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Why did the Aeromarine 700 use a simulated torpedo?
Short answer
Because of limited payload capacity: with a payload capped at 700 lb, the Aeromarine 700 could only carry a light, simulated torpedo. The seaplane was developed in 1917 to study whether dropping torpedoes from aircraft was feasible, and it was used in the earliest trials of that kind.

A seaplane to test the aerial torpedo
The Aeromarine 700 was an early United States Navy seaplane developed in 1917 to investigate the feasibility of dropping torpedoes from aircraft. The Navy ordered four Model 7 seaplanes from the Aeromarine Plane & Motor Company during 1917. It accepted delivery of only the first two, A142 and A143.
700 pounds of payload
The Model 700's payload was limited to 700 lb. With that margin, only a light, simulated torpedo could be used. The two floats were mounted on separate structures so the torpedo could be released between them from the ventral mount.
The first American trials
The aircraft was used in the first American experiments with dropping torpedoes from aircraft. Later in 1917, the United States Navy began trials with a simulated 400-pound (180 kg) torpedo that, in the first test, bounced back off the water into the air and nearly struck the aircraft that had dropped it.
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