~h. ^ S"
H 1 3
c
STATEMENT OF
JAMES H. HUSTIS
PRESIDENT
OF THE
BOSTON AND MAINE RAILROAD
BEFORE THE
INTERSTATE COMMERCE COMMISSION
IN THE MATTER OF
CONSOLIDATION OF RAILROADS
I. C. C. DOCKET NO. 12964
MAY 1923
H • fr *
The Boston and Maine is seeking no
alliance with other railroads. Its manage- introdUction
ment recognizes, however, that the consolida¬
tion of railroads into larger systems than now
exist is a necessary and fundamental part of
the Transportation Act. Among other pro¬
visions of the Act, the Commission is directed
to submit a plan for consolidating the railroads
of the country into a limited number of sys¬
tems, and the Commission is now seeking
evidence upon which to base such a plan. I
am here in response to the Commission's
notice in respect to this hearing. While any
opinions in this statement should be taken
largely as individual expressions, yet, in a
general way they are, I believe, in harmony
with the views of the Board of Directors.
Exhibits indicating the physical, traffic and
financial situation of the Boston and Maine Exhibits
have been prepared in accordance with the
outline of suggestions submitted by the
Commission some time ago, and are largely
self-explanatory. If the Commission desires
detailed explanation or discussion of them,
witnesses will be furnished under whose
immediate supervision they were prepared.
The exhibits are largely based on the calendar
year 1921. They were prepared before the
expiration of the year 1922 in anticipation of
an earlier hearing. Although the traffic of 1921
2
was light, it is in some respects a more repre¬
sentative year than 1922 when the service
was affected by the coal and shopmen's
strikes.
So far as possible the exhibits show the
Consolidations entire Boston and Maine system, which com¬
prises the following lines:
Boston and Maine
St. Johnsbury & Lake Champlain
Montpelier & Wells River
Barre & Chelsea
Vermont Valley
Sullivan County
York Harbor & Beach
These lines are controlled by the Boston
and Maine through stock ownership and are
operated as parts of the system. We have
recently attempted to consolidate these sub¬
sidiaries, except the St. Johnsbury & Lake
Champlain, with the Boston and Maine, and
necessary authority has been obtained from
the interested states. Our application to the
Interstate Commerce Commission was denied
on March 19, 1923, in Finance Dockets Nos.
2592-3-4 on the ground of lack of authority.
It is hoped that as the outcome of these pro¬
ceedings, the Commission may find it possible
to grant the necessary authority.
Description of The Boston and Maine System comprises
the Property 0Ver 2500 miles of railroad in northern New
3
England, and a considerable portion of the
territory which it serves is exclusively de¬
pendent upon it for railroad transportation.
The northern half of Massachusetts is served
almost exclusively by the Boston and Maine,
the State of New Hampshire almost entirely
so — so also are important sections of Ver- '
mont and Maine. It is the only rail outlet for
the State of Maine except through Canada.
It also reaches into Canada and New York
State in connection with its participation in
important through routes, and controls a small
but important railroad in Canada.
In the year 1920 it carried over 3,700,000,000
tons of freight one mile, and over one billion Traffic Volume
passengers one mile. Its freight traffic meas¬
ured in ton miles more than doubled in the
twenty years from 1901 to 1920, and the
passengers carried one mile increased sub¬
stantially (60%) in spite of the encroachment
of the automobile. This growth in traffic has
required large investments in the property
and in the past lQyears alone, over $50,000,000
has been expended in improvements and for
new equipment.
Figures in millions or billions of traffic
units do not carry any special significance ^^^any*
except to students of transportation. Few Prominent
realize that the Boston and Maine not only Roads
handles more tons than the Union Pacific,
4
Northern Pacific or Frisco railroads, but that
it has a higher freight traffic density per mile
of line than the Burlington, Santa Fe, North¬
western, Great Northern, Rock Island, Mis¬
souri Pacific, Southern Pacific, Northern Pa¬
cific, Frisco and Southern. In number of
passengers handled and in passenger traffic
density, the Boston and Maine leads all of
the roads mentioned above. Among Eastern
roads it exceeds the Baltimore and Ohio as
well as the Big Four and Michigan Central
combined in this respect. Its passenger traffic
density is nearly double that of the Southern
Pacific, over three times that of the Burlington
and over five times as great as that of the
Great Northern. The North Station of the
Boston and Maine at Boston ranks first in
the United States in number of passengers
handled by a single railroad, being distanced
only by the South Terminal Station at Boston
and the Grand Central and Pennsylvania
Terminals in New York, all of which serve
more than one railroad.
It has been so often stated — even by our
New England's own New England people — that New England
Growth is becoming decadent industrially, that many
have come to believe it is true. This is not
true. While New England has not grown as
fast as some parts of the country, it has by
no means gone backward.
5
Taking our own railroad, for example. In
the last two years 25 industries have either
been discontinued or moved to points outside
of New England, and 13 have transferred to
other points within New England. In the
same period, however, 82 new industries have
located in Boston and Maine territory. The
net result is a substantial gain.
The population of the New England states
increased from 5,592,027 in 1900 to 7,400,909
in 1920, over 32%. The capital invested in
New England manufactures has increased
from $1,870,000,000 in 1904 to $5,671,000,000
in 1919, and the value of products of manu¬
factures has increased from $2,025,000,000 in
1904 to $7,183,000,000 in 1919. In the same
period the wage earners increased from 940,-
752 to 1,288,389.
We hear much about the textile industries
leaving New England and it is true that the The Textiles
growth of these industries outside of New
England, particularly in the South, has been
rapid. Nevertheless in 1920 New England
cotton mills had over 17,000,000 spindles or
47.6% of the spindles operated in the United
States. It is a. matter of common knowledge
that the available labor in the South has been
largely absorbed, and with the industrial
problems now arising in the South and the
development of the water powers of Northern
Importance of
Doston & Maine
Financial
Structure
New England and the adjoining portions of
Canada, it is not unreasonable to expect that
New England's industrial preeminence will
continue in the textiles as well as in many
other fields of manufactures.
It is evident that the maintenance of ade¬
quate transportation on the Boston and Maine
system is important not only to the territory
immediately served by it, but to the country
as a whole, for which its territory is an im¬
portant market and to which products of its
territory move in large volume. Approximately
60% of the Boston and Maine's tonnage is
interchanged with roads outside of New
England.
The financial structure of the Boston and
Maine Railroad is sound. It has the stamp of
governmental approval. The United States is a
holder of $43,614,479 of its bonds. A reor¬
ganization was accomplished in 1919, with the
approval and assistance of the United States
Railroad Administration, by which the holders
of the stock of leased lines, upon which re¬
turns in excess of $2,500,000 per year were
guaranteed, accepted first preferred stock of
the Boston and Maine, the dividends upon
which are contingent upon earnings. By this
reorganization the ratio of fixed obligations
to stock was reduced roughly from 4 to 1 to
3 to 2.
7
From a valuation standpoint the integrity
of both the property investment account and valuation and
Capitalization
the capitalization of the Boston and Maine is
assured. The Bureau of Valuation of the Com¬
mission last year served tentative final valua¬
tion figures. These figures give the following
results when adjusted to December 31,1921,
by the inclusion of actual additions to the
property since the date of the valuation. As
certain minor portions of the property were
not included in the Federal valuation, the
following figures have been adjusted accord¬
ingly.
Interstate Commerce Commis¬
sion valuation adjusted to
December 31, 1921 $281,553,126
Property investment account
as of same date and includ¬
ing all items covered by val¬
uation 256,919,350
Capitalization as of same date 221,653,159
Protests have been filed which, if allowed in
full, would increase the valuation over
$125,000,000.
If the Boston and Maine were able to earn
a return of 5% % — the rate currently es- Earning Power
tablished as fair by the Interstate Commerce
Commission — upon even its conservative
property investment account, this return would
pay all fixed charges, dividends, and provide
8
a substantial amount for surplus or improve¬
ments to the property. During the 3-year
"Test Period," prior to Federal Control, the
earnings of the Boston and Maine were suffi¬
cient to pay all interest, preferred dividends,
and leave a return of about 4% on the common
stock. The earnings of the test period did not
reflect the increased divisions of through rates
which have recently been granted the Boston
and Maine, nor the increase in local New
England rates which was approved by the Com¬
mission in 1918.
In the next seven years there will mature
obligations aggregating over $77,000,000 ex¬
clusive of Equipment Notes. Of the total of
$43,614,479 Boston and Maine bonds held by
the Government, over $35,000,000 are in¬
cluded in the maturities of the next seven
years.
Aside from these refunding operations, the
need for new capital during the next few years
will be no less than it has been in the past
decade. The establishment of credit, there¬
fore, is an important, if not a controlling factor
in any plan of consolidation.
I have attempted to point out that the
Boston and Maine is an important and neces¬
sary transportation unit with a financial struc¬
ture entitling it to earn a return that should
restore its credit, enable it to develop its
g
property, and provide a satisfactory trans¬
portation service.
The Commission is aware of the financial
results since the return of the roads at the
end of Federal control.
It is also aware of the favorable develop¬
ments, particularly in the so-called New Eng¬
land Divisions Case, and in the decision of the
United States Supreme Court in support of
that case which offers hope for the future to ,
roads situated as is the Boston and Maine.
On the other hand, the Commission's de¬
cision ordering a. 10% reduction in freight
rates, effective July 1st, 1922, and its recent
order in the matter of interchangeable mileage
books, by which groups of railroads rather
than individual units were considered, make
it evident that the future of any one railroad
may not be considered entirely apart.
The Commission, therefore, may itself
forecast the future with greater accuracy than
it is possible for me to do.
But whatever may be the ultimate outcome
of the provisions of the Transportation Act
which offer relief, the processes by which this
relief may be secured are slow, and neces¬
sarily so. In the meantime, the demand
for transportation is insistent and controlling.
Before considering any of the tentative The Practical
plans of consolidation recommended by|the Side
10
Commission, I should like to say something
as to the practical side. Previous to coming to
New England in 1907, I was connected with
one of the trunk lines, the New York Central,
in an official capacity, and since coming to
New England I have occupied the position of
chief executive of the three principal New
England roads. During the period of Federal
control, I was District Director, having super¬
vision over all roads within New England.
As a result of this experience, obtained
from both sides of the Hudson River, I wish
to say that, in my judgment, the arguments
which have been frequently made for or against
the several plans such as "absentee manage¬
ment", "competitive routes", "bargaining
power as to rates and divisions", etc., are all
much less important than service.
In passing, it might be said that as to the
matter of "absentee management" and "com¬
petitive routes", so far as there is any weight
to these arguments, they may be and have in
the past been urged against any consolida¬
tions, whether in New England or elsewhere.
In spite of these and other considerations,
Congress has directed that a plan be prepared.
But as I have said, service, in my judgment,
Service is the fundamental thing; and by service
I mean the ability of the New England rail¬
roads to receive promptly from their Western
11
connections freight as it is offered and
distribute it with equal promptness, as well
as to handle the products of New England.
To do these things it is necessary that the
roads should be equipped with tracks, yards,
engine facilities and locomotives to handle
with reasonable dispatch the peak loads
that come during certain seasons in each
year of normal business. Failure to do
this means not only congestion and expense
to the railroads within New England but to
those without, and perhaps even to a larger
degree to the interests which the railroads
serve.
The expense because of these situations
has been and will continue to be enormous
to all interests affected, and it will be repeated
from year to year in seasons of heavy traffic
until the conditions responsible for it are
removed.
They have been largely removed in the
case of one New England railroad by the The Boston
& Albany
only means through which it will be pos¬
sible for them to be removed by the others.
In 1907 I became connected with the Boston
& Albany. At that time it was unable to
receive through its Western gateways in
excess of 500 cars per day. For many recent
weeks it has handled an average of over
1100 cars per day from its Western connections.
12
In 1907 the bonded indebtedness of the Bostc
& Albany was $8,485,000. Today it
$26,000,000, an increase of over 200%. Ho
was the money spent? For third and fourl
main tracks, yards, engine facilities, locc
motives and other equipment. What hi
been done on the Boston & Albany in th
way of improved service would not hav
been possible without the expenditure (
these large sums. I might add that thes
large sums, in my judgment, would not hav
been forthcoming had the Boston & Alban
continued to have been operated as an ir
dependent unit.
Before referring to the three alternativ
Canadian plans published tentatively by the Commi;
Connections a wor(| ^ regar(i to the Canadia
connections of the Boston and Maine may b
pertinent. The Boston and Maine has
substantial interchange with the Canadia
Pacific direct and with the Grand Trun
(now the Canadian National Railway;
through the Central Vermont. New Englan
traffic is regarded as attractive by both (
these lines, and a high quality of service :
maintained through these northern gateway:
which has probably been quite as effectiv
in maintaining the popularity of these route
as have the westbound differential rate:
The suggestion has been made that one c
13
the other or both of these lines might take
over the Boston and Maine. It is doubtful
whether the Commission has power under
the statute to recommend consolidation of
American roads with the two large Canadian
systems. Moreover important political con¬
siderations would be involved in such an
arrangement. But there is nothing to prevent
some arrangement short of actual consolida¬
tion satisfactory to those interests and ours,
and I trust that the findings of the Commis¬
sion in this case will not foreclose us from
entering into such an arrangement. In any
event, and in any plan which may be adopted,
the importance of these routes not only to
New England but to the Boston and Maine
will, of course, be recognized.
Of the Commission's three alternative
plans, one is that of an all New England New England
System
system (No. 7) excluding however, the Boston
& Albany, Rutland and Central Vermont which
are already affiliated with outside systems,
as well as the Grand Trunk and Canadian
Pacific lines in Maine.
I am in accord with the suggestions already
made in these proceedings, that if a New
England system is decided upon, it should be
a really inclusive New England system com¬
prising all lines within the territory except,
possibly, the Canadian lines in Maine. Only
14
from such a system could the full benefit of
the advantages claimed for a New England
consolidation be realized.
There is a sentimental appeal to the New
Englander in the New England plan and it
also has its practical appeal, both of which
should and, no doubt, will receive consider¬
ation. But will it solve the problems which the
Transportation Act is designed to remedy?
However effective such a system would be
in maintaining "the existing routes and
channels of trade and commerce," and even
if the competition of trunk lines for New
England business may be assumed to meet
the requirements of the Act as to the preser¬
vation of competition, a New England system
would hardly comply with the requirement
that "the several systems shall be so ar¬
ranged that the cost of transportation as be¬
tween competitive systems and as related to
the values of the properties through which
the service is rendered shall be the same, so
far as practicable."
In his testimony in these proceedings, Mr.
"Unfair and Loree, after commenting on the exclusion of
Excessive «
Divisions" certain important lines from the proposed
New England system, states "the consolida¬
tion into a single system of the remaining
New England railways is, however, one of
the proposals and as to this it is necessary to
15
observe that the power of such a combination
to divert an important volume of traffic at
its pleasure from one connection to another
would confer an opportunity to extort unfair
and excessive divisions which would cer¬
tainly be utilized and which ought not to be
permitted." A similar argument has been
advanced by those favorable to a New Eng¬
land consolidation.
If it is true that through a combination the
New England roads would secure these
results, then that is an important considera¬
tion in favor of such a plan, but I confess that
this has not appealed to me as particularly
promising of practical results. I am inclined
to agree with Mr. Jenney who is reported to
have said in substance, that under the pro¬
visions of the Transportation Act, divisions as
between carriers rest more on equity than on
the ability to drive a sharp bargain. Our re¬
cent experience in the New England Divisions
Case would seem to substantiate this view.
In recommending a New England system
Professor Ripley recognized the financial Financial
Obstacles
obstacles to such a plan and suggested "a
mustering of all the financial resources of the
region, public as well as private."
In my judgment, the arguments in favor
of a New England system, particularly as it
may be expected to solve the financial diffi-
16
culties, are too indefinite. In any event, the
burden of proof rests with the proponents of
the plan to show that it is practical and will
solve the transportation problems in New
England more effectively than is possible with
the present separate properties.
Another alternative plan suggested by the
Commission is that of a New England-Great
Lakes System (No. 7-A). One of the advan¬
tages claimed for such a plan is that it would
provide the New England roads with access
to the coal fields. Another is that derived
from the inclusion of certain roads of estab¬
lished credit. This plan, however, is merely an
extension of the suggested New England
system. It includes the Delaware and Hudson,
one of our principal connections, to which
I shall make further reference in discussing
the Trunk Line Plan.
The Trunk Line Plan as recommended by
Trunk Line Plan the Commission is that the Boston and Maine
should be included in system No. 1—New
York Central. Professor Ripley discarded
this plan by reason of the size of the present
New York Central system. On the other hand
he states "The baldest proposal is a consoli¬
dation of all of these properties (Boston and
Maine, Maine Central and Bangor and Aroos¬
took) with the New York Central. The finan¬
cial advantage is obvious." .
New England—
Great Lakes
System
17
My own judgment in the matter is that it
would be both to the advantage of the Boston
and Maine as well as to the territory served by
it to be affiliated with a strong east and west
system. Whatever economies in management
or operation might result from a New England
system would be more than offset by econ¬
omies resulting from an affiliation with a trunk
line which would result in a long haul under
one management. At the present time the
only system answering that description is the
New York Central. It is possible, however,
that other systems may be built up which
would serve the same purpose and avoid some
of the objections which have been raised
against a combination with the New York
Central system.
Mr. Loree in his testimony states, "The
Delaware and Hudson would be particularly Attitude of
and most unfavorably affected by the pro- Trunk Line
posed transformation of the Boston and
Maine from an independent operating con¬
cern to an integral portion of a system which
would be capable of diverting to its own rails
a great deal of the traffic which now passes
:rom and into New England through the Me-
ihanicville gateway."
Mr. Loree suggests two methods of treating
:he northern New England roads. First, that
he New England roads north of the Boston
18
& Albany be united with the Delaware &
Hudson. Second, that the New England roads
north of the Boston & Albany be united
with the Boston & Albany and that the
Delaware & Hudson and New York Central
become equal owners in the consolidated
property.
There is much force in Mr. Loree's objec¬
tion to the control of the northern New Eng¬
land roads by the New York Central viewed
from the standpoint of the Delaware and
Hudson, for it is true that the freight inter¬
change of the Boston and Maine with the
Delaware & Hudson is larger than that with
any of its other western connections.
Mr. Rea also states that "The Pennsyl¬
vania is deeply interested in keeping the
Boston and Maine as a gateway and open
traffic exchange, notably through the Dela¬
ware & Hudson system and the joint Wilkes-
barre gateway in Pennsylvania."
From the standpoint of the properties repre¬
sented by Messrs. Loree, Rea and Willard, a
union of the Boston and Maine with the New
York Central is not appealing. From the stand¬
point of the Boston and Maine and the territory
served by it, however, a consolidation with the
Delaware & Hudson as it exists today would
not be comparable with the proposed plan of
the Commission, to unite the Boston and
19
Maine with the New York Central, either from
the standpoint of financial strength or from
the traffic advantages to be obtained from a
combination with any system reaching the
Chicago gateway and the Mississippi River,
and the intervening territory of the middle
west. If, however, the Delaware & Hudson
is itself incorporated in a trunk line system
covering substantially the same territory,
these disadvantages would largely disappear.
I am convinced that the Boston and Maine
would be of real value to any trunk line sys- ^runVunes
tern. While it is true that all necessary routes
and gateways should be and undoubtedly will
be preserved, there would be an inevitable
tendency for the controlling line to secure the
long haul on traffic to Boston and Maine ter¬
ritory. To retain this long haul, however, it
would be necessary to provide service equal,
if not superior in quality to that provided by
other existing routes, and so long as the qual¬
ity of service is maintained, the question of
routing should not be of material interest to
the shipper.
The Boston and Maine is provided with
ocean terminals, docks and elevators ; is
equipped for the direct transfer of export,
import and coastwise traffic between cars,
ships and elevators ; and is the leading carrier
of export and import traffic in New England.
20
During the war, ships were turned more
quickly at Boston than at any other Atlantic
port.
Reference has already been made to the
virtual validation of the property investment
account of the Boston and Maine by the
Federal valuation. Under the terms of the
Transportation Act this established valuation
would be an asset to any consolidated system.
I have refrained from rehearsing the de-
fndependent tailed arguments for and against the different
Sources; plans of consolidation, for these arguments
have been summarized in numerous reports
which have been made after a careful inves¬
tigation of the subject. Among these are the
report of the Commission on Foreign and
Domestic Commerce, the Associated In¬
dustries of Massachusetts, and the Counsel
of the Affiliated Technical Societies of Boston.
Other contributions to the subject have been
made by Mr. John E. Oldham of Boston, a
banker and a recognized authority on railroad
credit, and by Professor "William J. Cunning¬
ham of Harvard University in the Harvard
Business Review for October, 1922. I assume
that the Commission has been furnished with
copies of all such reports. Furthermore, a
Committee appointed by the New England
Governors has been engaged for months in a
highly technical study of the subject, and I
21
assume the report of that Committee will be
placed before the Commission during these
proceedings.
But when all of these reports have been
analyzed, and recommendations for this or
that solution of the problem have been
weighed, we must finally return to the funda¬
mental question of what is to be the treatment
during the period of readjustment of these
railroads situated as is the Boston and Maine,
which, although a creature of the Transpor¬
tation Act, may not be free to secure its full
benefits except through consolidation.
I have indicated that I believe the Boston
and Maine is a valuable property, not only conclusions
physically and because of its property invest¬
ment, but through its traffic resources and its
potential earning power under the proper ad¬
ministration of the Transportation Act. It is
not a property to be scrapped or to be taken
over as a bankrupt concern at the expense of
its owners, who are entitled to a fair return on
their investment, and should obtain it if the
Act is interpreted as I believe it will be.
I am conscious that in all that I have said
I have contributed but little of a constructive
nature to the problem which Congress has
placed in your hands. You have heard the
views of those representing the Trunk Lines,
and it is apparent from what has been said
22
that the disposition of the New England lines
in any plan of consolidation is vital to these
interests. To me these are very significant
admissions and should receive due weight by
the Commission in their consideration of the
subject. If the Boston and Maine were left
free to conduct its own negotiations, I have
no doubt that arrangements satisfactory to its
owners and of advantage to its users could be
made, but that is not permitted under the
law except as it may be in harmony with the
plan established by the Commission.
Mr. Smith has stated that the New York
Central is not seeking further expansion
within New England unless it is wanted. The
Boston and Maine, likewise, is not seeking
alliances unless it is wanted. After all, what
the country wants, and what New England
wants, is good transportation. What the
railroads want, or what the Boston and Maine
wants, is to have its value recognized in any
trade that may be made in the future.
For the Commission to decree that this or
that particular plan must be adopted and
rigidly adhered to in those instances where
there otherwise would be bargaining possi¬
bilities as between several interests might
result in serious loss to the owners of the
properties affected and indirectly to the terri¬
tory served.
23
In its tentative plan, the Commission has
recognized the unusual position of the Boston
and Maine and other New England roads by
including them in three alternative systems,
and I respectfully urge that the Commission
in its final treatment of the subject should not
foreclose the property which I represent from
making the best bargain consistent with the
public interest to which it is entitled by
reason of its intrinsic value both from a
physical and traffic standpoint.