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Pursuant to the recommendations in this report, the Secretary of War, under date of October 18, 1921, ordered a careful study to be made in order to establish if possible a capitalization to determine a fair commercial value that should be fixed for the Canal and its various allied activities. As a result of this order, the Governor of the Canal reported in 1921 the (a) transit, (0) business, and (c) defense capitalization of the Canal. Approximately $113,000,000 was allocated to defense, $235,000,000 to transits, and $19,000,000 to business.

Until 1927 no interest was charged in the Annual Reports of the Governor on either the commercial, business, or defense capital expenditures so arrived at. In 1927, however, the Governor reported surplus over and above operating expenses of $16,487,630.60 for the year, and for the first time included in his report a fixed capital charge at 3 percent on the commercial investment in the Panama Canal as determined under the 1921 order. Interest was not then charged on the amount determined in 1921 to be defense capital.

The Canal continued to report profits after this interest and it was suggested by the Canal authorities in 1928 and 1929 that the capitalization of the Canal should be increased and that the rate of interest should be increased to 4 percent.

In 1932 the practice of charging interest only on the commercial portion of the capital investment was abandoned and the defense capital expenditures were from that time forward included in the capitalization upon which interest at 3 percent was thereafter charged. In this way the defense capital, which was excluded in 1921, was restored to the Canal books.

In addition, in the 1932 report and all subsequent reports there was included in the capital upon which interest was charged "interest during the construction period” in an amount which is now established at approximately $129,000,000, hnd from that time forward interest has been computed annually upon this interest and charged in the accounts of the Canal against tolls and other revenues.

The effect of the restoration of the defense capital to the Canal books and the inclusion of interest during the construction period can be seen from the reports of the Governor. In 1931, before these changes, the Governor reported a profit for 1931 of 7.1 million dollars. In his 1932 report, however, the Governor, as a result of these switches in accounting methods and the reinclusion of defense capital and interest, reported a loss for 1931 of 0.8 million dollars.

It is only fair to say, of course, that these changes, accomplished by administrative fiat, were subsequently in 1937 approved by Congress and that the present congressional policy is to charge interest on the defense capital. What is required is a reexamination of this policy by the Congress to determine whether it is equitable and fair and whether on a broad long-range basis it best serves the public interest.

Mr. O'TOOLE. If there are not other witnesses who desire to be heard, the meeting stands adjourned.

(Thereupon, at 12:25 p. m., the subcommittee adjourned, subject to the call of the Chair.)

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Pursuant to the recommendations in this report, the Secretary of War, under date of October 18, 1921, ordered a careful study to be made in order to establish if possible a capitalization to determine a fair commercial value that should be fixed for the Canal and its various allied activities. As a result of this order, the Governor of the Canal reported in 1921 the (a) transit, (b) business, and (c) defense capitalization of the Canal. Approximately $113,000,000 was allocated to defense, $235,000,000 to transits, and $19,000,000 to business.

Until 1927 no interest was charged in the Annual Reports of the Governor on either the commercial, business, or defense capital expenditures so arrived at. In 1927, however, the Governor reported surplus over and above operating expenses of $16,487,630.60 for the year, and for the first time included in his report a fixed capital charge at 3 percent on the commercial investment in the Panama Canal as determined under the 1921 order. Interest was not then charged on the amount determined in 1921 to be defense capital.

The Canal continued to report profits after this interest and it was suggested by the Canal authorities in 1928 and 1929 that the capitalization of the Canal should be increased and that the rate of interest should be increased to 4 percent.

In 1932 the practice of charging interest only on the commercial portion of the capital investment was abandoned and the defense capital expenditures were from that time forward included in the capitalization upon which interest at 3 percent was thereafter charged. In this way the defense capital, which was excluded in 1921, was restored to the Canal books.

In addition, in the 1932 report and all subsequent reports there was included in the capital upon which interest was charged “interest during the construction period" in an amount which is now established at approximately $129,000,000, hnd from that time forward interest has been computed annually upon this interest and charged in the accounts of the Canal against tolls and other revenues.

The effect of the restoration of the defense capital to the Canal books and the inclusion of interest during the construction period can be seen from the reports of the Governor. In 1931, before these changes, the Governor reported a profit for 1931 of 7.1 million dollars. In his 1932 report, however, the Governor, as a result of these switches in accounting methods and the reinclusion of defense capital and interest, reported a loss for 1931 of 0.8 million dollars.

It is only fair to say, of course, that these changes, accomplished by administrative fiat, were subsequently in 1937 approved by Congress and that the present congressional policy is to charge interest on the defense capital. What is required is a reexamination of this policy by the Congress to determine whether it is equitable and fair and whether on a broad long-range basis it best serves the public interest.

Mr. O'TOOLE. If there are not other witnesses who desire to be heard, the meeting stands adjourned.

(Thereupon, at 12:25 p. m., the subcommittee adjourned, subject to the call of the Chair.)

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