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Operation Plunder

The Secret Scandal of World War II

DURING the past 25 years billions of dollars of the taxpayers' money have been appropriated, under false pretenses, by the shipping industry. The story of this looting of the federal Treasury, as it unfolds in volume after volume of the Congressional Record, is a study in twentieth-century piracy that reduces Captain Kidd, Bluebeard and other bravos of the Spanish Main to the stature of mischievous schoolboys.

The entire history of our modern merchant marine, in general, has been one of microscopic investment and astronomic profit, of deliberate fraud, misrepresentation and collusion with government officials to evade or directly violate federal law.

The shipping industry grew fat on liberal government subsidies provided by successive administrations after World War I. During World War II it set a new record in the organized manipulation of public funds for private profit. So brazenly conceived and boldly executed has been its raid on the Treasury that Senator George T. Aiken of Vermont was moved to exclaim (October 25, 1943) on the floor of the Senate:

I doubt if in all the history of the world one can find an instance of the plundering of  nation such as is going on under our very eyes today, while Congress and the people seem to take it for granted.

During the war the U.S. Maritime Commission and the War Shipping Administration spent more than $21 billion of the taxpayers' money in the construction, charter, purchase and insurance of the merchant vessels to support our armed forces, and those of our allies. Last February 18, Senator Aiken told his colleagues:

When an examination of Maritime Commission affairs has been brought up to date, it will be the most shocking story of collusion, corruption and disregard of public interest ever presented against an agency of the United States Government. 

Within the past four years hundreds of pages of evidence have been introduced into the Congressional Record to show the development of the nation's biggest scandal since Teapot Dome. Yet up to this writing Congress has failed to order any kind of comprehensive investigation of the accused government officials and shipping interests.

On the contrary, Congress has passed, and President Truman has signed, a new ship-disposal bill termed by its critics “a two-billion-dollar blunder.” This bill, i addition to placing an official seal of approval on one of the most flagrant steals of history, now makes an outright gift to the accused shipping interests of new war-built vessels representing a $15-billion investment to the American public.

THE UNITED STATES emerged from World War I with a government-owned fleet of more than 2,000 sea-going vessels, acquired at a cost of approximately $3 billion. THe problem, then, as after the recent war, was how to dispose of this tonnage. 

In 1920 Congress committed itself to a policy favoring a privately owned and operated merchant marine to carry our extensive foreign trade in times of peace and to form an adequate reserve of naval auxiliaries in the event of another war. In furtherance of this program, the United States Shipping Board proceeded to sell government vessels at bargain prices to private operators, with the stipulation that these ships must be operated at regular intervals over an established period of years on specified “essential” trade routes. Competition on these routes from cheaper foreign shipping was offset by liberal government subsidies in the form of “mail contracts.”

It was an ideal set-up for promoters: little investment required, generous and rapid profits guaranteed. The mad scramble of shipping operators to climb aboard the gravy train provided the nation with a spectacle unrivaled since the famous gold rush of '49.

Through political influence and personal wire-pulling, the choicest government vessels were knocked down to privileged individuals and companies at firesale prices, with only the merest pretense of competitive bidding.

ITEM: Harry Chandler, publisher of the Los Angeles Times and principal stockholder of the Los Angeles Steamship Company, bought the SS City of Los Angeles (formerly the German ship Aeolus) for $100,000. Bids on this vessel were advertised for 13 days while it was at sea and consequently not available for inspection by other bidders. The Shipping bOard previously had refused an offer of $660,000 from another company, and only a year before, it had rejected Chandler's bid of $250,000 for the same vessel. Just before its sale, the government spent $2,816,000 to recondition the vessel.(Senate investigation of the U.S. Shipping Board, 1935.)

Extremely liberal terms were offered purchasers of government ships. Many companies acquired new vessels without any cash outlay whatever and were able to meet payments from subsidies so generously provided by the Shipping Board.

ITEM: In 1923 R. Stanley Dollar, influential West Coast Republican, bought seven new “President” ships, which had cost the government $29 million to build, for only $3,850,000. Terms: No cash down, 25 percent in a two-year letter of credit, the balance to be paid off at the rate of five percent annually. (Ibid.)

Other sales followed the same pattern. In the first few years after the war the Shipping Board sold 220 of its best vessels, which originally had cost the taxpayers $516,174,250, for only $41,411,665—about eight cents on the dollar. (Report No. 898, 74th Congress, 1st Session, page 4.) Later, additional vessels of the fleet, costing up to $200 per ton to build, were sold for as little as $5 per ton—about 2½ cents on the dollar.

In the midst of World War II some of these same vessels were sold back to the government, after years of profitable operation in the hands of their owners, for prices up to 33 cents on the original dollar.

PENDING disposal of its wartime fleet, the Shipping Board maintained its ships in service through contracts with private managing operators. The government paid all expenses, as well as a commission to the operators in the form of a fixed percentage of gross revenue.

Although these percentages were deceptively small, this arrangement proved extremely expensive to the taxpayers. Many of the operators padded expenses, increasing gross revenues and thereby the commission paid them by the government. Companies with little cash capital realized enormous profits, paid huge dividends and, out of earnings from the government, bought government vessels at low prices with which to earn additional millions from the mail contracts.

ITEM: The Admiral Oriental Line was organized in 1922 with a cash capital of only $500 and notes given for capital stock amounting to an additional $499,500. In less than three and a half years this company earned $997,396 from its managing-operator agreements, and was able to retire from its dividends the notes given for capital stock. In 1926, without any investment beyond the original $500, the company bought the line and several ships from the government, and in the seven years that followed, with the aid of liberal government subsidies, showed a net profit of $6,767,858. (Ibid., page5.)

In 1930 the Shipping Board discontinued the percentage basis in managing-operator contacts, substituting lump-sum payments per voyage to all private operators of government vessels. Under the new arrangements, later found illegal by the Comptroller General of the United States, contractors made larger profits than ever before.

In many instances shipowners obtained a substantial increase in these payments, after a year of operation, on the plea that operation under the existing contract was unprofitable. There is no evidence that the Shipping Board ever took the trouble to verify the truth of such claims.

ITEM: In 1931 the Lykes Brothers-Ripley Steamship Company obtained an increase from $7,000 per voyage to $14,500 by asserting that an analysis of the first year's sailings “conclusively” showed there would be no profit, and very probably an “actual loss.” Subsequent investigation showed that the company actually made a net profit of $100,000 in the period it claimed loss. Through increased payments, in less than three years this company and its subsidiaries realized a net of $1,620,770 from managing-operator contracts. (Ibid., page 6.)

The record amply supports the conclusion that the examples cited here were not exceptions: they were the rule. By 1935 the government had spent more than $120 million in payments under such “temporary” agreements for operation of its vessels by helpful managing operators.

The government poured an additional $120 million, in the words of a Senate investigating committee, “down the mail-contract rat hole.” These “mail” contracts cannot be justified on any grounds of postal expediency; they were nothing more or less than concealed subsidies, by which the shipping industry obtained between $2 and $8 per mile traveled by each vessel, regardless of the amount of mail carried.

“MAIL” CONTRACTS, as a form of subsidy, had been provided in the Merchant Marine Act of 1920. The Act of 1928 reasserted and emphasized the “mail” contract-subsidy principle. However, in the new law Congress determined that such aid should be distributed under a system of competitive bidding rather than by arbitrary award.

Needless to say, this provision did not meet with unqualified enthusiasm on the part of the shipping interests and of many government officials. Immediately after the enactment of the new law a host of agents, lobbyists and representatives of shipping companies descended upon the Post Office Department to “assist” the authorities in determining the routes to be served, the character of the service to be required and the amount of compensation to be paid.

With a certification by the Postmaster General in hand, the agent the visited the Shipping Board, which obligingly certified the route and advertised for bids. Naturally, the prospective contractor who had done all the spadework always obtained the contact. The services specified in the advertised contracts always strangely coincided with the routes then being operated by these companies, and the types of ships they were using.

A shocking picture of how cynical government officials made a farce of federal law administration is offered by the stenographic records of an interdepartmental meeting to consider “mail” contracts held in Washington in June, 1929. Participating were A. Lane Cricher, of the Department of Commerce; J. Caldwell Jenkins, of the United States Shipping Board; Commander Court, of the United States Navy; and W. Irving Glover, Second Assistant Postmaster General.

Cricher proceeded to present a plea for the award of a contract to the Colombian Steamship Company, and Commander Court suggested that the Shipping Board “figure out some way of specifying type, size, speed,etc.,” to give Colombian “a preferred position.” (Ibid., page 8.)

Assistant Postmaster General Glover agreed to this plan, provided the United Fruit Company also received a contract: “...they want to get some of the money that is being passed around,” he said. Predicting “an awful howl” from the Grace Line on the United Fruit contract, he suggested a contract for that company, too: “...If there is going to be any pie, they want to be in,” is the way he put it. (Ibid.) 

IN 43 of 46 contracts let, there was only one bidder; only six were let at less than the maximum rates allowed by law. In only one instance was an “outsider” able to get the contract—and less than a year later he was bought out by the company for which this contract was originally tailored. 

Detailed analysis of some of these contracts reveals numerous instances of duplication of service, subsidized operations of no postal or trade value whatsoever, delay in the mails caused by giving preference to slow vessels of favored companies and outright perjury on the part of some of the contractors.

ITEM: A contract let to the Gulf Pacific Mail Line, Ltd., contained the customary warranty that the contractor had not employed any person to solicit or secure the contract for a commission or contingent fee. Later the company admitted paying one Elisha Hanson a fee of $25,000 for aid in securing the contract. The route itself was without postal value and of more trade value to Canada than to the United States. The contractor, moreover, failed to construct a new vessel, as required. (Ibid., page 10.)

The compensation to be paid on these contracts depended on the speed and tonnage of the vessels employed. In many cases the speed of vessels was purposely misrepresented for the record, and the owners collected large sums in excess compensation from the government.

ITEM: A former first officer of the SS Margaret Lykes, operated by the Lykes Brothers Steamship Company, testified that he was instructed to falsify the ship's log so as to indicate an average speed of 13 knots per hour in ordinary weather. Actual tests by Navy and Commerce Department experts demonstrated that this vessel never had been capable of such speed. Excess payments on this ship alone: $437, 123.. (Ibid., page 13.)

The Senate investigating committee estimated that “unjustified and inexcusable classifications” alone resulted in excessive payments to contractors of $15,429,658 up to January 1, 1935.

Now the avowed purpose of the ship subsidy is to enable American shipping to compete with foreign vessels on equal terms. The “mail”-contract pie was so big that even the intercoastal operators, competing only with other American services, received a slice. Even more ironic were the contracts given United States companies which confuted the major part of their shipping activities under foreign flags, and thus in many services competed directly with other American shipping. IN effect, the government helped support the very competition that allegedly was responsible for the need of a subsidy in the first place. 

ITEM: The United Fruit Company held three “mail” contracts under the 1928 Act. With its subsidiaries, this company in 1935 owned 95 vessels: 82 of these were built in foreign yards and 64 were operated under foreign flags. (Ibid., page 16.)

ITEM: The Strachan Shipping Company owned 80 percent of the South Atlantic Steamship Company of Delaware, holder of one “mail” contract. THe parent company acted as the United States agent for shipping interests under the British, Dutch, Swedish, German, Italian and Japanese flags. (Ibid.)

In 1934 the Postmaster General informed President Roosevelt that 42 of 43 active ocean “mail” contracts were liable to cancellation because of flagrant irregularities and “arrogant and open defiance of the legal requirements for competitive bidding.”

WHAT KIND of merchant marine did we obtain by the expenditure of more than $240 million in public funds? The Senate committee in 1935—four years before the opening guns of World War II—sadly concluded: “The American merchant marine is neither adequate nor is it in any true sense privately owned.”

It was not adequate because it ranked third in tonnage, fourth in speed and last in regard to the age of its ships, among the principal maritime nations of the world.

It was not privately owned because the government had “invested,” in loans and ship-sale mortgages on contractors' vessels, an amount equal to $139 for every $100 interest held in these companies by their stockholders. This is a rock-bottom estimate. It does not include the $240 million spent in managing-operator and so-called “mail” contracts—which government money was responsible for the major part of the contractors' total capital. Nor does it include an excess of $451 million paid by the government to build certain vessels over the book value of these ships in 1935.

This article appeared in the May 13, 1946 issue of the magazine.