From the book:
The ship was swinging in a circular path. The target and towline were well forward of the beam, The helmsman was staring at the target, his mouth gaping. The turning diameter of the Caine was a thousand yards, and the towline was twice that long; it was therefore obvious to Stilwell that at the present rate the ship was going to cut far inside the target, and pass over its own towline.
A further problem is that Queeg refuses to recover the target for fear of looking foolish through a late arrival back at Pearl. Maryk and Gorton (then the Executive Officer) strongly urge him to do so but he refuses, opting to radio for a recovery tug instead.
When Queeg is called to account for the incident soon after, what galls the Admiral, and his Chief of Staff, is not that the target was lost -apparently targets coming loose from the towline wasn't an uncommon event, but that Queeg didn't attempt to recover it.
"Hell, man, there's nothing complicated about recovering a target," Grace said irritably. "You can do it in half an hour. DMS's out there have done it a dozen times..."
and then,
"May I know, sir," Queeg said in a faltering tone, "in what respect the admiral finds fault with me?"
"Well, hang it man, first time under way you run up in the mud -of course, that can happen to anybody- but then you try to duck a grounding report and when you do send one in upon request, why it's just a phony gun-deck job. And then what do you do call that despatch to us yesterday? 'Dear me, I've lost a target, please, ComServPac, what shall I do' Admiral blew up like a land mine. NOT because you lost the target -because you couldn't make a decision that was so obvious a seaman second class could have made it! If the function of command is not to make decisions and take responsibility, what is it?"
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