Unchartered: The Movement to Foreign Registration and Flags of Convenience by American Shipping Companies in the late 19th Century


  1. INTRODUCTION

A.  Background and Research Question

From the birth of the United States, sustaining a capable maritime industry was vastly important.  Merchant shipping was America’s link to far away lands, to foreign trade and international commerce.   A U.S.-flagged fleet was a source of pride for the nation, a symbol of strength in business and technology.  But the shipping industry had its problems, and certain issues were exacerbated due to the nature of the sea.  This unclaimed place was also difficult to regulate, and companies were continually competing for their own domination of the ocean world.

In the United States, the maritime industry has long been a source of great prosperity and pride, as well as controversy.  One of the most contested aspects of the shipping world was the issue of foreign registration by American-owned shipping companies.  It has often been though that the movement to register under foreign flags was a modern phenomenon, and there is some truth to that.  Following the two World Wars, the shipping industry began to grow and develop with the acceleration of the industrialized world.  The growth of internationalization, globalization and free trade was seen as especially lucrative in the maritime world, as ships represented the important link between countries and trade markets.  Foreign investments and international contracts increased, and the involvement of shipping companies in this new business was substantial.

It was at this time that American ship owners began to take advantage of foreign registration in the Panlibhon countries.  This term comes from the countries Panama, Liberia, and Honduras, and was coined around the same time as the term “flags of convenience.”  The Maritime Administration designated these three countries in 1950 as the only countries to which transfers of registration would be allowed.  One of the first instances of the use of flags of convenience was during World War II, when the U.S. government approved the transfer of 63 ships to register under the Panamanian flag in order to evade neutrality laws.  Thus began the mass exodus to register in the Panlibhon countries, by American shipping companies, in an effort to run and maintain their ships at less cost and to avoid U.S. regulations.

However, while a number of ships registered abroad in these post-war years, the movement to foreign registration was not necessarily a strictly twentieth century phenomenon.  In fact, by the end of the nineteenth century, nearly 90 percent of American commerce was carried by vessels registered under foreign flags.  The question this paper seeks to answer is what prompted the movement to foreign registration by American shipping companies nearly one hundred years earlier than what is commonly thought?

B.  Secondary Literature

Secondary literature on the subject of foreign registration mainly focuses on the time period in which flags of convenience became prolific.  There are several books which focus on the post-World War II foreign registration by American shipping corporations looking to evade regulations and profit from cheaper labor.  The books that do mention foreign registration in the late nineteenth century treat it as somewhat of an oversight; an anamoly, rather than an effect of a larger cause.  This paper uses secondary literature to map out the history of the shipping industry, most importantly the history of policies and legislation enacted by the government which affected the industry.  It has also been useful in gaining a larger sense of historical context; with a subject as dense and storied as American maritime industry, it is essential to remember to realize at what place in time and history events were taking place.  However, while secondary literature offered some explanation to the question of foreign registration in the late-nineteenth century, there was relatively little explanation as to why exactly it occured.

C.  Approach to Research Question

This paper approaches the question of foreign registration through both secondary literature, as mentioned above, and primary sources from the late-nineteenth century.  The sources used provide commentary on legislation passed in this time period, and they give a general insight to the feelings of those closely involved in the shipping industry during this stage of foreign registration.

D.  Organization

This paper is organized into three main sections: 1) The history of American shipping until the Civil War, 2) The condition of American shipping industry in the late nineteenth century, and 3) The problem of congressional legislation in the late nineteenth century.  The first section provides a background of the American shipping industry from the formation of the United States until the Civil War a century later.  This section examines the legislation enacted to support the formation of the maritime industry, as well as the development of the industry under this legislation.  The next section discusses the changing economy of the global shipping industry, including the rising costs of maintaining American vessels and new shipbuilding technologies adopted, which began to challenge the growth and development of American shipping.  The last section focuses on legislation, namely the repeal of protective acts for American shipping companies and the upholding of registry acts, both of which were detrimental to the industry and ultimately helped cause the movement to foreign registration.

  1. THE HISTORY OF AMERICAN MARITIME SHIPPING UNTIL THE CIVIL WAR

From the formation of the United States, early lawmakers understood the importance of promoting an American shipping industry.   Thus, the history of maritime legislation dates back to the formation of the Constitution, with the encouragement of stateside shipbuilding and economic protection of American vessels as the primary issues.   By 1789, most states had adopted discriminating duties acts that gave American-owned ships an advantage over foreign ones.  In that same year, congress passed legislation (that was further enforced in the Act of 1792) that promoted shipbuilding by letting only American-built vessels register under the U.S. flag.  This section will examine the circumstances that led to the adoption of these acts, the development of the shipping industry in this period, and the changes in technology that affected American maritime shipping.

Arguably the most important legislation enacted by the states in the late 18th century were the discriminating duties acts, and state governments passed these acts for several reasons.  The first reason laid in the influence of British sea power over the colonies, and the importance of breaking away from that power during and after the Revolutionary War.  Professors at the United States Naval Academy Herman Krafft and Walter Norris describe in their book, Sea Power in American History, how the large of a role the maritime industry played in early colonial lives.  It was easier to get around by sea (rather than by land), and in New England in the 1780’s, there were more people employed by the shipping industry than in agriculture.  They also assert that not only was the promotion of the American maritime industry important to gaining independence from Great Britain, but that it was absolutely essential.

Another reason for adopting the discriminating duties acts was the need that arose after the Revolutionary War, when American vessels were no longer protected under the British Navigation Acts.  The U.S. flag now stood alone, and faced safety concerns as well as heavy competition in foreign seas.  Krafft and Norris describe an example of this competition; in 1873, Great Britain enforced large duties on American ships carrying American goods into British ports.  It was clear that the United States needed its own form of duty regulation on foreign vessels, so that foreign competition did not swallow up the American shipping industry.

For these reasons, states began to enact legislation in the form of discriminating duties acts to protect their shipping industries.  In American Navigation, ex- United States Commissioner of Navigation William Bates provides information regarding the duties on tonnage in different states as of 1789.  For example, in 1785 New Hampshire and Massachusetts placed an “extraordinary tonnage duty” on all foreign vessels, with no duties on American vessels.  New York doubled the duties carried by British vessels in 1784, and Maryland enforced a duty of one dollar per ton upon British vessels, 66 cents per ton on French and Dutch ships, and left American vessels free.  Pennsylvania was one of the only states to differentiate between the types of goods carried, with different tariffs for different items carried on foreign vessels.  While these acts provided immediate protection to the shipping industry, the members of the Constitutional Convention knew that a cohesive front was necessary for the United States to attempt to rival British and foreign sea powers.

The issue of enacting a universal policy for the shipping industry was taken up during the Annapolis Convention to Regulate Trade during 1787, and later reflected in the framing of the Constitution.  The newly drafted policies in the Constitution gave the Federal government power to regulate foreign and domestic commerce.  They also prohibited individual states from laying duties on imports or exports, or laying duties on tonnage.  In order to further promote the American shipping industry, the federal acts gave a ten percent discount of duties on imports carried into the U.S. by American-built and owned vessels.  With regard to tonnage, the policy provided that American vessels were subject to the rate of six cents per ton.  Ships built in the United States but belong to foreign owners were subject to thirty cents per ton, and all other foreign vessels were given the rate of fifty cents per ton.  The purpose of this legislation was not only to stimulate the shipping economy, but also to form a uniformed policy that all the states could follow together.

Another important piece of legislation put into place was the Registry act of 1789; it was later revised and notably reinforced in 1792.  This act served to encourage American shipping companies to build their ships on American soil by prohibiting foreign-built vessels from registering under the U.S. flag.  Consequently, it gave American-built ships the advantage of operating under much lower duties and tonnage costs than foreign vessels.  The adverse effects of upholding this act were seen later as a major reason companies began to register under foreign flags, but in the late eighteenth century the Registry Act was a major incentive for companies to build ships within the U.S., and it became a catalyst for the growth of the U.S. maritime industry.

This legislation, including both the federal discriminating duties acts and the Registry Act, had an enormous and almost immediate positive effect on the American shipping industry.  Bates estimates that in 1789, American vessels carried 400,000 of the 600,000 tons entered into foreign and domestic trade.  Krafft and Norris note that in 1790, American tonnage in foreign trade more than doubled, and from the years of 1789-1796, the amount of tonnage carried by British ships in the American trade reduced by one fifth.  The prosperity of U.S. shipping was further increased by the outbreak of war between Great Britain and France in 1793, as the United States’ neutral status gave its maritime industry a distinct advantage in foreign trade.

The United States’ Congress was also empowered enough by this early confidence to begin to commission the rebuilding of great naval ships.  In 1794, Congress approved a provision to build six frigates, with six captains, twenty-two lieutenants, and two thousand soldiers to be trained.  In 1798, Congress created the Navy Department, to oversee the construction of twenty-four smaller warships, as well as other naval pursuits.  These measures were enacted for the purpose of rebuilding American naval defense, but they also show how the government was beginning to regain confidence in its maritime fleet.  This confidence became important as the U.S. shipping industry progressed and expanded during the nineteenth century.

As the global market opened up in the beginning of the nineteenth century, so too did the American shipping industry.  The U.S. fleet was a forerunner in the developing free trade around the world, and the amount of tonnage carried by American ships, as well as the number of ships built, increased accordingly.  In 1807, American ships carried 92.7 percent of American foreign commerce, and the value of that commerce reached $246,843,150.  In 1821, 126 ships sailed from Salem, Massachusetts, and by 1826, the number of American foreign commerce carried by American vessels held strong at 92.5 percent.  In 1831, the amount of domestic tonnage carried by U.S. ships surpassed foreign tonnage, and by 1838, the amount of domestic tonnage carried reached a million tons.  In the year 1855 alone, The United States built 2,000 new ships.  Even the introduction of British steamships did not slow the American shipping industry down, as early models of steam engines were slower and required too much room for coal to carry many goods.

And so, it is evident that the American shipping industry enjoyed unprecedented power in the years leading up to the Civil War.  By 1861, the tonnage carried by American ships in the foreign trade reached 2,496,894 tons, its highest number to date.  It would seem that the legislation passed and the promotion of American shipbuilding did indeed stimulate the economy of U.S. shipping.  This growth and prosperity would not last long, however, as the Civil War and developing technologies challenged the maritime industry.

  1. THE CONDITION OF THE AMERICAN SHIPPING INDUSTRY IN THE LATE NINETEENTH CENTURY

For all of the advancements that were made by the shipping industry in the first half of the nineteenth century, the onslaught of civil war proved to be the catalyst for the decline of American maritime power through the rest of that same century.  And although the war had a tremendous effect, leaving the U.S. merchant marine fleet battered and depleted, there were several other factors that led to a decreased interest in maintaining and supporting the American shipping industry.  The next two sections will focus on the changing economic conditions of the industry, as well as the shifting of interest away from the promotion of American maritime power by the government, both of which led U.S. shipping companies to begin to register under foreign flags.

This section will discuss the economic changes, namely the rising costs of building and maintaining American vessels, and how these expenses made operating vessels under the U.S. flag less desirable.  It will be seen that the movement to the steam engine and the advent of the use of iron rather than wood in shipbuilding had great detrimental consequences to American shipping companies.  This section will also examine the rising expenses of employing American crews, and how this factor led ship owners to explore other options by registering under foreign flags.

The most notable change in the technology of the shipping industry during the nineteenth century was the movement to build vessels with iron, and the employment of the steam engine.  Until the 1860’s, America’s use of wood and sail ships dominated the seas, as ship builders had patented a fast efficient and cost-effective way to construct ships out of wood.  Krafft and Norris suggest that the period from 1854-62 saw the American clipper fleets flourish, mainly due to the profitability of American shipbuilding:  “Here was the native genius in design of a people bred to the sea for generations; here were cheap timbers and skillful workmen; here was an increasing demand for more ocean carriers to provide for the expanding transoceanic trade.”  The prosperity enjoyed by American shipping companies to this point was dealt a blow, however, when the rest of the world began employing the use of iron and building steamships.

This change in technology had a grave impact on the American shipping industry.  Had shipbuilders been able to adapt immediately to the use of iron, this might not have been the case, but they were reluctant to do so for several reasons.  Most shipbuilders were used to wood, felt they knew what they were doing, and they did not see any reason to switch to the new technology.  Those who did wish to make the change received little to no support from the rest of the industry, or the government.  Most shipbuilders simply did not wish to change their old, tried and true methods of building ships with wood.  This stubborn attitude only served to put American shipping at a disadvantage in competing with the newer, more efficient, and faster iron vessels.

When American ship owners, and builders, finally did make the transition to iron-built ships, it was seemingly too late.  They had already lost the edge they had once enjoyed over the rest of the world, because they no longer had the advantage of cheaper shipbuilding.  Furthermore, the costs of maintaining and running American ships with American crews had become significantly higher than for foreign vessels, thus making the U.S. flag increasingly unattractive to ship owners.  In his 1896 essay Our Neglected Shipping, Secretary of the American Merchant Marine Association, Alex R. Smith, describes the price of running American ships.  He cites several sources in this piece, concluding that it was obvious fact that running American ships was more expensive than running foreign ones.

The two main factors involved in the higher costs for U.S. ships were the wages paid to American crews and the costs of maintaining ships.  With regard to the wage issue, Smith cites an 1895 report by the commissioner of Navigation which notes the discrepancies of wages between American and foreign shippers.  It states that the increased expense of wages for American crews totaled approximately $80,000 in that year, while by contrast; the expense for crews on British vessels was only $25,000.

Smith also mentions an 1888 report by Captain Charles T. Russell, an experienced American shipmaster, to further his point.  Russell’s report focuses on the cost of running ships and asserts that American crews were paid the highest wages in the world, and the cost of maintenance on these crews was the highest in the world as well.  Russell also provides numbers for these costs:  in 1888, the cost of maintenance on American vessels was about 40 cents per day per man; on British vessels the cost was about 29 cents.  The vessels of Norway, Sweden, Russia, German, Denmark, Austria and Spain all provided wages at an average of 47-50 percent lower than those of the United States, and averaged a cost of maintenance approximately 32 percent lower than that of American vessels.

Taking into account the rising and superior costs of running American ships, it is not hard to see why the movement to iron-built vessels had such an impact on the U.S. maritime industry in the late nineteenth century.  If the cost of running and maintaining ships in the United States were not so high, then the industry would not have to depend so much on the cheaper costs of building ships with wood.  This was not the case, however, and the advent of iron ships left the American shipping industry at yet another economic disadvantage.

In his plea for government recognition of the shipping problem, Subsidies to American Shipping, John A. Porter Prize laments the change, noting, “The moment wood was shown to be less desirable than iron in ship construction America lost the advantage she had of cheap material.”  He claims that it was cheaper for British shipping companies to build ships from iron, citing improved methods of construction, cheaper labor, cheaper production of iron, and a closer proximity to iron and coal mines.  Although the United States’ reign over shipbuilding endured through much of the nineteenth century, the lack of ability to keep up with new technologies had a lasting effect on the demise of the U.S. merchant fleet.

In summation, the changing economic condition of the shipping industry in the second half of the nineteenth century was not favorable to the U.S. flag.  The advantages ship owners once held over the rest of the world with cheap and effective shipbuilding were taken away when the global industry moved to iron and steam-engine ships.  Furthermore, because these advantages had previously been enough to cover the U.S.’s higher cost of maintaining crews and running ships, when they ceased to exist, so did the hopes of continuing a profitable American shipping industry in its current state.  As mentioned, the costs of owning and operating a ship under the U.S. flag were significantly higher than in any other country, and without any other economic advantages, shipping companies would be forced to either seek protection from the government or register their vessels elsewhere to stay in business.

  1. THE PROBLEM OF SHIPPING LEGISLATION IN THE LATE-NINETEENTH CENTURY

The previous section ended with the notion that fater the changing technologies in the post-Civil War period left dismal economic prospects for the American shipping industry, government support and protection would be necessary to keep companies afloat under the U.S. flag.  However, for a number of reasons, not the least of which was the government’s desire to enter into global free trade markets, this protection never came.  In fact, just the opposite occured; the discriminating duties acts had been repealed in the mid-nineteenth century and no legislation was moved to replace them.  Furthermore, against the adverse economic conditions for the American shipping industry in the late-nineteenth century, the registry acts of 1789 and and 1792 – which had once promoted and encouraged American-built ships – were upheld and now served as a detriment to the U.S. flag.

This section discusses the inability of the U.S. government to provide sufficient protective measures to ensure the survival of the U.S.-flagged maritime fleet.  It will focus on and analyze the direct response to government inaction, including the aforementioned essays by Alex R. Smith (Our Neglected Shipping) and John A. Porter Prize (Subsidies to American Shipping).  It will be evident that the lack of government concern or interest in promoting the American maritime industry through protective legislation led directly to the number of shipping companies who moved to register under foreign flags.

The effects of repealing the discriminating duties acts in the mid-nineteenth century were not immediately felt, mainly because when the repeals took place in 1828, the American shipping industry was thriving.  The exact reason for the repeals is not completely clear, but it seems likely that the U.S. government wished to enter and engage in the global markets of free trade, and the abolition of discriminatory tariffs on shipping commerce was necessary in doing so.  Also, the United States was not at war, and American domestic interests in the 1820’s were beginning to become more focused on westward expansion and the development of the railroad systems.  Maritime pursuits simply did not capture the interest of the government at the time, and the protective acts were repealed.

As the end of the nineteenth century neared, the problems plaguing the American maritime industry began to come to light, and  shipping companies began to see the effects of these repeals.  The lack of protection for U.S.-flagged ships, coupled with the effects of the high costs of maintaining ships in the United States, caused several companies to consider the possibility of registering their vessels under foreign flags.  In the article American Interests in Transatlantic Commerce and Trade, William Henry Flayhart III traces the story of the International Navigation Company, a corporation that received its charter from the Commonwealth of Pennsylvania in 1871.  The company did not feel that it could succeed while registered under the U.S. flag, so it transferred its vessels to registration under foreign flags.  Flayhart notes that the I.N.C. was representative of American shipping owners who did not want to pay the “heavy surcharge for the right to fly the American flag.”  This surcharge included the higher cost of building ships in the U.S. and the higher cost of employing American crews.

The International Navigation Company was just one of several companies with headquarters in the United States, but who chose to build, operate, and man their ships in foreign flags due to the lack of protection by the U.S. government.  However, the movement to foreign registration was not just the consequence of the repeal of the discriminating duties acts; the registry acts of 1789 and 1792, which prohibited foreign-built ships from registering under the U.S. flag, were a large factor as well.  Although these acts had once served to promote American shipbuilding, the changing economic conditions in the shipping industry gave these acts a new effect.  The cost of building ships in Great Britain at the end of the nineteenth century was 40-75 percent lower than that of the United States, and, as Samuel Lawrence writes in United States Merchant Shipping Policies and Politics, “The result was that American shipping capital flowed overseas to purchase foreign-built ships for registry under foreign flag.”

By the end of the nineteenth century, concerned members and watchdogs of the shipping industry began to take notice of this occurance, and became concerned with the threat foreign registration posed to the American maritime industry.  The Manufacturer and Builder, an industrial journal, ran an article in their January 1894 issue, citing a report from the Commissioner of Navigation regarding the depletion of American-owned vessels flying the American flag.  The article describes the prolificity of steamships crossing the Atlantic who were mainly owned by American companies, but flew foreign flags.  It states that thirty-three foreign-flagged vessels traveled regularly to Europe, while in contrast only six U.S.-flagged vessels made that journey.  From the article:  “American enterprise is a century in advance of the law, for American own more steamships forbidden by the registry law to wear American colors than they own steamships in foreign trade under the stars and stripes.”  Cleary, the decline of the U.S. flag, and conversely the increase of foreign registration, was noticeable; to those involved in the shipping industry, American legislation was to blame.

Several other industry insiders called for governmental action to protect the disappearing American fleet.  Secretary of the American Merchant Marine Association Alex R. Smith wrote Our Neglected Shipping as a plea for protective legislation.  In this work he places the blame squarely on the repeal of the discriminating duties acts, and calls the neglect of the shipping industry by lawmakers, “as disgraceful as it is impoverishing.”  He further makes his case by quoting those senators who are in agreement about the state of the U.S. maritime fleet, such as Maine Senator Frye, whom he calls shipping’s “champion in congress for a quarter of a century.”

John Porter Prize also takes up the cause in Subsidies to American Shipping, arguing for the removal of all taxation on American ships, which he believes, “destroys all commerce and isolates us from the world.”  The conspicuously absent voice from this debate are the shipping companies themselves, which would suggest that they were not as unhappy with the shift to foreign registration as others.

Despite appeals for protective legislation and the removal of the registry acts, the U.S. government did very little to remedy the situation.  In the following years, Democrats in the Senate attempted to repeal the registry acts and permit foreign-built vessels to operate under the U.S. flag, in order to be better able to compete in foreign trade.  However, Republicans were staunchly opposed to these measures, and the issue remained deadlocked until the beginning of the twentieth century.

The detrimental effects of U.S. shipping legislation may not have been felt until the American shipping economy’s problems were realized in the late-nineteenth century, but when they occured they were devastating to the U.S.-flagged merchant marine fleet.  The repeal of the discriminating duties acts left shipping companies without legislative protection on foreign trade, and the already high cost of maintaining ships under the U.S. flag gave them a distinct disadvantage against foreign vessels.  Furthermore, because of the exhorbitantly higher price to build ships in the United States, many ship owners sought to construct their vessels in foreign shipyards.  However, if they chose to do so, they were essentially forced to register under foreign flags, due to the registry acts invoked in the late-eighteenth century.  The removal of protective legislation and the disadvantage American shipping companies faced due to the changing economics of global shipping set the trend for the movement away from the U.S. flag, and towards foreign registration under foreign flags.

  1. CONCLUSION

This now brings the story of foreign registration by American shipping companies in the late-nineteenth back to the original question: what were the reasons for the movement to foreign registration at a much earlier time than has been widely recognized?  It is clear that the movement to register under flags of convenience after World War II began as a way to evade regulations and increase profits.  It was a method used by ship owners to employ cheaper foreign crews, and get around safety regulations.  It was, as the name implies, a matter of convenience.  The reasons for foreign registration nearly fifty years earlier, however, were quite different; foreign registration began almost as a matter of necessity.

The historical background of the United States shipping industry shows a government eager to promote its vital industry.  It shows favorable legislation passed for shipping companies, and it shows great prosperity.  Through the context of history, however, it is easy to see how easily that turned sour.  As new technologies developed, ship owners were reluctant to change their ways, and at the same time factors beyond their control dealt them a high price of maintaining their ships.  As history unfolds, so did the growth and expansion of government interests and ideals.  The once-vital shipping industry was no longer a priority, and as the global markets of free trade opened up, American interests shipping began to deteriorate.  Protective legislation was repealed, and ship owners were forced to look in to other options in order to stay afloat in the competitive industry.

The movement to foreign registration came about, then, for economic, social, and political reasons, and more markedly, for a combination of all three.

 


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