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"The volume of British shipping which will use the canal will in all probability be very large. Its opening will shorten by many thousands of miles the waterways between England and other portions of the British Empire, and if on the one hand it is important to the United States to encourage its mercantile marine and establish competition between coastwise traffic and transcontinental railways, it is equally important to Great Britain to secure to its shipping that just and impartial treatment to which it is entitled by treaty and in return for a promise of which it surrendered the rights which it held under the earlier convention."

The Hay-Pauncefote treaty provides that tolls shall be "just and equitable." Sir Edward Grey pointedly observes:

"The purpose of these words was to limit the tolls to the amount representing the fair value of the services rendered, i. e., to the interest on the capital expended and the cost of the operation and maintenance of the canal. Unless the whole volume of shipping which passes through the canal, which benefits all equally by its services, is taken into account, there are no means of determining whether the tolls chargeable upon a vessel represent that vessel's fair proportion of the current expenditure properly chargeable against the canal; that is to say, interest on the capital expended in construction and the cost of operation and maintenance. If any classes of vessels are exempted from tolls in such a way that no receipts from such ships are taken into account in the income of the canal, there is no guaranty that the vessels upon which tolls are being levied are not being made to bear more than their

fair share of the upkeep. Apart altogether, therefore, from the provision in Rule 1 about equality of treatment for all nations, the stipulation that the tolls shall be just and equitable, when rightly understood, entitles His Majesty's Government to demand, on behalf of British shipping, that all vessels passing through the canal, whatever their flag or their character, shall be taken into account in fixing the amount of the tolls.

"The result is that any system by which particular vessels or classes of vessels were exempted from the payment of tolls would not comply with the stipulations of the treaty that the canal should be open on terms on entire equality, and that the charges should be just and equitable."

We will now proceed to show that the foregoing statements by Sir Edward Grey are entirely sound. To do this we ask the reader to note the language used in the last sentence of Section 1, Article III, of the Hay-Pauncefote treaty; namely, "Such conditions and charges of traffic shall be just and equitable."

John Hay states: "One amendment proposed by Lord Lansdowne was regarded by President McKinley as so entirely reasonable that it was agreed to without discussion. This was the insertion at the end of Clause 1 of Article III of the words: Such conditions and charges of traffic shall be just and equitable.' '

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How are charges that are just and equitable, in this instance, determined? The Panama Canal is an international utility-a public utility. So considered, the foregoing question is easily answered from a financial standpoint.

The common law of England and America, the public policy especially of America at the very time this treaty was being negotiated, enforced with unsparing rigor the duty of equal charges and equal service by all public utilities to all the public which they were to serve. Discrimination is outlawed. All must pay the same charge for identical units of service.

The general principles underlying charges that are just and equitable are no longer subject matter for debate. They have been established by court decisions-state and national, including the United States Supreme Court. There is difference of opinion as to what may be included in the investment account on which a reasonable return must be allowed. In the case of the Panama Canal, the amount of the bona fide investment is easily determined. Therefore, where difference of opinion exists in the regulation of public utilities none can exist here.

The difference of opinion in this (tolls) case is in regard to rates. Must American shippers pay the same rate as foreign shippers for identical units of traffic?

The principles as established in the regulation of national, state and municipal utilities compel all to pay the same rate for an identical unit of service. The same principle applies to the Panama Canal, which is an international utility whereof the United States is merely the trustee as far as concerns the fixing of tolls. It cannot honorably apply one principle in the regulation of national, state and municipal utilities and another principle, in short, the monopoly principle, in the management of the Panama Canal.

A rate that is just and equitable provides for operating

expenses, interest on the investment and a reasonable amount for amortization of the principle. This fixes the amount to be collected from the users of the canal over a normal business period. The volume of traffic then determines the rate to be charged. The rate is a resultant of the amount to be collected to make the canal commercially self-sustaining and the volume of traffic. A rate determined in this way is just and equitable and it must be determined in this way to be just and equitable. Exempting any traffic from the payment of its proportionate share of the tolls means that the traffic not exempted from payment must contribute through a higher rate the amount which should have been levied on the traffic relieved from payment.

The tolls levied under the Panama Canal act cannot be made just and equitable as these terms are understood in the regulation of national, state and municipal utilities. The whole outlay must be levied on the traffic as soon as the volume of traffic permits. The act requires that no tolls be levied on our coastwise traffic and permits our foreign commerce to be relieved from any payment whatsoever. The entire outlay, therefore, must be levied on the remainder of the traffic through the canal, thereby imposing thereon a rate that is higher than one that is just and equitable-the rate assured to non-nationals by the Hay-Pauncefote treaty.

The United States need not assess taxpayers with canal construction and operating expenses if it manage the canal as a business enterprise. If it has already assessed taxpayers therefor, it has failed in the proper

exercise of its function as trustee of this international utility and should immediately employ an expert accountant for the purpose of introducing business methods into the management of the canal. It is not enough that the construction department be efficient. The accounting department should keep the records so that the entire outlay can be charged to revenue as rapidly as income permits. The amounts charged to taxes should be treated in the canal accounts as a suspense-debit and the United States treasury should be reimbursed as soon as the debit can be extinguished from surplus revenue.

It is not necessary in a long-period project such as the Panama Canal that revenue exceed operating expenses and interest on the investment in its initial stages for the undertaking to be commercially self-supporting. It is only necessary that in a normal business period (say twenty-five years) the revenue exceed total operating outlay and interest on investment. The deficit of the initial period is merely a suspense-debit to be amortized when revenue exceeds operating outlay. Thus viewed, the Panama Canal will be commercially self-sustaining from the beginning, if the history of the Suez Canal and similar projects are any criterion.

The management of the Panama Canal is similar to that of a transportation company. A railway through new territory will have a deficit period in which traffic is developed. This deficit with accrued interest thereon is extinguished by being.charged to surplus revenue after traffic has been developed and the company has revenue in excess of the annual operating expenses and interest charges.

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