This Business of Shipping
I
ON June 29 of last year Congress passed the Merchant Marine Act of 1936, the long-awaited new charter of American shipping. It was almost nine months later that President Roosevelt designated a chairman for the United States Maritime Commission, the central body of administration responsible for making the act work. The extraordinary length of that interval and the notable character of the appointee emphasized the importance and complexity of our shipping situation. For the appointee was Joseph P. Kennedy, returning to Washington after acknowledged administrative success as chairman of the Securities and Exchange Commission. He was confirmed with almost pathetic eagerness by the Senate, and embarked upon the most hazardous and perhaps the most thankless task in Washington to-day.
The shipping industry stands in as great a need of strong administrative association with Washington as any interest in the country. For four years it has awaited the development of a new policy; for when Congress gave the President, in June 1933, the right to cancel or modify the ocean mail contracts it meant that the old policy was done. But Mr. Kennedy has more to do than merely to administer a new policy. It is his job to foster a consistent shipping policy. If past errors are not to be repeated, he must guarantee at least five years’ adherence to a single programme for developing the American merchant marine, and must prepare for the orderly carrying out of that programme over twenty years of uninterrupted long-range planning. The danger is not that Mr. Kennedy will fail, but that he will leave too soon.
Ever since 1914, short-range planning has vitiated the growth of the American merchant marine into any sort of ordered maturity. When the war broke out in Europe we had a fleet which carried about 10 per cent of our commerce. When most of the ships that carried the other 90 per cent went home for war duty, depression descended upon us out of a clear sky. We suddenly found a huge unemployment problem in our cities, riots for shelter in churches, bread lines and soup kitchens, prices falling because we could not ship abroad, and factories closing because we could not get foreign supplies. It was our first lesson in the value of a modern merchant marine.
In 1916 we created the United States Shipping Board and then the Emergency Fleet Corporation. We built the Pipestone County, and the Blue Hen State; we built Hog Island and Great Lakes ships, concrete ships, an immense fleet, and we poured into it and its administration over three and a half billion dollars. As usual, when a country short of shipping needs ships, prices rose. We paid an average of $150 a ton, and in 1920 we had 1926 vessels acquired at that price. We then liquidated. We sold for $33 a ton, disposing of 1450 ships which had cost the government $2,300,000,000 for the 1921 price of about $340,000,000. We continued to operate a hundred other vessels at an ultimate net loss to the government of about $120,000,000.
Despite this colossal loss to the government, however, it must be remembered that we put the United States back into the shipping business. Our ships began to carry up to 40 per cent of our commerce, later dropping down to between 30 and 35 per cent and consistently staying there. Those Pipestone Counties, Black Herons, and the like, — 2000, 3000, and 4000-ton cargo ships, — are the backbone of our shipping to-day, the modest freighters which the public never hears about. We have built practically none since. When you read that 85 per cent of our foreign trade fleet will become obsolescent in four or five years, it is these ships that are meant. For we built a merchant fleet without any programme for replacement.
To-day one looks back with more regret at that mistake than at any other. Beside the 26-billion cost of the war the 3½-billion shipping bill seems an inevitably minor casualty of our former neglect. One quarter of that sum, spread over the previous twenty years, would have provided us with most of the ships we needed. Having been so extravagantly improvident once, we continued on the same course. The Merchant Marine Act of 1920 made only indirect and half-hearted plans for the replenishing of our merchant marine with new ships. It passed the coastwise provision forbidding direct voyages between our coasts and our insular possessions to foreign ships; it offered preferences in rail rates to goods shipped on American ships, and it began to ‘take the government out of shipping.’ The government loans under this act produced only fifteen ships, all coastwise, and then ceased to influence shipbuilding.
That lack of foresight almost at the start of our shipping programme may be traced down to the present in one outstanding case. Shortly after the war the Munson Line put four new ships on the East Coast run to South America and cut the time from New York to Buenos Aires to twenty-one days. The American Legion and her three sister ships were the blue-ribbon ships of their day. But such has been engineering progress since the early twenties that now much larger ships cost less to operate per voyage, make faster time, and carry more cargo. Twenty shipping lines now call regularly at Buenos Aires, and at least nine ships superior to our once smart liners fill the eyes of our good neighbors. Against the crack 22,000-ton British Royal Mail boats, to say nothing of the 25,000 to 30,000-ton German and Italian ships, our 13,750-ton Munson liners still plough their twenty-one days to New York. Foreign lines are making money, but in 1934 the Munson Line went into bankruptcy and so remains.
It was not until 1928 that a real attempt was made to build ships for our foreign trade. Under the Merchant Marine Act of that year a system of mail contracts was developed which frankly had the purpose of assisting the operation of American ships on essential trade routes. More important than the 27 million dollars allocated for this purpose was a revolving fund of a quarter of a billion actually devoted to loans to shipping companies for the purpose of building new tonnage. To that era we owe the Manhattan and the Washington, which have proved to be splendid and economical ships in every way and have at last put our flag back in the North Atlantic at the stern halyards of big modern ships for the first time in a generation. The Dollar Line got the President Coolidge and the President Hoover, and provided the best argument for new ships by operating the 22,000-ton new liners at the same fuel cost per day as the old 13,800-ton President Harding, which the United States Lines has to run at a loss until it can build a third ship on its New York-Havre run. The Grace Lines built 52,000 tons, and their five new crack ships are preëminent to-day on the West Coast of South America. The Mediterranean route, the West Indies and Caribbean services, matched our competitors, and with our new ships to the southern Pacific we have won the preferred position in the trade with Australasia.
In all thirty-three merchant ships of 366,000 tons were constructed under the 1928 act, beside nine tankers of about 80,000 tons; and a further 270,000 tons were reconditioned. The authorized construction loans amounted to about $116,000,000. That this method of encouraging shipbuilding has been sound is proved by the fact that of the $145,000,000 lent for shipbuilding, under both the 1920 and the 1928 acts, only $3,000,000 is in default. Considering the fact that the world depression has been particularly severe on shipping, and especially on American shipping, this record will bear comparison with that of any American interest to which the government has lent money.
II
This brief retrospect of the recent history of our shipping omits the political factors, under which each change of party requires that much of what has been done by the preceding Administration should at once be shown to be iniquitous and extravagant. Government loans gave us the bulk of our blue-ribbon fleet, and government construction gave us the war fleet; yet because, for a time, ships were government-operated the Republicans capitalized for years the errors of the old Shipping Board and of the Emergency Fleet Corporation. Nevertheless, the government contribution to our mailcontract fleet exceeds by almost one third that of private American shipowners. Even in the thirty-three new ships built after 1928, private equity amounted, when the Senate reported on it last year, to only 48 per cent, with the government still owning the remainder. Inevitably, government operation per se steadily decreased. Today only five small lines remain in which the Maritime Commission shares the management with private agents. They comprise thirty-nine ships, aggregating less than 300,000 tons, about one tenth of our entire fleet in foreign service. And even these arrangements, it is promised from Washington, will soon terminate; so that nowhere on the high seas will the shadow of government-aided competition be cast on the private operation of our ships.
Yet, in spite of the restriction of actual ship operation, government responsibility for our shipping has steadily increased, and the government equity involved, as the above figures clearly indicate, has certainly not decreased. With few exceptions, ships have been built only through government aid, and shipping operations on almost all our essential lines have proved possible only through government grants. The necessity for these grants has not precluded violent disputes over their form and character. We have run ships outright, we have paid by the voyage; we have made up losses to manageroperators of our ships; and, lastly, we have resorted to the subterfuge of the mail subsidy, paying our ships roughly ten times the actual cost of carrying the mail.
In June 1933, Congress gave President Roosevelt the power to cancel or modify all mail contracts. In the long investigation that followed, the trail of politics again entered our shipping with the change of party. The report of Senator Black revealed many evils. Complicated groups of holding companies carried on many businesses other than shipping; executives received pay out of proportion to the status of the company; there were partnerships in foreign-flag lines and unwarranted subsidies for coastwise lines. The report lost, much of its potentiality for real value to the public, however, by its violently partisan character. Though a true bill on the whole, its distortions of animus and prejudice have made the task both of the President and of Mr. Kennedy far more difficult with the shipping companies. And much of this suspicion and distrust has found its way into the otherwise highly constructive Act of 1936.
As the present charter of our shipping, this act is probably the bestrounded piece of merchant-marine legislation produced in this country since the war period. Many of its shortcomings may still be corrected by intelligent and understanding administration, as Mr. Kennedy already knows. It is a great improvement over the 1928 act in one conspicuous feature. Under that act, the government lent money to shipowners to contract for ships in American yards, the shipowner paying to the shipbuilder, even though in deferred payments, the full American price. This was not putting the American shipowner on a real parity with his foreign competitor. Since the average figure now used in Washington as to the relative cost of a comparable foreign ship is 60 per cent of the cost of an American ship, the moment an American ship went to sea and competed with foreigners its actual competitive value fell from a unit of $1,000,000 to one of $600,000. These capital charges added materially to the cost of operating an American ship.
Under the present law the shipowner pays the comparable foreign price for his ship, and the government pays the American shipbuilder the difference. This is a wise adjustment of the government’s bounty, so that it now promises to aid both parties to the transaction. Henceforth the investment of the American shipowner competing with foreign ships will not carry an extra burden that sometimes exceeded 50 per cent.
Moreover, instead of receiving a camouflaged mail subsidy, the shipowner will now receive an outright grant based on the comparative cost of operating his vessel with his principal foreign competitors on the same trade route. The gross amount of these subsidies is estimated to approximate the mail grants, at somewhat less than $30,000,000 a year; but in particular cases considerable revision will be made, the basis for the new subsidy being the actual service to American trade performed on an essential trade route. In frankness and plain intention this reform has much to commend it, and has been generally accepted by an American public which all political observers reported as hostile to ship subsidies throughout the decade following the war.
III
Here the broad virtues of the act come to an end, and its multitude of qualifications, prohibitions, and regulations enter into the picture. One shipping executive has counted fiftyfour rulings made in the act as to things shipping companies must not do. There are provisions that shipping executives must not be paid more than $25,000 a year, that shipbuilding companies must not make more than 10 per cent profit, prohibitions against holding companies, against business connections with foreign-flag ships, against lobbying, against collusive bidding, against every form of iniquity divulged in the hearings before the Black Committee. What the shipowners like even less than these hampering restrictions is the requirement that they must finance 25 per cent of the cost of their new ship ‘to the Commission,’ which they interpret as 40 per cent of the foreign cost, an apparently highly burdensome requirement on an industry which is only now beginning to recover from the depression. And what the shipowner likes least of all is the broad labor charter in Title III of the act, establishing wage and manning scales at the highest existing levels and making it the responsibility of the Maritime Commission to see that this ‘social contribution ’ to the standard of living of the American seaman is paid out as part of the subsidy he receives from the government.
These are serious objections, but none of them are fatal ones. The serious outlook for the fut ure lies rather in the actual complexion of the American shipping business itself, its status as a business and not as a ward of the government. It is not a large business. Its gross annual income is estimated by shipping men themselves as not greatly over $300,000,000, or about the size of our candy and confectionery business. In the hearings on the present Shipping Act it was divulged that, with the exception of one mainly industrial line, the liquid capital of all the American shipping companies operating mail contracts is only about $4,000,000. It is not an integral part of our great organizations of capital. Railway and banking capital is interested, for example, in relatively few lines, mainly the smaller freight companies.
In these circumstances its prospects of replenishing its ships without the aid of the government are small, as has been proved by the almost complete stoppage of building when government assistance failed. The condition of our shipping industry at the present time reflects not only inability to build ships, but neglect on the part of the government to repair a deficiency which has placed us in a hazardous position in international trade. Since 1933 the size of our foreign-trade fleet has been forced into third place by that of Japan. We have somewhat over 2,700,000 tons (with Germany close behind), compared with Japan’s approximately 3,000,000 and England’s great superiority at well over 13,000,000 tons. But only half of our tonnage is capable of the modest speed of twelve knots, and we are on a level with France and Holland in striving for fourth place behind England, Japan, and Germany. In ships ten years old or less, only one sixth of our fleet can be counted and we are in eighth place, Italy and Norway also leading us. Finally, in ordinary, runof-the-sea freight tonnage, in the little ships which carry the big freight, we are at the bottom of the list of the world’s maritime nations with not a replacement since 1921.
It is reassuring that the first plank in Mr. Kennedy’s programme is to embark at once upon the building of 150 of these freight ships, thus plugging up the greatest deficiency in the American fleet. The next point of replenishment will be in the group of combination freight and passenger liners. Between forty and fifty of these ships will modernize our fleet to competitive status. Tankers will also be given some aid, though on the whole the industrial fleet has shown more ability to take care of itself than any other part of the shipping community. Thirty tankers built and building over the past two years have constituted our entire shipbuilding programme since the depression. Of the six larger companies of the American fleet reputed to be in good health financially to-day, three are our industrial carriers of oil, steel, and fruit.
But behind the programme of necessary replenishment there are grave questions which our merchant marine will have to answer. In the first place, can the investment be found for new ships? Even on the limited scale asked for by the government, this is going to be difficult for many of the lines, with existing equities already possessed by the government and repayments under way. Some have gone so far as to suggest that it will be franker and more wholesome in the long run for the government to own the new ships itself, and lease them on a charter-hire basis to the companies on a twenty-year plan. This has the great advantage of easy payments at the start. Moreover, it would not, according to its proponents, cost the government so much as the twenty-year deferred-payment plan, with its substantial burden to the companies of a heavy initial down payment.
The government has so much title to our ships at present anyhow that the difference would be in principle rather than in practice. And, since a ship lasts only twenty years, what is wrong, from the shipowner’s point of view, with the plan which hires to him ship service for this period, with the title at the end of it not in his hands but the government’s?
IV
Another problem for the shipping industry and the government to consider is whether we need so large a fleet. We probably do not, provided that our replacements are up to the standard we showed we could build in the 1928 programme. It is not in more ships or in bigger ships that our greatest need lies. It is in well-managed ships, wedded to an established trade route where there is actual business for American ships, competitive with our rivals on a healthy give-and-take basis. It will be unwise to look for ton-for-ton replacement, when it is also well known that a newer ship, like a modern automobile, will do twice the work of an old one, owing to greater speed, cheaper fuel consumption, and many other factors of which all shipowners are aware.
Why, again, this insistence on cost differentials as the sole determinant of the difference between American and foreign ships? If we want to establish ourselves as carriers of prime commodities upon which the life of the nation depends, — such as rubber, for instance, — we should put ships on the necessary runs whatever the disparity of operation. On the other hand, no formula should lead us too far into the crowded shipping lanes of the north Atlantic. If prestige is a greater factor than trade in the ship lanes to the River Plate, then it is a superior interest of the American people and should be paid for on that basis. In other words, the Maritime Commission will be wise if it imitates the Tariff Commission, and demands latitude in deciding what differentials to pay American shipbuilders and operators in conformity with its own practical experience, and in accord with half a score of imponderable factors, beside that of flat differences in costs, which would never show on an accountant’s ledger.
What the shipping business needs most is a far better long-range accord in its necessary partnership with the government. Shipping itself, modernized in approximately its present volume, is absolutely indispensable to the American people. We cannot afford another solution to the shipping problem which will leave us in exactly the same predicament in five years’ time. The present deficiencies can be made up in ships and even in solvency of shipping companies; but past refusals to plan for the future and to stay by the programme profoundly challenge the new Maritime Commission.