as an important unit in the defense program) was prevented, (3) a serious economic blow to the thousands of employees of the plant, to the city of Tampa and the State of Florida, was incidentally averted, and (4) provision was made against loss to the Government through the acquisition of the seven vessels by the Navy Department.

10. The Commission has not permitted willful extravagance, incompetent management, or looting at shipyards holding contracts for the construction of vessels.

In a program involving the speed and the extent of the expanded shipbuilding program, and especially in view of the necessity for diluting experienced management skills as hereinabove mentioned, it would appear to be almost inevitable that some weak spots should occur. To date, however, the Commission has not found many instances wherein shipyard managements appeared to have abused their prerogatives. Remedial action has been taken promptly by the Commission in all such cases.

The Commission maintains a staff of competent men at every shipyard. This staff consists of a resident plant engineer to supervise the construction and installation of facilities; a chief hull inspector and assistants to check hull construction in detail day and night on every ship; a chief machinery inspector and appropriate assistants to check every item of machinery on every ship; a chief accountant and assistants to check every voucher and every pay-roll item; and purchase control and disbursing officers to follow through on the purchase, allocation, and delivery of materials.

The Commission's position on the matters that Senator Aiken has questioned can be fully understood only upon the basis of the elements in judgment upon which it acted, and it is manifestly impossible to incorporate such details in a letter. The Commission is confident, however, that the facts of record will sustain the propriety of its actions as indicated by the report of the Truman committee.

Sincerely yours,

E. S. LAND, Chairman.
FEBRUARY 8, 1941.

Hon. LAWRENCE J. CONNERY,

House of Representatives.

DEAR CONGRESSMAN CONNERY: I have your letter of January 30, 1941, requesting information concerning the basis for allowing construction-differential subsidy in the case of the sale of vessels constructed for the Commission, to the Alcoa Steamship Co., Inc. (a wholly owned subsidiary of the Aluminum Corporation of America), listed in the table facing page 463 of the House hearings on the independent offices appropriation bill, 1942.

The basis for such allowance is Public Resolution No. 82, Seventy-sixth Congress, approved June 11, 1940, whereunder the Commission was specifically authorized for a 1-year period (or until revocation of the Neutrality Act proclamations) to make determinations of the estimated foreign costs of vessels upon the basis of conditions existing during the period prior to September 3, 1939. In passing this legislation the Congress had before it the considerations set forth in House Report No. 2180 on House Joint Resolution 537 (which became Public Res. No. 82) some of which are quoted in your letter. Among these considerations are the following:

"The object of the Merchant Marine Act was to put our operators on a comparable basis with foreign competitors * *

"The most nearly contemporaneous foreign construction which would be determinative of the competitive conditions that an American operator building a ship will have to meet, would appear to be either construction which will be undertaken immediately following the lifting of the present war conditions or construction contracted for during the period preceding the instance of war conditions.

"Obviously, to base a differential upon an assumption as to the conditions that will prevail after the war would carry the matter into the realm of pure conjecture.

"If such conjecture were permissible, then it might well be extended to take in such considerations as the probability that merchant vessels built during the war period under the auspices of the belligerent governments will be disposed of to private operators, when the emergency condition no longer obtains, at

greatly reduced prices, thus producing a most serious competitive situation which any American operator who might have acquired tonnage at high cost would have to meet. This is what happened after the World War, and its repetition is a reasonable assumption. But as noted, this lies in the realm of conjecture; its possibility may strengthen the view as to what is a reasonable and fair present policy, but can hardly be used as a basis of computation.

"It would appear that the best possible basis, and that most nearly conforming to the letter and the spirit of the act, is construction which was entered into as late as practicable, but prior to the breaking out of the war. Such construction is most nearly representative of the actual competition from the standpoint of capital costs which the American ship now building or presently to be built will have to meet and hence is the best yardstick with which to measure parity. "In accordance with the terms of title VII of the act, the Commission is to some extent taking the initiative in constructing for Commission account vessels urgently needed for the national defense and economically to carry our commerce, and which private enterprise currently is unable to contract for. If the selling price of these vessels must be computed on the basis of abnormal wartime foreign construction costs, it is evident that the Commission will encounter serious difficulties in finding private purchasers in order that the vessels may be owned and operated ** by citizens of the United States insofar as may be practicable" to accord with section 101 of the act.

*

*

"It is highly important to the welfare of the United States, as a whole, that the Commission continue a stable construction program rather than a sporadic one, regardless of conditions abroad. Not only will shipyard labor benefit, but every State in the country produces materials which go into the construction of ships." For the reasons quoted herein and the reasons set forth in your letter, Public Resolution No. 82, "froze" estimates of foreign cost as determined upon conditions prevailing in the period prior to September 3, 1939, during which period the Commission had found that the actual differential was greater than the percentage of 33% prescribed in section 502 (b). Public Resolution No. 82 being a later enactment than section 502 (b), as amended, suspended or superseded the provisions of the latter for the life of Public Resolution No. 82.

Further, with respect to the basis for the Commission's allowance of construction-differential subsidy, the base unit selling price on the world market level immediately prior to the beginning of hostilities in 1939 for ships of the type acquired by the Alcoa Steamship Co., Inc., was determined by the Commission after careful study of all available data, to be $982,000. The unit contract construction price for the four hulls built at Union Iron Works, San Francisco, was $2,002,000. In view of the 50-percent construction-differential limitation of the act which was not set aside by Public Resolution No. 82 in its relation to prewar determinations, the minimum price at which the Commission could sell each of these vessels was $1,001,000 or $19,000 in excess of the value of a similar new vessel, determined in accordance with Public Resolution No. 82.

Your letter on page 2 states:

* I would greatly appreciate your informing me on what basis the Aluminum Co. of America and other similar gigantic money-making enterprises are awarded a total of what appears to be approximately $100,000,000 of the taxpayers' money.”

It is not clear how you arrive at the $100,000,000 to which you refer. Included in the table in the appropriations hearing are sums which the Commission must lay out, in accordance with the terms of the Merchant Marine Act, 1936, but a considerable portion of which will be recovered by the Government, with interest over the economic life of the ship.

The Alcoa Steamship Co., Inc., has received a construction-differential subsidy, but not an operating-differential subsidy. Experience has shown that steamship companies affiliated with the large industrial concerns to a considerable extent in the past either have purchased or chartered vessels abroad and operated them under foreign flags in foreign trade, because the cost of such transportation has been decidedly cheaper than that of American-flag tonnage. Possibly these concerns did not consider themselves authorized to contribute the difference in such cost, out of their shareholders' money, to the national defense.

It does not appear that the Alcoa Steamship Co., Inc., was under immediate compulsion to build ships in United States yards.

They already own a number of vessels and conceivably might have made temporary arrangements for other vessels, and again chartered or acquired foreign-flag vessels when the war condition is over, unless permitted to purchase American

flag vessels under the same terms available to other citizens of the United States. By purchasing vessels for United States registry (which under the terms of sec. 503 of the act must remain under United States documentation for at least 20 years if a construction-differential subsidy is involved) the concern in question is committed to pay the higher American operating costs for at least 20 years, creating employment during that entire period, for American seamen.

As stated, the Alcoa Steamship Co., Inc. has received only a construction, and not an operating-differential subsidy. The nature of that subsidy, and its real beneficiary, can best be stated in the language of the Congressional committees:

"The financial assistance required to adjust the construction differentials is for the purpose of equalizing the difference between American and foreign cost. It is not paid to the ship operator. It is paid to the shipbuilder and represents the difference in cost between the American and foreign ship from which American labor benefits. Since approximately 85 percent of the cost of constructing a ship is labor, therefore labor is the chief beneficiary. It is wholly desirable that American wage scales and standards of living be maintained in shipbuilding for foreign trade. The profits of the shipbuilder in the transactions are adequately restricted by recapture." [Italics supplied.] (S. Rept. No. 1721, 74th Cong. 2d sess., p. 7.)

"A further point generally overlooked in discussing what percentage of the cost of a ship the Government might possibly put up, is the nature of the construction differential. A ship that would cost $1,000 000 if built in the United States and $600,000 if built abroad is worth just $600,000 in foreign trade. The shipowner does not get a million-dollar ship as is stated, because its utility value is $600 000. American labor benefits from the difference, not the shipowner." (S. Rept. No. 1721, 74th Cong., 2d sess., p. 8.)

"Construction-differential subsidy.—The purpose is to equalize the difference between the American and foreign cost of a ship. It is not paid to the ship operator. It is paid to the shipbuilder to promote the employment of American labor and to make sure the existence of American shipyards when needed for national defense purposes. Americans can, and many do, build their ships abroad and operate them under some foreign flag. When the Government offers them a similar ship at the foreign price, there is of course no benefit to the shipowner." (S. Rept. No. 1618, 75th Con., 3d sess., p. 2.)

In addition to the above considerations, the Government secures decided advantages by reason of construction-differential subsidy payments. For example, by reason of section 802 of the act, if the Government requisitions the vessel for national defense purposes it pays the owner only what the owner has paid less depreciation (the depreciated cost of the vessel less construction subsidy and cost of national defense features), instead of "just compensation" as provided by section 902 in the case of vessels which do not receive construction-differential subsidy.

The Alcoa Steamship Co., Inc., although a subsidiary of the Aluminum Corporation is a common carrier as that term is defined in shipping legislation. Its vessels on both their south-bound and their north-bound runs, carry cargo for any shipper who offers it at the going rates. It is true that on the north-bound run, the vessels carry bauxite for the Aluminum Corporation, but they also carry a substantial amount of cargo for other shippers.

With respect to the nature of the enterprises (described as “gigantic moneymaking enterprises"), which have acquired some of the ships the record shows that Congress has given thorough consideration as to whether such concerns should be eligible under the act, and has decided this question in the affirmative.

Some of the prints of the ship subsidy bill (which resulted in the Merchant Marine Act, 1936) contained provisions which would have restricted the situations Ander which a so-called industrial carrier could receive operating-differential subsidy. (It is pertinent to note that in none of these prints was any such discrimination suggested with respect to construction-differential subsidy, which is all that the Alcoa Steamship Co., Inc., has received.) Even the provisions with respect to limitations on industrial carriers receiving operating-differential subsidy were stricken out by Congress before the bill was enacted. No doubt a principal reason which motivated Congress in removing the suggested restriction was that stated by the chairman of the Committee on Merchant Marine and Fisheries when the bill was debated in the House of Representatives. I quote from the Congressional Record of June 26, 1935, page 10181:

"Mr. WHITE. Is there anything in this bill to prevent those big industrial organizations such as the Standard Oil Co., the United Fruit Co., and Henry Ford from

securing under the provisions of the bill taxpayers' money with which to build their ships?

"Mr. BLAND. Not at all, because we need ships of that character to build up the merchant marine and to have as auxiliary cruisers in time of war.

"Mr. WHITE. Then the gentleman is in favor of giving a subsidy for the building of ships to Henry Ford, the Standard Oil Co., and the United Fruit Co. to haul their own products?

"Mr. BLAND. We need that type of ship under the American flag for use in time of war."

It is probable that some of the enterprises to which you refer are the oil-tanker companies listed on the table in the appropriations hearings. These companies receive neither construction-differential subsidy nor operating-differential subsidy, the net cost to the Government being only the cost of national-defense features incorporated into the ships as desired by the Navy, to make the vessels suitable for naval use in time of war or national emergency, and which the Merchant Marine Act specifically provides shall be paid for by the Commission. Under the act, these national-defense payments are clearly distinguished from subsidy. The 12 highspeed national defense tankers first completed (originally constructed for the Standard Oil Co.) have been taken over by the Navy Department, and constitute an indispensable part of the Navy's program for national defense.

In the case of the Alcoa Steamship Co., Inc., there is an excellent reason, from the governmental standpoint, which makes it desirable that this company be permanently committed to the operation of American-flag vessels. Although the company carries a substantial amount of cargo on a common-carrier basis for shippers with which it is not affiliated, it also transports from South America a large amount of bauxite ore, the chief source of metallic aluminum, which has a wide use for national defense purposes, particularly in aircraft manufacture. Based on estimates secured from the Advisory Commission to the Council of National Defense, it appears that importations of this ore will have to be substantially increased. Furthermore, within the trade route served by the company are located a number of United Staes naval bases to which the company is in a position to transport supplies and equipment on its south-bound voyage. If the Commission were to impose a discrimination not provided by law and which wou'd have the effect of discouraging the operation on a longrange basis of American-flag vessels upon this route so essential to the national defense, such action would be difficult to justify in view of the basic law under which the Commission functions.

I am convinced that Congress acted with wisdom and foresight in refusing to adopt restrictions which in effect could have barred the type of enterprise to which you refer, from participation in the American merchant marine program. By sections 501 (a) (3) and 601 (a) (3) Congress has limited participation in such program to those applicants who have sufficient financial resources to carry out their contracts with the Government. In view of the great number of merchant vessels which would be required for military purposes in event of war or emergency, and the limited field of experienced and financially sound private American operators, it appears that a restriction designed to eliminate the larger concerns from participation in the program could have constituted a serious blow to the national defense, and to American labor engaged in the construction and operation of ships.

Sincerely yours,

Hon. LINDSAY C. WARREN,

E. S. LAND, Chairman.

APRIL 14, 1942.

Comptroller General of the United States, Washington, D. C. MY DEAR MR. WARREN: You have requested in your letter of February 28, 1942, certain information with respect to contracts entered into between the United States Maritime Commission and the Tampa Shipbuilding & Engineering Co. and other matters relating to these contracts. A full report in compliance with your request is in preparation and will be made available to you shortly.

Meanwhile, however, I thought it might be helpful to you to have before you a general statement of the Tampa matter.

The Tampa Shipbuilding Co. has played an exceedingly useful part in the working out of the Commission construction program, particularly in the early stages thereof. Although the company experienced certain financial difficulties during the period of its contracts, a series of circumstances made it possible to

work out the corporate and contractual situation in such manner that there were no losses involved to the Government. The company was preserved as a going concern and became available to the Navy Department as an important factor in their own building program as well as an important repair yard; certain bonds of the company held by the Reconstruction Finance Corporation which were in default have been in effect salvaged; and very substantial sums have been saved to the Commission through lower shipbuilding prices resulting from the original Tampa award, affecting the Commission's entire early construction program. When bids were solicited early in 1938 for the first group of cargo vessels, the prices offered by the various shipyards that had ability to perform were, with the exception of the Tampa bid, far beyond the estimates which the Commission had made. The Tampa bid was approximately in line with the Commission's estimates.

The Commission was faced with the problem of whether it was better to reject all bids and readvertise with no assurance that any substantial reductions in contract prices would result or accept the Tampa bid in order to serve notice on the other builders of what the Commission was prepared to do in order to attain this vital construction a proper prices.

During the First World War, cargo ships had been sucfcessfully built at the Tampa yard. The company was, to a certain extent, already under the control of the Government through its obligations to the Reconstruction Finance Corporation and administrative and financial controls were thereof feasible. The only serious question appeared to be the matter of sufficiency of financing for some necessary plant improvements and for working capital. The Reconstruction Finance Corporation had a nonliquid investment in mortgage bonds resulting from the construction of a drydock. Interest on these bonds was in default for a year or more and the best way of preserving such investment was through putting the company into a going-concern condition. The Reconstruction Finance Corporation therefore agreed to a refunding of the defaulted mortgage bonds, including the overdue interest, and made available to the company $500,000 cash, two Tampa banks participating to the extent of $100,000 each. The Reconstruction Finance Corporation insisted, however, on a guaranty by the Commission with respect to its $300,000 part of the $500,000 loan, the guaranty being solely of the nature of an interdeparmental transaction and any possibility of third parties securing any rights thereunder being specifically excluded. Certain suppliers of steel and machinery were willing to grant credits to help the working capital situation, and arrangements were made whereby Mr. Kreher, the president of the company, and Mr. Spadaro served as sureties. Mr. Spadaro was induced to act in this capacity by one of the local banks and consented to do so under a plan which limited his liability to $500 000. Mr. Kreher pledged his stock in the company as collateral to his surety bond.

The Tampa bid was, therefore, accepted, and contracts entered into for four vessels. The circumstances were far from ideal but the award appeared to be fully justified by the circumstances, a view that was, I believe, well borne out by subsequent happenings.

As a result of the action taken in the Tampa situation, the second set of bids obtained on readvertising the remaining vessels were at prices which, although higher than the Tampa award, nevertheless were very much lower than the previous bids and were at a level which justified awards.

This reduction was so substantial that, in my opinion, the Tampa transaction, even had it resulted in a complete loss to the Government, would still have saved money.

It is not necessary for purposes of these present comments to go into detail as to the Tampa operations except to say that the company's estimates of funds required for necessary plant improvements proved inadequate, and the particular payment plan embodied in the contracts further strained the company's cash resources. This situation was partially corrected by changing the terms of payments to a plan which put payments to the contractor into a better relation with bis current disbursements for labor and material.

In April 1939 a second group of C-2 contracts was advertised for competitive bidding. Tampa was a bidder on these contracts at a price somewhat in excess of the previous bid and more nearly in line with its competitors. Since Tampa was the low bidder, it was entitled to consideration, provided it made necessary financial arrangements. At this point, a group of commercial surety companies who had previously followed a policy of not going into contracts with new shipyards and who had specifically refused to act as sureties with respect to the first 81710 43 49