ASSOCIATION OF RAILWAY EXECUTIVES
6 1 b r o ad way
OFFICE OF THE CHAIRMAN
Thomas Dewitt Cuyler
Sept. 1919
Dear Sir:
A sub-committee has reported to the
Interstate Commerce Committee of the United
States Senate a proposal for constructive
railroad legislation known as the Cummins
Bill (Senate Bill 2906).
This contains many admirable and
helpful provisions ; but in one important
respect it seems to us to strike at the very
root of private ownership and operation
of railroads.
The Bill provides that if any com¬
pany shall receive in any year more than
a "fair return" on the value of its
property, the excess above such "fair
return" shall be paid over to the gov¬
ernment .
The effect of this can only be
disastrous to the incentives to competitive
effort and efficiency in operation, and
seriously jeopardizes any hope of attract¬
ing to the future development of the
railroads the sums of private capital so
greatly needed.
Enclosed herewith please find copy
of my letter on this subject to the Inter¬
state Commerce Committee of the Senate. If
you agree with the position herein taken,
I hope you will take appropriate means
to express your opinion to your friends
in Congress.
Very truly yours,
p cil 5 / Chairman.
Ill n
Cr J
Membership of Senate Committee on Interstate
Commerce
Albert B. Cummins Iowa
Charles E. Townsend Michigan
Robert M. La Follette Wisconsin
Miles Poindexter Washington
George P. McLean Connecticut
James E. Watson Indiana
Frank B. Kellogg Minnesota
Bert M. Fernald Maine
Joseph S. Frelinghuysen New Jersey
Davis Elkins West Virginia
Ellison D. Smith South Carolina
Atlee Pomerene Ohio
Harry L. Meyers Montana
Joseph T. Robinson Arkansas
Oscar W. Underwood Alabama
Josiah 0. Wolcott Delaware
A, Owsley Stanley Kentucky
ASSOCIATION OF RAILWAY EXECUTIVES
61 BROADWAY
Office of the Chairman
Philadelphia, Pa.,
Sept, 9,1919,
To the Honorable Committee
on Interstate Commerce of the Senate :
Gentlemen :
The responsibility for the improvement and de¬
velopment of railroad facilities, and of raising the
money from time to time needed to finance the same,
rests upon the boards of directors and the stock¬
holders of the Eailroad Companies, of whom the Rail¬
way Executives are the authorized representatives
and for whom they are the authorized spokesmen.
In view of this responsibility, the Steering Com¬
mittee of the Association of Railway Executives
(which Association represents approximately 93 per
cent of the mileage and 93 per cent of the earnings of
Class 1 railroads) appointed especially for the pur¬
pose of seeing that the facts and the circumstances
affecting the railroad problem are properly presented
to your Committee and to the corresponding Com¬
mittee of the House of Representatives, without un¬
dertaking at the moment to review in detail the pro¬
visions of Senate Bill 2906, presented by Senator
Cummins, deems it an imperative duty to call special
attention to one feature which, in its judgment,
seriously endangers the transportation interests of
the country and the Constitutional protection of all
property.
While adopting the alternative of private owner¬
ship and operation, and relying upon private capital,
rather than upon Government ownership, to provide
the transportation facilities which the country re¬
quires, this Bill, for the first time in the history of
our legislation, undertakes to limit the amount which
a company, by good management, fortunate location,
efficiency, and other lawful means, is able to save out
of the rates which the Government itself prescribes or
regulates. The, Bill provides that, if any company
shall receive from operation, during any year, more
than "a fair return," to be determined by the Inter¬
state Commerce Commission, on the value of its prop¬
erty, the excess above such "fair return" shall be
paid over to the Government within the first four
months of the succeeding year.
It ought to be borne in mind that the earnings of
the companies are to be made from rates fixed or
authorized by the Commission. Inasmuch as the
Congress has no right to authorize the collection of
unreasonably high rates from the shippers who
happen to need the services of a particular road, or
to make rates higher than is reasonable for the serv¬
ice, it must be presimied, as against the rate making
power, that the rates which it prescribes or authorizes
are reasonable. It follows that any earnings which a
company makes will be derived from reasonable rates.
Otherwise, the shippers, or those on some roads,
would be over-charged and grossly wronged. There
is no such thing as unreasonable earnings from reas¬
onable rates, and, therefore, if the rates are not more
than reasonable, as would be presumed if lawfully
made, it is impossible to conceive of there being an
excess of earnings over a fair return. Returns can¬
not be more than fair if provided by reasonable rates.
The only use made in the law of the terms ''fair re¬
turn," is to establish a test below which the legislature
may not without confiscation reduce earnings from
rates. It is, we think, manifest, that a company is
entitled, as a property right, to all it can save from
reasonable rates, and to deny it this right would be
to deny it the right of Constitutional protection for
its property. The attempt to do this, no matter how
high the purpose, would be the beginning of a fatal
policy which would tend to the removal from all
property of its Constitutional protection.
Moreover, to take from a company a part of its net
earnings derived from reasonable rates, not only
diminishes, and in some cases removes, the incentive
to competitive effort, efficiency and economy, hut
forecloses the hope of success as an attraction to
capital. This limitation, together with the necessity
of constantly expending substantial sums from the
apparent net earnings in renewals and replacements
incident to maintenance of roadways and equipment,
would in our judgment, seriously impair the ability
of the railroads upon which the country is dependent
for handling its business, to finance the necessary
additions, betterments and equipment.
Instead of attracting private capital and establish¬
ing the credit of the railroad companies, which all
seem to agree to be necessary at this time, this pro¬
vision, in our judgment, by denying Constitutional
protection to this class of property, by removing from
it the reward of success, and by seriously complicat¬
ing the question of keeping the property up, would
repel capital and tend to impair the credit of the
railroads generally. Investors will hesitate to go
into a business in which, not merely the rates which
may be charged are prescribed by law, but the ammunt
saved by good management, thrift, economy and
efficiency is to be taken and appropriated for the
benefit of others, or for some governmental purpose.
to such extent as a Government body, in its unlimited
discretion, shall deem fair;—a proceeding which, in
the common jndgment of mankind nntil now, has
been regarded as plain confiscation.
We have no hesitation in urging the above men¬
tioned view, notwithstanding the apparent snpport
of this provision by some bnsiness men and institn-
tions who, we fear, approach the snhject too mnch
from the standpoint of bondholders. The problem
must be considered from the standpoint of stock¬
holders as well as of bondholders. Bond interest
comes before dividends on stock, and a limitation of
net earnings ample to provide interest, might still
ruin the stockholders; whereas the stockholder can
not protect his holdings without, at the same time,
protecting the interests of the bondholder. A limita¬
tion on earnings which a bondholder could perhaps
regard with equanimity might be destrnctive of the
interests of the stockholders. The limitations pro¬
vided for in the Bill, wonld in onr jndgment, effect¬
ually defeat the apparent desire of Congress and of
railroad economists, to finance railroad improve¬
ments partially by the sale of stock rather than solely
by bonds, since it reqnires the stockholder to take all
the risk of the business, while denying him the right
to profits made from reasonable rates, thns making
his return nncertain in bad years, and yet little, if
any, greater than the retnrn on bonds in good years.
By order of the Steering Committee,
Chairman.
What is necessary to restore public confidence in
railway investment
(From the Report of the Railroad Securities Commission, Arthur Twining Hadley,
President, Yale University, Chairman, dated Nov. 1, 1911, page 32.)
' ' There was a time when the efforts of the banking authori¬
ties in most of the states were directed toward getting the dis¬
count rates as low as possible. The bank commissioners in those
days regarded themselves as the representatives of the merchants
who wanted loans. They made little or no attempt to safeguard
the stockholders and creditors of the bank. Those were the days
of wild-cat banking. The country has passed beyond that period
—not solely or primarily because it obtained a national banking
law, but because it administered that law with due regard to
the security of the stockholders and creditors of the bank as
well as its customers. We have not developed our ideas of rail¬
road management as far as we have developed our ideas of bank
management. The subject is a more complex one. The apparent
conflict of interests between the management and the customers
is greater with a railroad than with a bank. As a result of this
misunderstanding, the necessary development of railroad facili¬
ties, is now endangered by the reluctance of investors to pur¬
chase new issues of railroad securities in the amounts required.
This reluctance is likely to continue until the American public
understands the essential community of interest between shipper
and investor and the folly of attempting to protect the one by
taking away the rewards of good management from the other.''
ASSOCIATION OF RAILWAY EXECUTIVES
61 Broadway, New York City. 320 Munsey Bldg., Washington, D. C.
THOMAS DeWITT CUYLER, Chairman
ALFRED P. THOM, General Counsel
S. T. BLEDSOE, Associate Counsel
STANDING COMMITTEE
S. T. BLEDSOE General Counsel,
Atchison, Topeka & Santa Fe Ry. Co.
R. M. CALKINS President,
Chicago, Milw. & St. Paul Ry. Co.
W. R. COLE President,
Nashville, Chatt. & St. Louis Ry. Co.
HOWARD ELLIOTT President,
Northern Pacific Railway Co.
S. M. FELTON President,
Chicago Great Western Railroad Co.
W. H. FINLEY President,
Chicago & North Western Ry. Co.
CARL R. GRAY President,
Western Maryland Railway Co.
CHARLES HAYDEN President,
Chicago, Rock Isl. & Pac. Ry. Co.
L. E. JOHNSON President,
Norfolk & Western Railway Co.
HOWARD G. KELLEY President,
Grand Trunk Railway System
JULIUS KRUTTSCHNITT. .. President,
Southern Pacific Co.
E. E. LOOMIS President,
Lehigh Valley Railroad Co.
L. F. LOREE President,
Delaware & Hudson Co.
ROBERT S. LOVETT President,
Union Pacific Railroad Co.
WM. CHURCH OSBORN Vice-President,
Detroit, Toledo & Ironton Railr'd Go.
CHARLES A. PEABODY. ... President,
Illinois Central Railroad Co.
SAMUEL REA President,
Pennsylvania Railroad Co.
BIRD M. ROBINSON President.
American Short Line Railroad Assa
W. L. ROSS Receiver,
Toledo, St. Louis & West. Railr'd Co.
A. H. SMITH President,
New York Central Lines
F. D. UNDERWOOD President,
Erie Railroad Co.
HENRY WALTERS Chairman,
Atlantic Coast Line Railroad Co.
DANIEL WILLARD President,
Baltimore & Ohio Railroad Co.
ROBERT S. BINKERD, Assistant to the Chairman
FRANK H. FAYANT, Assistant to the Chairman
MARK S. WATSON, Special Assistant