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BKFORE THE .
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Interstate Commerce Cömmjlssion^^^^^ .
Docket No, 12964.
In the Matter of
CONSOLIDATION OF THE RAILWAY PROPERTIES OF THE
UNITED STATES INTO A LIMITED NUMBER OF SYSTEMS.
STATEMENT FOR THE PENNSYLVANIA RAILROAD SYSTEM
BY
SAMUEL REA, PRESIDENT.
MAY, 1923.
\
SUPPLEMENTAL STATEMENT FOR THE PENNSYLVANIA RAILROAD SYSTEM
SAMUEL REA, PRESIDENT.
Vv?^■
JUNE, 1923.
I
Statement of Samuel Rea, President of the Pennsylvania
, road System, before the Interstate Commerce Commission, in
' the matter of the Consolidation of the Railway Properties of the
United States into a limited number of Systems. May, 1923.
(No. 12964)
August 3rd, 1921, the Interstate Q«n-
merce Commission ordered its tentative
plan for consolidation of th^ Railway Proper¬
ties of the United States into a limited
number of Systems to be served upon the
carriers, to which was appended the report
of Professor William Z. Ripley, prepared by
the direction of the Commission. Now in re¬
sponse to the order of tíie Commission of
March 3rd, 1923, I attend this hearing,
called to consider that part of the Plan affect¬
ing carriers in the Eastern District, to offer a
statement respecting the Pennsylvania System.
Tentative Consolidation Plan '
. I realize that the Interstate Commerce
Commiasion has a definite duty-under the
Transportation Act to pr^are and adopt a
plan for. the foregoing purposes, and is en¬
deavoring to discharge it, and, having pro¬
mulgated a Tentative Plan, the Qjmmission is
entitled to the best judgment of all concerned.
Let me also express my appredation of the
work done by-Professor Ripley in his report
attached to the Tentative Plan, as an appen¬
dix. Whether we agree with his conclusions
or not, we must admit that he brought to the
task a detached mind, and endeavored to make
an impartial study from all the facta and
statistics which he could procure from
printed documents, and from railroad officers,
"owners, users, and others, having knowledge
of the railroad properties.
Peimaylvanla Systmn—How Coiutituted
System designated No. 2—Pennsylvania—
in the Interstate Commerce Qsmmissbn
Tentative Plan includes practically all the
railroads now composing this System, wholly
«»ntrolled by leas^ stock ownership, or
partly owned with other Systems, which is in
accord with its growth and public service, and
its relations with other carriers. This Sys¬
tem was developed along the two primary
principles recited in the Transportation Act,
namdy, moving the traffic through estab¬
lished channels and maintaining competition.
The line itself was incorporated originally in
1846 to extend from Harrisburg to Pittsburgh,
Pennsylvania, with a branch to reach the
Great Lakes. It is well known that this route
was part of the State's ambition to meet com¬
petition with the Erie Canal in New York, and
had for its purpose not only reaching the
Great Lakes but the Ohio River, and through
the latter the Mississippi River. Before 1860
the Pennsylvania Railroad purchased the un¬
profitable Main Line of PuUic Works ownsl
by the State of Pennsylvania, consisting of
railroads and canals chiefly between Philadel¬
phia and the City of Pittsburgh, ertending
across the Alleghany Mountains. In the
sixties, and not withstanding the Civil War, it
leased the Pittsburgh, Fort Wayne & Chicapr
Railway, which it had been assisting finan¬
cially for years, and by which it secured an
entrance into the City of Chicago. The
Pennsylvania Railroad loaned to that Com¬
pany to complete its railroad from Plymouth
to Chicago, 111., the rails that had been used
on the Alleghany Mountain Portage Rail¬
road, which the Pennsylvania Railroad pur¬
chased from the State of Pennsylvania. In
1861 the Pennsylvania Railroad leased the
Philaddphia & Erie Railroad, which gave it
a line from Sunbury, Pa., to Erie, Pa., on the.
Great Lakes, and also obtained control of the
Northern Central Railway which gave it a
line from Sunbury, Pa., south through the
Susquehanna Valley to York, Pa., and thence
to the Chesapeake Bay at the Cily of Balti¬
more, Md. Tlie Pennsylvania Railroad Com¬
pany leased the Erie & Pittsburgh Railroad
in 18HÎ, in 1871 the Cleveland & Pittsburgh
Railroad, and later on developed and finally
löised the Pittsburgh, Youngstown & Ash¬
tabula Railroad. In the seventies it furthered
the construction of the Grand Rapids & Indi¬
ana Rhilroad from a ronnimtion on the Pitts¬
burgh, Ft. Wayne & Chicago Railway, near
Fort Wayne, up through the Michigan Penin¬
sula, leading finally to ownership and lease.
A somewhat similar story illustrates its
relations to the Southwest System. Begin¬
ning as early as 18S2 with what is now the
Pan Handle System (Pittsburgh, Cincinnati,
Chicapj & St. Louis R, R. Qs.), it furthered by
financial grants, guarantee of bonds, advanras
2
of money, and traffic agreements, and later
purchases of stock and securities, the Pan
Handle System of railroads, which gave it
entrance into the Cities of Cincinnati, Indian¬
apolis, St. Louis and Chicago, and gradually it
consolidated and later leased these lines.
Turning towards the East, having secured an
entrance into the City of Philadelphia through
the purchase in 1857 from the State of its
public works, the Pennsylvania R. R. Co. in
1871 leased the United New Jersey Railroad
and Canal Company lines (having previously
constructed the link known as the Connecting
Railway in Philadelphia to reach the Philadel¬
phia and Trenton Railroad) and thus extended
the System from Philadelphia to New York,
Harbor, via what is known as the present main
line of the New York Division. It also
thereby secured an alternate route known as
the Camden and Amboy Railroad from the
City of Camden to the Port of South Amboy,
New Jersey. It also then and since acquired
broader relations with railroad lines all over
the State of New Jersey including what is
known as the West Jersey & Seashore Rail¬
road which reaches Atlantic City, Cape May
and other places.
The relations with the Northern Central
Railway Company were further strengthened
by the joint construction, in the early seven¬
ties, of the Baltimore & Potomac Railroad,
by which a through line was constructed from
Baltimore into the City of Washington and
other points. In 1881 the Pennsylvania
acquired its majority interest in what is now
the Philadelphia, Baltimore & Washington
Railroad through the purchase of stock.
Later the Baltimore & Potomac Railroad was
merged with it to form a through line to
Washington. By purchasing control of the
Union Railroad of Baltimore, the lines of the
Northern Central Railway Co., and of the
Philadelphia, Baltimore & Washington Rail¬
road Co., had already been connected in the
City of Baltimore, Md., and were subse¬
quently leased to the Pennsylvania Railroad
Company.
Therefore, for about forty years the Penn¬
sylvania System has been extended into its "
present territory, with the exception of a di¬
rect entrance into the City of Buffalo, acquired
through the purchase of stock and income
bonds of the Western New York & Pennsyl¬
vania Railway in 1901, and the purchase of
practically a controlling stock interest in the
Norfolk & Western Ry. and the Long Island
R. R. The work since that time has been
largely the compacting of the System and the
building of short branches and feeding lines to
develop and serve the territory.
With this as a groundwork it will, therefore,
be very clear that the Pennsylvania System,
as indicated in the tentative plan, represents
a gradual creation of 75 years and, I think,
in accord with the basic consolidation require¬
ments of the Transportation Act. It serves
13 States and the District of Columbia. It
exchanges freight traffic with 157 railroad and
terminal companies and at exchange points
exceeding 750 in the aggregate. The reports
to the Interstate Commerce Commission give
full traffic and operating statistics, the latest
report filed being that for 1922. I believe the
subject needs no further discussion on my
part as my statement is supplemented by
maps, statistics, etc. From the list of com¬
panies'recited as tentatively assigned to this
System, it will be noted that there are strong
and some weak companies. Among the latter
the Toledo, Peoria & Western Company (in
which the Chicago, Burlington & Quincy also
has an interest) is in receivership, and so is
the Central Indiana Company, in which the
Big Four has an equal interest with the Penn¬
sylvania System. The Lorain, Ashland &
Southern, owned by the Pennsylvania and
the Erie, is also a weak road. Then there are
the jointly owned roads such as—Lake Erie
& Pittsburgh, the Pittsburgh, Chartiers &
Youghiogheny and the Monongahela Rail¬
roads which are owned jointly by the New
York Central and Pennsylvania Systems.
These and several other relatively short rail¬
roads, and important terminals, in which the ^
Pennsylvania and other railroads are jointly
interested, were built, or acquired, by their
owners, to avoid duplication of railroads and
terminals, and to effect economies, and should
remain as neutral properties, for joint use.
Should the joint management of these roads be
changed, and their final disposition be made to
one System, it would prove unsatisfactory to
other existing using Systems, and be detri¬
mental to the public interest, and probably
lead to parallel building, or shifting of traffic..
In the past thirty years 127 Companies
have been eliminated by the Pennsylvania,
chiefly through consolidation, or absorption;
and it also leased 20 railroads, which so far ^
we did not deem it prudent to absorb, because
of legal or financial questions. Consolidation
which required the formation of new Corpora-
3
tbns' and the exchange or re-isane of large
amounts of securities has always been avoided.
In this way we have been compacting an
operating system. From the financial side
it is not yet dear that one System Company
Could, or should, issue all the capital stock and
bonds, to provide for the whole system not
merely the new capital for improvements but
for refunding all maturing issues; It is one
task 1» sell ?10,000,(XM of stock or bonds per
annum at a'good price, and have them absorbed
easily by the investing public, and quite a dif¬
ferent task to sell {550,000,OCX) or more per
annum with equally satisfactory results. As a
result of such compacting of Corporations
forming the Pennsylvania System, what were
origin^y about 600 corporations, most of
them promoted or financially assisted by
the parent railroad rompany, have been
reduced to 70 transportation companies
imw constituting the Pennsylvania Rail¬
road System. With every desire to reduce
unnecessary corporations, the System still
has 70 transportation companies with iheir
Separate organizations. These in turn have
to be supplemented by water supply com¬
panies;'short electric lines to reach adjacent
points; and warehouse companies, aU depend¬
ing upon the various physical and legal're-
quiremaits that have to be met, so that the
System still has over 100 active corporations
of various kinds essential to carry, on the
transportation service, and many more in¬
active corporations whose lines are not
ßjnstructed.
Norfolk & Western Railway
■ In the Tentative Plan of the Commission,
and the appended report of Prof. Ripley,
suggestions are made that the Norfolk &
Western be excluded from the Pennsylvania
Railroad System, and independently extraided
from Columbus to Lake Erie, either by a
grant of trackage rights or actual lease of
that part of the Pennsylvania Railroad Sys¬
tem between Columbus and Sandusky, which
forms part of the road owned by a subsidiary
oimpany, known as the Toledo, Columbus &
Ohio River Railroad;. and the other sugges¬
tion recommended for adoption in the Ten¬
tative Plan, is that the Norfolk & Western
System should utilize the Toledo & Ohio
Central Lines (New York Central System),
which would obviate the necessity for the
disruption from the Pennsylvania of the
Columbus-Sandusky Line. Prof. Ripley's
report shows that the Norfolk System at ife
Eastern and Western termini connects with
the Pennsylvania System and exchanges more
traffic than with any other System, and in
•many ways both Systems supplement each
other, not as aunpetitors hut as connecting
lines. To my mind his report conclusively
demonstrates, from every standpoint, lie
advisability of continuing the Norfolk in
close co-operation with the Pennsylvania.
Nevertheless the foregoing suggestions were
made, respecting the "Norfolk," and I am
bound to regard th«n as unwarranted by the
facts, and, if adopted, would be hurtful to the
interests of both Systems and to tie public
which they serve, and to the traffic and busi-
nras rdations whidx have been established
for many years.
The Pennsylvania, following its policies of
many years, obtained financial interests in
many of its principal connecting lines, in¬
cluding tie Norfolk & Western. For over
twenty years tie Pennsylvania System has
had a considerable stock interest in the
Norfolk & Western, and representation on
its Board of Directors, and in part through
that informed and helpful counsel, the
Norfolk & Western's property has been de¬
veloped with respect to coal terminals and
other facilities, and has been kept equal to
pubKc requirements, and the Norfolk &
Western has become strong financially and
very effective in its operation. Bediming in
the seventies the Pennsylvania participated
in the promotion and building of what was
later known as the Shenandoah Valley Rail¬
road, which, after many difficulties, was finally
constructed, extending from Hagerstown,
Md., on the Cumberland Vallqr Division of
the Pennsylvania Railroad, southwanl, and
is now a part of the Norfolk & Western Rail¬
way. Since that time the traffic and other
relations of both Companies have been most
co-operative. The Norfdk & Western con¬
nects with the Pennsylvania System at Port
Norfolk, Va., Hagerstown, Md., and Colum¬
bus,. Cincinnati, Circleville, Qare, Ivorydale
and Idlewild in the State of Ohio, for the
exchange of traffic.
The Pennsylvania has spent millions of
dollars for additional tracks and facilities in
advance of what have been necessary for its
ordinary traffic, so that it could distribute,
or collect, Norfolk & Western traffic to the
best advantage of both Companies, and of
the industries and territory which they serve.
4
As part of that program it double-tracked a
great portion of its line from Columbus West¬
ward to Chicago, and Northward to Sandusky,
and at the latter point erected docks and
machinery for the handling of Norfolk &
Western coal traffic. Further, in the terminal
developments in and around Norfolk, Va., and
Hagerstown, Md., the co-operative working
of these two Companies has saved duplication
of expenditure, and has been of material ad¬
vantage in the exchange of traffic.
In ten months of the year 1922 Pennsyl¬
vania distributed about ten million tons of
coal and coke traffic on its System North,
East and West of Columbus, and if from the
co-operative relations and use of facilities the
Pennsylvania System had not been able to
obtain and move that coal to the homes and
industries along its System, the public would
have suffered great deprivations. This long
connection with the Norfolk & Western as a
connecting and distributing System has been
most helpful in the development of transpor¬
tation, as can be proven from the enormous
development of the coal and other traffic.
The amount of freight traffic handled by the
Norfolk 8: Western increased from 20,183,213
tons in 1907, to 32,701,743 tons in 1913,
48,196,792 tons in 1917, and on account of
the strike fell to 3^357,078 tons in 1922, and
the traffic delivered to the Pennsylvania
System by the Norfolk & Western increased
from 3,342,684 tons in 1907 to 10,525,581
tons in 1913, 13,781,129 tons in 1917, and
dropped off to 12,163,208 tons in 1922 for the
reason above stated.
I respectfully urge that to sever the Norfolk
& Western from Pennsylvania System would
disrupt the movement of traffic from its nor¬
mal channels and would deprive it of a large
amount of revenue which is necessary to
maintain its present net return on its property
investment; would leave it with expendi¬
tures made for the enlargement of its System
West and North of Columbus but stripped of
a large part of the Norfolk & Western traffic;
and would segregate a very important part
of a Pennsylvania subsidiary Co.—the Toledo,
Columbus & Ohio River Railroad, which it
requires to reach not only Sandusky but also
as a route by which the Cities and ports of
Toledo and Detroit are served. The situa¬
tion of the Norfolk & Western and the Penn¬
sylvania would not be helped by attaching
the Norfolk to the Toledo & Ohio Central
Lines to afford a Lake connection for the
Norfolk from Columbus to Toledo. An ex¬
amination of the line will show that its grades
would have to be revised, and the line rebuilt
in part to handle the coal trains of the Norfolk,
and new dock facilities would have to be con¬
structed at the Lake, and I further assume
that the segregation of the Toledo & Ohio
Central from the New York Central System,
and its use for this purpose, would not be
beneficial to the latter System.
Both suggestions would put an increased
handicap and unnecessary expense upon the
public, and would disrupt a service for which
the road, equipment and Lake facilities are
already suited. In addition, this tentative
proposal to disrupt natural connections with
the Pennsylvania System, and substitute an
enforced consolidation with an unsuited Lake
line, and also leave the Pennsylvania System
with an investment of over ¿54,000,000 par
value in the stock of the Norfolk & Western
does not, in my opinion, assist in carrying out
the consolidations according to the Transpor¬
tation Act, and is hurtful to all concerned.
The chief reason assigned for this divorce is
undue magnitude, but mere magnitude is
concerned chiefly with organization," which
experienced management can provide; and
in this case Prof. Ripley has demonstrated
that the relationship of the two Companies
is essentially that of connections, and he
points out, more clearly than I can that the
real test of successful consolidation is the
return that can be earned on the property
investment. In this case consolidation of the
Norfolk & Western and the Pennsylvania
would result in a moderate property invest¬
ment return that would not even equal other
consolidations suggested viz: about 4.64 per
cent, for 1917 and 4.03 per cent, for 1922. So
far as management is concerned the Norfolk
& Western even after consolidation would con¬
tinue to have an able operating management
to deal with its own affairs affecting the
public as at present, the principal change
being more in the line of financing new im¬
provements and as to future general policy.
I would further point out that the Pennsyl¬
vania cannot regulate the extent of its coal
traffic, which is governed by the demands of
the population, industries and territories
served by its lines. For the protection of
that territory, as well as for the protection of
the Company itself it should co-operate to
maintain and replenish that large coal traffic.
It is true that for many years the State of
5
Pennsylvania has a large supply of coal for
fuel and manufacturing purposes, but with
the exhaustion of the larger bituminous coal
seams, and the increased cost of working the
deeper and smaller seams, a large part of the
territory served by the Pennsylvania System
must largely rely upon the coal fields of
Kentucky, West Virginia and other places
reached by the Norfolk & Western for its
future adequate coal supply. Many of the
important coal companies of Pennsylvania
have purchased lands in these States for that
purpose, and the Pennsylvania finds it
equally as essential to protect its territory by
retaining suitable railroad connections to
handle that coal traffic.
A great many of these features, I have no
doubt, can be more clearly brought out when
the Commission considers the suggested
Norfolk & Western System.
Western Extensions
It has been suggested that the Pennsylvania
Railroad System might have some interest
in going west of the Mississippi River and
also east of New York into the New England
Region. So far as the west is concerned,
our policy has been to regard Chicago and
St. Louis as our gateways and rely upon our
trafiSc relations with the other roads. I think
that is a wise and a reasonable view in main¬
taining an efficient system within reasonable
scope for administration, particularly in view
of the dense traffic and population of the
Eastern District.
Chicago-St. Louis Line
For such a large System as the Pennsylva¬
nia, with termini at Chicago and St. Louis,
it may be in the public interest to round out
the System by including a direct line con¬
necting the Northwestern Region of the
System at Chicago with its Southwestern
Region at St. Louis. The Chicago & Alton
—only between those Cities—or the Chicago
& Eastern Illinois would fulfill this suggested
requirement.
Traffic Exchanges with other Railroads
The preservation of open gateways with
the Pennsylvania's chief connections is very
essential. In the single month of March,
1923, it delivered to its connections 260,756
loaded cars, and received from them 287,636
loaded cars. In its consideration we have
the benefit of Prof. -Ripley's report, because
he puts side by side the traffic statistics of the
several gateways, and the amount of car
interchange between the various carriers,
whether competitors or not. In this he
brings clearly to the front the relations with
various roads, showing several important
traffic. exchange railroads, and demonstrates
that the open gateways result in the free ex-
' change of an extraordinary volume of traffic.
For instance, the Reading and Pennsyl¬
vania systems are competitors in Eastern
Pennsylvania, yet the Pennsylvania System
is dependent upon the Reading for a large
part of the anthracite coal tonnage needed
in its territory, and the latter has fifty points
on its System at which the Pennsylvania
exchanges loaded and empty freight cars.
The chief points are Philadelphia, Coates-
ville, Harrisburg, Lebanon, Milton, Potts-
ville, Shippensburg and Thurlow, Pennsyl¬
vania; Trenton, New Jersey; and Wilmington,
Delaware. In the three closing months of
1922 alone, the Pennsylvania System de¬
livered to the Reading System 95,106 loaded
cars, including over 55,000 cars received from
the Baltimore and Ohio via our Cumberland
Valley Division. It will, therefore, be seen
that the Pennsylvania System has a deep
interest in seeing that in any proposed scheme
of consolidation the Reading System gateways
are kept freely open, as it is a terminal dis¬
tributing railroad.
The New England situation is another
illustration of the benefits of Prof. Ripley's
work, in putting side by side the traffic
statistics of its several gateways at the
Hudson River, which convey a better idea
of the car movement to and from New Eng¬
land than any statistics heretofore published.
It is surprising to note the volume flowing to
and from the Boston & Maine Railroad,
which is the primary System for Central and
Northern New England, and aside from its
interchange with the New York Central, it
handled practically all the freight between
that section and points West of the Hudson
via the Delaware & Hudson, the Erie, the
Lehigh Valley and the Lackawanna Systems,
and through these roads traffic from the
Pennsylvania. The Pennsylvania is deeply
interested in keeping the Boston and Maine
as a gateway and open traffic exchange,
notably through the Delaware & Hudson
System and the joint Wilkes-Barre Gateway
in Pennsylvania.
It is also very important to the Pennsyl-
6
Vania S^rstcm that its traffic rclatbns with
Kew England through the New Haven Rail-
iroad be continued, both through New York
"Harbor and, looking to the future,. through
the New Haven's western gateways that now
serve the Lehigh and Hudson River Railway
and the Lehigh and New England Railroad.
Pennsylvania has a small stock ownership in
"the New Haven, and it has had established
■passenger and freight traffic relations with it
for about fifty years. It is the New Haven's
chief wcstbouhd connection, and a wide
market for the latter's traffic is found chiefly
in the Pennsylvania Railroad territory, and
the connections it reaches. The Pennsyl¬
vania is also its chief feeder of products from
the other States, including coal, steel, food
and materials of all kinds for its factories.
In connection with the New Haven System
the Pennsylvania constructed the New York
Connecting Railroad, known as the "Hell
Gate Route" which includes the use of 11
miles of the Long Island Railroad, a part of
the. Pennsylvania Railroad System. The
New Haven and Pennsylvania Companies
are joint owners of the stock and guarantors
of the New York Connecting bonds, the road
being operated by the New Haven.
Our long established mutual relations have
built up a large e.xchange traffic, and as a
tonscquence well established commercial
relations on a large scale have resulted be-
"ttvecai both territories, so that any proposi¬
tion to assign the New Haven and its traffic
to any other System would be a public calam¬
ity, as well as hurtful to the Pennsylvania
System. It is true, as Prof. Ripley points
out, that the New Haven's financial condi¬
tion is not strong, and under existing limited
net earnings the Pennsylvania could' not carry
its own burdens and financially carry the
New Haven as well. However, under the
proposed Consolidation Plan, which requires
valuation and assumably re-capitalization of
the Consolidated Systems, the financial ques¬
tions must be faced, and if adjusted in other
'cases, similar action wül be taken for New
Haven, and in that event I am sure it will be
found that all relationships, public and cor¬
porate, will unite the New Haven with the
Pennsylvania System as the best method of
giving the broadest transportation service.
Even if that result should be brought about,
the requirements of the territory donand a
a.eparate operating orgamzatfon dealing with
New England problems right at home. Fur¬
ther, I cannot see how the New Haven could
be assigned to another System mthout
assigning with it the guarantees, traffic re¬
lations and the important facilities which the
Pennsylvania provides. I also feel that the
tentative outline which in the west would
strip the Pennsylvania of the Norfolk &
Western traffic, and in the East would, strip
it of the New Haven traffic, is not in accord
with the aims of the Transportarion Act to
keep the Transportation Systems in full vigor.
We realize that the officers of the New
Haven System have been making à brave
struggle to meet conditions in their territory,
notwithstanding they must be short of both
facilities and equipment, because of their
weak financial condition; and are, no doubt,
hurt by the improved highways and the use
of motor trucks, which must result in making
many of the branch lines unprofitable. To
the extent of our resources we have always
made the New Haven very favorable allow¬
ances out of the through rates, and we assist
in supporting the New York Connerting
Railroad which is used chiefly for traffic to
and from the New Haven Railroad. Until
the financial difficulties of this situation are
cleared up, and without any knowledge of
what the New Haven officers may recommend
to the Commission, I feel that the New Haven
Road should remain separate under an inde^
pendent management, exchanging traffic
freely with the various connecting trunk lines.
In addition to its New England railroad
connections via New York Gty, the Pminayl-
vania System, for its present traffic also joined
\vith the Delaware & Hudson Railroad in
constructing an improved joint connecting
line around Wilkes-Barre to reach the inner
New England States and the Boston and
Maine, with coal and other traffic. To ac¬
commodate the present traffic and provide
for future growth, the Pennsylvania regards
it as most essential to have a direct western
entrance to the New England roads ■via the
Poughkeepsie Bridge route in co-opaation
with the Lehigh & New England Railroad.
The Pennsylvania System has only a small
tonnage of anthracite coal originating on its
own lines, and the Lehigh Coal and Naviga¬
tion Company, the owners of the Lehigh and
New England Railroad would be greatly
benefitted, if its coal could directly reach the
markets on the Pennsylvania System. Fur¬
ther the Betiilehem Steel Company is reached
via the Lehigh and New England Railroad
7
aad usea a quantity of aoft coal, part of
which oripnatca oa the Pennsylirama, and
besides has a large tonnage that needs such
an additional outlet. This would mean the
construction of a short Hnk, or the use of
some existing line, from the Susquehanna
Valley above Harrisburg to the Schuylkill
Valley, and there connect with the Lehigh &
New England Railroad which serves the Coal
Company's coal lands and also reaches- the
Bethlehem Steel Company's development.
There is a limit to the future volume erf traffic
that can be taken by the New Haven System
over its main line, which has.a very heavy
passenger traffic, through the New York
Gateway, and this additional outlet to New
England is UKessary. The Pennsylvania
also sends tonnage into New England via
the Lehigh & Hudson River Railway, recom¬
mended by Professor Ripl^ td remain as a
bridge line. (Pennsylvania and other roads
have a joint ownership in this road.) To
enable it to reach other roads which give it
through traffic for the New Haven via Pough-
keepsie Bridge route, Pennsylvania gave its
trackage rights from Phillipsburg to Belvidere,
N. J., in 1889. In rètum the LeMgh &
Hudson River Railway gave the Pennsyl¬
vania reciprocal trackage over its railroad
from Belvidere to Greycourt. That road
should probably be attached to the carriers
^ving it a larger business than tiie Pennsyl¬
vania provided the latter has a New England
connection via the Ldiigh and New England
Railroad, which also probably s^uld be con¬
tinued as an open bridge route.
Consolidation Requirements of Transpor¬
tation Act
My statement has been directed chiefly to
the Pennsylvania Railroad System, recog-
nking that this System works into and with
so many railroads for the movement of traffic
to all sections of the Qsuntry but I feel that I
should, out of a tong experience, say this
alignment and creation of new systems by
consolidation, as proposed in the Transporta¬
tion Act, does not deal with many of the
financial and other questions that corpora¬
tions usually decide before reojmmending
consolidations. Thé proposed grouping of
roads and thrir consolidation into large sys¬
tems muât keep plainly in view the special
requirements of the Transportation Ät of
1920, which indicate that the System Con¬
solidation Plans, to be prepared and adopted
by the Commission, must conform to the
followiiig essentials and proceduret— ;
' (1) Preserving competition as fully as'
possible.
(2) Maintaining' the erisling routes and
channels of trade and cqmmerce wherever
practicable.
■ (3) Subject to the foregoing paramount
requirements, the Systems are to be arranged,
so that the cost of transportation as between
competitive Systems, and as related to the
values of the properties through which the
servicès are rendered, shall be the same as
far as practicable. " ■
(4) These Systems to employ uniform
rates in the movement qf competitive traffic.
(5) Under efficient management tihese Sys¬
tems to earn substantially the-same rate of
return upon the value of their ■ respective
properties.
(6) The Commission, after hearings, is to
adopt a plan for such consolidations knd
publish the same, and at any time thereafter,
upon its own motion or upon application,'it
can in its judgment change, or modify, the
same, to promote the public interest.
(7) In harmony with such Plan oonscdida-
tions may proceed, by which the property of.
two or more railroad carriras, or any part
thcrœf, may be consolidated into one corpora¬
tion, but such consolidation must be in har¬
mony with, and in furtherance of, the cam-
plete plan of consolidation and must be ap¬
proved by the Commiasion.
(8) The bonds and capital stock, at par, of
the consolidated corporation shall not exceed
the value of the conscflidated properties as.
determined by the Commission.
(9) Such value shaU be ascertained by the
Commission upon the filing of the application
for consolidation.
(10) A hearing shall be given; theOa-vern-
ors of the States in which the consolidated
properties are situated shaU be notified, and
the Commission may raiter an order approving
consolidation, and the same may be effected
in accordance therewith, if all the earners t«-
whed assent thereto, notwithstanding the
laws, decisions or orders of any State authority
to the contrary.
Compacting 1600 Companies into 22
Systems
Let us look at the existing situation to be
dealt with.
The Act authorizes consolidation info a
limited number of systems but does not
8
prescribe the number. Hiat means all of
the railroads of the Country are to be dealt
with, and according to the Commission's
tentative outline and Prof. Ripley's report
about twenty systems are formulated. The
prment actual situation is the railroads of the
United States consist of about 1600, or more,
separate railroad operating and lessor cor¬
porations, but in addition there are about
five hundred more rather unimportant com¬
panies, and, therefore, I have not œnsidered
them as an essaitial part of the Transporta¬
tion System. In practical operation the 1600
or more companies have been reduced
pracrically to the 186 Class 1 railroad cnn-
paniei, t. e,, operating companies earning over
31,000,000 per annum in gross revenue, and
about 14 important Switching and Terminal
Cmnpames. These 200 Companies originate
over 91 per cent, of the frmght traffic, prob¬
ably a higher percentage of the passenger,
mail and express traffic, and earn about 97
per cent of the total railroad operating rev¬
enues of the Country. It would have been
no inconsiderable task to have laid down a
policy in the Transportation Act by which
the 1600 companies would be acquired by
the 186 Class I carriers, as a first st^, either
by dir«* punffias^ or exchange of securities,
but so that about 1400 Companies would have
been " disposed of. But consolidation is
intended to produce such far reaching results
that none except those who have reaHzrf the
enormity of the task would be satisfied with
even 186 carriers. Therefore, I can state it
differently—about 22 recognized railroad
systems now earn nearly 85 per cent, of the
transportation revenues of the Country.
The total operating revenue of Class I
Railways and Large Switching and Terminal
Companies for year ending Decamber
Slst, 1922, were 35,617,252,656, of which
84-7/10% was earned on the Class I Roads
embraced in the following systems:
1. Pennsylvania-Norfolk & Western Sys¬
tem.
2. New York CentraL
3. Baltimore & Ohio.
4. Delaware, Lackawanna & Western.
5. ]&ie.
6.-Lehigh Vall^.
7. New Haven—Boston & Maine.
8. Reading—Central Railroad of New
Jersey.
9. Atíantic Cfoast Line—^Louisville &
NashiriUe.
10. Chesapeake & Ohio—Nickle Plate, etc.
11. Illinois CentraL
12. Southern.
13. Atchison, Topeka & Santa Fe.
14. Chicago & North Western.
15. Chicagt^ Milwaukee & St Paul.
16. Chicagj^ Rock Island & Pacific.
17. Great Northern—^Northern Pacific—
C. B. & Q.
IS. St Louis-Sán Frandsco.
19. Soutiiern Pacific.
20. Union Pacific.
21. Missouri Pacific.
22. Missouri, Kansas & Texas.
Of course the real test is not the size, but
the net return earned on the property invest¬
ment and tlte ability to give a reliable trans¬
portation service.
It would be a task to reduce through con¬
solidation, or what might be simpler by
merger, absorption, and exchange of securities,
or by purchase^ the 186 Oass 1 carriers into
the 22 existing railroad Systems. Most of
the 186 carriers already either connect with
them as feeders or are allied with them through
stock ownership, leaser traffic rdations, etc.
What 1 hoped for at the time of the passa^
jrf the Transportation Act was an Act broad
enough to eliminate restrictive Federal and
State Laws and, provided the existing rail-
, roads had the necessary earnings, to gradually,
by absorption or by purchase of their physical
property or of their stocks, compact within
the existing Systems the numerous subsid¬
iary corporatíons now allied to the foregoing
22 Systems, and abolish the separate work
of accounting, reporting, financing and deal¬
ing with State and Federal bodies as well
as with their own respective owners. Then
deal with the indepaadait operating Com¬
panies as opportunity ctfFered.
Underlying Questions Concerning Con¬
solidated Companies
But I suppose that in recommending the
present Systems, sudi questions as these,
and others concerning the powers of the
Consolidated Companies, their valuation,
capitalizatioa, the rights of the existing
stodc and bondholders, the present and
future finandng and management of the
new Companies, and taxation including that
connected with the fmmation of the new
Qnnpanies and the issue of their securities,
the question of whether they have the facili-
9
ties and equipment'to co-ordinate and oper¬
ate tiie new Systems assigned to them, have
been, or wül be, considered. The present
Teatative System outhnc seems to be based
largely on freight traffic, but some serious
consideration I suppose has beai given to
passenger, mail and express traffic, terminals,
ekctrificathm and ot^r r«iuisites.
It needs no words from'me to say that
sufficient earnings and credit wUl be required;
nor need I point out.that in the past when
the Companies had sufficient earning power
and credit, consdidarions,. mergers, leases,
etc., were a common occurrence until stopped
by restrictive laws and poor earnings. I
need hardly say that the present carriers
sustain^ many weak branches and œm-
panies within their own Systems. Most
trf.them can support no more under existing
earnings. 1 assume that bdore ffiaal formu¬
lation of these Systems, some ' review will
be made of the necessity for continning many
weak roads and branches in view of decreased
business brought about by new highways and
waterways, exhaustion of lumber, coal, agri¬
cultural products, changes of business and
industries.
The English Plan
It may also be of interest to study the
English plan of dealing with their transpor¬
tation problems. They recognized that they
could not settle , their transportation policy
without having a basis for the co-operative
understanding and treatment of the Mgh-
ways. They, therefore, adopted a policy by
which, in substance, Governmental aid was
given.to the construction of Improved high¬
ways, but in- return the users of the highways
were require to pay additional taxes for
their maintenance, widening and improve¬
ment, by the National and local Govern¬
ments. Last year it was reported that
ÎK0,000.000 was raised from the motor users
for the benefit of highway improvement.
Some similar policy might also be applied
to our waterways as well as our highways.
With regard to their railroads, they have
carril out a pretty complete grouping under
permissive legislation, re-inforced, however,
with the notice that Parliament would make
amalgamations mandatory after a certain
date. There th^ carried out what I think
has many commendable features. The four
System Companies purchased the holdings
of the stockholders in their subsidiary Com¬
panies, and these Companies were wiped
out of existence. This left twenty-seven
larger Companies which exchanged their
securities for securities trf tte respective
System Companies of which they now con¬
stitute a part.
Thus they amalgamated 120 Companies
into Four System Cbmpanies having approxi¬
mately 2200 miles, 3800 miles, dStXJ miles,
and 7500 mil^, but all located in territories
not more than six hunted nûles long by
about 200 milles wide. However, ninety-
three unimportant enterprises, such as jointly
owned railroads, light railways, narrow gauge
lines, electric urban and subtrrban railroads,
and similar undertakings, were left for future
• action. The aggr^te road mileage of the
Four System Companies was only 20,ttX)
miles, against 250,000 miles in the United
States. Their total track and siding mileage
is 50,000 miles as against 400,000 in the
United States. Thar freight rates are double
the average ton mile rates allowed the rail¬
roads of the United States, even after deduct¬
ing from the British rates the cost of collec¬
tion or delivery of the traffic. Their average
frright car load is tons œmpared with
over 27 tons in the Unit«l States.
However, we may well inquire how it was
possible to compose so many different inter¬
este and work the important problem to a
conclusion with the approval of the Govern¬
mental Authorities, the public and tiie
owners. The chief reasons are that the
Government made a genmous settlement for
the War period to place the roads in the best
physical and finandal condition. They also
loaned capital to tite railroad ormpanies at
moderate interest rates to give them a start
on a normal basis. Most of the ormpanies
had increased their dividends since the War
and none had reduced tiiem. They are
allowed by the consolidation law to fix rates
and wages, subject to review by the Govern¬
mental Tribunals, that will continue the net
financial returns of .1913, in addition to
interest on the new capital spent since that
year. In addition, the British Government^
relieved them of all restrictive laws and taxes
covering the issue' and exchange of securities,
or the purchase of stocks of subsidiary com¬
panies.
The British public wanted this consolida¬
tion carried out, and realized it could not be
carried out unless financially sound and fair
to the owners. The public in Great Britain
10
had the option of continuing higher rates
to produce such a result, or to pay Increased
taxes to support the railroads. They said,
in substance,, we prefer to pay the rates
fixed by the railroads for they can and will
be reduced, rather than to support the rail¬
roads through taxes which are rarely reduced.
CONCLUSION
(1) That the real test of successful con¬
solidation Is that efficiency and economy will
be Increased; that the Initiative of manage¬
ment and operation will be preserved; and
above all that the net earnings will be suffi¬
cient In normal years to earn a fair return
on the property Investment, so that at all
times sound credit may be maintained to
provide present and future adequate trans¬
portation facilities, and keep the railroad
transportation service In full vigor.
(2) That judged by what the Pennsyl¬
vania Railroad System has gradually accom¬
plished In compacting Its System from six
hundred Companies to about seventy Trans¬
portation Companies, consolidation can be
accomplished under permissive consolidation
laws, provided the carriers are allowed to
earn the financial basis to undertake con¬
solidation. A similar proof Is afforded by
the record of thousands of railroad cprpora-
tlons that have been eliminated In a twenty
year period by other railroads.
(3) That in considering consolidation and
the creation of new Consolidated Corpora¬
tions, It Is well to keep in mind that we have
at present about twenty-two chief railroad
systems which could be compacted so as to
eliminate many unnecessary corporations.
That the railroads are owned by the public
and their institutions; are regarded all over
the World as conservatively capitalized com¬
pared with their real value; are most effi¬
ciently operated and their rates lower than
in any other civilized Country. That they
have been the main Instruments for the
settling and developing the entire Country;
and notwithstanding the small return of
less than 4 per cent, on the property invest¬
ment in the last fifteen years, their efficiency
and vigor should be a matter of National
satisfaction. That they could have done far
more with larger earnings, and better credit,
is beyond.all question.
(4) That with liberal laws, and with fair
returns on their property investment, they
can prove one of the most Important Instru¬
ments In developing the trade and commerce
of the Country and promoting Its progress;
and that they will require no special financial
aid from the Government beyond the freedom
given to other corporations, but under reason¬
able regulation, to preserve full vigor and
initiative of management and operation.
(5) The Pennsylvania System as It exists
today Is one of the most Important of these
carriers, and. has been developed to meet
the requirements of trade and commerce, and
to exchange traffic with most of the large
systems In the Country; and Its mainte¬
nance In Its practical Integrity will tend to
maintain and preserve the competition
designed by the Transportation Act. That
for such purpose Its traffic exchange rela¬
tions with the New Haven System and New
England generally, should be preserved; and
equally Important to Its operating and
financial stability and public service. Is the
maintenance of Its relations with the Norfolk
& Western Railway. The holding of a large
stock ownership In that Company by the
Pennsylvania, would naturally tend to facili¬
tate consolidation between It and the Penn¬
sylvania System, and this Important point
should not be overlooked, as Prof. Ripley
points out the purpose mainly sought to
be subserved by the grouping, so as to best
serve the public. Is to bring about voluntary
consolidations by the Companies affected.
Further, the separation of these traffic rela¬
tions and properties from the Pennsylvania
group would result in giving It a property
Investment return below many of the other
groups tentatively outlined, and thereby
would not comply with one of the main
requirements of the Transportation Act.
Prof. Ripley significantly points out that:—
"Quite Irrespective of size, the ulti¬
mate financial test of the feasibility
■ of the 21 systems herein proposed Is
applied by the subjoined table. The
significant feature Is the right-hand
column, bringing out the net operating
Income In percentage of Investment.
* * * The measure of success, there¬
fore, is the relative approximation of
the earning capacity of each system to
that figure."
Il
SupplemenM Statement of Samuel Rea, President of the Penn¬
sylvania Railroad System, before" the interstate Commerce
Commission, at Philadelphia, in the matter of the Consolida¬
tion of the Railway Properties of the United States into a
limited muaber of Systems. June, 1923.
(No. 12964)
T DESIRE to supplement my statem^t re-
specting RaUroad Consolidation, which was
made before the Interstate Commerce Com¬
mission at the public hearing held in the City
of Washington, May 16th, 1923, as foUowsí-^
Appreciating how earnestly the Interstate
Commerce Commission is endeavoring to
comply with that part of the Transportation
Act of 1920, requiring it to prepare and adopt
as soon as practicable a plan for the consoli¬
dation of the railway properties of the conti¬
nental United Stat» into a hmited number
of systems, and realizing the special duty
assigned to it by Law, which may not require
it to deal with all phases of consolidation at
this lime, and wWch, nevertheless, the Acs
does not fully or dearly deal with, may I
direct the Commission's atteaticm espedally
to page 29 of my statement respecting con¬
solidation made at the recent hearing before
that body. It refers to the underlying ques¬
tions concerning the proposed consolidated
companies and are questions that railroad
companies desiring to consolidate, in accord¬
ance with the Transportation Act, will have
to answer to their own stocdc and bcmd holders,
to trustees and bankers and to savings banks
' and insurance companies, etc., who purchase
or hold railrmd secmritim under restrictions im¬
posed by Law as to returns earned thereon and
mortgage lien requirements, and finally to the
Commission, before consolidations can proceed.
They constitute some of the practical
problems which the railroads must face when
they ccane to carry out any plan of system
consolidaticm under the Transportation Act^
in addition to other features referred to in
the statement I made to the Commission at
the public hearing.
For instance^ let us at the outset agree that
two or more of the larger companies desire to
apply for authority to consolidate under the
Transportation Act. Is the new consolidated
system company omtemplated in their appli¬
cation required to be a Federal corporation or
a State corporation?
How oan appKcation be made by the com¬
panies for oonsolidation unless the value oF
the consolidated property has been first ascer¬
tained, yet the Act docs not authorize valua¬
tion to be ascertained -until application has
been filed? Without such valuation how can
the companies determine how much stock and
bonds can be issued? This is a most impon-
tant essential of every consolidation. The
Act states that the bonds and capital stock
at par of the consolidated company shall not
etceed the value as determined by the Cont-,
mission. Think of what this final valuation
means. The present railroad valuation has
been under way £sr about ten years and seems
far from a conclusion, at least so far as fixing
a purchase or condemnation value, or a value
for re-capitalization purposes to effect a
consoUdation.
The system consolidation plans can provide
that part of the properly of one or more rail¬
road carriers may, in furtherance of the plans of
consolidation, be assigned to another system.
How are the rights or equities of the present
bond and stock holders to be determined?
What is to be the effect on security values
while this is going on?
If part of a railroad is given to another con-
sdidated system, or if a system with which
traffic relations now exist is attached ■ to.
another competing system, will the system to
which it is assigned take over the responsi¬
bilities and guarantees that form part of such
relation, and also take over the physical facili¬
ties now jointly used, such as yards, piers and
floating equipment, and compensate the
present owners? This wiU also greatly affect
existing values and commercial relations.
. Are the constituent systems to be earning
the 5^ per cent, return allowed by the Trans¬
portation Act, or some better self-sustaining
return, before consolidation takes effect?
Otherwise, how can a strong road, without
any guarantee from the Government, get the
consent of its bond and stock holders to con¬
solidate with weak roads, or to ^ve up.
12
voluntarily, and at its own risk, part of its
present property, traffic, or earnings to a
weak road to make it strong?
In agreeing upon the capital to be issued by
a consolidated system, shall the capitalization
of the weak road, to be included therein, be
based upon earnings or upon physical value,
and in the latter case is the cost of property
or valuation of property constructed through
a country with heavy grades, or over a cir¬
cuitous route, to be entitled to the same value,
in the consolidated company, as that of a
railroad constructed over the most economic
route?
Will the assignment of a weak road to a
strong road in practice mean that, although
the weak road has heavier grades or a longer
route, the strong road will be forced to route
traffic over the weak line to make it self-
sustaining, and that the public will be willing
to pay the necessary rates to sustain the weak
road? It is clear that while the weak road
may be very essential to a certain part of the
Country, it is not at all so necessary to the
Country as a whole, compared with a main
low grade line over which through, as well as
local, traffic in great volume is carried, and
from a transportation service standpoint sec¬
tions of the weak road might be abandoned
and the traffic moved over the most direct
route and the lower grades. If the weak
road should be abandoned in whole or in part,
or its capitalization reduced because of poor
earnings, why not do so before consolidation?
Even when the consolidated company has
been formed, the Commission may, at any
time thereafter, either on application or
upon its own motion, change or modify the
same. (See Section 5, paragraph S.) Does
this really mean what it says, that is, a con¬
solidation once affected might be modified
or changed by the Commission? If so, it
will not be possible to finance a consolidated
company subject to such risks of changing
policies.
The consolidated company will mean the
formation of a new system corporation and,
therefore, will require extensive negotiations
to ascertain on what basis the liens of the ex¬
isting respective mortgages, contracts, lease¬
holds, and guaranteed stocks and bonds will
be dealt with, and the relative order of their
precedence, both as to principal and interest,
or fixed rentals.
It will be noted that the Act requires that
the systems are to be so arranged that the
cost of transportation as between competitive
systems, and as related to the values of the
properties through which the services are
rendered, shall be the same, as far as practi¬
cable. There is no means indicated by which
that relation shall be preserved as against
changes in agriculture, manufacturing centers,
mining or population, or even against changes
ill the relative operating efficiency and man¬
agement, or the routing of traffic by the
shippers.
The new consolidated system company,
if subject to State laws, must be prepared to
pay the fees required by the State in connec¬
tion with its formation and the authorization
of stock to be issued in exchange for the
outstanding stock of the constituent com¬
panies. Just take two of these provisions
and apply them to a system equal to the
Pennsylvania Railroad System, if consoli¬
dated into one system corporation, valued
at say 32,500,000,000., which would be
capitalized in 31,250,000,000. stock and
31,250,000,000. ■ bonds. There is a Federal
tax on the original issues of securities of
50 cents for each 31,000. par value, which
would be equal to 31,250,000. In some of
the States through which it passes there is a
tax equal to 0.1 per cent, on the par value of
the authorized capital stock, which, if carried
out by all the respective States, would amount
to 31,250,000. in each State, for we may
assume that the States will find means of
levying these taxes. If the new company is
to be a corporation only of the State of
Pennsylvania, there is the Bonus Tax in
that State of one-third of one per cent, on
capital stock, and this would amount to about
34,167,0(X). on the original issue if applied
to this consolidated corporation. Think of
the large additional cost of engraving bonds
and stock certificates, and the cost of regis¬
tration, record of ownership, etc. Think of
the effect on market values while all this is
going on, and while all of the foregoing
problems of such great magnitude are pro¬
ceeding.
The reason for directing attention to these
prospective, but practical, problems is in the
hope that the Commission, in outlining the
consolidated systems to Congress, will also
point out the necessity of having a practical
basis upon which the consolidations can be
carried out. For that reason reference has
been made to the existing big systems into
which ' the other smaller connecting lines
13
might be merged, or by which they could be
purchased and absorbed, and thereby avoid
the necessity and expense in creating new
consolidated system companies as far as
possible.
In my statement respecting consolidation
I referred to the English Grouping Plan,
which has been carried into effect but, as
yet, has had too short an experience to be
called successful. Nevertheless, the chief
reasons why the English Grouping Plan was
effected were:—
1. The companies were put on a self-
sustaining basis;
2. The larger Amalgamated, or Group,
Companies purchased the securities of their
smaller subsidiary roads, and exchanged the
securities of the- larger connecting roads for
those of the Group Railroad Companies
into which these larger Companies were
consolidated; and
3. Taxes in connection with the issue,
conversion or exchange of securities to con¬
stitute the new Group Companies were
remitted.
• If, in the United States, we must form
new consolidated system companies, it will
take a long time to do so unless some, if not
all, of the foregoing basic questions, and the
heavy taxation, are dealt with in advance by
ample legislative authority.
It may be said that this frank expression
on the situation means consideration of
mandatory consolidation. My reply would
be that under mandatory consolidation the
same problems would have to be faced.
First and foremost the existing companies
must have a proper earning and credit basis
to proceed with system consolidations; other¬
wise the system consolidation plan will be
largely theoretical and futile
The question might well be asked what
remedy have I to suggest to meet the various
situations dealt with in this statement.? My
general conclusion is that railroad consoli¬
dation ought to be encouraged to eliminate
unnecessary corporations. Therefore, if there
is any doubt as to the present provisions of
the Transportation Act regarding the power
of the existing railroad companies to eliminate
unnecessary existing railroad corporations,
and to do it free from the restrictions of the
Anti-Trust Laws or other restrictive legisla¬
tion, Federal or State, then a new consoli¬
dation act should be passed which would, in
substance, enable any existing operating
railroad system to absorb, merge or con¬
solidate with and into itself, upon terms to
be approved by the Interstate Commerce
Commission, all of the railroad companies
which at present form a part of its system, or
are allied with it through stock ownership,
lease, traffic relations, etc. I had believed the
Transportation Act did not prevent this but,
in practice, it has. The provisions of the
Act preventing consolidation referred only
to large systems, especially competitive sys¬
tems, which might have disarranged com¬
merce, and to prevent that the Act required
the preparation of the consolidated system
plan on which the Interstate Commerce
Commission is now engaged. I would also
extend these broad powers to such other
railroads as the Interstate Commerce Com¬
mission might approve, because of their
relation as feeders or connecting lines of the
acquiring railroad, and as a proper develop¬
ment of the railroad system of the acquiring
company to more properly serve the public
and strengthen the credit of the carrier.
In other words, the practical result at
which I would aim would be to reduce the
1600 or more separate railroad operating and
lessor corporations that form an essential
part of the continental transportation sys¬
tem of the United States into the 186 Class I
railroad companies and the 14 important
switching and terminal companies. Then
the next step would be to reduce the 186
Class I carriers to a relatively small number
of systems, as about 22 recognized railroad
systems now earn 85 per cent, of the trans¬
portation revenues of the Country. This
I pointed out in my statement to the Inter¬
state Commerce Commission at the hearing
held in Washington in May, 1923. My
further belief is that given the proper amount
of earnings to enable these systems to under¬
take consolidations or mergers on a large
scale, mandatory consolidation provisions
are unnecessary.
For instance, I would permit this to be
done in different ways:
(1) I would permit consolidation of one
or more of these companies in which new
corporations would be created, and re-issue
the securities in whole or part as might be
required.
(2) I would permit it to be done by merger
or absorption, i. e. merger by which the
14
parent or system company would merge into
itself other railroad corporations by issuing
its own securities for the whole or any part"
of any of the existing securities of the cor¬
poration to be merged. Further, I would
permit the adoption of any of the existing
securities of either the merging company or
the merged companies and allow them to
remain outstanding, such as their bonds and
also guaranteed stock or un-guaranteed stock.
In this case, of course, a proper price or value
would have to be agreed upon, subject to
the Commission's approval. This would be
a matter of negotiation.
Under the heading of merger I would also
permit the absorption by the system company
of any subsidiaries of which it already held
either the entire stock, or in which it held
the larger part and give it power to acquire
the balance. This would apply to leased
roads as well as separately operated companies
in the system.
(3) I would authorize the acquisition by
the system or parent company by deed of
conveyance, or other appropriate instrument
of transfer, of the whole or any part of any
other railroad property and franchises of
which the Commission might approve, so
that it could practically be carried out like
a real estate purchase and conveyance.
Merger, absorption, or outright purchase
gives an opportunity to avoid many questions
and delays. respecting outstanding stock or
bond issues of either the vendor company or
vendee company.
The point at which I would aim is liberal
powers for any company with the necessary
credit to acquire, in every possible way, any
existing smaller railroad corporations, and in
doing so avoid heavy taxes and extensive
changes, issues and transfers of stocks, bonds
and other securities. There is one element in
regard to these acquisitions and mergers that
must be guarded against, and that is many of
them are concluded on the basis of cancelling
the existing stocks and taking over the prop¬
erties subject to the existing bonds. The
result of that process with many of the exist¬
ing railroad systems is to reduce J^he out¬
standing stock and correspondingly 'increase
the proportion of capitalization represented
by outstanding bonds. The widest latitude
should, therefore, be given to the railroad com¬
panies and the Commission to deal with such
situations.
In these consolidations and mergers every
system may have to retain several rather
large corporations as component parts of the
System for some years until the whole ques¬
tion of earnings and credit has been placed
in the condition whereby one system company
can do all the financing for the system and be
free of restrictions as to the amount of stock
or bonds it can issue. None of these systems
ought to have its capitalization represented
by bonded debt or other fixed obligations in
excess of some proportion like three times the
par value of its outstanding stock; or that will
require to pay its fixed charges too great a
proportion of its net railway operating in¬
come and the income from its investments,
which together constitute its gross income, in
normal years. There must be a fair amount
left to pay reasonable dividends. Otherwise,
without any guarantee from the Government
or any other source, the credit of the system
becomes too weak to finance its needs, at
reasonable interest rates, and common stock
cannot be sold on any basis.
Other questions such as permitting rail¬
road companies to issue and sell or exchange
railroad stocks for less than par, which is the
right they have with respect to bonds, should
be embodied in the law. I am greatly im¬
pressed with the English Plan already referred
to as a practical method to insure progress.
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