It has been strongly urged by those who favor the exemption of the owners of coastwise ships from the payment of Panama tolls that the freight rates paid by shippers both by coastwise water routes and, what is far more important, by the all-rail lines across the country will be lower by the amount of tolls not paid for the use of the Panama Canal. This argument assumes that the carriers by water will compete so actively with each other and with the railroads as to bring the rates as low as the cost of the service will allow, and that if the cost of transportation by water between the two seaboards is increased by canal tolls the rates of the water carriers must be, and the charges of the rail lines will be, higher by the amount of the canal tolls. This reaches to the core of the theory of rate making. Will the adjustment of the rates of the coastwise carriers and of the railroads be the result of a rate-controlling competition among the water lines, and will it be the policy of the railroads to compete actively with the coastwise carriers for practically all of the traffic moving between the two seaboards?

Perhaps the most convincing evidence upon this question is not that afforded by the theory of transportation rates, but by testimony of men who make or control rates. The manager of a large steamship company engaged in the trade between the two seaboards of the United States remarked that "it has always been my theory that the ship rather than the shipper paid the tolls." The head of one of the largest manufacturing corporations of the United States, a corporation that operates a large fleet of ocean steamers, gave it as his opinion that the rates of freight between the two seaboards will not be affected by the tolls upon coastwise shipping.

Transportation charges are fixed primarily with reference to what the shipper can afford to pay-what the traffic will bear-and only secondarily with regard to the cost of the service. Carriers, whether by rail or by water, can not disregard the costs of the service, but they make their rates such as they think shippers can afford to pay. Moreover, it is the practice of steamship lines when operating between common termini to adjust their rates and services in conferences. The general public has been made aware of this by the evidence presented to the Merchant Marine Committee of the House of Representatives, and it is coming to be a matter of common knowledge that the informal organizations or "conferences" of steamship companies are able to regulate competition and to prevent rates from being forced thereby to the level below which they could not be forced without making the business unprofitable. The relation of the coastwise steamship companies with each other will be so regulated in their conferences that their charges will tend to be what the traffic will bear; that is, what shippers will pay to have their goods transported by water instead of by rail. The tendency of the coastwise carriers operating through the canal will be to adjust their charges with reference to the schedules of railroad rates. In other words, the charges of the steamship lines will not be based upon the costs of service, including the tolls, but will be what the traffic will bear. Thus, whether there be tolls or not, the rates paid by shippers patronizing the coastwise lines will be the same.

The exceptionally large producers and traders who ship goods in vessels which they own will (and those who use chartered vessels may) enjoy lower transportation charges between the two seaboards of the United States, if the Government relieves them from the payment of Panama tolls. But, as I pointed out in the report upon Panama Canal traffic and tolls, "most of the traffic through the canal between the two seaboards of the United States will be handled by regular steamship lines and only a minor, and probably a decreasing, percentage of the total will be transported in individual vessels owned or chartered by shippers. The traffic handled by the regular lines more than trebled during the six-year period (ending with 1911), while that carried by individual vessels decreased more than 50 per cent." In 1911 about one-eighth of the total freight carried by water between the two seaboards of the United States was transported by individual vessels chartered or owned by the shippers while the regular lines had seven-eighths of the tonnage.

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In so far as the railroads compete with chartered vessels for lumber, coal, ore, and similar traffic, the canal tolls will be of advantage to the railroads. This advantage, however, will be more theoretical than real, for it is not probable that the railroads can compete with the carriers by water for bulk cargoes of lumber, coal, ore, and similar products. The railroads will be obliged to allow that traffic to go by water and the charter rates on that traffic will not be affected by rail competition.

In considering the effect of the canal upon railroad rates, the fact should be borne in mind that only a small portion of the total traffic of the transcontinental railroads will be subject to rail and water competition. It has been estimated that if the transcontinental railroads maintain their schedule of rates they may possibly lose onetenth of their through traffic to the coastwise carriers. It will doubtless be the policy of the railroads to allow a portion of the traffic that might, by active rate competition, be held to the rails to be shipped coastwise through the canal. It will be more to the

advantage of the railroads to maintain profitable rates upon their traffic as a whole than to disturb their intricate rate structure for the sake of holding that small portion of their traffic for which the water carriers may possibly compete.

The effect which canal tolls upon coastwise shipping will have upon rail and water rates, and the adjustment of the charges of coastwise carriers and the railroads engaged in handling traffic between the two seaboards of the United States may be summarized as follows:

The rates on traffic handled by regular steamship lines between the two seaboards will be but slightly affected by canal tolls. Only such producers and traders as use vessels which they own or charter for the shipment of full cargoes will profit by the exemption of the coastwise shipping from tolls. Probably 99 out of every 100 shippers will pay the same rates whether there be tolls or not. Most of the intercoastal traffic will consist of general commodities and package freight handled by the established steamship lines. Bulk cargoes of lumber, coal, ore, and heavy steel products will comprise a relatively small share of the total traffic. The rates charged by the several steamship lines will be the same. The charges will be regulated by agreements among the competing companies and will be fixed primarily with reference to what the traffic will bear, and only secondarily, if at all, with reference to the cost of the service to the carriers. The several steamship lines will maintain relatively stable schedules of charges which will ordinarily be adjusted with reference to the even more stable schedule of commodity and class rates maintained by the transcontinental railroads and their eastern rail connections. If the regular steamship lines are required to pay Panama tolls, their payments to the Government will be a part of their operating expenses, which will thus be increased by the amount of the tolls. If the steamship companies are exempted from the payment of tolls, they will thereby receive a subsidy equal to the amount of the tolls not collected by the Government. Secretary of State Knox was entirely correct when he stated in his reply to the note of Sir Edward Grey that

"The exemption of the coastwise trade from tolls * granted by the United States to that trade."

is merely a subsidy

This subsidy to the coastwise shipowners, moreover, is not needed. The coastwise carriers are prosperous; they are protected against foreign competition; they do not need further Government assistance.

The foregoing analysis sets forth in a brief way that the coastwise shipowners, rather than the general public, will profit from the exemption of the intercoastal carriers from Panama tolls, and that the rates between the two seaboards by rail lines and water lines will probably not be made lower by granting the coastwise shipowners exemption from canal tolls. The report upon Panama Canal traffic and tolls, submitted to the Secretary of War in 1912, contains the following economic arguments against toll exemption for coastwise carriers. The arguments presented in this statement, it will be observed, do not consider the international questions that will arise if the American coastwise shipowners are exempted from toll payments.

ARGUMENTS AGAINST FREE TOLLS FOR COASTWISE SHIPOWNERS.

The arguments in favor of charging all vessels, American and foreign, the same canal tolls and in opposition to the policy of omitting or remitting tolls upon American coastwise shipping may be summarized as follows:

1. It is not necessary to relieve coastwise shipping of canal tolls as long as foreignbuilt ships are not allowed to engage in the domestic commerce of the United States. American shipowners have a monopoly of the coastwise trade. The canal will greatly increase the demand for coastwise transportation, and the rates that may be charged by water carriers between our two seaboards will be high enough to make their business profitable. Coastwise shipping will be increased in tonnage in proportion to the enlarged demand for transportation facilities.

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2. The rates charged by steamship lines between ports on the Atlantic and ports in British Columbia will probably be the same as the rates of the steamship lines operating between the Atlantic and Pacific seaboards of the United States. The coastwise steamship lines operating through the canal to and from Canadian and British Columbian ports will be in competition with the lines operating between the two seaboards of the United States, and it is not to be expected that the lines serving Canadian and American ports will act independently of each other. In all probability the rates of the several lines, American and foreign, will be fixed in the "conferences" of the interested lines, and it is not to be expected that the rates to and from British Columbian ports will be lower than the rates between the less distant places on the two seaboards of the United States.

Shippers in British Columbia and Canada will be able to charter vessels at lower rates than the shippers in the United States will have to pay, for the reason that American producers and merchants will, unless our navigation laws are changed, be able to secure the services only of American vessels, which, as compared with those under foreign flags, are more expensive to build and to operate. However, as has been explained in earlier parts of this report, a relatively small share of the tonnage between the two seaboards of North America will be shipped as full vessel cargoes. All but a comparatively few of the largest shippers will employ the services of line

steamers.

The producers and exporters of lumber from the Northwestern States of the United States are desirous of being relieved from the payment of canal tolls in order that they may thereby more readily compete with their Canadian rivals. Lumber is well adapted to shipment as full cargoes in chartered vessels, and the exemption of coastwise shipping from the payment of canal tolls would somewhat increase the profits of the Northwestern lumbermen. *

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The large exports of lumber from Washington and Oregon are shipped mainly to foreign countries, and can be transported in foreign vessels at the same charter rates as are paid by British Columbian exporters.

3. The third argument in favor of relieving American coastwise shipping from Panama tolls-that the tolls charged will be added to railroad rates-assumes an improbable adjustment of rail and water rates. Those who contend that the traffic carried by rail between the eastern and western parts of the United States will be charged rates increased by the rate of canal tolls assume that the rail charges must be and will be controlled by the coast-to-coast water rates, and that the schedules of railroad rates will be fixed at such differentials above the water rates as the railroads can charge and secure traffic in competition with the rival water lines. In order to bring about this adjustment of rail and water rates there must be, first, active, ratecontrolling competition among the water lines, and, second, it must be the policy of the railroads to fix rates so as to compete actively with the carriers by water for practically all traffic moving between the two seaboards. Will those conditions exist?

It is the practice of steamship lines, when operating between common termini, to adjust services and rates by "conference." The informal organizations or conferences of steamship companies are able to regulate competition and to prevent rates from being forced by competition to the level below which they could not be forced without making the business unprofitable. When several steamship lines operate over established routes and serve the same sections, they are able, by agreements and understandings with each other, so to limit competition as to make their services and rates at least partially monopolistic. Unless prevented by effective Government regulation, steamship companies will, like railroad companies, steadily increase the monopolistic character of their service.

If this analysis of the relation of steamship companies with each other be correct, it follows that the rates charged by steamship lines between the two seaboards of the United States will be, or will tend to be, not the lowest rates at which traffic can be profitably handled, but rates as high as the interested steamship lines think the rates can be put without limiting the growth of traffic or without losing tonnage to the railroad lines. Steamship companies, like railroad companies, will tend to charge what the traffic will bear: and steamship traffic will bear such rates as shippers will pay to have their goods transported by water instead of by rail. If this be true, the tendency will be for carriers by water to adjust their charges with reference to the schedules of railroad rates. In so far as this practice of rate making prevails, it will be impossible for the carriers by water to add the canal tolls to their rates. Whether there be canal tolls or not, rates by water carriers will be such as the traffic will bear; the upper limit of what traffic by water will bear will be the lower limit to which rates are brought by the railroads; and the tolls will be paid by the owners of the steamship lines, instead of by the shippers, in additional water rates.

In the case of chartered vessels, however, the shipper, and not the owner, of the vessels must bear the burden of the canal tolls. Charter rates will necessarily be increased by the amount of the canal tolls; and in so far as railroads compete with the chartered vessel for lumber and similar traffic, the canal tolls will be of advantage to railroads. This advantage, however, will be more theoretical than real. It is not probable that the railroads can, in any event, compete with the carrier by water for bulk cargoes of lumber, coal, and similar products. The railroads will be obliged to allow that traffic to move by water. They will not run the risk of depressing their general schedule of commodity and class rates for the purpose of preventing chartered vessels from securing traffic that can be handled between the two seaboards of the United States for $5 per ton.

It will be the policy of the railroads to allow a portion of the traffic that might be held to the rails to be shipped coastwise through the canal and to maintain rates. upon the traffic which can readily be prevented from taking the canal route. It is probable that the railroads will adopt the general policy of surrendering without serious struggle the minor portion of their traffic in order to maintain profitable charges upon the major share of their tonnage.

The effect of canal tolls upon rail and water rates and the adjustment of the charges of coastwise and all-rail carriers handling traffic between the two seaboards of the United States may be summarized as follows:

Producers and consumers would not secure the major share of the benefits resulting from the remission of tolls upon coastwise shipping using the Panama Canal. On the traffic handled by steamship lines between the two seaboards rates will be but slightly affected by canal tolls. The coastwise traffic between our Atlantic and Pacific ports will consist mainly of general commodities and package freight handled by the established steamship lines. The rates charged by the steamship lines, being regulated by agreements among competing companies and being fixed with reference to what the traffic will bear, will presumably be as high as traffic conditions warrant, regardless of tolls. The several lines will have uniform and relatively stable schedules of charges and the rates of the steamship lines will ordinarily be adjusted with reference to the stable schedule of commodity and class rates prevailing upon the transcontinental railroads and their rail connections. If canal tolls are charged, the operating expenses of the steamship companies will be increased by the amount of the tolls and their net profits will be lessened by the same amount.

Charter traffic between the two seaboards of the United States will be limited to a few commodities handled as bulk cargoes by or for the exceptionally large shipper. Chartered vessels will not compete with the regular steamship lines to such an extent nor in such a manner as generally to regulate the rates charged by the steamship lines on the greater portion of their traffic.

4. The contention that, unless coastwise shipping is relieved of Panama tolls, there will be an insufficient supply of American ships and that this condition will bring about the admission of foreign-built ships to our domestic trade need not be given great weight. If the canal brings about a large demand for coastwise transportation facilities it will be profitable for American capital to invest in ships to provide those facilities. If there should prove to be a permanent scarcity of American ships to handle the coast-to-coast traffic, it is probable that the Congress can and will devise methods of aiding American shipping without closing American shipyards to the detriment of our Navy.

5. It is earnestly argued by those who favor relieving American shipping of Panama tolls, that the policy should be adopted in order to give further aid to the American merchant marine. When subjected to analysis this argument loses force. Our shipping employed in the foreign trade needs assistance, but our coastwise marine has a monopoly of the coastwise trade and does not need further aid. In 1911 there were 3,537,750 tons of American ships enrolled for the domestic trade on the AtlanticGulf and Pacific seaboards. The increase during the preceding decade had been 38 per cent. There is thus a relatively large and healthily increasing tonnage of coastwise shipping, and the opening of the Panama Canal will undoubtedly bring about a large addition to the coastwise fleet. Our coastwise marine is now given sufficient aid and protection by our navigation laws.

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The same tolls should be collected from all ships, American or foreign, in order that the Government may secure from the canal traffic such revenue as can be collected without limiting the commercial usefulness of the waterway. This argument ought to be given weight in deciding upon the policy to be followed in charging Panama tolls. The United States Government should conserve its revenues carefully. The fiscal policy of the Government should square with business principles. Our coastwise shipping does not need further aid, and to exempt our marine in the foreign trade from canal tolls would be to grant a subsidy that would reduce the Government revenues without effectively aiding our merchant marine.

SUMMARY OF ARGUMENT AGAINST TOLL EXEMPTION FROM THE POINT OF VIEW OF DOMESTIC POLICY.

The same rate of toll should be charged upon American as upon foreign vessels, because

(a) The omission or repayment of tolls on American shipping would be of assistance to our coastwise shipping, which does not need aid.

(b) Such subsidies as are given the American merchant marine should be paid to vessels employed in our foreign trade.

(c) The exemption of coastwise shipping from Panama tolls would inure mainly to the benefit of the coastwise carriers. Neither the rates of the steamship lines nor the charges of the rail carriers will be appreciably higher if tolls are charged on coastwise shipping than they will be if such shipping is relieved from the payment of tolls. (d) The United States should adhere to business principles in the management of the Panama Canal. The Government needs to guard its revenues carefully. Present demands on the general budget are heavy and are certain to be larger. Taxes must necessarily increase. Those who directly benefit from using the canal, rather than the general taxpayers, ought to pay the expenses of operating and carrying the Panama Canal commercially.

II.

The exemption of the American coastwise shipowners from the payment of Panama tolls raises international questions, historical, legal, and economic. Concerning the historical and legal considerations that affect the interpretation to be given the HayPauncefote treaty I shall not speak; but there are certain economic consequences of toll exemption which I wish to consider.

The much-quoted section 1 of Article III of the treaty provides that the canal shall be open to the vessels of all nations observing the rules laid down in the treaty, "on terms of entire equality, so that there shall be no discrimination against any such nation or its citizens or subjects, in respect of the conditions or charges of traffic, or otherwise"; and in determining the obligations of the United States under the treaty it is necessary to inquire whether the exemption of the owners of the ships engaged in the coastwise trade of the United States from Panama tolls will effect a discrimination against any foreign "nation or its citizens or subjects in respect of the conditions or charges of traffic, or otherwise." To answer this inquiry, the effect of the exemption from Panama tolls of the coasting trade and of the coastwise carriers of this country upon the conditions under which foreign traders and carriers will compete American merchants and shipowners must be considered.

In a short article published in the April, 1914, issue of the North American Review, I have called attention to the handicap which toll exemption for our coastwise shipowners will impose upon foreign traders and carriers in competing with American merchants and shipowners. The discrimination against the citizens and subjects of foreign countries will be specific and will be such as it would seem the Hay-Pauncefote treaty was intended to prevent. Unless the facts presented in the following statement are incorrect, it seems certain that the exemption of American coastwise shipowners from Panama Canal tolls will work a violation of the Hay-Pauncefote treaty. It is assumed by those who favor the policy of the exemption from the payment of Panama tolls of the men and companies who own the ships that serve the coastwise trade that this exemption can be no discrimination against the owners and users of ships under foreign flags, because only vessels of American ownership and enrollment can carry goods from one port of the United States to another. Will the exemption from Panama tolls of ships owned by citizens of the United States, or, more accurately speaking, by the coastwise steamship corporations chartered under the laws of some one of the States of the United States, work a discrimination against "the citizens or subjects" of any nation?

The four specific questions involved are:

Does Panama toll exemption for the owners of ships serving the trade between the two seaboards of the United States and toll payment by the owners of ships serving the trade between the two seaboards of Canada and Mexico discriminate against any "nation or its citizens or subjects"?

Does toll exemption for the owners of ships serving the trade between the eastern seaboard of the United States and our west coast and toll payment by the owners of ships serving the trade between European countries and the west coast of the United States result in "no discrimination against any such nation or its citizens or subjects in respect of the conditions or charges of traffic or otherwise"?

Does Panama toll exemption for the owners of ships taking goods from New York to San Francisco or to Seattle for reconsignment and export thence to the Orient and the payment of tolls by the owners of ships serving the trade from Europe to the Orient discriminate against the citizens or subjects of European countries?

Does Panama toll exemption for the owners of ships carrying from Seattle or San Francisco to New York, goods that have been brought to the west coast of the United States from the Orient, and the payment of tolls by vessels carrying goods directly from the Orient and Australia to New York, discriminate against the foreign carriers and merchants?

The mere statement of these questions suggests affirmative answers. It will be well to inquire whether the questions represent merely theoretical possibilities or prac