of United States Government vessels transiting the Canal indicates that the very least percentage of cost so allocated should be 10 percent.

2. Require that a fair proportion of the capital cost of the Canal and its ancillary facilities be allocated to national defense, again specifying a minimum percentage to be so allocated in the law. Our association believes that minimum percentage should be at least 50 percent.

3. Specify that the interest rate to be paid the Treasury on the capital allocated to commercial operations shall not be greater than the average rate of interest borne by all interest-bearing, long-term public issues of the United States at the time toll rates are fixed. While section 246 (b) of the Panama Canal Code may cover this particular issue, we believe it would be safer to spell it out in the section dealing with the fixing of Canal tolls.

4. Require that the net costs of civil government in the Canal Zone be distributed among all business-type operations in the Zone, including Government commissaries, in proportion to their gross revenues. This appears to our association to be the only fair and equitable way of distributing these costs, which are in lieu of the taxes these businesstype operations otherwise would pay. As we have pointed out, the proposal in this regard in H. R. 8677 is completely unfair in that it applies these Government costs to gross revenues of the Canal but only to net revenues of other business-type operations.

5. Retain a maximum toll rate for laden commercial vessels in the law, preferably at the present maximum of $1 per ton. I realize that this is perhaps putting an extra padlock on the gate. But our association is vitally concerned with the intercoastal trade, and any substantíal increase in Canal tolls at this time would be a most serious burden to that trade, which is facing enough difficulties in surviving as it is. Under the tolls formula proposed in H. R. 8677 as it stands, an increase of 30 cents or more per ton in commercial tolls would be certain, depending on the volume of Government vessels transiting the Canal and the percentage of civil government costs allocated to the Canal operation. Such an increase, which would amount to $2,000 to $2,500 for each transit of the Canal by a C-type vessel, would be a considerable burden on American-flag operators, and particularly on the intercoastal lines, which already are having a difficult time keeping their costs low enough to compete with the railroads.

In conclusion, our association again emphasizes that our use of the Canal in two World Wars as well as its tremendous value in serving the over-all trade and commerce of the United States amply justifies Congress in allocating a substantial part of the original cost of the Panama Canal to national defense and we strongly urge adoption of an amendment to H. R. 8677 along the lines we have proposed. I thank you for this opportunity to present our views.

EXHIBIT A

Association of American Shipowners-Figures on origin and destination of cargo transiting Panama Canal in fiscal year 1949 from Annual Report of the Governor of the Panama Canal

Beginning with line 24, page 20, strike out through line 23 on page 21, and insert:

"(b) Tolls on merchant vessels and yachts shall be prescribed at a rate or rates sufficient, under normal traffic conditions, to cover but not exceed (1) such part of the expense of maintaining and operating the Canal (in no event more than per centum of such expense) as is fairly allocable to non-nationaldefense purposes of the Canal, plus (2) interest on such portion of the depreciated capital cost (not in excess of - per centum of such cost) of the Canal (including improvements) as is fairly allocable to non-national-defense purposes of the Canal, such interest to be at a rate not greater than the average rate of interest borne by all interest-bearing long-term public issues of the United States at the time such toll rate or rates are prescribed, plus (3) that part of the net costs of operation of the agency known as the Canal Zone government which bears the same ratio to the total net costs of such agency as the estimated gross toll revenues of the Canal bears to the estimated total gross revneues of the corporation from all business-type operations, including commissaries. For the purposes of this section, the allocation of expenses and costs between national defense and non-national-defense purposes of the Canal shall be made on the basis of the relationship between the value of the benefit of the Canal as a military asset to all of the people of the United States and the value of the benefit of the Canal as a commercial asset to shippers of goods. The rate of tolls on laden merchant vessels shall not exceed $1 per net ton as determined under the rules for the measurement of vessels for the Panama Canal. In addition to the tolls based on measurement or displacement tonnage, tolls may be levied on passengers at rates not to exceed $1.50 for each passenger. As used in this subsection 'the Canal' includes only the Canal itself and its ancillary facilities and equipment for vessel-transit purposes.