HE 
 
 74G 
 
 H73 
 
 UC-NRLF 
 
WILL AMERICA RETAIN 
 IT'S MERCHANT FLEET 
 
 FINAL REPORT 
 
 TO THE 
 
 PRESIDENT 
 
 31st JULY. 1919 
 
 DOCUMENTS DEPARTMENT 
 
 QIC 2 01962 
 
 U8RARY 
 
 UNIVERSITY OF CALIFORNIA 
 
 FROM 
 
 EDWARD N. [HURLEY, CHAIRMAN 
 
 UNITED STATES SHIPPING BOARD. 
 
#73 
 
 TO THE PRESIDENT: 
 
 At the signing of the armistice the United States found itself in possession, 
 or prospective possession, of almost fourteen million deadweight tons of ocean- 
 going merchant shipping. This fleet represents a construction investment of 
 $2,861,755,570, and alone among the vast outlays made for the prosecution 
 of the war, it seems capable of returning close to 100 per cent salvage to the 
 Government. In addition, if properly administered, it is capable of greatly in- 
 creasing the activity, prosperity and wealth of the American people by extending 
 their trade with all parts of the world. The careful development and efficient 
 utilization of this new power looms large as a matter of national importance. 
 
 In Europe, I found it taken for granted that our Government and our 
 people would co-operate to derive the utmost possible advantage from this op- 
 portunity. The fact that our war-born fleet is out of balance, i. e., consists of 
 too many small, slow cargo vessels, and too few large, fast passenger and cargo 
 vessels, was held to constitute no barrier to our success. The speed with which we 
 had built our emergency ships seemed sufficient guaranty that we could remedy 
 our deficiency quickly. Meanwhile the run-down condition of the European 
 fleets, (the congestion of the ports of the world has kept hundreds of ships out 
 of service) and the unprecedented world-wide demand for any sort of tonnage 
 seemed to assure the profitable employment somewhere of every ship we could 
 put into the water. The British, who are more heavily interested in ocean trans- 
 portation than any other people, and whose fleet has borne the brunt of the 
 war's depreciation and losses, were keenly alive to this situation. The British 
 press discusses frankly the potential prowess of England's new competitor 
 on the sea. 
 
 Upon my return to the United States in February, I was surprised to find 
 a wholly different feeling. Instead of enthusiasm I found what I feel I can prop- 
 erly designate as organized pessimism. The American people wanted a merchant 
 marine. There is no doubt about that. But a large number of shipowners, 
 ship managers, ship brokers, marine insurance men, and others who are pre- 
 sumed to be authorities on the subject, were filling the daily newspapers with 
 
 712 8 
 
interviews, announcements and warnings to the effect that our new fleet would 
 prove a white elephant on our hands. They solemnly declared we never could, 
 cannot N and never will, be able to build ships in competition with certain other 
 nations; that American labor is so much more expensive and so poorly trained as 
 compared with British labor, that even 47 years of tariff exemption on ship- 
 building materials had failed to make us a shipbuilding nation, except for the 
 purpose of supplying vessels to our inland and coastwise trades from which the 
 competition of cheap foreign ships is excluded by law. 
 
 OPTIMISM ABROAD PESSIMISM AT HOME. 
 
 As for operating American ships in competition with foreign ships, any 
 such proposition was declared wholly out of the question. The American wage 
 scale; the American standard of living quarters and victualing; the excess num- 
 ber of men required by American law; the privilege granted American crews 
 to leave a ship when and where they please ; alleged oppressive American steam- 
 boat inspection regulations, measurement rules, and a dozen other reasons, 
 plausible enough on the surface, were advanced to show that the operation of 
 ships under the American flag is economically impossible. 
 
 I had heard all these arguments before. So has everyone else. The records of 
 congressional hearings are full of them. They have been resurrected time and 
 time again, whenever a ship subsidy bill is under consideration. The last time 
 I heard them was when the Shipping Act of 1916 was being drawn, and the in- 
 vestigation of their truth is one of the duties with which the Shipping Board is 
 specifically charged by law. I wish to say that none of them impressed me as 
 the most important factors, even if 100 per cent were true, and it is now admitted 
 generally that they are true only in a very limited degree. I doubt if any or all 
 of them ever has or have been an insurmountable obstacle capable of being 
 offset only by a subsidy from the public treasury, or other special concession at 
 the public) expense. At the present time I am sure that none of them is either 
 real or important enough to be given so much prominence as weighty factors in 
 the problem. 
 
 For instance : the experience of the war period has proved conclusively that 
 our shipyards can build six or seven times as rapidly as the shipyards of any 
 other country in the world, and the fact that our war-built vessels have re- 
 ceived the 100 A 1 classification from Lloyds Register of Shipping proves that 
 our work is fully up to the standards of the British yards. I cite British yards 
 specifically because their workmanship always has been accepted as the stand- 
 ard of the world. 
 
 It is true that our war-built vessels cost three times as much as similar ships 
 cost before the war, but the same thing is true of the war-built ships of Eng- 
 land, Scandinavia, Japan and other countries. Morever, American construction 
 costs are decreasing while those of Europe are rising. You can contract for an 
 
 4 
 
American ship, six months delivery for a final flat base price of about $155 a 
 deadweight ton. In England the best you can do is to contract for two years 
 six months delivery at a base price of about $150 a deadweight ton plus what- 
 ever increase in the cost of labor and materials may occur in the meantime. The 
 argument about tariff exemption on shipbuilding materials for 47 years has no 
 point at all. During the last eight years there never has been a time when 
 American ship steel has not been at least $5 a ton cheaper than British ship steel. 
 Today the difference in favor of the American shipbuilder is from $14 to $17 a 
 ton, according to type of material. 
 
 THE TRUTH ABOUT OUR SHIPBUILDERS AND OUR SHIPS. 
 
 Immediately upon my return from Europe last February I reported these 
 fact to my colleagues in the Shipping Board, and the text of the report was 
 given wide currency by the newspapers. I also showed that the world- wide 
 demand of labor for something approaching the American standard of living had 
 raised the labor cost of everything everywhere; also that the provision of the 
 Seaman's Act which permits men to leave a ship when and where they please, 
 and forbids the arrest of a sailor leaving a foreign ship in an American port, had 
 caused foreign seamen to leave in American ports, and to join American vessels 
 in such numbers that the wages of seamen on board ships of all the important 
 maritime nations had been raised approximately to the American level. 
 
 Personally I do not attach much importance to this circumstance, because the 
 wage and subsistence items combined constitute at the maximum 12 per cent of 
 the total operating expenses of a ship. I cite it, not particularly in refutation 
 of the argument that high wages furnish any valid reason why a high-wage ship 
 cannot compete with a low-wage ship, but rather to show how superficial is the 
 chief argument that has been advanced to prove the contention that it is im- 
 possible to operate ships under the American flag. The other arguments, on 
 their very faces, are equally superficial; and, in the case of inspection laws, etc., 
 they can be easily corrected the moment it is affirmatively shown that they are 
 unwise. At the same time, it may be worth while to note in passing that none 
 of these alleged handicaps seem to have prevented the Red "D" Line from doing 
 a successful business under the American flag between New York, the West 
 Indies and Venezuela during the last thirty odd years; nor have they inter- 
 fered with the prosperity of the Atlantic, Gulf and West Indies Company, whose 
 vessels also fly the American flag. The successful competition of the American 
 flag ships of W. R. Grace & Co. with the powerful British P. & 0. Line in the 
 South American trade has been a matter of common knowledge for many years; 
 and last, but perhaps most significant of all, is the fact that the vessels of the 
 Pacific Mail Steamship Company, flying the American flag, have successfully met 
 the competition of ships paying the lowest wages on earth in the trans-Pacific 
 trade for about seventy years. 
 
Of much more importance than the wage-and-subsistence item, which is 
 not over 12 per cent of the total operating cost, is the coal fuel item, which 
 ranges between 30 and 40 per cent of the total. Here the advantage is heavily 
 in favor of the ship which takes her coal in an American port. The use of oil 
 fuel turns coal bunker space into revenue-earning cargo space; gives a larger 
 steaming radius, and also reduces the propelling cost per mile. Here again the 
 American merchant marine as a whole has a really worth-while competitive ad- 
 vantage because it contains a greater percentage of oil-burners than any other 
 merchant marine in the world. Also, the matter of effecting a quick turn- 
 around offers an opportunity for turning costly idle days into money-making 
 days at sea which is not yet fully appreciated, and which American ships are 
 free to use their initiative in developing by planning their voyages and arrang- 
 ing for return cargoes in advance. 
 
 SUPERFICIAL CHARACTER OF ARGUMENTS AGAINST AMERICAN 
 
 SHIP OPERATORS. 
 
 I almost regret having written this last paragraph because the items I have 
 cited do not lie at the root of the problem, and are open to the same charge of 
 random superficiality which I have laid against the wage-and-subsistence and 
 navigation law items they offset. Still, it is important to bear in mind some of 
 these things: in order to fully understand the appalling superficiality with which 
 the merchant marine problem has been set forth and passed upon offhand by 
 men who appear before Congress and undertake to influence public opinion by 
 giving out press interviews as authorities on the subject. 
 
 Naturally, after reading columns of newspaper articles, and pages of maga- 
 zine and trade paper articles, telling how and why we could not operate ships 
 under the American flag, I was anxious to learn what constructive suggestions 
 the men responsible for these articles had to offer. Accordingly, I announced 
 that the Shipping Board was studying the problem and would welcome any help 
 anyone interested in creating and maintaining an adequate American merchant 
 marine might care to give. 
 
 The results were disappointing. Almost without exception the letters I re- 
 ceived from men connected with, or claiming knowledge of, the steamship busi- 
 ness assumed the existence of same un-named reason why American flag ships 
 cannot hope to compete with foreign flag ships unless heavily subsidized. Some 
 thought the Government ought to charter or lease its vessels to private operators, 
 saying that the ships might be susceptible of profitable operation under the 
 American flag for three or four years while abnormal conditions exist, but that 
 after that time the Government would be obliged either to guarantee a return 
 of five or six per cent to the operators, or else would have to sell the vessels 
 into foreign registry. Others thought if it were understood that the La Follette 
 Seaman's Act would be repealed; the steamboat inspection regulations revised, 
 
 6 
 
and a subsidy of some sort were guaranteed, it might be possible to sell the 
 Government ships. In this event, however, the Government must be reconciled 
 to the sacrifice of more than a billion dollars, of construction expenditure, for 
 the ships would have to be sold at not more than half their average cost, or 
 about $100 a deadweight ton. Otherwise they could not hope to compete with 
 foreign ships, many of which are carried on their owners books at $20 or $30 
 a deadweight ton. 
 
 I cite these suggestions and recommendations in detail chiefly to show the 
 prevalent habit of accepting conditions as stated simply because for many years 
 they have been so stated. It is quite, difficult to understand why our shipping 
 people if truly American continue to argue against our ability to operate in com- 
 petition. Two of the most striking characteristics of the letters I received were 
 the apparent absorption of the writers in operating details, and the obvious dis- 
 inclination to dig below the surface of the problem. For instance, the expressed 
 fear of competition from ships carried, on owner's books at $20 or $30 a ton is 
 wholly without justification. A vessel which had been written down to that 
 figure would be old and worn, costly to operate, often laid up for repairs, and 
 not at all comparable with a new modern ship, economical to operate, and having 
 a long life of usefulness in prospect. Such an argument is the last thing one 
 would expect to hear from a steamship man at this time when every shipowner 
 in the world is at his wits' ends for time and shop facilities with which to re- 
 condition his vessels after the continuous, hard, racking service to which they 
 have been held and driven during the war. 
 
 I confess it caused me to experience a feeling of exasperation which led me 
 to ask my associates and myself what on earth could be the matter with these 
 people who kept going around and around in circles, never getting anywhere. 
 They claimed that their industry was a great one, and that it was a national 
 necessity because it made large sums of money for many other industries ; and in 
 this we all agreed with them. Yet in the same breath they solemnly averred they 
 could not make money for themselves, or even stand on their own feet without 
 Government aid. 
 
 It seemed to me that this story had a familiar ring a sort of timbre which 
 I had heard in other countries besides the United States and straightway I 
 began to wonder if it were possible that somewhere, way back in the history 
 of ocean transportation, the merchant marines of the world had fallen 
 under some extraneous influence which had slowly, insidiously and impartially 
 strangled them all. I had seen so many unsound and illogical things accepted 
 and taken for granted in this strange industry that I could understand how it 
 might be possible for creeping paralysis of this sort to develop indefinitely, and 
 still remain unidentified. 
 
 7 
 
GETTING DOWN TO FUNDAMENTALS. 
 
 The only extraneous influence which can affect the merchant marines of 
 
 v 
 
 all nations alike is the combination of vessel classification and marine insurance. 
 So I resolved to go back and search in history for the point at which a single 
 little sailing ship ceased to make snug 1 fortunes for her owner and his merchant 
 patrons in twenty or thirty voyages, and at which the present era of Govern- 
 ment subsidies for large fleets of powerful steamships began. A comparison of 
 the marine insurance practices of the two periods might prove interesting. 
 
 In the days when the ships of Florence, Venice, Pisa and Aries traded with 
 Africa and the Levant there was no such thing as organized marine insurance. 
 Each vessel was an entity in itself; each voyage a venture in which shipowner 
 and shipper of goods were regarded as partners. If a ship were knocked down 
 in a gale and it proved necessary to cut away the masts in order to save the 
 ship and cargo, all concerned contributed toward re-conditioning the vessel, 
 each in proportion to his financial interest in the venture. In like manner all 
 concerned contributed to pay for cargo jettisoned in order to save the ship. 
 The practice was based on the theory that the one partner had sacrificed part of 
 his property in the interest of all, and that therefore all should be assessed 
 equitably to make good the loss. The assessment was called a "general average", 
 "average" being a corruption of a Florentine word meaning loss. If, on the other 
 hand, a mast and its sail were blown away because of mismanagement, or any 
 inherent weakness, or if a sea boarded the vessel and damaged the cargo be- 
 longing to any one merchant, the circumstance was regarded as a matter of 
 bad luck and the loss lay where it fell. Such a loss was known as a "particular 
 average," and the person who sustained it bore it all. There was, of course, 
 no provision to protect from total loss. 
 
 This system was far from complete and far from satisfactory. Still, it is well 
 worth study, not only because under it ocean trade grew and prospered, but 
 also because it left the shipowner and the merchant absolutely free to make any 
 voyage they wished to make; to handle any cargo they wished to handle; to 
 seize upon any opportunity which presented itself; to establish communication 
 with and develop the resources of any new country, and generally to utilize all 
 the initiative, enterprise and salesmanship they possessed. It is a matter for 
 regret and grave consideration at this time that the same thing cannot be said 
 of the marine insurance system under which the merchant marines of the 
 world operate today. 
 
 MARINE INSURANCE, ANCIENT AND MODERN. 
 
 Modern marine insurance is a development, and its rules and practices can- 
 not in any sense be regarded as the product of design. It originated at, or rather 
 crystallized about, the London Lloyds as naturally as the practice of ship classi- 
 fication for insurance purposes developed in the same manner and at the same 
 
 8 
 
place under the name of Lloyds Register of Shipping. The British Lloyds com- 
 panies and groups are said to write, or to participate in writing, more than 70 
 per cent of the marine insurance of the world. The marine insurance organi- 
 zations of the other maritime nations are modeled closely after the British 
 Lloyds, and several of them bear similar names. They even use the British 
 Lloyds forms and actuarial data, just as the German Lloyds, the French Societe 
 Veritas, the American Bureau of Shipping and other classification societies have 
 adopted, in many cases verbatim, the scantlings and other superstructural 
 requirements prescribed for vessels by the British Lloyds Register of Shipping. 
 Thus, it is plain why classification and insurance practice is uniform all over the 
 world, and that no matter who actually, writes any given marine policy, the form, 
 terms and limitations of all policies covering similar vessels and similar voyages 
 are substantially the same. 
 
 It is a matter of common knowledge that modern marine insurance is 
 purely a financial enterprise conducted solely with the idea of collecting a 
 maximum of premiums while paying a minimum of losses. Premiums collectible 
 and losses payable are based upon an arbitrary insurance valuation set upon 
 the vessel insured, the premiums varying with the age and condition of the 
 vessel and with the trade in which she is engaged. Whether the vessels are 
 busy developing trade and making money, or whether barely eke out an existence 
 is of no consequence to the insurance companies. They are no more interested 
 in stimulating the business of the merchant marine than they are in stimulating 
 the business of the many manufacturing and warehouse enterprises, whose prop- 
 erty on shore the same companies stand ready to insure against fire, lightning, 
 etc., as readily as they insure vessels against marine perils. 
 
 Of course the basis for all this insurance, and for the ship classification 
 upon which it rests, is the actuarial record of past performances. This actuarial 
 record dates back through several centuries, during which each disaster has 
 been analyzed, cross-analyzed, listed, averaged and totaled, while of the millions 
 of successful voyages there is no record whatever. Consequently, it is natural 
 to expect that the marine insurance system under which the merchant vessels 
 of the entire world operate today would be retrospective and conservative in 
 the extreme, if not actually obstructive to progress. 
 
 INFLEXIBILITY OF REQUIREMENTS. 
 
 As a matter fact, the rigidity and backward-looking character of the classi- 
 fication and insurance requirements are amazing. During the war there was 
 not enough anchor chain to equip all the emergency vessels in conformity with 
 classification requirements, and there were not enough anchors to provide each 
 ship with a spare bower. The anchor and chain requirements of the classifica- 
 tion societies were based upon what was considered necessary in the olden days 
 
 9 
 
when ships did not often lie alongside wharves, and when lofty spars stopped 
 the wjnd and made holding difficult when a ship lying at anchor in a gale had 
 no engines with which she could steam up to her anchors. 
 
 Nevertheless, after prolonged negotiations, the classification societies made 
 only slight concessions in the chain requirements, and while the American 
 Bureau of Shipping finally permitted the omission of the long-obsolete spare 
 bower anchor, Lloyds' Register of Shipping steadfastly refused to do so. 
 
 Nothing short of the war-time necessities of England and the United States 
 ever could have secured these slight concessions from the iron-clad dictates of 
 the past which bind every steamship owner in the world hand and foot. Ninety 
 per cent of the anchor chain carried by merchant vessels never sees the light of 
 day except when roused up on deck for its annual coat of asphaltum paint. Yet 
 the shipowner may sigh in vain for the opportunity to carry some revenue- 
 earning cargo in the space where several tons of this excess baggage are 
 stowed. The voice of the past says "No," and that is final. Personally, I am 
 curious to see how soon the marine insurance people will veto the war conces- 
 sions of the classification societies and send the private owners of some of our 
 emergency ships into the market inquiring for chain and anchors. The matter 
 has not yet come before them because so long as the vessels remain the property 
 of the Government the Shipping Board insures them in its own fund. 
 
 However, the restrictions under which ship construction labors are not 
 so important as those universally imposed upon ship operation. For example, 
 a vessel with the highest classification rating may be engaged in lifting cargo 
 from a Pacific port to Vladivostok. Late in the season she may have an oppor- 
 tunity to pick up a return cargo at Petropavloski. If she has a wooden rudder- 
 stock, or if her forward frames are spaced further apart than the ancient 
 requirements for an ice-breaker prescribe, the insurance company will not 
 permit her to venture into the Bering Sea. Many years may have elapsd 
 since the insurance companies have lost money on a vessel engaged in such 
 a voyage, and meanwhile much progress may have been made in taking meter- 
 ological observations and in detecting the proximity of ice-fields. The insurance 
 loss is remembered, and, because the insurance business is purely an actuarial 
 financial institution, out of touch and unsympathetic with merchant marine 
 enterprise, the progress made by the science of navigation is ignored. Instead 
 of being allowed to make additional money, the vessel will be obliged to make 
 a costly return voyage in ballast. 
 
 THROTTLING EFFECT OF MODERN MARINE INSURANCE. 
 
 To anyone who wants more light on this subject I recommend the persual 
 of a dozen or so marine insurance policies, or the charter parties based upon 
 them, selected at random. These documents, issued to the ordinary cargo 
 vessels, which constitute the backbone and mainstay of ocean transportation, 
 
 10 
 
provide that the vessel may cruise in certain oceans, seas, bays and rivers only 
 at certain seasons of the year; that she is not to enter certain other bodies of 
 water at all, and that she is warranted not to go north of a certain parallel 
 of north latitude or south of a certain parrallel of south latitude at any time 
 or in any circumstance. 
 
 A moment's reflection will suffice to show that the tendency of these 
 restrictions is to standardize ocean trade routes and to force all vessels to 
 adhere closely to these routes. Such an arrangement may have its advantages 
 from the insurance point of view, which regards safety as the main object in 
 life. But it is not so advantageous from the shipowner's point of view. Stand- 
 ardized ocean routes means also a corresponding standardization of ocean 
 termini, or the crowding into a few ports of the trade which otherwise would 
 be distributed among many ports. This, in turn, means slow turn-around, 
 unnecessarily keen competition and unnecessarily reduced revenue. A ship- 
 owner naturally will cut freight rates if by doing so he can stay in the route 
 where he is and avoid being forced to trade with a port to and from which 
 his fuel and other operating costs may be considerably increased, or for the 
 privilege of trading with which he may have to pay a much higher insurance 
 premium on his vessel. The owners of some tramp steamers the type of 
 vessel which always is the pioneer of trade have told me they would like to 
 establish trade with a number of undeveloped parts of the world, but that they 
 are absolutely estopped by the refusal of the insurance companies to under- 
 write their vessels on any terms if they contemplate entering harbors which 
 are not well charted and buoyed, and which do not afford full protection in 
 bad weather. 
 
 FINANCIAL DECADENCE OF SHIP OPERATION EXPLAINED. 
 
 The universal development and steady tightening of these restrictions 
 over a long period of years are in themselves sufficient to explain much, and 
 perhaps most, of the steady decrease in ship earnings which has occurred during 
 the last century. The remainder probably has been absorbed by the increased 
 cost of ships and of ship operation, which, like the property and operation costs 
 of other industries, have risen rapidly during the last thirty or forty years. 
 Moreover, while the prices of manufactured commodities have been steadily 
 advancing, the tendency of ocean freights, up to the beginning of the war, has 
 been rather in the opposite direction. 
 
 But this is not the whole story. Superimposed upon the classification and 
 insurance restrictions has been the heavy burden of universal overcapitalization. 
 This process began when the steamship companies were hard pressed during 
 the trade slump which followed the panic of 1873. Very few companies seem 
 to have escaped overcapitalization, and most of the new ones seem to have 
 been systematically "watered" almost as soon as they sprang into existence. 
 
 11 
 
I have before me a 200-page analysis of the annual financial statements 
 of representative steamship companies of all nations covering a period of 
 twenty years. The collator remarks that many of the statements seem to have 
 been prepared with the idea of showing the position of the company "as it is 
 not." However, practically all of them whose statements are sufficiently com- 
 plete to admit of intelligent interpretation show degrees of overcapitalization 
 indicating that they are obliged to find money to pay dividends on stock issues 
 which are from ten to forty per cent in excess of all the property value they can 
 show. A recent statement of one American company frankly admitted that 
 its capitalization of $11,000,000 consisted of $5,000,000 in "tangible assets" and 
 $6,000,000 of "good-will." 
 
 In the classification, insurance and capitalization conditions I have just 
 described I feel convinced that I see a real, deep-rooted and fundamental 
 reason why the merchant marines of the world, the instruments for the promo- 
 tion of overseas trade and the creators of wealth for other industries, find 
 themselves incapable of making a living for themselves. After more than a 
 century of slow, progressive strangulation of extraneous influences, and a 
 half-century of effort to earn returns on values which do not exist, I am not 
 surprised to see the great merchant marines of the world, ignorant of what 
 really ails them, huddled and inert, like so many statues of Buddha, sitting 
 with upturned palms, before the public treasuries beseeching national aid. 
 I consider this aspect of the matter infinitely more important than the La Fol- 
 lette Seaman's Act, the tonnage measurement rules, the seamboat inspection 
 regulations and the other operating details which are mere surface excrescenses. 
 And it is along these lines, rather than upon what the steamship authorities have 
 told me, that my associates and I developed the plan of ownership and operation 
 which the U. S. Shipping Board has officially recommended to Congress. 
 
 GROPING FOR A REMEDY. 
 
 I do not wish it understood that I advocate embarking upon a Quixotic 
 knight-errant crusade to reform the long-established ship classification and 
 marine insurance practices of the world. I know too well the futility of 
 attempting to teach so old an animal new tricks. Moreover, I do not claim 
 sufficient familiarity with the technicalities of the business to presume to say 
 exactly what the new tricks should be. I admit that a certain amount of insur- 
 ance restriction is necessary and proper, but I do not believe this restriction 
 should be one-sided. I believe that enterprise at sea should enjoy more freedom 
 of action than it has enjoyed for at least a generation; that a shipowner should 
 be able to get hull and machinery insurance for any voyage he wishes to under- 
 take, and that he should have his insurance under reasonable conditions and 
 on reasonable terms, just as a manufacturer or merchant on shore can get insur- 
 ance for his property, no matter what his business, on terms which are not so 
 prohibitive as to cause him to abandon the venture. 
 
 12 
 
This can never be accomplished until we have some marine insurance 
 companies which do not adhere rigidly to and depend absolutely upon the 
 acturial records of the past, but which make themselves familiar with the 
 business of the modern shipowner, and work in sympathy with the aspirations. 
 Such a state of affairs actually exists on shore, where the underwriter and 
 the insured are in daily touch with one another, and where competition is 
 keen. At this time, when we Americans find ourselves called upon to build up 
 a brand-new marine insurance business of our own, I see no reason why we 
 should not ignore the backward-looking methods of the rest of the world and 
 build along sound, progressive lines. 
 
 POSSIBLE SOLUTIONS OF THE PROBLEM. 
 
 This task is not one which the Government can properly undertake, except 
 possibly to emphasize the importance of having liberal American insurance 
 for American ships and cargoes. It seems rather to be the duty of the steam- 
 ship owners, the American classification society and the American companies 
 who write, or wish to write, American marine insurance. The Shipping Board 
 plan provides the machinery for starting such co-operative action through the 
 Association of Steamship Directors, which it would have meet quarterly in 
 Washington to compare notes and experiences, and to discuss merchant marine 
 problems with the Government. 
 
 If all else fails, and a real, progressive American marine insurance busi- 
 ness fails to develop, the steamship companies will still be free to create, among 
 themselves a common marine insurance fund, administered by themselves, into 
 which they all pay their premiums, and from which they pay all their losses. 
 For the last two years the Shipping Board has demonstrated the practicability 
 of such a plan under much more difficult conditions than obtain today. The proc- 
 ess was more like taking money from one pocket and putting it into another than 
 anything else. Nevertheless, although the rate charged was consistently about 
 three-quarters of the prevalent commercial premium, the plan furnished full 
 protection against marine loss, and left about enough surplus to pay overhead 
 expenses, all without touching a dollar appropriated by Congress. 
 
 The urgent and immediate necessity for American shipowners and pros- 
 pective shipowners to consider seriously and carefully the establishment of 
 an independent American marine insurance system at this time is further 
 shown by the agitation for higher rates on all forms of marine policies which 
 began in London last autumn, and has now spread to all the maritime countries 
 of the world. The marine insurance business, unlike any other business, never 
 takes a loss. If it experiences a bad year it raises rates and recoups next 
 year and the steamship companies pay the bill. The chief cause of the 
 present agitation for increased rates is the accumulation of unexecuted repairs 
 brought about by the inadequacy of existing repair yard and drydock facilities. 
 
 13 
 
No doubt the extraordinarily hard driving to which the fleets engaged in the 
 trans- Atlantic trade have been subjected during the war has rolled up an 
 imposing total of repair claims. It is for the purpose of meeting these claims 
 without reducing their own profits that the marine insurance companies are 
 co-operating to raise the cost of marine insurance for an indefinite period to 
 shipowners all over the world, no matter whether their ships participated in 
 the repairs or are new ships which may not contract a single repair bill for 
 several years. 
 
 In his recent address to the Eagle, Star and British Dominions stockholders, 
 Sir Edward Mountain, a great power in the marine insurance world, spoke of 
 these accumulated repair bills, admitted that their payment in a lump sum 
 cannot be avoided, and urgently besought the co-operation of steamship owners 
 to keep the cost of the repairs down to the lowest level possible. At the same 
 time, he described and deplored the practice of including in a marine policy 
 several minor extra risks, which has arisen during the confusion of war business, 
 and which, until now, has escaped the alertness of the underwriters. For 
 instance, he said that shippers and shipowners are taking advantage of this 
 unprecedented practice by using bills of lading to contract themselves out 
 of liabilities which formerly were theirs, but which they now find they can pass 
 along to the underwriters. 
 
 The elimination of the overcapitalization handicap from the American 
 merchant marine is fully provided for in the Shipping Board plan. When we 
 can get both the insurance and overcapitalization handicaps out of the way I 
 expect to see the merchant marines of other countries worrying about their 
 ability to compete with American ships, and the arguments about our inability 
 to compete with foreigners will disappear. 
 
 ORGANIZATION OF STEAMSHIP COMPANIES. 
 
 From a close study of world shipping, and from the experience of the 
 Government since the slow return toward commercial conditions began last 
 autumn, I am convinced that ships can be operated to maximum advantage only 
 when the individual fleets are of such size that the management can give care- 
 ful personal attention to every detail and all the potentialities of each voyage. 
 I believe, and all my colleagues and associates in the Shipping Board agree 
 with me, that when an operating organization exceeds this size its routine 
 becomes too complicated and its reactions too slow; the comparatively few 
 big, competent brains of the organization do not have the time to bestow the 
 proper attention upon the details and potentialities of each venture; too much 
 of the planning and bargaining is left to relatively inferior subordinates whose 
 names and personalities mean nothing to customers, either at home or abroad; 
 profitable business opportunities are overlooked; personal contact with cus- 
 tomers is to a large extent lost, and many forms of lost-motion and other kinds 
 of wastefulness are certain to germinate, develop and multiply. 
 
 14 
 
Again, I believe, and my associates agree, that the affairs of the ideal 
 steamship organization should be administered by the most far-seeing and 
 versatile type of man the country produces; that as many agricultural, indus- 
 trial, transportation and merchandising industries as possible should be repre- 
 sented on the board of directors, and that the stock ownership should be widely 
 distributed among American citizens of every occupation, persuasion and school 
 of economic thought. Then there could be no such thing as a steamship interest 
 separate and distinct from every other interest; farm, factory, ship and mer- 
 chant would always be working together in the common national interest; and, 
 by the same token, their acts would always be responsive to and would always 
 enjoy the support of national popular opinion. 
 
 It has been argued that such cosmopolitan composition of operating com- 
 panies might lead to more or less frequent sacrifices of steamship profits in 
 favor of promoting foreign trade schemes, but I think this objection is 
 answered by the fact that the officers of the organization would have steamship 
 responsibilities to which they would be bound to give weighty consideration, 
 even if it were not for the circumstance that the interest of the steamship 
 business, as such, is inextricably interwoven with the expansion of foreign 
 trade, and therefore the steamship company would be more likely ultimately 
 to gain than to lose through any such concession that may be made. 
 
 In this connection it is worth while to note that a new, apparently suc- 
 cessful and, in its present form, a distinctly American steamship development 
 is the ownership and operation of vessels by companies which use those vessels 
 exclusively for the purpose of distributing and marketing their own products. 
 The U. S. Steel Corporation and the Standard Oil Company furnish conspicuous 
 examples of this, and I am told that for the purpose of insuring efficiency, the 
 sales departments of these companies deal with the marine departments on a 
 scrupulously strict business basis, so that if it were desired at any time to 
 divorce the marine department from the rest of the business, that department 
 would be entirely self-contained, self-supporting and capable of earning a 
 profit. 
 
 NEW CONDITIONS TO BE RECKONED WITH. 
 
 I do not wish to hazard any prophecy about the extent to which this 
 innovation may be expected to develop, or about the effect it may be expected 
 to have upon the independent steamship owner. Oil tankers can never become 
 serious competitors for return cargoes because the variety of the merchandise 
 they can carry is narrowly limited. The cargo steamer which carries its owners' 
 own products abroad, however, is a different proposition. Still, I believe that 
 the modern thirst for returns from by-products is so great that such a steamer 
 would not be likely to cut rates unless faced with the alternative of returning 
 home in ballast, 
 
 15 
 
In any event, here is a new state of affairs in the steamship world which 
 undoubtedly will extend, and which must be reckoned with and allowed for 
 accordingly. Moreover, it is natural to expect that the cue given by this 
 development will be taken up by other industries, and that to some extent 
 combinations of manufacturers and merchants having similar interests and 
 important trade connections in the same foreign country will seek to further 
 those interests through stock ownership in the steamship companies which 
 carry their goods. 
 
 Personally, I see no objection to such a tendency. Undoubtedly it will 
 stimulate the establishment of American steamship companies, cause them to 
 gravitate quickly into regular trade routes where plenty of business awaits 
 them, and at the same time it will make the steamship companies sympathetically 
 responsive to the needs of the country's trade. These should be our main 
 objectives at the present time. I am not apprehensive that the manufacturing 
 and merchandising elements will ever be able to make the steamship companies 
 serve their own selfish ends to the detriment of independent stockholders who 
 expect dividends fromi steamship profits, because, apart from the reliance which 
 must be placed upon the intelligence of steamship stockholders and steamship 
 managements, the Shipping Board plan contemplates careful Government super- 
 vision of the issue and transfer of steamship securities. 
 
 ALL MUST CO-OPERATE. 
 
 I have already indicated, and I wish now to emphasize, my conviction 
 that no empirical policy laid down by the Government, no matter how complete, 
 sound and well co-ordinated, can, by itself, be expected to vouchsafe to the 
 American people the establishment of the magnificent economic mechanism they 
 justly demand that the American merchant marine shall be. The Government 
 policy endorsed by Congress will simply be the reflected composite of the wishes 
 and aspirations of the country. As such it will be the cue which the American 
 steamship operators, the American marine insurance men, the American classi- 
 fication society, the American terminal companies and the American exporters 
 and importers should take up in formulating their policies, all of which, of 
 course, must be consistent and consonant with one another, and so moulded 
 that they will work smoothly and harmoniously under the Government plan. 
 
 A SURVEY OF MATERIAL. 
 
 Before describing the Shipping Board plan of ownership and operation, 
 I believe it will be helpful if I sketch an outline of the material with which 
 we shall have to work. 
 
 Our fleet will aggregate almost fourteen million deadweight tons. The 
 last vessels are due for delivery in February or March, 1921. The ships are 
 good, strong ones, of much better quality, equipment and finish than the cargo 
 
 16 
 
vessels of Europe. But the fleet as a whole is seriously out of balance. That 
 is, we have too many small, slow coal-burning ships, and too few large, fast 
 oil-burners. We can get along without many palatial ocean greyhounds for the 
 present, but the derth of good, serviceable combination passenger and cargo 
 vessels is deficiency which we should correct as soon as possible. 
 
 I have no apology to make for this condition. Our program was laid 
 out at the end of a week in which the Germans had destroyed forty allied 
 merchantmen, and seemed in a fair way to make good their boast that soon they 
 would be destroying sixty a week. The greatest world need of the moment 
 was ships of any size and description that could carry supplies to our armies 
 and to the armies of our allies. There was no time and no disposition to stop, 
 plan and create facilities for building a fleet which would be ideal for com- 
 mercial use after the war. We simply went ahead finishing whatever had been 
 laid down, and multiplying as rapidly as possible our facilities for building the 
 types of ships we were equipped to build with least delay. 
 
 THE BALANCING OF THE FLEET. 
 
 It happens, however, that our headlong production of ships which are now 
 superfluous not only enabled our country to accomplish its military purpose, 
 but also placed in our hands the means for balancing the fleet from which we 
 wish to create a permanent American merchant marine. The Shipping Board 
 proposes to sell to citizens of foreign nations, at prices not less than 
 construction costs, such coal-burning cargo vessels as we do not need, using the 
 proceeds of such sales to construct as rapidly as possible in American yards 
 the larger, faster oil-burning passenger-and-cargo vessels which we need. 
 
 The exact tonnage we can profitably spare will depend, of course, upon the 
 extent to which our people go in for tramp steamer ventures, engaging in the 
 transportation of cargoes back and forth between foreign countries, and touch- 
 ing at American ports only incidentally, or at long intervals, when extensive 
 repairs are needed. If much of this sort of business develops we shall not have 
 so many superfluous small cargo vessels as at present seems indicated. 
 
 WHAT THE SHIPPING BOARD HAS RECOMMENDED TO CONGRESS. 
 
 The Shipping Board recommends private ownership and operation as the 
 fundamental policy for commercial shipping. The Government should, there- 
 fore, contemplate retirement from commercial shipbuilding, ship-owning and 
 ship-operating activities at the earliest date which may be convenient and 
 practical in order : first, to give our overseas trade the full benefit of competitive 
 service; second, to leave steamship operators free to render this competitive 
 service, and, third, to impart to present and prospective steamship operators 
 that confidence which they must feel before they can be expected to invest 
 
 17 
 
their money in existing ships, and to place the orders for new ships without 
 which the outlook for the American shipbuilding industry will not be 
 encouraging. 
 
 PLAN OF ACTION. 
 
 In order to carry out this policy, the Government should construct no 
 more ships, other than those now in the program, except such new vessels as 
 may be needed to balance the fleet, and for the construction of which funds may 
 be provided by sales of superfluous ships to foreigners. It should adopt, and 
 rigidly adhere to, a definite plan for selling its' ships. 
 
 Obviously it will be impossible to sell the whole fleet at once; but during 
 the period in which the ships are being sold it is essential that the Government 
 handle the unsold ships in a manner which will not permit their operation to 
 react unfavorably upon the operation of the ships which have been sold, and 
 will definitely tend to stimulate the purchase of more ships by private operators. 
 
 This double purpose can be served by assigning unsold ships to managers 
 and operators, as has been, and still is, the practice of the Shipping Board. 
 The operation of ships through the medium of operators and managers should 
 not react unfavorably upon the operation of privately-owned ships because, 
 under present conditions, only flagrant mismanagement in the distribution of 
 ships by the Government would be likely to cause overberthing in any trade 
 route. 
 
 At the same time, these methods of operation will enable the Government 
 to take care of its ship investment while any ships remain in its hands, because 
 the difference between the earnings of the ships and the fees paid to the man- 
 agers and operators is paid into the Government operating fund. These 
 moneys will be available for depreciation, insurance, operating charges (includ- 
 ing organization overhead) and the many other liabilities a shipowner should 
 always be prepared to cover with earnings. 
 
 This method of operating the unsold ships also will place in the hands of 
 the Government a mobile tonnage reserve peculiarly well suited for use in 
 opening and developing new avenues and fields for American commerce. Not 
 only will it permit the development of new business and new steamship routes 
 with great ease, it will also, and at the same time, develop the competent 
 operators, familiar with the routes, who will buy the vessels as soon as condi- 
 tions warrant the sale of the fleets which have been established in the new 
 routes. 
 
 We do not anticipate the establishment and development of new trade 
 routes in this manner will involve any expenditure of Government money. We 
 feel that a surplus of receipts over expenditures in the operating fund, together 
 with the Merchant Marine Development Fund, described later, will provide 
 centralized working capital adequate to finance this, national enterprise. 
 
 18 
 
TERMS OF SALES. 
 
 With these principles in mind, we have recommended the enactment of 
 legislation which will empower the President to carry on for as long a period 
 as may be necessary, after the expiration of six months from the signing of 
 peace, the work which is now being done under his direction in planning and 
 organizing, with the equipment now at hand, and that may hereafter come to 
 hand, an adequate, well-balanced and properly co-ordinated merchant marine. 
 Such legislation should include: 
 
 The power to sell to American citizens at the current world market 
 price such Government-owned steel vessels as the President may designate from 
 time to time, at least twenty-five per cent of the purchase price being paid upon 
 delivery, the remainder falling due and payable in graded annual installments 
 over a period not exceeding ten years. The President should also be empowered 
 to take and hold a mortgage for the unpaid balance, the mortgage bearing inter- 
 est at the commercial market rate for similar mortgages, the rate being revisable 
 annually. 
 
 The power to take and hold such mortgages should also include the power 
 to dispose of interest moneys as follows: That part of the interest which 
 represents payment at a rate which fairly reflects the cost of correspondingly 
 short-term credit to the Government should be paid into the United States 
 Treasury. The difference between this sum and the interest actually paid at the 
 commercial rate which the mortgage carries, representing a saving the Govern- 
 ment is able to effect in virtue of its peculiar credit advantage, should be paid 
 into a Merchant Marine Development Fund. 
 
 The power to sell Government-owned vessels should also include the 
 power to sell to foreigners at prices not less than those charged American 
 citizens, and on terms not more advantageous than those extended to American 
 citizens, for similar vessels, such wood ships and coal-burning steel ships as 
 may be superfluous, or otherwise undesirable, in the American merchant marine. 
 Coupled with this power to sell to foreigners should be the power to use the 
 proceeds of such sales to build the vessels the United States needs to balance 
 its merchant marine as planned, said new vessels to be disposed of in the same 
 manner as other prime vessels owned by the Government. 
 
 In considering the effect which legislation authorizing the sale of ships 
 at "the world market price" is likely to have, it seems advisable to explain 
 what we had in mind when we used this expression. 
 
 THE WORLD MARKET PRICE FOR SHIPS. 
 
 In order to judge the price prospects of such a market, it is necessary 
 to realize that ships are fluid international commodities, which, because they 
 compete with one another, irrespective of the flags they fly, maintain a remark- 
 ably level capital value all over the world. The vigilance of shipowners is so 
 
 13 
 
keen, and cable service is so quick, that abnormal earning power in one trade 
 route is destroyed almost as soon as it appears by an inrush of tonnage from 
 other routes in which the earning power of ships is not so great. With few 
 exceptions, this condition is as true today while a world-wide shortage of 
 tonnage is keeping all earnings and capital values high, as it was in 1913, when 
 a world-wide surfeit of tonnage was keeping earnings and capital values at 
 much lower levels. 
 
 As good an idea as anyone can form of the present and prospective values 
 of ships can be had from the following statements of fact: 
 
 In the first place., there is no question that the current charter market, 
 which itself is the product of many factors, reflects accurately the momentary 
 capital value of ships, although, because of its susceptibility to fluctuations, it is 
 not necessarily a reliable index to their investment value. At present the 
 bare-boat charter rate for ordinary cargo vessels is $5 a deadweight ton a 
 month. This means that a 10,000-ton ship can be hired out at $50,000 a month, 
 or $600,000 a year. In order to reach a conservative valuation, we shall assume 
 that this rental represents as large an income as 20 per cent. The indicated 
 capital value at the moment, therefore, is $3,000,000, or $300 a deadweight ton. 
 
 While no one would expect to see a private operator bid this figure unless 
 the vessel were peculiarly suited to his especial need, we cite this evidence of the 
 current value of spot delivery tonnage because a knowledge of it is necessary 
 in order to understand the situation as a whole. 
 
 At the other extreme is the shipbuilder's price for distant delivery ships. 
 This figure is almost entirely independent of the current demand for spot ton- 
 nage, and is composed of two principal factors: anticipated construction costs, 
 and the desire to book business in competition with other builders. In England, 
 where construction costs were held down during the war, but are now rising, 
 the shipbuilder's bid for two years' delivery ranges between $140 and $160 a 
 deadweight ton, the buyer agreeing to assume any increased cost of labor and 
 materials. In the United States, where the increased efficiency of shipyard 
 management and labor is lowering construction costs, but where private demand 
 has not yet developed actively, flat price offers to construct for from $150 to 
 $165 a deadweight ton have been held out by builders for future delivery. 
 
 Between these two extremes, the value of tonnage has a high rather than 
 a low level and tendency especially spot tonnage. Most of the world's fleets 
 were built before the war and during the first two years of the war. They have 
 been driven hard, and they are heavily depreciated. Their periods of idleness 
 while undergoing postponed repairs are long, and will become longer. Their 
 repair bills are large, and will become larger. In a short time the mortality 
 among them will be very great. Practically 1 the only ships now free from these 
 handicaps are the ships built by the United States Shipping Board Emergency 
 Fleet Corporation, and because the trade of the world must be carried by 
 
 20 
 
someone at some price, it seems reasonable that the demand for ships which 
 can be operated with certainty and economy should keep the market price of 
 such ships at a high, rather than a low, figure throughout the now-visible future.. 
 
 FIXING THE WORLD MARKET PRICE. 
 
 From the foregoing it seems logical that the United States Government, 
 which is the only agency in the world with any considerable number of spot 
 delivery ships to sell, will be very influential in establishing the world market 
 price, and the offers made by our citizens can reasonably be regarded as reflect- 
 ing carefully estimated earning power in the ocean carrying trade, modified, of 
 course, by the buyer's natural desire to buy as cheap as he can. Moreover, since 
 the completion and delivery of a large part our fleet will be placed over 1919, 
 1920, and the first two months of 1921, there seems in this circumstances a 
 sufficient guaranty that our sales prices will always follow the actual market 
 value closely, and especially that no tonnage will be dumped on the market at 
 prices below those justified by the economic conditions of the times in the ocean 
 carrying trade. 
 
 The influence which our Government may be expected to exert directly upon 
 the prices of ships in other countries will be betteer understood if one remem- 
 bers that the 4,000,000 deadweight tons which we may offer for sale to foreigners 
 during the next eighteen months is equivalent to double the combined annual 
 output of all the shipyards of the British Isles at present. 
 
 In this connection it is interesting to note the sharp upward turn taken by 
 the prices of ships in England during the first quarter of 1919, the records of 
 which have just been published by Lloyd's Register of Shipping. A 10,800 ton 
 standard cargo vessel built by the Government in 1908 brought $2,114,100 or 
 $195.61 a deadweight ton. A war-built standard steamer of 2,980 deadweight 
 tons sold for 437,400 or $147 a deadweight ton. During the last quarter of 1918 
 the ruling price for war built standard steamers was a little more than $100 a 
 deadweight ton. These figures unquestionably reflect a recognition of the sound- 
 ness of the American prices of new tonnage. 
 
 The Lloyd's report also discloses sharp advances in the re-sale price of old 
 tonnage. The "Reims" a 6,000 ton steamer built at Sunderland in 1901, was 
 purchased in 1914 for $100,000, or $16.66 a deadweight ton. During the first 
 quarter of 1919, the same vessel brought $325,000 or $54.16 a deadweight ton, 
 despite the fact that it is 18 years of age with not more than two years' use- 
 fulness in prospect. The "Quinto" 5,560 deadweight tons, built in Glasgow in 
 1900, sold in 1915 for $225,000 or $40 a deadweight ton. During the first 
 quarter of 1919, the same vessel, although 19 year of age, brought $425,000 or 
 $76 a deadweight ton. 
 
 The explanation of these sharp rises in the sales prices of ships probably 
 lies in the withdrawal of Government regulations which, throughout the war, 
 
 21 
 
seem to have been framed and administered with the idea of holding down the 
 capital value of tonnage. The occasion for the sudden relaxation of this restraint 
 probably has been the unlocked for development that new ships cannot be built 
 in England for less than three-and-a-half times their former cost. 
 
 AMERICAN INSURANCE FOR AMERICAN SHIPS. 
 
 Returning now to the terms of sale which should be laid down by law, the 
 American purchasers should be required to engage that they will place, and keep 
 placed, if possible, hull and machinery insurance for their equity in the vessels 
 they buy with American Marine insurance companies which underwrite marine 
 risks with their own funds, or with the funds of a group of American companies, 
 each and every member of which group underwrites original marine risks with its 
 own funds. The same provisions should authorize the President to carry in the 
 Shipping Board insurance fund, as heretofore and as at present, the hull and 
 machinery insurance for the Government equity in the same vessels, this insur- 
 ance being so carried for purchaser's account, and at the same rate charged the 
 purchaser by the private insurance companies which insure the purchaser's equity. 
 The President should also be authorized to cause the difference between the pre- 
 miums so collected at the commercial rate and the actual cost of the insurance 
 to the Government, representing a sum the Government is able to save in virtue 
 of its peculiar position, to be paid into the Merchant Marine Development Fund. 
 
 The object of the legislation just indicated is to provide for the insurance of 
 American ships with American money, and for the development of an American 
 marine underwriting business capable of protecting the American Merchant 
 Marine. The legislation suggested is designated to turn over the hull and 
 machinery insurance to private American Insurance Companies in the same ratio 
 as title to the ships passes to private American steamship companies. At the 
 same time, it is designed to enable the Government to retire from the insurance 
 business in the same ratio as it retires from the steamship business. 
 
 FEDERAL CHARTER. 
 
 Each purchaser, manager, and operator for Government account, or oper- 
 ator for private account, who acquires title to or otherwise operates in the over- 
 seas trade any vessel sold, owned or chartered under the legislation now in 
 question should be required by law to be incorporated under federal charter. 
 Congress has been requested to authorize such incorporation, and to include in 
 the law the requirements that: all stockholders shall be citizens of the United 
 States; capitalization shall be limited to property value plus working funds; no 
 additional security shall be issued without permission from the Shipping Board, 
 or such other Government agency as may be designated by law to perform its 
 present duties. Complete financial statements shall be published quarterly, and 
 
 22 
 
the Shipping Board shall at all proper times have access to the companies' books. 
 The board of directors of each steamship company shall include one director 
 especially designated to serve as liaison officer with the Government. 
 
 Should Congress fail to pass legislation providing for federal incorporation, 
 it should make conformity with these requirements a condition precedent to eligi- 
 bility to buy or otherwise operate Government ships. 
 
 THE MERCHANT MARINE DEVELOPMENT FUND. 
 
 It has been indicated that this plan contemplates the setting aside of certain 
 moneys representing the difference between the customary commercial charges 
 for interest and insurance and the rates at which the Government, in virtue of its 
 peculiar position, is enabled to charge. In the matter of interest, it is estimated 
 that this difference would be 1 per cent, which represents the advantage over the 
 costumary commercial rate of 5 or 51 per cent the Government can concede with- 
 out loss in view of the fact that 4 or 4 1 per cent is the rate which approximates 
 the interest the Government is accustomed to pay for short-term borrowings such 
 as Treasury Certificates of Indebtedness. In the matter of marine insurance, the 
 experience of the war period indicates that the Government can safely carry 
 vessel insurance at at least 1 per cent of the value of the vessel below the com- 
 mercial market rate. It is estimated that on the basis of $2,000,000,000 worth 
 of ships sold on ton-year terms, the money derived from these two sources will 
 amount to $14,000,000 at the end of the first year, accruals in progressively 
 diminishing sums throughout the following nine years, raising the total size of 
 the fund for the ten-year period to $72,800,000, exclusive of any interest which 
 may be earned by keeping the balance on hand out on deposit in a national bank. 
 
 In this connection, there should be enacted legislation which would empower 
 the President to pool the moneys which form parts of the Merchant Marine 
 Development Fund with the surplus expected to accumulate in the Shipping 
 Board operating fund, and to use such moneys, or any part of them which may 
 be needed, to carry out the spirit of the policy of encouraging the establishment 
 and development of an adequate merchant marine under the American flag. This 
 would include the development of new trade routes, and the financing of such 
 other kindred enterprices as the President may consider important to the wel- 
 fare of the American Merchant Marine as the instrument of American over- 
 seas trade. 
 
 ADDITIONAL LEGISLATION NECESSARY. 
 
 Before any large-scale financing of the purchase and operation of ships 
 can be undertaken in the United States, it will be necessary to change the legal 
 status of ships mortgages in order to make them attractive investments. 
 
 23 
 
The security of a mortgage may be imperiled by loss or damage to a vessel, 
 or by attachment of superior liens. Such liens can generally be classed as those 
 arising from debts and from liabilities. The most important ones, resulting from 
 debts, arise from the furnishing of repairs, supplies, or other necessaries in the 
 maintenance and operation of a vessel, including pilotages, towages, port 
 charges, crews' wages, and other contractual obligations. Liabilities creating 
 liens result principally from collisions, strandings, salvages, general averages, 
 cargo demages, and personal injuries. Practically all such liabilities can be in- 
 sured against by the standard form of marine insurance policies, and by pro- 
 tection and indemnity insurance. 
 
 If, therefore, the mortgage contains covenants and agreements to compel 
 the mortgagor to insure against such liabilities, as well as loss from fire and 
 marine peril, the security of the mortgage will only be jeopardized by liens aris- 
 ing from contractual obligations. It is our proposal to obtain protection against 
 the latter by amending the existing law so as to assure to anyone furnishing such 
 repairs, supplies, other necessaries, etc., the opportunity, by exercising due 
 diligence, of obtaining full information by the existence of the mortgage, and 
 then to provide that the lien of the mortgage shall be superior to liens for repairs, 
 supplies, and other necessaries (contractual obligations), etc. 
 
 By this co-ordination of mortgage, covenants, and agreements and the 
 statutes, reasonable and adequate protection can be secured to the mortgage. We 
 would provide for such notice by requiring that all mortgages be recorded with 
 the Collector of Customs where the mortgaged vessel is registered or enrolled and 
 that the ship's registry or enrollment have endorsed upon its face the names of 
 the mortgagor and mortgagee, the place of record, and the amount secured 
 thereby. 
 
 Such record and endorsement would be made a condition precedent to the 
 validity of the mortgage as against all the world save the mortgagor and mort- 
 gagee. If then the owner, master or agent of any vessel apply for the furnishing 
 of repairs, supplies and other necessaries, or for the rendition of contractual 
 services (except for the services of seamen) upon the mortgage of the vessel, 
 the proposed creditor could immediately advise himself of the existence of any 
 mortgage by examining the ship's papers, and could by telegraphic means com- 
 municate with the Collector of Customs of the home port of the vessel and ascer- 
 tain the amount remaining unpaid upon the mortgage. With this information the 
 proposed creditor could determine for himself the advisability of extending the 
 requested credit. If he did so and a foreclosure of the mortgage upon the vessel 
 should destroy his security, he would be without grounds of complaint against 
 the superiority of the mortgage, because he would have furnished the credit with 
 full knowledge of the superior lien of the mortgage. 
 
 We would also vest in the United States District Court exclusive juris- 
 diction over the foreclosure of the mortgages, instead of leaving the mortgages 
 
 24 
 
to their present remedy in the State court. This would make the practice 
 uniform and therefore greatly enhance the security value of the mortgage by 
 providing a speedy and simple method of foreclosure. It would also avoid the 
 inconsistencies, delays and uncertainties of the State laws and procedure which 
 now exist. By-and-large, the enactment of a statute such as we have outlined 
 would make of a mortgage on American vessel property a security fully as 
 good as, and in some respects better than, a mortgage on vessel property sailing 
 under any other flag. 
 
 OCEAN MAIL SERVICE. 
 
 In connection with, and as port of a policy contemplating the establish- 
 ment and development of an adequate merchant marine under the American 
 flag, an adequate American overseas mail service should be provided. 
 
 We have had a number of mail subvention statutes on the books for many 
 years, but they have failed to accomplish what they were intendend to accom- 
 plish because they are based on the principle of paying a bonus which was not 
 large enough, and could not in justice b& made large enough, to call into exist- 
 ence on its own account the large, fast vessels to which the law made it 
 payable. 
 
 Now that we have a substantial merchant fleet either in hand or in prospect, 
 the Shipping Board believes there should be legislation which would discard 
 the mail subvention or bonus principle, and pay for the carrying of the over- 
 seas mail, including an overseas extention of the parcel post, on the basis of 
 service rendered. 
 
 Inasmuch as a constant flow of mail between American business men and 
 their foreign customers would give more reliable service than the occasional, 
 and at present uncertain and inadequate, communication provided by passenger 
 liners most of which fly foreign flags we have recommended that the United States 
 mails be carried in all American vessels plying regular routes at a speed of 
 twelve or more knots an hour, and that provision be made by law for payment 
 to such ocean mail carriers on the basis of service rendered. 
 
 WIRELESS TELEGRAPH. 
 
 The Shipping Board believes that for the purpose of promoting the safety 
 of life and property at sea; for the purpose of facilitating the instant trans- 
 mission of commercial and maritime information, and for other purposes, all 
 merchant vessels flying the American flag should be equipped with the wire- 
 less telegraph. We have recommended that this equipment be owned by the 
 Government and operated by naval reserve personnel, and that legislation cover- 
 ing such installation and operation, including provision for increased naval 
 reserve personnel, be enacted. 
 
 25 
 
TRAINING OF AMERICAN MERCHANT OFFICERS. 
 
 % 
 As in the case with the ocean mail laws, the laws now on the statute books 
 
 covering the training- of cadet officers should be revised to meet the new con- 
 dition. Our old laws compelled mail steamers to carry one cadet for each 
 thousand tons burden. The cadet was an extra member of the crew, and had to 
 be paid and fed by the steamship company. Inasmuch as the demand for 
 American officers was not large enough to give the steamship company any 
 incentive to educate and train them, it naturally made the cadets shine brass, 
 polish brightwork, and do other menial labor for their pay and keep instead 
 of educating them. They were taken aboard chiefly because the law required 
 a full crew list. Not many of them made more than one or two voyages. 
 
 Now the training of an American officer personnel has become a matter 
 of national importance, and we have recommended that it be taken up by 
 Congress. Legislation should require that all merchant ships carry at 
 least two and not more than ten cadet-officers. Half of them should be 
 trained as deck officers and half as engineer officers. The course should 
 extend over two full years. The cadets should be paid living salaries by the 
 Government, and the Government should pay the steamship companies fees for 
 their tuition. They may be selected from the boys who already have elected to 
 follow the sea, or from those who wish to do so. They may be appointed as the 
 result of an examination held in the Customs Houses by the local boards of 
 steamboat inspectors under the auspices of the Civil Service Commission. 
 
 UNDERLYING PRINCIPLES OF THE PLAN. 
 
 To my mind, the outstanding vital features of this plan are the provisions 
 for sound capitalization and the several provisions designed to stimulate rapid, 
 systematic and co-ordinated development through the active co-operation of 
 all interests connected with the steamship business. 
 
 I have told how, while people were talking about "the war after the war", 
 the British Government took the precaution to frame and administer its re- 
 quistion regulations in a manner which prevented the inflation of the book 
 value of British tonnage. The idea, no doubt, was to keep British ships in a 
 position of financial advantage, as compared to the higher-valued ships of other 
 nations, which would enable them safely to do such rate-cutting as might prove 
 necessary to meet postbellum competition. Whatever advantage this precaution 
 may have given to British ships is now annulled by the rise in valuations which 
 has followed the relaxation of the requisition restrictions. But had the British, 
 or any other Government been able during the war to place its fleets on the 
 sound, pared-to-the-bone, capitalization basis which the Shipping Board plan 
 contemplates for the new American fleets, those fleets would have had an 
 initial and indestructible advantage over competitors which, in any rate war, 
 would have became greater and more pronounced every time a rate was cut. 
 
 26 
 
OWNERSHIP THE GOAL. 
 
 It cannot have escaped notice that the entire Shipping Board plan has 
 been moulded about the central idea of developing direct popular ownership 
 of merchant shipping, and direct popular participation in all the profits it earns. 
 Every detail of organization and administration, including the education of 
 prospective new shipowners by employing them to operate unsold ships in new 
 trade routes for Government account, has been fashioned with the idea of 
 placing those ships as soon as possible in the hands of American citizens who 
 have resolved to lay down a heavy stake upon their ability and determination 
 successfully to engage in the business of serving and extending the overseas 
 trade of the United States. Every inducement and protection which the Gov- 
 ernment can offer without sacrifice to the public interest is offered them. 
 
 World conditions permit the ships to be sold on terms which will reimburse 
 the Government for the cost of construction, and, if Congress acts favorably 
 upon a recommendation which I have made, the enterprising groups of citizens 
 who buy ships now will be permitted to take advantage of the extraordinarily 
 favorable opportunities of the next three abnormal years and so strengthen 
 their financial position that they need have no apprehension whatever about 
 their ability to meet successfully whatever conditions the return to normal times 
 may bring about. 
 
 Briefly, this recommendation was to the effect that the citizens who buy 
 vessels now be permitted to charge off annually out of earnings for three 
 years, in addition to the customary five per cent, a special amortization of ten 
 per cent, the amount of the special amortization so charged off to be exempted 
 from federal taxation, provided that within the three years the shipowners use 
 the special amortization fund so set aside from the earnings of all his vessels 
 to construct one or more new vessels in an American shipyard. I believe this 
 special amortization is a legitimate charge against the cost of transacting cur- 
 rent business done on present valuations, which have not been created by the 
 new steamship owners, but much of which especially in ship construction 
 is known to have been created by various acts of this and other Governments 
 while striving to get quick results in an emergency. It seems to me no more 
 than just that at this time, when every value on earth is being questioned, the 
 Government takes this step, which is also a help to the uncertain future of the 
 shipping industry to impart confidence to the men who buy and build ships. 
 
 If this is not done, I fear that a great many ships will not be sold at this 
 time. Many a man who would like to buy ships today and intrench himself 
 firmly in the business during the next three years of high earnings, naturally 
 hesitates when he sees the shipyards offering to deliver new vessels in 
 eighteen months or two years at $150 a ton, or seventy-one per cent of what 
 a purchaser has to pay today. If he could see his way clear to write off enough 
 to enable him to meet the competition of the $150-ship two years hence, he 
 would not hesitate. 
 
 27 
 
The Government, too, has an interest in this matter, for it would seem 
 wiser to* forego a little taxation now than to be obliged to sell the greater part 
 of the fleet at a forty per cent loss two or three years hence, when the $150 
 new ships begin coming on the market in quantity. Then it may not only be 
 necessary for the Government to meet the $150 price; it may also be necessary 
 to make an additional concession equivalent to three years' normal depreciation 
 at five per cent a year in order to place the three-year-old ship on competitive 
 parity with the new ship. 
 
 THE MENACE OF CHARTERING SHIPS. 
 
 Throughout all our studies and plans we have kept before our minds' 
 eyes the objective of creating a merchant marine owned and operated by 
 citizens who believe in its future, who have staked their all upon success, 
 and who stand ready to back their convictions with all the personal and 
 collective moral, intellectual, physical and financial resources they possess. 
 So far a goodly number of such citizens has come forward. They and the 
 commerce of the country are enjoying the results of their American courage 
 and initiative. We are all proud of them. Many more such men stand ready 
 to buy ships, but a pall of doubt suddenly has been thrown over the situation 
 by a fresh outburst of the same old propaganda to which I have referred before, 
 accompanied by agitation before Congress for the enactment of a law under 
 which the Government would charter or lease its ships for five year periods to 
 anyone who wants to try his hand at the game. 
 
 It does not require much business sense, or even much imagination, to 
 comprehend that the adoption of such a policy would shatter forever our 
 hope of establishing a permanent American merchant marine. The steamship 
 operator who operates chartered ships is the seagoing analogue of the man on 
 shore who engages in business on a ten-million-dollar scale with a thousand 
 dollars capital what is commonly known as a ''shoestring operator". 
 
 We cannot expect any man or group of men who have any business 
 acumen whatever to invest millions of dollars in vessel and terminal property 
 when other men can get the full use of similar ships at an outlay of only 
 a small monthly rental. Having no capital liabilities to protect, and none of 
 the other restraints and responsibilities of ownership, the operator who charters 
 ships is free to shift his vessels from one trade route to another, slashing rates 
 right and left, demoralizing the business of legitimate steamship companies; 
 and finally, when he has exhausted all the possibilities of the present excellent 
 opportunity for such piratical operations, he is free to step out and throw his 
 vessels back on the hands of the Governmenet. The summary revocation of the 
 charters of such an operator would do no good, for the next day the vessels 
 probably would be chartered to another operator who would repeat the per- 
 formance. 
 
 28 
 
It cannot be argued that I have taken an extreme view of this situation 
 because everyone knows that the Government has no power to control ocean 
 freight rates in the foreign trade, except to the extent of preventing a steam- 
 ship operator from discriminating against an American merchant in favor of 
 a foreign merchant. Nothing short of a long series of international agreements 
 could make it possible for our Government to control freight rates in our 
 overseas trade. These agreements, of course, would have to be made with our 
 marine competitors, so it is easy to guess how much sympathy we would get. 
 Moreover, all Americans would blush to see our Government driven to beg such 
 favors of competitors in consequence of its own folly. 
 
 At first glance it seems incredible that any considerable body of American 
 citizens would come forward and seriously advocate such a proposition, especially 
 at this time when ownership and permanent organization should be our goal. 
 After reading the evidence advanced before the ship subsidy hearings in Con- 
 gress during the last twenty-odd years, and after reading the newspaper articles 
 and interviews to which I have referred, and which are still being published 
 day-by-day, the answer is not difficult to find. They are not the real American 
 steamship men, the men who have owned and operated ships under the American 
 flag through good times and bad, for years and years. Nor are they men of 
 the type we wish to see operating the ships of the American merchant marine. 
 
 It is not the real American shipowner, or the enterprising aspirant ship- 
 owner, but men of the type I have just described, and a large number of men 
 who aspire to follow in their selfish footsteps, who constitute the driving force 
 behind the agitation, urging the wholesale chartering of Government vessels 
 to whoever wished to operate them. With these men are a great many loyal 
 and honest citizens whom they have mislead by posing as American steamship 
 men of long experience, and therefore authorities on the subject. 
 
 It may be that later on, when we have the situation better in hand, we 
 may find it useful to employ the "bare boat" commercial ship charter form, 
 with a clause providing for the setting-aside of a sinking fund out of earnings, 
 as a bill of sale in selling vessels on the installment plan. The Shipping Board 
 recommendations to Congress contain broad provisions under which this may 
 be done. But in no sense would such a practice be chartering ships in the 
 commercial sense of the word; nor would the man who took the ship on such 
 a basis have any advantage over the man who buys ships outright, or under 
 any other plan. 
 
 COST OF SHIP-CHARTERING TO THE GOVERNMENT. 
 
 In strict consistency with their testimony at congressional hearings and 
 their published interviews and announcements advocating ship subsdies at the 
 
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Government's expense, the advocates of this ship-chartering plan now want the 
 Government to assume all the responsibilities and expenses incident to owner- 
 ship which, as I have said before, they wish to avoid themselves. I informed 
 Congress of the Board's opposition to any ship-chartering plain in writing as 
 follows : 
 
 "From the stipulations set forth in the plan we submitted to you on June 
 10, you can see clearly that the Shipping Board considers it vital to guard and 
 limit carefully the practice of chartering or leasing ships if, in fact, it proves 
 desirable to charter or lease at all. 
 
 "One reason for this attitude is our desire to create a merchant marine 
 based upon the solid foundation of ownership and serious, determined ambition 
 to grow and to succeed. We do not wish to shatter this objective by making 
 it possible for anyone to get the full use of the Government ships by paying 
 only a small monthly rental, avoiding all the responsibilities of ownership. 
 
 "Moreover, such men would be a constant menace to the American steam- 
 ship business. It would be impractical to control them. They would be free 
 to shift their vessels from one trade route to another, demoralizing the business 
 of the serious, constructive men who have thrown their all into the business 
 of serving the overseas trade of the United States. Then they could simply 
 throw their vessels back into the hands of the Government, depreciated in 
 accordance with the usage they had received. 
 
 "The question of chartering the Government ships to private operators is 
 a very complicated one, and I think you should have the other salient points 
 of the proposition before you. Therefore, I am going to give you an outline. 
 I feel that the importance of the subject will justify my writing at some length. 
 
 "Everyone knows that the commercial practice of time-chartering ten or 
 a dozen vessels for operation in a few trade routes always has been a profitable 
 business, and many foreign shipowners are engaged in it. But when the 
 Government undertakes to time-charter 2,000 ships scattered over all the trade 
 routes of the world, the proposition assumes a different aspect. 
 
 "In order to man, victual, insure and keep repaired 2,000 ships, the 
 Government would be obliged to maintain a nation-wide recruiting and training 
 organization capable of keeping 100,000 positions filled on board ship. It 
 would also have to maintain a national steward's and commissary department 
 with purchasing and distributing agencies in every American and many foreign 
 seaports. In addition, there would have to be a large auditing organization to 
 look after the finances of the recruiting and commisary departments, and to 
 
 30 
 
handle accounts with operators, repair yards, etc. A large legal department 
 capable of looking after the charter contracts and of handling the questions 
 of admiralty law arising out of the operation of vessels, and an insurance de- 
 partments with a corps of trained adjusters would also be necessary. 
 
 "It goes without saying that the cost of all this establishment to the 
 Government would be large, and if to this overhead we add the wages and 
 subsistence of 100,000 seagoing men; the cost of their food; the cost of marine 
 insurance for 2,000 ships and the cost of keeping the whole fleet in repair, 
 we would get a very large total. 
 
 If the going time-charter rate was $7.00 a deadweight ton a month, the 
 Government's monthly income from a fleet of 10,000 tons would be $70,000,000. 
 At an average freight revenue of $12.50 a deadweight ton a month (which is 
 about the current revenue of well-managed free ships) the operators would 
 receive a monthly revenue of $55,000,000, from which they would have to meet 
 expenses totaling much less than the Government's expenses. 
 
 "Under such an arrangement it seems that the Government would be 
 obliged to appropriate large sums annually to make up an operating deficit; 
 and if this should prove true, it would be doubtful if the Government ever could 
 recover a dollar of the money spent on the construction of the fleet. Also, 
 I think you will agree that if the Government ever embarked on a policy of 
 chartering its vessels it could succeed in selling few, if any. Operators would 
 not be likely to lay out a million dollars for a ship and assume all the risks and 
 responsibilities of ownership when the Government offered them the much 
 easier alternative of hiring it at a small monthly rental, and in addition relieved 
 them of the expense and trouble incident to manning, victualing, insuring, etc. 
 
 "Of course the bare-boat form of charter would not cause the Government 
 to maintain quite so large an organization, or to bear quite so great an expnese, 
 as time form. Still, it Would cut the Government's revenue from $7.00 to $4.00 
 a deadweight ton a month (or from $70,000,000 to $40,000,000), and it would 
 not help the Government to sell the ships, or to reimburse itself for its con- 
 struction outlay. Furthermore, any system of chartering would naturally result 
 in the running down of the fleet, which, after a few years, would equally 
 and naturally be thrown back on the Government's hand worthless for com- 
 petitive use at sea." 
 
 I am hopeful, however, that some of the investigations now in progress in 
 both houses of Congress will reveal enough of the intricacies of the steamship 
 business to prevent the taking of any serious false step. I am hopeful that 
 Congress will soon give the Shipping Board o cbnitcr of broad, constructive 
 
 31 
 
powers under which it can invite the American people to come into the steam- 
 ship ^business fearlessly, and to build undisturbed on the sound foundation of 
 ownership, courage, initiative and co-operation." 
 
 EDWARD N. HURLEY, 
 Chairman United States Shipping Board. 
 
 July 31st, 1919. 
 
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