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3d Session



REPORT No. 1714



MAY 28, 1940.—Ordered to be printed

Mr. BAILEY, from the Committee on Commerce, submitted the



(To accompany S. J. Res. 260)

The Committee on Commerce, to whom was referred the joint resolution (S. J. Res. 260) to make emergency provision for the maintenance of essential vessels affected by the Neutrality Act of 1939, and for adjustment of obligations with respect to such vessels, having considered the same, report favorably thereon without amendment with the recommendation that the resolution be agreed to.

The resolution was considered by the Subcommittee on Merchant Marine and reported without objection to the full committee. A letter from the Maritime Commission favoring the resolution and explaining the need of the legislation follows herewith:


Washington, May 28, 1940. Hon. Josiah W. BAILEY,

Chairman, Committee on Commerce, United States Senate. DEAR SENATOR BAILEY: You have requested the views and recommendations of the Commission with respect to Senate Joint Resolution 260, a joint resolution "to make emergency provision for the maintenance of essential vessels affected by the Neutrality Act of 1939, and for adjustment of obligations with respect to such vessels."

The general purpose of this joint resolution appears in the title just quoted. The resolution defines an "essential vessel” as one which is security for any mortgage indebtedness to the United States or constructed under the Merchant Marine Act, 1936, or required by the terms of a contract under that act to be operated on an essential foreign-trade route, and which it is necessary in the interest of commerce and national defense to maintain in condition for prompt use. The Commission would be authorized to make adjustments of obligations to the United States in respect of such vessels and to make arrangements for the maintenance of such vessels if it finds that the operation of the vessel in the service, route, or line to which it is assigned or in which it otherwise would be operated is not lawful under the Neutrality Act of 1939 or is not compatible with the maintenance of availability of the vessel for purposes of national defense or commerce, and it is not feasible under existing law to employ the vessel in other service and that the applicant, by reason of the restriction of the Neutrality Act or the withdrawal of the vessel for national-defense purposes is not earning or will not earn a fair and reasonable return on its aggregate capital necessarily employed in its business. “Essential vessels" as thus defined are therefore vessels in the preservation of the availability of which there is a definite national interest (as distinguished from vessels that are merely related to private enterprise) and with respect to which there is a financial or operating obligation running to the United States Government, the performance of which may be prevented by the Government. Even in such cases relief is not to be provided if the shipowner is able to carry the burden while earning a fair and reasonable profit by reason of other operations.

The adjustment and arrangements with respect to such vessels must include suspension of the contract requirement to operate the vessel in the foreign trade service under the applicable agreement, and suspension of the right to operatingdifferential subsidy. Further arrangements may include any one or more of the following provisions, in whole or in part:

(1) Lay-up of the vessel by the owner or in the custody of the Commission, vith payment or reimbursement by the Commission of necessary and proper expenses thereof,

(2) Postponement for a period not in excess of that of the lay-up of the maturity Jate of each installment on account of the principal of obligations to the United States in respect of the vessel.

(3) Postponement or cancelation of interest accruing on such obligations during such period or periods of lay-up.

(4) Extension, for a period not in excess of that of lay-up, of the 20-year life limitations and other limitations based on a 20-year life, as provided by the Merchant Marine Act, 1936.

(5) Provisions for temporary or emergency employment, if practicable, of the vessel during the period of "technical lay-up” including payment of expenses and application of the proceeds of such employment as the Commission may approve.

(6) The payment to the Commission, upon termination of the arrangements with the applicant hereunder, out of the applicant's net profits, earned while such arrrangements were in effect, in excess of 10 percent of the capital necessarily employed in the applicant's business, in reimbursement, to the extent that the Commission shall deem it necessary to carry out the purposes of this joint resolution, on account of obligations postponed or canceled and expenses incurred or paid by the Commission.

The Senate Committee on Foreign Relations reported to the Senate, September 29, 1939, House Joint Resolution 306 which was subsequently amended and enacted as the Neutrality Act of 1939. The resolution as reported, because of the broad scope of its restrictions on American shipping might well have resulted in the lay-up of a large segment of the American merchant marine, with consequent unemployment of personnel afloat and ashore, and, if the lay-up were of long duration, financial ruin of the companies affected.

At the request of the Chairman of the Committee on Commerce of the Senate, the Maritime Commission prepared an economic study of the probable effects of enactment of the reported resolution which was printed in the Congressional Record, October 12, 1939, beginning on page 268 (bound volume 85, pt. 2). Before the resolution passed the Senate, broad amendments were made (October 24, 1939), which materially narrowed the scope of the restrictions proposed by the resolution as reported.

After the enactment of the Neutrality Act of 1939, November 4 of that year, and the issuance of the proclamations pursuant thereto, it was found that 86 American vessels had been removed from 8 foreign trade routes as a result thereof instead of the 130 or more vessels from 15 foreign trade routes estimated on the basis of the legislation before amendment.

The operators of the vessels affected, with the cooperation of the Commission, immediately attacked the problem of disposition of the vessels displaced. This problem involved consideration of the reemployment of the vessels in other trades, the maintenance of their operators' organizations including personnel and contact with shippers, the employment of seagoing personnel, and continued service, insofar as practicable under the new conditions engendered by the law, to meet the export and import needs of American shippers.

Due in great measure to the leeway allowed by the amendments to the resolution as originally reported, unless the presently permitted areas of operation are further restricted, the difficult problem has been solved, and the financial stability and future prospects of the American Merchant Marine preserved. Some of the

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displaced ships were transferred to other routes, some were chartered on more or less temporary bases, and some, of relatively little value to the national defense because of their obsolescence, were sold and transferred to foreign registry thus permitting them to continue to meet the requirements of American shippers and farmers, and permitting the accumulation of funds for new American-flag ship construction,

If the war in Europe spreads and nations heretofore neutral become involved it might not be possible to provide employment for all the vessels which would be forced out of service by reason of our neutrality policy and the extension of the war to areas heretofore open to American shipping. The narrower the field of operation permitted to American shipping the more difficult it becomes to find new employment for the larger and more specialized types of vessels.

Since the prescription of the original combat zone pursuant to the Neutrality Act, it has been found necessary to extend that zone, thereby eliminating the American Scantic Line service to northern Norway, a service permitted by the first proclamations. The seriousness of the present situation may be realized when it is considered that if it becomes necessary to extend the combat zone so as to prevent American vessels from entering the Mediterranean, 2 large American passenger liners, 17 American combination passenger and cargo vessels, and 21 American freighters, a total of 40 American vessels, would be prohibited from operating on their present regular routes. In addition to these 40 vessels, under present conditions a considerable number of American ships operate to and from Mediterranean ports on an irregular basis, with full cargoes.

Even if the operation in danger zones of American-flag vessels were permitted by law, it still would be in the public interest to keep vessels which are particularly valuable to the national defense and vessels in which the Government has a large investment, away from dangerous waters.

Although other disposition has been made of the vessels displaced to date, and of course every effort will be made to find employment for vessels displaced in the future, it is obvious that there is a limit to the tonnage which can be absorbed if there is to be a constantly narrowing field of operation, particularly with respect to passenger and combination type vessels which are not always practically adaptable to other trade routes. Some vessels, because of their draft or because so constructed that their passenger capacity is extremely large in relation to their cargo capacity, are practically usable only in the North Atlantic services.

Should any of the American vessels displaced by the national neutrality law be unable to find other suitable employment, opinions differ widely as to what should be the policy of the United States with respect to such vessels.

From the narrow legalistic standpoint losses sustained by citizens because of the effects of lawful governmental actions are not protected by the fifth amendment. Ordinarily, there can be no recovery unless there has been an actual taking of private property for public use. However, the destruction of business under the Neutrality Act would not be even remotely comparable to the destruction of a lottery business, a bucket shop, a race track, or a liquor store or factory. There is no question as to the public mores involved, there is no taint of any description suggested as a reason for the displacement of lawful and economically vital merchant shipping. The Nation would sacrifice not a business of arguable value from the economic or moral standpoint, but a sound and necessary part of the national economy.

It, therefore, appears that the situation would present unusual equities in the event of any considerable extension of the areas prohibited to American vessels. The people of the United States, through their Congress and President, deliberately have barred American vessels from the world's busiest ocean routes and abandoned that trade to their competitors, in order to minimize the occurrence of incidents that might embroil us with one or more of the belligerants in the current European war and it is possible the areas of restriction might be extended. As a result of such possible extension the lawful business enterprise of a few of our citizens may be sacrified for the good of the Nation. The situation is not unlike that presented when the master deems his vessel in peril and throws overboard a portior. or all of his cargo to save the vessel. Under such circumstances, under the maritime law of general average, the vessel and the cargo which have been saved through the sacrifice, contribute, so that they share the losses sustained with the owner of the jettisoned cargo.

It is clear, however, that enactment of the proposed legislation would not establish a precedent for the compensation of those whose business is sacrificed, although not taken, for public purposes. The maintenance of an American merchant marine as a potential naval and military auxiliary and to insure the continuance of our ocean-borne commerce is a national policy, and the public pay for it

interest therein is in no sense confined to the losses or profits of individual ship operators.

The basis of the proposed legislation is self-interest of the United States in the preservation of shipping companies to operate American vessels for the needs of future commerce, and to prevent deterioration of essential vessels of the American merchant marine, thus insuring their immediate availability in good operating condition in the event they are needed by the Government for the national defense. This would be accomplished at the cost of the shipowner if he is able to make sufficient money in excess of a reasonable profit (from operations which still would be permitted) to bear all or a part of that cost and if after consideration of the equities involved, it is felt he should do so. It would be accomplished at the cost of the Government only if the shipowner is not able or should not be required to

The authorized reimbursement is to be effected upon the termination of the arrangements for lay-up or temporary or emergency operation. It is to be made out of the net profits of the owner earned during the continuance of such arrangements. In the case of subsidized operators this would have the practical effect of accelerating the recapture of profits now required by the Merchant Marine Act, 1936, but not recapturable by the Commission except at the end of a 10-year period, so as to make any such excess profits payable to the Commission presently in reimbursement for the Government's aid under the provisions of the legislation.

The Congress undoubtedly believed, in passing the Neutrality Act, that business and profits must be sacrificed by shipping companies operating to belligerent ports and combat zones, but it has nowhere been suggested that Congress intended to sacrifice established operating companies vital to the maintenance of an efficient transportation system.

The proposed legislation would avoid the needless permanent sacrifice of vessels and shipping companies—it would not avoid the sacrifice by Americans of business and profits from the war trade. This sacrifice must be made in the interest of the Nation. The loss of valuable transportation facilities and transportation management would be a sacrifice wholly detrimental to the Nation's interest and should be avoided.

The proposed legislation is sufficiently broad to permit a continuance of the authority granted after the period of hostilities with respect to vessels which are so valuable to the United States, or in which the Government has so large an investment, that it may be considered in the public interest not to risk such vessels, however well insured, in areas where floating mines or other menaces to navigation may exist after the period of hostilities.

A shipowner, lacking in prospects for employment of his vessels for an indefinite period no doubt would dismantle such vessels in order to reduce lay-up expenses, and, if he were projected into financial straits by reason of such conditions, might be under the necessity of permitting the vessels to deteriorate. If the vessels subsequently are required by the Government for purposes of national defense, valuable time would be lost in placing them in suitable operating condition, and considerable expenditure by the Government to that end might be necessary

The Government, by reason of the national neutrality policy, has in effect suspended the operation of certain valid contracts between the United States and private citizens which contracts contemplate adequate service of essential foreign trade routes, and the shipowner, in reliance upon such contracts has made considerable private investment therein and has committed his credit to that end.

Adjustment of obligations is generally accepted as good business practice whenever the creditor would prefer that the enterprise or facilities which constitute security for the obligation should continue under the management of the debtor rather than to take possession. It is doubtful whether the Government would desire to be placed in the inconsistent position of passing a law which prevents a debtor acting in good faith from earning the money to meet his obligation and then foreclose when the obligation is not met.

Adequate provision is made for operation of the vessels, although technically in lay-up, since such operation would be beneficial to prevent deterioration of the vessels and would tend to keep them in immediate operating condition, though the type of operation contemplated would not be economically feasible from the standpoint of the owner.

Adequate and fair treatment of the situations which would be engendered by failure to find other employment for vessels displaced as a result of policy, with respect to each individual operator affected would constitute a separate and distinct problem. The proposed legislation, by granting the Commission discretion with respect to the application or withholding of each type of relief specified will permit treatment dictated by the public interest within clearly defined limits, und recognition of the equities and necessities of each particular case.

The Commission understands that the term “lay-up" as used in the joint resolution, means a period between voyages during which a ship has no suitable (or lawful) employment, and in no case would be considered as requiring that a vessel be tied in a laid-up fleet or dismantled (situations which the legislation proposes to prevent) in order to make effective the provisions of the joint resolution. In view of all the foregoing, the Commission approves the proposed legislation.

In view of your request that the Commission advise you with respect to this legislation as soon as possible, this report is being transmitted to you without the comment of the Director of the Bureau of the Budget. His comment will be transmitted to you as soon as it is received. In the meantime, nothing in this report is to be construed as an indication of the relation of the proposed legislation to the program of the President. Sincerely yours,


Vice Chairman. O

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