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all governmental agencies dealing with the merchant marine. Excessive costs assessed against shipping en- terprises by parent companies, sub- sidiaries, and affiliates should be abolished. Without rationalization along the lines indicated, no system of subsidies will be able to develop and maintain an adequate and per- manent merchant fleet. “Inasmuch as government aids to shipping have as their objective the establishment of an efficient and ul- timately self-sustaining merchant marine, the essential trade routes to be served should be determined by analyzing the flow and volume of traffic, with due consideration to such other factors as military re- quirements, trade policies, industrial and agricultural needs, and the pub- lic interest generally. Differentials in costs of ship construction and ship operation should continue to form the basis for computing the amount of government aid required for each subsidized line, The differential in domestic and foreign eonstruction costs is the major competitive disad- vantage which the subsidy is de- signed to remove. “TWnder the present mail contract system, the government has not par- ticipated adequately in the various construction programs, and _ has therefore not maintained even a semblance of control over the price of ships, notwithstanding that the construction differential has in each ease been used as a factor in com- puting the amount of subsidy award- ed, “In view of the above the follow- ing recommendations are made: (1) The present system of aid in the form of compensation for the earriage of ocean mails should be replaced by specific subsidies granted for the maintenance of essential services, but should not be extended to lines in protected trades. (2) Subsidy contracts should be based on differentials in building and operating costs, should be suffi- ciently flexible to permit of equitable readjustment as changes in condi- tions occur, and should provide for necessary replacements. (3) Subsidies should be differen- tiated in three broad classes: (a) A subsidy to cover the construction differential; (b) A subsidy to cover the operating differential; and (c) A trade penetration subsidy. (4) Money for subsidies should be appropriated from general treas- ury funds and not, as at present, be provided indirectly through some _ other department of the government. (5) Subsidies should not be grant- ed to more than one line competing in the same trade. Building Cost Differential Subsidy HIS form of subsidy, paid to the shipowner either as a lump sum on completion of the ship, or in fixed installments (the terms to be de- termined at the time of the agree- ment) would bind the owner to oper- 10 ate the vessel in a designated serv- ic or services, under the American flag, and to comply with ‘any other requirement stipulated by the gov- ernment, “Should the subsidy be paid in in- stallments, the number and duration of the payments would be limited to the estimated useful life of the ves- sel, Provision could be made to dis- allow payments for inactivity in ex- cess of a stipulated period, and for discontinuance of payments and possession of the vessel by the gov- ernment for more serious violations of contractual obligations. “In consideration of the benefits accruing to builders, they too should be parties to subsidy agreements, and together with owners should be re- quired to maintain uniform cost ac- counts, to be rendered to the desig- nated governmental authority in ap- proved form, and to submit to exam- ination of records when so requested by authorized representatives of the government, ‘“‘While the shipbuilding cost dif- ferential subsidy would as a rule apply only to future ship coonstruc- tion, consideration should be given to the advisability of compensating, through a modified form of ship- building subsidy, carrying high differential charges on account of vessels built during re- cent years, Operating Cost Differential Subsidy UBSIDIES under this head would be granted to operators of Amer- ican flag vessels in the foreign trade who contract with the government to maintain service of a_ stipulated character over a fixed period, and would be based on the operating dif- ferentials which handicap the Amer- ican operator. “Contracts involving operating cost differential subsidies should provide for payments by the government at stated intervals, and should also provide that the government or the operator may at any time, and should at stated periods, initiate a review and possible revision of the amount of subsidy originally agreed upon. Except in cases where extraordinary handicaps or peculiar advantages, due to traffic or other conditions, justify a modification of standard practice with regard to. subsidy awards, the amount granted should cover only the actual differential in physical operating costs, and should not take cognizance of such items as equipment and supplies for passen- ger ships; repairs, materials. serv- ices, or supplies contracted for abroad: interest on indebtedness or invested capital; insurance, depreci- ation; damage claims or administra- tive charges, The operator shonld be compensated for the carriage of mail en a poundage basis, and should be required by the terms of the subsidy contract to set aside an adequate re- serve for depreciation. As in the case of shipbuilding cost differential sub- sidies, the operator should also be MARINE REviEw—April, 1934 owners who are. required to maintain, and to make available to the government, in ap- proved form, records which reflect the financial results of operations. ‘Operating cost differential sub- sidies might well take into account the disadvantageous conditions sur- rounding ship operators who com- pete for trade in new fields, as con- trasted with operations conducted in well-established services. In deter- mining the amount of subsidy for operators engaged in what may be described as ‘‘trade penetration,’ due allowance should be made for the peculiar conditions involving lesser cargoes and other handicaps, under which they compete with for- eign lines long entrenched in the particular trade. In the present sys- tem of mail subventions the trade penetration factor may have been somewhat abused. To prevent a re- currence of this situation, considera- tion should be given to the establish- ment of a definite trade penetration subsidy, to be used only in special cases justified by the foreign trade policy of the government. Method of Procedure HE system of direct subsidies should be administered through a joint committee of experts represent- ing government departments having a direct interest in the development of the merchant marine. A ship sub- sidy committee composed of repre- sentatives of the department of state, commerce department, trea- sury department and navy depart- ment would effectively coordinate the government’s interest in matters of policy and in the final determina- tion of individual contracts. Admin- istration of each subsidy contract in all its details should, however, rest in the commerce department. “Introduction of any new subsidy program should be gradual to pre- vent demoralization of the industry and for competitive reasons. The fol- lowing procedure is suggested: (a) Determine the type of subsidy and method of administration. (b) Determine the services to be subsidized. (c) Provide shipping lines now subsidized with opportunity to accept the new subsidy plan where it is found that these lines are entitled to such treatment. Cancel sub- sidy contracts of shipping lines found not to be entitled to aid, giving due considera- tion to the interests of the company involved. (d) Present operators of subsid: ized lines who are unwilling to continue under a new sub- sidy shall have existing mai! contracts cancelled. Due con- sideration should be given to their interests and the inter- ests of the government before inviting bids from or nego- tiating with other overators. (Continued on Page 56)