before
The Interstate Commerce Commission
DOCKET No. 3400.
IN RE INVESTIGATION OF PROPOSED
ADVANCES IN RATES BY CARRIERS
IN OFFICIAL CLASSIFICATION
TERRITORY.
verbatim report of testimony
OF
Mr. DANIEL WILLARD, President,
THE BALTIMORE AND OHIO RAILROAD COMPANY,
AT j '
WASHINGTON, D. C., OCTOBER 13th, 1910.
before
The Interstate Commerce Commission
DOCKET No. 3400.
IN RE INVESTIGATION OF PROPOSED
ADVANCES IN RATES BY CARRIERS
IN OFFICIAL CLASSIFICATION
TERRITORY.
verbatim report of testimony
OF
Mr, DANIEL WILLARD, President,
THE BALTIMORE AND OHIO RAILROAD COMPANY,
AT
WASHINGTON, D. C., OCTOBER 13th, 1910.
INTRODUCTION.
Early in July, 1910, the railroads situated in that portion of the
United States, lying north of the Potomac and Ohio Rivers and east
of the Mississippi River, filed with the Interstate Commerce Com¬
mission tariffs to become effective August 1st, 1910, which advanced
certain rates within that territory. The Interstate Commerce
Commission thereupon instituted an investigation into the reason¬
ableness of the proposed advanced rates. Pending this investigation
the railroads, which had filed the rates, voluntarily postponed the
dates on which they were to become effective, pending the decision
of the Interstate Commerce Commission on this proceeding.
On September 7th, 8th, 9th, 10th, 12th, 13th, 14th and 15th, evidence
was offered by the railroads in support of the proposed rates before
Examiners Brown and Hillyer, representing the Interstate Commerce
Commission, in New York. This evidence consisted of:
First.—Testimony by the accounting officers of the rail¬
roads involved, which showed that the additional revenue to
be obtained under the proposed advance in rates, would not be
sufficient to offset the additional expense of the railroads, due
to recent increases in wages of employes, cost of material and
in fact nearly everything the railroads use.
Second.—Testimony by the traffic officials of the railroads,
explaining the reasons why it had been decided to advance the
particular rates in question.
At the conclusion of the hearings in New York, counsel for the
railroads stated that they desired to present to the Interstate Com¬
merce Commission, in person, through the presidents of the railroads,
the reasons which, in their opinion, necessitated an advance in rates.
In accordance with this request the Interstate Commerce Com¬
mission, all members of which were present, heard the testimony of
Mr. James McCrea, President of the Permsylvania Railroad Com¬
pany; Mr. Daniel Willard, President of the Baltimore & Ohio Rail¬
road Company; Mr. W. C. Brown, President of the New York Central
& Hudson River Railroad Company, and Mr. J. C. Stuart, Vice-
President of the Erie Railroad Company, in Washington, D. C.,
October 12th, 13th, 14th and 15th, 1910.
Washington, D. C., October 13, 1910.
10 O'clock A. M.
Met pursuant to adjournment.
The Chairman: Gentlemen, you may proceed. Whom
will you call next?
Mr. Bond : Mr. Daniel Willard.
DANIEL WILLARD
was called as a witness on behalf of the defendants, and,
being first duly sworn, testified as follows :
Direct Examination.
Mr. Bond: Mr. Willard, you are President of the Balti¬
more & Ohio Railroad Company and of the companies
forming its system?
Mr. Willard: I am.
Mr. Bond: How long have you occupied that position?
Mr. Willard: Since the 15th of January last.
the needs and conditions of the baltimore and
ohio system.
Mr. Bond: When you came to the system on the 15th
of January, Mr. Willard, I presume you had occasion to
study the needs and condition of the system?
Mr. Willard: Yes.
Mr. Bond : First as to the needs of additional capital,
what did you find and what steps were taken?
Mr. Willard: I found that it was necessary to arrange
at once for necessary funds to pay for equipment already
ordered, and also for the purpose of carrying on work such
as additional tracks, yards, and so forth, that had to be
started shortly after I came with the property; and in order
to do that it was necessary to raise a large sum of money
—in fact, $50,000,000.
Mr. Bond: What was done in that regard?
Mr. Willard: The first thing that was done, the
Company arranged for a short time loan of $10,000,000 to
6
apply on requirements that were immediately pressing.
After that it was considered desirable to make arrange¬
ments on a larger scale to take care of payments for equip¬
ment ordered and to carry out a program that was under
consideration, and of course various plans were discussed
and various means for raising the money were considered,
and finally it was thought best to sell, if possible, the Com¬
pany's debenture bonds, convertible into stock, and
negotiations were entered into with that in mind; but about
that time the market conditions became more or less un¬
settled, and before we could reach a conclussion on any one
basis, conditions would change, and finally it became
apparent that in order to negotiate a loan of that character
we would have to pay a rate of interest that we thought
the Baltimore & Ohio Company would not be justified in
paying for a long term arrangement. At last it was decided
that the Company had better sell its three years secured
notes at 43^ per cent, on the best basis they could obtain,
and they were sold on practically a five per cent, basis—
something a fraction less than that, perhaps, and they
become due in June, 1913.
Commissioner Prouty: For what amount?
Mr. Willard: $40,000,000. The issue of $50,000,000
was authorized, $10,000,000 being reserved to take up the
$10,000,000 of short notes maturing next March.
Mr. Bond: What was the result of the operations for
the fiscal year 1910?
Mr. Willard: As shown by the annual reports, the
property during the last fiscal year was able to pay its fixed
charges, taxes, a four per cent, dividend on its first pre¬
ferred stock, to which it is entitled, on a noncumulative
basis, and six per cent, on its common stock. It also spent
about $415,000 on the property, which expenditures were
not included in the operating expenses, but went into better¬
ments, and it also showed a surplus, carried to profit and
loss, of $4,815,000, which of itself was also spent on the
property or is in process of being spent.
Mr. Bond: How do the gross earnings for 1910 compare
with the previous gross earnings of the system?
7
Mr. Willard: They are the largest in the system's
history.
Mr. Bond: In making those gross earnings, I gather
from your statement there is additional capital expenditure
particularly for equipment in use on the system?
Mr. Willard: Yes sir.
Mr. Bond: Amounting to some $10,000,000?
Mr. Willard: The Company ordered last year some
10,000 cars and 225 locomotives, I think. Most of those
locomotives, in fact all of them, were used more or less of
the time in that fiscal year, and some of the cars.
Mr. Bond: What fiscal year was the next largest in
gross earnings?
Mr. Willard: 1907.
Mr. Bond : What was the result in that year?
Mr. Willard: That year the road met its fixed require¬
ments, paid its six per cent, dividend, spent a million and a
quarter in extraordinary expenditures, such as we spent the
$415,000 the last year for, and carried a surplus to profit
and loss of $6,900,000.
Mr. Bond: What happened the next year, 1908?
Mr. Willard: It failed to earn its dividend by about
$1,000,000.
Commissioner Prouty: What is the amount of the
common stock?
Mr. Willard: $152,000,000 of common.
Mr. Bond: In 1909, how was it?
Mr. Willard: In 1909 it paid—I will have to refer to
some figures. It earned a small surplus. In 1909 it paid
six per cent, as formerly on its common stock and showed
a surplus of $1,800,000.
Mr. Bond: There is already evidence in the case in
regard to the increase in wages which became effective
April 1, 1910, and also as to some other increased expenses,
particularly taxes. Can you say, taking the results of 1910
—of course by way of estimate—what would have been
those results had the increase of expenses existed through
the year 1910 that we know must exist through the fiscal
year 1911.
8
Mr. Willard: Yes. We made estimates on that and I
have some memoranda which I think I had better refer to,
perhaps. The increase in our pay roll, if it had gone through
the entire year—of course we only had the effect of it for
three months—but if it had gone through the entire year
it would have been $1,635,000, as we estimate, more than
it was. If we had had the interest payments for the
entire year that we did have for the latter months of the
year, because of increased capital, some of which has been
and all of which will be spent, our interest payments
would have been increased $1,900,000; depreciation charges,
which we will have to assume this year because of additional
equipment, would amount to $360,000; and, from the nearest
estimate, our taxes will be increased this year $222,000.
That aggregates $4,144,000, and our surplus this last year
was $4,357,000, thus reducing the surplus to $213,000 on
account of those particular items.
Commissioner Clements: How did the net of 1909 and
1910 compare?
Mr. Willard: In 1909 there was a small surplus,
$1,800,000. In 1910 the surplus was $4,315,000.
Commissioner Clements: I spoke of net earnings as
compared with gross earnings. You stated what the gross
was in 1909 as compared with 1910, and my question now
simply goes to the net.
Mr. Willard: I think I can give that. The net income
in 1909—the gross income before any deductions were made
whatever, $29,000,000; and in 1910 it was $31,000,000.
Commissioner Clements : That is the gross?
Mr. Willard : That is the gross income after operations.
Mr. Bond : The gross net income?
Mr. Willard: Yes, the gross-net income. The gross
income was $90,000,000, including outside operations, and
on the same basis in the former year it was $77,000,000.
There is a very large increase in the gross, something over
$12,000,000 increase in gross, and about $2,000,000 increase
in net.
Mr. Frank Lyon: Mr. Willard, what were those
ñgures for 1909?
9
Mr. Willard: The figures for 1909, as shown here, are
$77,000,000. They will not agree exactly with the figures
shown in the annual report.
Mr. Lyon: It is $72,000,000 as reported to the Com¬
mission.
Mr. Willard: This statement is made up for the entire
system and it includes outside earnings, which I had put
in for purposes of comparison, this being a statement I had
made up for my own information.
Mr. Lyon: The figures we got from the Baltimore &
Ohio for 1910, show $90,000,000.
Mr. Willard: The difference is because I have included
in this for comparison the outside earnings before mentioned.
Mr. Bond: You have included outside operations too?
Mr. Lyon: Yes.
Mr. Willard: The figures in the report show $88,000,000.
Mr. Bond : Then on the estimate which you have made
there would practically be very little surplus for the year
1911?
Mr. Willard: If we can judge the year we have just
entered upon by the past, making the best applications we
can of changed figures, it would appear that as the result
of this year's operation we will have about $200,000 surplus
if we pay the six per cent, dividend, as of course we expect
to do.
Commissioner Lane: That is not figuring on any
increase of business?
Mr. Willard: Not taking that into account. The
increase in business, however, is a problematical question
just now. The first three months of this present fiscal year
our earnings show an increase of $1,800,000 over the same
three months last year, and our expenses are $2,100,000
greater, so there is an actual less net of about $300,000.
With that in mind, it is somewhat difficult to determine
just what effect it may have through the entire year. It
seemed perhaps better to judge by last year's figures,
although that is a matter of opinion of course.
Commissioner Lane: The increase in your gross was
$12,000,000 last year?
10
Mr. Willard: It was substantially 112,000,000 increase
in gross. May I have our annual report?
Mr. Bond: Yes, here it is.
Mr. Willard: $12,488,000, and the net earnings from
operations were $3,300,000.
some elements of railroad credit.
Mr. Bond: Mr. Willard, before going into a little more
detail as to the application of the surplus earnings of the Bal¬
timore & Ohio System, I should like to get you to state what
is in your view the importance of the surplus earnings as
affecting the credit of the Baltimore & Ohio and its ability
to get additional capital. If you will, give us your experience
and views on what constitutes the basis of that credit?
Mr. Willard: I think, to reply to that question, it is
necessary to consider the elements that make credit for a
railroad, and particularly for the Baltimore & Ohio Railroad,
and that is a matter it has been necessary for me to con¬
sider with some considerable care in the last few months,
because of our own pressing necessities.
In discussing the matter with bankers I have asked them
the question—what in their minds, were some of the
essential elements of credit, what things did they consider
specifically, when clients of theirs came to them and asked
their opinion about the relative merits of certain investments.
Perhaps this sums it up as well as anything—that they
considered, of course, the history of the company, whatever
it might be, railroad or industrial; that they considered the
relative volume of the bonded indebtedness and the amount
of stock outstanding; and it seems to me that there is a well
defined opinion that the relation of the stock to the total
capital probably ought not to be less than 40 per cent, and
preferably more than that; and I judge, from the laws that
have been passed in some states—and inferentially from the
requirements of the Federal Corporation tax law—that a
proportion of one-half funded debt and one-half stock is
looked upon as desirable, as a proper and fair adjustment
of those two kinds of securities. I was told that in consider¬
ing the value of a bond, of course the amount of stock with
relation to the bonded indebtedness and the stock dividend
11
paid would be elements to be considered; that those who
invested in railroad.bonds were usually people who desired
a maximum security and were willing to accept a minimum
return. Those who contemplated investing in railroad
stock or in the stock of any industrial organization were
willing to accept the greater hazard because of the increased
return that they would expect to receive; but that the value
which they would place upon a share of stock would be
governed not only by its volume, its relative volume as com¬
pared with the funded debt, but particularly by the surplus
that the company showed above its actual dividend require¬
ments, and also the disposition of such surplus. I asked what
relation if any, they believed should exist between the volume
of the payments on stock and the surplus that should be earned
above it, to bring about a safe condition, and I found that
opinions varied considerably. As developed here yesterday in
Mr. McCrea's testimony, it would appear that it has been
the practice of the Pennsylvania Railroad Company to put
substantially a dollar of surplus in that property per dollar
paid in dividends, and of course the Pennsylvania Railroad
itself is the best evidence of the result of that policy. It
has been the policy of the Baltimore & Ohio, since its
reorganization covering that entire period, as its records
show, that for every dollar paid in dividends 50 cents has
gone back into the property. Certainly that is not too
much, and our condition would be better and we would
better serve our patrons if we had been able to follow a
more liberal policy. I was told by bankers that they look
upon the application of 50 cents, or we will say, one-third
of the surplus earned, to the property for betterments and
keeping it up to date, as about the minimum that should be
used in that way.
railroad stocks as an investment.
Commissioner Prouty: Your common stock is $152,-
000,000?
- Mr. Willard: Yes.
Commissioner Prouty: $1,500,000 would be equivalent
to one per cent, on that stock?
12
Mr. Willard; Yes.
Commissioner Prouty: Would the financial condition
of your Company be stronger if you paid a regular dividend
of five per cent, to your stockholders, with a surplus of
$4,500,000, or if you paid a dividend of 6 per cent, to your
stockholders with a surplus of $3,500,000?
Mr. Willard: I think it would be stronger as it is.
I could not imagine that a railroad stock today paying less
than six per cent., would have any attractiveness to any
investor.
Commissioner Prouty: It would have attractiveness to
investors who wanted to invest their money in a perfectly
safe security, if they wanted that security to be perfectly
safe.
]\Ir. Willard: I do not think that opinion would be
justified.
Commissioner Prouty: Would it not be justified if you
were to pay him five per cent., and if you had a safe surplus
of 3 per cent, more?
Mr. Willard: I do not think it would be attractive.
It would not be attractive to me.
Commissioner Prouty: I presume not to you, for you
would expect to make more than five per cent, out of your
money.
Mr. Willard: I would want to, but not only that.
I do not believe a man would invest his money at five per
cent, and assume all the risk of loss, when he could get four
per cent, with surety.
Commissioner Prouty: Just what is the risk of loss in
the case of the Baltimore & Ohio paying a regular dividend
of five per cent, year after year and having a safe surplus
year after year of $4,500,000?
Mr. Willard: I think that can best be answered by the
results of 1907. In that year the road earned $8,000,000
surplus, which was equal to double its dividend payment
of 6 per cent., and the following year fell short of earning
even six per cent.
13
Commissioner Prouty: I am not talking about surplus
that you make in the most prosperous year you have, nor
surplus you make in the poorest year you have. I am
asking about the safe surplus of $4,500,000 and a dividend
of five per cent.
Mr. Willard: You ask my opinion?
Commissioner Prouty: Yes.
Mr. Willard: I do not think that would make an
attractive investment. I think there has come about two
very important changes with reference to railroad stock
within the last few years. I wbuld like to give my views
on that if you care to have them.
Some years ago, in fact until quite recently, railroad
stocks, in addition to having an investment value, were
supposed to have a speculative value—not in the offensive
sense in which the word "speculation" is sometimes used,
but people who invest in stocks in any undertaking feel there
is always the possibility of large returns because of good busi¬
ness conditions, and distributions of various characters that
might be made. I can well imagine that a man would be
willing to take a chance of loss and accept a regular dividend
of five or six per cent, if he felt that the history of the Com¬
pany was such that there would probably be other distri¬
butions that, over a period of years, might make his average
return eight or ten per cent., as I think was shown over a
period in connection with the Pennsylvania. That specu¬
lative element in railroad stocks has now been removed.
If it has not already been removed, it is being removed
as fast as the machinery for doing it can be perfected.
Commissioner Prouty: If you are allowed to advance
your rates to make up for advanced interest charges, you
substitute, in place of the speculative feature, the feature of
certainty.
Mr. Willard: That is exactly what I consider the
strongest argument for advancing rates at this time, be¬
cause you have taken away the speculative element or
value in a share of railroad stock, which has not been taken
away in other industrial stocks, and you must substitute
something in its stead, and the only thing possible is a
greater element of security.
14
Commissioner Prouty: That is to say, it is necessary
for the public to understand that the supervising of stock
will allow the railroads to advance their rates when that is
necessary in order to enable them to earn a certain amount
of money?
Mr. Willard: I think that is the only way railroad
stocks can be made attractive at a fair rate of interest.
Commissioner Prouty; If the public were persuaded
of that fact it would not be necessary to have as wide a
margin in the future as in the past? If the public were
persuaded of that fact, would not a five per cent, stock with
a three per cent, surplus, make a stock attractive?
Mr. Willard: It might under that condition, and there
is another element which I think should also be considered,
that is due to recent changes. Previous to the last two or
three years it was the custom of well managed, conserva¬
tively managed railroads, to include in their operating
expenses very many of those items that, are now paid out of
surplus. When the roads were doing that they were making
those expenditures, such as I have in mind, out of what is
now shown as surplus, but they were not then showing that
money as surplus. If we were keeping our accounts now
on exactly the same basis that we did two or three years ago,
I should say your conclusion was right, but the surplus the
roads show today in a sense is fallacious. I can under¬
stand the reason for the desire to have the accounts kept as
they are now kept. At the same time, much of that money
that is now shown as a surplus really ought to go back into
the property to take care of obsolescence and depreciation,
and so forth, if the property is to be maintained. That is
why I make the statement that I could not quite agree with
you about the size of the surplus.
Mr. Bond: Of course that leads in any case to the
uncertainty of the volume of traffic?
Mr. Willard: Yes.
Mr. Bond: And in really hard times it would not be
possible, from a commercial standpoint, to advance rates to
make up for earnings.
Mr. Willard: It did not seem to be possible in the last
period of depression; at any rate, it was not done.
15
the latitude of uncertainty as to earnings.
Commissioner Prouty: Upon that point, as you see
the situation in this country east of the Mississippi River
and north of the Potomac and Ohio Rivers, what is the
latitude of uncertainty as to gross earnings? Of course
there will be years when they are not as great and there will
be years when they are greater, but as you forecast the
future, what are the limits within which you think those
earnings may be varied? Is there any probability that the
Baltimore & Ohio will ever accept, for a continued period,
earnings which are less from the same mileage than
$90,000,000?
Mr. Willard: I wish I might feel sure of that.
Commissioner Prouty: I want to know just how you
do feel about it, if possible, and just what your reasons
are.
Mr. Willard: Of course I am not.able to look far into
the future and I only undertake to look ahead during, we
will say, the next 12 months. It is necessary in a way to
make our estimates for 12 months ahead. If you ask my
opinion as to that period, I should say that as I view the
matter the commercial conditions today all promise pros¬
perity—the large crops of corn and wheat, the large promise
of cotton; and conditions as I have seen them along the Balti¬
more & Ohio Line all favor a period of prosperity. I have
wondered why it is that the business generally is not better
than it is, although with us I must say that it is practically
up to our limits to handle at the present time. But I find
that there is more or less feeling of uncertainty among men
engaged in large affairs, shippers of coal, and in the manu¬
facturing concerns. The only reason I can find for that
feeling is the element of uncertainty associated with the
political situation at this time.
One thing more I would like to say, with all respect to
the Commission—certainly with no desire to be under¬
stood in any sense other than that—that I believe in
railroad matters today there is not any single thing that is
having such an influence upon railroad credit or upon the
feeling of railroad managers, as the effect that this decision
16
may possibly have. In that connection, perhaps I should
explain myself a little more fully.
It was shown, I believe, yesterday, that the result of the
increases asked for, should they be granted in full, would
only amount to some $35,000,000, and when considered
in connection with the magnitude of the undertaking, that
certainly is not a very large sum. But I believe it is true
that investors generally look with great interest for the
decision in this case, not so much because of the money
involved, but as an indication of what may transpire under
the changed order of affairs. I happened to be in Berlin
and in London a short time this summer, and while there
I met men who have much to do with the furnishing of
money to the Baltimore & Ohio Railroad. I found in every
instance the thing that they wanted to know about first,
was what would be the outcome of this new condition of
affairs. Of course I was only able to say that I felt the
case of the railroads was good, and if they succeeded in
presenting it in its full force and showed that the proposed
rates were justified, they would probably get them; and if
they could not show they were justified, they probably
would not get them. This thought, however, was all the
time evident, that that was a matter which was in their
minds, and until that was disposed of in some manner,
things waited. There is a feeling of hesitancy, and that
feeling today dominates the railroad situation. That feeling
today is influencing the expenditures of the Baltimore &
Ohio, and it could not be otherwise. If the railroads had come
to this same juncture of affairs, if the present law placing
the decision of this matter in the hands of the Commission
had never been passed, and if the railroads had found
themselves today unable to reach any substantial under¬
standing which might help the situation, we would then be
in the same hesitating state of mind; we could not tell.
The conditions do not justify, from my point of view, a
policy of liberal expenditures on the part of the roads, cer¬
tainly not on the part of the Baltimore & Ohio.
Commissioner Lane : Do you , think the investors are
looking not to the amount of traffic that you are hauling.
17
but to the acts of this Commission or the policy of the
courts before they will invest?
Mr. Willard: I think that is having a great influence
with them at the present time. I think the people abroad
have great confidence in the American commercial con¬
ditions generally; that is, they believe in the growth of the
country, in the inherent strength of its commercial con¬
ditions. It has shown recuperative capacity in the past,
and I do not know that I have a right to say that they
look with any special fear upon the present condition, but
there is certainly a feeling of concern.
Commissioner Lane; I think they are throughly justi¬
fied in looking with fear upon the present condition, in
Europe, judging from the statements that are published in
the European papers as coming from the United States,
which are given a color so as to prejudice the Europeans
against any American investment in American railroads.
Mr. Willard: I have not seen that.
Commissioner Lane: There is a manifest policy of that
character. But why should it be that, with you doing as
much business as you can handle, and threatened almost
with a car shortage, and with the steel industry doing a
greater business than it has for years, with all building
material moving very rapidly, which is generally considered
an indication of prosperity, and with gross earnings increasing
so rapidly—why should there be trepidation on the part of
the investors?
Mr. Willard: Possibly for the same reason there is
trepidation on my part when I consider the program we
ought to follow. Having in mind estimates I have men¬
tioned based on last year's operations, it appears likely
or probable that we might come out of this year with
earnings substantially the same as last year, or some little
better, and with a surplus of a few hundred thousand
dollars, instead of over 14,000,000. With this in mind,—
that in 1907 the Company showed a surplus of nearly
$8,000,000 and in the year following a deficit of $1,000,000,
necessary to pay its six per cent, dividend, certainly we would
not dare to draw against the possible surplus of even a
million dollars we might earn this year, when one bad month
18
in the winter might reduce our gross earnings a million
dollars, and might increase our expenses by half that amount
and wipe out the whole thing. Based on last year's opera¬
tions, and to illustrate that thought a little more clearly, I
had prepared, in consultation with our officers, a program
of the things we wanted to do, and which in our opinion
should be done out of such surplus earnings as I have
referred to, and that included, among other things, the
equipping of our more important trains with electric lights—
not a necessary thing, but certainly a desirable thing. In
our case that amounted to an original expenditure of
$225,000. We equipped four of our through trains, two in
each direction, and then we stopped because I did not think
it prudent to go ahead and spend, against our possible
surplus, money in that direction when it may be needed
later in the year for some more important matter. Other
questions of a similar character are being held in abeyance
because I must confess I do not dare to go ahead as I had
hoped to do. That condition that makes me feel that way,
having in mind our possibilities in the way of earnings and
expenses, no doubt is reflected to some extent in the mind of
the investor.
surplus earnings.
Commissioner Lane: How much surplus do you think
you should have each year?
Mr. Willard: I think we should have not less than we
have spent during the last twelve or flfteen years, which has
been, as I said, 50 cents in surplus for each dollar paid in
dividends on the common stock, and certainly that is not
putting the Company in any too good condition.
Commissioner Prouty: That is $4,500,000?
Mr. Willard: $35,000,000 in that period.
Commissioner Prouty: On the basis of your present
stock, it would be $4,500,000 a year?
Mr. Willard: Yes sir. In that connection, I would
like to say that since the reorganization of the Baltimore &
Ohio Railroad, the Company has earned applicable for
dividends, above its fixed charges, $125,000,000. Of that
amount $26,400,000 has been paid in 4 per cent, dividends
19
on its preferred stock, and that is all that character of
security is entitled to. The remaining $98,000,000 has been
disposed of as follows: $64,400,000, or 65 per cent., has
gone to dividends on common stock, ranging from 2 per
cent, at the lowest, through 4, 43^ and 5 per cent., up to 6,
and nothing higher than 6 per cent. The balance of the
sum, over $34,000,000, out of the surplus, has gone into the
property, and our property is that much more valuable
today. The capital assets of the Company today exceed the
capital liabilities by that amount, $35,000,000.
Commissioner Lane: None of the surplus which you
have put into the property has been capitalized?
Mr. Willard: No sir.
Commissioner Lane: What about those notes you have
out against the property?
Mr. Willard: That money of course represents new
capital, and that money will be spent in the purchase of new
equipment and distinct additions to the property that,
under the present classification, we think should be charged
properly to capital account. The items that have been paid
for out of the surplus and which in my opinion should be so
paid for, would be such things as track elevation, which does
not add to the earning of the property, substitution of heavier
and better bridges for poorer and older ones, stone ballast for
sand, good coaches for poorer ones, and things of that kind,
things that do not in themselves add to the earning of the
property.
Commissioner Lane: None of your surplus should be
capitalized, as I understand you to say?
Mr. Willard: None of the surplus that has been spent
so far on the Baltimore & Ohio since its reorganization has
been capitalized, and in my opinion it should not be; and
when the surplus that I speak of, the 50 cents for each dollar
which should be put into the property in each year, is spent,
it should not in my opinion be capitalized. My thought
is that at least that much money should be spent on the
property each year to afford a proper basis of support for
the existing securities.
20
Commissioner Prouty: Your idea of it is that it is
necessary to spend that much on the property in a way that
would not directly add to its earning capacity?
Mr. Willard: Yes, and the best evidence is—I am
speaking of this particular property of course—that such
has been the policy or twelve years, and the property is
certainly not any better now than it ought to be. A more
liberal policy on the Pennsylvania Railroad has made that
what it is. So I think what we have done is the very mini¬
mum we can do if we are to properly maintain the property
and maintain dividend payments, and it is certainly most
essential that we should, if we are to raise money on proper
terms in the future.
Commissioner Lane: There should be some scrutiny, I
suppose, as to whether that money is actually invested for
these things that do not add to your revenue':
Mr. Willard: That is all reported of course to the
Commission. This is all shown in detail in our annual report.
Commissioner Lane: Your view in that respect is
practically the view of Mr. Ripley?
Mr. Willard: I really cannot say. I do not know what
his view is
Commissioner Lane : I thought perhaps you knew.
Mr. Willard : I have read his testimony, but I could not
say from memory that my view is the same. Very likely it is,
but I do not think such expenditures as I have referred to,
made out of that kind of surplus, should be capitalized. I am
speaking specifically of this railroad, of this property, and I am
urging the necessity for the continuance of that particular
policy.
Mr. Bond: That is the character of improvements,
whether you call them betterments of conditions or whatever
you choose to call them, on the property upon which these
earned surplus moneys of the Baltimore & Ohio in the past
and up to the present time have been expended, is it not?
Mr. Willard: Of course, no dollar is earmarked.
Mr. Bond: I am speaking generally.
Mr. Willard: I mean that we do not follow the dollars
from all sources, as they all go into the same box and they
go out as it happens, but the character of work that I have
21
in mind, that should be paid and has been paid for out of the
surplus, is the work that is necessary in order to keep the
road abreast of modern requirements, and does not materially
add to its earning capacity; and possibly that can be illus¬
trated by one particular case in mind. It so happens that at
Cumberland, Maryland, the Baltimore & Ohio twenty-five or
thirty years ago put up a very expensive hotel and station that
cost nearly a quarter of a million dollars. The station facil¬
ities, the plumbing and other features, were fully abreast the
requirements of that time. It is merely a statement of fact
to say they are just the same now as they were twenty-five
years ago, and that is the argument that is being advanced
why we should spend $40,000 or more there for other facilities,
not that those are not just as good as they were, but simply
because they are the same as they were. The standard of the
public has been raised, and to meet the requirements of
today means an expenditure of not less than $40,000 and
perhaps anywhere from $50,000 to $75,000.
Commissioner Prouty: Has the business of Cumber¬
land increased much in the meantime?
the standards required have been raised.
Mr. Willard; Some. It is a small city in Maryland.
It has not increased to that extent that the facilities are in¬
adequate as to size; it is simply a question of character. The
standard of the people has been changed; it has been raised.
The facilities are just as good as they ever were and just as
adequate in the matter of size. I think it may be said in
that connection that with very few exceptions there is
nothing on a railroad today that was put on twenty-five
years ago, and now in good shape, that is today adequate
for the present requirements, with the possible exception
of such things as stone viaducts. The Relay Viaduct
might be an exception; that was built seventy or more
years, and it is still in use; but that is the exception
that proves the rule. It is fair to say that a locomotive or
a rail or a car or ballast or a bridge, even though built of
steel, a coach or a station or anything that might be enume¬
rated, built twenty-five years ago and maintained in exactly
that same condition of twenty-five years ago, today would
22
be altogether unsatisfactory to the people, and certainly it
would not be a business proposition that could live. It
could not live as a going concern. That same result might
come about in much less than twenty-five years; I am sure it
would come about easily within that time.
Commissioner Pbouty: Do you think that will come
about in the next twenty-five years again?
Mr. Willard: Yes, I see no reason why it should not
continue. When I was assistant general manager of this
railroad, eleven years ago we built a station at Fairmont,
West Virginia, costing $22,000. Last week I had letters
from the Fairmont Board of Trade asking for an interview to
consider the building of a new passenger station at Fair¬
mont, and the one that is there was built only eleven years ago.
I see no reason why that tendency which has been constantly
at work in the past, should not continue. It would seem
to me very unfortunate if it should not continue.
Commissioner Prouty: I know of stations that were
built ten years ago that ought to be rebuilt because they were
not built right in the first place.
Mr. Willard: That may be, and if so, I shall have to
accept the responsibility in this instance, because I was here
when it was built.
Mr. Bond: A matter has occurred to me and I want to
ask if you think it is true, that when we speak of these
investments of capital we are really using an expression that
covers two different things, and a great deal of the difficulty
we have had in discussing the subject is due to that fact, that
the term "capital investment"— and it is because we have
not got all the accuracies of accounting that we probably
should have—now includes not merely the conditions and
new facilities which add to the earning capacity of the prop¬
erty, but it includes money expenditures which are annually
as necessary, if the property is to be kept a going concern,
as the operating expenses?
Mr. Willard: Yes.
Mr. Bond: As I understand it, what you are speaking
of and what you are arguing for as necessary to be taken
care of out of the surplus earnings, is the latter class of
expenditures? You have not any idea of paying for earning
23
additions to the property out of this surplus? That is not
what you mean?
Mr. Willard: No. I think it is only fair that any
addition to the property that adds to its earning capacity,
adds to its net income, should stand on its own bottom and
should not be a charge on the business or the capital already
invested. I think it is entirely proper, too, and right that
additional securities should be issued to pay for such im¬
provements. But there is a large class of work to be done
on a railroad, such as the elimination of grade crossings,
railroad crossings, and innumerable matters of that kind
that we all know of and that I could enumerate, that are
constantly going on and cannot now be included in operating
expenses, and properly so, no doubt. They must, however,
be paid for, and they may be paid for out of income, but
they have to be capitalized—at least, they have to be
shown as money so expended, and that money so expended
is shown in the capital cost of the road. When I speak of
capitalizing such expenditures, I do not mean that neces¬
sarily capital securities are issued against them, because
the Baltimore & Ohio in the last thirteen years has increased
its capital assets $35,000,000 in excess of its capital liabilities,
and that increase in capital assets is due to that
amount of money spent in that way during that period.
It has been capitalized, but no securities have been
issued against it, and in my opinion none should be issued
against it.
Mr. Bond: There is an entirely possible line of dis¬
tinction between the two classes of expenses?
Mr. Willard: Yes.
Mr. Bond: As a matter of fact, in the actual practice
of the railroads, before the more accurate methods of
accounting now enforced by the Commission, were not a
large part of those expenditures such as you have in mind
charged to operation?
Mr. Willard: Very largely so.
Commissioner Clements: Why do you say in your
opinion no capital should be issued against that kind of
expenditures?
24
expenditures from surplus to sustain credit
of existing securities.
Mr. Willard: Because I think such expenditures are
necessary to keep the property abreast the every day re¬
quirements, and unless those requirements are met, the
securities already issued would depreciate in real value, and
I think a conservative policy requires such expenditures as
will sustain the credit of existing securities.
Commissioner Clements: You think if the policy were
pursued of issuing capital against that investment, it would
ultimately run the capitalization of all roads beyond reason?
Mr. Willard: I have not pursued that thought, but I
have this in mind, and possibly it is what you have in mind :—
I do not think such expenditures as that, as I have said,
should be capitalized. If surplus earnings are spent in other
ways, that add greatly to the earning power of the property,
that is another matter. We are not confronted with any
such condition as that on the Baltimore & Ohio property.
In saying, as I have said, that I think a certain minimum
surplus should be earned and spent upon the property each
year, I have in mind that such money should be spent, I
want to repeat, simply for the purpose of keeping up the
proper standard and maintaining credit of existing securi¬
ties^ and of course it would not serve that purpose if other
securities were issued against it.
Commissioner Clements: If they use the money of
stockholders, and instead of taking it in dividends they put
it back in the property to keep it up, why might they not
have a stock dividend or something of that sort to cover it?
Mr. Willard: I think that depends on the character
of the expenditure, and I have in mind—•
Commissioner Lane: (Interposing.) I am talking about
this character, the kind you have just been talking about.
Mr. Willard: I have in mind, in that particular kind
of investment, that that was done to maintain the security
of the stock, to maintain the credit the stockholder already
had. If the stockholder took his surplus money and put
it into the road today, as was done in the case of the Bur¬
lington, where 1200 or 1500 miles were built out of surplus,
against which no securities have been issued, then I think
25
it would be very proper to give him stock dividends in
recognition of that kind of investment; but the kind I am
speaking of is entirely different.
Commissioner Clements: This is the only kind I am
talking about—the kind that you have been talking about.
Mr. Willard: Yes.
Commissioner Clements: And you think that it has
been put in there to maintain the credit of the property and
to keep it up. If you capitalize it and cover it in stock,
might you not ultimately capitalize all the roads of the
country beyond reason?
Mr. Willard: I think this: If all such improvements
as that are to be represented by additional capitalization,
without doubt it would bring the American railroads into
the condition of the English roads today. Their capital
would be so great that they could not show a proper
return on any reasonable rates, or what would be looked
upon as such.
Commissioner Clements : It would ultimately have the
bad result, would it not, of seriously impairing the credit of
these properties for raising additional money?
Mr. Willard: It would impair the credit of existing
securities; yes, sir.
Commissioner Clements: And it would also lay the
foundation for greatly increased rates, would it not—^if
there is any relationship between capitalization and rates
that are being paid—to make the capitalization good?
Mr. Willard: If I understand your question, the con¬
stant building up of fixed charges because of the issuance of
increased capital liabilities would, of course, in the end, mean
a raise of rates.
relation between capitalization and rates.
Commissioner Clements: It has frequently been said
that there is no fair relation between the reasonableness of
rates and the capitalization, either in the form of bonds or
stock; and that is asserted on the theory that all the road
may fairly earn, according to the decision of the courts, is a
fair return on the property which is used for the public; and
that, therefore, the amount of stock or bonds has nothing to
26
do with it. I infer from what you say that you consider
that there is, or should be, a constant relation between
capitalization and rates?
Mr. Willard: Why, I think there must be, because it
seems to me that the sum of all the rates must be sufficient
to pay a proper return on all the capital necessary to provide
facilities. Otherwise the capital will not be forthcoming,
and there will be no facilities. That seems to me so. I do
not look upon it as a determining factor, because we all
know that the capitalization of a road does not determine
the rate charged by any group of railroads. As a general
proposition, however, I think there is a relation between the
two. There must be.
Mr. Bond: This country is confronted with the fact
that it still is a growing country, and needs growing trans¬
portation facilities. You mean that there must be some
such adjustment as will enable, not any particular railroad
company, but the country as a whole, to get the capital to
provide the necessary facilities? That is what you had in
mind; is it not?
Mr. Willard: I have not heard from any direction any
intimation that we had too many railroads, or that the rail¬
roads were too good. One of the ablest railroad men we have
in this country, Mr. James J. Hill, has said that the rail¬
roads should spend a billion dollars a year for five years to
provide the additional facilities required. I am sure that
the only way in which that money can be obtained is by
the voluntary giving up of those who now have it; and they
will not give it up unless they get something instead of it
that is sufficiently attractive so that they want it as against
any other thing procurable.
Commissioner Clements: Do you not understand that
now the accounting rules of the Commission permit charges
to operating expenses to cover depreciation, which would
take care of obsolescence?
Mr. Willard: Yes; to some extent. That is shown
separately, though. It is shown entirely separated. It is
not included in the operating expenses. What I should say is
this: They do not permit the charge to operating expenses
27
of those items, but they permit the payment of such items
from income.
Note.—Query evidently misunderstood. It is permitted to charge
operating expenses with depreciation and also with book value, less
salvage, of equipment put out of service.
Commissioner Clements: Have there been stock divi¬
dend issues on the Baltimore & Ohio Railroad?
Mr. Willard. I cannot answer as to that. The road,
as you know, was reorganized in 1909, having gone into the
hands of a receiver because of conditions previous to that
time.
Commissioner Prouty : In what year?
Mr. Willard: In 1899 it came out of the receivership.
Commissioner Prouty: You said "1909." You meant
"1899"?
Mr. Willard: 1899.
Commissioner Clements: Judging from what you say,
I suppose it would be your further opinion, in regard to
capitalization, either as to bonds or stocks, that when stocks
or bonds were issued and added to the capitalization, in
view of its relation to rates, etc., you would hold to the idea
that when issued they should be issued only for the purpose
of building and keeping up the property, and should be sold
to the best advantage and realize as much as they may bring,
and that that money should be applied to the property and
the equipment?
Mr. Willard: Yes, sir.
Commissioner Clements: And not to dividends and
profits to stockholders or other people who may be able to
turn it to their advantage?
Mr. Willard: I do not know that I quite follow you
there at the last. I think this: That when new capital is
issued by the railroad, it ought to be because of expenditures
which will take care of that particular capital. Otherwise
the issuance of such capital becomes a burden on that
already existing; and you cannot put additional burdens on
the securities already issued without destroying to that
extent your credit. Conservative management means the
holding up of credit.
28
Commissioner Clements; It would not only impair the
credit of the road, but it would lay the foundation for
additional rates, would it not—if the relationship exists that
we have referred to between rates and capitalization?
Mr. Willard: I repeat that the capitalization of the
properties, the liability of the properties, in my opinion,
must certainly be considered when fixing the sum of all the
rates. They must be sufficient to pay interest on that—
a fair return.
relation of wages and rates.
Commissioner Lane: Do you think that there should
be an increase in rates each time that there is a considerable
increase in wages?
Mr. Willard: I think that depends. In my opinion)
the two things will be found to be very closely related to
each other in the future, and for the reasons stated by Mr.
McCrea yesterday. I think the possibilities of further
operating economies have been pretty well exhausted.
Certainly after a hill is reduced there is no way to improve
on a level grade. The size of our locomotives is determined,
in a way, by the weight that can be put upon the wheel,
which can be put upon the rail in any one spot. The length
and the clearance are determined largely by the permanency
of a lot of structures that could not be changed with any
reasonable expenditure. And besides, there has been a
tendency shown in legislation of late, and in contracts with
employes, to limit the length of trains and to limit the hours
that they can be on duty. There has been at the same time
a constantly growing higher standard of service exacted and
required, by the commissions and others. All of those
things, operating during the last ten years, have eaten up
the economies that have so far been effected because of
these improvements. I must confess that I am unable to
see very much more that can be done in the way of reducing
the cost of operation. So if wages do go up, and if legislation
is passed which puts heavier burdens upon the railroads
(and proper burdens, we will say), I cannot see how they
are going to be taken care of unless they are reflected in the
rates.
29
Commissioner Lane: But does not an increase in
business mean an increase in net revenue?
Mr. Willard: An increase in business of course will
mean that there should be^ out of any given amount of new
business, a greater per cent, of net than out of the other
business previously done. But I have in mind the result of
the first three months of this year, where we spent more
than we got for doing an increased business.
Commissioner Prouty: You say you are handling all
the business you can now with your system as it is?
Mr. Willard: Very nearly.
Commissioner Prouty: If that is true, and you have
more business, how are you going to handle it?
Mr. Willard: As I have pointed out, we have borrowed
fifty millions of dollars to get additional facilities in order
that we may be able to handle the business that is being
offered today. Of course that will increase our fixed charges
by that amount. It ought also to contribute something
beyond that, to the general payment of the Company's
charges.
the credit of american railroads in the hands
of the commission.
Commissioner Lane: Should there be no period of
experiment before rates are put into effect? You are asking
practically, that there shall be a guarantee given by the
Government of the United States that your stockholders will
get six per cent., and that your railroad will be kept up to
its present efficiency and better all the time out of the rates
that the shippers pay. That is practically insurance for
your road. Now comes an increase in wages. The result
of that, as to your revenue, is problematical. Look at this
thing, now, from the standpoint of the people at large, and
give me your best judgment as to whether there should not
be a period of experiment in which, perhaps, you could live,
if necessary, upon a surplus for a short time before it was
determined that you should advance rates.
Mr. Willard: That, of course, is a matter of opinion.
But I think perhaps I should say, again, that in the past when
such conditions have arisen the railroad managers have met
those conditions, either by economies, if such things were
30
possible, or by advances in rates. In other words, they have
maintained their credit to such an extent that the American
railroad system, such as it is, has been based upon money
raised upon that credit. Today a new condition of affairs
has come about. The credit of the American railroads
has been placed in the hands of this Commission. There
has been taken from the hands of the owners the responsi¬
bility, the burden, of maintaining the credit of the American
railroads to such an extent that it may be impossible for them
to obtain money in the future on terms such as the people
ought to pay. In the end, of course, the people through the
rates pay the interest on the bonds. In my opinion, the
credit should be such that the railroads can obtain money
on the most favorable basis. That should be the measure of
their credit. They should get money on the most favorable
basis; and that credit rests in the hands of this Commission.
If, for any reason, it is thought wise to depart from the
practice that has obtained in the past when estimates have
shown that because of increased wages or other increased
expenses it was necessary to increase the income, and such
action has been taken—if that practice is to be departed
from, and the experiment suggested is to be tried, and that
shows an inability on the part of the Company to maintain
its payments and maintain the property, it seems to me that
in the end the people will be the ones that will suffer more
than the comparatively few stockholders, however numerous
they may actually be. The individual stockholder may be
obliged to accept, for a short period, a reduced dividend;
but in the meantime developments would stop because
credit would be impaired. That is as I view it. And it
seems to me it would be better to face the possibilities
of excess earnings on the part of some of the railroads—
which in any event must all be spent under the general eye
of the Commission—than to face the possibility of a deficit,
which would mean stagnation.
Commissioner Lane: When you speak of excess
earnings, I suppose you mean by that the amount that would
be carried to surplus?
Mr. Willard: Yes.
31
Commissioner Lane; Suppose that the excess earnings
to which you refer should amount to twice as much as you
estimate that you ought to have?
Me. Willard; Yes.
Commissioner Lane: Suppose they amounted to eight
or nine million dollars instead of four and a half million
dollars: What would be the result so far as your rate
situation is concerned?
Mr. Willard: In our case it would permit us, if we
paid the same dividend we now pay, to put a dollar in the
property for a dollar paid, which has been the practice of
the Pennsylvania Railroad. I think it would be a good
thing for the community served by the Baltimore & Ohio
Railroad if it was in shape to pursue that policy. I think it
would be a good thing.
Commissioner Lane : Then, whatever the rate increase,
you think the railroad ought to absorb it, and it should not
be reflected back in a reduction of the rates?
Mr. Willard: Within reasonable limits—within reason¬
able limits. I think they should pay a fair
Commissioner Lane: I am giving you the illustration
of 100 per cent, on your own estimate of the surplus that
would be reasonable.
Mr. Willard: In our own estimate, I have said that
such a surplus as that, in my opinion, would not justify a
reduction in the rates. I think it would be to the beneflt
of the property and to the benefit of the people served if
it all went back into the property.
will rate increases be progressive.
Commissioner Lane: Is there any reason to believe
that these increases would stop with the present increase,
if it should be allowed?
Mr. Willard: Increases in rates?
Commissioner Lane. Increases in rates; yes.
Mr. Willard: No; I think not. I think the tendency
of rates will be to continue upward.
Commissioner Lane: You think there will have to be a
progressive increase?
Mr. Willard: Yes sir.
32
Commissioner Lane: Would this condition exist and
these increases be made if there were no such thing as an
Interstate Commerce Commission?
Mr. Willard: I do not know that I quite follow you.
Commissioner Lane: For 25 or 35 or more years you
had a schedule of class rates between New York and Chicago
which you now propose to raise. You propose to raise
those rates, and you say that you should do so.
Mr. Willard: Yes.
Commissioner Lane: Suppose there were not any law
which threatened railroad investments, as you think, or as
some people think—would there be that increase in rates
proposed by you?
Mr. Willard: I think the best answer to that is that
there was no such law when this tariff was filed. That was
the conclusion or decision that was reached when there was
no such law.
Commissioner Lane : What do you mean? When what
tariff was filed?
Mr. Willard: That is, there was no law putting the
question of rates in the hands of this Commission, because
the tariffs were prepared and filed before the present law was
passed.
Commissioner Lane: You are speaking of the move¬
ments this year?
Mr. Willard: Yes.
Commissioner Lane: That is to say, that we had no
power to suspend?
Mr. Willard: I understood that that was your
question.
Commissioner Lane: No. We have got an Interstate
Commerce Commission, which is a body created by the law
for the purpose of passing upon the reasonableness of rates.
Mr. Willard: Yes.
Commissioner Lane: We have had some complaint
from shippers to the effect that the tendency of the existence
of this Commission and the existence of regulative law has
been to increase the burden upon the shipper. I am asking
you whether, under the conditions that obtained, we will
say, prior to 1906, when there was no power in the Commis-
33
sion to regulate rates—if that had continued to exist, and
you had absolutely free swing, whether such increases as
you now speak of, the present increase and possibly other
increases in the future, would be made?
Mr. Willard: I think the tendency would be exactly
the same; yes, sir. I think, regardless of the Commission,
that the tendency of rates will continue to be up. I think
this thought also is worthy of consideration right there:
This is notoriously a country of high prices, high wages, and
high prices on all kinds of material. But there is one
notable exception to that rule: The railroad rates in this
country are the lowest in the world. I think, per se,
that that shows that the railroad rates must be fair. In a
country notoriously famous for its high prices, and with
railroad rates less than they are anywhere else in the world,
and wages and materials higher than they are anywhere else
in the world, I believe it must inevitably follow that such
railroad rates are fair.
Commissioner Lane: That generalization is subject, of
course, to a good many exceptions.
Mr. Willard: To some exceptions; but, generally, I
think, it is true.
impending rate increases have not caused com¬
mercial disturbance.
Mr. Bond: Mr. Willard, a question was asked you as
to a time of trial. My understanding of the Act of Congress
is that it primarily provides a time of trial; that the great
complaint against the railroads was that they made an in¬
crease of rates suddenly and without proper notice or
proper consideration of the existing conditions of the mer¬
chants. We have had, it seems to me, a time of trial since
the filing of these rates—as you say, before the passage of
the existing Act. You have had opportunities in that time,
have you not, to learn if there was any great commercial
disturbance caused by the impending enforcement of these
increased rates? And have you heard or noticed any
interference with business, or commercial disturbance such
as we often have in a case, for instance, where a tariff rate
is changed?
34
Mr. Willard: No; I have not. I think it must be
conceded that if people engaged in that kind of business
looked upon the possibility of the raised rates as a serious
feature; it would no doubt be reflected in their business
today; and I should imagine that their business would very
likely be adjusted already on the changed basis. However,
I have seen nothing to indicate that the proposed increase
in rates has had any influence upon business so far.
Mr. Bond : If the increase in rates was a serious matter
in the buying and selling of commodities whose transporta¬
tion rates were affected, it would be a matter which would
have to be considered as between the buyer and seller, and
taken care of somehow as between them; would it not?
Mr. Willard: I should judge so.
Mr. Bond: Is not that the rule?
Mr. Willard: I should judge so.
Mr. Bond: I want to ask you now, Mr. Willard, what
would be the effect on the Baltimore & Ohio Railroad sys¬
tem, or any other railroad system, of stopping the expendi¬
tures which have to be, as you state, provided for out of sur¬
plus earnings?
Mr. Willard: I think the effect would be the one that
I referred to awhile ago: Everything is out of date at
least at the end of 25 years; and if you stopped expenditures
your railroad would go back. At some period of time that
would happen—certainly in many instances much quicker
than that limit. I placed it, perhaps, rather carelessly,
having in mind particularly the Cumberland station. But
unless expenditures are made of such a character as are
necessary to keep the property abreast of existing standards
—and standards are constantly being raised—it would go
backward, and in the end it would fail to serve the people
and the territory depending upon it, and it would fail. It
would fail as a commercial proposition. It cannot stand
still.
Mr. Bond: And you state that in the case of the Balti¬
more & Ohio Railroad system we are not so far ahead of the
times as to enable us to stand still very long?
Mr. Willard: The character of my corresjiondence does
not indicate that.
35
Commissioner Lane; How long has the market for
bonds been dull?
Mr. Willard: I had no particular personal knowledge
of that matter until I came to the Baltimore & Ohio
Railroad. That was in the middle of January last. The
market was considered somewhat shaky in January. It fell
off very rapidly in the following two or three months; and
in April and May it became practically impossible to sell
securities. Good bonds, guaranteed by the Baltimore &
Ohio Railroad, could not find a purchaser.
Commissioner Lane: Has it not been poor and shaky
for the last two j'ears, ever since the panic of 1907?
Mr. Willard : I do not know that I am qualified to pass
on that matter. I think perhaps that has been true much
of the time.
Commissioner Lane: There is one question that Mr.
Bond asked that suggested another question in connection
with the one that I put to you before. The position of the
shippers, as testified to before us in many cases, has been
that they were able to get better rates when they were able
to make a bargain with the railroads than they are now.
Mr. Willard: I think that was true of some of the
shippers.
Commissioner Lane: And some of the shippers have
testified before us to the effect that as much as 20 or 25 per
cent, off the regular rate was given to them, and that the
effect of this Act has been to increase the burden upon
them.
Mr. Willard: It was intended to do that.
Commissioner Lane: That is what it was intended to
do; yes. The question that I have, that I put to you before,
is this—whether, if the bargain-and-sale proposition had
continued, these increases in rates would have been made?
Are you not leaning back upon the fact that there is an Act
to regulate commerce, and that you now have practically
the power to agree among yourselves as to the rates that
you shall make?
Mr. Willard: I think perhaps the best answer to that
question would be to see what the results of the present
policy have been. Has the present policy made railway
36
credits too good? Have the expenditures made upon the
railways themselves been too extravagant? Are the rail¬
roads too good to meet the conditions? The expenditures
on the property and the payments on capital have taken up
and absorbed all the money taken in from the people. It
has gone in those two directions; and it should be reflected
in the character of the credit and in the condition of the
properties. And I do not believe any one will say that on
the whole either of those things is better than it ought to
be. And less return than that—
Commissioner Lane: Of course, Mr. Willard, you will
admit that they made a great deal larger net last year than
they ever made before, unless it was possibly in 1907, which
was the banner year. The railroads of the country made
more money, net, last year than ever before.
Mr. Willard : I do not know about that.
Commissioner Lane: Those figures have been intro¬
duced before us.
Mr. Willard: I have not seen them.
Commissioner Prouty: Mr. Willard, Mr. Lane's ques¬
tion really comes to this: Could the carriers have
advanced these rates under the old system? When I first
came on this Commission the Baltimore & Ohio and the
Pennsylvania and the New York Central used to get together
about every other week and agree to advance the rate on
grain products, or something else, between Chicago and the
Atlantic Seaboard; but it never went up; it never stayed
up. They could not maintain it. Under the old system,
would it be possible to advance rates?
conditions for the people and i'or the r.mlroads
are better because of the interstate
commerce commission.
Mr. Willard: I think this: I think whenever the
situation got serious enough, it was possible to do what was
necessary. That would probably follow. But if you want
me to say what I think of the conditions today from the
railroad point of view generally, or from the point of view of
the people at large—and I have a right to speak that way
as well as a railroad man—I think the conditions are better
37
because of the Interstate Commerce Commission, for the
people, and for the railroads.
Commissioner Prouty: You have not yet answered the
question.
Mr. Willard: Possibly I did not understand it.
Commissioner Prouty: The question is this; Under
the old conditions, when the Chicago shippers could bring
pressure to bear on your road or on the New York Central
road or on the Pennsylvania road, do you think it would be
possible for you to advance those class rates?
Mr. Willard: Do you mean to ask whether I think we
could agree to do it?
Commissioner Prouty: You could agree to do it; but
would you stand by your agreement?
Mr. Willard: I think sometimes they did not in the
past; but I intended to answer that question in this way: I
think it would depend upon the seriousness of the case.
I think when things got serious enough they would stand
together. Probably, and no doubt, they would press it to
the end that some roads would go into the hands of re¬
ceivers, which it seems to me is undesirable. The Baltimore
& Ohio went there under the old conditions.
Commissioner Clements: You made a remark just
now to the effect that the greater net revenue in late years
had gone back into the property generally. You would
qualify that somewhat, would you not?
Mr. Willard: I do not recall saying that.
Commissioner Clements: Perhaps I misunderstood
your remark.
Mr, Willard: I think I did not make myself clear.
Commissioner Clements: It is a fact, however, is it
not, that there is a much smaller percentage of non-dividend-
paying stock now than there was a few years ago, and that
the average rate of those that do pay dividends is higher
than a few years ago?
Mr. Willard: I think that is a fact. I could not
testify in regard to those figures. That is a matter I have
not looked into.
Commissioner Clements: I probably misunderstood
what you said. A good deal of it has gone back into the
38
properties, I know; but, at the same time, it has improved
dividends to a great extent by reducing the number of
non-dividend-paying roads, and by increasing the average
of those that do pay dividends.
the outlay of an earned dollar 1910 compared
with 1900.
Mb. Bond: Mr. Willard, there have been a number of
suggestions in the course of the examination of witnesses in
this case as to what might be done to preserve existing
conditions—the conditions of the fiscal year 1910—other
than the proposed raising of rates. Can you tell us what
became of the dollar that was earned by the Baltimore &
Ohio in 1910?
Mr. Willard: Yes sir.
Mr. Bond : I refer now to gross earnings.
Mr. Willard: Yes. Observing that that question had
been asked, or substantially the same one, during the progress
of this hearing, I had the figures prepared for the Baltimore
& Ohio for the year 1910 and the year 1900. They are as
follows:
The amount paid for pay-roll—not including construction,
but the pay-roll in the operation of the railroad—the sum
paid out of a dollar earned, taking the dollar as the basis,
was, in 1910, 42 cents and a fraction.
Mr. Bond: You had better give the fraction, if you
please.
Mr. Willard: I have not it; I dropped it. I have not
it here. In 1910 it was 42 cents and a fraction, and in 1900
it was practically 40 cents. Out of the dollar, the amount
paid for fuel in 1910 was 5.82 cents. In 1900 it was 6.94
cents—a reduction in the amount paid for fuel.
The amount paid for ties in 1910 was (these should all
be cents) 1.50 cents. In 1900 it was 1.01 cents.
Mr. Brandeis: Will you repeat that, please?
Mr. Willard: Which one?
Mr. Brandeis: The last.
Mr. Willard: In 1910, out of a dollar earned, the
Baltimore & Ohio paid 1.50 cents for ties. Ten years prev¬
ious to that time, in 1900, they paid 1.01.
39
For rails, frogs and switches, in the last year it paid 2.33
cents. In the former period, it paid 2.05 cents.
All other expenses in 1910—that is, of an operating
character—were 17.47 cents as against 12.61 cents in the
former period.
In 1910, out of a dollar earned, 2.74 cents were paid for
taxes. In 1900, 1.64 cents were so disposed of.
In 1910, 11.84 cents went to pay interest, rents, and other
deductions from income. In 1900 the sum so expended
was 19.12 cents.
In 1910, 11.11 cents were paid as dividends. In 1900,
11.54 cents were paid for dividends.
In 1910, out of every dollar 22.95 cents were paid for
interest, rents and dividends on the capital investment. In
1900, 30.66 cents were spent in that same direction.
In 1910, 4.22 cents were applied to surplus, were shown
as surplus. In 1900, 5.19 cents were shown as surplus.
The total of these figures is a dollar in each instance.
Note.—For tabulated comparative statement see page 128.
Commissioner Prouty : Mr. McCrea testified yesterday,
as 1 understood it, that in his opinion the cost of transporting
a ton a mile was somewhat less today than it had been ten
years ago on his line. How is that, in your opinion, on
the'Baltimore & Ohio?
Mr. Willard; 1 do not know, to be candid. But when
1 have in mind the rate that obtained ten years ago, it would
seem that they must have been operating more cheaply at
that time than they are now; because the rate, as you may
know, and as is shown in our annual report, ten years ago,
was on a very low basis—less than four mills a ton mile.
Commissioner Prouty: That is, you think it perhaps
costs more today than it did ten years ago?
Mr. Willard: I think it must; yes, sir. 1 am quite
sure it does, although 1 cannot testify to that under oath.
1 have not the figures.
Mr. Bond: Mr. McCrea's figures, as I understood, did
not include anything for interest charges on account of
improvements.
40
Commissioner Prouty: No; simply the cost of opera¬
tion, the cost of transporting a ton a mile.
Mr. Bond; The figures you have just given as to the
distribution of the dollar in 1910 include the increase of
wages that was made in April, 1910, only for three months?
Mr. Willard: That is all.
Mr. Bond: The 42 cents that went for labor, therefore,
does not reflect more than one-fourth of the total?
Mr. Willard: That is true; and still, at the same time,
the amount paid for labor is not wholly dependent upon
wages. It might, for instance, be necessary to keep the
labor expenditure in this year at the same limit as it was a
year ago in spite of increased wages.
Mr. Bond: How could that be done?
Mr. Willard: We would have to employ less men.
So that the point I wanted to make was this: The amount
paid for labor out of the dollar depends not only upon the
rate of wages but upon the number of men employed.
Mr. Bond: I was going to ask you this question: Is
it not a fact that the only way you could maintain the
condition of 1910 in the matter of labor would be, in view of
the increase of wages, to employ fewer men? Is not that
so?
Mr. Willard: Yes.
Mr. Lyon: Or get better men, Mr. Bond?
Mr. Bond: "A man's a man for all that."
You have spoken of the reductions in grade. What has
been the result of the larger locomotives on the Baltimore &
Ohio system, as shown by our figures? How far has the
increase in tractive power been reflected in the increased
load of train?
service conditions prevent full realization in
trainload of increased tractive power
and car capacity.
Mr. Willard: Our figures show that the average
tractive power of the locomotive on the Baltimore & Ohio
Railroad today is 31,916 pounds. In 1900, ten years ago,
it was 23,285. That is an increase of 37 per cent. The
trainload last year was 442 tons. Ten years ago it was 364
tons—an increase of only 21 per cent. The increase in
41
traiiiload has not kept pace with the increased tractive power
of the locomotive, as measured by the difference between
21 and 37.
Mb. Bond : Do you know any reason for that?
Mr. Willard: Yes sir.
Mr. Bond: Why do you think that is so?
Mr. Willard: Because of the character of the service.
That has something to do with it. I refer to the higher
standard of service that is maintained on all roads today,
and particularly with reference to the character of freight
under consideration. That is one thing. The operation of
the hours-of-labor law is another thing. Those two things
cover it mostly—the hours-of-labor law and the character
of the service. In some instances, contracts with employes.
Mr. Bond: How is it in regard to the increase in the
size of cars?
Mr. Willard: The average capacity of the Baltimore &
Ohio freight car today is 37.2 tons. Ten years ago it was
28.9—an increase of 28.7 per cent. A carload in that time
has increased 24 per cent.
Mr. Bond : And that in spite of the fact that a large part
of the Baltimore & Ohio traffic is coal and coke?
Mr. Willard: Yes.
Mr. Bond : I intended to ask you whether you regarded
these existing conditions to which you have testified as
temporary or otherwise? I do not know but that you have
covered all that you wish to say about that in answer to
to questions by the Commissioners.
Mr. Willard : As I say, I am unable to see any commercial
conditions that would justify any fear as to the future;
and I think such hesitancy as there may be in railroad matters
particularly is influenced largely by the possible outcome of
matters now under consideration.
Mr. Bond: Do you think that the gross earnings of
increased traffic would, in any time to which you can look
forward, make good the increase in expenses which you now
see and which you have reason to contemplate from what
you know of conditions?
Mr. Willard: I think that it may be said that when a
road is so provided with facilities that it is in position to
42
take on a considerably increased volume of business, without
overcrowding its existing facilities, there should be a pro¬
portionately larger amount of net out of that than out of
the business generally. Unfortunately, that is not the
condition of the Baltimore & Ohio. We are working our
facilities today to their utmost capacity, and on that account
are not working them in the most economical manner. In
order that we may work them in an economical manner it
will be necessary to expend these large sums of money.
That, in turn, will increase our interest charges, so that we
will not realize as much out of increased business as might
be the case with some other roads.
increased rates necessary to command credit
to furnish facilities required by public.
Mr. Bond: So that to preserve the conditions of 1910,
you will have to do a great deal more than to merely increase
your gross earnings by the use of the same facilities that you
had in 1910? You will have to make large expenditures for
increased facilities to get the business which you can get?
Mr. Willard: We are practically doing all the business
we can do at the present time with existing facilities; and
we cannot increase our earnings unless we handle more
business; and we have got to have more facilities in order to
handle more business.
Mr. Bond: So that you see no way to meet the problem
which confronts the Baltimore & Ohio Railroad Company
except by some increase in rates?
Mr. Willard: Unfortunately, I am unable to see any
way in which we can maintain the policy that we have been
maintaining, and which in my opinion ought to be main¬
tained, unless this increase in rates is granted. That is the
conclusion I am forced to reach.
Commissioner Lane: If some of the other roads that
are not making so much could get some of that business,
perhaps it would relieve you.
Mr. Willard: Possibly.
Mr. Bond: As I understand it, you regard the mainte¬
nance of at least the conditions of 1910 as necessary, not
merely to enable you to make expenditures out of surplus to
43
keep the property as much abreast of the times as it has been
kept in the past, but to maintain the credit of the existing
securities of the Company?
Mr. Willard: Yes sir.
Mr. Bond: And to enable you to get more capital?
Mr. Willard: Yes sir.
CROSS EXAMINATION.
Mr. Lyon: Mr. Willard, will you state generally what
line of improvements you refer to as necessary for the
Baltimore & Ohio to increase its business? What character
of improvements do you mean?
Mr. Willard: Do you wish to have me separate them
as between improvements from surplus and improvements—
Mr. Lyon: No; any improvements that are necessary.
You have said your line was saturated, now, with business.
Mr. Willard: Yes.
Mr. Lyon: And that to conduct the business of the
country properly, it is necessary to improve it.
Mr. Willard: Our budget at the present time shows
$28,000,000 of miscellaneous improvements under way,
toward which about fourteen or fifteen million dollars has
already been spent, as I recall. That budget covers such
improvements as the building of the new double-track tunnel
under the Allegheny Mountains, where we now have a single-
track tunnel on our busiest double-track railroad. It will
cost a million and a half of dollars—to do that.
Mr. Lyon: You now have a single-track tunnel there?
Mr. Willard: We now have a single-track tunnel
there.
Mr. Lyon: Will that increase the efficiency or economy
of operation, or not?
Mr. Willard: It will result in some economy, but very
little. The only economy resulting from it will be a re¬
duction in overtime. It will permit the more expeditious
movement of the trains.
Mr. Lyon: Is not that an economy to a railroad?
Mr. Willard: It is a small economy; yes, sir.
44
Mr. Lyon: It would not be justified from a financial
point of view?
Mr. Willard: No, sir. The economy would not justify
the expenditure at all. The expenditure is only justified
by the fact that^ the existing single-track tunnel limits
absolutely the business we can take out of West Virginia
over that line.
Mr. Lyon: What is the justification for the B. & 0.
doing it, then, from the point of view of its stockholders?
Mr. Willard: There is none from the point of view of
the stockholders, in the case of that particular thing, except
that we hope to gain money, increased net, out of the
increased business we will be able to do.
Mr. Lyon: That is the object from the stockholders'
point of view—to increase the net; is it not?
Mr. Willard: Yes.
Mr. Lyon: And you think it will accomplish that
result?
Mr. Willard: It may. We hope so.
Mr. Lyon: That is not one of the matters which you
think should be paid for bj^ the public out of this surplus
fund?
Mr. Willard: Yes; that is one of the matters that
should be paid for. That is a distinct addition to facilities.
Mr. Lyon: That is an addition to facilities that will
produce revenue?
Mr. Willard: Yes.
Mr. Lyon: If that is done, should that be capitalized?
Mr. Willard: I think it should be, in that particular
case.
Mr. Bond: He misunderstood your question.
Commissioner Harlan: What would you do in the case
of a wooden bridge, a two-track bridge, that is replaced by a
steel bridge?
Mr. Willard: I would pay for that out of surplus;
and if our condition were such as to justify it, I would do that
also with tunnel. But it is not.
Mr. Lyon: What I want to get at is this: You, of
course, largely represent the stockholders. That is your
direct interest?
45
Mr. Willard: Well, it is sometimes said that I am a
servant of the people. I suppose I stand for them, too.
Mr. Lyon: My point is whether these improvements
that you speak of ought to be made for the benefit of the
stockholders or the public?
both the stockholders and the public benefit
by improvements.
Mr. Willard: I think they are both interested in that
matter. I will tell you how we happened to do that. We
did not start to do it because the stockholders were raising
any clamor. It was a fact, however, that when I first came
to Baltimore there was a large delegation of West Virginia
shippers sitting on my doorstep, urging that we get in shape
to handle their business, and get there quickly. That was
one of the things we had to do. That was what prompted
us to start that work.
Mr. Lyon: The shippers urged you to get in condition
to handle this business?
Mr. Willard: Yes, sir.
Mr. Lyon: That is to the interest of the railroad, be¬
cause that is what the railroad is there for.
Mr. Willard: Yes.
Mr. Lyon: What other line of improvements do you
refer to?
Mr. Willard: We are building a new yard at Grafton
that will cost $650,000.
Mr. Lyon : Is that for purposes of economy, or—
Mr. Willard: Some of both. It will enable us to do
business that we were not able to get through there at all;
and we hope, of course, that we can handle it more econom¬
ically.
Mr. Lyon: What other improvements do you refer to?
Mr. Willard: We are building eleven miles of third
track up the west side of the Allegheny Mountains, costing
$100,000 a mile, and taking out several tunnels that are not
large enough to permit the passage of the large locomotives.
I think that improvement altogether involves upwards of
$2,000,000, for those tracks and the tunnel elimination.
That is not exact, but that is substantially what it is.
46
Mr. Lyon: Seriously, however, all improvements of
this class are made for the benefit of the B. & 0. revenues;
are they not?
Mr. Willard. Why, of course. We ought not to spend
money in that direction unless it would result in bring¬
ing satisfactory returns. But they are forced upon us at
this time in order that we may move properly the business
that is being offered, which we have not been able to move.
Mr. Lyon: And increase your gross revenues, and
thereby your net?
Mr. Willard: We hope so.
Mr. Lyon: Have you any other class of improvements
in mind? What other class of improvements do you speak
about?
Mr. Willard: We are building eight or ten miles,
perhaps eight miles, of third track east of Cumberland, that
will enable us to move the business that is offered on that
division. That is of the same character.
Mr. Lyon: Is there any particular class of improve¬
ments being made now that does not inure to the benefit of
the B. & 0. stockholders?
Mr. Willard: I hope not. It would be a reflection on
me, I should think, if I were doing anything that was not
for their benefit, and at the same time for the benefit of the
public. The two interests are allied.
Mr. Lyon: There was some statement made here
yesterday in regard to a terminal at New York which was
largely in the interest of the public, as I understood.
Mr. Willard: Unfortunately, we have no (passenger)
terminal in New York
Mr. Lyon: These improvements that you have men¬
tioned thus far are to increase the capacity, as I understand
your testimony, of the B. & O. Railroad to handle its business?
That is the object of them?
Mr. Willard: To increase its capacity. I will say
there that the improvements that would be undertaken in
the interest of economy would be such as reducing a hill, and
to substitute a level track for a hilly track where the matter
of capacity was not involved—where the road might be able
to move the business over either line, and would only build
47
the lower road because of the possibilities of greater econo¬
mics. I cannc'u recall that we are doing a single thing of
that kind at the present time.
Mr. Lyon; Those improvements that you speak of, the
grade improvements, are no different from your tunnel
improvement. They only have the ultimate object of in¬
creasing your business and increasing the economy of con¬
ducting it, do they not?
Mr. Willard : I think you lay a little too much emphasis
upon the matter of economy. I hope it may develop that
way; but, as I have said, the only economy that will be
realized from these expenditures will be because of our
ability to expedite the train movement and earn more
money. They are not done primarily for purposes of
economy. They are done primarily to enable us to move
the business satisfactorily that is there to be moved.
a dollar for improvements for each dollar in
dividends.
Mr. Lyon: You have said that you think the Balti¬
more & Ohio should lay by a dollar—that it would be better
policy to lay by a dollar in improvements of the character
which you have mentioned (public improvements, we might
call them) for every dollar paid in dividends?
Mr. Willard: I said the B. & O. had spent 50 cents in
that way.
Mr. Lyon: Fifty cents?
Mr. Willard: Yes.
Mr. Lyon: You think it would be better policy to lay
by a dollar, do you?
Mr. Willard: I think the experience of the Pennsjl-
vania Railroad would indicate that.
Mr. Lyon: Yes; I understand. To accomplish that
result, what increase in rates would have to be made on the
B. & O.? Can you form any idea as to that?
Mr. Willard: No I have not thought of it in that
particular connection.
Mr. Lyon : I understand that in the past you have only
been able to lay by fifty cents, and that you have neglected
in the last few years to do even that? You have been unable
to do that in the last few years?
48
Me. Willaed: No; last year we did do it. Three years
ago we did not. Two years ago we did not. Last year we
did it.
Me. Lyon: Will the increase in rates here involved
enable you to do t lat?
Me. Willaed: Not unless we are able to get more
business and do our present business more cheaply than we
have done. The increase in rates will do very little more than
make up the increase in wages; and then we will have
increased fixed charges on fifty millions of dollars. So that
in that event we will not have as much surplus as we had
last year, unless we make it up in some other way.
Mb. Lyon: Then the present application to the Com¬
mission for these increased rates will not accomplish that
result?
Me. Willaed: Not of itself; no.
Me. Lyon: It will not accomplish the result that you
think is so necessary for the railroads?
Me. Willaed: It will not accomplish the result you
mention.
Me. Lyon: Is it the intention of the B. & 0., as you
understand, to further increase its rates so as to accomplish
the desired end?
Me. Willaed: I expect that from time to time it will
be considered necessary to advance rates to meet the con¬
ditions, the changes, that are constantly coming about.
Me. Lyon: How much in money, in dollars, would
that require?
Me. Willaed : What?
Me. Lyon: To get this condition which you think is
necessary for the proper development of the railroad? Take
the B. & 0., especially: How much in money per year would
it require? I want to get its relation to your gross revenue.
Me. Willaed : I do not think I understand your question.
Me. Lyon: I understand you to say that you need a
certain amount of money to lay aside for these public
improvements per year. You think the ideal condition is
"dollar for dollar?"
Me. Willaed: I said I thought that was a conservative
policy.
49
Mr. Lyon: Yes; that is conservative. How much more
would you have to collect in order to do that?
Mr. Willard: If we continue to pay six per cent.,
as we have paid, and put a dollar in the property instead of
fifty cents, it would take nine million surplus instead of
four and a half. The average su plus during a period of
years has been three per cent, above the dividend that was
paid; but we did not pay six per cent, dividend all that
time.
Mr. Lyon: That would require about ten per cent
increase in your revenues of $90,000,000 this year.
Mr. Willard: No.
Mr. Lyon: I understand your surplus would be less
next year.
Mr. Willard: No, it would not, if the revenue was the
same as last year; it would take half of that.
Mr. Lyon: But I understood that the burdens which
are already on you, that you have enumerated here to Mr.
Bond, would absorb that surplus, all except three or four
hundred thousand dollars.
Mr. Willard: The burden of increased fixed charges,
increased wages, increased taxes, increased charges for
depreciation, and cost of additional, equipment, will take
up all that surplus except $213,000.
Mr. Lyon: Therefore, next year, with those burdens
on you, with the same amount of business you will have to
increase your rates?
Mr. Willard: We would have to have more than
twice the increase we expect to receive from the increased
rates should they all be granted.
Mr. Lyon: Take the case of a railroad not so favorably
located and not doing so favorable a business as the B. & 0.—
for instance, one of your competitors, the Erie Railroad:
That is capitalized, I think, for $220,000 a mile, whereas
with the B. & 0. it is $118,000 a mile. What would have to
be the effect upon the rates of that company in order to ac¬
complish your ideal condition?
Mr. Willard: I think the officers of that company,
who are here, are better able to speak as to that than I am.
50
Mr. Lyon; That, of course, might be a question. I
might think otherwise. But that is not important. I just
ask you.
Mr. Willard: I have not studied that matter. I do
not think I am competent to testify on that subject.
Mr. Lyon : It would have to be a much larger increase
in rates than it would have to be on the B. & 0.; would it
not?
Mr. Willard: I do not know their conditions; I cannot
answer that.
Mr. Lyon: With a fixed charge, a capitalization, nearly
double that of the B. & O., would not that necessarily be true?
Mr. Willard: I do not think it would necessarily be
true, because the Erie Road is not paying any dividends.
The Baltimore & Ohio is. I do not recall what their fixed
interest is, what their fixed charge is. They are only paying
interest on their bonds.
Mr. Lyon. You do not mean by that that because the
Erie Railroad is paying no dividends, therefore there should
be nothing laid by?
]\Ir. Willard: I do not mean anything about it. I am
not expressing any opinion about the Erie at all.
Mr. Lyon: What I really wanted to get at is this:
When you speak about a dollar being laid by as to dividends,
must there not be some regulation or some ascertainment of
the fair capitalization and the fair amount of dividends
that should be paid?
Mr. Willard: Possibly that is so. What I have said
has had specific reference to the Baltimore & Ohio; I do
not know that I quite follow you with reference to the
Erie.
Mr. Lyon: I thought you were testifying somewhat in
the way that Mr. McCrea did yesterday—that you were
summoned here as a general witness. Certainly the question
before the Commission is somewhat general; and the B. & 0.
probably cannot be selected by itself and the rates made
upon that basis.
Mr. Willard: Then what was your question?
Mr. Lyon: My question was whether what you state
would be the ideal condition in regard to the basis of rates—
51
that is, to lay by one dollar for these public improvements
when you lay by one dollar in dividends—would really have
application to your competitors? That is a general question
as a practical matter.
Mr. Willard: I think the policy that I have advocated
is a good and proper policy as applied to any one. Whether
they can get it or not is another matter.
Mr. Lyon: Then when the Commission applies that,
should it take the best operated and the lowest capitalized
road to determine what should be the rate in that section of
the country?—because what it determines for one road would
largely govern the others.
Mr. Willard: I think Mr. McCrea answered that very
aptly yesterday. I thought so at the time. I do not think
I could improve on his answer.
Mr. Lyon: I do not recollect it. You might restate it.
Mr. Willard: I hesitate somewhat to do that, because
I do not recall exactly what he said, now. I did think at
that time that he answered it very well. But I will say this:
I do not think it necessarily devolves upon the Commission
to pick out the poorest railroad that can be found anywhere
and make that the basis of adjustment. I do not think
that burden is on the Commission. I think this, however,
if I may say so: I think this thought is entitled to
consideration :
Any railroad—the Erie, for example—regardless of its
conditions, serves a community. A considerable number
of people and manufacturers and growing concerns depend
upon the Erie Railroad for transportation. It seems to me
that any fair adjustment of the question ought to be such
as to give them that fair measure of service that they are
entitled to.
Mr. Lyon: The reason I asked you the question was
that I understood that you were laying down something
that is possibly the measure to apply in arriving at a just
conclusion in this matter; and I presume that you meant
taking the B. & 0. as the proper standard—that is the B. & 0.
in the condition in which it is today, with its capitalization,
and so forth?
Mr. Willard: Yes.
52
Mr. Lyon: Do you think a rate made on the B. & 0.
that will produce enough revenue to pay the operating
expenses, the fixed charges, the dividend which it has been
paying—say six per cent—and to lay by an equivalent
sum for these general improvements, would be the proper
solution of this question?
Mr. Willard: It would be the proper solution for the
B. & 0.
Mr. Lyon: Yes; for the B. & O. But my question, to
make it once more, is this: Could you apply it to this
proposition as a whole?
Mr. Willard: I have not studied that matter. I do
not know; I would not want to answer that. I would not
care for my own opinion upon that subject.
Mr. Lyon: You would not advise the Commission to
follow it, I suppose
Mr. Willard: I would not advise at all in that matter.
Mr. Lyon: If it costs the Baltimore & Ohio more to
move a unit of freight now than it did in 1900, and it does
not cost the Pennsylvania more, or costs the Pennsylvania
less, what would that indicate?
Mr. Willard: I do not know. It might indicate that
we were less efficiently managed. It might indicate that
we had conditions that did not exist over there. I do not
know. It would not necessarily mean anything, just on the
plain face of it.
Mr. Lyon : The mere statement of fact, as to whether it
costs more to do business now than formerly, would not be
a factor in this matter at all.
Mr. Willard: Not necessarily. It might be, but not
necessarily, as I view it.
Mr. Lyon: Would it have any bearing upon the question
of the return to the carrier compared with what it was
formerly.
Mr. Willard: I have gotten quite away from the
original question now. What is the question? I want to
answer it correctly, and I do not know just what it is.
Mr. Lyon: My idea was this: I was not trying at all
to mislead you.
Mr. Willard: No; I know that.
53
Mr. Lyon: Mr. McCrea said that the Pennsylvania
Railroad could transport freight cheaper now than it could
ten years ago.
Mr. Willard: Yes; I have no doubt of it.
Mr. Lyon: You have said that the B. & 0. cannot do
that.
Mr. Willard: Yes; that is a fact. We cannot do it.
We are not in the shape that the Pennsylvania Railroad is
in. As I said a short while ago, we are crowding our
facilities today to the maximum limit, which means extrava¬
gant operation. When we have spent some of the money
that we are spending, and permit the business to move
more freely, it will reduce overtime; it will expedite busi¬
ness; it will suit the people; it will do the thing we ought
to do; and it ought also to be shown in cheaper operation.
Mr. Lyon: As I understand you, then, the difference is
probably due to a larger investment in capital on the part
of the Pennsylvania than on the part of the B. & 0.? That
is, they have reached a greater stage of efficiency of
operation?
Mr. Willard: Yes; I think they have. I think the
Pennsylvania has reached a higher state of efficiency than
the Baltimore & Ohio.
possibilities for reductions in future of trans¬
portation costs.
Mr. Lyon: Therefore, then, it is true that there are
possibilities for the B. & 0. increasing its efficiency?
Mr. Willard: ■ Yes.
Mr. Lyon : I understood you to say a while ago that you
had probably reached your maximum of efficiency.
Mr. Willard: I said we had reached the maximum of
efficiency due to certain things. We cannot cut down hills
any more than to make them level. We cannot run loco¬
motives any larger than we can get over the road. We
have reached certain limitations. But beyond that, of
course, as we do a larger volume of business, it ought to
result in some increase in net earnings. But the net savings
will not be of the character^that have followed these
expenditures in the past.
54
Mr. Lyon: I thought you were telling the Commission
that the B. & 0. cost could not be reduced. I thought that
was the general tendency of your testimony.
Mr. Willard: It cannot be reduced in the future at
the same ratio, at the same rate, as it has in the past. The
reductions that will be found in the future, in my opinion,
will not serve in the future as they have in the past, to meet
those increased expenditures.
Mr. Lyon: Then you want to amend your answer by
saying that the ratio of reduction will not be as great in the
future as it has been in the past"?
Mr. Willard: Yes; if I did not make that thought
clear before, I do.
Mr. Lyon: Referring now to those improvements for
which you need further capital : Do you need terminals in
any of the large cities?
Mr. Willard: Yes. In that way our condition is not
unlike that of most railroads. The question of increased
terminals is a constant problem. In the last year the
Baltimore & Ohio has made a large investment in a terminal
in Chicago; and it will be necessary to expend a great deal
more money to put that in shape to properly handle our
business at that place. We will probably have to spend,
in the next three or four years, some four or five millions of
dollars on that same terminal in track elevation alone.
Mr. Lyon: I understand from your testimony that the
Pennsylvania Railroad is better built for the handling of
business in its present condition. In what respect is it
superior to the B. & 0., generally?
Mr. Willard: Mr. McCrea stated yesterday that in his
opinion it was the best railroad in the world; and I should
not like to dispute him on that subject.
Mr. Lyon : I have no doubt that nearly every president
would say that about his own railroad.
Mr. Willard: Well, if any one road is entitled to
that credit, I think it rests with the Pennsylvania.
Mr. Lyon: I think the New York Central may have
some dispute with you, judging from the testimony given in
New York. Can you tell us just where these economies are
to be worked in on the B. & 0.?
55
Mr. Willard: What economies?
Mr. Lyon; The ones that you speak of, that can be
made, to reduce its cost?
Mr. AVillard: I have not spoken of very many
economies.
Mr. Lyon: You said that there were possibilities for
the B. & 0. to reduce its cost.
Mr. Willard: You said that, and I agreed that there
were some possibilities; but the possibilities will grow out
of expenditures that are justified for other reasons. The
economies will be a by-product. The economies will simply
be a by-product of the expenditures. I will not say that
there are not some hills that will be reduced, and some other
things that will be done. I will not say that we will not get
some bigger engines in time, some heavier cars, perhaps.
But I think the possibilities in those directions have been
very largely exhausted. The economies that will come will
be because of better terminals—such economies as will result
from a better arranged terminal, or a greater number of
second and third tracks that will permit a more expeditious
movement, and things of that kind.
Mr. Lyon: Those are what you refer to?
Mr. Willard: Yes.
increases in cost of labor and material.
Mr. Lyon: It has been stated here several times in
the course of these two cases, both of which I have attended,
that the cost of material to the carrier has not increased in
the last ten years, and certainly in the last three or four.
Do you disagree with that?
Mr. Willard: I showed this morning that the cost of
fuel to the Baltimore & Ohio had not increased in that period.
Mr. Lyon: I meant on an average. I understood the
railroads to say that, generally speaking, the material
question was not involved here; that those items had not
increased.
Mr. Willard: I think on the whole the material has
increased. Railroads are very large consumers of lumber,
for instance, and the price of lumber of all kinds has gone
up very much within that period. I think the increase of
56
lumber alone would more than offset any possible decrease
in anything else. That is just my opinion; I do not know.
Mr. Lyon: There seems to be a difference of opinion
among the railroad men, and I was wondering—I asked the
question out west—why transportation increases in cost
when manufactured articles have not increased in cost?
Mr. Willard: I think I can explain that. The wages
paid by railroads in the last ten years have gone up. We
estimate that on the Baltimore & Ohio they have gone up
about 30 per cent. That is one element.
Mr. Lyon: Is not that true of the manufacturers?
Mr. Willard: I doubt if it is true to that same extent.
Mr. Lyon: I thought it was.
Mr. Willard: I do not think so. I do not know, but
I do not think so. I think it is generally believed that the
scale of wages paid men in the employ of railroads is larger
than that paid in most other lines of employment. Probably
that is a good thing. However, that may be, I think it is so.
The expenditures of the railroads in the last four or five
years have been greatly increased by legislative enactments,
such as the hours-of-labor law. I do not wish to be under¬
stood as criticising that law. I think the 16-hour law was a
very good thing; but it cost money. Whether it is good or
bad, it cost money. It added to the cost of operating the rail¬
roads. Some of the States have passed so-called "employers'
liability" laws. I am not opposed to that. I think the
thought behind such legislation is good; but I think it ought
to be carried out in its entirety, and so far it has not been.
A compensation law, properly prepared and so adjusted that
that item of expense, such as it might be, should be properly
reflected in the rates I am in favor of. That is the kind of
law advocated by Colonel Roosevelt when he was President
of the United States. I am in favor of that kind of a law.
But so far as any progress has been made in that direction
as yet, it has only resulted in transferring the burden from
the injured employe to the stockholder; and the latter part
of the transaction has not yet been completed. In the mean¬
time, that^is adding to the cost of operation. The standard
of service has been raised in many of the States by order of
the Commission and by legislative enactment. Those are
57
the items that enter into the cost of transportation, that make
the cost of doing that particular thing constantly go up,
when, as you say, the cost of manufacturing goes down—
which is no doubt true. I have not looked into it. Those
are some of the things; probably not all.
Mr. Lyon: Then I understand it to be your view that
those laws that have been passed do not apply to the manu¬
facturing establishments?
Mr. Willard: No; I do not understand that they do.
Mr. Lyon: Do you understand that there has been any
reduction in the hours in ordinary manufacturing estab¬
lishments?
Mr. Willard: I do not know.
Mr. Lyon: In the hours of labor?
Mr. Willard: I do not know. I know that we have
an eight-hour law in Maryland for operators. We have the
nine-hour operator law in the United States generally.
We have the full-crew bill in Indiana. I think I have some
figures on those matters that I can submit, probably.
Mr. Lyon: I do not think you need give the figures.
I just understood that the manufacturing establishments
were also affected by this labor question, if not by law, at
least by the organizations which impose conditions upon
them.
Mr. Lyon: Of course if that is not true, I can under¬
stand your explanation.
railroads must adjust wages having in mind
conveniece of the public.
Mr. Willard: I think this should be borne in mind,
since you press that question : The position of the ordinary
manufacturer is quite unlike that of the railroad company.
In that connection I will refer to this large recent wage in¬
crease. It so happened that the beginning of the movement
started with the Baltimore & Ohio Railroad. In view of the
fact that that railroad at that time was paying higher wages
than were being paid on any of the other roads in the East at
that time, with one possible exception, and the rates that were
being collected were the same, we did not think we could con¬
sistently raise our standard of wages. The rate of increase
58
that was asked for would have been approximately 14 or 15
per cent. So we declined to grant the increase. The
ordinary manufacturer could have done that, and he
could have forced an issue; he could have closed his shop;
and no one would have cared. The railroad could not stop
running; and it had been provided by legislative enactment
that under such conditions certain things might be done,
and the machinery had been furnished. Acting in accord
with the spirit of that enactment, then, we invoked the good
offices of the proper Commissioners under the Erdman Act.
They looked into the matter, and they recommended that
we make certain increases, because they felt that if we
failed to do that it would probably result in a stoppage of
work, to the great loss and inconvenience of the public.
That brought an entirely different burden upon the railroad
in the adjustment of labor matters than rests upon the
individual who considers only his income in adjusting his
rate of wages, and does not care particularly about what
the public says about it. If we are going to be required in
the future to adjust our wages, having in mind the con¬
venience of the public, it seems to me the public should share
to some extent in the payment of the bill.
Mr. Lyon: In other words, your opinion is that if a
public body recommends that you increase the wages of
your employes, your position is that the public body should
allow you to increase rates to recoup?
Mr. Willard: I think they should recognize that there
is a certain relation between those two things.
Mr. Lyon : Heretofore you have done that, if you agree
with Mr. McCrea, by simply increasing your rates to meet
the wage situation?
Mr. Willard: I think that is generally true.
Mr. Lyon: And that burden has not been borne by the
railroads, but has been taken by the public?
Mr. Willard: It has been divided. The railroads
heretofore, as has been said, have been able to effect great
economies in operations in recent years. That has been
done by larger train loads, and things of that kind; and that
has helped in a great measure to keep down the cost of
operation. I think the figures put out by the Interstate
59
Commerce Commission, showing the average rate per ton
mile in the last ten or twelve years, fail to indicate any very
great advance in rates.
Mb. Lyon: Do you mean by that to say that the
average rate per ton per mile indicates anything definite?
Mr. Willaed; Oh, I suspect it indicates something, or
it would not be published. I do not think it is conclusive.
Mr. Lyon: Is it not a fact that your rate per ton per
mile is increased by reducing the volume of your coarse
products?
Mr. Willard: It might be; but if it had no value,
people would not talk of it at all.
Mr. Lyon: I have often wondered why they did, and I
am asking you.
Mr. Willard: I must confess that I am interested in
it. I like to see it. It is not controlling, though.
Mr. Lyon: The Northwestern Road, I think, testified
that they were interested in the high-class products rather
than in the reduction of the rate per ton per mile; and they
said they had some money in their treasury as the result of
that policy. I do not know whether that is true of the
B. & 0. or not.
So that is your accounting for the increased transportation
cost as against the manufactured product?
Mr. Willard: Well, I do not know that I understand
just what you mean. I must plead to some extent ignorance
of the Baltimore & Ohio, partly because I have only been
there for a short time. But if our transportation cost has
increased, as you say, I presume that some of those factors
have entered into it.
Mr. Lyon: I should like to ask you this question: Do
you understand that in transportation labor is a larger
element than in manufactured products?
Mr. Willard: I cannot tell. It is a very large element
in transportation.
Mr. Lyon: That has been given as the explanation by
some of the carriers—that the labor element in transporta¬
tion was larger than in the manufactured article as a whole.
Mr. Willard: I think almost invariably that would be
found true.
60
Mb. Lyon: I understood from your testimony, in
answer to a question, I think, by Commissioner Lane, that
you were satisfied that the regulation of carriers was of
benefit both to the public and to the carriers.
Mr. Willard: That is, you understood me to say that
I thought that it was of benefit.
Mr. Lyon: That is it was of benefit.
Mr. Willard: Yes; I intended to say that.
Mr. Lyon: And I take it from that that you do not
think the rate should be based upon the value of the service,
then.
Mr. Willard: Oh, I have not said anything to indicate
that.
should rates be based on the value of the
service ?
Mr. Lyon: I will ask you, then, if the rate is based
upon the value of the service.
Mr. Willard: You are speaking now of a specific rate?
Mr. Lyon: No; all rates.
Mr. Willard: I think—
Mr. Lyon : I did not finish my question.
Mr. Willard: I think that would possibly take you
into some difficulty. If you took all the rates, and if it were
possible to decide that the value of the service for all of the
business could only justify a certain rate, and if it were found
that the sum total of all of those rates did not pay a proper
return on the capital, you would be in a dilemma; so I do
not think you can do that. I think that in cases of indi¬
vidual rates, the value of the service must be considered;
but I think your question was as a basis of rates generally.
All of the rates must bring forth money enough to furnish
the additional capital that is necessary to provide the facili¬
ties, regardless of the value of the service. If the service
is not worth it, they ought not to have the facilities.
Mr. Lyon: Your system is not based upon the value
of the service, then?
Mr. Willard: Why, I do not think I want to say that.
I think the value of the service docs not determine it. I
61
think the value of the service cannot determine a general
rate structure. I think the value of the service does enter
very largely into the matter of determining a specific rate.
I want to say this, however: I am not familiar with this
question of rates, and there are men that can talk on that
subject very much more intelligently than I can; and I will
not undertake to qualify as an expert in that direction.
Mb. Lyon: The B. & 0., I think, has not called any one
else.
Mb. Willabd: They called Mr. Wight.
Mb. Lyon: Mr Ripley testified in that regard. He
said he thought it ought to be based on the value of the
service.
Mb. Willabd: Mr. Ripley has had more experience in
that direction than I have.
Mb. Lyon: As I understand the value of the service, it
practically means no regulation; and I just wanted to get
your view about it.
Mb. Willabd: I have not said that.
Mb. Lyon: Now, Mr. Willard, let me ask you the same
question that I asked Mr. McCrea yesterday. Your
reports for the fiscal years 1908, 1909 and 1910 show that
your transportation expense for 1908 was $27,700,000.
Mb. Willabd: What is that, please?
Mb. Lyon: Your transportation expenses for 1908—
the year ending June 30th, 1908—were $27,700,000, and
during that time you earned a revenue of $73,600,000.
Mb. Willabd: Yes
Mb. Lyon: Your transportation expense for 1910 was
$29,000,000—an increase of $1,300,000, or five per cent.
Your operating revenue increased from $73,000,000 to
$87,000,000, or sixteen per cent.?
Mb. Willabd: Yes.
Mb. Lyon: Does that indicate anything to you in
regard to the economy of handling the traffic by the B. & O.?
Mb. Willabd: Not necessarily; not without some other
knowledge of it, it would not.
Me. Lyon: The fact that your transportation expense
only increased 5 per cent., and your gross revenue increased
about 20 per cent.?
62
Mr. Willard: I understood you to say that the gross
revenue decreased in that period.
Mr. Lyon: No; the gross revenue increased from
$73,000,000 to $87,000,000; in other words, your transporta¬
tion expense increased 5 per cent., and your gross revenue
increased 20 per cent.
Mr. Willard: Yes.
Mr. Lyon: Would that indicate that you were handling
that business more economically in 1910 than in 1908?
Mr. Willard: It might, or it might not. When the
business was off 20 per cent., of course this followed—it
always happens on every railroad : That a certain minimum
amount of service has to be given. For instance, the
Baltimore & Ohio Railroad is obliged to load or partly load
1,300 box cars a day with miscellaneous freight to cover
established lines. We load those 1,300 cars regardless of the
amount of business to go, although as a rule our total loading
is between seventeen and eighteen hundred. The aver¬
age load is less than five tons per car. That is brought about
by those conditions. On branch lines, in times of business
depression, it usually happens that there is not business
enough to fill the minimum number of trains that must be
run. People demand a way-freight each way a day, or some¬
thing of that kind, whether the business is large or small.
So that it might be possible that in such a time as that they
were operating with great efficiency, although the percentage
of transportation expense would seem higher than normal.
So without any knowledge of that, I would say I cannot tell.
Mr. Lyon: That was during the fiscal year ending
June 30, 1908, when the business of the B. & 0. was at its
maximum for the first four or five months of that fiscal
year, and was slow for the. last six or seven, producing, I
should say, about an average condition. The second figures
were for the year ending June 30, 1910, which, I believe, was
the most prosperous year in the history of the B. & 0. I
think it was. I only asked the question because there seems
to be an idea here that it costs more to do the business this
year than two or three years ago.
63
Mr. Willard: I think it did.
Mr. Lyon: At the same time with those figures—those
were the ones covering transportation expense—the Penn¬
sylvania reduced its cost $3,000,000 to earn 20 per cent. more.
You increased yours $1,300,000, or five per cent, to earn
20 per cent. more. The operating expenses show substan¬
tially the same thing. Your operating expenses increased 10
per cent, while your revenues increased 20, in those two
years. It shows, from further examination, that your way
and structure account increased 8 per cent, between those
two years, so that no undue amount went into that, while
your equipment account increased 27 per cent.?
Mr. Willard: You understand, I was not here at that
time, and I am not familiar with the conditions.
Mr. Lyon: It is not a question of whether you were
here or not. The question I ask is what the history of the
railroad as it has been given would indicate.
Mr. Willard: I do not want to give you an opinion
that I would not care anything about myself; and I would
not care anything about my opinion on that subject, based
on such knowledge as I have of it. I do not think it is
worth anything, and I do not want to give it to jmu.
Mr. Lyon: Is there anybody here for the B. & 0. who
is qualified to give an opinion that would be worth anything?
Mr. Willard: There might be; I do not know. Other
officers are here.
Mr. Lyon: Of course the Commission only has the
figures before it, unless the officers of the railroad go on the
stand. We know nothing about what this equipment was
spent for, except that we see that it is a fact that 27 per cent,
more was spent in one year than in another, while the trans¬
portation expense only increased 5 per cent.
Mr. Willard: I should think that was a very healthy
condition. Of course the percentage of the cost of conducting
transportation to gross earnings is what we look upon as
the real measure of efficiency in operating a railroad, because
the money so spent brings nothing except the immediate
service.
Mr. Lyon : That is, transportation.
Mr. Willard: Tran.sportation.
64
Mr. Lyon: Therefore if that increased 5 per cent.—
Mr. Willard: If that increased 5 per cent, and the
earnings increased 20 per cent. I should say that it indicated
a very healthy condition—a very satisfactory condition.
Mr. Lyon: With that situation, would you think con¬
ditions had so changed, adversely to the B. & 0. between
those years, as to justify an increase in rates, or would that
have any bearing upon it?
higher rates warranted aside from increase in
wages, which now render them necessary.
Mr. Willard: I have not thought of that at all in
reaching the conclusion that we needed to increase our rates.
I am constantly impressed with this fact: We earned a
certain amount of money last year and had over $4,000,000
surplus left. Next year our increased payments are going
to take up all of that $4,000,000 surplus; and one bad month
in the winter would put us where we would not have any
surplus. You can see that that might be possible. Under¬
stand, I do not intend that anything shall affect the Baltimore
& Ohio's present rate of dividends, because there are a lot
of things that can happen before that is disturbed. But
those are the things I have thought about, in reaching my
conclusion that the rates ought to be advanced. I did not
go at it from the point of view you have taken, although
that is no doubt a very proper one. I have based my
conclusion on other things.
Mr. Lyon: I really have no conclusion about it. I am
simply trying to bring out these points in the interest of the
subject. I understand your position to be, if I may state
it, that you think there should be this increase in rates
because of increased expenses which would absorb your
surplus?
Mr. Willard : That is one reason; yes.
Mr. Lyon: When was the matter of increasing the rates
first considered; do you know? I will tell you what Mr.
Wight said. He was your traffic man. He said this was
considered for three or four years.
Mr. Willard: He is better qualified than I am to speak
on that subject, because he was here and I was not.
65
Mr. Lyon: Therefore, if he was the man who was
considering the increase of rates, he could not have been
considering it from the basis on which you base it now.
Mr. Willard: I cannot say what he considered; and
regardless of what he considered, nothing was done. When
I came here in January the thing was under discussion. I
do not know how long it had been under discussion. I did
not ask any questions about it. But immediately, after I
became identified with the property, it became necessary for
us to increase our expenses very largely, and then I began to
get seriously interested in it myself. From that time on I
have tried to keep in touch with the question; and the thing
that made it of primary importance at this particular time,
regardless of any other reason, was the fact that our expenses
were so greatly increased by reason of our wages.
Mr. Lyon: Were they increased in January, 1910, when
you considered this subject?
Mr. Willard: Wages?
Mr. Lyon: Yes.
Mr. Willard: No; but the committee was there waiting
for an audience as soon as I got to the Baltimore & Ohio Rail¬
road. They had asked for an increase. We knew of the
movement that was on foot, and we knew the probable
outcome.
Mr. Lyon: You knew the probable outcome. Did you
know the probable outcome of these increased rates at that
time—what the volume would be?
Mr. Willard: We did not know the probable outcome
of that particular schedule, of course, until it had been
worked up in some sort of shape; but we did do this: We
knew that we were asked to increase our wages a certain
per cent. We made various calculations to see what that
would amount to, and we had estimates varying all the way
from two and a half to three or four millions of dollars. We
knew that if we were to recoup ourselves for that amount
of payment, it would have to come from freight income,
freight rates. It could not come from passenger earnings.
We knew that our freight earnings the previous year—I have
forgotten what they were, but this last year they were
$69,000,000. We knew that that increase had to be spread
66
somewhere on our freight rates. Then we discussed it in
various ways—what an increase on this commodity would
amount to, if we could get anything. It was under dis¬
cussion for a long time, and finally it took such shape as
is shown in the tariffs that were filed.
Mr. Lyon : I suppose you of course could not have known
at that time that your receipts for the year ending June 30,
1910, would show an advance of S3,500,000 over what they
were for the previous year, which was about 50 per cent.?
Mr. Willard: Did they show that? I do not under¬
stand those figures. What were they, please?
Mr. Lyon; For the year ending June 30, 1910, the
Baltimore & Ohio earned in net operating revenue $3,587,000
more than it did for the fiscal year ending June 30, 1909.
Mr. Willard: I do not know where you got those
figures. They are not in harmony with mine. At any rate
you are right in saying that we did not know in the spring
what the net earnings would be in June; no.
Mr. Lyon: If you had known at that time, would you
have raised your rates?
Mr. Willard: No; I think not, because I do not think
the revenue that the Baltimore & Ohio Company had been
getting was enough to meet the condition of affairs. Now,
understand, we were not only confronted—
Mr. Lyon: I think you misstated just then; you meant
to say that you would increase the rates, but you said you
would not.
Mr. Willard: I meant to say I do not think the rates
that were in effect were as high as they should be even if this
increase of wages had not corne at all, because the amount
of surplus was not as large; the credit, the strength of the
property was not as much as it should have been. Under¬
stand, we had in mind not only possible wage increases;
these among others, but possible legislation of various kinds,
now under consideration, that is intended to increase our
expenses still more. And understand, please, that in
anything I say about legislation or regulation I am not
criticising it at all. I am simply saying that, good or bad,
unnecessary or otherwise, it costs money; and we can see
that that is going to happen.
67
Mr. Lyon; This increase was not made because of
changed conditions since January 1st, 1910?
Mr. Willard: I did not say that. I said it became
acute just exactly because of that changed condition. That
brought it to an acute stage.
Mr. Lyon: That brought it to an acute stage; but, as
you say, you considered the rates too low?
Mr. Willard: Speaking as an accessory after the fact,
I say "Yes." I was not here at that time; but I do not
think the road was earning any too much money. It did
not earn its dividends two years before.
Mr. Lyon: And knowing the facts as they are now—
that you did for this year have three million and a half more
than you did the previous year, and that the increase of
wages for the year 1911 will be $2,000,000 (that is, ulti¬
mately, including all that have been made and are to be
made, as I understand)—you still think that the rate
increase should be allowed.
Mr. Willard: I still think that the rate increase
should be allowed?
Mr. Lyon: But you do not base that upon the fact of
this wage increase?
Mr. Willard: Why, yes.
Mr. Lyon: You stated a while ago that it was for the
purpose of borrowing money, for influencing your bond¬
holders.
Mr. Willard: No; I do not think I said that. I said
the question became acute on account of the wage increase.
I said, or intended to say, that regardléss of that I thought
the railroad was not earning money enough to maintain its
credit and keep up the property, not only because of what
had happened, but because of the things that we expected
would happen if legislation that was being urged should be
passed, as some of it probably would be.
Mr. Lyon: It was based upon those three conditions?
Mr. Willard: Those and others. I will not say that
there are only those three.
Mr. Bond: Mr. Lyon, may I interrupt a minute to ask
you where you got those figures of net operating expense for
1909 and 1910?
68
Mr. Lyon; I can refer you to my accountant.
Mr. Bond: You are reading, I think, the figures of 1908
and 1910. We do not know of any such difference. Do
you say there is a difference of 83,000,000?
Mr. Lyon: The figures taking from your monthly
reports show a difference of $3,587,963.77. That is the net
operating revenue increase.
Commissioner Prouty: From what year to what year?
Mr. Lyon: For the fiscal year ending June 30, 1910,
over the fiscal year ending June 30, 1909.
Mr. Bond: And what road are you talking about?
Mr. Lyon: The Baltimore & Ohio Railroad.
AIr. Bond: Not the system; it is simply the Baltimore
& Ohio?
Mr. Lyon: No; we do not worry about the system here.
The railroad companies report to the Commission.
Mr. Bond: Yes; all of them report to the Commission,
but now we have got them in a consolidated statement.
You are talking about part of the system.
Mr. Lyon: We have them separated, as they report to
the Commission.
Mr. Bond: Have you tried to combine them?
Mr. Lyon: No sir.
AIr. Bond: The difference in the system was $1,900,000,
and not $3,000,000.
AIr. Lyon: I do not know about that.
A'Ir. Bond : I do not want to interrupt the examination.
I just wanted to see.if we were not getting at cross-purposes
on our figures. There is not any use in quarreling about
figures, you know.
AIr. Lyon: I have particularly taken the figures which
I have gotten up as they are reported to the Commission by
the railroads. Of course if a number of the railroads are
combined in systems, we know nothing about that except
from the information we get from the outside. As I under¬
stand it, there is no report to the Commission which reports
this matter of the system. The Southern Pacific, as I
understand, includes many railroads; but it is the operating
railroads that report to us.
69
Commissioner Peouty: Mr. Bond, what was your
gross revenue for the year 1910?
Mr. Bond: The gross revenue—that includes outside
operation—was $90,163,401.09.
Commissioner Prouty: That is for the system?
Mr. Bond: That is for the whole system, including
outside operations.
Commissioner Prouty: Mr. Lyon, what are your gross
revenues?
Mr. Lyon: I have got the same figures here.
Commissioner Prouty: Then you are talking about the
same thing.
Mr. Bond: Then you have got it wrong for 1909. What
are your gross figures for 1909?
Mr. Lyon: As I said, we have a full report up to 1909.
I have had that made up. That is $72,207,000.
Mr. Bond: It ought to be $77,563,449.95, to make the
comparison correct.
Mr. Lyon: For the system?
Mr. Bond: To compare with the $90,000,000 in 1910,
you ought to have $77,563,449.95.
Mr. Lyon: Will you give me the figures for 1910?
Mr. Bond: I think perhaps it would be better to let
us file—
Mr. Lyon: I think not; if you will just answer this
question we will straighten it out. These figures were sent
to us by the B. & O. Railroad upon the special request
for the making out of this report; and the $90,000,000 was
sent to us, and we have inserted that. We have not your
annual report for 1910. That will not be submitted here for
some months, or some time. But we sent out and made a
special request for these figures from the operating railroads,
and they were given to us as $90,000,000. There must be
a clerical error of some kind.
Mr. Bond: The trouble is that the ninety millions
includes the whole system, and your prior figures do not
include the whole system. That is the trouble.
Mr. Lyon: I understand; and therefore I ask you if
you will give me the figures for 1910—the gross revenues
of the Baltimore & Ohio Railroad as it reports to the Inter-
ro
state Commerce Commission. If you will do that, I will
insert them.
Mr. Bond: As it reports to the Interstate Commerce
Commission for the year 1910, it reports more roads than it
reported prior to that time. That is the trouble. In 1910
we are reporting the whole system, because in the interval
we have acquired these roads. Your 1909 figures are split
up between the different roads. That is the trouble.
Mr. Willard: Mr. Chairman, I have the figures. I
think I can set this thing straight. There is no mistake,
except that we have not taken the same basis for comparison.
Accepting the figures of 1910 as $90,163,000, with a surplus
of $4,857,000, similar figures for 1909 should be $77,563,000,
and a surplus of $1,897,000, leaving an increase this year
over last year of about $2,500,000. Now, when reduced
to exactly the same basis, that is the result; but the
figures you had did not include last year some of the items
that we have put in this year. That is the only difference.
Mr. Lyon: Of course we took the figures as reported
to us by the special report.
Mr. Bond: We misled you, no doubt, by including
roads which were not in before.
Mr. Thorne : If you will give us the operating expenses
for that same part of your road for those same years, we
could figure out the net operating revenue which Mr. Lyon
has referred to.
Mr. Willard : We can give you all those figures.
Mr. Thorne: Just those two—I mean, the operating
expenses of those two years.
Mr. Willard: The operating expenses for 1909 were
fifty-two million, eight hundred and fifty-three thousand
and some dollars.
Mr. Thorne: In 1910, what were they?
Mr. Willard: In 1910 they were $63,195,000.
Mr. Bond: You have those figures, have you not, Mr.
Willard, for ten years back?
Mr. Willard: Yes.
Mr. Bond: If you will let us just put them in, it will
save a great deal of labor if there is to be any comparison.
71
Mr. Willard: This is just my personal statement.
I have no objection to putting it in if you want it. I may
want to see it again, though, on this examination.
(The above-mentioned paper was marked "Exhibit
Willard A.")
Note.—See compilation page 127.
Mr. Lyon: Mr. Willard, I should like to have you
direct some of the employes of your road to furnish us the
information so that we could make a comparison on the basis
of 1909.
Mr. Willard: What information would you like?
Mr. Lyon: All the information as to gross revenue,
operating expense, and so forth.
Mr. Willard: But we have furnished it now, in this
statement just put in.
Mr. Lyon: Does not that include the system?
Mr. Willard: Yes.
Mr. Lyon: It does not show the figures, then, the
way that—
Mr. Willard: The whole thing is made on a compara¬
tive basis for ten years—just what you want, I think.
Mr. Bond: Let me hand that to Mr. Lyon. (The
statement above referred to was handed to Mr. Lyon.)
Mr. Lyon: We are trying to work this up for all these
railroads, and I do not know whether the B. & O. had—
Mr. Willard: I had that statement prepared for my
own information, but I think perhaps it is what you want.
Mr. Lyon : I should like to have you ask some of your
departments to furnish us the figures for 1910 on the same
basis that they were furnished for 1909.
Mr. Willard: We will do that.
Mr. Lyon: That will be necessary in order for us to
make this comparison, because these other figures upset
all the figures they had for the last nine or ten years. The
same question, then, applies: Instead of being $3,900,000,
your net income was increased about $2,500,000. With
that amendment the question would apply. You say you
would make the advance in rates, regardless of that infor¬
mation.
72
Mr. Willard: Just the same.
Mr. Lyon: And if 1911 should improve as 1910 has, you
would do the same, I understand?
Mr. Willard: Oh, well, I do not know anything about
that. I cannot say what conclusion I would reach on some¬
thing that might happen in the next twelve months. I do
not think our security holders would like to have their
business handled that way.
Mr. Lyon: But if your business had increased in the
course of ten years from $34,000,000 for the first year I
have here, 1900, up to $90,000,000, or probably something
a little less than that, averaging eight or ten per cent, a year,
would not that be a fair basis for assuming that that will
occur for the coming year, or would it be unreasonable?
Mr. Willard: Well, it might. It might occur.
Mr. Lyon: Well, it has occurred; the test is what it has
done?
Mr. Willard: Yes.
Mr. Bond: You are not comparing the earnings of the
same properties for that period, Mr. Lyon. You are taking
the old B. & 0. properties.
Mr. Lyon: Well, let us leave out the figures, Mr.
Willard. It seems to bother Mr. Bond.
Mr. Bond: I think if you are going to base it on
figures, the figures ought to be correct.
Mr. Lyon: If the Baltimore & Ohio Railroad for the
fiscal year ending June 30, 1911, makes an addition to its
gross revenues and to its net operating revenues on the basis
of what it has done for ten years, do you think that should
be taken into consideration in determining what shall be
the rate for the coming year, when you do take into
consideration the expense to which you have been put for
the coming year?
Mr. Willard: No, sir; I do not think we should give
weight to some uncertain element of that kind on the one side
when we have so many absolutely certain elements to con¬
sider on the other side. The reasons that make me think it
is necessary to advance our rates are in no sense uncertain in
my mind, and I could not weigh against them such an uncer-
73
tain thing as you suggest. I do not think it would be right
to do that.
Mr. Lyon: Then the fact that rates have increased in
this country—the gross income of the railroads and the net
—about eight or ten per cent, for the last ten or fifteen years
(I have the figures here) you think should be given no con¬
sideration?
Mr. Willard: I did not say that.
Mr. Lyon: In determining what the earnings of the
carriers will be as compared with their expenses?
Mr. Willard: I did not say that. I am not sufficiently
familiar with the condition of all the eastern railroads to speak
of all the conditions. I am only speaking of the Baltimore
& Ohio Railroad, and what I say applies to that Company.
I think the Baltimore & Ohio rates should be increased as
proposed. In fact, I do not think that the increase as pro¬
posed is as large as it ought to be. Certainly nothing less
than that, in my opinion, should be given; and I have told
you my reasons for thinking that.
Mr. Lyon: I call your attention also to the fact that
during the last ten years your expenses for maintenance of
equipment have very materially increased, being for the
year 1910, I think, the largest in the history of your road—
that is, in proportion to the revenues?
Mr. Willard: Yes.
Mr. Lyon: In proportion to the gross revenue, which
was $20,000,000 larger than it was in the fiscal year ending
June 30, 1908.
You appropriated for that year a larger proportion for
equipment—18 per cent as compared with 17 in 1908.
Mr. Willard: Yes.
Mr. Lyon: Increasing from a basis of 12 or 13 per cent,
in 1901 to 18 per cent, in 1910?
Mr. Willard: Yes.
Mr. Lyon: Do you understand that that goes to the
fact that it is more costly to repair equipment now, or is
that—
Mr. Willard: It is more costly to repair it, and it is
also due to the fact that during the year when the Company
did not earn its dividend it restricted maintenance charges
74
more than it should have done. It did not hold up as it
should. The engines today are bigger; they are more
expensive to maintain. The wages paid are very much
higher than they were formerly; and all of those things enter
into the cost of maintenance.
Mr. Lyon: Then a large expense on account of mainte¬
nance now would indicate that the railroad was doing a
better business?
Mr. Willard: Not necessarily. I should want to
know about how that expenditure compared with the
expenditure of other roads. As I recall, the percentage of
gross earnings spent on maintenance of equipment on the
Baltimore & Ohio last year was about what it was on the
Pennsylvania and some other good railroads. I do not think
it was in excess. I do not think we spent more than we ought
to have spent.
Mr. Lyon : Oh, I do not think so. I simply wanted to
bring out the fact that it was more than had been spent in
previous years.
Mr. Willard: Oh, yes; more than had been spent.
Mr. Lyon: It shows a tendency to increase from 12 to
18 per cent very gradually, and there has been no falling off.
Mr. Willard: No. I think that in those figures there
are probably included depreciation charges. I am not
sure, but I judge you included them in there.
Mr. Lyon: Should not they be included?
Mr. Willard: They should be, but formerly they were
not.
Mr. Lyon: Are they represented in the maintenance of
equipment in any other form?
Mr. Willard: I might say here that formerly, for
some years, the Baltimore & Ohio did not charge to deprecia¬
tion as much as it should; and you will notice that in our
last annual report that is referred to. We had a committee
appointed to value the equipment, and they found that in
their opinion it stood on the books at about $8,000,000 more
than it ought to stand. We reduced the value that much
last year. We wrote it off. That showed that not enough
depreciation had been taken into account in the past, and
we readjusted it.
75
Mb. Lyon: Is that what increased the ratio for 1910,
and made it 18?
Mr. Willard: It entered into that. I think the
figures you have no doubt include that. I am not sure.
I do not know how you made your figures ; but I presume they
do.
Mr. Lyon: I think that is ail.
(The Commission then, at 12:45 o'clock, p. m., took a
recess until 2 o'clock of the same day.)
AFTER RECESS.
Testimony of Daniel Willard—Resumed.
The Chairman: Mr. Lyon, had you concluded your
examination?
Mr. Lyon: Yes.
The Chairman : Mr. Brandeis, you may proceed.
Mr. Brandeis: Mr. Willard, in stating the prospect of
the current year, have you not, ijn your modesty, omitted
one element which ought to be taken into consideration?
Mr. Willard: Possibly.
Mr. Brandeis: It has been said that Dan Willard was
worth $2,000,000 in savings to the Baltimore & Ohio.
Mr. Willard: I am embarrassed.
Mr. Brandeis: Well, but seriously, is not the question
of management, of the men who operate the road, one of
prime importance in considering its net earnings?
Mr. Willard: I think that is generally so considered.
Mr. Brandeis: And it is so not only in regard to rail¬
roads, but in regard to all enterprises?
Mr. Willard: I think that is fair.
Mr. Brandeis: And the whole difference that is indi¬
cated by this increase in wages that has been referred to of
$2,000,000 is just three per cent, of the operating expenses,
is it not?
Mr. Willard: Yes, it may be.
Mr. Brandeis: Just about three per cent.?
Mr. Willard: Of the entire operating expenses? It
may be.
76
Mr. Brandéis: I say, an amount equal to that?
Mr. Willard: Possibly.
Mr. Brandeis: You have operating expenses raising
S60,000,000. Three per cent, on that brings about
$2,000,000?
Mr. Willard: That brings a little less than that, yes.
Mr. Brandeis: So that another possibility of meeting
that demand is an improvement, that relatively small
improvement, of three per cent, in the operating efhciency of
the property, all other problems being the same?
Mr. Willard: I do not think I quite understand your
question, if you desire an answer.
Mr. Brandeis : I say, attention has been called to what
you call the urgent need of this money?
Mr. Willard: Yes.
Mr. Brandeis: Because the Company finds itself con¬
fronted with wage advances of $2,000,000?
Mr. Willard: Yes.
can increase in wages be overcome by increased
efficiency in operations.
Mr. Brandéis: Now, assuming that you need more
income, there are several ways possible in which to get it.
One is by a rate increase. Another is to keep the rates as
they are and to increase the efficiency of operation. Your
problem is to manufacture transportation more cheaply.
Now, I ask you whether it is not a fact that approximately a
three per cent, cheaper manufacture of transportation would
not meet your need, or this need, just as well as an increase
of rate?
Mr. Willard: I think you have shown that it would.
Mr. Brandeis: Yes. Taking the operations as they are
in the community in manufacturing, three per cent, is a
very small difference as between one concern and another
concern similarly situated in all respects other than manage¬
ment, is it not?
Mr. Willard: Yes; I think that is fair.
Mr. Brandeis: Take, for instance, the business of
manufacturing, which has been the most developed, prob¬
ably, of any in America—that of cotton manufacture. With
77
that old business there are greater differences than three per
cent, in the cost of manufacture, are there not?
Mb. Willard: I presume so.
Mr. Brandeis: Under similar conditions?
Mr. Willard: I have no doubt that is so.
Mr. Brandeis: It is absolutely so. And if you take
some classes of the manufacture of cotton—the higher
grades of cotton goods—the percentage of cost that goes
into labor is larger even than it is in transportation, is
it not?
Mr. Willard: How is that?
Mr. Brandeis: I say, when you take the higher grades
of the manufacture of cotton goods—the higher classes of
goods—the element of labor in the cost, as distinguished
from the materials and incidental expenses, is even greater
than it is in the manufacture of transportation?
Mr. Willard: I do not know.
Mr. Brandeis: I think it is clearly so.
Mr. Willard: I do not know.
Mr. Brandeis: You see those differences. Now, why
should you say, unless it be from modesty, that the limit of
efficiency—I mean by that the efficiency in man as dis¬
tinguished from the addition of equipment or improvements
in road making—why should you say that in the case of
railroads in general, or in the case of the Baltimore & Ohio
in particular, it is impossible to increase efficiency three per
cent.?
Mr. Willard: I do not think I have said so.
Mr. Brandeis : You have not said so in words.
Mr. Willard: No.
Mr. Brandeis: In fact, you have said the contrary in
answer to questions that I have put to you; but when you
said that you did not see any reduction in cost that was
possible, did you not overlook for the moment that re¬
duction which comes from the absolutely recognized differ¬
ence not only in the ability of men, but in the accomplish¬
ments of the same man under different conditions?
Mr. Willard: I do not think I said, in the first place,
that it was not possible to increase the efficiency. I have
in mind, however, the necessities that confront the Balti-
78
more & Ohio Railroad Company for raising new money, and
I doubt very much if such an argument as you have advanced
would help us materially in our efforts to get money if we
did not show a sufficient surplus to justify it.
Mr. Brandéis: Let me take up that question of money
later, Mr. Willard. I want to go a little more into this
question of efficiency, and I do it because my study of this
subject in connection with others has led me to believe that
that is really at the root of the matter, more than anything
else. As we do find in every other realm of human effort
this difference of efficiency between men and between the
same man under different conditions, is it not reasonable to
suppose that if the mind of men is addressed to securing
greater efficiency with the same equipment, that greater
efficiency will be attained?
Mr. Willard: Well, that is assuming that proper
efficiency has not previously been attained.
Mr. Brandeis : Precisely.
Mr. Willard: Yes.
Mr. Brandeis: But have we not found in every branch
of human activity that can be measured in dollars that there
is, subject to fluctuation, of course, which is more or less
temporary, an increasing efficiency?
Mr. Willard: I do not know that that can be said—■
that we have found that universally; no.
Mr. Brandeis: I do not think it is universal at all; no;
because we find all of the failure : side by side with the
signal successes under precisely the same conditions; but,
as it is expressed in our manufacturing community, "When
you are buying stock, do not buy bricks and mortar, but buy
men." You have doubtless heard the expression, so common
among our bankers and in the community generally. Now,
is it not probable that during the last ten or fifteen years
when these huge capital expenditures have been made,
the tractive power of the locomotive increased, and the
capacity of the car increased, and the grades decreased, and
the roadbed improved, that the minds of the men towards
increased efficiêncy have been consumed in that part of the
operation which deals with improved equipment or machin¬
ery, and that they have not been directed to that other part
79
which is perhaps far more important—the improvement of
method and the saving of labor through method and scien¬
tific management, as distinguished from those coarser and
more obvious improvements which can be attained by the
expenditure of money?
Mb. Willard: I think it is possible, but not necessarily
probable.
Mr. Brandeis: Not necessarily true, but in the light
of human events and the advance of man in the arts, is it
not probable?
Mr. Willard: I do not think it is probable. I think
it is possible.
Mr. Brandeis: You would say, I suppose, as you did
in regard to another suggestion, namely, of the greatly
increased business, that your security holders would not like
you to bank upon that possibility. Is that what you mean?
Mr. Willard: On what possibility?
Mr. Brandeis: The possibility that increased efficiency
of the men could make up to the extent of three per cent, the
increase in the rate of compensation of labor?
Mr. Willard: In view of the fact that our stock has
gone down about 12 points since I became President of the
road, I might conclude that that is not so. They do not
put the value on my efficiency that you speak of.
Mr. Brandeis: In the first place, they may not know
you as well as the railroad men know you. In the next
place, there have been other general conditions which have
affected the stock market. Is not that the fact?
Mr. Willard: Yes.
Mr. Brandeis: And what is more than that, in speaking
of the bond market, have you not rather overlooked one of
the very important elements, namely, the question of the
peculiar situation that this country finds itself in for the
first time since the panic of 1893, when eight months' imports
and exports show an obvious trade balance against the United
States, instead of a balance of four or five hundred million
for a corresponding period in some of the earlier years?
Is not that a consideration bearing upon the question of
the bond market?
80
Mr. Willard; Undoubtedly that would have some
influence.
Mr. Brandeis; Would it not be apt to have a very
great influence?
Mr. Willard ; It depends on how much you mean by
"very great." I should say it would, without doubt, have
an influence.
no evidence of concerted action by financiers
to depress railroad investments.
Mr. Brandéis; When you were making your inquiries,
among the bankers, in regard to the financing of this ques¬
tion, and finding out the views that were held here and there,
and the trepidation in regard to railroad investments, did
it occur to you as possible that this attitude in regard to the
railroads was due to some concerted action, more or less
concerted action on the part of those eminent financiers,
very few in number, who actually control the operations of
the financial world, and of the railroads among other things?
Mr. Willard; What action have you in mind? What
is the character of the concerted action?
Mr. Brandeis; Concerted action to make it appear that
unless the railroads get what those who actually control
them—namely, the financiers—want, the people of this
country cannot get the money with which to make the desired
improvements?
Mr. Willard; Oh, no. I saw no evidence of that.
Mr. Brandeis; Well, did you in the course of that
investigation or of your recent inquiries, find that there
was in the community such a view?
Mr. Willard; No.
Mr. Brandeis; ' In the course of your investigation
among the bankers did you learn that these financiers were
asking as a commission, an underwriting commission, or as
other commission, for fioating securities?
Mr. Willard; Yes.
Mr. Brandeis; What did you find?
Mr. Willard; I think on the notes that we sold the
commission was half of one per cent. I am not sure. It is
a matter of record, and our secretary will know. I have
forgotten.
81
Mh. Brandeis; At what price did the bankers sell those
notes?
Mr. Willard; Those notes I think were sold so as to—
I do not know what he got. I cannot tell you that. I
do not know.
Mr. Brandeis: Yes. Now, have you not learned that
the financiers who were so powerful in this country, and
with their international relations, have undertaken to make
terms to the railroads, as the result of which the railroads
net materially less for their securities than is common and
than the investor himself gets?
Mr. Willard: Oh, no. I see nothing of the kind.
Mr. Brandeis : Can you tell us what those commissions
are on the bonds that were recently issued?
Mr. Willard: We have not issued any bonds recently.
Mr. Brandeis: No; but I dare say you have heard
what has been done in regard to other railroads?
Mr. Willard: No; I do not know. I am not compe¬
tent to speak of that. I do not know. I have no personal
knowledge.
Mr. Brandeis: And you have not learned in the course
of your inquiry anything that might aid the Commission as
to the extent to which underwriting commissions are exacted,
if I may use so harsh a term—?
Mr. Willard: Yes.
Mr. Brandéis: (Continuing.) By the financiers?
bankers act as agents, and purchasers determine
price of securities.
Mr. Willard: I think perhaps we are not thinking in
just the same direction. The commission the banker
requires for the handling of securities is one thing. The
price at which the security is sold to the public is quite
another thing, and that is not determined by the financier.
The financiers, as you use the. term—and I have in mind
that you refer to the bankers—do not hold our securities.
They act as our agents, if you please, to find a purchaser
for our securities, and the man who takes the security
determines the price.
Mr. Brandeis: And is it not a fact, Mr. Willard, that
the man who gets the commission for marketing your securi-
82
tÍ6s—in that sense perhaps being called your agent—
himself sells those securities direct or through his syndicate
which he forms, to the community?
Mb. Willard: Very likely.
Mr. Brandeis: What I am asking is what that difference
is of the margin—because, of course, it varies in different
cases—between the net price to the railroad, which the
railroad receives, and the price which the investor in the com¬
munity finds himself obliged to pay?
Mr. Willard: I do not know.
Mr. Brandeis: Now, Mr. Willard, you said that you
believed you must have this larger income.
Mr. Willard: Yes.
Mr. Brandeis: You must have a surplus.
Mr. Willard: Yes.
Mr. Brandeis: Among other things, to give you a
credit; and that you regarded as essential the continuance
of the dividend which has for some years been established at
six per cent.?
Mr. Willard: Yes.
Mr. Brandeis: That is correct, is it?
Mr. Willard: Yes.
duty rests with commission to see that returns
to railroads are ample to maintain credit.
Mr. Brandeis: And you use an expression, in sub¬
stance, this: That the obligation of the owners to look
after the credit had been transferred by Congress to this
Commission?
Mr. Willard: I think so.
Mr. Brandeis : So that as you regard it—and I assume
that this whole investigation, this whole filing and request
for an increase is based upon that idea—
Mr. Willard: Just let me correct that. Whatever I
may say in the way of my opinion is simply my own
personal opinion, and I would not want it thought that I
speak for anyone else.
Mr. Brandéis: I understand that you do not intend
to lay down a rule for others, but that you have regarded
it as your opinion that Congress has shifted upon this
Commission as representing the public the obligation of
83
building up or maintaining the credit of the institutions for
which heretofore the managers or owners of the property were
altogether responsible?
Mr. Willard: I think in effect, yes.
Mr. Brandeis : In other words, that now the community
represented by the Commission is to become the guarantor
of the success of the Company?
Mr. Willard: I did not say that.
Mr. Brandeis: No; but is not that the effect of what
you said?
Mr. Willard: Well, no—not guarantor. I did not
say they should guarantee.
Mr. Brandeis: No; but that they should make a rate
which in the opinion of the managers of the property, is
requisite to enable the managers to maintain what they
believe necessary, namely, in the case of the Baltimore &
Ohio—a six per cent, dividend; and even as Mr. McCrea
put it in the case of the Pennsylvania, it should be increased
to a seven per cent, dividend.
Mr. Willard: I did not say that. I do not think that
is quite putting it right. I think that the duty will rest
with the Commission as I view it, to see that such return
is made to the railroad as will cause the public to feel that
our securities are attractive. The public will not be in¬
terested in, they will not put great value, when buying
our securities, on my opinion. It will be for the public to
determine as to the value of our securities.
Mr. Brandeis: But is it not a fact that you have
shifted a burden upon this Commission which is entirely
inconsistent with the existence of private property in rail¬
roads?
Mr. Willard: Many think so; but I am speaking of
conditions as they exist.
Mr. Brandeis: Well, I say, taking the conditions, are
you not introducing an element which neither Congress nor
any of those outside, I think, of the banking and railroad
world would do, namely, that the Commission is to fix the
rate which will enable the railroads, whatever be the degree
of efficiency of their management at the present time or
84
in the recent past, to pay the dividend rate which you have
named?
Mr. Willard: I have not said what dividend rate
I thought ought to be paid, I said I thought we ought not to
pay less than we were paying.
Mr. Brandeis: Well, I say, taking your six per cent, in
the case of the Baltimore & Ohio, to which you have preferred
to limit your testimony, is not that so—that if this position
which you have contended for should be adopted, namely,
that a railroad is entitled to such a rate as will enable it to
pay the customary dividend, would not that action put a
premium upon inefficiency, or rather, to put it in another
way, would it not remove that premium upon efficiency
which is the compelling cause of most existing efficiency,
and which has given rise to the common maxim, that
necessity is the mother of invention?
Mr. Willard: It may be that that is so. If so, it is
one of the results of the law, whether intended or not.
Mr. Brandeis : Is it the result of the law? Is it not to
be put, rather, another way, Mr. Willard? That this
Commission is to consider, among other things, not merely
what has been done by the railroads in the efficiency of
their operations—not only that which with perfect honesty
those in charge believe is the best that can be done—but
whether they are not to consider what, with their knowledge
of human nature and of operations in all other branches of
business, has been found to be possible where the conditions
compelled improvement?
Mr. Willard: Your question is if I think the Com¬
mission ought to consider that in arriving at a conclusion?
Mr. Brandeis: Yes.
Mr. Willard: I think that would be a proper thing
for them to consider.
Mr. Brandeis: For them to consider?
Mr. Willard: Yes.
Mr. Brandeis: You have referred to the increases in
various costs of operation. Take manufacturing. Even
those manufacturers where the prices have not been in¬
creased but have been almost steadily decreasing, like the
manufacturiers of paper, have met an increase, for instance.
85
in the cost of their raw material, wood, which is twice as
great, or three or four times as great as any increases in
material to which you refer. Is not that a fact?
Mr. Willard: It may be; but if so I should judge it
simply follows that they had a greater margin of surplus to
draw from.
Mr. Brandeis: They would have testified at any time
that they did not have any margin of surplus, but that all
the minds of all the paper manufacturers—is it not the fact
—were pressed upon that point of having to meet the
increasing cost?
Mr. Willard: I do not know.
Mr. Brandeis: You know that is true in other branches
of manufacture—I mean, those that are competitive. I am
not talking about those that are controlled by trusts, but
those that are competitive. For instance, the shoe manu¬
facturers. They have had an increase in the cost of leather,
an increase in the cost of labor, an increase in the cost of all
incidental expenses, and they have not been able to raise,
practically, the price of the shoes.
Mr. Willard: We are told that it is because of the
raising of such prices that the cost of living has gone up.
I had assumed that they raised their price, too.
Mr. Brandéis: Let me ask you, on the other hand, if
you speak of the cost of living, have you considered what
articles of common necessity have been reduced amidst this
constant increase in the cost of living in the last two or
three years?
Mr. Willard: No; that has not been brought to my
attention.
Mr. Brandeis: There are two very important things.
I would ask, if you have not considered, in the first place,
insurance. That is one of the commonest articles of neces¬
sity, and the cost of insurance, in some instances, has been
reduced twenty per cent.—industrial insurance, and all
insurance. The cost of operating an insurance company
has been reduced from 25 to 28 per cent., with increasing
cost in every respect. Why is it?
Mr. Willard: I do not know.
86
Mr. Brandeis: Increased efficiency. The cost of
another necessity, gas—at least in Boston and in New York
—has been reduced amidst increasing prices, from $1.00 to
SO^cents. Why is not what they have done in the insurance
companies possible in the operation of a railroad? I do
not mean to say to the same percentage, because we are
speaking of three per cent.
Mr. Willard: Assuming that there has been that lack
of efficiency in the railroads that there evidently was in
these other lines you refer to, it might, no doubt, be possible
to accomplish similar results in the same direction. I am
not willing to assume that that is so.
tests op efficiency in railroad operations.
Mr. Brandeis: I want to know what test you have in
your railroad today, by which you can determine, as a
manufacturer of shoes or of paper, or of tools and other
things, whether you are getting an article for what it is
worth?
Mr. Willard: I have only such tests as can be had
from my own knowledge of the business and from such
figures and statistics as I can get bearing on that subject.
Mr. Brandéis: Take any particular service. Take
the question, for instance, that we were talking of, about
the repair of a locomotive. Is it not a fact that it does not
give you any idea as to whether you are getting that article
at what it ought tp be, at cost, if you estimate that you are
getting it at a certain per cent, per locomotive mile?
That does not give it, does it?
Mr. Willard: I think that is worth something. It
does not determine it, but that is a factor to be considered.
Mr. Brandeis: It is a factor, but it does not give it
to you with accuracy, because conditions may govern it
altogether. It was pointed out yesterday by Mr. McCrea
that ten cents per locomotive mile on one road and in one
year may be more efficient work than five cents per locomotive
mile on another road, because the engines may be different,
and all the conditions may be different. Now, in the manu¬
facture of something other than transportation, men have
come to know—for instance, in the shoe business—the cost
87
Mr. Willard:
Mr. Brandeis:
Mr. Willard:
Mr. Brandeis:
of each one of the 100 operations or 150 different operations
which enter into the single article of a shoe, by which they
can test themselves and predetermine what the cost ought
to be. Why cannot that be done? Why can you not do
what they have found so neccessary to do in competitive
businesses?
It can be done, and it is done.
Is it done?
Yes.
Well, what can you name to me as a
single instance, or one of many, if there are many, where
it is done, in the methods by which the railroads are con¬
ducted?
Mr. Willard : I can tell you of a great many instances,
in my own case.
Mr. Brandeis:
Mr. Willard:
is one thing.
Mr. Brandeis:
Mr. Willard:
Mr. Brandeis:
convey any idea?
Mr. Willard:
Mr. Brandeis:
Mr. Willard:
Mr. Brandeis:
Mr. Willard:
Mr. Brandeis:
Mr. Willard:
State one.
Take the repairs of freight cars.
That
Stop right there.
All right.
The "repairs of freight cars" does not
It does to me.
Just tell me what it costs.
What what costs?
Anything.
To repair a freight car?
Yes.
It costs on various roads from thirty
to as high as eighty or ninety dollars per year per car,
depending on the character of the road, the kind of car, the
prices paid for labor in various parts of the country, the
miles of service, etc.
Mr. Brandeis: Just see how uncertain that factor is.
Mr. Willard: That makes it more difficult, I admit.
Mr. Brandeis: No; you are taking the average. The
only way you could tell whether the work on any one of
those cars was efficiently done, is it not, would be for you
to know the particular thing that was done on that particular
car?
88
Mb. Willard: Yes.
Mr. Brandeis: Because by reason of one thousand
things the repairs on one car or one set of cars may, in point
of greatest efficiency, cost more than what was done on cer¬
tain other cars. It is a different job. You call it "repair
of cars," but that is not the same thing, any more than
men are the same thing?
Mr. Willard: I do not think I quite get at what you
want to make plain.
Mr. Brandeis: I want to endeavor to reach an under¬
standing with you, because as I say I deem this the most
important question that is before the railroad world. If
you state for instance, that the cost of repairing a freight
car on any one road you may name is $37, and on another road
it is $45, and on another road it is $60, and on another it
is $100—
Mr. Willard: Yes.
Mr. Brandeis: It is perfectly possible that the road
which is operated most economically and cheaply is the
road that pays $100 for the repair of the particular car,
because the car may be different, the work it has done may
be different, the difficulties under which it has labored may
be different. That is taking an extreme case, as between
$100 and $37, but that is all possible?
Mr. Willard: Oh, it would be possible.
Mr. Brandeis : And consequently you have no accurate
gauge, any more than the Illinois Central may have had,
in overlooking the facts, which, if they had known about
them, might have stopped graft?
Mr. Willard: I have not any gauge? I have not
said so.
Mr. Brandeis: I have asked you whether you had.
Mr. Willard : You did not let me tell you.
Mr. Brandeis: I thought you said you did not have any
other test.
Mr. Willard : No ; I did not say I did not have any other
test. I said I had that for one thing.
Mr. Brandeis: Keep on with that subject.
Mr. Willard: I am going to, if you will permit me.
Mr. Brandeis: Í hope I will.
89
Mr. Willard: I think if I saw it was costing us to repair
cars S60 or S70 per year, on the Baltimore & Ohio Railroad,
for instance, and $25 or $30 per car per year on some other
road, under similar circumstances, I would immediately
start an inquiry, to see where the differences were, and I
would find out what they were paying for various kinds of
material, if I could, what wages they were paying, what
miles they were making with their cars per year, and if I
could, whether they were working on a piece work basis, as
we are, I would find out their piece work price for doing a
certain piece of work. I would see what they paid for doing
it. I would find out, in connection with painting, if they
were doing it with hand brushes or by machinery. All
those things I would look into.
Mr. Brandeis : I have no doubt, taking your own road,
that you will find, for instance, that your locomotive repair
cost was 7.93 in the same year that the Delaware & Lacka¬
wanna was 6.40.
Mr. Willard: That may be.
Mr. Brandeis; Have you looked into that question?
Mr. Willard: Not that particular question. It is not
necessary. I should say that if we could repair our loco¬
motives at not more than one cent per mile more than the
Lackawanna, we were taking care of it very cheaply, knowing
what I do of the character of our locomotives, and the char¬
acter of our road.
Mr. Brandeis: That brings me precisely to the point
which it seems to me indicates that railroad methods of
accounting are in an elementary stage as compared with
the best manufacturing industries. They predetermine the
cost of the article; that is, they do not wait until after the
event.
Commissioner Prouty: How are you going to pre¬
determine the cost of repairing a locomotive until you know
what is to be done to it ? You can predertime the cost of
manufacture of a shoe, because you know what you will
make, but you cannot predetermine the cost of repairing a
locomotive until you know what is to be done to that
locomotive.
90
Me. Brandeis: I am very glad to answer that question,
because it has all been worked out. It has been prede¬
termined, not what the cost will be of repairing the par¬
ticular locomotive that has not been injured—we do not
know what the difficulty is on that—but it has been worked
out, on the Atchison, for instance, what the cost should be
of each operation that enters into the repair of that loco¬
motive, and the introduction on that system of prede¬
termined cost in the Atchison resulted in a reduction—I can
give you the exact figures that were presented, but at any
rate it resulted in a reduction in the repair account of
something like twenty-five to thirty per cent. That is, it
is worked out for all possible operations that may enter into
the repair of the article.
Commissioner Prouty: Mr. Willard says they do
their work by the piece now. You are simply inquiring
whether the price is too high or not by the piece?
Mr. Brandeis : As I understand it, that still would be a
different question. For instance, there are 50,000 different
operations that have been worked out. The matter is
predetermined what that is to cost. When the work is
actually done, you determine then whether that work as it
is done costs more or less than this standard cost by which
you are constantly being met?
can increased costs be met by more efficient
management.
Commissioner Prouty: It is your claim—and I ask
this because you went over all this ground with Mr. McCrea,
and I do not see why you might not present it to the Com¬
mission in an argument as well as to repeat the statements
to this witness. Is it your claim that the Commission
should find that the railroads in this section are not
economically managed, and they ought to save this $35,-
000,000 a year by introducing better methods into their
operation?
Mr. Brandeis: I think the Commission should find, as
I indicated, that it would be a most serious danger to the
country to establish the principal that if, according to
present conditions, they need more money, they raise rates
instead of doing what in every competitive business it is
91
necessary to do, namely, to consider whether you cannot
make the more money by reducing your cost. What I say
is, and I desire to speak to the Commission in detail about
these conditions—I merely refer generally to the methods
of predetermining cost and scientific management which
have been covered—I desire to present that to the Com¬
mission so that what I have indicated through this witness
may appear very fully.
Mr. Bond: Have you any objection to letting the wit¬
ness state whether he has some method of predeterming
such matters?
The Chairman: Pardon me, but you have not answered
Commissioner PrOuty's question.
Mr. Bond : I beg your Honor's pardon.
Commissioner Proutt: My question is whether it is
your idea that the railroads are not efficiently managed and
that they ought to be required to make up for this advance
in wages by more efficient management?
Mr. Brandeis: I do. I do claim that they ought to
show that.
Commissioner Prouty: It may be said with great truth
that the Pennsylvania Railroad perhaps has plenty of
money to throw away and no special inducement to a higher
efficiency, but how about the Erie, which is in competition
with the Pennsylvania and which must charge the same
rate, and which certainly has no money to throw away?
That road has every inducement to good management which
a boot and shoe shop has.
Mr. Brandeis: I do not think it has, if I may be per¬
mitted to say so. I think it has just the opposite, because
the Erie, not being under the obligation pointed out by
Mr. Willard to pay a dividend, is relieved even from that
moral question which has hitherto existed.
Commissioner Prouty: It is under the desirability of
keeping out of receivers' hands every ten years.
Mr. Brandeis: It may be under that, but I think, as a
matter of fact—
Commissioner Prouty: (Interposing.) I merely wanted
to get your idea, and I understand you to say that you will
ask the Commission to find that these railroads shall show
92
they are managed with the highest efficiency before they ask
to increase their rate to meet this increase of operatin
expenses?
Mr. Brandeis: In view of the fact which I desire to
speak fully, through witnesses, to the Commission, that
their methods are not the methods of scientific management,
and that I desire to say—
Mr. Bond: (Interrupting.) Mr. Brandeis, you have
testified; now let the witness testify as to what the railroad
methods are. You have testified as to everybody else's
methods, and now you are testifying as to the railroad
methods. I am perfectly willing to have you testify about
other people's methods, but I would rather have a railroad
man testify as to railroad methods. You have interrupted
Mr. Willard every time he started to answer a question.
Mr. Brandeis: Then I beg your pardon, Mr. Willard.
Mr. Willard: For the information of the Commission,
Mr. Chairman, inasmuch as Mr. Brandeis has offered the
Santa Fe as a standard, it may be interesting to the Com¬
mission to know that for the year ending June 30, 1909, the
Baltimore & Ohio spent $400 per engine less to maintain its
locomotives than the Santa Fe did, according to its annual
report.
Mr. Brandeis: That is a fact I endeavored to point
out that proves nothing.
Mr. Willard: I understood you to state that you set
up the Santa Fe as a standard. According to that standard,
we spent $400 less on the maintenance of our locomotives
than they did.
Mr. Brandeis: I submit that does not prove anything.
Mr. Willard: I did not suggest it. I merely followed
your suggestion.
Mr. Brandéis: I say it does not prove anything. I
said the man who spends $100 may do the work cheaper
than the man who spends $37. But Mr. Bond said I did
not give you an opportunity to answer, and I desire to beg
your pardon.
Mr. Willard: I do not know that I have anything
further to say in that connection.
93
Mr. Brandeis: Then I will ask you this question:
you said that stockholders should receive a six per cent,
dividend?
Mr. Willard: No. I said I thought they should^ re¬
ceive not less than that.
Mr. Brandeis: I mean not less than six per cent., I beg
your pardon—on the Baltimore & Ohio?
Mr. Willard: Yes, sir.
Mr. Brandeis: You have also said that you felt that
through the action of the Commission conditions should be
such that you would be assured and he could be reasonably
assured of that return?
Mr. Willard : I said in substance that, yes.
Mr. Brandeis : If a stockholder, if a holder of stock, as
distinguished from a bond holder, is to have an assured
return, ought not his investment and his rate of interest, in
your opinion, to represent a reasonable certainty of payment
instead of a rate of interest which expresses that natural
fluctuation in business for which a larger return is asked?
Mr. Willard: Yes. If you are considering the other
features that enter into it, yes. But I think you would say
as a lawyer that the security under a mortgage bond is
entirely different from any security that there can be found
at all under a share of railroad stock; so the guarantee of
the Commission, if you desire to use that term—and I do
not—does not give the stock any lien on the property.
Mr. Brandeis: It does not give the stock a lien on the
property, but what could be better as a security for payment
than a ruling that the rates shall be such as to permit stock¬
holders to receive six per cent, dividends.
Mr. Willard: I have not suggested any such thing as
that.
Mr. Brandeis: Is not that the effect of what you sug¬
gested?
Mr. Willard: No. In the first place I am not willing
to commit myself to that statement. Of course you must
bear in mind, that regardless of any act that this Commission
or any other body could take, there would always be the
94
possibility, as it came about in 1908, that they would not
earn what they had under the conditions that previously
have existed.
CoMMissiONEB Lane: Let me ask a question right
there. If we should approve these advances, what reason
have you to believe you could get the benefit of them?
Mr. Willard; I do not quite understand that question.
Commissioner Lane: You want an advance, you say,
of so much, so as to offset labor cost, and so as to give you a
reasonable surplus that will maintain credit?
Mr. Willard; Yes.
Commissioner Lane : You think that this is a step in the
right direction—this advance, at any rate?
Mr. Willard: Yes.
Commissioner Lane: What reason have you to think
that if these rates go into effect you can increase your
surplus—and I have this thought in mind: Suppose these
class rates are put up and some road in this same competi¬
tive territory chooses to make a reduction in its rate; take
the Erie, which has been talked of so much, and suppose
they want to develop the grain trade out of Hoboken and they
make a big cut in the export grain rate. That might cut
entirely from underneath your feet the benefit of all this
advance in rates?
Mr. Willard: It might, yes.
Commissioner Lane: So there is no possibility of our
doing anything like guaranteeing returns to your railroad?
Mr. Willard: I do not see how you could, and I have
not suggested that.
Commissioner Lane : So the burden cannot be cast upon
us until there may be such a thing as the absolute fixing of
a rate by the Government, or the fixing of a minimum rate?
Mr. Willard: Either the fixing of a minimum or, if you
will pardon me, through this Commission, in the exercise
of its best judgment,doing those things the railroad managers
have done in the past, by means of which they have been
able to maintain the credit, as they have. Of course, there
was no guarantee then whatever.
Commissioner Lane: What do you refer to?
95
Mb. Willabd: They found it necessary to increase
their rates, just as has been testified by Mr. McCrea yes¬
terday, to meet those increased costs.
Commissioner Lane: You and the Erie Road could get
together, we will say and agree on these increases today.
The management of the Erie may change or the traffic
manager may change the rate, and he may take away from
you and from the other roads in this territory the benefit
of these very advances?
Mr. Willard: Yes, very true.
Commissioner Lane: So there can be no continuous
line of policy, even with this Commission's consent, under
the present law, which will insure to you the thing that you
seem to desire and to regard as essential.
Mr. Willard: I think you are right as to that.
Commissioner Prouty: Do you think there is any
probability that the Erie Railroad or any other railroad
would do that thing?
Mr. Willard: I do not think there is any probability
of it.
Commissioner Prouty: If the Erie Railroad did it,
where would the Erie Railroad get its money the next time
it wanted any.
Mr. Willard: I do not know.
Commissioner Prouty: No, and the Erie Railroad
would not know either.
Commissioner Lane: Is not this true, that if the Erie
Railroad did that you of course would have it in your
power to enter upon a game of reprisal as against them?
Mr. Willard: Yes.
Commissioner Lane: So that game of coercive power
you have in your hands would be simply a means to cut
your own throat further?
Mr. Willard: That policy put the Baltimore & Ohio
into the hands of receivers once and I have no desire to
repeat it.
Mr. Brandeis: You have referred a number of times
to the fact that there was a deficit in 1908. Is it not a fact
that that deficit arose merely because in the preceding year
96
the dividend rate had been increased by the management
from five to six per cent.?
Mr. Willahd: Of course, if that dividend had been only
two per cent, then they earned enough to pay that, but in line
with that thought, I should say in reply to that question
that the earnings the year before very amply justified the
payment of the six per cent, dividend, because the road in
that year earned 12 per cent, or practically that.
Mr. Brandeis: It is a fact, is it not, that the year
before this deficit arose, the management in its wisdom
raised the rate of dividend from five to six per cent.?
Mr. Willard: I rather think that is a fact.
Mr. Brandeis: And it is also a fact that the deficit in
the year 1908, of which you have spoken, is less than the
amount of that one per cent, of dividend?
Mr. Willard: Yes; that is true.
Mr. Brandeis : Then properly one of the ways in which
you could have described that action was that the manage¬
ment was too optimistic in assuming that the good year of
1907 would justify them in raising the rate of dividend.
Mr. Willard: You might say that. I think, before
saying that, that you would do well to consider that since
the reorganization the common stock up to that time had
never paid over five, one year paying nothing, some years
paying two, and four, and the earnings of that year justi¬
fied that dividend.
]\Ir. Brandeis : Bear in mind that I am not undertaking to
criticise anyone. I am simply calling attention to the circum¬
stances which I thought possibly had escaped your attention.
Mr. Willard: And I wanted to call attention to a
coincident circumstance which I thought perhaps you had
overlooked.
Mr. Brandeis: No, I remembered it, because I have
the table before me. Passing from that to this point, you
stated, as I understood it, that this $35,000,000 that repre¬
sented surplus had been invested, in large part, in improve¬
ments which in and of themselves might not be net income
bearing.
Mr. Willard: I think I said that.
Mr. Brandeis: That you think they ought to be made—
97
Mr. Willard; (Interupting.) Understand, I was not
here when it was done, but I thoroughly approve of the
policy as I now see it.
Mr. Brandeis: I merely wanted to get your point of
view. If the question came up, as it would in an ordinary
rate case where the legislature undertook to fix the rate
which you could charge for passengers or for local freight,
would you not claim that all that money that had gone in,
although not in itself remunerative, was money which was
entitled to receive a return and that a rate was confiscatory
which did not permit a return on that investment, whether
it had increased the net income or not?
Mr. Willard: I have answered that—that is, there are
two questions in that and I have answered one of those
questions. I will repeat that one. In my opinion the
expenditures that were made out of that money also should
be capitalized.
Mr. Brandeis: Does that answer the proposition?
in ascertaining value of property expenditures
from surplus should be considered.
Mr. Willard: I thought it did, if not, then I want to
say that in any investigation getting at the value of the
property, certainly I do not see how you could ignore the
fact that $35,000,000 had been spent in improving the prop¬
erty, even though it came out of surplus. A dollar is a
dollar.
Mr. Brandeis: If, therefore, the legislature should in
its wisdom take the Baltimore & Ohio by right of eminent
domain, or the legislature, in the exercise of police powers,
should undertake to fix a rate, the railroad would contend
that that property was the property of the stockholders and
would have to be regarded just as much as the property
which, when it was constructed, added to the net income?
Mr. Willard: I have not considered any such condition
as you speak of. I have said that in getting at the physical
valuation of a railroad, I think it is only fair and I think
it is right that expenditures should all be considered, no
matter where the dollar came from. We are not confronted
with any such condition as that, and I have said distinctly
98
for the purpose of this proceeding I do not think such
expenditures should be capitalized.
Mr. Brandeis; But the result is then, is it not, that
if you did consider it and rates were to be based in any
way upon the value of the property, that property which
the public itself through rates had contributed would
therefore bear tribute for the benefit of the stockholders?
Mr. Willard: I do not quite agree with one of your
contentions there. I think you emphasize too much the
fact that the public contributes. It is true the public paid
the rate which gave that surplus. It is also true that that
surplus by legal right belongs to the stockholders. It is
also true the Baltimore & Ohio stockholders have been
willing to put it into the property and get nothing for it.
If you suppose an entirely different case where rates are to
be based on valuation of the property, an entirely different
condition than we have today, then I should say that
money so expended ought to be considered.
Mr. Brandeis: It is a legal right belonging to the
stockholders only in case the rate was a reasonable rate,
because if a more than reasonable rate has been charged,
then an extortion has been taken from the public.
Mr. Willard: I was assuming the rates which have
been in effect for a long time must have been generally
reasonable.
Mr. Brandeis: There is only one other question I want
to ask you, and it is this: These class rates which it is
proposed to increase had been in effect for practically a
generation, had they not?
Mr. Willard: I understand so.
Mr. Brandeis: And as a matter of fact the net rate on
these class rates, when rebates were abolished, or by the
result of the abolishment of the rebates, had really been thus
increased to whatever extent the rebates amounted to as a
discount on the rate.
Mr. Willard: I suppose that is so. I was not in the
rebate department, and I do not know about that; I have
no personal knowledge.
Mr. Brandeis: Having in mind the rebates to which
you cannot testify, it is a fact that while all other rates
99
throughout a generation, up to say ten years ago, have been
reduced, those rates are the rates of a generation ago when
the average rates were very much higher than today?
Mr. Willard: You have said that is so.
Mr. Brandeis : Isn't it so?
Mr. Willard: I presume it is. I must confess ignorance
concerning those rates.
Mr. Brandéis: I do not want to inject the question if
you are not familiar with that fact.
Mr. Willard: No, I am not, only in a very general
way.
CROSS EXAMINATION.
(By Mr. Clifford Thorne.)
Mr. Thorne: Do you know, Mr. Willard, or have you
investigated anything as to the original cost of the Baltimore
& Ohio?
Mr. Willard: Do you go back to 1832 when it was first
built?
Mr. Thorne: Yes sir.
Mr. Willard: No, I have never tried in my investiga¬
tions to go beyond the receivership. The road, following
that in 1896, was reorganized in 1899. I have only been at
the head of its afiairs a short time, and I have not gone back
beyond the receivership.
Mr. Thorne: You do not know the actual investment
in the property?
Mr. Willard: No; not to that extent.
Mr. Thorne: Have you made investigation as to the
physical value of the Baltimore & Ohio, the physical
valuation of it?
Mr. Willard: No sir.
Mr. Thorne: You do not know whether the present
capitalization is greater or less than the physical valuation
or greater or less than the original cost, from actual investi¬
gation?
Mr. Willard: I do not actually know, but I have an
opinion.
Mr. Thorne: Mr. Willard, you have had occasion to
learn some facts in regard to the reorganization of the
Company in 1899, I presume?
100
Mr. Willard: Very few. '
Mr. Thorne : Is it not true that at that time new stock
was given the stockholders at the rate of 1150 for a $100
share held before?
Mr. Willard: I do not know.
Mr. Thorne: Have you heard anything to that effect?
Mr. Willard: I may have; I cannot tell you, because
I do not know. I should have to refer you to counsel for
the railroad; he was here at that time.
Mr. Thorne : Do you know whether or not the holders
of preferred stock were given new trust certificates at the
rate of $150 for $100?
Mr. Willard: I have read the plan of reorganization,
and that is all a matter of record, but I cannot answer from
memory.
Mr. Thorne: I find in 1899, if I am correctly informed,
the new capitalization was about $90,000,000 greater than
the capitalization of the year before, while the mileage did
not increase one mile.
Mr. Willard: That may be.
Mr. Thorne: Can you explain that situation?
Mr. Willard: No.
Mr. Thorne: Would you please furnish the Commission
information relative to the increase of capitalization at that
time and what value was in fact added to the property?
Mr. Willard: Certainly, if that can be had. It is
somewhat doubtful if it can be had, because our records
were all destroyed in 1904; but if it is a matter of record
and we can get it, there is no reason why it should not be
presented.
Mr. Thorne: When you say you are entitled to at
least six per cent, on your stock, you further mean that you
would be entitled to that even though it were found that
your property was greatly over capitalized?
Mr. Willard: I cannot conceive of that being found.
Mr. Thorne: I am not asking you about your idea or
your opinion as to whether that is the situation, but if it
should be found to be true that the capitalization is far in
excess of the actual investment, and that the capitalization
is far in excess of the actual present value—not physical
101
value, but present value as interpreted by the courts—
would you still claim they were entitled to six per cent, on
this present capitalization?
Mr. Willard: I have not said so.
Mr. Thorne: Would you say so?
Mr. Willard: I do not know. I should want to have
something more tangible to talk about than that. I would
not care myself for my opinion based on such a suppositi¬
tious case as that.
not in favor of dividends on "fictitious
capitalization."
Mr. Thorne : I am asking a hypothetical question and I
want to know whether you would or not claim the right to a
dividend upon that fictitious capitalization if it should be
found to be the case. I am not asking you to say it is true.
Mr. Willard: I have an opinion of what I think a
stockholder ought to get, and what I think the rate ought
to be. I will be glad enough to give you my opinion if you
care to have it, but I cannot give my opinion and make it a
reply to that question.
Mr. Thorne: I am not stating a situation that exists.
I am merely stating a hypothetical question, and I am entitled
to an answer, whether you would claim a return on fictitious
capitalization?
Mr. Willard: I think I answered that this morning.
Mr. Thorne: Would you or not?
Mr. Willard: Would I what?
Mr. Thorne : Claim a return on fictitious capitalization? .
Mr. Willard: No, I should not be in favor of that.
Mr. Thorne : Then, before you can say—
Mr. Willard: (Interrupting.) Understand, and let us
not forget the word "fictitious" was used there.
Mr. Thorne: Oh, yes. Before you can determine
whether you are entitled to these increased rates, is not a
first act to be performed to find out the reasonable value of
your property and interpret that value fairly and justly to
the railroads?
Mr Willard No, I do not think that is necessary.
Mr. Thorne: If the capitalization is your sole test—
102
Mr. Willard; (Interrupting.) I do not say it is the
sole test.
Mr. Thorne: What is the test? Six per cent, on that?
Was it not your proposition that it should be six per cent,
on your capital stock providing there was no ficticious
capitalization in it? Is not that what you stated?
Mr. Willard: What is your last question?
Mr. Thorne: Will the stenographer read the question,
please?
The Stenographer: (Reading.) "What is the test?
Six per cent, on what? Was not that your proposition that
it should be six per cent, on the capital stock providing there
was no fictitious capitalization in it? Is not that what you
stated?"
Mr. Willard: No, I did not say that. I said in the
case of the Baltimore & Ohio it should not be less than six
per cent., in my opinion.
Mr. Thorne: And six per cent, on what?
Mr. Willard: On the stock of the Baltimore & Ohio
Railroad as it is today.
Mr. Thorne: But if it is found to be fictitious capitali¬
zation, you say it should not have that six per cent.?
Mr. Willard: Yes, I said that.
Mr. Thorne: Then it is six per cent, on the value of
the property, is it. not, fairly, Mr. Willard?
Mr. Willard: That it should not be less than six per
cent.—
Commissioner Prouty: (Interposing.) That would not
come to that at all, because he only pays four per cent, on
a part of the value of the property, and perhaps a little
less than four per cent, on some of it—four per cent, on the
bonds and four per cent, on the preferred stock, and six per
cent, on $152,000,000 of common stock. I understood Mr.
Willard to say that the Baltimore & Ohio was entitled to
earn at least six per cent, on $152,000,000 of common stock,
in addition to paying its fixed charges and in addition to a
surplus which ought to be from two to three per cent. more.
Mr. Thorne : That is the way I understand it precisely,
and I did state the question perhaps somewhat erroneously,
but he also qualified it in this manner, that if there was
103
fictitious capitalization in that common stock he should not
be entitled to the six per cent.
CoSiMissiONER Prouty: You probably would not agree
among yourselves as to just what that word "fictitious"
capitalization means.
Mr. Willard: I was very particular to refer to that
word "fictitious." That does not mean simply a difference
of opinion, as I understand "fictitious." It may be inter¬
esting and you may be glad to know that the Baltimore &
Ohio has never at any time, since reorganization, including
six per cent, dividends on the common stock, paid as much
as five per cent, on its capital liability. It has never paid
at any time as much as four per cent, on its bonded debt.
That is a matter of interest, and you may not know that.
Mr. Thorne; You have stated that there was
$35,000,000 added out of the surplus earnings?
Mr. Willard: Yes, sir.
Mr. Thorne: Would that not have been merely added
value to what had already been capitalized?
Mr. Willard: It gave added value to what had been
capitalized, because the value of the road is $35,000,000 in
excess of its capitalization.
Mr. Thorne: You do not know whether that capital
liability truly represents the value of the property?
Mr. Willard: I think it does.
Mr. Thorne: You do not know it? You have not
made any investigation to find out?
Mr. Willard: I did not say I had not made any
investigation.
Mr. Thorne: You have not made any investigation to
find that out?
The Chairman: He did not state that. You asked
him if he had made a valuation of his property.
Mr. Willard: That was the question.
Mr. Thorne: I asked the question if he had made an
investigation, and I simply want to know the facts; I want
merely the truth.
Commissioner Prouty: I understand Mr. Willard to
say that he did not know where this stock came from and
did not know against what it has been issued. I suppose
104
you can file, Mr. Bond, a plan of reorganization, can you?
Mr. Bond: We can, but it would not show anything, if
the Commission please. The liabilities of the Baltiiñore &
Ohio Railroad Company prior to the receivership were not
on its books, and the final windup was a proposition from the
gentlemen representing the reorganization committee that if
the court would approve the issue of certain bonds and
stock on the new Baltimore & Ohio System, these gentlemen
would turn over all the properties, free from all leases, all
guarantees, all debts, all the old liabilities, and the court
said it was a fair proposition and authorized the acceptance
of it and the issuance of new securities. We do not know
and I do not know as counsel what actually those stocks
were issued for. I do not know what they stood the reorgani¬
zation managers, and I do not believe anybody on earth can
find out, and I do not believe the reorganization managers
themselves today know. The result was that they came
out free from debt, and with one half the fixed charges they
had when they went in. That was the result.
Me. Thorne: And $90,000,000 more of capitalization.
Mr. Bond: More capitalization than the book capitali¬
zation and liabilities at the time it went in.
Mr. Thorne: And it did not increase the value of the
property one iota?
Mr. Bond: There you are entirely mistaken. There
were $30,000,000 borrowed during the receivership and put
into the property. There was the one receivership in this
country where there was the unlimited spending of money.
All that was taken care of in this new matter.
Mr. Thorne: That leaves $60,000,000?
Mr. Bond: It does not, because there were guarantees
and leases, and all sorts of liabilities which were wiped out
only by buying up the the securities of the properties to
which they applied, and what those cost nobody knows.
Mr. Thorne: I desire to say just a word in regard to
any explanation of what I was getting at. The witness
testifies that they are entitled to 6 per cent, on the capital
stock. I think he stated fairly and frankly that he does
not know, as a matter of fact, whether that capital stock in
that total capitalization represents the value of the property.
105
He thinks it does. The point I was making was that even
admitting he was entitled to six per cent, on the value of the
property, yet he should not be entitled to six per cent, on
the stock until he knew that that value was represented by
the total capitalization.
Commissioner Prouty: I understood Mr. Willard to
say that he thought, from what he knew about the Balti¬
more & Ohio, that it was entitled to earn six per cent, or
pay dividends of six per cent, on 1152,000,000 of common
stock, in addition to its fixed charges, and in addition to that
it was entitled to a surplus which would provide from
$3,000,000 to $5,000,000 a year. He states that is what he
thinks the Baltimore & Ohio is entitled to do, and he knows
nothing about where that $152,000,000 of stock came from
or what it represents. Is not that right, Mr. Willard?
Mr. Willard: Yes.
Commissioner Prouty: From what he knows about the
Baltimore & Ohio property, he thinks it is entitled to that.
Mr. Thorne: And he further states he does not know
that the capitalization represents the value of the property.
Mr. Bond: He says he has an opinion, but he has not
made a valuation.
Mr. Thorne: Am I correct, Mr. Willard, when I say
you have made no actual investigation of the physical
valuation of the property?
Mr. Willard: Probably not in the sense that you have
in mind. I have been over it—
Mr. Thorne: (Interrupting.) You have also made no
actual investigation as to the original cost of the property,
and actual investment?
Mr. Willard: No sir.
Mr. Thorne: In determining the credit of your Com¬
pany have you offered any bonds drawing 4)^ per cent, for
sale that have been refused?
Mr. Willard: We tried to sell our debenture four per
cent, bonds, convertible into stock, and could not sell them
on a basis that was attractive.
Mr. Thorne: Could not sell four per cent, bonds?
Mr. Willard: We tried four and then considered
106
Mb. Thorne: Have you ever offered 43/^ per cent,
bonds that have not been taken?
Mb. Willabd: We did not offer them. We considered
it and discussed it with the bankers and decided the way the
market was at that time we could not dispose of them.
Mb. Thobne: Have you ever offered per cent,
bonds that have been refused?
Mb. Willabd: I have just stated to you—
Mb. Thorne: (Interrupting.) You have not. Is that
all there is?
Mb. Willabd: I want to explain the process of the
offer. First, we had to consult with our bankers, and we
did not insist on their putting it to an offer, when they
thought, from their experience, that it would not be well
received. We discussed it.
Mr. Thobne: Have the bankers ever told you 4)^ per
cent, bonds could not be sold at this time?
Mr. Willabd: They told us last spring they did not
think we could sell 4J^ per cent, debenture bonds at a rate
we thought was attractive.
Mb. Thorne: You mean at par?
Mb. Willabd: Could not sell them at par.
Mr. Thobne: Do you know of any well organized,^
solidly capitalized company that has offered any 4)/^ per
cent, bonds that have not been sold?
Mb. Willabd. I do not know anything about it.
Mr. Thorne: You do not know of such a thing or such
a company?
Mb. Willabd: I do not know anything about it.
Mr. Thorne: You made a statement—I do not know
whether it is very material or not—but you saw fit to offer
the statement that the rates in the United States were the
lowest of any country. Do you know of any country where
the average haul, the distance haul, is as great as it is in the
United States, and where the tonnage, the density of traffic,
is substantially the same as in the United States?
Mb. Willabd: No, I cannot answer that.
Mr. Thobne: Do you know of any country where the
density of traffic is as great as it is here and the investment
per mile of road is no greater than it is here?
107
Mr. Willard; No, I certainly do not.
Mr. Thorne: Have you made any comparisons of rates
for the same distance, not the average revenue per ton mile,
but rates for the same distance on commodities, between
this country and other countries where the conditions are
substantially similar as to density of traffic?
Mr. Willard: I have not. I do not think there are any
places where conditions are substantially similar as to
density of traffic.
Mr. Thorne: Have you made any comparisons for
similar distances?
Mr. Willard: No; I have not seen any figures of that
kind.
Mr. Thorne: You made a statement in regard to
operating expenses during three months of this year, and
you made a forecast as to the coming year based upon that
three months?
Mr. Willard: No, I did not make a forecast for the
coming year. I said our estimates had been based on last
year, but that the effect of the first three months of the
present year was such as to cast considerable doubt upon
our estimates of last year, because while we had shown a
large increase in gross, the operating expenses had more than
eaten it all up.
Mr. Thorne: The expenses during this coming year of
1911 will include interest charges on S4Q,000,000, I believe
you said this morning?
Mr. Willard: Yes.
Mr. Thorne: Is that a usual investment in betterments
and improvements for one year? Did you invest that much
last year?
Mr. Willard: Oh, no, not that much.
Mr. Thorne : Is not that an extraordinary large amount?
Mr. Willard: Very likely it is. I do not suppose we
will spend it all this year.
Mr. Thorne: How is that $40,000,000 to be invested?
Mr. Willard : It is to be invested in facilities and equip¬
ment. You can spend money pretty fast in equipment.
We bought $15,000,000 worth of cars, and $7,000,000 or
108
$8,000,000 worth of locomotives last year. You can spend
money pretty fast that way.
Mr. Thorne: How much did you spend for equipment
last year?
Mr. Willard: I do not know. The annual report will
show.
Mr. Thorne: About how nuch?
Mr. Willard: I refer you to the annual report. That
gives it.
Mr. Thorne: What is the interest on this $40,000,000?
Mr. Willard: I think that approximates nearly five
per cent. Slightly less than five per cent.
Mr. Thorne: Almost $2,000,000?
Mr. Willard: Yes, not quite.
Mr. Thorne: And that extra payment, that extraor¬
dinary payment, falls for the first time during the year
1911, and you include that in your estimate of expenses
for 1911.
Mr. Willard: It falls for the first time during an entire
year. We had to meet that for one month in 1909, and
we paid the interest on $10,000,000 for four months in 1909,
I think. There are two loans, one of $10,000,000 and one
of $40,000,000.
Mr. Thorne : Then for the first time the entire amount
falls in this coming year and you have included that, and
you have also in your estimate for 1911, if I understand you
correctly, made no allowance for increase in business or
increase in net earnings?
Mr. Willard: We have not made any estimate on 1911
at all, except I presented the figures for the first three
months. My estimates have all been based on last year's
figures. Last year, you will remember, was the biggest
year we ever had, and we were doing business practically up
to our capacity and I do not believe we will be able to earn
very much more than we did last year.
Mr. Thorne : That was the forecast I referred to.
Mr. Willard: That was on last year's business.
Mr. Thorne : In making up that estimate of what your
surplus will be for the coming year, you have taken this for
the purpose?
109
Mr. Willard: Yes.
Mr. Thorne: You have not considered any increase in
net earnings?
Mr. Willaed: From what?
Mr. Thorne: Increased volume of business?
Mr. Willard: No.
Mr. Thorne: And you have included this extraor¬
dinary interest charge on $40,000,000?
Mr. Willard: Yes. I want to remind you again that
in the first three months there has been no increase in net
earnings, because of increased expense.
Mr. Thorne: Will you furnish the Commission with
the details, and myself with a copy, because I do not have
physical access to those here, of the operating expenses
during those three months?
Mr. Willard: Certainly. We have already two
months, and we will give the other as soon as we can get
it ready.
Mr. Thorne: Distributing the expense among cars and
locomotives, and so forth?
Mr. Willard: We do not distribute it in that way. It
is all included in the one charge to maintenance of equipment.
Mr. Thorne: You have that so kept in your books?
Mr. Willard: Yes.
Mr. Thorne : Could you give those details?
Mr. Willard: I will be very glad, if the Commission
desires it.
Commissioner Prouty. Do you keep performance
sheets by divisions?
Mr. Willard: We keep our expenses—well, I cannot
answer that. I would have to ask my assistant about that.
Commissioner Prouty: If you could furnish us a com¬
parative statement for certain months this year, for these
months to which you have referred in this year, and the
same months in last year, we would like to have it.
Mr. Willard: We can do that.
Commissioner Prouty: Showing by divisions the items
of expense—because I think it would be very instructive.
Mr. Willard: We can do that; we will do that.
110
Me. Thoene; I noticed, in an examination of your
repair account for 1910, the repairs to locomotives and pas¬
senger cars and freight cars exceed the same items for 1909 in
the sum of about $4,000,000.
Me. Willaeu: Yes.
Me. Thoene: An increase of about 50 per cent, in your
repair account?
Me. Willaed: Possibly.
Me. Thoene: Would you please explain the occasion
for that?
Me. Willaed: Yes, and will be very glad to, because
that interests me a great deal. The equipment was not kept
as it should be in former years because of the reasons I
mentioned. This last year we have had a great deal of busi¬
ness and have taken down a good many cars and destroyed
old ones, and I think the depreciation charges have been
included in that—have they?
Me. Thoene: No, sir, they are not included in the
figures I gave. I also find they are about $3,000,000 greater
than 1908. Does the same reason apply?
Me. Willaed: I was not here, but I should think
perhaps it might. I noticed this, and perhaps you have
noticed, that our percentage of gross earnings, during the
last year, spent for maintenance of equipment was substan¬
tially the same as spent by the Pennsylvania Railroad. So
I assume it is not too much. At any rate, I have not heard
our equipment was in too good condition.
Me. Thoene : The result of that is that you are crowding
into this year repairs that should have been made during
those other years.
Me. Willaed: Oh, we probably have done some, yes.
Me. Thoene: So that that item is practically a reflec¬
tion of the operation of your road under its financial system
rather than actual expenses properly chargeable to that
year?
Me. Willaed: I do not think the expenses as they now
are, are higher than they should be. I think as they were
before, they were too low.
Ill
Mr. Thorne: If you are crowding into this year
expenses which should have been met during that year to
that amount, it is higher than it should be.
Mr. Willard: To some extent, for the purposes of
argument, but I think they will continue very much as they
are now.
Mr. Thorne: Upon what do you base that?
Mr. Willard: The increase in wages for one thing;
that makes it more expensive to do the work.
Mr. Thorne: That increase in wages during 1910 did
not affect these figures very materially.
Mr. Willard: Not that year, but it will this year, and
that will offset what may be saved by catching up with the
other years.
Mr. Thorne: Do you know how much it did affect
it?
Mr. Willard: Yes, I can tell, but I haven't it here.
Mr. Thorne: Will you furnish a statement, giving the
standards referred to by Mr. Brandéis as to the repair and
renewal accounts which are averaged for the different
factors, locomotives and passenger cars and freight cars?
Mr. Willard: He did not refer to any specific items.
If Mr. Brandeis will enumerate what he and you want, I will
give it. You have not enumerated them yet, but you have
spoken in a general way. I can tell what we spend per
freight car, per coach, and per engine.
Mr. Thorne: What you state to me now as the reason¬
able repair charge for locomotives on your roads—
Mr. Willard: (Interrupting.) That will vary from
$1500 to $3000. Year before last we spent $2100. I do
not remember what we spent this year.
Mr. Thorne: What is it per freight car?
Mr. Willard: That will run anywhere from $30 to
$100.
Mr. Thorne : What per passenger car?
Mr. Willard: Probably $600 and up.
Mr. Thorne: No maximum?
Mr. Willard: That depends—oh, yes.
Mr. Thorne: What do you consider a fair charge just
to keep it up to its ordinary efficiency of the prior year?
112
Mr. Willard: If you have good cars and they are in
good condition, perhaps you could keep them up for $600,
but it costs us more than that.
Mr. Thorne: How much would it cost under these
same conditions to keep up a freight car?
Mr. Willard: With our class of equipment, we ought
to keep it up for somewhere from $50 to $60 a year.
Mr. Thorne: What would you say under the same
conditions as to keeping up locomotives?
Mr. Willard: It is difficult to say. We have a lot
of old locomotives. I have not studied that, but I will
get it for you.
Mr. Thorne: I thought you were familiar with that.
Mr. Willard: I am. With last year's figures I am not
familiar.
Mr. Thorne : I am not asking for last year's figures. I
am asking for your opinion as to what would be a fair
standard of cost of repairs of locomotives for the Company
if the property is in reasonably good condition at the begin¬
ning of the year.
Mr. Willard : Possibly you have forgotten, Mr. Thorne,
that I have only been with this property a short time and I
could not form an opinion on a matter of that kind, with my
present acquaintance, that would be worth anything. It
will vary from $2100 to $2800 for locomotives.
Commissioner Clark: Mr. Willard, what is the effect
upon your cost for locomotive repairs and maintenance of
an extremely dry season?
Mr. Willard: It has a very serious effect with us,
because the water gets contaminated with sulphuric acid,
and that is particularly the case in the Pittsburg District at
the present time; also through West Virginia. Today we
are hauling water the entire length of our heaviest division
in West Virginia just on that account, because we have no
water at all.
Mr. Thorne: Was that true during the year 1910?
Mr. Willard: I was not here the year before. This is
the dry season of the year, and I was not here a year ago.
Mr. Thorne: This is not an extraordinary situation to
that extent?
113
Mr. Willard: No, I judge it ordinarily happens. I
was asked to approve an expenditure of 1100,000 for a
reservoir to prevent that, but we have not got the reservoir
built yet, and it is because of that thing happening frequently
that we are spending that money.
Mr. Thorne: When you call this a dry season, is it
an ordinary season, or is it extraordinary?
Mr. Willard: I have not been here all the time for
ten years. I am told they have more or less trouble every
year.
Mr. Thorne: One question in regard to your renewals:
Could you state the same figures under normal conditions
for equipment under reasonably good conditions—the
charge proper to renewals on freight cars in any given year?
Mr. Willard: I do not understand your question. I
answered a similar question. I do not know that I under¬
stand what you want now.
Mr. Thorne: I am referring to renewals.
Mr. Willard: Our practice is, I think—I will have to
ask my assistant. I think it is to charge four per cent, on
the value of the wooden cars and three per cent, on the
steel. We are obliged to report to the Commission about
those matters.
Mr. Thorne: That is depreciation?
Mr. Willard: Yes.
Mr. Thorne: You have another account called renewal
account, do you not?
Mr. Willard: No, I do not know of any such.
Mr. Thorne: This is all I desire to ask at this time.
CROSS EXAMINATION
(By Mr. Francis B. James.)
Mr. James: Mr. Willard, your Company has recently
entered into an intercorporate relation with the C. H. & D.,
has it not?
Mr. Willard: It did, something like a year ago.
Mr. James: And in this intercorporate relationship you
have made guarantees of the bonds of that company?
Mr. Willard: Yes.
114
Mr. James: Before entering into that intercorporate
relationship, I understand you were on a committee to carry
that out?
Mr. Willard; No.
Mr. James: You were on a subsequent committee, or
on a committee now?
Mr. Willard: No, there is no committee now.
Mr. James: You were on a committee that had some¬
thing to do with that?
Mr. Willard: No sir; it was all consummated before I
came here.
Mr. James: You know, do you not, as a matter of
general information that prior to entering into that guar¬
antee, the C. H. & D. Railroad Company for a number of
years did not earn sufficient net operating revenue to pay
its fixed charges?
Mr. Willard: That is my understanding, yes.
Mr. James : I notice in a memorandum from the reports
submitted to the Commission, the various sums of money
raised by the sale of notes, in 1904, 1905, 1906 and 1908.
You are familiar in a general way with those records?
Mr. Willard: No, I was not here.
Mr. James: You say there are now outstanding
840,000,000?
Mr. Willard: 150,000,000.
Mr. James: Do you know at what date those notes
were issued?
Mr. Willard: Yes; $10,000,000 issued last March and
$40,000,000 of them issued in June, I think. .
Mr. James: The records I have here of previous years
should then show the other notes have been paid off and
new notes substituted?
Mr. Willard: I do not think we have any short-term
notes out at all, except the $50,000,000 just referred to.
Mr. James: I notice in 1908 it was reported to the
Commission that during that year you issued $11,660,000.
Are those outstanding?
Mr. Willard: I do not think so.
Mr. James: The possibilities are if they are not out¬
standing, the previous notes ha\'e been taken care of?
115
IVÍR. Willard; I think that is right.
Mr. James: There have been repeated statements made
in the press and some general opinions prevailing that all
railroad supplies and materials have generally advanced in
the last few years. I want to know if this impression is
wrong, that it may be corrected by some one who knows
whether that impression is not correct or is an erroneous
impression that all railroad supplies and materials have been
advanced in price.
Mr. Willard; I think when you say all, probably it is
erroneous.
Mr. Jambs: As a matter of fact, is it not true that in
the bulk of railroad supplies and materials, the prices for
1910 are less than the average for six previous years?
Mr. Willard: I cannot answer that, but I think we
filed a statement on that.
Mr. James: I have analyzed your statement, and want
at this time to have that public impression corrected.
There has been an impression given out to the public that
all railway supplies and materials have materially advanced
in price during the last few years. Are you somewhat
familiar with the exhibit filed by Mr. Leary in response to
a question at the New York hearing?
Mr. Willard: In a general way, but not very speci¬
fically.
Mr. James: I will not ask you as to these enumerated
107 items in the diagram, but I will ask you as to a few
material ones—for example, bridges. The expenditures
made for bridges is a large item, is it not?
Mr. Willard: Yes, one of the largest we have.
Mr. James: Please state to the Commission whether it
is not true that while there is a slight increase in the prices
paid for bridges in 1910 over 1909, that the prices paid in
1910 are not materially less than those paid in 1908, 1907,
1906 and 1905.
Mr. Willard: If it says so in that statement, I accept
that.
Mr. James: That is an item in which there are large
expenditures running up into the hundreds of thousands?
Mr. Willard: Yes, undoubtedly.
116
Mr. James: I would like to ask whether in the case of
brake beams there are large sums spent annually?
Mr. Willard: Yes, considerable sums.
Mr. James: And whether the price of 1910 has not
increased over the price of 1909 and whether the price in
1909 and 1910 is not materially less than those in 1908,
1907, 1906 and 1905.
Mr. Willard: I accept whatever the statement says as
being correct.
Mr. Bond: That whole statement being in evidence
from which Mr. James is examining the witness, what is the
use of taking up the particular items?
Mr. James: I want to call attention to just a few.
There has been a persistent impression given out to the public
by a number of witnesses called by the railroads that there
have been material increases. I want to call attention to a
few.
Mr. Bond : Why do you examine this witness, who says
he does not know anything about it?
Mr. Atwood: This witness says that was one of the
reasons why there should be an advance in freight rates.
Mr. Willard: No, I do not think so. I think I said
there had been an increase in the price of lumber, and in
that connection I can give you some information.
Mr. James: Just let me ask a question or two in regard
to that. I will ask you, for example, taking the item of
yellow pine, long-leaf lumber, whether or not exceedingly
large expenditures, very large expenditures, for yellow pine
long-leaf lumber were made, running as high as some
$600,000 a year. Is not that true?
Mr. Willard: I do not know. If it says so, I expect
it is.
Mr. James: I want to know whether it is not so, that
so far as yellow pine long-leaf lumber is concerned, the price
for 1910 has not increased over 1909, and whether it is not
a dollar less than in 1908, three dollars less than the previous
year, and four dollars and fifty-five cents less than the
previous years here indicated.
Mr. Willard: If it says that, I expect that is so.
117
Mr. James: And whether the Baltimore & Ohio did not
in 1909 expend $605,000 for yellow pine long-leaf lumber, as
indicated?
Mr. Willard: If it says so.
Mr. James: You would not say then, so far as yellow
pine long-leaf lumber, as to which there are large expendi¬
tures, that you need an increase of freight rates for the pur¬
pose of meeting an increased expense in that direction?
Mr. Willard: It is not based on that, and to save time
I will say I referred specifically to ties. I presume you have
items there as to those.
Mr. James: The short-leaf is also a large expenditure?
Mr. Willard: I presume if it says so there.
Mr. James: What I have said as to long-leaf is practi¬
cally the same as to short-leaf, in the matter of prices?
Mr. Willard: If that is what the statement says, yes.
Mr. James: Also that chestnut lumber is a smaller
expenditure; is not that true?
Mr. Willard: I accept the statement in its entirety.
Mr. James: Also as to hemlock?
The Chairman: Mr. James, is it worth while to examine
Mr. Willard about a statement as to which he says he knows
nothing?
Mr. James: He said lumber.
Mr. Willard : I should have been more specific ; I should
have said ties.
Mr. James: As a matter of cross-ties, what material
does your road use for cross-ties?
Mr. Willard: White oak, chestnut, yellow pine, cedar.
Mr. James : They are capable of treatment, are they not?
Mr. Willard: Yes.
Mr. James: And are, in fact, treated?
Mr. Willard: Yes.
Mr. James: Most of them?
Mr. Willard: I do not think so, in our case.
Mr. James: Large quantities are treated?
Mr. Willard: The Baltimore & Ohio has not gone into
that as much as we intend to.
118
Mb. James: The increased cost of the tie is about how
much for treatment? How much do you pay per tie for
treatment?
Mb. Willabd: It depends—from 12 cents up to 30
cents per tie.
Mb. James: The effect of the treatment is to prolong
the life of the tie or to double the life of the tie?
Mb. Willabd: We hope it will.
Mb. James: When you double the life of the cross-tie
you save all the expenses of removing the old rails and the
old ties and replacing with the new ties; in other words,
you only have to go through with that additional labor and
expense once where you formerly did twice?
Mb. Willabd: Yes. If it does not cost anything for
the tie—
Mb. James: (Interrupting) So whatever increase there
may be in the cross-tie is more than offset by this increase in
life of the tie?
Mb. Willabd: No; I am not prepared to say that.
Mb. James : You are not prepared to say to the contrary,
either?
Me. Willabd: No, I could not say that; I do not know
whether it is so or not so.
Me. James: You would not have treated the tie unless
you did think it would result in economy?
Mb. Willabd: We treat the tie for two reasons, one
because we think it results in economy and another because
of the fact that timber is becoming so rapidly exhausted and
so much more difficult to get.
Me. James: So, in the face of these statements filed by
Mr. Leary, in the face of your testimony now limiting
yourself to the cross-ties, increased life of the cross-ties and
large increase in labor in relaying them so frequently, you
would not tell this Commission you are basing this request
for an advance in freight rates upon the increased cost of
cross-ties?
Mb. Willabd: I did not say so.
Mb. James: Do I understand you correctly to say that
the per cent, cost of actually conducting transportation to
gross earnings furnish a factor or test of efficiency?
119
Mr. Willard: I think in a way it may be so considered.
Mr. James: The percentage, as I understood your
evidence, for the year ending June 30,1910, showed a smaller
percentage of the cost of actually conducting transportation
to gross earnings?
Mi. Willard: No, I did not say that.
Mr. James: That is true, is it not?
Mr. Willard: It may be; I cannot really say.
Mr. James: If it were true, then down to June 30, 1910,
there has been a gradual increase in the efficiency as indi¬
cated by such a percentage?
Mr. Willard: To the extent that it is indicated by
that, yes.
Mr. James : If that were true, you would not want this
Commission to understand that you had suddenly discovered
since June 30, 1910, that there was not any further increase
of efficiency?
Mr. Willard: I have not said so.
Mr. James: Your road is not in a bad way for credit,
when it could raise $40,000,000 or $50,000,000 to which you
have referred? ,
Mr. Willard: That is a matter of opinion.
Mr. James: In your opinion you would not regard it in
a very bad way?
Mr. Willard: I hope not; I trust not as bad as that,
but the book you have there in your hand gives our rating,
and there are not as many A's alongside of our name as I
would like to see.
Mr. James: But there were sufficient to enable you to
sell $50,000,000 of the notes?
Mr. Willard: At about a five per cent, basis. I am
not particularly proud of that.
Mr. James: You spoke of conditions in Europe and how
Europe regarded it, and I understood you to say that
Europe is more interested in seeing the problem settled than
in how it is settled.
Mr. Willard: I did not say Europe. I said some
gentlemen I talked with in Europe seemed to be very much
interested in how the problem would be settled.
120
Mr. James: Those were foreign interests, were they?
Mr. Willard: Yes sir.
Mr. James: Is it not true that every time a conflict has
arisen either between the Federal Government and the car¬
riers or between the shippers and the carriers, that the
railroad officials have taken particular pains to sound a note
of alarm, to alarm investors?
Mr. Willard: I do not know. I hardly think that is
necessary.
Mr. James: Do you not know it is a fact?
Mr. Willard: No, I do not. I think the investor does
not need anything of that kind.
Mr. James: Do you read the documents issued by the
various press agencies of the railroads and the speeches made
by some of the officials in which the note of alarm is sounded?
Mr. Will.vrd: I presume so.
Mr. J.i mes: You have noticed that "note of alarm."
statement of facts not " notes of alarm. "
Mr. Willard: I have noticed what to me was a plain
statement of fact. I did not recognize the note of alarm.
Mr. James: I have found the publishers of these publi¬
cations, which are paid by the railroads, deliberately starting
out with a statement of alarm.
Mr. Willard: I do not know about that.
Mr. James: Do you know a Chicago man who did it?
Mr. Willard: I know that very well.
Mr. James: Do you know he starts his book with a note
of alarm, and has a note of alarm from the first cover to the
back cover?
Mr. Willard: Yes.
Mr. James: And some other railroad officials who have
addressed business and labor organizations have sounded
the same note of alarm?
Mr. Willard: Very likely you refer to something I
have said, and possibly thought you discovered the note of
alarm—and what I said then I repeat now.
Mr. James: Has not this note of alarm been more
instrumental in bearing down the stock market and causing
121
an inability to raise money than what was disclosed by any
development of a decrease of net earnings?
Mr. Willard: Possibly; but it seems to me a more
important question is, were those statements true—not
what the effect was, but were they true?
Mr. James: I want to know whether these statements
were confined to mere statements of fact, or whether they
were not the prophecies of these officials who should have
been standing man to man to maintain the market?
Mr. Willard: Standing man to man to deceive the
investing public?
Mr. James: I am not speaking about the fact; I am
speaking about the unfulfilled prophecies of the railroad
officials in their publications.
Mr. Willard: I do not know what ones you refer to.
Mr. James: I will not take up the time of the Com¬
mission to develop that now.
How much did the Baltimore & Ohio Railroad Company
charge to operation for depreciation of equipment? Between
the years 1907 and June 30, 1910, if you know?
Mr. Willard: I do not know. It is in our annual
report; that should show you.
Mr. James: Do you know as to any of those years?
Mr. Willard: No. It is in our annual report.
Mr. James: I want to know if it is in the annual report,
although you do not have the exact figures, whether that
does not account in some degree for increase in operating
expenses as set forth in these reports?
Mr. Willard: In what year?
Mr. James: 1907 to 1910.
Mr. Willard: To the extent, of course, that deprecia¬
tion charges were greater than in any other year, that
would be so; but I do not know whether that is true or
not. I do not know what their charges were in those par¬
ticular years.
Mr. James: I understood you to say that of a dollar
expended in 1900, 40 cents went to payroL?
Mr. Willard: I think I said that—39.9.
Mr. James: We will say in round figures, 40 cents.
Mr. Willard: Yes.
122
Mr. James: In 1910, but 42 cents went to the same
account?
Mr. Willard: Yes.
Mr. James: So that in a decade, ten years, from 1900 to
1910, represents a mere increase of five per cent, in the
entire ten years?
Mr. Willard: It represents that increase, yes.
Mr. James: After all, when you get to all of your
factors and all of your analyses, and when you get down to
the physical problem, is it not a fact that after all it is a
question of net results?
Mr. Willard: Yes.
Mr. James: So far as your railroad is concerned and
your railroad system, your net results for June 30, 1910, are
entirely satisfactory?
Mr. Willard: I would not say that.
Mr. James: You are quite satisfied with the result?
Mr. Willard: For 1910?
Mr. James: Yes.
Mr. Willard: No; I would not be, applied over a year.
Mr. James: I am asking you for June 30, 1910.
Mr. Willard: I will have to say no.
Mr. James: You are not satisfied with the result of
your operation for the year June 30, 1909, to June 30, 1910?
Mr. Willard: Let me get that.
Mr. James: Are you satisfied with the net results of
your operations of your railroad for the year beginning
June 30, 1909, and ending June 30, 1910?
Mr. Willard: Oh, yes; they were fairly satisfactory—
not too much. They were low.
Mr. James: You were pretty well satisfied and pretty
well pleased?
Mr. Willard: That depends on "pretty well," but let it
go at that.
Mr. James: So far as your own prophecies were con¬
cerned, your prophetic vision was disappointed, was it not,
favorably and welcomely disappointed?
Mr. Willard: No.
Mr. James: Did you expect more? Did you in your
calculations or anything you may have said or considered.
123
expect to have as good a result on June 30, 1910, as the
figures show you absolutely had?
Mr. Willaed: I have told you I only came to the
property in January. I knew nothing about it until then.
Mr. James: You came into the road the first of
January. Was not your expectation that you had in your
mind on January 1, 1910, more than fulfilled by the net
results of June 30, 1910?
Mr. Willard: I do not know that I had any. I knew
nothing about the property at that time.
Mr. James: You did not have any idea about what it
would bring?
Mr. Willard: I did not know.
Mr. James: Did you have in your mind an imagination
of the new broom that would sweep clean?
Mr. Willard: I cannot make an answer to the question
that would be worth anything.
Mr. James: Who started the agitation for increased
rates? Had it been started before you arrived on
January 1st?
Mr. Willard: I answered that this morning. I shall
have to repeat what I said.
Mr. James: Perhaps I want to get at it again.
Me. Willard: The thing was under way. It was under
discussion when I came here.
Mr. James: You pushed it along?
Mr. Willard: I certainly did, all I could.
The Chairman: Are there any further questions to be
asked of Mr. Willard by any one?
Mr. Wadhams: I have a few questions, Mr. Chairman.
CROSS EXAMINATION
(By Mr. William H. Wadhams.)
Mr. Wadhams: Mr. Willard, in respect to July and
August operating expenses and transportaion expenses, I
desire to ask you a question. The operating revenue for
July, 1910, and the operating revenue for July, 1909, b ing
deducted one from the other, leave a balance of $455,591.
124
That is to say, the increase in operating revenue of one year
over the other was 6.43 per cent, increase?
Mr. Willard: Very likely.
Mr. Wadhams: The figures for the transportation in
July, 1910, and in July, 1909, showed a difference of $415,-
367.61 increased transportation expense. It is fair, is it
not, to apply the increased business along the ratio of the
operating revenue? It is a fair assumption that the business
would increase proportionately with the operating revenue?
Mr. Willard: I never made such a comparison, and it
does not—no, I do not understand what you mean.
Mr. Wadhams: I understood Mr. McCrea to say that,
taking the transportation expense and applying the same
percentage, it would give you a fair estimate of the-increased
business, the increased transportation.
Mr. Willard: If he said that, he must have reasons
for it; but I must confess I cannot see any relation there at
all as you put it to me.
Mr. Wadhams: If a certain amount is expended to
transport property, it is reasonable to suppose that it at
least brings in a proportionate income relative to that
expense?
Mr. Willard: No, I do not know that. I am sorry
that I do not understand you, but I really do not, and if
you can make it a little clearer, I will try to answer you.
Mr. Wadhams: I do not know how I can make it any
clearer except to apply this: Applying here this percentage
of the transportaion expense of the 6.43, which is a ratio I
gave you before—
Mr. Willard: (Interrupting.) That increase of 6.43?
Mr. Wadhams: Yes.
Mr. Willard: You think that indicates some increase
of business to be expected?
Mr. Wadhams: No, I think that applying that to the
transportation expense 6.43 per cent, would give you a
figure of $141,886, which is the expense of adding the in¬
creased business plus such other expenses as there may be.
125
facts not theories.
Mr. Willaed: That is purely theoretical. Let me
give you something that is a fact. In July our earnings
were $455,000, I think, greater than they were a year ago.
Our expenses were $609,000 greater, and we earned about
$160,000 less money in July net than we did a year ago.
I know that is a fact.
Mr. Wadhams: Why was that?
Mr. Willard: I wish I could tell you. I do not know.
There are a lot of things that could enter into that.
Mr. Wadhams: That is what I am trying to get at here.
I want to get at these figures which you give us for July.
Commissioner Prouty: Mr. Wadhams, Mr Willard will
supply a performance sheet which will show for the month of
July of this year and for the month of July of last year the
details of these expenses, and when you have that detail you
will be able to then see just where the increase was and just
what the difference was. If he knows, of course he may state,
but if he does not know it is hardly worth while to spend the
time in this examination at this time.
Mr. Wadhams: In the preparation of that table I will
just briefly suggest what this calculation was. That would
show $141,886. Applying now the accepted ratio of one
half of the expenses of the increase in wages to such transpor¬
tation, the increase being 5.81 per cent, and taking one half
of that as 3 for round numbers, and applying that would
give us an additional expense, added to these increased
wages, of $69,742, making the total increased expense of
the transportation $211,628, whereas the estimate furnished
by the road is $415,000.
Mr. Willard: That is not an estimate. That is a
fact.
Mr. Wadhams: Yes, that is a fact. So I wish to
inquire what other element there is that enters in there
other than the increased wages that brings the sum total up
to $415,000.
Commissioner Prouty: He has already indicated some
of those elements possibly. But when you see the figures,
then you will know where the difference is, whether it is in
126
maintenance of equipment or maintenance of roadway or
what it is—but this is simply transportation?
Mr. Wadhams; Yes.
Commissioner Prouty: Then jmu will know whether
it is coal or whether it is men or whether it is repair of
equipment or maintenance of equipment, or whatever it
will be.
Mr. Wadhams: This takes into consideration the in¬
creased wages, and therefore the $200,000 is unaccounted
for in some other items, which I desire to know.
Commissioner Prouty: If he keeps a detailed perform¬
ance sheet, that will show the figures.
Mr. Wadhams: In the same way for August, the
actual facts given by Mr. Willard show $481,000, whereas
this application of the increased wages and the increase in
business shows only $139,000, leaving the difference to be
accounted for by some other items.
Mr. Bond : It can be accounted for by the fact that your
method of getting at the increase is all Muong—that is the
ultimate conclusion. You are assuming all sorts of things
which evidently are not right.
Commissioner Prouty: The statement filed, if properly
made up, will show exactly what the fact is.
The Chairman: Are there any further questions to be
asked of Mr. Willard?
(After a pause.) Apparently not. You may be excused,
Mr. Willard.
(Witness excused.)
"Exhibit Willahd A.
THE BALTIMORE AND OHIO RAILROAD COMPANY—ALL LINES.
127
Yeak.
1899
1900
1901
1902
1903
1904
1905
1906
1907
1908
1909
1910
Mileage. * Eabnings.
* Expenses.
Operating
Ratio.
Net Operating
Earnings.
2,046
3,200
3,221
4,340
4,397
4,442
4,482
4,486
4,462
4,448
4,460
4,434
$28,404,921.57
42,117,405.25
47,114,430.57
62,217,702.83
68,178,676.36
69,390,274.49
72,539,446.16
82.508.719.28
88,552,924.49
79.377.351.29
77,563,449.95
90,163,401.09
$21,783,322.78
27,644,129.70
31,046,230.53
39,571,088.85
42,740,002.03
47,118,322.32
48.439.795.01
53,341,919.43
59.032.027.02
58,204,106.64
52,853,823.90
63,195,583.21
76.69
65.64
65.90
63.60
62.69
67.90
66.78
64.65
66.66
73.33
68.14
70.09
$ 6,62i;698.79
14,473,275.55
16.068.200.04
22,646,613.98
25,438,674.33
22,271,952.17
24,099,651.15
29,166,799.85
29,520,897.47
21,173,244.65
24.709.626.05
26,967,817.88
*Inolude outside operations.
A Charged off.
B Charged to Cost of Road and credited to
additions to property.
Other Income.
$ 855,289.89
995,139.09
856,793.42
1.235.220.01
1,624,015.23
2,662,016.05
2,993,330.04
3,484,718.63
4.055.710.02
4,396,609.98
4,722,581.97
4,217,898.01
'Appropriated Surplus"
Total Income Available for Stock.
Less Preferred Stock Dividends...
Gross Income.
$ 7,476,888.68
15,468,414.64
16,924,993.46
23,881,833.99
27,062,689.56
24,933,968.22
27,092,971.19
32.651.518.48
33.576.607.49
25,569,854.63
29,432,208.02
31,185,715.89
DEDUCT.
Fixed Charges, i-m-tscetianeoes
:Taxes and Other Misoellaneols
Net Income.
Deductions.
S 6,415,296.70
8,658,093.56
9,326,711.68
13.267.133.40
11.456.026.41
11,720,383.89
12,366,807.50
13,094,443.71
13,805,209.00
14,815,895.89
15,455,275.80
14,938,128.86
Improvements.
Earned on I
Common ;
Stock. ■-
DIVIDENDS
B. & O. R. R. CO.
Pfd. Com.
Amount.
Surplus.
A.
Total.
$ 14,090,83
240,932.19
265,194.04
619,889.98
427,656.27
485,778.90
1,077,974.80
1,291,180.33
279,209.11
548,444.31
_415,760.6JL
5,666,irL37
$ 1,061,591.98
6,796,230.25
7,357,349.59
10,349,506.55
14,986,773.17
12,785,928.06
14,240,384.79
18,479,099.97
18,480,218.16
10,474,749.63
13,428,487.91
15,831,826.42
10.57
8.77
8.43
10.13
8.36
9.51
11.74
10.57
5.31
7.51
8.82
4%
4%
4%
4%
4%
4%
4%
4%
4%
4%
4%
Si%
6
6 %;
6 %!
6 %l
I 4,073,560.00
3,300,000.00
5,439,848.00
7,370,482.40
7,370,482.40
7,992,042.70
9,251,478.30
11,530,189.74
11,530,549.74 Del
11,530,549.74
11,474,212.79
4,061,591.98
2,722,670.25
4,057,349.59
4,909,658.55
7,616,290.77
5.415.445.66
6,248,342.09
9.227.621.67
6,950,028.42
1,055,800.11
1,897,938.17
4,357,613.63
Total $53,408,750.67
Deduct amounts written off, principally account Depreciation of equipment, $10,266,160;
Discount on Securities Sold, $3,545,593; and Adjustment Subsidiary Lines,
$4,986,923.48, etc., etc
$19,066,481.43
APPORTIONED :
To Common Stock Dividends 65.25%.
To Surplus 34.75%.
.1125,205,665.05
. 26,400,000.00
I 98,805,665.05
. $64,463,395.81
. $34,.342,269.24
Net Surplus Revenue $34,342,269.24
THE BALTIMORE AND OHIO RAILROAD COMPANY.
Disbursements per Dollar Earned for Items Shown
Fiscal Years 1910 and 1900.
Disbursement per II.IX)
Earned from Traffic.
1910.
1900.
Pay Rolls less construction
42.96
39.90
Materials—Fuel
5.82
6.94
" Ties
1.51
1.01
" Rails, frogs, switches
2.33
2.05
All other expenses
*17.47
12.61
Taxes
2.74
1.64
Interest, rentals and other deductions
from income
11.84
19.12
Dividends
11.11
11.54
Total for interest, rents, dividends, etc...
22.95
30.66
Surplus
4.22
5.19
Total to be accounted for
100.00
100.00
* Exclusive renewals and depreciation, 16.70 cents.