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FEDERAL OPERATION OF TRANSPOR-
TATION SYSTEMS
HEARINGS
BEFORE THE
COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE
OF THE HOUSE OF REPRESENTATIVES
SIXTY-FIFTH CONGRESS
SECOND SESSION
ON
H. R. 8172
JANUARY 8 to 29, 1918
WASHINGTON
GOVERNMENT PRINTING OFFICE
1918
FEDERAL OPERATION OF TRANSPOR-
TATION SYSTEMS
HEARINGS
!
US Congress House
BEFORE THE
COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE-
OF THE HOUSE OF REPRESENTATIVES
SIXTY-FIFTH CONGRESS
SECOND SESSION
ON
H. R. 8172
JANUARY 8 TO 29, 1918
WASHINGTON
GOVERNMENT PRINTING OFFICE
1918
COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE.
HOUSE OF REPRESENTATIVES.
THETUS W. SIMS, Tennessee, Chairman.
FRANK E. DOREMUS, Michigan.
DAN V. STEPHENS, Nebraska.-
ALBEN W. BARKLEY, Kentucky.
SAM RAYBURN, Texas.
+
ANDREW J. MONTAGUE, Virginia.
PERL D. DECKER, Missouri.
CHARLES P. COADY, Maryland.
ARTHUR G. DEWALT, Pennsylvania.
HARRY II. DALE, New York.
JOHN S. SNOOK, Ohio.
JARED Y. SANDERS, Louisiana.
II
JOIIN J. ESCII, Wisconsin.
EDWARD L. HAMILTON, Michigan.
RICHARD WAYNE PARKER, New Jersey.
SAMUEL E. WINSLOW, Massachusetts.
JAMES S. PARKER, New York.
CHARLES II. DILLON, South Dakota.
BURTON E. SWEET, Iowa.
WALTER R. STINESS. Rhode Island.
JOHN G. COOPER, Ohio.
W. ALVA TAYLOR, Clerk.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Cup
HOUSE OF REPRESENTATIVES,
COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE,
Washington, D. C., January 8, 1918.
The committee met at 10 o'clock a. m., Hon. Frank E. Doremus
presiding.
The Committee thereupon proceeded to the consideration of H. R.
8172, which is as follows:
[II. R. 8172, Sixty-fifth Congress, second session.]
A BILL To provide for the operation of transportation systems while under Federal con-
trol, for the just compensation of their owners, and for other purposes.
Be it enacted by the Senate and House of Representatives of the United States
of America in Congress assembled, That the President, having in a time of war
taken over the possession, use, and control (called herein Federal control) of
certain systems of transportation (called herein carriers), is hereby authorized
to agree with and to guarantee to any such carrier that during the period of
such Federal control it shall receive as its just compensation an income at an
annual rate equivalent as nearly as may be to its average net railway operating
income for the three years ending June thirtieth, nineteen hundred and seven-
teen (called herein standard return); said net railway operating income for the
purposes of this Act shall, as to carriers making returns to the Interstate Com-
merce Commission, be computed from such returns, excluding, however, debits
and credits arising from the accounts called in the monthly returns leased road
rents and miscellaneous rents: Provided, however, That no Federal taxes in
excess of taxes assessed during the year ending June thirtieth, nineteen hundred
and seventeen, shall be charged against revenue in computing such standard
return. Any net railway operating income in excess of such standard return
shall be the property of the United States. The amount of such standard return
as accruing during said period of three years shall be determined by the Inter-
state Commerce Commission, and the certificate of said commission as to the
amount of said net railway operating income shall, for the purpose of such
agreement and guaranty, be taken as final and conclusive.
During the period of such Federal control adequate depreciation and mainte-
nance of the properties of the carriers shall be included as a part of the operat-
ing expenses or provided through a reserve fund, in accordance with such prin-
ciples and rules as shall be determined by the President.
SEC. 2. That if no such agreement is made, the President may nevertheless
Day or cause to be paid to any carrier while under Federal control an amount
not exceeding ninety per cent of such standard return, remitting such carrier to
its legal rights in the Court of Claims for any balance claimed; and any amount
thereafter found düe above the amount paid shall bear interest at the rate of
six per centum per annum; and any excess amount paid hereunder shall be
recoverable by the United States, with interest at the rate of six per centum per
annum.
SEC. 3. That any claim for just compensation not adjusted as provided in
section one shall be submitted to a board of three auditors appointed by the
Interstate Commerce Commission, members of which and of the official force
thereof being eligible for service as such auditors, but without additional com-
pensation therefor. Said auditors shall give a full hearing to such` carrier
and to the United States, and shall report to the President the amount due
such carrier as just compensation; a sum not exceeding the amount so re-
3
321676
4
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
ported may be agreed upon by the President and such carrier. Failing such
an agreement, either the United States or such carrier may file a petition in
the Court of Claims for the purpose of final ascertainment of the amount of
such just compensation, and in the proceedings in said court the report of
said auditors shall be prima facie evidence of the facts therein stated. The
just compensation of any carrier under Federal control not making returns
to the Interstate Commerce Commission shall be determined in accordance
with the provisions of this section.
SEC. 4. That the return of any carrier shall be increased by an amount reck-
oned at a rate per centum to be fixed by the President upon the cost of any
additions and improvements made while under Federal control, with the ap-
proval of the President, to the property of any carrier and paid for by such
carrier from its own capital or surplus, and by an amount equal to the rate
accruing to the United States upon any advances made to such carrier for
the cost of such additions and improvements as provided in section six hereof.
SEC. 5. That no carrier while under Federal control shall, without the prior
approval of the President, declare or pay any dividend in excess of its regular
rate of dividends during the three years ending June thirtieth, nineteen hun-
dred and seventeen: Provided, however, That such carriers as have paid no
regular dividends or no dividends during said period may, with the prior ap-
proval of the President, pay dividends at such rate as the Presient may de-
termine.
SEC. 6. That the sum of $500,000,000 is hereby appropriated, out of the Pub-
lic Treasury from any funds not otherwise appropriated, which, together with
any funds available from any excess earnings of said carriers, may be used
by the President as a revolving fund for the purpose of paying the expenses of
the Federal control, and any deficit of any carrier below such standard or
ascertained return, and to provide terminals, improvements, engines, rolling
stock, and other necessary equipment, such terminals, improvements, and
equipment to be used and accounted for as the President may direct and to
be disposed of as Congress may hereafter by law provide.
The President may also on or in connection with the property of any carrier,
make or order any carrier to make any additions and improvements necessary
or desirable for war purposes or in the public interest. He may from said
revolving fund advance to such carrier all or any part of the expense of such
additions and improvements so ordered and constructed by such carrier or by
the President, such advances to be charged against such carrier and to bear
interest at such rate and be payable on such terms as may be determined by
the President, to the end that the United States may be fully reimbursed for
any sums so advanced.
Any loss claimed to accrue to any carrier by reason of any such additions
or improvements so ordered and constructed may be determined by agreement
between the President and such carrier; failing such agreement the amount
of such loss shall be ascertained as provided in section three hereof.
From said revolving fund the President may expend such an amount as he
may deem necessary or desirable for the purchase, construction. or utilization
and operation of boats, barges, tugs, and other transportation facilities on
the inland and coastwise waterways, and may in the acquisition, operation:
and use of such facilities create or employ such agencies and enter into such
contracts and agreements as he shall deem in the public interest.
SEC. 7. That for the purpose of providing funds requisite for maturing obli-
gations or for other legal and proper expenditures, or for reorganizing rail-
roads in receivership, carries may, during the period of Federal control, issue
such bonds, notes, equipment trust certificates, stock, and other forms of
securities, secured or unsecured by mortgage, as the President may approve
as consistent with the public interest. The President may purchase for the
United States all or any part of such securities at prices not exceeding par,
and may sell such securities whenever in his judgment it is desirable at
prices not less than the cost thereof; any sums available from the revolving
fund provided in section six may be used for such purchases.
SEC. 8. That the President may execute any of the powers herein and hereto-
fore granted him with relation to Federal control through such agencies as
he may determine, and may fix the reasonable compensation for the per-
formance of services in connection therewith, and may utilize the personnel
and facilities of the Interstate Commerce Commission and call upon members
of such commission, or any of its employees, or employers of any department
of the Government for such services as he may deem expedient. No such Fed-
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
5
eral official or employee shall receive any additional compensation for such
services.
SEC. 9. That the President is hereby authorized while carriers are under
Federal control to direct that the Federal workmen's compensation Act of
September, nineteen hundred and sixteen, shall be extended so as to apply to
carrier employees, on such terms and conditoins as will give due consideration
to remedies available under State compensation laws or otherwise.
SEC. 10. That nothing herein contained shall be construed as modifying or
restricting the powers heretofore conferred upon the President to take posses-
sion and assume control of any or all systems of transportation; and the Presi-
dent, in addition to the powers conferred by this Act, shall have and is hereby
given such other and further powers necessary or appropriate to give effect to
the powers herein and heretofore conferred.
SEC. 11. That carriers while under Federal control shall, in so far as is not
inconsistent therewith, or with the provisions of this Act, or any other act
applicable to such Federal control, or with any order of the President, be sub-
ject to all laws and liabilities as common carriers; and suits may be brought by
and against such carriers and judgments rendered as now provided by law:
Provided, however, That except with the written assent of the President no
attachment shall be levied by mesne process or on execution on or against any
of the property used by any such carrier in the performance of its duties as a
common carrier.
SEC. 12. That every person or corporation, whether carrier or shipper, or any
reeciver, trustee; lessee, agent, or person acting for or employed by a carrier
or shipper, or other person, who shall knowingly violate or fail to observe any
of the provisions of this Act, or shall knowingly interfere with or impede the
possession, use, operation, or control of any railroad property, railroad, or trans-
portation system hitherto or hereafter taken over by the President, or shall
violate any of the provisions of any order or regulation made in pursuance of
this Act, or of any other Act concerning such possession, use, operation, or con-
trol, shall be guilty of a misdemeanor, and shall, upon conviction, be punished
by a fine of not more than $5,000, or, if a person, by imprisonment for not more
than two years, or both. Each independent transaction constituting a violation
of, or a failure to observe, any of the provisions of this Act, or any order
entered in pursuance hereof, shall constitute a separate offense. For the taking
or conversion to his own use or the embezzlement of money or property derived
from or used in connection with the possession, use, or operation of said rail-
roads or transportation systems, the criminal statutes of the United States, as
well as the criminal statutes of the various States where applicable, shali apply
to all officers, agents, and employees engaged in said railroad and transportation
service, while the same is under Federal control, to the same extent as to per-
sons employed in the regular service of the United States. Prosecutions for
violations of this Act or of any order entered hereunder shall be in the district
courts of the United States, under the direction of the Attorney General, in
accordance with the procedure for the collection and imposing of fines and
penalties now exisitng in said courts.
SEC. 13. That the Federal control of transportation systems herein and here-
tofore provided for shall continue for and during the period of the war and
until Congress shall thereafter order otherwise.
Mr. DOREMUS. I regret to announce that Judge Sims, the chairman
of this committee, is absent this morning, his absence being occasioned
by an accident which occurred last evening. I have just been told
over the telephone that while the injury is quite painful it is not
necessarily serious, and we are hopeful that Judge Sims will be with
us in a few days.
We have met this morning to consider H. R. 8172, a bill to provide
for the operation of transportation systems while under Federal con-
trol, for the just compensation of owners, and for other purposes; a
bill introduced by Mr. Sims on January 4. Commissioner Anderson,
of the Interstate Commerce Commission, who has taken a very promi-
nent part in the preparation of this bill, is with us this morning. I
think the committee, Mr. Anderson, will be pleased to hear from
you now.
6
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
STATEMENT OF HON. GEORGE W. ANDERSON, COMMISSIONER,
INTERSTATE COMMERCE COMMISSION.
Mr. Escн. If you prefer, Mr. Anderson, I suggest that you be
permitted to conclude your remarks before questions are asked.
Commissioner ANDERSON. It is immaterial to me; I am entirely
willing to be interrupted. I have no set speech, and if I can illu-
minate the mind of any member of the committee in any situation
better by an interruption I am entirely willing to be interrupted.
My own preference, when I am on the other side and do not see a
point, is to interrupt the speaker. So you will follow your own
views on that.
At the outset, Mr. Chairman, I ought to make it clear that, al-
though a member of the Interstate Commerce Commission, I do not
speak this morning for the commission as a commission. This bill
has not been taken up formally with the commission in conference to
consider what attitude, if any, it should take. Indeed, as I under-
stand the custom there, ordinarily matters of prospective legislation.
are not so taken up unless they are involved in the annual report or
are referred to the commission by some committee of Congress. It
happened, these being war times and matters of precedent and prac-
tice necessarily being somewhat disregarded when conditions are as
bad as they have been recently, that I have had to take a considerable
part in the preparation of this bill, and am therefore assumed to be
in possession of a somewhat more intimate knowledge of it than
most others; I therefore have been asked by the Director General,
after consultation with Judge Sims, to come here and make a brief
statement as to what has been attempted to be covered by the bill.
Perhaps I might add that I have had the benefit of consultation with
some of my associates, and while I do not assume to bind them, I do
not claim either the merit or demerit of sole responsibility for every-
thing there is in this bill. Of necessity I have checked my own.
judgment from every available source, as we have tried to work our
way through to a tentative decision on the difficult and mainly new
problems presented.
The situation as presented is that we have, as is known to the com-
mittee, possession, control, and the utilization of the railroad systems
of the country, including the water-transportation companies which
are owned or controlled by them, under the power vested in the
President under the act of last August. This bill is an attempt to
present for consideration proper supplementing legislation. It is
so plain, that we need not stop to consider it, that whenever any
property of citizens, whether corporately or individually owned, is
taken for public purposes there must be just compensation. No
express rule of just compensation was laid down or intimated in the
act of last August, under which the President was authorized to take
possession and control of and to utilize the railroad systems.
Whether or not there was any implied power to deal with that point,
I do not discuss.
Section 1 of this bill undertakes to lay down a general principal
under which the President may enter into contracts or agreements
with the carriers whose property has thus been appropriated to
public use. It is, I think, of some importance to have in mind that
section 1 does not require the President to make any contract of any
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
7
kind with any carrier whose property has been thus taken. There
has been in some of the newspapers an apparent misapprehension,
probably not shared by the members of this committee, on that point,
as if section 1 were mandatory instead of permissive. It provides,
you will observe, then, that the President having in time of war
taken over the possession, use, and the control-called, for short,
"Federal control "_of_certain systems of transportation-called
herein "carriers "--and I may here digress to say that the proclama-
tion as now drawn undertakes, broadly speaking, to take over the
chief rail carriers, including the Pullman and private-car lines and
only the water lines connected therewith, excluding trolley lines, as
we understand them, even including in the exclusion the interurban.
That is the general scope of the present proclamation.
Mr. DOREMUS. Does it exclude the interurban railways doing inter-
state business?
Commissioner ANDERSON. Yes.
Mr. DOREMUs. Does it exclude all interurban electrics?
Commissioner ANDERSON. It excludes all interurbans, as I con-
strue the proclamation. There may be some of those interurbans
which may fall in the twilight zone, but it was obvious it was neces-
sary to take in not only steam roads, but roads operated by electric
power, as some of the lines are across the Rockies and in New York
and elsewhere, so you could not make an exclusion based merely on
the operating power, steam or electricity. On the other hand, it was
clear that the war needs would not extend, at least at present, to the
operation of the ordinary street railway trolley systems. After
some discussion it seemed to be clear there was not present necessity
of taking the interurbans, most of which are intrastate, but a few of
which are interstate. You will remember, Mr. Chairman, there is
something in the proclamation to the effect that those are exclusions.
at the present time, reserving the right and power, if it be found.
necessary hereafter, by subsequent proclamation to take them over.
That is a species of warning that the public needs would be further
considered in that twilight zone.
Mr. DE WALT. Is it not a fact that the Government has already
taken some of these interurban roads that do interstate business? I
have one in mind now.
Commissioner ANDERSON. Maybe so. I did not know it.
Mr. Dewalt. There is one in Pennsylvania that carries freight
and express matter from eastern Pennsylvania over into the Jersey
side, and that line has already been taken by the Government in the
last 10 days.
Commissioner ANDERSON. Is that not a part of one of the steam-line
systems?
Mr. DEWALT. No, sir; it is operated entirely by electric power-
the Eastern Transit System.
Commissioner ANDERSON. I am only undertaking to deal, as I must
deal, with the present systems taken over, as I have had more to do
with formulating legislation than with transportation.
The act further provides the President may agree with and guar-
antee to any such carrier that during the period of such Federal
guarantee to any such carrier that during the period of such Federal
control it shall receive as its just compensation an income at an
annual rate equivalent as nearly as may be to its average net railway
8
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
operating income for the three years ending June 30, 1917 (called
herein standard return), said net railway operating income for the
purposes of this act shall, as to carriers making returns to the Inter-
state Commerce Commission, be computed from such returns, exclud-
ing, however, debits and credits arising from the accounts called in
the monthly returns leased road rents and miscellaneous rents.
""
I pause there before I come to the taxes. I ask to have distributed
to members of the committee a statement of the accounts in order
that the committee might, if otherwise in doubt as to just what is
meant by the language used in section 1, which has been a matter of
very long and detailed consideration, see precisely what is intended.
This sheet, which has been distributed, gives the numbers of the
accounts in what is called the "Income statement," the carrier re-
turns, and you will find under the head of "Nonoperating income,
items 503 and 504, and following, certain items which seemed to
those of us who are trying to frame this act so as to include carrier
property and carrier income and exclude noncarrier property and
noncarrier income, although they are put in here as nonoperating
income. Item 503 is "Hire of freight cars-credit balance." That
is included. Item 510, "Miscellaneous rent income," is not, and there
is a corresponding item on the other side; these are in the twilight
zone. It has been excluded here because the bulk of the property,
which is held and from which this miscellaneous rent comes, is, to
the best of my information, property which is not strictly or gener-
ally carrier property. Undoubtedly there are some items, like prop-
erties, carried which have been properly bought for prospective
future needs, extending terminals or stations or yards, from which
they now get some income pending the use of it for carrier purposes,
and other properties which have been abandoned and for sale which
they get some use of.
Mr. BARKLEY. Does the President's proclamation include that
property you have just spoken of under governmental control?
Commissioner ANDERSON. I do not think you could say at the
present moment that the President's proclamation either excludes or
includes it. It was necessarily couched in general terms and follows
the language of the statute, and takes over the possession, control,
and use of carriers.
Mr. BARKLEY. This section of the bill-section 1-then, was based
upon the theory that property is not in use by the Government, and
therefore should not be considered in compensation?
Commissioner ANDERSON. I should not say that was exactly the
theory. I should say it would be more accurate to say of necessity,
in dealing with a problem of the magnitude of this, that the Presi-
dent's proclamation was couched in general terms; that when you
come to apply it, even for legislation, you are required to make some-
what finer lines than was possible to make in the proclamation; and
this is an attempt to define more accurately, by statute, as distin-
guished from the President's proclamation, that' which is carrier
property and carrier operation, and therefore ought to be included
in Federal control, from that which is noncarrier property and non-
carrier operation, and therefore might be left to the control of the
corporations themselves, except so far as corporation control is neces-
sarily affected by Federal control.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
9
Mr. BARKLEY. In figuring the net railway operating revenue under
the rules of the Interstate Commerce Commission what relation does
this property occupy toward the result of that calculation? I mean
this iniscellaneous property which you said might not necessarily be
used as carrier property but which is in the possession of the roads
and from which they derive no revenue.
Commissioner ANDERSON. I do not think I get quite your point.
Mr. BARKLEY. Was it figured at all in the net result, which you
call the net operating revenue?
Commissioner ANDERSON. Called standard return under section 1?
Mr. BARKLEY. Yes.
Commissioner ANDERSON. No; it was excluded on both sides, and
I was explaining we thought it ought to be excluded on both sides,
although it is in the twilight zone, and you could perhaps dispose of
that under the de minimis rule, because it involves only a few million
dollars on either side, and will not make much difference, either in
principle or in financial result, whether you take in the rents, both
coming and going, or lease them out. So I hardly think you care to
give that much consideration. It is not a large matter.
The other matter which is excluded, leased road rents, those which
have been included in the accounts are, in the opinion of those of
us who have been drafting this bill, proper disbursements on ac-
count of capital. For instance, an operating road gets, we will say,
$50,000,000, after paying operation expenses of the ordinary kinds.
It pays out $20,000,000, generally in the form of dividends upon the
stocks of leased lines. That is, so far as relates to the public, the
situation is essentially the same as though they pay that in dividends
on their own stock or in interest on their own bonds. A guaranteed
stock of a leased line being, of course, closely analagous, in relation
to the operating carrier, to bonds which have been issued by it. So
that has been excluded, leaving the standard return to bear the ex-
pense of the leased road rents as being a capital disbursement or a
disbursement on account of capital.
That, then, is the basis upon which the standard return, taken as
the proper, the fairest, and the most easily applicable methed—has
been figured. I may add that the question of determining the lan-
guage of that section has been considered with great care with the
accounting and statistical department of the Interstate Commerce
Commission, and that I am now informed by the head of our Bureau
of Statistics that there is no difficulty in making computations from
the returns, determining, so far as you can determine anything which
is based upon bookkeeping, with accuracy just what revenue is in-
volved. In other words, there is a careful detailed system of accounts
in which, in pamphlet form, going back practically to 1907, each ac-
count is by name described in substantial detail. And the language
used in section 1 applied to those accounts makes perfectly clear to
the accountant and to the Bureau of Statistics what they are to in-
clude and what they are to exclude.
You will observe with what I am now saying I came down to the
latter part of section 1, beginning with line 12, on page 2:
The amount of such standard return as accruing during said period of three
years shall be determined by the Interstate Commerce Commission, and the
certificate of said commission as to the amount of said net railway operating
10
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
:
income shall, for the purpose of such agreement and guaranty, be taken as final
and conclusive.
:
It follows, as I take it, as a practical matter, assuming that this
section were law, that one of the very first things which would be done
by the President would be to ask from the Interstate Commerce Com-
mission a certificate (there referred to) of the amount of standard
return to which each individual carrier would be entitled if the trade
here contemplated were made. That would, of course, be referred at
once to the Bureau of Statistics and Accounts, and the returns made
by the carriers, checked up in such way as may be thought necessary
in order to eliminate every reasonable possibility of error, the basis
of the certificate made. And the certificate being made, it would
be determinative simply of a single fact upon which the carrier and
the President might then proceed to negotiate for a possible trade.
It is not unimportant to keep in mind that the determination of
that fact is the determination of no ultimate right. It simply de-
termines a statistical or financial fact, which, being determined, con-
stitutes a part of the basis of negotiation between the President and
the carrier. The carrier is not deprived of any right because of that
determination of the fact. Indeed it is elementary, of course, that the
carriers can not be deprived of their property under the due process
of law clause except by trial in court. The compensation must be
fixed by trial in court if they so insist.
As a practical matter, however, about 75 of the carriers do 90 per
cent of the business. The expectation is, if the basis is sound, fair,
and reasonable, that almost every carrier whose condition of health
during the past three years has been fairly normal, so that its returns
will be fairly normal, will enter into a contract or agreement with
the Government on the basis of the standard return, thus limiting
litigation to a very narrow field. You will observe, also, at the later
part of section 1, that it is provided that:
During the period of such Federal control adequate depreciation and mainte-
nance of the properties of the carriers shall be included as a part of the oper-
ating expenses or provided through a reserve fund, in accordance with such
principles and rules as shall be determined by the President.
It is a fact that there have been no adequate methods and prin-
ciples generally applied by the carriers for taking care of deprecia-
tion and maintenance, which, of course, are as much a part of oper-
ating expenses as the wages of trainmen. Some of them have prob-
ably charged too much to operating expenses, at least in some years;
others have charged too little. There is no method, I have been able
to think of at any rate, by which you can do strict justice as between
carriers and carriers and the Government on that subject. The best
I have been able to think of is the principle there laid down. It is
clear that if the Government is to take these carrier properties over
and operate them, into operating expenses should be charged proper
maintenance and depreciation. It is also clear that their net earn-
ings, to use a phrase which you will understand, although not used
in section 1, for the past three years, proposed to be taken as the
basis, does not exactly or accurately reflect their dealings with de-
preciation and maintenance. But a species of rough justice and
practical business common sense seems to us to be set forth in the
principle here stated. It is true that this principle may involve
giving to certain carriers that have taken inadequate care of depre-
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
11
ciation during the past, a little more than they ought to have, and
to others a little less. That is the line of practical common sense,
which on the whole, in dealing with the future, comes the nearest
to working out essential justice not only between the aggregate of
carriers and the Government, but between the carrier and carrier and
the Government.
You will observe, however, going back to line 7, page 2, a state-
ment as to taxes, as follows:
That no Federal taxes in excess of taxes assessed during the year ending
June thirtieth, nineteen hundred and seventeen, shall be charged against revenue
in computing such standard return.
And the Government is now assessing under the act of last October
certain special increased income and excess profits tax called "general
war taxes." Section 1 is drawn upon the theory that the owners of
carrier property, now taken over for the benefit of the public, should
bear their own war taxes, and that therefore there should be charged
in as a part of operating expenses, to be deducted before you com-
pute your standard return, only the taxes assessed prior to June 30
last. As I understand it-I am not much up on the details of the
income-tax law for various reasons, personal and others--the income-
tax law of October is retroactive. Even so, unless the taxes have been
actually assessed before June 30 on the carriers, they would not be
paid as a part of the operating expenses, but would remain to be paid
out of the standard return if the carriers should trade with the Gov-
ernment on the standard return.
Now I think that what I have said will be made a little clearer, if
you will look, Mr. Chairman and gentlemen of the committee, at this
little computation of only three sheets, which I had prepared in the
Bureau of Statistics, and which is brief, but I hope full of informa-
tion. You will find the following on the outside of the pamphlet
which I will read:
The net railway operating income for the three years ending June 30, 1917,
as defined in H. R. 8172 for the purpose of computing standard return, is for
Class I steam roads, $896,259,264. This is based in part on estimates.
It ought not be overlooked, if you find us a little apparently lacking
in some statistics, that not very long ago which used to be June 30
has been changed back to the calendar year, so in order to come
down to June 30 last we have had to go outside of the ordinary scope
of returns now being made. That has made the statistical task a
little more difficult than it otherwise might have been.
Class I carriers are those having annual operating revenues of more than
$1,000,000, and in the fiscal year 1916, their net operating revenue was 95.87
per cent of the aggregate net operating revenue of Classes I, II, III roads and
switching and terminal companies.
For general legislative purposes you therefore see that this class
of railroads will be a very practical and pretty nearly an adequate
guide in the statistical field.
On this basis the $896,259,264 becomes approximately $935,000,000 for all
carriers indicated above. This does not include the Pullman Co., express com-
panies, or private car lines.
The private car lines have not made such reports as to make it
possible within the time we had to figure to what extent their returns
will increase the aggregate otherwise reached. But the Pullman Co.'s
12
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
figures, of which I made a brief examination yesterday, show net
revenue around $13,000,000. They have $120,000,000, as I remember
it, of capital stock, and substantially no debt. I think no debt. So
you can easily carry in your mind what change that would make.
Now, I take it the members of the committee will be at once
inquiring what is going to be the effect of that tax exception. I think
also that any members of the committee who have undertaken to
figure out the operation of the tax law will have sympathy for the
persons who undertake to answer that entirely proper and pertinent
question. I can go far enough, I think, to give some illumination
on that important fact.
The war-income tax of October 3, 1917, provides, in section 4, for
an additional tax of 4 per cent upon the income of every corpora-
tion for 1917 and succeeding years; this is additional to the act of
September 8, 1917. Then there is a war-excess profits tax, which is a
progressive tax on the net income of a corporation in addition to
the war-income tax, after deducting certain amounts based upon pre-
war income, not to exceed 9 per cent of the invested capital and not
less than 7 per cent.
The general method of computation-I shall only describe it in a
word-is to go back to the years 1911, 1912, and 1913 and take that
period as a sort of standard-the method, the details, I do not think,
need trouble you-and then figure out the income in 1917 and succeed-
ing years, and base your income tax and excess-profits tax on the dif-
ference thus obtained; accurate details I do think are material, but
the best we have been able to do in the time we have had to illumi-
nate that problem for the benefit of the committee, is to take the com-
putations made of taxes for the returns made for the month of Octo-
ber this year, and compare them with the returns made for October
of last year, on the assumption as you will see
Mr. ESCH. You mean by this year, 1917?
Commissioner ANDERSON. Yes. Take the return for October, 1917,
and compare that with the return for 1916. That comparison, you
will see, is based upon the theory-there might be other minor differ-
ences that the amount of taxes assessed in October, 1917, and the
amount of taxes assessed in October, 1916, is based upon a computa-
tion necessarily tentative by the railroad officials of the excess taxes
accruing under the act of October. On that assumption we find that
there is approximately a 10 per cent increase in the taxes returned
for October, 1917, over those returned for October, 1916. Applying
that to the other figures which you already have in this sheet and
which I have read, we get pretty close to $90,000,000 a year as the
probable result of war taxes which will come out of standard return,
if you should adopt section 1 and make it law. It is not very satis-
factory to you gentlemen in charge of this responsibility to have
figures which are no better verified and which are not asserted to be
more accurate. But that is the best we can do. If you take, there-
fore, the standard return and estimate that approximately $90,000,-
000 is likely to come out of it for war taxes you get the best results
we have yet been able to reach.
Mr. RAYBURN. Is not your reason for the proviso there, with ref-
erence to the Federal tax, simply this: That the Government takes the
railroads with the charges that were against them at the time they
were taken, and there is an additional war tax after the Govern-
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
13
•
:
ment takes the railroads, or that is applicable after the railroads, or
the income that they derive should bear that tax just like anybody
else's income?
Mr. ANDERSON. Substantially that. It comes down in substance
to what occurred in the hearing of the 15 per cent case early in No-
vember. President Rea, of the Pennsylvania Railroad, was on the
stand, and a lot of figures had gone in as to their prospective income
and expenses in the late part of 1917 and perhaps in 1918. I inquired
of the witness whether or not they had not set up as a part of their
operating expenses the war taxes, and I asked President Rea if it
was the theory of the railroad people that the shippers and rate
payers should bear the war tax, and on consideration he said no; he
did not think they ought to. He thought that the holders of railroad
securities ought to bear their war tax, just like the holders of other
securities. That seemed to me to be a sound answer.
Mr. RAYBURN. In other words, this standard that is applicable
after the standard has been set, if the Government were not to compel
the railroads out of their income to pay that, it would be simply like
taking money out of one pocket and putting it in another?
Commissioner ANDERSON. Precisely. The Government pays the
tax.
Mr. RAYBURN. In other words, if this clause was not put in here,
there is no use for any additional tax on railroads as far as the
Government Treasury is concerned, as long as the Government oper-
ates the railroads?
Commissioner ANDERSON. That must be so, I think.
Mr. COADY. What effect, if any, will this act have on purely mu-
nicipalities and States to tax railroads?
Commissioner ANDERSON. That is a very pertinent and a pro-
foundly difficult question to answer. No question arising under the
war powers as to the relations of the Nation and the States, and the
Nation's private property is so difficult, and I think it is not fair to
give a dogmatic answer. I do not believe my opinion, offhand, is any
better than yours on that, and I doubt if it is as good, as very likely
you have thought of it more than I have.
Mr. COADY. No; I have not; but I know it is a very serious propo-
sition for the States and some of the cities.
Commissioner ANDERSON. You know that the dividing line between
the powers of the State and Nation as to taxation are, under peace
conditions and under decisions of the Supreme Court, exceedingly
difficult to draw sometimes. New questions are going to arise that
only the Supreme Court can finally determine. My own offhand
view, and I do not think it is entitled to much weight, is that the
States can not assess anything upon railroad property in the control
of the Government which amounts to an assessing of State taxation
upon a Federal agency. Now, that is ambiguous and is not intended
to say that I believe that the States are not going to have ordinary
powers to assess taxes upon property which is within their own
confines. I should not dare to be more definite than that at the pres-
ent time.
Mr. BARKLEY. If that is true, would it not be a wise provision to
include that there shall not be taken away from the States the power
of taxation of railroads? Let it be provided so that there should be
no uncertainty about it.
14
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Commissioner ANDERSON. As it now stands, all taxes except those
especially excluded, in line 7 and following, have been left to be
charged to operating expenses. If the States have the power, not-
withstanding the fact the carriers are under Federal control, to in-
crease State taxes they would be charged to operating expenses, and
in one theory, at least, chargeable against the Federal Government,
to be recouped, of course, out of rates to be assessed upon shippers
and passengers.
Mr. BARKLEY. That enters into the computation, but that does
not touch the power of the States to levy taxes.
Mr. MONTAGUE. Do I understand upon the passage of this act
there exists in your mind any doubt that the States will have the
right to tax the railroad properties at the existing rates.
Commissioner ANDERSON. I do not think so. I think there would
be no doubt of their right to continue all proper taxation upon
properties which have been held within the scope of their tax laws.
I intended to limit my answer to this proposition, that I do not
believe a State could be permitted to levy some special tax upon a
special agency.
Mr. DOREMUS. I assume you have in mind a line of cases, begin-
ning with the case of McCullough against the State of Maryland,
where it is held the State has no power to tax an instrumentality of
the Federal Government. They had reference in that case, as I
recall it, although I have not read it in a long time, to a constitutional
agency of the Government like the United States Mint, the United
States customhouse, or patents. Now, do you see any analogy be-
tween those agencies, which were referred to in the case to which
I have called your attention, and the Government operation of our
transportation systems during the war?
Commissioner ANDERSON. I think I do, some. Let me make this
suggestion, Mr. Chairman: I do not believe my opinion on that
problem is worth much. If you want a brief prepared on that ques-
tion, I will have one prepared and presented.
Mr. MONTAGUE. A constitutional purpose in time of war and in
time of peace is nonconstitutional.
Commissioner ANDERSON. I should not-
Mr. MONTAGUE. Is not one as much constitutional as the other?
Commissioner ANDERSON. I could conceive no higher exercise of
the Federal power than the war power.
Mr. DEWALT. Is not this the distinction, that the mint is the
property of the United States, whereas the railroads are the proper-
ties of corporations and are merely being operated by the Federal
authorities?
Commissioner ANDERSON. You get beyond that; you could not tax
a nation's bank except under certain provisions, as I remember it.
But I have not read those cases in detail for a long while, although I
remember the difficulties in them. If the committee wants a brief
prepared on that question, I will have it attended to at once.
Mr. RAYBURN. I am frank to say I think it is very important.
Commissioner ANDERSON. We will have a brief prepared on that
point.
Mr. RAYBURN. The power over State regulation is going to enter
into this thing, especially in my section.
:
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
15
Commissioner ANDERSON. The attitude taken up to the present
time is that the law as drafted would not interfere with State taxa-
tion. That is our belief.
Mr. PARKER of New Jersey. And I think it is your belief that it
certainly would not interfere with the State taxation, which has
already been proposed, although there might be some doubt as to
new taxes?
Commissioner ANDERSON. I should be dogmatic in saying that it
will not interfere with standard taxation hitherto held reasonable on
interstate carriers.
Mr. PARKER of New Jersey. As already existing?
Commissioner ANDERSON. Yes. Say a State undertook to encroach
on the Federal field by some manifestly unfair legislation-
´Mr. PARKER of New Jersey. New legislation?
Commissioner ANDERSON. I should want to refer that question.
Mr. MONTAGUE. If there should be any doubt about that, should
there not be a penalty clause in this statute?
Commissioner ANDERSON. I would rather reserve my answer to that
until I see the brief which I have said we will prepare. We did not
think it necessary when we made the first draft to put anything in
except the provision that war taxes should come out of the standard
return.
Mr. DOREMUS. I suppose it is true that if it is unconstitutional for
the States to levy these taxes its unconstitutionality would not be
cured by any legislative enactment.
Commissioner ANDERSON. There again you have been presented
some difficult questions. There are certain kinds of functions the
Constitution authorizes the Federal Government to assume, but you
do not exclude the State from those fields unless and until Congress
acts. You are probably all lawyers, and know the difficulty of being
dogmatic in that field, particularly if you are a little stale on the
decisions. Sometimes it is even more difficult if you are fresh on
the decisions.
Mr. MONTAGUE. The tax by the State might be unconstitutional in
a given instance, and yet if authorized by the Federal Government
in the same instance it would not be unconstitutional?
Mr. ANDERSON. I think that is a sound proposition.
Mr. STEPHENS. Would you see any difficulty in increasing the rate
of taxation to the State, or do you make a distinction between an
occupation tax and the increasing of the rates that now exist?
Mr. ANDERSON. My own view is not entitled to great weight.
There can be no doubt about the States having under this proposed
section 1 the normal right to tax the property within their own field;
and if the municipal rate, for instance, on real estate goes up, why,
it would increase it; but if they undertook to levy some special tax,
which is directly due to the fact that the Federal Government is the
guarantor of a net income, I think there might be a serious question
raised. I had not intended to say anything which indicated any
doubt of the power of the State and municipalties to tax this carrier
property except in the possible field of their attempting to tax it be-
cause it is Federal property. That is not a very accurate statement,
but I think you understand what I mean.
If you will look on page 2 of this little statistical statement, you
will find in the first column "Railway operating revenues." That is
16
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
+
gross income. You will observe that for the year 1917 those have
been in part estimated that means the June 30th year. It was im-
possible, as pointed out on page 1, to give you absolutely accurate
figures. And the railway operating income means railway operating
revenues less taxes and uncollectible railway revenues.
Mr. DEWALT. Will you give us that again?
Commissioner ANDERSON. If you will look under "A" you will see
railway operating income, which has a technical meaning in our
accounting; it means operating revenues-that is, gross revenues less
what are called operating expenses, after you take out taxes and
uncollectible railway revenues, which are a negligible factor here.
You will observe for the year 1917 those run, and I will only read
round figures, $1,061,000,000; for 1916, $1,024,000,000; for 1915,
$716,000,000.
Then, passing to column 4, you will find net railway operating
income as defined below-that is, made standard within the mean-
ing of section 1-eliminating the debits and credits and miscellaneous
rents and also eliminating the debits and credits on leased road rents,
that gives you for 1917, for class I roads, $1,020,000,000, nearly
$21,000,000. For 1916 it gives $985,000,000; for 1915, $683,000,000,
all in round figures. That would be the standard return.
If you
take in the other small factors referred to on page 1, it would be in-
creased by about 5 per cent.
The next column is headed "Investment in road and equipment-
book value." I eliminate the words "book value." There are no
known figures of the actual value, either based upon original cost,
investment cost, or any other kind of valuation for railroad prop-
erties. It is known to you that a valuation is now going on at large
expense for the purpose of making that very important and uncertain
factor certain. These figures are taken from the books and are the
property accounts for the carriers as returned to the Interstate Com-
merce Commission. You will see that there were, in round figures,
seventeen and a quarter million dollars for 1917, indicating to you
that of necessity there was some element of estimate in the last year's
return. In the year before it was $16,872,000; in 1915 it was
$16,499,000.
The next column is interesting; it shows that the return in per
cent for the year ending June 30 last is the highest for the period of
six years shown on this sheet.
In 1917 it was 5.91; the year before it was 5.84, whereas in 1915 it
was 4.14. You will observe also that the next highest figure before
1916 was for the year 1913, when the return was 5.06.
It is only fair to call attention to the fact that in arriving at the
figure of 5.91 as the total earnings of the carriers for the year 1917
none of the retroactive war taxes have been deducted. It might re-
duce that somewhat if the retroactive taxes assessed in October went
backward.
The next sheet is mainly interesting as bringing forward as a gross
for the three classes the figures actually returned for 1916. You will
observe the amounts on the upper left-hand column, on Classes I,
II, and II, "Switching and terminal," and, having those figures in
mind, it is comparatively easy for you to apply the same general pro-
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
17
portions to the other years-$75,000,000, round figures, for Class II
in operating revenue, $15,000,000 for Class III, and $48,500,000 for
switching and terminal companies. The railway operating income
for that year, you will observe, for all those companies was $1,056,-
000,000, which compares with the figures $1,024,000,000 over on
page 2.
(The document referred to is here printed in full, as follows:)
Statement of income and reported investment in road and equipment of steam
roads having annual operating revenues of more than $1,000,000, excluding
switching and terminal companies, 1912–1917.
Year.
Railway
operating
revenues.
Railway
operating
income.i
Net railway
operating in-
come as de-
fined below.2
Investment in Ratio
road and equip- column
|ment-book value. 4 to 5.
!
June 30-
1917.
1916.
1915.
1914..
1913..
1912.
·
་
$1,061, 814, 4274
1,024, 381, 299
716, 476, 186
$3,791, 651, 529
3,381,597, 866
2,871, 563, 017
3,031,326, 963
692, 330, 572
3, 108, 361, 215
816, 510, 793
2,805, 006, 544
736, 466, 326
$1,020,800,000
984, 872, 959
683, 104, 833
661,018, 147
787, 610, 435
708, 481,383
Per cent.
$17,250,000,000
5.91
16,872,373,900
5.84
16, 499, 124, 491
4.14
16,077, 330, 839
4.11
5.06
4.72
15, 553, 559,036
15,018,762, 958
Average for three years 1915-1917: Column 4-$896,259,264. Column 5-$16,873,832,797. Per cent, 5.31.
¹ Railway operating income means railway operating revenues less taxes and uncollectible railway
revenues.
2"Net railway operating income" is the basis for the "standard return" proposed in pending bill,
being railway operating income (column 3), modified by debits and credits arising from equipment and
joint facility rents, but not including debits and credits from leased road and miscellaneous rents.
3 Road and equipment account of Class I operating roads plus road and equipment account of all non-
operating subsidiaries. Probably includes some duplication. Reserve for accrued depreciation not
deducted.
4 In columns 4 and 5 estimated figures are used for the year 1917.
Statement of income, investment, and capitalization of all steam roads for the
year ending June 30, 1916.
Railway operating revenues:
Class I
Class II___
Class III____
Switching and terminal__
Total___
Railway operating income:
Class I_
Class II___.
Class III____
Switching and terminal___
Total__.
Net railway operating income as defined in pending bill as a
basis for " standard return":
Class I..
Class II___
Class III____
Switching and terminal_.
Total_.
40958-18-2
$3, 381, 597, 866
75, 334, 775
15, 709, 300
48, 500, 735
3, 521, 142, 676
1,024, 381, 299
18, 288, 737
1,932, 554
11, 519, 807
1,056, 122, 397
984, 872, 959
16, 733, 311
1, 328, 521
24, 210, 277
1,027, 145, 068
18
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
i
Total income available for rental for lease of road, interest on
funded debt, dividends, improvements, and income balance to
profit and loss:
Class I.
Class II
Class III.
Switching and terminal..
Total___.
Property investment:
Class I
Class II__.
Class III
Switching and terminal_
Nonoperating
Total__.
1
Capital stocks and bonds:
Reported outstanding railway capital of Classes I, II, and
III and switching and terminal companies and their sub-
sidiaries.
$1, 136, 581, 817
16, 219, 534
297, 924
24, 001, 135
1, 177, 100, 410
13, 926, 181, 880
670, 679, 642
159, 159, 677
413, 724, 454
2, 986, 914, 219
18, 156, 659, 872
21,583, 746, 569
Net, after deducting amounts held by railway companies__ 16, 710, 650, 327
Mr. DEWALT. Of course this again does not include the Pullman
Co. ?
Commissioner ANDERSON. No, it does not. I think everything
else on page 3 speaks for itself.
Mr. RAYBURN. I have failed to find before this where the term
"Net operating railway income" is used. I find that "Railway op-
erating revenue" is used, and I find "Railway operating income " is
used, and "Net income," etc., but the term, or the phrase rather,
"Net railway operating income," why do you feel it is necessary to
use that? Just exactly what is the reason?
Commissioner ANDERSON. It has a perfectly definite financial use
in the accounting of the carriers and in the bureau of statistics, and
in the monthly returns; and it is under a comparatively recent order.
So that every one of those accountants, in every railroad office, knows
precisely what is meant, and I know precisely what is meant.
Mr. RAYBURN. I want to know what you mean by that?
Commissioner ANDERSON. We mean that you take the gross reve-
nue of the carriers and deduct all operating expenses, uncollectible
revenue, and taxes, and then you go into that realm which is set
forth on that sheet, which you have before you, and which I under-
took to explain a few moments ago of nonoperating income. If you
will look down there, Mr. Committeeman, you will find items 534,
535, 536, and 537, and 538 are liquidated now, and the converse of
them over on the other side. Miscellaneous rent income I explained
as being in the twilight zone and nearly negligible. The same thing
is true of miscellaneous nonoperating physical property, except that
it is probably clearly outside. Dividend income is in large part the
income that carriers receive from securities; frequently the securities
of their own leased lines, where money goes out of one pocket into
another. It is common practice for a road to lease a road, and
guarantee a certain dividend upon the leased line stock; or to buy
a large part of the leased-line stock, yet it goes in and out in that
fashion. That is not regarded as an operating item, nor is income
1 Subsidiary to Classes I, II, and III and switching and terminal companies.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
19
from funded securities, which falls in the same category, nor the
income from unfunded, nor the income from sinking and other
reserve funds, so that you have taken in operating income and op-
erating expenses everything that the carrier does in the way of car-
rier operations, or derives from carrier properties, excluding only
those things which are in the nature of returns from investments or
payments for capital. That is what we are going to undertake to do.
Mr. BARKLEY. I wish you would explain just the difference be-
tween classes 2 and 3. We have got to explain all these matters
when the bill gets on the floor, and we can not get knowledge except
from those who have it.
Commissioner ANDERSON. We are only human?
Mr. BARKLEY. We are only human.
Commissioner ANDERSON. That is all. I think class 2 roads are
between $1,000,000 and $100,000, and the class 3 roads are under
$100,000. So my associates tell me.
Mr. BARKLEY. Just one other question with reference to this item
of leased rents. I have in mind, for instance, the Illinois Central
Railroad, which leased, as I understand, from the Chicago, St. Louis
& New Orleans Railroad Co. the line from Louisville, Ky., to Mem-
phis, and possibly one to New Orleans, somewhere down in there.
Of course, I do not know anything about the amount of rent they pay.
What is the theory upon which that rent which they derive from the
leasing of that road is excluded from consideration in arriving at
this net railway operating income?
Commissioner ANDERSON. That it is a disbursement on account of
capital. I do not know anything about that particular road, but the
New York Central leases the Boston & Albany, which runs into my
New England country, on the basis of guaranteeing an income of 83
per cent call it 8 per cent for present purposes. Now, I assume that
in lieu of B. & A. stock, the New York Central operates the B. & A.
into Boston, and that it all goes into its private treasury, precisely
as though it owned and had its whole outstanding stocks and bonds
with the entire property. It pays its rent on the basis of paying
the interest upon the outstanding bonds of the B. & A., which are
X dollars. It pays in addition Y dollars on 8 per cent plus upon
the stock. If it owns Z dollars or Z shares of stock, the dividend
paid upon that stock goes right back into its own treasury. That
is a disbursement on account of capital, precisely as much as though
those payments were made on outstanding stocks and bonds of the
Central itself. That is the theory they go on.
Mr. BARKLEY. What I am trying to get at is this: It is excluding
them because under its contract and under the form of report of the
leasing company, if it is not excluded from the company that does
the leasing it would be considered twice in making up the net op-
erating railway income, by the leasing and by the leased. Is that
true? In other words, if the return which the company owning the
tracks obtains as rent is actually made by the company leasing the
track in its report to the Interstate Commerce Commission, there
would be no occasion for the company owning that track to report
that also in computing this net railway operating income?
Commissioner ANDERSON. No; the B. & A. does not make any re-
turns at all to the Interstate Commerce Commission now because it is
not an operating road.
20
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. BARKLEY. I am speaking of really operating roads.
Commissioner ANDERSON. I do not think it would follow you
would get it in double, but you would be treating as operating ex-
penses what is really a payment for capital. That is the confusion
about it. When a road has more rolling stock than it uses on the
average for its own purposes, and that rolling stock and the rolling
stock on other lines, and it gets a net revenue out of freight cars,
that is an earning by its investment in rolling stock, hence we treat
that exactly as if they got that money in directly from shippers of
freight.
Mr. BARKLEY. I am speaking of the railroad bed itself, which is
leased by one company to another, for which it obtains a stipulated
rent. Is that included in this item of lease which you have excluded
from consideration?
Commissioner ANDERSON. Yes; that is, we treat a leased road, for
the purposes of this accounting, as though it were an owned road,
leaving the payments for lease to go into the same category as the
payments for interest and dividends upon the bonds and stock of the
operating carrier. That is a correct statement.
Mr. BARKLEY. I get your point now, that it being considered as an
owned road, it is useless to consider it as a leased road, because it
would be considered in some respects twice?
Commissioner ANDERSON. That might be so. I do not think I
quite get that, but I am sure of the other ground.
Mr. DEWALT. Is this the concrete proposition? Railroad A leases.
to railroad B, railroad A pays as a rental 8 per cent dividend and
also the other charges that you have mentioned in your instance.
Now, query: In this calculation you have made, you treated the leased
railroad as being a part of railroad A, do you not?
Commissioner ANDERSON. Precisely.
Mr. DrWALT. Further query: Railroad A then makes return for
the leased road?
Commissioner ANDERSON. Yes.
Mr. DEWALT. Further query: Is railroad B also obliged to make
a return of the rents received as dividends on its stock?
Commissioner ANDERSON. No, sir; it is not.
Mr. DEWALT. That is the concrete proposition.
Commissioner ANDERSON. We ignore it for the purposes of this
case and treat railroad B as though it actually had been legally
absorbed into railroad A.
Now, if there are no other questions as to section one, which is a
very, very important section-
Mr. MONTAGUE. Why do you select the term of three years, and
why do you put it 1917 on page 1?
Commissioner ANDERSON. I worked for some time trying to find
some basis which was as nearly just as anybody can say anything can
be just in a matter of this magnitude and difficulty, and which was
practicable of application. I figured on five years, and it seemed to
me that the results which showed tentatively seven hundred and sev-
enty-five or seven hundred and eighty millions were probably inade-
quate to help out in the financial situation, which seemed to be part
cf the railroad problem as well as carrying things. The Govern-
ment has got to have a source of finance in order to get the money,
and in order to carry on this great war, as well as to have things in
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
21
order to carry it on with. So I abandoned that. I figured at one
time on the question as to whether you could deal with the owners of
the securities, but I found it a blind alley and had to back out of it;
there was no practical way. I found 1915 a pretty poor year, and
that the years 1916 and 1917 were excellent years, and you may say,
by process of exclusion, that seemed the best result in the way of a
plan which was comparatively simple, and it seemed to me to be
essentially just and fair as between the Government and the aggre-
gate of the security owners of all the carriers, and, so far as I can
now see, just as between the Government and the individual carrier.
Mr. ESCH. Under the English system they only used the year 1913.
Commissioner ANDERSON. With some modifications subsequently
adopted.
Mr. Escн. Do you know why they did not take a period of years
such as we have gotten here in this bill?
Commissioner ANDERSON. No, sir; I do not.
Mr. ESCH. Do you know whether 1913 represents a normal return
for the carriers of Great Britain?
Mr. DEWALT. Mr. Esch, are you accurate in that statement?
Mr. ESCH. Which?
Mr. DEWALT. In regard to the system adopted?
Mr. ESCн. I understand it is based on 1913.
Mr. DEWALT. I had a pamphlet which said it was based on the six
months of 1913 and the first six months of 1915, and if it appeared
that the receipts of 1914 were greater than the receipts of the last six
months of 1913 there should be an average.
Mr. Escн. I understood that had been subsequently changed.
Commissioner ANDERSON. What is the specific question?
Mr. ESCH. It was with reference to why Great Britain only
adopted the term of one year.
Commissioner ANDERSON. Well, they took their roads over im-
mediately on the opening of the war, in August, 1914. I suppose it
was the natural thing to take the nearest available period, and, so
far as my own line of thought was influenced by the English conduct,
I should say we did about the same thing, taking the nearest available
period to the date of taking over the properties. I did not think
it fair to take the entire year 1916; I thought it was too large, taking
the so-called war profits, or 1917, so far as I was concerned. I do not
know whether the same line of thought influenced the minds of others
who had a more important part in deciding it than I. I made vari-
ous memoranda; I came to the conclusion that three years was the
fairest.
In 1913, if you want to get the figures, the net operating income
was $803,000,000 as compared with 1914, $376,000,000; 1915, $697,-
000,000; and 1916, $1,006,000,000. In other words, you will see
that in 1913, it is two hundred and four or five millions less than
1916, but that it is $105,000,000, in round numbers, larger than 1915.
The same computation would hold if you had in the small carriers.
Mr. MONTAGUE. You wanted to make it as fair as possible?
Commissioner ANDERSON. Yes.
Mr. MONTAGUE. And even knowing that estimate had some degree
of arbitrariness?
Commissioner ANDERSON. There is some degree of arbitrariness.
You have got to get a workable plan.
22
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. MONTAGUE. That is inseparable from the problem?
Commissioner ANDERSON. Yes.
Mr. RAYBURN. Do you not think, Mr. Anderson, in order that we
be entirely fair with ourselves and the railroads, and that is all we
want to do, that if you take a road for the year, say, 1915, which
was rather a lean year-everybody else has got a little of the war
profits, their business has been increased a little, that in all proba-
bility the railroads ought to be allowed to share in that?
Commissioner ANDERSON. I think that is a fair factor, and I think
there is another thing you want to take into account. There has
been increased capital investment of this carrier, and if you go back
to 1913 and 1914 and take that return you will be taking a return
on less capital invested, and if you undertake to figure accurately
on the amount of capital invested year by year you get a tremend-
ously complicated statistical factor, and that you want to avoid.
It must be made something simple and workable and understandable
in order to be good, in my view.
Mr. BARKLEY. Is it reasonable to assume, if the Government had
not taken over the railroads and the war had continued, would their
profit have been still larger than allowed in this bill?
Commissioner ANDERSON. I do not know any more dangerous busi-
ness than prophesy.
Mr. BARKLEY. Well, based upon the history of the last two years,
I will say.
Commissioner ANDERSON. It depends upon how you put up your
rates. Cost of fuel at the present time is appalling. The labor cost
is increasing, not only because of certain proper increases of wages,
but because the congestion of roads is such that labor is, without its
fault in many instances, very ineffective. You have got a very com-
plicated problem there, and one I might discuss before you for two
hours and I do not believe we would be much further, valuation to
rates and rates to valuation; it is a vicious circle. It has been run
by a great many people and a great many railroad attorneys have
been around that circle, until it seems to me they have gone crazy
with the dizziness which results. I might go around at the same rate.
If the Interstate Commerce Commission took a book of rates-as it
came out in the 15 per cent rate case, somebody said, "The sky is the
limit.”
Mr. DEWALT. Is it not true that the railroads increased rates
$15,000,000, approximately speaking, and the cost for fuel of the
railroads in this country has increased $150,000,000, approximately?
Commissioner ANDERSON. The figures I had in mind the other day,
but I have forgotten them now. I can not verify that without turning
to those sheets, but that does not appall me in their size; I have got
accustomed to large figures.
Mr. MONTAGUE. The cost of steel and equipment has increased?
Commissioner ANDERSON. Approximately 100 per cent; and that
is one reason why the roads should be taken over and put under Fed-
eral control, so that every practicable transportation facility now
shall be utilized, and avoid any unnecessary duplication at the present
prices. That is a very important consideration leading up to the
assumption of control by the President..
Mr. DOREMUS. If you had followed the English plan and adopted
the year last preceding the war-last preceding our entrance into the
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
23
war-as the basis of the earnings, the result would have been more
advantageous to the railroads than the plan you did adopt; is that
not true?
Commissioner ANDERSON. No; take the year 1913.
Mr. DOREMUS. No; the year last preceding our entrance into the
war.
Commissioner ANDERSON. Oh yes; take the calendar year 1916, it
is about $100,000,000 higher than the result now achieved, ignoring.
for the moment the Federal taxes-pretty close to $100,000,000 under.
In other words, putting 1915 in with 1916 and 1917 cuts down the
average about $100,000,000 below what 1916 would be, taking June 30
instead of the calendar years. That is substantially or approximately
an accurate answer.
Mr. Escн. But taking a three-year period, as you did in this bill,
it is possible to conceive the bill would then apply to a railroad that
might have been bankrupt in 1915, that might hardly have regained
its equilibrium in 1916, and was just barely getting on its legs in
1917. That would make a low average return for three years. I sup-
pose under your bill the guaranty would be to raise that?
Commissioner ANDERSON. The guaranty would not be applicable to
that. The trading power under section 1 is limited to the basis
stated; but you will observe, and I repeat myself, that it is a power
and not a mandate, and comes under sections 6 and 7, but what your
mind is obviously turning to is an exceptional case.
Mr. Escн. All right.
Commissioner ANDERSON. Then I pass to section 2. There are cer-
tain railroads taken-for instance, a railroad which was not com-
pleted until the year 1915, or for some reason did not have any kind
of normal operating income, net revenue, in 1915, or perhaps 1916-
that are not traded on the basis there stated. Conceivably, there were
some that had no larger revenues for certain artificial reasons and
that the President ought not to apply that standard. I can not say
about that. That should be left to be dealt with when you get the
figures in detail of the various carriers. It is probably true, as I
stated, that that standard applied to ninety-odd per cent of the car-
riers would be a perfectly fair and just standard, and that the car-
riers would trade with the President on it.
Now, as to the exceptional cases, section 2 provides, "That if no
such agreement is made" -and it might not be made because it
ought not be made, and might not be made because the carriers were
not reasonable and would not make it in either event-" and the
President may pay, or cause to be paid, to any carrier while under
Federal control an amount not exceeding ninety per centum of such
standard return, remitting such carrier to its legal rights in the Court
of Claims for any balance claimed; and any amount thereafter found
due above the amount paid shall bear interest at the rate of six per
centum per annum; and any excess amount paid hereunder shall be
recoverable by the United States, with interest at the rate of six per
centum per annum."
That goes, gentlemen, upon the theory that it is desirable to stabil-
ize the security market, and if a corporation is in the hands of some
cantankerous directors, or if it has good ground to say it falls out
of the principles contained in section 1, they ought not be kept out
of all income pending the determination of their just rights. It is
24
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
not in the public interest that they should be kept out of all
income pending their just rights, and therefore as a rough mat-
ter we said, “Let the President at least have power to see that they
get up to at least 90 per cent of what their standard income would
figure, which we say, roughly, would be adequate to take care of all
outstanding bonds and prevent all hardship to security holders of
those roads." It is then stated very simply that "the amount paid
shall bear interest at the rate of 6 per cent per annum," and if
perchance the payment should overpay any of those carriers the
amount that is determined in section 3, that may be recoverable at
the same rate.
Section 3 indicates a method which we think will be adequate to
take care of the cases which are not settled under section 1. Instead
of having them go direct to the Court of Claims, it is provided that
they shall first be referred to auditors, and that the Interstate Com-
merce Commission and their force shall be eligible to appointment as
auditors, but without increased compensation, the idea being you
would probably appoint a board of three auditors-very likely one
member of the commission, and somebody from the valuation and
statistical staff who would hear that case. They can make a re-
port, precisely as in an ordinary court proceeding, and the Presi-
dent is then authorized to settle with the carrier on an amount not
greater than that provided in the report of the auditors. If they do
not care to settle if the report is deemed improper either by the
President or by the carriers-then they may go, as they have the
constitutional right under the due process clause-to the Court of
Claims, where the auditors' report is prima facie evidence, leaving
either the Government or the carrier to seek to upset it. It is our
belief that the machinery provided under section 3 will take care of
all the cases that are not settled under section 1, and that almost none
of them will ever be found in the Court of Claims; but if we should
be found wrong in that view, the answer is, they have the constitu-
tional right, under the due process clause, to go to the court, and we
think we have done the best we could to prevent any claims for com-
pensation for a substantial part of these properties being involved in
court litigation and overburdening the tribunals of justice.
Mr. BARKLEY. What effect will the operation of section 3 have
upon the provision authorizing the President to pay 90 per cent of
the standard return and then fight the rest of it out in the Court of
Claims?
Commissioner ANDERSON. They will get 6 per cent on any balance
there recovered.
Mr. BARKLEY. Is it your intention or idea that no road would take
a case to the Court of Claims until this auditing board would pass
upon it?
Commissioner ANDERSON. Before the auditors' proceeding gets
into court-and it is prima facie when it gets there it is provided
that after the auditors' report the President may settle with the
carrier in a sum not exceeding the auditors' report.
Mr. BARKLEY. Can the President pay in this 90 per cent referred
to in this section 2 independently of the investigation of this board
of auditors?
Commissioner ANDERSON. Yes; he can pay the standard return
figured on the basis of section 1.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
25
Section 4 provides: "That the return of any carrier shall be in-
creased by an amount reckoned at a rate per centum to be fixed by
the President upon the cost of any additions and improvements made
while under Federal control, with the approval of the President, to
the property of any carrier and paid for by such carrier from its
own capital or surplus," which you will see referred to later in the
act, "and by an amount equal to the rate accruing to the United'
States upon any advances made to such carrier for the cost of such
additions and improvements as provided in section 6 hereof."
The bill contemplates that additions and improvements of the.
property, some of them good for peace purposes and general im-
provements, others only available for war purposes, may be ordered
by the President during the war. That if the capital or surplus of
the carrier itself goes into those improvements, that the President
may allow a rate of return upon that capital adequate, of course, so
that it should be an object to the boards of directors to agree that it
could be paid for out of corporation capital instead of being ad-
vanced by the United States. But if the United States, as provided
for in section 6, makes advances to the carrier for the purpose of an
addition, for instance, of a track, a shipping track, or a track to a
cantonment, then the return to the carrier should be increased only
by the amount which is charged by the Government to the carrier
for the advances made by the Federal Government, so that one hand
would just wash the other.
Section 5 is intended to prevent any manipulation of the stock
market.
It provides: "That no carrier while under Federal control shall,
without the prior approval of the President, declare or pay any
dividend in excess of its regular rate of dividends during the three
years ending June thirtieth, nineteen hundred and seventeen: Pro-
vided, however, That such carriers as have paid no regular dividends
or no dividends during said period, may, with the prior approval of
the President, pay dividends at such rate as the President may deter-
mine."
It is contemplated that the standard return will be adequate to pay
standard, regular dividends, and that it is desirable for the stabili-
zation of the security market that those standard dividends or regu-
lar dividends should be paid. It is conceivable, if the purchasing
power of money goes down, that it may be desirable that a regular
dividend, for instance, the New York Central's 5 per cent, should be
increased to 6 per cent; therefore we put in there the words "with
the prior approval of the President."
Mr. BARKLEY. You mean by "regular," the same rate from year
to year?
Čommissioner ANDERSON. That word "regular" may be possibly
in the field of ambiguity, but I think it is generally understood. The
regular rate of the Pennsylvania now is 6 per cent, of the New York
Central 5 per cent. If there be a dividend which falls into a cate-
gory that you might say was neither regular nor irregular, it is ex-
pected it will be put up to the President before they pay it.
Mr. BARKLEY. In other words, if a railway last year declared a
6 per cent dividend, the year before a 5 per cent dividend, and the
year before a 43 per cent dividend, it could not be construed to have
a regular rate?
26
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
!
Commissioner ANDERSON. That might be true.
Mr. BARKLEY. In that case the President would have the authority
to prevent the increase over the last rate declared; I mean, would
the road have the right to increase only the last rate they declared
without the President's consent?
Commissioner ANDERSON. No, sir; they would not.
'Mr. BARKLEY. Are you sure that is made clear in this language?
Commissioner ANDERSON. I think no road could safely pay, under
section 5, anything that was not plainly a dividend, without getting
the prior approval of the President.
Mr. DEWALT. Referring again to section 4 for a moment, line 6,
and the phrase "with the approval of the President to the property
of any carrier," in regard to additions and improvements made, you
construe that to mean with the approval of the President first ob-
tained or subsequently made?
Commissioner ANDERSON. I should say as drawn it would cover
either.
Mr. DEWALT. Well, to a lawyer's mind, that would lead possibly
to an ambiguity. Would it not be better to say "first obtained or
subsequently made"? I am merely throwing out the suggestion.
Commissioner ANDERSON. It is a very pertinent question. Of
course that raises the question as to whether you want to take such
rather minute control over the ordinary additions and betterments
that a carrier would make as to say they shall not improve a station
to the extent of $1,000 without getting the prior consent, or whether
you want to leave them in general control with the expectation that
anything that is of magnitude or unusual would first be put up to the
Federal control.
Mr. DEWALT. The danger in my mind is this: I do not say that
it would arise, but human nature is human nature. The danger in
my mind is that some railroad companies might go on and make
very extensive betterments, improvements, and additions, and if they
relied upon the subsequent approval of the President, then they would
have been used, and that would put them in as a charge here, and in
that way decrease their net revenues and increase their operating ex-
penses and take from their surplus account in that way, whereas if
they were obliged to have the prior approval of the President there
would be a check on that very thing.
Commissioner ANDERSON. I do not think there is any practical
danger of their proceeding in large matters without it being known
to Federal control, for I happen to know inquiries already have gone
to the chief carriers asking what matters are now under way, or in
contemplation, in order that the Government may have adequate and
early data as to prospective capital demands. So that I can hardly
conceive that a sane board of directors, acting in good faith, would
undertake to involve the Government in large matters of that kind.
Mr. DEWALT. But do you think it of sufficient importance to give
us your opinion later on as to whether that wording should be "with
prior approval or subsequent "?
Commissioner ANDERSON. I think that should be given careful con-
sideration to see whether that is likely to involve too minute control,
or whether it is necessary to make effective Federal control.
Mr. DEWALT. I beg your pardon for interrupting you.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
27
Commissioner ANDERSON. I am very glad indeed to have it.
Mr. BARKLEY. Does that not imply a necessity for getting the ap-
proval before the improvement is made?
Commissioner ANDERSON. If they made a lot of improvements
that the President could not approve of, I think they could be
charged to their expenses, and they would be in serious trouble, so I
rather think, as it now stands, the board of directors would err on
the side of safety. On the other hand, you would say if a station
ought to be enlarged, $1,000 expended, it would be rather queer that
the ordinary executive force should not proceed without getting the
prior approval of the Federal control.
Mr. DEWALT. I judge certainty would be better than uncertainty,
however, would it not?
Commissioner ANDERSON. That is generally true in legislation and
in finance. That is chargeable, I ought to say, to capital account and
not expenses under the rules which now exist, but the Government
must necessarily have a substantial control over capital expenses, be-
cause they have a financing obligation here of a very serious kind.
The latter part of section 5 provides:
That such carriers as have paid no regular dividends or no dividends during
said period, may, with the prior approval of the President, pay dividends at
such rate as the President may determine.
There is a substantial number of carriers now in the hands of
receivers, or coming out of reorganization where they have not had
awarded, although they have earned, money applicable to dividends;
they have not, in many instances, paid it. It is of course desirable
that all carriers whose earnings warrant it, should be put into the
sound dividend-paying class, and that language speaks for itself. It
is intended to permit every carrier which really earns, and therefore
receives, under a Federal guaranty, an income which would war-
rant dividend paying, to be made a dividend payer.
Mr. EscH. Under this power of control of the Federal authority,
would it not be possible for the Federal Government to give more
business to a road and thus increase its dividend-paying power? Is
it possible here to equalize traffic conditions?
Commissioner ANDERSON. No, sir; it would not make any differ-
ence what business goes over any road during the period of Federal
control as to net earnings.
Mr. ESCH. That is true.
Commissioner ANDERSON. Our minds are always getting into that
erroneous view because of the old-time methods, but when you reflect
a moment you see you fix a guaranteed rental upon the basis of
three years past, or a determined compensation under court pro-
ceedings under section 3. It is then immaterial whether the Balti-
more & Ohio earns more or less under the Federal control.
Mr. Escн. That is true, but my thought is this: That to relieve
congestion the Federal authorities would give more business to a
weak line, or one that did not have as much business, and thus in
doing that increase its revenue-producing power, and at the same
time relieve congestion.
Commissioner ANDERSON. That is true, but the revenue-producing
power would accrue to the Government and not to the carrier.
Mr. ESCH. Certainly.
28
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Commissioner ANDERSON. Because I overlooked what I suppose
you all had in mind that any net revenue or earnings accruing in
excess of net earnings, accrues to the Government.
Mr. STEPHENS. Then you have a fixed rate where a road earning a
great deal of money would have its earnings transferred to a road not
earning any money.
Commissioner ANDERSON. Unless you provided some method based
upon what they earned when under private control to give them some
substantial equivalent to what they would earn if they had been kept
under private control.
Mr. SNOOK. What are you going to do with the railroad that did
not earn anything?
Commissioner ANDERSON. They have got to have their rights de-
termined under section 3, and if they have any real earning
capacity at the time they were taken over by the Federal Govern-
ment, so that just compensation, as determined by the courts, gives
them an income they will get it.
Mr. SNOOK. Suppose I had a railroad that had not made anything
up to 1917, had no net earnings, or whatever you want to call it, no
profit, but I thought it was a winner, and was going to make some-
thing this year, and the Government takes it over now, how much is
the Government going to pay me?
Commissioner ANDERSON. Whatever the court says they ought to
under section 3.
Mr. SNOOK. What basis will the court have to go on, and is it
not the duty of the legislature to say, and not a court, what shall be
the basis of compensation in cases like that?
Commissioner ANDERSON. You could provide, in general, a rea
sonable brief legislation, if there are cases that can not be deter-
mined justly under sections 1 to 3, that require legislation. I suppose
we must assume that the owners of those properties will apply to
you gentlemen for a special act. That is the only answer I can make
to that. I do not know of any other. I can not say there are not
any, but you could not provide for it, as we think, in any better fash-
ion than to leave them to their rights in court, due process of law.
Mr. SNOOK. I am not satisfied with that. Here is a road, we will
say, which has not paid anything so far, but it is living in hopes,
and it is his road; he has put his money in it. The Government
takes it. I do not see how you say, "Just leave it to the court."
The court did not take it. The legislative power of the country takes
it. Is it not up to the legislative body to say what about it, what
will it be paid?
Commissioner ANDERSON. No; the legislature could not say, con-
stitutionally. When you take any property for public purposes it
is a legislative question as to what is a public purpose. What is just
compensation is a judicial question outside the scope of legislative
action, is my understanding of the Constitution, and they have their
constitutional rights under section 3. Moreover, Mr. Committeeman,
you want to remember this: When railroads say they do not make
any money, they mean they did not make enough to pay interest on
their debts and give a dividend to their stockholders. It does not
follow they do not make money, because very frequently roads have
so many debts accruing out of transactions not altogether beyond
question that they really were good earners without its appearing to
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
29
the poor unfortunates who held their stock. But you have got ex-
ceptional cases, and very exceptional cases, that can not be covered
either by sections 1 or 2, and you have got due process of law to take
care of all such cases.
Mr. BARKLEY. A company which did not have any net earnings
for three years could not claim under section 1, could it, because
there would be no basis for a claim?
Commissioner ANDERSON. That is right; or no net earnings, as
provided under the section. You try it out in the first place before
the auditors; if they can not agree, they go to the Court of Claims.
Mr. COADY. I understand, then, this does not take into considera-
tion the capitalization, net income, and other bonded debt?
Commissioner ANDERSON. No; it has nothing to do with disburse-
ments on account of capital. Their stock may have been watered
three times, or they may have put a lot of their earnings improperly
into their properties that have nothing to do with capital.
Section 6 is a very important provision. It provides that the sum
of $500,000,000—and you will want to know why that was put in,
and I will say that figure was put in by the Secretary, and he him-
self will be far the best source of information as to why that sum
was taken. I can give you some figures as to the amount of maturities
that are coming in in the next few years and the amount of money
that has been put by the carriers into their equipment, additional
money for the last few years, if you want them.
Mr. Escн. I understand that Mr. Daniels has just telegraphed to
the presidents of the roads to make inquiries of their lines, and that
report will come in very soon, so it would be then available to the
committee.
Commissioner ANDERSON. Yes. I know an order of that kind was
issued yesterday or Saturday. Yes; there will be data coming in all
the time. This problem is going on step by step to a larger and
larger illumination of the practical effect, so in a short time you will
have figures more accurately determined than anything I can give
you now,
SEC. 6. That the sum of $500,000,000 is hereby appropriated out of the public
Treasury from any funds not otherwise appropriated, which, together with any
funds available from any excess earnings of said carriers, may be used by
the President as a revolving fund-
That is a phrase I found in the Lever bill of last spring; other-
wise I should not ever have dared to use it, but having that dignity
of standing I use it in here-
for the purpose of paying the expenses of Federal control and any deficit of
any carrier below such standard or ascertained return.
The standard return would be the basis in section 1, and the amount
would be the amount found by the auditors or the Court of Claims
under section 3. And also,
to provide terminals, improvements, engines, rolling stock, and other necessary
equipment, such terminals, improvements, and equipment to be used and ac-
counted for as the President may direct, and to be disposed of as Congress may
hereafter by law provide.
We had a lot of discussion about these last words, as to what should
become of this rolling stock. There may conceivably be terminals,
although the expectation is, as we come to consider section 7, that the
30
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Government's investment in railroad properties will be limited to
equipment, rolling stock. We came to the conclusion that nobody
could previse what ought to be done with it; that it was a war mat-
ter; that it would have to be determined by Congress and that there
was no use in attempting precision and going into the realm of
prophecy, where we would certainly accomplish nothing. It was
simply put in there that the Government may furnish for war pur-
poses, provide additional equipment, and so forth.
That goes on the theory that we shall do what the English did
not-have accurate accounts kept by the carrier of the use of the roll-
ing stock, its own, the Government's, and other carriers', and of Gov-
ernment freight and troops moved upon the carriers' line, so that at
the end of the period of Federal control the accounts of the various
carriers may reflect what has been done. But the conclusion was,
after much thought, that it was utterly useless to try to previse fur-
ther than to say that the disposition of Government property should
await action by Congress.
Mr. COOPER. Could any part of this $500,000,000 be used for main-
tenance and depreciation?"
Commissioner ANDERSON. Yes; that is to say, if you should operate
these carriers on such rates that the operating revenue was not ade-
quate for the total care of operating expenditures, including depre-
ciation and maintenance, the Government would have to stand the
deficit to come out of it. That is, any deficit-
Mr. COOPER. If the carrier and the President were not able to agree
upon the amount that shall be used for maintenance and deprecia-
tion under section 1, does section 3 provide for a way by which that
can be fixed, or does that section 3 apply to that, or is that left en-
tirely to the discretion of the Secretary and the President as to what
it shall be used for?
Commissioner ANDERSON. It is left entirely to the determination of
the President.
Mr. COOPER. Section 3 has nothing to do with it?
Commissioner ANDERSON. Nothing to do with it. I withdraw that
statement. No; I do not think section 3 would have anything to do
with that. Section 3 is the determination by due process of law of
the just compensation that may be had by the nonagreeing car-
riers. In determining what that just compensation is, if you went
into a long, thorough hunt, you would probably consider what they
had done in the past with relation to depreciation and maintenance,
but I do not see that future depreciation and maintenance, future
meaning under Government control, has anything to do with the de-
termination of the amount under section 3.
Mr. BARKLEY. Would any advances made by the President to any
road for improvements be taken out of this fund?
Commissioner ANDERSON. Yes, sir; that is provided in the act
later.
Mr. SNOOK. Then, I understand you to say that the amount for
depreciation and maintenance is left entirely to the discretion of the
President, in your opinion?
Commissioner ANDERSON. Yes.
Mr. SNOOK. That would be before the money paid provided in this
bill, or approved by the President, after the railroads go on and ex-
pend any amount they see fit to expend?
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
31
Commissioner ANDERSON. They will not go on and expend any
amount they see fit. The question of what is adequate and proper for
depreciation and maintenance ought be worked out by the engineers
and accountants in the early stages of Federal control, in the light of
all known experience and what has been determined by the Interstate
Commerce Commission on that subject.
Mr. SNOOK. The point I want to get at, is it clear under this sec-
tion that that amount must be fixed before any amount is expended;
that is, they must determine that amount before the railroads have
the right to expend that money, or, should they go on and expend it,
to be approved thereafter?
Commissioner ANDERSON. I am not quite sure that I get what is
in your mind.
Mr. SNOOK. This provides the amount that should be expended by
any road for depreciation or maintenance; that it must be fixed by the
President; you say that is left entirely to his discretion. Now, if
the amount is necessary to be expended, must that be determined
before the money is expended, or can the company go on and expend
the money and then get the approval of the President afterwards?
Commissioner ANDERSON. I should say the latter. I should say
when you come to deal with the account of a carrier, in the matter
of expenditure for new rails and engines and cars and stations, and
all those things, they would have to be dealt with on the basis of
charging a proper amount for depreciation and maintenance. There
has been nothing like a standard. I think the C., B. & Q. charged as
high as 6 per cent for depreciation and maintenance, and some other
roads are charging only a fraction of 1 per cent. Now, it is expected
by some of us, in any event, that experience will work out something
like a standard basis for depreciation and maintenance, to make it
applicable to all the carriers, which would be an exceedingly whole-
some thing for the railroads of the country.
Mr. ESCH. And exceedingly difficult?
Commissioner ANDERSON. Änd exceedingly difficult.
Mr. SNOOK. Under this bill must the railroads go to some authority
before they can make expenditures for this, or can they make an
expenditure and have it approved afterwards?
Commissioner ANDERSON. You mean for depreciation and mainte-
nance, or improvements?
Mr. SNOOK. Yes; depreciation and maintenance.
Commissioner ANDERSON. No; I should say that ordinary expendi-
tures for depreciation and maintenance would fall within the ordinary
scope of the Executive order. The rail wears out and somebody orders
a new one put in. An engine goes out of repair. They put it into the
shop and have it repaired. That is taken care of in maintenance.
Depreciation is more difficult.
Mr. SNOOK. Then they bring that question to the proper author-
ities and it is settled, and the expenditure is made?
Commissioner ANDERSON. The accounting of the carriers must re-
flect honestly and accurately their transactions. Operating expense
includes maintenance and depreciation, although it is intensely diffi-
cult thing properly to include. They will undoubtedly go ahead
substantially as they have hitherto in each one of the constituent
companies, unless and until some general or special order is made
32
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
that that particular carrier should deal with those items differently.
That is my own prophecy. Some carriers, there is a general tradi-
tion-I do not speak with any authority-that the Pennsylvania has
taken very good care of depreciation, taking a dollar for the stock-
holders and a dollar for the property. Whether they have charged it
up to capital account, so it will be accurately reflected in their ac-
counts, I do not know.
Mr. SNOOK. This is something I am intensely interested in. For
some time past the Erie Railroad Co. has been contemplating elimi-
nating several grade crossings in the city of Youngstown, Ohio, which
contemplated the expenditure of a large amount of money to make
this improvement. Now, under this bill, would it be necessary for
the Erie Railroad to get the.consent of the Government or the Presi-
dent before they can go ahead with those improvements?
Commissioner ANDERSON. In my opinion, yes. One other, and I
should say a very small matter, ordered by the local authorities in the
interest of safety or public convenience would probably fall within
the scope of the discretionary powers necessarily vested in any man
holding an important executive position.
(Thereupon, at 12 o'clock m., the committee adjourned until Wed-
nesday, January 9, 1918, at 10 o'clock a. m.)
COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE,
HOUSE OF RepresentatiVES,
Washington, D. C., Wednesday, January 9. 1918.
The committee met at 10 o'clock a. m., Hon. Frank E. Doremus
presiding.
The CHAIRMAN. The committee will come to order. Mr. Ander-
son, you may proceed.
STATEMENT OF HON. GEORGE W. ANDERSON, COMMISSIONER,
INTERSTATE COMMERCE COMMISSION-(Resumed).
Commissioner ANDERSON. Mr. Chairman, referring a moment to
the questions which arose yesterday concerning the operation of the
tax clause in section 1, I have to say that an examination of the
authorities indicate that the correct conclusion was reached yester-
day, both by the members of the committee who participated in the
questions and by myself. There can be no doubt that the right of
the States to continue taxation of carrier property within their own
domain would remain unimpaired. The State may tax the physical
property of a railroad. (See The Postal Telegraph Company v.
Adams, 163 U. S., 688; Western Union v. Taggart, 163 U. S., 31.)
Under the present control by the Director General or the Presi-
dent, and under the bill as now drafted, the railroads' properties
within the State would remain subject to State taxation, and the
Federal control no more affects that than would a leasing of a
property.
The same thing applies to properties taken here in Washington for
Federal purposes. The right of local taxation remains unimpaired.
You will find further illuminating discussions of the principles in
Kansas City Railroad v. Kansas (240 U. S., 227); in St. Louis, etc. v.
Arkansas (235 U. S., 350).
FEDERAL OPERATION OF TRANSPORTATION \
33
SYSTEMS.
There are other discussions, if any be needed, which illuminate the
general character of the problem which is sometimes presented, and I
think not plainly presented here, in the Galveston Railway Company
v. Texas (210 U. S., 217), and in the Philadelphia Steamship Com-
pany v. Pennsylvania (122 U. S., 326).
In those opinions there will be found citations of a very large
number of tax cases in which practically every aspect of the ques-
tion as to where the dividing line is between Federal taxation and
State taxation falls is discussed.
On the other hand, it is clear that no State has power to levy
a tax on the gross income of an interstate carrier and that interstate
commerce may not, as interstate commerce, be taxed by a State. I,
therefore, without amplifying the discussion, and resting my own
opinion in part upon the opinion of the chief counsel and the others
who prepared the memorandum, and a brief examination of the
cases, say that there is no difficulty whatever as between State and
Nation arising out of the tax clause proposed in section 1.
Mr. RAYBURN. What do you think, Mr. Anderson, about legislation
referring to the operation of trains within States? I am frank to
say to you that I have in mind the separate coach law.
Commissioner ANDERSON. I have not undertaken to consider that.
I think what Mr. Justice Hughes said in the Shreveport case, where
the dividing line between intrastate and interstate commerce was
very carefully drawn, is illuminating as to what the Federal Govern-
ment may regulate, and that it must dominate so far as domination
is necessary to effective regulation. That is the substance of one of
the fundamental propositions there.
Mr. COADY. Did I understand you to say that the States could not
tax gross receipts of a railroad on interstate business?
Commissioner ANDERSON. Yes.
Mr. COADY. If it is an interstate railroad?
Commissioner ANDERSON. Yes. No State has power to levy a tax
on the gross income of an interstate carrier, 210 U. S., 217; nor to
tax the receipts of an interstate carrier, 122 U. S., 326.
Mr. COADY. On intrastate business?
Commissioner ANDERSON. No; interstate business?
Mr. COADY. On intrastate business of an intrastate railroad?
Commissioner ANDERSON. That is a different question. The State
could not tax the Federal Government on the operation of intrastate
business which was an essential part, necessarily growing out of the
control of the interstate business, in my opinion. It can tax the
property which is within its jurisdiction.
Mr. COADY. An interstate road may have a great many local trains
wholly within the State.
Commissioner ANDERSON. Yes.
Mr. COADY. Could not the State tax the gross receipts from busi-
ness of that character?
Commissioner ANDERSON. If it was purely intrastate, the law would
remain so far as this bill is concerned, precisely the same as it now is.
I have not looked at those cases, Congressman, on that.
Mr. COADY. Do you not think it would be wise to amend the law
and to clear up all about that? Do you not think it would be wise to
amend this bill, rather?
40958-18-3
34
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Commissioner ANDERSON. I find frequently that when you amend
a law that has been passed on by the courts, you make more litigation.
Mr. COADY. We are not undertaking to amend a law that has been
passed upon by the courts, but my idea is to amend this bill and to
make that clear.
Commissioner ANDERSON. My idea was that the bill as it now
stands has no effect whatever upon the lines previously drawn for
taxation purposes between interstate and intrastate property and
business. On that proposition I rest with a good deal of confidence.
I have not undertaken, as you will easily see from the other things
that I have undertaken to do, to read or reread all the decisions on
every smallest kind of division between interstate and intrastate tax-
ation, excise taxes, and others. You can not tax interstate commerce
by the States. The States may tax property within their jurisdiction
which is used for interstate commerce.
Mr. BARKLEY. Are you able to say, Mr. Anderson, whether, as a
matter of fact, any State attempts now to tax the gross receipts or
the business which is purely intrastate which is done by an interstate
carrier?
Commissioner ANDERSON. I do not know, sir.
Mr. COADY. They do it.
Mr. BARKLEY. You spoke a moment ago about the power to tax
physical property. Do you include also within that the franchise tax
of a railroad?
Commissioner ANDERSON. Yes; we have those in Massachusetts,
and I suppose they are of rather general application.
Mr. MONTAGUE. Before you leave that subject, Mr. Anderson, and
from what related to it, in making the computation for standard
returns, as to certain Federal excess taxes, does that mean to imply
that there will be no deduction of State excess taxes?
Commissioner ANDERSON. Yes, sir.
Mr. MONTAGUE. This bill is intended to confine wholly to Federal
excess taxes?
Commissioner ANDERSON. Yes sir, federal excess taxes being
within the control of the same government that has taken over these
carriers, it was our thought that they should fall upon the holders
of the securities and not upon the government which has taken con-
trol.
I have had distributed this morning as a matter of convenience
for any of the members of the committee, a copy of the monthly re-
turn blanks. If the committee care to look for one moment at that,
as I assume you will be called upon to explain to colleagues what
that means as much as I am called upon to explain it to you, it is
available.
If you go down near the bottom to items 24 and 25, you will find
the items of leased road rent and miscellaneous rents, which are
excluded from the net operating income, for the purpose of find-
ing the standard return computed under section 1. That is, the
carriers are now making monthly returns on these blanks, and the
numbers of the accounts referred to parenthetically in this sheet
are the accounts which are set forth in the typewritten sheet which
I caused to be distributed to you yesterday morning.
We have included, you will see, all the items down to and including
item 23, in the left column of figures, but excluding 24 and 25, in
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
35
order to reach the net railway operating income as used in section 1.
This sheet, read in connection with the one that I showed you yester-
day, makes it a little easier to follow the accounting methods of the
commission.
Mr. PARKER of New Jersey. Mr. Chairman, might I ask there, are
rents paid included in operating expenses there? I do not find them
unless they are under miscellaneous operation 14.
Commissioner ANDERSON. No, sir; rents for leased roads are re-
garded as a disbursement on capital account.
Mr. PARKER of New Jersey. And are not in operating expenses?
Commissioner ANDERSON. No, sir.
Mr. HAMILTON. Perhaps I might ask here another question that
might come later. I understand that all operation of a railroad in-
cludes overlapping accounts that came from the past year?
Commissioner ANDERSON. Yes, sir.
Mr. PARKER of New Jersey. They are not paid in the year. The
operating expenses are those of current accounts of the last year, and
so forth, including accidents.
Commissioner ANDERSON. Yes.
Mr. PARKER of New Jersey. I do not see any provision in the bill
which suggests that the Government, in operating the roads, might
charge those overlapping accounts as operating expenses, and when
you consider that in a receiver's accounts he excludes them and will
not pay any of them, I have been wondering whether there ought to
be such a provision in the bill.
Commissioner ANDERSON. That matter was given consideration,
and it was deemed unwise and impracticable. The question arose
naturally, but the Government has taken these concerns over as a
going business, and if they are turned back to the carriers they will
be turned back as a going business. It would make a tremendous
amount of additional bookkeeping, and it would put the Government
and the carriers to a very large amount of additional expense for
getting new books, and necessarily involve a good deal of confusion,
and it was deemed inconsistent with the present war needs of having
every man who can contribute to transportation efficiency put his
energies at transportation efficiency, and it was thought that a result
essentially just could be obtained without the necessity of so dividing
the accounts between those that the carriers do keep and which the
Government would keep.
Mr. PARKER of New Jersey. I so understood it. The only question
was whether the bill should say that you did not mean to change the
overlapping accounts. It does not say so now, and I was afraid it
might be supposed that the contrary was to be done, because in a
receivership case the receiver pays no bills.
Commissioner ANDERSON. That is true, except as he may be author-..
ized for the purpose.
Mr. PARKER of New Jersey. Yes.
Commissioner ANDERSON. There are always authorizations, but
they are made matters of special accounting, would perhaps be a
little more accurate way to state it.
Mr. PARKER of New Jersey. I thought in this provision on page 2,
that where it said that during the period of Federal control depre-
ciation and maintenance may be carried, it might also be said that
36
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
the operating expenses shall be paid as they come due, as heretofore,
without regard to when exactly they were accrued.
Commissioner ANDERSON. I am inclined to think there will be no
difficulty. We considered that with a good deal of care. I will not
say that there will be no difficulty, but I am inclined to think that
the method now proposed will make less difficulty than any other.
This is the line of least resistance. I should take it over as a going
business, and at the end of the war, or at some stated period, they
can be turned back as a going business. If, perchance, it be found
that any carrier has undertaken to slow up at any time the payment
of accounts, instead of paying them in the usual course of business,
by checking up transactions at one period with another period, the
Government can pretty nearly protect itself against any attempted
fraud of that kind, if there be an attempted fraud of that kind,
which we do not easily assume, of course; and if everybody acts in
good faith and the business runs on a comparatively even keel,
then there is no occasion to do it, as there may be in the case of a
receivership.
Mr. PARKER of New Jersey. I agree entirely. The only question is
whether it is worth while to say that the Government will run it as a
going business, so as to avoid any questions. I have only submitted
that to you. I only present it to you.
Commissioner ANDERSON. I shall be glad to give further thought
to that and discuss it with the people in the accounting department.
The proclamation I think probably adequately covers that, but we
are now beyond the proclamation, dealing with law making.
One other matter arising under section 1, Mr. Chairman. There
has been some criticism of the language in lines 19 to 23, at the end
of section 1, page 2. It is thought by some of my associates in the
Interstate Commerce Commission, and here again I file the caveat
that I speak not for the commission as a tribunal, but for myself
alone as a member of it, and that that body, as a body, is not bound
by anything I say, but some of my assistants there have suggested
that the language at the end of section 1 as now drawn would require
the United States to apply from a quite different standard of depre-
ciation and maintenance to certain poorly maintained properties
during the period of Federal control than that which has obtained
during the three years which are taken as the standard for fixing
the standard return.
In other words, there are some properties, it is suggested that have
had less real net earnings than their bookkeeping indicates, for they
have been taking it out of their property by not charging enough to
operating expenses, so as to maintain the properties in as good con-
dition at the end of a period as they were at the beginning of the
period.
That being so, their bookkeeping exaggerates their earnings, and
if their earnings thus shown are taken as the standard of return to be
made by the Federal Government, they will get more than they are
entitled to. If, in addition to paying them the same amount of
money that their bookkeeping shows they had divisible for capital
purposes, the Government now institutes as to their properties
sound and adequate depreciation and maintenance rules. In other
words, it is suggested, that if we are to take the course of business
of the carriers for three years, including the amount of net earn-
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
37
ings that their books show that they have had applicable to interest
and dividends and surplus, we ought to take also from their books.
the amount which they have actually applied for depreciation and
maintenance. It is not quite easy to find an adequate answer to that
statement. Hence, it has seemed desirable to bring at least to your
attention a suggested substitute which I have had typewritten and
put before you, which undertakes to apply to the separate carriers
during the period of Federal control the same standards of depre-
ciation and maintenance that they have themselves applied during
that three years, the language being:
During the period of Federal control each carrier may charge to operating
expenses for depreciation and maintenance on its several classes of property,
sums not exceeding sums determined by the respective average rates chargeable
by it on such classes of property during the three years ending June 30, 1917:
Provided, That the President may authorize different rates if the public interest
so requires.
I submit that, Mr. Chairman, as a substitute for the printed draft
which has at least a somewhat more logical application."
The CHAIRMAN. You recommend that substitution personally,
do you?
Commissioner ANDERSON. I do recommend that substitution per-
sonally.
Mr. Escн. How do the charges for depreciation and maintenance
in 1915, which would be the first of the three-year period, compare
with the normal preceding that time? Have you any data on that?
Commissioner ANDERSON. I have a long memorandum about de-
preciation.
Mr. EscH. Will you have it printed as a part of your remarks, for
the use of the committee?
Commissioner ANDERSON. I do not think it is sufficiently applicable
to the subject matter so that it is desirable to print it, but if I could
work out something somewhat more brief and containing less tabula-
tions of statistics which have very remote bearing, I should be glad
to do it.
I undertook to find out some weeks ago what the carriers were
doing. The results were confusing, and you can not. That is one rea-
son why I did not bring anything in here. There has been nothing
like a standard of depreciation adopted by these carriers.
There is one road, I forget which it is, the Frisco, I think, that was
charging for depreciation on equipment one-half of 1 per cent a year.
You gentlemen can figure about how long that could continue. There
is another road, I think the Chicago, Burlington & Quincy, which is
charging 6 per cent on equipment. There have been no adequate
standards of depreciation of any kind on property maintained gen-
erally by the carriers.
Mr. ESCH. Then this proposed substitute of yours would maintain
that diversity of standard, would it not?
Commissioner ANDERSON. It would so far as fixing the amount of
net revenue accruing to them is concerned, but it would not follow
that the Government would let those properties continue to run
down. Quite the contrary would be my view.
If you assume, for the purpose of illustration, that you have had
a carrier in the hands of a board of trustees and have been skinning
the property, as the phrase is, for the purpose of making apparently
38
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
good showings and putting the stock up, it is hardly conceivable that
the Government would continue skinning the property and letting it
run down, perhaps to the danger of the traveling public, during the
period of Federal control; nor does it follow that the security
holders in that "skinned" property ought to receive returns during
the period of Federal control on the same basis as they received it
during the past three years, but that they should receive what they
would have received during the past three years, if instead of taking
out everything that they could, they had left enough in there to keep
their property sound and safe.
Mr. ESCH. As a matter of fact, during 1916 and 1917 there has
been a great deal of readjustment necessary, has there not, owing to
the congested travel, the high cost of materials, and the high cost of
labor?
Commissioner ANDERSON. That has been discussed pro and con,
for instance, in the 15 per cent case. The Commission has never made
any finding.
Mr. COADY. When you use the words "security holders," do you
mean bondholders?
Commissioner ANDERSON. The owners of the property, bonds, stock
and notes. They are the people that really own these carriers, of
course. We will consider that further and see whether we shall have
any perfecting amendment that ought to be suggested.
Mr. DECKER. I am not sure what you mean. Taking the case of
the Frisco, for instance, do you mean that they have only been
charging one-half of 1 per cent to maintenance and depreciation,
and that the Government would take hold of it and charge what the
Government thought was right, in the upkeep of their equipment,
and so forth, and then deduct that from the standard pay that the
Frisco was to receive?
Commissioner ANDERSON. So far as the operating expenses are con-
cerned, yes. Yes, it would result in that.
The CHAIRMAN. The substitute which you submitted gives the
railroads permission to make the same charge for depreciation and
maintenance as they have made during the past three years. Have
you considered the question of whether they should be required to
do that?
Commissioner ANDERSON. Yes, I did, and I had a good deal of
doubt whether the "may" should be "shall" or not. I think you can
meet a good argument either way. As the carriers are under Federal
control, I do not think it is very material. Personally, I have no
objection to making "may" at the end of the first line "shall."
Mr. BARKLEY. If you do that, you will have to modify the proviso.
Commissioner ANDERSON. No, I do not think so. The last would
condition the matter as the public interest may require, to be deter-
mined by the President. I should not think that would follow.
Mr. BARKLEY. He would have the authority to abrogate the im-
perative nature of the word "shall."
Commissioner ANDERSON. Oh yes, I think so. I had also circu-
lated in typewritten form this morning, a further memorandum
originating in the Bureau of Statistics. I stated yesterday to the
committee that it was a matter of very great difficulty to compute
what the excess war taxes would be on all the carriers, chargeable
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
39
against the standard return, assuming section 1 becomes a law. It
might be as high as ninety millions of dollars. This memorandum
circulated this morning, shows that the statistics department are
of opinion that ninety million dollars is the outside figure; that it
will be more than fifty millions of dollars, but probably not ninety
millions of dollars. The method of computation is sufficiently set
forth on the memorandum. You might insert this in the notes, if
you choose, the memorandum not being very long.
(The memorandum referred to is here printed in full as follows:)
JALS'
RAILWAY TAX ACCRUALS FROM INCOME ACCOUNTS REPORTED TO THE INTERSTATE
COMMERCE COMMISSION.
For the month of October, 1917, the amount of railway tax accruals re-
ported by roads having operating revenues of more than $1,000,000 was
$21,910,588; for the same month of 1916 the amount was $13,898,678; being an
increase of $8,011,910. Twelve times this amount would make approximately
ninety-six million dollars, but this is doubtless too large an estimate of the
effect of new taxes, as some roads probably included tax estimates applicable
to previous months in making up the October statement. If the tax accruals
for the ten months ending with October 31, 1917, be compared with the corre-
sponding ten months of 1916, the increase is $42,742,604. Twelve-tenths of
this amount is approximately fifty-one million dollars.
Some allowance is probably to be made for an increase in State taxes.
Probably the increase due to war taxes as estimated by railroad officials is
less than ninety millions and more than fifty millions.
Railway tax accruals.
CLASS I.--ROADS.
Year ended June 30----
1911__.
1912__.
1913__
1914
1915_
1916
1917¹
$98,626, 848
109, 445, 407
118, 386, 859
135, 572, 579
133, 276, 330
145, 517, 034
172, 037, 286
Commissioner ANDERSON. I pass, then, unless there be some other
question, back to the consideration of section 6.
As I recall it, at the time when the committee adjourned, I had
made some statements relative to the first paragraph of section 6.
Beginning with line 8, in section 6, page 5, the committee will find
the provision which is intended to deal with additions and improve-
ments necessary or desirable for war purposes or in the public in-
terest, whether it be tracks or terminals.
That provision goes further than the provision for equipment in
lines 3 and 4. Obviously it will be necessary to put in some tracks to
a shipping yard, or a cantonment, and the President should have
authority to order them, and it is on or in connection with the prop-
erty of any carrier, as the President may make them, or may order
the carrier to make them.
There was discussion as to whether such additions and improve-
ments, on or in connection with the property of a carrier should re-
main the property of the United States or whether title should vest
in the separate carriers.
¹ Includes some switching and terminal companies.
40
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
You will recall that as to equipment, and as to certain terminals,
in the language higher up on page 5, we left the title to remain in
the United States, to be disposed of as Congress may hereafter pro-
vide.
After consideration, it seemed to us that the weight of argument
was in favor of having additions and improvements on or in con-
nection with the property of the carrier belonging to the separate
carrier or carriers, so that there would be no confusion of title as to
an additional track or a spur or a branch, or some perhaps temporary
terminal at a shipping yard or a cantonment. It would be an almost
inextricable confusion of property rights between the United States
and the separate carriers if the United States, wanting for its war
purposes an additional thousand feet of track, took or purchased
the land and built the track so that it owned physically a part of a sepa-
rate carrier, one thousand feet. It seemed much better on the whole
that those properties should belong to the United States, but some
of the carriers may not have the finances necessary to make those
additions and improvements; hence authority is given in line 11 et
seq. to the President to advance from the revolving fund all or any
part of the expense of such additions or improvements so ordered
and constructed by such carrier or by the President, such advances to
be charged against such carrier and to bear interest at such rate and
be payable on such terms as may be determined by the President, to
the end that the United States may be fully reimbursed for any sums
so advanced.
The natural inference would be that the rate charged would be
what might be called the Government rate, now 4 per cent. We hope
it will never go any higher, but it is obvious that if a carrier is ordered
to make such additions and improvements, perhaps to a cantonment,
which we hope we shall sometime not have to use, that those addi-
tions and improvements may not be worth, for peace purposes, any-
thing like what they cost, yet they have been made on property which
vests in the carrier or belonged to the carrier originally, and the cost
thereof has been charged to the carrier, either out of its own resources,
or advanced by the Federal Government. Hence, there must be a
provision that any loss claimed to accrue to any carrier by reason of
any such additions and improvements so ordered and constructed,
may be determined either by agreement, and if there be no agreement,
that then it shall be ascertained as provided in section 3, first heard
by auditors, or referees, if that be the preferable term, and then by
the Court of Claims, if they do not settle on the auditor's report.
I digress here for a moment to say that my attention has been di-
rected to the fact that my New England narrowness has led me to
use the word "auditors" in a way that is not generally understood.
Up there an auditor is a quasi-court that hears a case and makes a
report which is prima facie. It is a practice of very long standing.
I think "referee" is the phrase more commonly used in other parts
of the country, and if it be desirable to get away from our New Eng-
land provincialism, and to change "auditors" to "referees," I have
no objection except the natural sectional prejudice that we all prob-
ably have.
On the top of page 6, the committee will find a provision for deal-
ing with inland and coastwise water transportation. It is a matter
of common knowledge that we have not availed ourselves as fully
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
41
as we think we should have on our inland and coastwise water trans-
portation, and it is felt that the difficulties under which the country
is now laboring may be very much lessened if authority be given to
utilize boats, barges, and tugs, furnishing them on the inland and
coastwise waterways.
At the very end, the committee will see the language "that the
President may use such facilities, or employ such agencies as he
shall deem in the public interest."
There is already in the Shipping Board, and I think the United
States Shipping Corporation, certain shipping machinery in opera-
tion, the details of which I am not familiar with, but the language
there used was intended to permit the President to use all existing
Government machinery now available, applicable to these purposes.
Mr. ESCH. Would that language in that paragraph be broad
enough for the President to rehabilitate the Chesapeake & Ohio
Canal? Is that such an inland waterway as is contemplated by the
language of the section? Or do you refer, or have in mind by the
use of the word "waterways" only the navigable streams, or is it
broad enough to cover artificial waterways?
•
Commissioner ANDERSON. I have not thought of that. It reads:
The President may expend for the purchase, construction, utilization, and
operation of boats, and so forth, and other transportation facilities on the in-
land and coastwise waterways, and may, in the acquisition, operation and use
of such facilities create or employ such agencies and enter into such contracts
and agreements as he shall deem in the public interest.
I should think it was a little narrow. My off-hand opinion would
be that I should add the word "canals " after the word "inland."
Mr. Escн. After the word "inland" you would insert "canals"?
Commissioner ANDERSON. Yes; or say after "waterways," "in-
cluding canals." I think canals should be expressly mentioned in
there, if it is desirable, and my view would be that it is desirable.
Cape Cod Canal, for instance, has been under discussion, and I have
a notion that there is a bill pending in one of the Houses of Congress
relative to the Cape Cod Canal, and it may be of very great value
before we get through with the war.
Mr. DEWALT. May I be permitted to ask a few questions?
The CHAIRMAN. Certainly.
Mr. DEWALT. Yesterday the subject of these inland waterways
was mentioned, and the improvement therof, and the necessity of
using them in order to relieve railroad congestion. Would this
clause be wide enough, do you think, to authorize the President to
construct locks along waterways, say along the Mississippi, and lease
docking facilities?
Commissioner ANDERSON. I should think it was.
“Utilization" is
a very broad word in line 3. "And may, in the acquisition, operation,
and use of such facilities, create or employ such agencies, and enter
into such contracts or agreements as he shall deem in the public
interest."
Mr. DEWALT. The thought arising in my mind, Mr. Anderson, is
this: Where a clause in an act specifies by itemizing certain things
over which certain powers have control, that general words in the
act, do not, as a matter of law, include more than the specific ones so
enumerated. That is the general principle as I understand it. Now,
we have here "boats, barges, tugs, and other transportation facilities."
42
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
The question in my mind is as to whether the general word "trans-
portation facilities would include the improvements and construction
of docks and the dredging of the waterways in and about harbor
facilities, and so forth. In other words, should it be made more ex-
plicit by including this specific subject, or do you believe as a lawyer
and framer of the act that the general words do include what I have
indicated?
Commissioner ANDERSON. I am inclined to think they do. "Utili-
zation" is a broad word. Of course the principle of construction
that you refer to, inclusio unius exclusio alterius is a principle which
sometimes gets into trouble.
Mr. BARKLEY. Would not the words "other transportation facili-
ties" be broad enough to include anything necessary to transport?
Commissioner ANDERSON. I think so. I intended to draw that in
broad language.
Mr. COADY. It could not utilize and operate boats and barges with-
out piers and docks.
Commissioner ANDERSON. Quite so. That is a fact. You can not
do much with boats unless you have a place to start and take things
on and off, and if there is a mud bank or sand bar that comes down,
you have got to get it out of the way, so that anything which is a neces-
sary incident of the practical performance of the task delegated
would seem to be necessarily given under the word "utilize."
Mr. DEWALT. My thought was only in the spirit of inquiry, and
not in the spirit of criticism.
Commissioner ANDERSON. I understand.
Mr. DECKER. While you say the word "utilization" is very broad,
can the word "utilization" be any broader than the terms that it
applies to, to wit, boats, barges, tugs, and other transportation facili-
ties, and with the words "transportation facilities" preceded by the
word "other," would that not indicate others of the same class, to
wit, tugs, boats, barges, and so forth? Would not your sentence be
broader if you left out the words "boats, barges, tugs, and so forth"
and just say utilization and operation of all transportation facilities,
or else be more specific or less specific?
Commissioner ANDERSON. That is concededly the best way of han-
dling it. I suppose what lay in my mind when I framed that was
this: The Government has always done more or less dredging and
fixing up the levees, and things of that kind, taking care of what
you might call the roadway. It has never, so far as I know, except
in time of war, gone into the business of buying and operating boats,
barges, and tugs, so that taking it from the past you would more
easily assume that there was power to remove the sand bars and to
fix up the bed of the river so that boats could go into it than that
there was power to buy and operate boats, barges, and tugs.
Mr. DECKER. But here is what is in my mind. Any money, for
instance, applied on the Mississippi River, for dredging, etc., comes,
I think, rather through a specific act of Congress, and here we are
trying to give the President power to make use of these waterways.
We give him power to use all of the barges he can buy, build, or
borrow, and yet if he has to wait for one of these bills to get through
Congress to get the money to dredge the harbors and the rivers the
war might be over before we got the boats into the harbor.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
43
Commissioner ANDERSON. I shall be very glad to look that over
critically and see if there is any word which can be added which may
put it beyond doubt.
Mr. R. W. PARKER. I would like to put another question on the
same subject. The present law, I understand, prohibits a railroad
from running a boat line in connection with the railroad, whereas,
in order to carry what is needed during the war, we may have to do
just that thing. For instance, it might be advisable to take whole
trainloads of boats on car floats on the inland waters, even on the
Mississippi River. This particular section gives power to take boats
and barges and use them. It does not expressly give the power to
use them in connection with and as a part of the railroad trans-
portation, as far as I can read it, and I have wondered whether
it would not be worth while to add, on page 6, some statement that
in the operation of the railroad he might buy barges and boats and
use those also so as to make it perfectly plain that both laws are not
to be read together, and that he should not be prohibited by the old
law from using boats as a part of his transportation by rail.
Commissioner ANDERSON. It seems to me that must necessarily be
implied. It is hardly conceivable that the whole transportation sys-
tems are taken over as a unit and yet the Panama act held to be
precipitated, so to speak, in the midst of the war control, so as to
prevent the coordination of water and rail. The Panama act to
which you refer provides in substance, as I recall it, that certain
carriers shall not continue the ownership and operation of water
carriers that substantially affect competition. Some of those cases
have been tried out and some of them are still pending before the
commission. The New Haven's control of the Sound boats is still
pending and undecided.
I take it that it is a fair inference, and I speak again without the
slightest authority from the commission, that those cases will not be
decided pending the Government control. I also add to my state-
ment that there can not be the remotest doubt that under the procla-
mation, and under this proposed bill, the Federal control would unify
everything that is taken into the possession of the Government, and
that while up to the present time a substantial number of carriers,
like interurban and trolley companies, have not been taken, and inde-
pendently owned lines of steamboats have not been taken, if it be
found, as the problem is more firmly grasped, necessary or advisable,
in the interest of transportation efficiency to take in other systems,
they will be taken in. That must be so.
Mr. BARKLEY. Was not one of the chief reasons for taking over
the roads by the Government the fact that that was the only way to
nullify these prohibitions against pooling and combination and coor-
dination among competing lines?
Commissioner ANDERSON. Yes. In other words, you had a lot of
transportation facilities that we were not getting adequate use of,
and we must take these transportation facilities and use them in the
most available way, stopping all possible crosshauling, and use all
we have.
Passing then, unless there is some further question-
Mr. MONTAGUE. Before you leave that section, I will ask what is
the reason for fixing the amount, in line 21, page 4, at $500,000,000?
44
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Commissioner ANDERSON. As I stated yesterday, the Secretary will
himself explain his views on that.
Mr. MONTAGUE. I do recall now.
Commissioner ANDERSON. I did say that I would give the commit-
tee a few figures, that I have gotten from the Bureau of Statistics
as to maturities and additions, and I will come to that in a moment.
Mr. MONTAGUE. I recall that distinctly.
Commissioner ANDERSON. I would rather the Secretary would
deal with that himself. Section 7 deals with maturing obligations
primarily. It is broadly drawn so as to give power, so as to permit
the President to deal not only with ordinary maturities, but with
maturities or liabilities which ought to be met growing out of re-
organization of railroads, and in receiverships. Quite a number of
roads are in the hands of receivers now.
It provides that the carriers may, during the period of Federal
control, issue such forms of securities as the President may approve
as consistent with the public interest, and that the President may
purchase for the United States all or any part of such securities,
at a price not exceeding par, and may sell such securities whenever
in his judgment it is desirable at prices not less than the cost thereof,
using the revolving fund for the purpose of financing the undertak-
ings under this section.
The maturities, as indicated by what figures are available, are less
than I at least had supposed. Of course, the returns of the carriers,
unless examined in detail, each one of them, would not show, that is,
the summaries of the returns would not show. The Bureau of Sta-
tistics gave me figures indicating that they had ascertained only about
$360,000,000 for the calendar years 1918 and 1919. I think tl. at those
should be regarded as probably too small. I should not want to state
that there would be less than four or five hundred million dollars of
securities, or bonds and notes, falling due in the two years, but I have
a confident opinion from the statistical bureau that it will not exceed
$500,000,000.
I stated yesterday that I would give the committee some figures
relative to the amount of new capital which had been put into new
equipment during the years 1915 and 1916, the figures for 1917 not
yet being available.
The actual figures shown of money expended in new equipment,
in addition to take care of retirements, depreciation, and mainte-
nance for roads having operating revenues of $10,000,000 or more
per annum was, for the year 1915, less than $62,000,000. For the
year 1916, it was less than $117,000,000. Increasing that by a per-
centage computation to take in all roads, you get in round figures
$68,000,000 in 1915, and $131,000,000 in 1916, or $200,000,000 in the
two years.
Applying the standards, therefore, of 1915 and 1916 as possibly
applicable to 1918 and 1919, as a period of possible Federal control,
you might say that there is some basis for assuming that $100,000,000
a year would take care of additional equipment, or it might take
care of additional equipment, and that $200,000,000 would take care
of maturities.
Mr. BARKLEY. Mr. Anderson, are you referring to section 7?
Commissioner ANDERSON. I was.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
45
Mr. BARKLEY. I would like to get your idea as to the reasons that
actuated you in providing "the President may purchase these securi-
ties out of the public Treasury and sell them." I am asking that
question more for the record than perhaps for my own satisfaction,
because I have an idea, but you understand that all sorts of ques-
tions are going to be fired at this committee when the bill is on the
floor of the House, and I would like to get what was in your mind
at the time that provision was inserted.
Commissioner ANDERSON. There are several reasons that would be
controlling, it seems to me, in favor of some power of Federal financ-
ing. In the first place, the Government has and is entitled to have,
as long as it is engaged in this struggle, a monoply of the investment
market for its own securities. It was agreed at the hearing of the 15
per cent case with the representatives of the greatest carriers here,
that they ought not to offer their own securities in competition with
the Government's offerings, if the roads were now in good credit,
and if they could perhaps get money at 5 or 6 per cent, while the
Government was getting it at 4. That, in and of itself, seems to be
a controlling reason. Then it is stated that some of the carriers
are in impaired credit. Just what their credit will be under Federal
control, with the uncertainties of Federal control, no one would prob-
ably venture a prophecy, I should not at least, but it seems to me that
the Government that has taken over the control of these carriers, out
of the hands of the security holders, the theoretical hands of the se-
curity holders at any rate, for in theory stockholders elect directors,
is bound to finance them, and in order to see, at the end of the period
of Federal control, whatever it may be, that the properties are
sound and intact. In other words, keeping the financial structure is
as large a part of the undertaking of Federal control as keeping the
physical structure, in my view.
Mr. BARKLEY. I can imagine an objection that might be urged here
by somebody that will have to be answered. This section does not
give the President, I think, any power to fix the rate of interest at
which railroads may issue securities. He may either approve or re-
ject the issue of securities, but he does not have the power to fix the
rate of interest. Let us assume that some company would issue securi-
ties bearing 5 or 5 per cent interest, and then the President is
authorized to purchase that lot of securities or bonds, and we will
assume that he purchases them out of money which the Government
has borrowed from the people at the rate of 4 per cent interest, the
result being that those from whom the Government borrows the
money receive a much less rate of interest than the carrier will receive
from the Government. What answer would you make to an objection
of that sort?
·
Commissioner ANDERSON. It seems to me you are somewhat in
error as to two points. In the first place the language that the car-
riers may issue such securities as the President may approve as con-
sistent with the public interest, gives the control of all the terms of
the securities, and the rate of interest included.
Mr. BARKLEY. Do you think that would carry with it the rate of
interest also?
Commissioner ANDERSON. Absolutely.
Mr. COADY. If the rate of interest was not satisfactory, he would
not approve it.
46
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Commissioner ANDERSON. Of course. Then you come to the next
step. Suppose the Pennsylvania Railroad issues some 5 per cent
bonds and the President buys them. They go into the Treasury, and
the Government gets 5 per cent out of that carrier, so that the
Government makes 1 per cent if it borrows the money on its own
bonds at 4 per cent, and it is hardly conceivable that the power would
be so exercised that the President would purchase at par bonds pay-
ing a less rate of interest than the Government is paying to the people
that buy Government bonds. I can conceive that the Government
will make a profit out of the interest difference, but hardly that it
would ever make a loss.
Mr. DEWALT. I suppose "maturing obligations" in line 10 would
include outstanding bonds, would it not?
Commissioner ANDERSON. Yes, sir.
Mr. DEWALT. Let us conceive of this situation: A railroad has out-
standing one million dollars of bonds; a railroad is not in good
financial standing, and its bonds, therefore, in the market are below
par, say they are selling at 90. Section 7 provides that funds may be
raised for maturing obligations, to wit, these bonds, or for reorgan-
izing railroads in receiverships. The carriers then issue new obliga-
tions, to wit, new bonds for these maturing obligations, one hun--
dred million dollars; the President has the right to buy these new
bonds at par. The question no doubt will be asked in the House
"What is going to be the effect upon these maturing obligations?
Will they not rise in the market? Will the speculative tendency
be for that purpose, and will not some gentleman who is very much
against corporations say, "This is a scheme for the enhancement of
the value of these outstanding obligations?
99
""
Now I do not say it is, but how are you going to obviate that?
Is not it a natural law of the trade that when the Government stands
back of these maturing obligations, by issuing new obligations, for
purchase at par at once, that your one hundred million dollars, instead
of being worth ninety million dollars, will be worth one hundred
million dollars?
Commissioner ANDERSON. I have no doubt that one effect of this
law would be to add market value to certain kinds of depreciated
railroad securities. I do not believe that that provision, wisely
administered will put any artificial and improper value into any rail-
road securities. I believe that there are a great many railroad securi-
ties now selling for very much less than their intrinsic value, and
that this law will tend, as the President's proclamation intended,
to restore sound railroad securities to sound market values. I do not
know of any way of there being speculation, if you choose to call it
that, on the part of people who have securities now, railroad securi-
ties at less than their worth, and make money out of Government
financing, even if and I emphasize that, even if with absolutely sound
judgment that Government financing is limited to doing only the
things which are warranted by the intrinsic value of the properties
back of the securities.
That is the only answer I can make. The Government is not re-
quired, as my friend suggests, to pay par, and the Government is
not required to purchase them. The Government may purchase those
securities at the price that the President makes when the public
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
47.
interests require that the Government shall do that financing, and
that it shall not be done by the carriers themselves.
Mr. DEWALT. The reason, Mr. Anderson, that I brought out that
thought was this: Always in legislation of this kind there is a dispo-
sition from some quarters in the house to attack provisions of this
sort, and I wanted to have in my mind some concrete answer to such
objection.
Mr. ESCH. This provision says that the President may buy these
securities at prices not more than par.
Commissioner ANDERSON. Yes.
Mr. Escн. Then he did not sell them for less than he paid for
them?
Commissioner ANDERSON. No.
Mr. ESCH. Do you consider it a contingency that the Government
might not be able to sell under such conditions?
Commissioner ANDERSON. Yes; we considered the language “not
exceeding par" and we thought it was not important, but that it
might avoid some criticism and avoid somebody saying, "Why, the
President can pay any price he chooses," and we considered the other
as to whether he ought to have power to sell, even if it was lower,
and we doubted if Congress would be willing to give the power,
which might, in the hands of some people, be used improperly, and
those provisions were put in there out of deference to what we
thought would be the view of Congress as to imposing some limita-
tion on the powers which even as thus limited is still an enormous
power. In other words, the desire was to not ask for power which
did not seem to be reasonably essential for the performance of the
task undertaken by the President under his authority.
Mr. ESCH. That might lead to the fact that the Government would
hold these securities indefinitely.
Commissioner ANDERSON. It might, and it might find itself with
securities which it could sell after a 5 or even 20 per cent advance.
Mr. EscH. Yes. There is nothing to prohibit them from selling
for more than they paid.
Commissioner ANDERSON. I should expect, after financing of the
roads, it would be carried on by the Government with the intent to
make the carriers self-supporting, but not with an intent to levy a
lot of indirect taxation through carrier operation upon shippers and
passengers. The European practice in that particular, as is prob-
ably known to many of you, is quite different. Some countries,
Switzerland, at one time, and I do not know what they are doing
now, made a lot of money out of the railroads. It was nothing but
an indirect form of taxation.
Mr. WINSLOW. Mr. Anderson, you spoke of the uncertainties of
Government control of railroads. Would you mind stating what you
regard as those uncertainties?
Commissioner ANDERSON. I do not think I quite get the signifi-
cance of your question.
Mr. WINSLOW. As I remember your language back a while ago,
you referred to what might happen in respect of the uncertainties of
Federal control of the railroads.
Commissioner ANDERSON. Uncertainty of the period of Federal
control.
48
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. WINSLOW. I did not get that word.
Commissioner ANDERSON. Perhaps I did not use it, but I do not
think I used "uncertainties" in any other relation.
Mr. WINSLOW. You did not intend to leave it in that way anyhow?
Commissioner ANDERSON. I do not think so. No one can prophesy,
I take it, for the purpose of legislation how long this will last. I do
not recall that I used the word "uncertainties" or a phrase equiv-
alent thereto in any connection, except in connection with the uncer-
tainty of the period.
The CHAIRMAN. Is that all, Mr. Winslow?
Mr. WINSLOW. Yes.
The CHAIRMAN. Mr Stephens.
Mr. STEPHENS. I want to ask if in your judgment, Mr. Anderson,
the practical operation of this section would have the effect of equaliz
ing the value of railroad stocks in view of the power given the Presi-
dent to buy these stocks in the market?
Commissioner ANDERSON. I think "equalizing" would be too
strong a word to use. I think it would stabilize the securities, and
that securities would tend more nearly to approximate their intrinsic
value. Speculation would be eliminated, and in my judgment the in-
vesting public, if called upon or if given the opportunity to invest in
securities which are issued with the President's approval, would feel
more confident that they represented sound values than they now feel.
Such has been the effect in Massachusetts, for instance, of the regula-
tion of the lighting securities for a great many years. The light com-
panies' securities, the gas companies' securities have sold at a very low
rate because the gas companies up there have issued practically no
bonds. That is not a legal prohibition, it has been a practical matter.
The rates have always been adequate so that on the average, until
recent times, gas stocks in Massachusetts have sold better than at a
4 per cent rate, because there was confidence that business was sound,
and that it was being kept sound under proper regulation.
Mr. STEPHENS. Another question, Mr. Anderson. Would you con-
sider that the practical operation of this section would lead to the
uniformity of interest rates on all of the roads? For example, a road
that was in poor condition and whose stocks were below par as com-
pared with the road in good condition and whose stocks were selling
at par or above, would there be a tendency to equalize the interest
rate on the two?
Commissioner ANDERSON. It might tend to less differences in inter-
est rates, but I can not conceive that a good many roads will have, as
long as there is a possibility or probability of their coming back into
the hands of their separate corporations, equal credit. It would be
hardly conceivable that some of the roads you could mention would
be put on the credit basis of the Pennsylvania, which last March put
out $60,000,000 and got it on a basis of 4.80. That was net to the
road after they had paid the bankers and everybody else.
Mr. STEPHENS. It would depend very largely upon the faith of the
public in the continuation of the Government operation, I take it?
Commissioner ANDERSON: Yes. If the public gets an opinion hat
all these roads are going to be financed permanently through and
through by the Government that would be a power in favor of equili-
zation of rates, but if the securities are marketed on the theory that
the Government control is merely temporary, and that the securities
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
49
may ultimately rest on the individual properties under a manage-
ment which can only be guessed at, I do not think it will be anything
like an equalization of rates.
Mr. RAYBURN. I would like to ask you one question, Mr. Ander-
son. It looks like here that it might be contemplated that the Gov-
ernment would buy some of these bonds, and probably some of them
will be sold in the market. Do you look upon the term " without the
prior approval of the President for the issuance of new obligations
of a railroad," as in any way guaranteeing a return to the purchaser
on those obligations?
Commissioner ANDERSON. You are now referring to line 15 of
section 7?
Mr. RAYBURN. I am referring to the general subject of previous
approval of the President before a railroad can issue new obligations.
Commissioner ANDERSON. No, sir; I do not, taking the question
literally; but I do think, and it is an old question with us in Massa-
chusetts, that when a Government assumes the responsibility of
allowing a carrier, a public service company, to put out securities
of a kind and in a form as being consistent with public interest, that
there is some moral obligation assumed by that Government toward
the investors in that security against private mismanagement. I have
illustrated my theory by this: For instance, the Edison Electric
Light Co., which is the chief electric light company of Boston, was
permitted under the regulation of the Massachusetts Gas & Electric
Co. for many years-I do not know what it is doing now-to pay
7 per cent dividends, and to charge rates which permitted 10 per
cent dividends. I ought to say that a good deal of this stock was
issued way above par so that 10 per cent was very much less than
10 per cent upon what most of the investors got on the dividends,
and the stock was bought and sold under regulation on that theory
that 10 per cent dividends was to be paid, and under our new stock-
watering laws they put out some of that stock, fixing the market
value thereof at $215 at one time, I remember.
I have always mantained that it would be a breach of public
faith, after they have put that stock out at $215, on a 10 per cent
basis, to cut the rates so that the dividend would be only 6 or 7
per cent, and thereby wipe out a part of the $215 price which the pub-
lic tribunal fixed as the market value and yet there was no guaranty.
It is a question of sound public policy and good faith, as I regard it.
Mr. RAYBURN. The general question, though, does not cover the
question of approving the sale of a bond which is issued at $100, or
$250 or something like that. I did not presume your utilities com-
mission would say that those things were worth that much. It is a
question in my mind always, and it was a question here in 1914
when the bill was up and passed the House for the prior approval
of the Interstate Commerce Commission, before a carrier could issue
new obligations, or, in other words, our idea was then to put a veto
power somewhere, not so much an approval, but a power to veto
something that they did not think was in the public interest, and
that is what I should think would be this power conferred here,
the power to veto a proposed issue of securities if the President did
not think it was in the public interest. But I would dislike to think
that simply because of the prior approval of the President in the
40958-18-4
50
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
interest of the people, in the interest of the Government, and in the
interest of the carriers, so far as that is concerned, and that securi-
ties to an unlimited amount can not be thrusted on the market, and
that the Government by that would become guarantor for a return
upon those securities.
Commissioner ANDERSON. I quite agree with you that it is a power
to which you can not look again without a good deal of solicitude, and
yet is a power absolutely essential for this period of Government
control, and its implications, so far as the investing public is con-
cerned, if the investing public is led into the purchase of any part
of those securities, is a question which might be discussed at very
great length and which would carry us pretty far afield from the
mere question of war control.
Mr. RAYBURN. I understand. That is coming right exactly along
the line that I want to ask you. If the Government buys these
obligations, of course it is going to make the return, is it not?
Commissioner ANDERSON. It is going to get the return; yes. It is
going to charge it against the carriers and collect interest on it just
the same as the outside public would.
Mr. RAYBURN. If part are purchased by the Government and
part not purchased by the Government, is not the fellow who invests
in this thing going to say he has as much right to get his return as
the Government has?
Commissioner ANDERSON. Certainly. If the Government gets its
interest on the part of the issue that it buys, the outsider will get his.
Mr. RAYBURN. That is exactly what I am thinking about. Always
when we get into a thing like this I wonder what is going to become
of us after it is over, and that is what I have been wondering ever
since this war began. That leads to a discussion in connection with
section 13. When this war is over and we go to turn these railroads
back to their owners, which I hope we will, what are we going to
do about the securities that the Government then owns? Is the Gov-
ernment going to keep them, or sell them, or what?
Commissioner ANDERSON. You gentlemen have got to deal with
that.
Mr. RAYBURN. That is what I hope we may be able to do in this
bill.
Commissioner ANDERSON. Our view was that it was impossible to
be of any substantial assistance to Congress in its present delibera-
tions if we carried our prevision substantially beyond the stages that
we have reached here. I do not think you can think your way into
this problem. Certainly I have talked with long experienced and
competent men who have thought their way into this problem. When
the war is over, Congress has got to pass some kind of legislation
dealing with the railroad status, the carrier status that will then ob-
tain.
dealing think it is useless to try to previse now just what kind of
.legislaion you will think wise at that time.
Mr. RAYBURN. But my thought is with reference to both bonds and
the question of turning the railroads loose, is that when the question
of Government ownership comes up in this country, I think that
the people who are advocating it ought to be proponents of the legis-
lation in that instance, and that this burden should not be left upon
the people who are against Government permanent ownership and
operation of railroads to throw this thing off. Therefore, my idea
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
51.
has been that we ought to provide in this bill some definite time
after the close of the war, or depending upon the happening of some-
thing, that we would get out of this business. It is this proposition
of securities, Mr. Anderson, and the Government buying and becom-
ing a partner in this business, I think, leads also to a discussion of
when we are going to get out of this business if we are.
Commissioner ANDERSON. I have no objection, Mr. Chairman, if
it be desired, to pass right to what I have to say under section 13 in
connection with that.
The CHAIRMAN. You had better follow section by section.
Commissioner ANDERSON. I shall have a few expressions to address
to the committee on that point when we come to section 13, pointing
out how those of us that have thought into this problem, and I will
not say that any of us have thought through it, approaches the
question of continued control, as we got into it.
The CHAIRMAN. Before you leave section 7, just one question.
Would the effect of section 7 be to take from the jurisdiction of the
various State commissions who are now clothed with authority to
pass upon the issuance of railroad securities, and vested exclusively
in the President during the period of the war?
Commissioner ANDERSON. I think the answer must be "yes.'
The CHAIRMAN. I think so, too.
"2
Commissioner ANDERSON. I have not seen any escape. If the Gov-
ernment is running some railroads, it has got to run them, and while
you can use the carrier corporations for a great many purposes, as
they are being used and will continue to be used, what the Govern-
ment possesses and controls it must dominate. It may very likely
utilize, although I can not venture any prophesy on that, the assist-
ance of some of these State commissions, but I think the power must
be asserted to exist.
Mr. Escн. I think the Association of State Railroad Commission-
ers in their meeting in October adopted a resolution favoring Gov-
ernment control of the issuance of stock and bonds.
Commissioner ANDERSON. Yes.
Mr. Escн. That being their attitude, they would not resent the
exercise of power granted in this section.
Commissioner ANDERSON. I do not think so. I should not want to
go into it here, but I might as well say as that question was raised
somewhat by what Mr. Dewalt also suggested, that Governmental
regulation is a myth and almost a fraud until you regulate the issu-
ance of your securities. I never would stay on the Interstate Com-
merce Commission many years and go through such so-called regu-
lations as have been gone through the past five years. I would rather
be at something where I could accomplish something.
Mr. ESCH. This committee has twice passed a bill giving your
commission that very power.
Commissioner ANDERSON. I do not know as I could state it any
stronger than to state that it is a myth and almost a fraud until the
power is given.
Mr. DILLON. I would like to ask a question.
The CHAIRMAN. Yes.
Mr. DILLON. Under this section 7, the carrier may issue bonds,
notes, stock, and other forms of security. Assuming that the Gov-
ernment allows a bankrupt corporation to issue additional stock and
:
52
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
bonds and put them upon the market, and after so doing how is the
Government to protect itself against this watered stock? Is there
any protection for the Government if afterwards it determines to
take over the railroad as an owner? How is it to protect itself
against the watered stock when the Government has sat by and
permitted and allowed a new issue?
Commissioner ANDERSON. Mr. Chairman, that assumes that the
Government is going to sit by and permit the issuance of watered
stock, which I should not easily assume. I should expect that power
vested in the President in line 15 would be so exercised that no se-
curities could be offered which did not represent sound values.
Mr. DILLON. Then you would favor putting that provision into the
law, would you?
Commissioner ANDERSON. No; I think that power is broad enough
as it is here. I think the implication is sufficient.
Mr. DILLON. The reason I asked you that question is I think we
are entering the wedge for ownership of these railroads, and the
time therefore to protect the Government is now.
Commissioner ANDERSON. That may or may not prove to be so,
but I come right back to what I stated a moment ago. You can not
look at the power granted under section 7 without regarding it as a
great power with very many implications. You can not consider the
problem of war control as being effectively granted, so that the Gov-
ernment can do what it ought in justice to do to the general public
or to the owners of the securities outstanding with the various car-
riers, or deal with the future, unless power to finance pending war
control is given.
The CHAIRMAN. If there are no more questions you can proceed
with section 8, Mr. Anderson.
Commissioner ANDERSON. Section 8, I think, is very simple. It
says:
That the President may execute any of the powers herein and heretofore
granted him with relation to Federal control through such agencies as he may
determine and may fix the reasonable compensation for the performance of
services in connection therewith, and may utilize the personnel and facilities
of the Interstate Commerce Commission, and call upon members of such com-
mission, or any of its employees or employees of any department of the Govern-
ment for such services as he may deem expedient. No such Federal official or
employee shall receive any additional compensation for such services.
That is a general enabling power.
Section 9 provides with relation to the workmen's compensation
act, and we have redrafted that to make it a little broader than it
now is. It provides, as we have redrafted it, that while carriers are
under Federal control, that the President may determine whether
and on what terms and conditions, giving due consideration to
remedies available to employees under State compensation laws or
otherwise, that the Federal workmen's compensation act of Septem-
ber 7, 1916, shall be applicable to carrier employees.
That is a question of a good deal of importance, but I do not want
to make any lengthy address concerning it. There is a general Fed-
eral workmen's compensation law, passed in 1916. The law relative
to railway accidents is now in a state of a good deal of confusion. It
seems to us that the proper way to deal with it in this bill is to grant
power to the President to make the outstanding law applicable to
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
53
Federal employees available to carrier employees if after careful
and discriminating study of it, and with the assistance of those that
have been through that field of inquiry, it be found desireable.
Some method just and adequate to take care of the victims of rail-
way accidents must be worked out. There is now no adequate or
approximately uniform method. We believe that this is a grant
of power which will enable that difficult subject to be adequately
and justly dealt with.
Mr. Escн. Mr. Anderson, under the accident reports, there are
many hundred of railway employees killed and many thousands
injured yearly. You are to apply the compensation of September
7, 1916, to them. Under that compensation act they would be en-
titled to medical attendance, supplies, hospital service, and I think
funeral benefits. It is your idea that all of those benefits should
be applicable to injured railroad employees and the heirs of those
that have been killed?
Commissioner ANDERSON. This is not a mandate. It is a grant
of power. It authorizes the President. It does not require him to
extend that act to carrier employees on whatever terms and condi-
tions shall be found equitable, having due regard to other remedies
to which they may have recourse.
It is true that there were 2,600 or 2,700 deaths on the railroads in
the year 1916, and 178,000 accidents reported, and that the acci-
dents and deaths_reported are probably under rather than over
the actual facts. It is true that it is a mater of very serious import
to the employees and to the finances. We do not feel prepared at
the present time to make any specific all-inclusive and all-exclusive
recommendation to this committee as to what should be done.
limit ourselves by saying that that matter was dealt with as to Federal
employees in September, 1916, and that it is desirable that the power
be granted to the Federal control to extend that act on such terms
and conditions, having reference to other outstanding or available
remedies, as may be found desirable.
We
Mr. BARKLEY. Do you think, Mr. Anderson, that the President
would have the power if he extended this act of railway employees,
to modify its application in any particular, or would he have to
extend it precisely as it applies to Government employees?
Commissioner ANDERSON. I think that the language, "on what
terms and conditions," is a very broad power.
Mr. DECKER. Have we a right to delegate that legislative function
to anybody, even the President, if we wanted to, Mr. Anderson?
Commissioner ANDERSON. I should think so.
Mr. DECKER. In other words, have we a right to pass a bill saying
how much a man shall get if he loses his leg, or how much his widow
shall get if he loses his life, and fix it so he is bound by it?
Commissioner ANDERSON. Yes, I think so, and the State laws prac-
tically come to the same thing.
Mr. DECKER. Do they not set limitations in there as to how much
or how little a man may get?
Commissioner ANDERSON. Oh, yes.
Mr. DECKER. Under that substitute that you suggest there, do you
not give the President the right to modify that? I would be as will-
ing to leave it to him as to anybody, but can we shirk that responsi-
bility ourselves if we wanted to?:
*
54.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Commissioner ANDERSON. Of course there are limits to the power
of delegation of legislation. I do not think we have passed beyond
them here. I had occasion a few years ago to consider and write some
theses on the question of the constitutionality of compensation acts.
It has gone a little stale in my mind. As a general proposition, most
of the courts have sustained it. The New York court held it uncon-
stitutional at one time, and then under a slightly different act they
made a different ruling. Some people think that they reversed their
position in the later decision.
Mr. DECKER. Let me ask you another question. Just to finish the
other question that I had asked. Have you thought of whether it
might not be better to leave the railroad men of the country to their
present remedies which, in many cases, are pretty valuable to them,
rather than to undertake at this time, without the fullest considera-
tion, to change their rights and remedies by giving the President the
power to extend the provisions of another act, the efficacy of which
when applied to railroads has never been considered by this com-
mittee, or by Congress? In other words what injustice would be done
for the President just to leave the railroad employees to their present
rights and remedies until we can at least go into that far-reaching
subject in detail?
حر
Commissioner ANDERSON. Because the present rights and remedies.
of the railroad employees are, as I am informed, in a very highly
chaotic and very unsatisfactory state. You will find a decision of the
Supreme Court of the United States, made, I think, last June, in
which the court split, as I remember it, five to four, on the question
of the law now applicable to railroad employees. And it is in a
very, very, chaotic state. I have undertaken in the brief time that
I have been at this to get some illumination. I have a valuable
memorandum here, prepared in haste, by the chairman of the
Federal Workmen's Compensation Committee, and we are working
with him to try to see what ought to be done. I must limit myself
by saying that up to the present stage I am unwilling to go further
than to say that I think the power should be granted to the Presi-
dent to extend that, after such investigation, and it may prove to be
an investigation of several weeks of study by those who are now
best advised on that, and after such study as may be found de-
sirable. That something ought to be done, I am convinced. Just
what ought to be done, I do not know.
Mr. DECKER. You understand my position, and I think the position
probably of most of the Members of Congress would not be so averse
to a compensation law, but I would have great doubts on the spur of
the moment whether that law that we passed for Federal employees,
like those in the civil service, and so forth, would be adequate or
necessary or wise to apply to railroads.
Commissioner ANDERSON. I should have doubt enough so I should
certainly want to hear the parties in interest and people who are
better advised on it than I am before I ruled on it.
Mr. DECKER. With the profoundest respect for the President, I do
not know whether we would be justified in putting that burden on
that, just from the standpoint of time.
Commissioner ANDERSON. It has to be investigated, of course, by
somebody else, but our view was that this legislation ought, in the
public interest, to be passed as soon as possible. I think everybody
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
55
will agree to that. It is very important in its effect on the general
public interest, and particularly upon the security markets. Hence
we said when it comes to this question of industrial accidents, it is
clear that the present status is highly undesirable. How can we
deal with it? We are not prepared to say that the workmen's com-
pensation act ought to apply. The most we could dare to say now
is that the President should have the authority to make it apply on
such terms and conditions, having regard to other available remedies,
as may be found desirable.
Mr. Escн. Mr. Anderson, under the compensation act of Septem-.
ber 7, 1916, the burden is put on the Federal Treasury. Is it your
plan that the $1,000,000 necessary to make compensation to railroad
employees should be a charge on the Federal Treasury or should be
a charge on the carriers?
Commissioner ANDERSON. I think the railroads should be operated
under Federal control so as to be entirely self-supporting, and that
the industrial accidents is as much a part of operating cost as wages.
Mr. Escн. Then you differentiate between the two?
Commissioner ANDERSON. Yes.
Mr. Escн. Under the workmen's compensation law, the Federal
Government pays. Under your suggestion, you would put that
charge upon the carriers?
Commissioner ANDERSON. Yes; but it would not follow that it
would come out of the Treasury because the compensation law was
made available.
Mr. EscH. Your idea is that the Federal compensation law would
be used as a basis by the President in fixing really a compensation
law for the railroad employees?
Commissioner ANDERSON. Yes. And my idea also is that as à
matter of accounting it should be charged as a part of operating
expense of the various carriers.
Mr. STEPHENS. In effect, then, Mr. Anderson, the President would
fix the compensation; that is, he would take into consideration the
laws as they now exist, but under this act he would have the power
to fix the compensation independently of legislation.
Commissioner ANDERSON. He could not certainly go beyond the
limits set by the act of September 17, 1916. If it should be found
that the carriers and employees in a certain State had a State law
which was reasonable and just, approximately like that of the Federal,
it might be quite conceivable that the injured employee should be
required to elect as to whether he should seek his remedy under the
State or under the Federal law. He should not be given a duplicate
remedy.
Mr. STEPHENS. Then the President could not make rules and regu-
lations, or create a method of compensating of these people that
would exceed the present existing laws?
Commissioner ANDERSON. I do not think so, yet, as this is passed in
that form.
Mr. DEWALT. I think, Mr. Anderson, the difficulty possibly is one
more of ideal than it is of practical solution. Under the State laws
with regard to compensation the injured man now has the right to
select his remedy. He has the right to avail himself of the compen-
sation law, or he has the right to sue and recover his verdict, and
almost universally the records will show that the injured party has
56
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
accepted the compensation law and the provisions thereof, so here
this, I think, might be cured by saying that the railway employee
should have the right of election as to whether he would take the
State law or whether he would take the Federal compensation law.
Commissioner ANDERSON. I should not quite dare to draw it in
that form and put it into this bill.
Mr. DEWALT. That general thought, I mean.
Mr. COOPER. May I ask a question? While touching on the
employees of railroads, I do not think that is covered in this bill.
We have now our safety appliance laws, the hours of service law,
and this has been asked: "Has the Director General of Railways the
power to set aside those laws?"
Commissioner ANDERSON. Under the present power?
Mr. COOPER. Yes.
Commissioner ANDERSON. The safety appliance law?
Mr. COOPER. Yes, and the hours of service law, and who is going
to enforce these laws?
Commissioner ANDERSON. The laws are being forced precisely as
hitherto. As a matter of fact, under the proclamation it is provided
in substance that until and unless otherwise ordered they shall con-
tinue as hitherto, and as the very next section of this act here, sec-
tion 11, continues the same status. Whether or not under the war
powers the hours of service law could be set aside, I should answer
that question in the affirmative. It could be. It would be inconceiv-
able, I take it, to anybody, if the Government were removing troops
to repel an invasion that men could quit on the eight hour law.
Mr. COOPER. May I ask a further question? Supposing now that
the inspector of the Interstate Commerce Commission finds, since the
Government has taken over the railroads, a violation of the safety
appliance law. Who will they prosecute?
Commissioner ANDERSON. The carriers, the same as they are now,
and you will find that referred to section 11. There is language in
the proclamation which reserves the right.
Something was said about the compensation act. I do not want
to spend time unless you wish on that.
The CHAIRMAN. Just a moment, Mr. Anderson. It is now nearly 12
o'clock. Would you prefer to go on and complete your statement
now?
Commissioner ANDERSON. I am at the service of the committee.
I had expected, and I may say hoped to complete, but I am here to
help out this bill, and if the fact that I have studied it somewhat
makes it desirable for you to have me here longer, I am at your
service.
(Whereupon, at 12 o'clock noon, a recess was taken until 2 p. m.)
AFTER RECESS.
1
STATEMENT OF COMMISSIONER GEORGE W. ANDERSON-Resumed.
Mr. DOREMUS (presiding). You may proceed, Commissioner An-
derson.
Commissioner ANDERSON. Referring for a moment to the work-
men's compensation status, if the committee will look at the case
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
57.
of the New York Central Railroad v. Winfield (244 U. S., 147),
majority and minority opinions, you will find the latest authorita-
tive description of the remedies now open to carrier employees.
Mr. MONTAGUE. What connection has that?
Commissioner ANDERSON. In connection with remedies open to
railroad employees.
Referring now, briefly to section 10, which is a precautionary sec-
tion, put in to make certain that nothing herein contained shall be
construed as "modifying or restricting the powers heretofore con-
ferred upon the President to take possession and assume control of
any or all systems of transportation." We had in mind in drafting
that that at the time of this expected legislation the President would
be in possession of only a part of the systems of transportation, and
that it was desirable to keep in existence the present power to take
such other systems, as shall be found necessary to supplement or
make more effective what had already been taken over. There is a
general grant of power in the last few lines, speaking for themselves
as plainly as any elaboration could speak.
Mr. ESCH. I notice you use the phrase "systems of transportation,”
as you used it, I think, in the first section. Now, where you have
taken over all the carriers, including independent lines, some of them
comparatively small, would such a small line be considered as a sys-
tem of transportation under the language that you used?
Commissioner ANDERSON. It is not quite accurate to say that "we
have taken over all the carriers." It falls very short of that. The
language of the statute of August, 1916, is "systems of transportation
or any part thereof," and we naturally in drafting the
Mr. ESCH. You followed the same language?
Commissioner ANDERSON. Yes.
Mr. MONTAGUE. You mean the language that is the authorization
of the proclamation employs the word "systems"?
Commissioner ANDERSON. Systems. The statute of August, 1916,
provides that—
The President in time of war is empowered, through the Secretary of War,
to take possession and assume control of any system or systems of transporta-
tion, or any part thereof, and to utilize the same.
And so on. That is where we got that language originally, and
naturally the proclamation followed the act, which was the main
basis of the proclamation, and this legislation naturally follows on as
being supplementary to the legislation of August, 1916, under which
the action has now been taken.
Section 11 is a precautionary section, something like section 10,
although for a different purpose, and should be construed by the
legislative mind in connection with a paragraph in the proclamation
to which I referred this morning, in answering the question of one
member of the committee-I forget for the moment who asked it.
The proclamation contains this language:
Until and except so far as said director shall from time to time otherwise by
general or special orders determine, such systems of transportation shall remain
subject to all existing statutes and orders of the Interstate Commerce Commis-
sion and to all statues and orders of regulating commissions of the various
States in which said systems or any part thereof may be situated. But any
orders, general or special, hereafter made by said director shall have paramount
authority and be obeyed as such.
58
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
The whole movement of the Federal Government into this great
field has been upon the theory that it should be, so far as possible,
evolutionary and not revolutionary; keep all that there is in the way
of existing personnel, machinery, and established practices in full
operation, except so far as it may be found necessary and desirable
to change in order that the Federal control may be made effective
for war and national purposes.
Section 11 carries out the same general theory and provides that
the carriers—
Shall, in so far as is not inconsistent therewith-
That is, Federal control-
or with the provisions of this act or any other act applicable to such Federal
control, or with any order of the President, be subject to all laws and liabilities
as common carriers; and suits may be brought by and against such carriers and
judgments rendered as now provided by law.
It keeps in existence the whole body of established law and prac-
tices, Federal and State; prevents no party having an action from
pursuing that action to judgment; interrupts not at all the processes
of the courts, until you come to the proviso:
Provided, That, except with the written assent of the President, no attach-
ment shall be levied by mesne process or on execution on or against any of the
property used by any such carrier in the performance of its duties as a common
carrier.
There you have the ordinary provision in case of a receivership.
You can not allow receivership property to be interfered with by at-
tachment or on execution. Indeed, there has been an increasing tend-
ency in the attachment laws of some of the States to prevent carrier
property from being attached on the ground that some other remedy
should be sought, because that was so injurious to the general public
interests; that has been so in Massachusetts, at any rate. Some one
said to me the other day-it was the Secretary himself-describing
an episode in his early practice, in which they attached the engine
which was about to haul out the mail train and chained it to the track.
Obviously things of that kind should be prohibited. But section 11,
we think, is a wise caveat against any disturbance of existing law or
existing practices that does not fall plainly outside the letter of any
existing order or statute or, by necessary implication, outside an order
or statute growing out of the Federal control, so confusion may be
avoided.
Mr. DEWALT. Conceding there is the right of suit against the prop-
erty of a railroad, conceding also that the Federal Government oper-
ates the railroad, suppose a passenger on the Pennsylvania Railroad
meets with an accident and is injured. The mere fact of his injury,
he having paid his fare, the presumption arises as to damages, and he
sues the Pennsylvania Railroad Co. Do you think, under the pro-
visions of this act and of this section that the solicitor of the Pennsyl-
vania Railroad could interpose as a defense and say: "It is true that
the suit is against the Pennsylvania Railroad for proper service, but the
Pennsylvania Railroad Co. was not operating the road, the Director
General, Mr. McAdoo, is operating the road and we were only the
servants and employees of the Federal Government?" Query, Would
that be legally effective? Second, that John Jones, being thus injured,
effects a compromise with the Pennsylvania Railroad Co., by which
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
59
the solicitor of the Pennsylvania Railroad Co. says, "We are willing
to pay $10,000 damages," and John Jones is willing to accept $10,000.
Will that be effective as against the Federal Government, or can the
Pennsylvania Railroad say, "Mr. McAdoo has charge of that en-
tirely"? Confining ourselves to the main inquiry, Would it be a
good defense for the railroad company to say, "We are not respon-
sible; you have not sued the right parties"; and, secondly, if a com-
promise is effected, is it a binding compromise upon the Federal
Government?
Commissioner ANDERSON. My answer to the first question is, no;
you can not impose the defense that the Pennsylvania Railroad is not
in operation of that transportation system. My answer to the second
question is that settlements made for personal injuries or for any other
claim arising in the ordinary course against the carrier, in good faith
and with reasonable judgment, are valid and binding. Of course, if
there should be a settlement made and fraud practiced upon the Gov-
ernment
Mr. DEWALT. It would vitiate the whole thing.
Commissioner ANDERSON. It would vitiate the whole thing. But as
long as the Federal Government leaves the existing personnel and
corporate machinery in the operation and control of these roads and
as long as the President's proclamation under the statute which you
enacted in August, 1916, remains the mandate, remains the declara-
tion of the exercise of that power, you can go ahead with suits, you
can go ahead with everything except attachments and levy execution
on the property necessary to be used.
Mr. DEWALT. Let me interrupt you again. You say there would
be no doubt about the subject. You will pardon me for saying there
might be some doubt in my mind, and therefore I want to relieve it.
Commissioner ANDERSON. Yes.
Mr. DEWALT. Would that doubt be cured by this provision in this
section, stating that in this suit to be brought against the Pennsyl-
vania Railroad Co., in the instance named, that the Government had
a right to intervene as a party defendant, if it shall choose to inter-
vene, and if it did not intervene then judgment obtained against the
Pennsylvania Railroad should be binding upon the Federal Govern-
ment?
Commissioner ANDERSON. It does not occur to me, sir, that it is at
all necessary, for I have no doubt that the Director General has power
to throw the solicitor of the Pennsylvania Railroad out of that office
and send down his own personal counsel to take care of that litigation
for settlement, so that the Government is potentially an intervener in
every piece of litigation now pending, and I do not think there is any
additional power necessary.
Mr. MONTAGUE. Do I understand you to intimate that the injured
person could not enforce a judgment to recover in the manner such
as my colleague, Mr. Dewalt, describes, by execution and levy upon
any of the physical property?
Commissioner ANDERSON. The provision at the end of section 11
is that-
Except with the written assent of the President no attachment shall be levied
by mesne process or on execution on or against any of the property used by any
such carrier in the performance of its duties as a common carrier.
A
60
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
·
Levy could be had upon property which would not interfere with
the performance of its duty.
Mr. MONTAGUE. Levy could not be made, for instance, on a loco-
motive?
Commissioner ANDERSON. Oh, no; levy could not be made upon a
locomotive; but, of course, in ninety-nine and a fraction per cent of
those cases that business will proceed precisely as hitherto. The
carriers will be entirely solvent, and executions or judgment will
probably be paid without taking out an execution, just as a bunch of
bills, and the average litigant will not know any more about the Fed-
eral control than you know when you pass over the rails of a railroad
which is in the hands of a receiver. That is what will happen. The
courts will be running, litigation going on, and everybody doing
precisely as they did before, so far as that entire field is concerned, ex-
cept where it is necessary for Federal control, which is now struggling
desperately to get new routings and get cars moved and to take such
possession of the congested places as will result in relief to the
country. The rest of the field remains undisturbed and would re-
main undisturbed under the statute.
Section 12 is simple and speaks for itself. It provides that viola-
tions of this act or of the other act shall be punishable as misde-
meanors, by fines and imprisonment, or both, and that the Depart-
ment of Justice shall have the ordinary jurisdiction. It is what we
might call an ordinary penalty statute, which you generally put into
a law of this sort or any sort, where penalties are applicable.
It is also provided, on page 9, that—
For the taking or conversion to his own use or the embezzlement of money or
property derived from or used in connection with the possession, use, or opera-
tion of said railroads or transportation systems, the criminal statutes of the
United States, as well as the criminal statutes of the various States where appli-
cable, shall apply to all officers, agents, and employees engaged in said railroad
and transportation services, while the same is under Federal control, to the
same extent as to persons employed in the regular service of the United States.
That is put in upon the theory that the exact status of the carriers'
money is not now a determined question, but that so far as crimes
and embezzlements are concerned, you plainly have power to say that
there shall be liability for crimes against railroads as though they
were dealing with Government money. We can see no possible ob-
jection to that, and many reasons why it should be so enacted.
Mr. PARKER. Might I ask, is there any precedent for enforcing a
criminal statute of the State in a United States court? I see the
prosecutions for violations of this act or of any order entered here-
under shall be in the district courts of the United States." I do not
know whether that applies to indictments under the State statutes.
Commissioner ANDERSON. I do not think that is what it means.
That is simply an exclusion; it simply says that the criminal statutes
of the various States shall not be held inapplicable.
Mr. PARKER. Yes; that is right.
Commissioner ANDERSON. You have this instance: You take steal-
ings from carriers in interstate commerce, and it is proper to prose-
cute in the State courts, and yet at the same time the United States
has jurisdiction. In Massachusetts I have had the curious situation,
where property was being stolen from interstate express companies,
and it was thought that the Massachusetts authorities were not as
:
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
61
active as they should have been in running down the thieves, that
they used to apply to the United States courts and we would take
those cases up and prosecute them.
""
Mr. PARKER. Understand, mine was a question of language. Would
there be any objection to taking that, beginning with "prosecutions
and ending with "said courts," and inserting after the word "offense,"
on the first line, page 9, so that it would not seem to apply to the
State courts.
Commissioner ANDERSON. Then, you are in trouble with what you
have in lines 4 and 5, "criminal statutes of the United States, as well
as the criminal statutes of the various States."
Mr. PARKER. But I think the fact that prosecutions were to be had
in the district courts after the provisions for such prosecutions, after
the word "offense" in the first line, page 9.
Commissioner ANDERSON. It would strike me, off-hand, that if
you do that you would leave a question as to the criminal statutes
of the United States in lines 4 and 5.
Mr. DECKER. The way it is drawn would it not leave the inference
or the possibility that it might mean all criminal statutes of the
States applying to railroads in this act.
Commissioner ANDERSON. I do not think that could be done. I do
not think my opinion is entitled to great weight on it, but that is my
off-hand impression. I did not suppose you could, by enactment,
make the criminal laws of the States your own. It would be legisla-
tion by reference. We will look that over again and see if there is
anything in that page 9 which can be improved as a matter of order
or statement.
I come now to section 13.
Mr. Escн. Just before you come to that, that section you just read,
12, would make collective bargaining criminal.
Commissioner ANDERSON. I do not understand that.
Mr. ESCH. Organized labor, for instance, to secure increase of
wage through a strike without subjecting the membership to the
penalty provisions.
Commissioner ANDERSON. You mean, would that be a combination
condemned by the Sherman Act, and therefore punishable under this
section?
Mr. ESCH. Yes.
Commissioner ANDERSON. I think not. I do not understand that a
labor union has ever, for about a hundred years at any rate, been held
to be a criminal conspiracy either at common law or within the mean-
ing of the Sherman Act or any other act that we have; although it
is a combination in restraint of trade it has been a combination
which has been regarded by the courts as a reasonable restraint of
trade for many years. So I do not understand it is capable of such
omnibus construction.
Mr. DOREMUS. My recollection may be a little hazy, but would
these combinations among workmen and farmers which did not con-
stitute a violation of a State law still constitute a violation of the
Sherman Act?
Commissioner ANDERSON. The exception in the Clayton Act is
perhaps-is, and I emphasize "perhaps "-those sections in the
Clayton Act which deal with injunctions and not merely to the
criminal provisions.
62
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
:
Section 13 provides-
That the Federal control of transportation systems herein and heretofore
provided for shall continue for and during the period of the war and until
Congress shall thereafter order otherwise.
I take it that there is discussion of the words "and until Congress
shall thereafter order otherwise."
It is manifest when you come to face the situation contemplated
in the act of August, 1916, and now at least in part existing under
the acts of the President under that order, that you have created a
radically changed status, even giving full force to what I said a few
moments ago, that the Federal control had been carried out as far
as possible as an evolutionary process and not as a revolutionary
process, preserving everything which can be preserved in the way of
corporate machinery, statutes, orders, Federal and State. Neverthe-
less, to take 250,000 miles of railroad, with some water lines, with a
capitalization running from fifteen to seventeen billions, with 600,000
security holders (although there may be some duplications in that
number; we can not say), with an annual wage roll of a billion and
a half, with 1,700,000 employees, is to take over the largest single
business enterprise that was ever taken over at any one time by
anything on the face of the earth, much larger than when the United
States took over the Philippines, and it is a much larger enterprise,
although within the country, than most annexations that have taken
place as the result of war in the amount of property involved.
That can not be carried on for the war purposes, to assist in the
mobilization of the great resources of this country in this frightful
struggle in which we are now engaged, without disregarding the sepa-
rate, competitive rights of the various groups of security holders con-
stituting the separate corporations and carriers, for a corporation,
broadly speaking, is nothing but a business machine, belonging to an
identified group of security holders. The whole theory upon which
separate railroad corporations exist in this country was that of com-
petition. They were made subject, wisely or unwisely, to the Sherman
Act, and, curiously enough, the Supreme Court has seemed to have
had much less difficulty in applying the Sherman Act to the railroads
than it has to a lot of industrial corporations, the existence of which
was one main cause of the enactment of the Sherman Act. The inter-
state-commerce statute prohibits pooling in section 6. In the Pan-
ama act an attempt was made to cut off railroad-controlled water
lines which were in any way competitive. Under what we call
"fourth-section cases," down at the commission, the existence of
water competition is regarded as a dissimilar condition within the
meaning of the statute, limiting the long-and-short-haul clause. So
that the administration of rail carriage has been pitted against
water carriers, resulting in many cases, as I am told-this is not
an authoritative statement; I do not know this-but I am told that
in many cases rail competition has gone to the extent of destroy-
ing water competition, making our rivers, which were formerly com-
merce bearing, barren of commerce. All that is changed, and changed
as a matter of war and national necessity, and being changed every
hour under this Federal control just as fast as it can be done in
orderly, progressive, efficient fashion. So that every piece of trans-
portation machinery, transportation facilities, is being utilized for
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
63
•
war and national needs, without any regard to whether the routing
of freight or passengers over one line or another line would result
under the bookkeeping which is still being kept up, in profits or
losses to any separate carrier. All that ought to be done just as you
would use the streets of the city, if you had an inauguration crowd
here and wanted to move it from one side of the city to another
you would route people on one street or another without any regard
to which particular street was most popular; you want to get the
people from one point to another, utilizing everything which is avail-
able for that purpose. The more you think about it, the more you
will see that you are creating a status which must be dealt with in
any aspect of the problem, whether you believe in national ownership
through and through, whether you believe in modified national owner-
ship, whether you believe in a different kind of regulation from that
which we have had, or whether you believe that the carriers, as soon
as possible, should take back under the existing general code the opera-
tion and control of their different properties.
I have not talked with a railroad lawyer-and I have tried to get
what illumination I could-who has not said that the status created
is going to require fair, just, careful appreciation at the time or after
the time when the war necessity for this continued control is ended.
I know of only one opinion on that. I have had from no one on the
railroad end, or anywhere else, any opinion that it was within the
competency of the human intelligence now to previse what ought to
be done when this war-control necessity ceases.
Mr. MONTAGUE. Commissioner Anderson, the scheme of this control
rests upon the necessities of war.
Commissioner ANDERSON. Yes.
Mr. MONTAGUE. When those necessities are removed, what is the
difficulty of marking the period of time in which the regulation shall
cease, unless Congress revives and continues the regulation?
Commissioner ANDERSON. I was just coming to that.
Mr. MONTAGUE. In other words, is it not best for us to make the
period when it shall stop, and then permit Congress to start it again,
if it sees fit? For instance, to put it concretely, that the regulation
shall continue for a period of, say, the war and for one year or two
years thereafter, unless Congress shall otherwise determine?
Commissioner ANDERSON. We had it so drawn once, and then I left
the time blank.
Mr. MONTAGUE. I am just roughly giving you this.
Commissioner ANDERSON. Let me pass for a moment. That is ex-
actly the question I was coming to.
I assume, then, that there is universal agreement that the signing
of a treaty of peace ought not to end the Federal control; that there
ought not to be a chance, as I put it, of some corporation bringing
habeas corpus against the President after the signing of the treaty
of peace to get back its property. It might be all right for the
Pennsylvania Railroad Co. or some other company that is in strong
financial condition, and possibly for some company which may have
taken over during the time of Federal control an increased volume
of traffic from which it might expect to get a larger increment of
income out of in the future, when it would raise havoc with a lot of
the weaker companies, and those whose conditions of traffic may be
64
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
!
radically changed, and possibly for the worse, if you take simply
the amount of traffic and the amount of income accruing from that
traffic over those particular lines. Nobody knows how you are going
to use these facilities in the minutia of their use. One road may be-
come a nonpayer on the bookkeeping end of it and ought to become
a nonpayer. Another road may become much more widely and ex-
tensively used, and therefore, taking the bookkeeping accounts and
testing it by that rather artificial test, a more profitable property.
That being so, it is perfectly clear that the Congress must take the
responsibility of dealing with the newly created status, and that
there ought to be a reasonable time to do that. Conceivably, you
may have gone away next summer.
Mr. MONTAGUE. Do you provide any reasonable time within which
Congress should do that?
Commissioner ANDERSON. There is no time limit put. We will
assume the treaty of peace is concluded the middle of July, one week
after you have adjourned, or something of that kind, or a month.
Six months would not be reasonable-a year might be a better time.
But the reasons why we did not undertake to set the time limit were
mainly two. In the first place, no Congress binds any succeeding
Congress, and it is clear that the Congress must take the responsi-
bility of dealing with the status. In the second place, it was thought
that if there should happen to be a Congress divided in opinion, faced
by an actual time limit, you would create a speculative situation with
relation to a lot of railroad securities, and particularly with relation
to the fate of some of the weaker companies, that would be in its
actual results no less than wicked, as applied to some of the less for-
tunate holders of railroad securities.
Mr. MONTAGUE. That would apply at any time when resumption
of ownership management occurs?
Commissioner ANDERSON. To a much less degree. If the existing
status continues until Congress otherwise determines, then every
person, every corporation whose interests are possibly to be affected
adversely and unfairly by any proposed measure of resumption of
private control must have their day before this committee or some
committee that deals with that question, and the matter is fully
heard. But if you have a stop order, and the Congress, perhaps more
or less affected by partisan considerations-nobody knows-perhaps
a division between Congress and the President, a chaos is to take
place on a day named, unless Congress acts and extends the time.
Mr. MONTAGUE. Suppose you put it one, two, or three years, and
then Congress acts within that time?
Commissioner ANDERSON. If Congress does act?
Mr. MONTAGUE. Congress assumed the initiative.
Commissioner ANDERSON. Suppose it had three years and acted
within one year, I do not think there would be any evil. But suppose
it be one year, and you got into a legislative discussion-I won't say
quarrel "--but where there were marked differences of economic
theory or public policy and perhaps of partisanship?
66
Mr. MONTAGUE. If you do not put in some time, have you not held
out to the people of this country assurance that you are going to con-
tinue to Government ownership; will it not draw that inference?
Commissioner ANDERSON. No, sir.
·
1
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
65
Mr. MONTAGUE. Do you not think if Congress fix no time at which
this shall cease will not be an educational factor in forming the
public opinion to the conclusion that this regulation is to continue
indefinitely and Government ownership is intended to result?
Commissioner ANDERSON. I do not think so. I do not think it points
either one way or the other; I do not think it ought to. Of course, the
fact that the Government has had in time of war to take over the
transportation facilities, in order to meet the war and national needs,
those who are in favor of national ownership will make, and are
entitled to make, a point of it. But the fact that you do not under-
take to state in your section 13 a time limit within which the war
control shall cease, but leave it to Congress, as it must be left to
Congress, without undertaking to put a stop watch on Congress, is
to make an absolutely neutral provision, so far as this main issue of
national ownership is concerned.
Mr. MONTAGUE. Do you think-I do not mean to be impolite--it is
a very candid provision?
Commissioner ANDERSON. Yes; I do. I think it is entirely candid.
Mr. SAUNDERS. Would it not be otherwise than candid to set a
certain date for it to stop?
Commissioner ANDERSON. It did not strike me so at first. I do
not think the word "candid" has any application to either one of
them. I first, when I came to that thing, woke up to the problem
of what is going to happen.
Mr. MONTAGUE. I withdraw the word "candid.".
Commissioner ANDERSON. I took no offense at it.
Mr. MONTAGUE. I know you did not, but I withdraw the word.
Commissioner ANDERSON. I do not think there is anything about
that which has any slant one way or the other. You have to face
these facts, and the intent of those of us who have been drawing this
act has been to face them dispassionately and without giving expres-
sion to any pet theories of our own. These are war times. It is a
time to subordinate, to suppress personal views on minor policy to the
great business of mobilizing the men and resources of this country in
this most frightful struggle to which the American people were ever
engaged; and the bill has been drawn with that spirit, if not with
that result.
Mr. RAYBURN. You say, or intended at least, that the thought that
if no time were set, that conditions would be more settled with ref-
erence to this than if a time were set. I do not just understand your
reasoning on that. If we set a time limit here, people will be put on
notice then. You may say that before this law is changed no time
limit was set; people would have their day in court; but you can not
tell what time some Congress will immediately pass an act termi-
nating this thing; and it seems to me that that would create much
more unsettled conditions than it would if you would have some time
definitely fixed within which this is to be done.
Commissioner ANDERSON. I do not think it will operate in that
fashion.
Mr. RAYBURN. If the time limit is fixed, that does not prevent
Congress acting suddenly, if it sees fit?
Commissioner ANDERSON. No, sir. It might be an evenly divided
Congress, either on partisan lines or on policy lines or discord be-
40958-18 5
66.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
tween Congress and the President. It puts a premium on discord
for speculative interests that would like to see the railroad-security
market thrown into speculative chaos; that is what it does. Let me
illustrate that a minute: Suppose that you had a provision that it
should last a year after the war, after the treaty of peace. Suppose
the treaty of peace were signed on July 1 next, and then you have
another year. You come back here next December and you begin on
this problem, and Congress is closely divided on party lines and on
questions of economic policy; you begin, but you do not generally
do much until January. Then you have really got six months in
which to find and determine the policy on which these carriers shall
be taken out of the Federal control and put back into the hands of
their groups of security holders. If you do not agree there is chaos
on July 1, 1919, is there not? The agreement is the condition prece-
dent to order. That is your situation. Now, order prevails under
Federal control until Congress substitutes some other order; that is
the situation I want to avoid, i. e., the condition of speculative chaos.
Mr. RAYBURN. That is, it seems to me, just exactly like the other
situation you want to avoid. If we put in here 12 months after this
law is repealed, there is nothing indefinite about that.
Commissioner ANDERSON. There is nothing indefinite about that,
but there is chaos accrues from it.
Mr. RAYBURN. Why?
Commissioner ANDERSON. If you do not do something within that
period of a year, which will take care of the conditions which arise
when you let go.
Mr. PARKER. Would not the railroads agree with each other if
they knew this was going to come to an end by which there would
be no chaos?
Commissioner ANDERSON. You want to bear in mind that the rail-
roads belong—the oldest and more prosperous of them-to women,
to charity institutions, to all kinds of educational institutions-the
stock is widespread; that the people have absolutely no voice in their
management; that they do not vote at all or else vote haphazard for
the old board of directors "the selective draft," so to speak-for
boards of directors in the older, best established corporations of this
kind simply does not work. You get sometimes very highly reputa-
ble, responsible, and desirable boards of directors, and then again
you get a board of directors who do just what the New Haven board
of directors did. There was the New Haven and the Boston & Maine
in the hands of guileless women, of educational and charity institu-
tions all over New England. These stocks had been the so-called
luxury of the rich" and the conservative investment of the thrifty
for a generation. The New Haven stock has been selling around 20
and the Boston & Maine under 20 within a few weeks; losses have ac-
crued to the colleges and academies, to the charity institutions, to the
poor old women, and to the orphans, and suffering without end.
What I want to point out is that you can not assume that you are
going to have a fit and responsible management of a railroad under
our modern system of corporation control.
66
(The chairman, Hon. Thetus W. Sims, at this point took his place
with the committee.)
The CHAIRMAN. Mr. Anderson, I want to make this statement:
Was it not a fact that even before the present war commenced that
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
67
the railroad owners and their responsible managers and presidents
and financiers had determined upon a plan of compulsory national
incorporation and of a great change of Federal control of railroads,
based upon the theory rather that a prevailing condition existed by
which railroad development was in a state of suspension absolutely,
and that without such legislation as they advocated or some other
which would answer the same purposes the railroad development
was at an end? Is that not in a general way a fact?
Commissioner ANDERSON. I think, so far as my information is
adequate, that the general answer to that is yes. But I should like to
qualify it by this: I was not either actively or prospectively an Inter-
state Commerce Commissioner when a good deal of that went on.
I read it with perhaps a little more than the average man's interest,
and I have read some of the discussions of the more responsible rail-
road people on that matter since I have been on the commission. But,
of course, I have not read nearly all. I think the most serious
minded of the railroad men were of the opinion that existing con-
ditions were intolerable.
The CHAIRMAN. Intolerable and destructive and ruinous without
legislation of some kind.
Commissioner ANDERSON. Yes.
The CHAIRMAN. Now, then, others, who take the opposite view of
it, say that the conditions of the better and good roads was satis-
factory, and if there was only some sort of division of earnings of
the poor with the better roads they might get along. Now, then,
to return these roads without any legislation to a state or a condition
which the railroad people now own them say was intolerable and
destructive of credit and future development; is that something that
anybody would desire?
Commissioner ANDERSON. I can not.
The CHAIRMAN. On the other hand, now the railroads are unified
and will be operated as one road until the war is ended. Then the
railroad owners and the people do not want them to go back to the
former status; they want to eliminate, as far as possible, destructive
and unnecessary competition. Why not leave this open for both
railroads and people, the served and those to be served, for such
legislation as will prevent the condition in the future that the rail-
road owners and security holders themselves have been complaining
of for years?
Commissioner ANDERSON. Precisely that is the theory we adopted.
under section 13, and I repeat what I said a moment ago-we were
driven to the conclusion that unless the responsibility was left to
Congress, untrammeled by any attempted stop order by this Con-
gress, that you would very likely play into the hands of vicious
speculative forces in the country that might work very grave injury
to general interests, and particularly to a lot of helpless investors.
Mr. RAYBURN. It seems to me that your reference a moment ago to
the New Haven case, and Judge Sims's statement, there is not an
answer to the proposition that we should write into this bill when
this control should cease; but it is a criticism, rather, of private
ownership.
Commissioner ANDERSON. No; I did not quite complete what I in-
tended to use that illustration for. I instanced the New Haven
as indicating to you that you ought not to deal with this great
6.8
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
problem upon the theory that there are well-organized and repre-
sentative groups of security holders perfectly able and competent
to take back their properties and handle them well; that we have
had, under the old theory of private ownership, very frequently very
irresponsible boards of directors. We have now some of the best men
of New England on the boards of directors, and I think they are
struggling hard to do their duty-I am not directing any general
indictment against the railroad directors of this country. What I
did say and what I insist upon is that the theory that the stockhold-
ers do, by and large, select their directors with any intelligent com-
prehension of their own interests in that selection is a myth, an out-
worn theory that has no general application to the older and larger
corporations, the stock of which is widely spread, and which tends
more and more to get into your charity institutions, to be held for
your old women and for the orphans, by guardians and trustees, the
people who ought to be taken care of by those who are in the active
business of life.
Mr. MONTAGUE. I infer if you do not favor Government owner-
ship you favor great governmental extension of the control.
Commissioner ANDERSON. I have come to the conclusion that we
can not expect to get private capital into great public utilities until
we far more effectively guard that private capital than we have in
the past. I do not say that I favor national ownership. I have never
reached a dogmatic conclusion on that. I do not favor the status
that existed a month ago.
Mr. DEWALT. Is not this true with regard to the return of the prop-
erty to these corporations? Granting the perhaps somewhat violent
presumption that Members of Congress are responsible public citi-
zens, would not this be true, that if during these abnormal times the
operation of these transportation facilities proved to be effective, and
also proved to be paying, so far as the stockholders are now con-
cerned, with regard to dividends, and also proved to be effective in
serving the public at large with regard to service rendered, that then
public sentiment would demand, maybe insist, upon the retention
of the roads by the Government, so far as management was concerned;
and would not the contrary be true, if during this time it turns out
that this management was not good, and that it seriously affected the
earning powers of the roads, and thereafter diminished the earnings
of the stockholders, etc., that then public sentiment after the war
would say, "We are not satisfied." Then Congress, directed by that
public sentiment, would be obliged to take up legislation for the
return of those properties to the stockholders. Is not that possible?
Commissioner ANDERSON. That illustrates one aspect of the chaotic
times we are in. The railroad problem is only a part of the general
phenomenon that we are all looking at, I take it, with interest and
wondering just how far we are going into a state of socialism, and
how far we can go back to the old days when the Government had
very small functions. I have no prophecy to venture. I do prophecy
that the old status as to the railroads, the public-service corpora-
tions never ought to be sought and to be recreated. But it does not
at all follow that there should be a national ownership or national
operation. Indeed, you can have various kinds of status; you can
have national ownership without operation; you can have national
operation without ownership, and you can have national control of
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
69
all kinds and degrees, either with or without national operation or
control. What I do assert with some dogmatism is that the Congress
that exists and has a large part of the fate of the American people in
its hands after peace is declared ought to deal with that great prob-
lem without any stop watch on it, and as dispassionately as it may.
There will necessarily be bad blood in some quarters or violent differ-
ences of opinion. I would not create a status by present law which
would offer a premium for speculative forces or for engendering any
unnecessary strife.
Mr. MONTAGUE. Do you not think an uncertain period of time.
would cause more chaos than certain?
Commissioner ANDERSON. No, sir.
Mr. MONTAGUE. You think speculation would be more apt to be
created by certainty than uncertainty?
Commissioner ANDERSON. No, sir; that is where I beg to differ.
You create uncertainty. To come back to my illustration, suppose
peace comes next July, which is-
Mr. MONTAGUE. I say two years, three years, any time you choose;
but I just suggest a definite date.
Commissioner ANDERSON. Suppose you say two years.
Mr. MONTAGUE. Take that.
Commissioner ANDERSON. Then you discuss it, and you disagree.
Then you go to the people and you get another Congress, a species
of referendum as to what the people want. There will be various
theories formulated. What they will be I do not know. I make no
prophecy. But you are just as likely to wake up on almost the last
day to the fact that unless you do something then these roads go back
immediately into the hands of the separate carriers anyway. I admit
that it is possible, if you had two or three years, that a year before
the time limit you might have worked out a policy, in which case
the evils I suggest would be avoided.
Mr. BARKLEY. Would you allow me to illustrate what might arise?
Commissioner ANDERSON. I do not know more about it than you do.
I am not here to teach. I only tell you what I have thought of.
Mr. BARKLEY. Suppose we fixed a two-year limitation, at the end
of which time automatically, without any action on the part of any-
body, these roads go back to the status out of which they have come.
During that two years Congress attempts to legislate on the subject,
and we will say that the Congress passes a bill providing that these
roads shall go back into their private ownership and regulations or
that they shall remain permanently under Government control. That
bill does not meet with the approval of the President and he vetoes
it, which would require a two-thirds vote of both Houses in order to
enact it, and while that situation is developing the two-year period
ends. Then what would be the result?
Commissioner ANDERSON. Chaos.
Mr. BARKLEY. Could not that situation conceivably arise?
Commissioner ANDERSON. Precisely that situation.
You might
have a Senate holding one view and a House holding another view.
You put a premium on chaos.
Mr. BARKLEY. A premium on what?
Commissioner ANDERSON. On the chaos which would be created.
This House might say, "We will have national ownership," and the
Senate would say, "We will not; we will give you a species of na-
;
70
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
tional control, but we will not have anything to do with national
ownership." How many times has there been a deadlock between the
House and the Senate, or the Congress and the President, in the past.
25 years?
Mr. BARKLEY. If they do not agree, everybody knows one thing
happens.
Commissioner ANDERSON. You will have chaos as between the Gov-
ernment and the roads, as a whole, and you will have chaos as be-
tween road and road, and you will have speculation in the hands of
manipulators such as never before seen.
Mr. RAYBURN. Would not as much chaos arise if we left this bill
exactly like it is, and these questions come up for discussion in Con-
gress and easily passes one House and totally fails of passage in the
Senate, would there not be just as much zone in there for them to
operate as if we had a day certain?
Commissioner ANDERSON. No, sir. See what has happened in the
past few days. Railroad securities were going to the dogs in the
financial market, because nobody knew what was going to happen,
and, as I stated this morning, were away below their intrinsic value.
They have been going up to somewhere approximating their real
value in the last 10 days. You have stabilized the market. There is
belief on the part of the investors that the American people can be
trusted, and that the Congress can be trusted to deal with this prob-
lem fairly, and that the President can be trusted to deal with it fairly.
That condition of affairs should be continued until you have enacted
some other legislation which is as reasonable and just, dealing with
the then conditions as that proclamation was construed to be reason-
able and just dealing with these war conditions. When I started to
work on that thing, about six weeks ago, I did not see how it could
be done under that statute without chaos; I made memorandum
after memorandum, threw most of them into the wastebasket, and
worked on until I reached the conclusion that it was entirely prac-
ticable to take over those roads without doing anything which would
be deemed chaos creating either in the financial market or in the
operation of the carriers themselves.
Mr. BARKLEY. Would not the knowledge on the part of the people
that the permanent solution of this railroad question be worked out
by Congress largely have a greater effect to stabilize values than the
knowledge that it had, within a certain limited time, to rush through
whether right or wrong?
Commissioner ANDERSON. I think it would. I think you would
get a better result than you would if you put a premium or offered a
reward, so to speak, to speculative interests to get some extremists of
either kind in here.
The CHAIRMAN. Commissioner Anderson, I ask this for the pur-
pose of getting information: Under the act of August 29, 1916, power
was conferred upon the President to take over the roads. Suppose
this section 13 in this bill passes, is there any power under heaven
to take these railroads away from the President, until the President
thinks, under the full authority of his judgment already given him
by existing legislation he should turn them over?
Mr. MONTAGUE. Do you think this authority extends that far?
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
71
The CHAIRMAN. There is absolutely no time in the authority
already given-no date specified when the authority conferred ceases.
Commissioner ANDERSON. Judge, I thought of that. The sub-
stance of this part of the act is as follows:
The President, in time of war, is empowered, through the Secretary of War,
to take possession and assume control of any system or systems of transporta-
tion, or any part thereof, and to utilize the same, to the exclusion, as far as
may be necessary, of all other traffic thereon, for the transfer or transportation
of troops, war material, and equipment, or for such other purposes connected
with the emergency as may be needful or desirable.
The "emergency " refers to war.
Mr. MONTAGUE. Could it refer to anything else?
Commissioner ANDERSON. The "emergency "?
Mr. MONTAGUE. Yes.
Commissioner ANDERSON. I do not think so.
Mr. MONTAGUE. No definite date is fixed when this war may be
ended.
Commissioner ANDERSON. Suppose the war ended. When no time
is set for something which obviously requires a time limit, the courts.
always say "a reasonable time is implied." If you have no legisla
tion the date of ending Federal control would probably be set by the
courts.
The CHAIRMAN. There is no arbitrary day.
Commissioner ANDERSON. No arbitrary day. You put a premium
on litigation, at any rate. If there were some who wanted to get a
certain kind of property out of your control and peace was declared,
and the President was still holding on, and Congress had not acted,
and there was a desire to get into court, you would provoke litigation
and chaos.
Mr. STEVENS. Mr. Anderson, I would like to ask you if it would
not be quite an argument for no date being fixed in this thirteenth
section here in the suggestion that Government ownership may prove
entirely satisfactory, and it could not possibly be proven whether or
not it would work under all conditions until after the war was over,
and there would be required a period of peace in order to fairly
demonstrate the practicability of operating the railroads through the
Government?
Commissioner ANDERSON. I think there is something in that. I
can not quite see why anybody who is not obsessed with a pet theory
should object to having the Federal control, which we have had to
take over as a war necessity, fairly tried out. If the opponents of
national ownership are right and it does not work well, with the
experience of it for a year or two, of course the country will go with
them; if they are wrong, they ought to be ready to admit it.
Mr. BARKLEY. Does not the self-interest of the public and of the
stockholders eventually control this situation?
Commissioner ANDERSON. I think the self-interest of the public
and of the stockholders will have much to do with it. I have some-
times said that the stockholders were the only people that were not
represented in modern railroad management. It is pretty nearly true
with regard to a good many of them. Labor is pretty well organized,
the Wall Street bankers are directors, the Pullman people have direc-
tors, the express companies have directors, but the great body of
72
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
stockholders did not use to have any directors at all in the older,
better-established corporations.
Mr. BARKLEY. They would be looking out for dividends on their
stocks, and if it did not turn out well they would not want to con-
tinue it.
Commissioner ANDERSON. In theory that is true; in practice it is
not true of the older, better-established railroads. I never knew a
woman to cast an intelligent vote as a stockholder; I never cast one
myself as a stockholder, and I should be surprised if more than
two or three of the members of this committee (who seem to be a very
unusual body of men) have ever cast any intelligent vote as stock-
holders of a big corporation. You buy 10 or 15 or 50 shares of stock
and put it away, and you either sign a proxy or you throw it into
the waste basket; and you have no more to say about the adminis-
tration of that corporation, either directly or indirectly, than the
native of the Desert of Sahara has about the English Government,
which may have control. They are entirely unrepresented. It is
a pure myth.
Mr. STEPHENS. In connection with that, Mr. Anderson, I notice in
the testimony of some hearings of a few years ago that the Harri-
man interests, that controlled the Union Pacific Railroad, did so on
less than 2 per cent of the stock of the company; that is, the syndi-
cate that controlled it held less than 2 per cent of the stock.
Commissioner ANDERSON.. It is a common thing for men to be
named as directors of great companies and have to go and buy 5 or 10
shares of stock in order to qualify. They are put on there by inter-
ests which are oftentimes utterly without investment in the property,
frequently adverse. The corporation control system has broken
down, that is all there is to it; and that is one reason why you have
got to work out a different theory when you take the control of these
railroads away from the Federal Government. That burden must
rest on Congress, and it should be dealt with deliberately, dispas-
sionately, so far as possible without partisanship, and under no stop
order which would put, as I say again, a premium on engendering
strife and discord in order that speculation might ensue for the benefit
of those who can manipulate for speculation, victimizing, as is always
the case, the great body of honest investors, the thrifty dollar which
we must have in our public utilities, unless you are going to capitalize
them entirely out of the Federal Treasury, either by bonds or
through taxation.
The CHAIRMAN. It is stated in the proclamation as the purpose of
the President that these roads shall be returned to their owners in
as good condition as they are when the Government takes them over.
Would the changed conditions of traffic, sending freight by the mil-
lions of tons over roads that otherwise would not receive it, collecting
it from other roads now receiving-may not that create a condition
that would exist at the end of the war that would make it impossible
to automatically restore the conditions of the railroads as they are
now received by the Government without legislation that would be
based upon conditions then existing, and they can not in advance
be foreseen or surmised?
Commissioner ANDERSON. There are two things I would like to say,
Judge: The language to which you refer is not formally in the
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
73
proclamation; it is in the President's accompanying statement, and
is this:
I shall recommend that these definite guaranties be given: First, that the
railroad properties shall be maintained during the period of Federal control
in as good repair and as complete equipment as when taken over by the Gov-
ernment; and, second, that the roads shall receive a net operating income equal
in each case to the average net income of the three years preceding June 30,
1917.
There is nothing about his returning the roads; it says "during
the period of Federal control in as good repair and as complete
equipment as when taken over"; that is, during the period of Federal
control.
The CHAIRMAN. How would it be possible to turn these roads over
in that condition?
Commissioner ANDERSON. It might be possible to turn them back
in as good repair and in as complete equipment as when taken over,
but there is another problem which may arise there, which your mind
has obviously forecast, and which may retard special legislation,
that I have not dealt with, which was one consideration which we
had in mind, but we finally came to the conclusion that the Congress
should be left with full and untrammeled power to deal with it.
Suppose that Government control diverts a large volume of present
profitable traffic from the present routes, and people get in the habit
of using the new route. You may have to pass a law, if you turn these
roads back to the individual carriers, providing for the assessment of
damages, to business, accruing out of the different routing and differ-
ent habits of business created under Federal control. You can go
no further than this at the present time. You can take their earn-
ings as they were when they were each scrambling for business and
theoretically doing the best they could to make money, and say,
"While you are under Federal control, we will give you as much.
within these named limits, as you would have made if you had run
your business yourself." Take that as the standard. "We wil)
keep your properties up."
But how about keeping up their business? Suppose that for three
or four years you have taken the business of a carrier created by
private control largely away from it and it must search out new busi-
ness; that carrier has an equitable right to say that it shall have some
special consideration and that it ought not to have simply its prop-
erty turned back to it, plus a moderate rental based upon the three-
year period. Loss of business is jnst as actual a loss to a private con-
cern as loss of property. Business is property; out of buiness arises
property. I would not undertake to forecast the kind of legislation
that I would vote for if I were a Congressman or advocate if I were
an Interstate Commerce Commissioner until after I have seen what
happens under unified control for two or three years. It is beyond
present human prevision.
Mr. Escн. Mr. Anderson, under Federal control the Director
General practically renders nugatory provisions of the antitrust
acts, renders nugatory section 6 of the interstate commerce act on
pooling?
Commissioner ANDERSON. Yes.
Mr. ESCH. Renders nugatory the section of the interstate com-
merce act which gives the shippers right to route shipments and pos-
:
74
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
sibly renders nugatory the provisions of the Interstate Commerce
Commission on the 15 per cent rate case—all of these powers are sus-
pended during Government control. That continues in the time
when peace shall come. Then it is your idea that to overcome that
status or inertia Congress must act?
Commissioner ANDERSON. You have to deal with the status. Sup-
pose that a road which has succeeded in wiping out a competing
water carrier under the old law finds built up under Federal control
an effective water carrier, operated as provided here under section 6,
by Government capital, so that the business it now has is largely
gone; are you going to throw that corporation's physical property
back at it and merely say, "You have got your flat rental and as good
cars and as good rails as we took away from you"? If they were
making large sums of money out of a traffic which you have diverted
by Government money and Government control to the water, you can
not do that; it is not good faith nor fair dealing.
Mr. DECKER. What about it if the railroad built some fine ter-
minals, if that might happen, during this time?
Commissioner ANDERSON. That is provided for under section 6.
If we build fine terminals for them and charge them to the roads,
then any damage accruing to them, "by reason of any additions or
improvements so ordered and constructed may be determined by
agreement between the President and such carrier; failing such
agreement, the amount of said loss shall be ascertained as provided
for in section 3 hereof." That is already provided for. The other
thing (loss of business) is not provided for and can not now be pro-
vided for. The first thing will happen. Carrier A will be told to
build a track to a cantonment or put in a lot of tracks here and there
or a yard, and it will be charged to them. The cost may be $5,000,000.
The property is worth more to them than to anybody else, but it is
not worth in peace times its cost. That is all provided for in the
bill.
Mr. DECKER. I was speaking of terminals. I understood the rail-
road built it out of its own money and retained the title.
Commissioner ANDER.ON. That would be true. But the Govern-
ment has ordered it; the Government wants the track. No one
would do it out of his own money or from money advanced by the
Federal Government as a profitable investment. Their damage
accrues out of the fact that they have built under Government order
facilities which are not worth what they cost when applied to peace
purposes, instead of war purposes. They must be reimbursed.
Mr. DOREMUS. In your investigation, Mr. Anderson, did you con-
sider at all the idea of having Government control terminated upon
the proclamation of the President?
Commissioner ANDERSON. Yes; we did; but we come back to the
view that we must have new law to deal with the new conditions
which would necessarily arise, and that this is the law-making body,
and we therefore came to the conclusion that it was not one of those
things properly to be determined by the President and announced by
him, so that no further action of Congress is necessary.
Mr. RAYBURN. One other question I want to ask you. Under the
Director General, the Interstate Commerce Commission is supposed
to be operating railroads. What about the question of rates? Who
is going to determine them hereafter?
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
75
Commissioner ANDERSON. As a practical matter or a legal matter?
Mr. RAYBURN. How will it be done?
Commissioner ANDERSON. I do not know, for I am not the director.
Mr. RAYBURN. Who will have the powers under this bill and under
the operation of it to do that? Who will do it?
Commissioner ANDERSON. The Director General.
Mr. RAYBURN. Where does he get his power?
Commissioner ANDERSON. To possess, to control, to utilize a going
business necessarily involves fixing the selling price of the things
you are producing in that business, and you are producing transporta-
tion.
Mr. MONTAGUE. Will he fix the salaries of all the officials of the
company?
Commissioner ANDERSON. Yes.
Mr. MONTAGUE. And determine the number of officials and em-
ployees?
Commissioner ANDERSON. Yes; in theory of the law.
Mr. MONTAGUE. What do you think about it?
Commissioner ANDERSON. In theory of law that is true, in my
opinion.
Mr. MONTAGUE. I mean, that is the authorization?
Commissioner ANDERSON. That is the authority that you gave in
August, 1916, in my opinion.
Mr. DOREMUS. He gets authority under section 10 to do most any-
thing, does he not?
Commissioner ANDERSON. I do not know as he gets any more than
he now has. Section 10 was put in to prevent the possibility of any
court saying that Congress has taken away the power he now has.
Mr. DOREMUS. Now has, "and is hereby, given such other and fur-
ther powers necessary or appropriate to give effect to the powers
herein."
Commissioner ANDERSON. That is only a general phrase, as I take
it, which means that all reasonably necessary implied powers for the
main powers expressly granted are hereby expressly given.
Mr. RAYBURN. That is the same interpretation that you think is
conferred upon the President not only to operate the railroads to
carry war materials and things that are absolutely necessary for the
maintenance of the Army and Navy and also to do general business?
Commissioner ANDERSON. Why, yes; Congress could not have con-
templated that when you authorized the taking over of a system of
transportation and mentioned the moving of troops and munitions
that you were going to stop all the business of the country.
Mr. RAYBURN. No. That was not my point at all. The act of
1916 gave the President power whenever, in his judgment, he deemed
it necessary. In other words, to commandeer enough transportation
facilities to supply the Army and Navy with what they needed. You
think that could not be done at all unless he operated the railroads
for all purposes?
Commissioner ANDERSON. No; I would not go as far as that.
think if the need of the country had been less-
I
Mr. RAYBURN. Do you think that conferred that power?
Commissioner ANDERSON. I think that conferred that power, be-
cause you were not satisfied in August, 1916, with saying that the
President might take possession of the transportation system or
76
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
such part thereof as might be deemed necessary for the transfer or
transportation of troops. You used about as broad language as you
could put into six lines, and you said he was—
To take possession and assume control of any system or systems of trans-
portation, or any part thereof, and utilize the same, to the exclusion as far as
may be necessary of all other traffic thereon, for the transfer or transportation
of troops, war material, and equipment.
And then you were not satisfied, because it was obvious to any
sensible mind that the war requires the mobilization of resources,
not merely the moving of troops, and you said:
Of for such other purposes connected with the emergency as may be needful
or desirable.
I studied that statute a good many days before I reached the con-
clusion that it was a plain mandate to do everything that might be
needful or desirable; but there is no other possible interpretation of
it in the light of surrounding circumstances and considering what
Congress was contemplating as possible to happen when you enacted
it, and which did happen less than a year afterwards.
Mr. RAYBURN. The question has been raised by some pretty able
lawyers about the power-
Commissioner ANDERSON. It has been raised; that is true.
Mr. RAYBURN. And how the general transportation business could
be conducted under the limited war powers granted in the Consti-
tution.
Commissioner ANDERSON. I think I was one of the most doubtful
Thomases on that proposition when I reflected on it first. I found
others had gone very much further than I. My present observation
leads me to think that at least nine out of ten, and I am inclined to
think forty-nine out of fifty, of sound-thinking lawyers say that the
President had absolute power to do all that he has done under that
section.
Mr. RAYBURN. Under this act giving Government control the
Government guarantees compensation of carriers. There is a pos-
sibility of that meaning that the Government will have to go into
its own pocket to make it up. With that factor constantly before
the Government would there be a tendency for the Government to
increase the rates for traffic to recoup itself on the indemnities?
Commissioner ANDERSON. I do not think that that fear would be
an unintelligent fear. Generally, you know within less than a month
what the carriers are doing; you always know approximately how
they are coming along. So that, while there will be more or less.
chaotic results from carrier operations this winter, because of the
extreme prices of fuel and the congestion (which makes it perhaps
doubly expensive to move every train), as soon as traffic gets anything
like normal under the new routing the monthly returns (which come
in about the 20th of the succeeding month) will tell you pretty nearly
whether rates will be adequate or not. I do not believe there will be
any hysterical rate making based upon financial fear. I am quite
sure there will not, knowing what I do about the present control.
Mr. ESCH. Every Government of Europe has had to raise its rates
during the war.
Commissioner ANDERSON. That may be true. I was trying a big
rate case in New England involving all the roads up there, and my
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
77
mind was entirely open on the question as to whether all the pas-
senger rates ought not to be increased for two purposes, to give more
revenue, and, second, to discourage passenger travel. They raised
passenger rates in 1917 in England 50 per cent for those two purposes.
Mr. MONTAGUE. Do you think travel ought to be decreased?
Commissioner ANDERSON. My own notion is other people differ—
I like to see people at liberty to move about as freely and cheaply as
possible. I think it not only is a social blessing, but an economical
advantage of an indirect kind that you can not estimate. That is my
theory. Perhaps I am going a little beyond your question, but if we
were in piping times of peace, with prosperous carriers, I would put
the main burden on freight. I think it is a burden which is more
equitably apportioned than to charge a substantial profit to passenger
traffic. Others differ from me.
Mr. Chairman, I have taken before this committee a length of time
which I apologize for; the only excuses I can offer are that it is a
very, very important matter, and that I have been honored by the in-
terruptions and questions of the committee. I feel complimented that
you have permitted, and in some degree kept, me here so long. If
there is any way I can serve the committee or any member, either
now or by giving through our facilities any additional facts, data, or
furnishing any citations of law or further discussion of any of the
problems, I am at your service.
Mr. DOREMUS. I will say, Mr. Anderson, no apologies are necessary.
The committee deeply appreciates your able presentation and ex-
planation of the various provisions of this bill, and we thank you
for them.
STATEMENT OF HON. J. HAMPTON MOORE, A REPRESENTATIVE
IN CONGRESS FROM THE STATE OF PENNSYLVANIA.
Mr. MOORE. I wanted to say what I have to say before Mr. Com-
missioner Anderson goes, and I hope he will remain until I have said
it. It will take just a minute.
The proclamation of the President proposes under the act of August
29, 1916, to take every system of transportation and the appur-
tenances thereof, etc. That pertains to the railroads of the country,
but it is a question with me-I am not a lawyer-as to whether it
covers certain canal companies and certain canals, some of which I
understand have been held not to be transportation companies. I
desire to suggest an amendment to that paragraph of section 6 on
page 6 which pertains to the taking over by the President when he
may deem it necessary or desirable, "such boats, barges, tugs, and
other transportation facilities on the inland and coastwise water-
ways." On line 3, after the words "operation of," at the end of the
line, I would insert the word "canals" with a comma, so that that
clause would read, "from such revolving fund "-the $500,000,000—
"the President may expend such amount as he may deem necessary
or desirable for the purchase, construction, or utilization and oper-
ation of canals, boats, barges, tugs, and other transportation facili-
ties," etc. Unless the word "canals" is put in there I question
very much whether the jurisdiction conferred upon the Director
General of Railroads or which will be conferred upon him if this
78
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
:
act passes-would take over such canal companies as the Chesapeake
and Delaware, which now connects the Delaware River with the
Chesapeake Bay, and which is a private corporation and not a trans-
portation company.
Mr. MONTAGUE. Is that strictly what is called an inland waterway?
Mr. MOORE, Yes.
Mr. MONTAGUE. And when you speak of "inland waterway," is
it sufficiently broad to embrace canals?
Mr. MOORE. I question whether the language in this waterways
paragraph on page 6 would cover canals.
Mr. MONTAGUE. That says "inland waterways."
Mr. MOORE. It says, "boats, barges, tugs, and other transportation
facilities on the inland and coastwise waterways." Does that mean
the property of the canal company, or does it mean only the boats,
barges, tugs, and other transportation facilities? The Inland Water-
ways Commission presented a comprehensive and luminous report to
Congress three or four years ago in which it refers to the Chesapeake
& Delaware Canal corporation as one not engaged in transporta-
tion, and, according to the statement of the managers, it was not
leased to any railroad. The President's message contemplates the
utilization of such waterways or water lines as are under the control
of railroads. This canal is not under the control of a railroad. It
is an active canal, carrying a large amount of commerce and doing
an increased business because of the war; but it is not under the
control of a railroad, nor is it a transportation company. Take the
Chesapeake & Ohio Canal, which connects Cumberland, Md., with
the District of Columbia, and which might be of great service to
the District and to the Government now if it were fully utilized for
carrying coal to this section. The Inland Waterways Commission
reports as to that canal-that is to say, the Chesapeake & Ohio
Canal-that under its charter it is "rather a public highway than a
transportation concern and is not in any sense a common carrier."
It leases towage rights to a towage company.
Now, with regard to the Chesapeake & Delaware Canal, there
having been some litigation on the subject, I understand that it has
been held to be a highway and not a transportation company.
Mr. MONTAGUE. And the practice was in the old days that they
charged toll on those canals, and anyone could operate on them if
you paid the toll, just as you could on highways that charged toll.
Mr. MOORE. Yes; they charged toll as if it were a public highway,
but it is not a transportation company.
Mr. BARKLEY. But the canal itself is an inland waterway?
Mr. MOORE. The canal itself is an inland waterway, but I contend
it is not included in this legislation.
Mr. SWEET. Then your amendment should be after the word
"waterways" instead of just before "boats."
""
Mr. MOORE. I may read it imperfectly, but my understanding of
this language is that it pertains only to "boats, barges, tugs, and
transportation facilities on inland and coastwise waterways." It
does not include the waterways themselves.
Mr. MONTAGUE. Mr. Moore, Mr. Anderson, if I recall correctly,
suggested that after the word "waterways" you insert the words, if
you desire to make it perfectly clear, "including canals."
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
79
¡
Mr. MOORE. But the jurisdiction would still extend only to boats,
barges, tugs, and other transportation facilities on inland and coast-
wise waterways and canals. It excludes canals.
Mr. BARKLEY. It is not assumed that the Government is going to
wise waterways and canals. It excludes canals themselves.
Mr. MOORE. You propose to take the railroads over.
You propose
to take the railroad beds, the tracks, and the equipment and operate
them, and you have already-the Government has already, in certain
instances, taken over boats, barges, tugs, and other transportation
facilities; it took them over before the President's proclamation.
Mr. SWEET. But under your amendment it would read, "purchase,
construction, or utilization" of canals.
Mr. MOORE. Well, I feel that that ought to go in, if you are going
to take over the railroads and put them under Government control.
The question of Government ownership stands aside for the present.
That matter has been very clearly explained by the gentleman who has
just spoken. If you are going to take over the railroads, purchase
roads, construct them, or utilize them, pray tell me why we should not
take over canals which are as serviceable in their way and in their par-
ticular territory as the railroads are, and if properly utilized would
be of incalculable value to the Government at the present time?
The CHAIRMAN. Mr. Moore, wouldn't that matter come up more.
appropriately in the consideration of the bill for amendment para-
graph by paragraph?
Mr. MOORE. It would be appropriate to introduce an amendment,
but I thought I would do what is the customary thing, bring it be-
fore the committee first.
The CHAIRMAN. And the general debate is only a preparation to
offer such an amendment?
Mr. MOORE. I would much prefer to have the committee accept it.
I thought, in view of the fact that Mr. Anderson had spoken so
lucidly and so ably for the last few days on the general question of
railroads, and had referred to the fact that the waterways are at least
to be utilized, that while he was here we might have an expression.
from him. I don't want to intrude on the committee's prerogatives.
at all, but we might have a general expression from him as to whether
that term "canals" would be acceptable.
The CHAIRMAN. I didn't know whether Mr. Anderson had already
expressed himself or not. I haven't been here all the time.
Mr. MOORE. He did not until this morning. He spoke on the water-
ways paragraph this morning.
Mr. PARKER of New Jersey. As I understand it, I think you want
to have this canal put on the same basis as the railroads?
Mr. MOORE. Exactly.
Mr. PARKER of New Jersey. And as I understand it, if the Govern-
ment takes possession of them, in order to carry on traffic, it would
take tolls for the benefit of the owners, just as it takes freights on the
railroads. On the railroads the Government buys cars and puts them
wherever it pleases on the railroads, and they would likewise buy boats.
and put them on the canals; but I don't understand that the Govern-
ment wants to buy the railroads or buy the canals.
Mr. MOORE. The Government would be in this peculiar position.
It would buy boats, barges, and tugs; construct and utilize them and
utilize these canals, but it would pay tells to the owners of the canals.
80
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
¡
Mr. PARKER of New Jersey. That is what they would do on the
railroads.
Mr. MOORE. It seems to me the Government ought to have the
canals, just as it takes over the railroads, and make them account in
the same way.
Mr. PARKER of New Jersey. We don't pay the railroads.
Mr. MOORE. The railroads are certainly to account to the Govern-
ment if this bill passes. I want to urge this canal amendment upon
the committee. It seems to me it is not included in the bill; that is
to say, the actual taking over and operation of the canals.
Mr. DECKER. You are considerably familiar with river transporta-
tion. I would like to ask you this question. Wouldn't it be well to
amend that also so as to make it say, "for the purchase, construc-
tion, utilization, and operation of docks, wharves, and piers," as well
as boats?
Mr. MOORE. I listened to Judge Anderson on that question, and I
am inclined to think his view is correct, that the powers conferred
by this paragraph would include construction of docks and piers, as
being "other transportation facilities."
Mr. DECKER. I don't think he gave an opinion on that. I think
he said he would think it over. I don't think he committed himself
on that.
Mr. MOORE. I may have misunderstood him. You are speaking
now of a section of the country, of course, where that question is
uppermost.
Mr. DECKER. I am from farther West than you are, you know.
Mr. MOORE. Yes; I know; and I am inclined to agree with you that
if we are going into this business-temporarily, I hope of putting
railroads on their feet that we shall also go into the business-tempo-
rarily, at least, of putting these canals on their feet; and if we are
going to put railroads and canals on their feet, we might just as well
put inland waterways on their feet; and if we are going to put them
all on their feet, to be successful, we can't do it without coordinating
them through construction of such docks, piers, and landing places
as may be necessary.
Mr. DECKER. Is it your thought to have the Government actually
purchase the Chesapeake & Delaware Canal?
Mr. MOORE. I have been contending for that for 10 years. In this
particular instance I think it would be a desirable short cut.
Mr. MONTAGUE. Is that the purpose in your amendment?
Mr. MOORE. No; it is general. I would include any canal the Presi-
dent thought ought to be taken to tide him over the crisis.
Mr. BARKLEY. You believe in Government ownership of canals but
not in Government ownership of railroads?
Mr. MOORE. I think it would be a wholesome thing to have the Gov-
ernment control canals, in order that general transportation might be
facilitated.
Mr. STEPHENS. Then, you do believe in Government ownership of
railroads on the same principle?
Mr. MOORE. I will go far in the war emergency, but primarily
I am not for Government ownership of railroads. But where a
canal is completely suppressed by other transportation systems;
where it is capable of rendering service; and where, if it had been
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
81
used, the great coal shortages now existing in the country would
not have prevailed, it seems to me it might be a wise step on the
part of the Government to at least have the anchor of the canal to
windward, so that if it wanted to stock up its coal yards or freight
stations in times of plenty and when the water is clear and the sailing
good, it might do it; so that in a crisis like the present there would be
no great congestion of and storage upon the railroad cars of the
country, upsetting the business of the country and embarrassing the
Government.
Mr. DILLON. Does the gentleman believe that in this bill we should
grant power to purchase canals?
Mr. MOORE. I have just explained why I believe it, ought to be
done in certain cases.
Mr. STEPHENS. This canal would have some naval value, would it
not, Mr. Moore?
Mr. MOORE. There isn't any question about it. Naval and war
experts agree upon that. We have unlimited testimony from experts
in the War and Navy Departments as to the utility of these canals
for strategic purposes.
Mr. MONTAGUE. What particular one?
Mr. MOORE. I was speaking of no canal in particular, Governor.
If you refer particularly to the Chesapeake & Delaware, I will say
that it is 131 miles long, and it connects two great bodies of water,
Chesapeake Bay and Delaware Bay, which means the linking up
of the North and the South along the Atlantic seaboard. If you are
referring to the Chesapeake & Ohio Canal, I would say that it runs
from the District of Columbia, where it empties into the Potomac
River, about 187 miles through the State of Maryland to Cum-
berland. It is hindered very much by 78 locks of antiquated con-
struction. But if that canal had been used to its capacity prior to
the freeze, Washington would not have gone cold the last month,
and shivered the way it has done. It seems to me that in times of
plenty, when conditions are fair, we might utilize these canals and
save ourselves the risk of being stormbound and car short when the
railroads are overloaded.
Mr. PARKER of New Jersey. How deep is the Chesapeake & Dela-
ware Canal?
Mr. MOORE. Ten feet.
Mr. PARKER of New Jersey. How much lift is there into the locks?
Mr. MOORE. I have forgotten for the moment—I think about 16
feet.
Mr. PARKER of New Jersey. How long and how wide are they?
Mr. MOORE. They are 24 feet and a few inches.
Mr. PARKER of New Jersey. And how long?
Mr. MOORE. About 220 feet. That is my recollection. I will put
that accurately in the record if desired. I think it is 220 feet.
Mr. PARKER of New Jersey. I think they will take in a small
destroyer, but not a large one.
Mr. MOORE. They would accommodate one or two of the very
smallest types of naval boats. The Secretary of the Navy on numer-
ous occasions has regretted that he could not send boats through that
canal. On one or two occasions he has attempted it, but the risk is
so great as to make it practically worthless for naval purposes.
40958-18-6
82
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
}
I would say to the committee that at the present time, so far as the
Chesapeake & Delaware Canal is concerned, it is carrying-I suppose
it is frozen over now temporarily but up to a month ago it was
carrying cotton, which goes into the manufacture of munitions; it
was carrying large quantities of lumber which relieved the railroad
congestion, and it was doing on the average a million tons of com-
merce a year, some of it going to the new shipbuilding plants along
the Delaware River, where hundreds of cars are now standing idle
but laden with lumber and raw materials. They are being used for
storage purposes, the contractors or shippers apparently preferring
to pay demurrage rather than unload them.
Mr. DEWALT. Your view would not be met if canals generally were
to receive the same treatment that railroads-but what you are
speaking of is the actual purchase of canals by the Government.
Mr. MOORE. I want to leave that up to the President. I will say
to you frankly that the administration, or the Council of National
Defense part of it, is considering this very question of canals. It is
important that some of these canals should be under Government
control.
Mr. DEWALT. Government control is one thing, but purchase is
another. I am speaking now of the purchase.
Mr. MOORE. It would still be left, if you insert the word "canals,"
as I suggest-it would still be left to the discretion of the President
to take any or none, and that is all I ask and all I would suggest at
the present time.
Mr. MONTAGUE. Suppose you put the word "canals" in the fourth
line instead of the third line?
Mr. MOORE. I don't think that would cover it. That would not
cover the question that I have raised as to these independent canal
companies to which I have referred.
The CHAIRMAN. Are you through, Mr. Moore?
Mr. MOORE. Yes. And I wish to thank the committee for listening
to me.
The CHAIRMAN. Mr. Little wants to address the committee.
STATEMENT OF HON. R. M. LITTLE, CHAIRMAN OF THE UNITED
STATES EMPLOYEES' COMPENSATION COMMISSION.
Mr. LITTLE. Mr. Chairman and members of the committee, I wish
to make a statement relative to section 9 of the pending act on the
compensation question, because it has come before the commission for
action, and action has been taken, and this committee should be ad-
vised of that action.
On this date the motion was made that by virtue of section 1 of the
act approved August 29, 1916, and the proclamation of the Presi-
dent of December 26, 1917, the employees of the following trans-
portation agencies included in the said proclamation, namely, "each
and every system of transportation and the appurtenances thereof
located wholly or in part within the boundaries of the continental
United States, and condition of railroads and owned or controlled
systems of coastwise and inland transportation companies engaged
in general transportation, whether operating by steam or by electric
power, including also terminals, terminal companies, and terminal
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
83
associations, sleeping and parlor cars, private cars and private car
lines, elevators, warehouses, telegraph and telephone lines, and all
other equipment and appurtenances commonly used upon or operated
as a part of such rail or combined rail and water systems of trans-
portation," became employees of the United States at 12 o'clock noon,
December 26, 1917, and are therefore covered from that hour and
date by the Federal compensation act of September 7, 1916.
Commissioners Axtell and Keegan voted "aye" on this motion.
Commissioner Little stated that he wished to be recorded as not
voting, because of lack of sufficient time to thoroughly consider the
question.
The motion was made and seconded that in view of the action of
the commission ruling that the employees of the transportation
systems and agencies outlined in the President's proclamation of
December 26, 1917, which are now under the control and operation
of the Federal Government, are employees of the United States,
that section 9 of H. R. 8172, Sixty-fifth Congress, second session, be
omitted. Commissioners Axtell and Keegan voted aye on this motion.
Commissioner Little wished to be recorded as not voting, for the same
reason that he did not vote on the motion to consider employees of
such transportation systems and agencies as employees of the United
States.
Mr. DECKER. Did you recommend what should be omitted?
Mr. LITTLE. To omit section 9.
Mr. MONTAGUE. To strike it out?
Mr. LITTLE. To strike it out altogether. The question, Mr. Chair-
man and members of the committee, came before the commission
from a workmen's compensation commissioner of Connecticut, who
inquired what the present status of employees of the transportation
systems might be. The subject is one of great concern wherever
there is a State compensation board and wherever there is a court to
consider the liabilities, and it is of tremendous concern to the rail-
road employees of the country. It was not a question that the com-
mission could long delay in giving some judgment upon, and as
just recorded the commission has expressed its judgment that they
are, on and from that date, 12 o'clock noon, December 28, 1917, em-
ployees of the United States, and therefore covered by the com-
pensation act of September 7, 1916.
Mr. BARKLEY. Does that mean, Mr. Little, that any compensation
that any employee of any railroad would be entitled to by reason of
accident, would be paid out of the Treasury of the United States?
Mr. LITTLE. Yes, sir.
Mr. BARKLEY. Upon what theory would the commission-the other
two members of the commission-conclude that they had authority
to legislate upon this subject?
Mr. LITTLE. I don't think that they would have the point of view
that they had the authority to legislate upon that point, but that
they are vested by the act of September 7, 1916, the compensation act,
section 32, which reads "that the commission is authorized to make
necessary rules and regulations for the enforcement of this act and
shall decide all questions arising under this act"; and it was a ques-
tion arising under the act as to the status of the employees and
whether they would be compensable.
84
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. BARKLEY. Now, the proclamation of the President stipulated
that these men shall operate under the same terms until further
orders, as they did before the railroads were taken over.
Mr. LITTLE. Quite true.
·
Mr. BARKLEY. And doesn't that preclude the idea that they are to
become employees of the United States, to be paid by the United
States? If they are employees of the United States Government they
must be paid by the United States Government. They can't continue
to be paid by the railroads. Their salaries and their wages must be
paid out of the Treasury if they are employees of the United States
Government. I would like to get the full viewpoint of the commis-
sion in arriving at the conclusion that if they are injured they are
to be paid out of the Treasury, but that their salaries are not to be
paid out of the Treasury, and that all the income and disbursements
of these railroad systems are not to go through the Treasury, a thing
which I have understood was not contemplated.
Mr. LITTLE. Now, Mr. Chairman, that phase of the subject was
covered in a memorandum which I furnished to Mr. Anderson-not
the full commission-as we didn't have time as a commission even to
consider this memorandum, but the principle involved in it, I pre-
sume, would be agreed to by the commission.
Mr. BARKLEY. I don't mean for my question to be indicative of my
attitude as to the wisdom of making the employees subject to this
workmen's compensation law, but purely as a matter of law, whether
the commission has any authority under the law itself to take over
a body of men who are suddenly thrown into a status that the law
hasn't contemplated-1,700,000 of them?
Mr. LITTLE. Well, after you have finished asking me questions,
the commissioners are here, and I think they can best represent their
own view. As you have observed, I didn't wish to vote upon the
question.
1
Mr. DECKER. How many are there on that commission?
Mr. LITTLE. Three.
Mr. DECKER. What facilities have you for investigating all the
accidents that happened on the railroads.
Mr. LITTLE. We don't have any.
Mr. DECKER. Well, what was the hurry about this?
Mr. LITTLE. AS I remarked, the inquiry of the commissioner from
Connecticut and the unsettled condition of mind that obtains in the
commissions all over the country. The State commissions only cover,
of course, the employees of transportation companies engaged in
not interstate, but intrastate commerce. By the decision of the
Supreme Court handed down this last May in the Jansen and
Winfield cases all employees of transportation systems engaged in
interstate commerce are deprived of the compensation benefits under
the State laws, and their recourse is to the Federal employers'
liability act.
Mr. RAYBURN. You say your commission-a majority of them-
arrived at that conclusion. Has any other department of the Gov-
ernment passed upon this in any way?
Mr. LITTLE. Not to my knowledge.
Mr. RAYBURN. I understand that Gen. Crowder has held that they
are not United States employees.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
85
Mr. LITTLE. I have observed no formal view from any authorities
in the Government upon it.
Mr. RAYBURN. Does anybody know that that is true?
Mr. BARKLEY. That is true. Gen. Crowder, in passing upon cer
tain phases of the draft law, held that they were not employees of
the United States.
Mr. LITTLE. In reply to your question in reference to paying out
money, of course, the Comptroller of the Treasury is the last au-
thority on this point.
Mr. DECKER. There hasn't been any money paid out, has there?
Mr. LITTLE. No, sir.
Mr. BARKLEY. Under this order or ruling of the commission, would
that operate to prevent any railroad employee in the United States
from bringing suit against any railroad company to secure damages
for injury?
Mr. LITTLE. If the railroads of the country-if the Government
has taken possession of them and is controlling them and operating
them, the right of suit is one to be determined, whether against a
railroad or whether it would be against the Government, through the
compensation commission or the Court of Claims.
Mr. BARKLEY. Well, is it true that the President's proclamation
specifically provides that suits might be brought either by or against
railroad companies as if the proclamation had not been issued? Is
that correct?
Mr. LITTLE. I think that is so.
شنگه
` Mr. BARKLEY. Why wouldn't that include a man who had a claim
for damages as well as a man who had a claim on account of services?
Mr. LITTLE. I think it would.
Mr. COOPER. What is the rate of compensation to the railroad
employees?
Mr. LITTLE. Under the Federal act of September 7, 1916, it is 663
per cent of the wages, when the wages are not below $50 a month or
above $100 a month. Those are the boundaries $50 to $100-and 663
per cent during the time of total disability after a three-day waiting
period. That is the main point in it.
Then, for dependents, a widow would receive 35 per cent during
widowhood or until death. Children under 18 years of age receive 10
per cent each, and if there were enough of children to make the com-
bined payments to the widow and children more than 663 per cent, it
would have to be limited to the 663 per cent.
:
Mr. COOPER. How long does this compensation last?
Mr. LITTLE. It lasts for the dependent children until they are 18
years of age. If it were a subnormal child, it would last through life.
If it is a widow, it would last until she remarries or dies.
Mr. COOPER. If it is the employee, how long would it be?
Mr. LITTLE. If it were the employee, until the disability had been
removed. If it is total disability of a temporary nature, two weeks,
four weeks, six weeks, three months, during that period the claimant
or employee injured would receive compensation as mentioned. Sup-
posing that he has lost an arm, then that is a permanent functional
loss of 50 per cent to 75 per cent earning power, and the law would.
then place upon the commission the responsibility of determining his
loss of earning power and give him the difference between his earning
?
!
86
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
}
:
power after that loss and before and divide it as the per cent is pro-
vided in the bill.
Mr. COOPER. Now, just on that point, if you will pardon an inter-
ruption, suppose a locomotive engineer loses an arm; wouldn't you
class that as total disability?
Mr. LITTLE. I believe that with an engineer who would lose hist
right arm that because of the nature of his work the economic loss to
him would be about 75 per cent. He is not entirely economically de-
pendent after that.
Mr. COOPER. As far as his present occupation is concerned he is.
Mr. LITTLE. It will change his occupation. That permanent func-
tional loss will change a man's occupation.
Mr. COOPER. Suppose a man of 55 or 60 years of age-suppose
that he has gotten up to that stage in life and lost an arm. Do you
think there is anything else he could take up in this life?
Mr. LITTLE. My experience in handling handicaps for a good many
years has been this, that when a man is 50 years of age and experi-
ences a physical handicap of the nature you speak of, it is almost
impossible to get him a job where he can make enough to keep him
interested, to keep on the job.
Mr. ESCH. Under the act of September 7, 1906, if I remember
rightly, there was appropriated $500,000 to carry out that act.
Mr. LITTLE. Yes.
Mr. ESCH. Now, by your action you immediately bring under the
provisions of that compensation act 1,700,000 men.
Mr. LITTLE. Yes.
Mr. Escн. Under your original act when men are injured they are
entitled to medical attendance, some hospital service, and other
benefits.
Mr. LITTLE. Yes, sir.
Mr. Escн. If they get killed, of course their dependents get the
benefit. Have you had time to make any calculation of what that
might possibly entail on the Treasury if applied to the railroad
employees?
Mr. LITTLE. Mr. Chairman, if you will permit me, and if I can
read hastily this memoranda, I will cover a good many of the ques-
tions which are in the minds of the committee bearing on the number
of employees, the number of accidents, the cost, and how the cost
should be apportioned. Is it your desire that I do that?
The CHAIRMAN. Yes; go ahead.
Mr. LITTLE. Now, this is a personal communication. It is from
me to Mr. Anderson and had to be hurried up Monday night.
As the object of the Government in assuming control and operation of the
transportation systems is to mobilize our national resources to help win the
war, it follows that whatever will materially assist to accomplish this object
ought to be done. In assuming control of the transportation systems, the
Government also assumes control and direction of the employees of the systems.
In order to effect the most satisfactory operation of the transportation systems
it will be necessary for the Government to provide some method of compen-
sating the employees for personal injuries received while in the performance
of their duties; otherwise there will be unrest and dissatisfaction among them,
lessening their efficiency, causing a large labor turn-over, and creating a feeling
of injustice.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
87
I. PRESENT STATUS OF THE EMPLOYEES OF THE CARRIERS AS REGARDS
COMPENSATION.
(a) When their work is altogether within States which have compensation
laws and does not have to do with interstate commerce, the employees of the
carriers are covered by the State compensation acts.
(b) In 11 States and in the District of Columbia there are no compensation
laws, and the recourse of injured employees is to the common law or employers'
liability laws or the Federal employers' liability law. The States without com-
pensation laws are Virginia, North Carolina, South Carolina, Georgia, Florida,
Alabama, Mississippi, Tennessee, Arkansas, Missouri, North Dakota, and the
District of Columbia.
(c) The employees of carriers engaged in interstate commerce are not cov-
ered by any compensation act, but must depend upon the Federal employers'
liability law, which for most injured men is not practicable. Besides, it only
applies when there is negligence upon the part of the employer.
(d) The only act, therefore, which would afford equal protection to all the
employees of the carriers under Government control and operation is the United
States employees' compensation act of September 7, 1916.
II. SECTION 9 OF HOUSE BILL 8172.
"That the President is hereby authorized, while carriers are under Federal
control, to direct that the Federal workmen's compensation act of September,
1916, shall be extended so as to apply to carrier employees, on such terms and
conditions as will give due consideration to remedies available under State
compensation laws or otherwise."
If this section should be enacted in the law, the President would have dis-
cretionary power to extend the United States employees' compensation act of
September 7, 1916, to cover the employees of the transportation systems, or to
continue the present unsatisfactory system of compensating the employees.
What would be the probable cost of compensation for injuries to railway
employees under the Federal compensation act of September 7, 1916?
lowing is a tentative estimate:
The fol-
(a) NUMBER OF EMPLOYEES.
The average number of railway employees in 1916 was 1,654,075. An esti-
mate, therefore, of the number of employees at the present time of 1,700,000
would not be excessive.
(B) WAGES.
The total amount of wages paid to railway employees during the year 1916
was $1,403,968,437. An estimate of $1,500,000,000 would therefore not be ex-
cessive for the present year.
!
(C) NUMBER OF ACCIDENTS.
The number of accidents to railway employees during 1916, according to the
latest figures of the Interstate Commerce Commission, was: Killed, 2,675; in-
jured, 178,855. It is probable that these figures actually understate the number
of injuries to railway employees. According to the rule followed by the com-
mission, employees are recorded as killed only when death results within 24
hours after the time of the injury. The records of one large railway system
show that approximately 8 per cent of the deaths from injury occurred after
the first 24 hours. It is probable also that the number of those injured with
the resulting disabilities of over three days was in excess of the number re-
ported. The employee has no financial motive for making a report of injury,
and it has been found in industry generally that where there was no question
of compensation at stake many injuries were not reported. It is necessary,
however, to accept these figures as reported by the Interstate Commerce Com-
mission as the best available information in regard to the number of injuries to
employees.
88
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
•
(D) COST OF COMPENSATION.
Data for a reasonably accurate estimate of compensation cost are not avail-
able. It is possible, however, to give some notion of the cost from the very
limited experience of the United States Employees' Compensation Commission
(it has been in existence only since the end of March, 1917), and the experience
under the New York State compensation act. Upon this basis a rough estimate
of the cost would be as follows:
2.000 deaths, with dependents, with average value of $4,500__
600 deaths, without dependents, with average value of award of
$100 for medical and burial expenses-
725 permanent disabilities, loss of arms, hands, legs, and feet, with
average value of award of $4,000___
178,000 temporary disabilities, with average value of award of $40__
178,000 with average medical expenses of $15--
Total__.
$9, 000, 000
60,000!
2,900,000
7, 120, 000
2, 670,000
21, 750, 000
The above figures show the value of awards from the beginning to the termi-
nation of payments. The amounts which would be required to be paid out dur-
ing the first 12 months would be approximately as follows:
1,800 deaths, with average compensation of $216 (6 months at $36) __
1,800 medical and burial expenses, with average compensation of $100_
550 deaths, with no dependents, medical and burial expenses, with
average compensation of $100__.
660 permanent disabilities, loss of arms, hands, legs, and feet, with
average compensation of $360 (6 months at $60).
150,000 temporary disabilities, with average compensation and for
medical expenses, at $55_--
28,000 with average medical expenses of $20-
Total___
.
$388,800
180,000
55,000
237, 600
8, 250,000
560,000
9, 671, 400
In addition to these amounts to be paid for compensation, medical benefits,
etc., a considerable allowance must be made to meet the cost of administration.
On the basis of the experience of the State compensation acts, these might
amount to as much as 10 per cent of the compensation, medical benefit, etc.,
costs. It is possible, however, because of the large number of cases to be
handled that the administration cost may fall considerably below 10 per cent.
#
If the Federal compensation act is to be applied to railway employees, it is
very important to consider whether the bill as drawn gives the President or
any other official authority to charge the costs of compensation and the
administration of the act as a part of the operating expenses of the various
railway systems. Such a charge, if made, might reasonably include not only
compensation and administration expenses actually paid out during each year,
but the total cost of compensation and administration as applied to each par-
ticular disability from its beginning to its termination. Such a cost would
apparently be properly chargeable to the operating expenses of the period in
which each accident occurred. If this method should be accepted as proper, it
would be necessary to establish a reserve fund, in which would be placed an
amount representing the present value of each award as soon as determined.
This reserve fund would then meet the future demands for compensation and
administration from time to time as they become payable.
III. OBJECTIONS TO EXTENDING THE FEDERAL ACT TO COVER THE EMPLOYEES OF
THE CARRIERS.
(a) If the present Federal act were extended to cover the employees of the
carriers while they are under Government control and operation, it would afford
said employees a uniform and quite satisfactory system of rights and benefits
during the period of Government operation, of which they would be deprived
when the carriers pass out of Government control and operation.
(b) Presumably it is not desired to disturb the systems and operation of the
carriers more than is imperatively necessary during the war and to return them
to private management without loss or injury. It must be admitted that to
bring all of the employees of the carriers under the Federal act for two or three
years and then have them revert to the irregular and often unfair compensa-
?
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
89
tion acts and liability laws would produce a grave situation among the em-
ployees of the carriers at that time, and besides it would interrupt and partially
disrupt their claims departments.
(c) To place all the employees of the transportation systems under the
Federal compensation act would make necessary a quick enlargement of the
Federal compensation commission's organization in order satisfactorily to
administer the law. Apparently, it would be necessary to request Congress to
make a few slight changes in the compensation act for administrative
purposes.
IV. AN ANSWER TO OBJECTIONS.
(a) It does not follow that the employees should revert to the former
status as regards compensation when the control and management of the
transportation systems is restored by the Government to private ownership.
and operation. All the employees of the carriers engaged in interstate com-
merce could be, and perhaps should be, permanently covered by the Federal
compensation act. The largest number of employees engaged in hazardous
work in our country not covered by a compensation law for injuries received
while performing their duties is the employees of the carriers engaged in the
interstate commerce. This includes practically all who are engaged in the
movement of trains. They are entirely shut out of the benefits of the State-
compensation laws by recent decisions of the United States Supreme Court.
For several years there has been earnest discussion among railroad managers
and represensatives of the railroad brotherhoods of a Federal compensation
act to cover men engaged in transportation which has to do with interstate
Commerce.
(b) Representatives of the railway executives state that they are in favor
of a Federal compensation law to cover all railway employees in all depart-
ments on all roads carrying any interstate business.
(c) The attitude of the employees is mixed. The railway trainmen have
taken the position of opposing compensation legislation of any kind. The loco-
motive firemen and enginemen have given discretionary powers to the presi-
dent of their organization on the subject. The Order of Railway Conductors
has taken the position of favoring compensation of the elective type, giving
the injured workman a choice between remedy under the Federal employers'
law and award under his State compensation law. The locomotive engineers
have taken a position favoring a Federal compensation law to cover railway
employees. Representatives of the various brotherhoods say that they can not
reconsider the action taken by them in regard to workmen's compensation
until their supreme bodies meet again in May and June of 1919. The Ameri-
can Electric Association is favorable to railway compensation.
LEGAL QUESTIONS.
(a) The President's proclamation, by authority of Congress, assuming con-
trol and operation of the railroads raises the question of the present status
of the employees, whether they are not now, by said proclamation, civil em-
ployees of the United States instead of employees of the carriers. This is a
question so fundamental and far-reaching in its importance that I only wish
to say that several controlling factors indicate that they are now civil em-
ployees of the Government. In order that the status of the employees shall be
beyond question, the pending bill in Congress should clarify the question.
(b) If it is desired to cover the employees by the Federal compensation act,
it is suggested that section 9, which appears on page 7 of H. R. 8172, Sixty-
fifth Congress, second session, a bill "To provide for the operation of trans-
portation systems while under Federal control for the just compensation of
their owners, and for other purposes," be amended as follows:
Insert in line 10, after the word " September," the figure "7"; in line 11,
before the word " carrier," insert the word "all"; and strike out, after the
word "employees," in line 12, the remainder of the section.
The effect of these amendments would be to authorize the President to ex-
tend the terms of the present Federal workmen's compensation act to all em-
ployees of the carriers designated in the bill. This would provide an abso-
lutely uniform system and rate of compensation for all carrier employees,
whether engaged in intrastate or interstate Commerce and whether injured in
a State which has a compensation law or in one which has not.
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FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
?
I regret that our commission did not have an opportunity to carefully con-
sider this question before sending you this memorandum, but we have been
before the Appropriations Committee twice to-day and it has been impossible
to confer together upon the points herein set forth. Statements of fact can
be depended upon and the rest should be interpreted as my personal views
and not the views of the commission.
Mr. COOPER. Mr. Little, may I ask a question? Do you believe
that the railroad employees engaged in this hazardous occupation
ought to be put on the same basis of compensation as the average
workingman?
Mr. LITTLE. The civil employees of the Federal Government are
engaged, many thousands of them, in extremely hazardous employ-
ment. I don't know of anything in the railway service that is more
hazardous than river and harbor work. Lighthouse work is also
hazardous, although it has a relatively small number of men engaged
in it. Then the work in the navy yards and arsenals is hazardous.
Mr. DALE. What is the percentage of accidents compared with the
railroads? It isn't nearly as great, is it?
Mr. LITTLE. I wouldn't wish to speak on that offhand. In Gov-
ernment manufacturing establishments under normal conditions the
work is not perhaps speeded up as much and under as much stress as.
it is in the railroads, and therefore the frequency of accidents may be
less in the Government service than it would be in the railroad
service.
Mr. COOPER. The reason I ask you that question is this: I am of the
opinion that the compensation granted to railroad employees ought.
to be a little more than that granted to the average workman in
civil life, because of his hazardous occupation.
Mr. DECKER. Do you think more ought to be paid to an engineer
than a rural carrier?
Mr. COOPER. Well, he is taking a great chance with his life every
dav.
Mr. DECKER. It seems to me that we are up against the proposition
that this Federal compensation bill was not passed with a view to
railroad men. I am very glad myself to have listened to this state-
ment, because it opens up a broad field there, and shows very serious
questions that we have got to pass on.
Mr. STEPHENS. I don't understand that this compensation has
anything to do with the hazard a man takes. It is a compensation
for the damages that he sustains. It doesn't make any difference
whether a man is killed driving a mail wagon or a steam engine. If
he is killed he is killed, and the compensation ought not to differ.
Mr. COOPER. Well, you know, Brother Stephens, as well as I do
that by the report that has just been read there are thousands upon
thousands of railroad men injured every year that are not injured
in civil life.
Mr. STEPHENS. But the loss is no greater per man. It is no more
trouble to pay the loss for a man killed in the railroad service than
for a man killed in the mail-carrier service or any other service.
Mr. ESCн. You stated, Mr. Little-and I am not clear as to what
you did state that the Government, of course, would be obligated to
pay this compensation during Government control, but during that
period of Government control there would be a lot of obligations
for compensation created. Now when peace comes and restoration is
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
91
}
made to the carriers—if it ever is made—should the Government con-
tinue its payments, or will the Government unload those subsequent
claimants until death upon the carrier?
Mr. LITTLE. The Government would still have to administer it.
The Government assumes the hazard for the employees during the
period of its management and control and operation of the railroads,
and whatever may befall an employee of the carriers during this
period would be a permanent liability against the Government. The
Government should reimburse itself by charges against the earnings
of the carriers during its period of holding, and sufficiently so to
cover that permanent charge against the Government; but when the
carriers revert back under private management, it would not be
practicable to separate out all those claims and cases that had been
adjudicated and were in process of monthly payments, and turn them
over to the railroads and ask them to continue adjudicating them
under a system that belonged distinctively to the Government.
Suppose a man works down here in the navy yard and he is only
there one year but he suffers a loss of an arm, or an eye, or a hand,
or a foot, and he may turn the next year and work for somebody in
the District, entirely apart from the Government service, but the
Government has to continue to pay him for that functional loss, that
permanent partial disability.
Mr. DEWALT. As I understand it, Mr. Little, you provide in that
report for the creation of a reserve fund?
Mr. LITTLE. Yes, sir.
Mr. DEWALT. That is in answer to Mr. Esch's question.
Mr. LITTLE. And it ought to be charged against the carriers-suf-
ficient for administration. That would be most difficult to do, but
we can compute the cost for the continued years to a certain claimant.
Mr. DECKER. Suppose a case like this: Let us suppose, for the
purpose of facilitating the transportation business of the country,
the Government should decide to ship most of the freight from St.
Louis to Washington over the B. & O. and would turn over the
passenger traffic to the Pennsylvania. Now, this only applies to
employees, and I guess there would be as many injured on freight
service as there would be on passenger, wouldn't there?
Mr. LITTLE. There would be more.
Mr. DECKER. Well, there would be more injured on the freight
service, then. That is what I was getting at. Then when the Gov-
ernment control ceases wouldn't we be up against this proposition,
that the B. & O. would have, during this Government control, re-
ceived compensation no greater than it had prior to our taking
control and its percentage of accidents might have doubled? And
then during the rest of its existence it would have to be paying for
these accidents that happened under Government control and for
which it did not receive any more compensation than it did before
the Government took charge. How would you remedy that charge,
which is above normal?
Mr. LITTLE. I think it is inextricable. I think that the situation
becomes so involved by the routing of traffic and the various uses to
which the Government places the transportation systems that you
can never unscramble the eggs; that this compensation business will
have to be handled in such a way that you will have a clear-cut line
of demarcation between the Government's responsibility for the time
92
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
of operation and after the operation is over for the accidents that
occurred during the operations, and it will never go over to the
railroads to try to adjudicate the things that occurred under Gov-
ernment control and operation.
Mr. DECKER. Then that is hardly in your jurisdiction as a spe-
cialist, but I am going to ask you another question. Take the Penn-
sylvania, then; suppose that we had shipped all the passengers, or
most all of them, over the Pennsylvania, and of course the Penn-
sylvania would have all the passenger accidents to pay for when it
went back into private ownership, and how would you unscramble
that, just in a minute?
Mr. LITTLE. I don't think it could be done.
Mr. DECKER. Well, you wouldn't be in favor of putting a stop
watch on when Congress should hand these back, would you, to the
private owners?
Mr. LITTLE. No, sir.
Mr. STEPHENS. Mr. Little, is the object of the commission to have
the Government assume this liability in order to give the men greater
advantage in the way of compensation? Did I understand you to
say that the present compensation laws were not adequate and that
this would favor the men injured in the service?
Mr. LITTLE. Personally my point of view is that it would be the
very best thing possible for the railway employees of the country.
The law might be changed. If it is the judgment of Congress that
these schedules are not fair, the law might be changed. It was inti-
mated by Mr. Cooper that the $663 per month is not high enough as
a maximum. The commission has had under consideration the
question of recommending to Congress that the maximum be placed-
the wage boundaries-at $50 and $150 or $75 and $150, so that the
maximum could be $100 a month. Under the present administration
of the compensation act there are men killed in the Government
service and seriously wounded who are making up to $2,000 a year,
and then during the period of their disability the Government can
not give them more than $66% a month and their reasonable medical,
hospital, and surgical attention. For instance, postal clerks, who
are rather highly paid and are in an extremely dangerous service,
don't like to turn to the Compensation Commission and take com-
pensation, and they do not therefore make claims, but they turn to
their legal association and to attorneys over the country who have
that sort of business, through their own legal bureaus or attorneys to
adjust with the railroad claim agents, either by adjustment or by
suit. We have observed that in the few months that we have been
administering this law the postal clerks think that the law is
not liberal enough and that they can get more money the other way
during disability.
Mr. STEPHENS. Do I understand that your commission has the
power to fix the rate of compensation?
Mr. LITTLE. It is fixed by Congress. The act of Congress fixes it.
Mr. STEPHENS. Then, how can the Government give the employees
any greater rate of compensation?
Mr. LITTLE. Oh, not unless Congress would amend the act.
Mr. STEPHENS. Well, if Congress amends the act and gives them
a greater rate of compensation, under the general act, so that the
1
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
93
carriers will have to pay it, will not the employees be as well off as
they would should the Government assume the liability?
Mr. LITTLE. What is your last point there, Mr. Stephens? The
Government assumes liability at what point?
i
Mr. STEPHENS. As I understand it, this provision here section 9,
as you have it amended there-would provide for the Government
assuming the liability of compensating these employees for injuries.
Mr. LITTLE. Yes.
.
Mr. STEPHENS. Well, now, if that is omitted entirely the railroads
would go on paying their own liabilities just as they have been.
Mr. LITTLE. Well, the action of the commission is that they are.
already of the status of Government employees, and the first claim
that comes into the commission from an injured railway employee,
an injury that occurs after noon December 28 last, that claim, if
regular and the evidence sufficient, is compensable and would be paid.
Mr. STEPHENS. By the Government?
Mr. LITTLE. By the Government.
Mr. STEPHENS. Is that final? Is that conclusive?
Mr. DECKER. Are the commissioners lawyers? I don't want to be
personal, you know, but I am just asking for information.
Mr. LITTLE. We are not lawyers. There is a solicitor for the com-
mission.
Mr. DECKER. Have you consulted the Attorney General or the legal
department of the Government on that? I am not doubting it, but
it strikes me with a good deal of surprise.
The CHAIRMAN. Is your solicitor present this afternoon?
Mr. LITTLE. Yes, sir.
Mr. COOPER. Mr. Little, may I ask you one more question? Do the
employees in interstate commerce come under the workings of any of
the State compensation laws at this time?
Mr. LITTLE. No, sir.
Mr. COOPER. I thought not. Now, one further question, and then
I will leave you. Has the employee the privilege of choosing between
this Federal compensation-taking that or going into court? Has he
got that privilege?
Mr. LITTLE. No, sir; he is right under this.
Mr. COOPER. It is compulsory compensation? He can't go into
court to recover if he so desires?
Mr. LITTLE. I wouldn't wish to say whether or not he has that
right of suing against the railroad. That is something upon which
I haven't any opinion to express.
Mr. COOPER. He couldn't very well sue the railroad, could he, if
the roads were taken over by the Government?
Mr. LITTLE. They have been taken over by the Government.
Mr. DECKER. Doesn't it all hinge upon whether he becomes a civil
employee of the Government?
Mr. LITTLE. The whole thing hinges upon that-is he or is he not
now a civil employee of the United States Government?
The CHAIRMAN. Has your solicitor given an opinion to the com-
mission that he is now an employee of the Government?
Mr. LITTLE. No; I don't believe the solicitor has reached a full
conclusion on that.
Mr. DECKER. Your object is just to bring it to the attention of
Congress before the bill is passed?
94
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
*
?
1
Mr. LITTLE. Why, gentlemen, it was this: We were sitting in the
midst of a great human problem. It was pressed in upon us. It
was coming to me from different points of view. We listened here
to your debate this morning on the question of section 9, and whether
you are to leave it in that form, or change it, or what to do with it.
We were perfectly aware of the fact that we could not deal with
an ambiguous situation; that it has to be clarified one way or the
other, and if in the judgment of Congress the employees of the rail-
roads while the Government controls them and operates them are
not civil employees of the Government in the sense of being covered
by the compensation act, Congress ought to say so, and of course
that is final.
Mr. SNOOK. Mr. Little, I would like to ask you this question.
You have given an estimate of how much it would cost to apply
this law to the employees of the railroad companies-the employees
in interstate commerce. Are there any figures available which you
can get which would show how much it is costing the railroads to
take care of these accidents, personal injury cases, etc.?
Mr. LITTLE. They are not available. One or two railroads have
figures, but the time did not permit to get in communication with
them, and we were not sure that they would want to give them to us.
Mr. SNOOK. Have you any notion as to the comparative.cost?
Mr. LITTLE. It is too big a question to even guess at, but I would
be under the impression that the carriers to-day by their claim de-
partments, their suits, their benefit funds, their various ways of deal-
ing with it, are perhaps paying out more money than it would cost
under the Federal compensation act.
Mr. SNOOK. It would cost less to have the Federal act than they
are paying out at this time?
Mr. LITTLE. I am under that impression, but I have not enough
data to say. I am of that impression but I don't know, and I don't
know of anybody that does know.
Mr. SNOOK. There are no figures available on that?
Mr. LITTLE. You might get it from one or two railroad systems,
and then you could make an estimate for all the rest. But the cost
varies so much that the figures at last would be wide of the mark
which actual experience would show.
The CHAIRMAN. Do you think that you can finish this matter in
the next few minutes? I don't know whom you have with you.
Mr. LITTLE. The other commissioners are here, Mrs. Axtell and
Mr. Keegan, and I think they ought to be heard, because this is their
view, that the railroad employees are now employees of the Gov-
ernment. I wish to say to you gentlemen that while I wanted fur-
ther consideration of the question before acting, that action was
going to have to be taken soon by the commission, and my inclina-
tion is to believe that the railway employees are now employees of
the Government.
Mr. DEWALT. Mr. Chairman, I move that we take up this matter
again at our next meeting.
The CHAIRMAN. Won't you hold your motion just a minute, Mr.
Dewalt? This morning I understood it was agreed-I was not
presiding at the time-with Senator Faulkner that Mr. Thom was to
be here day after to-morrow.
Mr. FAULKNER. Yes, sir.
1 EDERAL OPERATION OF TRANSPORTATION SYSTEMS.
95
The CHAIRMAN. Now that has already been settled, so to-day and
to-morrow-what time we have to-morrow-is the only time we
have to hear these gentlemen.
Mr. DECKER. We wouldn't have any time to-morrow, because
Congress meets at 11 o'clock.
The CHAIRMAN. We can have an hour.
Mr. LITTLE. Commissioner Keegan says that half an hour will 'be
sufficient for him and for Mrs. Axtell, unless the members of the com-
mittee wish to ask questions.
The CHAIRMAN. It seems to be the wish of the committee to ad-
journ now and meet to-morrow at 10 o'clock until 11 o'clock. With-
out objection, that will be done.
(Whereupon, at 4.40 o'clock p. m., the committee adjourned until 10
o'clock a. m. Thursday, January 10, 1918.)
COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE,
HOUSE OF REPRESENTATIVES,
Thursday, January 10, 1918.
The committee met at 10 o'clock a. m., Hon. Thetus W. Sims
(chairman) presiding.
The CHAIRMAN. The committee will come to order. I believe it
was the arrangement last night that Mr. Little and the members of
the commission should go on this morning.
Mr. R. H. LITTLE. Mr. Chairman and members of the committee, I
think I finished last evening, unless the committee wishes to ask me
further questions. The other members of the commission are here,
however, Mrs. Axtell and Mr. Keegan; also our solicitor, Mr. Dei-
bert.
The CHAIRMAN. You can put on whoever you wish.
Mr. LITTLE. I think we had better hear from Mrs. Axtell, as she
comes next on the commission, and then Mr. Keegan and Mr. Deibert,
the solicitor.
The CHAIRMAN. You may proceed, Mrs. Axtell.
STATEMENT OF MRS. FRANCIS C. AXTELL, OF THE UNITED STATES
EMPLOYEES' COMPENSATION COMMISSION.
Mrs. AXTELL. I hardly know what it is your honorable body wishes
to know from me, but, of course, we desire to explain why we voted
as we did yesterday in our commission to decide that the railroad
employees were employees of the Government.
In the first place, it is very necessary if they are to be employees of
the Government and are to be put under the compensation law that
we know it at once, because we have to go before the Appropriations
Committee next week with our budget for next year.
This is not the first time that we have been called upon to decide
who is an employee of the United States Government. The first
section in our law-the way the law starts out which your Congress
passed in September, 1916-says that the United States shall pay
compensation as hereafter specified for the disability or death of
an employee resulting from personal injuries sustained while in the
performance of duty. Then over further in the act it says the term
96
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
"employee" includes all civil employees of the United States and
the Panama Railway Co.
·
Now, of course, as soon as we began to try and do business under
this law we were confronted with the question of who is an employee
of the United States Government. It is very clear that all of the
services that take in people under civil service are employees of
the Government, but when it comes to pieceworkers in the arsenals,
for instance, that was, I think, the first question we had to decide.
And then the cantonments, the men that worked in the cantonments,
that question had to be decided. Then there was the question of the
contractors who carry the mail to and from the trains.
As you
know, the Post Office Department issues a call for advertisements
for bids for contracts to carry that mail, and that question had to
be decided. Then the firm known as Stone & Webster was to put
in a large cantonment on the other side-in France-and they are
to have many civil employees, and that question, before it was brought
to us at all, they took to the Attorney General, and he gave the
opinion that they were employees under the terms of the contract-
which, of course, you people could see if you so desire-that they
were employees of the Government, because they were agents of the
Government; but he also said that he had no authority to decide
whether they were or were not, as it was clearly specified in this act
of September, 1916, under section 32, that the commission is au-
thorized to make recessary rules and regulations for the enforce-
ment of that act and shall decide all questions arising under the
act. Therefore, while it was his opinion that those men were em-
ployees, it must be decided by us, and the commission decided that
they were. They agreed with the Attorney General, and decided
that they were employees of the Government.
Then, the Stewart & Co. contracts came up for building tanks on
the other side, and they were decided to be employees of the Gov-
ernment.
Next was the railroads.
So it seems that we had a precedent, and we had authority under
these former acts that we must take, and in taking action we did it
because all the arguments that you heard yesterday regarding stocks
and bonds apply also to the men. It is just as necessary that this
question be settled in order to carry on this work successfully as it
is that you should decide about the other property of the railroads.
The fundamental principle of compensation has been accepted, and
there is no need of debating that. These men need protection, and
it was one of the most chaotic problems that was before the Govern-
ment, regardless of the war, because these men have never been cov-
ered by compensation that are in interstate commerce.
Then, as I say, we must know, because we have to increase our
work accordingly and go before the Appropriations Committee for
extended appropriations if we undertake this work.
Now, those are the fundamental principles, but the details, of
course, are something that must be worked out.
It was, I think, a mistaken statement when our chairman said
yesterday that we were not prepared to take care of this work. We
are not prepared to take care of all the details of the work, but we are
the only function of Government that has the machinery to undertake
the work at the present time.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
97
Because of the work we have already handled we have, of course,
tried to cooperate with the other departments of the Government, as
the law specifies we must. We have the Department of Justice to
appeal to in cases of liability, and, of course, the greater part of our
work-or one of the great departments of our work-is the hospital
and medical service which we must give to these employees under the
act, and to take care of this work we are directed in the law to use
the established services of the Government, which, of course, would
mean the surgeons of the Army and Navy and of the Public Health
Service.
When we first began our work we found that the Army and Navy,
due to the war conditions, were unable to do anything for us. We
therefore appealed to the Public Health Service, and the Public
Health Service has cooperated with us in every way possible to carry
on this work, and we now have facilities for handling our medical
work through the Public Health Department, and where they were
unable to handle it they have in some cases extended their work and
made contracts with private hospitals, which they were already using
for this. work, for our work. Therefore, we have the nucleus for
handling this medical work, and of course if it should be decided
that these men are employees of the Government, there are many hos-
pitals which belong to the railroad companies themselves which are
just handling the work for one railroad which would necessarily have
to handle the work for the United States Government, and instead
of their hospitals being partly occupied, as they are now, we could
extend that service to all the departments of the Government for
handling this work, and it would be a great saving to the Govern-
ment. In that way it would, of course, be very easy to extend the
medical work that is already existing to this branch.
I don't know that I have covered the entire subject, but this, gen-.
tlemen, is the reason that we speeded up this action yesterday, in
order that we may know immediately whether we are to take care
of this work or not, and I believe we have the nucleus of an organiza-
tion with which to do it.
Mr. BARKLEY. Let me ask you this: It seems to me that the ques-
tion whether the railway employees come within the compensation
law is a matter of law, the matter of interpretation of which, of
course, can not be finally passed upon except by a court. It occurred
to me that a resolution passed by the compensation commission can
not change the fact as to the law.
Now, I have understood that Government employees were men who
were paid by the Government out of Government revenues. The
matter of the cantonments and contracts for building camps and
things of that sort, which you have mentioned, strikes me as hardly
being analogous to the railway employees, because, while the em-
ployees of contractors who do this work may not be strictly on the
pay rolls of the Government, the money with which they are paid
comes out of the Government Treasury. Now, that isn't true of these
railway employees. The revenues of the railroad companies do not
go through the Treasury; they are not covered into the Treasury;
the employees are not paid by the United States; they are not given
checks by the Government; the money does not come out of the Treas-
ury. Now, in the event that the courts should hold that this law is
40958-18——————7
98
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
not broad enough to cover railway employees, do you think it would
be wise to omit to make some provision in this bill that would au-
thorize the President, as this bill already does, to cover them into that
compensation if he should see fit?
Mrs. AXTELL. I think your question would be covered under the
interpretation of section 32, which says we shall decide all questions
arising under our act.
Mr. BARKLEY. You can decide all questions arising under the act,
but that does not mean that you can bring questions in that do not
arise under the act. In other words, it doesn't mean that you can by
resolution cover 1,700,000 men into the act which Congress did not
intend at the time it was passed.
Mrs. AXTELL. Of course, the matter of quantity-the principle
would be just the same with one man, would it not, as if it were
1,700,000?
Mr. BARKLEY. I think so, too; but in interpreting the law you have
got to get the attention of Congress, and I think we certainly ought
to guard against the possibility of the court holding that these men
do no come within this law by providing that if they do not some-
body should have the power to bring them in.
Mrs. AXTELL. Then, of course, our action would just simply speed
up that action, would it not?
Mr. BARKLEY. Well, if your action was held effective and valid it.
would, but suppose it goes on and is not held by the courts to be
within your jurisdiction by resolution to say that men who do not
draw salaries from the Government and do not owe any duty to the
Government except indirectly, are brought within the terms of the
law?
Mrs. AXTELL. Of course, the question would enter in as to whether
that was what decided who a Government employee is to be.
Mr. BARKLEY. It strikes me as a little bit far-fetched interpreta-
tion to construe any man who doesn't draw his pay, either directly or
indirectly by the Government, as a Government employee.
Mrs. AXTELL. Well, wouldn't you also consider it as stretching the
interpretation of the law to decide that the men who are in France
under contract to build a certain cantonment, for instance, and the
work was to be completed under this contract, and all of the condi-
tions under which the work was operating should be decided by the
contractor to relieve the Government, but in the end it was to be paid
by the Government and the men are to be paid on Government vouch-
ers—that was one of the conditions to bring them under this law
as employees, and it was necessary to do that in order to get them to
go to France. Also, one thing I did not mention, the men on the
transports have been declared Government employees, and that ques-
tion, of course, might be construed as stretching the interpretation.
Mr. BARKLEY. I don't think it would be stretching it so far as the
railway question does, because in that case the money that goes to pay
for these facilities comes directly out of the Treasury. In the rail-
way case it does not. These men are employed by their agency. The
Government has no voice in saying who shall be employed as con-
ductor, brakeman, or flagman. They are employed through their
agencies, just as they are now. They do not get their pay from the
Government. The railway companies pay them. Now, as a matter
of law, it is a question of caution and precaution that is bothering me.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
99
I have always been in favor of workmen's compensation laws, and I
have advocated this, and I have advccated laws for railway em-
ployees, but as a matter of law I am in doubt whether you can by
resolution bring these men within the compensation law.
Mr. STEPHENS. What do you suggest, Mr. Barkley? Do you sug-
gest that this act be amended?
Mr. BARKLEY. No; there is a paragraph already in there taking
care of it, but Mr. Little recommended and he said the commission
recommended-that that be stricken out.
Mrs. AXTELL. Of course, our idea in asking that it be stricken out
would be that you would have to take our interpretation of this
section or put it in; and it was a matter of expediency.
Mr. STEPHENS. I didn't quite understand your explanation.
Mrs. AXTELL. In asking you to strike out that section, it simply
means you accept our interpretation. If you keep it in, it means you
do not interpret that section that way or that you wish to legislate
concerning it.
Mr. COOPER. May I ask you a question regarding this cantonment
that Stone & Webster are going to build in France? That really is
Mrs. AXTELL. Well, the way the contract is drawn, they are de-
clared to be agents of the Government, but they have entire super-
vision of the work and collect their men wherever they please. Then
after the work is completed each month the men are to be paid on
Government vouchers. The terms of the contract, of course, make
them Government agents.
Mr. COOPER. Is it not a fact that Stone & Webster have taken this
job on a percentage basis?
Mrs. AXTELL. Yes.
Mr. COOPER. And it really is a Government job?
Mrs. AXTELL. Well, that all depends on how you interpret the
contract; just the same as this depends on how you interpret this
section.
Mr. PARKER of New Jersey. Have you a copy of the contract?
. Mrs. AXTELL. We have a copy at your disposal if you would like
to see it.
·
Mr. ESCH. You were persuaded to recommend the striking out of
section 9 by the fact that this was a matter of urgency; that the
figures read by Chairman Little yesterday indicated there were
150,000 casualties among railroad employees in a year. That would
mean 500 a day.
Mrs. AXTELL. Well, of course, the idea in asking that it be stricken
out was not on the basis of the size of the proposition, but on the
fundamental principle that in the interest of expediency it must be
decided.
Mr. ESCH. Well, if it is not decided, it means that somebody has
got a great mass of work to do, and to do quickly.
Mrs. AXTELL. Yes; that is the point. And we are the only branch.
of the Government that has been handling this work and that has
the basic principles for carrying it out. We have the foundation
for extending our work to do this work. Otherwise you must est»b-
lish-if they are Government employees, you must establish soine
new system for handling the work.
100
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
;
Mr. Escн. In other words, you wish to have the same thing hap-
pen to your commission that happened to the War Risk Bureau,
which started originally with merely insuring the hulls and cargoes
and ended up with separation allowances, with compensation, and
with insurance for all of the soldiers and sailors of the pending war?
Mrs. AXTELL. Well, our point of view is that the men in the sec-
ond line of defense are just as important to this Government as
those in the first line of defense; that some one must take care of
them; and that we are not on the same footing as the war-risk in-
surance, because that law was passed when they had no machinery
for operation. They have had to create their machinery. We have
been creating our machinery for six or eight months, and we have
applied our machinery to the law that we already have; therefore we
can extend it better than a new machine could handle it.
Mr. Escн. We did not change the principle of the war-risk in-
surance matter; we simply enlarged the work of the division; and I
judge if you get jurisdiction over railroad employees you would prob-
ably enlarge your work, but you wouldn't change it very much.
Mrs. AXTELL. But they were created so recently that they did
not have an opportunity to work on a smaller basis before they had
to increase.
Mr. DEWALT. You spoke of having the opinion of the Attorney
General in regard to the matter which you presented to him.
Mrs. AXTELL. It is from his office. I am not sure whether it was
his opinion or one of his assistants.
Mr. Escн. Will you let us have that opinion?
Mrs. AXTELL. I think we have it on file.
Mr. ESCH. Would it be too much trouble for you to get that?
Mr. LITTLE. The Attorney General, of course, only furnishes the
commission formal opinions by request of the President. We have
to make requests through the President to the Attorney General's
office for a formal opinion. We have only received one formal
opinion from the Department of Justice, and that was as to who is
an officer of the Government. We confer informally with the First
Assistant Attorney General, now Mr. Frierson; and on this matter of
the Stone & Webster contract I took it to him and we looked it over
together, and it is specifically stated that they were to be agents of
the Government. The Judge Advocate General has held also that
it made the employees civil employees of the Government.
formally the First Assistant Attorney General thought so, too, and
the comptroller thought so also. So we had the judgments--not in
writing of all of them, and we had the opinion in writing of the
Judge Advocate General also that the contract would do that, and
informally the First Assistant Attorney General said he thought so,
and the Comptroller of the Treasury thought so. I think there is
no question about that.
In-
Mr. DEWALT. As I understand it, that was ruled specifically upon
zne terms of the contract?
Mr. LITTLE. Yes, sir; each one of them was taken up on its own
merits and decided that way.
Mrs. AXTELL. But they also ruled that they could not decide; that
it must come to us for final decision under section 32.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
101
Mr. DEWALT. That is what I would like to have. They say that
you have authority under the provisions of your act to decide ques-
tions of this kind? You say you have that?
Mrs. AXTELL. We have that; yes, sir.
Mr. DEWALT. Now, another question: Do you have any specific
ruling or investigation from the Attorney General's office in regard
to this specific question now before us?
Mrs. AXTELL. No; so far as I know, we have not. We have really
had no time to consider it.
Mr. DEWALT. Just one more question: You said you have made sev-
eral rulings-that is, your board has made several rulings-in regard
to who are and who are not employees. Have those been accepted?
Mrs. AXTELL. They have, by the Comptroller of the Treasury.
Mr. DEWALT. Any money paid out in accordance with those rul-
ings?
Mrs. AXTELL. Yes, sir.
Mr. STEPHENS. I would like to ask one question: I would like
to know if this section 9, as it stands or as we might modify it, gives
you full authority without any question to put these people in a
status so there will be no question about them coming under Federal
jurisdiction?
Mrs. AXTELL. You ask if it did what? I didn't understand the
question.
Mr. STEPHENS. What I wanted to know was whether or not this
section 9, if left in the act, would remove all question of your right
to classify these people under the compensation act?
Mrs. AXTELL. I should think so. The only objection is, of course,
that it causes delay.
Mr. BARKLEY. Not unless the President should act on section 9.
This simply authorizes him to put these men in.
Mrs. AXTELL. I haven't a copy of that now, but, it seems to me, the
last clause, if that were eliminated, I think it would. It provides
that while the carriers are under Federal control the President may
determine whether and on what terms and conditions the Federal
workmen's compensation act of September, 1916, shall be applicable
to carrier employees. Yes; that leaves it to the President to deter-
mine. This amendment-I have not seen the amendment-the orig-
inal section, I think, means the same thing if the last clause is
omitted, "On such terms and conditions as will give due consider-
ation to remedies available under State compensation laws or
otherwise."
The CHAIRMAN. Are you through now, Mrs. Axtell?
Mrs. AXTELL. Yes, sir.
The CHAIRMAN. We are much obliged to you. Now, Mr. Commis-
sioner Little, who is the next speaker?
Mr. LITTLE. Mr. Keegan, of the commission.
STATEMENT OF JOHN J. KEEGAN, UNITED STATES EMPLOYEES'
COMPENSATION COMMISSION.
Mr. KEEGAN. Mr. Chairman and members of the committee, I think
the question has been pretty fully stated by the other two com-
missioners.
102
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Possibly some of the confusion that seems to have arisen in the
minds of members of the committee might have been due to the way
we stated our case, Mr. Little being a member of the commission
representing the negative side of the question and presenting, as it
were, the commission's affirmative view on the question.
As it occurred to the commission, as Mrs. Axtell has tried to make
plain to you-and possibly has-it was not a new question for the
commission, but just an incident to our usual line of work, deciding
just who was a Federal employee-a civil employee, rather of the
United States Government. There doesn't seem to be any question.
about the right of this commission to decide that question, so far as
the administration of the law is concerned. If there is any doubt
about the authority of the commission in the matter, we have been
unable to have anyone give us that legal opinion. Right in the be-
ginning it seemed to us in individual cases the case of some indivi-
dual persons as to whether or not they were employees under the
terms and meaning of the compensation act. We went to the Comp-
troller of the Treasury and we went to the Department of Justice,
and here and there, trying to ascertain just what rulings had been
made by courts, or precedents established, defining civil employees
of the United States Government. We learned that there had been
practically no general ruling of any court, nothing at all from the
Supreme Court on the subject, and that it was entirely left to this
commission-the administration of the act-and that being one of the
features of the administration of the act, that the sole power of defin-
ing for compensation purposes who were civil employees of the United
States Government was vested with this conmission.
So it drifted from the individual case to the case of the cantonments,
as Mrs. Axtell said, and in the first instance where a contract for a
cantonment was given out and had to be acted upon by the commis-
sion, the ruling was by the Governor General, I believe or the Judge
Advocate General of the War Department-before we got time to
act on the question, that they were not civil employees, and in that
instance the cantonment employees were not under the Federal com-
pensation act. The question never came to our commission to decide.
The contractor came there, or his representative, but the War Depart-
ment settled the question before it was actually put up to the com-
mission.
Then, in the next instance the contractors changed in giving out the
cantonments, and the line was so uncertain that it made them, to our
thought and purpose, civil employees of the United States, and they.
were included. It then drifted cn to the men in the leased ships, by
the Shipping Board, and they were included. And from one incident
to another of that kind groups of men came in under the term of
civil employees of the Government, because of these abnormal condi-
tions, that naturally were not cared for under the compensation act.
Now, I think the thought of the majority members of the commis-
sion, in asking that you omit from the bill legislation on compensa-
tion purposes, largely is based on the fact that if the act is not com-
mensurate with present conditions that might be amended, covering
the matter with less injury and much more expeditiously to all parties
concerned, and avoiding at the same time the possibility of again hav-
ing two conflicting bodies administering possibly the same function
of law; and if it occurs to the committee that the compensation law
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
103
does not cover them, I believe that the compensation act itself would
be the act to amend and change, not leaving it to the President or
anyone else.
If the purpose of taking over the railroads is for the purpose of
conserving to the Government the greatest efficiency of transporta-
tion, it occurs to me, in my lay mind-and I am not a lawyer-that
there is just this possibility: That when the men go into court for
redress for injury-the Federal court-the court might hold that in
so far as the responsibility for transportation is concerned the rail-
road corporation is dead; that the Government now has assumed the
responsibility for the transportation of the country, and for that
reason they could not sue the Government, and the court might leave
them beyond the pale of suing the railroad corporation, and there
would be no agency through which they could seek redress. I do
not know of any condition that might have a more demoralizing effect
upon the employees of the railroads, and might tend to a greater length
to reduce the whole efficiency of the transportation system, than just
such chaotic conditions as that.
Mr. BARKLEY. Will you allow a question there? Doesn't the Presi-
dent's proclamation protect the rights of all employees already exist-
ing and that may come into existence in the future and bring suits
against railroad corporations, just as they have done all along?
!
Mr. KEEGAN. Well, as I said, Congressman, I am not a lawyer; but
it occurred to me that even a Federal court might hold that, while the
President had the power to take over the railroads for war purposes,
that he might not have the power to designate just what could be done
with the company's property in a suit of that kind after they were
taken over.
Mr. Barkley. Doesn't the authority of the President, both express
and implied, carry with it the power to make all regulations neces-
sary to conduct the railroads?
Mr. KEEGAN. I am sure you would be in a much better position to
express an opinion upon that than I would.
Mr. BARKLEY. I am just trying to get your view, so that we can
take care of the situation in the law.
Mr. KEEGAN. My view was and I believe Mrs. Axtell shares it
with me that there might arise that condition through the interpre-
tation of a Federal court that would leave the men without the pro-
tection of the old law, the common law, or the statute liability law,
and at the same time they would be without compensation from the
Government; and, it being impossible to sue the Government, they
would be without any redress whatever. And by extending this act
to cover these men as civil employees of the United States Govern-
ment the few amendments that we now have agreed upon, even in ad-
vance of this question coming up, would make this law wholly ade-
quate, in my judgment, to cover all of the men. The only question
is that these railroad men are a little better paid than the average
Government employees that have been covered by the act.
Mr. ESCH. Of course it would entail a very large additional ap-
propriation for the Public Health Service and increase their person-
nel, because they are the agency that would have to give medical
care and attention to these railroad employees, since the Army and
Navy Medical Departments would not or could not.
104
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. KEEGAN. I think that is possible. I think it would undoubtedly
entail considerable expense, but the question as to whether that should
come out of the Government, that was raised here yesterday, or
whether it should be paid by the railroads, I think, is largely a ques-
tion for the President, the Director General, and those controlling
the roads to decide whether or not this is an item of expense of opera-
tion; and then, if it is, it can be assessed to them just as well. It
would undoubtedly entail considerable expense and additional appro-
priations to cover even the compensation of the men.
There is another feature attached to this: The committee realizes
that this law is not going to be passed within 30 days, anyway. I
think that is a fair guess. Now, if the number of accidents reported
here yesterday-in round numbers, about 200,000—is the annual num-
ber of accidents occurring on railroads, if that is true, that brings
us to about 500 a day, or a little more, and in 30 days you would have
more than half a million accidents to be adjusted by whichever
tribunal you may designate; and if you know anything about the
complication of following out the surrounding conditions of each
injury and accident to an employee in order to fasten their right of
compensation, it entails a tremendous volume of work, and I would
not want to think if this commission was going to interpret—if their
interpretation was to be accepted and we were to administer the
compensation to the men-that we would ultimately have it loaded
on us when there would be from 500,000 to 800,000 cases pile in at
once. This act passed last September. The commission was not
appointed until March, and we had then only 500,000 employees,
approximately, in the Government service coming under the act, and
we had over 3,000 cases in the five or six months waiting for adjust-
ment then.
Mr. BARKLEY. You should have said September, 1916.
Mr. KEEGAN. Yes, sir; 1916.
Mr. EscH. Under the act of September 7, 1916, you assumed settle-
ment of many of the claims for injury, do you not?
Mr. KEEGAN. Yes, sir.
Mr. Escн. And you have in some cases been successful in securing
settlement without litigation?
Mr. KEEGAN. Yes.
Mr. Escн. I suppose that same power and practice would apply to
the railroad employees?
Mr. KEEGAN. Yes; the difference would be this-I don't think it
would be more expensive to the railroad corporations. While, as
stated yesterday, no definite figures are available on the question, that
is true, but with a quarter of a century of actual contact and experi-
ence with that question, my impression is that the railroad com-
panies pay out just as much now as this compensation would amount
to; the only difference being that under the compensation law all
that they pay out would go to the injured employee, where now a very
small portion of it goes to them.
Mr. EscH. That is a very great advantage of the compensation
act.
Mr. DEWALT. Mr. Keegan, if these employees were to be included
under the working of the compensation act, then, of course, on the
occurrence of an injury the liability of the Government would be
fixed, all other things being equal?
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
105
Mr. KEEGAN. Yes, sir.
Mr. Escн. Now, that liability of the Government would continue
until the injured person died, or until he recovered?
Mr. KEEGAN. Yes, sir.
Mr. ESCH. And that period might be after the termination of the
war, might it not?
Mr. KEEGAN. Yes.
Mr. ESCH. It might last for 10 or 15 years?
Mr. KEEGAN. Yes, sir.
Mr. Escн. Now, you propose to put them under the compensation
act and, as I say, then the liability of the Government is fixed and
the liability of the Government continues. But now, suppose the
Government, within a certain period, perhaps, after the termination
of the war, surrenders possession of the railroads to their corporate
entities; how are you going to pay this future liability of the Govern-
ment after you do not get the revenues from the railroad companies?
Mr. Little said yesterday by creating a reserve fund. Now, what is
your thought in regard to creating this reserve fund? Where are
you going to get it? From whom?
Mr. KEEGAN. Personally, I have no thoughts upon it, because I
have felt the impossibility of it and the impracticability of it. I
don't believe that is the way, and Mr. Little was expressing his own
personal view, and I am expressing mine.
Mr. Escн. That was not the opinion of the commission?
Mr. KEEGAN. No; my thought is that when the war is over and the
roads are turned back-if they ever are to be turned back-to private
ownership again-that this will be but a small incident of the many
things that Congress will have to adjust by legislation at that time.
Mr. ESCH. Your thought, then, would be that Congress would
legislate on this, and that this compensation, then, in turn must be
paid by the railroad companies instead of the Federal Government?
Mr. KEEGAN. They could create the same condition, in my judg-
ment, between the Government and the interstate workmen and em-
ployees, as the States create between their State compensation and the
workmen in that State.
Mr. ESCH. In other words, you don't agree with Mr. Little on the
reserve fund idea?
Mr. KEEGAN. No; I don't.
The CHAIRMAN. We are much obliged to you, Mr. Keegan. Now
who else have you, Mr. Little?
Mr. LITTLE. Mr. Chairman, do you wish to hear our solicitor, Mr.
Deibert? He is here.
The CHAIRMAN. Well, this is a legal question, and I think we
should hear him.
Mr. LITTLE. He will be glad to answer your questions.
STATEMENT OF ARTHUR H. DEIBERT, SOLICITOR UNITED STATES
EMPLOYEES' COMPENSATION COMMISSION.
Mr. DIEBERT. Mr. Chairman and gentlemen, I have no statement to
make, but I will be very glad to answer any questions that you may
desire to ask, to the best of my ability.
Mr. BARKLEY. I am bothered about you interpretation of this lan-
guage in the statute which gives to the commission authority to pass
106
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
t
upon questions that arise under the act. Of course, that contem-
plates, in my opinion, any questions that legally arise as to the inter-
pretation of the intention of Congress in passing the act, whether
this commission has authority to take within its jurisdiction a large
number of employees who were never contemplated by Congress
and who do not draw their pay through the United States Treasury.
I would like to get your view, just your reason, about that; how you
arrived at that.
Mr. DIEBERT. Section 32, as Mrs. Axtell said, provides that all
questions arising under this act shall be decided by the commission.
À number of questions involving various phases of the act were put
up to the Comptroller of the Treasury shortly after the commission
organized, for his opinion. They were fiscal questions, and it was
believed they might properly come within his jurisdiction. He
replied that all of the questions asked were matters for the commis-
sion to decide, but he did say that the question as to who is and who
is not a civil employee of the United States was one for him to decide.
Therefore the commission having decided yesterday that railroad
employees are civil employees of the United States for the purpose
of this act, it is my personal view that before any money could be
paid, the Comptroller of the Treasury would have to express his
opinion as to whether or not it was a compensable case under our act.
Mr. BARKLEY. Now if the comptroller should decided, after many
claims have been allowed and adjusted, that under the terms of the
compensation act these employees were not included, would that
not bring considerable confusion both as to the employees and the
Government?
Mr. DEIBERT. I am afraid so.
Mr. BARKLEY. In view of that, would it not be more wise to make
certain in his law some provision that would take care of that situa-
tion, if that should arise?
Mr. DEIBERT. It was my own personal view that Congress should
express some opinion on the matter through this act.
The CHAIRMAN. Does anyone wish to ask the solicitor any further
questions?
Mr. DILLON. You say the comptroller passed upon these cases and
gave his approval and the warrants have been drawn?
Mr. DEIBERT. No; but the claims have been paid under those-he
has given his informal opinion in same cases; yes, to the chairman
of the commission.
Mr. DILLON. Well, do you know whether the comptroller appar-
ently has approved these applications that have been passed by your
commission?
Mr. DEIBERT. The cases have gone to him, and we have heard
nothing to the contrary from him. No cases have been disapproved
by him, and in many of the cases the question as to whether or not
the persons doing specific work for the Government were contractors
or simply agents of the Government has been put up to him, and he
has decided that they were agents of the Government and not con-
tractors.
Mr. STERLING. What was that?
Mr. DEIBERT. I say, the comptroller in a number of specific in--
stances in which the question arose as to whether persons doing work
for the Government were contractors or agents of the Government,
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 107
he has considered that they were agents of the Government and not
contractors; and that the employees or the persons doing that work
became civil employees of the United States for the purpose of
compensation.
Mr. DILLON. I think I saw something in the papers that Gen.
Crowder had expressed an opinion that these employees were not
Government officials. Do you know anything about that?
Mr. DEIBERT. Nothing more than what I have seen in the papers
to the same effect, that for the purpose of classifying them under the
selective-service law he considered that they are not employees of the
United States.
Mr. DILLON. Well, under his interpretation do you not think it
would be well for your commission to rather hold up these decisions
until Congress can make some provision in reference to it, so as to
make it specific?
Mr. DEIBERT. Well, that is a matter of policy, of course, for the
commissioners to decide.
The following memoranda are submitted by the United States Em-
ployees' Compensation Commission to be included in the record:
TREASURY DEPARTMENT,
Washington, April 12, 1917.
CHAIRMAN UNITED STATES EMPLOYEES' COMPENSATION COMMISSION,
Washington, D. C.
SIR: I have your letter of the 10th instant submitting to this office for de-
cision certain questions which have arisen, or are likely to arise in connection
with the administration by your commission of the act to provide compensa-
tion for employees of the United States suffering injuries while in the perform-
ance of their duties (act of Sept. 7, 1916, 39 Stat., .742).
The first question submitted is as to the proper method of computing com-
pensation to be allowed to per diem employees who are ordinarily paid for holi-
days, but are not paid for Sundays.
The second question is as to proper rate of compensation to be allowed to an
employee who is paid one rate of pay for day work and a different rate for
night work.
The third question is as to the proper rate of compensation to be allowed to
pieceworkers.
The fourth question is as to whether an employee who has been in receipt of
subsistence, as well as wages in money, would be entitled to commutation of
such subsistence if taken to and treated in a hospital of the United States
Public Health Service where subsistence in kind is furnished to him.
The fifth question is as to whether, in case an employee's rate of pay would
have been either reduced or increased had he continued working, his injury
compensation shall be correspondingly reduced or increased.
Section 28 of the act of September 7, 1916 (39 Stat., 748), creates a commis-
sion to administer the provisions of the act.
Section 32 of the act is as follows:
"That the commission is authorized to make necessary rules and regulations
for the enforcement of this act, and shall decide all questions arising under this
act."
Section 35 of the act provides:
"The commission, upon consideration of the claim presented by the benefi-
ciary and the report furnished by the immediate superior and the completion
of such investigation as it may deem necessary, shall determine and make a
finding of facts thereon and make an award for or against payment of the
compensation provided for in this act. Compensation, when awarded, shall be
paid from the employees' compensation fund.”
Sections 37 and 38 provide for review by the commission of its own awards
and for further action by the cominission in accordance with its finding on such
review.
Section 36 provides for a finding by the commission and an award for or
against payment of compensation provided for in the act. When the commis-
108
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
sion has made its findings and has awarded payment in any case, the next ques-
tion for determination is what rate of compensation the act provides for the em-
ployee in that particular case. This is a question arising under those sections
of the act which fix the compensation to be paid to injured employees, and is
therefore a question which section 32 of the act provides shall be decided by the
commission.
The commission is fully empowered by section 36 of the act to decide all ques-
tions involved in their finding of facts and award of payment. If meaning and
effect is to be given to section 32 of the act, it must be held to empower the com-
mission to decide all other questions necessarily involved in the final adjudica-
tion of any case properly and lawfully before it for settlement.
All of the questions submitted are such as should be settled by the commission,
and this office must therefore decline to express any opinion as to their proper
determination.
Questions involving the jurisdiction of the commission, such as the question
of whether or not a particular person is an employee of the United States within
the meaning of the law, are questions which this office must decide when sub-
mitted.
Respectfully,
?
W. W. WARWICK, Comptroller.
WAR DEPARTMENT,
OFFICE OF THE JUDGE ADVOCATE GENERAL,
Washington, November 10, 1917.
Memorandum for the Chief of Ordnance.
Subject: Status of employees in connection with construction of American
ordnance base depot in France.
1. In a letter from the Chief of Ordnance, dated November 7, 1917, the ques-
tion is presented as to the status of civilian employees engaged in the construc-
tion of the American ordnance base depot in France, pursuant to the terms of
the contract with Stone & Webster. It is desired to know whether such
employees are covered by the compensation act of September 7, 1917 (39 Stat.,
742); if so, whether they would be considered as in the performance of their
duty while being transported upon a Government-owned or chartered carrier, or
» privately owned carrier; and if not within the terms of the compensation act,
whether they should obtain insurance from a private or corporate source.
Copy of the contract is attached.
2. An examination of the attached contract shows the following pertinent
facts:
(1) The contractor's agreement to plan, furnish, and install all structures,
etc., necessary for the said depot is "as agent for the Government.”
(2) The possibility of doing a substantial part of the labor by troops or
conscripted laborers working under the direction of the contractor is contem-
plated and provided for.
(3) The contractor is to prosecute the work under the supervision and direc-
tion of the contracting officer or other duly accredited representative of the
Government.
(4) All materials, workmanship, plans, specifications, proposals, contracts,
policies, etc., are subject to the approval of the contracting officer or his repre-
sentative.
(5) Pay rolls for labor performed in France are to be prepared by the con-
tractor and submitted to the contracting officer for his approval, and upon such
approval the contracting officer is to furnish funds which shall be immediately
paid out by the contractor under the supervision of the contracting officer.
(6) Practically all material required in carrying out the provisions of the
contract is to be furnished by the contracting officer and paid for by him.
(7) The Government assumes sole responsibility for shipment of materials
and delivery at or near the site of the depot in France.
From the foregoing it is apparent that while the contractor employs the
men and does the work of distributing the pay to them, and has general super-
intending power under the contracting officer, the employees are really under
the control of the contracting officer, through the contractor as agent; that the
Government has, under this contract, the right to control not only the result of
the work but also the method of doing same; and that the contractor is in fact
only a superintendent of the Government. Therefore these employees are em-
ployees of the United States and should be entitled to the protection of the
compensation act of September 7, 1916. It must be borne in mind, however,
•
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
109
that by section 32 of said act the commission is given authority to decide all
questions arising under the act, and it would be for the commission to make a
determination of this question.
3. If these employees are hired in the United States and are paid wages from
the time of their hire and are transported from the place of hiring to the place
of work at the expense and by direction of the United States, whether directly
by the Government or by private carriers, they are, during transportation,
acting in the performance of duty and are covered by the terms of the act just
as fully as if they were actually engaged in the construction work.
The answer to the foregoing makes unnecessary an answer to the last ques-
tion submitted, but if these employees were not within the terms of the
compensation act and it was desired to procure insurance for them against
death or disability, it would have to be procured from some nongovernmental
agency, for such employees are clearly not within the protection of the act
of October 6, 1916, commonly known as the war-risk insurance act.
5. The questions submitted therefore are answered as follows: The employees
in question are employees of the United States Government and are covered by
the compensation act of September 7, 1916. They are to be considered as in the
performance of their duty while being transported to the place of work upon
a Government-owned or chartered carrier, or upon a privately owned carrier,
provided that their term of employment begins before the transportation and
they are acting pursuant to orders. If insurance against accident and death is
desired by these men it must be obtained from some nongovernmental agency.
S. T. ANSELL,
Acting Judge Advocate General.
[Stone & Webster.]
J. R. LOTZ.
Lieut. Col. D. M. KING.
Subject: Liability insurance.
NOVEMBER 7, 1917.
From a study of the situation in regard to liability insurance, there appear to
us to be two alternatives from which we can choose:
First. If it is decided that men engaged on this work are Government em-
ployees and, therefore, entitled as such to compensation for death or disability
resulting from personal injury sustained while in the performance of their
duties, including the risk incident to transportation to the work, whether by
Government transports or by privately owned steamers, then the proposition as
regards employees is simplified and they could be informed of their status as
civil employees of the Government and of the fact that they would be com-
pensated accordingly by the Federal civil employees' compensation act. The
latter would prove to be quite an encouragement with some, at least, who
enter this service, and would answer the many inquiries about protection and
would provide for the payment of a fixed insurance indemnity to employees
engaged in duties incident to the work in the United States, which is not the
case with regard to employees of a private contractor. (In the District of
Columbia and some States workmen's compensation laws are not in effect, and
an employee must make claim or bring suit for damages.) Liability on the part
of the Government or the contractor, or both, would seem to begin at the time
of hiring as respects persons to be sent to France from the United States and
elsewhere outside of France, when it is recalled that their names are placed
upon the payrolls and salary or wages computed from the time of hiring, not-
withstanding that they may not perform any actual duty incident to their
employment until reaching the location of the work.
Second. If the persons engaged for this work are held to be employees of
the contractor, there is no means of insuring the risk of transportation, and the
Government would be called upon to indemnify the contractor for any loss or
expense so sustained, as provided in the contract. However, insurance can be
obtained to cover the risk of liability of the contractor on employees engaged
both in this country and in France, and the employees would be compensated
as provided by the law or laws, including workmen's compensation acts, of the
locality in which the injury occurred.
The public liability feature is also to be considered. If it is decided that the
Government is the real responsible agency prosecuting the work at home and
abroad, then such claims could only be maintained or enforced in the customary.
manner or usual channel, and not by suit, at least so far as the accidents in
110
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
:
the United States are concerned, and would, perhaps, have no standing in the
courts of France; but if the contractor is the responsible head of the work, then
it might be thought advisable for him to insure such liability at the Govern-
ment's expense.
We are informed that the Judge Advocate General, United States Army,
should be appealed to as to the status of the employees on this work. We under-
stand that the United States Employees' Compensation Commission has held
that employees are engaged in the performance of their duties while being
transported to and from their work upon Government owned and operated car-
riers, and, no doubt, would accord the same treatment to employees herein con-
sidered, while being transported by private means if an official ruling is made
to support them.
We believe the proposition of such importance that every effort should be
made to arrive at an immediate decision, and we await your advices.
Copy of the United States civil employees' compensation act is attached.
A COPY OF CONTRACT BETWEEN THE UNITED STATES GOVERNMENT AND STONE &
WEBSTER FOR THE CONSTRUCTION OF THE AMERICAN ORDNANCE BASE DEPOT IN
FRANCE.
These articles of agreement, entered into this Twenty-second day of August
(22d), 1917, between Charles A. Stone, Edwin S. Webster, Russell Robb, Henry
C. Bradlee, Dwight F. Robinson, and John W. Hallowell, partners trading under
the firm name of Stone & Webster, having its principal place of business in
Boston, Commonwealth of Massachusetts (hereinafter referred to as the "Con-
tractor"), of the first part, and the United States of America, by David M.
King, Lieutenant Colonel, Ordnance Department, U. S. Army (hereinafer re-
ferred to as the " Contracting Officer"), acting by authority of the Chief of
Ordnance, United States Army, and under the direction of the Secretary of
War, of the second part,
Witnesseth: Whereas funds are now or will be available for the establish-
ment of the American Ordnance Base Depot in France;
And whereas the Government is desirous of having the facilities above de-
scribed furnished and constructed, and is desirous of contracting with parties
having experience in the design and construction of similar undertakings for
the design, construction, and equipment of the said depot;
And whereas the contractor has had experience in similar work, is equipped
with facilities for the performance of such work, and is willing to undertake
the same upon the terms and conditions hereinafter stated:
Now, therefore, for and in consideration of the premises and the mutual
covenants herein contained, these said parties have mutually covenanted and
agreed, and by these presents do mutually covenant and agree, to and with each
other as follows:
ARTICLE 1. The Contractor agrees, subject to the terms hereof, and acting as
agent for the Government, to plan, furnish, and install all structures, buildings,
equipment, and apparatus necessary and required for the said depot.
The work as now contemplated consists of—
Gun shop, 500 by 245 by 28 feet high.
Truck shop, 500 by 245 by 15 feet high.
Small-arms shop, 500 by 245 by 15 feet high.
Equipment shop, 500 by 245 by 15 feet high.
Carriage shop, 500 by 245 by 15 feet high.
28 warehouses, 500 by 245 by 15 feet high.
Power station of 5,000 KW. capacity.
Administration building.
Oil storage.
Grading, railroad tracks, roads, water supply, fire protection, sewers, lighting,
heating, plumbing system, elevators, conveyers, telephone system, etc., for yards
and buildings.
The Contractor is to lay out, purchase, and install all machine-tool equipment
with its power supply.
It is understood, however, that any work may be added to or deducted from
this schedule by the Contracting Officer.
If any substantial part of the labor shall be done by troops or by conscripted
laborers working under the direction or supervision of the Contractors the
wages of such labor paid by the Government shall be considered as a part of
the cost of the work on which said fee is based. This does not include sub-
sistence.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
111
Subject to the terms hereof the Contractor shall assemble all of the material
required for the work that is to be shipped from the United States at a port or
ports designated by the Contracting Officer. The Government assumes sole
responsibility for shipment from said port or ports of said materials and their
delivery at or near the site of the Depot in France. The Contractor shall take
over the material on its delivery at or near the site and erect the buildings,
install the equipment, and complete the plant.
ARTICLE 2. The Contractor further agrees to prosecute the work under the
supervision and direction of the Contracting Officer or other duly accredited
representative of the Government, or whose designation for this purpose due
notice shall be given the Contractor in writing, and all material, workmanship,
plans, specifications, proposals, contracts, policies, etc., shall be subject to the
approval of the Contracting Officer or his representative. The Contractor
agrees to prosecute the work in accordance with its best skill and practice and
as part of said work will do all things necessary to make ready for the oper-
ation of the Depot with such reasonable diligence as may be required by the
Government.
ARTICLE 3. It is understood and agreed that the Contractor will establish the
necessary branch and field offices and will employ the necessary assistants,
including superintendents, engineers, draftsmen, mechanics, laborers, and
clerical force, to plan and erect the buildings and plant, purchase and install the
furnishings and equipment.
Pay rolls for labor performed in France under this contract shall be prepared
by the Contractor and submitted to the Contracting Officer or his repesentative
for approval. Upon such approval the Contracting Officer shall furnish funds
to the amount of said pay roll, which funds shall be immediately paid out by
the Contractor under the supervision of the representative of the Contracting
Officer.
+
For such men in the field offices as it may seem to the Contractor desirable
to pay from his Boston Office and for men employed at his Boston Office monthly
bills shall be rendered which shall be paid before the 15th of the following
month. Payment of such bills shall be on the usual Government vouchers and
individual receipts shall be attached thereto.
ARTICLE 4. It is understood and agreed that practically all material required
in carrying out the provisions of this contract will be purchased by the Con-
tracting Officer, and paid for by him, the advertisements, abstracts of proposals,
and vouchers being prepared by the Contractor on the prescribed Government
blanks. In the event of its being necessary for the Contractor to furnish mate-
rial essential to the prosecution of- the work, it may be furnished on the order
of the Contracting Officer and paid for on the usual Government voucher, sub-
ject to the usual limitations covering Government purchases.
ARTICLE 5. The Contractor shall procure and thereafter maintain such insur-
ance, in such forms, in such amounts, and for such periods of time as the Con-
tracting Officer may approve or require.
ARTICLE 6. It is agreed for the purpose of this agreement to define "costs "
as including:
The cost, delivered at seaboard of all materials, construction plant, tools,
machinery, and equipment required for the work.
All transportation charges for material except for transportation furnished
by the Government under Article 1.
All pay rolls for labor.
The cost of procuring and transporting labor.
The salaries of engineers, draftsmen, inspectors, and material chasers in or
from the Boston Office for the time they are actually engaged on this work.
The salaries of employees in branch and field offices, including engineers,
draftsmen, superintendents, clerical forces, etc., for the time actually employed
on this work.
The actual traveling and living expenses of men engaged on this work.
The cost of the bond required by this contract, of any other bonds and of such
insurance as the Contracting Officer may approve or require; and losses due to
accident or damage and legal and other expenses in connection therewith sus-
tained by the Contractor and not compensated by insurance or otherwise in-
cluding settlements made with the written approval of the Contracting Officer.
The cost or rental of all buildings and equipment required for branch and
field offices to the extent actually employed on this work, except such buildings
and equipments as may be furnished by the Government, commissary, and hos-
pitals either in the United States or in France, and the cost of maintaining and
112
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
operating such offices, commissary, and hospitals, including commissary supplies
and such minor expenses as cablegrams, telegrams, telephone service, postage,
expressage, etc.
Such other items of cost not specifically provided for herein and arising in
connection with the fulfillment of this contract as may be specially authorized
in writing by the Contracting Officer.
ARTICE 7. The Contractor agrees to do all the work contemplated under this
contract for the sum of three and one-half per cent (31%) of the total cost
of the work authorized hereunder, except payment, if any, for losses due to
accident or damage, and the reimbursement to the Contractor by the Govern-
ment for any expenses incurred by the Contractor, including expenses in con-
nection with losses due to accident or damages, chargeable under Article 6.
•
It is agreed, however, that if the cost of the work shall exceed the sum of
twenty million dollars ($20,000,000) the fee payable to the Contractor shall be
three and one-half per cent (31%) of twenty million dollars ($20,000,000) plus
three per cent (3%) of the excess over twenty million dollars ($20,000,000).
The Government agrees to pay to the Contractor on or before the fifteenth
(15th) day of each month three and one-half per cent (31%) or three per cent
(3%), as the case may be, of the total of the expenditures of the Contracting
Officer during the preceding month, and to reimburse the Contractor for any
material or labor supplied or expenses incurred by the Contractor hereunder
during the same period properly chargeable as part of the total cost.
ARTICLE 8. It is understood that the Contractor will do a part of its work in
Washington. The detail building designs, the purchase and following up of mate-
rial and equipment, payments and general administration of the job will be han-
dled in its Boston Office. The Contracting Officer agrees to detail a representative
to work with the Contractor in its Boston Office. This representative shall have
authority to give conclusive approvals and instructions to the Contractor, to
issue orders for materials and supplies, and to receive and transmit to a Dis-
bursing Officer vouchers prepared by the Contractor.
The Contracting Officer shall detail another representative to work with the
erecting force in France, who will act in a similar capacity.
ARTICLE 9. The Contracting Officer or his representative shall have the privilege
of examining the books and papers of the Contractor relating to this contract
for the purpose of verifying any or all bills rendered by the Contractor under
this contract, and the duly authorized representative of the Contractor shall be
accorded the privilege of examining the books and papers of the Contracting
Officer relating to the work to be performed under this contract for the purpose
of checking up and verifying the cost of this work.
ARTICLE 10. It is further specifically understood and agreed that, in case
of failure to observe any or all of the covenants and the agreements to be per-
formed by the Contractor under this contract, the Contracting Officer shall de-
termine what constitutes a failure hereunder. If any doubts or disputes shall
arise as to the meaning of anything in this contract, the matter shall be re-
ferred to the Chief of Ordnance, United States Army, for determination.
however, the Contractor shall feel aggrieved at any decision of the Chief of
Ordnance, he shall have the right to submit the same to the Secretary of War,
whose decision shall be final.
If,
ARTICLE 11. It is further agreed that this contract shall not be effective
until the Contractor shall furnish a satisfactory bond, in the penal sum of
Two Hundred Fifty Thousand Dollars ($250,000), conditional upon the faithful
performance of all the provisions and conditions of this contract.
ARTICLE 12. No person or persons shall be employed in the performance of
this contract who are undergoing sentences of imprisonment at hard labor
which have been imposed by the Courts of the several States, Territories, or
Municipalities having criminal jurisdiction.
ARTICLE 13.—This contract is subject to the provisions of the following laws
so far as they may be applicable:
1. The Naval Appropriation Act approved March 4, 1917, containing, among
other things, the provisions quoted below in the President's Executive Order,
dated March 24, 1917.
2. The President's Executive Order, dated March 24, 1917, which provides as
follows:
"Under authority contained in the Naval Appropriation Act approved March
4, 1917 (Public 391, 64th Congress), whereby it is provided-
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
113
That in case of national emergency the President is authorized to suspend
provisions of law prohibiting more than eight hours of labor in any one day of
persons engaged upon work covered by contract with the United States:
Provided further, That the wages of the persons employed upon such con-
tracts shall be computed upon a basic day rate of eight hours' work, with over-
time rates to be paid for not less than time and one-half for all hours work
in excess of eight hours.
It is hereby ordered that the provisions of the Act approved June 19. 1912,
limiting the hours of daily service of mechanics and laborers on work under
contracts to which the United States is a party are suspended with respect to
all contracts for ordnance and ordnance stores and other military supplies and
material, contracts for buildings under construction or to be constructed at the
arsenals, and contracts for fortifications work during the pending emergency
and until further orders.
This order shall take effect from and after this date.
The WHITE HOUSE, 24th March, 1917.
WOODROW WILSON.
The act of June 19, 1912, referred to in the aforesaid Executive Order, con-
tains, among other things, the following provisions, which are here set forth
in order to indicate the persons and contracts subject to said Executive Order
and the Naval Appropriation Act approved March 4, 1917, viz:
*
*
SEC. 1. That every contract hereafter made to which the United States
is a party, and every such contract made for or on behalf of the
United States
which may require or involve the employment of laborers
or mechanics shall contain a provision that no laborer or mechanic doing any
part of the work contemplated by the contractor, the employ of the contractor
or any subcontractor contracting for any part of said work contemplated, shall
be required or permitted to work more than eight hours in any one calendar
day upon such work; and every such contract shall stipulate a penalty for each
violation of such provision in such contract of five dollars for each laborer or
mechanic for every calendar day in which he shall be required or permtted to
labor more than eight hours upon said work.
*
*
*
SEC. 2. That nothing in this act shall apply to contracts *
for the
purchase of supplies by the Government, whether manufactured to conform to
particular specifications or not, or for such materials or articles as may usually
be bought in open market, except armor and armor plate, whether made to con-
form to particular specifications or not * * * Provided, That all classes of
work which have been, are now, or may hereafter be performed by the Govern-
ment shall, when done by contract by individuals, firms, or corporations for or
on behalf of the United States *
be performed in accordance with the
*
terms and provisions of Section 1 of this act
ARTICLE 14. Neither this contract nor any interest therein shall be transferred
to any other party or parties, and in case of such transfer the United States
may refuse to carry out this contract either with the transferrer or the trans-
feree; but all rights of action for any breach of this contract by the Contractor
are reserved to the United States.
ARTICLE 15. No member of or delegate to Congress, or Resident Commissioner,
nor any person belonging to or employed in the military service of the United
States, is or shall be admitted to any share or part of this contract, or to any
benefit that may arise herefrom, but, under the provisions of Section 116 of the
Act of Congress approved March 4, 1909 (35 Stats., 1109), this stipulation shall
not apply or be construed to apply to any contract made with an incorporated
company for its general benefit.
ARTICLE 16. If for any reason it may seem to the Government desirable to dis-
continue this work, the Contracting Officer shall have the right to terminate
and cancel this agreement. In case of such termination, the Contractor shall
be entitled to reimbursement for its expenses and commitments caused by such
action, and to such an amount as will make the total fee equal three and one-
half per cent (31%) of the aggregate of expenditures of the Government at
the date of termination and its outstanding orders and commitments as of the
same date, unless said aggregate shall exceed Twenty Million Dollars ($20,000,-
000), in which case the total fee shall be three and one-half per cent (31%}
of Twenty Million Dollars ($20,000,000) plus three per cent (3%) of the excess
over Twenty Million Dollars ($20,000,000).
40958-18—8
114
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
ARTICLE 17. This contract is subject to the approval of the Chief of Ordnance,
United States Army.
In testimony whereof the parties hereto have hereunto set their hands and
affixed their seals the day and year first above written.
as to
Approved:
as to
The CHAIRMAN. I want to
of the committee made it to me
make this suggestion-some member
that we suspend the hearings now
and finish on this subject in the morning before beginning with the
others.
Mr. ESCH. I think, in view of the fact that Mr. Anderson only
wants three or four minutes, we might hear him now.
The CHAIRMAN. Well, the trouble of it is that when they get up
for three or four or five minutes we ask them so many questions that
it takes a good deal longer.
Mr. BARKLEY. Are you going to be at the hearing to-morrow, Mr.
Anderson?
Mr. ANDERSON. I shall try to be here, unless I am held before the
Senate committee. I can not say. I have only a suggestion of about
a moment to make, Mr. Chairman.
Mr. ESCн. I move that we hear him now.
The CHAIRMAN. Well, proceed, Mr. Anderson.
STATEMENT OF HON. GEORGE W. ANDERSON, COMMISSIONER,
INTERSTATE COMMERCE COMMISSION.
Mr. ANDERSON. Mr. Chairman, I have a suggestion to make which
I think may possibly assist and in some degree relieve the committee.
As I stated to the committee, this is a part of the problem that I
thought into, but not through. Seven years ago last summer I spent
some time on workmen's compensation, and if I were not in process
far beyond my capacity, I should deem myself competent to deal
with this matter of workmen's compensation. I do not deem myself
competent to deal with it as it ought to be dealt with and considered,
in the present difficulty and complexity, and consider other problems
that I am compelled to deal with.
It is suggested that 1,700,000 men, three times the number brought
under the act at the time it was passed, have been suddenly brought
under that act. I do not accept the interpretation given by the
members of the commission. I do not think it is necessary either to
rule that these carrier employees are not Federal employees or to
rule that they are under the terms of the compensation act. Every
act must be construed with the attempt to reach the mind of the
legislature. The legislature when it passed the act of September,
1916, had in contemplation the Federal employees then and there-
after to be added to the same general kind of enterprises. This
problem is different, not merely in degree, but in kind. Under the
war power you have taken over a business with 1,700,000 people,
which bears an entirely different relation. as pointed out by Con-
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
115
gressman Barkley, to the Federal Treasury from that which arises.
in connection with most of the contract work. It results that my
present tendency of mind is to think that this act does not apply and
that it perhaps would have been wiser for the commission not to have
ruled. I make no criticism of that. I venture to digress to say
that if Mrs. Axtell did not convince me that the law is what she
thinks it is, she at any rate made a powerful argument in favor of
woman's suffrage, for no one could listen to such a lucid statement,
with such a grasp of the subject as she has, without coming to the
conclusion that a good many women know how to vote better than
a good many men.
Now, then, to come to the particular point, it was arranged last
night that we shall at once draft into the service, for the purpose of
going through this matter, one of the most competent men in the
country. Two or three are under consideration. We propose within
the next hour to take steps to get such a man on this problem, and
then to be ready to present to Congress, to this committee, within
a few days the matured and definite views of the Director General
and of those who share with me the responsibility as to suggesting
legislation. I therefore think it will be helpful for this committee
to await our getting the advice and assistance of one of the most
competent men who has had to deal with this class of problem; who
will undoubtedly be a highly trained lawyer, and who will deal with
all the questions of law and policy, of present and of prospective
legislation. It is a serious problem. It involves large sums of money.
It must be worked out so that there shall be essential justice to all
the employees, and so that they will know that they are being dealt
with justly. Therefore if you will allow the matter to wait in that
fashion, we shall probably have a few other perfecting amendments
it will be strange if we do not find as a result of the hearings that
we want to change here and there a phrase to meet some question
which has arisen. We will present to you shortly, at such time as
may suit your convenience, such perfected amendments as we think
then will embody our matured views on all these questions for your
final deliberations. That is my suggestion.
Mr. BARKLEY. I think that is very wise.
The CHAIRMAN. Now, Mr. Plum, do you desire to come on now, or
will you take your time to-morrow?
Mr. PLUM. I think it will be better to take the time to-morrow.
The CHAIRMAN. The committee will stand adjourned until 10
o'clock to-morrow morning.
(Whereupon, at 11 o'clock a. m., the committee adjourned until 10
o'clock a. m., Friday, January 11, 1918.)
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS
COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE,
HOUSE OF REPRESENTATIVES,
Washington, D. C., Friday, January 11, 1918.
The committee met at 10 o'clock a. m., Hon. Dan V. Stephens
presiding.
Mr. STEPHENS. I think Mr. Thom was to appear this morning.
STATEMENT OF MR. ALFRED P. THOM, COUNSEL FOR RAILWAY
EXECUTIVES' ADVISORY COMMITTEE.
Mr. THOм. Mr. Chairman and gentlemen, I wish to take advantage
of this, my first opportunity, to explain to the committee why it is
I have not been heretofore in attendance upon its meetings. You
gentlemen have properly observed that there has been a sort of dual
investigation going on in the Senate. The Senate adopted a resolu-
tion, known as the Cummins resolution, to inquire into and report
upon the recommendations of the Interstate Commerce Commission,
and before the President had made his address to Congress, and be-
fore he had taken over the railroads, that committee entered upon
the consideration of that question. Also, before the President made
his address to Congress, and before the introduction of any bill, the
Senate committee had set last Monday as the time for me to appear
before them. That was the day that this committee began the con-
sideration of the present bill. The Senate then merged, apparently,
the consideration of the two questions into one, and have since Mon-
day been considering a bill similar to the one before this committee,
so that investigation has been going on morning and afternoon be-
fore the Senate committee every day this week, and it has been neces-
sary, by reason of the engagement I made with that committee
before these bills were introduced, for me to continue in my
appearance there, and that is the only reason why I have not been
here. I have for presentation to the committee this morning a wit-
ness who must, if possible, get through to-day, and therefore I will
ask of the committee permission to present my own view on this ques-
tion at a later date. I will merely make a few preliminary remarks
in respect to this situation.
The railroads realize as fully as anybody that the President has
been actuated by a purpose to do justice in what he has recommended.
We believe he has been actuated by a high sense of official responsi-
bility, and nothing that we shall do or say should be interpreted as
an indication of an obstructive attitude on our part, or of a carping
or critical spirit, and yet we feel, Mr. Chairman, that we do have
large responsibilities in this matter. What has been recently done
in respect to the railroads constitutes the largest economic revolution
117
118
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
that has ever taken place in the history of our country. It involves
more, it is more far-reaching, than anything which, in any economic
way, has ever been done by us. I am free to confess to you that this
is the largest case I was ever in. I believe that, even with your great
representative responsibiilty and the large matters with which you
have been called to deal, that, outside of such questions as a declara-
tion of war, the preparations for war, that you have never been called
upon to sit in judgment upon a larger or more important case.
The question then comes, How shall we best perform these respon-
sibilities? Ought we to say nothing in respect to this matter and
just allow it to take its ordinary course? Or do we, because of the
important interests we represent, owe a duty to you as well as to
ourselves to present in a calm and dispassionate way the facts as they
appear to us? We can not forget, Mr Chairman, that there are se
curities and properties variously estimated from $16,000,000,000 to
$20,000,000,000 involved in this matter. We can not forget that, as
the President has himself said, railroad securities are at the very
heart of all investments, large and small, by institutions and by indi-
viduals. We can not forget that there is no savings bank that is not
based upon the value of these securities; that there is no National or
State bank of which these securities do not form the substantial
basis of their solvency; that there is no insurance company, fire or
life, but which depends upon these securities for its ability to meet
its obligations, and that there is no institution, business or benevo-
lent, but what it likewise is founded upon this great mass of securities.
It therefore becomes a very solemn duty upon everyone who has to
do with this matter to approach it in a spirit of wisdom, of deliberate
consideration, of a desire to know the facts, and of a desire to reach
a conclusion which shall be consonant with the best interests of our
financial structure. We can not disguise from ourselves that the
very purpose of this act of the President, which was to take these
roads and use them in a larger and more efficient way for the conduct
of this war, must not be made a means of breaking down the financial
structure on which our ability to carry this war to a successful issue
depends. And that a mere ordinary regard for that enormous ques-
tion, the stability of our financial institutions in time of war, the
ability hereafter to find a basis for the flotation of new loans, and
for the imposition of new taxes, all depends upon the wise manage-
ment of this great economic question which is before you.
Governed by considerations of this nature, we have concluded that
it is our duty to lay before you the facts as we see them in respect to
the question as to whether or not the proposed compensation to the
carriers is adequate. We assume that you desire to know these facts.
You will realize that we have had no opportunity to present these
facts to the President; you will realize that the country has the right
to what the facts are; you will be doubtless confronted by the claim,
as I have seen the claim made in certain cases, that this proposed
basis of compensation is very liberal. You in the performance of
your duties ought to know whether that is true; you ought to know
whether it is adequate or inadequate; you ought to know how close
it approaches the line of adequacy. So that, without detaining you
further, in this opening statement I wish to explain that the pur-
pose of our appearance this morning is to give you the facts in this
1
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 119
case on that question, not in any obstructive or carping or critical
spirit, as I have said, but with the desire simply to lay before you the
facts for you to determine whether or not the basis suggested is ade-
quate or inadequate, and how the basis suggested relates to an ade-
quate return.
Mr. COADY. Do you propose to give us figures separately for each
of these railroad systems?
Mr. THOM. We can do that. We have them made out and can do
that.
The basis of our contention is, leaving out now the figures, that
the railroads are entitled, as a matter of law and as a matter of jus-
tice, to the equivalent of what the Government takes. The inquiry
will, therefore, be, first, what the Government takes. I suppose there
will be no difficulty in answering the question that the Government
proposes to take here in this period of control the use of these prop-
erties. The problem, therefore, before you will be to determine
what the value of that use is. What you want to do, what the solemn
obligation of Government is, that when it takes this use is to find its
equivalent and to provide for it.
Now the President has said in his proclamation that the value of
this use must be determined by its demonstrated value in the hands
of its owners. He has said that what these railroad companies are
entitled to is the amount that the owners have been able to make of
the use of which they are deprived. We think that is a sound prop-
osition. We think that is the basis. We think that if a man owns
a warehouse and is able to make a certain rental out of it, and the
Government takes the use of it for a few years, that what the owner
was able to make out of it is the minimum, at least, of the value
of that use.
Mr. COADY. At the time of the taking?
Mr. THOM. At the time of the taking. So we believe that the
basis, the principle which the President has advanced. is the correct
principle. We must find-our problem is to find-what the value
of this use is at the time of the taking. We do not believe that the
Government, acting through its legislative representatives, or
through the courts, or obliged to take a too restricted view of what
is the time of the taking. We realize that it may be that at the very
moment is too restricted a view of the period which would give a
fair indication of the values, and it is a matter of judgment as to
what period should be taken, and as to how far that period should
extend, but it should be reasonably related to the time of the taking.
Mr. DEWALT. What is the rule of law in regard to all condemna-
tion proceedings? Say, a right of way, after the fixing of damages.
Mr. THOм. In what respect, Mr. Dewalt?
Mr. DEWALT. As to the time. Is it not the fair market value it
has at the time of the taking?
Mr. THOм. It is; at the time of the taking.
Mr. DEWALT. The fair market value at the time of the taking?
Mr. THOM. Yes. Now, we are not taking here the railroads, we are
taking here the use of the railroads. Our problem is to find out,
from a period reasonably related to the time of the taking, what the
value of that use is as demonstrated by the uses which the owners
have been able to make of the property. This basis of the earnings,
120
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
which has been demonstrated as being a legitimate measure of the
use, is strengthened if we find that every use that the owner has
been making of that property has been limited and regulated by
law, if there is no question about the legitimacy of the amount of the
earnings which the owner has been able to make. If for 30 years,
with varying degrees of regulation, the earning capacity has been
limited and determined by law, then it seems to be incontrovertible
that the demonstrated earning capacities of the properties thus
regulated and limited by law becomes the lower level of what may
be deemed to be the value of the use. And the question comes:
What period ought to be taken? Ought it to be of the day of the
use? That is hardly a practicable standard. We come now into the
region of judgment. What, judicially speaking, is the best measure
of the earning capacity of these properties at the time they were
taken over?
On that subject we have the great precedent of what was done in
England. That was done under a statute which is substantially
the same as the statute of the United States of August 29, 1916,
under which the President acted. I will read briefly the provisions
of the English statute on this subject:
*
There shall be paid to any person or body of persons whose railroad or plant
may be taken possession of
such full compensation for any loss
under this section as may be
or injury they may have sustained
agreed upon between the secretary of state and the said person or body of
persons, or in the case of difference may be settled by arbitration.
That is the English statute.
Mr. BARKLEY. What is the date of that act?
Mr. THOм. 1871; just after the Franco-Prussian War.
Mr. BARKLEY. Is that the act under which the roads were taken
over in England after this present war began?
Mr. THOM. Yes.
Mr. BARKLEY. Has that been amended since the war began?
Mr. THOM. No.
Mr. STEPHENS. This English statute was passed in 1871.
Mr. THOM. Yes.
Mr. STEPHENS. Did the Government take over the railroads at
that time?
Mr. THOм. They exercised the power in 1914, but under the
statute.
Mr. STEPHENS. For the first time?
Mr. THOм. For the first time.
Mr. DOREMUS. There was some testimony a few days ago, Mr.
Thom, to the effect that in England the basis of return to the rail-
roads was the earnings of the roads for the year preceding the
war.
Mr. THOм. Yes.
Mr. DOREMUS. Is it strictly correct to say there has been no amend-
ment or change in that statute of 1871 since then?
Mr. THOм. Not in any matter relating to the subject now under
discussion. There was a slight amendment to this act in 1888, but
it had no relevancy at all to this matter we are now discussing.
This is a part that was exercised in August, 1914, by Great Britain.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
121
Mr. BARKLEY. The fixing of the basis of 1913, then, as the basis
for compensating the railroads was an agreement entered into by
them with the Secretary of State under this act?
Mr. THOM. Yes. As a matter of some historical interest, you
gentlemen are probably aware that this act provided for the taking
over of those railroads only for a week at a time, and it is historically
true-I say a week; it is a week or two weeks-and it is historically
true in England that they took them over for this brief period, and
by an order at the expiration of a week or two weeks have con-
tinued during the war.
Mr. HAMILTON. You say they took them over for a week or two
weeks at a time?
Mr. THOM. Yes.
Mr. HAMILTON. Did they afterwards take them over during the
continuance of the war?
Mr. THOM. No; I say they have extended that original order at
the expiration of every week or two weeks, as the case may be, since
the war began.
Mr. HAMILTON. So it has continued that way?
Mr. THOм. It has continued that way throughout this war.
I should like, perhaps, to straighten out some suggestion I think
was made here as to the basis of the English law. The first thing
that was done in England when war broke out on the 4th day of
August-England entered the war on the 4th day of August, 1914—
was to begin an intensive course of mobilization, and this act about
the railroads took effect at midnight that night. All this was done.
that day. The agreement was that the net opertaing income of the
year 1913 should be adopted as the basis of the guaranty, with this
check upon it: That if the first seven months of 1914 as compared
with the next five months of 1914 showed a difference, that the oper-
ating results of 1913 should be modified by that difference, and it
was found that this basis of 1913 should have deducted from it 23
per cent in order that the basis of 1914 should correspond with the
actual results of these last five months as compared with the first
seven months of 1914.
7
Then labor commenced to make demands for an increase of wages.
Mr. DECKER. In other words, they reduced the pay?
Mr. THOм. By 2 per cent. Then labor commenced to make de-
mands, and the English Government said that if labor appreciated
that the whole of the addition was to be paid by the Government
there would be no restrictions upon the demand of labor. A curious
conclusion, it seems, in this country, and therefore the Government
insisted that one-fourth of this first increase of labor should be borne
by the railroads. In a little while other demands of labor came on
and it was found that that method was not workable, and this one-
fourth of the labor increase was offset against this 23 per cent which
had been used as a deduction from the basis of 1913, and thereafter
the basis of 1913 was adopted as the exact measure without any de-
duction of percentages and without any addition to the labor cost of
the companies. Those are the historical facts about this matter.
Now, England, confronted with this necessity, took them in the
end took the previous year, the year 1913-as a basis of this guaranty.
It was not deterred by the fact, as it was the fact that the year 1913
was a year of greatest earnings of the English railroads; it planted
122
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
itself upon the proposition that one year prior to the taking was a
reasonable period; that that year must not be discarded because it
was a year of highest earnings; and that year, being thus nearest,
was the best reflection of the earning capacity at the time of the
taking, and it was adopted and has since been in use.
Mr. HAMILTON. May I interrupt you to inquire?
Mr. THOM. Yes.
Mr. HAMILTON. If you can, please state briefly just why 1913 was
a year of perhaps extraordinary or of greater earnings by the Eng-
lish railroads.
Mr. THOм. I think there are only general economic reasons. I
know of no others.
Mr. HAMILTON. There were no unusual elements?
Mr. THOм. It was not an unusual year. I mean to say by that it
was not a year of unusual addition.
Mr. HAMILTON. You think, then, it was a process of the evolution
of the railroad business?
Mr. THOм. I do; and of commercial business.
Mr. Escн. It was a good year throughout the world, was it not?
Mr. THOM. It was; and it happened to be the best year in the re-
turns of English railroads up to that time.
Mr. COADY. In other words, there were no abnormal conditions? ·
Mr. THOM. I do not think there were any abnormal conditions.
Mr. DEWALT. Have you read MacKenzie on Railroads of the Eng-
lish War?
Mr. THOм. I regret to say I have not.
Mr. DEWALT. I wondered whether somebody in touch with your
people had read that and whether they considered it authority.
Mr. THOM. I do not know. I have not heard that matter discussed.
Therefore, I say, it is a matter of judgment. We have the great
precedent of the English as to what they have done. How far that
is to be persuasive with you is a matter for you to determine. Our
view is that one year is enough, that two years are certainly enough,
and that when you go back to a more distant period and get a year
of abnormal depreciation, as 1915 was, that the result of the average
is inadequate. That is our view. We will present evidence on that
subject.
We have one other view which we shall attempt to develop. The
plants that the President_took over on the 28th day of December,
1917, were not the same plants that made the earnings of 1915, and
it was not a plant representing an investment of nearly $900,000,000
more. It was not the same plant that did the earnings in 1916. It
plant representing an investment of $600,000,000 more. It is
not even the same plant that did the earnings for the fiscal year
ending June 30, 1917, for it represents an estimated investment of
some $240,000,000 more.
Mr. BARKLEY. Is that after deducting the natural depreciation
during that year?
Mr. THOм. The depreciation, you know our property investment
account, was on the cost basis; it is not on a value basis, and the only
account of depreciation that was carried on equipment.
Mr. BARKLEY. I had in mind that you spoke about taking over the
plant; that it was not the same plant.
Mr. THOM. Yes.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
123
1
Mr. BARKLEY. I was wondering whether you had taken into con-
sideration any depreciation in the value of the plant in comparing
that depreciation with the increased
Mr. THOM. We have not considered the plant with the deprecia-
tion. It is unimportant for the purpose of the idea I have to present
whether these figures I give are exact or not. All I want to bring to
the attention of the committee is that there is a substantially larger
and more efficient plant which the President took over on December
28, 1917, than that plant which did the earnings during the test
period.
Mr. SWEET. These figures you give us relate to equipment?
Mr. THOм. No; but both equipment and enlarged yards and other
systems.
Mr. COADY. Are the systems of accounting of the various railroads
uniform?
Mr. THом. Yes; they must be under the Interstate Commerce
Commission act. You understand that under the system of railroad
accounting every dollar that I am talking about is a dollar. There
is no water in any of these recent dollars, whatever may have been
the fact and difference of opinion about previous investments, but all
that has been put into these carriers' properties in the period to
which my remarks now relate is actual money, and if there were
any water in previous investment accounts it would be to the dis-
advantage of the idea which I am now presenting from our stand-
point; it would be to our disadvantage in respect to the idea I am
now advocating, because I am talking about the relations of what
the property was on June 30, 1915, and what it is now. If it was
larger on June 30, 1915, than it ought to be, and everything that
has been put to it since is dollar for dollar, of course the proportion
to what has been put in since June 30, 1915, would be smaller. So
that the idea which we wish to bring to the attention of you gentle-
men is this, and the arguments which we shall make on it is this,
that in finding out the value of the use of the thing that the Presi-
dent took over on December 28, 1917, you are adopting a basis of
earnings of a plant materially smaller and less capable doing any
of these years.
•
2
Mr. COADY. There is no uniform system among the various rail-
roads about charging off depreciation, is there?
Mr. THOм. The only depreciation that is charged off in these
accounts is in respect to equipment, and there has as yet been no
uniform percentage on which that has been done, although there
ought to be, and I think the Interstate Commerce Commission was
gradually working up to require it.
Mr. Escн. It does not make any difference with your argument,
Mr. Thom, that the dollar put in in 1917 produced very much less
equipment than prior to the war as to purchasing power of the
dollar?
Mr. THOм. I do not know. I think perhaps you would have to
make some allowance for that, Mr. Esch, in talking about the value
of the thing taken over. I think we may have to make some allow-
ance for that, but I am illustrating, I am not asking you gentlemen
to make a mathematical calculation on this subject, I am speaking
of principles, and I am illustrating by figures...
124
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Now, manifestly, if a plant is greater on December 28, 1917, when
it is taken over by the Government, the earning capacity and con-
sequently the value of the use of what is taken over is not adequately
measured by the smaller thing that did the earnings in previous
years. We shall therefore contend that this measure of compensa-
tion that is suggested in this bill is inadequate, because in order to
arrive at the proper earning capacity of the plant that was taken
over, by reference to earning capacity, you must level up the earnings
of 1915 so as to eliminate what would have been during that year.
Mr. HAMILTON. Must you not take into consideration that the earn-
ings are affected by abnormal conditions?
Mr. THOM. I will get to that in a moment if you will let me finish
this idea. You must recall that the earnings of 1915, so as to make
them the earnings of the real thing you took over, you must level
up the earnings of 1916 so as to make them the earnings of the thing
you took over. You must level up the earnings of the year ending
June 30, 1917, so as to make them the earnings of the thing you took
over, before you can arrive at an adequate conclusion as to what is
the earning capacity, and therefore what is the value of the use of
the property at the time you did take it over.
•
Now, to come to Mr. Hamilton's question. Of course, if it could
be said that the earnings of any particular period, which was sug-
gested as a standard, is abnormal and did not represent necessarily
the earning capacity of the plant, then we would not be justified in
taking the abnormal standard.
. The burden of proving that fact, however, that it is abnormal,
would naturally rest on the man who wanted to question the actual
results. My own feeling, Mr. Hamilton, is that while the years 1916
and 1917 were years of large earnings they were also years of larger
service. The question before us then, Are we to expect during the
period of Government a smaller degree of service of these railroads;
that they are to perform less service than they did in these two years?
Of course if they are to perform the service under rates fixed by the
Government there is nothing abnormal about those earnings. You
must come to the conclusion that these were years of abnormal serv-
ice as compared with the years under which you are going to enjoy
the use of these properties, in order to say that those were abnormal
years.
Now, if during the period of Government control these properties
are to perform a service no less than in 1916 and in 1917; if we must
conclude that if any thing they are to perform a service greater
during the period of Government control than they did during the
years 1916 and 1917, then we must conclude that those were not ab-
normal years. The return is the product of the service multiplied by
the charge. The charge is constant. It is fixed by law; it can not
be questioned by a governmental agency. As somebody has said, you
can not cripple a horse in order to buy it. So that is fixed.
Now, the value of the use during this period of governmental con-
trol must depend upon the other factor, upon the service, and if you
come to the conclusion that the service during the years that the Gov-
ernment deprives these companies of their use will be as great as the
service during the years 1916 and 1917, you have conceded the pro-
position that those years were not abnormal years.
FEDERAL OPERATION CF TRANSPORTATION SYSTEMS.
125
Mr. ESCH. But if the commission grants the 15 per cent increase
it would make good something of that extra service, would it not?
Mr. THOM. It would make it good to the Government, because they
will enjoy the revenue now.
I do not want to argue this question longer now. I shall ask at a
later period, if it is not an imposition on this committee, to be able
to appear here when all the facts are before you and to make an
extended argument on the law involved and upon these matters. I
merely want this morning to make some introductory remarks to
tell you the line of thought which we will endeavor to pursue in the
presentation of these facts.
Mr. DOREMUS. According to the tabulations submitted by Mr. An-
derson, the net railway operating income of the roads increased from
$683,000,000 in 1915 to $1,020,000,000 in 1917. Is it contended on be-
half of the roads that the value of the plant-using your own
phrase increased faster during that three-year period than the net
railway-operating income?
Mr. THOм. I have attempted, Mr. Doremus, to draw the distinc-
tion, which I think is a sound one, between the value of the plant
as a basis for arriving at the use of the plant and the value of the
use. Now, my own judgment is that we have got nothing to do
here with the value of the plant in arriving at the value of its use,
because, it seems to me, we are confined in determining the value of
the use to its demonstrated use, except in special cases. By that I
mean there may be cases in which no general rule will apply. Sup-
pose there was a new road that was not in existence during this pe-
riod of test, of course, we would have to have exceptional rules to
control that. Suppose that a road was in the hands of a receiver
during that period, and there has been, as we approached the receiv-
ership, a great deal of deferred maintenance, because the road was
poor and did not have any money to keep it up, and during the period
of receivership, as is the history in all receiverships, there was an
abnormal amount put in maintenance for the purpose of catching
up, that would affect the earning capacity during that time, so there
would not be a fair basis of determining its value.
And there may be other exceptional cases. But, outside of the
exceptional cases, our contention is what you take is the value of
the use.
What you want to pay for is the value of the use; and if
the President is right in saying that, you must take the demonstrated
value of the use in the hands of the owners as a fair measure of value
of what the Government ought to pay for it.
Now, the only reason that I think that the change in the plant
ought to be considered is to determine whether or not that the
period that you take, as representing the earnings, is of the same
thing as the plant the Government has taken over. Manifestly, if,
on the 28th day of December, 1917, the Government took over a road
2,000 miles long, every mile of which was of equal value and the uses
of which were of equal value, and you found out that in the year
ending June 30, 1917, there were but 1,750 miles, that during the
year ending June 30, 1916, there were but 1,500 miles, and during the
year ending June 30, 1915, there were but 1,000 miles of that road,
you would hardly be justified in taking the earnings of those three
years and applying them to the road which was 2,000 miles long and
126
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
of equal value per mile in the way of usage. So that we now contend
that the changes in the investment in the plant must be considered
when you are trying to arrive at what is the legitimate earning capac-
ity of that plant.
I will come again before the committee and answer all questions.
I am very anxious for Mr. Kruttschnitt to get through.
Mr. SANDERS. Do you consider the year 1913 as a fair basis? In
England it was a year of profound peace.
Mr. THOм. No.
Mr. SANDERS. No war conditions cover the year preceding.
Mr. THOM. I think if there were such conditions, and those add to
the value of the use, you have the right to consider them.
Mr. SANDERS. There were no war conditions in 1913.
Mr. THOм. There were none in England.
Mr. SANDERS. Would you consider taking the year 1913 as the basis
of settlement in this country?
Mr. THOM. No; I would not. It is too far away.
Mr. SANDERS. The year 1912 was a poor year on the roads, was it
not?
Mr. THOм. I have forgotten.
Mr. SANDERS. And 1913 was a good year?
Mr. THOм. Fairly good.
Mr. SANDERS. And 1914 and 1915 were poor years?
Mr. THOм. Very bad.
Mr. SANDERS. And 1917 was good?
Mr. THOм. Very good.
Mr. SANDERS. In other words, were not the poor years of 1914
and 1915, did they not reflect the war conditions in Europe on the
roads of this country?
Mr. THOм. The year 1914, of course, did not. The year 1915 em-
braced the first 11 months of the European War, and the reason that
was a very poor year we were about to give you. I will mention a
few, which you will at once appreciate.
You take the cotton situation in the South. There was not any
cotton moving in 1916. I bought a bale of cotton myself.
Mr. SANDERS. So did I.
Mr. THOM. Everybody able to do so bought a bale of cotton, which
was 4 and 6 cents a pound. That cotton did not move out of the
South.
Mr. SANDERS. You would not consider 1913 a fair basis?
Mr. THOM. No; it is too far away and not related at all to the
service we render.
Referring to this cotton business, no cotton was sold in the South,
consequently nothing was bought to carry back to the South with
cotton money, and there was a general paralysis.
Mr. SANDERS. Was that not true in 1913?
Mr. THOM. No; but that is not proposed in the bill. I am speaking
of the year 1915, which is proposed in the bill. The year 1913 I will
give my reasons against if it is proposed, but this is the only one that
is proposed, and we want now to give the historical facts about the
year 1915.
Mr. HAMILTON. Have there been substantial betterments of the
railways from June 30, 1917, over the conditions of, say, two years
before?
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
127
Mr. THOM. Oh, yes.
Mr. HAMILTON. Large sums of money have been spent on the rail-
road companies in improvements of their roads?
Mr. THOм. Yes, sir.
Mr. HAMILTON. Their plant, as you put it?
Mr. THOM. Yes, sir.
Mr. HAMILTON. You are going into that?
Mr. Tпом. We will go into that. We are going to give you the
figures.
Mr. COOPER. Was there any material increase in the earnings of
the railroads between the year 1915 and 1917?
Mr. Tпом. Oh, yes; some increase; mostly in the eastern section
of the country you are familiar with. There was a partial allowance
of the 15 per cent.
Mr. COOPER. But you maintain that this greatly increased revenue,
1916 and 1917 over 1915, came about by reason of the increased
service that was rendered?
Mr. THOм. There were some increased rates, but there was tre-
mendously increased service which Mr. Kruttschnitt, who has all
these figures, will indicate to the committee.
The CHAIRMAN. I have not heard all of your statement, as I was
not present at the opening of the hearing, but I am going to ask you
if you have already answered it. I want to ask you, in your judg-
ment, whether or not there should be some legislative provision
made whereby the railroads and the Government may adjust and
settle the question of rental value, or whatever it is to be termed,
without having to go to the courts? Whether you believe that is a
good policy?
Mr. THOм. I am glad you asked me that question, Mr. Chairman.
I regard that as fundamental. I believe that if these railroads are
driven into court, or before any tribunal that may be established, to
determine what they shall receive, it is going to wreck the financial
structure of this country; and I believe that the railroads, if they
do not regard the basis as adequate, unless there is such a serious
departure from it that they ought to try to accept whatever is
offered, in order to prevent this tremendous danger which I antici-
pated on this matter.
For instance, suppose that the railroads had gone from their pos-
session, from the possession of their owning companies, and no pro-
vision is made anywhere for compensation, and it becomes necessary
for some savings bank to sell some of those railroad securities, how
are they going to do it without a tremendous loss, and is it conceiv-
able that any institution, either owning the securities or holding
them as mere collateral, if obliged to dispose of them in a condition
of uncertainty, could do so at a price that would make the whole
financial structure of this country crumble into ruin. I think,
therefore, that there ought to be such a basis of adjustment per-
mitted to the President as will bring about a voluntary agreement
in the great majority of cases, and in nothing that we shall ask
shall we ask, gentlemen, to give us any advantage. All that we
ask is that the President be allowed a decision to take in view every
fact which ought to be controlling in respect to these values. We do
not come before you and ask that you give us something; we are
128
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
}
asking simply that you do not confine the discretion of the Presi-
dent so close that he can not give us something. Our proposition is
that if, representing all these private interests, we can trust to the
President, certainly the Government of the United States ought to
be able to trust to the President.
The CHAIRMAN. Then provisions for settlement ought to be flex-
ible so as to be adjusted in any particular case which may be pre-
sented?
Mr. THOм. Yes.
As illustrating that, before I answer your question as to what we
think on that subject, I shall read to you one amendment which we
shall ask this committee to put on. I have indicated that there were
certainly exceptional cases, that as to some roads this period can
not reflect the real value of their use, and we shall ask you to say
this in the first section:
Providing, however, That in the case of any carrier which was not in opera-
tion, or was in the hands of a receiver, during any portion of the period of
standard return or in respect to which the President shall find its conditions
are so exceptional that the basis above mentioned would not constitute just
compensation, he is authorized to make with such carrier an arrangement and
guaranty for such amount of compensation as he shall find just in the par-
ticular case.
Mr. DEWALT. I was going to ask you, Mr. Thom, if you can state
concretely what items you would take into consideration in recom-
mending this compensation for use. Can you state that concretely,
what you would take?
Mr. THOм. Yes. I think that we ought to take the earning ca-
pacity of the two most recent years, if you are unwilling to take one,
and level that up to the additional amount of capital that was
taken over. That is what I think ought to be done.
Mr. DEWALT. Well, with that, of course you would take the capital
invested in the roads and the actual plant as established in these
various years and the betterments accrued since, of course?
Mr. THOм. That is what I have included in saying the additions
made to it in the earning period.
Mr. COADY. Mr. Thom, is it not true that since the outbreak of
the war the railroads turned over to the Government a number of
incomplete engines and equipment of various kinds in the various
shops of the country, for France, and that upon the strength of
those they have borrowed money ?
Mr. THOм. I do not know as I understand you. If you mean
this: There were certain contracts
Mr. COADY. Under the terms of this section 1.
Mг. THOм. By that I mean this: It is undoubtedly true that the
railroads had outstanding a large number of contracts, both for
engines and cars, and that the Government said: Here is a war in
Russia that must be won, and here is a war in France that must
be won. Now, they need locomotives more than these American
railroads do and you must postpone the deliveries under your con-
tracts so that this equipment can be furnished abroad. That was
done. Of course, the Government paid for those-I mean some-
body else paid for what was delivered, but that has crippled our
capacity to perform the work in this country.
1EDERAL OPERATION OF TRANSPORTATION SYSTEMS.
129
Mr. COADY. My thought is this: Didn't the railroads in order
to provide for the payment of these locomotives and cars borrow
money?
Mr. THOм. Oh, yes.
Mr. COADY. And are paying interest on that money now?
Mr. THOM. Yes.
Mr. COADY. Would they get any credit for that under the terms of
section 1?
Mr. THOм. None at all.
Mr. COADY. Have you any idea what that amounts to, Mr. Thom?
Mr. THOм. Well, we have only made the estimate as to the addi-
tional amount of capital put in. For example, I suppose we have
put in in the last six months $240,000,000. Manifestly, no part of
that was earning anything in 1917, which year ended on June 30,
before this six months began. Not a cent of that. But there is
nothing in this bill which recognizes that as new capital. In addi-
tion to that, manifestly in 1915, repeating what I have previously
said, the thing that was earning did not represent the capital put
in since 1915, and so with the other years, and you will find that
that amounts to a very serious item, which is not recognized in
this bill.
Mr. DILLON. I would like to ask you a question. If I understand
your position correctly, you assume that the value of the use rests
wholly upon the actual earnings, other than the watered stock
issued?
Mr. THOM. Yes.
Mr. WINSLOW. Mr. Thom, if the railroads had made advance pay-
ments on account of equipment, as yet incomplete, you would prob-
ably expect, would you not, that those advanced payments should
be treated as capital in the adjustment between the Government and
the railroads?
Mr. THOм. The additional value to the plants.
Mr. WINSLOW. Whether it has yet been entered into capital account
or otherwise?
Mr. THOM. Well, I suppose if that is the case it is entered into
capital account. Mr. Peuchen can tell you that.
Mr. WINSLOW. And if it had not been entered into capital ac-
count
Mr. THOM. It ought to be.
Mr. WINSLOW. You would feel the railroads should have the benefit
of treating it as capital?
Mr. THOM. Yes. I want to call Mr. Kruttschnitt. Mr. Krutt-
schnitt is chairman of the board of directors of the Southern Pacific
Co. and a member of what was known as the war board.
STATEMENT OF MR. JULIUS KRUTTSCHNITT, CHAIRMAN OF THE
BOARD OF DIRECTORS OF THE SOUTHERN PACIFIC CO.
Mr. TнOм. Mr. Chairman, will you kindly bring out the informa-
tion you desire by questions?
The CHAIRMAN. I suppose Mr. Kruttschnitt has a statement that
he proposes to make here-the statement in chief. Is that a fact?
40958—18—9
130
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. Kruttschnitt wishes to make a statement on his own initiative.
I suppose.
Mr. THOM. Yes; he will make a statement.
Mr. KRUTTSCHNITT. Availing myself of your permission, Mr.
Chairman, I will first call attention to the abnormal conditions that
existed at the end of the year, in the last half of the fiscal year 1914,
and the beginning of the fiscal year 1915. That is to say, the condi-
tions that existed in the year ending June 30, 1915, which embraced
the first 11 months of the European war. So as not to rely on
memory, I have looked up contemporaneous opinions on the char-
acter of business, railroad earnings, and industrial conditions gen-
erally in the country, and have a few quotations that I will read
to establish the fact that 1915 was really what we might call the low-
water mark in the business of the United States.
The Commercial and Financial Chronicle of January 9, 1915,
under the title of "Retrospect of 1914," says:
The flame of war did not burst forth until seven months of the year had
elapsed. Yet in these seven months the industrial situation kept steadily grow-
ing worse. Enterprise here was at a low ebb and business in most lines of
trade very much depressed, with the railroad carrying interest prostrate.
And another quotation:
At one time, in November the steel plants were said to be engaged to only 30
to 40 per cent of their capacity.
With the exception of the month of March, when there was a trifling gain,
gross earnings of United States railroads, treating them as a whole, declined
in each and every month of the year-in most of them, too, very heavily. For
the 11 months to November 30, the loss in gross revenue aggregates $178,359,263.
By a tremendous paring down of expenses, the loss in the net was reduced to
$66,701,841.
In the same paper, the Commercial and Financial Chronicle of
January 8, 1916, under the same title of " Retrospect of 1915," it says:
The outbreak of hostilities occurred in the previous year and the first effect
here was disorganizing in the extreme, the same as among the belligerents
themselves. Evidence of this is furnished in the fact that the New York Stock
Exchange was forced to suspend business immediately upon receipt of the news,
for the first time since the panic of 1873, and had to be kept closed for a period
of over four months. During 1915, however, the situation was completely re-
versed.
*
* most persons have probably already forgotten that when the year
opened unemployment was so pronounced that the problem of taking care of
the idle during the cold winter months became pressing and serious. Special
commissions were appointed in several of the large cities for dealing with this
problem and for providing measures of relief. In this city investigations and
inquiry brought forth data that indicated that in New York City alone no less
than 400,000 persons customarily employed were for the time being idle.
*
* *
That the situation here was symptomatic of affairs in other parts of the
country is evident from the circumstance that the year 1914 has closed with the
steel mills employed to only about 30 to 35 per cent of their capacity,
when 1915, the year under review, opened, leaving the demand for labor and
for everything else extremely slack.
* Recovery and convalescence
were necessarily slow for a time, but progress toward renewed activity under
the stimulus of the orders from abroad was steady and uninterrupted, and in
the last three months of the year business activity proceeded with a rush and
gained tremendous momentum.
The improvement in domestic trade was slow and did not come, as already
stated, until the last third of the year.
Two important and powerful influences tended to keep domestic trade in
check until the latter part of the year. One was the deplorable condition of the
railway industry and the other was the depression and lassitude in the South.
The outlook for the railroads looked uninviting-in fact dismal-until the
last quarter of the year. Their revenues ruled at a low level and their credit
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
131
was poor. They were forced to practice extreme economy, and as a consequence
net eanings recorded considerable increases in many instances. But this was
deceptive of their real situation, reflecting merely the reductions in expenses
wrought in carrying out their enforced policy of retrenchment.
The Railway Age Gazette, December 31, 1915, page 1237, contains
a review of railway earnings in 1915 by Prof. Frank Haigh Dixon.
Prof. Frank Haigh Dixon is professor of economics at Dartmouth
College, N. H.
Comparing the gross operating revenues month by month during
the calendar years 1912, 1913, 1914, and through October, 1915, the
author says:
For any revival in the carrying industry we look at once to the figures of
gross earnings. Here the first six months of 1915 tell the same story as to the
final figures for the fiscal year just discussed-a decline month by month as
compared with the corresponding month of 1914; and this, it should be recalled,
was on top of a shrinkage in gross earnings in the previous year. In not one
single month of 1914 did the operating revenues equal those of 1913. However,
during these six months of 1915 the monthly decreases were growing smaller,
until finally they disappeared altogether, and in July were replaced by an
increase of one-half of 1 per cent.
The Analist, January 3, 1916, says:
The opening of 1915 found the steel industry still prostrate from the blow
which it had received at the end of July, 1914, and which threw the world's
commercial machinery suddenly and unexpectedly out of gear.
*
*
* The production of pig iron, amounting to only 1,601,000 tons in
January, gained slowly in February, and then in March expanded at a rate
which brought the output up to more than 2,000,000 tons. That was the turn-
ing point. Each month thereafter saw an increasing rate of production. But
up to the middle of the year the gains were almost wholly to the credit of war
business and consequently did not reflect a rising tide of domestic trade.
The Railway Age Gazette, October 1, 1915, says:
* According to the Railway Age Gazette's record, the addition of the
3,865 miles of the Missouri, Kansas & Texas system makes a total of 82
railways, operating 41,988 miles of line, and with a total capitalization of
$2,264,000,000, now being operated by receivers. This is more than one-sixth
of the railway mileage of the United States, and exceeds the total railway
mileage of any other country in the world except European and Asiatic
Russia combined
*
""
* * *
Bulletin No. 177 of the Chamber of Commerce of the United
States, dated January 4, 1915 (or about the middle of the year under
consideration), headed: "General Crop and Business Conditions in
the United States," refers to "the adverse and paralyzing effect of
the European war upon every form of industry "; states "manufac-
turing plants in general are only running about half time on the
average"; that "mining of many kinds.
is generally in a
parlous state"; that "many of the lumber mills are closed down";
that "the dearth of building has likewise caused the closing of most
quarries"; that "extreme conservatism and caution in business pre-
vails in all districts"; that "it is almost impossible to obtain loans
from any of the banks in the smaller towns"; and refers to the
paralysis of business in the South because of the cotton situation.
Postmaster General Burleson, in his annual report dated Novem-
ber 15, 1915, uses the following language:
The year ended June 30, 1915, was an abnormal one. Surpluses of $3,800,000
and $3,500,000 were reported and covered into the Treasury for the fiscal years
1913 and 1914, respectively, showing that the Postal Service had been put upon
132
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
a self-sustaining basis after a long period of annually recurring deficits. Had
normal conditions prevailed, a third successive surplus would have been paid
into the Treasury for the fiscal year 1915.
These outside contemporaneous opinions, give some idea of the
industrial and traffic conditions of the United States in the year
ended June 30, 1915, which is one of those which the proponents of
the compensation paragraph in the present bill think should be used
in determining the Government guaranty to the carriers. I will
give you a few other statistical facts that bear upon the abnormal
conditions prevailing in the year ended June 30, 1915.
I have mentioned the paralysis of business in the South. The
South's cotton could not be marketed because it could not be ex-
ported. There were no ships. The war at the end of this fiscal
year had been on for 11 months. England was using most of her
ships for the transportation of munitions and troops. The Ger-
man ships that carried the larger tonnage from the United States,
of course, were out of business; other ships were afraid to
take to the seas because of the depredations of the submarines.
Under those conditions only 55 per cent of cotton was exported in
that year, 55 per cent of the crop, as against 67 per cent in the pre-
ceding three years. In the desire to get cotton to Europe we were
importuned to charter some of our ships engaged in the coastwise
traffic between New York and New Orleans and Galveston; we were
able to spare four or five, which were loaded with cotton and sent
to Europe. To that extent these vessels helped the situation, but
of course their help was insignificant in comparison to the carrying
capacity of the tonnage that had been driven off of the seas.
The tonnage of vessels cleared from United States ports in 1915
was 46,700,000 tons, against an average for the three preceding years
of 50,000,000 tons. There was a drop of 3,300,000 tons in this year
as compared with preceding years. The movement of passengers
over United States railways in that year was the smallest since 1910.
The tons carried 1 mile was the smallest since 1910. The income
from operation in 1915 is given by the Interstate Commerce Commis-
sion in its recent annual report as $728,000,000. That is only $14,-
000,000, or 2 per cent more than in 1906, 10 years previous, and,
with two exceptions, the lowest in that period of 10 years, although
the book cost of road and equipment in that period was increased
4,827,000,000, or 47 per cent. If the roads had obtained the per-
centage return on the cost of road and equipment that they obtained
in 1906 their income in 1915 would have been about $270,000,000*
more.
Another index of the low ebb of business is the report of the
American Railway Association of idle cars. On July 1, 1914, there
were 220,000 cars for which there was no loading; on April 1, 1915,
327,000; and on June 30, 1915, 276,000; and the association published
this note:
"From October 15, 1914, to February 1, 1915, the net car surplus was so
large and the railroad depression so acute that the association, as a measure
of economy, temporarily discontinued the compilation and publication of these
data."
Bank clearings for that year were $163,000,000,000, the smallest
since 1910, with the single exception of 1911.
600 000 000
40958-18.
(Face p. 133.)
700 000 000
000 000 008
$1 100 000 000
1 000 000 000
900 000 000
$760 277 000/$760277 000
645 681 000
4.07
791 221 000
732 642000
LO*
322 165 000
17 000 000 000
26 000 000 000
15 000 000 000
14 000 000 000
13 000 000 000
1907
4.07
826 466 obo
853 109 000
13 030 344 000
OLIE
13 214 000 opo
4.07
768 213 000
884 053 000
13 507 344 000
oco-doo 609 ET
$18 000 000 000
CHART SHOWING NORMAL, CONTRASTED WITH ACTUAL, INCREASES IN INCOME
FROM OPERATION AND BOOK COST OF ROAD AND EQUIPMENT
1907 TO 1917
(pata taken from 31st annual report of I. C. C., December 1, 1917)
Cost of Road and Equipment
70
13–984–334 600
3.72
14 388 000 000
1916
14 461 344 000
3.70
04 138 344 000
15 195 000 000
Normal Increase
3.70
15 416 344 000
15 875 000 000
Actual Increase
1911
1912
19 13
19 14
Income from Operation
Normal Ancrease
000 166 ST6
751 266 000
4.07
829 263 000
500 000 000
1907
1908
1900
1910
1911
1912
1913
1914.
1915
1916
Actual Increase
704 685 000
4.07
728 212 000
000 116 946
1917
500 000 000
4.07
000 588 346
600, 000 000
I 007 829 COO
700 000 000
3.70
00000 75€ Gr
1915
1 043 839|00011 038 773 COO
1 069 750 514
4.07
800 000 000
900 000 000
15 892 344 OOD
\16 937 000 000
3.70
16 369 344 000
1915
069 750 000
$1 100 000 000
1 000 000 000
3.70
17 247 000 coo
16 846 344 000
3.70
(17 525 000 000
1A 323 344 000
17 800 000 000 | 3.70\
17 800 344 000
000 000 000 BT:
17 000 000 000
16 000 000 000
15`000 000 000
14 000 000 000
1917
13 000 000 000
1
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
133
Again, it has been argued by those who advocate the inclusion of
the income from operation of 1915 in the computation to determine
the Government guaranty to be paid for the use of the roads which
they condemn or impress for war purposes-that the operating in-
come of the years ending June 30, 1917, and June 30, 1916, are abnor-
mally high. I have prepared a chart to show what the normal rate
of income from operation increase would have been from 1907 to
date; in other words, in the last 10 years; also what it actually was.
With your permission I am going to pass these charts around, so
that they may be before the gentlemen of the committee while I am
explaining them.
Mr. HAMILTON. I think they ought to be printed as a part of Mr.
Kruttschnitt's testimony.
Mr. KRUTTSCHNITT. I thought you would want to do that.
Mr. HAMILTON. Yes; we would like to use them as you testify.
Mr. KRUTTSCHNITT. I think they ought to be before you.
Mr. HAMILTON. Yes; but for the permanent record I think we
ought to have them printed.
(The chart referred to is here shown.)
Mr. KRUTTSCHNITT. I respectfully direct your attention, Mr.
Chairman, first to the diagram or chart on the upper half of the
sheet. That shows the normal as contrasted with the actual increases
in cost of road and equipment in the 10 years preceding 1917. The
increase from 1907 to 1917 is 37 per cent; the normal increase there-
fore would be one-tenth of that, or 3.7 per cent per annum.
You will observe the figures of 3.7 written against the risers of the
little steps that are marked on the chart, which show what the in-
crease would have been in those 10 years had it been absolutely nor-
mal. That is, it would have been 3.7 per cent over 1907 per annum,
or 37 per cent for the period. You will observe, starting in the
lower left-hand corner, a broken black line proceeding from 1907 by
a curved path up to 1917. That shows the actual increases in cost of
road and equipment in those years. You will observe that from
1907 to 1910 the broken line lies below the stepped line; that is, the
cost of road and equipment was below normal. In 1910 it almost
reached the top of the step and was almost normal. After that it
is above the steps all the way to 1917, showing that it is above normal.
Now, dropping to the lower left of the sheet, the same principle is
used in showing the income from operation for the 10 years. The
increase in income from operation between 1907 and 1917 was 40.7
per cent, which indicates a normal annual increase of 4.07 per cent,
and that normal increase is written against the risers of the series of
steps between 1907 and 1917. The broken line indicates the actual
net income from operations for the same years, and you observe at
once that for the years 1908, 1909, the income from operations
was very much below the normal line. In 1910, however, there was
a rise, and it was almost the same as the normal. After that it falls
continuously and is the lowest in 1914 and 1915. Then there is a
rapid recovery for two years to the figures shown for 1917.
We are apt to refer the recovery of income in 1916 and 1917 to the
low-water mark period of 1915 and thereby get an impression that
those years showed abnormal operating incomes. If you take 1915,
or the lowest point, as the basis perhaps they do. But is that fair?
134
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
The rate of increase of operating income from 1907 to 1917, as I
show, was 40.7 per cent, giving the moderate amount of 4.07 per cent
per annum. The reason that 1915 was so low was that for a number
of years this decrease in the operating income was in effect, and the
rise in 1916 was a rise not above normal but was a recovery from the
low-water mark to the average level of earnings; or, to be strictly
accurate, the recovery was slightly above the normal earnings. I
have put those figures on a sheet, which I will also give to the stenog-
rapher, which shows that the recovery in 1916 exceeded the normal
by $5,066,000.
Normal, contrasted with actual, increases in income from operation.
[Thirty-first Annual Report of Interstate Commerce Commission, Dec. 1, 1917.]
1907...
1908..
1909...
1910..
1911.
1912..
1913...
1914.
1915...
1916...
1917...
Income from
operation.
Normal in-
crease.
Below normal. Above normal.
$760, 277,000
$760, 277,000
645, 681,000
791, 221,000
732, 642, 000
822, 165, 000
826, 466,000
853, 109, 000
768, 213, 000
884, 053, 000
751, 266, 000
829,863, 000
704, 685, 000
728, 212, 000
1,043, 839,000
1,069, 750, 514
914, 997, 000
945, 941, 000
976,885,000
1,007, 829,000
1,038, 773, 000
1,069, 750,000
$145, 540,000
89, 523,000
26, 463,000
163, 731,000
116, 078, 000
272,200,000
279, 617,000
115, 840,000
$5,066,000
Normal years, 1907, 1917.
Above normal, 1916.
Below normal, 1908, 1909, 1910, 1911, 1912, 1913, 1914, 1915.
You will observe the broken line in 1916 is a little above the
stepped line. In 1917 we maintain the earnings were quite normal.
Mr. THOM. You will find that in all the railroads, including the
Southern Pacific?
Mr. KRUTTSCHNITT. I should have said, perhaps, by way of pref-
ace, that I am appearing here for the American Railway Association
in behalf of all the railroads of the United States, and the data I
have given here apply to all the railroads of the United States and
not to the particular road I have the honor to represent.
Mr. HAMILTON. It is not confined to group 1?
Mr. KRUTTSCHNITT. These data are not confined.
Mr. HAMILTON. They are not confined to group 1?
Mr. THOм. Class 1, you mean, don't you?
Mr. KRUTTSCHNITT. No; they apply to all the roads of the United
States. I will repeat, then, that the recovery in the railroad busi-
ness between 1915 and 1916 and 1917, which everyone considers phe-
nomenal, really carried in 1916 only $5,066,000 above the general
level. That is where 1916 ought to have been if the increased busi-
ness of the roads had been normal. That covers a period of 10
years only. Critics might say hat I should have gone back farther
and studied the returns of the roads farther back than 10 years. It
occurred to me after preparing this chart that perhaps the argument
was open to that criticism.
The CHAIRMAN. Mr. Kruttschnitt, when you say the normal, do
you mean by that that you take the entire increase for the 10-year
period and divide it by 10, and by that method reach what you call
the normal?
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 135
Mr. KRUTTSCHNITT. Yes.
The CHAIRMAN. You do not mean, then, that if the business was
normal it would have increased exactly that much each year during
the time?
Mr. KRUTTSCHNITT. If it had been exactly normal, yes; it would
have increased that way. But it increased by drops down and
leaps up; so that the actual increase via the broken line is the same
as via the stepped line, the stepped line showing a uniform or nor-
mal increase and the broken line the actual increase, which was very
far from normal.
I am sorry I have not got copies of this 26-year chart, but I made it
very hurriedly the night before last, and the draftsman was busy all
day yesterday getting the 10-year one in shape to present to you and
had not been able to get this one, so, with your permission, I will refer
to it and have it put in shape by the draftsman to go as a companion
sheet to the one I have already presented.
This chart which I have penciled covers the returns given by the
Interstate Commerce Commission from 1891 to 1917, or a period of
26 years.
The CHAIRMAN. Not to interfere, Mr. Kruttschnitt, but is it your
purpose to show that the average net income for the three years
mentioned, as suggested by the President, is not a fair period by
which to judge of what the income may be in the next three years
for such period of time as the roads may be in the hands of the
Government?
Mr. KRUTTSCHNITT. I mean to advance the opinion that the in-
clusion of 1915, which was in all respects an abnormally bad year,
is unfair to the carriers in determining the amount of the guaranty
to be paid by the Government, by including it in determining the
average. It has been put in with the years 1916 and 1917.
The CHAIRMAN. You do not consider, then, the advance in 1916
and 1917 as abnormal?
Mr. KRUTTSCHNITT. No; that is the very crux of my argument-
that they seem abnormal because we were used to bad times so long,
but if we go back in the past, say, 10 years, they are not abnormal;
the railroads under ordinary normal conditions would have reached
about the same net income in 1916 and 1917 as they have actually
reached by dipping down into a period of very great depression and
then a sudden recovery.
Mr. RAYBURN. But, let me ask you, isn't an average for the three
years, counting 1915-isn't that average higher, even if you count
the bad year that you call abnormally low? Take the 3-year average,
then; that is higher than to take the period of 10 years or 15 years,
is it not? I think I have seen some papers on that. Take any
period up to 15 years, you will find that the 3-year average is higher
than counting all the 15 years up to 1910 or 1917. I understood it
run somewhere as high as 5.6, the average.
Mr. KRUTTSCHNITT. The average for the three test years in our
returns on property investment would amount to 5.26 per cent. I
had that worked out for the statement that I made before the Senate
committee on this chart. In other words, in 1915 the return on the
property was 4.09 per cent. In 1916 it was 5.8, and in 1917, from the
best data that we can reach, it would be probably 5.88. The average
136
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
of those years is 5.26. Now, to answer your question specfically
the roads in 1910 got a return of 5.73 on their property, which is
higher than the average of those three years. In 1909 they got a
return of 5.35, which is higher than that average. In 1907 they got
a return of 5.66, higher than that average. In 1906 they got a re-
turn of 5.67, which is higher than that average.
Mr. BARKLEY. 1907, on that I think you are mistaken. I think
you meant 5.60.
Mr. KRUTTSCHNITT. I should have said 5.60. And if we go back
as far as 1903, or 14 years ago, the return on the cost of road and
equipment at that time was 5.20, or almost as much as the 5.26, which
would be the average of these three test years.
Mr. RAYBURN. That is not answering my question.
Mr. KRUTTSCHNITT. Sir?
Mr. RAYBURN. You intend to go on, do you?
Mr. KRUTTSCHNITT. Yes; but I thought you asked the question.
Mr. RAYBURN. I asked the average. Have you got an average
there for the years from 1907 to 1917?
Mr. KRUTTSCHNITT. No; I understood your question. If you will
allow me-of course my answer would be unintelligible unless I
Mr. RAYBURN. Well, Mr. Doremus was going to ask a question; I
did not know whether you were through, that was all.
Mr. KRUTTSCHNITT. My answer was predicated on this understand-
ing of the question: Whether the average of the three test years was
not larger than the returns gotten by the railroads in years preceding
that.
Mr. RAYBURN. I meant an average for any period, say 10 years.
Take it all-or 15 years. Take the average in 1903, 1910, 1907. I
meant had you figured an average for 10 years, as we take the three
years and figure an average, or had you figured an average for 15
years as we had figured an average at three years? That was my
question.
Mr. KRUTTSCHNITT. No; I did not, because the chart before you
shows that an average for 10 years would be extremely unfair, be-
cause all of the years in that period except the initial and terminal
years and one year in between, were exceptionally bad years.
Mr. RAYBURN. Well, I was asking you whether they were fair or
unfair years.
Mr. KRUTTSCHNITT. No; I have not figured the average that way.
Mr. RAYBURN. I simply asked the average.
Mr. KRUTTSCHNITT. Well, I did not make the average that way
for the reason that I have given.
Mr. RAYBURN. I understand it is less, and that was the reason I
asked the question. If it was more I would like to know it.
Mr. BARKLEY. Mr. Kruttschnitt, let me ask you this question. We
can not tell yet that is a matter for Congress to determine whether
this Government operation shall end suddenly at the time the war
ends, or whether it shall continue for a period of a year or two years,
depending on the conditions that may exist at the end of the war.
Now, let us assume that the situation at the time of the declaration of
peace would be such as to make it unwise for the roads to go back
suddenly into the hands of the owners. It might be necessary, you
would say, for a period of one year or two years of readjustment to
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
137
take place before the carriers got possession of their roads again.
Now, in fixing the compensation of the roads for the whole period
of Government control, we can not take into consideration what they
might earn during the war period but to attempt to strike an average
of what they would earn during the war period and during the period
which follows the war, up to the termination of the Government
operation. Taking that view into consideration, would you think
it would be quite fair to take merely the war period or the two years
1916 and 1917 as a basis, when probably the Government operation
will run over into a period where normal conditions may again re-
turn, due to the ending of the war?
Mr. KRUTTSCHNITT. I think the Government in taking our prop-
erty, as it did, on the 28th of December, should pay to the owners the
fair value of its use, and I don't see how the terms of payment from
December 28 on should be predicated on what might happen after
the 28th of December, 1917, or might happen one or two or three
years after the declaration of peace. The advocates of this method of
paying have said to us, " You should be satisfied with the guarantee
that is suggested, because you don't know whether you are going to
make as much in 1918, 1919, and subsequent years as you have made
in 1915, 1916, and 1917." We say that is true; but, then, also, we
don't know that we may not make much more. This is a mere specu-
lation both on the part of the Government and on the part of the
railroads, and we say that the guarantee to the roads should not be
based upon a speculation as to what is going to happen after the 28th
of December, 1917. The payment should be predicated on what did
happen in the fiscal years as nearly as possible preceding the date
of the taking.
Mr. BARKLEY. That would be true if the Government operation
were to end at the exact time when this inflation, as we might call it
war inflation—should end. But assuming the probabilities of the
Government operation at a time when this war inflation does not
exist, must we not take that into consideration in fixing the compen-
sation of the railroads, not at the maximum figure which it has been
able to reach, but at an average which would likely cover the period
of Government operation?
Mr. KRUTTSCHNITT. The English Government that went through
all that did not hesitate to guarantee the roads the earnings that they
had made the year preceding the declaration of war, although, as
Mr. Thom says, they were the highest earnings in the history of the
English roads. There was nothing in industrial conditions as far as
he knew or as far as I knew to think that those conditions were
affected very much by the war.
Mr. BARKLEY. Have you any facts or any information that would
enable you to state whether the returns to the English Government
since they took over the roads have been even larger than they were
to the roads in 1913, due to the increase of business following the war?
Mr. KRUTTSCHNITT. I have read some articles, particularly the one
referred to by one of the members of your commission, written by
Mr. MacKenzie, which seemed to me to be the best article that I had
read, and my recollection is that either he says in that article, or
some other writer that has written about the English roads, that the
English Government has made money under this arrangement.
138
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. THOм. The English Government.
Mr. KRUTTSCHNITT. The English Government; yes.
Mr. BARKLEY. In other words, the English Government is paying
to the roads less than the roads would have made if they had con-
tinued under their own operation?
Mr. KRUTTSCHNITT. Yes; and, on the other hand, they are paying
to them much more than they would have made if they were making
Jess. That is just the position that we are in. There are a great
inany people who don't agree with the view implied in your ques-
tion—that the war will be followed by a period of depression. A
great many people think that the close of the war will be followed
by even greater activity in mining, manufacturing, and trade in the
United States than prevails during the war, for the reason that the
European nations and instead of nations I might say all Europe,
because all Europe is involved in this war-will be exhausted at the
end of that time. The manufacturing establishments have been de-
stroyed; also the mines to a great extent, certainly in France and Bel-
gium; and a great many of the steel works in France and Belgium
have been destroyed. They have no copper. Many think that
there will be demands made upon the United States for copper, for
manufactures of every description, particularly in steel, that will
bring about an activity much greater even than prevails during the
war.
Mr. BARKLEY. I agree to that, and I think that assumption is a fair
assumption. I did not mean by my question that I thought there
would be a depression. What I meant was that a more normal con-
dition, and certainly not so feverish an activity among the railroads
and among the industries of the United States.
Mr. KRUTTSCHNITT. A more normal condition of great industrial
activity will mean vastly greater income to the railroads than even
greater activity under feverish conditions. One of the great troubles
of the railroads in the last six months has been a feverish activity
and such a heaping of business on them that they were unable to
furnish the facilities. Under normal conditions those great varia-
tions in volume of traffic would not exist and the roads would really
make a better income. Their expenses have been run up unreasonably
by the way in which traffic has been forced upon them.
I don't mean to say it could have been helped. The traffic was
thrown on them by our own Government. The railroads, like good sol-
diers, made up their minds to do the very best in the circumstances.
Their best apparently has not been satisfactory to the country. The
properties have been taken over, and if under this new control it is
possible to get more out of the roads than in the past nobody will
work more loyally to bring that about than the railroad men them-
selves, who have made up their minds to be good soldiers and to
respond to the wishes of the President, who is Commander in Chief
of the Army and the Navy, and to do everything to hold up his hands
and to help win the war. But a period of feverish activity like this
is not necessarily a period of enjoyment of great operating income
or of very good results financially.
Mr. DEWALT. Well, isn't this true, in reply to Mr. Barkley's in-
quiry, that a résumé of the operation of the British railways dis-
closes this fact, that while some of the roads have had increased in-
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
139
comes others of the roads have had decreased incomes, occasioned, of
course, by the diversion of traffic and by the change in the character
of traffic from one road to the other; but that the English Govern-
ment has pooled all the receipts, and that it has equalized by a divi-
sion of this pooling the receipts of the different roads, making up
the deficiencies of one road which received less receipts and taking
from the other road which had increased receipts the amount neces-
sary to meet that deficiency? Isn't that the way they worked out the
system over there?
Mr. KRUTTSCHNITT. That is their intention.
Mr. DEWALT. I am speaking only from the information I have
received from Mr. MacKenzie on British railways.
Mr. KRUTTSCHNITT. You are quite right. Our British cousins are
very secretive about the operations of their roads; even in peace
times you can not find out what they are doing. They have always
been opposed to keeping the statistics of operation that are kept
by American roads, under which American managers, and the Inter-
state Commerce Commission, can tell exactly what they are doing.
Now, such statistics are not available for the English roads; but it
would necessarily follow if the operating income of all the roads is to
be guaranteed to be the same as 1913, as is the case in England; that
the great probability is by a diversion of freight the conditions out-
lined by you would come to pass. That is, some roads would have
an excess income and some a deficit of income, and the English
Government proposes to take the surplus wherever one exists and
apply it to paying the deficit. I understand that is what our Gov-
ernment proposes to do under this bill; that each carrier in the
United States-and there are six or seven hundred-will be expected
to make an agreement with the Government accepting the guaranty
which Congress may fix, and that if they earn anything over and
above that guaranty it becomes the property of the Government, and
the Government can, of course, do what they like with it. They can
either buy shells with it or cannon or they can pay the deficit of the
roads that do not earn the guaranty.
Mr. DEWALT. I might suggest, Mr. Chairman, that I am sure it
would be of value to the members of the committee if the gentleman
has a copy of MacKenzie on Railways, and, if he so desires, that that
be made a portion of his remarks and included in the record.
Mr. KRUTTSCHNITT. I shall be very glad, indeed, to furnish a copy.
I had a copy during the existence of our War Board, and it was such
a very valuable document that we had it reproduced in mimeograph
form. I have one of those, and I will hand it to the stenographer.
The CHAIRMAN. The committee, of course, will do what they please
about it. I assume, of course, there is no objection to putting any-
thing in the record that will be of benefit to the committee. But I
would like that you state to us who Mr. MacKenzie is, what his op-
portunities have been to know, whether he is a railroad man or a
Government man. In other words, I am not acquainted sufficiently
with Mr. MacKenzie by merely referring to his name to know what
value to attach to what he says.
Mr. KRUTTSCHNITT. I was so much impressed by his article, by his
evident possession of information, that I did have him looked up. I
wanted to know who he was. He is a professor in Toronto Uni-
140
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
versity in Canada, and up to about two years ago he was the editor
of the Times Weekly of London. That is all I have been able to find
out about him.
The CHAIRMAN. Then, he has not been a practical railroad men in
the sense that he operated railroads or anything of that kind?
Mr. KRUTTSCHNITT. No; I do not think he is. In other words, I
have given you all that I know about him.
Mr. MONTAGUE. Irrespective of any biography, do you think the
subject matter is of real moment?
Mr. KRUTTSCHNITT. I think the subject matter is of real moment.
Mr. Acworth testified before the Newlands Joint Interstate Com-
mittee back in last March on the operations of the English roads
under the Government plan, and has published an article on it.
Prof. Frank Haigh Dixon, of Dartmouth, has been charged, I think,
by the Carnegie Foundation to write an article on the operation of
the English roads. He told me some time ago that he was busily
engaged on it, and I do not think it has appeared yet, but when it
does appear I should think it would be very helpful.
Mr. THOM. In connection with that, Mr. Chairman, I was just
about to say there was a very valuable publication which is being
jointly produced by Dr. Parmelee and by Dr. Dixon. Dr. Parmelee
has been intrusted by the Carnegie Foundation with the giving of
the history of the English roads. Dr. Dixon is in charge of the
American roads.
Mr. MONTAGUE. What do you mean by the Carnegie Foundation-
the Carnegie Institution of Washington?
Mr. THOM. I suppose so.
Mr. MONTAGUE. Meaning the scientific research bureau?
Mr. THOм. Yes. That has been published for the use of the Eng-
lish roads by the Senate committee, and I would take pleasure in
obtaining copies of it and presenting it to you-not, unless you de-
sire, to be incorporated in your proceedings, but for the use of the
members if they desire to make use of it.
N
The CHAIRMAN. I think that would be more satisfactory. Is that
article confined to the operation of the railroads by the Government
since the Government has taken them over?
Mr. THOм. Yes; the history of all Government operations since
the war.
Mr. MONTAGUE. Mr. Thom, speaking only for myself, if it is put
into printed form I would like to have it detached from the hearing.
Mr. THOM. This is in good print, and I will obtain copies for
the members of the committee and have them presented.
Mr. KRUTTSCHNITT. Evidently my information was not accurate
and I accept Mr. Thom's correction. I know that Dr. Dixon and
Dr. Parmelee were associated in this work, but, apparently, I gave
the wrong information that Mr. Dixon was preparing the part for
the English roads. It is just the reverse; he is preparing it for the
American roads and Dr. Parmelee for the English roads.
Mr. TнOм. And the part relating to the English roads has just
been published.
Mr. ESCH. Just a question with regard to chart 2 on the sheet. I
noticed it is confined to income from operation. Would the inclusion
in the chart of all the other income of the railroads, interest on bonds,
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
141
dividends on stocks held by them, office buildings, operations of
hotels, and all that sort of thing, modify in any way the broken line?
Mr. KRUTTSCHNITT. I suppose it would, but the only income that
has been discussed in connection with this bill is what is designated
in the President's proclamation and in the bill as net railway operat-
ing income. That is the income derived from the operation of the
ralways as carriers.
Mr. THOм. That is, the properties taken over?
Mr. KRUTTSCHNITT. That is, the properties taken over. Some
roads, notably our own, have large numbers of outside investments
that are in no wise connected with carrier operations. And that
income does not appear in the net operating income as reported to
the commission by us. And similar conditions for other roads.
Mr. DOREMUS. Mr. Chairman, I would suggest that if the witness
is not through that we take a recess until 2 o'clock, as the House has
no particular business on to-day and we could sit this afternoon.
The CHAIRMAN. Let me ask the witness this: I do not know what
you have in mind, Mr. Kruttschnitt, to bring before the committee, or
how much time you need. If it won't take any considerable length of
time, you could finish now.
Mr. KRUTTSCHNITT. About three-quarters of an hour.
Mr. DOREMUS. I move that we recess to 2 o'clock.
The CHAIRMAN. There being no objection, the committee stands
recessed until 2 o'clock.
(Thereupon a recess was taken until 2 o'clock p. m. of the same
date.)
AFTER RECESS.
The committee met at 2 o'clock p. m. pursuant to recess.
The CHAIRMAN. The committee will come to order.
Mr. A. P. THOм. Mr. Chairman, before Mr. Kruttschnitt resumes
the stand I will say that I have some copies of the publication by the
Carnegie endowment for international peace, published by them in
respect to this railroad situation in Great Britain. I stated this
morning that the part of that volume which related to railroads in
the United States had not been completed. I find that I am in error
about that. In the first part of this volume it relates to the railroads
in the United States, and was prepared by Dr. Dixon. The second
part, beginning about page 67, relates to the railroads of Great Brit-
ain, and was prepared by Dr. Parmelee. I will give you the number
of copies I have, and regret that I have not more. There are only
about 10 copies that I have.
I find that it is page 69 that the question of Great Britain begins,
instead of 67.
The CHAIRMAN. Mr. Kruttschnitt, you may proceed.
MENT
STATEMENT OF JULIUS KRUTTSCHNITT-Continued.
Mr. SWEET. Before you begin, Mr. Kruttschnitt, you mentioned
this morning having figures on income from operation as far back as
1891. Can you furnish the committee with those figures? I am not
really particular about your going into them now, but I would like
to have you make them part of the examination.
142
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. KRUTTSCHNITT. I have charted the actual income from the
data published by the Interstate Commerce Commission from 1891
up to 1917. That will be a period of 26 years.
If in 1907, which was the beginning of this period covered by the
chart that I placed before you, we had undertaken to prophesy where
the income of the roads would be in 1916 or 1917 if the normal rate
of increase from 1891 to 1907 had prevailed, we find that the operat-
ing incomes would be very nearly the same in 1916 and 1917 as they
actually are.
Again, if in 1910, when there was a period that some people might
have thought was high, we take that and figure the normal in-
crease from 1891 up to that date, which would be 19 years, and predict
what the roads ought to earn in 1916 and 1917 under that normal
rate, again it comes out about the same as the earnings actually are,
showing that the normal rate of the increase of income of the
roads, if it had been left undisturbed, would have put the roads,
as to income in 1916 and 1917, just about where they are now.
SoSo that the income of those two years can not be considered by
a study of the past as anything out of the usual or abnormal. As
I said, it is shown very clearly on this pencil sketch that I have
here, which I did not have time to put in shape to file with the com-
mittee, but with your permission I will put it in shape and send it in
to you in a few days, as soon as I can have it properly drafted, if I
may do so.
The CHAIRMAN. You have that permission, if you wish to do so.
(The chart referred to is here shown.)
Mr. KRUTTSCHNITT. There is one thing I should like to say: It is
evident from a question asked me by a member of the committee at
the luncheon adjournment that there is some misunderstanding about
my use of a certain percentage, 4.09, and another percentage, 4.07.
It is simply a coincidence that they are nearly the same. They have
absolutely nothing to do with each other. The figure 4.09 that I
did use is the rate of return on property investment in the year 1915.
The figure 4.07 used in describing this chart that has been filed with
you relates to an entirely different matter. It is the normal uniform
rate of increase in operating income from 1907 to 1917.
Mr. STEPHENS. How do you secure that normal rate of increase?
Mr. KRUTTSCHNITT. By dividing the total rate of increase by the
number of years covered. In other words, it really follows from a
definition of normal, which means an increase which is according to
rule or according to law, regular, and in this sense is used in that
exact meaning, as contradistinguished from the very erratic path of
operating income actually shown between 1907 and 1917.
In commenting on average rate of return given by the three years
of 5.26 that I gave, I should like to read a paragraph from the
opinion of the Interstate Commerce Commission in the 5 per cent
rate case. The commission said, referring to the figure of 5.36 per
cent return on property investment in 1913 that was then before
them:
In view of a tendency toward combining the net operating income as shown
by the facts described, we are of the opinion that the net operating income of the
railroads in official classification territory taken as a whole is smaller than is
demanded in the interest of both the general public and the railroads-
3
MILLION
DOLLARS
17,000
15,000
1691
CHART SHOWING NORMAL CONTRASTED WITH ACTUAL INCREASE IN INCOME FROM OPERATION:
BOOK COST OF ROAD AND EQUIPMENT;
AND RETURN ON COST OF ROAD AND EQUIPMENT (Authority: 31st annual report, I.C.C., Dec. 1,1917)
1892
1893
1894
1895
1896
4691
1898
1899
COST OF ROAD AND
AND EQUIPMENT
00611
1903
606 ol 56
εισι
ટાઈ
1914.
1915
1916
1917
MILLION
DOLLARS
16,000
Normal or near Normal Years 1891-2-3,1907,1910, 1916, 1917
Below Normal 1894-5-6-7-8-9, 1900-1-2-3-4-5-6-8-9-11-12-13-14-15
14.000
13,000
12,000
11,000
10,000
9,000
8,000
MILLION
DOLLARS
1,000
900
800
700
600
500
400
300
PERCENT
4
5
6
1600
1891
888888
+681
1895
1896
1897
1898
Normal Increase
Actual Increase
INCOME FROM OPERATION
Normal or near Normal Years 1891-2-3,1906-7-10-16-17
Below Normal 1894-5-6-7-8-9, 1900-1-2-3-4-5-8-9-11-12-13-14-15
1692
1893
1894]
1895
1896
40958-18.
(Face p. 142.)
1905
Normal Increase
Actual Increase
Α
1912
༔ ༔ ༔
A- Estimate based on increases of 1891 and 1910.
of the normal incomes of 1916 and 1917,
substantially same as actual increases
B- Estimate based on increases of 1891 and 19071
Esti
timate based on increase.
eases of
of 1891 and 1907
of the normal incomes of 1916 and 1917.
substantially same as actual increases
PERCENTAGE OF INCOME TO COST OF ROAD AND EQUIPMENT
1911
1912
1913
1914]
1915
9161
1917
4
1917
17.000
16,000
15.000
14,000
13.000
12,000
11,000
10,000
9,000
8.000
MILLION
DOLLARS
1,000
900
800
700
600
500
400
300
PERCENT
B
10
3
Up
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
143
That is, 5.36 they considered too small, that being the return on the
property investment.
The CHAIRMAN. What do you mean by "property investment"?
Mr. KRUTTSCHNITT. It is the term used by the commission in their
annual report, which I think you must have before you.
The CHAIRMAN. Can't you give an explanation of that now?
Mr. KRUTTSCHNITT. They give in their annual reports, the last one,
dated December 1, 1917-a column headed "Book cost of road and
equipment."
The CHAIRMAN. Does that mean the cost that the railroads have
carried on their books, the property investment? Is that what it
means?
Mr. KRUTTSCHNITT. Yes.
The CHAIRMAN. And it doesn't mean the value of the property
otherwise than as determined by that original cost?
Mr. KRUTTSCHNITT. It is the book cost. And they take the rela-
tion of that book cost of road and equipment to the operating income,
and they give a column headed "Ratio of column J to column M."
That means the return, the cost of the property divided into the
income derived from it. And it was the average of those for the past
three years that I gave the committee this morning as 5.26.
The only other matter that I would like to speak about is the
money put into the road in equipment since 1915. In 1915 the com-
mission gives the book cost of road and equipment at $17,247,000,000;
in 1916 they give it as $17,525,000,000. They don't give it for 1917,
but they do give the average book cost per mile of road at $74,500,
and by multiplying that cost by the number of miles of road rep-
resented in the preceding year, which is the mileage used by the
commission, adding 900 miles to that as the number of miles of road
built in 1917, we get the book cost of road and equipment in 1917 as
$17,880,000,000.
Mr. THOм. Ending June 30.
Mr. KRUTTSCHNITT. Well, I am always speaking, unless I say
otherwise, of the years ending June 30, because they are the years
used by the commission.
We
Now, that book cost of road and equipment is about $633,000,000
over 1915, and we have nothing at the present time for the additional
investment in road and equipment from the 30th of June, 1917, to
the end of the year, when the Government took the roads over.
think that whatever years are taken to determine the guarantee, the
roads should also be allowed for a period dating from the latest year
of that guarantee, up to December 28, 1917, as a return on the addi-
tional money put in.
The CHAIRMAN. Does the word "equipment," as used include roll-
ing stock?
Mr. KRUTTSCHNITT. Yes, sir.
The CHAIRMAN. And are consumable in their use? I mean of a
nature consumable-that wear out with use?
Mr. KRUTTSCHNITT. Yes; but the cost of equipment is included in
capital invested, and they are kept up.
Mr. PARKER of New Jersey. Mr. Kruttschnitt, you haven't been
over Mr. Anderson's figures that he gave us in his testimony yes-
terday?
144
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. KRUTTSCHNITT. No, sir; I haven't seen them.
Mr. PARKER of New Jersey. He has modified both the net railway
operating income by leaving out on operating income on debit and
credit from leased roads, miscellaneous rent, and adding debit and
credit arising from equipment, and on the investments he says,
reserve depression not deducted," or something of that sort. His
figures seem to differ a little from yours. I only wanted to know if
you have seen these figures.
66
Mr. KRUTTSCHNITT. No, sir; I haven't seen them at all.
Mr. HAMILTON. I was going to suggest to Mr. Parker whether an
inspection of those figures might not aid you in your statement.
Mr. KRUTTSCHNITT. These figures I have before me have just been
published by the commission, and they use the term "income from
operation." That is revenues less operating expenses, less taxes.
They have another term which is used in the President's proclama-
tion in the bill called “net railway operating income." After using
it in the bill, it says we will take that figure less certain items. Those
are evidently the figures that this gentleman has just read out. So
unless you sit down with these statements before you and analyze
them most carefully, you are apt to be very much confused, and I
couldn't take them on the spur of the moment and give any intelli-
gent opinion.
Mr. HAMILTON. It was for that purpose that I made the sugges-
tion, so as to have some commentary by you on the difference.
Mr. KRUTTSCHNITT. It is unfortunate that the same income had
not been used in the annual report of the commission, in the bill,
and in these figures presented yesterday. Then there would be an
opportunity to compare them, but as it is it would require quite a
long while and the most careful analysis to compare them.
I am handed a newspaper copy of this McKenzie report, which I
do not want to offer because I think from its size it is not the full
article, but I have a copy in my room at the hotel, which I will
furnish.
The CHAIRMAN. You will furnish us a copy of that?
Mr. KRUTTSCHNITT. Yes, sir. I don't think I have anything else,
Mr. Chairman, that I wish to offer.
The paper referred to follows:
BRITISH RAILWAYS AND THE WAR.
By F. A. MCKENZIE.
[Professor in Toronto University, formerly editor of the Times Weekly, London. ]
British railways have played a great and splendid part in the war. Working
with depleted staffs under war conditions, they have enabled England to move
millions of men and millions of tons of munitions with the utmost rapidity and
with an entire absence of confusion. They have met to the full every demand.
They have sent their trained workers to the colors by the many score of
thousands. They have torn up their lines and given their locomotives and
rolling stock for the service of the army in France. Sinking ancient rivalries,
they have come together, working as one for the common good. The Govern-
ment took control of the lines when hostilities began, but Government control
merely provided the agency through which the railway men themselves rallied
to employ their resources as an effective instrument of war.
The British and German railway organizations before the war presented a
striking contrast. German railways were almost wholly State owned. Many
of them were built primarily for purposes not of commerce, but of strategy.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
145
To the German great general staff the railway was one of the foundations of
national war preparation. The railway staffs were selected from the army and
were virtually managed as a branch of the central military organization. The
very railway cars were built to a size that could be employed for transporting
the maximum number of men. Goods trucks were planned so as to be suitable
when the moment came for the carriage of guns and war material.
The British railways were privately owned and were built solely for commer-
cial purposes. The control of the principal lines was divided between 40 com-
panies. These maintained only a minimum of cooperation among themselves, and
wherever they ran through the same territory there was keen rivalry. British
lines were laid, the size of railway carriages and goods trucks decided, and the
staffs selected solely for the ordinary work of peace time. It was the business
of the railways to provide for the needs of the communities they served and to
obtain a fair return for their shareholders, and nothing else. They were peace
lines laid down not where strategy dictated, but where business was likely to
be best.
One thing, however, had been done, a thing that was to prove of vital
importance when war broke out. In 1871, following the Franco-Prussian con-
flict, the British Government took power by act of Parliament to acquire by
royal proclamation any or all of the railways of the United Kingdom in time
of war.
A committee of railway managers was already in existence to deal
with such a situation. This body, known first as the war railway council and
afterwards as the railway executive committee, was to act as a central
organization, to give instructions, and to coordinate the activities of the differ-
ent railways in war time. Working in cooperation with it was the engineer
and railway, staff corps, a volunteer organization of railway workers, whose
purpose was to develop schemes, methods, and personnel for the war railway
service. It was composed of general managers of the leading railways, leading
contractors, engineers, and other railway men.
Month by month and year by year the staff corps worked out schemes for the
utilization of our lines under any contingency. It planned how to carry out
movements of troops from one part to the other. Few, if any, then contemplated
more than handling bodies of men running into a total figure of from four to
five hundred thousand. When, later, the needs of the war raised the total to
ten times the old maximum the plans proved to have been so soundly laid that
the greater demands were easily met.
The railway executive committee and the railway staff corps, working in
conjunction with the director general of military transport, gradually com-
pleted, during the years preceding the war, their plans of operations. These
covered more especially the movements of a British expeditionary force to its
embarkation port, the quick concentration of men at any point to repel an
invading army, and the evacuation of invaded districts. By 1912 all was in
readiness. Every railway manager had in his safe a confidential, sealed,
unopened document detailing a scheme of mobilization. In it he was told
exactly what to do, the trains to be moved, their starting points and destina-
tions, and the entire schedule of running if war came. So far as the operation
of our railways was concerned, England was prepared.
THE MEANING OF GOVERNMENT CONTROL.
On the same day that war was declared (Aug. 4, 1914) the railways of
England, Wales, and Scotland-not Ireland-were taken over by the Govern-
ment. The managers opened their sealed instructions and proceeded to carry
them out. It had been provided in the act of 1871 that full compensation
should be paid to the owners for any loss incurred. The Government, however,
did not at the beginning announce any terms with the companies. This was left
for a later date. Government control, it is important to note, did not mean
Goverment ownership. The lines remained the property of the companies.
They retained the management of their own concerns, subject to the instruc-
tions of the executive committee, and the whole machinery of administration
went on as before. The sole purpose at the beginning was to facilitate the
movements of troops. But as the war developed, as economy became more and
more essential, the scope of the railway executive committee, now in supreme
control, became greatly extended.
The official chairman of the railway executive committee was the president
of the board of trade, but the real presiding chief was the acting chairman,
Mr. H. A. (afterwards Sir Herbert) Walker, general manager of the London &
40958-18—10
146
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
}
South-Western Railway. Working in cooperation with the acting chairman
were 12 general managers of leading British lines. They were Mr. J. A. F.
Aspinall, of the Lancashire & Yorkshire; Mr. Guy Calthrop, of the London &
North-Western; Mr. C. H. Dent, of the Great Northern; Mr. (afterwards Sir)
F. H. Dent, of the South-Eastern & Catham; Sir Sam Fay, of the Great Cen-
tral; Mr. (afterwards Sir) William Forbes, of the London, Brighton & South
Coast; Sir Guy Granet, of the Midland; Sir A. Kave-Butterworth, of the North-
Eastern; Mr. Donald A. Matheson, of the Caledonian; Sir Robert Turnbull, of
the London & North-Western; and Mr. A. Watson (assistant to general man-
ager), Lancashire & Yorkshire. The secretary was Mr. Gilbert L. Szlumper.
Under the central body were groups of committees, each made up of railway
experts. The war office and the director general of transport were in touch
with the central committee. There was a constant interchange of ideas, but
from the beginning there was no attempt to supersede the railway men in carry-
ing out their work.
The main plans of the war policy of the railways had, of course, to be ap-
proved by the Government, and announcements were made in the name of the
-president of the board of trade. But the plan uniformly adopted was for
the authorities to tell the railway executive committee what had to be done
and then leave it to plan the details of how the work should be completed. In
other words, the experts were allowed to carry out their own work in their
own way, so far as was possible, under war conditions. And they got the thing
done. Sir Guy Granet, general manager of the Midland Railway, became
deputy director general of military railways in the war office. Mr. Eric C.
Geddes, deputy general manager of the North-Eastern Railway, was appointed
deputy director general of munitions supply; he was knighted in 1916 and made
director general of movements and railways and director general of communi-
cations in France. His history from then is one of the romances of the war.
Having done great work on the railways at the front, he moved to the Ad-
miralty, where he shortly became first civil lord and a member of the Govern-
ment. He was succeeded at the war office by Sir Guy Granet. Sir Sam Fay,
assumed responsibility in the war office for the directorate of movements.
Mr. Thornton, general manager of the Great Eastern Railway, became hon-
orable lieutenant colonel of the engineer and railway staff corps and deputy
director of inland waterways and docks.
The first task before the committee was one calculated to tax its resources
to the full. The territorials-the volunteer forces of the United Kingdom-had
been called to the colors, and had to be distributed to their training grounds
and their defense areas all over the country. Simultaneously the expeditionary
force, numbering 120,000 men, with a vast amount of material of war, had to be
transported in a minimum of time to Southampton, the port of embarkation for
France.
73 TRAINS IN 14 HOURS.
The Government gave the railways a time limit of 60 hours to make ready
for dispatch to Southampton of 350 trains of about 30 vehicles each. In addi-
tion, close on 1,200 other trains were necessary for conveying the equipment,
munitions, and food supplies of the forces. There were about 60,000 horses to
be carried, 7 to a truck; there were 5,000 tons of baggage and 6,000 vehicles.
Sir Herbert Walker, over whose system-the London & Southwestern Rail-
way-the trains had to travel to Southampton, described what was done, in a
speech, shortly afterwards at the American Luncheon Club in London. He
told of the Government time limit of 60 hours.
'We delivered the goods,' as you Americans would say, in 48 hours. At
Southampton, for practically every day of the first three weeks of the war,
we handled during a period of 14 hours no fewer than 73 of these trains,
including the running of them to the boat side and the unloading of the full
equipment of guns, ammunition, and horses.
“The trains arrived at intervals averaging 12 minutes. It was a matter of
special pride to all the railway men concerned--and we general managers give
credit for the feat to the efficiency of our disciplined staffs-that practically
every train, without exception, came in to scheduled time. Some of them
came from remote parts of the Kingdom-Wales and the north of Scotland."
Among the audience on that occasion was Mr. (afterwards Lieut. Col.)
H. W. Thornton, general manager of the Great Eastern Railway, a distin-
guished American railway organizer, who had come to England from the
United States. He said that, so far as his knowledge of great transportation
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 147
achievements went,, there was no event in railway history to compare with
what the British lines had accomplished in that month of August, 1914. Cer-
tainly in America, the land of "big stunts," there had never been anything
like it. It may be added that this rapid transportation of the troops to
Southampton was only possible because the docks there had been carefully
planned by the railway company for the handling of large masses of men and
quantities of material. The trains conveying the troops and freight were run
right down to one of the berthing stations; they were emptied there with the
greatest expedition, and at once sent back. Each train had a permanently
displayed index number on it, by which it was known throughout its journeys;
its exact time of arrival and departure at each place were scheduled, and the
schedule had to be kept. What is still more noteworthy is that while this rapid
concentration of troops was proceeding at Southampton the ordinary traffic
of the railways was maintained with comparatively little alteration. Here
and there a section of line was closed for a few hours, particularly sections
of some of the junction lines across London; but the general public scarcely
realized what was happening. Such precautions were taken that even the
elaborate espionage system maintained at that time by Germany in England
failed to convey to the enemy full details of what was going on. The British
army had landed in France and was marching into Flanders before the Ger-
mans realized where they had landed or what their numbers were.
The railway companies," said Lord Kitchener three weeks after the out-
break of war, "in the all-important matter of transport facilities have more
than justified the complete confidence reposed in them by the war office, all
grades of railway service having labored with untiring energy and patience."
The terms under which the railways were being taken over for the period
of the war were published in September. The Government guaranteed to the
proprietors of the railways that their net revenue should be the same as in
1913, except when the net receipts for the first half of 1914 were less than
the first half of 1913; in that case the sum payable was to be reduced in the
same proportion. The entire Government traffic- -men and freight-was to be
carried without any direct charge being made for it or any accounts ren-
dered. This plan was considered satisfactory by both sides. In the majority
of cases there had been a reduction of earnings in the first half of 1914 over
the previous half-year, and companies were contemplating a still further re-
duction. The interests of their shareholders being assured, they were able
to devote themselves to the work of economical and efficient distribution, quite
apart from the usual financial problems. The one weak side of this agree-
ment was that it made no allowances to cover increased interest payments on
account of new investments, new capital expenditure since the war began.
This point was afterwards met by an arrangement that the Government should
pay interest at 4 per cent on all new capital invested by the railways since
August 4, 1914, on new lines, branches, terminals, equipment, or other facilities
put into use since January 1, 1913.
SOME EFFECTS OF COMBINED ACTION.
The conclusion of the financial agreement between the Government and the
companies automatically brought about a great economy in the system of rail-
way accounts. Hundreds of clerks had been employed at the railway clearing
house at Euston, London, in dissecting payments covering different lines, so
that each line should have its proper share. This work was no longer required.
The vast amount of competition maintained before the war for traffic at once
ceased. British railways, particularly those competing with others for the
business of particular towns, had maintained staffs of canvassers not only for
freight, but even for passenger traffic. Their competition went so far that,
in some cases, if it was announced that a visitor was coming to one of the
midland towns he would promptly receive at his home address callers on behalf
of rival railways asking him to buy his ticket by their line. There was still
more acute canvassing for goods traffic. All the great companies had extensive
publicity departments which, by posters, pamphlets, and newspaper articles
sought to bring home to people generally the attractions of their lines. In the
years before the war this publicity had tended to grow more and more elaborate
and more and more costly. Now it was swept away at a stroke. The weekly
traffic returns of the different lines were no longer required, and so ceased
to be published. The reports of the companies were cut down to a bare
148
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
minimum, and in many cases even these reduced reports were not sent to the
shareholders unless they specially asked for them. The tickets issued by
various companies for the same points were made for a time available by the
trains of any railway running between the points to which the tickets were
issued. This concession was shortly afterwards withdrawn.
The great strain of the dispatch of the first expeditionary force passed, but it
soon became clear that the railways would be faced by a double problem. They
would all the time have a vast amount of military traffic to handle the trans-
ference of troops, the carriage of munitions, the assembling of different sec-
tions of war material. Simultaneously with this great increase of work they
had a very serious reduction of staff. A number of railway men had been
called up at once as army reservists and territorials, while many others volun-
teered to join the colors. It was estimated a few months after the outbreak of
war that 66,000 men out of a total of 643,135 had joined the army. This figure
rapidly grew until at the end of 1916 nearly 150,000 men had been released by
the railways for war duty-close on 50 per cent of the men of military age.
This shortage of labor quickly grew into one of the most serious issues. The
companies had no desire to keep back recruits from the army, but they realized
that it was essential for the welfare of the nation that the railways should be
maintained in an efficient manner and be prepared to meet any military de-
mands which might be placed on them. The King, in a message to the skilled
workers in the shipbuilding and armament firms, emphasized this latter point
in words that applied equally to railway workers: "His Majesty greatly ad-
mires that spirit of patriotism which arouses in them (the skilled workmen)
the desire to enlist and fight at the front, but His Majesty wishes to remind
them that by work that they alone can most successfully carry out they are
assisting in the prosecution of the war equally with their comrades serving by
land or sea."
The railway executive committee, which now was the main body for making
financial arrangements, announced that the railway companies had arranged to
supplement the army pay and allowances of army reservists and territorials in
the railway service who joined the colors in such a manner that the families
would be maintained in circumstances which should avoid hardships during the
absence of the breadwinner of the family. Certain privileges, such as the sup-
ply of cheap coal, would be continued. Occupants of the companies' houses
would not be disturbed, and when the men returned positions would be found
for them on the railways equal to those they formerly occupied. The general
plan adopted was to make a grant to augment the income of the wife and family
to at least four-fifths of the man's standard wage.
THE COMPANIES AND THEIR STAFFS.
At the time of the outbreak of war the railway companies and the men's
unions-the National Union of Railwaymen and the Associated Society of Loco-
motive Engineers and Firemen were engaged in a controversy on the question
of wages. A railway conciliation scheme drafted by a royal commission had
come into operation early in 1912. This was to continue until November 6,
1914, but either side could terminate it on or after that date by 12 months'
notice. The men had given notice in November, 1913, to withdraw; they wanted
the conditions revised. When war broke out the negotiations between both
sides were in a very forward state. A temporary arrangement was arrived at
in October, 1914, by which the conciliation scheme was to be continued, but to be
terminable by either side at six weeks' notice. Many railway employees were
convinced that since the Government was now virtually in control of their lines
their demands for increased wages should be met. The rapid rise in the cost of
living had made it obvious, after a time, that something must be done. The rail-
way companies felt that from their point of view any rise in wages, even though
wholly or mainly made by the Government, might have the serious result of put-
ting on them a heavy burden to be borne after the war and after private owner-
ship was resumed. It is always difficult to reduce wages whatever the con-
ditions may have been under which they are raised.
On February 13, 1915, terms of settlement were arranged. A weekly bonus
was to be paid to all wage-earning employees of 18 years old and upward en-
gaged in the manipulation of traffic; all whose standard rate of wages was
under 30s. a week were to receive a weekly bonus of 3s., and those earning 30s.
or more were to be paid 2s. The cost of this bonus was divided, one-quarter
being paid by the companies and three-quarters by the Government. Modifica-
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
149
tions of the original agreement between the Government and the railway com-
panies were made in order that this might be done. This agreement was re-
vised afterwards in 1915, and in its final form all employees of 18 years or
upward were given a bonus of 5s. per week, those of under 18, 2s. 6d.
understanding at the time was that this arrangement was finally to settle the
wages question until the end of the war. A definite undertaking was given on
the point by the men's organizations:
The
“The National Union of Railway Men and the Associated Society of Loco-
motive Engineers and Firemen undertake that during the pendency of this
agreement that they will not present to the railway companies any fresh
demands for increased bonus or wages or general alterations in conditions of
service, and that they will not give countenance or support either to a demand
on the part of any of their members to reopen the settlement now made or any
strike that might be entered upon in furtherance of such demand."
Here, however, war conditions proved a stronger factor than formal agree-
ments. The cost of living generally, and particularly the cost of food, continued
to mount up. A second war bonus of 5s. was added to the first, coming into
force in September, 1916, and in April, 1917, a further agreement was come to
between the railway executive committee and the various trade-unions of the
men by which the war bonus was increased to 15s. per week for all employees
over 18 and 7s. 6d. per week for those below that age. It was estimated that the
total additional expenditure on account of the war bonus would be £23,000,000.
The whole of these latter increases were borne by the Government.
These rapid rises in the wages paid to the men came in for much criticism.
It was pointed out that the increase of 1916 was nearly equal to wiping out
the dividends on the ordinary stock. The Railway Magazine declared:
"Under no other system but state control would a war bonus be paid on an
all-round basis alike to lads of 18 years of age and the oldest employee, and
single and married men placed on the same plane, no matter what may be
their financial responsibilities or comparative wages."
But here certain considerations have to be borne in mind. This rise in
wages was not pecular to the railways, but was general in industry. The rail-
way men under the war-labor regulations were not to leave their employment
for other work. It was felt that they could not reasonably be expected to con-
tinue under far lower wages than other men in allied industries in the same
districts. Above all, there was the outstanding fact that the old scale of wages
was inadequate under war prices. The average cost of food of the kind mainly
purchased by working men had doubled; clothing was much dearer; all the
incidental expenses of living, except rent and rates, had gone up; and men could
not maintain their families decently on the old wage scale. The idea of making
the rise the same for all ranks was to benefit most those who needed it most-
the lowest paid men.
Up to the beginning of the war British railways had been very reluctant to
employ women labor, even for office details. Booking clerks, head-office staff,
ticket collectors, attendants in dining cars, were in nearly every case men.
But the shortage of men and the desire to release as many as possible for
service with the colors caused the introduction of women workers early in 1915.
The experiment was a great success. Women were employed on an ever-
growing scale, not only for purely clerical duties but for manual work of many
kinds. Soon everywhere there were women cleaners, women porters, women
ticket collectors, women booking clerks, and many others besides. The trade-
unions pressed for a definite understanding about the wages the women were to
receive and further asked for assurances that the employment of women in
capacities where they were not formerly employed was an emergency action
arising out of circumstances created by the war and would not prejudice in any
way the undertaking given by the railway companies as to the reemployment
of men who had joined the colors, on the conclusion of the war. The pay of
women in grades in which they were not engaged in August, 1914, was fixed at
the minimum pay of the grade. At first women were not granted a war bonus;
but in November, 1916, it was arranged that women of 18 years of age and
over should be given a bonus of 3s. a week and those under 18 years of age
1s. 6d. This amount was later increased to 5s. 6d. a week for the seniors and
2s. 9d. for the juniors.
No statements have been issued showing the final balance sheet of the rail-
ways under Government administration, and any such statement would be very
difficult to make out, since a vast quantity of Government traffic not credited
150
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
under the war arrangements would have to be charged up in attempting to
make any fair balance sheet.
In December, 1916, Mr. Bonar Law, speaking officially in the House of Com-
mons, said that the Government agreement with the railway companies, notwith-
standing the grant of the war bonus to railway employees, had "involved no
financial loss, but probably some gain." When we contrast the working of the
railways under Government supervision with the working of the British ship-
ping independently, the gains of the Government control become evident. The
railways under Government direction kept freights even, directed their opera-
tions on an organized plan, gave undue profits to no man, and were worked
for the sole purpose of benefiting the country. The merchant shipping trade,
left largely under private control, was used in many directions for the accumu
lation of individual fortunes-fortunes earned out of the necessities of the
community.
The erie of economy in administration extened. At first the railway com-
panies, believing that the war would possibly be short, attempted to carry on
as usual, to maintain as many of their ordinary services as they could, and to
give the public all the facilities to which they had been accustomed in days of
peace. After a time it became evident that this course was impossible. Step by
step restrictions came in force._ Restaurant and sleeping-car services were cut
down or suspended altogether. Excursion and week-end tickets, formerly a very
prominent feature in British railways, ceased. The service of passenger trains
was reduced. Minor stations were closed, and some branch lines were aban-
doned. The "luggage in advance " system, by which passengers could send
their luggage on a small payment before they themselves left and have it de-
livered by the railway company to their destination, was ended, and passengers
were asked to take as little baggage as possible. Later on passenger baggage
was definitely limited to 100 pounds per head.
FURTHER BENEFITS OF THE POOL."
Among the most important economies in handling traffic was, first, the estab-
lishment of the common user for railway companies' open-goods wagons.
Under the old system the wagon received loaded by one company from another
had to be promptly returned to the owning line, even though there was no freight
for it on its return. Under the common-user arrangement it became available
for loading in any direction, thus reducing the haulage of empty vehicles to a
minimum. This system of pooling luggage cars came into force on January 2,
1917. The pool did not include the very large number of privately owned
wagons, estimated from 600,000 to 700,000, which are a distinct feature of
British railways; but the benefits of the pool were soon seen to be so real that
steps were pushed forward to take over the control of the private wagons also.
A minor economy introduced early in the war was an agreement by the rail-
ways to accept each other's "paid" and "to pay" stamps and labels on parcel
traffic. This saved very much labor, and it led to a further development in
January, 1917, when the Railway Executive Committee announced that from a
given date "the carriage charged for all descriptions of traffic for conveyance
by passenger train or other similar service must be paid by the sender at the
forwarding station." The whole system of bills and accounts for passenger-
goods traffic was thus swept away. Some reformers even proposed that the
railways should go further, and insist upon the prepayment of all small traffic
by goods trains. Still another step was a decision that claimants for the loss or
damage of goods traffic should be dealt with by the company on which the claim
was made without any division, such as had formerly taken place, of the amount
paid between the companies concerned in the route over which the traffic had
been conveyed.
The saving in printed matter was so extensive that at least one large company
was able to turn out many tons of paper which had been stored for office use
and to put this on the market at a time when paper was scarcest.
In January, 1917, in addition to the changes already described, passenger
rates were raised 50 per cent, and Irish railways, which had formerly been out-
side the Government control, were taken into it. The rise in passenger rates
was instituted not to increase revenue, but to reduce the amount of traveling.
The British authorities openly appealed to the people not to travel except when
necessary. It was urged on the public in every way possible that pleasure
traveling under existing conditions was unpatriotic. The railway men were
wanted for other work. Thus at the Christmas season of 1916 the board of
trade issued an appeal as follows:
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
151
CHRISTMAS TRAINS-JOURNEYS OF REAL URGENCY ONLY.
"The board of trade desire to urge upon the general public the necessity of
avoiding all traveling by train at Christmas time.
"No journey which is not of real urgency should be undertaken, and the public
are warned that the passenger-train service during the Christmas holidays will
be greatly reduced in comparison with previous years, and that the railway com-
panies can not undertake to convey passengers to any particular destination.
The military authorities propose to restrict the leave of soldiers stationed in this
country, and, in the interests of the nation, civilians should regard themselves
as under a like restraint. Soldiers on leave from the front will be given a pref-
erence over other passengers."
More-
The increase in passenger fares did not apply to workmen's tickets, season
tickets, traders' tickets. or zone tickets, nor to the local traffic in towns.
over, shortly afterward the board of trade announced that the increase of 50
per cent would not apply to tickets issued to relatives desiring to visit wounded
soldiers or sailors in hospitals on producing the hospital authority to do so.
The rise was generally borne with equanimity, but it caused some protests.
One deputation appealed to the railway executive committee for consideration
in the matter of railway fares for watering places and health resorts. The
deputation was told that, so far from the increase being modified, a still further
increase might be necessary in the future.
TRANSPORTING STOCK TO THE WAR ZONE.
Late in 1916 a fresh consideration came to the fore. In the early stages of
the war the British had relied mainly for the transport of their goods in France
on the service of large numbers of powerful motor wagons. Experience proved
that while a motor service might answer as a temporary measure for a com-
paratively small body of men it was impossible to provide for very large armies
by road traffic. It was particularly impossible to bring forward with sufficient
rapidity the enormous quantities of shells required and the numerous heavy
guns without the use of properly built railroads. The companies could not
well manufacture afresh the rails, locomotives, and rolling stock necessary or
educate outside men to operate them in France. To meet this situation large
sections of line were torn up in England and sent over to France and every
spare locomotive and spare bit of rolling stock was also sent over. These rails
were quickly laid down by the railroad construction corps, drawn largely from
railroad builders from the Dominion of Canada. The new lines were oper-
ated by the railroad corps, recruited from practical British railway men. This
of necessity still further reduced traveling facilities in England. Speaking at
Carnarvon on February 3, 1917, the Prime Minister dealt with this matter:
"The Germans discovered early in the war that the railways are a great
military machine. As usual, we come a little later.
"When I was secretary of state for war one of my first duties was to
appoint a great railway manager to take over the question of railway transport.
The commander in chief in France not merely welcomed his appointment but
instantly appointed him as chief railway representative behind the lines. He
is one of the ablest railway men in the world, and the railway system there
has been taken in hand. But you needed locomotives, you needed wagons,
you needed drivers, you needed steel rails, and even if these had been times of
peace you could not have had them without taking no end of time in manu-
facturing for a great demand of that kind. The president of the board of trade
had to take the matter in hand. He thought it was common knowledge that
there was infinitely more traveling on the part of the general public in this
country than in any fighting country in the world-nonessential traveling-and
he advised these restrictions in order to cut down unnecessary traveling.
"What has been the result? He has already saved hundreds of loco-
motives-I could not tell you how many-for the army in France, and their
drivers are volunteering to go there. The Union of Railway Servants has
been extremely helpful to us in engaging them. He saved tens of thousands
of wagons; he saved scores of thousands of steel rails, that we could not pos-
sibly get manufactured for at least a year, and not even then, except at the
expense of steel, which we required for building against submarines. Now,
this is what I want to put to you: The next time you find that the time-
table is inconvenient to you, the next time you have got to pay an exra fare,
do not forget you are helping the army in France by that means more than
152
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
if you had sent three fresh army corps there. Those are some of the things
that we want the public to do."
Still further economies were necessary. The men organizing the railway
services of the country ever kept in mind the purpose of effecting these econo-
mies with the minimum of inconvenience to the public. In July, 1917, an im-
portant scheme, going far beyond anything yet attempted, was announced for
the coal trade. The carriage of coal was one of the big problems of the rail-
ways, for it involved much labor. In the winter of 1916-17, owing partly to
delays in railway transit and partly to difficulties in local delivery, considerable
numbers of people-particularly the poor-had been unable to obtain supplies
of coal with any regularity. It was feared that conditions might be still
worse in the approaching winter. This the authorities planned to prevent.
The controller of coal mines published a scheme, dated July 4, 1917, for the
purpose of reorganizing the transport of coal by railway for inland consumption.
Under this scheme England, Wales, and Scotland were divided out into 20
areas, and each area had to take its supplies from certain fixed districts of
production. It was estimated that the plan would effect a saving in railway
transport of not less than 700,000,000 ton-miles annually. The scheme was
based on four main issues:
(1) That consumption of coal should take place as near the producing point
as possible.
(2) That in view of the superior facilities offered by the main traffic lines
the movement of traffic should follow these routes wherever possible.
(3) That the movement of coal should, as far as possible, be in well-defined
directions-north to south, north to southeast, north to southwest, east to west.
(4) That an area producing less coal than suffices for its own need should
not send any portion of its output to other areas. That an area producing more
coal than it requires for consumption within the area itself should only dis-
tribute to adjacent or convenient areas.
This scheme did not affect water-borne coal, anthracite, or coke of any de-
scription.
It was the precurser of other schemes which were to reduce unnecessary
traffic in goods to the minimum.
No description of the work of the British railways in the war would be com-
plete without some reference to the service in handling the wounded. Soon
after the outbreak of hostilities several of the railway companies began the
construction of special ambulance trains. One of the first of these was
equipped at the Great Eastern Works, at Stratford. It was made up from
vehicles taken from service and consisted of eight cars. The first was a five-
compartment brake composite. The guard's compartment was fitted up as a
mess room for doctors and nurses; the first-class compartments in it were re-
served for 2 nurses and 2 doctors; and the two thirds were converted, one
into a pantry, one a store, and one as a room for 2 men on the staff. Next
came a ward car, with one section for 4 officers and a ward for 16 men. This
was followed by a ward for 20 men. Then came four cars-a pharmacy car
and treatment room, three more cars with wards for 20 men each-a dining car;
and a last car with three third-class compartments adapted each to accommo-
date 2 men and two first-class compartments converted into stores and a
small guard's compartment. This was an excellent example of the quick con-
version of existing stock for war purposes. Other lines did much the same.
As soon as possible special trains were built, new throughout, for hospital
requirements and were put on the line both in England and in France. One
excellent example of the kind used in England was built by the Brighton Rail-
way.
It consisted of 16 bogie coaches, 2 kitchen cars, a pharmacy car, 4 ward
cars, 5 sitting-up cars (1 for infectious cases), a staff car, a personnel car, and
2 brake vans. Accommodation was provided for 144 beds and 384 sitting up
cases. The train was 930 feet 8 inches long, with buffers, and it weighed 429
tons. Its equipment was the final word in comfort and convenience. The ab-
sence of vibration, the ease with which cases could be taken in and out, the
facilities for carrying patients to the treatment room, and the arrangements for
the staff excited the greatest admiration in the numerous places where the train
was put on show before it was brought into service. Not that the Brighton
Railway was exceptional in this. All the great English railway works devoted
their utmost skill and care to the ambulance trains, and each pitted itself
against the others in providing the best for our wounded men. He would have
been a bold judge to decide which did best.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
153
PROBLEMS AFTER THE WAR.
The responsible men on our railways recognize that the problems in railway
management and control raised by the war will not altogether come to an end
when the war is over. A new era has begun in railway management, and it
will be impossible to go back completely to prewar conditions. Even if it were
possible it would be highly undesirable. While no definite schemes have yet
been arranged, it can safely be foretold that there will be greater unity of
administration when peace returns than in the old days before war came. Co-
operation has proved to be better than cut-throat competition. In the old days
the railway clearing house at Euston provided the machinery for a limited
amount of cooperation, but one dissentient could often hold up great reforms.
The railway executive committee of to-day is almost certain to develop into a
permanent central body, which will act as the coherer, the organizer, and the
supreme court of appeals among railways themselves when rival schemes
threaten conflict. This central body will promote economy of effort. It will pre-
vent extravagant and excessive competition, and it will, if wisely guided, hold
the scales evenly between the triple claims of the railway proprietors, the
railway employees, and the general public.
The second problem is that of wages. Practical railway men maintain that
under normal conditions it will be impossible to pay, when the companies emerge
once more from Government control, anything like the war bonus of 15 shillings
per week per man now received. Any attempt to revert to the prewar wages
would probably plunge us into a labor war. What will be a fair and practical
wage for the men after the war is over? How can it be paid? If a substantial
increase on the prewar rates is found necessary, as many think it will be, how
are the companies to meet it? Are they to be allowed to maintain higher pas-
senger rates or to increase freight charges? If so, will these higher charges
mean increased revenue? It is an axiom of management that low fares mean
heavy traffic. Here is a matter which will demand the most careful considera-
tion of both railway managements and the men's leaders.
The third problem is that of the future of women's labor on the railways.
The companies have promised that men who have left them to serve with the
colors will be reinstated on their return in positions equal to those they left.
That promise must be kept, and kept to the full. But, unfortunately, many of
the men will never return. Women have been found such efficient railway serv-
ants that they are certain to be retained. Many branches of railway employ-
ment before the war exclusively held by men will, a few years hence, be wholly
or almost wholly in women's hands. How can the change which has already
taken place be made permanent without strife?
The changed conditions after the war may, of course, provide in themselves a
solution for all these possible problems. In the great rush of work to be done
when the world is to be repaired, when ruined countrysides are to be rebuilt,
great cities reequipped, and the waste of war made good, there will be for a
time at least a demand for labor greater even than the supply afforded by a
gradually demobilized army. It has been the experience of other generations
that a successful nation emerging triumphantly from a hard-fought war has in
itself such springs of hope, enthusiasm, and inspiration that the impossibilities
of other days are tackled and overcome. The British railways may at least hope
that, having solved the problems of war traffic and employment in unequaled
fashion, they will master the lesser problems of the coming days of peace.
Of the many high tributes paid to the British railways by the responsible
heads of the nation, only two need be quoted here. The first is from Sir
William Robertson, the chief of the imperial general staff, on May 12, 1917:
During the last five or six weeks, I suppose, we have expended some 260,000
tons of ammunition, which have had to be moved by road, rail, and sea from
the factories in England to the guns in France, and manhandled probably not
less than half a dozen times. As you can imagine, this has entailed a great deal
of railway work at the front as well as in England, and the skillful and deter-
mined way in which the work has been executed by the railway managers and
employees who have assisted us is beyond all praise.”
The Earl of Selborne nearly two years earlier, on August 26, 1915, said:
"Have you thought of what the railway men are doing? An immense number
of men have been taken from the railways. The railways are carrying now a
volume of trade such as never has been carried on our railways before, and the
strain on those men is very great. That is nothing but silent heroism, as neces-
sary and as great a contribution to victory as the work of the seamen or the
work of the soldier."
No tributes were more richly deserved.
154 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. PARKER of New Jersey. I want to ask one question here, be-
cause I want to stick to these figures while they are before me. In
referring to the report of the Interstate Commerce Commission to
which Mr. Kruttschnitt has referred-I think it is page 35, 1917,
pages 36 and 37-42 and 43 of the previous year, 1916, but the same
figures I notice the last two years, or the last three years, that you
have in your calculations, 1915, 1916, and 1917, are partially at least
war years. The war was going on in Europe.
Mr. KRUTTSCHNITT. Yes.
Mr. PARKER of New Jersey. 1915 was about wholly a war year,
wasn't it?
Mr. KRUTTSCHNITT. Eleventh-twelfths, you might say, was war.
Mr. PARKER of New Jersey. I thought it might be well to take
years before the war and see how those went for quite a time, and if
you take the last year before the war, as 1914, I find the income from
operation as given in this report is $704,685,079.
Mr. KRUTTSCHNITT. Yes.
Mr. PARKER of New Jersey. Ten years before that it was
$574,581,484. That is 1904, and ten years before that, in 1894, it
was $303,822,201. The book costs of the road and equipment was, in
1914, $16,936,000,000; I disregard the rest of it for the present.
Well, I will read it all-$16,936,693,840. In 1904 it was $11,511,-
537,131 and in 1894 it was $9,073,470,532. I think I have got that
right.
From this statement have you made up any average as to the
increase in capitalization and income in those peace years, such as
you have in the 10 years due to three war years?
Mr. KRUTTSCHNITT. You ask whether I have made any computa-
tion on the three years you have read out?
Mr. PARKER of New Jersey. On the 10-year period that I have
mentioned before the war.
Mr. KRUTTSCHNITT. No; I have not. But the returns, of course,
can be seen by inspection from this table, which I followed as you
read them out. The figures I have are the same as you read.
Mr. PARKER of New Jersey. I find that in the 10 years from 1904
to 1914 the income increased about $130,000,000, while in the three
years from 1914 to 1917 it increased over $360,000,000. Is that right?
Mr. KRUTTSCHNITT. Well, you have made the subtractions. I as-
sume they are right. I can't make them mentally as you read them
out.
Mr. PARKER of New Jersey. Is it or not fair in getting at the
progress of the road-railroads and their business-to take the ordi-
nary times of peace, or may the criticism be made that every 10
years, 20 years, or 30 years are so likely to live up to one another in
the conditions of business, the recurrence of panics, and all that that
all such computations have to be taken with a good deal of care lest
they lead you into error?
Mr. KRUTTSCHNITT. As a general proposition, you are quite correct.
Mr. PARKER of New Jersey. On the whole, is it better to take
times of peace or years that were all peace or to take a term of which
part of the years were of war and the sudden demands of war for
those years?
Mr. KRUTTSCHNITT. I should say that if you take the property in
times of war, and after some three years of war, if you are going to
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
155
use the properties during the period of war, that it is eminently fair
that you should pay to the owners of that property the returns that
they were getting out of them in the period immediately preceding
the date on which you took them. It would be obviously unfair to
consider the return in the conditions referred to by you, when the
amount of traffic handled and the amount of service rendered to the
public was very much less than it is now, and predicate on that the
amount which you propose to pay them under the right of the Gov-
ernment to impress them into the public service.
Mr. PARKER. Your proposition is that they are going to be paid-
that if they are going to do a war business they ought to be paid
for their business during that time?
Mr. KRUTTSCHNITT. I think so.
Mr. PARKER of New Jersey. On the other hand, if you were going
to make a prophesy or an arrangement which might become per-
petual and may have to be continued after the war is over, and you
wish to find out what was the proper arrangement to make with the
railroads in peace times, I take it that you would take the statistics in
peace times to govern that arrangement, would you not?
Mr. KRUTTSCHNITT. I would take the statistics of peace times as
nearly as possible relating to a property such as was impressed into
the public service.
Mr. PARKER of New Jersey. I mean after the public service is over,
if it remained-if there remained some sort of a pooling arrangement,
or Government control, as has been suggested here I don't know
whether it ought to be done or ought not to be done but if this
thing is to be permanent, you can't expect the same business to
remain after the war that there was during the war, because the
war business would be taken away, would it not?
66
Mr. KRUTTSCHNITT. I am one of those who expect a larger busi-
ness after the close of the war than during the war.
You may say
that the world has to be reconstructed. Take the thousands of mil-
lions of dollars of property that have been destroyed during the
war; they must be replaced, and I take it that the United States
will be called on to do a great deal of this replacement. Follow-
ing the Civil War, which was, you might say, a mere scrap" com-
pared with what is going on to-day, there was tremendous develop-
ment in this country, fabulous expenditures for rebuilding prop-
erty that was destroyed, for making good the progress that had been
checked during the Civil War. Now, those influences are vastly
more potent in the present world conflict than they were in our
Civil War.
Mr. PARKER of New Jersey. And that improvement after the Civil
War lasted five years, to 1870, or possibly a couple of years more.
Mr. KRUTTSCHNITT. Not to 1870. It was over in 1864 or 1865.
Mr. PARKER of New Jersey. I say the improvement after the Civil
War, the growth of railroads and great development which you speak
of lasted till 1870.
Mr. KRUTTSCHNITT. Till 1873.
Mr. PARKER of New Jersey. And in 1873 there was a panic in which
everything went to pieces for about 10 years. Nothing much revived
till after 1885.
Mr. KRUTTSCHNITT. I don't remember the period of depression,
but I do remember the period of 1873, because I was very hard up
156
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
:
to find a job then. I had just left college, and I didn't know where
to go or what to do.
Mr. PARKER of New Jersey. Well, I remember the crisis of real
estate, etc., between 1873 and 1885, and where everything went to,
so that I didn't mean to ask you unless you remembered.
Mr. KRUTTSCHNITT. But, take these years of 1916 and 1917, they
have been years in which the owners of the property have gotten
certain returns for their use by the public under rates most care-
fully watched and prescribed by government, under laws regulating
a good many of the operations of the roads, and under other laws
prescribing the expenses to which they are put. Now, if the share-
holders have, in rendering a certain number of units of service to the
public, realized from the use of their property a certain sum of
money, and the Government takes those properties over on the 28th
of December it will certainly use them during the war to an extent
at least as great as the owners have used them, and I don't think
that it is fair to pay the owners, or to cut down the returns to the
owners, by including in the test period a year that by all measures
that you can apply to it was an abnormal year. The quotations that
I read this morning from papers published about that time seem to
me very convincing. The period is not so far back that most of
us can not remember what a dreadfully hard year the year ending
June 30, 1915, was, and, as I have tried to show you diagrammati-
cally here, and as I hope to show you still further by this chart which
I am going to file, everything shows that the normal growth of the
railroads, if it had not been interrupted by the depression of 1915-14
and the years immediately preceding, would have reached the same
stage of development and operating income that it has reached in
1916 and 1917.
There were two ways to reach those results one by the orderly
steps that I have shown on the diagram, the other way by the erratic
path pursued by income between those dates. It jumps up and jumps
down.
Mr. PARKER of New Jersey. Mr. Kruttschnitt, I have been trying
to distinguish between the two branches of the argument or the
statement which you have made. Many of us will entirely agree
that there will be a great deal of use of the railroads during the war,
which ought to be paid for, even if some of us, including myself,
don't so much agree that this great increase that has come by the
war would have taken place anyhow by orderly processes such as is
suggested by the diagram; and I thought it would be wise, therefore,
and I think you would, too, to compare various periods of 10 years
with one another during the time for which we have statistics, and
I ask you to do it, if you would, so as to get peace times progress as
well as war times.
Mr. KRUTTSCHNITT. This diagram will show you all periods for
which I have data, and I have no data, except insofar as I can get.
them from the Government-the Interstate Commerce Commission
publications. I think the questions you have in mind will be an-
swered with this diagram that I expect to leave with you.
Mr. PARKER of New Jersey. We will be very much obliged to you
for it.
Mr. KRUTTSCHNITT. There was one thing that I wanted to add
in answer to some of the matters you touched on, that what you gen-
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
157
tlemen have before you now is to provide a fair compensation for the
property that you impress for public service, based on the returns that
the owners were getting at the time you took it. In other words, you
are called on to make an emergency payment for the use of these
properties; it would be a very different matter, indeed, if, as you
said in one branch of your question, these properties were to be
taken over permanently. I assume that there would then be an
orderly condemnation proceeding, such as is prescribed by the laws
of our country, that every element of value, every possible element
of value, which we have been frequently told by our attorneys are
to be taken into account when we, under the right of eminent domain
given us by the State, seek to acquire a piece of property ourselves,
would be considered. In other words, that the Government, con-
demning our property, should be guided by the same laws that guide
us when we condemn the property of a private individual. And
that would lead to a very different result from this emergency war-
time result.
There is no disposition on the part of the roads in these times of
national peril, when it is incumbent on every patriotic citizen to
hold up the hands of the chief in winning this war, to raise cap-
tious objections about the payment that is to be made for them;
and it does seem to me that if you provide a guaranty or method
of compensation that is reasonably fair, there isn't a railroad, a
board of directors, or a body of shareholders who would be disposed
to seriously contest the payment that you allow. There would be
in all systems of payments some few roads that would be so hard
hit that they would be compelled to use the method provided in
the bill for seeking special rates of compensation, but I take it
that you can provide for a method of compensating the roads that
will probably be acceptable at the outset to 90 or 95 per cent of them,
and that they will come up and make agreements with the Govern
ment on the basis of the guaranties provided by Congress, and there
probably would be but a small 5 or 10 per cent that would find them-
selves so hard hit that they would have to ask for a reconsideration
on the part of the President or director general of railways as to
the special compensation that they should get.
There is one thing before closing that I would like to touch upon.
It is closely related to the question of compensation, and what I am
about to say is based on the impression that I have formed from the
President's proclamation and, I think, some of the public utterances
attributed to the director general of railways; and that is that the
Government expects to give the orders for the control and running
of these properties to the officers who are now managing them. If
that is the case, it seems to me that the roads at the end of this
period of Government control would get their properties back with
substantially the same operating staff and organizations that they
had at the time the Government took the properties over. If, how-
ever, another method is contemplated, of changing the personnel
entirely and substituting for the existing organization another one,
I would say that no compensation that the Government can pay us
could compensate for the destruction of our organization; that it
would take years and years to reproduce it, and would cost the roads
untold millions of dollars in seeking to get back to the condition of
158
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
efficient operation that they are now in, contrasted with what they
would be in if their staffs were replaced with men who are unfamiliar
with the properties and unfamiliar with the methods that the roads
have taken to secure the results that they were getting on or about the
28th of December of this year; because I do say-I know it from re-
turns that we have got that the roads of the United States had
never been worked to as high a state of efficiency as they were
worked in the last seven or eight months of the calendar year 1917.
They were doing 50 per cent more work per locomotive owned
and 50 per cent more work per car owned in 1917 than in 1915.
Some of the roads were up nearly as high as 100 per cent more work
for their equipment in 1917 than in 1915. But the roads of the
country as a unit were getting 50 per cent more public service out of
each unit of equipment, counting locomotives and cars-freight
cars than they were getting two years before.
The CHAIRMAN. Didn't that reduce the cost of operation per unit?
Mr. KRUTTSCHNITT. Did it?
The CHAIRMAN. I say, did it not also reduce the cost of operating
per unit, when they were getting 50 per cent more?
Mr. KRUTTSCHNITT. Unquestionably, and the only way the roads
for the past 10 years have avoided bankruptcy has been by studying
more and more efficient methods. It almost is axiomatic-it doesn't
admit of argument-that with the tremendous rises in the prices of
material and labor that have taken place in the last 10 years, and
particularly in the last 6 or 8 years, the roads never could have
existed unless they had devised ways and means to conduct their busi-
ness more economically each year than the year before.
Mr. STEPHENS. In connection with that, doesn't this bottom line
here show that they are bankrupt, considering their earnings? This
bottom line of your chart here in relation to the average earnings
that they ought to make, 4.7 per cent, would indicate that they are
earning so little, or earning so much less than the normal rate, that
they are in effect, as a whole, bankrupt.
Mr. KRUTTSCHNITT. No; that is the point that I tried at the out-
set of my talk after the reconvening of the committee to make clear.
I am sorry I put that 4.07 on the risers of those steps, because by its
coincidence with the return on the property of the railroad it is mis-
leading. Now, that is not the return on the property that you see
there, 4.07. It is the average annual percentage increase in the in-
come from 1907 to 1917. It has nothing to do with the returns.
Mr. STEPHENS. Is it the increase from the year 1907 to 1917 aver-
aged through the 10-year period?
Mr. KRUTTSCHNITT. Yes; but it has nothing to do with the return
on the property.
Mr. STEPHENS. Then, as a matter of fact, it really has no relation
to the fact, does it? That is, I mean this line at the bottom is the
one that shows the actual earnings of the road-the bottom line there?
Mr. KRUTTSCHNITT. The bottom line shows the path by which the
income of the road reached the 1917 total from 1907. The income
increased 40.7 per cent. Or, if it had been by a regular orderly in-
crease, it would have been 4.07 per cent per annum.
Mr. STEPHEN. I see now.
Mr. HAMILTON. It is a sort of an ideal line by which you can com-
pare the actual line.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
159
Mr. KRUTTSCHNITT. Yes; the title of the chart is "showing the
normal, contrasted with the actual increases" of income in this
period.
Mr. STEPHENS. Then they have actually earned an average of 4.07
per cent?
Mr. KRUTTSCHNITT. No; the actual earnings are the figures at the
angles of this broken line. You will see some numbers there-for
instance, 1914, $704,685,000. Those are the actual earnings.
Mr. STEPHENS. But it doesn't give the per cent.
Mr. KRUTTSCHNITT. No; the percentage is not given.
Mr. STEPHENS. Then the railroads have made an actual profit
through this 10-year period, and not a loss, taking them as a whole?
They have had an actual profit?
Mr. KRUTTSCHNITT. They have had some, certainly. If they hadn't
made some return on their property in that period they would have
all been in the hands of receivers. If you have before you the an-
nual report of the commission-
Mr. STEPHENS (interposing). Yes; I have it before me, and I see
the earnings now per year for that 20-year period.
Mr. KRUTTSCHNITT. If you have got that before you, if you will
look to the next to the last column on the right, you will find a
column headed "Per cent." That is the percentage return on the
cost of road and equipment each year.
Mr. STEPHENS. Yes; I see that.
The CHAIRMAN. Mr. Kruttschnitt, this 3-year period referred to
will only embrace from the 6th of April to the 30th of June, 1917, of
the actual participation in the war by the United States. It is
spoken of as the "war period," but it will be only from the 6th day of
April to the 1st day of July following, 1917. That much of it only
will cover the period in which the United States itself was in the war.
Mr. KRUTTSCHNITT. Yes; that is true.
The CHAIRMAN. The rest of those three years, the balance of the
period of three years, when we speak of the war period you mean the
period of the European war?
Mr. KRUTTSCHNITT. Yes.
The CHAIRMAN. And business was very seriously and adversely
affected in the early states of the European war, during the period
of 1914 and 1915, and very greatly accelerated after that time?
Mr. KRUTTSCHNITT. Yes; as these trade papers show and as I
have stated in my testimony, there is a period of great depression up
to the end of the fiscal year ending June 30, 1915; and the recovery,
I said, came about the middle of the year, and these trade papers said
about the last third of the year.
The CHAIRMAN. But the depressions, as I understand it, were di-
rectly responsible for the subnormal earnings that preceded the be-
ginning of the fiscal year 1914-15 for a number of years?
Mr. KRUTSCHNITT. Yes.
The CHAIRMAN. And if you take the normal for three years prior
to the beginning of the European war-fiscal years-you would have
a much less rate of increase than you have by adding the years 1916
and 1917 to it, would you not?
Mr. KRUTTSCHNITT. That is true; but if you will cast your memory
back to the period when the European war broke out-that was the
160
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
middle of 1914 you will remember, and the chart shows that, that
we were in a period of very great depression in 1914.
The CHAIRMAN. You mean prior to the breaking out of the war?
Mr. KRUTTSCHNITT. Yes. As an actual fact, if you will refer to
the chart, you will see that the income of the roads for 1914 was only
$704,000,000, as against $729,000,000 in the year ending June 30, 1915.
In other words, as far as actual earnings go, 1914 was a worse year
than 1915.
The CHAIRMAN. Well, take the fiscal years back from the begin-
ning of the fiscal year 1914-15, the 1st of July take it back 10 years
and let the average be formed by the income, the net income, or in-
crease either during that period, would it not be less, decidedly less,
than the three years provided for in the bill?
Mr. KRUTTSCHNITT. That is true; but those years would not be rep-
resentative of the property that you are taking over. In other words,
if you go back 10 years from 1915, as you mention, you would have
about 35,000 miles less of railroad.
The CHAIRMAN. But your per cent of increase would be the same,
I suppose, relatively?
Mr. KRUTTSCHNITT. That doesn't follow, because if you take the
period mentioned by the gentleman who questioned me just before
you-you take, for instance, in 1894, which was the beginning of one
of the periods he mentioned, the return on the property at that time
was only 3.20 per cent. Those returns in back years were very poor.
They fluctuated. Sometimes they were better; sometimes worse.
The CHAIRMAN. But the normal for that 10-year period from
1904 to 1914, speaking of fiscal years, the normal being the average
during that period of 10 years, would be less than the average for
the 3 years embraced in the bill, would it not?
Mr. KRUTTSCHNITT. I think so. And if we went back 10 years
more of course it would be still lower, but we would all the time be
getting farther and farther away from the property that you take.
•
The CHAIRMAN. I know, but we are speaking about normal and
abnormal. It seems as though the time when neither Europe nor
the United States or any other country was at war would come
nearer being a normal period than any portion of the time since
the European war broke out. In other words, the income of the
railroads of the United States, as well as all other business, was
decidedly reduced by the breaking out of the European war, from
the beginning of August, 1914, to the end of that fiscal year. Now
then, after that, in 1916 and 1917, it was very greatly accelerated.
Now then, the more normal period would seem to be composed of
the entire time not in the war, both before we got into it and subse-
quent. It is the war normal that you are fixing. If you are estab-
lishing a normal by the war period, you should measure that normal
by all the years and months composing the war period. Isn't that
a fair way to get the war normal? It is a war service now. In
other words, how can you have a war normal and only include a
portion of the war period?
Mr. KRUTTSCHNITT. Because during the first 11 months of the
war, as all of these extracts that I read this morning show, during
the first 11 months of the war we were at the bottom of the general
period of depression that had gone on from bad to worse and had
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
161
culminated about at the end of the fiscal year ending June 30, 1914,
and that depression continued after 1914. There were no war orders
placed in the United States until the early part of the year 1915,
and the profits from those orders and the earnings of the railroads.
from carrying material did not begin to be in evidence until the
latter half or the latter third of the calendar year 1915. That is
why the inclusion of the first year is not fair.
The CHAIRMAN. Well, if you don't include it, what year prior to
that would you include? In other words, all the years prior to
that during the whole decade seem to have been practically as bad
as the fiscal year 1914.
Mr. KRUTTSCHNITT. Not all of them. They vary. I would take,
as shown on this chart-which I have before me, and which I pro-
pose to file with you-I will take the years from 1891, which is the
first year given by the commission, and 1907. I would take the
average yearly increment of income in those years. I would assume
that that increment would prevail from 1907, 10 years forward to
1917.
The CHAIRMAN. You may assume it, but the facts are that the
income from the railroads for 1916 and 1917, due to the war in
Europe and this country, has been very greatly accelerated over any
two years prior thereto.
Mr. KRUTTSCHNITT. That is where we differ, Mr. Chairman. It
is very difficult in looking at the results for 1915 and 1916 to avoid
a reference of the earnings of 1916 to those of 1915, which were at
the very lowest. But if you go back a sufficient number of years to
lose sight of this 1915 depression, and undertake to say under nor-
mal conditions-peace conditions if you wish-where would the
railroads have been 10 years ahead of 1907? The reply given by
this chart is that they would have been just about where they are.
In other words, normal increases would have put them where they
actually are in 1917. Now we were not there in the period inter-
vening between 1907 and 1917 because there were influences pulling
them down below normal, and they were not allowed to expand
naturally.
The CHAIRMAN. But in order to obtain the normal that you speak
of, 1907 to 1917, you include the earnings of 1916 and 1917, which
were abnormal, compared to the former years. You embrace the
abnormal increase and add it as a part of the 10-year period, and
then divide the whole and call it a peace normal; and you would
include part of the active increase of business due to the war. That
is, if I understand it.
Mr. KRUTTSCHNITT. I am afraid I am unfortunate. I don't see
that.
Mr. WINSLOW. What period is the subnormal?
Mr. KRUTTSCHNITT. You can only determine what period is sub-
normal or above normal by taking a period of years and seeing what
the increase is in the income of the roads. If that increase is uni-
formly distributed or normally distributed, all of those years that
actually fall below that are subnormal, and those that are above it
are above normal.
The CHAIRMAN. Well, here is what I mean: Suppose you take
10 years prior to the 30th day of June, 1914. You take the entire
40958—18—11
162
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
$
sum of the increases and divide it by the number of years, and that
makes the average increase per year during that period, does it not?
Mr. KRUTTSCHNITT. Yes.
The CHAIRMAN. Now, take that increase for that 10 years, and
does that normal, ascertained in that way, exceed the normal for
the prewar period included in this bill?
Mr. KRUTTSCHNITT. Why, of course they won't; if you take 10
years, of which 8 were extremely bad, and average them. Of course
they won't average the same as 1916 and 1917.
The CHAIRMAN. You wouldn't think a whole decade would be
abnormally low, would you?
Mr. KRUTSCHNITT. As a matter of fact, it was, substantially.
The CHAIRMAN. It seems to show that it is the rule of normality.
Mr. KRUTTSCHNITT. If I understand it right, Mr. Chairman, the
rule of normality is simply that between two periods, I don't care
what two periods you take, regardless of rates of increases and de-
creases-regardless of what they were the normal rate is the total
increase or decrease, as you defined it just now, divided by the
number of years in the period. Now, to the extent that the actual
increases depart from that line, they are either below or above
normal.
The CHAIRMAN. Now, in order to ascertain a 10-year normal
period, coming up to and including the year 1917, you add these
2 years of extraordinary returns to the railroads, extraordinary
business, due to the business of the war, and therefore it is not such
a level as we would have by normal periods prior to the war. I
mean by the same number of years measured by the amount of in-
creased returns prior to the beginning of the war. Now, if I under-
stand it, Mr. Kruttschnitt-and I may not-it seems to me that
justice to the railroads would be, if there was any way to ascertain
it, that we pay for the use of the roads what the roads themselves
would have made out of it under the conditions that they exist
during the occupation by the Government. What would they have
made if they had paid in with war conditions on them?
Mr. KRUTTSCHNITT. We can not possibly disputé the fairness of
that. That is all we asked.
}
The CHAIRMAN. Now, then, the only thing I can see about it is to
agree on some method that we will assume, as near as we may be, will
measure that benefit to the roads, and then by agreement adopt it.
And then, of course, the possibility of increased cost of operation as
the war goes on is a matter that you would have to consider when
the roads remained in their own possession, and all that kind of
thing, but it does seem to me that when we take the two highest
periods of railroad business throughout the country-and of that
period but three or four months having been at the time when we
were not in war ourselves, at the time the Government would be in
possession of these roads will be a period in which we ourselves are
involved in war-that the further cost of operation of the railroads,
labor and material, may be all against them in the future, and that
we ought to consider these possibilities, these adverse possibilities of
the railroads, as well as the possibility of increased earnings by in-
creased traffic. What I want to ask you now is, What is your opinion
as to the increase in the volume of traffic or decrease of it since the
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
163
28th of December, 1917? Should the war last one or two or three
years, what would be the general tendency of the volume of traffic to
go up or go down, or remain stationary, in your judgment?
Mr. KRUTTSCHNITT. The only way I could answer that, Mr. Chair-
man, is to consider the volume of traffic or the operating income of the
roads from 1917 back for a number of years. I would determine
what the average normal increase was in a number of years preceding
1917, and I would project that rate of normal increase into the-
future; and I would say that that is the probable development of
traffic or increase of operating income that will follow the 28th
of December, 1917. Now it seems to me that that is eminently fair.
How are we ever going to tell anything about the future unless we
base it on the experience of the past?
The CHAIRMAN. I think you are taking a very conservative way of
looking at that matter.
Mr. KRUTTSCHNITT. I really want to try to be clear, you know.
I want to try to make you understand just the line of argument
that I have in mind. That is, you ask what do I think will be the
increase in the service of these railroads during the time of the
war? I would say, frankly, that I don't know any other way to do
it than to take the increases preceding the 28th of December, 1917,
and attempt to prophesy from the rate of increase up to that time
what it will be after that time.
The CHAIRMAN. And you are willing to take only two years, 1916
and 1917?
Mr. KRUTTSCHNITT. No; I have taken on this little chart
The CHAIRMAN (interposing). No; I say, as a measure of wha
you would receive for the roads during Government operation of
them. You don't think it is fair to the roads to take in the fiscal
years 1914 and 1915, if I got you right.
Mr. KRUTTSCHNITT. Well, I don't think it is safe to take the
operation of three years to undertake to predict the future.
The CHAIRMAN. I will tell you why I asked you the question. M
Jacoway, a Member of the House from Arkansas
Mr. KRUTTSCHNITT (interposing). Pardon me; I probably misu……….
derstood the question.
The CHAIRMAN. Mr. Jacoway, a Member of the House from Arkan-
sas, sent me a letter a day or two ago, which I read this morning,
including a letter to him from Little Rock, Ark., from a railroart
man, as I understood it, in which he was complaining of assuming
the three-year-period, because the business, the traffic of the railroads,
was on the decline and would perhaps continue throughout the war
to decline. It was entirely different from anything I had heard,
and I wanted to hear what your idea was about it. His position was
that the continuation of the United States in war would reduce the
volume of the business of the railroads as a whole; that they might
be
very active at sections and portions, but the whole volume of busi-
ness would be reduced by the United States continuing in the war.
Mr. KRUTTSCHNITT. Why, the best answer I can give you to that,
Mr. Chairman, is this: During the existence of our operating com-
mittee, which was popularly known as the Railroad War Board here,
we required monthly returns from every railroad giving the amount
of traffic that they were doing—that is, the number of ton-miles that
164
FEDERAL OPERATION F TRANSPORTATION SYSTEMS.
they were handling, the number of miles that they were running
their freight locomotives and cars, and the traffic that they were
doing; and in every month of the existence of that board, from
April-and our existence dates from the entry of the United States
into the war-the amount of traffic carried by the roads has shown
a continual increase.
The CHAIRMAN. And that has been general all over the country?
Mr. KRUTTSCHNITT. The figures I give you are for the entire
United States. Our statistics were, I will say, to be strictly accurate,
confined to railroads that earned more than $1,000,000 a year. It was
so difficult to get all of these statistics in at a given date that we left
out the smaller roads, because they don't affect the traffic of these
large roads to more than the extent of about 2 or 2 per cent.
The CHAIRMAN. Well, I say that I was surprised at the letter, and
you are a railroad man, and I think I will bring the letter over and
let you see it.
Mr. KRUTTSCHNITT. I should like to see it.
The CHAIRMAN. I may have drawn an improper inference myself
from it.
Mr. THOм. Before you leave that, would you let me ask the wit-
ness whether he does not think it is safe to expect that the volume of
business hereafter during the war will not decrease?
Mr. KRUTTSCHNITT. I don't believe it will. That is simply putting
the answer that I have already made to the chairman in another
shape, where I said that if I were basing requisitions for equipment
and facilities of the roads of the country on our past experience I
would base the requisitions for cars, locomotives, and everything
else on the normal rate of increase that has prevailed prior to the
28th of June, 1917, and I would provide for that increase in the
future. If I did that, I think I could answer critics one or two or
three or four years from now who might say, "You ordered too
much," or "You ordered too little," by saying that we used the best
light and really the only light that we had before us at the time.
Mr. THOм. In other words, this thing would not decrease but
would actually increase.
Mr. KRUTTSCHNITT. I think it would, and I don't think that in-
crease would be checked by the declaration of peace.
The CHAIRMAN. Another matter I wanted to ask you about, be-
cause you referred to it, and I think it is very important-when
you referred to the effect that it would have upon railroads to cease
to use their existing organization and build new organizations, or
substantially build them up, would result in very great damage to
the railways, which might be involved in the question of returning
them to the owners in as good condition as they were when received
from the owners or taken over, what I want to ask you about was
this-
Mr. KRUTTSCHTITT (interposing). My fear was inspired by the
question asked this morning as to what I thought of the Govern-
ment retaining this control for one or two or three more years after
the declaration of peace.
The CHAIRMAN. What I want to ask you about is this: We all sup-
pose, as a matter of course, that the railroads operated as a unit-
that more service can be obtained out of the same number of em-
ployees than could be if they were operated as competitive systems,
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
165
as they have been operated. In other words, there will be necessarily
economy in operation. Now, that may result I don't know that it
will-in the discharge of some of the men row employed by these
competitive systems, and are necessary to be employed when they were
competing with each other and having to obey all the antitrust laws
and everything of that sort. Now, have you any idea what economy
in operations will be accomplished by ceasing to use employees, pro-
fessionally or otherwise, that were needed only because they were
competing railroads? I mean solicitors for freight and things of
that sort. Can the operating force, or the expense growing out of
it, be reduced to some extent without endangering the operation of
the road?
Mr. CODY. Or reducing the efficiency of the road?
The CHAIRMAN. What effect will it have in the way of reducing
expenses? And would it discharge men that you need only because
you are competing roads? Would that be regarded by you when
the roads are returned to you as a permanent injury to your organiza-
tion, all roads being treated alike in that respect?
Mr. KRUTTSCHNITT. I certainly would not mean to be understood
by anything that I have said as speaking to establish the principle
that under the unified operation of roads every single man formerly
needed will be needed in the future. A great many of the men-
perhaps the men that you have in mind, who are called solicitors
for freight-
The CHAIRMAN (interposing). Or passenger-anything of that
sort that depends on competition, and in view of the elimination of
competition has been considered unnecessary.
Mr. KRUTTSCHNITT. They have in certain instances. But now im-
mediately after the information reached the roads that the Govern-
ment was to take them over there followed on some roads whole-
sale dismissals of men, men who had been soliciting freight, men
who gave the public information about the routing of their freight,
men who might be considered by some as unnecessary and by some
as necessary for the convenience of the public-they were, as I say,
being dismissed on some of the roads right and left.
The CHAIRMAN. I didn't know that had occurred.
Mr. KRUTTSCHNITT. As executive head of the Southern Pacific
system of over 11,000 miles of road. I feared that that practice
might extend to the Southern Pacific; that the public would be
seriously incommoded; that the first thing we would hear would be,
"Here, these railroad men, the minute the Government takes over
their properties, propose to say, 'We will discharge this one and
discharge that one; competition is gone; it is no interest to us
whether we handle much freight or little; it is no interest to us
whether these operations are watched or not; we will discharge these
men.””
Now, I sent a telegram after carefully studying the President's
proclamation, his explanation to the public of what the proclama-
tion meant, and all of the orders so far issued by the Director Gen-
eral of Railroads, and my conclusion and that of my associates was
that we were not called on to do anything except to give the most
efficient operation we knew how, to the new controllers of the
property.
Mr. THOM. Read that telegram, Mr. Kruttschnitt.
166
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. KRUTTSCHNITT. I feared, I must say, Mr. Chairman, that the
issuing of the order would be taken as an excuse by indifferent or
unpatriotic employees to cease their efforts to get the most efficient
operation and to accommodate the public, and the public would
begin to say at once, "Here, we were very much better served under
the old régime than the new," and I cautioned them against show-
ing anything that would give ground for such an accusation. In
other words, I begged them to continue the operation of the prop-
erty just as efficiently for the new controllers as they did for the
shareholders. And I shall continue to impress that upon them
unless and until some power says that I am wrong. Up to the pres-
ent time I can't find that I am wrong, as there is nothing that has
been issued either by the Director General or the President that
would call for wholesale dismissals. For instance, some roads said
at once, "Well, why trace freight for the public any more? That is
an expense. Let's do away with it." The answer is, "Why shouldn't
you continue to accommodate the public? That is the service that
was rendered heretofore. Why don't you continue it until some one
tells you to stop? Maybe you will never be told to stop?" That is
the position we have taken, and I want to make myself clearly under-
stood on that. I am not asking or not suggesting that men whose
services are absolutely unnecessary should be maintained under
Government control, but I do say that I don't think any men should
be dismissed or any services should be curtailed that the public has
been enjoying up to now. I don't think the Government would
want it, or if they do hereafter, and they say so, we, like good sol-
diers, will do what we are told.
The CHAIRMAN. Is it your idea that under unified operation dur-
ing the period that they are retained by the Government that all the
employees-I don't know what else to call them-I may not be
accurate that they have heretofore maintained as competitors in
business will remain necessary while they are under the unified con-
trol of the Government? All of them, I mean?
Mr. KRUTTSCHNITT. I have already said that perhaps some can be
dispensed with, but if you remove the incentive to good management,
the effort to handle all the business that the property can handle, where
will the property land in a year or two, and where will it be when it is
turned back to us? If the entire staff has been reduced to the dead
level of indifference to effort, if they should say, "What is the
difference whether the Union Pacific carries this freight or the
Southern Pacific, it all goes into the same pocket?" What would
be the effect of two or three years of spirit like that?
Wouldn't it be absolute disorganization of the staff? Would the
Southern Pacific have the ability to compete for freight and to re-
store to its shareholders the income that it was enjoying on the 28th
of December if that thing was done for two or three years? Or
could the Union Pacific do it? Isn't it just as much to the interest
of the Government that the Southern Pacific property should be
worked right up to the limit of its capacity hereafter as heretofore?
I think that is the case.
The CHAIRMAN. It seems to me, Mr. Kruttschnitt, that if com-
petitive conditions ceased for a number of years that it can't arbi-
trarily be restored to former conditions simply by ceasing to operate
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
167
:
as a unified property; that it will take time; that your organization
will be affected adversely.
Mr. KRUTTSCHNITT. It depends on what you have in mind when
you say "competitive conditions."
The CHAIRMAN. I mean conditions that prevailed before the Gov-
ernment took hold of the railroads. That was competitive, as alleged
by you and the gentlemen that have appeared before our committee
in the past.
Mr. KRUTTSCHNITT. For many years the only competition that
has existed between the railroads of this country has been one of
service. There has been no means by which the carrier could in-
crease the amount of freight it could carry and its influence on the
shipping public except by efficiency of service. In the old days the
public was influenced by a number of illegal and improper influences
that, I thank Congress, have been removed. We haven't had to con-
tend with them for a great many years, but we have had to contend
with our competitors in inducing shippers to use our line because
we gave him better service than the other did; that our property
was worked better than the other fellow's. Now, I do believe that
under the Government control the Government can not afford to
stifle that condition. If they do, they won't get efficiency of operation
or the accommodation to the public that has been gotten out of the
roads heretofore. That is what I mean by competition not having
been absolutely stifled or killed.
The CHAIRMAN. But that competition and service all cost you
gentlemen who used it some money.
Mr. KRUTTSCHNITT. How was that?
The CHAIRMAN. The competition and service by the competing
systems that you have just referred to cost the respective railroads
a good deal of money who use these efforts.
Mr. KRUTTSCHNITT. It did cost them some, but the question is
whether they were not largely repaid by the additional volume of
business that they handled.
The CHAIRMAN. As between systems; but all this competitive effort
together perhaps did not increase the entire volume of business in
the United States.
Mr. KRUTTSCHNITT. Well, let us take, for the purpose of illustra-
tion, your side of the argument that all of these competitive in-
fluences should be stifled; that the roads should understand that it
doesn't make one iota of difference whether freight proceeds from
San Francisco to New York via the Southern Pacific or via the
Union Pacific; isn't it self-evident that the whole staff of employees
on both of those roads will deteriorate into a state of mediocrity and
indifference?
The CHAIRMAN. I think, to speak candidly, it would have that
tendency. I don't see how it could be otherwise.
Mr. KRUTTSCHNITT. Now, if you admit that, Mr. Chairman, the
efficiency falls and the greatest product out of the plant can not be
gotten.
The CHAIRMAN. Well, aren't the railroads to-day trying to dis-
courage people from using the railroads in the way of passengers
on account of war conditions? Aren't you taking off trains every
day on account of war conditions and reducing your competitive serv-
ice facilities?
168
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
;
Mr. KRUTTSCHNITT. Certainly we are. We were doing that, and
it is being done still more under the Government control. But why?
The CHAIRMAN. And you would have to go on the same way,
perhaps.
Mr. KRUTTSCHNITT. But you must look for the motive. It is not
to discommode the public or to make Smith, Jones, and Thompson
stay at home; but it is because we haven't locomotives enough and
haven't cars enough to do the business; therefore we have begged
them as a favor to please stay at home and allow us to handle busi-
ness that is more important than their traveling.
The CHAIRMAN. That war conditions require should be handled?
Mr. KRUTTSCHNITT. Yes; the roads haven't been able to obtain the
locomotives and cars that they had under contract at the opening or
the declaration of war by the United States, because the delivery
of this output has been put back by Government authority for the
purpose of supplying France, Gen. Pershing, the British, the Rus-
sians, with locomotives and cars. We were asked to stand back.
We were told, rather, "We are sorry, but the needs of our allies are
greater than yours." We said, "We bow to authority. If you gen-
tlemen in authority say that it is necessary that we should do with-
out locomotives, we are going to do without them. We will do the
best we can with what we have got." But the fact remains that we
didn't get the locomotives and we didn't get a great many freight
cars that we ought to have gotten; and for the purpose of creating
locomotives we went to work to make each locomotive that we had
do extra service-work overtime. We succeeded in creating 4,900
locomotives that were not in existence before. That is, in other
words, they were mythical locomotives, if you please, created by the
fact that the existing locomotives did that much more work. In
other words, they did 10 or 15 per cent more work. Now, we took
off the passenger trains to get passenger locomotives and turn them
over to the freight business in order to get still more.
The CHAIRMAN. I understand, and I approve the motive, but I
can't see any use of paying a solicitor of passenger traffic a salary to
solicit people to travel and at the same time tell them not to travel.
Mr. KRUTTSCHNITT. Well, please don't understand me as having
taken that position.
The CHAIRMAN. Well, but you retain all these competitive condi-
tions. In other words, you continue your passenger-soliciting agents
and your freight-soliciting agents and at the same time you tell the
public not to regard these solicitations. You tell them not to travel,
and what is the use of having the expense of a soliciting passenger
agent when you don't want the business?
Mr. KRUTTSCHNITT. We don't want the passenger business to inter-
fere with the freight business.
The CHAIRMAN. Then what do you want the passenger solicitor
for?
Mr. KRUTTSCHNITT. I am going to try to answer that, Mr. Chair-
man; that, in so far as passenger solicitation goes, we don't want
them; but the solicitors are generally combined passenger and
freight, and we do want the freight solicitation, and we do want the
movement of freight to work every road in this country to its maxi-
mum. I think the Government's aims are the same as our own; or,
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
169
if they are not, I am frank to say I am willing to be instructed if
the Government doesn't wish it; that is the end of it.
The CHAIRMAN. Still, substantially what I am trying to arrive at
is, Can't there be economies of operation effected by unification and
ceasing of competition between the several systems themselves? Can't
those be reasonably reduced?
Mr. COADY. Isn't the result of this competition better service to
both the shipper and the traveling public?
Mr. KRUTTSCHNITT. Unquestionably; and I have tried to explain
that, but perhaps I didn't put it as clearly in all my talk as you did in
one clean-cut sentence.
The CHAIRMAN. I understand it thoroughly, but we are not run-
ning railroads during the war for the great accommodation of the
peace-traveling public but for the conditions of the war.
Mr. KRUTTSCHNITT. No; but we are running them for the purpose
of carrying freight. That is just what we are doing. That is just
what our war board here was trying to do and what the Govern-
ment is trying to do with still greater intensity than we did to make
the roads carry still more and more and more and still more freight.
Mr. BARKLEY. Isn't the question of some solicitor to be discharged
a matter for the Director General, anyway, to determine, not for
Congress?
Mr. KRUTTSCHNITT. I did not mean to convey the suggestion that
Congress should take action on that. This discussion has come up
simply because of my remark that I hoped that there would be no
disorganization of forces and that I did think that the retention of
the roads for one or two or more years after the declaration of peace
would tend to the disorganization of the staff.
The CHAIRMAN. Do you think there is any serious intention of re-
moving the present staff of the railroads by the Director General?
Have you seen any evidence of it?
Mr. KRUTTSCHNITT. I haven't said that. My position or platform
is indicated in this telegram.
Mr. THOM. I would like to have that telegram read.
The CHAIRMAN. I think I understand your position, and I thor-
oughly indorse it.
Mr. HAMILTON. Let's have that telegram read.
The CHAIRMAN. I have no objection to its being read.
Mr. KRUTTSCHNITT. To use a political term, this is the Southern
Pacific platform.
The Southern Pacific Co. has three presidents, located at San
Francisco, Houston, and Tucson, respectively, and this telegram is
addressed to them on the 4th of January, as follows:
WILLIAM SPROULE, San Francisco.
W. B. SCOTT, Houston.
E. RANDOLPH, Tucson.
NEW YORK, January 4, 1918.
The duties and authority of the Railroads' War Board have been terminated
and it was assumed that departmental committees would be automatically
dissolved. By proclamation of the President and orders of Director General
the facilities of our lines are required, first, for the transportation of troops,
war material and equipment, and second, for the performance of such other
services as the national interest may require and of the usual and ordinary
business of common carriers. Our officers and employees are expected to con-
tinue the operation of the lines in the usual and ordinary course of the busi-
ness of common carriers and report to the same officers as heretofore. Physical
170
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
facilities are to be so coordinated and fully utilized as to promote operation
as a national system of transportation. Disregard of shipper's routing is
authorized only when speed and efficiency of transportation may thus be pro-
moted, and disregard of traffic agreements is required only when they interfere
with expeditious movements. Through routes not heretofore open are to be
established and used whenever expedition and efficiency will be promoted. Ex-
isting schedules of rates and outstanding orders of Interstate Commerce Com-
mission are to be observed until otherwise ordered by the Director General,
and no changes in present methods of accounting as prescribed by Interstate
Commerce Commission are required.
Everything in the President's proclamation contemplates the continuance of
regular practices except as they may be changed by order of the Director Gen-
eral, and the Director General's orders so far issued are specific and exclusive
exceptions to regulate practice. There is nothing in the proclamation or orders
requiring the discontinuance of solicitation or the closing of offices or agencies.
Therefore we are free to decide such questions of policy on behalf of our own
lines irrespective of proposals made by other lines and should decide them
after full conference and consideration among ourselves with the dual object of
facilitating and promoting the maximum capacity and efficiency of the national
transportation system and achieving the operating results that are as desirable
and essential to the Government during the period of its control as to the owners
of the properties after control is relinquished by the Government. It is as
important to the Government as to the owners that our organization should
not become demoralized or have its efficiency impaired, that individual initiative
should not be discouraged, and that officers and employees should recognize
the same responsibility to their superior officers and directors as heretofore.
About this feature I am writing you to-day.
J. KRUTTSCHNITT.
The "writing" was simply elaborating these instructions. I will
say by explanation that the services rendered by a solicitor of freight
are not only to beg a man to ship by your line but it is to give him
information about the service that you can render; about the date
on which you can put freight in a certain point, and about the vari-
ous other matters that a shipper of freight wants to know.
If solicitation is cut off altogether, then the shipper of freight
must proceed to some central office and make all of these inquiries,
and is deprived of a good deal of convenience that is accorded to
him at the present time. Perhaps it may be the Government's
wish that that be done, but, as I say, the motive that prompted
the sending of that telegram was not to give any of the public
that dealt with our lines any foundation for the idea that with
Government control went disregard of accommodation for the public
or indifference to their wants.
The CHAIRMAN. I think that is very proper, indeed.
Mr. KRUTTSCHNITT. I am glad to hear you say that, Mr. Chair-
man, because some roads did not do that, but we thought it was the
proper thing to do.
The CHAIRMAN. I can not reach the conclusion, however, that all
the roads operated as one does not at least support a good oppor-
tunity to economize to some extent in the operation of these prop-
erties.
Mr. KRUTTSCHNITT. It will, particularly when it is qualified by
the words you use there, "to some extent
"to some extent "; but what I mean to say
is, the extent to which the economies can be effected are not as great
as popularly supposed.
The CHAIRMAN. Now, there is no question in my mind that the
railroad companies have been forced to do many things that cost
them money, by reason of being in competition with each other and
with river carriers and with boats and ships and everything of that
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
171
sort. I am not making any complaint of it because they did do it,
because I think conditions forced them to do so; but when they
ceased to be in that condition, I don't see any use of continuing the
expense of the facilities that they were compelled to use when they
were acting as competitors.
Mr. KRUTTSCHNITT. You are quite right about that.
Mr. COOPER. Now, let me ask you one question there. In the first
place, I want to say that I believe we have the best and most efficient
railroad systems in the world in America. Now, the question I
wanted to ask was this: This is a time when we need the very high-
est efficiency in the railroad systems of our country. I think every-
one will agree to that. Now, if you do away with some of these
institutions which the railroad companies have had in order to
create efficiency, and give to the public the best service possible, will
not that have a tendency to decrease the efficiency of the railroads
now that the Government has taken them over? Or, in other words,
don't you believe it is just as absolutely necessary at this time, now
that the Government has taken control of the railroads, to have just
as high efficiency and just as good a class of men working for that
interest as it was when the railroad companies had them?
Mr. KRUTTSCHNITT. I do, most emphatically. And that was the
idea I had in sending this telegram. There is one other idea that
perhaps is not fully revealed in the language of the telegram, and it
was this: Reports reached me from various parts of our system that
grave uneasiness existed in the minds of large numbers of employees
as to their future; what was to become of them. Now even before
the Government assumed control it was very difficult for the rail-
roads to keep attached to them the men that they had in their service,
even though large increases of wages in all departments had been
granted, because the profits of munition factories, of various indus-
tries, were so great that they could afford to come and take any man
from the railroad that they wanted. They took a number of our
officers by offering them twice and sometimes two and a half times
the salary that we were paying. Now I wanted to quiet the minds
of the employees and not have them think of going to this place
and that place to get slightly better jobs, or even as good jobs, for
fear that they were going to be turned out. I didn't think then-
and I don't think now-that there is to be a wholesale discharge
and removal of men. I don't believe that, else I would not have
sent that telegram to reassure our people.
Mr. COOPER. The point I had in mind is this: That if the Govern-
ment undertakes to dismiss a great many of these employees that are
now working for the railroad company, it will have a tendency to
decrease the efficiency of the railroad system instead of building
it up.
Mr. KRUTTSCHNITT. Well, I think it would, and that was the
thought that I expressed this morning. Our intention is that as we
find employees that are unnecessary to the unification of the opera-
tion of the roads we will transfer them to some other place and
gradually go down the line and let out the less experienced man and
the junior employees. That is to say, if we have 10 solicitors and we
find that only two are wanted, we should use the other eight by
putting them in positions that they were qualified to fill, and that
were then occupied by men their juniors in the service and of less
172
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
ability. There would be eight men turned out, but not the exact
eight men that were made unnecessary by the abolition of solicita-
tion.
Mr. COADY. We should not, however, in any event, do anything
that might lower the standard of efficiency of any road.
Mr. KRUTTSCHNITT. I thoroughly believe that.
Mr. COOPER. I have talked to some men that investigated govern-
ment ownership of railroads in European countries. All that I have
talked to maintain that the standard of efficiency under govern-
ment ownership in European countries is not anything to compare
with our system of railways in this country under private owner-
ship, and it may be because the Government hasn't taken interest in
the operation of the roads that the private interests have taken in this
country that causes that inefficient system.
Mr. KRUTTSCHNITT. I recall that Mr. Acworth, whom you per-
haps know by reputation-he is an English lawyer, a barrister, they
call them, I think over there-and a close student of railroad
affairs-has on more than one occasion publicly stated just what
you did, that he believed that the American roads were more effici-
ently managed than any other roads in the world. Secretary Lane
attended a meeting of the International Railway Congress in Berne
some seven or eight years ago, and on his return, having looked
into the operation of European roads, expressed the same sentiment
that you did, that he thought the American roads were operated
more efficiently than any roads in the world.
100.
I have a little diagram on the efficiency of American and European
roads that I prepared some years age for an address on railroad
efficiency of the American roads, and I have had it brought up to
date. In each case we have used the figure of 100 to represent
the conditions under these different headings of the railroads of
the United Kingdom, first, the capitalization per mile of road.
That of the United Kingdom is $274,000 per mile. We call that
The capitalization in Germany is 44 per cent of that, in
France 55 per cent, in Switzerland 49 per cent, and in the United
States only 24 per cent of the capitalization of the British roads.
The units of service-that is, tons and passengers carried one mile
rendered the public per dollar of capital. In the United Kingdom
4.52 units were rendered for a dollar of capital, and we call that a
hundred per cent. In Germany the service rendered was 308 per
cent, in France 155 per cent, in Switzerland 112 per cent, and in
the United States 512 per cent. In other words, over five times as
many units of service were rendered per dollar of capital in the rail-
roads of the United States.
The net operating revenue per mile of road in the United Kingdom
was substantially $10,000. Calling that 100 per cent, the net operat-
ing revenue in Germany was 67 per cent, in France 56 per cent, in
Switzerland 33 per cent, and in the United States 47 per cent.
The units of service of tons and passengers carried one mile ren-
dered the public per dollar of net revenue in the United Kingdom
was 125 units, in the United States 316. Or, in percentages, the
United States rendered 153 per cent more service per dollar of net
revenue collected from the public than did the British roads.
Now, the average gross earnings per ton-mile of freight for carry-
ing a ton of freight one mile in the United Kingdom were 2.285 cents;
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
173
in the United States it was 0.716 of 1 cent. Or, calling the earnings
on the British roads 100, the earnings on the American roads were 31.
In other words, it was 69 per cent less.
Mr. STEPHENS. The British roads were the only ones in the list.
that were privately owned roads? All the others were Gevernment
owned?
Mr. KRUTTSCHNITT. No, the British roads are privately owned.
The German roads are publicly owned. They are simply an arm of
the military service.
Mr. STEPHENS. How about the Swiss roads?
Mr. KRUTTSCHNITT. The French roads are largely privately owned.
There is only one very important system owned and operated by the
Government in France. The Swiss roads are Government roads,
and the United States' roads are of course privately owned.
Mr. PARKER of New Jersey. You gave the ton-mile charge in Eng-
land and the United States. Have you the ton-mile charge in
Europe?
Mr. KRUTTSCHNITT. I have the other roads here. As I intended
to file this, I didn't read that. The average gross earnings per ton-
mile of freight in the United Kingdom were 2.28 cents; in Germany,
1.37 cents; in France, 1.30 cents; in Switzerland, 2.54 cents; and in
the United States, 0.71 cent; or 7 mills in the United States, 25 mills
in Switzerland, 13 mills in France, 14 mills in Germany, and 23 mills
in Great Britain.
(The diagram referred to is here inserted:)
Relative efficiency of capital and public service of the railroads of the United
States, United Kingdom, Germany, France, and Switzerland.
Amount.
Item and
country.
100
200
300
400
500
600,
Rela
Total.
tive.
Capitalization
per mile of
road:
United King-
dom..... $274,224 100
Germany..... 120,874 44
France...... 150,322 55
49
66,447 24
Switzerland.. 133, 255
United States
Units of service
(tons and
passenger
miles) ren-
dered pub-
lic per dol-
lar of cap-
ital:
United King-
dom...
4.52 100
Germany..
13.93 308
France.....
7.01 155
Switzerland..
5.08 112
United States
23. 14 512
174
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Relative efficiency of capital and public service of the railroads of the United
States, United Kingdom, Germany, France, and Switzerland-Continued.
Amount.
Item and
country.
100
200
300
400
500
600
Total.
Rela-
tive.
Net operating
revenue
per mile of
road:
United King-
dom....
Germany..
France..
Switzerland..
United States
Units of service
(tons and
passenger
miles) ren-
dered pub-
lic per dol-
lar of net
revenue:
United King-
$9,949 100
6,693 67
5,594 56
3,319 33
4,633 47
dom....
125 100
Germany.....
France..
252 | 202
188 150
Switzerland..
204 163
United States
316 253
Average gross
earnings
per ton-
mile of
freight
(cents):
United King-
dom..
2.285❘ 100
Germany.....
1.376
60
France.....
1.309
57
Switzerland..
2.540
111
31
זיין
United States 0.716
NOTE.-United States, year 1916; United Kingdom and Germany, 1913; France, 1912; Switzerland, 1915
The CHAIRMAN. Mr. Kruttschnitt, I only had one object in asking
you, because you are a practical railroad man, and that was if the
service performed by the railroads as a unit could not be to some ex-
tent performed at less expense than it could when they were com-
peting systems, fighting each other-I don't mean in a destructive
way, but having necessarily to incur expense due to the very fact
that they were competitors; if that expense might not be, if not
altogether eliminated, considerably reduced by reason of the unifica-
tion of operations, and if you railroad gentlemen who are going to
be in charge of it, if it is not your intention to try to operate these
roads while they are being under Government control as economically
as possible?
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
175
Mr. KRUTTSCHNITT. There is only one sentiment that I have ever
heard expressed among railroad managers in the United States, and
that was that they considered themselves helping to win the war,
and there wasn't any effort that they would leave unmade to do
everything possible under the new condition of things, as they did
in the past, to increase efficiency and provide greater transportation
service for the country. We must remember, however, that the
enviable position that the United States roads have attained has been
through competition as to service. In other words, each man run-
ning his railroad was interested in showing better results than his
competitor was showing, and if you, through pooling all of the
roads and abolishing corporation lines, throw them all into a general
system, the question to ask ourselves is whether a large part of this
spirit of emulation would not be lost.
I believe that we should maintain our organization just as intact
as ever, barring such men whose services are absolutely not required.
The CHAIRMAN. Well, I had supposed that that was to be the
pro-
gram under the director general, but if the present organizations
already have their minds made up that all the facilities that they
needed as competing properties will be necessary to be continued at
the same expense during this unified control-if that is their view
about it, they wouldn't do, I wouldn't think, very much to bring about
any economies along that line.
Mr. KRUTTSCHNITT. Please don't understand me, Mr. Chairman,
as advancing that view. The way you enunciate the matter now is a
little different from the way you did before, when you said “to a
certain extent," that the expenses could be reduced.
The CHAIRMAN. I agree with you altogether, but I mean to an
extent. I wouldn't want it to be of such an extent as to be of ma-
terial damage to the country, the business of the country, but I
can't see any use in keeping up absolutely useless expense in the way
of employment of people that were useful before the railroads were
taken over and now can not be of any use whatever to the railroads.
I don't see why, during the war, we can't waive some of the con-
veniences of services that we demand and pay for in time of peace.
I don't think any argument is possible on that view, and it is only
to that extent that I am speaking.
Mr. KRUTTSCHNITT. You are entirely right, and, as I say, argu-
ment is impossible.
Mr. COADY. Don't you think the right sort of competition is con-
structive and helpful among railroads?
Mr. KRUTTSCHNITT. I do; competition in service. I don't think
the old-fashioned competition was.
Mr. COADY. No; I wasn't referring to the old-fashioned competi-
tion.
Mr. KRUTTSCHNITT. As I say, I thank the Lord and Congress that
that has gone and was gone long before I had anything to do with
the general operations of a railroad.
Mr. DILLON. To put a concrete case to the witness, I want to state
this: I have heard it said that there were 21 passenger trains run-
ning each way from Omaha to Chicago, and that one-half of those
passenger trains on the five roads that operate them could be taken
176
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
off, and thereby save that much expense. Now, don't you think the
Government could do that, or order it done, and thereby reduce the
amount of indemnity that the Government would have to pay?
Mr. KRUTTSCHNITT. Absolutely they should. I don't know whether
the number as quoted by you is right, but the principle does not
admit of argument. And when we were attempting here through
our committee to get unified operation of roads, we attacked that
problem and we could have solved it long ago but for the fact that
whatever road was ordered-to whatever road we suggested that
they take off trains, they would say, "Well, that is going to affect
our earnings." The answer would have been, "Well, run the neces-
sary number of trains between Omaha and Chicago and we will
divide the proceeds among all the roads interested.” But the law
forbade us to do that. The Government now can do it and they
will save all of that money, just as you say.
Mr. DILLON. And thereby protect us in the damages that we pro-
pose to give you?
Mr. KRUTTSCHNITT. Unquestionably. And the men relieved from
that service will be not discharged but they will be transferred to
the freight service and they will be used in moving freight.
Mr. DILLON. You understand that the railroads are willing to co-
operate to reach those results, do you?
Mr. KRUTTSCHNITT. The railroads are not only willing to coope-
rate, but they were eager to do it and would have done it but that
the law forbade them from doing it.
Mr. DILLON. Likewise I understand that from Chicago to Mil-
waukee nearly every train carries a dining car and a buffet car.
They can very easily be eliminated and thus save expense?
Mr. KRUTTSCHNITT. Well, you could enumerate à great many in-
stances over the country where that unnecessary number of passen-
ger trains is run, but the principle is the same in all, that they should
certainly be taken off and there should be no trains left except suf-
ficient to meet the reasonable demands of the public. Now, all of the
other employees and locomotives should be used for the purpose of
moving freight.
Mr. ESCH. Mr. Kruttschnitt, in the article that was referred to by
Mr. McKenzie, in relation to the war conditions, he elaborates this
proposition, that there should not be increases of pay to the em-
ployees of the roads because of increased cost of living due to war
conditions, but that that increase in cost of living should be met to
the employees by way of what the Government terms "bonuses."
You remember his discussion of that phase of it?
Mr. KRUTTSCHNITT. Yes; I read the article when it came up per-
haps a month or six weeks ago, and so many things have happened
since that I am not over familiar with the details of the paper, but
it struck me at the time as the best thing I had read up to that time.
Mr. ESCH. And he stated in the last report the bonuses to men over
18 had now amounted to 15 shillings a week, and those under that
were 7 shillings a week; that the philosophy back of this bonus sys-
tem was the fear or inability of the carriers to go back to the normal
wages after war conditions, if the labor enjoyed higher wages during
the war. Now, we are not contemplating adopting the bonus system
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 177
in America, I judge, from the fact that the Director General has
appointed a labor board. That being the case, there would have to
be considered increases of wages as such, would there not?
Mr. KRUTTSCHNITT. Yes.
Mr. ESCH. What do you think of that fear expressed on the part
of the English carriers that if during the period of war the employees
on railroads in the United States enjoy war wages, it may be difficult
if not impossible to go down to the normal after peace should come?
Mr. KRUTTSCHNITT. I think it would be absolutely as hard for the
English to abolish their bonuses as it will be for the Americans to
reduce their wages. I want to explain my meaning. A bonus paid
regularly and for any protracted period of time is an increase in
wages. You can't make it anything else.
Mr. BARKLEY. And it soon becomes habitually regarded as a part
of the permanent compensation.
Mr. KRUTTSCHNITT. Certainly.
Mr. MONTAGUE. It is a system of wages.
Mr. KRUTTSCHNITT. Exactly. The question came up in the direc-
tory of our own roads. We paid a bonus to employees about two
years ago, and the question came at the expiration of the bonus year
whether we should pay it again, and the directors reached the con-
clusion unanimously, as the war seemed to be on for a good long
while, that if they paid bonuses for any lengthy period every em-
ployee who received a bonus would adjust his method of living to
the bonus. In other words, he would come to expect it; he would
treat it just as it actually was—that is, a raise in his pay. He
couldn't possibly look at it any other way, and if we undertook
after paying it one or two or three years to cut it off, it was
tantamount to a reduction of that man's pay, and we couldn't make
him look at it in any other way; it wasn't reasonable to expect him
to look at it in any other way. So we concluded that we would deal
with the employees on the basis of their fair demands. That is, if
a class of employees was underpaid we would consider all the circum-
stances and adjust the pay to suit, and do away with the bonus. We
did so, and I think we were right, and I think those who deceive
themselves into believing that immediately the war ceases they can
stop paying bonuses are going to be very rudely awakened when the
time comes.
Mr. THOM. Mr. Chairman, if the members of the committee will
refer to page 103 of the publication that I have put before them I
think they will see that these bonuses have already been transmuted
into war wages, and they are no longer bonuses in England.
Mr. KRUTTSCHNITT. Well, I didn't know they had reached that
already.
Mr. THOм. Yes; they have.
Mr. ESCH. One other question that I would like to ask Mr. Krutt-
schnitt-under this proposed bill the Government guarantees com-
pensation to the carriers on a standard return, based upon a certain
period. Might not that lead to an increase of rates in order to lessen
the Government's possible responsibility for that compensation?
Mr. KRUTTSCHNITT. Quite possibly. I assume that the Government
will use its influence. I suppose it could only use its influence with
the commission, which is an independent body, but would use its
40958-18-12
178
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
influence with the commission if they saw fit to advocate making
the people that use the railroads pay these guarantees, if they were
to be paid, instead of making the people of the country generally pay
them through congressional appropriation.
Mr. Escн. That is, through taxes?
Mr. KRUTTSCHNITT. Through taxation; yes.
Mr. THOм. While this general subject is in the minds of the com-
mittee I wish to draw their attention to this: Of course if during the
war there is a large increase in the scale of expenses on these roads,
with indifference to the question of rates, and the roads are turned
back into the hands of these owners on a very high basis of expense,
without a corresponding addition in rates, it will mean ruin. And I
will illustrate that by this section 9 of this bill. Here it is proposed
in this bill to extend or to authorize the extension of the present
Federal compensation act to cover the employees of the railroads.
Now, the New York Central Railroad reports that the effect of that
section on their road will be simply to double the expense that they
are now paying for the subjects which would be covered by the com-
pensation act. If that is done by the Government and the relation
of expenses to earnings is thereby destroyed, when the roads are
turned back without restoration of that relation, it will mean simply
ruin. So that one of the problems that the Government has all the
time to consider in dealing with this situation is that when they turn
these roads back they can't lose sight of the fact that they must not
in the meantime have destroyed the proper relation between the earn-
ings of the railroads and their expenses.
Mr. DILLON. You take it, then, that if the policy of the Government
should be to materially increase the wages of employees during the
time of holding that that would be an element of damages for the
United States during the holding?
Mr. THOм. Yes; unless they accomplish that by an increase of
rates-earning capacity.
The CHAIRMAN. Mr. Thom, I don't know what your program is,
but is Mr. Kruttschnitt now through with his testimony?
Mr. KRUTTTSCHNITT. Yes; I am through. I was simply answer-
ing questions of the committee.
The CHAIRMAN. I understood you wanted to leave this afternoon,
and you stated, Mr. Thom, this morning that you wanted to be heard
further, but not until later on.
Mr. THOм. Yes.
•
The CHAIRMAN. Now, have you anybody else that you want to
bring in further in connection with this?
Mr. THOм. We have got a number of tables here which I think
would be probably of interest to the committee. I will indicate some
of them.
Mr. BARKLEY. Has Mr. Kruttschnitt concluded? I wanted to ask
him about another matter, if I might do it before you start.
Mr. Kruttschnitt, I wanted to ask whether you had given any
thought to the question which was discussed by Commissioner Ander-
son, as to the length of time that this operation by the Government
should continue, whether it should end immediately at the close of
the war or whether at a time fixed thereafter, or leave that situation
to be dealt with when peace comes?
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
179
Mr. KRUTTSCHNITT. I think the bill should prescribe definitely
when the roads are to be returned to their owners. If the conditions
during the time that the Government operates the roads are thor-
oughly met by the officers of the Government, such as providing
revenue to the railroads to pay increases in wages, to meet large
increases in expenses-increases in expenses larger than those that
prevailed at the time that the Government took the roads over-I
don't see any reason why the roads should not be returned to the
owners substantially at the time of the declaration of peace.
Mr. BARKLEY. Well, assuming that the authority granted in this
bill would be used in the issuance of securities, etc., and assum-
ing for argument's sake that the operation carried on by the Gov-
ernment of the railroads should stabilize its securities so as to
make the margin of fluctuation less than it ordinarily would be,
would you think the question of turning the roads back to the owners
would have any appreciable effect upon the value of the securities
held by people in the roads?
Mr. KRUTTSCHNITT. I don't think it would have any effect if the
conditions that you have just outlined were fully taken care of by
the Government. That is to say, if the Government advances money
to the roads, let us say, for buying equipment, which is one of their
largest expenses, they would purchase the equipment under deeds
of trust, which would leave the equipment in the hands of the Gov-
ernment until it could be taken out by purchase on the part of the
carriers by partial payments. That certainly would not require any
time to adjust that matter. It would adjust itself.
If the Government advanced money, by taking securities, to roads
that wanted to make betterments in the way of second tracks or
terminals, I assume the Government would receive some kind of
security for these loans or advances; and I can't conceive why it
would be necessary to wait six months or a year or two years after
the declaration of peace simply because these advances had been
made. I really don't see I can't conceive of conditions that would
require holding these roads indefinitely, as the bill seems to provide,
after the close of the war. It seems to me that they should be re-
turned to the owners within a reasonable time put in the bill, "not
exceeding blank months," I should say-six months.
Mr. BARKLEY. I was wondering whether if the war lasted a good
while there would be considerable interlocking of governmental and
railway operating functions that might require considerable un-
scrambling after the thing is over, before the two can be separated
distinctly and without some confusion.
Mr. KRUTTSCHNITT. It seems to me if the scrambling process didn't
occupy more than 15 minutes that the unscrambling ought to be
done in a few months. [Laughter.]
Mr. BARKLEY. But you see it takes very much longer to unscramble
eggs than it does to scramble them.
Mr. KRUTTSCHNITT. The difficulty is this, I don't know of any
case where eggs have ever been unscrambled.
Mr. MONTAGUE. That is the danger of the whole situation.
The CHAIRMAN. Mr. Kruttschnitt, now you have given an indica-
tion that within six months, but that is based upon the condition
that the railroad properties are in addition to be returned to the
180
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
owners in as good condition as when they were taken from them.
Now I can't tell, and no one else can-I don't suppose you can-
whether rates will be decreased, whether wages will go up or go
down. I don't know how long the war is going to last, and if these
roads are to be returned in the same condition that they are in, I
don't understand that means the actual physical condition, but as
an earning, going property, a going concern, that legislation may
be absolutely necessary prior to that time in order that justice may
be done to the owners of these railroads as well as the public. You
wouldn't want them to be turned over to you without any increase
in rates, and double the wage bill that you have been paying. How
are you going to prepare for those things except by legislation?
How are you going to legislate until we know what we are con-
fronted with?
Mr. KRUTTSCHNITT. It seems to me very easy, Mr. Chairman, that
if you make increases of wages or add to the operating expenses of
the roads amounts that were not contemplated at the time that the
roads were taken over, you should contemporaneously provide the
money to pay for those expenses. We have been arguing that point
for so long that I can't remember when we were not arguing it-
our expenses went up through the operations of the laws of our coun-
try, expenses that we couldn't possibly control, and the fixed reve-
nues that we couldn't control. The same power that limited revenues
and also prescribed certain extra expenses ought to provide us with
ways and means to pay them. But we have never been able to
persuade the commission to do it.
The CHAIRMAN. Suppose we put an arbitrary date for this control
to terminate and do not provide legislation necessary for them to be
returned to you in the condition in which they were taken. What
are you going to do about it if you have an arbitrary date fixed in
advance without legislation, without being placed in the condition
that you ought to be placed in?
Mr. KRUTTSCHNITT. Well, it seems to me that when you make these
advances you can contemporaneously provide revenue to meet them.
The CHAIRMAN. Well, we don't know what we can do contempora-
neously. We will do what we can.
Mr. THOм. It doesn't require legislation to increase the rates.
Mr. PARKER of New Jersey. Might I suggest that after the war is
over the Interstate Commerce Commission would still exist?
The CHAIRMAN. Yes; but they don't want to take that chance.
Mr. KRUTTSCHNITT. Well, I suppose Congress might, in the exer-
cise of its powers, instruct that the rates be raised. Then we wouldn't
have the delay that has followed applications from the railroads
themselves to raise rates.
Mr. THOм. That is passing the buck, isn't it? [Laughter.]
The CHAIRMAN. Well, I am sorry that the discussion of section 13
came up, because I know we will discuss it 30 years and not come to
any conclusion.
Mr. KRUTTSCHNITT. What I am afraid of, Mr. Chairman, we read
in history of a 30 years' war, and I couldn't help thinking about that
when I read that clause.
Mr. MONTAGUE. Mr. Kruttschnitt, it has been suggested here by an
eminent witness that to fix a certain date for the conclusion of the
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
181
regulation provided in this section, rather than to leave it indeter-
minate, as it is in the bill, would be productive of speculation in the
stocks and securities of the railroads. What is your opinion about
that?
Mr. KRUTTSCHNITT. If a definite date were fixed?
Mr. MONTAGUE. Yes; that was the statement made, as I now re-
member it. I don't think I am mistaken about it.
Mr. KRUTTSCHNITT. I think what anybody doesn't know about the
stock market would fill a pretty large book, but I can't conceive of
how a certainty of an event happening could be used for speculation,
when the uncertainty as to its happening would not. In other words,
all speculation is based on an uncertainty, is a gamble. It seems to
me that speculation would be encouraged much more by the fact that
no date was assigned, and one man would say, "Why, I believe they
are going to turn the railroads over in three months." Another
fellow would say, "You're all wrong. They won't turn them over
in three years." "Now, there is an opportunity for a gamble, whereas
if it were known that the roads are to be operated for three months
or six months or nine months after the conclusion of peace I don't
see how that could encourage speculation.
Mr. DECKER. Well, if you owned stock in a railroad and you knew
that as long as the Government had control of it you would get a
certain pay or certain dividend on your stock, there wouldn't be
much need of speculation about the value of that stock, would there?
Mr. KRUTTSCHNITT. The speculating is not carried on generally by
the people who have stocks for investment. It is done by outsiders
who try to stimulate trading in stocks because they make money
coming and going. They make it whether the stocks are sold or
whether they are bought." I believe that tht opinion of any investor
shareholder as to the value of the stock would be based very largely
upon the business of the company and its conservatism as to dividend
declarations. That has more to do with it than anything else.
Mr. DECKER. His opinion of what?
Mr. KRUTTSCHNITT. Of the dividend policy of his company.
Mr. THOм. In connection with that question, I would like to call
attention to this; it seems to me to have a most substantial bearing
upon this question: There is the greatest possible difference between
a Government guaranty which is perpetual and a Government guar-
anty which is for two or three years. If there were a Government
guaranty which is to cease when these railroads come back, and you
don't know in what way they are to come back, why the Government
guaranty for the two or three years that they would be under Gov-
ernment control would not save those stocks from the apprehension
of the injury that might result in the way the property was turned
back; whereas, if the Government guaranty was to be perpetual, as
would be the case if the Government bought the properties on a Gov-
ernment guaranty, the situation would be entirely different. And
I use that for this purpose: The amount which the Government
should pay for this use is very substantially influenced by whether
or not this is to be a perpetual taking or a temporary taking. If
this is to be perpetual and there are to be no uncertainties as to the
situation when the property is returned, then what you should pay
would be a very different thing from what you should pay for a tem-
182
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
porary use. And, consequently, it will be absolutely necessary for
you to determine section 13 before you determine section 1, because
what is just compensation for these properties would be one thing
if this is a taking for permanent use for the Government and an
entirely different thing if it is a temporary taking.
The CHAIRMAN. Well, the guaranty is just as permanent as the
operation.
Mr. THOм. But if the guaranty is coextensive with the operation,
and the operation is for three years, it is a very different thing from
a guaranty which would last permanently.
The CHAIRMAN. Now, Mr. Thom, could anything be more disastrous
to railroad values-I mean bonds and stocks-than to put a permanent
guaranty on an income that is satisfactory for three years, or any
specific time, but in the meantime the railroad people, the owners,
have no opportunity whatever to shape the method of business, the
rates, or the wages to be paid, and the period was absolutely nominal
as to the time when they would be returned and without this care-
taking that the railroad people would give it if they were in control
of it? The road might be returned to them when the guaranty ceased
under such conditions that it would be practical confiscation of the
road, to a great extent at least.
Mr. THOм. Mr. Chairman, I regard section 13 as Government
ownership.
Mr. DECKER. Well, it isn't definite. We just want to see how we
like the business first. [Laughter.]
Mr. THOм. I mean that you have power of Government ownership
if you do like it.
Mr. DECKER. Yes; they have been dodging around that for a long
time.
Mr. THOM. Under section 13 as it is now written there can be no
handing back of these properties to their owners until Congress
affirmatively acts on the subject.
The CHAIRMAN. After the war is over.
Mr. THOм. After the war is over. Now, all that Congress has got
to do is to determine that they like it, and, as Mr. Decker says, do
nothing.
The CHAIRMAN. And continue the guarantee of dividends.
Mr. THOм. Continue the guarantee of dividends.
The CHAIRMAN. Now, isn't the guarantee of temporary return,
according to your own judgment, liable to be much higher than a
permanent guaranty would be on the same stock?
Mr. THOм. There are a great many railroad men, Mr. Chairman,
who believe that you, in taking over these properties, must take them
over on the value of the properties themselves, and that you must not
take them over on a value simply of their use, and that they want the
value of their property; they want them if they are taken away from
them and they are not satisfied with a guaranty of the value of their
use. And my proposition is this: Whenever any such tremendous
change takes place as the acquisition by the Government of one-
seventh of the property of the United States, that question ought to
be decided on its merits and the advantage of all conditions, of the
patriotic impulses of men to stand aside and not to throw unnecessary
obstacles in the way of the Government action ought not to be taken
1
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
183
advantage of for the purpose of creating a situation which can pass
by simply nonaction into Government ownership.
Mr. MONTAGUE. Do I understand that you are going to take the
position that the question of Government ownership ought to be
dealt with under normal conditions and normal environment?
Mr. THOм. Yes; and on the merits of the question alone.
Mr. MONTAGUE. Disassociated from all hysteria and all passion
of war and under normal and economic conditions?
Mr. THOм. It ought not to be done under the patriotic impulse of
people toward serving their country in time of war.
The CHAIRMAN. I was in hopes that this section 13 would not be
taken up on the theory of Government ownership at all. I don't see
that it is involved.
Mr. THOм. How can you get away from it? As Mr. Decker says,
suppose that the Government were to say, "We have made a good
bargain. We like these roads, and we will simply do nothing"!
Haven't they got the roads then as long as they want to keep them?
The CHAIRMAN. Yes; upon paying the guaranty that you have
agreed to yourselves as being remunerative for three or four years.
Mr. THOм. Yes; we agree to that; but if the Government finds out
that this is a very low price to pay for these roads, and they say, in
other words, "We like it," having simply gotten them into that po-
sition you simply do nothing.
The CHAIRMAN. There would have to be legislation to acquire titl
to the property. Undoubtedly you would have to have legislation.
Mr. THOM. You wouldn't need any title if you got the property
and are paying this price which would turn out to be too low.
The CHAIRMAN. Do you suppose the public would want to be con-
sidered as the owners of the railroads without any opportunity to
operate them except through their owners?
Mr. THOм. I don't think this is a question to be passed upon,
upon supposition. I say here, suppose you make a guarantee to
these roads by the use of this very abnormal year of 1915, and you
arrive at an amount of guarantee which is by no means acceptable
to these roads, but which they do accept out of patriotic impulses.
Now, having gotten all that, all you have got to do is to simply do
nothing, and you retain the roads just as long as you please. How
is that distinguishable from Government ownership?
The CHAIRMAN. Well, I have no doubt, myself, but what Congress
will have as much patriotism and as much judgment as we have,
and that they have the numbers that will advise them in the exercise
of the judgment and wisdom that we do not have.
Mr. THOм. Mr. Chairman, your legislative experience will teach
you that there may be a majority of Congress that want to do a
thing, but through some parliamentary method it takes years for
the will of the majority to translate itself into legislation. I have
one case in my mind now, the compensation act, the compensation
bill, that was reported by a most distinguished commission to this
Congress and was passed by the House of Representatives, and it
went to the Senate and the votes were there to pass it, but they were
within three days of the end of the session and one Senator was
enough to hold that matter up. Now, are we to have a situation
where there will be that sort of sentiment toward returning these
184 t
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
roads and the act of Congress could not be passed because it reached
a legislative tangle such as that, and are we to have one-seventh of
the whole property of this country subjected to that kind of uncer-
tainty?
The CHAIRMAN. Mr: Thom, is your fear based upon the assump-
tion that Government operation will be so good and so valuable and
so economical as to justify its permanency?
Mr. THOм. No; not at all.
The CHAIRMAN. It appears in the case that you do.
Mr. THOм. My apprehension is based upon this: Here in a time
of war you are taking these properties, at a time and under condi-
tions where you are simply estimating the value of the use, and
where every patriotic consideration keeps men from being obstruc-
tive in trying to prevent that or unduly embarrassed by the ques-
tion of compensation. Now, having arrived at that, without in any
measure contending what ought to be paid for permanent use, you
put that property in the situation not of a fixed tenure by the Gov-
ernment but in the uncertainty of how soon a majority in Congress
can translate its wish into affirmatively returning these properties.
That creates a condition of uncertainty which is arbitrary, which
is hurtful, and which plunges the status of these properties into
a condition where nobody can predicate anything in regard to either
their ownership, their future market, or their utilization.
The CHAIRMAN. I can say frankly that I think any Member of
the House or Senate that would want to insert this thirteenth section
as a mere piece of indirection in order to bring about Government
ownership would be unpatriotic and unworthy of the seat he has got.
On the other hand, I think any Member of the House or Senate,
because he could not fix a specific date in which this ownership or
control should end, that therefore we shall not have the control
of the legislation that ought to make it necessary in war time-I
think there are extremes on both sides of this thing, therefore I was
hopeful that the question of Government ownership should not come
in, and if this operation should prove expensive and unsatisfactory
it would be the strongest argument against Government owner-
ship that could possibly arise.
Mг. THом. My proposition, Mr. Chairman, is that if you rent a
house to a man you have a tenure. You don't leave it to the lessee to
say when he is going to give it back. If you hire a horse you have a
time limit when he must be returned, and now the proposition to take
one-seventh of the property of the United States and in these war
times to pass it into Government utilization for the purposes of the
war on a tenure where there is no limit and to call a man who wants a
limit exacting, as unwilling to trust to the future action of Congress
and to their patriotism, is to expect a policy and principle to be
adopted about this tremendous property-one-seventh, as I say, of
all the property in the United States-which does not apply in the
smallest transaction of mankind.
The CHAIRMAN. Then you want the bill to fail if it doesn't make a
definite time?
Mr. THOм. To fail?
The CHAIRMAN. Yes; fail.
Mr. THOм. Of course I don't want it to fail. How can we allow
this bill to fail?
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
185
The CHAIRMAN. Unless we make it definite in the bill when it is to
cease operation.
Mr. THOм. Why, Mr. Chairman, talking about the bill failing
you have got our property, and this bill gives us compensation. Is it
possible that we want it to fail?
The CHAIRMAN. Then what is the use of opposing the bill upon no
higher ground than that you are afraid to trust the judgment and
the patriotism of future Congresses?
Mr. THOм. I am not opposing the bill. I am asking this committee
to fix a tenure upon which the Government will hold this property.
Mr. MONTAGUE. You want to trust the judgment and the patriot-
ism of the present Congress?
Mr. THOм. That is what I want to do.
Mr. RAYBURN. Doesn't it seem to you that the proposition of not
setting a definite date is dragging it into Government ownership more
than it ought to?
Mr. THOM. I think so.
Mr. DILLON. In other words, Mr. Thom, you want to draw the
contract now?
Mr. THOм. That is what I want to do. And is that improper? We
want to have it now. Is it improper for us to want this Congress,
who is prescribing the terms of our compensation, to fix a tenure that
they expect to use in relation to this vast body of property? It
seems to me that we are asking nothing but what every man that has a
farm to rent would want.
The CHAIRMAN. I don't mean to impugn your motives, because you
represent men who have rights and of course they have a right to
present those rights to Congress.
to
Mr. THOм. I know, Mr. Chairman, you don't want to be unjust, and
say that I am impugning anybody's motives is very unjust.
The CHAIRMAN. I didn't say that. I said I did not impugn your
motives, and I say you are representing private persons, and you
have a right to do it.
Mr. THOM. I say I am appealing to the men that fix our com-
pensation to fix our tenure, and I am appealing on the basis that a
tenure of three years or four years ought to be paid for in a different
way from a tenure that may last forever. I am appealing on the
ground that it is not in the public interest and not right to these prop-
erties not to have certainty as to when they are to be returned to
their owners. Now, if you think legislation is necessary in order to
untangle what is being done, then fix your limit and say that the
President at any time within that limit may return the properties;
but fix your limit, for if you don't fix your limit you have destroyed
the value of these properties.
Mr. RAYBURN. The other day when Mr. Anderson was here I
asked him if he didn't think it would be much better for the country
and much better for the security holders and much better for the
railorads if a time definite were fixed, and if it wouldn't be in the
interest of all those things, and he answered that in the negative.
I haven't been able to understand him yet; that a definite date would
make the situation more indefinite was his argument, as I understood
it would produce more speculation and chaos to set a day certain
when this should be done than not to set a day.
186
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. THOм. From our standpoint, Mr. Rayburn, we can not enter-
tain that view. We can not at all sympathize with it, and we think
that, as the investors in this property, our view of what is best for
them ought to be laid before you.
Mr. Escн. You were going to describe some tables there, Mr.
Thom.
Mr. THOM. Yes; I have some tables here.
Mr. Escн. You want to insert those in the record, do you?
Mr. THOM. Either by myself or some other witnesses.
The CHAIRMAN. Do you want to present other witnesses, Mr.
Thom?
Mr. THOм. Well, we would be ready in the morning. I will state
frankly to you we have got a meeting of the railroad executives of
the country on Sunday in New York. We have to work Sundays
these days to consider a great many of these questions, and I have to
be there, so I have to-morrow morning available.
The CHAIRMAN. Well, speaking for myself, I want to accommo-
date you.
Mr. RAYBURN. You can be here Monday, can't you?
Mr. THOM. Yes.
Mr. BARKLEY. Could you put these tables in the record to-day, so
that they would be available as soon as possible in the hearings?
Mr. THOм. I could file them here; yes.
Mr. BARKLEY. Is that what you wanted to do?
Mr. THOм. I wanted to have a witness to explain them a little
better than I could.
The CHAIRMAN. Well, I want to say that to-morrow there is a
gentleman here representing the short-line roads and Mr. Plumb, rep-
resenting the brotherhoods. Would you like to be heard to-morrow,
Mr. Plumb?
Mr. PLUMB. No.
Mr. DECKER. Is anybody going to be here to speak for these roads—
I don't know just what they are the short-line roads, short-revenue
roads the ones that have been in the hands of receivers ?
Mr. BIRD M. ROBINSON. I will speak for them, and I just wanted
to ask the chairman if we might have Tuesday assigned to us. We
will have a number of witnesses here Monday, and we have a tentative
understanding with the Senate committee, and we might appear
before them Monday, and I think we will be ready to appear here
and represent 25,000 or 30,000 miles of the class 2 and 3 roads, and
we would like to let those witnesses return, if we might be heard on
Tuesday. They will not be here to-morrow.
The CHAIRMAN. I understand that it is the policy of the com-
mittee and every body else to try to expedite the consideration of this
bill, but not to refuse consideration by too much expedition, and all
I want to do as the chairman of the committee is to carry out the
wishes and purposes of everybody concerned, as much as possible.
Mr. BARKLEY. Could Mr. Thom give the committee an idea as to
how many witnesses he expects to use?
Mr. THOм. I don't expect to do anything more than put in these
tables and argue the case.
Mr. MONTAGUE. How much longer will it take you; what time
do you want yourself?
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 187
Mr. THOм. Well, I really don't know.
The CHAIRMAN. Do you want to address the committee on the
general subject before the hearings are over?
Mr. THOм. No; I want to do that after the hearings are over; but
I will be able to get somebody to come here and put these tables in
to-morrow morning if you desire that.
Mr. RAYBURN. You mean you want to make your general statement
later than Monday?
Mr. THOм. Yes; after all the evidence is in I want to present an
argument.
Mr. MONTAGUE. You want to have the published record before you?
Mr. THOм. Well, I don't care so much about that; but after you
have got the case in I want to argue it.
Mr. BARKLEY. If Mr. Thom is not going to be ready on Monday
himself, as he indicates, and these other gentlemen can't be ready
until Tuesday, what is the use of meeting here Monday just to put
these tables into the record, unless we can get witnesses from the
Treasury Department or somebody to go on?
The CHAIRMAN. If we adjourn until 10 o'clock to-morrow morn-
ing Mr. Thom or his witness can be here and be heard on these
tables.
Mr. MONTAGUE. Mr. Chairman, I don't mean to say that my ab-
sence should necessitate an adjournment of the committee, but, un-
fortunately, I can not be here to-morrow. I have an engagement
that I can not neglect.
The CHAIRMAN. How much time will it take you, Mr. Robinson
Mr. BIRD M. ROBINSON. Three or four hours. We will present a
general statement showing that there are a large number of roads
which will not receive anything-apparently not receive anything-
under the terms of this bill; that their property will be appropriated
and they will receive nothing for it. Then we present some special
cases showing the facts in those cases.
The CHAIRMAN. So far as I know now you can commence on
Tuesday, but this committee has no power to sit during the sessions
of the House, and I don't know what might be up on Tuesday. We
may have to put in the afternoon in the House.
Mr. BIRD M. ROBINSON. I will make an estimate that it will take
three hours, but that is a mere estimate.
The CHAIRMAN. Well, without objection, then, Mr. Robinson will
be heard Tuesday morning at 10 o'clock, and the gentleman who is
going to represent Mr. Thom will present these tables Monday morn-
ing at 10 o'clock.
COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE,
HOUSE OF REPRESENTATIVES,
Monday, January 14, 1918.
The committee met at 10 a. m., Hon. Thetus W. Sims (chairman)
presiding.
The CHAIRMAN. The committee will come to order. I wish to
make a statement to the committee before beginning the hearing.
Thinking I was doing that which was best, and which I myself per-
sonally felt we needed, to have some one here that understood the
188
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
bill and understood any objections that might be made to it from
the railroads' operating standpoint-in other words, had technical
knowledge-I asked the Director General if he would not have some
person come here, some gentleman that we might consult on this
matter, for a week or two, and we might explain to him what the
committee did not understand, from the standpoint of the bill and
the purposes and objects of it. There was no one here at all to
speak in favor of the bill, and so the Director General said that with
the permission of the committee-in response to my request-he
would ask Judge Payne to be here and remain with us during the
hearings for that purpose and explain anything that we wanted to
know or anything that we failed to understand, and I am informed
he was consulted about the provisions of the framing of the bill, and,
naturally, of course, understands them from the standpoint and
viewpoint of those who are seeking the legislation, and that is the
reason why Judge Payne is here to-day, and I thought I would
state the facts to the committee. Is that about correct, Judge? I
would like to have you make a statement yourself.
Mr. JOHN BARTON PAYNE. You have stated it exactly right. I am
general counsel of the Emergency Fleet Corporation, but I have been
working with the Secretary and with Mr. Anderson on this legisla-
tion as we had framed it, and I am entirely at the disposal of the
committee.
Mr. STEPHENS. Mr. Chairman, before you call a witness I would
like to make a statement for the record. I notice in the closing day
of the hearings, with Mr. Anderson on the stand, an extended colloquy
on page 19 of the brief we have here before us or proof, rather—
I am credited here with an extended colloquy which does not belong
to me.
Mr. RAYBURN. I have already asked that that be credited to me.
It ought to be credited to me.
Mr. STEPHENS. I am very glad to have it credited to you. It is a
very intelligent colloquy, but it does not belong to me.
Mr. RAYBURN. I am sure I expressed some sentiments in there that
you do not entertain.
Mr. BARKLEY. I think it is to the credit of both these gentlemen
that neither one wants to accept the responsibility for what the other
one expresses. [Laughter.]
Mr. STEPHENS. The gentleman expressed the hope that the rail-
roads would be again turned back to their original owners, which I
do not hold. I have an open mind on the subject and want to be
converted after we have had experience one way or the other. I did
not want the gentleman to put me in the attitude of coming to a con-
clusion even before the evidence is in, and I would suggest to the clerk
of the committee that he make sure that the reporters who report the
proceedings of the committee make sure remarks are accredited to the
proper parties.
You can readily see, Mr. Clerk, where my reputation might get to
with such a statement as that attributed to me. [Laughter.]
The CHAIRMAN. Mr. Thom, if you are ready now to have your
tables put in, whatever they are, the committee is ready to hear you.
Mr. A. P. THOM. I will ask the committee to hear Mr. L. E.
Wettling, who is manager of the statistical bureau of the western
railroads, who will present and explain some tables.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
189
1
The CHAIRMAN. Explain what they are and why they are?
Mг. THOм. Yes, sir.
The CHAIRMAN. You may proceed, Mr. Wettling.
STATEMENT OF L. E. WETTLING, MANAGER, STATISTICAL BU-
REAU WESTERN LINES, CHICAGO, ILL.
Mr. WETTLING. We have had prepared here first as the basis of
the information, these statements showing in the one a certain group
of roads called the "eastern district," following the classification by
districts as made by the Interstate Commerce Commission.
Mr. EscH. Just a moment, please-if you have copies of those, we
could follow you more intelligently if we had them.
(Copies of the tables were handed to the members of the com-
mittee.)
The CHAIRMAN. What is the object and purpose of the present
statement? Will you state it just briefly.
Mr. WETTLING. The object is to show the result of the operation
of the past three years of these railroads and following, of course,
the three years contemplated as being the basis of the standard re-
turn.
The CHAIRMAN. Bearing on the question of standard return?
Mr. WETTLING. Yes, sir; and to call attention to the variations
and some special situations as to certain roads.
The CHAIRMAN. Along the line of the explanation of Mr. Krutt-
schnitt?
Mr. WETTLING. Somewhat on that line; yes, sir. I will take them
up in the order of pages 2 and 3, and page 1 afterwards, as page 1
is a recapitulation of the other three.
Page 2 of this group of exhibits treats of the operating income, the
property investments for each of the three years ending June 30,
1915, 1916, and 1917; and also the three-year average of each
of the two items, together with the rate of return which was pro-
duced in each of the years, and the average rate of return produced
in all three years.
Page 3 treats with the southern district, and page 4 the western
district.
Page 1 is a general recapitulation of the totals of all three groups.
The mileage of the eastern district that is here treated is that
operated on June 30, 1917-that is, for the year ended June 30,
1917-and is as to the eastern roads 58,979.57 miles.
Mr. BARKLEY. Could you give us geographically an idea of what
you include in the eastern territory?
Mr. WETTLING. The eastern territory takes the territory north of
the Ohio and Potomac, and east of a line that is drawn along the
Mississippi River from the Ohio to St. Louis, through Peoria to
Chicago-everything east of that.
Mr. BARKLEY. That is not following the river precisely? It
doesn't follow the Mississippi precisely?
Mr. WETTLING. It follows the Ohio and the Potomac.
The CHAIRMAN. And the Mississippi so far as it goes up to St.
Louis?
Mr. WETTLING. Yes, sir. Now, in explanation of that there is
this for us to say in this districting of the roads, that where a road
190
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
occupies or is situated in more than one territory, it is grouped in
with that territory in which it has the largest percentage of its
mileage. For instance, the Illinois Central, which with its sub-
sidiaries, runs south and north, and west also that is, south, east,
and west, I should say, instead of south, north, and west-has a pre-
ponderence of its mileage in the south, and is therefore grouped with
the southern roads.
Mr. BARKLEY. So that its total return or groupings in the southern
group is not the proportionate part that it bears to the southern
roads?
Mr. WETTLING. No, sir; because that is impracticable to split the
road on the mileage basis as between territories. And so with the
road that includes let us say, the Wabash, which has a large per-
centage of its mileage in the western territory, yet its preponderat-
ing mileage is in the eastern territory, therefore it is grouped with
the eastern roads.
The southern district lies south of the south line of the eastern
district just described and east of the Mississippi River.
The western district, then, takes all the rest of the territory west-
erly of the Mississippi River to St. Louis and west of a line drawn
from St. Louis through Peoria and Chicago, and then along the
Lakes-along Lake Michigan and Lake Superior.
It happens a little unfortunately that just at this period, or just
prior to this period, the date of the year was changed the date of
the reporting year was changed by the Interstate Commerce Com-
mission something above a year ago, from the fiscal year to the calen-
dar year. Therefore the reports for the full fiscal year ended June
30, in the usual form, are not available to the commission for the
year 1917. Necessarily the data, then, were procured by making de-
mands on all of the railroads through a committee here in order that
these data might be presented to you to the latest date that it was
practically available.
:
Mr. Escн. Has Commissioner Daniels gotten returns from the
roads on that?
Mr. WETTLING. I don't know. I haven't seen Mr. Daniels, and I
can't tell you; but we, independently of him-the executive committee
of executives, independently-made this request on all of the rail-
roads excepting a few of the smaller ones, and returns were generally
sent in. Those that were sent in are exhibited in these three sheets.
Mr. PAYNE. I might answer that, that a very large number have
been received.
Mr. EscH. That information, then, will be available before the
committee finishes the hearings.
Mr. PARKER. Did you say that the Interstate Commerce Commis-
sion made that change by an order, and that Congress wouldn't get
any information for a year?
Mr. WETTLING. That is just it. After many years of considering
the question, some time in 1916 it was determined, for the convenience
of the roads, I think, and for the convenience of the commission,
and some several other reasons which I am not able to enumerate,
that it would be better to have, after the year 1916, reports come in
for the calendar year instead of the fiscal year ended June 30, as had
been theretofore made.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
191
•
Mr. PARKER. Who made that decision of the Interstate Commerce
Commission?
Mr. WETTLING. I think the Interstate Commerce Commission after
various conferences made it. The first report for a calendar year
that was rendered by the carriers was for the year ended December
31, 1916. They had also in that same year rendered a report as of
June 30, 1916, in the usual form.
Mr. WINSLOW. Does the fiscal year continue to be June 30 in most
of the railroads?
Mr. WETTLING. Many of the roads-a great many of the roads-
report to their stockholders as of December 31, and it necessitated
making two separate calculations and reports. A number of them
still do make June 30 their fiscal year.
Mr. PARKER. What was the proportion before this order was made,
of the roads that made the fiscal year June 30?
Mr. WETTLING. That I can't tell you. I was not present at the
conferences when this decision was reached.
Mr. WINSLOW. There is no regulation, then, as to the uniform
fiscal year involving all the railroads?
Mr. WETTLING. There is to the reports to the commission. There
always has been.
Mr. WINSLOW. That has been December 31?
Mr. WETTLING. Heretofore it has always been June 30. It was
absolutely uniform as to the reports to the commission. I thought
your question ran to the question of when the roads made reports.
to their stockholders. That was not uniform-not in all cases uni-
form.
Mr. WINSLOW. But for the purpose of reporting records hereafter,
what do you have to say about the fiscal year of the various railroads?
Mr. WETTLING. They would now be elimnated, if that ruling re-
mains and stands.
Mr. WINSLOW. In other words, all kinds of records will be as of
December 31, the calendar year, instead of the fiscal year, June 30?
Mr. WETTLING. That will be the reporting year.
Mr. WINSLOW. And beyond that the railroad may do as it chooses?
Mr. WETTLING. Not entirely do as they choose. Of course there are
restrictions by the ruling of the Interstate Commerce Commission as
to how they shall keep their accounts, but they may, of course, have
a different fiscal year for reporting to their stockholders.
Mr. HAMILTON. It is, however, expected that the railroads as a
whole will conform to the fiscal year prescribed in this suggestion
from the commission?
Mr. WETTLING. That, as I understand it, was the general purpose
of making the change, so that they would be alike, and that their
annual reports to the commission would conform to the dates and
annual reports made to the stockholders generally.
Mr. WINSLOW. Records of mileage, and so forth, would be coinci-
dent with the annual fiscal report to the commission?
Mr. WETTLING. Mileage, you say?
Mr. WINSLOW. All such tables as these, for instance, would be
computed as of December 31 hereafter?
Mr. WETTLING. That was the intent. I don't know what is going
to happen under present conditions, but that was the intent. .I
•
192 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
merely mentioned that as sort of an apology for being obliged to
put up statements which do not cover the entire United States-
that is, all the roads of the whole United States-and, of course, this
commission-the Interstate Commerce Commission-finds itself un-
der the same disability; and in trying to make up statements for the
entire railroads of the United States there must necessarily be some
estimates.
I have before me a statement of Mr. Anderson in which a state-
ment is rendered for all Class I roads, which covers roads whose op-
erating income is in excess of a million dollars per annum-gross
income, not operating income.
It will be seen from this statement for the eastern district that the
total net operating income of June 30 was, for the year 1917,
$370,000,000; for the year 1916, $421,000,000; and for the year 1915,
$274,000,000, in round figures. The average for the three years
being $355,402,491.
Mr. MONTAGUE. What page is that?
Mr. WETTLING. Page 2, showing the eastern district.
The CHAIRMAN. The averages are at the bottom of the fourth
column?
Mr. WETTLING. No; the fifth column. It will be noted that the
year 1917, as to these eastern roads, was not so very prosperous a
year as has been generally assumed, but that the year 1916, in fact,
was some $51,000,000 better in net operating income returns, while
the year 1915 was among the lowest in many years. In rate of re-
turn it was for the eastern carriers the lowest since 1891.
•
The CHAIRMAN. Did that difference hold throughout the United
States or is it confined simply to the eastern roads?
Mr. WETTLING. It does, but not in exactly the same degree. In
the case of the western roads the income net for the western roads
was a trifle over, in percentage, what it was for the eastern roads.
On the other hand, in 1914 the western roads were a trifle under.
The situation is that as between the sections of the country there is
never a year in which all of the roads or all of the sections enjoy
equally prosperity or suffer equally in adversity. That, of course,
is readily understood by reason of the difference in the crop condi-
tions or industrial conditions within the territory of one as compared
to the other.
Mr. STEPHENS. Did I understand you to say that the same approxi-
mate proportions existed in the western roads as in the eastern?
Mr. WETTLING. Yes, sir. I will treat of those later.
Mr. STEPHENS. Maybe I don't understand these figures here, but
under the western roads I notice that they have steadily increased
from $314,000,000 in 1915 to $474,000,000 in 1917.
Mr. WETTLING. Quite right; but I think you misunderstood the
application that I was making. I was showing the variation as be-
tween 1916 and 1915.
Mr. STEPHENS. Oh, yes.
Mr. WETTLING. And addressing my remarks particularly to the
low return in 1916.
Mr. Escн. Which was the lowest since what year?
Mr. WETTLING. Well, the lowest-I don't know how far back, but
it was the lowest since 1891-from what records I have conveniently
before me. It was the lowest in rate of return, not the lowest in
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
193
amount. In other words, it was the lowest in relation to the amount
of property devoted to the public use.
Mr. THOM. Now, you are asked by one member of the committee
if that statement of yours applied to each of the groups of roads.
Mr. WETTLING. The statement I made generally applies; that is,
that the year 1915 was a remarkably low year, an abnormally low
year.
Mr. THOM. And was the lowest since 1891 of all the groups?
Mr. WETTLING. It was as to the United States as a whole.
Mr. HAMILTON. How was that?
Mr. WETTLING. It was as to the United States as a whole.
Mr. STEPHENS. However, unlike the eastern roads, the western
roads increased in 1917 over 1916, I notice.
Mr. MONTAGUE. Mr. Chairman, excuse me, was the witness on the
eastern division?
Mr. WETTLING. No, sir.
Mr. MONTAGUE. Were you dealing with the eastern division?
Mr. WETTLING. Oh, I was dealing with the eastern division here.
Mr. MONTAGUE. Now, the question of Mr. Stephens related to the
western division; is that what I understand, Mr. Stephens?
Mr. STEPHENS. Yes; I was just drawing a comparison, that's all.
Mr. MONTAGUE. I think that we ought to get through with one of
these divisions at a time. Some of us can't follow figures with the
facility of my friend, Mr. Stephens, and we would like to deal with
one thing at a time.
Mr. WETTLING. In speaking of the low rates relatable to the prop-
erty investment, and stating that it was the lowest back to 1891, I
mean to be corrected as to that. I meant 1900. Most of my calcula-
tions have been made since 1900, and I had in mind at the time the
statement of the Interstate Commerce Commission, which ran to 1891,
but my statement does not apply clear back to 1891.
The next succeeding four columns treat with the property invest-
ment as of June 30, 1917, 1916, and 1915, the following column being
the three-year average of the three years. The idea being that the
property which earned the income, relatively, was the average of
the three years. That, of course, is never strictly true, because im-
provements made during one year during a certain year-are never
fully in use during that year. The improvements that are made, for
instance, in the last half of 1914, would probably reflect none of the
net earnings within the last half of that year, and so on. In fact,
many improvements do not reflect any earnings for some time after-
wards. The value of the property here shown is, of course, not the
value of the property that was taken over by the Government on the
28th of December, 1917, but is in each instance a lesser amount, and
the average is a much lesser amount than the amount turned over on
December 29. It is estimated that the property value as of December
28, 1917—or rather, December 31, when our accounting year ended—
was $17,203,000,000 for all the roads of the United States.
The property investment, which was shown for the beginning of
the year 1915, was approximately $15,153,908,000.
The CHAIRMAN. Now that shows what difference in those years?
Mr. WETTLING. It shows a difference of practically $2,300,000,000.
The CHAIRMAN. In two years?
40958-18-13
194
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. WETTLING. In three years. That is, since the first of the year
1915.
The CHAIRMAN. Then, in fact, the railroads have been making
wonderful improvements on their properties?
Mr. WETTLING. They necessarily must do so to keep up with the
improvement in the industrial conditions and the extension of the
use of the properties and the enormous increase in the traffic that
they have been obliged to carry.
The CHAIRMAN. This is the reason I asked that: I was under the
impression, from the statements made before the joint committee,
that railroad development in the United States was practically
arrested for lack of credit and the ability of the railroads to put out
an attractive line of securities. I was perfectly astonished that
almost $2,000,000,000 of property value was added to the roads
during that time, and I am glad to hear it if it is a fact.
Mr. WETTLING. That covers, you understand, since the 1st of
July, 1914.
The CHAIRMAN. Three years.
Mr. WETTLING. And is three and a half years.
The CHAIRMAN. They have been putting in nearly a billion dollars
a year?
Mr. WETTLING. Well, three and a half years and $2,000,000,000,
you see, would be something like $600,000,000 a year.
The CHAIRMAN. Well, that is very favorable. I am glad to hear
that.
Mr. THOм. Mr. Chairman, when the time comes I will show that
there is not the slightest inconsistency between the two statements.
that you allude to. I, of course, know what has been said before
the joint committee, and it in no way impairs the statements there
made. However, I don't want to interrupt at this moment.
The CHAIRMAN. I am not controverting it, but I understood you
to say in your first statement that we had practically reached a state
of arrested development so far as the railroads were concerned.
Mr. THOм. That is the fact.
The CHAIRMAN. But there seems to have been some real devel-
opment.
Mr. THOм. There has been only about 900 miles of new railroad
built in the country. These are improvements on existing lines, and
those are two things. What we are alluding to was the extension of
railroad property before the joint committee. These are improve-
ments.
The CHAIRMAN. I am glad that the credit of the roads has been
such as to enable them to expend about half a billion dollars a year
in the past three years improving properties.
Mr. THOM. But it hasn't been developed that that was borrowed.
money.
The CHAIRMAN. But they got it, and the question made by you
was that railroad securities had ceased to attract investors.
Mr. THOM. It is a fact and not at all inconsistent with this state-
ment. Of course I will go into that later, and I do not want to
interrupt the statement to do it, but I can't let the chairman's state-
ment, which indicates a misapprehension of the facts as they appear
to me, pass without saying that I wish at the proper time to make
a statement which shows that that position is wrong.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
195
The CHAIRMAN. I perhaps got the wrong impression from what
you said. I thought there were practically no improvements being
made for the lack of the roads being able to borrow at reasonable
rates, and that they were trying to make investments more attractive,
so as to attract capital in competition with other investments.
Mr. THOм. That is so. There has been very little railroad financ-
ing in these later years. A good deal of this that has been put in
here has been put in from the treasuries of the railroads themselves,
as they were able to do it. There has been no ability whatever to
float any stock of railroads within the period of within the recent
period of years. I think that in the last year, for example, there
were under $15,000,000 of new stock listed on the stock exchange,
and practically all of that was from the Chicago & North Western
Railway.
The CHAIRMAN. I didn't intend-I wanted to see if I understood
you.
Mr. THOм. I know, but I don't want the impression to get out,
which is evidently on your mind, Mr. Chairman, that there is some
inconsistency with the contention which we made there and here. I
wouldn't have interrupted except for that, but I want to say that
when the time comes and the convenience of this committee will
permit, I will draw attention to the two statements and give the ex-
planation. I now call attention to it merely so that it may not be
understood that there is any discrepancy.
The CHAIRMAN. I am supposing that I misunderstood your state-
ment, and I am glad that I did, because I am glad that the railroads
are able to put in half a billion dollars a year during that time in
permanent improvements to their property.
Mr. WINSLOW. Mr. Chairman, will the witness please state again
what properties were considered in the accumulation of the $2,000,-
000,000 in three years?
Mr. WETTLING. It is the difference between the closely estimated
property value as of July 1, 1914, and as of December 31, 1917.
Mr. WINSLOW. Does it appear anywhere on these tables?
Mr. WETTLING. That first figure does not.
Mr. PARKER. Mr. Chairman, may I ask the witness-I gather from
these figures that in the eastern district it seems that the difference
between the property investment of 1915 and that of 1917 is $714,-
000,000-a little more. What does that $314,000,000 represent?
Mr. THOMм. What group of roads are you alluding to?
Mr. PARKER. I am speaking about the eastern district.
Mr. WETTLING. That represents principally what are called "addi-
tions and betterments," not extensions.
Mr. PARKER. For instance, when an engine is worn out and a new
engine replaces it; that doesn't go into this estimate, does it?
Mr. WETTLING. No, sir.
Mr. PARKER. Where cars are worn out, or a depot is out of date
and has to be replaced with a new one; does that go in to make up
this $314,000,000?
Mr. WETTLING. It would not in the case of the cars, but in the
case of the depot the difference between the original cost of the old
depot and the cost of the new one would go in.
Mr. PARKER. To make that up?
196
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. WETTLING. Yes, sir. In the case of laying 90-pound rails to
replace 60-pound rails the difference between the original cost of the
60-pound rail and the present cost of the 90-pound rail, plus labor
necessarily attached, would go into additions and betterments. If
a bridge were found inadequate to carry the traffic at present, and
it was determined that it was necessary to replace it with a heavier
structure, then the difference between the original cost of the old
bridge and the cost of the new bridge-only the difference-would
be entered in the additions and betterments.
Mr. PARKER. So that all of this increase in the case of some roads
might be brought about without increasing the mileage at all-with-
out increasing the number of engines and the number of trains?
Mr. WETTLING. No; necessarily the purchase of new equipment
would go in there.
Mr. PARKER. Yes, I know; but to the extent that new equipment
was to replace old?
•
Mr. WETTLING. That would not be entered. Now, double-tracking
would go in there.
Mr. PARKER. It would?
Mr. WETTLING. Yes, sir. Double tracking, of course, would be a
betterment.
Mr. PARKER. Would sidings go in?
Mr. WETTLING. Yes, sir; new ones would.
Mr. PARKER. And stations?
Mr. WETTLING. But as to actual mileage built, it has been in the
past three years very, very small, comparatively, to what it had been
in the past. The increase in mileage has been very small, as Judge
Thom just mentioned a few moments ago. The increase in the prop-
erty investment arises principally from the improvement and the
betterment of the property that existed at the time, and not largely
from exensions or to buildings.
Mr. PARKER. Is there any way to tell just what proportion of this
increase is represented by new improvements and what by replacing
old, worn out or inadequate equipment?
Mr. WETTLING. That may be determined from the Interstate Com-
merce Commission data, or statistics that they have on hand. They
have very carefully kept account since 1907 of additions and better-
ments from year to year, so that the distinction as between new
buildings and additions to the old are readily determined. I have
not that data here.
Mr. PARKER. I can see where, of course, it would be easy to sep-
arate additions to track and that sort of thing, but I was wanting to
get some figures that state what proportion of this increase which is
tabulated here in your figures is represented by more expensive im-
provements put in in the place of improvements that are discarded.
Mr. STEPHENS. Are these additions and betterments included or
capitalized by the various companies and paid for out of the earn-
ings of the company?
Mr. WETTLING. That is the usual process. The theory-the plan
differs somewhat with different roads, depending upon the amount
of surplus they have, the facilities with which they are able to float
either stock or bonds, and the treatment is not exactly the same with
all roads, necessarily, because of the difference in their credit and
their ability to pay. I don't remember now just what point in addi-
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
197
tion to this-I was going to say that in addition to these additions
and betterments, of course there are a great many improvements
that have been forced upon the roads in the past 10 or 15 or 20
years by State legislation, by city ordinances, such as the question
of grade crossings, the raising of tracks, and various things of that
kind. Of course, many of them are nonproductive investments.
That is to say, the investment is made, the expenditure is forced
upon the roads, but there is no hope of drawing any additional reve-
nue or any additional net revenue because of them. I have in mind,
for instance, in a study made not long ago with regard to the situa-
tion in Chicago, there have been expended in the past 15 years or so
$90,000,000 in the city of Chicago for raising the tracks, and it was
sufficient to add $7,500 a mile to every mile of railroad on the aver-
age in the entire State of Illinois at the time.
Mr. THOм. That would necessarily go into additions and better-
ments. Under the rules of the commission those things must
go into
additions and betterments.
Mr. MONTAGUE. Have you had any tunneling that would come
under that classification?
Mr. WETTLING. Yes, sir.
Mr. MONTAGUE. And widening of tunnels?
Mr. WETTLING. Yes, sir.
Mr. MONTAGUE. Or elevating them?
Mr. WETTLING. Lowering grades and changing curves. All those
things necessarily run in there.
Mr. BARKLEY. So that this increase doesn't represent necessarily
a proportionate increase in freight-gathering facilities?
Mr. WETTLING. Well, it might in part, sir. Because, indirectly,
if you change a grade or shorten your line, cut off curves, you are
indirectly making better carrying capacity for the road. In that
respect it indirectly has that effect, but it does not add, excepting
in the case of second and third tracks—it does not add to the mile-
age of the road. There are other improvements of the same nature
in the matter, for instance, of building a station. A town of enter-
prise has probably had a little station built many years ago, and the
railroad officials have come to the conclusion that it is no longer
adequate for handling the business, and is not convenient or com-
modious enough, and they determine on building a new one. The
difference between the cost of the old, which might have been a mere
temporary structure, and the new is then charged to additions and
betterments. Well, just the moment that is done, of course, you
know, other towns will come in and they immediately demand new
depots, just the same as the other city. They want the same treat-
ment, no discrimination, and in that way sometimes, against the bet-
ter judgment of the railroad, improvements are forced on them that
may not seem absolutely necessary and yet must be made.
The CHAIRMAN. They become, in effect and in fact, nonproducing
property increase investments of the road?
Mr. WETTLING. Yes, sir.
The CHAIRMAN. That is, not producing in proportion to the
amount that they cost to make them?
Mr. WETTLING. Not producing in the proportion, in any event, and
in much of the improvement not producing anything.
198
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
The CHAIRMAN. But it does add to the amount carried in the ac-
count of property invested in the railroad?
Mr. WETTLING. Necessarily, and because it is proper and because
the Interstate Commerce Commission rules demand that it should
be so.
The CHAIRMAN. Yes; I am not criticizing that, but I am just ask-
ing for information. All that is included under the head of "Prop-
erty investment”?
Mr. WETTLING. Yes, sir.
Mr. BARKLEY. And those things are afterwards taken into consid-
eration by the Interstate Commerce Commission in fixing rates?
Mr. WETTLING. Well, they should necessarily be so; yes, sir.
Mr. STEPHENS. Not if those amounts were taken out of the earn-
ings of the road, would they?
Mr. WETTLING. I beg pardon? I did not catch that.
Mr. STEPHENS. If these amounts which were used for improve-
ments and betterments were taken out of the earnings of the road,
they should not be taken into account for rate-fixing purposes, should
they?
Mr. WETTLING. Well, it depends upon what you call the earnings
of the road. If they are taken out of funds which are withheld from
the stockholders and which legitimately belong to the stockholders,
why, they properly belong in road and equipment, regardless of
whether they were actually cash contributions direct from the stock-
holders or withholding of dividends from him. I can see no differ-
ence between handing a stockholder a dividend of $1,000 and asking
a man to reinvest $500 of it; or originally handing him a $500 divi-
dend, and, without his consent, possibly-or without the intermediate
procedure-invest that $500 directly.
Mr. STEPHENS. But suppose that the stockholder had had his divi-
dend at a reasonable rate of interest, and the surplus then the sur-
plus earnings of the road-were used in betterments and improve-
ments, you would not advocate that that sum should be capitalized
and the people who were paying the freight penalized as a result of it
by having their rates increased?
Mr. WETTLING. Possibly not, if the general average return was a
reasonable and fair one; but these rates that have produced this
money have been under regulation. The rates are presumably fair.
The commission has said so over and over again in its investigations,
and, necessarily, all roads will not participate equally in the net bene-
fits that are derived. Roads are situated differently, geographically
and topographically. They run through a more or less densely popu-
lated section of the country. Then there is the situation as to the
class of commodities that they may be permitted to carry or that the
section of the country that they traverse produces. There is the dif-
ference between the class of people that they serve, whether they are
all thrifty or partly shiftless; whether they are industrious and mak-
ing the best of their country; and even in the case of roads that are
running almost parallel they can not always equally participate in
the net results of the rates; but, on the average, the rates have not
produced any income which might be called excessive and invested
in property-in other property that is not properly a part of the
stockholder's value, and on which he has a right to have a rate of
return, in my opinion-
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
199
:
Mr. STEPHENS (interposing). What has been the average rate of
return?
Mr. WETTLING. The rate of return on the average for the past 15
years, back to 1900, has practically been 5 per cent.
Mr. STEPHENS. Well, I can readily see how that rate of return
could be perfectly fair and just on its face and yet be exceedingly
unjust if the surplus earnings of the road were constantly capitalized
when these earnings were used for improvements and betterments.
There never could be an excessive rate if they kept up that sort of
\ thing.
Mr. WINSLOW. Isn't it as broad as it is long? They get new capi-
talization.
Mr. STEPHENS. Well, I am considering it from the standpoint of the
man who pays the freight, as well as the man who has investments
in the road. If the surplus earnings of the road are capitalized and
then the rate that is paid to stockholders afterwards never could be
excessive, because they would constantly take earnings out and put
them into capital, keeping down the rates. Whereas if that surplus
was paid out as dividends it would show immediately that it was ex-
cessive earnings.
Mr. WINSLOW. It would all come out in the operation, sooner or
later.
Mr. THOм. Mr. Chairman, I would like to state the views that we
entertain on that subject. It has been the habit in England to di-
vide all the earnings and to borrow or otherwise secure the capital
put in the roads. The result has been that the English roads are
capitalized at over $200,000 a mile-$275,000 a mile against a capi-
talization of about $75,000 in America. Now, it has been the system
in America not to divide everything, but to put back a portion of the
earnings into the roads.
The CHAIRMAN. In other words, let it stay in?
Mr. THOм. Yes, sir. Now, our contention is that every dollar that
is earnings belongs to the railroads, absolutely, with no strings at-
tached to it, but it is property of the railroads because it is earned. It
is earned under regulations by the Government, which stamps it as
legitimate. Now, whether that is put back into the road or is dis-
tributed to the stockholders is a matter in which the public has this
concern and this concern only, and that is, if it is put back in the
road the indebtedness will not be increased to the same extent.
Bonds are sometimes issued for it, but at any rate it is the property
of the carriers; it is impossible to say that it is only pro tanto the
property of the carriers, but it is the property of the carriers that the
law has denominated the property of the carriers, and if they choose
to put it back in the road and to increase the facilities for the public,
they have got as much right to earn on that as moneys that are bor-
rowed from the public and put in the road. I say merely that that
is our position. I am not attempting to enter into that question con-
troversally at all at this time. Of course if it is necessary we shall
argue that, but it is inconceivable to me that the money that is taken
from one shipper, and if too much is taken, that he has the right to
claim the exorbitant charge that has been exacted of him. It be-
longs to him. It don't belong to the public. Every shipper that is
overcharged has an individual claim for the surplus. There is no
sort of alchemy that will convert that claim of the individual shipper
200
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
into a right of the public in respect to the amount that is over-
charged, if there was an overcharge. But there can be no such thing
as an overcharge if the method outlined by the law for the discovery
of it and for the restoration of it is not pursued. After that it be-
comes just as legitimately the property of the carrier as the fees that
I earn or that Mr. Stephens earns or anyone else.
The CHAIRMAN. Well, is anybody controverting that position?
Mr. THOM. I understand Mr. Stephens is.
Mr. STEPHENS. Oh, no; no.
The CHAIRMAN. I don't understand that at all.
Mr. THOм. Well, then, if it belongs to the carrier and is rein-
vested in the property, it necessarily follows that it is legitimate to
have an earning on it.
I would like at this point to get in the other figures. The witness
has now gotten in the differences in the property investment during
the years between June 30, 1914, and December 31, 1917. I would
like him in the same table, so that it would be easily accessible to
the committee, to get the difference in the amount of capital between
June 30, 1915, and December 31, 1917, and so on, in one table.
The CHAIRMAN. It is perfectly evident that the railroads are
worth as much more as they were then made by the amount of addi-
tional capital invested in them, whether it arose from the sale of
bonds or from the retention of earnings of the roads that were re-
tained in their treasuries.
Mr. THOM. I would like to get those figures into the record.
The CHAIRMAN. I say that is the fact.
Mr. THOM. Yes.
Mr. STEPHENS. Is this table to go into the records, Mr. Chairman?
Mr. THOм. It will go in if the committee will permit it. I am only
making some explanations about it at the present time.
Mr. WETTLING. The property investment for these groups shown
on the three statements as of June 30, 1915, was $16,271,112,525.
The CHAIRMAN. For the whole United States?
Mr. WETTLING. That is 86 per cent of the entire mileage of the
United States. We are not able to gather the statistics for the
entire 100 per cent of the mileage.
As of December 31, 1917, the investment was $17,203,000,000. Now
the addition since June 30, 1917, which I included therein, or in part
estimated on the basis of the four months' improvements-these re-
ports for the last two months are not yet in, and the roads could not
all give the full report-now the added investment since June 30,
1915, is $968,000,000 in round figures.
Mr. THOM. Give it exactly, won't you, please, Mr. Wettling?
Mr. WETTLING. $931,887,475. That represents the greater amount
of property value-the greater amount of property investment as
compared with December 31, 1917, compared with the beginning of
this standard period, June 30, 1915.
Mr. PARKER. From June 30, 1915?
Mr. WETTLING. Yes, sir.
The CHAIRMAN. I understood you to say a while ago that it
amounted to over $2,000,000,000.
Mr. WETTLING. That was from 1914.
Mr. SANDERS. You are giving two different and distinct sets of
figures.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 201
Mr. WETTLING. The difference in the property-investment account
between June 30, 1916, and December 31, 1917, is $646,735,000.
Mr. THOM. Greater.
Mr. WETTLING. It is that much greater than it was on June 30,
1916.
The CHAIRMAN. That is the permanent investment?
Mr. WETTLING. Yes, sir.
The CHAIRMAN. I mean, something the railroads permanently
need and have to have?
Mr. WETTLING. Yes, sir.
Mr. PARKER. Would you give me the total from 1914 to 1916—
$556,000,000, is it? What is the difference between that and 1917!
Mr. WETTLING. $646,735,000.
Mr. PARKER. Isn't it $566,000,000?
Mr. WETTLING. I will look and see, sir.
Mr. Esch. I think it is all contained on the first sheet.
Mr. PARKER. No; it is not. They have not got it there.
Mr. WETTLING. I can make no change in those figures,
$16,556,000,000. And the amount added, as I said before, partly
estimated since June 30, 1917, and to December 31, 1917, is
$237,742,000. That is the plant at the present time.
The CHAIRMAN. I don't understand that whatever is shown in
the way of returns for 1917, such as figures in this two-year period,
cuts any figure in the two-year period.
Mr. THOM. I will attempt to show, when you let me come to the
argument-I will show the purpose of that.
The CHAIRMAN. I didn't catch it on the surface.
Mr. THOм. I don't want to interrupt the committee unless it is
desired that I do so at this point.
Mr. BARKLEY. Have you put in your testimony the total difference
in the property investment between June 30, 1914, and December 31,
1917?
Mr. THOм. Yes, sir; I spoke of that.
Mr. SANDERS. Yes; he gave that.
Mr. WETTLING. Shall I resume now?
The CHAIRMAN. Proceed.
Mr. WETTLING. The last four columns of figures on page 2, treat-
ing with the western district, show the rate of return by road for
each of the years 1915, 1916, and 1917, and the three-year average;
and the final result as to the eastern roads is an average of 5.23 per
cent. Now, that is 0.13 per cent less than the rate of return which
the commission in 1915 pronounced as being inadequate. They said
at the time that a rate of return of 5.36, in the eastern 15 per cent
case, was too low and was approaching the danger mark, without
treating with the details.
The next statement, page 3, treating with the southern district,
is put up in generally the same manner for 32,693 miles of road
operated June 30, 1917; and the average rate of return produced
on the southern roads for these three years was 5.5 per cent. This
treats always with the average value, which, of course, we figure
is not the proper value to determine what the actual rate of return
is under the present property.
The next statement is for the western district.
202 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. MONTAGUE. Before you leave the southern district, you have
there only 32,698 miles out of a total of 50,500 miles?
Mr. WETTLING. Yes, sir; about 64.7 per cent. It seemed impos-
sible to get a larger proportion of the southern roads to make returns
to the committee who had the matter in charge.
In the case of the western district we treat with 130,249 miles,
which is 91.25 per cent of the entire mileage within the western dis-
trict. And, as Mr. Stephens suggests, the returns for the western
district, or the net operating return, rather, for the western district,
while it shows relatively as low for 1915, it shows an increase from
year to year, while the eastern roads show a decrease in 1917 as com-
pared with 1916. However, the increase from 1915 to 1916 in the
western roads was not ratably as large as the increase in the case of
the eastern roads.
Mr. THOм. Now, Mr. Chairman, to save time I would just make
this statement, which the witness has already made, so as to make it
certain: That these roads, the returns of which are here given, are all
the roads that the committee was able to get returns from. There
are some omitted, but those that were omitted were not sent in. So
that accounts for there being under about 86 per cent of these roads.
Now, I would like to ask the witness about the change in the ac-
counting rules of the Interstate Commerce Commission which went
into effect in 1907, and what bearing those rules have on the invest-
ments carried in property investments account since that date.
Mr. WETTLING. The change in the rules of the commission with re-
gard to property investments, promulgated in 1907, made it obliga-
tory on the part of the railroads to definitely set up and charge to
the property investment account all additions and betterments and
investments in new property in full. And since that date until the
present every dollar added to the property investment account repre-
sents a dollar completely and fully spent for additions and better-
ments and new property. That was not always the case prior to
1907, although there were certain rules back as far as 1900 which had
to do with the regulation of certain charges, and amounts so charged
since 1907 in this property investment account represent approxi-
mately 25 per cent of the whole. As to that, we know that the prop-
erty investment account is absolute. There is a difference, of course,
between property investment account and value. We are not claim-
ing that this is the value; that this would fully cover the value. It is
made up, of course, by a road when it first starts out charging up its
preliminary survey account, the purchase of right of way, the laying
of tracks, and the purchase of material and equipment. That, then,
would form its first property investment account. Later on, as it ac-
quires more property, either through building or through purchase,
it enters in and adds to that account the amount expended for the ad-
ditions or for the purchase of other property, and in that way most
of these roads have had their property investment account built up.
And, as I say, since 1907 the matter has been very closely followed
and watched by the Interstate Commerce Commission under its new
rules, and every dollar added since that time represents a dollar
actually spent in the property.
Mr. THOM. What I wanted to bring out is that the property in-
vestment account is based upon costs and not estimates of value.
Mr. WETTLING. Yes.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 203
Mr. THOм. And if a terminal, for example, in a city costs $100,000
and has grown to be worth $1,000,000, how is that carried in the
property investment?
Mr. WETTLING. That would still remain in the property invest-
ment account as $100,000.
The CHAIRMAN. And if it went down, it would be the same? You
would keep the account of what the property cost, regardless of
present value?
Mr. WETTLING. Yes, sir. But I was about to suggest there is not
very much gone down. Most of it has gone up.
Mr. EscH. Property investment is based upon rules adopted by
the commission pursuant to the Hepburn Act amending section 20
of the interstate commerce act. That is why it has been done since
1907.
Mr. WETTLING. Yes, sir-well, I didn't think it necessary to refer
to the basic reason for it, but I know that that is the reason.
Mr. ESCH. It is based in law, not on an order of the Interstate
Commerce Commission.
Mr. THOM.. That is so.
The CHAIRMAN. But beyond that time the property account would
not necessarily mean the actual dollars that it cost the purchasing
company?
Mr. WETTLING. Yes, sir.
The CHAIRMAN. I say, beyond that period, the property account-
the change was made beyond that, and it might not mean what it
does now?
Mr. WETTLING. It might not absolutely mean that.
Now as to these western roads, it will be noticed that the rate
of return for 1915 was only 4.1 per cent; for 1916, 5.32 per cent;
and for 1917, 5.96 per cent, which was the only year in which the
danger mark set by the commission in 1915 was exceeded. The aver-
age for the period is 5.14 per cent, and is far below the 5.37 per cent
spoken of by the commission in its opinion.
Page 1 is in the nature of a recapitulation of the totaling for
these three sheets, regarding which I have been speaking, covering
eastern, southern, and western districts, and all roads comprised
within those statements. It shows in the aggregate the average
property investment for the three years 1915 to 1917; the average
operating income for each of the three years for each of the districts,
and the total for all roads, which on that basis show a return of only
5.22 per cent. If we take the property investment as it stood on
June 30, in proportion to the average operating income, or that
which it proposed to us as a standard, the rate of return would only
be 5.11 per cent. If we take the property investment as it stood on
December 31, 1917—and that is property which has been turned over
to the Government-then if we are restricted to the standard pro-
posed, the rate of return would only be 5.04 per cent.
The CHAIRMAN. Well, I suppose you understand that there is no
intention, so far as the bill is concerned, to take any particular desig
nated sum. We are just trying to arrive at a basis by which an
agreement contract can be made.
Mr. WETTLING. I understand that, but the trouble lies here that
it isn't this property which has earned the returns that are being
used—that is, tentatively-proposed to be used as a basis.
204 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. PAYNE. May I interrupt there? I wish, Mr. Chairman, you
would let him state the basis on which this return is reached. For
instance, in the eastern lines, for illustration, the Lehigh Valley
Railroad pays 10 per cent on 100. It is put down here as having
a net return of 5.16 per cent. Of course without some explanation it
could not pay that much out of that return. The Union Pacific, on
the western roads, is put down here as having a return of 6.72. It
pays a uniform rate of 8 per cent and has for years, and has paid extra
dividends for some time past, making it 10 per cent.
7
The Northwestern, on the western roads, pays a uniform rate of
per cent, and it is put down here as earning 6.13.
My suggestion is that you ask how the basis is arrived at.
The CHAIRMAN. Well, consider the question as asked then, how the
basis is arrived at.
Mr. WETTLING. The basis, as is shown in the statements here pre-
sented, is arrived at by taking the book cost of road and equipment
that is, the equipment of property-investment account and dividing
that into the net railway operating income. Now, the ability of a
road to pay greater dividends than the rate of return as shown on
the property investment lies in one of two or in both of two things.
In the first place a large percentage of its property may be covered
in its capitalization with a low rate of bond, and the difference be-
tween the rate of return earned on the entire property and the in-
terest that they are obliged to pay on those bonds accrues then to the
stockholder, and if the stock issue is comparatively small, varying
of course with the amount of the stock proportioned on the stocks and
bonds, the dividends will necessarily be raised. Other roads—some
roads—have also, in addition to that situation, investments and other
property or stock or bonds of other companies, from which they de-
rive a benefit, and which adds to the net income from railway opera-
tions. And the amount saved from the entire income above the pay-
ments for interest on bonds and a few other charges of that nature
are then available for the stockholder.
Mr. THOM. You say which adds to railroad operating income.
You mean which is added to.
Mr. WETTLING. Which is added to; yes.
Mr. TнOм. But it doesn't become a part of railroad operating.
Mr. WETTLING. No; it becomes part of the corporate income, but is
not part of the railroad-operating income. If a road, for instance,
had $10,000,000, let us say, of road and equipment account, and it
had $6,000,000 of bonds on which it paid 4 per cent, it would be pay-
ing out $240,000 a year for interest. If they had made 6 per cent
return on their $6,000,000, they would have left for the stockholder
$360,000 to divide into the $4,000,000 of stock, or 9 per cent.
1
Now, if, on the other hand, the situation was reversed, if they had
$4,000,000 of bonds, on which they were paying, let us say, 5 per cent,
they would pay out $200,000 for interest, and there would remain
$400,000 for $6,000,000 of stock, and the rate of return would be 63
per cent. The difference between the stock and the bonds-the ratio
in which stock or bonds are out, or the amount of interest that is
chargeable because of the payment on bonds, disturbs and changes
the ratio that may be paid to the stockholder out of the same rate of
return, as comparing one road with another. Does that answer your
question?
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
205
Mr. PAYNE. It is not for me to say. I just wanted to get the basis
of your statement.
Mr. WETTLING. That points out why there is a fluctuation in those
things, and why the apparent inconsistency may properly appear
that a road which earns a comparatively low rate of return-say 15
per cent can still pay a fair rate of interest on the stock itself.
The CHAIRMAN. Dividend, you mean?
Mr. WETTLING. Yes; a fair dividend. Now another road in exactly
the same territory, with the same potential earning power, might not
be able to pay the same dividends, because it had a larger percentage
or a smaller percentage of bonds, or a higher rate of interest to be
paid on its bonds. If, for instance, in the case I was citing, if they
had a 5 per cent return, or $500,000, and they had $5,000,000 of bonds
carrying 5 per cent, there would necessarily just be less 5 per cent
for the stockholders. But if they had a larger amount of bonds at a
lower rate of interest the difference saved in the payment of interest
on bonds inures to the stockholders.
Mr. BARKLEY. Let me ask you, is additional stock issued for these
increases in investments?
Mr. WETTLING. It is, of course, proper that there might be, or there
might be an issue of bonds. Frequently bonds are issued, and some-
times stock.
Mr. BARKLEY. Well, if the increases in investment, money and cap-
ital invested, are taken out of the money belonging to the company,
would additional stocks be issued to represent that increase in invest-
ment?
Mr. WETTLING. Yes; it depends very largely on the policy of the
road. They might think it is best to issue more bonds.
Mr. BARKLEY. It may or may not be done?
Mr. WETTLING. Yes; it may or may not be done. Some sort of
security is very apt to be issued.
Mr. BARKLEY. If it is not done, then, as a matter of fact, the capital
investment would represent a larger amount than the actual capital
stock out?
Mr. WETTLING. No; it would be-yes; and would show in its sur-
plus in that case.
Mr. BARKLEY. And in a case of that sort 5 per cent figured on the
actual capital invested might mean 6 per cent on the amount of stock?
Mr. WETTLING. Yes; that is true also. I didn't think to mention
that phase of it. That might be very apt to happen, and does happen
in many cases.
Mr. THOм. There is one conspicuous instance of that in the United
States, where the capital stock outstanding was about $12,000,000,
and the property investment of that same company was about $240,-
000,000-no, about $45,000,000-so that in that case there is a very
large dividend declared; whereas the earnings on the property in-
vested are very much more.
I wish also to state a fact in regard to a class of roads which is
illustrated by the Erie Pacific, referred to by Judge Payne. You
gentlemen will remember the historical fact that the Union Pacific
bought a large amount of stock from the Northern Pacific and of the
Great Northern some years ago, with the idea of bringing out a
combination between those roads. That was assailed and was finally
declared an unlawful thing to do by the Supreme Court of the
206 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
United States, and the Union Pacific was required to sell the stock
which it has thus bought in those roads. Well, meanwhile, it had
gone up so that the Union Pacific made a profit on that of $60,-
000,000. Now the return that they get from that $60,000,000 comes
into their treasury and enables them to pay quite a substantial part
of the dividend which they actually do pay. You will bear in mind
that what the Government takes over here is these railway operat-
ing properties. It does not take over all the corporate assets. It
takes over the railway operating properties. The investment ac-
count, as stated in these statements here, is of the railway operating
properties, and of them alone. The income which is placed against
them does not include income from other assets, but is the operating
income; it is an income that comes from the operating properties,
and the comparison betwen the two is the figures thus stated. It
has nothing to do with the amount of capital outstanding; it has
nothing to do with the amount of bonds outstanding; it has nothing
to do with any assets except the operating property assets; it has
nothing to do with any income except the income from the class of
property that is taken over.
Mr. ĚSCH. I recollect a figure sometime ago that the railroads
held about $2,000,000,000 of securities of other roads. Now, the in-
come of those securities do not appear in this statement.
Mr. THOM. No, sir; it does not.
The CHAIRMAN. Proceed, Mr. Wettling.
Mr. WETTLING. I was treating with this recapitulation. I don't
remember at what exact point I left off, but the investments as of
December 31, 1917-and which is the property which is taken over
by the Government-was $17,203,000,000 in round figures, as I have
stated before, partially estimated as to additions in the past six
months, for this group of roads here recapitulated.
The earnings as shown for the three year period were an average
of $866,214,884 per annum, which produced a rate of return of 5.04
per cent, or far below the danger point pointed out by the commis-
sion in 1915.
The CHAIRMAN. You keep referring to the "danger point," as
though there was a red flag up somewhere. I don't know exactly
what you mean by it.
Mr. WETTLING. Well, it was in the hearing or rather in the
opinion.
The CHAIRMAN. That was in the rate case?
Mr. WETTLING. Promulgated by the commission in the rate case.
The CHAIRMAN. This is not a rate case and is no parallel to it.
Mr. WETTLING. I understand, but it was merely indicative as to
what their opinion was of what ought to be earned by the companies.
The CHAIRMAN. That the roads were not getting enough money,
and therefore endangered their ability to serve the public?
Mr. WETTLING. Yes, sir.
The CHAIRMAN. And that is what is meant by the "danger point "?
Mr. WETTLING. Yes, sir. Now in order to maintain the rate that
was earned on the average property invested during that three year
period, of 5.22 per cent first referred to in this compilation, on the
property turned over to the Government, then relatively the stated in-
come on that as a basis should be instead of $866,000,000, $897,831,727
per annum for this group of roads.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
207
In order to produce the rate of returns shown as an average in the
statement presented by Mr. Anderson-which is an average of 5.031
per cent-but, of course, take the different group of roads-then the
income would have to be $913,479,300 average per annum for this
group of roads.
There has been prepared a statement, but there has not been time
to photograph it and get sufficient copies for distribution to the com-
mittee.
The CHAIRMAN. You can do that later on. We have got more
now than I think we will ever understand.
Mr. THOм. To save time, Mr. Chairman, I will present this paper
and explain it, if the committee will allow me.
We have gotten returns from a number of railroads as to the
specific thing that is mentioned in this paper, which is the rate of
return as is shown by the average for the years 1915, 1916, and 1917,
on the property values as of June 30, 1917; and we have compared
those for these roads mentioned on this paper with the returns for
single years back to 1903, and we have tabulated that and brought it
here for such use as it may be to this committee.
For example, I will read simply a single road only. The proposed
average rate of return for the three years mentioned on the property
investment values of the Pennsylvania Railroad as those values stood
on June 30, 1917, was 5.26 per cent. Then we show in another col-
umn that that figure was lower than the returns for the years 1903,
1904, 1905, 1906, 1907, 1908, 1909, 1910, 1911, 1912, 1913, 1914, 1916,
and 1917.
Now, on the other hand, we show that the returns for the Rutland
Railroad was 4.44 per cent, which was lower, simply for the years
1916 and 1917. But they are set out there in that column and we
thought it might be interesting for the committee to see it.
I will not ask the witness to explain that paper further, but will
ask to have it go into the record.
(The paper referred to follows:)
Rate of return for the 3-year average 1915, 1916, and 1917, compared with rate
of return of the 15 fiscal years 1903 to 1917.
Road.
Rate of
return.¹
As compared with rate of return 1903 to 1917.
EASTERN DISTRICT.
Ann Arbor.
3.03
Atlantic City.
2.34
Atlantic & St. Lawrence.
2.0?
Baltimore, Chesapeake & Atlantic.
1.17
Lower than-
1903, 1904, 1905, 1906, 1907, 1913, 1916.
1906, 1916, 1917.
1906, 1907, 1908, 1909, 1910, 1914, 1915, 1916.
1903, 1901, 1905, 1906, 1907, 1908, 1909, 1910,
1911, 191. 1913. 1914, 1915, 1917.
Bangor & Aroostook.
5.28
1903, 1904, 1905, 1917.
Bessemer & Lake Erie.
9.22
1910, 1912, 1913, 1916, 1917.
Boston & Maine..
4.75
Buffalo, Rochester & Pittsburgh.
5.41
1903, 1901, 1905, 1906, 1907, 1909, 1910, 1916.
1903. 1904, 1905, 1906, 1907. 1910, 1911, 1912,
1913, 1916, 1917.
Central R. R. of New Jersey....
6.75
1903, 1904, 1905, 1906, 1907, 1908, 1909, 1910,
1911, 1912, 1913, 1916, 1917.
Central Vermont..
4.39
1903, 1904, 1905, 1906, 1907, 1908, 1909, 1910,
1911, 1916, 1917.
Chicago & Eastern Illinois....
3.70
1903, 1904, 1905, 1906, 1907, 1908, 1909, 1910,
1911, 1912, 1916, 1917.
Chicago, Detroit & Canada Grand Trunk
Junction.
4.98
1916.
Chicago, Indianapolis & Louisville.
4.03
Chicago, Terre Haute & Southeastern.
3.77
1903, 1904, 1905, 1906, 1907, 1910, 1916, 1917.
1903, 1904, 1905, 1917.
Cincinnati Northern......
6.73
1916, 1917.
1 Per cent 3-year average net operating income 1915 to 1917 is of 1917 property investment.
2 Deficit.
208
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Rate of return for the 3-year average 1915, 1916, and 1917, etc.—Continued.
Road.
EASTERN DISTRICT-Continued.
Rate of
return.
As compared with rate of return 1903 to 1917.
Lower than-
Cleveland, Cincinnati, Chicago & St. Louis.
5.14
1916, 1917.
Cumberland Valley..
11.99
Delaware & Hudson....
6.64
Delaware, Lackawanna & Western..
7.19
Detroit & Mackinac.
4.80
Detroit, Toledo & Ironton..
.91
Detroit & Toledo Shore Line...
9.88
Detroit, Grand Haven & Milwaukee.
1.73
Elgin, Joliet & Eastern...
6.40
Erie System……….
3.55
Grand Rapids & Indiana….
4.03
Grand Trunk Western.
3.56
Hocking Valley..
5.83
Kanawha & Michigan..
6.49
J
Lake Erie & Western..
3.75
Lehigh & Hudson River
8.32
Lehigh & New England...
7.98
Lehigh Valley....
4.95
Long Island..
3.91
Maine Central.
5.07
Michigan Central..
5.35
Monongahela...
3.99
New York Central.
5.96
New York, Chicago & St. Louis.
3.03
New York, Ontario & Western..
2.31
1905, 1906, 1907, 1908, 1909, 1910, 1911, 1916,
1917.
1903, 1904, 1905, 1906, 1907, 1908, 1909, 1910
1911, 1912, 1913, 1914, 1915, 1916.
1903, 1904, 1905, 1906, 1907, 1908, 1909, 1910,
1911, 1913, 1916, 1917.
1913, 1914, 1916, 1917.
1903, 1906, 1907.
1916.
1903, 1904, 1905, 1906, 1907, 1908, 1909, 1910,
1911, 1912, 1916.
1906, 1910, 1912, 1913, 1916.
1903, 1904, 1906, 1907, 1910, 1911, 1914, 1916.
1903, 1906, 1907, 1909, 1916.
1906, 1907, 1909, 1916.
1903, 1905, 1906, 1907, 1910, 1911, 1912, 1913,
1916, 1917.
1911, 1912, 1913, 1916, 1917.
1916, 1917.
1910, 1916, 1917.
1914, 1915, 1916, 1917.
1903, 1904, 1905, 1906, 1907, 1908, 1909, 1910,
1911, 1912, 1913, 1914, 1915, 1916.
1903, 1905, 1909, 1910, 1916, 1917.
1905, 1907, 1910, 1915, 1916, 1917.
1908, 1909, 1910, 1912, 1913, 1916, 1917.
1905, 1906, 1907, 1908, 1909, 1910, 1911, 1912,
1913, 1914, 1915, 1916, 1917.
1906, 1916, 1917.
1903, 1906, 1907, 1908, 1909, 1910, 1911, 1912,
1913, 1916.
1905, 1906, 1907, 1908, 1909, 1910, 1911, 1913,
1916, 1917.
New York, Philadelphia & Norfolk..
8.93
1904, 1905, 1906, 1907, 1908, 1909, 1910, 1916,
1917.
Pennsylvania Co..
6.05
1903, 1904, 1905, 1906, 1907, 1908, 1909, 1910,
1911, 1912, 1913, 1916.
Pennsylvania R. R........
5. 26
Philadelphia & Reading..
Philadelphia, Baltimore & Washington..
8. 13
4.82
Pittsburgh & Lake Erie.
13. 18
Pittsburgh, Cincinnati, Chicago & St. Louis
4.93
(including Vandalia).
Pittsburgh Shawmut & Northern
1.76
Port Reading..
1.56
Rutland...
4.44
Toledo & Ohio Central.
3.99
Toledo, St. Louis & Western.
2.52
Ulster & Delaware..
2.13
Wabash...
2.87
Western Maryland..
2. 28
1903, 1904, 1905, 1906, 1907, 1908, 1909, 1910,
1911, 1912, 1913, 1916, 1917.
1905, 1906, 1907, 1910, 1913, 1916, 1917.
1903, 1904, 1905, 1906, 1907, 1908, 1909, 1910,
1916, 1917.
1908, 1909, 1910, 1911, 1912, 1913, 1916, 1917.
1903, 1904, 1905, 1906, 1907, 1908, 1909, 1910,
1911, 1912, 1916, 1917.
1903, 1912, 1913, 1916.
1904, 1905, 1906, 1908, 1909, 1910, 1911, 1912,
1913, 1915, 1916.
1916, 1917.
1903, 1904, 1905, 1906, 1907, 1908, 1909, 1910,
1911, 1912, 1913, 1916, 1917.
1906, 1907, 1908, 1910, 1913, 1916, 1917.
1903, 1901, 1905, 1906, 1907, 1908, 1909, 1910,
1911, 1912, 1913, 1916.
1906, 1907, 1910, 1914, 1916, 1917.
1908, 1909, 1910, 1911, 1914, 1916, 1917.
West Jersey & Seashore.
4.27
1903, 1904, 1905, 1906, 1908, 1909, 1910, 1911,
1913, 1916, 1917.
Wheeling & Lake Erie.
2.12
1906, 1907, 1910, 1911, 1912, 1914, 1916, 1917.
SOUTHERN DISTRICT.
Alabama & Vicksburg....
6.04
1903, 1904, 1905, 1906, 1907, 1908, 1909, 1910,
1911, 1912, 1913, 1916, 1917.
Atlanta & West Point....
6.46
1903, 1904, 1905, 1906, 1907, 1908, 1910, 1911,
1912, 1913, 1914, 1916, 1917.
Atlantic Coast Line.
4. 16
1903, 1904, 1905, 1906, 1907, 1908, 1909, 1910,
1911, 1912, 1913, 1914. 1916, 1917.
Central of Georgia.
Chesapeake & Ohio..
Florida East Coast.
4.83
1905, 1906, 1910, 1911, 1912, 1917.
5.55
1906, 1910, 1916, 1917.
4.92
1904, 1917.
Gulf & Ship Island..
Gulf Mobile & Northern.
Illinois Central..
4. 25
2.52
5.35
1903, 1904, 1906, 1910, 1911, 1913, 1916, 1917.
1911, 1914, 1916, 1917.1
1903, 1904. 1905, 1906, 1907, 1908, 1909, 1910,
1911, 1917.
Louisville, Henderson & St. Louis.
Nashville, Chattanooga & St. Louis..
¹ Construction not completed prior to 1907
4.37
1916, 1917.
8.12
1903. 1904, 1905, 1906, 1908, 1909, 1910, 1911,
1912, 1913, 1914, 1916, 1917.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
209
Rate of return for the 3-year average 1915, 1916, and 1917, etc.-Continued.
Road.
Rate of
return.
As compared with rate of return 1903 to 1917.
SOUTHERN DISTRICT-Continued.
Lower than—
Norfolk & Western..
7.65
Richmond. Fredericksburg & Potomac...
13.20
Tennessee Central..
.83
Washington Southern...
5.98
Western Ry. of Alabama..
5.03
1916, 1917.
1916, 1917.
1905 1909, 1910, 1911, 1912, 1913, 1914, 1916,
1917.1
1916, 1917.
1903, 1904, 1905, 1906, 1907, 1910, 1912, 1913,
1914, 1916, 1917.
Yazoo & Mississippi Valley......
6. 11
1916, 1917.
WESTERN DISTRICT.
Atchison, Topeka & Santa Fe System...
6.06
1916, 1917.
Bingham & Garfield.
16.17
1916, 1917.2
Chicago & Alton.
2.64
Chicago & Northwestern.
5.96
1903, 1904, 1905, 1906, 1907, 1908, 1909, 1910,
Chicago Great Western..
1.76
Chicago, Milwaukee & St. Paul..
4.57
1903, 1904, 1905, 1906, 1907, 1908, 1909, 1913,
Chicago, Peoria & St. Louis
2.03
Chicago, Rock Island & Gulf.
5.54
1903, 1904, 1905, 1906, 1907, 1908, 1909, 1910,
1916, 1917.
1913. 1916, 1917.
1903, 1906, 1907, 1916, 1917.
1914. 1916, 1917.
1903, 1916, 1917.
1907, 1911, 1912, 1913. 1917.
Chicago, Rock Island & Pacific..
4.62
1903, 1904, 1905, 1906, 1907, 1908, 1909, 1910,
1911, 1916, 1917.
Chicago, St. Paul, Minneapolis & Omaha....
6.38
1903, 1904, 1905, 1906, 1907, 1910, 1911, 1916,
1917.
Colorado & Southern.
3.04
1908, 1909, 1910, 1917.
Colorado Midland..
9.26
1903, 1904, 1905, 1906, 1907, 1908, 1909, 1910,
1911, 1912, 1913, 1915, 1916, 1917.
Denver & Rio Grande..
4.70
Duluth, Messabe & Northern..
13.34
Duluth South Shore & Atlantic..
1.22
Fort Smith & Western.
.70
Fort Worth & Denver City.
7.42
1903, 1906, 1907, 1908, 1916, 1917.
1903, 1904, 1905, 1906, 1907, 1908, 1909, 1910,
1911, 1913, 1916, 1917.
1903, 1904, 1905, 1906, 1907, 1910, 1911, 1918,
1917.
1903, 1904, 1905, 1906, 1907, 1911, 1912, 1917.
1910, 1916, 1917.
...
Great Northern.
6.57
1903, 1904, 1905, 1906, 1907, 1910, 1912, 1913,
1916, 1917.
International & Great Northern..
3.49
1905, 1907, 1912, 1913, 1917.
Kansas City Southern (including Texarkana
4.30
1907, 1909, 1916, 1917.
& Fort Smith).
Los Angeles & Salt Lake..
4.31
1916, 1917.
Louisiana & Arkansas..
3.37
Mineral Range.
4.09
1915, 1916.
Minneapolis & St. Louis.
3.86
Missouri & North Arkansas.
.08
Missouri, Kansas & Texas system
2.76
1903, 1904, 1905, 1906, 1907, 1908, 1909, 1910, 1911,
1912, 1913, 1914, 1915, 1916.
1907, 1916, 1917.
1903, 1904, 1905, 1906, 1907, 1917.
1903, 1904, 1905, 1906, 1907, 1908, 1909, 1910, 1911,
1913, 1914, 1915, 1917.
Missouri, Oklahoma & Gulf.
3.71
1908, 1910, 1911, 1912, 1913, 1917.4
Missouri Pacific system.
4.30
1903, 1905, 1906, 1907, 1913, 1917.
New Orleans, Texas & Mexico.
1.47
1917.5
Northern Pacific..
6.24
1903, 1904, 1905, 1906, 1907, 1908, 1909, 1910, 1916,
Quincy, Omaha & Kansas City..
.49
1917.
1903, 1916, 1917.
St. Joseph & Grand Island.
1.98
1906, 1907, 1908, 1916, 1917.
St. Louis, Brownsville & Mexico...
6.37
1917.6
St. Louis-Francisco system.
4.31
1907, 1913, 1916, 1917.
St. Louis Southwestern...
4.78
1913, 1917.
St. Louis Southwestern of Texas.
1.85
1905, 1907, 1912, 1913, 1917.
San Antonio & Aransas Pass..
1.54
1903, 1904, 1905, 1906, 1907, 1908, 1909, 1910, 1911,
1912, 1913, 1914, 1917.
San Antonio, Uvalde & Gulf.
1.17
1911, 1912, 1913, 1917.7
Southern Pacific & Proprietary Co's.
4.88
1907, 1309, 1910, 1911, 1916, 1917.
Texas & Pacific.
3.67
1904, 1905, 1906, 1907, 1910, 1917.
Texas Midland….
1.60
1903, 1905, 1906, 1907, 1909, 1913, 1917.
Toledo, Peoria & Western.
1.59
1903, 1904, 1905, 1906, 1907, 1908, 1909, 1910, 1911,
1912, 1913, 1916, 1917.
Trinity & Brazos Valley.
8 2.09
Union Pacific system.
6.61
1904, 1905, 1906, 1907, 1909, 1910, 1911, 1915.8
1904, 1905, 1906, 1907, 1908, 1909, 1910, 1911, 1916,
1917.
Vicksburg, Shreveport & Pacific………….
3.88
1903, 1904, 1905, 1910, 1913, 1917.
Wichita Valley…....
2.75
1906, 1907, 1908, 1909, 1910, 1911, 1915.
1 Operated by Illinois Central & Southern Ry., 1906, 1907, 1908.
? Began operation October, 1911.
8 Deficit.
• Began operation 1908.
5 First full year report 1911.
• Not in operation prior to 1905.
7 Began operation 1911.
8 Began operation 1904.
40958-18-
-14
210
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. THOM. I will also ask that the other statements that the wit-
ness has produced shall be inserted in the record.
(The paper referred to follows:)
· Rate of return of average net operating income for 3 years 1915 to 1917.
COMPUTED ON THE BASIS OF AVERAGE PROPERTY INVESTMENT, 3 YEARS, 1915 TO
1917.
District.
Average prop-
erty investment.
3 years.
α
Average net
operating in-
come, 3 years.
b
Rate of
return.
c=b÷a
Eastern district.
Southern district.
Western district.
All roads..
$6,798, 489,504
1.994, 968.353
7,801, 087.319
16, 597, 545, 176
$355, 402, 491
109,739,400
401, 072, 993
866, 214, 884
COMPUTED ON THE BASIS OF PROPERTY INVESTMENT AS OF JUNE 30, 1917.
Eastern district.
Southern district…………………….
Western district.
All roads..
District.
5. 23
5.50
5.14
5.22
Property in-
vestment,
June 30, 1917.
d
Average net
operating in-
come, 3 years.
Rate of
return.
b
e=b÷d
$6,963,721, 271
2,045, 956, 704
955, 580, 026
16,965, 258, 001
$255, 402, 491
5. 10
-109, 739, 400
5.36
401, 072, 993
5.04
866, 214, 881
5.11
COMPUTED ON THE BASIS OF ESTIMATED PROPERTY INVESTMENT AS OF DEC. 31,
Eastern district.
Southern district.
Western district…
All roads.
District.
1917.
Estimated
property in-
vestment,
Dec. 31, 1917.
Average net.
operating in-
come, 3 years.
Rate of
return.
f
b
g=b+f
$7,073, 000, 000
$355, 402, 491
5.02
2,085, 000, 000
109, 739, 400
5.26
8,045, 000, 000
401,0 2,993
4.99
17, 203, 000, 000
866, 214, 884
5.04
MILEAGE REPRESENTED.
58,979.57 of a total of 64,750 miles in the eastern district, or approximately.
32,693.19 of a total of 50,500 miles in the southern district, or approximately.
130,249.88 of a total of 142,750 miles in the western district, or approximately.
221,922.64 of a total of 258,000 miles in the United States, or approximately..
Per cent.
91.1
61.7
91.2
86.0
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS,
211
Net operating income and rate of return on investment: Years ended June 30, 1915, 1916, and 1917, and 3-year average.
[Net operating income-operating revenues less operating expenses, taxes, and net balances of equipment, joint facilities, and miscellaneous rents.]
EASTERN DISTRICT.
Net operating income June 30.
Property investment as of June 30.
Road.
Mileage
operated
3-year
June 30,
1917.
1917
1916
1915
average,
1915, 1916,
1917.
1917
1916
1915
3-year
average,
1915, 1916,
1917.
1917 1916 1915
Rate of return (per cent).
3-year
average,
1915, 1916,
1917.
Ann Arbor
295.56
Atlantic City
170.18
$452, 215
380,765
$662, 443
288.604
$480, 091
14,533
$531,583
227,967
$17,520, 864
9,739, 361
Atlantic & St. Lawrence..
166.70
1 524,033
357,812
Baltimore & Ohio.
|
4,545.23 23,024,569
27,015,381
160,014
23,004,389
12,069
9,063, 146
25,348, 113
559,609,920
$17,374,337
9,439, 810
8,990,022
546,069, 341
$17,319,272
$17,404, 824
9,402, 866
8,968, 122
2.58
9,527,352 3.91
9,007, 096 15. 78
3.81 2.77
3.05
3.06
.15
2.39
3.98 | 1.78
1.02
537, 847, 119
Baltimore, Chesapeake & At-
547,842,127 | 4.65
4.95
4.28
4.63
lantic
88.00
Bangor & Aroostook..
632.07
109,487
1,751, 724
1 18,413
54, 108
48,394
1,482,088
1,460, 521
1,564,778
4,132,817
29,635, 514
4,101,992
4,325, 539
186,783 2.65 1.45
1.40
1.16
Bessemer & Lake Erie..
204.81
4,821,025
5,441,924
3,972, 614
4,745, 188
51,446,537
29,641,054
45,359,056
29,497,427
29,591,332 | 5.91 5.00
4.95
5. 29
44,096, 063
Boston & Maine.
46,967,219 9.37 12.00
9.01
10.10
2,305.49
9,757,344 11, 988, 029
7,714,798
9,820,057
206,589, 121
203,476, 160
Buffalo & Susquehanna R. R.
203, 175, 352
204,413,544 | 4.72
5.89
3.80
4.80
Corporation.
237.12
741,548 687,969
354,343
Buffalo, Rochester & Pitts-
594, 620
10,631,234
10,671,828
10,654, 219
10,652,427 | 6.97 6.45 3.32
5.58
burgh.
586.65
3,514,823
3,679,019
2,631,210
3,275, 017
60,505,027
59,310, 424
58,791,661
Central New England.
59,535,704 5.81
6.20
4.48
5.50
301.30
1,558, 255
1,750, 121
1,171,584
1,493, 320
Central R. R. of New Jersey.
23,756,085
23,655, 603
683.75
9,714,059
10,059, 236
8,328, 570
9,367, 288
138,718, 576
131,316,695
Central Vermont
411.20
782,948
831,400
656,298
756,882
17,235,610
17,020,563
Chirago & Eastern Illinois.
26,483, 830
128, 297, 734
16,770,330
25,631,839 5.82
5.82
6.57
4. 42
5.61
132,777,668 | 7.00
7.66
6.49
7.05
17,008,834 4.54
4.88 3.91
4.45
1,131.39
4,064, 232
3,424,787
1,514,058
3,001,026
81, 133, 553
79,752, 851
Chicago, Detroit & Canadian
81,363, 443
80,749,949 5.01
4.29 1.86
3.72
Grand Trunk Junction..
60.00
160, 166
280,033
144,195
194,798
3,915,278
Chicago, Indianapolis
3,338, 436
&
Louisville
638.39
2,049, 800
1,776, 175
1,070, 840
1,632, 272
40,541,663
39,637,913
Chicago. Terre Haute &
3,190,335
39, 595, 959
3,481,350 4.09 8.39 4.52
5.60
39,925,179 | 5.06 4.48 2.70
4.09
So itheastern.
375.04
1,255,093
865,636
673, 298
931,342
24,707, 269
Cincinnati, Hamilton & Day-
ton (including C. I. & W.)..
943.21
1,667,225
Cincinnati Northern..
245.68
380, 423
1,625.343
388,009
Cleveland, Cincinnati, Chi-
cago & St. Lois.
2,386.91
11,805,699
Delaware & Hudson.
Cumberland Valley
Delaware, Lackawanna &
Western
164.00
•
$78.98
1,637, 781
6,475,473
8, 618, 438
12, 197, 815
1,488, 076
1 45,919
208, 227
5,989,511
768, 749
7,484, 971
1,082,550
325,553
9,998,008
1,298, 202
7,526,294
10,824, 461
106,492, 754
55,406, 144
4,838, 795
194,477,753
188,367,304
10,308, 715
101, 826, 419
24,927,762
54, 279, 142
4,686, 196
24,948, 753
24,861,261 5.08
3.47 2.70
3.75
56,030,776
4,071,066
55,238,687 3.01
3.001.08
· 1.96
4,532,019 | 7.86
8.28 5.11
7.18
955. 12 | 16,661, 182 17,339, 667
|
13,967,096 | 15,989,315
222,436,480 |
215, 208, 555
187, 205, 426
10, 129, 728
100, 749, 217
198,454, 390
190,016, 828 6.07
6.48
10,420,968 15.13 14.44
103,022,797 | 6.08
6.08 8.46
3.20
5.26
7.59
12.46
7.43
7.31
212,033,142 | 7.49
8.06 7.04
7.54
1 Deficit,
212
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Net operating income and rate of return on investment: Years ended June 30, 1915, 1916, and 1917, and 3-year average—Continued.
EASTERN DISTRICT-Continued.
Net operating income June 30
Property investment as of June 30.
Rate of return (per cent).
Road.
Mileage
operated
June 30,
1917.
3-year
3-year
1917
1916
1915
average,
1915, 1916,
1917
1916
1915
1917.
average,
1915, 1916,
1917.
1917
1916 1915
3-year
average,
1915, 1916,
1917.
Detroit & Mackinac.
382.90
·
Detroit, Toledo & Ironton
Detroit & Toledo Shore Line..
441.29
$344,156
283,957
$339, 237
399, 6:46
$259,082
1 67,519
$314,158
$5,543,657
$6,505,983
$5,465, 518
$5,505,052
5.26 5.21 4.01
4.83
205,362
22,587,370
21, 460, 591
21, 145, 011
21,730,991
1.30
1.90
1.32
.95
80.80
461, 122
564, 411
461, 179
Detroit, Grand Haven & Mil-
waukee.
190.52
1 139,611
462, 071
Elgin, Jo iet & Eastern.
800.59
2, 189, 887
4,003,013
Erie System
2,542.75
13,727,961
Grand Rapids & Indiana
575.03
940, 987
Grand Trunk Western.
347.05
959, 496
22,941, 912
1,068, 832
2,059,277
Hocking Vallev.
349.60
3,375,535
Kanawha & Michigan.
176.60
1,446.746
Lake Erie & Western.
900.06
2,043,476
Lehigh & Hudson River.
96.60
Lehigh Valley.
Long Island.
Maine Central.
Lehigh & New England.
Manistique & Lake Superior..
Michigan Central.
Monongahela.
296.14
1, 443. 13
397.00
Washington
1,219.53
65.67
1,861.77
8, 552.981
108.25
615, 154
New York Central..
6,082.76 58,381, 781
766, 580
66,817,829
17,133
5,608. 170
367,787
42, 718, 812
|
New York, Chicago & St.
Louis.
523.02
1,865, 962
3,402,598
New York, New Haven &
Hartford..
1.997.30
17,743.063
New York, Ontario & Western
568.46
New York, Philadelphia &
Norfolk.
112.00
Pennsylvania Co.
1,754.67
Pennsylvania R. R..
4.536.00
47,399.490
Pere Marquette..
2.250.09
3.857.544
Philadelphia & Reading.
1,127.22
17, 530, 308
Philadelphia, Baltimore &
718.00
11,040, 291
3,356,056
3,103,325
18,966
10,406,650
944, 743
1,115, 483
31,309, 309
2,668, 017
896, 592
1,305, 229
1,039.033
417,145
1,678, 807
525, 314
1,154, 357
10,535,073
45, 737, 807
20, 103, 063
44, 802, 169
6,315,481
14.470,624
212.982.358
3,187.404
81,608.224
2,954,685
58,290.026
"
1,467,430
1.175,615
18.632,232 | 17,743.063
2. 149, 397 2.264.678
13.744.788 | 20.546.470
| |
4,531, 707
18,824, 785
1,135,277
16,123.056
55.566, 989
4,683.486
1,885, 653
17.499,450
2,099, 909
1,238,408
583.286
999, 103
10.152,006
14,814,421
36,182,076
46,382, 852
2,735,877
3,758,969
11, 772, 294
4,754, 248
2,076, 363
3,787, 440
525, 792
1,178.877
10, 158, 277
3,253,363
3.243,334
38, 574
2,846, 828
1,572,347
1,953,914
633, 006
1,247.617
10, 060.471
358,005
53,240
2,005, 070
13, 953, 689
824, 410
327,677
1,781,688
1,036, 578
2,952, 794
2,517,395
125, 234
2,732,657
16,874,521
24, 891
8,073, 874
583,174
55,972, 807
2, 134, 612
11, 772,294 | 16,042, 462
7,219,472
42,665, 704
475, 965,049
23,463, 623
150, 922.375
14,602, 018
938, 704, 758
70,478, 101
295, 124, 302
90,899, 586
11,187,014
244,970.378
882,017, 585
91.910, 354
197, 283, 011
78,635, 200
6,917,249
41,990,846
471,936, 015
23, 152, 958
36,000, 130
43, 108, 801
19, 943, 025
43,220,174
6, 247.585
14,046, 859
203,294,660
80.300.838
57,551, 764
1,425, 925
144, 742, 284
14,142, 020
913, 733, 958
66, 044, 003
10,879, 884
237,315, 791
844.683.844
91,446. 091
195, 258, 762
74,666, 943
35, 409, 766
43,017, 756
20, 003, 830
43,019, 377
6.076, 515
12,801, 194
196.287, 316
57.304.334
1,421,895
142, 742, 055
89, 806, 247
10,533, 162
227,183,506
813,769, 574
91,500.297
193,495, 157
4,667,076
4,630, 558
4,599, 065
682, 233
9.88 12. 19
7.78
9.96
6,973,460
41,311, 419
469, 838, 905
22,724, 747
7,036,727 |¹1.93
6.68
.76
1.78
41,989,323
5. 13
9.53 4.85
6.51
472, 579, 990
2.88
4.86❘ 2.97
3.57
23, 113, 776
4. 01
4.62
3.63
4.09
34, 239, 735 |
3.06
5.72
.92
3.26
43, 954, 788
7.38
6.33 3.99
6.07
20,016.640
7.20
7.86 4.48
6.52
43,680, 573
4.56
4.52
4.52❘ 2.42
3.84*
79,243,261
6, 213, 194
13,772,892
204, 188, 111 4.77
80,384,108 3.99
57,715.375 | 5.60
1,438,417 2.63
8.33
10.13 6.86
8.45
8.15 8.88 8.10
8.38
5.43 5.30
5.16
4.18 | 3.73
3.97
5.40 4.39
5.12
1.33 1.20
1.73
146, 135, 571
5.67
6.95 3.93
5.52
8.316,374
906, 068, 794
64, 375, 176
12.353.471 4.21
919, 502, 504 | 6.82
5.42 4.42
4.72
7.31 4.72
6.09
66,965, 760 2.65
5.15 1.76
3.19
290.473, 164
90,701, 514
287,832.530291, 143,332 | 6.31 6.11
5.60
6.01
:
90, 469, 116 2.36 2.50 2.10
2.32
72,043, 191
10,866, 687
236, 489, 892
846, 823,658 | 5.37
91,618,914 4.20
195,345,644
75, 115, 111
10.51 11.38 5.54
5.61
9.19
8.66 4.47
6.26
6.58 4.45
5.48
5.12 2.99
4.10
8.89 9.64 6.08
8. 21
5.76 6.37 2.88
5.04
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
213
Pittsburgh & Lake Erie.
224.56
Pittsburgh & West Virginia..
63.31
9,557.871 | 12, 184, 461
377, 239 391,463
5,472, 704
9,071, 679
68, 809, 1,28
127,380
298, 701
28, 402, 124
61,169.804
55, 877, 150
55, 525,964
55,842,083
61,834,965 [13.89 (19.92 | 9.86
46,707, 119 1.33
14.67
.70
.23
.64
Pittsburgh, Cincinnati, Chi-
cago & St. Louis (including
Vandalia)
2,398.94 13,399, 883 | 12, 740, 301
7,985,071 11,375,081
230, 500, 657
223, 292, 515
219,578, 863
224,457,345
5.81
5.81 5.71 3.64
5.07
Pittsburgh, Shawmut
&
Northern
Port Reading.
220.51
21.16
236, 753
800.706
499,950
512.470
64.953
240, 619
259,564
1*8.379
Rutland.
468. 11
1,132.270
1,134.257
821,823
1,029, 450
Staten Island Rapid Transit..
23.54
158.633
411,557
467.930
346,040
Toledo & Ohio Central.
435.69
1,416.443
1,276.492
601,914
1,098 283
Toledo, St. Louis & Western
455.04
1,197,159
1,341,954
463,170
1,000. 761
Ulster & Delaware...
128.88
132,334
Wabash.
2,519.06
7,936. 028
West Side Belt.
22.63
285.505
222.464
7, 152.015
238,182
15.990
2,324. 058
45.810
Western Maryland..
775.43
3,944.506
3,395.916
1,930. 319
West Jersey & Seashore.
359.00
997.706
1,173,844
Wheeling & Lake Erie.
512.13 1,823,275
2.226.435
712 206
768.279
Total.
123.596
5, 894, 034
189.832
3,090.247
961,252
1,605,996
39.737.994
5.798.532
204,408.429
5.929.631
135, 294, 091
22.533,005
38,984.376
4,612.975
23,064, 228
7.305.415
26.671,611
39,381,687
5,780, 913
201,683,006
5,040.823
114,181,340
21, 404.904
66,686, 216
421,441,
58,979.57 370,372, 281 421, 441, 608 274,393, 584 355, 402, 491 6,963, 721, 271 6, 782, 719, 359 6, 643, 027, 883 6, 798, 489, 504 5.32
SOUTHERN DISTRICT.
29.046.681
38, 778,935
35, 603.331
.81 2.05 1.28
1.44
5. 231, 194
4,544, 240
4,816, 136
1.23
5.22❘ 5.71
3.91
23, 200, 622
22, 976, 471
23.080, 440
4.88
4.92 3.58
4.46
8. 235,591
7,201, 352
7,580, 786
1.93
5.63 6.50
4.56
27,523.263
23.431,139
26,875, 337
5.15
4.79 | 2.28
4.09
39.384.249
39,501,310
3.01
3.41 1.18
2.53
5,739, 540
194.065, 016
5, 772,995
200, 052, 151
2.28 3.85
2.79
2.14
3.88 3.55
1.20
2.90
5.030.479
107.828.315
5,333, 644
4.81
4.73 .91
3.56
119, 767,915❘ 2.92
2.97 1.76
2.58
20,943, 626
21,627,178 4.43
5.48 3.40
4.44
75, 719, 245
63,479, 533
69, 628.331
2.41 3.34
1.16
2.31
5.32 6.21
4. 13
5.23
Alabama & Vicksburg.
142.78
Atlanta & West Point.
93.19
$506,357
387, 782
$372,607
251,908
$149,985
139, 824
$342,983
259, 838
$5,678, 241
4,021, 330
$5, 486, 133
3,711,574
$5,448, 339
$5.537,571
3,663, 735
3,798, 880
8.92 6.79 2.75
9.64 6.79 3.82
6. 19
6.84
Atlanta Birmingham & At-
lantic..
640.42
668, 133
397, 161
9, 835
358,376
38, 654, 758
Atlantic Coast Line.
4,761.37
12, 803, 122
Carolina, Clinchfield & Ohio..
290.91
Central of Georgia
1, 918. 74
1,937,4 '1
4, 277, 192
3,276,272
Charleston & Western Caro-
lina..
342.50
604, 714
Chesapeake & Ohio.
2,379.53 | 15, 632, 737 |
Coal & Coke
197.30
269, 879
14, 269, 689
285,854
Florida East Coast.
758.62
3,094, 791
2,217,691
10,582, 732
1,781,370
551,687
7,667,877 |
1, 128, (25
2,611, 208
304,602
9,901,861
288, 021
1,749, 181
10,351,243 | 2 183,400,000
37,986.095
178,621,690
39,760, 150
38, 467.001
1.73
1.04
.03
.93
177,435, 398
179,819, 029
6.98
5.89❘ 4.30
5.76
1,615,619
59.698,692
58, 104, 612
57,855, 436
58,552, 914
3.25
3.07 1.95
2.76
3,388, 224
70,085, 307
68, 732, 997
67,743, 464
68,854, 256
6.10
4.77 | 3.85
4.92
2,353, 888
Georgia R. R. Lessee Organi-
zation
307.00
1,245,047
892, 893
515,713
884, 551
Gulf & Ship Island
307.56
620, 219
740, 458
450,416
603, 697
Gulf, Mobile & Northern.
402.39
Illinois Central
4,766.29
Louisville & Nashville..
|
623, 802
21,847,965 | 15,958,448
5,070.50 22, 136, 526 19,300, 529
645, 661
417,629
562, 364
11,791,783 | 16, 549, 399
Louisville, Henderson & St.
Louis...
199.80
503, 109
342,805
10,494, 940
178,299
17,310,665
341, 404
1 Deficit.
• Estimated by Bureau of Railway Fconomics.
3,984, 983
14, 120, 463
23,589, 618
294, 505.034
269, 693, 481
7,585, 140
8,311.032
47,826, 901
4,526,195
14, 168,200
* Property investment of Georgia R. R. not available. Figures shown include only net expenditures for betterments to leased property. Rate of return not computed and figures
omitted from total.
487,001
13,269,056
281.251
8,477,586
238, 866, 800
8,458,973
47,795, 990
8,309, 746
48, 207, 859
8.331,664
229, 246, 163
8,331,966
226, 578, 982
8, 164, 377
47, 476, 853
8,380, 405
7.14
7.14
6.62 | 3.66
5. 81
231,563,982
6.54 6.22 4.37
5.73
3.19❘ 3.43
6.47 4.60 3.68
3.53
3.38
4.92
5,767,504
14,214,053
22, 319, 074
309, 458, 700
288, 525, 965
7,809, 627
3,956, 098
14, 170, 083
23, 7.52,932
300, 120, 767
275, 992, 120
7,605, 712
(8) (3) (3)
4.36 5.23 3.18
(3)
4.26
23, 220, 541 2.79 2.72 1.77
301,361.500 | 7.08 | 5.32 | 4.00
278,070, 522 | 7.67 | 6.99 3.89
7,666,826 | 6.44 4.51 2.35
2.42
5.49
6.23
4.45
214
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Net operating income and rate of return on investment: Years ended June 30, 1915, 1916, and 1917, and 3-year average-Continued.
SOUTHERN DISTRICT-Continued.
Net operating income June 30.
Property investment as of June 30.
Road.
Mileage
operated
June 30,
1917.
3-year
3-year
1917
1916
1915
average.
1915, 1916,
1917.
1917
1916
1915
average,
1915, 1916,
1917.
1917 1916 1915
Rate of return (per cent).
3-year
average,
1915, 1916,
1917.
Nashville, Chattanooga & St.
Louis.
New Orleans Great Northern
Norfolk & Western
Norfolk Southern..
& Potomac..
1,236.53 $4,437,202 | $3, 333, 929
284.60 621.455
2,085.22 | 24, 250, 800 |
$1,865, 831
$3,212,321
679, 044
431,568
.577,356
24, 101.201 |
4,404,490 | 20.918.830
907.71 1,442, 079
1,332, 186
760,249
1, 178, 171
$39,577, 063
16, 190, 891
27.3, 458, 453
31, 206, 540
$37,616, 633
16,045, 669
264, 158, 811
31,097, 144
£35,558, 189 *
15,978, 861
256,759, 324 |
30,766, 518
$37,583,962 11.21
8.86
5.25
8.55
16,071, 807 3.84
264, 792, 196 | 8.87 9.12
4.23
2.70
3.59
5.61
7.90
31,023,401
4.62
4.28
2.47
3.80
Richmond, Fredericksburgh
87.68
1,508,866
1,237,911
840.940
Seaboard Air Line.
3, 458.00
Tennessee Central.
294.90
7, 152, 153
267,497
Virginian..
512.62
Washington Southern
35.57
Western Ry. of Alabama
133.42
Yazoo & Mississippi Valley.
Total.
1,382. 04
136,077, 860
32, 693. 19 136, 077, 860
6,888,: 21
170, 172
3,322,302
527,266
310, 185
3,892,099
5,323, 472
53.589
2, 199, 435
239,383
175,607
2,792, 801
116,769, 489
1, 195, 905
6, 454, 649
163,753
3,270, 017
499, 249
294, 737
3,900, 363
109,739,
4, 288, 313
731,098
398, 419
5,016, 189
9,058, 424
182, 650, 076
19, 727, 585
88,547, 358
8, 345, 146
5,855, 380
63,873, 688
8,920, 658
179,941,249
19,720, 705
87,620, 727
8,331,021
5,836, 492
8, 559,317
166.979,2:2
19, 704, 483
87,074, 898
116, 769, 489 | 76,370, 851 109, 739, 400 2,045, 956, 704 1,990, 182, 577 1,948, 765, 778 1, 994, 968,353 5.65
WESTERN DISTRICT.
8,846, 133 16.66 13.88 9.82
13.52
176, 523,516
3.92 3.83 3.19
3.66
19,717, 591
1.36 .86 .27
.83
87, 747, 661
4.84 3.79
2.53
3.73
8,314, 393
5,792, 203
8, 330, 187
8.76
6.33
2.88
5.99
62, 513, 322
62, 325, 934
5,828, 025
62,904, 315 | 7.85
6.80
5.31
3.03
5.06
6.23 4.48
6.20
5.87 3.92
5.50
8,107.82 | 26, 189, 101
1 133, 417
1,347, 559
3,539, 828
24,612,595
35,937,072
3, 178, 999
1 178, 949
739,086
1,941, 657
19,416, 280
25, 898, 851
2,270, 558
1 80, 291
1,206, 721
3,211, 453
23, 405,992
34,008,645
2, 976, 371
4, 198, 585
6, 535, 827
121, 639, 979
379, 759, 342
480, 039, 927
167, 704, 810
Arizona & New Mexico.
tern.
-$468, 181
Atchison, Topeka & Santa Fe. 11, 270. 17 49,066, 330
49,066, 330
Beaumont, Sour Lake & Wes-
71, 492
112. 24
$213, 460
$226, 296
43, 225, 500
43, 225, 500| 34, 903, 388
$302, 645
42, 398, 406
$4,585, 811
699, 362, 329
$4,512, 571
686, 626, 934
180.30
Bingham & Garfield.
36.07
1,533, 518
Chicago & Alton.
1,052.65
4, 152, 874
Chicago & North Western.
Chicago, Burlington & Quincy
Chicago Great Western.
9,372. 21
1,496. 06
40, 190, 013
3,479, 557
4,273,027
7,463, 907
121, 850, 554
392, 934, 562
495, 706, 043
168, 747, 868
Chicago, Milwaukee & St.
Paul.
10, 216.20
Chicago, Peoria & St. Louis.
Chicago, Rock Island & Gulf.
255.47
476.75
222, 546
905, 872
28, 162, 425
237,035
1,302, 171
29,739, 712
24, 127, 788
44,014
705, 624
27,343, 308
167,865
971, 223
598,066, 613
8, 261, 422
17, 535, 809
580, 467, 863
8, 227, 876
17,418, 408
$4,414, 392
680, 260, 153
4, 216, 523
6,617, 278
121,340,585
371,934, 060
477,777, 882
167,056,858
562, 510, 791
8,313,848
17,364, 564
$4,504, 258
688, 749, 805
10.21
4.73
7.02❘ 6.30
6.30
5. 13
5.13
6.72
6. 16
4, 229, 379
1.67 13. 18 14.24
6,872, 337 20.54 20.61 11.17
121,610,372 3.41 2.91
1 1.90
17.56
1.60
2.64
381,542, 655
484, 507, 951
167,836, 512 |
6.67
6.48 5.22
6. 13
8. 11
7.49 5.42
7.02
2.06
1.90 1.36
1.77
5.12 4.29
4.71
2.70
5.20 4.06
.53
2.03
5.57
580,348, 423 4.71
8,267,715 2.87
17,439,591 | 7.43
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS,
215
Chicago, Rock Island & Pacific
Chicago, St. Paul, Minneapolis
& Omaha.
Colorado & Southern.
7,645.30 | 19, 139, 506
|
14, 945, 485 | 11, 137, 706
15,074, 232
326, 391, 579
314,552, 420
1,752. 81
5, 136, 404
Colorado Midland..
1, 102. €0
337.64
Cripple Creek & Colorado
Springs..
116.73
Denver & Rio Grande
2,577.73
9,367, 222
Denver & Salt Lake
225.46
115, 173
Duluth & Iron Range.
272.62
Duluth, Missabe & Northern..
412.69
2,635, 501
7, 146, 394
Duluth, South Shore & At-
lantic.
600.35
711,679
El Paso & Southwestern..
1,028.44
ern
Fort Smith & Western.
Fort Worth & Denver City.
Fort Worth & Rio Grande.
Great Northern..
International & Great North-
Kansas City, Mexico & Orient.
Kansas City, Mexico & Orient
253.65
6,073, 454
136,993
454. 14
235.22
2, 545, 862
5,465, 981
3,371, 285
1 16,573
576, 639
2,486, 275
1 42, 899
577,301
9, 197, 734
410, 104
2,801,348
5,996, 785
743, 636
4, 107, 254
55, 872
2,028,558
4,310,003
1,649,919
1 13,925
4,970, 796
2,502, 493
¹ 24, 166
77,877,937
82, 212, 831
9, 202, 301
76, 471,861
82, 326, 345
17,931, 058
316, 597, 291
74,453, 223
82, 146, 925
17,931, 058
319, 181,430 | 5.86 | 4.75 | 3.52
4.72
76,267, 674 7.02❘ 6.72 5.79
82, 238, 700 4.10 3.02❘ 2.01
15,041, 472 1.18 1.24 1.08
6.52
3.04
1.16
493, 284
6, 488, 463
485,484
549,075
8,351, 140
10, 528, 323
177, 824,348
336, 920
27, 228, 387
1,802, 880
2,413, 243
28. (94, 534
2,980,502
5,374, 561
40, 278, 560
10, 556, 470
175,040, 641
26, 919, 638
27,354, 603
38, 982, 204
10,550,067
174,875, 404
26,687,331
25, 9:0, 339
34,664, 218
10,544, 953
175,913, 464
26, 945, 119
27, 329, 825
37,975,004
5.47 5.47 4.67
5.26 5.25 3.71
.42 1.75
.42
1.82
5. 21
4.75
1.25
9.18 10.25 6.95
17.74 15.38 | 8.60
8.83
14. 15
329,024
2,530, 643
594,780
48, 595, 092
4, 237, 117
53, 632, 114
53,649
82, 171
11, 753, 236
1,084, 304
1,886, 241
25, 416, 446
10, €50
8, 172. 68
29,263, 152
|
1 27,824
32, 233, 047
22, 851
1,892
8,093, 475
|
25, 694,388
|
29,063, 529
442, 108, 613
48, 167, 020
52, 596, 172
11,673, 857
25, 220, 615
8,087, 006
430, 990, 697
48,286, 490
52, 272, 021
11,559, 032
25,099, 537
8, 112, 147
427,698, 474
48, 349, 534
52, 833, 436
11, €62, 042
1.46
11.32
1.54 .68
1.23
7.81 4.84
8.02
1. 17
.48
.46
.70
25, 245, 533
10.02
8.04
4.32
7.47
8,097,543
34.י| 13.
.28
.02
433,599, 261 6.60 7.50
6.00
6.70
1,159.50
272.16
2,852, 892
¹ 14, 122
1, 157, 4€0
30, 221
260, 754
97,625
1,423, 702
37,908
40, 828,287
22, 153, 159
39,631,598
21, 998, 475
37,920, 718
39,460, 201 | 6.99
6.99❘ 2.92
.69
3.61
21,934, 524
22,028,719 1.06 .14 .45
.17
of Texas
465.71
51, 191
Kansas City Southern
836.51
4,267, 031
1 53,397
3,504,374
Los Angeles & Salt Lake.
1,154.17
4,052, 168
3,702, 997
1 3,010
2,867,649
2,487, 8€5
1 1,738
3,546, 351
3,414,343
6,583, 929
82, 410, 752
6,542, 303
81,092, 729
79,204,095
77,282,096
6,457,312
80,081, 726
76,595,540
6,527,848
.781.821.05
1.03
81, 195, 06.9
5. 18 4.32 3.58
4.37
Louisiana & Arkansas.
77, 693, 910
5.12
4.79
4.79 3.25
4.39
290.53
295,670
476,503
Louisiana Ry.& Navigation Co.
342.47
493,074
Midland Valley.
384.00
610,335
411, 170
452, 281
453,973
180,848
408,715
12.137,824
12,073,8€6
12,048, 618
12,086, 769
2.44
3.95 3.77
3.38
361,697
20, 963, €€5
20,888,622
20,695, 958
20,849, 415
2.35
1.96 .87
1.73
277, 198
446, 605
Mineral Range.
120.10
70,039
175,146
196,736
147,307
Minneapolis & St. Louis.
1,646.75
2,753, 484
2,843, 329
2,331, 021
2,642,611
Minneapolis, St.
St. Paul &
Sault Ste. Marie.
4,227.81
10,986,151
12,766, 104
Missouri & North Arkansas..
365.24
316,668
Missouri, Kansas & Texas..
1,744.30
Missouri, Kansas, & Texas of
Texas..
6,756, 213
10,445,395
13,775
5,889, 730
1,791.98
Missouri, Oklahoma & Gulf..
332.36
Missouri Pacific..
7,433.69
New Orleans, Texas & Mexico
191.22
543,546
3,189
Northern Pacific.
6,514.23
35,226, 140
Northwestern Pacific.
507.29
1,462, 400
32,770, 039
1,394,566
Quincy, Omaha & Kansas
City.
256.90
40,725
51,601
St. Louis,
Brownsville
&
Mexico
548.18
2,050, 016
St. Louis-San Francisco 2.
4,778.21
15,504, 249
535, 103
13,608, 185
1,921
394,620
31,416
577, 709
57.702
19, 290, 710
1 16,965
4,521,587
1 94,415
1 122, 808
11,869,571
89, 040
7,583,931
1 258,378
6,391, 391
1,375,738
í 186,001
11,878, 113
24,075, 288
815,527
619,678
1 83.702
14,346, 131
211,925
30, 690, 489
1,224, 164
17,478,515
3,605, 558
68,475, 074
183,348,371
18, 043, 905
172, 149, 892
66,310, 283
12,033,270
332,097, 079
14,423, 055
491,528, 661
66,335,274
3,577,821
68,000, 719
181,591,764
17,999, 405
170,025, 145
65,725,259
11,885,067
320, 406, 184
16,343, 107
488,984, 795
65, 748,544
3,385,978
67, 163, 049
64, 420, 344
11,293, 154
320, 122, 696
15,903,031
487,858, 217
50, 632, 776
6,519,372
182,018,693
18, 001, 294
170, 363,565
65,485,295
17,538,6€8
17,606, 502
17,541,228
3.49
2.57 1.57
2.55
3,523, 119
1.94
4.90❘ 5.81
4. 18
67,879,614
4.02 4.18 3.47
3.89
181,025, 945
17,960, 571
168, 915,657
6.CO 7.00 4.02
5.74
1.75
3.93
1.09 11.44
2.66 3.78
.08
3.46
.87 1.14 2.14
.95
11,737, 163
.48
11.03 11.65
1.71
324,208,653 | 5.81
3.70 3.71
4.42
15,556,398
3.77
.55
.02
1.36
489, 457, 224
7.17
6.70
4.93
6.27
60, 905, 531
2.20
2.12 1.61
2.01
6,429, 462
6, 458,027
6, 468,954
993, 246
11,247, 692 | 13,453,378
15,600
301,854, 097
St. Louis, San Francisco &
Texas.
15,519,281
279, 208, 926
15,514,730
277,277, 157
.63 .80
15,514,732 13.15 | 3.45
286, 113, 393
.03
.49
2.54
6.39
5.14 4.87 4.06
4.70
239.74
St. Louis Southwestern..
943.10
1 262,333
4,755, 045
1 309,551
3,272,387
1 378,538
2, 166, 639
1 316, 807
3,398,024
10,335, 153
71, 154, 458
10,344,590
70,832, 908
10,263,516
70,863, 269
10,314,420 12.53
70, 950, 212
12.99 13.69
6.68 4.62 3.06
13.07
4.79
1 Deficit.
2 Includes Brownwood North & South and Paris & Great Northern.
216
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Net operating income and rate of return on investment: Years ended June 30, 1915, 1916, and 1917, and 3-year average-Continued.
WESTERN DISTRICT-Continued.
+
Net operating income June 30.
Property investment as of June 30.
Rate of return (per cent).
Road.
Mileage
operated
June 30,
1917.
1917
1916
1915
3-year
average
1915, 1916,
1917.
3-year
1917
1916
1915
average,
1915, 1916,
1917.
1917 1916 1915
3-year
average,
1915, 1916,
1917.
St. Louis Southwestern of
Texas
San Antonio & Aransas Pass..
St. Joseph & Grand Island....
Southern Pacific and proprie-
tary companies.
723.80
257.93
810.50 $1,123,496
777,315
534,335
$507,920
$53,207
315,581
26,477
$561,541
373, 125
375,350
197,390
369,025
11,065.50
60,525,808 47,505, 699
35,777,080
Spokane International.
163.51
282,050
148,499
San Antonio, Uvalde & Gulf.
317.26
163,632
41,891
147,263
1 37,167
Spokane, Portland & Seattle.
554.73
2,451,086
Texas & Pacific.
1,944.07
5,770, 865
Texas Midland
125.15
72, 746
Toledo, Peoria & Western.
247.70
276, 712
Trinity & Brazos Valley.
368.80
Union Pacific System..
7,982.00
1 362, 760
44,714, 255
1 250, 501
40,837,400
1,817,764
3,910, 244
34,741
198, 234
1,253,222
2,735, 243
23,537
5('6
1 103,459
30, 150, 254
47,936, 196
192.004
56, 119
1,840, 691
138,784
4, 138, 784
43,675
158,504
1 238,907
38,567,303
$30,416, 206
24, 261, 428
18,609,441
981, 462, 443
10, 206, 531
4,802, 880
61, 175, 798
112,908, 200
2,731,588
9,986,561
11,426,986
583,036, 188
$30, 165, 911
24, 206, 486
18,355,529
959,845, 953
10, 200, 105
4,709, 462
61, 266, 414
109, 250, 903
2,762,899
10,023,573
11,785,891
570, 636, 971
$29,505, 192
24, 168, 605
18,311, 234
927,324,619
10, 189, 264
4,760, 196
60, 934, 885
108,387, 664
2,759,305
10,079, 704
11,777,956
$30,029,113 3.69 1.68
1.68 0.18
1.87
24,212,173 3.20 1.30 .11
1.54
18,425, 401
2.87 2.04 1.08
2.00
956,211,005
6.17
6.17 4.95 3.86
5.01
10, 198, 633
2.76 1.46 1.45
1.89
4,757,513 3.41 .89 1.78
1.18
61,125,699 | 4.01
110,182, 255
5.11
5.11
2.97❘ 2.06
3.58
3.01
2.52
3.76
2,751, 264
2.66 1.26 .85
1.59
10,029,946
2.77 1.93
.01
1.58
11,663,611 13.17 12.13 | 1.88
12.05
567, 982, 013
Vicksburg, Shreveport
573,885, 057
7.67
|
7.67 7.16 5.31
6.72
&
Pacific...
Western Pacific.
Wichita Valley.
171.47
950.41
256.90
637,493
3,094, 978
143,533
347,817
83, 928
1,973,655
623.884
131, 188
175,305
356,413
1,897,506
150,009
9, 186, 694
85,627,005
5,449,351
9,037,665
8,815, 443
9,013,267 6.94
3.84 .95
3.95
81,915,606
81,692, 265
5,497,043
5,489, 638
5,478,677 | 2.63
|
83,078,292 3.61 2.41 .76
2.39 3.19
2.28
2.74
Total...
130, 249.88 474,337,861 414,368, 820 314,512,299 401,072, 993
130, 249.88 474,337,861 414,368,820 314,512, 299 401, 072, 993
7,955,580, 026 7,783,363, 066 7,673,318,864 7,804.087,319 5.96
| 5.96
5.32
5.32❘ 4.10
5.14
1 Deficit.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
217
Property investment and net operating income for roads in eastern, southern,
and wstern districts, with aggregate average mileage operated for year ended
June 30, 1917, of 221,922.64 miles, being 86 per cent of estimated total railroad
mileage in the United States, for the years ended June 30, 1915, 1916, and
1917.
PROPERTY INVESTMENT.
Year ended-
Eastern
district.
Southern
district.
Western
district.
Total.
June 30, 1915..
June 30, 1916.
June 30, 1917..
Average of 3 years...
$6,649, 027, 883
6, 782, 719, 359
6,963,721, 271
6, 798, 489, 504
1, 994, 968, 353
$1,948, 765, 778
1,990, 182, 577
2,045, 956, 704
$7,673, 318, 864
7,783, 363, 066
7,955, 580, 026
7,804, 087, 319
$16, 271, 112, 525
16. 556, 255, 002
16,965, 258, 001
16, 597, 545, 176
NET OPERATING INCOME.
June 30, 1915.
$274, 393, 584
$76,370, 851
June 30, 1916.
421,441, 608
116, 769, 489
$314, 512, 299
414, 368, 820
$665, 276, 734
952, 579, 917
June 30, 1917..
370, 372, 281
136,077, 860
474, 337, 861
980. 788, 002
Average of 3 years……………….
355, 402, 491
109, 739, 400
401, 072, 993
866, 214, 884
1
RATE OF RETURN.
Eastern
Year ended—
district.
Southern
district.
Western
district.
Average for
three districts.
Per cent.
Per cent.
Per cent.
Per cent.
June 30, 1915...
4.13
3.92
4.10
4.09
June 30, 1916..
June 30, 1917...
Average of 3 years..
6.21
5.87
5.32
5.75
5.32
6.65
5.96
5.78
5.23
5.50
5.14
5.22
↓
MILEAGE REPRESENTED.
June 30, 1917.
58,979.57 of a total of 64,750 miles in the eastern district, or approximately 91.1 per cent.
32,693.19 of a total of 50,500 miles in the southern district, or approximately 64.7 per cent.
130,249.88 of a total of 142,750 miles in the western district, or approximately 91.2 per cent.
221,922.64 of a total of 258,000 miles in the United States, or approximately 86.0 per cent.
The property investment shown does not truly reflect the actual amount of
property in use and which, in fact, produced the net operating income shown,
the amounts stated being the totals at the end of each of the respective years,
whereas additions to the property are made through the year and, except
possibly as to added equipment, additions to property do not immediately
after installation add in their full proportion to the earning capacity of the
whole—thus the income for any year is produced rather by the property at the
beginning of the year, which is a lesser amount, than at the close thereof.
The property investment for the roads under consideration on December 28,
1917, the date of taking over by the Government, is estimated at $17,203,000,000,
which is $237,741,999 greater than property on June 30, 1917, $646.734,998
greater than property on June 30, 1916, $931,887,475 greater than property on
June 30, 1915, and $1,295,000,000 greater than property on June 30, 1914, the
latter amount being based on estimate of the property investment of these roads
at the beginning of the fiscal year 1915, and showing an average increase in
property investment during the period proposed as basis of standard return
and to date of taking over (33 years) of $370,000,000 per annum.
The basis for "standard return as calculated assumes the average of prop-
erty investment, taken at the end of each of the three fiscal years as being the
amount of property used to produce the average net operating income of
$866.214,884, and the amount of property investment so determined is $16,597,-
545,176, which is $605,454,824 less than the property taken over on December
28, 1917. The rate of return as a result of the use of these two averages is
5.22 per cent. In table submitted by Mr. Anderson, treating with Class I
218
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
roads, the rate of return found on same basis of averages is 5.31 per cent;
this rate of return is, however, not strictly comparable with the 5.22 per cent
found in the tables submitted by the railroads, because they do not both treat
with the same roads on the same mileage. A further slight variation arises
from the fact that miscellaneous rents are excluded in statement presented,
while ours do not; the exclusion of miscellaneous rents in tables presented by
the railroads would reduce the net operating income approximately $2.500 000
per annum and reduce the rate of return on basis of averages from 5.22 per
cent to 5.20 per cent.
The net operating income should be in proportion to the property used. If
the amount of average net operating income for the three years is arbitrarily
taken as the measure of compensation instead of an amount increased in
proportion to the increase in property, then the rate of return on property
taken over ($17,203,000,000) is only 5.04 per cent and acts as an arbitrary
reduction from 5.22 per cent, equivalent to $31,616,843.
In order that the property taken over for the roads considered shall produce
the same rate of return as the average of the three years, based on the average
property investment for the same years, the "standard return" would have to
be $897,831,727, as against $866,214 884, average net operating income earned
by the assumed use of average property investment June 30, 1915-1917. To
produce 5.31 per cent on property investment of roads under consideration in
railroad tables on December 31, 1917, the "standard return" would have to
be $913,479,300.
Property taken over is 103.65 per cent of 3-year average, 1915-1917, which
was $16,597,545,176.
Property taken over is 105.90 per cent of 3-year average, 1914-1916, which
was $16.245,125,842.
Property taken over is 101.40 per cent of property on June 30, 1917, which
was $16,965,258,001.
Property taken over is 103.91 per cent of property on June 30, 1916, which
was $16,556,265,002.
Property taken over is 105.73 per cent of property on June 30, 1915, which
was $16.271,112.525.
Property taken over is 108.14 per cent of property on July 1, 1914, which
was $15,908,000,000.
Comparison of data bearing on rate of return in fiscal year June 30, 1916, as
reported in the annual reports of the Interstate Commerce Commission for
1916 and 1917.
Operating revenues..
Item.
Operating expenses..
Taxes..
Income from operations.
Number of miles operated.
Ratio of mileage under trackage rights to mileage
Average income per mile operated.
without trackage figuros....
Average income per mile operated with trackage
figures eliminated..
Book cost of road and equipment.
2
Number of miles represented..
Average book cost of road and equipment per mile.
Rate of return operating income per miſe on in-
vestment per mile (per cent)..
Class I roads
only, as reported
on page 43 of
I. C. C. annual
report for 1916.
$3,370, 789, 396
$2, 204, 228, 637
$145, 539, 215
$1,021, 030, 544
228,896.51
14.72
$4,461.00
1 $4,671.00
$16,065, 597, 000
3 218, 579.55
1 $73,500
Class I, II, and
III roads, as re-
ported on page 37
of I. C. C. annual
report for 1917.
$3,472, 641, 941
$2,277, 202, 278
$151, 599, 841
$1,043, 839, 822
257, 544. 41
4.79
$4,053.00
$4,247.00
Difference result-
ing from more
complete data
a year later.
$101,852, 545
$72, 973, 641
$6,069, 626
$22,809, 278
28, 647.90
0.07
$108
$424
$17,525, 576, 908
$1,459, 979, 908
239, 392. 31
$73, 209
20, 812.76
$291
5.80
1 6.35
0.55
1 Estimated by Interstate Commerce Commission.
Computed by multiplying estimated investment per mile by the computed mileage without trackage
rights.
*Computed by dividing the operated mileage shown by 1.0472.
Applying the ratios found in the differences above shown as between first
estimate and final results for 1916 to the estimates for 1917, as stated in Inter-
state Commerce Commission Report, 1917, pages 36 and 37, the following
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
219
results are obtained as an estimate for all roads, as against estimates for class I
roads only:
Item.
Class I roads as
reported page 36,
I. C. C., 1917.
Estimated for all
roads on basis
stated.
Income from operation...
Miles operated including trackage rights..
Ratio of mileage under trackage rights to mileage excluding same..
Average income per mile, including trackage rights…..
Average income per mile excluding trackage rights.
Book cost road and equipment....
Milos of road raɔɔsented
Average book cost of road and equipment per mile of road.
Rate of return.
1 Estimated.
$1,069, 750, 514
230, 906.31
2 4.72
$1,092, 888, 000
1 258,000
24.79
$1,632
$1,236
$1,851
$1,411
$17,920, 507 500
241,500
$74,500
2 6.50
$74,205
2 5.94
2 Per cent.
Mr. THOM. Mr. Anderson asked me to hand Judge Payne any
papers that we might put in, and I will hand this to Judge Payne.
Mr. PARKER. Would it be convenient to give us the total of pages ·
2, 3, and 4 of this table?
Mr. THOм. I think that has been done.
Mr. WETTLING. Page 1 shows the general recapitulation.
Mr. PARKER. Now, I beg pardon; it does not show the different
totals of the different years.
Mr. WETTLING. I see what you mean; not for each of the years.
Mr. PARKER. I want the totals at the bottom there of each year—
the last line put in the three lines and add it up.
Mr. WETTLING. I will prepare the statement and send it in.
Mr. PARKER. I would be much obliged if you would do that.
The CHAIRMAN. You can prepare the statement and file it.
Mr. THOм. There is one matter that the witness desires to explain.
Mr. WETTLING. In the last printed report of the Interstate Com-
merce Commission, issued December 7, 1917, we have caused to be
photographed and enlarged pages 36 and 37. This shows the operat-
ing revenues, expenses, income, and mileage, and so on, for the year
<ended June 30, for each of the years, 1891 to 1917, inclusive; and for
the year 1917 it shows the rate of return, estimated, of course they
state that it is estimated-of six and one-half years. This figure seems
rather startling, and for fear that it might be given too much con-
sideration, I have made an adjustment based on the adjustment made
by the commission itself finally upon its receipt of full returns, as be-
tween the years 1916, in sort of a preliminary report, and as shown
here for 1916, after all the returns were in." The preceding report.
showed, in the relative same way, that this shows for 1917, a rate of
return for 1916 of 6.35 per cent. When the final figures are intro-
duced it shows a rate of return of 5.8 per cent. Relatively, and re-
ducing these figures on the same ratios that the reduction appeared,
as between 1916 and the present, would show the rate of return on this
basis for the year 1917 at 5.94 per cent, instead of 6 per cent.
I merely wished to call attention to that. I will give you the basis.
for the figuring.
In order that we may have it in the record I would like to state that
the estimated mileage in the first column, without making adjust-
ments for trackage rights, is 258,000. The mileage that we treat with
adjusted is 241,500.
220
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
The income from operation is $1,092,888,000; and the book cost of
the road and equipment is adjusted to $17,920,507,500.
Mr. THOм. Your honor, that is all we will introduce by this wit-
ness. I would like to file for such use as it may be to the committee,
a statement by Mr. George M. Shriver, vice president of the Balti-
more & Ohio, which is here, and which would be available to be read
in print by the committee. I will hand a copy of it to Judge Payne,
and instead of taking time to read it now I will simply put it in the
record if the committee will permit it.
The CHAIRMAN. Without objection that permission is granted.
(The paper referred to follows:)
MEMORANDUM BY GEORGE M. SHRIVER, VICE PRESIDENT THE BALTIMORE & OHIO
RAILROAD Co., ON BEHALF OF THE EASTERN CARRIERS.
[Jan. 18, 1918.]
Total mileage Class I roads of the United States_.
Mileage of roads herein represented (26 per cent).
EASTERN RAILROADS.
..
230, 906
60, 380
The eastern railroads as herein referred to are those roads the principal mile-
age of which is in the official classification territory and generally north of the
Ohio River and east of the Mississippi River. In all there are something over
100 eastern roads reporting to the Interstate Commerce Commission, but for the
purposes of this presentation affiliated railroads are grouped and comprise 38
systems, and in stating the results of operation, intercorporate payments are
eliminated. Consequently the figures herein are not directly comparable with
the statements submitted for the roads in the eastern, western, and southern
districts, which presentation gives the individual carriers and follows the dis-
trict grouping of the Interstate Commerce Commission.
BASIS. OF DATA.
The figures herein submitted are based on the exhibits of these carriers in the
so-called Five Per Cent and Fifteen Per Cent Rate Cases, and as to which the
commission said in its opinion in the Five Per Cent case (31 I. C. C., 350, p. 360,
1914): "The substantial accuracy of these figures was not questioned," and in
the Fifteen Per Cent case (45 I. C. C., 303, p. 317, 1917) the commission said "All
the statistical exhibits introduced by carriers and protestants have been care-
fully checked, just as far as checking was possible, from the annual and other
periodical and special reports filed with us by the carriers. There can be no
question regarding the fundamental accuracy of the statistical summaries upon
which we have primarily relied in this respect."
These exhibits disclose the " property investment of the carriers, the 66 net
operating income," and the percentage return from such income upon the invest-
ment in question.
PROPERTY INVESTMENT.
The property investment is a summary of those items in the balance sheet rep-
resenting the cost of road, equipment, and other physical property used in the
transportation service of the carrier and producing the net operating income.
It does not include material, supplies, and working capital, involving a large
amount of additional capital.
NET OPERATING INCOMES
The net operating income, as used herein, is the amount of the gross revenues
derived from the operation of the properties utilized in the conduct of the car-
riers' transportation service, remaining after charging against said revenues all
operating expenses, including charges for maintenance, renewals, and depreci-
ation, taxes on the property used in the service or the revenues or income there-
from, and after debiting or crediting the net amount of hire of equipment and
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
221
joint facilities and miscellaneous rents (but not rent of leased lines); in other
words, the net income applicable to the payment of rental upon leased lines and
what, with the "income from other sources," constitutes the "net corporate
income" applicable to the payment of interest, dividends, and for surplus.
NOTE. The operating income herein shown is substantially as suggested for
the so-called "standard return," except that it includes generally debits and
credits arising from the account called "miscellaneous rents" but does not in-
clude leased road rents," and other adjustments may be necessary to accord
with the "standard return."
BASIS OF COMPENSATION.
The President, by proclamation, took possession and assumed control of the
transportation systems of these carriers at 12 o'clock noon on the 28th day of
December, 1917, but for the purposes of accounting, such possession and con- .
trol is to date from 12 o'clock midnight on December 31, 1917.
The suggested method of compensation is through a guaranty to the carrier
that during the period of Federal control it shall receive as its just compen-
sation an income at an annual rate equivalent as nearly as may be to its average
net railway operating income for the three years ending June 30, 1917, computed
as to carriers making returns to the Interstate Commerce Commission from
such returns, excluding, however, debits and credits arising from the accounts
called in the monthly returns "leased road rents" and "miscellaneous rents."
RETURN ON PROPERTY INVESTMENT.
In its report in the Five Per Cent case the commission stated with respect
to the operating income in relation to property investment:
"The carriers while exhibiting their returns in net corporate income, have
very properly placed greater dependence upon the net opeating income as the
measure of the sufficiency of their returns; and we shall use the net operating
income of these carriers as the product of transportation rates that should be
examined in order to determine, so far as we may, the adequacy and tendency
of their revenues."
The statement (Exhibit B) shows the net operating income of the thirty-
eight systems combined for the years June 30, 1903, to 1917, inclusive, in re-
lation to the property investment and the percentage return. There is also
shown the net operating income averaged for the years to June 30, 1915, 1916,
and 1917, in relation to the average property investment for the same three
years, and in relation to the property investment at June 30, 1917, and in re-
lation to the estimated property investment at December 31, 1917.
Before considering this statement attention is called to the large capital in-
vestment required in railroad transportation to produce $1 of earnings. For
the roads in the United States $5 of invested capital produces $1 of gross earn-
ings. In the eastern district it requires $4 of invested capital to produce $1 of
gross revenues. In other words, for all the roads of the United States the
gross revenues produced was 20 cents per dollar of capital invested. Comparing
this with a few important industries according to the census of manufactures
of 1909, we find there the following relations:
Bituminous coal
Anthracite coal…….
Packing house products
Milling
Oil refining-
Automobile___.
Blast furnace
Rolling mill
Cents per dollar.
40
60
339
248
130
132
80
47
It might be inferred that this simply indicates that the railroads were over-
capitalized but it is noted that the Pennsylvania Railroad which is generally
considered one of the most conservatively financed roads and as some authori-
ties has suggested is undercapitalized, has a return of 29 cents per dollar in-
vested. The Baltimore & Ohio Railroad Co., with whose property investment
account I am familiar, had gross earnings in 1917 of 22 cents for each dollar of
invested capital. Mention might also be made of the New York Central, 26
cents; Norfolk & Western, 24 cents; Chesapeake & Ohio, 21 cents; and the
Lehigh Valley, 25 cents-all in the eastern district.
222
FFDERAL OPERATION OF TRANSPORTATION SYSTEMS.
That vast sums should have been invested in the carriers' bonds, bearing in-
terest averaging but 41 per cent, in an enterprise producing such small gross
revenues compared with invested capital could only have been because of the
feeling of an assured income, while investments in stock of the enterprise was
no doubt in the expectation generally of a reasonable return and that with the
development of the country and the growth of business there would not only be
fair but liberal returns.
The suggested method of compensation contemplates giving each carrier its aver-
age net operating income for the three years ending June 30, 1915, 1916, and 1917.
So far as the 38 eastern railroad systems are concerned, the year ending:
June 30, 1915, was, with the one exception (1914), the worst year that the
eastern railroads had in the last 18 years. The net operating income of 1915
of the entire 38 systems was $296,000,000, and was less than the net operating
income of the years 1906, 1907, 1909, 1910, 1911, 1912, and 1913, notwithstanding
since 1906 there has been an increase in investment of over $1,790,000,000. The
return on the investment for the year June 30, 1915, was only 4.34 per cent, which
is less than the return in any year, except 1914, in the last 18 years.
The year ending June 30, 1916, was the first really good year that the eastern rail-
roads have had since 1910. It not only was the year of largest operating revenues
but was also the year of the largest net operating income, and the return on prop-
erty investment was 6.53 per cent, or the highest return in the 18-year period.
Reference has been made to 1916 as an "extraordinarily prosperous year." It
should be recalled in this connection that between 1913-the previous "peak
year in business-and 1916 these carriers had added more than $500,000,000 to
their property investment, and so were enabled when traffic offered in 1916 to
handle about 12 per cent more business than in 1913, and, as was demonstrated
in 1917, were capable of performing even larger service. The returns for 1916
therefore would seem to only represent the fair earning value of the plant, to
which further large additions were made to December 31, 1917.
The year ending June 30, 1917, showed a still further increase in operating
revenues over 1916, but the still larger increase in operating expenses, due to
the severe weather conditions prevailing in January, February, and March, and
to increases in the cost of labor, fuel, and material, offset in part only by
increased rates, reduced the net operating income return on property invest-
ment to 5.71 per cent, so that it was less than the return for the years 1906,
1907, 1910, and 1916, and very many of the eastern railroad systems showed a
lower return than in many of the preceding years. For example, in the case of
the Baltimore & Ohio Railroad system the return in 1917 was lower than the
return in 1903, 1904, 1905 1906, 1907, 1909, 1910, 1912, and 1916, and the return
for the Pennsylvania system was lower in 1917 than in any year from 1903 to
1910, inclusive, and lower than 1916.
The average of the net operating income for the 38 systems for the three
years ending June 30, 1917, amounts to $384,840,150, and in relation to the
average investment during the three-year period only affords a return of 5.54
per cent, or less than the returns for the years 1902, 1903, 1905, 1906, 1907, 1910,
1916, and 1917, but consideration should be given to the return such as average
yields on the investment which existed at June 30, 1917, and to the investment
at December 31, 1917.
1
When related to the investment as of June 30, 1917, the return afforded by the
suggested guaranty is by 5.41 per cent, or less than the years 1903, 1905, 1906,
1907, 1910, 1916, and 1917, and when related to the investment at January 1,
1918 (estimated), shows a return of only 5.33 per cent.
In this connection attention is called to the following comment by the Inter-
state Commerce Commission (Five Per Cent Case, 31 I. C. C., p. 371) :
"The ratio for 1913 is shown at 5.36 per cent.¹ This is below the average
for the entire period (1900 to 1913, inclusive), which was 5.64 per cent, and only
slightly higher than the ratio for 1900, although the property investment during the
period increased 59 per cent, while the operating revenues increased 110 per cent."
And the commission found (31 I. C. Č., p. 384):
“In view of a tendency toward a diminishing net operating income, as shown
by the facts described, we are of opinion that the net operating income of the
railroads in official classification territory, taken as a whole, is smaller than
is demanded in the interest of both the general public and the railroads."
There is attached statement which shows for each of the three years June 30,
1915, 1916, and 1917, and the average for the three-year period, the property in-
vestment, net operating income, and rate of return for each of the 38 systems.
1 Carriers' revised figures show 1913 ratio at 5.19 per cent.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 223
In addition, there are shown the years in which the rate of return exceeded the
average for the three-year period 1915-1917.
There is also submitted a statement showing for the 38 systems the property
investment, capital obligations, and income, based on average net operating
income rate of return, three years ended June 30, 1917, applied to property
investment June 30, 1917. The net operating income (column 3) is arrived at by
scaling up the earnings of the three years June 30, 1915, 1916, and 1917, taken
as test period, to the property investment at June 30, 1917, affording the prop-
erty at that date the same return as the average return for the three years,
and takes no account of additional investment to December 31, 1917, which is
shown, however, in footnote on this statement. This footnote indicates an
annual net operating income of $400,685,207, and there is attached an approxi-
mate condensed income account based on this net operating income. The avail-
able surplus, after providing for interest on new obligations and additional
income tax, is estimated at $71,643,110. Deducting appropriations for additions
and betterments on the basis of the average for the three years leaves a balance
unappropriated surplus of $37,373,481, equal to 1.33 per cent on the capital stock
and a margin of only 0.53 per cent on total capital obligations.
A memorandum has also been prepared, and is attached, showing for the 38
systems the net income return on capital stock for the three years ended June
30, 1917, and averaged, and showing approximate disposition of such net income
averaging the several items for the same three-year period, and showing the
final unappropriated surplus averaged for the three years.
Stating the case in dollars instead of ratios, we get the following results:
The property investment averaged for the three years to June
30, 1917
The property investment at June 30, 1917, was- $7, 116, 424, 426
The additional investment in road and equip-
ment, 6 months, July 1, 1917, to Dec. 31, 1917
(partly estimated), was….
Making a difference of.
$6, 950, 412, 492
110, 000, 000
7, 226, 424, 426
276, 011, 934
which has been added to these properties during a period of high interest rates
and for which the suggested basis of compensation makes no allowance. This
bears with particular severity on those roads which have added largely to their
facilities since January 1, 1917.
As a concrete example:
The Baltimore & Ohio R. R. Co., in an effort to meet the pressing
demands for service early in 1917, contracted for 40 locomotives,
100 steel passenger cars, and 4,000 freight cars, at a total cost of $10, 000, 000
None of this equipment was delivered prior to June 30, 1917,
but a large part of it was delivered by Dec. 31, 1917.
In six months to Dec. 31, 1917, that road also expended for new
construction and betterments over_.
Or a total of over..
5, 000, 000
15, 000, 000
In addition to the expenditures already mentioned, amounting to-- 15, 000, 000
The company expended for additions and betterments for the six
months, Jan. 1 to June 30, 1917, which were not completed, and
from which it received no benefit whatever in its earnings to
June 30, 1917___
Total___.
Some of these items are for:
5, 000, 000
New yard and coal-handling plant, New York.-
New line to shipbuilding plant, Baltimore_.
Capital cost in restoration of piers, Baltimore.
New pier just completed, Baltimore….
New second track on Chicago division_.
Tracks at cantonments, Admiral, Md., Chillicothe, Ohio, and other
points
With miscellaneous items, all aggregating over
Which with new equipment_-
Total
20, 000, 000
1,100,000
580,000
1, 020, 000
1,050, 000
1, 445, 000
450, 000
10, 000, 000
10, 000, 000
20, 000, 000
224
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
for new road and equipment available for use under the Federal operation, but
for which no compensation whatever is provided under the three-year guaranty
basis.
To provide for the cost of these facilities the railroad company has issued
its notes and equipment obligations and hereafter must meet the increased
interest charges
charges and annual equipment
annual equipment trust installments, aggregating
$2,000,000.
and
There are no doubt many instances where boards of directors have taken
similar action with the view of meeting, first, the obligations of the company,
and second, in anticipation of remunerative return to their shareholders.
In the absence, under the suggested basis of compensation, of provision for
allowance for additional investments of this character, it would clearly not be
practicable from the standpoint of the owners of the properties (notwithstand-
ing every desire to cooperate with the Federal authorities in the prompt disposi-
tion of a question having such wide and important bearing upon the financial
situation) to make voluntary agreements, but they would be compelled to
proceed under the exceptions provided.
The attention of the committee is also directed to certain other factors which
are of importance in this connection. These are:
(a) Instances during the period taken as a standard where the net operating
income of a particular carrier was seriously affected because of fire, floods,
failure of crops, or other emergency beyond its control.
(b) Instances where for all or any part of the period railroads have been
operated in the hands of receiver pending reorganization, and where the average
operations are not fairly representative of what has been demonstrated as the
earning power of the particular properties acquired by the reorganized company.
(c) Newly constructed roads not completed or in operation for the entire
period and which may still be undergoing development.
TO SUMMARIZE.
1. The suggested basis of compensation gives the carriers in the eastern dis-
trict less actual income than they received from the operations of their proper-
ties in several years prior to 1917, and a basis of return upon their property
investment less than that realized in a majority of the preceding 15 years.
2. The three-year average of net operating income is a flat sum and does not
properly allow for the increase in investment between June 30, 1915, and June
30, 1917, and makes no provision for additional investments made between June
30, 1917, and December 31, 1917.
EXHIBIT B.
Property investment, net operating income, and rate of return combined 38
systems.
Fiscal year.
Net operating Rate of
income.
return.
Property
investment.
1903
$4,460, 460,311
$251,332, 065
5.63
1904.
4,599, 134, 582
244,654, 734
5.32
1905.
1906.
1907.
1908.
1909..
1910..
1911.
1912..
1913.
1914.
1915..
4,789, 302, 878
5,016, 827, 089
5. 296, 796, 951
5. 166, 992, 058
5,555, 912, 661
5,828, 767, 319
6, 151, 783, 755
6,305, 907, 004
6,501, 134, 708
6,714, 375, 811
6,804, 462, 894
266, 880, 079
5.57
305,073, 665
6.08
318,925, 611
6.02
275,665, 826
5.04
296, 006, 015
5.33
352,658,
352, 658, 176
6.05
310, 490, 963
5.05
316,316, 092
5.02
337, 474, 829
5.19
260,544,936
3.88
295, 998, 383
4.34
1916.
6,916, 147, 918
451, 457, 424
6.53
1917..
7, 116, 424, 426
406, 461, 566
5.71
3-year average, 1915-1917...
6,950, 412, 492
384, 840, 150
5.54
3-year average for net operating income, property investment,
for 1917...
7,116, 424, 426
384, 840, 150
5. 41
3-year average for net operating income, property investment,
Dec. 31, 1917 (estimated).
7,226, 424, 426
384, 840, 150
5.33
The return in each year in relation to the average return is shown graphically
in chart, Exhibit A, attached.
COMBINED THIRTY-EIGHT SYSTEMS
RATE OF RETURN FISCAL YEARS 1900 TO 1917 INCLUSIVE
Yearly trend
Three year periods
Three year average
JEN
EXHIBIT A.
faith a sing
1900
1901
1902
1903
1904
1905
1906
1907
1908
1909
1910
1911
1912
1913
1914
1915
1916
1917
7.5
7.5
Per
cont
7.0
6.5
6.0
5.5
5.33
5.0
4.5
4.0
Per
cent
7.0
6.5
6.0
5.5
5.33
5.0
4.5
4.0
COMBINED 38 SYSTEMS
Fiscal
Property
year
investment
3.5
Net
operating
income
Rate of
return
3.5
1900
#4 008 422 530
1901
4 164 118 879
1902
4 253 463 863
$208 547 135
222 893 347
235 850 240
5.20
5.35
5.54
1903
3.0
1904
4 460 460 311
4 599 134 582
251 332 065
244 654 734
5.63
5.32
3.0
1905
4 789 302 878
266 880 079
5.57
1906
5 016 827 069
305 073 665
6.08
1907
1908
5 296 796 951
5 466 992 058
318 925 611
6.02
275 665 826
5.04
1909
5 555 912 661
296 006 015
5.33
2.5
2.5
1910
1911
5 828 767 319
6 151 783 755
352 658 176
6.05
310 490 963
5.05
1912
6 305 907 004
316 316 092
5.02
1913
1914
6 501 134 708
6 714 375 811
337 474 829
5.19
260 544 936
3.88
2.0
1915
1916
1917
6 808 909 371
6 921 385 242
7 121 776 144
295 998 390
451 457 434
406 461 565
4.35
2.0
6.52
5.71
1.5
Period averages
Three year
1900 to 1902
1903 to 1905
1906 to 1908
1909 to 1911
1912 to 1914
1915 to 1917
4 142 001 757
4 616 299 257
5 260 205 366
5 845 487 912
6 507 139 174
6 950 412 492
222 430 240
254 288 960
299 888 367
319 718 384
304 748 619
384 840 150
5.37
5.51
1.5
5.70
5.47
4.58
5.54
Dec 31, 1917
7 226 424 426 384 840 150
5.33
1.0
1.0
* Represents equated average net Operating
Income 3 years, 1915, 1916, and 1917.
0.5
0.0
40958-18.
(Face p. 224.)
Bureau of Railway Economies
Washington, D.C.
January, 1918
0.5
0.8
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
225
40958-18
-15
Net operating income.
Property investment.
Rate of return.
Num-
ber of
years
which
ex-
3-year average rate of re-
turn compared with
yearly rates of return
during the 15 years, ceeded
1963 to 1917, was less
than the yearly rate
in-
the
3-yr.
av.
Road.
1915
1916
1917
Average,
3 years.
1915
1916
1917
Average,
3 years.
Av.
1915 1916 1917 3
yrs.
Ann Arbor.
Baltimore & Ohio.
$479,062
23,472,31
$664, 981
$452,995
$532, 34(
27,426,938 26,183,202 25, 694, 15:
$17,319,272 $17,374,337
545,048, 471 553,374, 756
$17,520, 864
$17,520,864
567,845, 511
Bessemer & Lake Erie.
Boston & Maine.
3.972.685
Buffalo & Sus-
quehanna.
Buffalo, Rochester &
Pittsburgh.
5,441.923
7,714, 797 11,988, 028
274,646 687, 968
2,631,660 3,679, 019
4,821,025
9,757, 344
4,745, 211
43,650.302
9,820, 056
203, 340, 585
44,913,295
203, 496, 288
741,548
3,514, 823 3,275, 167
568, 054
17, 763, 390
56, 287, 958
10, 671, 828
56, 413, 113
9
59
5
27
5
14
4
13
3
8
4
10
1
7
14
51,000, 776
206,589, 121
10,631,234
57, 210, 215
26, 688, 225
106,165,883
229,246, 163
39,637,913
238.866,800
40,541,663
$17,404, 824 2.77 3.83 2.58 3.06
555,422, 913 4.31 4.96 4.61 4.63
46,521, 458 9.10 12.12 9.45 10.20
204, 475, 331 3.79 5.89 4.72 4.80
13,022,151 1.55 6.45 6.97 4.36
56, 637,095 4.68 6.52 6.14 5.78
26,330, 722 4.49 6.69 5.84 5.67
102, 131, 349 8.56 01.07 9.45 9.37
231.563,982 4.37 6.22 6.54 5.73
39,925,178 2.70 4.48 5.06 4.09
1903, 1905, 1906, 1907, 1916.
1903, 1904, 1905, 1906,
1907, 1909, 1910, 1912,
1916.
1910, 1916.
1903, 1905, 1906, 1907 1909,
1910, 1916.
1903, 1904, 1905, 1916, 1917
1903, 1904, 1905, 1906,
1907, 1908, 1909, 1910,
1911, 1912, 1913, 1914,
1916, 1917.
1912, 1913, 1916, 1917.
1903, 1904, 1905, 1906,
1907, 1908, 1909, 1910,
1911, 1912, 1913, 1916,
1917.
1910, 1916, 1917.
1903, 1904, 1905, 1906,
1907, 1910, 1916, 1917.
1903, 1904, 1905, 1917.
24,861, 261| 2.70 3.47 5.08 3.75
45, 770, 528 (¹) | 3.72| 2.74| 1.88| 1903,
3.72 2.74 1.88 1903, 1904, 1905, 1906,
1907, 1910, 1911, 1912,
1916, 1917.
14, 202, 240
.96 3.78 3.00 1917.
8,204, 469 3.56 3.48 3.25 3.43
112, 705, 072 6.92 7.86 5.81 6.85
1904, 1911, 1912, 1913,
1914, 1915, 1916.
1903, 1904, 1905, 1906,
1907, 1908, 1909, 1910,
1911, 1912, 1913, 1914,
1915, 1916.
Central New England
Central Railroad of
New Jersey.
Chesapeake & Ohio.
Chicago, Indianapolis
& Louisville.
Chicago, Terre Haute
& Southeastern.
Cincinnati, Hamilton &
Dayton.
1,171,584 1,750,121
8,465, 36 10, 201, 224
1,558,255
10, 029, 695
1,493, 320
9, 565, 428
26,099, 924
98,923,243
26, 204. 018
101,304,921
673,297
9,901.861 14, 269, 689
1,070,839 1,776,119
865, 636
15,632, 737
2,049, 799
13,268.096,
1,632, 252|
226, 578.982
39, 595, 959
1,255, 093
931,342
24,948, 752
24,927,762
145,910
1,489, 463
1,130, 083
857, 87€
56, 030, 776
40,072, 159
24, 707, 269
41,208, 648
Cincinnati, Indian-
apolis & Western.
2 136, 880
537,142
425, 70(
Coal & Coke.
288, 02:
Delaware & Hudson....
7,636,07€
285, 854
8,767, 697
269,879
281, 25!
6,752, 699
7,718,82
8,094, 667
110, 389, 108
14, 206, 983
8, 203, 116
111,504, 938
14,197, 496
8,315, 625
116, 221, 171
1 Deficit.
• 7 months.
226
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Thirty-eight systems—Eastern District-Continued.
Net operating income.
Property investment.
1
Rate of return.
Num-
3-year average rate of re- ber of
turn compared with years
yearly rates of return |which
• during the 15 years,
1903 to 1917, was less rerded
than the yearly rate the
in-
ex-
3-yr.
Road.
Av.
1915
1916
1917
Average,
3 years.
1915
1916
1917
Average,
3 years.
1915 1916 1917 3
yrs.
av.
$
Delaware
Lacka $13,967,096 $17, 339, 668 $16, 661, 183 $15, 989, 316 $188, 447, 134 $203, 571, 960 $208, 964, 671 $200, 327, 922 7.41 8.52 7.97 7.98 1903, 1904, 1905, 1906,
wanna & Western.
Detroit & Mackinac....
1,781,688 2,846,828 3,375,535
9
1907, 1908, 1909, 1910,
1916.
12
6,502,650 4.05 5.15' 5.17) 4.79 1903, 1904, 1905, 1907,
21,800, 290 (¹) 1.84 1.30 .96
472,579, 990 2.97 4.86 2.88 3.57
43,954,788 4.14 6.60 7.38 6,07
1908, 1909, 1910, 1911,
1913, 1914, 1916, 1917.
1903, 1906, 1907, 1916,
1917.
1903, 1904, 1906, 1907,
1910, 1911, 1916.
1903, 1906, 1907, 1910,
1911, 1912, 1913, 1916,
1917.
261,356
335, 103
338, 488
311, 649
6,460, 228
6,501,778
6,542, 943
Detroit, Toledo &
1ronton.
1 67,518
22,941,
13,953,689 22, 941, 312
399, 646
293, 957
208,695
21, 145, 010
13, 727, 951
16,874, 521
469,838,905
469, 838, 905
2,668, 017
43,017, 756
21,668, 490
471,936,015
43, 108, 801
22, 587,370
475, 965, 049
45, 737,807
417, 145 633, 006
1,036,577 1,247, 617
10,395,856 11,040, 290
525,792
6,076, 515
1,178,876
10, 164, 666
6,315, 481
13, 400, 954
201,339,391
6, 213, 194 6.86 10. 13
12, 983, 892 8.58 9.48
193,705, 413 5.56 5.73
8.33 8.45
8.80 8.96
5.05 5.43
1916..
1916.
57,551, 763
58,290, 026
57,725,374 4.38 5.39 5.56 5. 11
5.11
Erie......
Hocking Valley.
Lehigh & Hudson River
Lehigh & New England
Lehigh Valley..
Maine Central.
New York Central 2.
New York, New Haven
& Hartford.
New York, Ontario &
Western.
2,509, 515 3,099, 391 3,238, 655
63, 881, 615 110,940, 629 95, 980, 602
15, 973, 804 17, 592, 802 18, 482, 232
1,885,653 2,264, 677 2,149,397
525,314
1,154,357
10, 533, 604
12,083, 894
186, 971, 081
6,247, 585
13, 166, 829
192,905, 768
2,949, 187
57,304, 334
་、
90, 267, 615 1, 446, 252, 738 1, 459, 705, 757 1, 499, 876, 243 1, 468, 611, 579 4.42 7.60 6.40 6.15
272,657,
17,319, 613 272,375, 888 271,677,351 273,918,110 272, 657, 116 5.86 6.48 6.75 6.36
2,099,909| 88,092, 382 88,776, 620 88,766, 472 88, 545, 158
244, 731,902
20,918, 830
249,096, 522
85, 239, 204 1, 465, 734, 682 1, 507, 857, 127 1,
Norfolk & Western.....
Pennsylvania..
14,404, 489 24, 101, 201
63,440, 357 103, 489, 749
24, 250, 800
88, 787, 507
254,541,557
557, 473, 713
L
Pere Marquette.
Pittsburgh & West
Virginia.
2,735,876
127,383
4,683, 185
391, 462
3,857, 544
391, 462
3,758, 868
91,500, 296
9,1446, 091
91, 910, 354
303, 43€
43€ |
55, 842, 083
55, 877, 150
55, 877, 150
2.14 2.55 2.42 2.37
249,457, 660 5.89 9.68 9.53 8.39
1,510, 355, 174 4.33 6.86 5.70 5.64
91,618,914 2.99 5. 12 4.20 4.10
.23
55, 865, 461
.70 70 .54
1904, 1905, 1906, 1907,
1908, 1909, 1910, 1911,
1912, 1913, 1914, 1915,
1916.
1905, 1907, 1910, 1916,
1917.
1916, 1917.
1906, 1907, 1910, 1911,
1912, 1916, 1917.
1905, 1906, 1907, 1908,
1909, 1910, 1911, 1913
1916, 1917.
1916, 1917.
1903, 1904, 1905, 1906,
1907, 1908, 1909, 1910,
1916, 1917.
5
LO
7
9
1
1
13
5
27
10
20
10
1903, 1904, 1916, 1917..
4
1906, 1907, 1908, 1916..
4
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
227
7
10
200
5
347
7
Reading..
Rutland.
Toledo, St. Louis &
Western.
Wabash..
West Side Belt.
Western Maryland
Wheeling & Lake Erie.
Total..
23,030,
15, 226, 450| 23, 030, 452| 22, 011, 2041 20,089, 369
225,677,917|
225, 677, 917
227,733, 496
231,388,888
228, 266, 767
821,340
463,170
1.134, 256
1,341, 953
1,132,271
1,197,158
1,029, 289
21,508,530
1,000, 760
52, 129, 882
21,547,295
52, 121, 039
22,312, 403
52,479, 435
52, 243, 452
6. 75|10.111 9.51 8.80 1905, 1906, 1907, 1910,
51།
21,789,409 3.82 5.26 5.07 4.72
.83 2.57 2.28 1.92
2, 332, 127 7,244,078 8,023, 994 5,866, 733 189, 199, 938 201, 683, 006 204, 408, 429 198, 430, 458 1.23 3.59 3.93
1913, 1916, 1917.
1916, 1917.
1903, 1904, 1905, 1906,
1907, 1909, 1910, 1913,
1916, 1917.
1906, 1907, 1910, 1916,
1917.
2.96
45,809
1,930.319
768, 293
238.182
3.395.916
238,182
174.058
3.944.506
3,090.247
2,293, 881
1,823, 275
1,628, 483
5.030,478
109,828 315
71, 138, 617
5.040.823
114,181.340
71,290, 722
5,040.823
135.294.091
76,282, 565
5.037,375 .91 4.73 4.73
119. 767,915 1.76 2.97 2.92 2.58
72,903,968 1.08 3.22 .89 2.23
3.46
1906, 1916. 1917.
1910, 1911, 1916.1917.
1906, 1907, 1910, 1911,
1912, 1914, 1916.
295, 998, 383 451, 457, 424 406, 461, 566 384, 840, 150 6, 804, 462, 894 6, 916, 147, 9187, 116, 424, 426 6, 950, 412, 492 4.34 6.53 5.71 5.54 1903, 1905, 1906, 1907,
1910, 1916, 1917.
1 Deficit.
2 New York Central includes New York, Chicago & St. Louis, Kanawha & Michigan and Dayton & Union.
Returns for Pittsburgh & West Virginia and West Side Belt for 1917 not available; 1916 figures used.
228
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
STATEMENT OF PROPERTY INVESTMENT, CAPITAL OBLIGATIONS, AND INCOME, BASED ON AVERAGE NET OPERATING INCOME RATE OF
RETURN, THREE YEARS ENDED JUNE 30, 1917, APPLIED TO PROPERTY INVESTMENT JUNE 30, 1917.
[The net operating income shown herein (column 3) is arrived at by scaling up the earnings of the three years-June 30, 1915, 1916, and 1917, taken as test period-to the property
investment at June 30, 1917, affording the property at that date the same return as the average return for the 3 years, and takes no account of additional investment to Dec.
31, 1917, which is shown, however, in footnote.]
3-year
average
property
investment.
Property
3-year
average
rate of
investment, return on
June 30,
1917.
Net
operating
income after
applying
average
rate of
return for
3 years to
Other
income,
year 1917.
Total
income
adjusted.
Charges,
year 1917.
1917,
property.
investment.
Net
corporate
income
based on
average
net
operating
income.
Dividends
paid,
Surplus
Total
over
year 1917. dividends.
capital
obligations,
year 1917.
Per cent
surplus
to total
capital
obligations.
Ann Arbor..
$17,520, 864
3.06
$536, 138
$536, 138
$353, 352
$182, 786
Baltimore & Ohio
567,845, 511
4.63
26, 291, 247
$3,981,079
30,272,326
Bessemer & Lake Erie.
17,933, 196
12,339, 130
$9,951,675
$182,786
2,387, 455
$15, 298, 472
1.19
51,000, 776
10.20
642,580, 035
.37
5, 202, 079
94, 122
5,296, 201
1,261, 168
Boston & Maine.
4,035, 033
1,419,966
2,615, 067
206, 589, 121
38, 128, 850
6.86
4.80
9,916, 278
404, 705
Buffalo & Susquehanna.
10,320, 983
8, 281, 600
2,039, 383
10, 631, 234
4.36
2,039,383| 199,358, 368
1.02
463,522
185, 560
649,082
Buffalo, Rochester & Pittsburgh.
57, 210, 215
5.78
3,306, 750
73, 257
Central New England.
3,380,007
272, 286
1,784, 873
376,796
355,000
21,796
13, 421, 800
.16
1,595, 134
990,000
605, 134
45, 657,000
1.33
26,688, 225
5.67
1,513, 222
1 26,326
1,486, 896
Central R. R. of New Jersey.
707,595
779, 301
209, 216
570,085
25, 946, 100
·
106, 165, 883
2.20
9.37
9,947,743
507, 202
Chesapeake & Ohio.
10,454, 945
4,992, 952
5,461, 993
3,353, 993
2, 108, 827
75, 489, 800
2.79
238, 866, 800
5.73
13, 687, 068
1,042, 337
14,729, 405
Chicago, Indianapolis & Louisville.
8; 683,558
6,045, 847
2,511, 264
40, 541, 663
4.09
1,658, 154
160, 883
3,534,583
247, 633,931
1.43
Chicago, Terre Haute & Southeastern
Cincinnati, Hamilton & Dayton..
24, 707, 269
3.75
926, 523
13,809
41,208, 648
1.88
774, 723
115, 166
Cincinnati, Indianapolis & Western....
Coal & Coke
14, 197, 496
3.00
425,925
10, 446
8,315, 625
3.43
285, 226
137,777
1,819,037
940, 332
889,889
436, 371
423,003
1,058, 117
760, 920
540, 798
220, 122
36,092, 490
.61
799, 102
141, 230
141, 230
23, 214, 055
.61
1,029, 000
1 139, 111
1 139, 111
78,741, 781
1.18
190, 960
245, 411
245, 411
14, 471, 798
1.70
Delaware & Hudson.
116, 221, 171
6.85
7,961, 150
2,049, 438
10,010, 588
277, 460
3,435, 271
145,543
145,543
23,071,317
.63
Delaware, Lackawanna & Western.
208, 964, 671
7.98
16,675,381
6,404, 955
Detroit & Mackinac.
6,542, 943
4.79
313, 407
Detroit, Toledo & Ironton
22,587,370
.96
216, 839
Erie
475, 965, 019
3.57
16,991, 952
4,338,751
Hocking Valley
45,737,807
6.07
2,776, 285
Lehigh & Hudson River.
6,315,481
8.45
533,658
Lehigh & New England.
13, 400, 954
8.96
Lehigh Valley.
20',332,391
5.53
Maine Central
58,290, 026
5. 11
New York Central 2.
New York, New Haven & Hartford.
New York, Ontario & Western.
Norfolk & Western
1,499,876,243
6. 15
273,918, 110
6.36
88,766, 472
2.37
1,200, 725
11, 131, 038
2,978, 620
92, 242, 389
17,421, 192
2,103, 765
14,494
6, 401
27,782
4,117,211
221,282
23,080, 336
313.407
216, 839
21,330,703 |
2,790, 779
540, 059
834,982
90,566
74,708
6,575, 317
19,245, 354
222, 841
5,014,362
11, 166, 612
147,500
1,560,955
8,078,742
128,386, 500
1.22
140, 993, 238
5.73
75,341
5,250,000
1.44
142, 131
142, 131
22,527,001
.63
13, 461, 973
1,200, 207
7,868, 730
565, 604
7,303, 126
464, 215, 803
1.57
1, 228, 507
15,251, 279
3, 199, 902
153,550
380,880
7,191,810
1,880, 647
1,590,572
386,509
817, 627
8,059, 469
1,319, 255
437,980
1,150,592
160,800
225,709
480,000
367,627
36, 308,500
4,491,000
13,245,000
3. 17
5.03
2.78
9,793, 617
102,036, 005
49,662, 025
52,373,981
3,275,292
20,696,484 |
14,428, 465
6,268, 019
6,030,800
870, 888
21, 108, 992
1,711, 570
1,998,669
190, 391,998
1.05
448, 367
56, 877, 777
.79
31, 264, 989
1,485,371,109
2.10
4,556, 449
453, 818, 271
1.00
141,472
2,245, 237
1,439, 291
80.946
210
254,541,557
8.39
21, 356, 037
818,477 22,174,514
4,078, 839
18,035, 675
18,035, 675
10,262, 114
80,736
7,833,561
92,738, 982
.87
235, 364, 700
3.33
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
€ 229
Pennsylvania system..
1,557,473,713
5.64
Pere Marquette..
91,910,354
4. 10
Pittsburgh & West Virginia.
3,768, 325
87,841,517 | 12,784,645 [100,626, 162 | 31,401, 449 | 69,224,713 | 40,214,015 | 29,010, 698
113,354
3,881,679 3,956,691
1,316,020,686
2.21
55,877,150
.54
301,737
Reading system.
172, 064
473, 801
186,456
231,388, 888
8.80
20, 362, 222
Rutland.
333,553
20,695, 775
8,989,791
22,312,403
4.72
1,053, 145
Toledo, St. Louis & Western
51,230
1,101,375
485, 609
52,479, 435
1.92
1,007, 605
Wabash.
91,719
1,039, 324
1,105,367
1 75,012
287,345
11,705, 984
618,766
17,043
175,012
110,522,036
1.07
287,345
62,631, 880
.46
6,996, 290
4,709, 694
182,758,690
2.58
179,088
439,678
19,952, 600
2.20
201,408,429
1 7,043
2.96
6,050, 489
48,354, 899
1.01
171,679
West Side Belt
6, 222, 168
3,299, 659
2,922, 509
5,040, 823
1,386,000
3.46
1,536,509
204,896, 883
.75
174,412
7,359
181,771
Western Maryland.
73,528
108, 243
135, 294, 091
2.58
108, 243
2, 177, 285
4.97
3,490, 588
62,497
Wheeling & Lake Erie.
3,553, 085
2,461, 144
76,282, 565
1,091,941
2.23
1,091,941
1,701, 101
95,498
1,796, 599
1,562, 882
233,717
233, 717
Total.
7,116,424,426
Additional investment, 6 months to
Dec. 31, 1917 (partly estimated).
110,000,000
5. 54
Total to Dec. 31, 1917
7,226,424,426
5.54 394, 591, 207
6,094,000
400, 685, 207
51,792,787 446,383,994 202,462, 009 243,921,985 126,095, 910 117,826, 075
137,045, 358
80, 746, 473
6,974,232,466
.80
.29
1.69
1 Deficit.
2 New York Central Lines include N. Y., C. & St. L., Kanawha & Michigan, and Dayton & Union.
230
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Approximate condensed income account, based on net operating income, scaling
8-year average earnings to property at Dec. 31, 1917-thirty-eight systems:
Net operating income-
$400, 685.207
Other income (year June 30, 1917)
51, 792, 787
452, 477, 994
Interest and miscellaneous deductions June 30,
1917___
$204. 451, 992
Interest on new obligations to Dec. 31, 1917, esti-
mated $60,000,000__
3,600,000
Additional income tax, estimated_
25, 000, 000
233, 051, 992
219, 426. 002
Dividends (year June 30, 1917)
126, 095, 909
Available surplus--
Earned surplus----
Discounts, losses, etc. (average for three preceding years)
Per cent on capital stock---.
Per cent on total capital obligations_.
Appropriations for additions and betterments (average for three
93, 330, 093
21, 686, 983
71, 643, 110
2.55
1.01
years)
34, 269, 629
Balance unappropriated surplus__.
37, 373, 481
Per cent on capital stock___
1.33
Per cent on total capital obligations_.
. 53
Return on capital stock-38 systems.
Memorandum showing net income return on capital stock for the 3 years June 30, 1915, 1916, and 1917,
and averaged and showing approximate disposition of such net income, averaging the several items
for the same 3-year period, and showing the final unappropriated surplus averaged for the 3 years.]
Fiscal year.
Capital stock.
Net income.
Rate of
return.
1915.
1916.
1917
3-year average..
$2,701, 843, 547
2,765, 627.538
2,806, 460,000
$134, 377.038
4.97
290, 354, 384
10.50
253, 802, 360
9.04
2,757,977, 028
226, 177, 927
\
8.20
Net income carried to final surplus, averaged for 3 years, 1915, 1916, 1917.
Net income_
Dividends
Balance
Discount, losses, etc____
Available
Additions and betterments_
Unappropriated surplus___.
Per cent on capital stock__
$226, 177, 927
120, 302, 131
105, 875, 796
21, 686, 983
84, 188, 813
34, 269, 629
49, 919, 184
1.81
Per cent on total capital obligations___
The CHAIRMAN. Is Mr. Robinson present, Mr. Bird Robinson?
Mr. ROBINSON. Yes, sir.
.72
STATEMENT OF MR. BIRD M. ROBINSON, PRESIDENT AMERICAN
SHORT LINE RAILROAD ASSOCIATION, WASHINGTON, D. C.
The CHAIRMAN. Mr. Robinson, what is your purpose what is your
desire at the present time?
FEDERAL (PERATION OF TRANSPORTATION SYSTEMS.
231
Mr. ROBINSON. We are prepared in a way to present the views and
attitude of the short-line railroads, the poorer class of railroads.
The thought was that I would make a general statement in their
behalf.
The CHAIRMAN. With reference to the bill?
Mr. ROBINSON. With reference to the pending bill.
The CHAIRMAN. As it affects their interests?
Mr. ROBINSON. We would like to introduce a number of witnesses
that would occupy three to five minutes each stating special cases.
The CHAIRMAN. Proceed, then.
Mr. RAYBURN. What is your name and what do you represent?
Mr. ROBINSON. Bird M. Robinson, president American Short Line
Railroad Association; address is here in the city.
The American Short Line Railroad Association was formerly the
Short Line Railroad Association of the South, and consists of 130 of
the short-line railroads located very largely south of the Potomac
and Ohio Rivers and reaching into Missouri and Oklahoma and
Texas.
I have been specifically authorized to speak for 115 of those lines
and have been authorized to speak for a number of others that are not
members of our organization.
The CHAIRMAN. Do these railroads, the short-line railroads, em-
brace those roads that have been usually referred to as tap-line roads?
Mr. ROBINSON. No, sir; there may be a limited number of what is
called "tap-line" roads among them, but these are roads 50, 60, 75,
100 miles long, and so on, that have been built out into undeveloped
territories for the purpose of developing the communities and fur-
nishing the necessary transportation.
The CHAIRMAN. Some of them are what you call "tap lines"?
Mr. ROBINSON. Probably four or five among our list might be
termed "tap-line" roads, but the great majority of them are not tap-
line roads. They are not owned, as a rule, by some large interest upon
the property. They are usually built by local capital-local, inde-
pendent capital-for the purpose of aiding in the development of
their respective communities.
+
·
Mr. MONTAGUE. What is the total mileage represented by you?
Mr. ROBINSON. The total mileage represented-I have a table here
and will present that information-the total mileage of those for
whom I speak directly is 5,929. Over and above that--or including
the list of members that we represent--there is about 800 of these
short-line railroads in the country. Basing it upon the mileage-tak-
ing an average of the mileage that we represent in the 115 lines, they
would aggregate about 35,000 miles in the United States. And I
will come to it a little later, in presenting a table and showing how
we arrive at the average we have drawn. We hope a little later to
present tables that will present the actual facts. Those tables are
being prepared as rapidly as they can be, so that we may present
the committee something very definite.
I have said that these short lines, or the lines that build out into
communities-they furnish raw material; they furnish the necessary
transportation to the rural communities; they are built by local or
independent capital, and, as a rule, they are not very profitable. It
requires a long period to develop one of them and get the industries
along the line up to the point where they are profitable. And we are
$232
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
of the opinion that the proposed bill will result in just appropriating
the properties of a large number of these because of the fact that, for
various reasons, the net earnings, the net operating income for a
three-year period, will be such as to leave them not only without any
return on the investment, but without sufficient income to meet the
interest on their funded or other indebtedness. I have had a table
prepared here by the Bureau of Railway Economics of, as I say, 110
roads. The information for all of them could not be obtained be-
cause we had to go to the Interstate Commerce Commission to get
the reports. We selected the year 1916. That is regarded generally
as being one of the best years that the railroads have had, and we
selected that year so as to show that under the best conditions, under
the conditions where the largest returns on the property were being
received, that the returns under that basis would be unfair and wholly
inadequate to take care of the interests of these lines.
The returns for 1916 have not yet been printed by the Interstate
Commerce Commission. It was therefore necessary to go into the
records, and it so happens that they are transferring their files up
there to make room for the director general's office, and it was not
possible to get all of the reports, so that we have a list here of the
110, and we are trying to have a list made of from six to eight
hundred of these, which we want to file.
Unfortunately they did not succeed in getting copies for each
member of the committee ready for this morning, but we will have
copies for you during the day, so that each member may see, and I
want to submit now some information as to the character of the
roads, and so on.
As I have said, this is taken for the year 1916. It shows the miles
operated, the property investment, the capital stock, the funded debt,
the total operating revenue, the net operating revenue, the return
on the investment, and the return on the funded debt. I have had
them divided into three different sections-that is, there is five of
them that have an income of over $500,000 gross revenue. For
example, take the Georgia, Florida, & Alabama, a road running up
from Carabell, Fla., up to Richland, in Georgia, which has 192
miles, in round numbers. It has a property investment of $2,583,000;
its funded debt is $2,113,000; its operating revenue, $551,000; its
net operating income was $61,000, in round numbers; or it had a
return on the investment of 2.37 per cent; on-its-funded debt it had
2.90 per cent.
The CHAIRMAN. You mean additional?
Mr. ROBINSON. I beg your pardon.
The CHAIRMAN. You mean that they had an investment return,
and then also an indebtedness return?
Mr. ROBINSON. No, sir; I mean on their property invested. They
have got invested in that property $2,583,000; they have got a funded
debt of $2,113,000.
The CHAIRMAN. In other words, practically for the entire road?
Mr. ROBINSON. I want to give you all kinds of cases. Now, the
net return for 1916, the year that is supposed to be best, would only
give them 2.37 per cent.
The CHAIRMAN. Now, what I want to get at-do you mean net
return after having paid interest on the bonds?
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
233
Mr. ROBINSON. No, sir; not after paying the interest on the bonds.
I understand that the rule contemplated in this bill is that the net
railway operating income is after the expenses have been paid, the
rentals for cars, and so on, but not the interest on the investment or
the interest on the funded debt.
The CHAIRMAN. You were mentioning the bonded payments; in
that connection it looked confusing.
Mr. ROBINSON. I was trying to give the committee the percentage
that, under the bill as we understand it, would be available and pay-
able to the company, showing they would have 2.90 per cent to pay
on their funded debt of $2,113,000, which would at once show that
they couldn't pay the interest on their bonds. If that is to be the
return that the Government is to make for the use of the property,
then that company can not pay interest on its bonds.
The CHAIRMAN. Well, you mean they will get less under the Gov-
ernment than they will operating it themselves?
Mr. ROBINSON. That does not necessarily follow. If we took the
best year here, as I say, of 1916, and assuming that the Government
would pay them the best, their income would be that and nothing
more, and they would have nothing then to arrange to pay the inter-
est on their bonds. Now, whether they can handle the property now
and pay their interest on their bonds under existing conditions is
their trouble. It is up to them to look after that. But if the Govern-
ment takes the property away from them, then it is certain they can
not do it, because they would have less than a 3 per cent income.
Now, when you take the average three years
Mr. HAMILTON (interposing). How do they manage now, under
present conditions?
Mr. ROBINSON. I can't answer that particular question, but in
many instances, in a very large number of instances, as to these short
lines, the bonds are held by the parties who hold the stock, and they
carry it along-frequently they take the earnings that they have and
put it into improvements and put it into extensions, believing, "Well,
we can carry our coupons and not present them and collect them, and
we can thereby build up our property and eventually make it a pay-
ing enterprise."
Mr. HAMILTON. Treat it as an investment with the possibility of
unloading it later on, perhaps?
Mr. ROBINSON. Not necessarily. I don't know what one individual
may have in mind; one may have one thing in mind and another
another. But the more that the individual company takes of its
earnings and puts into the property in the way of extensions, and the
less net operating revenue they show, then the more serious this
proposition is to them, because it has decreased their showing and
thereby they will receive less on their return, on their property, than
they would otherwise.
Mr. HAMILTON. What is going to happen to roads like that?
Mr. ROBINSON. Well, we think that if this bill passes that a very
large per cent of these 800 will go into liquidation within a year and
that it will wipe out not only the stockholders but will wipe out the
bondholders.
The CHAIRMAN. Do you think they will withhold the coupons when
the Government is operating the roads, as well as when operating it
themselves?
234
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
:
Mr. ROBINSON. They could do so, but that is not necessary, and fre-
quently they will say, "Well, the Government has taken the prop-
erty; we will not hold it any longer," and will just drop out and quit.
A great many of these things are in banks.
The CHAIRMAN. Then you don't want the bill to apply to the short
lines at all?
Mr. ROBINSON. No, sir; I don't think there is a possibility of that.
I think that a just return, which is properly contemplated in the
constitution, will necessarily include the advancement of the amount
necessary to meet these fixed charges.
Mr. MONTAGUE. Do you want us to help you out? Do you want the
Government to help you out?
Mr. ROBINSON. If you take the property, I think you have got to
pay the fixed charges on it. If you do not, you may just take away
the property without any return at all, and I want to show you from
this table that a very large number of these roads have a deficit now.
They have an operating deficit. Therefore, under the terms of the
bill, there would be no return of any character.
Mr. DILLON. Well, Mr. Robinson, the stockholders of these com-
panies you represent are largely promoters, are they not, and their
holding of stock is with the intent of turning it over to some large
company; isn't that true?
:
Mr. ROBINSON. That may be true in some instances, but we will
show by witnesses that we present here to-day that a large number
of them, a large percentage of them, have invested real capital, real
money in it and that they have not yet had the returns. They are
now building it up and they are having no returns. I can give you
an illustration of my own. I have built in the past about 800 miles
of these railroads. I have never been a promoter, in the ordinary
sense of going out and getting somebody else to put in the capital.
I have always gone in as one of the investors and always have done.
my share of putting capital in. I have the Tennessee Railway now,
a railroad down in Tennessee of 62 miles. It has cost a little over
$1,800,000 to build it. We have sold and I have bought a good
share of those bonds-well, we have sold $1,130,000 of bonds. We
have got it in the hands of a receiver now, because we have not been
able to go ahead and finish work, and we have got $300,000 worth
of receiver's certificates. That represents money that has gone into
that enterprise, but we have invested during the 10 years that we
have been building-invested every dollar of the earnings. We have
never paid a cent on those coupons. We have invested every dollar
of the earnings that we have gotten out of that property back into it.
So that our net operating income now, as shown by the reports, will
be very small, probably not more than eighteen to twenty thousand
dollars a year.
The CHAIRMAN. Isn't that all you would get if you were operating
it yourselves?
Mr. ROBINSON. No; we are getting the earnings that we make, and
we are putting it into the property.
The CHAIRMAN. You will put in whatever the Government pays
you, if it pays you anything?
Mr. RAYBURN. This road that you are talking about-they did.
make a net income for the last three years?
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
235
Mr. ROBINSON. Yes; it is making a net income, eighteen to twenty
thousand dollars, after having put a large per cent of the earnings
back into the property in further extensions of the property.
Mr. RAYBURN. About what percentage?
Mr. ROBINSON. Well, during the 10 years we have put nearly $400,-
000 in.
Mr. RAYBURN. I don't mean that. I mean income percentage?
Mr. ROBINSON. I haven't figured it up, but it will run 4 to 5 per
cent, perhaps.
Mr. RAYBURN. Now, if the Government pays you that much-you
are allowing before you pay that all the fixed charges, aren't you?
Mr. ROBINSON. No, sir; the fixed charges-only the fixed charges
are paid in-that is, taxes-but the interest on the bonds is not
included in that at all. So that by trying to build up our property
and develop the country we have been using the funds for further
extensions. Now, if we had not done that; if we had taken the
earnings and put them in and declared them as dividends and paid
them out, then under the terms of this bill you would have had to
pay us probably 6, 7, or 8 per cent; but because we were using our
income in further developments and building up the property, and
because we were thus taking care of the situation, then we are sud-
denly penalized here now, because "you do not show those net carn-
ings, and therefore we are going to take over the property; we are
going to take the benefit of what you have been building and doing,
and we are not going to pay you anything except that small per-
centage, which, on the face of things, you have been earning."
""
Mr. WINSLOW. How much more is your property worth by virtue
of the dividends you have turned back in?
Mr. ROBINSON. Around $400,000-between three and four hun-
dred thousand dollars.
Mr. WINSLOW. Does that show in your accounting?
Mr. ROBINSON. To some extent. So that we are going to offer an
amendment to you at the proper time which will allow some flexibil-
ity; which will allow the President some privilege of taking these
special conditions into consideration and of meeting equitably and
justly the conditions as they are. As it is now it is rigid.
The CHAIRMAN. Let me ask you a question: Don't you think that
it is perfectly fair, long or short line, or any other kind of railroads,
that the Government pays to these roads what they would likely
make during the time of Government operation-if it pays all that
they would have made and likely would have made out of the prop-
erty had it not been taken?
Mr. ROBINSON. I don't agree with that as a proposition as a whole,
and I do not think that this bill meets the conditions stated by the
chairman at all.
The CHAIRMAN. I am not confining it to the bill. I just say the
theory that you should have pay for your property what you could
make with the property if possession had not been disturbed—that
you retained it.
Mr. ROBINSON. I don't think that is a just measure of the return
contemplated by the Constitution of the United States.
The CHAIRMAN. Do you want the Government to pay more than
the owners could make out of it themselves?
236 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. ROBINSON. That may be a condition that will result. It may
be that the roads can demonstrate that in court; that they are en-
titled to that; that he fact that what they earned at another and
different period under another and different condition is not a fair
measure of the value of the use of that property at a subsequent
period. For example, the profits that you have had this morning,
these investments that have been made from time to time, that money
has gone in; there is no return as yet on those; and I don't think
you can measure the just return that should be paid by the Govern-
ment for the use of the property hereafter on what was done in an
average of three years heretofore.
The CHAIRMAN. Then wouldn't you be left out, from your stand-
point, if the provisions of the bill as to authorities between your
company and the Government should be left out, as to you, and let
you resort to your legal remedies as to what your property was
worth after the use has accrued?
Mr. ROBINSON. No, Mr. Chairman, I don't see any need of leav-
ing us out. It would be very difficult to draw the line as to who you
would leave out and who you would not. I think Congress should
recognize that it is dealing with the rights of a great many people
and have large property interests, and if they are going to pass a
permissive bill, permitting the President to make agreements, and
thereby avoid litigation and avoid a great multiplicity of cases, that
it should give some flexibility to it, and give it so that the President
could recognize these various and sundry conditions, and that he
could make agreements that were equitable and just; that his hands
wouldn't be tied; and, in that way, you can accomplish justice, be-
cause we believe that the administration is trying to do justice.
The CHAIRMAN. The bill provides that in case of failure of an
agreement, 90 per cent of the estimated value shall be paid and let
the railroad company make its claim for the balance in the Court
of Claims.
Mr. ROBINSON. What would you do, Mr. Chairman, if I may re-
verse the thing with the company that had no net operating
revenue during that three-year period? It would have nothing
coming to it at all under those conditions, and, therefore, it would
be remitted to the courts to combat and fight for what it believed
to be its just rights. Under those conditions, it would have abso-
lutely no income. Its property would be taken away from it and
it would have no income coming in at all.
The CHAIRMAN. Did you hear the amendment suggested by Judge
Thom at the opening of his statement?
Mr. ROBINSON. I did not.
The CHAIRMAN. Is there a copy of that amendment here?
Mr. PAYNE. I wonder if that is it. He handed me one this morn-
ing.
The CHAIRMAN. Look at that amendment and see if that meets
your case. [Mr. Payne hands paper to witness.]
Mr. ROBINSON. I didn't know that that amendment had been
drawn.
The CHAIRMAN. It has not been offered-only suggested.
Mr. ROBINSON. I understand. I say the short lines have not been
in touch with the trunk lines on those subjects, and had no
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
237
The CHAIRMAN (interposing). I mean, does that cover, in sub-
stance, what you had in your mind?
Mr. ROBINSON. If I may make my statement-we did not know that
was drawn. We have one here which we have drawn ourselves,
which is somewhat similar, and I will read the one that we had in
mind so that it might show the situation.
The CHAIRMAN. That is perfectly fair to you, that you should have
an opportunity to offer what you think is proper. I just wanted to
see whether you and Judge Thom differed or not.
Mr. ROBINSON. I have. [Reading:]
Amend section 2 by striking out lines 24 and 25 on page 2 and line 1 and
the first six words ending with the word "return in line 2 of page 3 and insert
the following:
"SEC. 2. That pending such agreement, arbitration, or appeal the President
shall pay or cause to be paid to any carrier while under Federal control an
amount not less than ninety per centum of such standard return, but in no
event less than an amount equal to the accruing interest on its funded or other
indebtedness, remitting such carrier to its legal rights in the Court of Claims
for any balance claimed, and any amount thereafter found to be due above
the amount paid shall bear interest at the rate of six per centum per annum,
and any excess amount paid hereunder shall be recoverable by the United States
with interest at the rate of six per centum per annum."
The CHAIRMAN. The accrued interest might exceed all the returns
of the road.
Mr. ROBINSON. Sometimes it does that.
The CHAIRMAN. And you want us to make obligation to pay that
whether the Government receives such amount or not?
Mr. ROBINSON. If you take over our property forcibly and take it
away from us, then we think you ought to at least meet the obliga-
tions until there has been an agreement.
The CHAIRMAN. But if your company is not meeting those obliga-
tions as an operating, going concern, how can you expect the Govern-
ment to do it?
Mr. ROBINSON. There are various reasons why the company may go
along with the property in its own hands and handling its situation
and not meet its obligations, but the moment the property is taken
from it, and it has no possession of it, then it may not be able to
handle its affairs and become at once-it would go into liquidation.
Mr. DECKER. Suppose I have a horse that isn't paying for its feed.
Would that give you a right to take my horse and not pay anything
for it?
Mr. ROBINSON. No, sir.
Mr. DECKER. Well, what would be the basis now? I am just asking
for information. If you had a right some way to take that horse
from me, what would be the basis that the courts would decide how
much you would pay for the horse?
Mr. ROBINSON. It wouldn't be upon the basis of the fact that that
horse was a burden to me, certainly.
Mr. DECKER. Well, that strikes me as reasonable, but what would
be the basis? I have been trying to figure out myself.
Mr. ROBINSON. I am competent to answer that question. I can
give my theory.
Mr. DECKER. That is what I want.
Mr. ROBINSON. Here are two storehouses alongside of the street;
one of them empty and been empty a year; the other one has been
rented for $50 a month for a year. The Government has no right to
238
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
come along and take that empty storehouse and not pay you any-
thing for it because it has been empty for a year and because you
haven't been getting anything out of it. And it needs the other
storehouse, also, and they say, "We will pay you $50 for that store-
house because you have been getting $50 for it."
Now, our theory is that under the Constitution we are entitled
to just compensation, and that depends upon a great many things.
Congress can not consider all the details that enter intò that thing;
the courts have to go into that; and we have got to go to the courts.
They know the necessary protection to the property, to the corporate
property, is just as vital as the protection to the physical property.
The physical property is for the use of the public, of course. The
public gets the benefit of it, but the corporate property, the interests
of the bondholders and the stockholders, the men that put in the
money and created the situation, are just as much entitled to con-
sideration as the property itself. The bill proposes to take care of
the physical property by taking maintenance and depreciation.
Now, if you are going to take that property from the people who own
it, and you are going to relegate them to the courts to demonstrate
what their rights are, then you ought to take care of the financial side
of it pending that; and under this amendment which is here pro-
posed, if you advance money enough to pay the interest on the in-
debtedness, and if the courts hold, or if it be arbitrated and deter-
mined that that was too much, that that was more than just com-
pensation, then, under that provision of the bill, that is charged back
to the property and becomes a lien on it.
Mr. DECKER. Why wouldn't Mr. Thom's amendment be better for
you and better for the country than yours? Your amendment pre-
supposes that every one of those kind of cases will go into court.
That on the face of it looks bad to me from the standpoint of the
country, in that litigation about these matters ought to be avoided,
if possible.
Mr. ROBINSON. I beg your pardon. This thing came out of the
order, as I had arranged the matter, and I didn't read the amendment
that corresponds to Mr. Thom's. The two are closely allied. I think
probably the members of the committee recall Mr. Thom's, and I
will read the one that we propose.
Mr. DECKER. Read them both.
Mr. ROBINSON (reading):
After line 17, on page 2, the following:
66
Provided, however, That in the case of any carrier which was not in oper-
ation, or was in the hands of a receiver during ary portion of the period of
standard return, or in respect to which the President shall find that its con-
ditions are so exceptional that the basis above mentioned would not constitute
just compensation, he is authorized to make with such carrier an agreement
and guarantee for such amount of compensation as he shall and just in that
particular case."
Now, our proposal-
Mr. DECKER (interposing). Then you wouldn't have to go into
court on his amendment?
Mr. ROBINSON. Both of them reach the same end, and I will read
one we had prepared, without knowing they prepared one:
Provided, In cases where any such carrier has been putting its earnings back
into improvements and betterments, or where such carrier has not been operat-
ing for three years prior to June thirtieth, nineteen hundred and seventeen,
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
239
or when the interest obligations of such carrier exceed its said average net
railway operating income, or where there are other peculiar circumstances
which would make such standard annual rental unjust or inequitable, the
President may agree with such carrier upon other just and equitable basis.
Mr. DECKER. I had not heard that part.
Mr. ROBINSON. I say, I misread; I didn't read the correct one in
the confusion.
Mr. DECKER. Well, those are pretty much alike.
Mr. ROBINSON. Very much alike; and I say we didn't know they
had drawn this. We hadn't come in contact with them. So I have
copies here of these amendments sufficient to hand to the members
of the committee.
Mr. STEPHENS. I would like to have one."
Mr. PAYNE. Mr. Chairman, I wonder whether it would help the
committee, and perhaps it was due to these gentlemen, to make a
brief statement about the way these roads are coming in to the direc-
tor-applications from these roads for a determination whether they
are included in the President's proclamation. When I say "these
roads" I haven't any reference to particular roads, which may be
here, but the short roads.
The act of August, 1916, under which the President's proclama-
tion provides for the taking over by the Government of a system or
systems, or parts thereof, of transportation, it follows, of course,
that unless these short roads constitute a part of a system of trans-
portation necessary to be used by the Government in war times, that
they do not come within the purview of the President's proclamation.
So that it must not be assumed that all of these roads are included.
For instance, I was over at the director's office-on Thursday, per-
haps it was-and he asked me to consider the application of the
Leavenworth & Topeka road-and I speak of this purely as an illus-
tration that is a road 46 miles in length, which runs from Leaven-
worth toward Topeka-evidently intended to get there at some time,
but it hasn't yet. Ten miles from its westerly end, or 35 or 36 miles
from Leavenworth, a bridge is out of order, so that the road, for
the time, stops operation at that bridge. And they run a train each
way every other day. Now, they wanted to know where they stood,
and it was the opinion of the director that they weren't included with
the proclamation, because they were right along between two-
the Santa Fe on one side, and the Union Pacific on the other-and
were not used as a part of any system of transportation. That gives
you the notion that
Mr. DECKER (interposing). Well, let us také some of those bigger
roads, for instance. That might help us out as to some of those
little short lines. Take a road, for instance, that has been in the
hands of a receiver most of this period-I think, for instance per-
haps, the Wabash. I don't know much about it, but it has been in
the hands of receivers, and the receivers during the last three years
have been putting most of the earnings, or all of the earnings, to
make up for deferred payments. Now, they have necessarily almost
got to resort to the courts?
Mr. PAYNE. Did you mean that as a question to me? We have
supposed that section 3 deals with that, and as Mr. Anderson said
here, the word "auditors" are used in perhaps a New England sense,
the idea of that section is that referees, or whatever you call them,
240
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
without a resort to the court, may determine in these exceptional
cases what is right, and then you will see that the President is author-
ized without any resort to court to settle on the basis of that finding.
It seemed necessary to provide a tribunal without any resort to
litigation, with power to consider the facts and deal with these ex-
ceptional cases, and section 3 is intended to cover that.
Mr. ESCH. Mr. Payne, practically every one of these short lines
connect with a short line. If that short line hauls lumber, products
of the mine, wouldn't that bring it within the system or parts of
systems?
Mr. PAYNE. Very likely, and that is what I want to make clear.
It does not follow that all these roads are included. Many of them
will be included-for instance, roads that operate to munition fac-
tories or lumber camps necessary now for the Fleet Corporation to
get-whatever is necessary as a part of any system of transportation
for wartime needs is taken over, and you must, of course, provide a
means for determining what is just compensation.
Mr. HAMILTON. Mr. Payne, is any discretion given to the director
under the proclamation in determining whether a road shall be in-
cluded in a system?
Mr. PAYNE. It must be so, because it is a physical fact.
Mr. HAMILTON. For illustration, here is a short line which is a
feeder, to some extent. Would the director be permitted to exclude
that road operating under a discretion, or would it necessarily have
to be included?
Mr. PAYNE. It depends entirely on the facts; the proclamation
contemplates the roads may be dropped out. You have got to con-
sider; somebody has got to consider.
Mr. HAMILTON. Now, its contribution to interstate commerce may
be very small, indeed.
Mr. PAYNE. Pardon me if I make a suggestion: It isn't a question
in interstate commerce, because many roads wholly intrastate must
be included.
Mr. HAMILTON. I understand.
Mr. PAYNE. It is a question whether it constitutes a part of a sys-
tem to such an extent as to be necessary or expedient to be used for
war purposes.
Mr. HAMILTON. Then that does give the President that power?
Mr. PAYNE. Yes, sir.
""
Mr. PARKER. Do you mean by "system" any particular group of
roads controlled by the same authority, or do you mean by "system
to broaden that term to include any railroad property that operated
together, even under separate control, which carries freight in either
interstate or other commerce?
Mr. PAYNE. What I wanted to make perfectly clear is this: The
language used by Congress in conferring the power on the President
does not mention railroads at all. It is confined to system or systems
of transportation or parts thereof. Now, that is the law.
Mr. DECKER. Well, isn't a railroad that runs 25 miles a system?
That would be a good deal like a fellow down in our country that had
a 4-mile road, and he asked a big road for a pass, and they said the
road wasn't long enough, and he said it was as wide as theirs. It is a
system of its own, isn't it?
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
241
Mr. PAYNE. Now, let me finish. Now, what is a system? Who is
going to decide it? Manifestly the President has got to decide what
constitutes a system of transportation; Congress has not decided it;
that power is given to him, and therefore each case must be decided
on its own facts. You can not lay down any hard and fast rule.
Some of these roads that I spoke of-in the case of the Leavenworth
& Topeka that is of no more use to the Government now than the
proverbial five wheels to the wagon.
Mr. MONTAGUE. To make a practical application of that, what is
the short road you spoke of?
Mr. PAYNE. The Leavenworth & Topeka.
Mr. MONTAGUE. Is that embraced by Mr. Robinson's roads?
Mr. ROBINSON. It is not.
Mr. PAYNE. Now, that road, just to finish my illustration of figures,
it is in the hands of a receiver-which is, of course, not controlling-
but the income from the road, counting no taxes, no interest to in-
vestment, but nothing but the actual operating expenses, is consider-
ably less than the expenses.
Mr. HAMILTON. And in Alaska, for illustration, Judge Payne, there
are short roads operated only perhaps three months in the year. They
might very properly not be included as a railroad system precisely.
Mr. SWEET. Now, Mr. Payne, taking the illustration that you gave
a moment ago in regard to the Santa Fe and the properties parallel-
ing, one of these short lines paralleling the Santa Fe-we will say
that the short line has a part of that freight, and it is dependent for
its income upon freight and passenger service. Now, when the
Government operates it under the proclamation, and it is termed a
"system," why, a large part of the freight that had formerly gone
over the short line would go over the Santa Fe or some other road
paralleling the Santa Fe and this short line. It seems to me that
it would work a detriment to the short line for the Government to
operate the other road?
Mr. PAYNE. I don't think anybody can say that that may not hap-
pen in some cases.
Mr. SWEET. Well, was that contemplated in any way in the draw-
ing of this bill?
Mr. PAYNE. The draft of the bill proceeds on the theory that
whatever roads are taken are to be given just compensation as pro-
vided by the Constitution. Now, I take it, it would follow that if
roads are damaged, whether taken or not, they would be entitled to
just compensation.
Mr. SWEET. That is the point I make. If the road is not included
within the President's proclamation, and it is so determined, would
that road, if damaged, have any recourse?
Mr. PAYNE. I don't think the Government can take any man's
property, or damage any man's property, without making compen-
sation.
The CHAIRMAN. Whether it would bring him anything or not?
Mr. PAYNE. Well, if he is damaged. Now, if these gentlemen
came into court to determine their damages, what would be their
measure of damages?
Mr. DECKER. That is what I would like to know. If we knew
that, we might decide on it without sending them to court.
40958-18-16
242
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS,
Mr. SNOOK. Do I understand you to say that there is a discretion
lodged in the President under this law and the proclamation as to
what roads will be taken over, or is it a matter of interpretation?
Mr. PAYNE. It is purely a matter of interpretation.
Mr. SNOOK. No discretion?
Mr. PAYNE. Well, I am not very good on definitions, but it is
interpretation. It is the duty of the President to apply the facts
in each case, as I conceive, to the law which Congress-
Mr. SNOOK (interposing). That is, he doesn't have a right to de-
cide it on the question of whether it is expedient or not, without
regard to the law?
Mr. PAYNE. Well, now, there again-suppose a short road con-
nects with a trunk line, and right off on that short road there is a
munitions factory; manifestly that short road has got to be included.
Suppose there is a lumber camp, when the Government is trying its
best to get lumber to build ships; manifestly that would have to
go in; whereas, if there was nothing of that sort on the road and it
simply served the local community, there would seem to be no neces-
sity for it. Now, to that extent I think expediency is involved.
Mr. SNOOK. That is to say, in the end, if the President deemed it
expedient, he can take over or refuse to take over?
Mr. PAYNE. As a war measure, that is the whole test as applied
to the act of Congress.
Mr. RAYBURN. Now, you wouldn't mind-I suggest that we recess
till 2 o'clock.
The CHAIRMAN. Now, let me ask Mr. Robinson-if we return here
at 2 o'clock, do you think that vou and those witnesses cooperating
with you can finish this afternoon?
Mr. ROBINSON. I hope so; I think so. You sit until about 5?
The CHAIRMAN. You know that the first witness, like yourself,
was subjected to a great many more inquiries than any other.
Mr. ROBINSON We contemplated that condition, that my testi-
mony would be very much longer.
The CHAIRMAN. The committee will now take a recess until 2
o'clock, after which Mr. Rcbinson will resume the stand.
(Whereupon, at 12.30 o'clock p. m., the committee adjourned for
recess.)
AFTER RECESS.
The committee met at 2 o'clock p. m., pursuant to recess.
The CHAIRMAN. The committee will come to order.
Mr. ESCH. Gov. Sanders has a request he wishes to present to the
committee, and I would like for him to be heard.
Mr. SANDERS. I would like to request, Mr. Chairman and gentle-
men, that next Friday morning the authorities of the city of New
Orleans be given not exceeding an hour in which to explain to the
committee the workings of the public belt system of their city, which
is owned by the city of New Orleans. They want an opportunity
to be heard.
Mr. Escн. I suppose you will have to notify them in advance?
Mr. SANDERS. We have got to notify them to-day in order to get
them here by Friday.
The CHAIRMAN. Your request is that they have one hour Friday
morning?
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 243
:
Mr. SANDERS. Yes.
The CHAIRMAN. What does the committee say in regard to that
request?
Mr. ESCH. I move that that be done.
The CHAIRMAN. Without objection, one hour upon the opening
of the committee next Friday morning will be given to the represen-
tatives of the belt line, the Municipal Belt Line Railway around New
Orleans.
Mr. DILLON. Mr. Sanders, in that connection I think there is a
municipal line or State line that runs from Cincinnati down into
Tennessee.
The CHAIRMAN. This is city-owned, though.
Mr. SANDERS. And that is leased by the Southern Railway.
Mr. DILLON. Wouldn't this come under the same thing?
The CHAIRMAN. No; this is a belt line of the city of New Orleans,
and they want to present to the committee a statement with reference
to whether or not it comes under the law as contemplated.
Mr. SANDERS. Then there is no objection to that?
The CHAIRMAN. No; they can have one hour next Friday morn-
ing.
Mr. JOHN BARTON PAYNE. As we were closing this morning Sena-
tor Faulkner asked me whether I wanted to be understood as saying
that roads not taken would have a right to be paid just compensation
for any damages they might suffer, in response to the question asked
by Congressman Sweet. I do not. I have not given that question
consideration. All I meant to say was if they are injured, they
ought to have some redress. As a matter of law, I have not given
any consideration to that question.
The CHAIRMAN. You may proceed, Mr. Robinson.
STATEMENT OF BIRD M. ROBINSON-Continued.
Mr. ROBINSON. Mr. Chairman, the subject was presented here as to
the question of these short lines, or many of them, that had been
taken over by the Government or it was contemplated to take them
over, and I want to read a portion of the proclamation of the Presi-
dent:
Now therefore I, Woodrow Wilson, President of the United States, under and
by virtue of the powers vested in me by the foregoing resolution and the statute,
and by virtue of all other powers thereto me enabling, do hereby, through
Newton D. Baker, Secretary of War, take possession and assume control, at 12
o'clock noon, on the 28th day of December, 1917, of each and every system of
transportation, and the appurtenances thereof, located wholly or in part within
the boundaries of the continental United States, and consisting of railroads and
owned or controlled systems of coastwise and inland transportation, engaged
in general transportation, whether operated by steam or by electric power, in-
cluding terminals, terminal companies and terminal associations, sleeping and
parlor cars, private cars and private car lines, elevators, warehouses, telegraph
and telephone lines, and all other equipment and appurtenances commonly used
upon or operated as a part of said rail or combined rail and water systems of
transportation.
That is a portion of the President's proclamation in reference to
the taking over of the properties.
Mr. DILLON. Mr. Chairman, in that connection, why not have the
entire proclamation read into the record?
244
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
"
The CHAIRMAN. That can be done.
(The proclamation follows.)
POSSESSION AND CONTROL OF RAIL AND WATER TRANSPORTATION SYSTEMS.
BY THE PRESIDENT OF THE UNITED STATES OF AMERICA-A PROCLAMATION.
Whereas the Congress of the United States, in the exercise of the constitutional
authority vested in them, by joint resolution of the Senate and House of
Representatives, bearing date April 6, 1917, resolved:
That the state of war between the United States and the Imperial German
Government which has thus been thrust upon the United States is hereby
formally declared; and that the President be, and he is hereby, authorized
and directed to employ the entire naval and military forces of the United
States and the resources of the Government to carry on war against the Im-
perial German Governinent; and to bring the conflict to a successful termina-
tion, all of the resources of the country are hereby pledged by the Congress
of the United States.
And by joint resolution bearing date of December 7, 1917, resolved:
That a state of war is hereby declared to exist between the United States
of America and the Imperial and Royal Austro-Hungarian Government; and
that the President be, and he is hereby, authorized and directed to employ
the entire naval and military forces of the United States and the resources
of the Government to carry on war against the Imperial and Royal Austro-
Hungarian Government; and to bring the conflict to a successful termination,
all the resources of the country are hereby pledged by the Congress of the
United States.
And whereas it is provided by section 1 of the Act approved August 29, 1916,
entitled "An Act making appropriations for the support of the Army for the
fiscal yead ending June 30, 1917, and for other purposes," as follows:
The President, in time of war, is empowered, through the Secretary of War,
to take possession and assume control of any system or systems of transporta-
tion, or any part thereof, and to utilize the same, to the exclusion as far as
may be necessary of all other traffic thereon, for the transfer or transporta-
tion of troops, war material and equipment, or for such other purposes con-
nected with the emergency as may be needful or desirable.
Ard whereas it has now become necessary in the national defense to take
possession and assume control of certain systems of transportation and to
utilize the same, to the exclusion as far as may be necessary of other than
war traffic thereon, for the transportation of troops, war material and equip-
ment therefor, and for other needful and desirable purposes connected with
the prosecution of the war;
Now, therefore, I, Woodrow Wilson, President of the United States, under
and by virtue of the powers vested in me by the foregoing resolutions and
statute, and by virtue of all other powers thereto me enabling, do hereby,
through Newton D. Baker, Secretary of War, take possession and assume con-
trol at 12 o'clock noon on the twenty-eighth day of December, 1917, of each and.
every system of transportation and the appurtenances thereof located wholly or
in part within the boundaries of the continental United States and consisting
of railroads, and owned or controlled systems of coastwise and inland trans-
portation, engaged in general transportation, whether operated by steam or by
electric power, including also terininals, terminal companies and terminal asso-
ciations, sleeping and parlor cars, private cars and private car lines, elevators,
warehouses, telegraph and telephone lines and all other equipment and appur-
tenances commonly used upon or operated as a part of such rail or combined
rail and water systems of transportation;-to the end that such systems of
transportation be utilized for the transfer and transportaion of troops, war ma-
terial and equipment, to the exclusion so far as may be necessary of all other
traffic thereon; and that so far as such exclusive use be not necessary or de-
sirable, such systems of transportation be operated and utilized in the perform-
ance of such other services as the national interest may require and of the usual
and ordinary business and duties of common carriers.
It is hereby directed that the possession, control, operation and utilization of
such transportation systems hereby by me undertaken shall be exercised by
and through William G. McAdoo, who is hereby appointed and designated Di-
rector General of Railroads. Said Director may perform the duties imposed
ipon him, so long and to such extent as he shall determine, through the Boards
1
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
245
·
of Directors, Receivers, officers and employees of said systems of transportation.
Until and except so far as said Director shall from time to time by general or
special orders otherwise provide, the Boards of Directors, Receivers, officers
and employees of the various transportation systems shall continue the operation
thereof in the usual and ordinary course of the business of common carriers,
in the names of their respective companies.
Until and except so far as said Director shall from time to time otherwise
by general or special orders determine, such systems of transportation shall
remain subject to all existing statutes and orders of the Interstate Commerce
Commission, and to all statutes and orders of regulating commissions of the
various states in which said systems or any part thereof may be situated. But
any orders, general or special, hereafter made by said Director, shall have
paramount authority and be obeyed as such.
Nothing herein shall be construed as now affecting the possession, operation
and control of street electric passenger railways, including railways commonly
called interurbans, whether such railways be or be not owned or controlled
by such railroad companies or systems. By subsequent order and proclamation,
if and when it shall be found necessary or desirable, possession, control or
operation may be taken of all or any part of such street railway systems,
including subways and tunnels; and by subsequent order and proclamation
possession, control and operation in whole or in part may also be reliquished to
the owners thereof of any part of the railroad systems or rail and water systems,
possession and control of which are hereby assumed.
The Director shall as soon as may be after having assumed such possession
and control enter upon negotiations with the several companies looking to
agreements for just and reasonable compensation for the possession, use and
control of their respective properties on the basis of an annual guaranteed
compensation, above accruing depreciation and the maintenance of their prop-
erties, equivalent, as nearly as may be, to the average of the net operating in-
come thereof for the three year period ending June 30, 1917,-the results of such
negotiations to be reported to me for such action as may be appropriate and
lawful.
But nothing herein contained, expressed or implied, or hereafter done or
suffered hereunder, shall be deemed in any way to impair the rights of the
stockholders, bondholders, creditors and other persons having interests in
said systems of transportation or in the profits thereof, to receive just and
adequate compensation for the use and control and operation of their property
hereby assumed.
Regular dividends hitherto declared, and maturing interest upon bonds,
debentures and other obligations, may be paid in due course; and such regular
dividends and interest may continue to be paid until and unless the said Director
shall from time to time otherwise by general or special orders determine; and,
subject to the approval of the Director, the various carriers may agree upon and
arrange for the renewal and extension of maturing obligations.
Except with the prior written assent of said Director, no attachment by
mesne process or on execution shall be levied on or against any of the property
used by any of said transportation systems in the conduct of their business as
common carrier; but suits may be brought by and against said carriers and
judgments rendered as hitherto until and except so far as said Director may,
by general or special orders, otherwise determine.
From and after twelve o'clock on said twenty-eighth day of December, 1917,
all transportation systems included in this order and proclamation shall con-
clusively be deemed within the possession and control of said Director without
further act or notice. But for the purpose of accounting said possession and
control shall date from twelve o'clock midnight on December 31, 1917.
In witness whereof, I have hereunto set my hand and caused the seal of the
United States to be affixed.
Done by the President, through Newton D. Baker, Secretary of War, in the
District of Columbia, this 26th day of December, in the year of our Lord one
thousand nine hundred and seventeen, and of the independence of the United
States the one hundred and forty-second.
[SEAL.]
By the President:
ROBERT LANSING,
WOODROW WILSON.
Secretary of State.
NEWTON D. BAKER.
Secretary of War.
246 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. ROBINSON. Acting upon that, the very first order issued by the
Director General, Mr. McAdoo, was directed to the individual rail-
roads, and each and every one of the railroads on the list repre-
sented by the American Short Line Railroad Association—and prac-
tically all of the railroads of the United States-received a telegram
and a formal notice from the Director General that he had taken
possession of and he has proceeded to give directions as to what
to do. There is the execution of the President's proclamation.
Following that, the bill before us follows-the first three or four
lines of it" That the President having in time of war taken over
the possession, use, and control, called herein Federal control, of
certain systems of transportation, called herein carriers, is hereby
authorized to agree," and so on.
Now, I submit, Mr. Chairman, that the proclamation contemplates
taking each and every railroad, short or long. The Director General,
by due notice served upon the officer of the corporations, has taken
over the properties, and you are now considering a bill to provide
a permissive way of compensating these carriers for the use of their
property.
Now, I have no knowledge of any authority to enable the Director
General or somebody else to hand back a part of those properties,
and if that course be pursued many of them will already have been
damaged because they have been directed to discontinue solicitation;
they have been directed to discontinue other practices, and many of
the railroads in the United States get a large part of their traffic by
solicitation. So that already the question of solicitation has suf-
fered, and if a road is now eliminated it may have been seriously
damaged up to this time. So that I don't believe that you have be-
fore you the question of providing for compensation for some rail-
roads; I think you have before you the question of providing just
compensation for all the railroads. I don't see how you can get away
from that.
Now, in the discussion this morning we only got in this tabulated
statement to one railroad, and the questions went over to the ques-
tion of some minor, little neighborhood railroads. But the railroads
involved here those whose revenue will not be adequate under the
three-year average period collected to pay their fixed charges-go
way beyond the little neighborhood railroad. It reaches some of
some considerable mileage-two or three, sometimes four hundred
miles. Now, you can't take those properties under the Constitution
without rendering just compensation, and, while we have great diffi-
culty to determine ourselves in advance just what is just compensa-
tion, we might look to see some of the elements that go to make up
just compensation. One of the first elements, of course, would be to
pay the expenses of the operation of the property.
A second element would be to pay the proper maintenance to keep
the property up to the standard that it was at least to keep it up
to that standard.
A third and important one is to provide sufficient funds to meet the
interest on its obligations. Otherwise you destroy the value of its
securities, its bonds, and its notes, and thereby take away from the
owners the property without due process of law.
In addition to that you are entitled to take into consideration—
and the courts will take into consideration-any damages that may
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
247
have been done while the property is in the possession of the Gov-
ernment. For example, if that line has been permitted to run with-
out adequate cars, and the enterprises on that line have been starved
to death, so that "Well, we are not going to have that thing run,
and we are not going to supply cars to run it," and you cripple or
destroy the enterprises on that line, when you have finished with it
and turned it back with all those enterprises on it in bankruptcy
you have done substantial damage to the property, and it will take
years to recover its position, and the courts would take into considera-
tion, and justice demands that we take that into consideration to
determine what would be a just return.
If the Government proceeds to increase the compensation paid to
employees, it will be exceedingly difficult to reduce that compensation
when the company takes possession of them again.
Now, these companies, as a rule, don't pay standard wages for
their employees, and there is a good and sufficient reason therefor.
They don't employ the same efficient labor. The class of men that
these short roads and poor roads employ are usually men that can not
get employment in their respective capacities on the trunk lines and
the larger lines, and they haven't the ability, they haven't the experi-
ence, and they are not entitled to the same consideration. But the
Director General in his public announcements has indicated that these
wages are to be increased. If those wages are increased substantially,
and there be no increase in the freight rates or the return on the
property from its use, then a very substantial damage has been done
to the owners of that property when it is turned back to them,
because they can not in all probability reduce the expense. It would
take them years to rebuild their enterprises on their lines, and they
will be limited in their earning power because the Government
doesn't permit higher rates.
Now, all of those things will go into making a just compensation.
The courts will take all of those things into consideration if the com-
panies be forced under the circumstances to go into it.
In addition to all that, I am of opinion that under the Constitution
just compensation will include some reasonable return on the capital
invested, the funds that went into that property. I think the courts
have held in a number of cases that they shall have that now. In
many cases they are not getting it, but I want to read you a para-
graph from one or two decisions. They are very short and go right
to the point of whether the company should have a return on its
investment. I will read one paragraph from the opinion in the case
of the Northern Pacific Railway Co. v. The State of North Dakota
et al. (236 U. S., 586), Mr. Justice Hughes delivering the opinion:
The constitutional guaranty protects the carrier from arbitrary action and
from the appropriation of its property outside the undertaking assumed, and
where it is established that a commodity or a class of traffic has been segre-
gated and a rate imposed which would compel the carrier to transport
it for less than the proper cost of transportation, or virtually at cost, and thus
the carrier would be denied a reasonable reward for his services after taking
into account the entire traffic to which the rate applies, it must be concluded
that the State has exceeded its authority.
I submit, Mr. Chairman, that that has a direct bearing on the
question of the Government taking over this property without giving
just compensation.
248
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. ESCH. Was that in the Express Co. case?
Mr. ROBINSON. No, sir; that was the Northern Pacific rate case,
in the question of North Dakota's attempt to fix or cut down certain
rates, and the court held that they had no right to lower one rate
and pile it over on something else; that the company must have
just compensation, and that each branch of the service ought to bear
its full share of the burdens; that you couldn't lower the passenger
rate down and pull it over on the freight, or vice versa.
Now, in the case of Norfolk & Western v. State of West Virginia
the same was held.
In the case of the Montana, Wyoming & Southern Railroad Co. v.
Morley et al. (198 Fed., p. 991) the fourth section of the syllabus
is this:
A freight rate established by the State railroad commission which will
not admit of the carriers earning such compensation as under the circum-
stances is just to it and to the public, deprives such carrier of its property
without due process of law, and denies to it the equal protection of the laws,
in violation of the Federal Constitution.
My thought is, Mr. Chairman, that if the Government, the State
governments or the Federal Government, fix rates or a rate that
will deprive the company of its property, and thereby violate the
Constitution, as so held by the courts, that it certainly follows that
when you take the property itself-take it away from the people—
that you can not legally, properly, or equitably take it without
returning—giving a just return, a return on that investment which
the courts will hold is sufficient.
Mr. MONTAGUE. All that grew up under the question of fixing
rates, did it not?
Mr. ROBINSON. Yes, sir; it is all involved in the question of fixing
rates.
Mr. MONTAGUE. And the rate was so low that it became confis-
catory? The court held that it became confiscatory?
Mr. ROBINSON. Yes, sir; not compensatory, I believe, is the real
thought.
Mr. MONTAGUE. The converse of it would be confiscatory.
Mr. ROBINSON. Yes, sir.
Mr. Chairman, these short lines have suffered as the result of
Government regulation, to the extent that a large number of them
now appear before you with very small earnings, and some of them
with deficits. Had they been permitted to charge compensatory rates
they would have had net earnings something that they were entitled
to under the law-and therefore they would have been in a class,
or in the class which would have shown some returns under this
average period, this period upon which they propose to base this
situation.
Now you take the Government itself-we all assume that the Gov-
ernment is going to be just. I think the Government intends to be
just, but it doesn't always result that way. You take the question
of handling the mails and I want to give you my own experience
in that. My road handles the mails 40 miles; 22 miles of that is
handled twice a day and 18 miles of it is handled once a day. We
formerly received $1,763 a year for handling the mail over that road.
Within the past year the Government has reduced that pay to $165
a year. As against that, we have rural free delivery carriers radiat-
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
249
ing out from our line, carrying probably one-twentieth or less of
the weight of mail that we carry, and they get $1,200 a year. We
certainly handle twenty times as much and we get approximately 40
per cent.
Now that is the kind of treatment of these lines that brings them
before you showing small returns or deficits. And I submit that the
Government and the States are not legally entitled to impose burdens
of that character and then come along and say, "As a result of your
failure to show a large earning, we are going to take your property
without any real compensation."
Now we drifted away from this table this morning, which I think
is quite illuminating, and I regret exceedingly that I have not a copy
before each member of the committee. We only touched on one of
these lines, but I think I should like to read three or four or five
others and let you see the results that will follow.
Mr. ESCH. Was that falling off in the receipts for hauling the mail
on your line due to the substitution of the space for weight?
Mr. ROBINSON. Yes, sir; that was the result of it. We are carrying
the same mail--or more-but the reduction is because they appro-
priated they said they appropriated 3 feet of space, but many times
it takes 6 or 7 feet of space, but we get no return for it. But the
wages are there, the services are there, and we get practically noth-
ing for it; and therefore when it comes to showing our net returns,
we have got a loss on that.
Mr. ESCH. What effect would the application of the compensation
act of September 7, 1916, have upon the small roads?
Mr. ROBINSON. I think it would be serious, but I am not sufficiently
posted to enter into a discussion of it. I can only give the opinion,
but I think it would be quite serious.
Now, Mr. Chairman, reading from the class of roads having earn-
ings of more than $100,000 gross per annum and less than $500,000,
I will take the Birmingham & Northwestern Railroad, a line 48.70
miles long. They have a property investment of $855,000. They
have a funded debt of $800,000. The net returns on the investment
for the year 1916, the best year, is 3 per cent, and the net return on
their funded debt is 3.20 per cent.
Now immediately following is the Birmingham & Southeastern
Railroad, both of them being in the same general territory. It is
48.20 miles long, only just one-half mile shorter. It has a property
investment of $1,510,000. It has a bonded debt of $831,000. Its net
earnings are $26,342. Its returns on its property investment is 1.74
per cent, and the return on its funded debt is 3.17 per cent.
There are two roads just half a mile apart, and that is the sub-
stantial difference between them, and both in the same territory, the
Southeastern having cost a very substantial amount of money more
than the Northern, and yet its returns, if we took the year 1916, its
return would be practically the same. On its bonded debt, not on its
property—on the bonded debt there is only $31,000 difference between
the two.
Take the Charlotte Harbor & Northern Line, 113.79 miles, the
property investment is $3,300,000-I omit the odd numbers. Its
funded debt is $2,000,000. Its net operating income for 1916 is
$65,000. The return on that is 1.97 on its investment, or 3.27 on its
funded debt.
250
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Take the Georgia, Florida & Alabama, 156 miles long, the property
investment is $8,800,000. Its funded debt is $4,400,000. Its net oper-
ating revenue is $178,000, a deficit of $94,000. So that they have a de-
ficit of 1.08 per cent on their investment and 2.13 per cent on their
bonded debt.
Mr. Chairman, I could continue to go through this table here to
show you that these are not little railroads 5 and 6 miles long, and
serving small communities. These are real railroads. They serve
large communities. On them are located a great many important
enterprises. They produce raw material to a very great extent, and
for various reasons, some of which I have mentioned heretofore, they
have been prevented from earning an adequate return. They have
reinvested their earnings in the properties in the form of improve-
ments. They are doing everything they can to build up. Now the
Government comes along, and proposes to take possession of those
properties, utilize them, and give no return, if I understand it, by the
bill that is now pending.
We will supply you a little later, either to-day or to-morrow, each
of you, a copy of this table, and during the week, if we may, we will
supply a similar table for a very large number of these roads. We
are trying to make it as nearly full and complete as we can, so that
the Congress and those interested may get right down and select any
road-get all the information before them.
'Mr. RAYBURN. Don't you intend to insert that as a part of your
statement?
Mr. ROBINSON. I do, but I will pass it over to the secretary, and
then I will supply members of the committee with copies so that they
may examine it and go into it later.
(The paper referred to is as follows:)
Milcage, capital, revenues, and income, roads included in the American Short
Line Railroad Association (calendar year 1916).
Road.
Miles Property
invest-
oper-
ated. ment.
Capital Funded
stock. debt.
Total
operat-
ing reve-
nues.
Net
operat-
ing
income.
Rate of Rate of
return | return
on
on
invest- funded
ment. debt.
ROADS HAVING ANNUAL
OPERATING REVENUES
OF $500,000 AND OVER-
continued.
Fort Smith & Western
R. R....
Georgia, Florida & Ala-
hama Ry.
P. ct.
P. ct.
253.65 $11, 806,200 $5,000,000 $6,541,511 $927, 144 $101, 888
0.86
1.58
192.86 2,583, 550
Midland Valley R. R.
381.58 16,589, 434
Quincy, Omaha & Kansas
City R. R...
572,000 2,113,000 551,809
8,013,000 10, 512,500
61,
193
2.37
2.90
2, 121, 216
545, 594
3.29
5.19
255.09
6,426,076
Washington & Old Do-
minion Ry.
Total...
ROADS HAVING ANNUAL
OPERATING REVENUES
OF $100.003 AND LESS
THAN $500,000.
Alabama, Tennessee &
Northern Ry.
Apalachicola Northern
R. R…………..
Arkansas Central R. R…….
6,000,000
895, 877
78,703
1.22
71.58
4,047,763
1,700, 600 1,788, 125
420, 340
18,366
.45
1.03
1, 151. 76 41, 455,023, 21, 285, 600 20,955, 136
4,916,386
805,744 1.94
3.85
222.00 11,003, 513
25,000,000 4,121, 087|
487,837
52,564
.48
1.28
98.82 2,834, 102
46. 13 679,598
1,000,000 2,000,000
598,000
209, 742
17, 142
.60
.86
123, 737|
18,392
2.71
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
251
Mileage, capital, revenues, and income, roads included in the American Short
Line Railroad Association (calendar year 1916)—Continued.
Road.
Miles Property
oper- invest-
ated. ment.
Capital Funded
stock.
dcbt.
Total Net
operat-
operat-
ing reve- ing
nues. income.
Rate of Rate of
return return
on
on
invest- funded
ment. debt.
ROADS HAVING ANNUAL
OPERATING REVENUES
or $100,000 AND LESS
THAN $500,000.-contd.
Arkansas
&
Louisiana
P. ct
P. ct.
Midland Ry...
102.20 $1,230, 406 $1,000,000
Atlanta & St. Andrews
$200,000 $249,000 $39,692
3.23
19.85
Pay Ry..
Birmingham
84.38 1,512,299
300,000
850,000
234,056
63,013
4.17
7.41
& North-
western R. R
48.70
855,382
300,000
800,000
146, 611
25, 632
3.00
3.20
Birmingham
& South-
eastern Ry..
48.20
1,510, 297
700,000
831, 495
106,429
Carolina & Northwestern
26, 342
1.74
3.17
Ry...
133.50
3,889,636
1,404, 250 2,090,305
Carolina & Yadkin River
451,022
1
4, 650
1.12
1.22
Ry....
34.81
3, 182, 324
1,840,000 1,270, 200|
107,869
20,552
.65
1.62
Charlotte Harbor & North-
ern Ry...
113.79
3,301,984
2,000,000 2,000,000
466, 642
65, 456
1.98
Chattahoochee Valley Ry.
3.27
44.53
667,286
Columbia Newberry
110,000 278,000
144, 329
56,095
8.41
20. 13
Laurens R. R……….
75.00
1,815, 958
500,000 1,247,300
354, 892
Durham & Southern Ry
88,341
4.86
7.08
58.97
1,491, 108
1,350,000
375, 196
168, 120,
11.27
East Tennessee & Western
North Carolina K. R……..
36.18
1,134, 775
490, 800
500,000
Franklin & Abbeville
R. R..
Frankfort & Cincinnati
Ry.....
Gainesville Midland Ry..
Georgia & Florida Ry.
Georgia Coast & Pied-
mont R. R……….
Georgia Northern Ry.
Georgia Southwestern &
271, 161
113, 393
9.99
22.68
55.34
352,700
50,000
200,000
101, 894
18,875
5.35
9.44
40.00
261,972
40,000
160.000
107,976
15,347
5.86
9.59
74.00
1,454, 997
550, 000
963, 285
207, 297
31, 768
2. 18
3.30
348. 10 15, 501,345
8,695,000 7,868, 484
812, 056
68, 72S
.45
.89
67.68
101.24 3,402, 709
922, 189
1,572,000 1,817,035
150, 522
12,546
.37
.69
600,000
300,000
235, 216
68, 466
7.42
22.82
Gulf R. R...
35.30
513, 143
40, 500
555, 500
115,241
Gulf Florida & Alabama
20,095
3.92
3.62
Ry....
156.61
8,819,540
4,410,000 4,446,000
Live Oak, Perry & Gulf
178,029
194, 820
94,820
1 1.08
12. 13
R. R...
83.88
1,333, 315
Northwestern Railroad of
600,000 824,000
238,000
110, 539
8.29
13.41
South Carolina.
60.50
526,938
100,000
375,000
112,043
Ocilla Southern R. R..
24, 385
4.63
6.50
110.37
775,987
265, 000
416,000
South Georgia Ry..
132, 485
131,570
14 07
17.59
81.60
470,315
58,000
204,000
218,586
42, 335
9.00
20.75
Sugar Land Ry
38.94
654, 674
109, 400
Tennessee & North Caro-
400, 480
188, 520
83,994
12.83
20.97
lina Ry.
37.11
821, 141
306, 100
350, 209
Tennessee,
127,897
22, 473
2.74
6.33
Alabama &
Georgia R. R.
98.53
4,534, 14S
3,545,385 1,545,961
120, 159
1 50,092
11.10
13.24
Tremont & Gulf Ry.
72.75
1,952, 649
2, 000, 000 1,550,000
Virginia & Carolina South-
291, 803
93, 317
4.78
6.02
ern R. R………….
60.61
694, 115
Virginia-Carolina Ry.
141,000 524,000
143,511
48, 896
7.04
9.33
79.10 2,095, 648
500,000 1,480,000
252, 865
74, 847
3.57
5.06
Wadley Southern Ry.
88.74 1,468, 884
600,000
899,968
108, 668
Wrightsville & Tennille
R. R....
Total..
ROADS HAVING ANNUAL
OPERATING REVENUES
OF LESS THAN $100,000.
Aberdeen & Rockfish R.R.
Alabama Central R. R………….
Alabama Central Ry..
102.82 984, 922 600,000 200,000
2,960.43 82, 649, 999 61, 375, 435 41, 268, 309 7,861, 777 1, 335, 796
1 1,479
1 1.10
1.16
290,486
27,059
2.75
13.53
1.62
3.24
59.54
440,092
208,800
177,000
89,344
8.918
2.03
5.04
13. 10
114, 136
65,000
22.650
3, 121
2.73
8.75
96, 150
96,000
Aleolu R. R..
20,000
218
.23
38.50
Alabama & Mississippi
172, 284
100,000
68, 594
645
.37
R. R...
77.75
228,918
Atlantic & Carolina R. R..
10,000
99, 444
13, 420
5.86
9.52
69,230
Atlantic & Western R. R.
10,000 55,000
8,495
1 1,340
1 1.94
24.00
628,875
Bennettsville & Cheraw
303,000
303,000
46, 161
12,039
1.91
1 2.44
3.97
R. R....
44.50
327, 320
250,000
Birmingham & Atlantic
150,000
82, 502
20,492
6. 26
13. 66
R. R...
22.90
Birmingham, Columbus
721,927
50,000
653, 090
18,032
1
11,374
1 1.58
11. 19
& St. Andrews R. R..
38.00
21, 751
10, 503
26, 254|
509
2.34
4.85
1 Deficit.
252
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mileage, capital, revenues, and income, roads included in the American Short
Line Railroad Association (calendar year 1916)—Continued.
Total
Net
Road.
Miles Property
invest-
oper-
ated. ment.
Rate of Rate of
return return
Capital Funded
stock. debt.
operat-operat-
ing reve- ing
nues. income.
on
on
invest-funded
ment. debt.
1
}
ROADS HAVING ANNUAL
OPERATING REVENUES
OF LESS THAN $100,000—
continued.
Bonlee & Western Ry....
P. ct.
P. ct.
11.00
$63, 283
Bowdon Ry. Co……..
12.00
141, 836
Carolina R. R. Co……….
15.86
90,774
$61,700
52, 000
35,000
$11,350
$3,321
1 5.26
$60,000
23,084
3,903
2.75
6. 51
26, 650
3, 106
3.42
Chesapeake & Western Ry.
41.23
1,503, 583
Cumberland R. R...
1,419, 600 1,419,000
84,969
13,707
.91
.97
12.90
254, 955
20,999 1,028, 000
51,062
1 1,130
1.44
1.11
De Queen & Eastern R. R.
27.02
431, 791
692, 200
27,810
Dover & Southbound R.R.
1 6,590
1 1.52
24.40
74, 600
Durham & South Carolina
25,546
11,356
15. 22
R. R...
37.51
894, 859
500,000
300,000
94, 862
East Carolina Ry
48,798
5.45
16. 27
38.20
281.413
55, 500
Eastern Kentucky Ry....
300,000
84,500!
15,000
5.33
5.00
36.00
2,455,429
Elberton & Eastern Ry...
3,455, 899
51,581
14,565
1.19
21.80
501, 818
200,000
300,000
26, 004
742
.15
25
Emmittsburg R. R...
7.30
55, 135
50,000
19,453
Fellsmere R. R.
4,545
8.24
10.79
(2)
(2)
(2)
Flint River & Northwest-
10,399 110,866
ern R. R..
23.03
236, 115
125,000
125,000
Gainesville & Northwest-
53,008
21, 082
8.93
16.87
ern R. R...
37.00
785, 247
750,000
800
63,890
Glenmere & Western Ry..
11.00
166, 263
20.400
Greene County R. R..
105,000
65, 433
14,769
13.066
I. 61 1 596. 13
7.86
12.44
19.69
136, 395
100, 005
Groveton. Lufkin &
36, 322
21,300
1 1,448
11.06
1 3.99
Northern Ry...
36.00
480,943
50,000
437,000
Hampton & Branchville
62, 893
11,314
2.35
2.59
R. R.
34.00
141,508
100,000
Kansas City & Memphis
29,882
10.544
8.16
Ry...
58.00
1,643, 229
840,000
971,006
Kentucky & Tennessee
74,770 113,625
1.83 11.40
Ry.3.
16.27
777,677
Kinston-Carolina R. R. &
25,000 800,000
85,413 27,508
3.54
3.44
Lumber Co...
35.00
85,078
35,000
6,000
44,511
Knoxville. Sevierville &
6,295 7.40 104.92
Bern R. R…….
30.00 1,211,979
500,000
Lawndale Ry. & Indus-
500,000
63,341
11,927
.98
2.39
trial Co..
11.46
78,891
60,000
15, 603
1 598
1.76
Laurel Fork Ry.
14.00
422,210
100,000
Liberty-White R. R……….
76,469
1 19, 625
14.65
49.68
645, 449
300,000
7,550
Linville River Ry.
76, 763
16,719
11.04
25.60
241,693
200,000
Little River R. R..
110,061
33,645
1,129
.47
188.99
1.03
8.00
181,011
150,000
Madison County Ry...
34, 105
5,623 3.11
11.10
127, 193
Morehead & North Fork
50,000 100,000
23, 227
11,795 11.41
11.80
R. R..
26.00
641, 194
260,600
Natchez, Columbia &
373,000
81, 735
12,007
1.87 3.22
Mobile R. R...
29.42 550,556
900,000
New Orleans & Lower
50,562
17,557 11.37
Coast R. R.
59.71
593, 428
300,000
300,000
North Louisiana & Gulf
15, 847
2,821
.48
.94
R. R..
25.70
286, 470
200,000
Ocala & Southwestern
24, 794
13, 231
4.62
R. R..
23.00
47,496
25,000
15,575
Ocklawaha Valley R. R...
13,410
15.92
53.28
253,050
250,000
Oneida & Western Ry.
38,589 111, 157
14.41
20.00
430, 833
200,000
32,000
5,928
1 14,939
13.47
1 46.68
Pelham & Havana R. R.
25 00
145, 419
100,000
10, 298
32,147
Pickens R. R...
8,259
5 68
80.20
9 30
114, 333
63,000
52,000
17,769
665
.58
Raleigh & Charleston R. R.
1.28
43.00
1, 105, 892
574,500
550,000
Randolph & Cumberland
87,645
20,410
1.85
3.71
Ry..
22.50
1,226, 359
1,000,000
138,000
*Red River & Gulf R. R...
24, 155
4,014
.33
2.91
26.20
180, 126
101,000
Roanoke Ry.
83, 481
46, 117
25.60
5.64 138, 675
50,000
42,518
45, 475
15, 100
11.53
35.51
Rockingham R. R..
21.40
320, 043
72,000
250,000
38,966
Rome & Northern R. R...
6,303
1.97
2.52
22 90
317, 165
247,570
Sardis & Delta R. R..
13.50
147,693
100,000
Savannah & Statesboro
19,242 19,589
30,571 1 14,890 110.08
13.02
13.87
R. R...
33.00 495, 085
200.000
185,000
60,632
11,172
2.26
6.04
Shearwood Rv
15.00
219, 147
100,000
50, 500
14, 625
Shreveport, Houston &
2,229 1.02
4.41
Gulf R. R….
10.75
80,473
50.000
24,764
Smoky Mountain Ry
5,890 7.32
9.60
91.181
50.000
28.000
30.124
850
Statenville Rv..
.93
3.04
14.00
(2)
(2)
(2)
12.000
Talbotton R. R……….
6.63
66,930 32,500
30,000
15,757
1 545
2.498
3.73
8.32
1 Deficit.
• Data not available.
8 Six months ending Dec. 31, 1916.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
253
Mileage, capital, revenues, and income, roads included in the American Short
Line Railroad Association (calendar year 1916)—Continued.
Miles Property
Road.
oper- invest-
ated. ment.
Capital
stock.
Funded
debt.
Total
operat-
ing reve-
nues.
Net
operat-
ing
income.
Rate of Rate of.
return return
on
on
ment.
invest-funded
debt.
ROADS HAVING ANNUAL
OPERATING REVENUES
OF LESS THAN $100,000-
continued.
Tampa & Jacksonville
P. ct.
P. ct.
R.R..
Tavares & Gulf R. R
41.16
56.00 $1,161,586
597,871
་
$604,900
250,000
$546,717
299,000
$62,590
38, 251
$7,892
.68
1.44
920
.15
.31
Tennessee, Kentucky &
Northern R. R...
17.00
2.202 10,000
32,781
8,070
366.49
Wareshoals R. R..
5.00
20,630
3,500
21, 168
12,692
61.52
Warren & Ouachita Valley
Ry.
16.00
•
313,030
316.000
78.458
44,048
14.07
Warrenton R. R.
3.00
21,389
13,200
22,388
11, 738
54.88
Watauga & Yadkin River
R. R..
29.20 3,910.902 | 3,164,100
82,000
24,086 |¹ 46, 289
11.18
1 56.45
Waycross & Southern
R. R..
22.60
168, 534
147,900
43,976
16,543
13.88
Waycross & Western R.R.
44.50
450,830
420,000
315, 350
52, 471
11,136
2.47
3.53
Wellington & Powellsville
R. R..
22.00
225, 163
90.000
55,981
6.182
2.75
Total.
Grand total.
1,814.39 31. 259. 725 20.689,303 11,786,285 3.048.565 | 320.559
5,929.58 155,364,747 103,350,338 74,009,730 15,826,728 2,462,099
1.03
2.72
1.58
3.33
1 Deficit.
Totals estimated (about one-sixth):
Miles..
Investment.
Funded debt..
35,000
$930,000,000
$450,000,000
Mr. STEPHENS. In your judgment section 3 does not cover the
amendment that you have offered?
Mr. ROBINSON. I feel quite confident that it does not. I think it
provides only for such lines-it is only where the President and the
line fail to agree that it becomes effective, and then it provides that
if they don't become effective that 90 per cent of the standard re-
turn shall be paid; but I am trying to point out here that there will
be no standard return for many of these roads, and there will be no
90 per cent at all.
Mr. STEPHEN. They will have a deficit?
Mr. ROBINSON. Yes; or so small that a payment of 90 per cent
would be a deficit in so far as meeting the interest on the obligations
is concerned, and if that interest is not met we all know quite easily
what the result is. Of course, some of them are not now meeting it,
but it is an inside arrangement that "Well, we will hold our coupons,
and you go ahead and use this money for some other purpose, and
when you build up we will turn these coupons in and collect them."
So that, as we view it, it is absolutely vital to these large number
of roads, because it is approximating 30 to 40 per cent in number.
It will run from 30 to 35 thousand miles, in mileage; it will run
approximately a billion dollars in investment; and it will run a half
a billion dollars in funded debt that these properties have got to
have some special provision for. And under the proclamation of
the President I think that he contemplated that provision would be
mnade for them, and I will read just one clause:
254
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
But nothing herein contained, expressed, or implied, or hereafter done or
suffered hereunder, shall be deemed in any way to impair the rights of stock-
holders, bondholders, creditors, and other persons having interest in said sys-
tems of transportation, or in the profits thereof, to receive just and adequate
compensation for the use and operation of their property hereby assumed.
Now, our view is, Mr. Chairman, that this bill before you does not
conform to any extent to the President's proclamation in so far as
these poorer lines are concerned; that the bill does not make them
adequate provision; it leaves their property in the control of the
Government; it leaves them without any remedy at all except to go
to the Court of Claims. And we are of the opinion that to go to the
Court of Claims with six or eight hundred claims, and get into the
long delays that will be involved and these roads will go into bank-
ruptcy, their securities will be sold, the property will pass to other
people who are willing to buy it at some price that they can get it
for, and that great injustice and injury will be done to the present
holders. And the property that they have created, brought into
existence, that they have furnished the public transportation with,
opened up new territories, will pass to somebody else at some nominaĺ
price, whatever they can get for it.
The CHAIRMAN. Mr. Robinson, your amendment provides, though,
that the Government must pay the interest on these debts without
naking any provision whatever as to whether that interest is exces-
sive or unusual or unjust compensation. The interest on bonds, in
other words, might be excessive, there might be excessive bonding,
and Congress in authorizing and directing the President to pay the
interest might be unjust to the public, provided there should be an
excessive bond interest provided for in some of these railroads.
Mr. ROBINSON. I think I will take the liberty of answering that by
reading the proposed amendment and see if it will answer it.
The CHAIRMAN. That is what I would like to have. I thought from
what you said awhile ago that it provided that.
Mr. ROBINSON. This is an amendment to section 2:
"That pending such agreement "-the agreement between the
President has already been provided for-" or arbitration or appeal,
the President shall pay or cause to be paid to any carrier, while un-
der Federal control, an amount not less than 90 per cent of said
standard return "—that is practically the same thing that is in the
bill now" but in no event less than the amount equal to the accru-
ing interest on its funded or other indebtedness, remitting such car-
rier to its legal rights in the Court of Claims for any balance claimed,
and any amount thereafter found due above the amount paid shall
bear interest at the rate of 6 per cent per annum, and any excess
if they have paid more- "and any excess amount paid hereunder
shall be recoverable by the United States with interest at the rate of
6 per cent per annum."
""
Now that works both ways, Mr. Chairman. Under the pending
agreement, while the agreement is going on, if some interest matures,
or while it is in the hands of these arbitrators or referees, or what-
ever the bill may term them, or upon appeal from them to the Court.
of Claims, that maturing interest, and so on, shall be paid, because
the Government has possession and there is a difference of opinion
about what is just between the two. Now, when that is done, if there
be no agreement, then the short lines or these railroads will be re-
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
255
mitted to the Court of Claims to present their case, and if it be held
that the amount paid or advanced was not adequate, if there be
something more due, then the roads would be paid that additional
with 6 per cent interest on the balance. But if it should be found
under that clause that more has been paid than was proper and just,
that the court fixed, then the United States is entitled to collect it
back with 6 per cent interest. In other words, they take care of the
situation pending the final adjustment, and if they don't do that,
then it means bankruptcy for a great many of these properties.
The CHAIRMAN. Now, then, does the amendment that we have re-
ferred to several times here, the proposed amendment-proposed by
Mr. Thom-does not that cover the case without making specific
statements as to how much shall be paid pending adjustment? In
other words, doesn't that seem to cover the thing you have in mind?
Mr. ROBINSON. I don't think so.
The CHAIRMAN. While you are not making earnings?
Mr. ROBINSON. I don't think so, your honor. I don't think that
these referees or the President or anybody would have any obliga-
tion to pay the interest on this maturing interest, etc., under
the clause which Mr. Thom presented. We have a similar amend-
ment, and it is remarkable how near they are together, and being
drawn by men who never met one another and had never had any
conference at all. I have before me a copy of Mr. Thom's amend-
ment, and I don't think it goes to this question of insuring the pay-
ment of these maturing interest charges pending the adjustments,
etc. I don't think so.
The CHAIRMAN. I don't think so either. It doesn't cover all that
justice would demand.
Mr. ROBINSON. No, sir. Suppose the President says "I won't make
an agreement of that kind with you." Suppose the referees say
"We won't do anything," or suppose they be in the 1,800 cases that
will be presented for adjustment, and that it be six months or a
year before the President or the referees get hold of it—and I don't
assume that the President will deal with anyone until it shall have
gone through the investigation, either by the referees or by the In-
terstate Commerce Commission. He, of course, will not touch it un-
til it has passed through that. Now in the great number of cases
that are pending, it will be a long time. Suppose this interest ma-
tures in the meantime. The company doesn't have charge of its
property; it doesn't have charge of its income; it has no way of
meeting the obligation, and if the bondholder says "I am getting
tired of waiting on you; I am going to put this into the hands of the
court;" and they proceed to put it into the hands of the court
The CHAIRMAN. You don't mean to imply that I am in favor of
what is called the Thom amendment, or the committee? It has never
yet been offered as an amendment, and I don't know whether the
committee will favor the amendment suggested by Mr. Them, but
I only wanted, when we do come to consider these things, to have
your attitude and your views as to the effect that this might have on
your roads. I didn't mean to imply that the Thom amendment was
accepted or rejected. In other words, it never has been offered for
consideration.
Mr. ROBINSON. I understand it has not been considered. But there
is another angle to this, Mr. Chairman, that is important to the
256
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
people at large. Here is $500,000,000, in round numbers, of outstand-
ing bonds. They are in the hands of a great many people. A very
considerable amount of those bonds are in banks as collateral securi-
ties. If liquidation comes to any one of these companies, instantly
the holdings of that individual are involved. The bank says, "This
collateral is not good; we want you to remove this collateral, and if
you can not pay it we are going to sell it."
The CHAIRMAN. I understood you to say that these short-line rail-
roads, to a very large extent, the stockholders and bondholders were
the same people, and that the bondholders had been willing to defer
their interest and not collect it, and in that way you get along with
the small earnings that you had made; and now, if the stockholders
own the bonds, I would take it-and have been so far enabled not
to have to pay the interest as it accrues-in other words, that the
bondholders have been merciful and have not demanded the inter-
est-I suppose they would be just as merciful when you are in the
hands of the Government as when they are in the hands of the rail-
road directors.
Mr. ROBINSON. That is true in, what I may say, many cases_out
of some 800 companies, and yet it may be a limited number. But,
over and above that, the stockholders in many cases that don't own
any of the bonds, while they have possession of their property and
are operating it, are willing to provide the funds to pay the maturing
coupons and provide them out of their pockets, and many of them
are dealt with in that way, expecting that in the future they will be
fully recouped with the improvement in their properties and things
of that kind. So that there are all kinds of cases where there is no
fixed and set case that you can say applies to this company and that
and the other.
The CHAIRMAN. I have heard of cases of the kind, and I am going
to mention one--I don't know as it is any one of the roads that you
represent--that the stockholders-I mean that they would incorpo-
rate a railroad company and bring about the building of a railroad,
issue stock, and then afterwards make a contract with a construction
company largely made up of themselves, and make a contract with
the construction company to build the road for so many thousand
dollars in bonds per mile, and the stockholders and bondholders
would be very largely among the same people, and, the bondholders
of that road being stockholders themselves, more bonds would be
issued very often than was justified or would ordinarily occur with
good business judgment. In other words, they were making money
both out of the stock and the bonds, possibly. Now, I don't know
that any of that sort of thing occurs in this case, but such cases have
arisen heretofore in which the stockholders practically organized
themselves into a construction company and paid themselves as stock-
holders the bonds of the company for building the road, and after-
wards became the actual owners of the road to the extent of the stock
and bonds outstanding.
Mr. ROBINSON. There are cases of that character, beyond doubt;
how many, none of us know; but taking that as a fact, it required a
substantial amount of money to construct that railroad. Somebody
had to put up real money to build the railroad, because stocks and
bonds when you issue them off the press don't pay for building rail-
roads. Somebody has got to put in the money. In the majority of
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
257
cases that I know of that have been done along the general lines that
you mentioned, it is done by people who haven't money themselves,
and they have got to go out and sell those bonds to get the money to
do it with.
The CHAIRMAN. You referred to the fact this morning that your
bondholders seemed to be also stockholders. I thought perhaps some
of that kind of companies might be among those making this applica-
tion.
Mr. ROBINSON. I have heretofore answered that there are cases of
that kind, and quite a number of them. There are cases of people who
have not put any bonds on the property, but who have just bought so
much stock and paid for it and built the roads, and have no funded
debt at all, but I come back to the fact that cases following the lines
that you suggest that that class of men who organized the roads in
that way had to go and sell those bonds, and they had to get money
with which to build.
.
Now, those bondholders put up real money. It don't make any
difference about how the thing was manipulated as to the company;
those bondholders put in the money, and they have got to be pro-
tected if you undertake to do justice; and I know what I was just
saying a moment ago, that many of those bonds are in banks as
collateral security; and the moment this situation arises that the
Government has taken them over and has fixed a return on that
property which is wholly inadequate to pay the maturing interest
on those bonds, that the banks will immediately call on that indi-
vidual to pay his obligation; and if he doesn't do it, that security is
sold out, and you probably destroy that man who, in good faith, put
in his own money. And to accomplish that purpose you take over
the property in which he put in his money and take it over at
apparently a wholly inadequate and unjust basis, and you make no
provision for his protection until you can ascertain the fact to the
contrary. I think he is entitled to the benefit of the doubt, if I may
use a criminal-law term, and determine that the Government ought
to take care of those obligations until it is demonstrated that that is
more than sufficient; and under the provisions of section 3, as we
have proposed to amend it and leave it stand, would protect the
Government, and they could recover from the company.
The CHAIRMAN. The Government takes over physical property,
tangible property. Now if the Government pays for the use of that
tangible property what the property itself is reasonably worth,
what difference does it make about how many bonds are outstanding
or how much stock is outstanding?
Mr. ROBINSON. Well, I think you are going to ascertain something
about the value of that property, if in the end in this inquiry, this in-
vestigation, you are going to go into that subject and ascertain the
facts.
The CHAIRMAN. A mortgaged farm would not rent for any more
than unmortaged farm, would it?
Mr. ROBINSON. I should say that the mere fact of a place having
a mortgage on it wouldn't change its value to the slightest degree.
It might depreciate it some, but certainly it would not enhance it
any.
The CHAIRMAN. Although the man that owns the farm and owns
the mortgage would like very well to get a return that would take
40958—18—17
258 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
:
care of the mortgage and get him a rental on the value of the farm
in addition.
Mr. ROBINSON. There are plenty of them who would like that, of
course, but I submit that you have no right to go and take it and say,
"I am not going to pay that, but I am going to take it."
The CHAIRMAN. And pay a just rent on the thing I take the
farm.
Mr. ROBINSON. That gets right back to the question again of what
is just compensation. And our position is that the interest on the
funded debt of the corporation is part of the just compensation which
should be paid for the use of the properties; and that the Congress
and the President and others ought not to prejudge and say that it
isn't worth that, because you haven't had certain returns, certain
average returns heretofore on a different period and under different
conditions.
The CHAIRMAN. You are presenting instances, though, where you
admit that the roads have been operated by the owners and haven't
paid interest on the bonds, and you ask the Government if it operate
the roads that it must guarantee interest on the bonds which the road
has not paid by being operated privately?
Mr. ROBINSON. I am of the opinion that if I have some arrange-
ment with my creditors whereby they don't press me and don't fore-
close on my collateral and don't put me into bankruptcy, that that
doesn't extend to the Government or somebody else who comes along
and takes the property which the Constitution guarantees it shall pay
just compensation for.
The CHAIRMAN. But according to your own statement, the earnings
of the property have not been sufficient to pay-to maintain the road
and pay the interest on the bonds?
Mr. ROBINSON. That is true in many cases, but there are various
and many reasons why that has been so, and I have illustrated some
of thèm awhile ago in the question of the depreciation of postal rates:
I gave an illustration of the Government itself giving a railroad 40
per cent of the price for carrying mail 40 miles per day of what it
pays a man to carry it 24 miles a day; whereas the railroad carries
twenty times as much mail. There isn't any justice in that, and the
Government ought not to take advantage of its own act in depreciat-
ing the earnings so that the company can't earn the money and then
say, "Well, you haven't earned it and therefore we are going to take
your property and not give you a return." We insist, Mr. Chair-
man-our position is this: That if you take the property you should
at least provide for such charges as will leave the corporation intact;
not exposed to bankruptcy, and then investigate through the legal
way, and if it be found, as this section provides, that you have over-
paid, you have got a provision there for recovery and you have got
a lien on the property for it.
Mr. BARKELEY. Let me ask you this question: You mentioned in
your testimony before noon some instances where the amount of capi-
tal invested in the railroad was something over $800,000. and also that
the funded indebtedness of that company was over $800,000—practi-
cally the same as its capital investment. Now, I believe that you
stated that the net operating income of that company was something
over 2 per cent, based on the capital invested. Can you tell me
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 259
approximately the rate of interest that those bonds bear-the funded
indebtedness?
Mr. ROBINSON. A large percentage of these bonds bear 5 per cent.
This table doesn't show, and I haven't accurate information. Many
of them bear 6 per cent.
Mr. BARKLEY. Well, now, assuming that I am correct in the in-
stance that the capital invested is $800,000, and that the funded in-
debtedness is $800,000, and that that funded indebtedness bears 5 per
cent interest, and assuming that your statement was correct that the
net operating income of the company, wholly independent of the
bonds and interest, was something between 2 and 3 per cent, which
makes it perfectly apparent that the company wasn't making enough
money to pay interest, even if the bondholders had been insisting on
the interest being paid, it couldn't be paid, and is it your view that
the Government, by reason of taking over these roads, ought to come
in and pay not only as much as the company was making in net oper-
ating incomes but make up the difference and pay the interest of 5 per
cent on bonds?
Mr. ROBINSON. I will give you the facts as to the company you have
in mind and try to answer your questions. The Birmingham &
Northwestern was assumed to have a property investment of $855,382,
with a funded debt of $800,000. The return on that funded debt
would be, on the property investment, 3 per cent, and the return on
the funded debt would be 3.20. That is the case, I think.
Mr. BARKLEY. What do you mean by
66 return on the funded
debt "?
Mr. ROBINSON. That is the amount that would be equal to that-
would be equal to 3.20 per cent.
Mr. BARKLEY. That is return on the funded indebtedness-that
goes to the holders of the bonds, does it not?
Mr. ROBINSON. They have got that much money in the treasury,
and they use it as they please.
Mr. BARKLEY. You mean to say that the property invested repre-
sents $S55.000. You mean by that that only $55,000 actual cash
outside of the indebtedness was put into the road? Or do you mean
that $855,000 was first invested, and then, predicated upon that in-
vestment, $800,000 funded indebtedness was paid?
Mr. ROBINSON. The latter is not the fact. My understanding of it
is this and it frequently happens that way. This is, as I under-
stand it, a reorganized railroad, bought at a receivership sale, and
that the amount that they paid for it-not what it cost; not what
was originaly invesed in it, but what they paid for it at the receiver's
sale-is shown here at $855,000, and that they issued $800,000 in
bonds, which may be only 40 or 50 per cent of the original cost of the
property, but that is what they happened to do; and their earnings
for 1916 would be equivalent to 3 per cent on their property invest-
ment there of $855,000, or it would be 3.20 on the other.
Mr. BARKLEY. In other words, to pay this $855,000 for the prop-
erty they had to borrow $800,000?
Mr. ROBINSON. That is probably the fact. I don't pretend that I
know the exact facts, but I know that is frequently done. But the
original investment in that property was probably very much larger.
260
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. BARKLEY. I know, but the original investment doesn't figure in
your table there always.
Mr. ROBINSON. But it will figure in the courts as to what is the
value of the property, when you come to get at the just return on
the property. It will figure in there in spite of all that can be done.
Mr. BARKLEY. Now, what I am trying to get at is
Mr. ROBINSON (interposing). Now, I have got the balance of
your question in my mind, if I may proceed to answer it.
Mr. BARKLEY. Yes; I thought you had concluded.
Mr. ROBINSON. No. Now there may be many things that will
enter into it, that will demonstrate to the referees or to the Court
of Claims that this return for 1916-or the equivalent of the return
here is wholly inadequate as to the future. I don't know the
facts, but they may have invested a very large per cent of their
earnings in improvements, extending branch lines out to an enter
prise, or building sidetracks, or opening coal mines and things of
that kind, so as to increase the volume of business, and we will pre-
sent you a number of cases of that kind this afternoon, showing that
that is quite common.
Now, in many cases-and it may be so here those investments
have been made; they are just now ready to begin to make a return,
and the proposition in this bill is that you shall take an average of
three years last past and base your return on that, and say that
"We won't pay any more for that, but we will take advantage of
the increase in the volume of business that is going to come here."
Now, our answer to that proposition is that you have taken our
property; that we are entitled to a just return; that pending this
adjustment, either by agreement with the President or with the
referees, or with the court, that you shall take care of these obliga-
tions that are vital to the existence of the corporation and its securi-
ties, and that you are fully protected in the event you have over-
paid. You have got a lien on the property under this, and you
could proceed to recover.
Mr. BARKLEY. I am afraid there wouldn't be any case of overpay-
ment if the Government is to pay, say, 5 per cent in order to guaran
tee interest on these bonds, and the operating income of the railroad
is only 2 per cent. There would never be any case of overpayment,
because the President would have no discretion there except to pay
the interest on the bonds, and in that case there wouldn't be anything
coming back to the Government, because that would be the minimum
guaranty under the law.
Mr. ROBINSON. No; I don't think so.
Mr. DECKER. I don't think it reads that way.
Mr. ROBINSON. Oh, no; it doesn't read that way. I will restate it.
for you.
If our proposition is accepted and the Government proceeds to pay
the maturing interest, the accruing interest on existing obligations,
that will be charged to their account as a part of the consideration to
be paid for this property. If the President, upon investigation-
or if the arbitrators upon investigation-determine that that is a
correct amount, that that is what ought to be paid, and the company
accepts it, that settles it. There is nothing further. But if there be
an appeal, either by the Government or by the company, to the
courts, and it then be determined that this amount is more than
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
261
the just compensation due this company for this property, then it
is to be charged back and to be collected out of it.
Now, if it be determined by the investigating authority-finally
by the courts, if it went there that 5 per cent or 6 per cent or 7 per
cent was a just return on the property, then that would settle it. If
it happened to be just the amount that had been paid, there would
be nothing more to be paid. If it was less, there would be more to
pay.
Mr. BARKLEY. From hearing you read the amendment I gathered
the impression that the President was authorized to enter into agree-
ment with these short-line companies to fix their compensation, but
that compensation should not be less than the accruing interest on
the funded indebtedness.
Mr. ROBINSON. Let me read it, to make it quite clear in your mind.
The provision now is:
(6
"That pending such an agreement "-the President's agreement-
an arbitration or appeal"—that is, an appeal to the courts “the
President shall pay or cause to be paid to any carrier while under
Federal control an amount not less than 90 per cent of such standard
return." Now, that standard return is the average for three years
which is provided for in the bill, and if there was no standard return,
if they had a deficit, there would be no standard return, and there-
fore there would be no 90 per cent payment. "But in no event less
than the amount equal to the accruing interest on its funded or other
indebtedness, remitting such carriers to its legal rights in the Court
of Claims for any balance claimed. And any amount thereafter
found due above the amount paid shall bear interest at the rate of
6 per cent per annum, and any excess amount paid hereunder shall
be recoverable by the United States with interest at the rate of 6 per
cent per annum.
99
So that in that event it compels the President to advance that
fund, but it doesn't settle that as the final sum that is to be paid, but
it leaves it open, first, to agreement, second, to arbitration, and third,
to the courts.
Mr. BARKLEY. In other words, your idea is that if this 90 per
cent amounts to as much as the accruing interest, all well and good.
Mr. ROBINSON. Yes, sir.
Mr. BARKLEY. If it does not, the Government shall make up the
difference and pay the accruing interest?
Mr. ROBINSON. Advance it.
Mr. BARKLEY. Loaned to the company or advanced. Then when
they begin to settle, if it should be determined that this was too
much, then the company would have to pay back to the Government?
Mr. ROBINSON. Yes, sir. This section so provides.
Mr. BARKLEY. If it isn't enough?
Mr. ROBINSON. They shall pay the addition. In other words, it
takes care of the situation pending this adjustment, and if that
isn't done when we go into the 1,800 cases, or something of that
kind, and these attempts to agree, and so on, why a lot of little
fellows will get strangled.
Mr. BARKLEY. Now, how long, on the average, has this funded
indebtedness existed? How long has it been going on without
interest being paid?
262 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS,
Mr. ROBINSON. Each company stands by itself, and there should
be no general answer.
Mr. BARKLEY. Could you give an answer as to the average length
of time?
Mr. ROBINSON. I can't because it is too much of a guess, because
in seven or eight hundred different companies it is impossible to
know what the different amounts are and so on.
Mr. BARKLEY. In many cases it has been during the whole life of
the company, I presume?
Mr. ROBINSON. Some of them have been so.
Mr. BARKLEY. Now, do you think that these bonds, this indebted-
ness, the value of it would depreciate any more while the Govern-
ment is operating the railroads than it has during the inability of
the company to meet its obligations under its own management?
Mr. ROBINSON. I feel quite positive that it would in most cases.
The parties who sell bonds are usually in close touch with the pur-
chaser. They have personal contact. They have personal relations.
They arrange matters between themselves, but just the moment you
take the property of the company away from it, it is then a creditor
without an asset. It has no control over its own affairs, and it
ceases to have the ability to deal with its creditors, and the creditors
say: "Well, we can't tell; this property is gone permanently." Sec-
tion 13, if they adopt it, would mean that it would require affirmative
action of Congress before it would be restored, and it would be maybe
20 years before they would get the property back, and they would
say: "What's the use of waiting any longer? I'm going in there
and liquidate this thing."
Mr. DECKER. Suppose you had bonds of some company and the
interest had not been paid for quite a while, say 5 or 10 years. The
Government takes it over. Do you think the Government ought to
pay enough to make up for that back interest, or just what comes
due since we take charge?
Mr. ROBINSON. The interest accruing during the period that it is
in your possession, and it has nothing to do with anything prior to
that time.
Mr. DECKER. I wanted to be sure about that.
Mr. BARKLEY. That leads me to ask this question: The accruing
interest heretofore having lapsed and not been paid, would the
prompt payment by the Government of the accruing interest in
the future tend to give that stock a speculative value that was not
justified by reason of its basis in the value of the property?
Mr. ROBINSON. I assume that you mean bonds in your question,
because we are not dealing with stocks.
Mr. BARKLEY. Bonds is what I meant.
Mr. ROBINSON. It might have that effect to some extent. It is
difficult to form an opinion in so many different and various cases
and conditions, so that I don't believe I would be able to give you
any reliable opinion.
Mr. BARKLEY. Isn't that a natural assumption that bonds that
haven't been paying their interest immediately upon becoming, either
by the Government or some other agency, interest bearing or interest
paying, would promptly become more valuable than bonds that have
been dragging along for years?
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
263
Mr. ROBINSON. That might be so; and admitting that it is true, I
don't believe that that will change the status of affairs or relieve the
Government of its obligations to take care of property that is forci-
bly taken possession of. I don't think the fact that somebody might
speculate to some extent on it would relieve the Government to any
extent.
Mr. BARKLEY. You think that the claim of the Government for any
excess it might have paid would be prior to the claims of the bond-
holders?
Mr. ROBINSON. I think that in times of war, when you are dealing
with a war proposition, Congress could make it so without any pos-
sible doubt.
Mr. BARKLEY. Could it do that in spite of the constitutional provi-
sion with regard to the impairment of contracts?
Mr. ROBINSON. I think there is no constitutional provision in the
Federal Constitution preventing the impairment of contracts. If I
understand it, that provision is in the State constitutions, but does
not apply to the Federal Constitution. Am I correct in that?
A VOICE. That is correct.
Mr. ROBINSON. So that I have no doubt that the Congress can pro-
vide as a war measure-because this is a war measure, and you are
dealing with it as a war measure, and you have all the powers to do
that—I have no doubt that you can make it so that any advances made
for the purpose of taking care of the interest obligations which
already are a lien on the property-everyone of those interest obli-
gations are liens on the property as to the funded debt.
Mr. DECKER. I am afraid they would come prior to the Govern-
ment, too, because if they didn't, we could just as well confiscate
your property as to confiscate the property of the bondholders.
Mr. ROBINSON. No, sir; when you provide that fund you pay it to
him and you take his place to that extent. He has no grounds for
complaint.
Mr. STEPHENS (in the chair). In other words, your assumption is
that if the Government takes over the physical property, it ought
also to take over the liability?
Mr. ROBINSON. It ought to protect the owner of the property and
not expose him to bankruptcy, and not do anything that will rob
him of his property.
Mr. STEPHENS. Now, in connection with that, Mr. Robinson, in
your amendment you refer to the payment of the accruing interest
on these outstanding debts. Now, of course, that applies only to
the interest that is falling due during the Government control.
Mr. ROBINSON. During the period that the Government has it.
Mr. STEPHENS. But all of the back interest that is due on these
properties is covered by a certificate of indebtedness, I assume, and
of course there would be interest accruing, and therefore your amend-
ment would provide for the payment of interest on all of the ac-
crued interest of the years past which are now covered by certificates
of indebtedness?
Mr. ROBINSON. I don't believe that the amendment is subject to
that construction. It is not the intention to make any such pro-
vision. The intention is-and the proposition we submit for your
consideration is that during the period beginning at noon, Decem-
ber 28 last, until the day the properties are returned, or until the
264
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
day that these questions are decided by the authority that is provided
for in this act.
Mr. STEPHENS. I have a great deal of sympathy with that con-
tention, too. It strikes me that that is fair and just, but it appears
to me that the wording of that amendment would necessarily cover
the interest that is accruing on the certificates of indebtedness that
were issued for the purpose of payment of interest.
Mr. ROBINSON. If subject to that construction, it should be
amended; and if subject to that construction, it is not what we con-
templated when we presented the subject for your consideration.
Our thought is that on each day that you have the property you shall
take care of the interest obligation until the question is settled as to
what is a just return for the property, and on that day, then, the
changed status or the adjusted status will become effective.
Mr. WINSLOW. Have you finished on this line, Mr. Robinson?
Mr. ROBINSON. I think so.
Mr. WINSLOW. What is your attitude as to the time that should
be allowed the Government to give over the roads after the declara-
tion of peace?
Mr. ROBINSON. We are of the opinion that the Government ought
not to take over in time of war properties of this kind and keep
them for an indefinite period after the war. We believe that if the
existing act is passed-section 13 is passed-if that is finally adopted,
that that is a permanent taking over of the property, and some of
the attorneys that represent us say that we could go into the court and
sue for the entire value of the property, not for the use of it, but
that the Government has taken it. They have got an indefinite
taking, and therefore it is a permanent taking.
Mr. WINSLOW. Assuming that the interpretation would be that
the properties were to be taken back, how long do you think they
ought to be allowed?
Mr. ROBINSON. We think not longer than six months, and we
think it more important to us as short lines, as poor lines, than it
is to others—it is more important to us if this act as it is drawn is
to be applied, because most of us could get nothing, or practically
nothing, for our property, and therefore if the Government is to
take it and give 1.78 per cent, or 2 per cent, or one-half of 1 per cent,
we think the lower the return that would come to us, the greater the
importance for it to be returned to us as quickly as possible, so that
we may exercise our own judgment in handling our own property.
Mr. WINSLOW. You are speaking as though you had an amendment
that you were thinking of offering as a substitute for the thirteenth
provision.
Mr. ROBINSON. We haven't submitted an amendment for it, but
we suggest, so far as the poorer lines are concerned, that the posses-
sion ought not to be retained longer than six months after the decla-
ration of peace.
Mr. STEPHENS. Suppose that your amendment is passed there.
Suppose that your amendment is adopted that you have suggested
there, would that change your position on the termination of the
Government's control?
Mr. ROBINSON. But to a slight extent. It would make us possibly
a little less urgent about the possession, because we would feel that
we were going to get something, but until we know we are going to
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
265
get something we have to be quite urgent about the time the proper-
ties are returned to us.
Mr. BARKLEY. If you were sure that these little roads were going
to make enough to pay the interest on their debt perpetually, they
wouldn't care whether they ever came back or not, would they?
Mr. ROBINSON. If I should name the roads, I would agree with
you. But you take them as a whole, a great many of them would
disagree, because quite a number of them, many of them in fact,
have standard returns, which are satisfactory and they would not
be willing to accept that.
Mr. BARKLEY. Have you had occasion to give any thought to the
interpretation of the section of the act of August 29, 1916, which
authorizes the President to take over these roads, but doesn't say
anything about turning them back; whether he would have authority
under that to keep them for any particular period or indefinitely
after the war?
Mr. ROBINSON. I have not.
Mr. MONTAGUE. Does it say he can take it over as an emergency
and keep it during the emergency?
Mr. BARKLEY. Yes; but if he is to be judge of how long the
emergency exists.
Mr. MONTAGUE. You mean that after the war is over he would
continue to operate it in times of peace?
Mr. BARKLEY. The emergency might not be so coextensive with
the war. The emergency might continue after the war is over.
Mr. ROBINSON. I haven't made any investigation of that question,
but I assume as a matter of law that if Congress passes an act fixing
the terms, regulating the thing, making provisions for it and decid-
ing when it shall be returned, that that becomes effective as against.
its previous act which did not define that particular time. But if
it had been defined I would assume that Congress could still fix
a period.
Mr. BARKLEY. I was assuming that Congress would fix no date
and legislate in no way upon the subject in this bill-would cut out
section 13 and substitute nothing for it. Then under this act of
1916, which authorizes the President to, in times of war, take over
railroads, and to operate them, utilize them to the exclusion, as
far as may be necessary, of other traffic or transportation, to transfer
troops, war materials and equipment, or for such other purposes con-
nected with the emergency as may be needful or desirable-that is
quite a broad provision there, and I was wondering if you had
thought anything about it in connection with the power of the Presi-
dent after having taken them over, to continue their operation after
the conclusion of peace.
Mr. ROBINSON. I haven't made any investigation of it and can't
give you any mature opinion.
Mr. RAYBURN. It is evident though, if section 13 was stricken out,
the day that peace was brought about, the President would be com-
pelled to turn them back, because it says he takes them in time of
war. If you don't put in section 13, you will have to put in some
enabling clause like that.
Mr. ROBINSON. I rather doubt whether Congress has the power to
take over the use of the properties in times of peace, and if they have
266
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
not power to take over the use primarily, I doubt whether they would
have the power to retain them.
Mr. WINSLOW. In approaching this subject are you considering
this as a war measure pure and simple?
Mr. ROBINSON. Without doubt.
Mr. DILLON. I would like to ask one question. Mr. Robinson,
speaking about your losses and injuries, that these roads would sus-
tain, would the Government's possession protect you against receiver-
ships and against foreclosure proceedings?
Mr. ROBINSON. No, sir.
Mr. DILLON. Why not?
Mr. ROBINSON. There have been such cases already, and I have had
occasion to investigate them myself. The courts, as I understand it,
in one or two cases have since appointed a receiver, but said they
couldn't put their receiver in possession of the property, but so far
as the corporate affairs-so far as the securities were concerned, and
so far as all matters pertaining to the corporation, they could ap-
point a receiver and put him in possession, but they had to get
permission of the director general before they could change the con-
trol of the property itself.
Mr. DILLON. Now, another question: Your position is somewhat,
as I understand it, like this: That these are rather baby institutions,
and they are undergoing a plan of construction, and by reason of
the Government's adopting your plans and your construction work,
that you are thereby damaged?
Mr. ROBINSON. That is true in a great many instances.
Mr. DILLON. And you have thereby sustained serious loss? I can
see where that might occur. For instance, like a man who has a
building only partially finished, where somebody takes possession
and delays your work, and will not allow you to do it, that you would
thus be damaged. Now, could you suggest some measure of damages
that could be put into this bill to protect these small roads, other
than the one you have already suggested, that of paying interest?
Mr. ROBINSON. If I understand the situation from a legal point of
view, Congress has no power to fix the compensation; that this is a
permissive bill making provision so that the President may make
agreements with the railroads, so as to avoid litigation and adjust
things, if he can, and if he can not it has to go to the courts. But
if I understand it correctly Congress could not pass a bill here fixing
a specific sum for the rental or use of the particular property that I
happen to have, and preclude me from going to the courts. I think
this is purely a permissive matter, and our idea that the President's
hands or the arbitrators' hands should not be so tied with its pro-
visions that they can't do justice, and that justice demands that pend-
ing final adjudication in some form or other, either by agreement or
by adjudication, that these vital questions must be taken care of..
Otherwise you destroy not the physical property necessarily, but you
destroy the people that put the money into it.
Mr. DILLON. Yes; but Congress ought to fix in a positive way the
things that should be considered by your arbitration or by agreement,
and not leave it wholly discretionary without any fixed boundaries.
Mr. ROBINSON. I don't believe that Congress can be very definite in
fixing those things, and we will present you a number of witnesses
in a few minutes showing various kinds of cases, to show that it will
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
267
be very difficult to draw definite, specific provisions. I think you
have got to give the President, who will have the final say-you have
got to give him pretty broad powers. Otherwise it will result in
doing serious injustice.
Mr. SWEET. I would like to ask a few questions. Now you repre-
sent here, as I understand it, 115 short-line railroads?
Mr. ROBINSON. I am speaking directly for that number now, and
generally I am speaking for them as a body.
Mr. SWEET. And there are about 800, you say, in the United States?
Mr. ROBINSON. About 800; yes, sir.
Mr. SWEET. Now, these roads that you represent, are any of them
electric lines or interurban, as they are sometimes termed?
Mr. ROBINSON. None.
Mr. SWEET. And the propelling power of all of them is steam?
Mr. ROBINSON. All.
Mr. SWEET. Now, all of these roads that you represent you believe
come within the purview of the President's proclamation?
Mr. ROBINSON. I do.
Mr. SWEET. And how do you determine that?
Mr. ROBINSON. They are railroads, and the President says he has
taken charge of all the railroads. The director general has given
each and every one of them notice that he has taken possession of
their property. For example, I am receiver for a property, and I
have had telegraphic and mail notice of the fact that he has taken
charge of the property and that I am to be subject to his orders, and
I regard that as rather definite notice that the Government has taken
possession.
Mr. SWEET. The fact that you have been given notice, you believe,
is determinative of the fact that the Government has taken over
your railroad?
Mr. ROBINSON. That is my belief.
Mr. DECKER. Suppose under this power to take over the railroads
in time of war for certain purposes, as passed in the Army appro-
priation bill last year-1916-this bill should be drawn or should
be left to stand, so that the Government control might continue at
least for some considerable time after peace came, what authority
would the directors of the roads have to agree to that kind of a
proposition?
Mr. ROBINSON. I suppose that the directors of a corporation have
the power to lease their property at any time. In some of the States,
as I understand it, the directors are not authorized to sell a property
as a whole, but they would have power to lease it. And if an agree-
ment is made under this bill here with the President that is to all
intents and purposes a lease, in my opinion.
Mr. ESCH. Do you believe, Mr. Robinson, that under the power
given the President in the Army appropriation act of August 9,
1916, that he is given authority to annul section 6 of the interstate-
commerce act, against pooling, a criminal statute? Is he given power
to practically annul the provisions of the Sherman antitrust act
against combinations, and so on; that he is given power to annul
the findings of the Interstate Commerce Commission as to rates,
rules, and practices, or should this bill in itself include a positive
declaration giving him the power to so annul?
268 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. ROBINSON. I doubt very much whether he has the legal power
to do it or not.
Mr. ESCH. Well, we ought to be bound by legal powers.
Mr. ROBINSON. I am of the opinion that the Constitution still
exists, that the acts of Congress are supreme, and that a mere in-
ference from the act giving him the right to take possession of the
physical properties would not necessarily extend to the fact that
it was going to thereby make null and void existing acts of Congress,
which are not necessarily in conflict with the section authorizing
him to take possession.
Mr. ESCH. Now, it is asserted by Mr. Anderson that the director
general, who, of course, would be the President, would have the
right to ignore the findings of the Interstate Commerce Commission
as to rates and could raise rates over the raises made by the com-
mission. That is a legislative function. Do you think this bill is
sufficient to give the President that power to the director general?
Mr. ROBINSON. You mean the bill now pending?
Mr. ESCH. Yes.
Mr. ROBINSON. I dislike to get into expressing an opinion about a
pending bill which I have not given any study as to the question
there, but I should doubt it very much.
Mr. ESCH. Would it be your opinion that it would be better if
this bill contained provisions giving to the President or the director
general the power to ignore or annul these positive enactments that
I have called your attention to?
Mr. ROBINSON. Mr. Chairman, I am a great believer in orderly pro-
ceedings, doing things in an orderly way, and if it be necessary to
give the director general, through the President, power to ignore
existing laws of the country, that power ought to be specifically
conferred by Congress by an act, so that there may be no question
about somebody usurping power and exercising jurisdiction and
doing this, that, and the other. I think it is by far the better way
to do it in an orderly way, but I don't like to set up my opinion on
great subjects of that kind.
Mr. EscH. Another question not relating to what I have asked:
The financial troubles of the short lines are due to the fact, are they
not, in a large degree that they make through routes and rates with
trunk-line carriers and get the short end of the haul?
Mr. ROBINSON. That is true to a very substantial extent.
Mr. ESCH. And for incoming freight they still get the short end?
Mr. ROBINSON. That is true to a substantial extent.
Mr. ESCH. If the director general is given power to increase rates,
would it be possible for him to financially assist the short lines by
increasing their share of the joint rates?
Mr. ROBINSON. He would assist them just to the extent that he did
increase their proportion, and if he increased it very substantially
it would change the status of a large number of them.
Mr. Escн. Would it change the relations of rates and cause much
disturbance?
Mr. ROBINSON. It need not change the rate itself to any extent.
The rate itself could remain as it is and the division could be larger
to one and less to the other.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
269
Mr. ESCH. Well, if he exercised that power-it having been granted
to him-it might relieve the short lines of some of their financial
difficulties.
¡ Mr. ROBINSON. It would relieve to the extent that that was exer-
cised; but while they are under the control of the Government, under
the provisions of this bill, it wouldn't benefit them to any extent,
because it would be merely dividing Government funds.
Mr. ESCH. That's all.
Mr. ROBINSON. Now, Mr. Chairman, there is a statement or two in
here about guaranteed returns-in this bill. We haven't been very
much interested with the guaranty offered us on the figures, and I
am reminded of a little skit that I saw on the stage, and I am going
to take the liberty of telling it. It will take but a moment.
One of the leading actors-a Jewish actor-came dashing out of a
hotel and encountered a big, burly, red-headed Irishman. This little
Jew, highly excited, said there was a big black bear in the hotel there
and the proprietor had offered a reward of $10,000 to anybody that
would get it out. So the Irishman dashed for the door as hard as
he could and the little Jew got in front of him and interfered and
gesticulated, and did everything he could to stop him, and finally
succeeded in stopping him, and the better judgment of the Irishman
got possession of him. He stopped and thought a moment, and then
he said, "Sure; and did that fellow have the money?" "No," the
other fellow said, "but wasn't it a liberal offer?" [Laughter.]
Now, we are impressed with the idea that there is a liberal offer
here, but nothing else. We don't doubt that the Government has the
money, but we don't see where we are going to get protection for our
property, and we feel that if the bill as drawn is passed, it will re-
sult in very great injustice; it will result in the destruction of the
savings of thousands of people, and it will do one other thing, it will
forever stop the construction of roads of this character, and they are
the pioneers. There is a large amount of this country to be developed,
and it can only be developed by the construction of roads such as we
represent. It is apparent as a result of the experiences of the last
few years that there will be little or no further trunk lines built.
Most of the trunk lines have been pieced out and came out of smaller
roads, anyhow. So that you gentlemen ought to look beyond the
present situation and see what effect it is going to have upon the
country in the future. Have we all the railroads that we want in
this country? Have we developed all the sections of the country
that we want to develop? Have we sufficient raw material available.
to run us after the war? Or should we look forward to see whether
there is going to be roads built and develop these undeveloped terri-
tories? If this bill is passed and you take possession of these roads
under its terms, and you destroy the investment that has been made in
them, you will-none of us will probably live to see the day when there
will be further development in those territories.
Now, if the Government decides to buy the railroads in the start,
we all know what will happen thereafter. The pork barrel propo-
sition that we hear so much about in the newspapers will be a baby
as compared with the charges that will be made when it comes to get-
ting roads built in the future; that this section is being favored and
that section is being favored, and the pulling and hauling will be
serious.
270 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. MONTAGUE. One section will be destroyed and another built up?
Mr. ROBINSON. Yes, sir. So that I ask you to look beyond this
present situation; to be sure that you do justice to these roads that
have gone out and developed the new territory. Be sure that you do
justice to the people who put their money into them. I don't believe
it would be wise for Congress to be much afraid that there was an
extra bond issue. They had better pay a little something extra than
to kill that proverbial goose that laid the golden eggs. And therefore
I appeal to you to give these lines real justice, and we have proposed
some amendments there that will do substantial justice. If they
should be modified, you gentlemen have the power and can modify
them.
I think that is all I will say for the moment. Now, we have a num-
ber of witnesses here that will present special cases. Each one will
present his individual line to show just how it is going to affect him,
and those witnesses, I think, will be quite short-most of them.
Mr. MONTAGUE. Mr. Robinson, the amendment that you propose-
have you distributed those to the members of the committee?
Mr. ROBINSON. I thought so. Now, Mr. Chairman, one other
thought. I find I haven't touched on one point, as to the provision
for the appointment of auditors, which is practically an arbitration
board. We haven't offered or assumed to offer an amendment to
that. That board is really an arbitration board. That is what it
amounts to, and we are of the opinion that an arbitration board
ought to be one that represents both sides; that one interest ought not
to appoint all of the board; that there ought to be some provision so
that that board-that the parties in interest could have some represen-
tation or some voice in some way in that; and we submit that if they
are given the opportunity to have some representation on that arbi-
tration board and to have some voice in it that the result will be that
there will be less going to the courts than there would be if that board
is composed entirely of governmental employees and that the carriers
themselves have no voice in any way in their selection.
One of our witnesses is very anxious to leave-Mr. Anderson,
president of the Oneida & Western Railroad, down in Tennessee.
He has just built his road and is extending it some now, and I am
going to call him to the witness stand first, and then we will present
a number of other cases.
Mr. STEPHENS (in the chair). You may proceed, Mr. Anderson.
STATEMENT OF 0. H. ANDERSON, PRESIDENT OF THE ONEIDA &
WESTERN RAILROAD CO. OF TENNESSEE.
Mr. ANDERSON. We began the construction of the Oneida & West-
ern Railroad in January, 1914. It was projected to build 60 miles.
We have finished to date about 22 miles at a cost of approximately
$600,000.
Of course, we had no earnings during the three years, or practi- .
cally none, ending June 30, 1917, and under the provisions of this
bill as drafted we would be left out in the cold.
Now, ours was not a promotion scheme. I spent my money and my
people's money, and during the eight months ending January 1,
1918, we earned about 4 per cent on our investment above operation
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
271
and maintenance. So that earning, of course, occurred during the
period of construction.
There should be some elastic provision made to cover cases of this
kind. Otherwise our property would be practically confiscated. We
developed a very large coal field, and we think we are developing a
timber territory that will possibly yield 3,500,000,000 or 4,000,000,000
feet of timber. There is now located out on our line of railroad 15
or 18 sawmills, and one of our large customers, is a patron of a con-
cern which has a contract with the Government and is furnishing the
Government lumber. We want to know where we stand. We would
like to know, if it is possible, what is going to happen to us.
Mr. DECKER. Did you say one of these mills has a contract with the
Government for furnishing lumber?
Mr. ANDERSON. Our mill has an arrangement to furnish lumber to
a contractor of the Government.
Mr. DECKER. I was curious to know if the mill was taking con-
tracts directly.
Mr. ANDERSON. No; through the Government contractor. The rea-
son I know that is because shipments are being made to a large con-
tractor of the Government under the priority orders of the large
contractor.
Mr. STEPHENS. This 4 per cent that you have been earning last
year, does it extend over the four-year period?
Mr. ANDERSON. We did not get to operating before May, 1917.
Mr. STEPHENS. And you have earned the 4 per cent since then?
Mr. ANDERSON. Since that time, since we got the road in operation,
it has paid about 4 per cent above maintenance and operation.
Mr. STEPHENS. And under the provisions of this bill that would
be spread out over the three-year period?
Mr. ANDERSON. It only includes two months of the period. You
see, under the provisions of this bill as drafted, we could only come
up to June 30, 1917. That would only be May and June, and then
we have just reached the beginning of our earning capacity. We
have not finished the construction of the road. We have only built
20 miles. We have a contract out for the finishing of 25 miles. We
lack about 2 or 3 miles of having that finished. That will very ma-
terially increase our earning capacity. We are building through the
mountains down there over a very rough country, and this point will
enable a large number of shippers to reach the road, and, as a result,
our earning capacity will be increased. It is absolutely necessary
then to build 6 or 7 miles more road, but under the present condi-
tions, I do not know where I would get the money.
Mr. STEPHENS. Your prospects for the future are very bright, with-
out this legislation?
Mr. ANDERSON. Yes, sir.
Mr. STEPHENS. Your road would probably make a very satisfac-
tory income?
Mr. ANDERSON. We feel that way about it.
Mr. MONTAGUE. Have you been taken over by the Government?
Mr. ANDERSON. Yes, sir; I was notified to that effect by the di-
rector general.
Mr. MONTAGUE. Your road is a part of what system?
Mr. ANDERSON. A part of the Southern system.
272.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. RAYBURN. If the Government comes in that will be about all
the status you will have?
Mr. ANDERSON. That is about right; they have already got us.
Mr. RAYBURN. Did you have occasion or opportunity to examine
the amendment suggested by Mr. Thom?:
Mr. ANDERSON. Yes, sir; I read that.
Mr. RAYBURN. Do you think that is useful to you?
Mr. ANDERSON. No, sir; I do not. I do not think that is elastic
enough.
Mr. RAYBURN. How about the one submitted by Mr. Robinson?
Mr. ANDERSON. I do not know whether that is elastic enough.
Mr. MONTAGUE. Do you not think it would be advisable to submit
an amendment covering your views, that we might give it consid-
eration?
Mr. ANDERSON. Yes, sir; I presume so. I have not drafted an
amendment, however. I have not gone to the expense of employing
an attorney. I have spent all my money on railroads.
Mr. STEPHENS. Maybe we could understand it better if you drew it
yourself instead of having a lawyer do so. [Laughter.]
Mr. DECKER. My friend Stephens is rather proud of the fact that
he is not a lawyer.
Mr. BARKLEY. What part of Tennessee is your road in?
Mr. ANDERSON. The northern part, 200 miles south of Cincinnati.
Mr. BARKLEY. In the northern part of the State?
Mr. ANDERSON. Yes, sir. Our road has been equipped with 85-
pound standard steel rails, and we have built eight bridges through
the roughest country there is in Tennessee. I have one cut on that
railroad which is 124 feet deep in rock.
Mr. WINSLOW. I would like to ask you if you consider
working strictly under a war measure?
you are
Mr. ANDERSON. I do not understand you.
Mr. WINSLOW. I wanted to know if you regard the undertaking of
the Government to take over your road as strictly a war measure?
Mr. ANDERSON. Yes, sir; and I think it was absolutely necessary
under the conditions.
Mr. STEPHENS. We are very glad to have had your testimony.
Mr. ROBINSON. Mr. Chairman, we have with us Col. Dean, of
Georgia, who is attorney for the Gainesville Midland and Gainesville
Northwestern, two roads, presenting different points of view, and I
will ask Col. Dean to present those views to you.
Mr. STEPHENS. We shall be very glad to hear from Col. Dean.
STATEMENT OF MR. H. H. DEAN, REPRESENTING GAINESVILLE
MIDLAND AND GAINESVILLE NORTHWESTERN RAILROADS.
Mr. DEAN. Just a word before I come to the concrete case I have
to present. As I understand it, the bill itself is intended to carry out
and embrace the substance of the President's message in which he
took over the roads. Our contention is that it is not as broad as the
message and does not to that extent cover the breadth of the situa-
tion as embraced in the President's message; and in this amendment
of Mr. Robinson presented here we have started to bring, as we
thought, up to the real purpose of such a bill as should be passed.
For instance, four lines on the first page of the bill is restricted and
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 273
seeks to get a congressional adjudication that an average earning for
three years would be just compensation for the use of the roads dur-
ing the war period. We do not think, and we do not think that
anyone else in a congressional act could fix what would be just com-
pensation as to an average earning of a road. They might fix it, as
this gentleman over here suggested a while ago when he asked Mr.
Robinson whether, perhaps, some mode might be arrived at rather
than the interest and the bonded indebtedness. I think it could be
arrived at by interest on the value of the property, and that could
not be arrived at by this committee or by Congress. It could only
be arrived at by the trial or adjustment of each particular case.
Therefore we sought to amend the bill in such a way that that could
be arrived at. If the property is to be taken completely, you would
all agree that you would not regard the bonded indebtedness as the
only method of fixing the value of the road. It might be worth
more than the bonds or vastly less than the bonds or the same as the
bonds. You would arrive at it by the actual value of the property
taken. That is the law of condemnation proceedings. Then, if you
are going to take it for a part of the time, unquestionably the interest
on the value of the property at the time taken would be the legal rate
of interest in the State where the road is constructed during the
time that the road was being used by the Government.
The reason Mr. Robinson laid the stress on the question of interest
was because if the interest is not taken care of it means bankruptcy
for somebody. If it does not bankrupt the railroad it will bankrupt
the man who has got his bonds in the bank as collateral, because the
bank will call him, and if he can not do it they will sell his bonds
under the power of sale in the bank, and that will bankrupt him; and
then if it does bring half the price and the bank does not get the
money it will bankrupt the bank, and there will be a string of bank-
ruptcies following the depreciation of the bonds if something has got
no kind of a value on it.
As I understand it, the purpose of the committee and the purpose
of Congress and the purpose of the President-because nothing he
says in there is to be construed as doing anything that does not give
the owners of the property just compensation for that property.
We arrive, then, at the question, Is this bill to be made in such a
shape as some court or some board of arbitration can arrive at what
would be just compensation for the use of the property pending the
time it is occupied and controlled by the Government, and pending
that some arbitrary payment ought to be made, because the bill pro-
vides for an arbitrary payment of 90 per cent of the average earn-
ings. We do not think that would be right; if there is no average
earnings, it would be some arbitrary amount which we fixed in the
bill as being the interest and the bonded indebtedness pending an in-
vestigation. I do not think it would be met with the constitutional
objection that, I believe, the chairman, Mr. Sims, raised, that we
would not have the right to take that back afterwards if it turned
out there was water in the bonds. I think if the man accepted inter-
est on his bonds, knowing the law to be what it is, if it should be too
much he would have to lose it; I think if he accepted interest under
those circumstances he would be estopped from raising an objection
to the fact that he could back out of that afterwards.
40958-18-18
274
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Having said that much, we take the position for the two roads—
Mr. Barker, who represents as vice president one of the railroads,
and I want him to give more specifically the peculiar phase of that
road, and I will speak generally of both of them.
We are just in a straight line from Savannah, Ga., to Knoxville,
Tenn., and we have in the line about four short lines which, alto-
gether, amount to over three-fourths of the distance between those
two places. If you have had any experience in what you call "long
lines" you will find they are all made up of short lines. Every road,
so far as I know, in the United States started out as a short line,
took another short line and coupled them together, and you got a
long line. We have got four short lines. We have a line running
down from Knoxville to Murphy, N. C. That is a short line. You
go to the other end and there is one from Savannah up to Camak,
what is known as the Brinson Road; that is a short line. Then we
skip a short line to Athens, and we have a road from Athens to
Gainesville; that is a short line. Then from Gainesville on the
Northwestern up to a point named Helen; that is a short line. You
fill another gap of 40 miles-and by the way there is 18 miles already
built, although we have not got the rails down on it-coming up
nearly to Hiawassee. Then fill in from Athens down to Camak,
and you have filled that up, and you have a straight line from Knox-
ville, Tenn., to Savannah, which will be 100 miles nearer than any
road now in existence. So, it is just a line building up; and that
is what the people put their money in, with the expectation that it
would link up some day and be one of the trunk lines between the
great West and the ocean. These gentlemen of the Gainesville Mid-
land bought the road under these circumstances. It was owned by
the L. & N. Railroad. They owned all the stock. The city of Gaines-
ville has invested $500,000 in money and owned the stock of the rail-
road. They had issued a lot of bonds on there, but they had so much
water in them that I filed a bill and had it put in the hands of a re-
ceiver; and then I made such a stringent attack on their bonds that
they agreed they would give me an upset price and sell that road for
$3,000 a mile and let it go.
It was a narrow-gauge railroad at that time. They put it up at
public outcry, and it was bought for $3,000 a mile, amounting to
$165,000. Then I went to Savannah and interested a number of
gentlemen there, all Georgia capital, and they raised $165,000. That
road cost before that time from $500,000 to $1,000,000, but it was
a narrow gauge and had got to a point where it did not start any-
where and did not get anywhere, was just out in the woods, and it
failed. They then put in $661,000 more, and they constructed it to
Athens; and they broadened the guage from Gainesville to Athens,
and had a good line of 40 miles. It had another fork running down
to Monroe toward the Georgia Railroad and that was still a narrow
gauge, and after running some time and getting good earnings it
showed up all right and they said, "We will put in some more
money." So they borrowed the money and pledged it-here is the
paper right here [exhibiting a paper to the committee]-they bor-
rowed $325,000 more money. They pledged the other $661,000 worth
of bonds. Here is the bond certificate right here [exhibiting paper
to the committee] to raise the $325,000 to complete the broad gauge to
Monroe, where it tapped the other line.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
275
As a result they tapped three trunk lines. Here [illustrating] is
the Southern Railroad from New York to New Orleans; there [illus-
trating] is the Seaboard running from New York to Atlanta and on
to Birmingham, which they crossed. Here [illustrating] is the
Georgia Railroad, L. & N. system, running from St. Louis to Augusta
and on to Savannah; they strike that. There is the Central [illus-
trating], which is now the Illinois Central, coming to Macon and to
Athens; they struck that. Thus they have a line playing backward
and forward between those three lines. They saw that these towns
were going to be cities; that Athens, the city of learning of Georgia,
the seat of the State university and normal schools, growing big, a
healthy town, and it has got four railroads and had four depots,
and every one of them was a mile from the business center. Athens
is out on a hill. Our road went right into the center of the town
and established the Athens Terminal Co. and bought right in the
very heart of the town, where you can just step out of the depot and
you are right at the business part of the city. The Seaboard joined
with them and paid half of the interest, and those two together own
those terminals.
If you go to unionize all the railroads and rescramble the eggs
you are going to go back and form another trust, and you have got
to use the union station there which the Midland bought and own,
but has not got any interest from it because it has not reached the
use intended..
They went to Gainesville. There the Southern Railway is a mile
from the business part of the town. The Midland went right into
the heart of the town, within 300 feet of the public square, and got a
large area of ground in there, and built the terminals of the town
of Gainesville. If you combine the two railroads you will order all
the Southern freight shipped right up on the Midland's tracks to the
public square, where it will be delivered. There is no other way
to get into Gainesville. It is the same way at Monroe; it is the same
way at Winder, where they tap the Seaboard and Georgia; they
have got the terminals.
One gentleman asked awhile ago, "Suppose you had had a farm
which had only been paying 3 per cent interest and the Government
wanted to take it over, why should the Government pay any more
than 3 per cent?" I would say it depends on the farm. If that
farm was up to its utmost capacity, just 100 acres, and make 3
per cent, that might be fair compensation. But suppose it was a
thousand-acre farm, and suppose that only 100 acres was under cul-
tivation; suppose the balance of it was fine timber. Suppose the
Government said, "We will take it now and will cultivate the 100
acres and will pay you 3 per cent on what that 100 acres has brought
in, but we will go and clear up the best of the land and sell the tim-
ber and put that in our pocket and cultivate 1,000 acres, and we will.
get ten times 3 per cent; but we are only going to pay you 3 per
cent, because that is all you got out of it." That is the condition of
our railroads. We have terminals there with five times as much as
we are getting out of them, because we bought them with the expec-
tation of this trunk line ultimately going through, whren we have the
only terminals in all these towns.
:
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FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
You take the freights. They issued that order, which I think is
more or less crude, because they could not have understood exactly
all the situations. They said, "You must cut out and take the
shortest line for the delivery of freights." They said they wanted
to relieve congestion. Sometimes these are absolutely antagonistic
positions. Here was the Southern Railroad, congested to death, and
it comes to Gainesville. It has nearly all the cantonments of the
Government on its line. It just can not get freight out of Atlanta
to Gainesville. The remedy is to ship it out on the Seaboard or
the Georgia, tap the Midland at Gainesville, and bring it back this
way, and it does not cost the citizens of Gainesville any more. By
that means they get it the next day. It would require a week for
delivery the other way. It is a case of where the shortest distance
is not sometimes the quickest. It is a repetition of the old saying,
"The longest way around is sometimes the shortest way home.
If you can not get the short way, you better take the long way.
that is the way the road has subsisted, because it has been able to
tap these various towns by carrying the Southern traffic to Athens,
Monroe, and Winder, and then take the traffic over the I. C. up to
Gainesville. That has been exactly what the Government has been
fostering ever since the Government has been started, and that is to
foster competition. It is a good illustration of that. If you are
going to abolish competition outside of the local lines you had just
as well tear the track up.
*
And
When it comes to Gainesville it takes the Northwestern Railroad,
which is just a new railroad to tap two specific enterprises. One is
the largest timber enterprise-I came near getting into a fight a
while ago for saying it was the largest enterprise this side of the
Mississippi. Another gentleman said his is just a little larger, and
I did not want to get into a fight away from home, so I conceded
it—but we have 100,000 acres of fine timberland, with a sawmill just
started, and are developing these valuable timberlands and bring-
ing down to Gainesville and the southern railroads much very valu-
able timber to ship for shipbuilding. That is just started. The other
enterprise is a pyrites mines for sulphur and acid, for munition
plants and fertilizer manufacturing, but the Government is so anxious
to obtain that, it is actually paying one-half of the expense of con-
structing a dirt road alongside the railroad, so as to get the ore out
to the railroad before this branch railroad can be finished. It is
putting in about $40,000 or $50,000, I think; and they have not
hauled the first ton of ore. Take that earning capacity and say
you have got to start with that as a basis of earning capacity, and
you had just as well take a boy 21 years old, and because he is just
out of school and has made $100 the first year practicing law or
medicine, and then take some of us old fellows who are earning
$10,000 a year and fix our salary forever at $10,000 and the young
man's at $100 forever, because he may be President of the United
States in 30 or 40 years or the president of some of these big rail-
roads and getting $75,000 a year. The thing is right down to just
compensation. I think you get my idea, if you do not agree with
me all the way through.
I did want to say this: I think you will all agree with me, be-
cuse I know almost all of you are lawyers. There is only one clause
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
277
that allows you to go to the Court of Claims. This whole bill now
is unconstitutional, except that if you do not agree with the President
you can still go to the Court of Claims. What would be the result
of that? You would fill the Court of Claims full of litigation and
you could not get in there. Not a single grandchild here among us
would ever see the case tried. We think the thing to do is to have a
just bill, by which you can avoid litigation. First, have a bill broad
enough to allow the President, in his discretion, to arrive at just com-
pensation with the owners of the property, and we apply to a board
of directors for authority to make that lease; I still doubt its feasi-
bility, unless the board of directors has more authority than any I
have known of, but the stockholders could have a meeting and they
could grant the authority. There is no trouble about that; but I
doubt very much if the board of directors has authority ab initic, be-
cause I do not think any by-laws I know anything about are broad
enough to cover it. But if you have a bill broad enough and just
enough to give the authority to agree on just compensation, then you
avoid any litigation; and that ought to be based either on interest or
the value of the property. When you come to the question of arbi-
tration, if you can not agree, it seems to me that some machinery
ought to be arranged for arbitration that would be just and fair.
For instance, the President appoint a man representing the Govern-
ment, the roads agree upon one man representing the roads, perhaps
A, B, and C on long lines and short lines and maybe some other
lines, and then a middle man chosen by those two or by some other
power, or perhaps give the President the power to appoint two, and
by some means of that sort to arrive at just compensation. Have the
record made up, and then if either side wants to appeal, they could
go to the court of appeals, and give that board about the powers
usually given to a master in chancery, and you get rid of the uncon-
stitutionality of all these sections. I do not mean to say that the bill
as a whole is unconstitutional, because it does give an ultimate right
to go to the courts, and when that happens it becomes constitutional.
The last clause, 13-I believe it was drawn up on Friday, also-
contains this question about how long it should last; of course, being
so indefinite, it would be almost impossible for carrying out. Í think
this: If it is the purpose of Congress-and that is what all the news-
papers are saying "The roads will never go back to the corpora-
tions; it is a permanent taking "; they are hammering that every-
where if that is the purpose of Congress, I think it just as well to say
so; and if it is not, it ought to say so, because if you do not you are
going to have a string of bankruptcies that will be appalling. You
may think because a stockholder owns a bond that the bank does not
own him [laughter], but when you go to hunt it up and run it down
I do not know of any railroad man that the bank does not own.
Of course, if you would allow just compensation in the way of in-
terest, the bondholder would be taken care of. But I do not know of
any of these short-line roads who do not get some man broad enough
and big enough to advance the majority of the money, and he holds
the stock and lets it pay, and the other fellows do work, and as long
as he sees a chance of returns he will do it. When something like
this comes up, he says, "I want my money, boys," and he takes the
whole thing, and it will not be long until somebody owns all the
278
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
stock; they will be frozen out and probably the bank will own the
bonds.
If it should be for the period of the war, everybody would say
there should be a moratorium put on the question of destroying prop-
erty or taking advantage of conditions during two or three years
or two or three months. We can not tell how long it would last, and
the public would not approve of a man going and taking advantage
of that sort of a situation and seeking to rush out and take away the
property of the smaller stockholders. The banks would not do it.
They would say "We will wait a reasonable time, if we are going to
get the interest on our bonds. If there is something definite about it,
if it is a war measure, you will see everybody loyal, but if is the
understanding that it is first grab and the second grab will take the
balance, they are all going to look at it and see who can get the most.
Mr. WINSLOW. May I ask you a question there, please?
Mr. DEAN. Certainly.
Mr. WINSLOW. Are you of the opinion that this is strictly a war
measure?
Mr. DEAN. That is what they call it.
Mr. WINSLOW. I just want to get your views.
Mr. DEAN. I think it is a railroad measure; I think it is the first
step to railroad ownership.
Mr. WINSLOW. Is that the way you approach the matter, with
the idea that it is the first step to Government ownership?
Mr. DEAN. I am just giving my private opinion.
Mr. WINSLOW. I want to know your attitude in appearing before
the committee.
Mr. DEAN. I am not an advocate of it; no, sir.
Mr. WINSLOW. Is your attitude that of a railroad man believing
that this bill contemplates final Government ownership of the roads?
Mr. DEAN. Let me answer that in this way: It is said by a lot
of the newspapers that that is what it means, that that is in the at-
mosphere. Everybody I have seen since I have been here in Wash-
ington says it is the first step toward railroad ownership, and I will
be frank enough to say so.
Mr. WINSLOW. I will go a little further and ask you, as a railroad
official, whether you are approaching the subject as strictly a war
measure or as a measure which finally means the management of
the railroads by the Government?
Mr. DEAN. Let me give my position as a railroad official. I am
a practicing lawyer, and I represent a number of railroads, banks,
etc. I am not a director and not a stockholder. I own a few bonds
of the Gainsville-Midland, and I simply am paid as counsel and
they call on me when they want me, and they pay me a small salary,
and I will not be affected very much by the legislation. The passes
I get out of that are about the best things that come to me out of
the short-line railroad [laughter], and I think you ought to put
a clause in there that in no event should passes be abolished
[laughter].
Mr. WINSLOW. To put it another way, since you are just a repre-
sentative of these railroads, do you think the owners would approach
this subject in the same way if they felt this was the beginning of
an action that would result in Government ownership of roads?
·
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
279
Mr. DEAN. Let me answer this way: They would say this, that
if their property was worth $1,000,000, if they valued it at $1,000,000,
and you fix a rental valuation that was only 6 per cent interest on
$500,000, they would think that property had been depreciated ex-
actly $500,000, when the Government went to take it over paying
$500,000 instead of $1,000,000. They feel every time you fail to pay
a cent of interest you either take or destroy the value of the property
Mr. WINSLOW. I want to get a little more out of you than that, and
because you are a lawyer I expect it will be some time before 1 accom-
plish my object.
Mr. DEAN. I know what a witness is; I have punished many a one.
Mr. WINSLOW. I expect to keep at you. I want to tell you that I
graduated from the Harvard Law School.
Mr. DEAN. My hat is off to you. [Laughter.]
Mr. WINSLOW. However, be that as it may; do you think the own-
ers of your road will come before this committee in the same spirit,
with the same ambitions as to valuations, and returns, whether or
not this was a strictly war measure or a step leading to the ultimate
ownership by the Government of the railroads?
Mr. DEAN. I want to answer you as fully as I can, but let us see
if I catch the meaning of your question. You mean by that if the
question came up if they wanted to take the roads, would we come
here and say "Yes, we will accept just compensation without con-
troversy?"
Mr. WINSLOW. That is not quite what I mean. I do not give you
credit for the same astuteness that you are willing to throw over
yourself. I mean this: That it is apparent that the railroads of the
country in patriotic spirit mean to come up on this subject and be as
generous as they can so long as this is strictly a war measure?
Mr. DEAN. Yes.
Mr. WINSLOW. And they can afford to be generous; they can afford
to give up quibbling as to the rates and interest to some considerable
extent; according to my mind they would approach the subject very
differently if they thought that out of this legislation should come
the ultimate Government ownership of roads.
Mr. DEAN. I will answer that this way, that I do not think they
would approach it very differently. I think that the railroad people,
as a whole, especially the short lines, have gotten tired of the situa-
tion. They feel there is a large element that would take the property
away from them if they could. They feel, as some of the newspapers
say, that they would take them away for half their value if they
could, and there is that uneasiness about it. It makes the securities
of more or less doubtless value. They have lost courage toward
developing, and I believe you could make a good trade with them.
Mr. WINSLOW. You want me to infer that, as far as you represent
railroads, you do not think they are actuated entirely by patriotic
motives, that they are willing to concede if they can sell the roads at
a good price, they would do so?
Mr. DEAN. No, sir; I do not mean that. I think that so far as this
is concerned that when they see their property is not going to be
destroyed they are perfectly willing to raise no question and go ahead
on patriotic orders. I think, of course, if you understake to take the
roads permanently, then, of course, they would want to get every
dollar they could and naturally want to sell for the highest price.
280
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
;
Then I do not think it would be a subject of partiotism because it is
not necessary to keep the railroads if they want to whip the Kaiser.
Mr. WINSLOW. Am I justified then in publishing your statement to
this effect: In approaching this subject they are doing it from
patriotic motives-
Mr. DEAN. Largely.
Mr. WINSLOW (continuing). And not undertaking to drive a sharp
bargain in the anticipation of ultimate Government ownership?
Mr. DEAN. No, sir; not at all. The gentlemen who came to me
about this have a large stock interest in it. They did not suggest
that they wanted anything whatever on their stock. They only
wanted to get just compensation for the cost of the road. I will
allude just to one client I have got, because it is the only road which
is not bonded and that is the Barker road here, built by capital from
St. Louis, paid for in cash, preferred stock and common stock issued
without any water in either of them, without a bond on it, and he
said, “Where am I going to stand?" I said, "You ought to get in-
terest on your investment. You ought to be just exactly in the same
light as the man who has got his bond on there because I do not
think it just that the Government should pay a just compensation
on a road which has a debt and not pay a man just compensation who
owns a road that has not any bonds of indebtedness on it, and that is
one of the clauses we had-“ or, where there are other peculiar cir-
cumstances which would make such standard annual rental unjust
or inequitable." Suppose we have two stores just completed. Yours
is rented at $100 a month and you are satisfied. Mine is not quite
completed or is completed and it is vacant, and if a man comes along
and wants to rent my store, and I say I will rent it for $100 a month.
He says, "It is vacant. You are not getting anything for it. I will
pay for it what you are getting." My neighbor is getting $100 a
month for his store, and his tenant is not complaining. My store is
worth $100. If you are going to use it you ought to pay $100, you
ought not to take it because it has not quite reached its earning ca-
pacity. So I think if a man has a $1,000 in bonds or stocks, he
ought to get interest on the investment, but certainly more especially
ought it to be so that in legislating against it it will not bankrupt
his road and reduce the value of his property.
The CHAIRMAN. Speaking for myself only, personally I do not
know how to prevent it. I think it is very unfortunate that this
legislation should be viewed and considered from the standpoint of
what it may possibly lead to in peace times; that is, that it may lead
to Government ownership of the railroads of the country or it may
not, and that we should consider it with reference to that in view.
This is a war measure undoubtedly; Congress had no thought of
anything else. There has never been granted any such authority_as
contemplates Government ownership. The railroads are now under
the President of the United States. The status has been created by
law; he has got them. Now, we are trying to pass legislation to
enable the President to so operate these railroads as to be of the
greatest war value, but with the least injury to the country at large
and the greatest benefit to the country at large. How do the rail-
roads of the country appear to the public, standing here for hours
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
281
at a time, whether we take this year or that year or the other year.
as a standard of returns in the future, and then quibbling over the
question of whether it may lead to Government ownership? If the
unification of the railroads and the operation of them by the Gov-
ernment during the war is not only efficient for war purposes but
serves the country better than private ownership, it would be an
argument to continue such unification which could be brought about
by Government ownership. But, on the other hand, serving the
Government from the standpoint of the greatest war efficiency may
really reduce its efficiency to the public; freight rates may be higher,
wages may be higher, and it might be the best argument in the world
to defeat Government ownership, while if the Government did not
give as efficient service as the private proprietors of roads and their
operators did, it might be said " Therefore, we are opposed to Govern-
ment ownership."Again, suppose the Government does operate
these railroads in such a way as to convince the public that the status
ought to be made permanent and it is necessary to do so to defeat
the German Empire and its purposes against liberty of all mankind,
had we not better ignore the fetish of a theory one way or the other
and get together and do the best we can for all with as little injustice
to any as possible?
66
Mr. DEAN. I agree with a great deal you have said, Mr. Chairman,
but you
know people jump at conclusions, and you take this section
13" that the Federal control of transportation systems herein and
hereinbefore provided for shall continue for and during the ”—that
just simply means forever until this act is repealed.
The CHAIRMAN. Provided Congress would or otherwise?
Mr. DEAN. Congress has got to do it. As a lawyer, as I understand
the taking of private property for public purposes for a definite pur-
pose is public taking. I had a good deal to do with condemning
property for public purposes. You condemn for a railroad right of
way, you condemn for a park, you condemn for any public purpose,
and the only power and right you get is simply to get it so long as
you use it for public purposes. The minute you do not, although you
pay a million dollars for it, it reverts to the owner. If you take
property for an indefinite time, it is considered a permanent taking,
authorizing and giving the owner the right to go to the courts and
say, "I want just compensation; that has been advocated by the
Government."
The CHAIRMAN. Will not a future Congress determine that ques-
tion from the conditions that follow in this war operation of the
roads? Supposing the courts adjudicate you had taken permanently
if already taken?
Mr. DEAN. Because indefinite taking, in the terms of the law
The CHAIRMAN. You are speaking of the legal provision?
Mr. DEAN. Yes, sir; I am speaking of the legal condition. I do not
think we are here for quibbling, if the committee please. We are not
here, gentlemen, for the purpose of quibbling. I want to call your
attention to this, that the Government is, with lavish hands, throw-
ing its money away in a great many instances. I do not mean in an
intentional sense; but you conscript a boy and take him in the Army
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FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
and you give him $30 a month. You take a man who is a carpenter,
who has been working all his life and is satisfied with $2.50 a day,
and you take him down to a cantonment to build a house for that boy
and you pay him $7 a day, and it disturbs all values. They tell us to
economize. Take one illustration: I represent one of the biggest
mills in the South down there. The Government came to the presi-
dent of our company and said, "I want a contract for your supplies
for the Army." "Well," he said, "we have a contract now with the
allies"; and at that time it was 45 cents a pound. He said, "That is
for war purposes; we have the preference. We want it, and we are
going to take it." He said, "All right; we will cancel the contract
with the allies, because our Government has priority, and we will
let you have it." But he said, "We will not pay you 45 cents; that is
too big a profit. We will not pay you but 42 cents." The president
of the mill said, "I bow to the powers." "Here is the contract at 42
cents; sign it up." The next day the Government sent another man,
who went through the mill and offered every operative he had ex-
traordinary wages to get them to build cantonments at Atlanta.
That disorganized the mill owners' wages; tore everything up. You
can not hire a man to cut wood because he can go to the Government
and get higher prices. If you want to build a ship, you pay him 10
per cent, and the more he spends and wastes the more he gets; and
then when it comes to a railroad you want to get it at fifty cents on a
dollar.
Mr. RAYBURN. You say the proposition is abroad that this is a
permanent thing and that it is getting into the minds of the people
that it is the proper thing?
Mr. DEAN. Yes, sir.
Mr. RAYBURN. And the chairman says he wants nothing about
Government ownership in this. Would it not absolutely settle that
question if Congress would in this act set a date on which this should
terminate?
Mr. DEAN. I think it would settle all that part, but if you intend
to make it permanent the bill should say so.
The CHAIRMAN. How would it settle it if you fixed a date this was
to end, with the end of the war; that between now and that time the
service has become so acceptable that Congress converts it into
permanent Government ownership? Has not Congress as much
right to act one way as the other way?
Mr. DEAN. Unquestionably; but if you will just allow me to give
you my opinion-
The CHAIRMAN. I would not want you to give any opinion but
your own.
Mr. DEAN. I say my opinion is that the agitation for Government
ownership has been going on for several varied purposes political
purposes and otherwise. When it comes, and the labor unions find
out they have got their last raise and they can not simply throw
down the throttle and say, "I will be back next Monday; you can
get somebody else," because he knows it is not possible to get any-
body else, and he can not do that, he is going to be against Govern-
ment ownership, and when labor finds it is not able to do that thing
the trend of it is going to turn.
The CHAIRMAN. Will not we as legislators know very much better
how to advise after the fact than before the fact?
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 283
Mr. DEAN. We all know that when it is too late sometimes.
Mr. RAYBURN. The chairman is continuing his insistence that these
railroads are not being taken over for the purpose of Government
ownership.
The CHAIRMAN. I say, therefore, the question of Government own-
ership does not arise, and I think it is unfortunate that it should
be so considered.
Mr. PARKER of New Jersey. Ought we not to pay a different price
if taken over for permanent ownership than if taken over for tem-
porary ownership?
Mr. DEAN. If that is true, we ought to be paid more for tem-
porary_ownership than for permanent.
Mr. PARKER of New Jersey. You think so?
Mr. DEAN. Undoubtedly. Take our position. We have the only
independent line between the North Carolina line and Atlanta ex-
cept what is owned by the Southern. Every other branch line is
owned by the Southern. In order to keep our line from getting dis-
heartened and selling out everybody in Gainesville says, "Throw
your business to the Midland," and 90 per cent of the merchants
throw their business to us. It is the same in Athens and Monroe.
They have built up that business.
Mr. PARKER of New Jersey. I am not talking about what we ought
to pay; I am talking about what we are likely to pay. Is it not true
that the railroads are patriotic enough as to almost give the rail-
roads if they do not feel it is permanent?
Mr. DEAN. They can not afford to give them; it would break
them. Why should they give when the shipping people do not; the
cotton men are not; the wheat and corn men are getting $2 a bushel
for their grain, the chicken men a dollar a dozen for their eggs, and
everybody else is grafting on the Government, and why should the
railroads be the only contributors?
Mr. PARKER of New Jersey. I am only talking about the facts. The
big roads have come here and said they are ready to take a compensa-
tion during the war at the rate for 1917, and they are ready during
the war not to ask for any improvement, but they say if it is to be a
permanent taking they would certainly have to ask for the improve-
ment.
Mr. DEAN. And those big roads know that by absorption they will
get three-fourths of those little roads if they can take them. We have
been in the way; and they want to get them right.
Mr. PARKER of New Jersey. Can not the Government make a better
bargain for a short time than a long time with the big roads?
Mr. DEAN. They ought not to; they ought not to drive a bargain.
Mr. PARKER of New Jersey. Can not the Government make a better
bargain that way?
Mr. DEAN. Yes, sir; because we will take interest; in other words,
to start out with, pay interest on the bonded indebtedness or fair
value of services and the question of sale will come up later.
The CHAIRMAN. I want to say this: This bill proposes that the
amount paid to the railroads shall be upon the best operating revenue
or income period of three years, naming them, which, taken together
for the period of three years, have been the most prosperous three
years that the railroad companies have ever had, measured by the
volume of business they have received. How can that be taking ad-
284
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
vantage of the roads, if you propose to trade with them on the basis
of the best years? I am speaking generally of all the railroads.
What other basis could you name than to give the railroads the op-
portunity to accept contract terms based upon the best past services,
the largest volume of services the railroads have ever given?
Mr. DEAN. If everything had been fair and even, and all the earn-
ings had gone into dividends and that was a fair basis and had been
prorated with a view to this, you might say that is all right; but, you
take the gains of the Midland-
The CHAIRMAN. There are exceptions.
Mr. DEAN. This proves it. Here is a road which, beginning in
1905, had earnings of $88,000; the next year, $108,000; the next,
$125,000, $160,000, $156,000, $168,000, $173,000, $162,000, $187,000,
$168,000 $190,000, $207,000-12 years, running from $88,000 to
$207,000—and they have put all those earnings back into betterment
and extension. They have not paid dividends. If they had gone
ahead and known this was coming and skinned the situation down,
they would have paid the 5 per cent, but as a matter of fact they paid
only $32,000 after they got through the betterment this last year,
which would only mean 2 per cent on $1,000,000 security.
The CHAIRMAN. Is not their property worth that much more than
before?
Mr. DEAN. Yes, sir.
The CHAIRMAN. Have they not got it just the same?
Mr. DEAN. The Government is going to take it and pay because
they put the money in there instead of dividends-
The CHAIRMAN (interposing). This bill does not say anything
about dividends, but returns on the property, operating returns.
Mr. DEAN. That means by the books, but the operating returns
ought to be what would be an equivalent; supposing they had taken
that money and instead of paying dividends they had bought an ad-
ditional piece of land, new engines, or rolling stock?
The CHAIRMAN. They would have more lines than railroads.
Mr. DEAN. But you take it and pay no interest on it because they
put it somewhere else. Here are two roads running parallel. One
owner puts all the earnings in the bank and pays it out to his stock-
holders; the other man puts it back into betterment and does not pay
any dividends; would you pay as much to the man running the road
which has been allowed to run down, with rotten crossties, as to the
other who kept his road up but had not got any money in the bank?
The CHAIRMAN. The road which had not been kept up is worth just
that much less. I think the question of betterment ought to be con-
sidered, and I do not think the railroad which, as you said, did not
withdraw the bonds, and therefore capable of rendering the Govern-
ment valuable services, ought to be taken for nothing simply because
it had not skinned itself. But as to this matter of talking about
putting it back, it has not been taken up.
Mr. DEAN. You keep it three years, raise the rates, and make a
big profit out of it, but the railroad does not get the increase in rates;
the Government gets that.
The CHAIRMAN. My own theory is that it should be paid what
the use of the property is worth for the time it is used, without regard
to what it has paid before or has not paid, and if it is possible to do
so, we should pay what it would earn if not taken over.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
285
Mr. DEAN. Then the road ought to be paid its just earnings for
the next three years. When you raise the rates and increase the
business that affects the next three years' business, and the road ought
to get that.
The CHAIRMAN. Then we would have to wait until the three years
were up?
Mr. DEAN. Yes, sir.
The CHAIRMAN. That is exactly what I think about Government
ownership in general. We should wait until the time has passed,
and then act on what appears to be the result.
Mr. DEAN. Will you let me ask you a question there?
The CHAIRMAN. Yes.
Mr. DEAN. Do you think you could fix in an arbitrary manner what
would be just compensation for the taking of property?
The CHAIRMAN. No.
Mr. DEAN. I agree with you.
The CHAIRMAN. It is not proposed to do that.
Mr. DEAN. Our amendment just simply gives the President au-
thority to make a deal. This other bill does not give the President
that authority, except on a certain basis. I think that is not just.
The CHAIRMAN. It may be necessary, in order to work out the pur-
poses of the President, to amend this bill. That may be true, but.
I do not think in amending the bill we ought to make every amend-
ment in the direction of making it of the greatest possible benefit
of the owners during a period like this when they ought to assume
some of the risk the same as everybody else. We are all taking a
chance. On the other hand, if the roads make more by reason of
governmental powers and Government economies effects, why should
not the Government have the benefit of that?
Mr. DEAN. Let me answer that question by asking you another:
Here are three traffic lines now running from Atlanta to New York,
crossing this Midland Railroad. Suppose the Southern Railway
rents all three roads and also this fourth road. Then suppose they
say, "For the sake of economy we will stop this other road and only
operate these three roads and get all the business on the other three
roads and make nothing out of this one." Should they pay nothing
for it?
The CHAIRMAN. I will answer that, in a way, that would be practi-
cable. These roads will be operating for war purposes for one, two,
or three years, and conditions will be such that it would be abso-
lutely unjust to turn them back without further legislation. We
can tell better then what would be just and reasonable, and that is
the reason why I am not in favor of naming a definite arbitrary
basis on which they shall be returned to their owners. And I think
after we experiment with unification and turn the roads back to the
owners perhaps Congress will provide for unification of the roads as
privately owned enterprises, and there are many other things we
might be able to do then that we would not do now.
Mr. DEAN. If we wait two or three years, though, the present
owners will all lose their roads.
Mr. HAMILTON. May I ask the gentleman a question?
Mr. DECKER. I would suggest, Mr. Chairman, that there are about
15 witnesses.
286
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. HAMILTON. I only want to ask one question, and I am not very
particular about that. I have just this one question, sir: If you
were permitted to amend section 13 so as to limit the term of Fed-
eral control, how long after the war would you permit Federal con-
trol to continue? I do not know whether you have given any con-
sideration to that or not?
Mr. DEAN. I have not given that any consideration. I should say
for at least six months after the proclamation of peace, and the
President might delay the proclamation of peace if he wanted to.
But I think that might be the fixed time, so that the war might be
actually over a year before the proclamation of peace.
Mr. HAMILTON. You suggested that perhaps Congress might not
be insistent.
Mr. DEAN. I think so. We are not particular about any definite
time-just a few months.
Mr. ROBINSON. Mr. Chairman, I regret exceedingly that we made
the impression on anyone's mind that we are here quibbling. The
fact is that as this bill is drawn it will result in the appropriation
of the physical properties, the taking over in a permanent way of
these properties, giving the owners no return of any character or
description. We are here before your committee that we may pre-
sent some concrete information which will demonstrate that fact.
We have a number of witnesses here yet, and we will try to limit
them in time as much as we can, but we should like each witness,
like Mr. Anderson, to present concrete facts and show how just or
unjust this bill as it now stands will be. We ask your indulgence
to that extent. I will ask Mr. Barker, vice president of the Gaines-
ville & Northwestern, to address you now, and we will push along
as rapidly as we can.
STATEMENT OF MR. B. S. BARKER, VICE PRESIDENT GAINES-
VILLE & NORTHWESTERN RAILROAD CO., GAINESVILLE, GA.
Mr. BARKER. I want to ask the privilege of just saying a few
words of an introductory nature. I am vice president of the Ameri-
can Short Line Association. Mr. Robinson and myself have ap-
peared many times before legislative bodies, and have always had a
sympathetic hearing because of the property we represent. A few
years ago a man rushed up to Billy Sunday, when he asked for
mourners to come forward, and said: "Bless God! I have seen the
light." We hope very much this afternoon that we can give you
some light, because we represent the small lines, but they are very
essential to the commerce and the building up and growth of our
country.
I hope that every man here will take an interest in the short lines
in his territory. There is a gentleman here from Georgia, Mr. Bell,
who lives on my railroad, and he thinks we have a very helpful
institution, because we have developed the country in this way-and
what I say as applying to the Northwestern Railroad applies to
every one of these gentlemen here. You know the red-clay roads
of Georgia when they get wet are exceedingly muddy. People used
to haul their traffic 35 or 40 miles knee-deep in mud, and when they
finally got through with their crossties, their lumber, etc., the value
had gone out of it. Now, since the completion of the Northwestern
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
287
Railroad a little over three years ago, instead of getting 20 cents
for their crossties, they are getting 45 cents. Instead of getting $10
for their lumber, they are getting $28 to $35 for that oak timber.
These lines, as I say, are very helpful. We have towns on the
Northwestern Railroad that have grown up in the last four years-
our road was completed March 13—that formerly had no population
except farmers. Those towns now have 500 or 600 people. They
have 10 or 12 brick stores, planing mills, $10,000 hotels, and from 20
to 50 nice homes, and they have improved the valuation of those two
or three counties very much, indeed.
Take other interests. We have on our line of road a lumber in-
dustry that has about $1,500,000 invested. We have a pyrites mine
opening up about March 1 that has $400,000 invested. That is very
helpful to our taxes there. Our country is growing. I know of
instances on this Northwestern road where land has advanced from
$4 or $5 an acre to $50 an acre. So I think they are really helped,
and the interests of the people who live on these roads are in this.
If they travel over the Seaboard, or the Coast Line, or the Pennsyl-
vania, they call it the Seaboard," the "Coast Line," or the "Pen-
sylvania," but if they travel over the Northwestern, why, it is "our
road." There is a distinct pride in those railroads. In your hands
rests the fate of the small lines.
66
On the part of the Northwestern property we are not asking for
any return whatever on the true value of the road; the investment
value of the road is $786,000 to-day. We started with $750.000,
and we put into it, in such sums as the Interstate Commerce Com-
mission would approve, $36,000 in betterments in less than four
years. But if we take the real value of the Northwestern Railroad
to-day it is $125,000 greater than it was four or five years ago. We
have on our line of road to-day 3,100 tons of steel. That steel was
purchased for $24 a ton; I can take it to-day and sell it for $58.
That represents about $75,000. The timber in our property has en-
hanced in value greatly. When we come to the true value, I think
our road is worth $175,000 more than the investment value.
All we want is a fair return on the investment value, which is
$786,000. We occupy a rather peculiar position. As Col. Dean
has said, St. Louis interests came down there and bought this rail-
road. They put into the property $750.000, and if we ever get any-
thing from the Government we will have to prove those values.
Even by the plan suggested here we will have to prove by our books
the fact that we put into the property that much money. But we
have never issued a bond, and on this list that we will hand you
gentlemen to-morrow it appears that as of June 13, 1917, our road
owed $800. Our engines are all paid for; our cars are all paid for; and
still we have no bonds. This bill does not provide for a condition
like that, and that is what I want to ask you gentlemen to consider.
Whenever you use that word "peculiar," I want you to consider the
Northwestern Railroad. We occupy a peculiar position, because
we have no bonds.
Now, is it not fair that we should have some returns? I can have
this statement vouched for by the transportation men here. These
men will tell you you can not build a railroad through the mud, not
ballasted, unless you go over it after each rain and strengthen your
roadbed. It becomes soft and muddy unless you watch it very
288
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
carefully and put money back into it. We have not got through
that yet; we are strengthening our road every day; and the result
is we have a very good road. We have oak crossties; we have 60-
pound rails; and the result is we have never hurt anybody in the
four years we have been operating. That shows we have handled
it carefully.
The point I make is, that when it comes to being protected we
want it to be considered that we are entitled not to what we have
done, because we have been in a building stage, but what we expect.
And here is what we expect, gentlemen. We earned last year about
$60,000 gross. We put that into the property, and we had a deficit
of $5,700. That was with the most careful and economical handling.
Our wages are lower than nine-tenths of these short lines, because
we have never worked any organized labor whatever, and most of
these roads have organized labor.
But here is what I anticipate. I anticipate that under Govern-
ment control our wages for engineers, firemen, and trained con- .
ductors will be put on a standard basis. Another thing I anticipate
is this: The clerical labor has been starved by the railroads, and we
could not help it. These men have suffered. But every agent on
our railroad, every section foreman, the roadmasters, and every sin-
gle employee will be put in this legislation and helped. And I anti-
cipate that Mr. McAdoo will within the next 60 days-mark my
words-increase the wages of all labor on railroads from 25 to 40
per cent. What will be the result? The result will be that if these
properties are handed back to us, and not under Government control,
we will have the struggle of our lives with high wages and other
things that will bring down our earnings to a point where we can
not exist. I know that is true. Now we are handling our property
more economically than we will under Government control.
Up to this time we have reached a little more than $65,000 gross
earnings, and that has been with our property undeveloped. We
have great hopes of being able to go across the Blue Ridge Moun-
tains to Murphy, and if we do we will have a great railroad. We
will save a hundred miles of direct line to Savannah. We hope that
will be done.
But, notwithstanding that, we are certain of two things. The first
is that we will have 26,000,000 feet of hardwood lumber that will
start moving within 60 days. Twenty-six million feet of lumber
at 10,000 feet to the car means 2,600 freight cars. We will have
60,000 tons of pyrites, which is a very helpful thing in the fertilizer
situation, not counting what the Government needs for sulphuric
acid. People are building a line from Clermont, 16 miles above
Gainesville, on our line, over to this new pyrites industry, that three
Government experts have stated within the last six months has be-
tween 15,000,000 and 20,000,000 tons in one property. The Govern-
men was so much interested that they sent a man down there, and we
finally, through the influence of Secretary Lane, got the Govern-
ment to donate 50 per cent of a direct road, a standard 12 per cent
dirt road, that eradicated roads of 7 per cent, guaranteeing 9-inch
top soil, and the Government is paying a part of that expense now.
We have had a very hard winter, and the Government's idea was to
get the road in there quickly. Our railroad will be completed March
I. I do not think this Government road will be completed until
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
289
May or June. There has been a Government expert there recently.
I do not say this officially at all, but I believe the Government will
also develop that property from a sulphuric-acid standpoint, because
it is inexhaustible.
Summing up everything, I want to say this: We are going into a
good earning capacity within the next six months, and under this
bill right here we are not guaranteed one single penny, because we
have a deficit, and we always have had a deficit. We are behind
about $27,000 or $28,000 in our three years of operation. What do
you guarantee us here? Absolutely nothing. And the Government
itself is going to get the benefit of anything we may do as to increased
revenues. These other men have certain lines that are very helpful
to the Government, but ours is essentially so. The Government needs
our vast timber properties-100,000 acres in one body. The need
our sulphuric acid. They are going to need our railroad. The only
thing we ask, when you come to these peculiar conditions, is that you
put our road under the head of a peculiar situation. I think we have
got an honest investment, a clean proposition, and we are building
up a splendid country down there, and I believe you gentlemen will
give us justice.
The CHAIRMAN. Did you notice the terms of that amendment that
was submitted, called the Thom amendment?
Mr. BARKER. By the trunk lines or short lines?
The CHAIRMAN. I do not know the lines; it was allowing the Presi-
dent to act in exceptional cases.
Mr. BARKER. I did not see it in Mr. Thom's amendment; I saw it in
Mr. Robinson's amendment. I was present when this was drawn, and
it meets with my approval.
The CHAIRMAN. Mr. Robinson's amendment, I understand, will
provide that the Government will pay accruing interest during cer-
tain periods. Your railroad would have no accruing interest to pay
at all.
Mr. BARKER. Mr. Chairman, I am making my argument for the
Northwestern Railroad. All I want to say as vice president of the
American Short Line Association is that I did not approve this
amendment, because I think, in all justice, that a road ought to be
able to pay its interest on its indebtedness. If you do not, you are
going to have bankruptcy, and you will be very sorry you did not
take such action.
The CHAIRMAN. You may advance the interest.
Mr. BARKER. That has been gone over, over and over again. If
you meet the obligation and the court of appeals says it is not just,
it will be returned.
The CHAIRMAN. You said you had no bonds?
Mr. BARKER. We have no bonds.
The CHAIRMAN. Your road, having no bonds, would not receive as
favorable treatment as a road that did have bonds, because you would
have no interest to be taken care of.
Mr. BARKER. Here is our position exactly. Our people owe money
on the stock. Very few men in this country can advance $750,000
and have the money in cash. We have had to borrow money on that
stock.
The CHAIRMAN. You have a preferred-stock issue?
Mr. BARKER. Preferred and common.
40958—18—19
290
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
The CHAIRMAN. You have stock that stands in place of bonds?
Mr. BARKER. That is correct.
The CHAIRMAN. And stipulated dividends?
Mr. BARKER. Yes, sir.
The CHAIRMAN. What is the stipulated dividend?
Mr. BARKER. Oh, we have no stipulated dividends. It is 6 per
cent on stock.
The CHAIRMAN. Well, the stock is always a dividend, as I under-
stand?
Mr. BARKER. Yes, sir; it is not cumulative.
The CHAIRMAN. You have, then, in lieu of bonds and interest,
preferred stock with 6 per cent dividends?
Mr. BARKER. Yes, sir; and we have raised money on that stock.
The CHAIRMAN. I am trying to get at the situation. You said
that you had no bonds, but you did not say you had that which was
equivalent to it.
Mr. BARKER. Yes; that is what I want you to consider.
The CHAIRMAN. That takes the place of interest?
Mr. BARKER. Yes, sir.
Mr. SWEET. You spoke about your wages. How do the wages
that you are paying now correspond with the standard wage of the
Mr. BARKER. It is about 333 per cent of the trunk lines, and about
25 per cent less than lines that are working organized labor. I will
explain that this way: The Gainesville & Midland Railroad, enter-
ing Gainesville, are paying engineers $165 a month and conductors
$135 a month. I am paying our engineers, right in the same yard,
$100 a month, and conductors $90 a month. Long lines pay their
main-line engineers more than $300, and they pay their passenger
conductors $185.
Mr. SWEET. What are the wages of the section men?
Mr. BARKER. The section men are paid this way: On account of
the war competition in Georgia we can not afford to pay as much as
the Government is paying. They are paying common labor $3.
From three to seven months ago we got section labor for $1 and
$1.10 per day. At that time the Southern Railway was paying $1.20
per day. Now, after six months, we are all paying $1.50 per day.
Mr. WINSLOW. In discussing this matter with the committee, do
you appear with strictly the war necessity in mind?
Mr. BARKER. Yes, sir; I do. I believe we are going to have splen-
did service-
Mr. WINSLOW. Perhaps you do not get the point. I want to find
out whether or not in coming before the committee you are repre-
senting your road as to its attitude toward this bill as a purely war
measure, or holding in mind the possibility of this being a beginning
of Government control of your property?
Mr. BARKER. I am treating it now as a purely war measure.
Mr. WINSLOW. And if you were treating it the other way you
would be disposed to handle it a little differently?
Mr. BARKER. I would; yes, sir. I have just told you that our
property is worth $150,000 more than the investment, and we do not
want anything, you understand, except our property investment,
sworn to before the Interstate Commerce Commission.
The CHAIRMAN. How much outstanding preferred stock have you?
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
291
Mr. BARKER. $500,000 common and $250,000 preferred.
The CHAIRMAN. With 6 per cent interest?
Mr. BARKER. Yes, sir.
The CHAIRMAN. And what you want is that the Government shall
guarantee the 6 per cent on the $250,000?
Mr. BARKER. No, sir; I want it on the investment. I would go
in a bad hole with the $250,000.
The CHAIRMAN. Do you consider that the common and preferred
stock together are an investment?
Mr. BARKER. I certainly do; yes, sir.
Mr. BARKLEY. You do not seriously expect the Government to
pay you interest on an investment of $600,000?
Mr. BARKER. I am asking you more than that. You have taken
our properties
Mr. BARKLEY. You do not think Congress ought to guarantee you
6 per cent on $650,000?
Mr. BARKER. Not at all, sir. I am talking about what is ad-
judicated.
Mr. ROBINSON. Shall we continue, Mr. Chairman?
The CHAIRMAN. You are not through with your witnesses?
Mr. ROBINSON. No, sir; we will have a number in the morning,
but we can go along now if the committee desires.
The CHAIRMAN. With the consent of the committee, we will ad-
journ now until 10.30 to-morrow, and you may continue with your
witnesses.
(Thereupon, at 4.55 p. m., the committee adjourned to meet to-
morrow, Tuesday, January 15, 1918, at 10.30 o'clock a. m.)
COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE,
HOUSE OF REPRESENTATIVES,
Tuesday, January 15, 1918.
The committee met at 10.30 o'clock a. m., Hon. Thetus W. Sims
(chairman) presiding.
The CHAIRMAN. The committee will come to order. You may
proceed, gentlemen.
Mr. C. F. WHITTELSEY. Mr. Chairman, Mr. Robinson was called
to conduct the hearing before the Senate committee this morning,
and he asked me to direct the witnesses here, and preliminarily I
wish to advise that the copies of the statement which we promised
yesterday are here for each of the members.
Mr. STEPHENS. I would like to have one of those.
Mr. WHITTELSEY. Our first witness is ready at any time.
The CHAIRMAN. He may proceed in his own way, with such state-
ment as he deems important.
STATEMENT OF MR. NEWMAN ERB, REPRESENTING THE MINNE-
APOLIS & ST. LOUIS RAILROAD AND OTHERS.
Mr. ERB. Mr. Chairman and gentlemen, I primarily speak here
to-day for the Minneapolis & St. Louis Railroad, for the Ann Arbor
Railroad Co., the Manistee & Lake Superior Railroad Co., the Mid-
dletown & Unionville, and the Tennessee, Alabama & Georgia.
292
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
The CHAIRMAN. Mr. Erb, do you speak for the short-line railroads
as a class generally, or are you simply picking out certain ones?
Mr. ERB. I am speaking for the roads in which I have large per-
sonal interest, both as a bondhonder, stockholder, and in most of
them officially, as an executive.
The CHAIRMAN. I wanted to know if what you say about the roads
in which you are personally interested applies in a general way to
the whole class of short-line railroads now being heard.
Mr. ERB. I am speaking not only of the short-line railroads, I
am unfortunately interested in several of them, but I am also speak-
ing in behalf of the so-called weaker lines.
The CHAIRMAN. We understood in giving the hearing that the
short-line railroads were represented by an association, and naturally
I inferred that anyone appearing was appearing for the short lines
as a class.
Mr. ERB. One of my smaller roads here is a member of that asso-
ciation, and in speaking of that small road I shall also speak of the
roads generally that are in practically the same class.
The problems which we are discussing are perhaps the most com-
plex that have ever been presented to a legislative body to consider
and to solve. In their magnitude they surpass anything that gov-
ernments of the world have ever dealt with, except the problems
of war itself; and in considering the questions which relate to the
weaker lines, it is necessary that I should very briefly outline to
you the development of the railroad systems of the country from
their weaker lines.
It is only 67 years ago when the first locomotive was built in the
United States by Peter Cooper, in size about that of a modern
Hancock. Its tubes were made from gun barrels. Within 20 years,
in 1850, from that small beginning we had a little less than 9,000
miles of railroad in the United States. They were all short lines.
They were fostered and encouraged by communities, by the States,
and by the Nation. They were the wards of the people; they took
a direct interest in them. Some of them were built in part by
foreign capital, but nearly all of them were local capital.
From those beginnings we have built up a railroad system in the
United States, the greatest in the world, without system, without
reference to any system, but a development in which a particular
territory, resulting from competition of communities, perhaps, more
than from capitalists in the duplication of facilities. There is barely
a city, a town, or a community or county or State that doesn't seek-
hasn't for many years sought-additional railway facilities, and up
to 10 years ago that development of mileage was quite rapid; but
all the time at its foundation was the little road. I can instance in
one State in which I am operating-Michigan-when most of the
railroads that are now operating in that State were logging roads.
They had their origin in logging roads. The Pere Marquette, which
now has 2,300 miles of road in operation-I should say two-thirds of
its mileage-had its origin in short logging roads brought together
from time to time. I have the Minneapolis & St. Louis, in which I
acquired a large interest five years ago, and that was made up of
five different railroads-separate organizations-until we have 1,565
miles of road in operation, brought together within the last five
years.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
293
1
I am perhaps now, with one exception, the survivor-I have con-
structed more mileage, I will put it that way-I have constructed
more mileage than any other man, with one exception, now living in
the United States. My experience has been from the ground up-
from the lower round of the ladder-and I know what the hardships
and the vicissitudes of the managements of these weaker lines are
constantly encountering. They go to bed with their troubles, they
get up with their troubles, and they live through the day with their
troubles. They have been made more severe, they have been accentu-
ated in the past 10 years until conditions have become almost intol-
erable; and I want to point out to you this fact, that of all the weaker
lines and these shorter lines or weaker lines-that is, were weak 10
years ago—not, one has changed its class for the better. They are
weaker lines to-day. They were weaker lines 10 years ago.
There are two factors that have contributed to that condition. One
has been the action of the trunk lines and the more prosperous car-
riers-I won't say "prosperous," because I don't believe that under
conditions any of them are prosperous, but they were more pros-
perous-and in the natural effort to add to their revenues and im-
prove this condition they have thrown the bone to these smaller and
weaker roads. They have said, "You can have that or starve.'
They have given them divisions which were unfair and unreasonable,
coupled with unfair, as I contend, and unreasonable rates on top.
""
And so in the past five years-I can go back and give it to you
for 10-the average earnings on the net capital invested in the rail-
roads in the United States averages only 5.1 per cent.
Mr. DECKER. Of all the roads?
Mr. ERB. Of all the roads. For 1913 the earnings were 4.69 per
cent.
Mr. ESCH. Is that from the Bureau of American Railway Statis-
tics?
Mr. ERB. Yes, sir.
The CHAIRMAN. Is that on property investment?
Mr. ERB. On the net income per mile on net capital invested, be-
cause some railroads duplicate-own stock of others, you know. I
am speaking of the net capital, 4.69 per cent. For 1914, 4.04 per
cent; for 1915, 5.23 per cent; and for 1916, which is considered the
most prosperous year of all, 6.45 per cent, an average for four years
of 5.01 per cent.
Now, the weaker lines, of course, have not reached that average.
They haven't had this average, but they are the cornerstone of the
whole structure of railroads, as I shall attempt to show you. We
have here in mileage for 1916 829 railroads reported to the Inter-
state Commerce Commission, operating 254,179 miles; 697 out of the
829 separate corporations, or 82 per cent of the total, operated 136,-
350 miles, whose earnings were less than $10,000 per mile gross.
Now, you will observe that over one-half of the entire mileage of
the country comes within the class of weaker lines, and they only
represent less than 10 per cent, or approximately 10 per cent of the
gross revenues of the country. The great majority of these roads-
for instance, we have 538 separate companies whose earnings are
$5,000 and less per mile, and all of these lines, short lines, whose
pleas you have just heard here in the past few days and are still
hearing, are included. The total mileage of those that earn $5,000
•
294
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
a mile or less aggregate 28,839. The capital stock, $46,576,000, the
funded debt is $398,217,000. The total capitalization is $865,794,000.
Now, $865,000,000 out of $17,869,000,000, and there are 538 separate
companies out of 829. You see the number of orphans.
The CHAIRMAN. It represents less than 10 per cent of the entire
valuation?
Mr. ERB. Yes; they represent practically about 5 per cent, 5 per
cent of the entire capitalization. So that I say here, fundamentally,
in dealing with this problem, in considering these weaker and shorter
lines, it is not an important item to a great Government of this
kind, whose people have encouraged construction and are profiting
by the construction and establishment of these short lines-they are
just as essential, just as necessary, as the trunk lines, and in many
cases it is more so.
The CHAIRMAN. That 5 per cent there-approximately 5 per cent-
includes what you have in mind as weaker lines also?
Mr. ERB. This includes all the weak lines. These include short
lines and weak lines, 538 separate companies, with a capitalization
of a little more than 5 per cent of the total, and they represent
28,000 miles.
Now, to show you how very modest that capitalization is, it is less
than $30,000 a mile. The average cost in the United States per mile
is approaching $66,000 a mile, and that is less than the cost of rail-
roads per mile in any other country in the world. But small as that
average is, the average of this large mileage is only half of that-
less than half of that.
Mr. ESCH. Do your figures show how much of that is narrow
gauge?
Mr. ERB. No; very little of it is narrow gauge, very little; it is
infinitesimal. The narrow-gauge roads left in the United States
are unimportant. It is unworthy of spending any time upon the
purely narrow-gauge lines of the country.
The CHAIRMAN. These are all single track, I presume?
Mr. ERB. We are mentioning now single track. We take the
Pennsylvania, its main mileage-we don't take in the second, third,
and fourth tracks of any of these roads. They cover, for instance,
255,000 miles in length. That is the distance between community
and community.
Mr. WINSLOW. Have you ever worked out plain enough to tell
the difference in the rate per mile of valuation on what we call
cross-country" roads, outside of cities?
66
Mr. ERB. Yes; I want to say this, if I may, in answering that
question: All of the railroads in the United States were originally
built as, I call them, "surface" roads. They followed the contour
of the country. They maintained heavy grades to avoid heavy cuts
and fills. The cost of constructing those roads varied in communi-
ties that were accessible to steel and the markets for material which
entered into their construction; but, on the whole, I should say an
average of about $20,000 per mile. But no sooner were they com-
pleted, in a sense-because, in another sense, no road is completed-
but when the project was set afoot, then began reconstruction. I
know of one road down in southeastern Missouri that in order to
earn a subsidy was obliged to reach its destination by a certain
date, and it took up the track in the rear and put it in front.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
295*
[Laughter.] They resorted to all sorts of devices, and then went
on and got the material and finished it all up. The road is in ex-
istence. They got the road, and technically they earned their
subsidy.
But the people were locally interested in them. They did every-
thing they could to encourage them. They overlooked technical
conditions and did everything that they could to get the railway
facilities which they so much needed. Now, the railroad to which
I refer I later bought the control of. It served a very important
section of southeastern Missouri, and I afterwards extended that
road from St. Louis-into St. Louis from one end and to Memphis
on the other-and it is one of the most important parts of the mileage
of the St. Louis & San Francisco. It is their line from St. Louis
to Memphis to-day. But it is in just that sort of beginning and
struggling that it had its origin, and I should perhaps have never
gone into it if that beginning had not been made that ninety-odd
miles of road existing there, in which I had purchased a few bonds,
and I felt myself compelled to add to that investment in order to save
what I already had in it. And there are many others in just the
same way.
Now, there are 97 roads that earn between $5,000 and $7,500 per
mile per annum, with 30,368 miles.
Again they have $1,601,699,000 in capitalization.
Sixty-two companies earn between $7,500 and $10,000 per mile,
with $64,870,735,000 of capital. And so we come along to the point
where of the 254,000 miles of railroad, 697 separate corporations are
operating 136,350 miles. Of those roads, those that I first men-
tioned in the first group, of $5,000 a mile and less, which represent
the short lines-all of their mileage is included in it-the total divi-
dend appropriations were $1,301,400, in the United States, of which
$506,000 was appropriated out of surplus. In other words, it was
a return made, but really not earned. And that return was only 1.75
per cent.
1
Now these roads are taken over. Their organization is disrupted,
to be turned back at a later date, unfinished-every one of these roads
is unfinished; nothing done in the way of betterments or additions
during this period, and I ask of the Congress that to those roads
the most liberal treatment possible should be afforded. They should
have exceptional treatment. They should be encouraged. They are
the babies in the railroad world, and if you starve them you will
never have another baby railroad in the United States from private
capital, unless an overpowering local necessity exists for it. Now,
I don't personally intend ever again to build a railroad in the United
States, or any part of it, except in the development of that which I
have, because conditions are exceptionally severe; they no longer
exist and have not existed for many years-I will say for 10 years
past-the day of short-line railroads, the successful construction of
short-line railroads in the United States has gone by under the sys-
tem of regulation and under the system which has controlled here
for the past 10 years.
The CHAIRMAN. Don't you think the antagonistic competition of
existing roads, stronger roads, has had something to do with that?
Mr. ERB. Absolutely, yes. Now, I don't wish to take up your time
more than is necessary. I have tried to take the high points in the
296
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
discussion here, but I could instance many practices that have
resulted in oppression to the weaker lines, and out of this very con-
dition which has resulted in the Government taking over the oper-
ating control of the railroads, which I advocated teeth and toenail-
I did everything I could by advice and encouragement to bring it
about-these conditions were the very things, Mr. Chairman, that
you now refer to. We voluntarily surrendered to a central authority
the control of our equipment and obeyed the mandates and the or-
ders, and followed the advice of that central organization with re-
gard to it. We had priority, or no one, to meet a great national emer-
gency, as everyone believed and supposed. It was made use of, not
intentionally, but through the inherent weakness of human nature, in
diverting traffic from the weaker lines and concentrating it upon
the stronger lines. The people who controlled the direction of that
traffic could not divest themselves-there was no self-abnegation
there; it was impossible, and the traffic was diverted, and the roads
which I represent-I have the Minneapolis & St. Louis, the Ann
Arbor Railroad-we couldn't have stood up under it for another six
months. Receivership was inevitable. Our business was taken from
us. The natural flow of traffic diverted, and the richer lines as usual
were adding to their traffic, unfortunately to their own difficulties,
and we hailed with a great deal of gratification the taking over of
the operating control of the railroads under those conditions. They
became intolerable.
Now, that is simply the human element that is involved in separate
railroad management, such as we have had here for years. We
have the duplication of these facilities. These little roads have been
undertaking to make short cuts here, to shorten up a line there, to
enter a field of new development, to reach a coal mine, to reach tim-
ber, or a farming element, to open up new lands, and then, when the
division of rates comes about-very plausibly but very energetically-
the stronger lines will give a certain division which they think fair
and just, and as I say, it very plausible, but under which the shorter
lines can not live. And the Interstate Commerce Commission up to
this time has not undertaken to deal with the question of divisions.
Now the Government has taken these properties. They are un-
finished. Some of them assume operating deficits. I have con-
structed mileage, considerable of it, that for several years has been
unproductive. I have a large capital interest in the Denver & Salt
Lake that runs from Denver over to Craig, Colo., across the Conti-
nental Divide.
Mr. STEPHENS. Is that the Moffat road?
Mr. ERB. That is the Moffat road; yes. That road had its origin
with Mr. David Moffat, of Denver, a very patriotic citizen who had
amassed a fortune in other fields and thought he would do Denver
and the State of Colorado a great benefit by shortening the line be-
tween Denver and Salt Lake. I am not telling any tales out of
school, but the day he undertook the construction of that line he had
upward of $5,000,000 to his credit in one bank in New York City.
He was president of the First National Bank of Denver. He under-
took to build that road himself. About 164 miles of it was com-
pleted within his lifetime. He exhausted his fortune. His estate,
I believe, became insolvent, but the road was there unfinished. Then
a group of gentlemen came along from Denver and said, "We are
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
297
now within 40 or 50 miles of the coal fields; we had better extend it
there." And they came forward-Denver again, local interests-no
New York capital-and extended the road to the coal fields, just to
the edge of the coal fields. They found themselves with a large
bonded debt and just a developing earning power; no return upon
the capital possible under the conditions existing.
I was asked to and did take hold of that property, and I extended
it 45 miles additional. I cut the bonded debt that existed in two,
50 cents on the dollar. I said, "Now, we will put in our money
alongside of this property, but we want the bonded debt cut in two.
Mr. DECKER. How did you cut it in two?
Mr. ERB. By issuing a $500 bond for a thousand-dollar bond.
Mr. STEPHENS. By agreement?
""
Mr. ERB. Yes; by agreement. In fact, foreclosure was resorted to,
but it was practically the unanimous act of all the bondholders in
order to get additional money on which they had no return, and be-
lieving with me that the road could be made to yield a return if ex-
tended, we began its extension, and I added 45 miles to it. We were
contemplating its extension and had arranged for its extension clear
through to a connection with the Denver & Rio Grande at Provo and
going into Salt Lake, when the European war interfered. Two of the
parties who are associated with me were foreigners. One was a
banker, and the other was a great promoter-perhaps the greatest
the country has produced. I refer to Dr. F. H. Pearson, who went
down on the Lusitania. Dr. Pearson lost his life. The banking in-
terests in London that were associated with me were unable to carry
on the enterprise during the period of their war, and the conditions
made it impossible, and we stopped our construction, and the road
here within the last few months has gone into the hands of a receiver.
Now, based on earnings, this still gives us no return. We haven't
sufficient earnings. It is an unfinished project; we can't complete it.
I am not prepared at this moment to say what is fair under the cir-
cumstances, but certainly the bill makes absolutely no provision for
a road that is in the hands of a receiver under conditions such as I
have referred to.
Now, that brings me to the question of receivership, roads that
are in the hands of receivers generally. I don't know whether you
realize that there are still 34,000 miles of railroads in the United
States in the hands of receivers. How are they to be dealt with?
The receivers have taken the earnings, and in most cases charged the
whole, the betterment to their operating cost. It is what we term
"deferred maintenance." In other words, the road that has gone
into the hands of receivers for several years prior to the receiver-
ship was unable to adequately maintain their roads-properly
maintain them. And instead of spending a normal amount in the
maintenance of their roads and the maintenance of equipment, they
spent one-third or one-half, three-fourths, whatever it may have
been, but short of the normal. The receiver come along and he
puts in the earnings and replaces the fund from the earnings. He
replaces the deferred maintenance all within a brief period. Their
showing, according to section 1, would not be an adequate return, and
those receivers do not really represent the real owners of the property
who are affected by it, and I speak for them. I am not receiver for
the Denver & Salt Lake yet. I am a very large holder of bonds and
-298
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
stock. I am responsible for its being as under present conditions.
Mr. Moffat founded it, but I have become interested in it.
Now, I confess that a full interest on those bonds might not be a
proper return to make, but some return should be made upon the
money that has been put into these properties. The bonded debt
has been cut in two. The new money that was put in to build 45 miles
and to clear it-the bonds were sold at 85. I think, in view of
present conditions; a 5 per cent bond selling at 85 is a pretty good
price. There is no question of what it is there. There is no question
of getting anything on the stock. The question is of getting some-
thing on the investment. The road is there and serving the public.
More than that, it is furnishing coal to a very large section of the
country, and to-day, with a very modest expenditure, there are
upward of 4,000,000 tons of coal that could be developed from those
mines in 12 months, and I will presently come to another branch of
this bill that touches upon that.
I therefore say that provision should be made here to cover roads
that are in the hands of receivers, whose revenues have been diverted
in whole or in part or who have been in the control of receivers for
some part, if not the whole, of this period of three years. And I
wish to urge that in the strongest possible way.
Now, there is one feature about railroads that varies from every
other industry in the world-and the business men who are on this
committee will appreciate it, or the bankers or those engaged in indus-
tries—and that is that we have no "turnover" of our capital. There
is absolutely no turnover in railroad investments. Any merchant,
any banker that would have to operate under the turnover of the
railroads would be broke. He couldn't exist for a year. Only 20
per cent-one-fifth of our capital-is turned over in a year. In order
to do $1,000,000 worth of business we must have $4,000,000 capital.
I don't believe that that is properly appreciated. It makes mil-
road investment more mercurial. It responds more quickly and
is affected more readily by changes in economic conditions than
any other class of investment from that fact. Your packers get a
turnover of perhaps 12 or 15 times a year. The bank that has a
million dollars of capital may do $30,000,000 or $40,000,000 of busi-
ness a year. The merchant that has a little $5,000 grocery does four
times the amount of his capital investment-perhaps $20,000 a year—
and makes 10 per cent on that, and he gets $2,000 a year. But the
railroad must have four times the amount of capital invested to its
income. That is so fixed that I have gone through the records of
railroads since 1867, at the close of the war-1866-and I find it is
universal from year to year; it hasn't varied. With prosperous
companies, prosperous years and bad years, and poor companies the
average hasn't varied 1 per cent.
Now, with the weaker lines, while that is the average, the weaker
lines have had no such turnover. I am interested in the Tennessee,
Alabama & Georgia, a road in which I became interested some 20
years ago by lending some money to the people who built it, who
were unable to repay it, and the people who would loan the money
were obliged to take their road. And in those twenty-odd years
there hasn't been a month or a year in which the road has earned
its operating cost. There is approximately 100 miles-96 or 97
miles of road that is serving the community it enters in three
•
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
299
States-Tennessee, Alabama, and Georgia-and from the date of
its construction to this date it has never earned its operating costs.
Now, what has been the result? It has been foreclosed and reor-
ganized twice. We attempted, as a basis of ownership-we cut down
the mortgage debt. We have bonds outstanding to the amount of
a million and a half. I say "outstanding"; they are issued; but
we hold them, and we hold every share of stock. We wouldn't dare
to sell, and couldn't sell if we wanted to, those bonds or those
securities in these twenty-odd years. The Government has taken
them over. Well, I am awfully glad it did. I am glad to be relieved
of the uncertainty attending railway operations under present con-
ditions, which would only make the deficit larger, but what is to be
done with it? There is a road fundamentally wrong. It ought not
to have been built in that location, but to-day, if we would attempt
to take it up, we would have a revolution. Some people have located
upon it; some industries have located upon it, and they would pro-
test, and have protested most vigorously.
I have a little branch line road into Ann Arbor, Mich., that was
built to reach a coal mine. We built it under false pretenses-that
is, the owners of the coal mine wrote us promising certain shipments
of coal, which never developed. We asked for permission to take it
up, and we haven't been given consent yet, and that road can only
be operated at a loss. There are several railroads in Michigan in
that condition.
Mr. HAMILTON. What is the name of that railroad?
Mr. ERB. It is a branch line of the Ann Arbor, about 8 miles in
length. It is now part of the Ann Arbor.
The other road that I have reference to, about 120 miles in length,
runs to Manistee, in connection with our road-
Mr. HAMILTON (interposing). Is that the road that owns T. &
A.-the Toledo & Ann Arbor?
Mr. ERB. Yes; it was the T. & A.-the Toledo, Ann Arbor &
Northern-twenty-odd years ago.
And I will presently come to
that.
Now, on the Ann Arbor Railroad we have had no dividends. It
was reorganized twenty-odd years ago. We have earned our interest
and paid it. We have earned more every year than our interest,
but in order to meet conditions as I foresaw them we had not dis-
tributed the surplus earnings to the shareholders. We have not
increased our mortgage debt and have put those earnings and more
back into the property, with the result, as I have just illustrated
here the other day, that some 175 carloads of coal were delivered to
the Pere Marquette at Toledo, which it was unable to take, because
they could not handle 70-ton cars on their road. The Ann Arbor
took them. We were able to do it because the money had gone back
into the road. And now the Government has taken over the prop-
erty, and we want something more than the three-year average.
Why? Because last year and the year before we have put back into
the road capital which has enabled us to handle our business more
economically and to handle it more efficiently than it was handled in
1916, or even in 1917.
Then I come again to the Minneapolis & St. Louis.
Mr. STEPHENS. Before you leave that, just what could be done to
relieve the situation in regard to that road in Tennessee and Georgia
300
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
that you referred to, where there never has been sufficient receipts.
to pay operating expenses? Now, how could the Government relieve
that situation?
Mr. ERB. I couldn't expect in that case to have it relieved beyond
the Government to assume-to turn it back to us in the condition in
which they received it. That is a case that is an extreme one.
I am
giving you both sides of it. I am giving it to you both ways, and
the problem is beset with difficulties. The problem is a masterful
one. I don't believe, with all due respect to Mr. Anderson, who was
responsible for this bill, who has come to the railroad field untrained
and without experience, while a brilliant man, that he is capable of
meeting all of the questions from the product of his own brain or
unaided and unassisted to measure up to the requirements-all the
requirements of the railroads, and there are no two alike. They
vary just as much as the blades of grass vary. Now, the bill must
be catholic; it must be broad in its spirit.
Mr. STEPHENS. You would suggest that very large discretionary
power be vested?
Mr. ERB. Absolutely; far greater power; and you can see the con-
struction that may possibly be placed upon it. Section 1 fixes a
three-year period as a basis. Section 3 provides that any claim for
just compensation not adjusted as provided in section 1 shall be sub-
mitted to a board of three auditors. Why, this is not a question of
accounting. I understand that Mr. Anderson has used this term in
the sense in which it is used in Massachusetts, which means arbi-
trators. But that is not the generally accepted definition of the
term, and there must be no ambiguity about it. There should be
none.
Mr. PAYNE. What word do you suggest?
Mr. ERB. Arbitrators or referees. That would be a very good
term.
The CHAIRMAN. Mr. Anderson suggested the word "referee" be
substituted for "auditors."
Mr. MONTAGUE. He didn't say substituted; but he said might sug-
gest to the committee a better word. The word "auditor" was
used in his practice or in Massachusetts.
Mr. STEPHENS. Still you would have to base any decision that this
board might come to on the fact, and it would be necessary for this
board of auditors or referees to ascertain what justice should be ren-
dered to these weak roads.
Mr. ERB. I believe that is true. I have not undertaken to dis-
cuss to lay before you a definite plan for that. I am pleading here
now that a proper provision should be made to deal with the weaker
lines, which are exceptional. Their problems are not the problems
of the roads who receive 90 or 95 per cent of the earnings of the car-
riers. Those large percentages of earnings come from the trunk
lines. Their problems are not our problems. They are not dealing
with conditions such as I have to deal with every hour of the day. I
am struggling. I have to count my pennies, my nickels. I can give
can_give
you one instance in point, a short-line road that I have in New York.
The Erie Railroad turned it back four years ago to the owners.
They had a guaranty only of interest. I refer to the Middeltown &
Unionville, 14 miles in length, a little baby road, and they declined
to operate it any further.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
301
I put a man in charge of that road-two men-no matter what
they call him, he is the "Pooh-Bah" and an auditor. Why, they
have not only earned the interest on the bonds, but have made a very
handsome return beyond it, because of the operating methods of the
Erie Railroad, which could not be applied to that little road. It
bankrupted it. But when it was handled by people who had ex-
perience with weaker lines, who knew the problems, why, that road
responded to it. But there are some roads that can't and won't.
Now, I come to one other question in the bill that I think the
bill doesn't cover nor attempt to cover.
Mr. PARKER. Before you go to that I would like to ask whether
it would be a safe thing to say, when you have this three-year period
provided, that the rate of interest shall not be less than 3 per cent
or some limitation?
Mr. ERB. Yes; I think a limitation of that kind would cover it.
Mr. PARKER. Well, is that the right way to do it?
Mr. ERB. Well, now, I wish to say that I would rather think about
that a little bit in order to be entirely fair. I am opposed to ex-
ploiting the condition we are in here-the war condition-to the
benefit of any particular interest. I am not doing it for my own
property, and I don't want to see anyone else exploit it, and there is
no such intention, so far as I have seen it. But I want not only to
be fair but to appear fair.
Mr. PARKER. Now, I want to say to you frankly that several ways
have suggested themselves to me. One was this limitation of the
amount of interest on the cost. The second one would be where
there was no income for the last two years, we will say, to allow
some sort of pay for the business that is actually done by the Gov-
ernment or under the Government. That runs the danger, of course,
that during the war they might say they were doing an enormous
business, and ought to be paid for it; but it should be based not on
this emergency but what they have done previous to the war. There-
fore we might have trouble then.
The percentage scheme runs into the difficulty that the cost may
have been exorbitant or watered or difficult to find out. It is always
dangerous, and I have therefore thought it much better to take a
thing which is certain, like the earnings of the years ago, in usual
times, usual rates, rather than to try to go to the business of capi-
talization and income on it.
Now, is there any other scheme that might be used, either interest
or capital, earnings before the war, or business done during the
war, that could be thought of as a means of adjusting these special
cases?
Mr. ERB. I would suggest this, from what you have just said,
that occurs to me at the moment, that you take the group of roads
that are earning $5,000 and less per mile, which includes all of these
little short lines, and put in the provision, "Except provided that rail-
roads whose average earnings for the three years have been $5,000
and less per mile" should have at least 3 per cent upon their bonded
debt or upon the investment cost.
Mr. PARKER. Isn't it dangerous to go to this whole question of
indebtedness, because it is such an uncertain thing what the capital
of the road is, what the wise investment was?
302
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. ERB. The answer to that is of those lines the total capitaliza-
tion was $865,000,000, only 5 per cent of the total capitalization of
all the railroads in the United States, and that if you made a mistake
there the mistake would be a very small one. You are acting liberally
to your babies. You are furnishing them milk.
Mr. STEPHENS. Well, you certainly wouldn't think it a just basis
to apply the 3 per cent earnings to that road in Tennessee that never
did earn operating expenses?
Mr. ERB. Well, those roads that never earned operating expenses
you give them nothing, but you may elaborate that, that where they
have earned absolutely nothing and are completed-this road never
was completed, but other roads have been. You have short lines
here who are in process of construction and are not earning anything.
They are entitled to earnings. My Tennessee, Alabama & Georgia,
unfortunately, I don't believe is. But I heard a man testify hero
yesterday of a road on which he had no bonds and is still under con-
struction. He ought to have a return on that. That is an unfinished
road, and is still going ahead with it and developing it.
Mr. STEPHENS. Certainly. I am very much in favor of that, too;
but I can't see just how a hard and fast rule for fixing a rate of
return could be applied to these roads at all, because their conditions
differ so widely. I should think your original suggestion there that
great discretionary power would have to be placed somewhere to
adjust these difficulties.
Mr. ERB. I should think it should be. I think these referees should
be men in whom the railroad fraternity and all investors throughout
the country would have the fullest confidence, and they should be
given a voice in their appointment, as to one or two of them. If the
railroads were called upon, these lines of $5,000 a mile and less should
designate one. They can do that in advance, if you will. The detail
of this doesn't really matter, but they should have some voice in it,
and they should be able to explain their position. Now, if you do
that and give them the discretionary power, I think it would yield
the result. I think, really, it would be better than to undertake to
make hard and fast rules, because, as I have said, they vary as much—
there are 829 railroads, and no two of them are alike. And more
than that, you couldn't get executives of 829 corporations into an
agreement. There are as many kinds of cars as there are master
mechanics. These cars that go all over the country, some of them the
master mechanics will see only occasionally, but they are persistent
in having their ideas incorporated in their specifications, in their
models, and you have as many kinds of cars as you have master
mechanics, and you are going to have trouble trying to get railroads.
into an agreement on any subject. It is impossible.
Mr. PARKER. Mr. Erb, to what class of roads does this discretion
apply?
Mr. ERB. It applies to the weaker lines.
Mr. PARKER. I understand, but how would you determine what was
"weaker line"? Those that earn less than a certain sum per
annum?
a
Mr. ERB. A certain sum; yes. I should go further: I should include
the 58,000 miles of railroad-you will include many of them that are
in the hands of receivers, too-58,000 miles. That is 20 per cent, one-
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
303:
fifth of the country's mileage, and the limit would be $7,500 per mile
and less. That would be the equitable thing to do.
Mr. PARKER. Those whose earnings were $7,500 or less per mile per
year, you would put in a special class by themselves?
Mr. ERB. Absolutely.
Mr. PARKER. I only wanted to see how you' would classify them.
You would classify them by earnings?
Mr. ERB. Yes, sir.
Mr. PARKER. By gross earnings per mile?
Mr. ERB. Yes, sir.
Mr. PARKER. Not net earnings?
Mr. ERB. No; gross earnings. They are in a class all by themselves.
The CHAIRMAN. But if I understand it, you would authorize the
President or the director general, even in that class, to exercise dis-
cretion as to the peculiar conditions which each one of these roads
may find itself in?
Mr. ERB. Yes.
Mr. BARKLEY. Do you think it would be wise, Mr. Erb, to try to
classify in the bill itself these roads according to their strength?
Mr. ERB. I certainly do.
Mr. BARKLEY. Well, isn't it possible that any given road will shift.
its conditions before the war is over?
Mr. ERB. No; I mean the earnings up to the time. If the earnings
for the three-year period which has been fixed, or may be fixed, shows
earnings gross of less than $7,500 per mile, average earnings, they
belong to a class all by themselves.
a class all by themselves. That is fixed. The future
doesn't bother, because they are under the control of the Government.
But if during the period that is fixed the standard return, the gross
revenue, is less than $7,500, then they should come within that class
and be treated separately.
The CHAIRMAN. The President should have discretion to treat
those roads, that class, as exceptional, and take up each case with
reference to its own peculiar circumstances and conditions and deal
justice as near as possible?
Mr. ERB. Yes; he should have the right to appoint these referees
to deal with each of these cases separately.
The CHAIRMAN. Or arbitrators, whatever you call them, just so
they have the power and function to do it.
Mr. ERB. Yes. It is unfortunate that a problem of this magnitude
should be made the subject of hasty legislation. The bill is hastily
drawn. It is not sufficiently comprehensive. I will refer now to
revenues.
The roads are under the control of the Government. The revenues
during the period beginning January 1 belong to the Government.
Government funds under our statutes are required to be deposited in
a clearly designated place and way. When they become Government
funds there are statutory limitations as to how they shall be disposed
of. Are these funds which are being received now Government
funds? Do they belong to the Government?
The CHAIRMAN. Now, then, you have left the other subject. You
have commenced now a new subject?
Mr. ERB. I am beginning a new subject; yes, sir. I am dealing
now with the subject of imperfections of these bills as they occur
to me.
304
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
The CHAIRMAN. But without reference to the weak roads?
Mr. ERB. Without reference to the weak roads. I am speaking
Low of the general character of this bill being hasty; that it requires
amendment in many ways and amplification.
The CHAIRMAN. You went into a new subject without announcing
it, and I just wanted to get that.
Mr. ERB. Yes. Now I am just going to refer to that to indicate
what is in my mind-that there is an element there, a weakness in
the bill, that should be covered. But I wish now to change to the
question of equipment.
•
Railway equipment in this country has been stationery-that is,
the units of cars and locomotives-have been stationery for several
years.
Mr. BARKLEY. Have you left the subject of revenue now?
Mr. ERB. I have left the subject of the weaker lines being treated
specially.
Mr. BARKLEY. I know, but you started out to discuss whether this
revenue that is to be collected is Government revenue: You haven't
finished that subject?
Mr. ERB. Well, I wanted to-there are so many other witnesses
here that I am trying to touch the top point of the discussion.
Mr. BARKLEY. Well, that question has given me considerable con-
cern in considering this bill, as to whether this is Government reve-
nue; and if so, whether it must go through the Treasury, and
whether Congress must appropropriate all the money necessary to
carry on the expenses of these railroads, which the bill doesn't seem
to touch in any way. I was wondering if you were going to elabor-
ate that matter a little bit.
Mr. ERB. I am not going to elaborate. I will leave that to your
committee as a thought. I mentioned it only to illustrate that there
was a point which required elaboration-that required consideration.
Mr. BARKLEY. You don't want to express an opinion now as to
whether it is Government money?
Mr. ERB. Yes; the bill means-I am firm in my conviction that
it is Government money. It certainly doesn't belong to the railroad
companies. Their operation has been taken over and a guaranty
made-not a guaranty, but we call it a guaranty. Supposing the
railroads earn more, it goes into the Treasury of the United States.
Some roads will earn more and some less, and a jack pot is made of
the whole business.
•
Mr. BARKLEY. If that be true, then all the collecting officers of
the railroads must report to the Government and turn their money
into the Treasury by depositing it in certain places designated by
the Treasurer; and, as a matter of fact, the reports in the future to
the Interstate Commerce Commission would be of very little value
if this money is to go through the Treasury. Each account will be
balanced gainst the other.
Mr. ERB. The report
Mr. BARKLEY (interposing). As to earnings, I mean, net earnings,
and so forth, because the Government keeps its own accounts.
Mr. ERB. That is exactly it. The earnings of these railroads—
the reports, I was going to say, of these railroads during the period
of Government operation and control will furnish no indication of
their status, because of the diversion of traffic to short lines, diversion
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
305
of traffic on account of emergencies existing here, there, and every-
where. Some roads will have their earnings depleted, lessened, and
others will have them increased. It would furnish no satisfactory
basis for dealing with the railroads after they are surrendered. This
period will be a hiatus to nearly all of them.
Mr. ESCH. If it is Government money, Mr. Erb, not a dollar of
it can be spent without an act of Congress.
Mr. ERB. That has occurred to me, and I want to say this: That
for the roads that I have been identified with I have cautioned every
one of my officers that this money is Government money and to take
no chances with reference to the expenditure of a nickel that_isn't
absolutely essential and a necessary part of your operation. I am
taking funds which I used-my expenses are being paid by a cor-
poration, by my companies, but not out of any funds earned since
January 1. That is Government money. I don't believe I have a
right to make a trip from New York to this point to defend the
interests of my companies on that money.
Mr. DILLON. What portion of this bill do you say makes this
Government money? What portion-will you cite the terms in the
bill?
Mr. ERB. The proclamation takes over these properties of the
carriers. The properties of the carriers are all taken over.
Mr. DILLON. Isn't that just naked control?
Mr. ERB. What is there to ownership of property but control?
Mr. DILLON. Well, it may simply be a possessionary right.
Mr. ERB. I know it may be, but don't you think that is a dan-
gerous question to leave open?
Mr. DILLON. Well, I don't think it should be left open, no. I
want to get your idea on what theory you predicate the assumption
that these moneys become Government moneys?
Mr. ERB. When I take control of any property, the earnings of
that property belong to me. The earnings of this road belong to
whom? Whom does this money belong to that is taken in every
minute of the day and every second of the day? Who does it belong
to? Not to the carriers. We are not operating these railroads. The
Government is, and it is Government money, to my mind, just as
completely as any other moneys that the Government takes in
through its fiscal agencies.
Mr. HAMILTON. Is the relation of the Government a situation
analogous to that of a trustee?
Mr. ERB. Well, no; it is rather of a lessee. They have leased our
property for an indefinite period.
Mr. HAMILTON. In the assertion of its powers taking possession
of these railroad systems-
Mr. ERB (interposing). Without going into the legal question of
it, I simply point out that there is a point in your bill that should
be elaborated. It ought not to be left to uncertainty; it ought not
to be left to a court to determine what was in the minds of Congress.
Congress has the bill here, and it has power now to make it clear.
It ought to be made clear. That is the point I make, without decid-
ing the case, because I am a reformed lawyer. [Laughter.] I prac-
ticed law for many years and then went into railroading.
Mr. BARKLEY. Would you venture a suggestion as to which would
be the best way to close up this opening; to legislate affirmatively
40958-18- -20
306
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
declaring that it is Government money and providing for its ap-
propriation and distribution; or to provide that it shall not be con-
sidered as Government money, and not distributed and accounted for
as other Government money, but only settlements made upon that
basis at the end of the fiscal year, as provided for in the bill?
Mr. ERB. I think that would again be a mistake. I am not in
accord with many executives in those things. I believe that condi-
tions may arise that would make it to the interest of the Govern-
ment-in fact, necessary for the Government-to exercise its operat-
ing control more firmly than has thus far been manifested.
Mr. DECKER. Did you read on page 9 what it says there about,
"For the taking or conversion to his own use or the embezzlement
of money or property derived from or used in connection," and
so forth?
Mr. ERB. Yes.
Mr. DECKER. Does that affect the question?
Mr. ERB. No; it does not. I am president of several of these com-
panies. I have been disbursing, approving disbursement of funds
which I know would be improper to disburse without the approval
of the director general, if the operating control is fully and firmly in
his hands. If I am still president of the road and simply carrying
out his directions, operating the road and simply turning over to
him the balances, that to my mind is not a full measure of control
such as eventually, if the war conditions continue for a year or two,
will meet the needs of government. Conditions may arise when he
will brush aside, and have to brush aside, here and there, not the
interference but the inefficiency of executive officers of these roads.
That power he has under the proclamation. He has it under this bill.
He should have it. Now, if he exercises that, the funds here are
Government funds, and I think all that is necessary is a provision
in the bill that during the operation of the war the agencies of these
various companies which may be established with the approval of
the director general shall continue as the fiscal agents and as his
agent; and that those funds need not be paid into the treasury;
that should be done by just making a short provision there exempting
them from the existing provisions of the law. This revenue should be
exempted. That is my opinion.
The CHAIRMAN. Mr. Erb, you perhaps know better than I do about
this, but I understand that the Panama Railroad Co., operating on
the Isthmus of Panama, every dollar of its stock owned by the Gov-
ernment, yet it is operated as a private, distinct corporation and not
a dollar of its bonds is currently paid into the Treasury now, nor is
there any direct appropriation for that purpose. And the operators
of the Panama Railroad Co. use the receipts in paying current obli-
gations and expenses of the company without any specific appropria-
tion of Congress.
Mr. ERB. That has no analogy to this.
The CHAIRMAN. But that is a fact, isn't it?
Mr. ERB. Yes; that is correct; but it is not an analogy, because
there is only one company represented by the authority of Congress
to deal with the subject in a particular way.
The CHAIRMAN. And Government owned absolutely.
Mr. ERB. Absolutely; and is using the corporation as an agency of
Government. But this is not so here. You are taking the earnings
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
307
of these roads. You are also directing its operations. Suppose there
is an excess of earnings beyond the payments that are guaranteed
here. Such a thing is quite possible, and I think the Government
ought not to lose one penny. I think the rate would be adjusted so
that the roads can be operated without loss to the Government.
The CHAIRMAN. The reason that I cited the matter was that the
operation of the roads could be provided for so that you wouldn't
have to pay every cent into the Treasury and then have a direct and
specific appropriation to get it out.
Mr. ERB. Yes; that is what I am pointing to. There ought to be
some provision in the bill for that.
Mr. DECKER. It does provide that the excess of the earnings does
go into the revolving fund.
Mr. ERB. Yes; but that does not answer the question.
Mr. BARKLEY. Well, do you think it would be better for Congress
to attempt to say that this should not be regarded as Government
money, or that it should be regarded; or give the President or some-
body discretion as circumstances might adjust themselves later to
determine whether that should be true or not?
Mr. ERB. Exactly. The method of dealing with the revenues of
the railroads should be left by provision in this bill to the discretion
of the President, and let him say what shall be done with it; whether
it should become subject to it or not.
I must confess I rather at first hesitated to-I wanted to have
some authority for disbursing the funds that were coming in here.
Now, I don't want to go to the penitentiary. I am trying to do my
duty, and I think that ought to be made clear, that I am not guilty
of an offense in dealing with the funds that are coming in. I know
it is not the intention. There is no bill here yet, but when Con-
gress has acted, why that may be subject to interpretation. I think
you can clarify the atmosphere very readily, and I think you ought to.
I come now to a very substantial thing in the bill. I have two
more subjects to cover and then I will be through. One is the ques-
tion of equipment, for which there is no provision in this bill. There
has been a car shortage. The equipment of the country has not been
added to in years-the units-several years. We built 94,112 freight
cars in 1915, and 135,001 in 1916, and yet we had no more freight
cars at the end of the year than at its beginning. We use up over
5 per cent of our freight equipment each year. We therefore must
add at least 100,000 cars annually to keep even.
Mr. ESCH. Well, do you take into consideration the increased
tonnage of the new car?
Mr. ERB. Yes; I do. But I will show you how that is increased.
We had in 1914, 90,977,098 tons' capacity freight-car equipment.
We had 2,325,647 cars. The average car capacity in 1914 was 39
tons. In 1915 we had increased that capacity to 40 tons, 1 ton more,
by eliminating about 130,000-odd of the light capacity cars with
heavier capacity, but wholly inadequate. Your units count more than
your capacity, because the average loading is below the capacity of
the cars. That is not true of coal cars, but it is true of the average
car.
Now, you have taken over the railroads and made no provision for
even adding the normal requirements—that is, replacement require-
308 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
ments. You require 100,000 cars to keep even. Now, it is a strange
fact that the average that the life of all the cars in the country is
only 17 years, and that our steel cars do not seem to have added to
the life of our equipment.
Mr. MONTAGUE. How long did you say?
Mr. ERB. Seventeen years. Now, when we come to locomotives
Mr. DECKER. What is that on page 5? Don't that say that this
revolving fund can be used to provide improvements in engines and
rolling stock?
Mr. ERB. It is inadequate. It is wholly inadequate.
The CHAIRMAN. You mean the amount?
Mr. ERB. The amount is.
The CHAIRMAN. $500,000 is inadequate?
Mr. ERB. Because you are losing that revolving fund.
Mr. DECKER. This means, then, that we have made no adequate
provision?
Mr. ERB. No adequate provision.
The CHAIRMAN. The word "adequate " has reference to the amount
of money rather than to the use of it?
Mr. ERB. There is not a sufficient amount to cover the equipment
as well as the maturing needs of the company-that is, we have
maturities to be provided for. The question of individual financing
is one that is practically taken from the carriers. I know I can't.
borrow any money from my railroad.
The CHAIRMAN. Maturing obligations will be taken care of in the
way of the company itself?
Mr. ERB. Its own securities. But who will take them? Mr. Chair-
man, I am one of the weaker lines. I can't sell any of the securities
of those weaker lines with the Government in control.
The CHAIRMAN. Only on authority of the Government to buy
them?
Mr. ERB. Then, where is the funds? I say the amount is inade-
quate.
Mr. MONTAGUE. What sum would you suggest?
Mr. ERB. At least twice that. Now, I will just give some idea-
Mr. MONTAGUE (interposing). A billion dollars?
Mr. ERB. A billion dollars, at least.
Mr. PARKER. Isn't it a question that the revenues of a railroad will
pay for the repair which is incident to replacing worn-out cars?
Mr. ERB. It has not been. The experience has been that you will
have a depreciation fund, but the depreciation funds have only had
their origin in quite recent years. We have been obliged to maintain
our equipment. They are wooden cars. We maintain them and
rebuild them up to a certain point, and then we scrap them. They
are scrapped because their lives are only about 17 years, and we have
2,300,000 cars in service, and all of them will go out of existence in
17 years. Those replacements are not provided for.
Mr. PARKER. Not provided for by current revenue?
Mr. ERB. Not by current revenue, except as the depreciation funds
may do that.
Mr. COADY. Don't they have equipment notes out all the time?
Mr. ERB. Most of the roads have car-equipment notes out all the
time. The Pennsylvania, the New York Central, all of them are in
the same condition.
FEDERAL OFERATION OF TRANSPORTATION SYSTEMS.
309
Mr. PARKER. Is it good business to be running in debt and spend-
ing more capital in order to keep up a railroad with its cars?
Mr. ERB. I want to say to you on the subject of good business I
haven't found executives to be better business men than the ordinary
average. In fact, in my experience has been disappointing. Their
training is not a business training. They are taken from the operat-
ing field, and a great many of the problems which we are now dealing
with are caused by the fact that they have been dealt with in an
unbusinesslike way.
Mr. PARKER. I was speaking only of the theoretical question. Is
it theoretically good business to pay your repairs out of capital, as
it would be if you replaced cars out of capital?
Mr. ERB. Repairs are not, under interstate-commerce rules, taken
out of that, but there comes a time in the life of a car when it can
no longer be repaired, where it is no longer profitable to repair it,
and where it is scrapped, and when that time comes it is written off
at its value at the time. It may be $100, $200, whatever its scrap
value may be. It is written off and sold as scrap, and the price ob-
tained for it is credited to equipment fund.
Mr. PARKER. But the new car is then charged to capital?
Mr. ERB. The new car is charged to capital with a depreciation
allowed for it. Some roads have one rate, some another.
Mr. ESCH. Good business suggests the standardization of freight-
car equipment, does it not?
Mr. ERB. There is no reason why it should not have been done, and
every reason why it should have been done many, many years ago.
Without going into that-I could keep you here perhaps longer than
you cared to listen, if I were to enter into the subject of the technical
features of railroad management and operation. I am perfectly
willing to scold my wife, but I don't want anybody else to scold her.
I am perfectly willing to tell my fellow associates in the railroad
world what I think of their management, which I dislike to have to
say in public.
Now I come to the only other point in which the short roads and
the weak lines and all are interested in, and that is your section 13.
I think it would be a great misfortune to return these roads arbi-
trarily at a fixed hour and time to the carriers. I believe we are going
to be confronted with an economic readjustment with the close of the
war. I think it is inevitable. I think conditions such as we had on a
small scale at the close of the Civil War will prevail; when these
industries are obliged to slacken their pace; when wheat gets down
to a normal price, and corn and cotton; when a million and a half
or two million or more men will come back from the front and re-
sume their civil occupations. There is then bound to be a reconstruc-
tion, an economic reconstruction. I believe it from my standpoint-
I may be mistaken, but I believe it to be inevitable.
Now, after the organizations of these carriers have been dis-
rupted as they must be during the period of Federal operating con-
trol-after their organizations have been impaired, their business
diverted to new channels and new directions; their solicitation-
which is the only thing the weaker lines have had to get traffic, are
to be replaced-to say that it shall be delivered to them in 6 months
after, or 2 months or 12 months later, when that hour comes we may
310
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
be in the very midst of a great financial panic or business depression,
where it would be extremely unfair to the railroads-I speak now to
those who are interested in it, who are interested in the bonds and
stocks. You might precipitate a panic such as this country has never
seen by taking $18,000,000,000 worth of property and turning it back
on them at a period when they are less prepared to deal with it and
rebuild their properties and reorganize themselves.
I believe, therefore, that a period of two years should be fixed,
or sooner, at the discretion of the President.
Mr. MONTAGUE. You would fix a definite period?
Mr. ERB. I would give them latitude.
•
Mr. MONTAGUE. You would fix a maximum period?
Mr. ERB. I would fix a maximum period, or sooner, in the discretion
of the President.
Mr. MONTAGUE. A period not exceeding such and such a time?
Mr. ERB. Yes. Then, if it became necessary to extend that period,
we would come before Congress and ourselves ask to have it ex-
tended. But there should be a discretion given to the Executive,
the man who heads the Nation, whoever he may be at the time, who is
responsible for the prosperity and the business conditions of the
country-put the responsibility with him to say whether the condi-
tions warrant them being turned back at that particular time.
Mr. ESCH. We have used that same principle repeatedly in stating
the time in which the safety appliance act, for example, should go
into effect.
Mr. ERB. Yes.
The CHAIRMAN. But you think, Mr. Erb, it would be unwise to
fix an arbitrary date?
Mr. ERB. I think it would be unwise to fix an arbitrary date. At
the same time I think it is more unwise to leave it open, as it is in
the bill. The owners of the property must know that they are
coming back into their own. I am one of those who believe that the
properties will never go back to the owners under conditions such
as hitherto have prevailed. I think it would be calamitous to have
it come back under those conditions. They must come back under
better conditions, but they must come back.
Mr. DECKER. Better conditions in what way?
Mr. ERB. In the way of concentration-the duplication of opera-
tion, the duplication of facilities, the operation of parallel lines,
the handling of business by circuitous routes, unnecessary routes-
you are to-day giving the railroad-I think it is being continued
under the director general's operation to-day-differentials in pas-
senger rates that are given to the longer lines, and the ones to whom
it is the most expensive to handle the business gets less-are per-
mitted to charge less for it than the shorter lines. It is that sort
of conditions that can not and must not come back.
I am not prepared to enter into that discussion here, and it would
be unwise for you to consider it. They may come at the last period.
You will have to consider it then.
Mr. DECKER. Here is the point. If we knew better some of the
changes that would have to be made or ought to be made before they
were turned back, we would be better able to judge whether we
should fix any limit as to their being turned back, because if we
:
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
311
knew the extent of the changes that were to be made or ought to be
made in railroad management we are pretty good judges ourselves
of about how long it takes to get anything through Congress, and
we might decide not to fix any limit.
Mr. ERB. I believe that when you have this is an emergency
measure; this is purely a war measure. It is proper that it should
be dealt with and treated as such, and as soon as you have turned
that leaf in the book I think you should take up and not wait until
the end of the war to frame legislation that will show how these
roads are to be turned back.
Mr. DECKER. Well, don't it take a pretty wise man to be able to
look forward to the end of this war and determine what the con-
ditions will be and as to whether the roads can be turned back in
two years or five years or three years? Now, you say there may
be a panic and that it would be disastrous to dump $17,000,000,000
worth of property back-or securities-back to the owners. Well,
suppose there is a panic. Who is the man wise enough to know how
long the panic will last and whether it will last 2 years or 10 years?
I never heard of a panic that only lasted two years. Now, you say
there may be a panic, and yet you say that we should set a limit of
two years or sooner.
Well, now, if we are in the midst of a panic the President would
have the discretion to turn it back sooner, but that would not be the
power he would need. He might need the power to let it go on for
5 years or 10 years. It might be that you wouldn't want your roads
at that time; you might want them later but not then, through no
fault of yours. Now, why not trust to the wisdom of the Congress
that may be in existence then, which will be just as wise as we are,
and let them face the proposition as they meet it? I appreciate the
patriotism of railroad men in yielding their views, or whatever you
may call it, and yielding acquiescence to the desires of the President
in this crisis, but I am like you, I am not so sure but that the crisis
that follows the war will require as much or more patriotism from
railroad men and the people than what is required now; and why not
trust the Congress then?
Mr. ERB. I will answer that in this way: There is nothing more
mercurial than invested capital. There is nothing more mercurial
than capital for investment. It hides its head the moment it scents
menace or danger. Now, to hold these properties-I am speaking
now as an investor in them-to hold these properties under an un-
certain tenure would be to jeopardize the credit of every one of these
lines. The investor wants to know what is going to happen to his
property; he wants to know that it is coming back to him; he wants
to know that it is coming back to him in as good physical condition
as when it left, or that he will be compensated for any variation from
that normal condition. If you make this an indeterminate occu-
pation, uncertain, your securities will again go lower, and it will
create a disturbance. You are dealing with $18,000,000,000 of se-
curities, and I wouldn't I am frank to say I believe you would have
a panic on your hands if it became known to-day that a foundation is
being laid through this measure for ultimate Government owner-
ship; and yet ultimate Government ownership may be hailed with
relief by investors four or five years from now, on account of con-
ditions.
312 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. STEPHENS. Didn't the stocks go up as soon as the Government
took control of the railroads, indicating that the people had a great
deal more confidence in the Government than they did in the men
who were in control of the roads?
Mr. ERB. No; that wasn't it. I differ with you radically about
that. They felt safer with the stability given to their investments
during the period of the war. I know now when I go to sleep that
whether wages go up, whether material goes up and rails become
worth $100 a ton that I can sleep, so far as my investments go, with
absolute reliance that they will remain unchanged. That is what has
given confidence to investors.
Now, that is a war condition, but the moment you open the gate to
a controversy on Government ownership you will have all of the gain
lost, and we must do all we can in the present crisis to uphold public
credit and private credit as well. They go hand in hand, and I be-
lieve that it would be just as disastrous as anybody could possibly
imagine to have that subject now opened.
Mr. DECKER. Well, now, Mr. Erb, I am in sympathy with your
object, to afford to avoid the unsettling of conditions during this
war, but I haven't been able yet-and I have listened attentively to
the arguments on this point-to see any way to avoid that uncer-
tainty. There is nothing we can do to keep the people from watch-
ing this Government control and seeing how it works, and I don't lay
as much stress on the feature in the bill as some, which provides that
it will require affirmative action of Congress to turn them back, be-
cause the same question can be raised, and is raised now. There is no
use dodging it. You see it in the newspapers-in some papers, not
all-as to what is going to happen to the railroads after the war.
Now, it don't make any difference whether we say in the bill-so far
as I can see whether they shall stay in the hands of the Government
till Congress turns them back, or you provide for the war. If the
people discuss this question they are the boss after all that is said and
one, with the profoundest respect for the President and this present
Congress and the railroads; and the man that invests in railroad
property now with any idea in his head that anything can be done by
us or by him to avoid the consideration of this question when the time
shall come for its consideration, it seems to me he is deceiving himself.
Mr. ERB. There is this, however; you are raising a question that
is bound to affect railroad securities investments injuriously until
you specify a limit of time. I don't believe under our Constitution
that with the end of the war it is possible for you to hold on to the
railroads without their consent, unless you make prompt compensa-
tion for them. And if I had a railroad, under this bill-and I have
one now-and when the war ceased and you failed to return it—
the opportunity was there for its return and you didn't return it-
I should feel that I was very badly treated if it was not returned
to me immediately or I was given an opportunity to obtain compen-
sation.
Mr. DÉCKER. That is true.
The CHAIRMAN. I am very anxious to have an executive session
of the committee on another matter, and the committee will stand in
recess until 2 o'clock, when the hearings will be resumed.
(Whereupon, at 12.10 o'clock p. m., the committee recessed.)
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 313
AFTER RECESS.
STATEMENT OF MR. NEWMAN ERB-Resumed.
The committee reassembled at 2 o'clock p. m.
Mr. BARKLEY (presiding). You may proceed, Mr. Erb.
Mr. ERB. Mr. Chairman, there is just one other subject that es-
caped me that is very important to one of my undertakings. I refer
to the matter of additions and betterments, for which this bill ap-
parently makes no provision. I will give a concrete illustration of
what I have reference to. The Minneapolis & St. Louis, in 1916,
added 500 cars to its equipment. Last year it added 1,500 cars,
making a total of 2,000 cars, approximately an addition of more
than 20 per cent. The aggregate cost exceeding $3,000,000. Some
of those cars that were bought last year have not yet been delivered,
and it would be manifestly unfair and unjust to take the three years'
earnings of these roads without making some allowance for these
late expenditures, which involved 2,000 cars. The director general
would have the benefit of their use and the earnings of which have
not been reflected in any part of the period proposed of 1913, 1916,
and 1917. It would seem to me that the bill should make some pro-
vision for dealing with cases of that kind.
Mr. RAYBURN. Do you mean that many cars were delivered or
do you mean that you bought that many?
Mr. ERB. No; for instance, take the 1,500 cars: The earnings from
those cars are not reflected in the revenues of the road for the three
years past, but will be reflected in the years 1918, 1919, and further on.
Mr. RAYBURN. You say you bought that many cars?
Mr. ERB. We bought 2,000 cars.
Mr. RAYBURN. What are you going to do with these engines and
cars-especially engines-that you ordered and which were not going
to be delivered, because they had been diverted to the allies in
Europe? How have you charged them?
Mr. ERB. The stragglers have incurred liabilities for them. After
they are delivered they will have to be paid for, and that raises still
another question. Most of the railroads of the country have bought
their equipment on the "sewing-machine plan," the car-equipment
plan. They have not had the money, like new housekeepers, to pay
for all their housekeeping outfit at once. The title to this equip-
ment is not vested in the railroad companies. The title, for the
purpose of preserving the rights of the money lenders, has been
vested usually in the trustees, who hold the legal title, the absolute
title, to the equipment. If the equipment trust obligations are not
met, like the furniture dealer, he takes his furniture back; he has the
right to do it. What is to become of those payments? Who is to
continue them? And out of what funds are they to be provided?
The Government operating control can not divest the rights of the
owners of that equipment.
Mr. PARKER of New Jersey. Will not they have to stand in the
place of the railroads?
Mr. ERB. Does this bill provide means for paying for that equip-
ment?
314
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
•
Mr. PARKER of New Jersey. If those installments are to be con-
sidered along a period of years. The life of the car is 16 years—how
many installments are there?
Mr. ERB. In this revolving fund?
Mr. PARKER of New Jersey. How many installments are there?
Mr. ERB. Usually 10 and sometimes as many as 20, but usually 10.
Mr. PARKER of New Jersey. As many as 20; then that is the life
of the car, and they could be considered operating expenses.
Mr. ERB. But they are not; and exactly what I am referring to is
that there should be some provision in the bill to compensate the
Minneapolis & St. Louis Railroad Co. for the capital investment
made in the last 12 or 18 months, the earnings of which have not
been reflected in the previous returns; that is, they are not reflected
for any of the three years within the period fixed by section 1.
Mr. BARKLEY. If the bill should be amended in accordance with
your suggestion, so as to give the President discretion to deal with
certain of these roads in an exceptional manner, would not that give
him all the discretion he needed to deal with situations like that
and others that might arise?
Mr. ERB. I believe it would.
Mr. BARKLEY. So that they could not go into such details, and
by directing him what and where to do in a bill as well as by leaving
these matters to the discretion of some executive authority.
Mr. ERB. Some administrative agency.
Mr. BARKLEY. Arbitrators?
Mr. ERB. Yes. I am not asking to have cases of that kind covered
by special provisions in the bill, but there ought to be some general
provisions in the bill that will meet conditions of that kind. It
simply goes to show that no hard and fast rule can be applied to
every case that may arise. There must be elasticity, and it ought
to be placed in conservative hands, not auditors, in the sense in which
at first blush we consider the phraseology of section 3, but real arbi-
trators, real referees, in which the public and the investing public
will have entire confidence, because I have said this morning struc-
tural confidence is absolutely essential to these carriers. The invest-
ing confidence is essential. You have taken from them their proper-
ties, and if you also destroy the confidence of investors then they
are unfortunate indeed.
Mr. RAYBURN. What condition are you in? I understand that a
letter written by President Fairfax Harrison, of the Southern Rail-
road, to the special committee, that 3,000 locomotives have been
bought, but they are not going to be delivered to American railways;
they are going to be delivered to France and Russia. What condi-
tion are you books in with reference to those orders?
Mr. ERB. I can only give you an outline to show you how in-
adequate an additional 3,000 locomotives would be to the motive-
power equipment of the country. It does not meet the question at all.
I give you here again actual figures:
There are 63,850 locomotives in service; in 1916 there were only
62,709 in service. There were less in service in 1916 than there
were in 1915. These are units. The tractive power had increased,
but the units had actually decreased. During that year I will give
you the number of locomotives that were added, but the tractive
power of the locomotives in 1915 was 2,014,000,000 pounds—this
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
315
goes by "pounds" on the engines. With less locomotives they had
2,038,000,000 pounds tractive power; in other words, they had in-
creased the tractive power about 24,000,000 pounds, but the number
of locomotive units had decreased; they had become obsolete, but
that is not the significant fact. In the year 1916, 4,075 locomotives
were built, and yet they had less at the end of the year than they had
at the beginning. So when Mr. Fairfax Harrison speaks of 3,000
locomotives, he has not investigated the subject critically nor care-
fully.
Mr. BARKLEY. He was speaking of 3,000 that had been diverted
to Europe, to France.
Mr. ERB. Oh, to Europe?
Mr. BARKLEY. Yes.
Mr. ERB. I do not believe from a statement that is made to the
executives by one of the American engineers who is just on leave from
abroad and whom we sent abroad, made to us Sunday, that Mr. Har-
rison was accurate again on that basis. He advises us that only
about 130 odd locomotives of American make have thus far been
received on the other side. The French Government had been
obliged to lend a large number of their own locomotives to move our
own men and our own munitions and requirements.
Mr. RAYBURN. For the purpose of my question, whether diverted
or delivered or bought, I am not going to get up a controversy be-
tween you and Mr. Harrison or anybody. What I wanted to know
is whether these 3,000 locomotives had been ordered by the railroad
companies, but it seems that those orders have been canceled for the
simple reason that they are going to deliver them elsewhere. I say,
what condition are your books in with reference to that order?
Mr. ERB. I have no record of that cancellation of those orders, but
I want to say this, that in 1916 there were 4,075 locomotives added
to our motive power, and yet we had a less number of engines in
service at the end of the year than we had at the beginning, as it
requires in this country approximately 4,000 to 5,000 locomotives
per annum to keep even. They have not been ordered. The capacity
of our locomotive work is represented by only two or three locomotive
manufacturing concerns of any consequence in the United States-
the American, the Baldwin, and the Lima, at Lima, Ohio. The
capacity of all three of them, if they were concentrated on a single
style of locomotive or two or three styles of locomotives, would
enable them to turn out about 7,500 locomotives per annum. They
have not been working to capacity in any of these years. We need
additional locomotives, we need additional cars, as I have pointed
out this morning.
Mr. BARKLEY. Have you completed your statement?
Mr. RAYBURN. May I read into the record right here Mr. Harri-
son's statement? [Reading:]
The railroads have not motive power enough. Approximately 3,400 loco-
motives and 33,000 cars are still under order, the delivery of which has been
deferred for military reasons. The National Government, recognizing its duty
to its allies, determined that it was more necessary, first, that the needs of
railways in France-which were to be used by our troops-for 2,331 locomotives
should be taken care of; second, that certain requirements of the British for
296 locomotives should be protected; and, third, and most of all, that Russia's
requirements for about 1,600 must be filled. We were told that we must take
care of the transportation needs of Russia, and every energy was bent on that,
316
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
and we were deprived of our locomotives and cars. Many of the 3,400 locomo-
tives still undelivered were ordered by the eastern trunk lines now suffering
so severely from congestion, for whose immediate relief 125 locomotives were
drafted by the war board, not from lines that could spare them-
And so forth.
Mr. ERB. I wish to say on that point, Mr. Chairman, that last sum-
mer I called the attention of the Secretary of the Treasury to the
fact that the Russian equipment was being ordered under conditions
of uncertainty that were beginning to be apparent, should be built
upon American lines, so that the only changes necessary for their
use on our rails would be to change their guage and coupling devices.
That letter was passed on, and I took the same matter_up pro
bono publico, as a citizen, with the president of the Russian Railway
Commission and suggested that they ask for nothing better or less
than that and that they adjust their requirements to those sandards,
and he agreed to it, and my understanding is that the cars-about
10,000 in number-and the locomotives that were ordered were built
and are being built up to quite a recent time on those standards and
will be available on the American roads, both in cars and locomotives.
But the subject is large. You are suffering from a coal famine all
over the country. It is due primarily to a shortage of equipment,
shortage of motive power, and more particularly of cars; and I called
the attention of some of the Senators last summer to that require-
ment. I blame the Interstate Commerce Commission as much as the
railroads in not foreseeing conditions as they have developed. The
shortage of cars was such that inevitably it should result in a short-
age of coal. Thirty-five thousand cars released in the tidewater to
service is but a drop in the bucket. We are dealing with vastly bigger
problems than 35,000 cars; we want 200,000 cars. We want 10,000
locomotives here. You have not 6,000,000 tons of shipping which
are still to be got together and to be served, 1,000,000 abroad, 1,000,000
men in camps on this side. Where is the equipment? It is just as
necessary for the prosecution of this war that this equipment should
be there and be there promptly as it is to have the men at the front.
You will have the ships and you will not have the facilities for filling
them. Therefore, I say this amount of money-$500,000,000-is not
nearly enough.
Mr. BARKLEY. Would the fact that it is a revolving fund, going
out and coming in all the time, have any effect upon the permanent
size of the appropriation?
Mr. ERB. The only revolving feature there is the rolling of the
wheels. The funds will never come back. You are putting money
into locomotives and motive power. Where is it going to revolve,
except upon the rails?
Mr. BARKLEY. Whatever excess the Government gets out of the
railroads over and above the guaranty would go into the Treasury
and become a part of the revolving fund, if that course assumes
there is going to be an excess.
Mr. ERB. Can this Government afford to take the chance of doing
an excess freight_operation?
Mr. BARKLEY. That could not be determined until the end of at
least one year, anyway.
Mr. ERB. Meanwhile what are you going to do with your require-
ments?
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
317
Mr. DECKER. That would be one thing to get amended. Just a
question of $500,000,000 would go through in about half a second.
There would not be any question about the amount.
Mr. ERB. I know that; but 200,000 cars and 10,000 locomotives will
keep every one of the car works busy here for 18 months, and the
locomotive works for perhaps a year and a half, and that money
must be available, and should be available promptly. That has been
the difficulty of that situation. We have had Government operating
control forced upon us because we did not recognize the magnitude
of the task which confronted us, neither the railroad executives nor
the Government.
Mr. RAYBURN. I know; but did that have anything to do with their
not getting enough equipment to haul them?
Mr. ERB. Who is going to get it? What incentive is there for my
railroad to buy another locomotive?
Mr. RAYBURN. Now?
Mr. ERB. Yes.
Mr. RAYBURN. No; not now; but would it two or three years ago?
Mr. ERB. We had not any earnings; we had impaired credit.
There, again, the countries had been in war for three years. The
preparedness should have aroused the interests of the Nation to the
necessity of giving these railroads the credit to do what they must do.
Mr. RAYBURN. What do you mean by "the Government giving the
railroads credit"?
Mr. ERB. I mean that the rates-I am speaking now from expe-
rience; I am differing now from a great many people, but I believe
that the whole policy of the Interstate Commerce Commission has
not been constructive; I do not say that it has been destructive, but
it certainly has resulted in the impairment of railroad credit. We
have not had the means of doing what we were required to do. It
could not all be done by giving rates. The money can not come out
of rates and ought not at come out of rates, but the rates should be
so adjusted as to maintain the credit of the carriers instead of seeing
it decline. It has been declining for 10 years, and I am one of the
unfortunate victims.
Mr. RAYBURN. Well, unless the railroads get to putting forth fig-
ures that people can understand it is going to be mighty hard to
adjust in a whole lot of quarters. It is most remarkable that the
railroads will be the most prosperous in their history, making more
net earnings, and then be asking for the biggest increase in rates.
Mr. ERB. What do you call "prosperous"? Less than 6 per
cent upon possible investment?
Mr. RAYBURN. I say 1916 was the biggest year you have ever seen.
Mr. ERB. That is the rich roads. The trunk lines have had very
prosperous years.
Mr. RAYBURN. You can not make a railroad built in a desert pay
anything.
Mr. ERB. My dear sir, there are 135,000-
Mr. RAYBURN. There were a great many railroads in this country
built where good judgment was not used as to the placing of the line?
Mr. ERB. That is true, but the people who are served by those
railroads to-day would rise in revolt against the Government if it
undertook to tear them up. What are you going to do with them?
Starve them out of existence; put them in the hands of a receiver,
318
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
once, twice, or three times? I know some of these roads have been
in the hands of the receiver three times, and under fair management,
with no suspicion of misconduct or mismanagement on the part of
anybody connected with it, and yet they have been in the hands of
receivers two or three times.
Mr. RAYBURN. And always will be.
Mr. ERB. There is something radically wrong with any regulation
that will force into the hands of receivers over 20 per cent out of
256,000 miles of railroad.
Mr. RAYBURN. Well, it might begin at either end.
Mr. SWEET. I just had a question, Mr. Chairman, which will be
very brief.
Mr. BARKLEY. All right.
Mr. SWEET. Some time ago you were discussing section 13. Sup-
pose that that section 13 of the bill be amended to read as follows:
SEC. 13. That the Federal control of transportation systems herein and
heretofore provided for shall continue for and during the period of the war,
and for two years thereafter, unless Congress shall order otherwise.
Would that be in accord with the suggestions that you made to
the committee some time ago?
Mr. ERB. I thought I had in my hands here a copy of the bill.
Will you kindly go over that again for me?
Mr. SWEET. Yes. The proposed amendment should read as fol-
lows:
SEC. 13. That the Federal control of transportation systems herein and
heretofore provided for shall continue for and during the period of the war,
and for two years thereafter, unless Congress shall order othewise.
Mr. ERB. Yes; that would be very much improved, but I still think
that it would be safer to eliminate the two years, because you can
always otherwise provide. You say action of Congress shall be
limited to two years, and I would insert the words "to be sooner
terminated at the pleasure of the President." Give him discretion
to terminate it sooner.
Mr. SWEET. You believe then that the President should be au-
thorized to terminate it?
Mr. BARKLEY. Of course, Congress could terminate it sooner by
changing the law, anyhow.
Mr. ERB. I think that conditions might arise-Congress may not
be in session, and Congress acts slowly; it acts slowly, wisely. It
is deliberate, far more deliberate; it takes it longer to make up its
mind generally. The President may see a condition, on conference
with the owners of the property, where it can be returned sooner,
and if he wants to return it sooner he will remit the properties to
their owners. I think there ought to be a discretion within the two-
year period.
Mr. RAYBURN. But you think there ought to be some period?
Mr. ERB. There ought to be some period, if you are going to obtain
railroad credit.
Mr. RAYBURN. Would you consider it should be 6 months, 12
months, 18 months, or 24 months?
Mr. ERB. I think, for the reasons I asserted this morning-the
feeling of certainty in my own mind that we will have an industrial
recession after the war, a readjustment of the economical conditions
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
319
which prevail, that makes it undesirable to fix absolutely a time when
these properties shall be turned back.
Mr. COOPER. You mean inside of two years?
Mr. ERB. I mean inside of two years; the discretion of the Presi-
dent should prevail.
Mr. RAYBURN. That is what I was asking-what term you would
suggest?
Mr. ERB. I would suggest two years or sooner, in the discretion of
the President.
Mr. DILLON. What do you say to the argument that after the
emergency ceases or the war ends, this holding beyond that period
would be an unlawful holding without the consent of the directors
of these corporations?
Mr. ERB. If you ask my candid opinion, I believe the action of the
President is unlawful as it stands. I do not believe it is within the
power of the President or Congress to take the possession of these
properties without fixing the compensation in advance. The Presi-
dent is Commander in Chief of the Army and Navy; by common
consent, the sense of patriotic duty, we have made him commander
in chief of the industries of the country, and in that spirit the rail-
roads have voluntarily surrendered 18 billions of their property
without having their compensation declared to them in advance. We
were perfectly willing to do it, and I was anxious that he should do
it, but I do not believe it can be continued for six months without
the consent of the carriers; I do not believe it can be continued for
two years without the consent of the carriers.
Mr. DILLON. Can it go beyond a reasonable time after the termina-
tion of the war?
Mr. ERB. No; but what is a "reasonable time" is left again to the
uncertainties of courts and the idiosyncrasies, if I may be pardoned
the liberty of saying so, of Congress. I think that the whole question
should be freed from the field of politics. The railroads must not be
made the football of politics, because it would create a panic such as
this country has never had before if those 18 billions of property are
put in the realm of absolute uncertainty.
I therefore suggest two years, but that would be covered by agree-
ments. I have no doubt that the President will see to it that he has
from each and every one of these carriers a written, signed agree-
ment, ratified by the board, perhaps by the stockholders, giving
him that power for a period of two years beyond the limits of the
war, at his discretion. Why? Because the carriers will know that
it will not do to have these properties turned back until there has
been time for readjustment of conditions. There is bound to be a
readjustment. First will come the reaction from the jab caused by
the financial jag and commercial jab under which we are now oper-
ating. Then, when that reaction is over and we get our senses-I
don't know whether it will be 6 months, 12 months, or a year-these
properties should come back; and the President, as the responsible
head of the Nation, will determine what it is; and we will all—I am
speaking for my company; I am speaking for those whom I have been
in conference with about it-I know we will all gladly, in writing,
give him and give the Government that authority to deal with these
properties for a period after the war, because it would be disastrous
to us not to do it.
320 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. RAYBURN. If this time is set at two years, the railroads will
agree to the Government taking their property for that time; but,
on the other side of the question, if that is an indeterminate tenure,
when the railroads thought the Government had held their property
a long-enough time, would they not have the right to go into the
courts to say the Government must pay them for the property or
give it back to them?
Mr. ERB. Yes; but what in the world would that mean? To go into
the courts to get it back would spell disaster.
Mr. RAYBURN. This indeterminate tenure?
Mr. ERB. The indeterminate tenure would work disaster, in my
opinion.
Mr. ROBINSON. We have a number of witnesses to present par-
ticular cases, and we will endeavor to confine them to special cases
somewhat different from the others, and we will try to make their
statements just as short as may be, so as to give you the idea of
that particular condition, and we will now present Mr. Beal, the
assistant receiver of the Gulf, Florida & Alabama Railroad, which
is a line that is being built.
Mr. SWEET. Before we proceed further along this line, I would
like to ask Judge Payne a few questions, so that we will get his
opinion as to just what roads we are legislating about here. The
questions I will ask will be very brief.
Mr. BARKLEY. I suppose there is no objection to that. I suppose
Judge Payne will have occasion later to give us the benefit of his
views, after hearing all this testimony. If he desires questions to be
asked him now, I suppose there is no objection to that.
,
Mr. SWEET. As I understand it, the President's proclamation does
not apply to all of the railroads of the country. Does it refer to inter-
urban and electric lines and the like of that; is that true?
Judge PAYNE. They are expressly excluded from the proclamation.
Mr. SWEET. There are some roads that are in what is termed the
"twilight zone," and, as I understand it, all of the railways have
been given notice of the fact that the roads have been taken over
by the Government.
Judge PAYNE. What happened was precisely this: The director had
no list of the railroads of the country. When the first notice assum-
ing possession was sent out, he prepared the notice and signed it
and sent it over to the Interstate Commerce Commission—I do not
mean officially, but I mean to their office force, and they sent it out.
No direction was given as to what specific roads should receive it.
so the receipt of the notice did not of itself amount to a taking of
a specific road, in his opinion.
Mr. SWEET. And that is the way the director general wants it
understood?
Judge PAYNE. Precisely. After returning from here last night, I
stated to him what was being offered here, and he authorized me to
say the act of Congress of 1916, on which the President's proclama-
tion rests, does not mention railroads. It deals with transportation
systems or a transportation system, or a part thereof, and, as has been
repeatedly pointed out here, is a war measure. Therefore a small
road which merely serves a local community and does not constitute
part of a transportation system, does not, in his opinion, fall within
the purview of the proclamation.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
321
Mr. SWEET. Suppose there is a road which comes within what they
call the "twilight zone," and it is in doubt whether or not the procla-
mation applies to it or not, what would you suggest for that road to
do for the purpose of knowing whether it is included in the Presi-
dent's proclamation or is not within the President's proclamation?
Judge PAYNE. Precisely what is being done every day. Roads are
making definite application to the director for a decision as to
whether they are included, as to whether they are taken over; and,
as I said here the other day, one or more decisions, at least, have been
made as to specific roads. There is no other way, in my view, of
doing it. Somebody has got to determine the law as applied to the
facts in each case.
Mr. SWEET. The method by which that is accomplished, I suppose,
then, is that these roads that are in doubt present the facts to the
director general, and these facts are specifically passed upon by him,
as to whether or not they are included or not included within the
President's proclamation?
Judge PAYNE. Precisely so; and the definite decision given, so
there can be no mistake, no misleading.
Now, it was stated here, I think, by Mr. Robinson, perhaps, though
maybe not, that some roads had discharged their solicitors, and that
a hardship might result. They ought not to do that; they ought
first to ascertain whether they are included. Of course, if they are
included, then that would be proper; but if they are not included
the Government does not desire to interfere with their operations
in any way.
Mr. SWEET. Is there any particular form of application prescribed
as yet by the Director General?
Judge PAYNE. None whatever; just to come in and present a map,
with a statement of the facts, showing the territory served, the kind
of business on the road, the connections, and whether this road is a
necessary part of the system.
As I gave you the illustration of the Kansas road, that road was
right between two great trunk lines, and simply served the local
community, and could have been of no service to the Government.
And yet there is a tremendous local pressure for the Government to
take that road, because it is supposed that that would be a benefit
to the community. Unfortunately, we can not deal with it on that
basis.
Mr. SWEET. Another question. In drawing this bill, was it con-
templated that it would simply cover the roads that came within the
purview of the President's proclamation or did it include all the
roads of the United States?
Judge PAYNE. Only those roads covered by the proclamation and
taken over as a war measure.
Mr. SWEET. I think that is all.
Mr. BARKLEY. Right there, should not this bill be drawn to cover
any road hereafter taken over? The President has authority, and
in his proclamation specifically reserves for future action interurban
lines and perhaps others not included in the proclamation. Would
it not be wise to frame this legislation so as not to have to come
back here and make separate provision for compensating roads that
may hereafter be taken over?
40958-18-21
322
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Judge PAYNE. Our view, Mr. Chairman, is that it does, and if
there is any doubt about that there is no difficulty about making it
more elastic.
Mr. BARKLEY. So that, as a matter of fact, it is useless to spend
any time on differentiations between how many roads are already in,
because they may all be in before the thing is over?
Judge PAYNE. I think so.
Mr. WINSLOw. Are all the orders of the Director General being
issued with the same degree of authority, telling the railroads they
have been taken, when, perhaps, they have not?
Judge PAYNE. Oh, no. You know it took some days to create the
world, and it takes a little time to create machinery.
Mr. WINSLOW. Assuming that is so, is it fair to believe that every
railroad for the present, until advised to the contrary, must wire
back to the director to find out if his order of yesterday was genuine?
Judge PAYNE. I think I have said all I can on that subject.
Mr. WINSLOW. You do leave the committee and the witnesses with
the impression that nobody knows exactly what roads are under the
control of the Director General and what are not.
Judge PAYNE. That does not seem to me difficult, when you know
the facts as to each road. It must be determined by a principle, and
the principle is, Is the particular small road a part of a transporta-
tion system? Is it necessary to be used by the Government as a war
measure? That is the test, and that is the only basis of the procla-
mation.
Mr. WINSLOW. Even so, do these gentlemen know whether or not
they are really coming under the direction of the Director General?
Judge PAYNE. You must ask them that; they can not come in
unless they fall within that principle.
Mr. WINSLOW. But you say the Director General does not know?
Judge PAYNE. How can any human being know until the facts
are presented; nobody in the world knows the history of each road.
Mr. WINSLOW. I think you are quite right; but I am trying to get
the status of these roads.
Judge PAYNE. All that I can say I have said, and that is you
must apply the principle in each case, and if the principle excludes
the road it is excluded.
Mr. COOPER. May I ask you a question? If the Government does
not take over these small-line roads, what effect will it have on them
when it gets their future business?
Judge PAYNE. Somebody said something about prophecy. I sub-
scribe to that sentiment. I do not know; it may have a disastrous
effect; it may have a beneficial effect.
Mr. COOPER. In other words, then, these men here to-day do not
know just where they are, whether the Government is going to take
them over?
Judge PAYNE. You must ask them what they know.
Mr. BARKLEY. You do not mean by a "system" necessarily a cer-
tain number of miles in trackage and cars and engines that are con-
trolled or owned by one particular body of men, but you mean, I
presume, the word "system" here is to be interpreted not so nar-
rowly, but that may be stretches of roads owned by separate con-
cerns, if all linked together, form one series of transportation that
would be regarded as the system?
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 323
Judge PAYNE. I think that is a correct statement.
Mr. BARKLEY. In other words, properly, a witness referring to the
Illinois Central system would be understood to mean the road owned
by the Illinois Central Co., but within the language of this procla-
mation, a system may not only include that road but all other con-
necting roads that bring freight to it, owned by various and sundry
corporations?
Judge PAYNE. In other words, the system of roads extends from
New York to San Francisco, in many ownerships, but in view to
making a movement of freight for any war purpose from San Fran-
cisco to New York all these roads constitute the great system, and
so those running out from the munitions factories or other things
that the Government requires-
Mr. BARKLEY. Could it be interpreted broadly enough to say that
all the railroads of the country, in whatever length and size, con-
stituted one system of transportation as distinguished from water
transportation, which might be another system, and thereby include
all the railroads of the country without regard to their size or their
connections with other roads?
Judge PAYNE. I do not think I would want to go quite as broadly
as that. It is very hard to lay down a hard and fast definition. You
have got to look at your map. You have got to see the connections;
you have got to see the competing lines; you have got to see whether
it is necessary. Just for a moment, suppose the Government was sad-
dled with these 827 roads these gentlemen are talking about. They
say they ought to have a guaranty on the cost of a fixed sum, even in-
dicating 6 per cent. Why, it would bankrupt the Treasury; there
would be no possible defense why they should be taken. Col. Deari,
here yesterday, in his very interesting talk, spoke about four roads
running across the State, but separated in two or three places by 40
miles. That is not a railroad system; those are four disconnected
roads, as I gather from his statement, having no sort of relation to
the necessary war demands of the Government. If that is true-
I do not know-I have not any map on the subject-I just gathered
from his statement-manifestly they are not included.
Mr. BARKLEY. We will go ahead with this witness.
Mr. ROBINSON. Just a moment. I would just like to see if we can
not find out where we are at.
Mr. BARKLEY. I doubt very seriously whether that can be done
before this committee.
Mr. ROBINSON. But we want to know the angle from which the
proof shall be presented. If the angle which Judge Payne presents,
then we want to present another line of proof than what we were
going to present. Here is a condition we are facing: The President
issues a proclamation and says all railroads have been taken over by
him. The Director General gives each and every one of those people
an order, directed to their officers, that "I have taken possession of
your railroad," and now the proposition is put up, apparently in
good faith, that it is the duty of those officers to come back to the
Director General and say, "Say, did you mean what you said when
you wired me? Am I really under your control or are you just fool-
ing or playing?" I think that is child's play and nothing short of it.
324
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Judge PAYNE May I interrupt for just one second? The gentle-
man is much mistaken when he says the President's proclamation
says it takes over all the railroads. It is not there at all.
Mr. ROBINSON. I will renew the statement, basing it upon my
understanding of thet language-and I read it twice into the record
yesterday and I repeat that my understanding of that language is
that it does say it takes all of the railroads over.
Mr. BARKLEY. Each and every system of transportation, including
railroads, whether operated by steam or electric power, including all
terminals, and so on.
Mr. ROBINSON. I state my understanding of that language, and
anyone can apply that as they may see proper.
Mr. BARKLEY. If any members of the committee disagree with me.
I would like them to speak up. The committee has proceeded on
the assumption that all railroads are included, and, as I suggested
to Judge Payne, it seems to me we must legislate so as to cover all
railroads, whether in now or whether they come in hereafter, and I
think you must proceed along the lines you have already pursued
up to this point, unless the committee takes a different view from that.
Mr. ROBINSON. We are ready to proceed on that, but I want to
answer just one thought--
Mr. STEPHENS. I will ask a question before you do that: You
stated that these roads had all received notice from the Director
General that they were taken over.
Mr. ROBINSON. I made that statement.
Mr. STEPHENS. Is that a fact that all short lines received notice?
Mr. ROBINSON. Every one of them.
Mr. STEPHENS. I do not see where there is any controversy over that.
Mr. WINSLOW. Before you came in Judge Payne said the Director
did not know anything about the job, and he issued a blanket order.
and sent it to the Interstate Commerce Commission, to be transmitted
to the heads of every railroad, and then after a while they have got
to check up and have the heads of the railroad companies send a wire
in asking whether they are really under the supervision of the
Director General.
Judge PAYNE. I beg your pardon.
Mr. WINSLOW. I so understood you.
Judge PAYNE. I said the Director General did not have the mailing
list; did not have a list of railroads, and he sent the notice where the
list of railroads was. Now as to any statement-
Mr. WINSLOW (interposing). Did you not say the "Interstate
Commerce Commission"?
Judge PAYNE. Yes; precisely. They had the list. As to the state-
ment that the notice that went out was a notice taking possession
of a particular road, I suggest that perhaps the committee had bet-
ter see the notice and see just what it contained.
Mr. DILLON. Mr. Robinson, did you have a copy of the notice
that was sent out to these railroads?
•
Mr. ROBINSON. We will supply a copy. I have not a copy here.
I have been trying to get one during the noon hour, but I did not
have an opportunity to do so.
Mr. BARKLEY. Was the same notice sent to all?
Mr. ROBINSON. I have not had the opportunity to compare, but
I assume one order was sent out to the whole of them.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 325
Mr. BARKLEY. I think we will get along better by proceeding with
the witness.
Mr. ROBINSON. May I make one statement in reply to the Judge's
statement about the magnitude of that situation? The magnitude
of the funded debt of the various roads, based upon the data fur-
nished as to the 115 upon which you make calculation, would run
the funded debt to about $450,000,000, and a substantial part of the
interest on that, under the very adverse showing that has been made
by the railroads as has been actually earned, so it would only be a
portion of the interest on an aggregate of not exceeding $500,000,000,
which would be involved. And I do not think that would quite
bankrupt the Treasury. We are dealing in big figures, now, but
I do not think that would bankrupt us.
One other thing, as to Judge Dean's statement: He described four
railroads, and described the potentiality of the situation that filling
in certain gaps you would have a railroad that would be 100 miles
shorter as to those large coal fields up in Tennessee reaching the
coast, but each one of those four railroads is a substantial railroad,
serving its community, furnishing raw material and aiding the
general Government, aiding in this war situation, just as much as
some of the larger ones, fully as much in proportion as those larger
ones.
Now, we will ask Mr. Beal, assistant receiver of the Gulf, Florida
& Alabama Railroad, Pensacola, Fla., to address the committee.
STATEMENT OF MR. BEAL, ASSISTANT RECEIVER OF THE Gulf,
FLORIDA & ALABAMA RAILROAD CO., PENSACOLA, FLA.
Mr. BEAL. The Gulf, Florida & Alabama Railroad Co. was incor-
porated in 1911, and runs from Pensacola to a point on the Southern
Railroad branch between Birmingham and Mobile. Pensacola is
reached by a branch of the Louisville & Nashville Railroad Co.
This road connects with the coal fields that is, connects with the
Southern, the branch that goes through the coal fields and goes
directly into Pensacola. We have a dock with a filled area of 23
acres, that is the land portion of the dock. We have two 1,200-foot
wharves that extend from the end of that dock into the water to
about 29 to 31 feet depth at the docks. We have also a coaling plant
that cost about $100,000 on a separate dock. So that we have three
docks, and one coaling plant situated in that position, and large and
valuable properties.
Prior to the war the shipping over those properties was very good:
since the war it has not been. Since the war it has been used nearly
exclusively for the export of lumber, steel forgings, finished shells
for the foreign and allied Governments, and it is now being used and
the dock is covered with large parts of that material at this time.
Fully 10 acres are covered with these large steel forgings.
Mr. BARKLEY. You mean since the war?
Mr. BEAL. I mean since we got into it. But ever since the Euro-
pean war has been in progress, before we got into it, the traffic has
been of that nature.
This road was built originally 18 miles, then 24 miles was added to it,
then 50 miles, and then 50 miles added to that. It opened operations
all the way through in the latter part of 1915, and since that time has
326 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
1
been building the roadbed up to standard. In May, 1917, the road was
placed in the hands of the receivers, and since that time the receivers
have been investing the proceeds of receivers' certificates in the
improvement of the property in the hope of improving the business
of the country. The actual amount of real money that has been put
physically into the property is $3,807,895.66, that is the actual
physical money, cold cash that has been put into this property. It
runs 132 miles, the length of the main line. The property has been
operating at a deficit, and a startling deficit, ever since it has started.
In fact, it is just now in a position to operate, because they built a
little part of the line and filled in 10 acres of dock, and then filled
in 10 acres more as they could get the money; and in the meantime
the stock was redistributed to widows, orphans, stenographers, and
bookkeepers. They issued $4,400,000 bonds, and this $3,728,000
represents what they got for $4,400,000 of bonds and what actually
went into the property. Those people, those little investors, of $500
and $1,000, everything they have got is invested in the bonds of this
road at this time.
The court, when it was put in the hands of the receivers, authorized
$500,000 receivers' certificates. I negotiated $250,000 of those cer-
tificates under the greatest difficulty between May and July, and it
was almost impossible then, and it is impossible now, to finance the
rest of that since the Government control has come along. The bond-
holders through a committee have a plan of reorganization by which
the road, were it not for the Government control coming along, would
have been put on its feet. The road made $240,000 gross income last
year, and it had a deficit of approximately $94,000. We have now
located on the road a steel shipbuilding plant-a Government plant
that will give us $100,000 more gross earnings next year, and that
will more than pay our operating expenses and cover our deficit and
give us a small amount to distribute to the bondholders. In addi-
tion to that we have other traffic over the docks, in which the docks
will have to be used, and next year we will be able to make more than
operating expenses. We have put $250,000 into this property-no;
we have put $300,000 in, because some money was owed on open
notes, since we could not place the receivers' certificates, as the com-
mittee planned, with collateral security to them in a larger amount
than the amount borrowed. There is $300,000 we have put into this
property and brought the physical condition of the property up to
where it will operate, where instead of having 2 box cars operating
we have 20 or 30 right now, and 5 or 6 at a time under construction.
and a larger proportion of flat ears; and instead of having two loco-
motives running they have now eight running, and the other one in
the shop will be out in a week or two.
Now, when we have invested all that money in the property and
have it about in a condition where we can realize on it and where we
have about 3 miles of road going into the shipbuilding plant and the
shipbuilding-plant freight starting to come in and the Government's
freight starting to go out over our docks, then the Government
control comes along and under the first bill we are classed in that
standard of return where we will get nothing. It is the bondholders
that we are talking for, because I am appointed by the court. I have
absolutely no personal interest in it at all; and for the bondholders,
those people who have been handed nothing for something.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
327
Mr. STEPHENS. You spoke of the bondholders having a plan of re-
organization in mind.
Mr. BEAL. Yes, sir; that is in the course of procedure now.
Mr. STEPHENS. Just what did they propose to do?
Mr. BEAL. They proposed to cut down the bond issue, which is
always the plan to reduce the security from $1,000 to $500; that is,
50 per cent reduction, and distribute that among the bondholders,
and also in distributing it to raise sufficient to pay the receiver's cer-
tificates or put the road in condition to operate at a profit.
Mr. STEPHENS. Did it propose the elimination of any of the stock-
holders?
Mr. BEAL. That would eliminate the stockholders entirely, because
sale in mortgage foreclosure is the method of eliminating stock-
holders, and the party who buys it up would be the one to pay off
the committee and distribute it among the stockholders, issuing new
stock, because nobody wants a bond without having control of the
stock.
Mr. STEPHENS. That seems to be the usual way of building rail-
roads; take the money from the stockholders and then shear them
and let the bondholders take the rest.
Mr. BEAL. Not in this instance. In this instance the stock was
given away with the bonds. A man would buy a bond, and they
would give him five shares of common and two shares of preferred.
The stock was not paid for. This was run on high class-
Mr. STEPHENS. You said stenographers and bookkeepers bought
the stock.
Mr. BEAL. No; they bought the bonds; that is what I said. The
bonds were taken and distributed around by the bond sales among
these different people, and I know stenographers, widows, and
orphans were among them, because I have had many letters from
them wanting to know what we have done with that property.
Mr. MONTAGUE. Has the Government taken over your road?
Mr. DALE. Positively. We have notice that it has been.
Mr. MONTAGUE. Have you the notice with you?
Mr. DALE. Anyway, I did not think there could be any question
of that. Now as to whether we are a system or not I do not know
what the idea is. A system is not a route. If you were to send
freight by a certain route you might send it by three or four differ-
ent routes. That would not be sending it by a system; you would be
sending it over a route.
Mr. MONTAGUE. It might go over two or three systems?
Mr. DALE. I can't tell whether I am a system or not. I am on a
direct line between the coal fields and the iron fields and the Gulf,
and I am in that position, and that shipbuilding plant that the Gov-
ernment has has been built on this road, and as that is a fact, and as
the Southern Railroad system and the Gulf, Florida & Alabama
Railroad Co. over their joint tracks carry that traffic we are very
much in the position of a darky I heard of that sued the railroad
company. A railroad train ran over his wife and killed her, and
he hired a lawyer and he had the usual agreement that he would
get 50 per cent, and the lawyer settled the case with the railroad, and
the darky was tickled to think that he had got rid of his old wife.
The lawyer had the money piled up in gold, a little bunch here and a
big bunch, and he said to the negro, "This little pile here is yours,
328
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
and this pile is for the costs, and this pile is mine; are you satisfied?"
"Yes," replied the darky, "but whose wife was it that got killed,
yours or mine?" We are in the same fix. We have had our wives
killed and we don't know whether or not it is our wives or somebody
else's. We do not know where we are, so we submit-we do not ask
that any fixed basis be made, or that the bill provide that you pay us
10 per cent on our bonds, or 8 per cent, or 5 per cent, or that you pay
us $7,500 a mile for the use of our road, or any definite fixed price.
What we ask is that an impartial committee be allowed to deter-
mine, not from some old accounts that they have gotten in the In-
terstate Commerce Commission, not from the accounts that these men
who originally foisted these bonds on the widows and orphans used in
operating the road, but that some fair and equitable basis be used by
men who have some authority, for instance, the authority of a master
in chancery. Every lawyer knows what the authority of a master in
chancery is. Then we won't have any indefinite discussion as to why
Judge Anderson says it means a route, and we don't want a lawsuit;
we don't want to embarrass the Government; we don't want to em-
barrass the Government with a lawsuit. We want something definite
just as if you would have something definite if you entered into a
contract for a hat. You would not call it a cover. So we want some-
thing definite on that, like the negro dividing the money. When it
comes to making a division we would like to have some one of the
three who is not a member of the Interstate Commerce Commission
or any other body.
The ACTING CHAIRMAN. I understand that this bill does not re-
quire the Interstate Commerce Commission to appoint a single mem-
ber. It says they shall not be ineligible.
Mr. DALE. That is very vague and indefinite. It leaves it in some-
body else's hands to determine that vague subject. If you appoint a
man who has had actual experience in the operation of railroads
for five years—make the qualifications of one of them a man that
knows something about it-then we would have an opportunity to
present these different points. We go on before another committee
and they say you are fooling us.
The ACTING CHAIRMAN. You are willing to leave it to the Presi-
dent to fix the compensation, but are not willing to leave it to him
to make the appointment.
Mr. DALE. Absolutely; but have some qualification. If you are
going to appoint a court of appeals, you would not appoint three
auditors.
The ACTING CHAIRMAN. There is nothing fixing the qualifications
of auditors or referees, whatever they may be. It simply says that
a man is not ineligible because he is on the Interstate Commerce
Commission.
Mr. DALE. But why not have a qualification? When you admit
a man to the bar or to practice medicine he has to have a qualifi-
cation.
The ACTING CHAIRMAN. I can not say as to whether Congress
would be willing to prescribe the qualifications of these referees.
Mr. DALE. Why not name the auditors and referees and name their
powers, so that we will know what they are to do, and we merely
ask that some fair basis be arrived at by which this road in particu-
lar can live through the storm. We do not want the Government
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. ! 329
to be held up. All we want is that the road be allowed to live
through the storm, so that when the storm is over it can come back
to life again.
Mr. WINSLOW. Are you considering, as you represent your rail-
road, that this matter applies purely as a war measure?
Mr. DALE. Absolutely, sir.
Mr. WINSLOW. And you are not presenting the case with a view
to what you might do if you thought this road would be taken over
finally?
Mr. DALE. Absolutely not.
The ACTING CHAIRMAN. Mr. Robinson, it seems to me that there
isn't very much difference between these various situations that are
being presented. Is it your purpose to let somebody represent each
separate road unless they present a different situation? The same
principle, it seems to me, covers all these roads, though the facts may
be different. If the language of this bill is broadened so as to cover
any one of them, it would cover all of them.
Mr. ROBINSON. My intention is to try to present as nearly as we
can the distinct cases, cases that have some distinct features from
the other cases. These representatives of the owners of the property
are here, and each feels that he is entitled to have some opportunity
to present his special case. I do not mean to run it at great length,
but there are six or eight additional ones that have some special
features to their cases. We will undertake to make them just as
short as we can. Our last witness took a limited time, and we do
not intend to go very far.
I was asked a little while ago as to the orders of the director
general, and I have before me one that has a direct bearing on the
subjects here that we have before us, and I will read a couple of para-
graphs from these orders, which are rather illuminating on that
subject. This is the file from the Carolina & Yadkin Valley Rail-
way. This file that I have before me is an order issued by the
director general signed by Mr. W. G. McAdoo, Director General
of Railroads, and it reads:
DIRECTOR GENERAL OF RAILROADS,
INTERSTATE COMMERCE COMMISSION,
Washington, January 8, 1918.
To all railroad officers and employees:
The Government of the United States, having assumed possession and control
of the railroads for the period of the present war with Germany, it becomes
more than ever obligatory upon every officer and employee of the railroads to
apply himself with unreserved energy and unquestioned loyalty to his work.
I then omit two paragraphs which go into the details of the
loyalty. Then I come to one additional paragraph:
Every railroad officer and employee is now in effect in the service of the
United States, and every officer and employee is just as important a factor in
the winning of the war as the men in uniforms who are fighting in the trenches.
That is a communication that was sent to all the railroads, as I
understand it.
The ACTING CHAIRMAN. You understand that all of these little
roads received copies of that?
Mr. ROBINSON. Yes; this is a small railroad; I do not remember
its mileage, but it is a small railroad, and it received it. I received
330
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
it representing a 62-mile line, and all of these delegates here re-
ceived it.
Mr. STEPHENS. What is your idea of the constitutional right of
the Government to retain control of these railroads after the war?
Mr. ROBINSON. I doubt very much whether they have the right,
but I agree with everybody that the owners of the railroads should
permit them to stay in a reasonable time after the war shall have
ceased in order that the country may be served the interests of the
people may be served.
Mr. STEPHENS. Don't you think that a definite time should be
fixed?
Mr. ROBINSON. I am strongly in favor of a definite time, and I
think it should be a limited period.
I want, Mr. Chairman, to introduce Mr. John P. Cochrane, re-
ceiver of the Alabama, Tennessee & Northern Railroad, that has
recently been constructed, or part of it.
STATEMENT OF MR. JOHN P. COCHRANE, RECEIVER OF THE ALA-
BAMA, TENNESSEE & NORTHERN RAILROAD, MOBILE, ALA.
Mr. COCHRANE. I would be glad to follow the suggestion of the
chairman that I go not too much into detail as to our own property.
Speaking for myself and those who are with me, I want to say
that whatever I say will be considered on a basis that this is a war
measure and that it will terminate some time after the war.
I am
still speaking for myself. I think it is a good bill, with probably
two exceptions, and I simply will try to point out what I think
about those two exceptions, and they are what these gentlemen have
already in a way said.
It seems to me that the question before us is not what railroads are
in or what railroads are out, but that is going to be determined, and
I shall not go into it nor the law in the case. All of us have got
these orders and we are acting on them. The Government has taken
over these railroads because the Government thinks the railroads are
necessary to win the war, and the railroads are taking the position
that if they can do anything to aid in winning the war it is their
duty to do so. But they want that done with the least harm to
them and to their security holders as is possible for it to be done,
and that is in line with the President's proclamation-that no in-
jury shall be done, or as little injury as possible, to the stockholders
of the various railroads.
It seems to me that the main thing that is needed in this bill is
some machinery by which it can be found what a fair rental of these
various properties is during the one, two, or three years that the war
is here. That can not be decided by the Congress of the United
States, because there are too many of them. I do not take it that
they could be written into a bill. The next thing to be done is to
formulate some board or somebody that will do it. In time of war
we do things differently from the way we do them in times of peace.
The war is a time that we have to act and have to act through a
central power, and act quickly. Right now we are taking up a great
deal of time over the matters that are going to have to be left to
somebody, and that somebody is going to have the authority coupled
along with the responsibility. I think that the amendment that this
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
331
association has suggested to your committee covers the situation;
that is, that the President be permitted to say what the peculiar cir-
cumstances with reference to each railroad justify him in paying that
railroad for its use during the time of the war; I think if you put
that in the bill that that part of it will be sure, and I believe it will be
satisfactory to the railroads. It doesn't make any difference to me.
I believe that human nature is about the same anywhere.
If I am
willing to leave it to the President, I would be willing to leave it to
his appointees, but it ought to be left to somebody, so that the matter
could go right along. There is no question that the Government has
the railroads. Now, the question is what is it going to pay for them.
I want to draw the attention of the committee to how that ought to
be considered, and cite my own instance as one that can be heard in
this case.
We undertook to build a railroad between the Gulf and coal and
mineral fields of Birmingham. We have got about four-fifths of it
built and we are unable to build the balance. We connect with but
one railroad system, and that is the Southern Railroad, which does
not give us any competitive business. We only handle local business.
We have not reached the coal fields, where we would get this new
business. Therefore our earnings do not return even interest on the
low rate of the investment, because we did not build this to be a local
road but a through line. These low earnings would prevent our get-
ing fair returns on that piece of railroad, and it would at the same
time prevent our going ahead and building the other one-fifth of the
mileage necessary to bring it into the coal fields, and it would at the
same time change the conditions under which we are operating to
such extent that when it was turned back to us it would cost us a
great deal more to operate our railroad than it did before the Gov-
ernment took it. I won't go into details, but the point is that the
labor situation would come into play. Where we are not paying
standard wages now we would have to pay it then. Our soliciting
force would be taken away from us and we would have to start all
over again to build up the industries on the road and to build up our
business. So when you come to decide what the rental ought to be
for these railroads you have to take into consideration not only the
money that is put into them, but you also have to take into considera-
tion what harm you do these railroads when you take from them a
state and a condition that they had no control over and that would
be hurtful to the further operation of the road.
You know the way that I read this proclamation of the President
that he should take over each and every system of transportation,
means in that case each and every means of transportation. Now,
the way the short roads figure in that is that they are feeders to the
large roads, and as the President had said this is a war of resources as
well as of men. These little roads are necessary to bring into the
main systems of roads the food and the war supplies and ammuni-
tions necessary to carry on this war. Therefore it is not fair to
figure these roads on what they have made during these times, under
war conditions and all that is against them, nor is it a fair estimate
of their value to the Government. Their value to the Government
lies in what they are worth in carrying out this war, and I can not
conceive of any railroad which taps a local territory and brings into
332
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
the main artery supplies and provisions and keep the people going,
but what is doing a service in this war.
Furthermore, the President has said that these railroads were
taken over, and one of the main reasons for taking over these rail-
roads was to put them under one control, and control the finances of
the country and prevent calamity coming from the bankruptcy of
various railroads, and to get those railroads out of the position of
going into the market and interfering with the demands and the
requirements of the Government.
Now, all these things taken together mean to my mind that the
little road is just as important as the big road, but I think that some
little roads are more important than others, and that some are en-
titled to more returns, and therefore the better way to get at that
would be to have the President take that authority and decide each
one of these cases on its own peculiar merits.
Mr. BARKLEY. Would you let me right there ask a question? A
good many witnesses have said that the Government has taken over
their roads without any provision to pay them for their rental. Of
course, nobody contends seriously that the Government intends to
take any road over without paying just compensation, the only ques-
tion being the method of computing that compensation. Section 3
provides that any cases that are not settled under section 1—I pre-
sume that your road would come under section 3—can be settled un-
der section 3, because it had no net operating revenue.
Mr. COCHRANE. It did have some, but not enough.
Mr. BARKLEY. Not enough to compensate you. Then it could not
be settled under section 1. It would be referred to this board of
auditors, or if you want to change the name, board of referees, and
the law here provides that these referees shall report to the President
the just compensation to which the road may be entitled. The
President can not allow the road any amount over that figure. He
may allow it any amount less than the earnings, less than the report
made by the auditors. Would it help the situation to rearrange that
language so as to provide for this situation? The President can not,
of course, personally investigate all these roads, and somebody must
make the investigation and report to him. Would it clear your
situation if this language was changed so as to authorize the appoint-
ment of a board of referees or commissioners and provide that they
shall report to the President the facts with reference to each par-
ticular road, and that based upon that report the President may
make an agreement for just compensation to the roads, so that there
would be some authority to investigate any certain circumstances
and report them to the President, and that the President, basing his
action upon the report, could allow compensation either below or
above that which the board might report?
Mr. COCHRANE. In my opinion that is what we want. I do not
think it is stated right here, but when I say referred to the President
I mean just like everything else that is done through the Director
General. He can appoint whoever he pleases to find out, but there
ought to be a board that somebody can go to. We ought to be able to
have somebody to whom to submit the facts to show the justice of our
situation. As the bill reads it gives the President no authority at all.
I think the first clause would do away with this clause. In other
words, the President can not go beyond the earnings.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 333
Mr. BARKLEY. Of course, that is a matter of interpretation. The
President is to use the standard earnings as the basis of compensa-
tion, and that is rather restricted. It does not mean that he can not
go under it, and it does not mean that he can not go above it; but that
is the basis of compensating where settlement is made under section
Section 3 is intended to cover the roads not settled in that way,
and they would have to go before this board, and whatever they re-
ported would be the maximum amount they could receive. The
President would not have any authority to give them 1 cent above
what the board reported.
1.
Mr. COCHRANE. I don't think that would be fair. I think the
President ought to have just as much authority to pay a railroad
what he thinks it ought to be paid as he has to pay the shipbuilder.
Mr. BARKLEY. Would your views be met by giving this board
authority to report the facts to the President as to each of the roads
and then let him use those facts as a basis for fixing the compensation?
Mr. COCHRANE. I do not know whether that would be practical for
one board to do that.
Mr. BARKLEY. It would be as practical for them to do that as it
would to settle the whole thing.
Mr. COCHRANE. I think that if the President had this within his
authority and had a board in different sections to take up different
propositions it would speed the situation.
Mr. BARKLEY. Your idea is to leave it to the President without
mentioning any board at all-to let him select boards if he wants to?
Mr. COCHRANE. That is my personal idea. I am not speaking for
the association. Leave it to the President, just as you leave it to him
as to the time of taking over these railroads. He has authority right
now.
Look what tremendous authority the Director General has.
He can take all the roads in the United States. One man can do that.
So that we are all doing that, not because that means Government
ownership, because we have no right to say that anyone has said it
means Government ownership. We are willing because it is neces-
sary to win the war. The President has said in his proclamation that
he is not going to, and that his Director General is not going to take
anything away from any carrier or security holder not just and right.
Now, we want to leave it to him-he knows everything and has the
situation in hand-to appoint a board, in Maine or Massachusetts, or
wherever he wishes, or he may turn it over to Judge Payne here or
anyone in whom he has confidence. But that does not relieve him of
dealing justly with the carriers.
Now, what I am trying to explain is that I believe in time of
war these railroads are certainly worth to the Government a fair
rental, at least on what they cost, and that when that is arrived at it
should be arrived at through taking into consideration the whole
situation. Now, it may be that the value of these railroads is very
considerable. I think that the value would be cut out if a part of
them were not taken. The value would lie in the fact that the Gov-
ernment may use some and might not use others, but it would not
be fair not to pay anything to the road that was not used, and to
say to him, "you do not come into the rule, therefore you do not
come into this scheme." He has to wait, he is just as loyal as the
other fellow, and his railroad is there subject to use, and I really
think the President through his director general and through the
334
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
War Department-this is a war measure should always keep in
mind this consideration. Everything I say is based on the idea that
we are fighting the war and that the railroads have come along to
help win the war, and nothing we say or agree to ought to be a
precedent for a Government ownership proposition later. The Gov-
ernment is demanding that the railroads surrender themselves to its
control. Now in doing that you certainly ought not to put the rail-
road in worse shape to meet the obligations that the railroad has
got to meet. That is a question of fact. It would not be a question
for anybody to surmise on. If you had a bond issue coming due
or you had interest on bonds coming due, then I think that Govern-
ment that has taken charge of you-and as Mr. Robinson has read,
you are now an employee of the Government and must do as the
Government says"-should not at least let the iron that is in the
fire burn up. It should protect you.
66
Mr. ROBINSON. This bill says that you can not issue any securities
without permission.
Mr. COCHRANE. Of whom?
Mr. ROBINSON. Of the President.
Mr. COCHRANE. I am willing for the President to say that: I am
taking the position that the President is the man that we are trust-
ing and this ought to be turned over to him, and he ought to have
a board, and he ought to select the board.
Now, the main idea, and that is the only thing before the com-
mittee, what is a fair rental for these railroads. It is not fair to
go down and say that because they have not earned so much money
they should not receive anything. I do not believe that the Presi-
dent would say that it is fair that because my railroad is partly
built and represents value, and that I must stop from going ahead
and improving the road and going on with my prospects, and at
the same time my railroad is turned over to the Government to use
as it pleases, they can take all my engines away, and get an order
from the director general to send those locomotives up to another
division, or to another railroad, and I would have to send them.
Therefore, what you should get is the best machinery to fix it so
that nobody-it does not make any difference whether his railroad
is run by one party or another-can take over his railroad without
paying a fair rental.
The CHAIRMAN. Don't you believe that you gentlemen, or the man
you select to represent you, the director general or such man as he
might select, and the Interstate Commerce Commission could get
together and work out something that would be practical and easy
of application when we all know that there is no purpose whatever
to take any undue advantage? The fact that the first draft of the
bill may not do what you want-perhaps you can work it out better
with technical men than with this committee.
Mr. COCHRANE. I do; but what I say is this, Mr. Chairman: Of
course I figure that is the way it ought to be done. Some of those
ought to get together and they ought to call in competent railroad
men and work out the questions of detail.
The CHAIRMAN. I mean, as to the compensation to the roads which
you have reference to. I don't mean the policy of the bill, I mean
that particular feature that you spoke of.
FEDERAL OFERATION OF TRANSPORTATION SYSTEMS.
335
Mr. COCHRANE. That is all there is to the case. But if you leave it
like it is, that may work into an interminable indecision, and in the
meantime what are the railroads going to do? For instance, here is
an order about interline billing. There is nobody really to appeal to.
They issue a general order that all bills must be through interline
billing, which means a monthly settlement. Some of these little rail-
roads can not finance themselves from one month to another. Of
course we will have to go to the Director General to fix that, but if
you send a good many people to the same person he can not get
around to all of them, and I think that they should work out a way to
settle these various things when the time comes. I do not think there
is anything else to the proposition except for you to simply pass this
bill just as you have it to-day, without exception to leave it to the
President and his advisers, and I am willing to so leave it. Now, if
he left it to the Interstate Commerce Commission-I am not opposed
to leaving it to them, only that they are commerce commissioners and
they have got so much to do that they could not get to it. It would
not help me any.
Mr. RAYBURN. They will not be so busy during the war.
Mr. COCHRANE. I think they would. They are going to have a
good deal to do. I may be mistaken.
The CHAIRMAN. I mean in finding a method of determining just
compensation in these cases which you insist are exceptions, that the
advice of the Interstate Commerce Commission, with the Director
General and directors themselves, could properly work out a legal
plan.
Mr. COCHRANE. I think so, and I think the railroads would be very
glad to do it.
Mr. BARKLEY. You have offered an amendment which you are
speaking in behalf of. Do you think the amendment works it out
to your satisfaction?
Mr. COCHRANE. Yes.
One other subject about the time. I think one time when it
comes is about as good as another, and my thought is that the
only thing to be considered is that the people who furnish the
money ought to have some idea, there ought to be some declaration
as to when this is to be, 6 months, or 24 months. My idea is that it
would be best to make it 12 months from the time that the President
declared the war is ended, and I think the only reason for that is that
there ought to be some stipulation in this bill as to how long it is to
run, to have ownership or control during the war.
Mr. STEPHENS. You think there ought to be a definite time?
Mr. COCHRANE. Yes, sir.
Mr. STEPHENS. But your object in having that time is to serve
notice on the country that Government ownership is a real benefit?
Mr. COCHRANE. I think it is a real benefit in this, that it shows
who own the properties that the Government will protect their
rights. I think you get very much quicker action, and I approve the
taking over of the railroads at this time, but I think the security
holders are entitled to know that at a certain time these railroads
will be turned back to them.
Mr. STEPHENS. Don't you think that the security holders would be
better protected if the Government kept the roads than if they turned
them back?
336
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. COCHRANE. Well, they would if they were willing to allow
fair returns on the investment. I think the time has come that that
would be better, but I don't think it would be better under this bill.
Mr. ESCH. What is the view of the short-line carriers as to the ap-
plication of the compensation act of September 6, 1916?
Mr. COCHRANE. Which is that?
Mr. Escн. That is the one that is provided in the bill.
Mr. COCHRANE. You mean on the basis of three years?
Mr. Escн. No; I think section 9 makes that applicable to the car-
riers taken over by the Government-the compensation act of Sep-
tember 6, 1916, providing for injuries, and so on. What is the view
of the short-line carriers as to the wisdow or practicability of apply-
ing that compensation act to them?
Mr. COCHRANE. I don't know.
Mr. ESCH. Would it be a financial burden that they couldn't bear,
or what is your view?
Mr. COCHRANE. I must confess that I don't get specifically what law
you are talking about.
Mr. BARKLEY. It is the Federal compensation law for compensating
Government employees for injuries or deaths.
Mr. EscH. Section 9 says, "The President is hereby authorized
while carriers are under Federal control to direct that the Federal
workmen's compensation act of September, 1916, shall be extended so
as to apply to carrier employees, on such terms and conditions as will
give due consideration to remedies available under State compensa-
tion laws or otherwise.”
Mr. COCHRANE. Oh, yes; I know. Well, I don't know that I would
want to give an opinion on that. My own idea is it would be better
without it. I don't favor that compensation act.
Mr. EscH. You don't favor it because of the financial burden it
imposes?
Mr. COCHRANE. Yes.
Mr. ESCH. Have you ever used it?
Mr. COCHRANE. Well, I don't think it is fair all around.
Mr. WINSLOW. Have you applied to the Director General to find
out whether or not you will come under this act?
Mr. COCHRANE. No, sir.
Mr. WINSLOW. How would you proceed now, in the light of what
has been said this afternoon?
Mr. COCHRANE. I am an officer of the Government, an employee of
the railroads, and I am working under the Director General.
Mr. WINSLOW. But the testimony is to the effect, by Judge Payne-
if I am not incorrect-to the effect that you can not tell whether you
really are under that or not until you go up and ask and are told
some time hereafter.
Mr. COCHRANE. Well, I must confess that was entirely new to me.
I never heard of that before.
Mr. WINSLOW. How are you going to run your railroad meanwhile,
if there is any doubt about whether you are working for the Govern-
ment or working for the railroads?
Mr. COCHRANE. I am going to operate mine under the directions.
of Mr. McAdoo, and I am getting telegrams and letters from him all
the time, telling me how to run it, and we are doing that. I will be
glad to answer any questions, gentlemen.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
337
Mr. DILLON. Have you any of those telegrams with you?
Mr. COCHRANE. I have a letter from him.
Mr. DILLON. Will you read it into the record?
Mr. COCHRANE. This is just one directed particularly to me. It is
a circular, but it has on it, "Receiver of the Alabama & Tennessee
Northern Railway. By direction of the Director General of Rail-
roads you will let me have by not later than the 15th the following
information."
Then he goes on and asks for certain information as to our re-
quirements for another year. "The above information is to be imme-
diately transmitted and may be supplemented later with such addi-
tions as may become later available."
That is the general order that we all got, and then this order
that Mr. Robinson read we all got, and I got a telegram from Mr.
McAdoo asking for suggestions as to terminal situations, if I had
any suggestions to make as to how terminals should be handled, and
the railroads in my town got them. We had a meeting and went
over it and answered them. Then I answered it individually.
Then I have another letter here from Mr. Edward Chambers, who
is one of the Director General's assistants, directing me that he
would be glad I got a personal letter from him signed by him.
They are the only people I am taking any orders from now, and I
don't think that so far as my road is concerned-we have 200 miles
of railroad operating between the port of Mobile north toward
the northern part of the State, and I don't think under any circum-
stances our road-even Judge Payne will agree with that that we
are inside the limit.
Mr. STEPHENS. Inside the limit?
Mr. COCHRANE. Yes.
Mr. STEPHENS. Well, now, what is "inside"?
Mr. COCHRANE. I call it inside to be now in with the Government.
Mr. STEPHENS. You are evidently in all right.
Mr. COCHRANE. Yes, sir; he has got us. [Laughter.]
Here is a letter-I sent this telegram to the Director General-do
you care to know about this? I believe somebody asked about it.
Here is a letter in answer to a telegram that I sent to Mr. McAdoo
in which I suggested that our line be used as a route to Mobile,
where heretofore the systems of railroads who were in competition
with us would not permit-and that is a point I wanted to bring
out, that is another thing I want to bring out very forcibly, that
while it may not be said in criticism of the large systems-we are
all human, even the larger systems. Sometimes they are inhuman
to the little roads, but they don't permit us to do any business in
competition with them. We have a railroad that represents that in
connection with one branch of the Southern Railroad is the shortest
line between the Birmingham mineral districts and the gulf port of
Mobile, and yet they will not permit us to handle any business over
that part of our road. We have got rates in force, but they won't
let the stuff move.
Now, the Director General in one of his first orders sent out an
order in which he said that all railroads, regardless of competition
and individuality, should immediately direct freight over the short
route, or the route of least resistance, so I wired Mr. McAdoo that
40958-18———22
338
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
I had a short route and that we were open and not congested, and
ready to move this business. And this is the answer I got from the
Director General of railroads:
you
"Interstate Commerce Building, Washington, D. C."-this is di-
rected to me individually as receiver of this railroad-"This will
acknowledge receipt of your telegram of January 4. We thank
for the recommendations. Consideration will be given to it. You
can appreciate that the necessary tariff routings must be arranged
before the operation suggested could be put into effect."
About that he was not informed. Of course, as Judge Payne
says, it is impossible for them to know everything, so he didn't know
that these rates were in effect. I immediately wired back to him
that the rates were in effect, and there were no reasons why this
freight should not move from Birmingham, and that was one way
to break congestion in the Birmingham yards; to which I did not
get any reply by the time I came here.
Mr. DILLON. Do I understand that it is your opinion that the
Secretary has the right under this proclamation to fix rates?
Mr. COCHRANE. I certainly do. I understand that the Director
General of railroads of the United States could make rates right
now without asking anybody.
Mr. DILLON. In other words, that he can set aside the law.that is
now upon the statute books and take that control out of the Inter-
state Commerce Commission and set his own rates?
Mr. COCHRANE. My understanding is that the Government took
over the railroads in order to do the very things that the railroads
could not legally do, and that Mr. McAdoo is empowered to do that
thing, and therefore he can set aside any ruling of the Interstate
Commerce Commission, or any legislative made laws, so far as I
know. I am no lawyer, but that is what I understand.
Mr. DILLON. Is it your understanding that he can fix rates with-
out the approval of the Interstate Commerce Commission?
Mr. COCHRANE. It is my understanding that he can. He sent me
a letter in which he said that I and all other officers and employees
of the railroads were employed by the railroads-that we were offi-
cers of the Government; that we could not leave the service without
a certain time notice, and that until further advised we would re-
ceive the same compensation that we had been receiving. Which in-
dicated that at some other time he might raise some of our salaries,
or at some other time reduce somebody.
Mr. DILLON. Do you understand that the Government is going
to pay these officers and employees out of its own funds?
Mr. COCHRANE. I do not.
Mr. DILLON. That is, that it is first to go into the public Treasury
and then be paid out from the Treasury?
Mr. COCHRANE. No; I don't understand that. My understanding
is-I noticed your examination of Mr. Erb-I am the executive offi-
cer of this railroad, and if he were to issue a general order that all
railroads would pay employees or labor a certain amount, I would
have to go ahead and pay them that; and I understand he would
have that authority. And furthermore, I think that he has the au-
thority on both sides-the rate side and the labor side. That is
something the railroads never had. He has also the authority, as is
FEDERAL OFERATION OF TRANSPORTATION SYSTEMS.
339
indicated in this letter that he wrote, to route freight in any direc-
tion without any previous arrangement to do it, if it moves the
freight.
Mr. BARKLEY. You don't understand that the receipts you get
from your railroad, for hauling freight, are to be sent through the
Treasury?
Mr. COCHRANE. No; I do not; because I am specifically directed
how to handle that.
We have another order from him; I wish I had brought it along,
to show you what these orders are. We have another order from
him, saying that all accounting, beginning January 1, 1918, would
be carried on in the same way that it had heretofore, but it must
be understood that it is for the Government; that this accounting
and handling of the business is carried on and that the auditors
should make their report to the Interstate Commerce Commission
in the same general manner that they have heretofore. And that
is what we are operating under. Now, gentlemen, if there is any
other questions-I just simply want to say for the railroads that
this is not looked upon by us, certainly not by anybody that I
know, as a chance to sell their railroads. We are not after that; but
it is a chance to help the Government. But we believe that the Gov-
ernment ought to pay fair rentals for these railroads; that it ought
to give us some idea as to their intentions, so long as there is so much
talk about it, as to when this shall terminate, and we are ready to
be good soldiers and go right along in that line. And the only way
for you to do, according to my judgment, to fix this is to make the
shortest machinery you can for us to get somewhere. Just bear one
thing in mind, if you put it into a department that is already so
much overloaded, then it will not be handled; but if you put it into
the hands of the Director General or the President, then I think he
will arrange for us to have a hearing, and that is all we want. We
then must stand on our own--the cases that we can present. The
only thing I do want, Judge Payne-I hope there is some further
business with the judge-I want him to feel that the short lines are a
part of the war necessities; that the short lines are the feeders to the
big lines, and it is just like a country road from the farmer's house
over to the highway. You know in our case you can't build a sawmill
on a paved street. You have got to build it in the woods.
The big lines have got the timber all cut back from their lines, and
they have to reach out these spurs. They furnish the timber and in
the mines they furnish the coal. They are a part of this system.
And then, not only that, that every acre of land that is on a short
line is a producer. And I would like for the judge to bear in mind
that the President himself says that the way to win this war is to
win it with our resources, and the way to get these resources to the
point where they will be effective is to carry them over the railroads.
And I don't think that it is going to bankrupt anybody to pay these
railroads a reasonable rental, and the only thing we have got to do
is to appoint somebody that we have confidence in and that knows
the whole situation and that has responsibility of doing the fair
thing to say what that machinery is.
340
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. HAMILTON. I understood you to say that you hadn't received
any orders by which the congestion of freight had been relieved by
sending it over your road as yet?
Mr. COCHRANE. No, sir; I think they are overlooking something
on that. I think we will help them.
Mr. HAMILTON. That was some time ago that you inquired about
that?
Mr. COCHRANE. The 5th of January that this reply came. Well,
it is a big country, you know, and they will get around to that.
They just haven't gotten there. I have no criticism to make of that.
I just mean he has asked for these suggestions, and then he has got
to see whether the suggestions are sound, and I believe he will find
that that was a good suggestion, even though I made it.
Mr. HAMILTON. Your route is much shorter to Mobile?
Mr. COCHRANE. Well, not much shorter, but some. It is one of the
routes into Mobile.
Mr. PARKER Of New Jersey. Are they tied up now into Mobile? Is
there any congestion now?
Mr. COCHRANE. Well, there is in the Birmingham district proper.
There is some congestion in the yards of Birmingham. They were
short of coal in Mobile. I think that is the best evidence of it.
Mr. PARKER. Is there water transportation to take coal from
Mobile elsewhere, or is such transportation scarce?
Mr. COCHRANE. There are three different systems of railroads run-
ning from the Birmingham district, the coal-mining district, to
Mobile; and there is a river that is navigable into a part of the coal
district. You said were there transportation facilities-cars?
Mr. PARKER. I say from Mobile-water transportation from
Mobile.
Mr. COCHRANE. Well, there is plenty of water, but not enough
boats. [Laughter.] We have got plenty of water but no boats to
float on it.
Mr. STEPHENS. I would like to ask Judge Payne a question about
this testimony. I understood you to say a few minutes ago, Judge,
that there was a question about the director general's order taking
over the short-line roads. Now I understood you to question whether
or not he had taken them over at all. Now, what answer have you
to make to the testimony of the gentleman who has just left the
stand in regard to the orders he has received-and no doubt many of
these other gentlemen?
Mr. PAYNE. I am not dealing with short-line roads as such. They
may constitute part of a system of transportation. I don't know.
But I do say that the fact that they have received a notice does not
constitute a taking over.
Mr. STEPHENS. What would constitute taking over?
Mr. PAYNE. I think there must be some consideration with refer-
ence to the case, if there is any question about it.
Mr. STEPHENS. Well, take his case.
Mr. PAYNE. He seems to have been taken over. I don't know any-
thing to the contrary.
Mr. STEPHENS. There seems to be nothing to it; no ceremony of
any kind; no flag raising or anything of that sort. [Laughter.]
Mr. PAYNE. Precisely.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 341
Mr. STEPHENS. He just received his directions.
Mr. PAYNE. You couldn't find any thing more happy than the
union which has resulted from that correspondence.
I want to say one word while I am up, if I may. I rather infer
from what these gentlemen have been saying that they construe that
section 3 as providing for a single board of auditors or referees. That
was not our idea. Our idea was that you might have one for every
case if necessary.
Mr. HAMILTON. That you might have what?
Mr. PAYNE. One for every case if necessary.
Mr. COCHRANE. I would like to ask the judge a question, if I may.
I am very glad for you to say that, Judge, for you can see the time
that it would take to get these various cases-800 cases-before these
various boards. Do you mean that the contemplation is that the
President may appoint these boards in any State?
Mr. PAYNE. The President is not to appoint, under section 3. The
appointment is to be made by the Interstate Commerce Commission.
Our idea was that it was fairer than for the President to appoint, be-
cause the President was some sort of a party; that the Interstate
Commerce Commission was a tribunal of recognized position and
fairness.
Mr. COCHRANE. Well, that is the same, which ever one appoints
them.
Mr. PAYNE. And the idea was that as many boards would be ap-
pointed as were necessary, anywhere. The only purpose, as the
chairman pointed out a while ago, was to make the members and the
technical men on the commission eligible. That is all.
Mr. COCHRANE. Would that board report back to the Interstate
Commerce Commission?
Mr. PAYNE. Oh, to the President. That is provided in terms.
The CHAIRMAN. Mr. Robinson, have you many more witnesses to
come on ?
Mr. ROBINSON. I have got four four-minute men. Each of them
has agreed to confine themselves to four minutes.
Mr. REYBURN. They can't do it when you get them up there, be-
cause we will ask them questions.
Mr. ROBINSON. Well, if they are asked question that is not counted
in their four minutes.
The CHAIRMAN. And these four four-minute men conclude your
witnesses?
Mr. ROBINSON. That will terminate our presentation for the pres-
ent; but if the angle changes, and if it becomes a question as to
whether the bill is to be changed so as to eliminate these lines, then
we have got to present the proof on that fact to show the serious
effect upon these roads that are eliminated, because it will result in
the absolute destruction of most of them. So if that view is taken,
then we want to present some proof on that subject.
The CHAIRMAN. I don't think we can give you any further than
to-day, as we have been very liberal with you, and we have a number
of other witnesses.
Mr. ROBINSON. We appreciate that very much; but, as I say, many
of our witnesses have voluntarily withdrawn, so as not to take up
your time, but these four are very anxious to proceed to-day.
The CHAIRMAN. Very well; go ahead.
342 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. ROBINSON. I will introduce first Mr. Frank S. Gannon, presi-
dent of the Atlantic & Savannah Railroad and the Montana, Wyo-
ming & Southern.
STATEMENT OF FRANK S. GANNON, PRESIDENT OF THE MON-
TANA, WYOMING & SOUTHERN AND OF THE ATLANTIC &
SAVANNAH RAILWAYS.
Mr. GANNON. I don't know where to begin. The question has
been so thoroughly worked up that it is threadbare.
I thought it might be worth while to give my little railroad down
in Georgia as an illustration. The Wyoming road will take care of
itself.
We opened up as a part of a system with the entrance into Savan-
nah for the Louisville & Nashville, the Nashville, Chattanooga & St.
Louis, which connects with the Chicago, Burlington & Quincy at
Paducah, to Savannah as their seaport. We opened the business the
1st of August last.
The results of operation for the four months for which we have
figures demonstrate very clearly that we will have no difficulty at all
in meeting our fixed charges, or would have had no difficulty at all
but for this change of control.
Now, one of the first orders I received from the Director General
was to cease solicitation. That is a specific order. Without solici-
tation I am sure I can not meet my fixed charges. I just mention
that as an illustration.
As to the danger of paying one short road that hadn't so far been
able to meet all of its fixed charges, and as against another that has
had a little surplus, I think that will even itself. This revolving
fund will be, no doubt, replenished to some extent by the surplus
earned by the favored roads I don't mean favored in any disparag-
ing sense, but there must be some lines more favorable that others for
the transportation of certain business that under ordinary conditions
would be competitive. You divide it so that there would be no ques-
tion about a standard return. Mand roads in handling the business
as it must be handled and as it should be handled are going to show
profits which they have not reached up to this date; others that have
been making handsome profits are going to show decreases. But, as
I understand it, all over that standard return goes into the Govern-
ment's Treasury to replace those who have lost, and I believe there
will be sufficient there to take care of all the fixed charges of all of
these struggling short lines. However, it is too great a question for
any one body to undertake to handle in detail in the time that is at
our service. It all centers in the preparation of some machinery that
will enable every road to state its case and show what just compensa-
tion under all the circumstances would be.
The matter of embargoes and the distribution of equipment is
going to interfere very seriously with the operation of some roads.
That will be an element of damage which can be set forth to the
satisfaction of any just board, and those will be factors to consider,
which I am sure will receive just treatment.
As to the thirteenth section, I would urgently urge that a definite
time be set. My judgment would be 12 months after the war has
been legally closed.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
343
I don't want to take your time and I am not going to, but I wonder
if I made a note here-I don't think there is anything here that is
worth your time now. You have heard everything that I might say,
but probably in a little different form. I will sum up by saying that
I would indorse the main features of Mr. Cochrane's statement.
On the matter of solicitation, I consider it one of the best assets
of my Georgia railroad. That has been taken away from me. That
is going to be one of my claims for damages, as I don't expect to
earn my fixed charges under Government control, where I can prove
conclusively that I would earn my fixed charges but for that inter-
ference.
Mr. ESCH. If competitive lines don't solicit, would it still result
in injury to you?
Mr. GANNON. Yes; very largely in the Savannah territory. It
will cut our business out of Savannah very materially, for our con-
necting lines are not able to compete and only hand over to us such
business as they are allowed to carry. It may result in our being a
favored route. I don't know. If the director general should say
that this freight should come down through and over the Georgia
road to us and into Savannah, why, under those circumstances we
would be one of the favored lines. I only mentioned that as an
example of what may happen.
My four minutes is exhausted, I think.
Mr. ROBINSON. Mr. Chairman, I will introduce Mr. Mendes, of the
Tampa & Jacksonville Railroad.
STATEMENT OF A. DE SOLA MENDES, VICE PRESIDENT AND GEN-
ERAL MANAGER OF THE TAMPA & JACKSONVILLE RAILWAY,
BRUNSWICK, GA.
Mr. MENDES. Mr. Chairman and gentlemen, I represent a little
56-mile road down in Florida, whose principal reason for its being
is the transportation of about 3,000 carloads of freight per year.
The large bulk of this is perishable-fruit and vegetables which are
raised in that territory and which move all over the country.
Under the proposed standard compensation of this bill this road
would receive an average of $3,000 per year rental from the Govern-
ment. If the standard of previous years had been taken, the road
would have received $18,000 per annum compensation. If the stand-
ard of the three years previous to that had been taken, the road would
have received compensation of $25,000 a year. This compensation
of $3,000 per annum which the bill provides will have to be a com-
pensation on practically $1,000,000 of investment in road with an
equipment, which, on the face of it, is inadequate.
It is not my understanding that section 3 of the bill under con-
sideration before this committee gives any latitude to the auditors
that are to be appointed, except to determine the standard compen-
sation. I would therefore urge that in unusual cases there be a board
of appraisers appointed and that specific authority be given that
board of appraisers, or referees, to see that the railroad companies
secure some adequate return on investments. That, I think, is all
that is necessary, as a war measure, to enable this company to be in
shape to take its property back after the termination of the war
and the operation of the railroads by the Government.
344
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
This road has a considerable local tonnage, which is inadequate
to keep it in operation of itself. During the period of the year when
there are no vegetables and no fruit moving to the northern markets,
it has to live on the competitive traffic that it can secure through the
Southern Railway system to Gainesville, Ga., and Emathla, Fla.
Under the orders of the director general, by which the solicitation
department of the connecting lines has been taken over, we are unable
to maintain our methods of securing competitive traffic, and if this
railroad is not taken over by the Government there is going to be
adequate revenue with which to maintain its operations.
Mr. HAMILTON. How long is your road?
Mr. MENDES. Fifty-six miles.
Mr. HAMILTON. How long has your road been doing business?
Mr. MENDES. The road has been in operation since 1895. The
first part was built then.
Mr. HAMILTON. Is it a prosperous road?
Mr. MENDES. It was able to pay its bond interest up until 1914.
Since that time, due to an absolute stagnation in the South, that
existed all over the South in 1914 and early in 1915, due to 6 and
7 cent cotton, the tonnage, inbound, fell off tremendously. The pur-
chasing ability of the community had been badly impared. And
then in 1915 and 1916, when there began to be a very much larger
demand for the produce of this territory, timber and naval stores,
we were unable in a large measure to get cars. There was a tre-
mendous car shortage on, and those cars were needed by the lines
up in the trunk-line territory, in the East.
Prior to three or four years ago it had been the invariable custom
of the trunk lines to furnish practically all equipment for through
business to the short lines. Then at about that time for the first
time it was urged that the short lines ought to have provided ade-
quate equipment to handle all of the tonnage which they originated,
which is distributed all over the country; which was, of course,
an impossible financial burden for them to assume.
Mr. HAMILTON. What are the termini of your road?
Mr. MENDES. At one point it connects with the Southern Railway
system at Sampson City, at the north end. At the south end it
terminates at Emathla, a local station, on its way to Tampa.
The invariable custom of building up these southern roads-I
think it applies not only to my road but to all other southern roads-
has been to build an economical line, keeping the cost as low as pos-
sible, developing the territory with the moving out of the timber and
the developing of the land for agricultural purposes until such time
as the road reaches gross earnings per mile of $3,000 to $3,500 per
year. At that time it is carrying itself, and at that time it issues
more bonds and goes ahead with another 10 or 15 or 20 mile section.
Then it goes through another development period and then makes
further extensions until it has accomplished the route for which it
was chartered. That is almost invariably the practice in building
these southern short lines that ultimately form main-line systems
of the South.
Mr. WINSLOW. Why do you assume that you are coming under the
direction of the Director General?
Mr. MENDES. Because we have either to go under the direction of
the Director General or cease operations. Moreover, we have been
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
345
notified formally by the Director General under his orders No. 1 and
No. 2, which I have here, that we have been taken over, and the
officers were directed to operate their property heretofore subject to
such special orders as the Director General may issue.
Mr. WINSLOW. You consider the information coming from the
Director General that you are under his orders as final?
Mr. MENDES. I regard it the same as a summons served on me by a
court or order of the court.
Mr. BARKLEY. Will you put copies of these orders in your testi-
mony here?
Mr. HAMILTON. Mr. Chairman, I would like to suggest that per-
haps we ought to have from some sort all of these orders and put
them into the record.
The CHAIRMAN. Are they not duplicates? They all received the
same ones.
Mr. MENDES. This is a mimeograph form sent out by the Inter-
state Commerce Commission.
Mr. HAMILTON. But each railroad receives a set of orders. Now,
what I was getting at was that we should get that set of orders and
have them put into the record.
Mr. MENDES. Let me offer for your records, gentlemen, a copy of
order No. 1, dated December 29; a copy of order No. 2, dated
December 29 also.
Mr. RAYBURN. If the whole series are going to be rotten-possibly
by Mr. Robinson or somebody-what would be the use of putting
one in here?
The CHAIRMAN. If they are all duplicates, one with another, what
is the use of filing them all?
Mr. MENDES. There are four different orders, and I was proposing
to furnish copies if I had them.
Mr. HAMILTON. It seems to me that some of these gentlemen
might want to keep these orders for their own convenience, and we
could get copies of the whole series.
Mr. ROBINSON. I will undertake to supply copies of the various
orders that have been served generally upon our members, the people
that we represent. We will undertake to place them before you
to-morrow sometime.
Mr. DILLON. I regard this feature as very important to this com-
mittee, and also some telegrams have been received, and I think they
ought to be included.
Mr. BARKLEY. Well, it strikes me that the only orders that bear
upon the committee's duties would be those tending to show that
the director general regarded that these roads were taken over
under his direction.
Mr. ROBINSON. I would understand the suggestion made was that
it referred to those telegrams saying that "We have taken over your
property and you are subject to our orders."
Mr. DILLON. Here is a telegram that has been sent out by the
director general that becomes an interpretation of law, and I think
it very material.
Mr. BARKLEY. Well, the material fact is that the director general
has taken over the railroads. Now, to follow up all the instructions
that he gives the railroads would incumber the record with a lot of
immaterial matter.
346
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. PARKER. I don't think it is at all material what he gave in
each order or to any particular road, but it seems to me that the
form of those circular orders which are issued to all roads shows his
course of doing business; it shows whether he has constituted vari-
ous railroad heads servants of the Government, or the servants of
the railroads, and it shows how we have to deal with this matter
in this bill. I think we ought to have a set of them.
The CHAIRMAN. I suppose that one form of one order would do
for all, and another form for another order used would answer for
all. There is no difference in them.
Mr. HAMILTON. That is exactly what I have in mind, Mr. Chair-
man, that we should just get a set of those orders served on the rail-
roads for this record.
Mr. SWEET. Mr. Chairman, it seems to me very important to
the men who are presenting this matter, that they should know
whether they have been included within that order or not. That
is one of the vital things to be determined.
The CHAIRMAN. Each one has testified so far that he has.
Mr. SWEET. That is true; but the question arises that the director
general has stated otherwise.
The CHAIRMAN. I didn't know that.
Mr. SWEET. According to the testimony of Judge Payne. Isn't
that true, Judge Payne?
Mr. PAYNE. Well, I have said what I have said. I don't know just
what you have in mind. I am not passing on the question whether
these roads are in or out. I haven't had them.
Mr. SWEET. Isn't this true, Judge Payne, that all the roads are
not included within that order?
Mr. PAYNE. That is certainly my very definite opinion.
Mr. SWEET. And the fact that this first order was sent out to
all the roads, through the Interstate Commerce Commission, does
not bring them within this order?
Mr. PAYNE. That is my opinion, very strongly said.
Mr. SANDERS. How can you order a road inside and then say he
is not in?
Mr. PAYNE. Let me make a remark, if I may. I was only going
to call your attention to the concluding part of the proclamation:
From and after 12 o'clock on said 28th day of December, 1917, all trans-
portation systems included in this order and proclamation shall conclusively
be deemed within the possession and control of said director, without further
act or notice.
Now, it is not the opinion of the director that he was decided
when he sent those notices-when those notices went out that the
roads receiving the notices were or were not in. His interpretation
is that the proclamation determined, and it is just a question of con-
struing the proclamation with reference to each road.
Mr. BARKLEY. And he has concluded to include the roads whom he
has notified?
Mr. PAYNE. He does not so understand it.
Mr. SANDERS. May I ask Mr. Payne a question? Mr. Payne, is it
possible for the committee to get a list of all the roads that that order
was sent out to?
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 347
ľ
Mr. PAYNE. It is entirely possible. I assume, without definite
knowledge, however, that that order was sent out by the Interstate
Commerce Commission to every railroad on file in their office.
Mr. SANDERS. I know my action on the committee would be very
largely governed by the fact whether orders were sent out or not
and every man that obeyed the order; and I would like to get a list.
of the railroads that were ordered by the Director General under
that proclamation. I would like to get the list, because they have
acted on it up to date.
Mr. PAYNE. Well, I will say I think you may assume that that
notice went out to every railroad that has reported to the commission,
or possibly even beyond that, where the address of the railroad is on
file in the office of the Interstate Commerce Commission.
Mr. SANDERS. And that would be the presumption with you?
Mr. PAYNE. Yes; I think so. Now, whether they are all on file
there I don't know.
Mr. WINSLOW. It is manifestly unfair to all these gentlemen to
come here and tell all they know about the inside troubles of their
roads and so on, if, after they have told it all, they would be advised
that they don't come in. It is only in justice to them that we really
should know where they stand.
Mr. BARKLEY. Mr. Payne, let me ask you this-this is a matter of
suggestion—whether these railroads are in or not, the legislation
must be based upon the assumption that they are either in or they
can be brought in?
Mr. PAYNE. No doubt about that.
Mr. BARKLEY. So that it is a matter of no consequence, so far as
the framing of this bill is concerned, whether any of these roads
are in or not.
Mr. PAYNE. I concur fully in that statement.
Mr. BARKLEY. The legislation must be general and broad enough
to cover them if they are in now, or are brought in later..
Mr. PAYNE. Not only is that true, but that has been the purpose
of the persons drafting the bill, and it was supposed that section 3
did that, and if it does not do it we desire to have it broadened
so that it will do it.
Mr. BARKLEY. It seems to me that the question of any individual
road being brought in has nothing to do with it.
Mr. ROBINSON. Mr. Chairman, I have something to answer as to
the questions before us. I don't agree with the suggestion there that
it is immaterial; that this bill may be drawn and passed upon the
theory that it applies if they are brought in and don't apply if they
are not brought in. We want to show, if it is going to come to that
point, that the taking of the main line or the taking of a part of the
line is absolutely butchery as to a large per cent of these short lines.
It is assassination of them if you don't take them, and it is vital to
us that the bill determines the question as to whether they come in
or out.
Mr. BARKLEY. Is that a matter that you think this committee or
Congress could direct the President about?
Mr. ROBINSON. I think that is a matter and a matter of first im-
portance for Congress to pass on. If it is going to take the majority
of the railroads, if it is going to take the great number of them, and
leave this little one out here and there, it ought to take them all,
because of the adverse effect of the taking of the one upon the other.
348
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
·
Mr. BARKLEY. You think then that if as a matter of fact and law
the President has left some road out somewhere we ought to imme-
diately give him instructions to take it, too?
Mr. ROBINSON. I think if it is shown that the act that has been
done is an unjust one, that it is unfair to some of the interests, that
then Congress ought to rectify that. On the other hand, I contend
and contend vigorously that the President has taken them and that
he hasn't left out a single one of them.
Mr. BARKLEY. I am inclined to agree with you about that, but I
doubt the propriety of Congress assuming that if the President,
through any reason that appeared sufficient to him, had left some
road out, Congress ought to come along and say "You have taken
over the rest of them; we will make you take this.'
Mr. ROBINSON. Then just so long as you doubt that, you ought to
give us an opportunity to present that question to you and demon-
strate that your point of view is not a correct one and that the bill
ought to be so drawn as to afford protection and do justice.
The CHAIRMAN. That is all a matter of argument, Mr. Robinson,
that you can bring in later. Let us have your witnesses now.
Mr. ROBINSON. It is a statement of myself as a witness in answer
to statements made by Judge Payne in response to some members of
the committee, and I think I ought to be entitled to make the state-
ment.
The CHAIRMAN. Yes; I know; but the committee can hear argu-
ment when there are not a great number of people waiting to be
heard.
Mr. SWEET. Mr. Chairman, it seems to me that for the proper
presentation of this matter the question naturally arises whether we
are going to legislate in regard to all the railroads or whether we are
going to legislate in regard to railroads that will simply be affected
by the President's proclamation. Now, it seems to me that the
legislation before this committee should be for all of the railroads,
taking into consideration the whole situation.
The CHAIRMAN. This is a hearing. We only want to find out
what will aid us to make a proper determination.
Mr. HAMILTON. If I understand correctly, Judge Payne stated
that the President's proclamation was taking over certain railroad
systems. Now, the question arises, as I understood the judge some
time earlier in the hearing, whether a certain railroad is or is not
a part of a system or it is a system. It is a question of construction
as to what constitutes a system, if I correctly understood Judge
Payne.
Mr. PAYNE. Do you want me to answer that?
Mr. HAMILTON. I would be glad to have it answered.
Mr. PAYNE. Really, I am a little embarrassed about this discus-
sion. The President has simply exercised the power that you gave
him, and here is the power:
The President in time of war is empowered, through the Secretary of War,
to take possession and assume control of any system or systems of transporta-
tion or any part thereof and to utilize the same to the exclusion, as far as may
be necessary, of all other traffic thereon, for the transfer and transportation of
troops, war material, and equipment.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
349
That is all. You can make the interpretation as well as I can.
Mr. HAMILTON. Well, I was simply wanting to ask for your inter-
pretation.
Mr. DECKER. If you are going to hold strictly to that clause, how
can the President take control of the railroads and do a general rail-
road business like it seems is contemplated? That simply gives him
power to take control of them for a specific purpose, to ship mu-
nitions and soldiers and troops.
Mr. PAYNE. There is the last line there, which I didn't read:
War material and equipment, or for such other purposes connected with the
emergency as may be needful or desirable.
Mr. DECKER. But don't that rule of interpretation that general
words following particular words_restricted_those things that have
been mentioned isn't that the rule here? In other words, that is
a military bill in which this authority was granted?
Mr. PAYNE. Yes; purely.
Mr. DECKER. And if it is a question, as this gentleman quoted sev-
eral times a little while ago, about war resources-if every pound of
butter and meat and eggs is a question of war material, then I can't
understand the reasoning, to be respectful and frank, why Podunk
should be neglected; if they raise eggs down there and have to get
them to market, why they are not part of the war, and why the little
jerk-water railroad that hauls those eggs to town should not be
under control. If you are going to give it a narrow limitation, then
it strikes me that you would have to limit it to guns and ammunition
and troops and leave out commercial business altogether.
Mr. PAYNE. You probably passed on it. I did not.
Mr. RAYBURN. The reason we are asking these questions is that we
presume you are speaking for Mr. McAdoo.
Mr. PAYNE. I am here for that purpose.
Mr. RAYBURN. And, of course, we are trying to get the interpreta-
tion of this thing out of you.
Mr. PAYNE. I am giving it to you as frankly as I can.
Mr. DECKER. I feel just as Mr. Robinson does about this matter,
that we ought to know about this, because I don't know anything
about a railroad except to ride on them; but I can easily see that if
you take part of the railroads and direct that all the butter and eggs
and beef and passenger traffic and everything else that you want to
shall go over those roads that you take over, and then leave a little
railroad, or a big road for that matter, we will say, out in the cold—
that is, if the Government can take all the business for any reason
that it wants away from that road-there is no question about that,
as it looks to me-it leaves them in a bad condition.
Mr. PAYNE. May I make a suggestion in answer to your question?
Theoretically, apparently, though not truly, the exercise of this power
is against the desire of the public and only comes as a necessary
emergency power. Now, the little railroad that isn't in competition
with any other railroad pursues its normal course-goes ahead with its
business. The Government ought not to interfere with it. They
ought to be allowed to do just as they please.
Mr. DECKER. It can't do that, though.
Mr. PAYNE. Let me finish-and the Government can only justify
the taking of what is necessary to be taken for war purposes; and if it
350 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
3
is not necessary to take these little roads, if there is no congestion, no
conflict, no difficulty, and they are moving on in their normal way-
suppose they didn't want to be taken, then you would have a row on
your hands. The reason they are raising this question is because they
think they are going to be benefited by the taking.
Mr. DECKER. No; that doesn't follow. I can readily see how a
road would want to be taken if everybody else is going to be taken,
and still would be glad not to be taken if everybody is out of it.
Now, for instance, you happened to mention a road out in Kansas.
Mr. PAYNE. The Leavenworth & Topeka.
Mr. DECKER. Well, that is a road I used to ride on. I went down
there to see my girl on that road. [Laughter.] That road starts
at Leavenworth and runs up into that country. It didn't get where
it intended to go. But suppose you take all the other railroads
around in that section of the country under the wing of the Govern-
ment, and everything this little road has to give it gets it into
Leavenworth, and then it has to wait on you to ship it the rest of
the way. And it strikes me that the fact that when it got up there
to Leavenworth, and the Government wanted control of everything
else, it would leave it in a bad fix if you didn't have room to take
what it had to ship.
Mr. PAYNE. Well, it happens in that connection that they don't
want to be taken.
Mr. DECKER. Well, that is all right with me, but suppose they
did want to be taken? Is that a question for us to consider here?
Mr. PAYNE. I don't think so.
Mr. DECKER. In other words, the power to take these comes from
us, from Congress, from the people, and it is up to us to define on
what terms and conditions they shall be taken and arrive as near as
we can to justice to all the little roads and big roads.
Mr. PAYNE. Of course, the taking is a fact. That has happened.
The work now in hand is to provide just compensation for every
road taken.
Mr. SANDERS. I want to ask the judge a question at this point.
Judge, I want to ask you, is there a single mile of railroad in this
country that doesn't belong to railway transportation systems?
Mr. PAYNE. I should say yes, many, that don't constitute a sys-
tem in the sense of this act.
Mr. SANDERS. Is there a single mile of railroad in this country
that isn't used to transport something that is produced in the country,
be it poor or rich, be it much or little?
Mr. PAYNE. I don't suppose there is, unless it has stopped.
Mr. SANDERS. Then it belongs to the railway transportation system
of continental America, does it not?
Mr. PAYNE. Now, I have said again, you can construe this act just
as well as I can.
Mr. SANDERS. Doesn't the proclamation of the President—and I
have got it here in front of me take over every bit of railway trans-
portation system of America in so many words? Doesn't it take
over every mile?
Mr. PAYNE. Well, I have read it and you have read it.
Mr. SANDERS. I have read it, too, and I read it "every mile."
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
351
It men-
Mr. PAYNE. It doesn't mention "railroad" in that sense.
tions railroad in the descriptive sense, but it takes over the trans-
portation systems of the country.
Mr. SANDERS. Consisting of railroads, and whenever it is combined
with water it takes over them.
Mr. PAYNE. Precisely.
Mr. SANDERS. Now, if you take over these public road systems of
a county, don't you take over the poor road as well as the good one,
if you take over the public road system of the county?
Mr. PAYNE. If I knew what was in the mind of Congress when.
this bill was passed I could answer that question.
Mr. SANDERS. I am talking about the proclamation, not about the
bill.
Mr. PAYNE. But the proclamation isn't a bit wider than the bill.
It can't be wider.
Mr. SANDERS. Whether it is wider or not is a question to be left
to the interpretation?
Mr. PAYNE. Precisely.
Mr. SANDERS. You mean it ought not to be any wider, even if it is,
don't you, Judge? Now, one other question. Considering for the
sake of argument that I am right, that the President's proclamation
covers every mile of railroad in America, it has already been con-
ceded that the Director General did take over by Order No. 1 every
mile of railroad in America?
Mr. PAYNE. Not by me.
Mr. SANDERS. Didn't he notify them that they were taken over?
Mr. PAYNE. There is no difficulty about the fact that the notice-
went out.
Mr. SANDERS. That is what I mean. There is no difficulty about
the fact that the notice that he was taking them over went out?
Mr. PAYNE. Well, I don't think that it is a taking over. That is
where we differ. But the notices, whatever they are, went out, and
these gentlemen got them.
Mr. SANDERS. Now, whether he meant what he said when he sent
them out, you are not prepared to say? He evidently meant to take
them, because he notified them that he had taken them, didn't he?
Mr. PAYNE. Well, now, that question speaks for itself.
Mr. SANDERS. If I tell you I am going to take your horse, that
means I am going to take your horse, doesn't it?
Mr. PAYNE. If you are stronger than I am; yes.
Mr. SANDERS. The Government is certainly stronger than any rail-
road in America.
Mr. PAYNE. But I say that the notices don't constitute a taking.
Now you can have your opinion about it, and I have mine.
Mr. RAYBURN. Well, that is exactly the reason, Mr. Payne, that
you have been asked these questions? Don't you understand when
you come here as the representative of the director general that
what you say as your interpretation is the interpretation, and that is
the reason why when we ask you a question you ought not to say
"You can interpret that as well as I can.
""
Mr. PAYNE. That was not exactly right. He wanted me to put
the interpretation on the notice.
Mr. SANDERS. No; I do not. I wanted you to put the interpreta-
tion on the fact that the notice had gone to the roads.
352 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. PAYNE. I say that is true. Now, I say in answer to your ques-
tion
Mr. RAYBURN (interposing). Well, I hadn't asked a question. I
was just making a statement of the reason why you were being asked
these questions as to interpretation, because you are Mr. McAdoo's
adviser, or one of them.
Mr. PAYNE. Well, I am sent here to answer these questions.
Mr. RAYBURN. Well, you are his adviser, as I understand it. I
have understood that you are the director general's adviser, and that
is the reason why these questions are being asked you, and that is the
reason why your interpretation is being asked for, for the simple
reason that when your interpretation of it is made, that is it.
Mr. PAYNE. Well, now, I have said to you bluntly that the di-
rector general does not think that this proclamation or these notices
constitute the taking of all these roads.
Mr. DECKER. Now, that suggested a question that I asked. There
is a more important question left for us to deal with, and that is, if
the director general doesn't think that the proclamation took them
all, and the notices took them all; then the next question is, if you
know, what about the director general's opinion as to the wisdom of
taking them all, so that if it hadn't been broad enough heretofore, we
are the ones to change that.
Mr. PAYNE. Well, he doesn't think that a railroad which is not
necessary to be used for war purposes ought to be taken over; that
the Government ought not to be saddled with a lot of railroads that
are not necessary to be taken and thereby cost the Government a great
deal of money. And that was evidently in the mind of the President
when this proclamation was drawn. On the middle of the second
page you will find this language:
And by subsequent order and proclamation, possession and control and opera-
tion in whole or in part may also be relinquished to the owners thereof of any
part of the railroad systems or rail or water systems, possession and control of
which are hereby assumed.
Mr. DECKER. I am not suggesting that they should all be taken,
but I am suggesting that it is a question that this committee ought
to consider, what the effect will be if they are not all taken.
Mr. PAYNE. Now, there I disagree with you, because, if you will
pardon me, I think what the committee are required to consider is a
bill so comprehensive that everything that is taken shall be com-
pensated for. Now, you don't have to decide what is taken, but if
these gentlemen's roads are taken, if the notices that I have been
asked about by Gov. Sanders constitute a taking, that may be a
question for the courts. It may be that I am entirely wrong about
that, and that these roads are taken.
Now, I say here in the most impartial spirit possible, that you
must provide a bill here sufficiently comprehensive that everybody
whose property has been taken shall be compensated.
Mr. PARKER. Or may be taken?
Mr. PAYNE. Or may be taken.
Mr. DECKER. Now, for instance, suppose it is our duty to pass on
some measure of compensation. Suppose you took the terminal of
the New York Central and didn't use any of the rest of it. I don't
know whether such a thing could be possible, but I could imagine it.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
353
You couldn't say then it wasn't our duty just to compensate for the
use of the terminal and not to consider the effect that it would have
on the rest of the road?
Mr. PAYNE. Please do not consider me as having made any
*
*
*
Mr. DILLON. I would like to ask Judge Payne one question. This
possession and control in the director general, do you understand that
that gives the power to fix rates and to fix compensation of em-
ployees?
Mr. PAYNE. I think so.
Mr. DILLON. You think so?
Mr. PAYNE. Yes.
Mr. ROBINSON. Mr. Chairman, I will introduce another four-
minute witness, Mr. F. D. Rubridge.
STATEMENT OF MR. F. D. RUBRIDGE, REPRESENTING THE BIR-
MINGHAM & ATLANTIC RAILROAD.
Mr. RUBRIDGE. I am rather pleased to be able to present a case
which is a little bit different from anything you have heard hereto-
fore, because I know you are getting rather impatient and would
like to adjourn.
I am somewhat surprised, however, that none of the witnesses that
have testified heretofore have presented a parallel case, because I
can not but believe that a number exist.
I represent the Birmingham & Atlantic Railroad. It does not begin
at Birmingham nor does it go to the Atlantic, and in that sense it is
a misnomer, much like many other railroads.
The Birmingham & Atlantic Railroad may be classed as a banner
railroad, for the reason that it has been operated for 20 years or
more and has never earned a cent. Now, it is necessary to go into
the history of the road to some extent in order to show why we
have operated for so long a time without any return on the invest-
ment.
As is the case with a great many short-line railroads, the road
was built in conjunction with an investment in other interests. In
this case coal and ore lines, and the value of the road is not depended
on the earning capacity of the road as a carrier, but on account of
its strategic position with reference to these other industries.
Mr. BARKLEY. The stockholders in this company have stock in
these other industries, do they?
Mr. RUBRIDGE. Yes, sir.
Mr. BARKLEY. It was built by them?
Mr. RUBRIDGE. Built by them-or purchased by them.
During the past the owners of these outlying properties, which
consist of a blast furnace, coal and ore mines, have sold those prop-
crties but have not sold the railroad to other interests. I negotiated
that sale myself, and in arranging for that sale it was understood
between myself and the purchasers that at the time when the revenue
or the profit from the operation of the blast furnace and mines
should be such as to warrant them to make further investments, that
they would come to me with the idea of negotiating for the railroad.
Now, it was to their interest to lead me to believe at least that they
would negotiate for the railroad, because it was being operated at
loss, and it was necessary that the operation should continue, for
40958-18--23
354
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
the reason that the railroad provided the only means for conveying
the ore from the coal mines to the blast furnace.
Now, taking into consideration the bill as drawn, it would result
in the owners of the railroad paying the Government a sum of about
$13,000 a year to operate this 25 miles of railroad.
There are outstanding on the railroad some $550,000 in bonds,
the interest on which has never been paid, but because of the arrange-
ment between the bondholders and the financiers it has been pos-
sible to carry these without paying interest on the bonds. How-
ever, within the last three years these bonds were hypothecated to
cover the operating deficit, and it is probably true that that condi-
tion could not obtain very much longer for the reason that the
holders of those bonds, holding them as collateral for the operating
deficit loans, would not hold them beyond a time when the scrap
value of the railroad would be such as to cover the loans.
Now, it is not my purpose to endeavor to give a solution for a
problem of this kind, but it is evident that the taking over of the
road by the Government-and I am another one of those who has
received Mr. McAdoo's order-jeopardizes the position of the com-
pany in that they no longer have the privilege of selling this property
to the purchaser of the other property; and for this reason, that
the purchaser now believes that the Government will continue to
operate that road and that he will not have any need to buy it or
pay any more attention to it, for the reason that the Government
is vitally in need of coal and ore and iron. It therefore becomes
necessary to provide a special compensation for roads in this pre-
dicament. Just what that compensation is I am willing to leave to
any committee which might be appointed, as has been suggested
heretofore.
Mr. SNOOK. Wouldn't it be far better for that road to not be
taken over by the Government?
Mr. RUBRIDGE. Let me answer that question in this way.
Mr. SNOOK. What reason would there be for the Government tak-
ing it over?
Mr. RUBRIDGE. The reason is this-and that will lead me to still
another statement. If that road is not taken over by the Govern-
ment-and as I firmly believe the Government will establish a stand-
ard of wage for all of the other railroads that are taken over it
will result in an increased deficit for the operation of this road.
That leads me to say that after the war, and it is contemplated
to return roads to their present owners, that some arrangement
should be made whereby roads which have a normal and uniform
earning capacity before the war, should be assured that earning
capacity after that period, because it is conceivable that the opera-
tion of the road under Government control might result in customs
and precedents which could not be reestablished, to say nothing of
the reestablishment of the wage schedule which existed prior to this
taking over of control.
Mr. ROBINSON. Mr. Chairman, the next witness we want to pro-
duce will go to the point of the parallel lines and the effect of the
Government taking the main lines and leaving the small lines un-
protected. I want to introduce Mr. Luce, president of the Electric
Short Line Railway, of Minneapolis, but it is not an electric line;
it is a steam line, but the name is electric.
1
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
355
STATEMENT OF MR. W. L. LUCE, PRESIDENT OF THE ELECTRIC
SHORT LINE RAILWAY, MINNEAPOLIS, MINN.
Mr. LUCE. Mr. Chairman, I represent a small road 60 miles in
length; also a terminal in Minneapolis, the fifth in size. There are
nine large roads that is, roads of a thousand miles or more—that
I understand have been taken over by the Government. I assumed
until I came to Washington yesterday that our road had been taken
over, but I understand that there are six or seven hundred roads
that will not be taken over:
We are a cattle and grain carrying road largely-farm produce,
running from Minneapolis to Hutchison. There are two other
roads the Great Northern and Milwaukee-that reach Hutchison.
Now, if the Great Northern and, the Milwaukee are taken over,
which, I understand, is the case, it will leave us where it would be
almost impossible to get business. That is, our coal, lumber, and
things of that kind at the competitive points will be handled by the
roads that are taken over by the Government. We have tariffs with
all roads and are doing a general business, and as there are seven
roads they would naturally, being Government roads, throw their
business to the roads that are in charge of the Government and
would leave us practically like a ship at sea without a rudder.
We have been doing business about three years. We have about
$4,000,000 invested in real cash, though not all in this 60 miles. We
have about a hundred miles of partly graded right of way secured.
The three roads end at Hutchison. It is the end of the Milwaukee,
the end of the Electric Short Line, and of the Great Northern. All
the roads contemplate building out of there some time. The two
larger roads have been 20 years making up their minds which way
they are going. We have gone a little further in that we have
secured our right of way and have done about $90,000 worth of
grading.
Mr. PAYNE. Is your road run by steam or electricity?
Mr. LUCE. By steam.
Mr. DECKER. I don't understand yet why you wouldn't get as
much business. You didn't make that clear.
Mr. LUCE. Well, the tendency would be for the other roads to
ship their carload lots over the roads that they are doing business
with, which, being all one family, would naturally go that way and
would undoubtedly work a big injury to this property.
The property the first year made about $30,000. The second year
it made considerably less than that, and last year, owing to the
advance in material, help, and everything pertaining to the operat-
ing of the road, it showed a loss of about our first year's gain.
We have a very substantial new passenger station that covers a
block, and our freight house is a large proposition. That is a ter-
minal company, a separate company from the railroad. The ter-
minal company, I think, has a capacity, if it was tracked, for about
4,000 cars.
Mr. BARKLEY. Did you get a notice from the director general?
Mr. LUCE. I got the same notice, I guess, that was issued to all
the roads. We have received all the notices that have been men-
tioned here.
356
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. BARKLEY. Did you get one?
Mr. LUCE. Yes; both the terminal company and the railroad
company.
Mr. PARKER. Did the notice say, "You will do so and so," or did
it use the general terms, "Officers of the road"?
Mr. LUCE. I am not prepared to answer that.
""
Mr. PARKER. Does it say, "You will not compete for business,
or does it say, "Officers of the roads that are taken will not compete
for business"?
Mr. LUCE. I am not prepared to answer that.
Mr. DILLON. I understood the gentleman to say he had understood
there were six or seven hundred of these roads that would not be
included.
Mr. LUCE. I assume that.
Mr. DILLON. Where did you get that information?
Mr. LUCE. In a general way. I understand that only the main
arteries of the country have been taken over at the present time;
that the small roads were not.
Mr. DILLON. What was the basis of your assumption, then?
Mr. LUCE. Well, I think that the Judge here-Judge Payne-made
some such statement. I am not positive about that, but I think so.
I met the gentleman last evening for a minute or two. I received
a little light on the subject. It undoubtedly will be a benefit for lots
of these small roads to be taken over. It will work a detriment to
some of the big roads, the small roads, the independent roads, if the
the rate that is prevailing to-day stands with the big roads; the
Government makes up the loss to the big roads and leaves the small
roads to take care of themselves-if it does that they are gone. They
are not worth-I wouldn't accept them as a gift.
Mr. BARKLEY. Your view is, if the Government takes part of the
roads and doesn't take over all of them, and those who are not taken
over happen to lose freight, the Government ought to pay the loss?
Mr. LUCE. I believe the Government ought to take over all the
roads.
Mr. WINSLOW. How strongly did you become impressed with the
idea that six hundred or seven hundred roads would not be taken
over?
Mr. LUCE. I thought they had been taken over. I didn't know
there were so many small roads, but Judge Payne gave me to under-
stand that the Government was only taking over the main arteries
of the railroad systems of the United States.
Mr. PAYNE. What I said to you. if I may ask you, is just exactly
what I have said here that is, that the transportation systems of
the country are taken over.
Mr. ROBINSON. Now, Mr. Chairman, just a few words and we will
not take your time further.
The CHAIRMAN. Are your witnesses through being heard?
Mr. ROBINSON. Yes; but I am going to make a condition as to our
closing. It will only take a couple of minutes.
As to the taking over of the road and whether it has been done or
not, the public press has announced that the Hainsville Railroad,
down in Alabama, was about to be taken up the rails were about to
be removed. It is a small line, as I was told, about 17 miles. My
information about it is not accurate. The public press announced
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
357
i
that the Director General, Mr. McAdoo, wired them to stop that;
not to take up the road, but to proceed to operate it. I am undertak-
ing to get that telegram so as to verify this fact that he has not only
taken over the roads under these general orders, but that he is giving
specific directions to not take up that particular track. I hope to
have that particular message.
The CHAIRMAN. You will file that telegram later?
Mr. ROBINSON. I will file the telegram if I can get it.
Now, if the question arises as to whether these lines belong to the
transportation systems, I want to show that the cars pass from one
to the other; that there is interline billing; that the stuff is billed
from one line to the other; that these short lines do everything neces-
sary to be a part and parcel of the transportation system of the
country, and I want to show that the Government, having charge of
the main lines and having charge of the great majority of the car-
riers the short lines having but few, comparatively small per-
centage that it will be perfectly natural for the Government to
have those cars loaded at enterprises on the main line, just so long
as there is anything there to load; and that they will starve these
short lines and leave them absolutely helpless, and therefore it will
ruin these properties, and that if the railroads are to be taken over
we must be included in doing justice in any sence of the word. So .
that if that is to be an issue we will want to present some testimony
on that fact. I appreciate, Mr. Chairman, the very great considera-
tion that we have received from the committee.
The CHAIRMAN. Now, there is a matter before the committee-
Judge Payne, do you know whether the Director General wishes to
come in before the case is closed-I mean the hearings-or is he ready
now?
Mr. PAYNE. I don't know, Mr. Chairman.
Mr. REYBURN. We might hear him to-morrow.
The CHAIRMAN. I was going to say that these gentlemen have closed
to-day, and there is no program for to-morrow that I know of.
Mr. PAYNE. I couldn't speak for him on that question. I don't
know what his engagements are.
Mr. REYBURN. Mr. Payne, you contemplate making a statement
yourself, do you not?
Mr. PAYNE. I think not. I don't think I have any occasion to.
Mr. REYBURN. Well, you have understood that Mr. McAdoo wanted
to be heard or expected to be heard?
Mr. PAYNE. Yes.
The CHAIRMAN. Suppose we adjourn to meet at 10.30 o'clock day
after to-morrow, and then in the meantime any witness that wants
to come before us on any feature of it can come. We agreed to hear
the gentlemen from New Orleans on Friday morning, and as to-mor-
row is Calendar Wednesday, I think it is a good idea that we do not
have a session to-morrow, unless there are witnesses here that will be
delayed by not being heard. In the absence of objection the com-
mittee stands adjourned until 10.30 Thursday morning.
(Whereupon the committee adjourned at 5.10 p. m. until 10.30
o'clock a. m., Thursday, January 17, 1918.)
358 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE,
HOUSE OF REPRESENTATIVES,
Thursday, January 17, 1918.
The committee met at 10.30 o'clock a. m., Hon. Thetus W. Sims
(chairman) presiding.
The CHAIRMAN. The committee will please come to order. Gen-
tlemen of the committee, I will have to ask for a leave of absence
for a little while this morning, as the Speaker has asked the chairmen
of all committees to meet him in a conference this morning.
Gov. Sanders, if I understand it, the gentlemen from New Orleans
can not be here when they thought they could, but will, perhaps, be
here later on?
Mr. SANDERS. Some day next week, I think.
The CHAIRMAN. Now, I thought, possibly, from the statement that
Mr. Anderson made during the testimony that the Secretary of the
Treasury would want to make a statement as Director General of
Railroads. I have not had an opportunity to confer with Secretary
McAdoo about this matter to know just what he wants or does not
want to do, and consequently I am not prepared at this time to say
when he will appear or whether he will appear at all; and inasmuch
as these Louisiana people can not be here to-morrow, I was going
to suggest that after the morning session we adjourn to meet at the
call of the chairman, and then when the Louisiana people get here we
will call them; but in the meantime, if the committee desires to be
considering these different features of this bill as a committee, I will
be glad to take up those matters.
I understood Mr. Thom to say that he wanted to make an argu-
ment when the hearings were closed, before we acted on the bill. Is
that correct?
Mr. PARKER of New Jersey. Yes; that was his statement.
The CHAIRMAN. The Senate and the House are both holding hear-
ings on this same matter, and Mr. Thom can not be in both places at
once, and I thought we had better find out when it would suit him
or let him know when we are ready to hear him.
Mr. RAYBURN. Who else is there to be heard?
The CHAIRMAN. I don't know.
Mr. ESCH. I understand that Mr. Thorne would like to present
something.
The CHAIRMAN. Mr. Thorne, I remember now, did write me a
letter some time back, in which he said he had suggested this very
matter this course of procedure; that is, operating the railroads by
the Government during the war-and Mr. Thorne is a man of such
high authority on all these transportation questions, so far as I am
concerned I would be very glad, indeed, to hear him.
Mr. EscH. I understand he can appear Saturday morning.
The CHAIRMAN. Then when we adjourn this morning, suppose we
adjourn to meet Saturday morning at 10.30?
Mr. PARKER of New Jersey. I want to give notice that I would like
very much to have a brief abstract made of what is taxed by the
various States-I don't care for the amount of taxes, or anything of
the sort, but I want to find out whether they tax freight or fares or
gross income or franchises or property, so as to see what we have to
guard against and what dangers we are running into in the actual
operation of the roads.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
359
The CHAIRMAN. You want the tax laws, in so far as they affect
railroads, in all the States?
Mr. PARKER of New Jersey. I want a summary of what property
they tax.
The CHAIRMAN. You only have reference to property that may
be owned by the railroads?
Mr. PARKER. Yes.
The CHAIRMAN. How would you suggest that that be procured?
Mr. PARKER. I think the Interstate Commerce Commission has a
summary of the tax laws.
The CHAIRMAN. Then it will not be necessary to have a hearing on
that, but just ask that it be furnished.
Mr. PARKER. Yes. I move that the chairman request that a sum-
mary of the tax laws of the various States be sent to us affecting
the railroads.
The CHAIRMAN. As covered by the subject matter of this bill?
Mr. PARKER. That is it.
Mr. COADY. Can't we meet that by making some affirmative provi-
sion in the bill to protect the States?
Mr. PARKER. I want to meet the whole proposition, and I want to
know what the States are doing.
The CHAIRMAN. I will assume, without going through the for-
mality of a vote, that I am to ask the Interstate Commerce Commis-
sion to furnish a statement with reference to the taxation laws of the
several States, touching the subject matter of this bill, railroads,
steamboats, or anything else covered by it.
Mr. COADY. That is, all the properties, rights, and franchises of
the railroads?
The CHAIRMAN. Yes; the subject matter of this bill.
There is a gentleman here, Mr. Amory, of New York City, who
came over to see me yesterday. He has given these matters a great
deal of thought, investigation, and study and would like to make a
statement to the committee. I asked him if he couldn't submit a
written statement-take up the bill and submit a typewritten state-
ment touching every section in it, or such sections as he thought
should be amended, making suggestions for amendments, etc. He
said he was very anxious to appear before the committee, even if for
only 15 minutes. He doesn't represent any railroad or any special
interest or anybody but himself as a citizen of the United States
who has an interest in the public welfare of our country. I told him
I would submit the matter to the committee this morning as to
whether or not they would hear him for not exceeding 30 minutes
this morning. Now, as I have got to leave and can not be here my-
self, that is a matter for you gentlemen to determine for yourselves;
I understand, however, that Mr. Amory in appearing does not appear
for anybody nor in the interest of any railroad or in opposition to
any railroad or anything else, but only to give general information
touching the general scope of the legislation. I am going to leave
you gentlemen to determine that for yourselves, and we will meet
at 10.30 o'clock Saturday morning and hear Mr. Thorne if he can
be heard at that time.
Mr. STEPHENS (acting chairman). If there is no objection to Mr.
Amory occupying 15 minutes we will listen to him now. Give your
name and post-office address and business to the stenographer, Mr.
Amory.
360 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
STATEMENT OF WILLIAM N. AMORY, 181 CLAREMONT AVENUE,
NEW YORK CITY.
Mr. AMORY. I have been in the railroad business for 20 years,
chiefly in the accounting department, and have been a student of
railroad accounting for 20 years. I was at one time secretary and
treasurer of some of the traction lines in New York City. During
the last 10 or 12 years I have devoted almost my entire time to study-
ing this subject of railroad accounting and writing on the subject.
That is my business at the present time.
I told the chairman of your committee the information that I had,
and he said he thought it would be useful to you, and suggested that
I should prepare a statement, have it typewritten, and read it here,
as the quickest and shortest way of laying the facts before you.
Therefore I prepared such a statement yesterday, including a state-
ment regarding the suggestions of amendments to the bill. It will
take me about 12 or 14 minutes to read this statement. [Reading:]
The COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE,
House of Representatives.
I respectfully suggest the following amendments to the Federal railroad bill:
First. In section 1, page 2, line 4, after the word "returns," insert the fol-
lowing: “and shall include due allowance for adequate depreciation and main-
tenance of the properties of the carriers as a part of operating expenses in order
to determine the true amount of said net railway operating income."
Second. In section 1, page 2, line 15, after the first word in line 15, insert the
following: as aforesaid, with due allowance for adequate depreciation and
maintenance.”
Third. In section 2, page 3, line 2, after the word "return," insert the fol-
lowing: "determined as aforesaid with due regard to adequate depreciation
and maintenance."
The purpose of these amendments, in all fairness and in accordance with
correct accounting principles, is to have the method of determining net railway
óperating income during the last three years conform to the method proposed
in the bill during Federal control, as set forth on page 2, beginning at line 19.
Fourth. In section 6, page 4, line 21, substitute "$1,000,000,000 ” for
$500,000,000."
The larger sum may be needed within a year.
Fifth. In section 6, page 5, line 10, after the word "any," insert the following:
"renewals and replacements of plant and equipment and." Also, in line 13,
after the word "such," and in line 20 after the word "such," insert the follow-
ing: renewals and replacements and."
66
Additions and betterments are a proper charge against capital, while renewals
and replacements are a proper charge against operating income.
Director General of Railroads McAdoo has charge of the greatest business in
the world. He has undertaken what was characterized before the Senate
committee the other day as "the most monumental financial transaction that
has occurred in the history of mankind."
The gross operating revenues of the railroads last year exceeded $4,000,000,000.
The business is not only big but of paramount importance. At the present time
the fate of the world depends upon the physical and financial integrity of
American railroads. In the final analysis the factor of transportation is the
foundation of and largely the creator of all wealth.
Every individual in the United States is vitally concerned in the welfare of
the railroads. And the people just now are of a mind to be informed frankly
of all their affairs, not for purposes of criticism, but with a view to correc-
tion. If the truth about the railroads had been appreciated years ago, they
would not now have broken down under war stress; they would not now be
short of tracks, terminals, and equipment; they would not now lack funds for
necessary improvements, but they would be fully equipped, physically and finan-
cially, to respond to the Nation's needs.
The history of American railroads shows them to be marvels of operating
efficiency and at the same time monuments of financial folly. They have suf-
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
361
fered from constant failures. There never has been any big business where
failures were so prevalent.
Between 1876 and 1917, 817 railroads failed, an average of 19 a year. Some
have failed more than once. These bankrupt roads operated over 175,000 miles,
and their capitalization, which includes stocks, bonds, and other funded debt,
exceeded $11,000,000,000.
On January 1, 1917, 71 railroads, operating some 36,000 miles, or about 13
per cent of the whole, were in receivers' hands. During the year there were 19
foreclosure sales and 20 new receiverships. On January 1, 1918, there were
72 railroads, operating 17,773 miles, in receivers' hands.
The steady stream of railroad failures indicates something radically wrong.
Railroads fail because they have been persistently pursuing a financial policy
with respect to the disposition of income and capital receipts which leads to
certain bankruptcy. They have brought about their own ruin through the
violation of cardinal principles of accounting, viz:
1. By failing to charge income with the full measure of maintenance ex-
penditures and by wrongfully charging a portion of maintenance to capital
account under the guise of additions and betterments.
2. By failing to charge income for adequate depreciation and obsolescence of
plant structures and equipment. Under this head they have been remiss to
the extent of hundreds of millions a year.
As an inevitable result, inflated statements of earnings have been perennially
issued, fictitious profits claimed, spurious surpluses shown, unearned dividends
paid, capital impaired, and bankruptcy insured. All this that dividends might
be paid on watered stock. The curse of the railroads has been Wall Street
management.
For present purposes the matter of neglected maintenance need not be con-
sidered, but depreciation alone, in order to have light on the railroad situation.
Speaking of corporate depreciation, a student of finance (A. W. Atwood)
has said:
"Natural depreciation will cause any physical property to disappear in 30
years at the most. Despite repairs, the new Equitable Building in New York
City breaks down at the rate of 34 cents a minute. Unrepaired depreciation
would wipe out all the capital in the world in 25 years. No business neglect-
ing depreciation is good for more than a generation.”
The highest courts in the State of New York have defined railroad deprecia-
tion and obsolescence. "As surely as humanity travels from the cradle to the
grave," it is solmenly asserted in one decision, "the machinery and equipment
of a public-service corporation travels toward the scrap pile."
The New York courts have declared that the provision of an adequate fund
from income is essential to solvency, and the neglect means certain bankruptcy.
They attribute the many corporate wrecks scattered throughout the State to the
failure to apply this essential principal of accounting. They demonstrate that
the neglect of depreciation results in statements of earnings which are mislead-
ing, in the unlawful payment of dividends with capital funds, and in the im-
pairment of capital and ultimate bankruptcy. They have declared that not less
than 4 per cent per annum of cost of corporate railroad property should be set
aside from income to provide for depreciation and obsolescence, and have laid
down a rule for computing the annual allowance for depreciation of the various
kinds of tangible property.
The Public Service Commission of New York has declared that in addition
to complete maintenance, depreciation, obsolescence, and inadequacy must be
provided for by adequate appropriations from income; that neglect of this
policy has brought many roads to financial disaster; that companies which are
soundly financed make ample provision for depreciation before dividends are
paid; that payments of dividends and bond interest when no adequate deprecia-
tion fund has been accumulated depletes capital and leads to ruin, and results
in "actually violating the law against the declaration of dividends out of capital
just as effectually as though it sold stock and distributed the proceeds imme-
diately in the form of dividends "; that the purpose of a depreciation fund is
to conserve the corporation, and preserve its financial integrity. The com-
mission attributes the disastrous failures of the New York traction lines to the
neglect of depreciation, and adds that such neglect "has thrown many com-
panies into receivers' hands and caused financial loss and ruin. No company
may wisely disregard this factor."
The commission further says:
"The end of such financiering may easily be imagined; but it need not be left
to the imagination. The results are too well known from the experience through
362
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS,
which the street railway lines in Manhattan have just passed. They were bad
service, dilapidated plant and equipment, high operating expenses, judgments, re-
ceiverships, foreclosures, heavy assessments or loss of property, stockholders
closed out, bonds paid off below par value, all corporations brought under sus-
picion, capital for legitimate enterprises obtained with difficulty, etc. The
capitalization of operating charges must stop, and replacements are operating
charges."
The Interstate Commerce Commission has defined depreciation as "funda-
mentally a question of values," and had ordered the railroads to make some
provision for equipment alone, but does not require them to make any provision
whatever for way, rodbed, and structure. And no rate, even, has been fixed
for computing depreciation of equipment. The commission says it is not an
arbitrary charge, the matter being left to the discretion of the carrier."
In consequence, the railroads have made totally inadequate provisions for
depreciation of equipment and none at all for depreciation of way, roadbed, and
structures. Primarily, the commission is to blame for the ruinous policy pur-
sued by the railroads and the steady stream of bankruptcies resulting.
The commission is fully aware that railroad reports of earnings and financial
statements are unreliable and misleading. In its twenty-second annual report,
reprinted in later reports, the commission says:
"No court, or commission, or accountant, or financial writer would for a
moment consider that the present balance-sheet statement, purporting to give
the 'cost of property,' suggests, even in a remote degree, a reliable measure
either of money invested or present value."
In its twenty-sixth annual report the commission says:
“Instances have been found of the misstatement of revenue and expense
accounts to such extent that the apparent results of operation were materially
affected, an actual deficit or surplus being reported as the opposite."
:
·
Railroads are the only big business which have been guilty of the folly of
neglecting depreciation. Take the United States Steel Corporation, for in-
stance. That concern when it began business was loaded down with half a
billion of watered stock. Yet under wise management a sum sufficient has
been accumulated from annual income not only to provide adequately for de-
preciation but actually to eliminate all the water in the capitalization.
The general attitude of reckless railroad management is shown in the follow-
ing true story. The head of a great railroad system some years ago boasted
he had replaced at great cost all the wooden bridges with steel bridges.
"How
did you pay for them," he was asked. "With a bond issue," he replied. 'Will
the bridges last 25 years; and if so, have you provided a 4 per cent per annum
depreciation fund from income? He answered: "The bridges will last 30
years. I don't intend to reduce my earnings with any depreciation fund. Let
posterity take care of the expense.'
Ten years ago the traction systems of New York, the greatest in the world,
were found to be hopelessly bankrupt. I pronounced the companies involvent
several years before insolvency was confessed, at a time when their stock were
selling at high figures and were supposed to be the soundest of investments.
:
The ruin was caused not by the looting of a comparatively few millions by the
insiders, as many persons have supposed, but by the total neglect of deprecia-
tion, with gross falsification of accounts, in order to pay unearned bond interest
and dividends on water securities, the consequent impairment of capital, fol-
lowed by the inevitable collapse.
:
A number of years ago the street railways of Glasgow had reached a similar
state of ruin after being operated, like the New York traction lines, for the
personal profit of a few individuals. The railways were taken over by the
city and after a period of municipal ownership and operation were put in
a condition of unparalleled efficiency and prosperity.
Here is what the Economist, of London, recently had to say about them:
"The Glasgow tramways have written off the entire capital cost of the system
that carries nearly a million passengers a day and earns a gross revenue of
$5,000,000 a year. And while this writing off was in progress the system was
extended, fares continually reduced until they stand at less than a cent a mile,
the wages of employees increased, considerable sums paid yearly in rates and
taxes, and dividends amounting in the aggregate to $3,143,000 paid into the
common good of the city of Clyde. The secret may be given in one word—
depreciation.”
Following the New York traction disclosures I undertook the study and
investigation of the steam railroads, and, much to my surprise, I found many
1
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
363
of them bankrupt as the result of the violation of the very same essential prin-
ciples of finance which has ruined the traction companies.
And I called the attention of Henry Adams-Prof. Adams-one of the most
scientific accountants then alive-then in charge of the accounting system of
the Interstate Commerce Commission, nearly 10 years ago, 9 years ago--to this
very fact. I pointed out that the railroads were making grossly false state-
ments of operations, and he wrote back and admitted the whole thing, but
nothing has ever been done about it. I want to say right here that to-day,
taking the railroads as a whole, their liabilities exceed their assets by billions
of dollars. Ninety-five per cent of the railroads of the United States to-day
have liabilities greater than their assets.
Mr. STEPHENS. On the books or theoretically?
Mr. AMORY. No, sir; not on their books. They have concealed the
true state of affairs on their books and on the reports made to the
Interstate Commerce Commission and to their own stockholders.
In 1910 Supreme Court Justice Louis D. Brandeis, then practicing law in
Boston, heard of my railroad investigations and invited me to meet him in
Boston and to bring him my analysis of the New Haven road. At that time
New Haven stock was still selling at high figures. The management was
under criticism, but no one questioned its solvency. In 1907 Mr. Brandeis
had opposed the proposed merger with the Boston & Maine Railroad and
wrote and printed a very able report of some 80 pages on the financial condi-
tions of both companies. But Mr. Brandeis did not claim the New Haven was
insolvent. It was left to me to show him in 1910 the very simple process by
which the railroad had been brought to a state of ruin. And he was pleased to
say that my simple demonstration had perfectly explained the financial methods
which could bring about the speedy ruin of a railroad and at the same time
conceal conditions from public view.
The Federal railroad bill, now before two committees of Congress, provides
that the railroads shall receive as just compensation while under Government
control an income at an annual rate equivalent to average net operating income
for the three years ending June 30, 1917, such net railway operating income
to be computed from the returns made by the carriers to the Interstate Com-
merce Commission.
Nothing is said about taking into account adequate depreciation and main-
tenance in determining the amount of net earning. But the bill does provide
that "
During the period of such Federal control adequate depreciation and
maintenance of the properties of the carriers shall be included as a part of the
operating expenses."
It is obvious that the same rules respecting adequate depreciation and main-
tenance should apply during the three years' period before Federal control, as
well as after.
The question now to be considered is. What was the actual average net operat-
ing income for the three years ending June 30, 1917?
In railroad accounting. net operating income is the balance of operating
revenues remaining after payment of all operating expenses, including deprecia-
tion and taxes. Such net operating income is then subject to the following
disposition: Interest on funded debt; interest on unfunded debt; rentals of
leased roads; additions and betterments charged to income, if any; sinking
fund and other reserves; and, finally, after all these payments, there should
be an ultimate balance available for dividends and surplus.
According to the returns, the railroads had the following net operating income
for the three years:
1915
$730, 455, 299
1916
1917
Total
Average annual net income….
1,044, 602, 590
1,091, 000, 000
2,866, 057. 989
955, 352, 663
These figures will not agree exactly with some that have been fur-
nished you, as I see on this sheet here-furnished by one of the
departments here-but for the purposes that I am now before you,
they are sufficient.
364
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Now, in the last three years the railroads charged operating income for de-
preciation with approximately $255,000,000, an average of but $85,000,000 a
year. This sum is nowhere near adequate; it is only a fraction of actual de-
preciation; it is only a little more than half enough to provide for depreciation
on freight cars alone. Railroad depreciation amounts to between $400,000,000
and $500,000,000 per annum, and that fact can be established beyond doubt.
Instead of having over $2,800,000,000 in the last three years for bond interest,
rentals, dividends, etc., the companies had approximately a billion dollars less.
Let us see how they finally come out with respect to dividends. After deduc-
tions from net operating income of bond interest, etc., the railroads had the
following sums available for dividends, surplus, and deficits of weak companies.
It should be remembered that the official returns have certain numerous
duplications, both of income and expenditures, on account of intercorporate
relations. The statement which follows has been compiled from the report of
the bureau of railway news and statistics, and will be found to differ in some
particulars from official returns, as it presents the ultimate balance applicable
to dividends as it would be if the Government owned and operated all the rail-
roads as a single concern with such duplications eliminated.
1915
1916
1917 (partly estimated)
Total for dividends in last three years.
$149, 223, 327
412, 848, 185
438, 000, 000
1, 000, 071, 512
This total is found after including an allowance of $255,000,000 for deprecia-
tion actually charged against income by the railroads, an average of $85,000,000
a year. If we conservatively adopt the minimum figure of $425,000,000 per
annum as representing average accrued depreciation, we find that the car-
riers undercharged income for depreciation $340,000,000 a year, a total of
$1,020,000,000 for the three years. It is accordingly seen that when adequate
depreciation is taken into account the railroads in the last three years did not
earn a single dollar with which to pay dividends and were short besides
$20,000,000 for fixed charges.
Of course there were some few railroads whose affairs have been conserva-
tively managed, that earned dividends and paid them out of earnings. But,
taking the railroads as a whole, one going concern, there were no dividends
earned, yet millions every year were paid in dividends, a part out of alleged
earnings and a part (in 1915 over $94,000,000) out of a spurious surplus.
Now, the railroads had neither profits nor surplus with which to pay the
dividends which were actually paid, and it accordingly follows that all such
payments were made with capital funds-the proceeds of stock and bonds-
and the truth concealed from public view by an elastic accounting system
until an analysis should disclose the facts.
They ought to be obliged to make honest returns of operating receipts and
expenditures with allowance for adequate depreciation and maintenance. At
the same time they ought to be permitted to earn a fair amount of dividends
on stock honestly issued. With present rates this is impossible. But remember
some billions of the capitalization is water, dishonest captalzation.
The bill ought to empower the President or Director General of Railroads
McAdoo to increase rates. Rates ought to be increased immediately 10 per
cent. We are at war. The railroad problem is a big and urgent problem and
ought to be handled forthwith in a big way. Nevertheless, there is no reason
why the Governments should pay the railroads profits based on returns which
are wholly inaccurate and misleading, and the bill should be amended ac-
cordingly. Be liberal with the railroads, but give the Government a square
deal.
Mr. STEPHENS. Have you finished?
Mr. AMORY. Yes, sir.
Mr. ESCH. Did you have some other document that you wanted to
refer to?
Mr. AMORY. I want to leave a memorandum regarding the law.
(The statement referred to is as follows:)
SOME AUTHORITIES ON RAILROAD DEPRECIATION.
The necessity of providing for railroad depreciation out of earnings has been
judicially determined.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
365
On November 25, 1910, Judge Randall J. Le Boeuf, of the Supreme Court of
New York, in a decision rendered in the Brooklyn Rapid Transit Railroad Tax
case, declared that:
"As surely as humanity travels from the cradle to the grave, the machinery
and equipment of a public-service corporation travels toward the scrap pile.
The plant and structures depreciate in less degree, but as certainly. This is
ordinary depreciation.
"But another form of depreciation in the case of properties here being valued
takes place. The machinery or equipment, while still capable of years of serv-
ice, becomes inadequate to do the work demanded, not only by the corporation,
but by the law itself. In the case particularly of electrical machinery, the type
becomes obsolete by reason of invention, and increasing public demands fre-
quently require in aid of safe and adequate service that the obsolete appliance
or equipment give way to renewal.
·
Some of these changes are capable of definite ascertainment. Many of
them may be provided against for the future by setting aside from gross
earnings a reasonable sum to create a reserve against the day when they shall
come. This reserve, with the amounts set apart for ordinary depreciation,
goes to amortize the capital of the company.
"Amortization of capital is something of a novelty in the case of public-
service corporations. Amortization of securities of trustees and money corpor-
ations has been known for many years, and the principle has been applied by
manufacturing corporations. Public-service corporations alone were slow to
recognize this necessity.
1
"The wrecks of many such corporations scattered throughout the State
would not to-day be seen if early this principle had been applied to their ac-
counting.
66
Each month as to equipment and ways and structures this relator is re-
quired to charge out of its earnings an amount to cover not only wear and tear,
but obsolescence and inadequacy estimated to have accrued.
"The testimony clearly shows that 4 per cent (on. reproduction of all prop-
erty) was not too high a deduction for depreciation and obsolescence alone.'
The appellate division of the Supreme Court in People ex rel. Binghamton
Light, Heat. and Power Co. v. Stevens et al., on March 8, 1911, said:
"Of course there are certain betterments to property that are properly charge-
able to capital. The general upkeep of a plant or of a railroad, however, ought
not to be charged to capital, but the company ought to be compelled to make
such repair and replacement as a part of current expenses. Of course if this
were not so they could capitalize all running expenses periodically and call the
gross income net income, and continually impoverish the company by paying
improperly large dividends.
One of the primary purposes of this general law is to prevent overcapi-
talization and to protect the public from the flotation of securities that do not
represent actual values. The mischief is just as great, whether this overcapi-
talization arises at the initiation of the corporation or whether it is the result
of a process by which property has been replaced, and the original capitaliza-
tion is still carried on the books in addition to the cost of replacement."
The New York Court of Appeals has settled the method of computing de-
preciation:
"The annual allowance for depreciation should be computed by dividing
the values of the various kinds of tangible property by the number of years
of their respective estimated physical lives, and that will be the opinion of
the court." (People ex rel. Manhattan Railway Co., 203 N. Y. 231, p. 236.)
The public-service commission of New York published the following opinion
in the Third Avenue Railroad case on July 29, 1910:
"Much evidence was submitted upon the subject of depreciation. That
property depreciates is an indisputable fact, and the failure to recognize and
provide for it has brought low many corporations. Unless the investment of
security holders is kept intact by a depreciation fund or some other similar
means the day will come when there will be no funds or property to represent
their securities. The street railway situation in Manhattan for the past three
years is an ominous warning, and anyone who unduly minimizes the subject
of depreciation harms not only the investor but the public.
"If the normal wear and tear be provided for directly out of the operating
expenses, obsolescence, inadequacy, and age must be met by a depreciation
fund or some similar fund.
"It is the first duty of every company to see that its capital investment is
kept intact. All charges for repairs, renewals, and replacements should be
met out of earnings, and dividends should not be paid until these expenses
'866
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
have been provided for in some way. It is evident that the Third Avenue
Railroad did not do so, but issued new stocks and bonds instead. The result
was that its capital was depleted, that it could not pay the interest on its
bonds, and that the property has been sold under foreclosure. Counsel for the
applicants seem to be of the opinion that all a company needs to provide for
out of earnings is its daily needs and mandatory demands, and that the stock-
holder is entitled to dividends regardless of provision for depreciation.
"This policy has brought many roads to financial disaster. Companies that
are soundly financed make ample provision for depreciation before dividends.
are paid. Neglect to keep investment unimpaired in order that dividends
may be paid will lead to ruin."
The same commission the same year said in the Metropolitan Railway case:
"If a company does not reserve a sufficient portion of its revenues to replace
capital consumed during the year, but not requiring replacement within the
year, and then proceeds to treat the entire surplus as divisible profits it is
actually violating the law against the declaration of dividends out of capital
just as effectually as though it sold stock and distributed the proceeds imme-
diately in the form of dividends.
"The failure to provide for obsolescence has thrown many companies into
receivers' hands and caused financial loss and ruin. It is one of the principal
causes of the overcapitalization of Manhattan Street Railways, of the dismem-
berment of the system as operated in 1907, and of the loss of innocent investors.
No company may wisely disregard this factor.
"The purpose of a depreciation fund is the maintenance of the property
in some form equivalent to the original investment. It is necessary that an
amount should be set aside annually out of the income before dividends and
interest on the income bonds may be properly paid."
In denying the New York Railways Co. permission to issue bonds for re-
placing cars which had depreciated and become obsolete, and for reconstruct-
ing car barns, the commission said on November 1, 1912:
+
"The end of such financiering may easily be imagined, but it need not be
left to the imagination. The results are too well known from the experience
through which the street railway lines in Manhattan have just passed. They
were bad service, dilapidated plant and equipment, high operating expenses,
judgments, receiverships, foreclosures, heavy assessments, or loss of property,
stockholders closed out, bonds paid off below par value, all corporations
brought under suspicion, capital for legitimate enterprises obtained with cliffi-
culty, etc. Yet the very corporation which was reared upon the ruins of the
Metropolitan system now comes before the commission and asks that we fix
the stamp of our approval upon the very practice which caused or aided the
disruption of the Metropolitan system. It was to be supposed that something
had been learned from experience. The capitalization of operating charges
must stop and replacements are operating charges."
The statistical expert agent of the railroad, Slason Thompson, of the Bureau
of Railway News and Statistics, as long ago as 1909, made some interesting
admissions respecting depreciation of equipment and the large sums required
annually to replace discarded rolling stock:
"Provision has to be made every year for the purchase of new equipment
amounting to approximately 5 per cent of locomotives and passenger cars and
4 per cent of freight cars in order to maintain the equipment numerically,
irrespective of the sums spent on maintainnig the remainder in serviceable
condition. *
*
"Approximately $142,000,000 has to be expended annually for new equipment
to take the place of old, worn-out, and discarded rolling stock. Conditions for-
bade the expenditure of any such sum in 1908 and 1909.”
A student of finance has said:
"Natural depreciation alone will cause any physical property to disappear
in 30 years at the most. Despite repairs the new Equitable Building in New
York City breaks down at the rate of 34 cents a minute. Unrepaired deprecia-
tion would wipe out all the capital in the world in 25 years. No business
neglecting depreciation is good for more than a generation." (A. W. Atwood.)
THE INTERSTATE COMMERCE COMMISSION'S VIEWS ON DEPRECIATION AND THE UN-
RELIABILITY OF RAILROADS' ACCOUNTS.
:
The commission has defined depreciations as follows:
"The question of depreciation is fundamentally a question of values, and
not a question of maintaining the original capacity or a standard of operating
efficiency or of keeping full the number of equipment series.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 367
"The basis of accumulation-that is to say, the amount to which the per-
centage rate is applied-ought in strict theory to be the original cost." (Classi-
fication of Operating Expenses, revised issue, 1917.)
In its decision upon questions, Accounting Bulletin No. 4, January 1, 1910,
case 106, the commission says:
It is recognized, however, that other classes of railway property are sub-
ject to depreciation, and carriers are permitted to set up subprimary accounts
covering depreciation.”
In case No. 40 the commission says railroads are not required to make any
provision out of income for depréciation of way, roadbed, and structures.
No rate has been fixed for computing depreciation of equipment. The com-
mission says it is not an arbitrary charge, "the matter being left to the discre-
tion of the carrier until such time as this office is prepared to recommend a
special rate." (Bulletin No. 4, cases 109, 168, 348.)
THE COMMISSION CONDEMNS RAILROADS' ACCOUNTS AND FINANCIAL STATEMENTS.
In its twenty-second annual report, page 85, the commission says:
66
It is sufficient to refer to the well-known fact that no court or commission or
accountant or financial writer would for a moment consider that the present
balance-sheet statement purporting to give the cost of property suggests, even
in a remote degree, a reliable measure either of money invested or of present
value. Thus, at the first touch of critical analysis, the balance sheets published
by American railways are found to be inadequate."
This arraignment of railroad bookkeeping appears in the same language in
subsequent annual reports.
The commission in its twenty-sixth annual report to Congress, under the
heading "Division of carriers' accounts," says:
"The commission's order covering its classification of expenditures for road
and equipment, effective on July 1, 1907, prescribed that after that date all
entries in such accounts should be in terms of cash. The general examinations
since made have developed the fact that in some cases items entered in the
property accounts have not represented simply expenditures in terms of cash,
but have been greatly in excess of such expenditure, whereby the wide disparity
between the cost of property and the par value of securities issued has been
concealed. Nor should it be assumed that misleading practices in accounting
are confined to the statement of capital accounts. Instances have been found
of the misstatement of revenue and expense acounts to such extent that the ap-
parent results of operation were materially affected, an actual deficit or surplus
being operated as the opposite. A number of cases of the more flagrant vio-
lations of the accounting rules are now before the commission, and proper dis-
ciplinary measures will be adopted in due course."
I also have here a memorandum as to the extent of depreciation.
My figures as to the amount, between $400,000,000 and $500,000,000,
may be questioned. If the committee cares to take up 5 or 10 minutes
more time, I can explain how that was arrived at.
Mr. ESCH. I think we ought to take that time.
Mr. AMORY. I will then read the memorandum. This is a memo-
randum that I had not proposed to read, but perhaps it is the shortest
way. It is a memorandum that I have prepared for my own use,
and while it is not, perhaps, in as good consecutive order as it might
be, I perhaps had better read it as it is. It will give you an idea
of the situation. [Reading:]
THE AMOUNT OF ANNUAL DEPRECIATION.
1. In the North and West Chicago street railways some years ago it was
decided by the United States circuit court, on a report of engineers appointed
by the court, that depreciation, in addition to ordinary maintenance, amounted
annually to 5.6 per cent of reproduction cost.
2. This has been exceeded in New York. On one traction line which went
into bankruptcy in 1908, depreciation and obsolescence are found to have
amounted to over 12 per cent of reproduction cost, or about 50 per cent of
annual operating income—
368
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
E
That was the Third Avenue Railroad, and that is true
Obsolescence is a factor to be reckoned with. For example, the New York
Central Station in New York was rebuilt in 1900 at a cost of $3,000,000, to last
50 years. It was the finest station in the country; nevertheless, it became obso-
lete in 10 years and has been replaced.
3. In San Francisco annual depreciation has been found to amount to 18 per
cent of operating income on the city-owned street railways, or 5 per cent of
reproduction cost of the railway.
Mr. MONTAGUE. What was the cost of that replacement?
Mr. AMORY. The new station has cost many, many millions more
than that. But what should have been done is this: It should have
been replaced in part by the depreciation fund, and that depreciation
fund should have covered the full cost of the original station. Now,
if the original station cost $3,000,000, the new station, when it was
built, should be replaced with new capital, excepting as to the
$3,000,000, which should go as an accumulation of the depreciation
fund.
Mr. ESCH. What road is that?
Mr. AMORY. The New York Central. [Reading:]
M
4. In New York annual depreciation on all the traction lines was determined
in 1913 in certiorari proceedings, and found to be about 5 per cent per annum
of actual cost of road and equipment (not on company's figures of cost which
are grossly excessive), which amounts to about 17 per cent of operating income,
practically confirming San Francisco figures. (See pp. 30 and 31, Traction In-
solvency.)
These, of course, are trolley lines and not steam railroads, but they
are useful in arriving at a conclusion.
5. The Glasgow city-owned street railways recovered from a state of financial
ruin through the application of a depreciation fund. (See the Economist, of
London.) In 1916, with operating income of $5,632,175, the sum of $848,850 was
set aside for depreciation and permanent-way renewals, equivalent to a little
more than 15 per cent of annual receipts. In addition, over half a million dol-
lars was set aside for sinking fund, or nearly 10 per cent more.
6. Steamship companies set aside annually from 5 to 7 per cent of cost of
vessels to provide a depreciation fund sufficient in from 15 to 20 years to pay
for replacement.
The White Star Line's depreciation fund has been so ample that the full
cost of the whole fleet was written off the books long before replacements were
required.
7. Taxicab companies must set aside from income annually from one-quarter
to one-third of the cost of equipment to provide for depreciation, in addition
to maintenance expenses for wear and tear, or else bankruptcy speedily results.
8. Every business wisely conducted provides for depreciation from income,
excepting American railroads, the greatest of all business, which alone have
ignored the vital principle, observance of which is essential to continuing
solvency, and neglect of which results in top-heavy capitalization and certain
ruin.
9. How much of income must American steam railroads set aside annually
to provide for depreciation?
Their operating revenues in 1916 amounted to $3,455,906,118.
Thompson, 1916, p. 108.)
(Slason
These figures are from the Bureau of Railway News and Statistics,
but are practically confirmed by the Interstate Commerce Commis-
sion figures.
The cost of road and equipment (248,244 miles) on June 30, 1916, according
to Slason Thompson, was over $18,600,000,000, and after deducting accrued de-
preciation computed from official general balance sheets, the net cost was
shown to be over $18,100,000,000. (S. T., 1916, p. 83.)
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
369
The figures which have been given to your committee, as I see on
this sheet, are about $17,200,000,000 for the cost of road and equip-
ment.
He shows in detail (p. 45) that cost of cars alone was over $4,000,000,000,
and remarks: "At prevailing prices this equipment could not be duplicated
for $5,000,000,000."
He proves that freight cars totally depreciate in 17 years, and says that
"the replacement requirement of 95,000 is probably too low" (p. 39). In
other words, an average of 95,000 or more freight cars annually depreciate and
require renewal. At $1,100 a car, depreciation of freight cars alone amounts
annually to over $104,000,000. That this is a moderate estimate is shown by
the fact that it is only 4.16 per cent of cost of freight cars detailed on page
45 ($2,501,000,000).
Mr. COADY. Isn't a great deal of this depreciation offset by in-
creased business, which is an asset?
Mr. AMORY. Absolutely not, sir; it has nothing whatever to do
with it. Depreciation, as has been declared by the courts of New
York and the Public Service Commission of New York, is an operat-
ing expense.
Mr. COADY. Increased business is an intangible asset, isn't it?
Mr. AMORY. Not in railroading. You might say that the right of
way is an asset in the same sense. The right of way is not a valu-
able asset unless it is an earning asset; unless it enables the railroad to
carn dividends on its stock. For instance, the right of way of the New
York Central into New York through Park Avenue is invaluable.
Mr. COADY. The stock in trade of some concerns consists princi-
pally of its business-almost altogether its business.
Mr. AMORY. Yes; but if they don't earn enough to pay the interest
on their debt, and then don't earn enough to pay dividends on their
stock, they are not in good financial condition. And that is the situ-
ation of the railroads.
Mr. ESCн. You stated as to the White Star Line that it had a de-
preciation of 7 per cent, and that it was able to write off the cost
before the equipment had been scrapped. Wouldn't that imply that
that line was charging an excessive rate to its passengers?
Mr. AMORY. No; not necessarily. You might say that they weren't
paying all the dividends to their stockholders that the stockholders
were entitled to. That is a very narrow view, however, to take of it,
because when income is devoted in that way to taking care of equip-
ment the stock is being made more valuable all the time. That is the
secret of the success of Henry Ford. Instead of borrowing money,
as the railroads always do, for improvements and additions and bet-
terments he kept putting back his income into his business. The con-
sequence is now that he has got an enormously valuable business.
The courts stopped him the other day from proceeding too far with
that practice.
Mr. STEPHENS. He collected his capital from the people, then?
Mr. AMORY. That was the theory-that he had collected his capital
from the people.
Mr. COADY. What is your suggestion as to the increase of rates,
10 per cent?
Mr. AMORY. Yes.
Mr. COADY. Would that take care of all this depreciation?
Mr. AMORY. Yes.
•
40958-18-24
370
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. COADY. You say 90 per cent of the railroads are practically
insolvent?
Mr. AMORY. There isn't any question about it. If honest balance
sheets were prepared it would be perfectly manifest to every person
that that is the situation.
Mr. SANDERS. Don't the railroads admit they are insolvent?
Mr. AMORY. They did here when they were before the Interstate
Commerce Commission a few years ago.
Mr. SANDERS. There is no question about it, then?
Mr. AMORY. They said there was no question about it. And they
have been declaring here recently that unless they got increases in
rates they were all going into the hands of receivers. They have
repeated that many, many times.
Mr. STEPHENS. What would be the good of giving increases in
rates if in turn they raised capital by selling more bonds?
Mr. AMORY. You get at the crux of the whole thing in that ques-
tion-that they must not be allowed to do what they have been doing.
They must be obliged to make honest returns. And that is very
simple.
Mr. DALE. Does the question of insolvency also apply to the New
York Central Railroad?
Mr. AMORY. I would prefer, if you please, not to be invidious-to
make invidious distinctions; to pick out any particular railroad and
say that that was solvent or insolvent. I don't think it would be
fair either to myself-which is of no importance or fair to the
railroads.
Mr. DALE. May I ask another question? You made reference a
moment ago to the invaluable right of way along Park Avenue in
connection with the New York Central, and then you were inter-
rupted. You were about to make some further reference. Have you
got that in mind now, that you could furnish to the committee?
Mr. AMORY. I would like to complete this: I merely wanted to
say-this was in response to a question regarding assets and canital—
and I wanted to emphasize the fact that such a franchise right as
the New York Central has-an invaluable right of way, worth, if
you want to look at it in the one sense, worth billions of dollars-
absolut ly not a railroad asset to go upon the books, to build up the
assets of that company. You see it is only useful for its earning
ability. It is useful to the New York Central to be used by it in
earning its dividends.
Mr. PARKER of New Jersey. And to the public in getting to the
center of the city.
Mr. AMORY. And to the public, of course, besides. But you couldn't
carry that franchise right and put it down as a book asset. It is
not a book asset at all; and if the New York Central, having that
right, worth billions from one point of view, should fail to pay-to
earn interest on its bonds, to say nothing about the stock-that com-
pany is insolvent, although it might go into court and say: "Here are
our assets, worth billions of dollars." The court would say: "That
is not an asset, a railroad asset; your earnings are not sufficient to
pay your interest on your fixed charges."
Mr. PARKER of New Jersey. Have you completed your statement?
Mr. AMORY. No; I am nearly through, however.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
371
Freight cars are figured on the basis of 17 years for their life,
and depreciation is found to be about 6 per cent of cost, say, $150,-
000,000 a year.
Mr. MONTAGUE. Speaking of the life of a freight car as 17 years,
are those figures made upon an average of freight cars made both of
wood and steel or steel alone?
Mr. AMORY. Well, it is the general average. But I think that
average is too low. I think as cars are to-day
Mr. MONTAGUE (interposing). You mean steel cars?
Mr. AMORY. Well, taking them all as a whole-these figures of 17
years are from this summary of Railroad News-it is official; gotten
up by the railroads themselves. I think the average life of a freight
car to-day is fully 20 years; but remember you have got to take
into consideration the question of obsolescence, too. The wooden cars
have become almost obsolete, just as the New York station became
obsolete long before it wore out, and inside of 15 years we may not
have a single steam locomotive going in the United States. There
is obsolescence.
Mr. MONTAGUE. I simply wanted your idea as to the life of a
freight car.
Mr. AMORY. I think the average life of a freight car is about 20
years.
Mr. ESCH. Would congested traffic or large traffic increase the de-
preciation rate over traffic during lax years?
Mr. AMORY. Yes, sir; to a certain extent, even though maintenance
was kept up to the full measure. And by "maintenance" is meant
repairs for wear and tear. And some people have argued-in fact,
I heard the president of a railroad once argue that if you took care
completely with maintenance there would be no depreciation. Of
course it is perfectly absurd. You might take a pair of trousers and
keep mending them, but by and by they would wear out regardless
of the patches, even if they don't become obsolete. [Laughter.]
Mr. ESCH. They wouldn't become obsolete.
Mr. STEPHENS. In connection with the New York station that
you referred to a moment ago, when it became obsolete you would
recommend that the new one be charged to capital?
Mr. AMORY. No, sir; I didn't make myself clear.
Mr. STEPHENS. Now, the old one should be charged to deprecia-
tion?
. Mr. AMORY. I was conscious of the fact, Mr. Chairman, and I am
glad you called my attention to it, that I didn't make a lucid expla-
nation. My statement was far from being clear. I will try and
make my statements clear now, though I am suffering from a violent
headache to-day and am not in very good form.
The situation is this: When that first station was built, we will say,
in 1900, costing $3,000,000, the railroad under a proper accounting
system should have established a depreciation fund and should have
set aside from income a sum of money which would have been in-
tended, as nearly as could be reckoned, to pay for the replacement of
that station when it should wear out or become obsolete and be re-
placed by another station. Now, then, if they had maintained a
proper depreciation fund and an ample one, at the time when they
found this station was obsolete that depreciation fund would have
372
FEDERAL OPFRATION OF TRANSPORTATION SYSTEMS.
amounted to the original cost-$3,000,000. The new station is
built, and the new station, we will say, cost $10,000,000; $3,000,000
of that $10,000,000 cost should be paid by that depreciation fund.
Do I make myself clear?
Mr. STEPHENS. Why not all of it? I don't understand why the
cost of the whole station should not be depreciated.
Mr. AMORY. It is perfectly proper to charge the new cost, the ex-
cess cost, to capital.
Mr. STEPHENS. It serves the same purpose as the old station.
Mr. AMORY. But it is an addition and a betterment, and it is per-
fectly proper to charge that to capital account and carry it in your
books as cost of road and equipment.
Mr. STEPHENS. Does it increase the earnings of the road?
Mr. AMORY. Yes; it does, no doubt.
Mr. STEPHENS. If it does, I can see a reason for charging it to
capital.
Mr. AMORY. Well, all new additions and betterments to property
are carried to capital account and are paid by the capital funds.
The trouble has been that the railroads have claimed that replace-
ments and renewals were additions and betterments. They lay new
tracks, taking up old rails and laying down new ones, and instead
of making that operating expense and charging it to depreciation-
the cost of those new rails they are putting it in as a capital ex-
pense under the guise of additions and betterments and increasing
their assets by actual operating expense. That is what it amounts to.
Mr. DECKER. Let me ask you a question there: This New York
Central Depot was built, we will say, in 1900. They thought it was
going to last for 50 years; that it wouldn't be obsolete until then.
How could they have provided for a depreciation fund that would
have paid for its cost in 10 years if they didn't know it was to last
so short a time?
Mr. AMORY. I am very glad you asked me that question. They
could not, if they had but one single depreciation fund, which cov-
ered the depreciation of that station alone. No human being with-
out the gift of prophecy could have seen that that railroad-that that
station-was going to become obsolete in 15 years. Therefore no
human being, in all probability, could have provided a sufficient
depreciation fund to have met the obsolescence of that station. But
when a railroad wisely conducts its affairs, it makes an allowance
not only for depreciation on all of its structures, such as this depot,
but on all of them and on all of the equipment; and it would have
accumulated a sufficient depreciation fund when this station was
replaced to have applied $3,000,000 toward the new cost.
Mr. DECKER. In other words, there would probably have been some
other station somewhere else that would have lasted longer?
Mr. AMORY. Yes, sir; absolutely, don't you see? This deprecia-
tion fund was covering the whole road, but part of it had to be
applied here on this particular structure.
Mr. DECKER. Quicker than they expected?
Mr. AMORY. Quicker than they expected.
Mr. BECKER. Now, I was not entirely satisfied with your answer
to Mr. Esch's question relative to the White Star Line. I will just
state what seems to me fair, and then I wish you would explain why
it is not fair.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 373
It seems to me if an operating company, or the owners of a com-
pany, had the wisdom to do it, it should have provided in the White
Star Line a depreciation fund that would have been sufficient to
have replaced the property or written off the cost at the exact time
that the replacement became necessary. It seems to me theoretically
that would have been the fair thing, and that whatever they wrote
off before the property was to be actually replaced was either taken
away from the people in exorbitant rates or taken away from the
stockholders, one or the other. What do you say to that?
Mr. AMORY. I think I can make it clear. First, I want to say
that I did not say that the White Star Line put aside from 5 to 7
per cent per annum for depreciation. I said steamship lines, as a
rule, do so. The White Star Line, I believe, put aside even a larger
percentage. Then, what do they do when they put aside this fund
for depreciation? They increase their cash assets. They are finan-
cially much stronger than they would be if they did not set aside
from income that amount for depreciation, or an excessive amount
for depreciation. The result is this: An accident may happen to
one of their steamships. It may have been all new last year and
not expected to become depreciated completely for 15 years. An ac-
cident happens; the boat sinks.
Mr. MONTAGUE. Like the Titanic did, of that very line.
Mr. AMORY. Of that very line. But the company has been setting
aside an excessive amount for depreciation. It has a large cash
capital when such an accident occurs, and instead of having to go
into the market to borrow money, as the railroads always do when
they want to make any improvement, the company was able to re-
place that steamship out of its own cash assets.
Mr. DECKER. When a ship sinks, isn't that depreciation?
Mr. AMORY. Yes.
Mr. DECKER. Then, in other words, they just had the wisdom to
foresee that there would be sinkings of ships, and so they charged
enough depreciation to replace it?
Mr. AMORY. They did. That is a wise policy. The same policy
is pursued by the steel corporation.
Mr. MONTAGUE. It has to be sort of an actuary approximation?
Mr. AMORY. Yes, sir; but you can come nearer approximating it
in railroads, because experience teaches you almost exactly how much
to set aside. And I hadn't completed what I had to say, and I am
coming to that, too. In the railroad it is almost an exact amount
that you can determine is necessary for depreciation.
I haven't got much more to say, but I am very glad to answer these
questions. The only thing is, I feel a little bit embarrassed. I am
afraid I am taking up too much time.
So
Mr. DECKER. We are the judges of that. Some of us may not
agree with the time you are spending and some others may.
we will have to just adjust ourselves to circumstances.
Mr. COADY. In the railroads' system of accounting, do they take
into consideration the appreciation of land values?
Mr. AMORY. No, sir; they do not.
Mr. COADY. Now that New York Central proposition, don't you
think that land there has increased wonderfully in value?
374 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. AMORY. Yes; but it is of no value as a railroad asset unless it
increases the earning capacity of the roads and the net earnings
with which they pay fixed charges and dividends.
Mr. DEWALT. May I be permitted in that line, Mr. Chairman, to
ask a question? Listening to your argument, I have come to the
conclusion that you consider as of great moment this capital ac-
count?
Mr. AMORY. I didn't quite get your question.
Mr. DEWALT. In listening to your argument I have come to the
conclusion that you consider of great moment this capital account of
railroads?
Mr. AMORY. Yes, sir.
Mr. DEWALT. I understood you to say-I may be mistaken-that
you don't think there should be included in the capital account the
right of way. Am I correct in that question?
Mr. AMORY. That is when it is a gift, as it is in New York. The
right of way there is a gift. If they had spent $1,000 in getting in
there of money that goes into capital-that expenditure.
Mr. DEWALT. That is what I was getting at.
Mr. AMORY. That goes into capital.
Mr. DEWALT. Therefore you qualify your statement by saying that
if the railroad company actually purchased and paid cash or the
equivalent therefor, for right of way, that that ought to be included.
in the capital account?
Mr. AMORY. Yes, sir.
Mr. DEWALT. Now take it for granted, in the instance you have
given to-wit, the New York Central, that they paid $5,000,000 for the
right of way, that certainly ought to go into capital account?
Mr. AMORY. Certainly, under head of "Cost of road and equip-
ment," in the balance sheet, the first entry in the balance sheet.
Mr. DEWALT. Now we have that clear." Therefore you qualify your
statement by saying now that if the road had paid for the right of
way, then it should be in the capital account?
Mr. AMORY. Yes, sir.
Mr. DEWALT. Now next suppose that this same right of way, which
was purchased in 1900, is now worth twice as much as was paid for
it, how would you treat, in your accounts, this accretion of value?
Mr. AMORY. It would not appear at all in the account or books of
the company.
Mr. DEWALT. But why not?
Mr. AMORY. Because when you get down to brass tacks accounting
is an extremely simple matter. It is the record of cash.
Mr. DEWALT. Well, say a million dollars-you have here an accre-
tion of value. Now, you admit that, don't you?
Mr. AMORY. Only in nominal value, not for railroad value, unless
it is shown in the earnings. That is the only way.
Mr. DEWALT. Now, lets push that a little bit further. You say you
have no accretion of value. Suppose that the New York Central, by
litigation, should be placed in the hands of a receiver; and suppose
that the court should order that the receiver dispose of the entire
rights and franchises and corporate property of the New York Cen-
tral. Under that order of the court, of course, this right of way
would be dispose of, and suppose, as I have already said, that in
1918 it is worth twice as much as it was in 1900, and that it was
·
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
375
sold. Evidently if it was worth twice as much, the bidders at the
sale would pay a commensurate amount above the amount paid in
1900. Now, how would you treat that?
Mr. AMORY. I should say no, the bidders would not.
Mr. DEWALT. But I am just taking that as a presumptive declara-
tion, that the bidders would bid. People pay usually in the open mar-
ket what things are worth. Now, supposing it paid only $5 more.
How would you treat that $5? That is the question.
Mr. AMORY. It is absolutely of no value to anybody in the world
excepting for its earning capacity.
Mr. SANDERS. Wouldn't the bidder at the public sale bid in that
system on its earning capacity and not on its terminal facilities?
Mr. AMORY. Absolutely. And let me tell you something: When-
ever these big men buy a railroad they have the most expert men
in the country to go over and make a report on the earnings, and they
put it down in percentages, and then what they buy is on a price
based on earning capacity and on nothing else.
Mr. SANDERS. Of course.
Mr. COADY. Doesn't the successful operation of all railroads, like
various other lines of business, depend on the human element largely?
Mr. AMORY. Yes; largely. And I should say that the railroad men
are about the cleverest men in this country, too.
Mr. RAYBURN. Isn't your position about this: That that property
is worth just the same for railroad purposes if it is a similar piece of
ground, whether it will sell for $1,000,000 or $10,000,000?
Mr. AMORY. Yes.
Mr. DECKER. Another question occurs to me right in that connec-
tion: Suppose there are two franchises that allow two different rail-
roads to run into the heart of New York. One railroad gets its fran-
chise for nothing; the other railroad would have to pay many millions
for its franchise. If you were on the Interstate Commerce Commis-
sion and had to determine a fair rate, what would you do then? You:
can't let the two roads charge a different rate, so what would you do
about that?
وو
Mr. AMORY. Well, the difference-you speak of "a few millions,'
but the difference is so slight when you are dealing with billions
that it wouldn't be a very great factor in the situation. That is the
situation here in New York. You know the New York Central has
the right of way down to Forty-second Street, New York, and the
New York & New Haven has leased a right of way over the same
tracks, and they pay the New York Central for the right of way to
get into New York-I believe it is owned by the Harlem, but it is the
New York Central. They pay-the other roads do-for running
over these tracks, and the situation is just as you have stated it. One
company has a greater expense for getting into New York than the
other one has.
Mr. MONTAGUE. Is there any relation in accounting between main-
tenance and depreciation?
Mr. AMORY. Absolutely none whatever. And it has been confused
by so many people. It has absolutely nothing to do with deprecia-
tion-absolutely not.
Mr. MONTAGUE, How can you maintain property if you don't
have anything to maintain it on?
Mr. AMORY. I did not get that.
3.76
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
•
Mr. MONTAGUE. How can you maintain property if you don't take
into consideration the cost of depreciation for the purpose of main-
tenance?
Mr. AMORY. You ought to maintain it, and it should be maintained
simply by taking care of it-repairing anything that needs repairing.
If a wheel flies off or becomes flat, it should be replaced; if a spring
breaks down, put on new springs; if the car needs painting, repaint
it; if it is smashed up in a wreck and you have to spend $500, that is
maintenance—an extra charge to maintenance.
Mr. MONTAGUE. You said a little while ago that if a car breaks
down or is destroyed that is maintenance?
Mr. AMORY. No; that is depreciation when it breaks down and is
entirely replaced by a new car. But there is a tremendous amount of
maintenance where they are not going to discard a car. They will
say, "Why, this car cost us over $1,000. We can afford to spend $500
to make it as good as new rather than to buy a new car for a thousand
dollars."
Mr. MONTAGUE. It seems as though this nomenclature of account-
ing is very arbitrary to the average looker-on. Do the railroads
themselves, any system that you know of, embrace in the item of
maintenance any element of depreciation?
Mr. AMORY. No, sir; they separate it in their account, in their
report, their returns made to the Interstate Commerce Commission.
And on their books they have an item of maintenance and they do
charge, though, for repairs and all that, and then they have another
item-a book account for depreciation, and a third one for replace-
ment. Now, that is nothing more than depreciation. Replacement
and depreciation are synonymous terms.
Mr. MONTAGUE. Interchangeable, are they not?
Mr. AMORY. Yes, sir; interchangeaable in accounting. Now, as I
say, I am nearly through on this, and if you will permit me, I will
go ahead. The figures which I have given of $150,000,000 a year for
depreciation freight cars are without taking account of depreciation
on locomotives and passenger cars, which cost over $1,565,000,000,
three-quarters of the cost being for locomotives. [Reading:]
Say depreciation amounts to 6 per cent, we have approximately $94,000,000
for annual depreciation on locomotives and passenger cars.
It is seen, according to these estimates, that depreciation on rolling stock
amounts to not less than $198,000,000 annually ($104,000,000 plus $94,000,000)
or, more probably, to $244,000,000 annually ($150,000,000 plus $94,000,000).
This does not take any account of floating equipment, which would increase
totals.
10. The estimate of $244,000,000 for annual depreciation of rolling stock is
conservative, as the following tends to prove.
In his report for 1905, page 27, Slason Thompson says: "Approximately
$142,000,000 has to be expended annually for new equipment to take the place
of old, worn out, and discarded rolling stock. Conditions forbade the expendi-
ture of any such sum in 1908 and 1909."
Now, total railroad revenues increased between 1909 and 1917 73 per cent.
Adding 73 per cent to Thompson's figures for depreciation in 1909, we find
depreciation on rolling stock in 1917 was nearly $246,000,000.
11. Total annual depreciation-that is, on tracks, way, and structures, as
well as equipments--undoubtedly amounts to $400,000,000, and probably to
over $500,000,000.
Allowing for duplication of costs by the railroads, say that replacement cost
of tangible property is but $10,000,000.000 instead of $18,000,000,000 reported
cost of road and equipment.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 377
Four per cent of $10,000,000,000 is $400,000,000. This is the equivalent of
11 per cent of operating revenues in 1916. (Compare this with 17 and 18
per cent of street railways). Twelve and one-half per cent on 1916 receipts
($3,455,906,118) would amount to over $430,000,000; 123 per cent on 1917 esti-
mated operating revenues ($4,188,000,000) is over $500,000,000.
12. An analysis of the railroads' own statements indicates that annual deprecia-
tion exceeds $500,000. The following is copied from a recent newspaper
publication:
"The railroads have estimated their needs, under a system of Government
financing, at a billion dollars a year. If the Government takes over and operates
the railroads, it will expend at least that amount in improvements, and it will
not be for equipment alone. The railroads estimate that $600,000,000 a year is
needed for cars and locomotives. The other $400,000,000 would go into trackage,
terminals, and other facilities."
Nothing like half of the billion dollars can possibly be needed for new con-
struction, additions, and betterments. It is therefore clear that more than half
is needed for replacements.
In December, 1917, Fairfax Harrison, chairman of the railroad board, wrote
the late Senator Newlands that-
"A billion dollars represents, in round figures, what ought to be spent every
year for several years to bring the American railroad plants up to capacity to
handle efficiently the growing traffic. About $600,000,000 per annum on the
average has to be spent for a number of years for road and equipment which, at
present prices, would be equivalent to about $1,000,000,000 for road and equip-
ment."
Let us take the chairman's own figures-$600,000,000 per annum on the average
spent for a number of years for road and equipment.
Based on gross receipts, it has taken the railroads 12 years to double their
business, showing that annual increase averages less than 10 per cent. But let
us liberally estimate that 163 per cent of the $600,000,000 represents expendi-
tures for new construction, additions, and betterments, then $500,000 represents
expenditures for renewals of plant and equipment; in other words, annual
depréciation.
The conclusion is reached that depreciation on American railroads for à
number of years past has averaged about $500,000,000 annually.
Mr. Escн. In the financial statement which Prof. Adams framed
for the carriers to make out under the interstate commerce act of 1910
were there specific requirements made for depreciation?
Mr. AMORY. No; not specific. The requirement was made that the
railroads should charge something for depreciation to rolling stock,
but the amount of the charge was left entirely to the railroads. The
railroads saw right away that the more they charged for depreciation
the less they would have for dividends, and it has been a continuous
struggle on the part of the railroads to make as large a dividend
showing as possible. Consequently, not being forced by the Inter-
state Commerce Commission, as they ought to have been, to charge
adequately for depreciation, this is the result.
Mr. ESCH. Is there any power in the interstate commerce act, as
amended by the Mann-Elkins Act, whereby the Interstate Commerce
Commission could compel railroads to charge for depreciation?
Mr. AMORY. I think only in general terms. I looked that question
up and found they have the right to regulate the accounting methods,
and through that section of the act they could no doubt force them.
to make proper returns.
Mr. ESCH. To make proper returns; but the act would not empower
the commission to say to a carrier, "You must charge off 5 or 7 or
any other per cent for depreciation "?
Mr. AMORY. Not in specific terms; no, sir; it does not.
Mr. Escн. Is it your idea that under the pending bill such power
should be granted to the director?
378
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. AMORY. I did not quite catch that.
Mr. EscH. Is it your idea that under the pending bill the director
general should be given such power?
Mr. AMORY. Yes, sir; that power should be given. The railroads
should be forced to make honest reports, and every time that they
squint depreciation they make a dishonest report; there is no ques-
tion about it-and there should be some power. The same thing,
however, exists in New York. After having written a beautiful
essay on "Depreciation," as the public-service commission did down
there, they allow the railroads to go ahead and neglect depreciation,
and the result is all the traction lines of New York City are bankrupt.
Mr. PARKER of New Jersey. Unless the Government has such rules
as that, when the Government is paying the operating expenses they
can make the Government assist to improve their road?
Mr. AMORY. Yes, sir; everything properly chargeable to deprecia-
tion is proper operating expense.
Mr. PARKER of New Jersey. There is no danger but they will make
the charge now.
Mr. AMORY. Yes; but what I am coming to-what I am before
this committee to-day for-is to show you should require-
Mr. PARKER of New Jersey. You are talking of the past.
Mr. AMORY. No, sir; I am talking right of the present. If the
Government is going to apply those proper accounting rules when it
has the railroads under control it should apply the same rule when
it is determining the amount of compensation to the railroads for
their business during the last two or three years.
Mr. PARKER of New Jersey. Otherwise they would be in a hole?
Mr. AMORY. Otherwise the Government is going to be defrauded;
it is going to pay on false figures and it is going to earn on honest
figures when it is operating in these next two or three months, or
forever-in my opinion the Government will never let go these rail-
roads when it gets ahold of them, and properly so.
Mr. DOREMUS. Do you think the bill we are considering should fix
an arbitrary percentage of depreciation cost as a charge in deprecia-
tion?
Mr. AMORY. The word "arbitrary" perhaps is a little too strong,
because it may cover more than you mean or more than I understand.
But is is certain that the Interstate Commerce Commission ought to
require the railroads to charge an adequate amount for depreciation.
What that adequate amount is can be determined, as it has been de-
termined in New York, by the courts. It can easily be determined by
the railroads themselves, as one of the decisions in New York says it
is a very simple matter to determine what the amount of deprecia-
tion is, because experience has taught us. Therefore, the Interstate
Commerce Commission should require an adequate amount to be
charged as experience has taught. It is impossible to say that the
cars on such and such a railroad should be charged with depreciation.
fund amounting to 6 per cent of their cost, and then perhaps apply
that to all railroads in the country. It will be somewhere in the
neighborhood of 6 per cent or 5 per cent for all, but it may vary
slightly, and it may vary with respect to the cars. The Pennsyl-
vania, which has a very large number of steel cars, and its deprecia-
tion fund with respect to those cars is not as great as for railroads
which have wooden cars entirely.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
379
Mr. DOREMUS. This bill as now framed provides that the railroads
may continue their former charges for maintenance and depreciation.
Mr. AMORY. I do not understand it that way, sir.
Mr. DOREMUS. That is my understanding of it. Have you a copy
of the bill?
Mr. AMORY. Yes, sir.
Mr. DOREMUS. You will find at line 19, page 2, this language:
During the period of such Federal control adequate depreciation and mainte-
nance of the properties of the carriers shall be included as a part of the
operating expenses or provided through a reserve fund, in accordance with such
principles and rules as shall be determined by the President.
What I am getting at is this: Is that satisfactory to your point of
view or should it be amended? Just what is your idea of what should
be included in this bill on the subject of depreciation and main-
tenance?
Mr. AMORY. That, as it stands, I approve of entirely.
Mr. STEPHENS. You would leave it out?
Mr. AMORY. No, sir; I approve of it entirely, and I want to include
exactly the same language in the bill in the previous section at the
top of the page, so as to apply to the returns of the railroads during
the last three years as it shall apply while the railroads are under the
Government, and that is the object of my being here to-day.
Mr. SANDERS. It was stated here the other day that some roads
charged off about 4 per cent for depreciation and that some other
roads charged off less than one-quarter of 1 per cent. Your idea is
that the Government should not pay to the railroad that charged
off one-quarter of 1 per cent on its return the same as it should pay
to the railroads which have made a proper charge of 4 per cent?
Mr. AMORY. Absolutely.
Mr. SANDERS. In other words, should the Government pay to the
road that has stripped its maintenance fund in order to make ficti-
tious dividends, then we are paying upon a false return?
Mr. AMORY. Absolutely; that is my whole idea.
Mr. SANDERS. I understand you thoroughly.
Mr. AMORY. And I put in these amendments to cover that.
Mr. SANDERS. Is it not true that the depreciation varies on some.
railroads?
Mr. AMORY. Very little; it does not vary the fraction of 1 per
cent.
Mr. SANDERS. It could not vary from 4 per cent on one road to one-
fourth of 1 per cent on another?
Mr. AMORY. I am glad you spoke about that. Permit me to tell
you that the Missouri Pacific and New Haven were charging around
$5 a year for depreciation on freight cars. Supposing freight cars
are worth $1,000—they are worth more than that-that meant those
freight cars were going to last 200 years, while other railroads were
charging $40, $50, or $60 a car, an ample depreciation charge, and
those railroads that were making those inadequate charges have
practically all gone into the hands of receivers or are about going
there.
L
Mr. SANDERS. I want to ask you another question along that line,
and I am speaking now of the entire railroad system of America:
Is their system of bookkeeping honest or dishonest, in that it is made
for the purpose of deceiving the public and the Government?
380 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. AMORY. The system of bookkeeping as prescribed by the In-
terstate Commerce Commission is not adequate, and under that in-
adequate system these railroads have been enable to make absolutely
false returns, and they should not be allowed to do so; and I hope
to gracious the Government is not going to allow them to do it from
now on, and I hope that the Government is not going to pay them on
those false returns.
Mr. SANDERS. That is the idea. Another question: What do I
understand is meant in the auditing returns or rather the system of
auditing that the railroad adopts that is known as "pocket funds"
or "hidden funds"?
Mr. AMORY. Oh, they have got so many clever ways of hiding
funds; but let me tell something an auditor of one railroad system
in this country told a friend of mine not very long ago that he
could not sleep nights for fear that the balance sheet of this rail-
road was $100,000,000 out of the way. This friend of mine told
me that story and I said, "Well, he should not worry; $100,000,000?
Why, it is more than $200,000,000 out of the way according to my
analysis."
Mr. SANDERS. Do you remember not long ago of a controversy
between the Interstate Commerce Commission and a certain railroad
as to whether it did or did not have $50,000,000?
Mr. AMORY. Yes; and I remember this, that in 1914 it was shown
that the St. Paul Railroad was issuing grossly false statements.
One of the commissioners of the Interstate Commerce Commission,
Mr. Harlan, who is pretty active in the matter, and I recollect very
well that he was attacked all over the country by the railroads and
by the railroad interests for daring to show up this falsification of
accounts, and it was gross. Before that, several years before, I
called the attention of Prof. Adams to the reports of the St. Paul.
Why, they were ridiculously false-so ridiculous that anyone who
knew nothing about balance sheets or railroad accounting could see
that the statements were false, and yet these false statements con-
tinued and they have continued up to the present time.
Mr. SANDERS. One other question, Mr. Amory: If we operate the
railroads as a whole on the return ending three years June 30, 1917,
do we not thereby put a premium upon the railroad that made a
dishonest return and did not charge off depreciation as it should
have been charged off?
Mr. AMORY. You certainly do.
Mr. COADY. What authority have you for the statement that there
is very little variation in the depreciations on the various railroad
properties? Have you any facts to substantiate that?
Mr. AMORY. No; I say that as a result of my own study and
observation. I have been studying this question practically 20 years.
Mr. COADY. In other words, you say that upon your own responsi-
bility?
Mr. AMORY. Partly, and also upon the determination of the courts.
There have been a number of cases where the courts have gone into
this matter. They have put experts at work, and they have deter-
mined the amounts of depreciation on these various kinds of prop-
erty. I have a lot of figures
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
381
Mr. COADY. Where a railroad has a lot of heavy grades, naturally
there will be a great amount of depreciation there, at least more
than on a railroad where there are not many high grades?
Mr. AMORY. No; very little more; it will amount to very little in
the long run.
Mr. WINSLOW. I would like to be indulged to make a little state-
ment, and I would like to direct my remarks to Judge Payne as the
representative of the the director general. We had a lot of very
illuminating evidence submitted the day before yesterday, and the
day before that, in respect of the misgivings that the representatives
of small railroads had as to where they were coming in under this
act, and it seems to me it was made very clear that that ought to be
given particular care under the provisions of this bill in order that
they may be justly and fairly dealt with. I think that everybody
here realizes that.
It seems to me that after the representative of the director general
had heard all that testimony that he must likewise have been im-
pressed with the soundness of their requests and representations.
So I would like to ask him, with a view to possibly cutting out a lot、
of discussion within the committee later, whether or not he and the
director general and those associated with him have thought the
matter over with a view to agreeing to the submission of some
amendments to the present bill which would meet the cases of those
small railroads. This is in my mind, that if the points have been
well enough established to make it clear they ought to be made, and
the director general has come to that conclusion, and Judge Payne
happens to know it, that it would be very helpful to us to find that
out at this stage of the game, and I think it would also be very
helpful to the representatives of those railroads to feel that they
were not fighting the administration in their effort to establish the
quality of their contention. So I would like to have the committee
indulge me for a little time to allow Judge Payne to make any
statement he may like in reply to the proposition I have just sub-
mitted.
Mr. STEPHENS. Judge Payne, if you care to you may proceed.
Judge PAYNE. We have considered the several amendments which
have been proposed here, not only by the gentlemen representing the
short roads, but also by Mr. Thom, who represented the other roads,
and Mr. Anderson and myself, particularly, having discussed it also
with the Director General, we are preparing and will be able to sub-
mit to the committee to-morrow-perhaps this afternoon, if it is ma-
terial-an amendment which we think covers all of the points that
have been urged here, giving the President power to meet all those
questions. The only thing, so far as I now recall, that we did not
at all concur in, is the proposition of the short-road people that a
guarantee of definite interest payment on their obligations shall be
covered, but even with respect to that we are willing to submit our
views to the committee that the President will be authorized under
certain conditions to meet interest payments on legitimate obliga-
tions not requiring it to be done, but authorizing it to be done, so
any particular situation may be dealt with. Does that answer your
question?
Mr. WINSLOW. Quite so.
382
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
}
+
Judge PAYNE. Without interrupting the speaker, Mr. Doremus
was asking-I do not know where it comes in the first section—about
adequate maintenance. We are also going to ask the liberty of sub-
mitting an amendment to that. I have enjoyed very much what Mr.
Amory has said, and I think we are entitled to thank him for his illu-
minating discussion. It seems that the "adequate " provided there-
that is, the Government during the period of Federal control shall
provide adequate maintenance, etc.-is too strong.
Mr. DOREMUS. Permit me to interrupt you right there a moment,
Judge Payne. In asking that question of Mr. Amory a moment ago,
I had in mind a substitute which Commissioner Anderson submitted
to the committee when he was before it, and that substitute reads as
follows:
During the period of Federal control each carrier may charge—
I ask your attention to this, too, Mr. Amory—
each carrier may charge to operating expenses for depreciation and mainte-
nance on its several classes of property, sums not exceeding sums determined by
the respective average rates chargable by it on such classes of property during
the three years ending June 30, 1917: Provided, That the President may author-
ize different rates if the public interest so requires.
Judge PAYNE. That is what I had in mind.
Mr. STEPHENS. Mr. Payne, under that amendment, this road which
was charging off one-fourth of 1 per cent may go on charging off
one-fourth of 1 per cent for maintenance unless the President in-
terferes?
Judge PAYNE. Precisely.
Mr. STEPHENS. I would not think it would be necessary to have
the President interfere in a case of that kind; it is so outrageously
improper on its face that a reasonable depreciation of 5 or 6 per cent
ought to be charged off without any authorization.
Judge PAYNE. Suppose they do not.
Mr. EscH. There has to be compulsion somewhere.
Judge PAYNE. That is right.
Mr. STEPHENS. Why not make it arbitrary?
Judge PAYNE. You can not make it arbitrary, if I might suggest,
because the conditions are very different, as Gov. Montague pointed
out a moment ago. Some roads have already uniformly kept up
their equipment. They have made the necessary repairs, etc. Others
have not; and if you undertook to lay down an arbitrary rule, I am
afraid it would not be workable.
Mr. STEPHENS. Certainly the upkeep of a road would run some-
where approximately 5 or 6 per cent, no matter what condition ex-
ists; that is, I mean to say, any road under ordinary repair would
require 5 or 6 per cent depreciation fund, and it occurs to me there
ought to be some sort of approximate amount fixed in order to obviate
this condition that is certain to arise by oversight.
Judge PAYNE. You know when I am discussing these matters here
I do not know how much to say as to what you have considered, but
this is true: The phraseology in the printed form of the bill, "ade-
quate" was the result of a good deal of discussion, and our conviction
was that there ought to be a standard established, and it was with
that view that that phrase "adequate" was put in the bill, but we
specdily realized that that was going to cost the Government too
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
383
much; that this "adequate" related to the future, and it might be
too large a task. So that the second phraseology, as read by Mr.
Doremus, was suggested, so that the President would have power to
establish a standard, if that was considered under all the circum-
stances wise. But that the road would have no right to require the
charge for maintenance on any different standard than that they
themselves have established heretofore. That is the purpose of that.
Mr. STEPHENS. Have you thoght of an amendment suggested by
Mr. Amory there, providing for an adequate depreciation for the
three-year period prior to the taking over of the roads?
Judge PAYNE. We have done a lot of thinking on that subject, but
we have not been able to suggest anything that could in our opinion
be workable.
Mr. STEPHENS. For example, the road which charged off only one-
fourth of 1 per cent, and in addition it perhaps paid 3 or 4 or 5 per
cent dividends-we will assume it did-it would certainly be an un-
fair proposition to guarantee the earnings of that road to the amount
of 4 or 5 or 6 per cent, according to its standard returns for the last
three years, when it had only charged off one-fourth of 1 per cent for
depreciation.
Judge PAYNE. I recognize the force of that argument.
Mr. SANDERS. Could not that be covered in some way, Judge?
Judge PAYNE. All I could say, Governor-
Mr. SANDERS. You will think about it?
Judge PAYNE. We will try to think it out.
Mr. MONTAGUE. You have been thinking it over, too?
Judge PAYNE. Oh, yes; we have had that in mind. You see, there
are two or three things lying at the foundation of this whole prob-
lem. In the first place, we have got to so manage it as to stabilize
conditions throughout the country. There must not go out any
notion that we are making an attack on anybody or railroads. If you
do, the Government can not finance itself. There will be a crash
or embarrassment. So that what we have been trying very hard to
do is to consider the whole problem and try to find the fairest way
to deal with it. If any of you can suggest anything of that kind that
will help we will be delighted to consider it. I realize the force of
Gov. Sanders's remark a moment ago, but in dealing with a large
problem you can not always be perfectly just, even to yourself.
Mr. BARKLEY. It would be hard to lay down a hard and fast rule
in the law itself, because it might be so inflexible as not to work?
Judge PAYNE. Precisely. I think perhaps Mr. Amory ought to
state and I will state it with his approval, I am sure-the Interstate
Commerce Commission has done a very large amount of constructive
work with reference to this subject of accounting, and they have many
regulations which have been most helpful, and since 1907, when they
began on these accounting methods seriously, great progress has been
made. For instance, in the case of the White Star Line, as an illustra-
tion of the point you were saying a moment ago-there is a definite
stop: If these roads should charge off as much depreciation as the re-
placement would amount to, then they have got to stop. But they
have not been able-and I have not heard of a suggestion which will
enable anybody-to fix a hard and fast percentage which must be
charged off by all the roads. For instance, on the subject of track
and permanent things of that sort, they do not require them to charge
384
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
a depreciation against that, because it is supposed that the roads
shall be maintained so well that it goes on and is always in A-1 con-
dition. Of course, that is not always the fact, but that is the theory,
and if the improvements and repairs, etc., are made as they ought to
be made, then it is not necessary to charge depreciation as to track,
while on the question of equipment it is perfectly manifest to every-
body that depreciation adequate in amount should be charged so
that the equipment may be constantly replaced.
Mr. STEPHENS. Mr. Amory, have you anything further to add?
It is 12 o'clock now.
Mr. DALE. I have a little request I would like to make to Mr.
Amory. A short while ago you stated that a beautiful essay was writ-
ten by the Public Service Commission of the City of New York
affecting the trolley lines, and then you were interrupted, and when
you resumed you went along on some other line. Had you anything
to criticize in reference to the "beautiful essay" that was written by
the public service corporation? If so, I think the committee would
probably like to hear it.
Mr. AMORY. Yes; that was an essay on depreciation. They pointed
out that the trolley lines had all failed as the result of the neglected
depreciation, and as I was reading the statement this morning-not
as I summarized it to you, but as I handed it in here-I was re-
minded of a little poem referring to one of the English kings. It
went like this:
Here lies our sovereign lord, the king,
Whose word no man relies on;
Who never said a foolish thing
And never did a wise one.
That essay of theirs was a beautiful essay. It was extremely wise,
but what they did was to fail to live up to it. They have not obliged
these railroads to attend to depreciation, and the consequence is that
every one of those lines to-day is absolutely bankrupt, and every rail-
road will go bankrupt in time which does not take care of deprecia-
tion, but which continues to pay for replacements and renewals with
capital funds instead of from income funds.
Mr. DALE. Then the failure, Mr. Amory, to take care of the depre-
ciation, no doubt, in a city like the city of New York, affects the
public convenience, does it not?
Mr. AMORY. It certainly does.
Mr. STEPHENS. Mr. Doremus wishes to ask you a question now, Mr.
Amory.
Mr. DOREMUS. Mr. Amory, are you also in the railroad business?
Mr. AMORY. I have been in the railroad business for about three
years.
Mr. DOREMUS. Always in the capacity of an auditor?
Mr. AMORY. No, sir; not entirely. I was one of the first promoters
of the underground railroad in New York. I have been director and
secretary-treasurer of several railroads, but I have devoted a great
deal of my attention to a study of the problem of railroad accounting.
I have written a good deal on the subject, and have devoted myself to
that. I am not actively engaged in any business at the present time,
nor have I been for a number of years; but I have been engaged in
this study. I am writing a book on the subject now.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 385
Mr. DOREMUS. What railroads were you connected with?
Mr. AMORY. I have only been interested since I was a boy-I was
then employed by a railroad-the underground railroads and the
trolley lines in New York are the only railroads I have been officially
connected with.
Mr. DOREMUS. And at the present time you are not connected with
any?
Mr. AMORY. No. I am chairman of the committee of stock-
holders of one of the railroads, and that is my only official capacity or
connection with any railroad at the present time.
Mr. DOREMUS. And you are not representing anyone here except
yourself?
Mr. AMORY. Absolutely no. It is the most unpopular thing to do.
I want to say that anybody who apparently attacks railroads has
made himself very much disliked. I know all about that, because
I showed up the bankrupt conditions of the traction lines in New
York three or four years before they went into the hands of the
receivers. If any of you are from New York, you probably re-
member
Mr. DALE. That does not refer to the present mayor of New York
City?
Mr. AMORY. What?
Mr. DALE. With respect to its being unpopular to oppose railroads,
that does not refer to the present mayor of New York City?
Mr. AMORY. Any man who attacks railroads makes himself un-
popular with railroad interests.
Mr. DALE. The subject of attacking railroads was pretty popular
in the case of the present mayor.
Mr. AMORY. I do not know; I have not any patience with anybody
who will attack railroads unjustifiably. Railroads are great institu-
tions. Everybody in this country practically are interested in rail-
roads, and everybody in this country are stockholders in them.
Mr. DALE. Do you know that for 10 years last past the present
mayor of the city of New York has been attacking the inefficiency
of the Brooklyn Rapid Transit Railway that deals with 1,800,000
people?
Mr. AMORY. I did not know it had been going on as long as that.
Mr. DALE. And he was elected by 150,000 plurality.
Mr. AMORY. I voted for him. [Laughter.]
Mr. STEPHENS. The committee will now stand adjourned until
Saturday at 10.30 o'clock a. m.
(Thereupon, at 12.30 p. m., the committee adjourned to meet Satur-
day, January 19, 1918, at 10.30 o'clock a. m.)
40958-18—25
COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE,
HOUSE OF REPRESENTATIVES,
Saturday, January 19, 1918.
The committee met at 10.30 o'clock a. m., Hon. Thetus W. Sims
(chairman) presiding.
The CHAIRMAN. The committe will come to order. Mr. De Ber-
nardi, before you begin, I want to state that Mr. Clifford Thorne is
to begin his statement this morning, but he is not here, and we will
let you proceed until he arrives.
STATEMENT OF MR. A. De BERNARDI, KANSAS CITY, MO., GEN-
ERAL MANAGER THE KANSAS CITY, MEXICO & ORIENT RAIL-
ROAD CO., AND FIRST VICE PRESIDENT KANSAS CITY, MEXICO
& ORIENT RAILWAY CO. OF TEXAS.
Mr. DE BERNARDI. At the present time I am first vice president and
general manager of the Kansas City, Mexico & Orient Railroad. I
have been connected with that road only seven months. For 35 years
prior to that time I had been connected with the Missouri Pacific
Railroad Company, in all capacities from laborer in the maintenance
of way department to that of generral superintendent. My experi-
ence, therefore, has been along the lines of construction, maintenance,
and operation.
I had no thought of appearing before your committee when I came
East, but as yet having heard no testimony having a direct bearing
upon the roads that we represent and its conditions, I appear before
you, and in order to get the matter, as I believe, clearly before you,
I will go back a little in the history of the road. It was planned
from Kansas City, Mo., across the States of Kansas, Oklahoma,
Texas, and then across old Mexico, the northwestern portion of the
coast.
The CHAIRMAN. As you have just mentioned, and as Mr. Thorne
has now appeared, we will ask that you suspend.
Mr. HAMILTON. Why not let this gentleman proceed? It will only
be a few minutes.
The CHAIRMAN. Mr. Thorne, can you come forward just one mo-
ment? We got a telephone statement a moment ago that you were
on the way, and perhaps would not be here for some little time, and
there was a gentleman here that wanted to make a short statement,
so we put him on with the understanding that he would give way to
you when you came.
Mr. CLIFFORD THORNE. I most humbly apologize for the lateness of
my arrival.
The CHAIRMAN. I want to know whether it is you desire to go on at
once, or will you wait 15 minutes?
Mr. THORNE. I will suit myself to your convenience.
387
388
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
The CHAIRMAN. You may proceed, Mr. De Bernardi.
Mr. DE BERNARDI. As I was saying, the road went across Texas
and old Mexico to the coast, approximately 1,600 miles. There are
now 737 miles from Wichita, Kans., south and west to Alpine, Tex.,
constructed and in continuous operation. There are also 140 miles
of right of way obtained and grades completed in Kansas and
Texas. In addition-which may not be of interest now-we have 240
miles constructed in old Mexico, most of which is also in operation
at this time.
At Wichita the present northern terminus connections are formed
with four trunk lines. We also have connections with other roads
intermediate, and with the Southern Pacific at Alpine, Tex., which
in addition to a connection with the Texas Pacific at Sweetwater,
Tex., forms a good through route to western Texas and southern
California. This road has developed and served a good agricul-
tural territory in Kansas, Oklahoma, and Texas. It also serves
exclusively 227 miles from San Angelo, Tex., to Alpine, Tex., there
being no other roads in that section. Its original cost in the United
States was $22,000,0000, approximately; and in old Mexico $5,-
500,000. The capital was raised for its completion but the panic
of 1907 and 1908 affected this as well as other roads, and that with
the subsequent war in Mexico stopped the sale of securities, and
likewise construction, and forced it into the hands of the court.
During the two years in which it was in the hands of the court 100
additional miles were authorized and constructed, forming the con-
nection at Alpine, or the most southwesterly point. At the expira-
tion of the two-year period in the court, it emerged with only $6,-
000,000 of preferred indebtedness, and seemed well on its way again
when the European war of 1914 was declared, and as much of the
money was coming from England that was stopped, as well as
some money from the East, and although there was then 737 miles
in the United States in operation the fact that it was unfinished to
either terminus where important connections were formed, and
friendly connections, like Kansas City-and by "friendly connec-
tions" I mean connections with roads that are not competitors.
At the present time all of our roads are competitors and of course
give us only such business as we solicit. Taking into account the
advanced cost of labor and materials, a very severe drouth in Texas
and low rates, in April, 1917, it again went into the hands of the
court with a receiver, Mr. W. T. Kemper, of Kansas City, Mo.,
serving without any salary or compensation. This court author-
ized the issue of $2,500,000 of receiver's certificates, and a portion
had been sold when the order taking over the roads, the order to
disregard the routing of shippers, and so forth, was issued by the
Government. That stopped the sale of these certificates and made
very uncertain our operations during the three-year period pro-
vided for in the standard period referred to, to June 30, 1917.
For these different reasons the road failed to earn its expenses, and
therefore of course that compensation would not be satisfactory,
because we had a deficit.
We feel that the route to assistance through article No. 3, as pro-
vided in the bill, is too long for weak roads. But during the last
half of 1917, which is not included, through intelligent solicitation
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
389
and economies we made a fair showing. In October, the last month
for which we have a regular report, we earned our expenses, our
interest, and a very little surplus, and we had every reason to believe
that we could proceed along that line, but of course the stopping as
I said of our solicitation, the diversion of the freight that we have
solicited, and the things that are now being brought about has made
it very uncertain. It will have a serious effect upon us no doubt,
and we are not sure what the effect may be. The Government may
find it fair to route twice as much freight over our road and put us
in good shape. It may cut our earnings in half. Then again they
have taken over the wage proposition. We don't know what that
will result in.
For these reasons that I have tried to name briefly, and the fur-
ther fact that the people along this road whose homes we are serving
need the road-pardon me just a moment, I wanted to say that if
we now fail under these conditions to earn our expenses there is only
one thing we can do, and that is to definitely suspend operations.
Our source of revenue has been taken from us, and we feel under
those conditions that it is clearly the duty of this Congress to defi-
nitely guarantee such lines their operating expenses and the interest
on securities authorized by the court.
That is in substance' what I had in mind. Any other route might
prove entirely too long. For instance, if our men were disposed to
wait for their wages, or the material supply men for their pay, until
we could go through any other route or guarantee, they couldn't do
so because the cost of living is too high.
The CHAIRMAN. The substance of your position is that the three
year standard return, as applied to your road, would not give you
just compensation for the use of the property during the time the
Government might have it, and that your road being an exceptional
case from such as might be covered by the three year term, ought
to be treated exceptionally by the Government during its operation
and control of the road?
Mr. DE BERNARDI. Yes, sir; we had a deficit, so that that three-
year period of course would not apply to us.
The CHAIRMAN. While in the next three years you might have
good earnings if you had not been taken over by the Government?
Mr. DE BERNARDI. We expected to be able to support ourselves, or
failing in the earnings to sell our receiver's certificates to tide us
through the war.
The CHAIRMAN. You think the Government taking the road over
and operating it for the next one or two years, whatever time it
should do so, should, in justice to you and the properties, give you
what you had reason to expect you would earn or could earn if it
hadn't been taken over?
Mr. DE BERNARDI. No; that isn't my thought. We may be able,
and hope we will, to take care of ourselves. We think we will, but
in the event that we do not, we think the Government should defi-
nitely provide for taking care of the difference between what we
earn and our expense, plus interest on the securities authorized by the
court, which is, of course, a legitimate part of our expense.
The CHAIRMAN. Have you a typewritten manuscript that you
would like to file in connection with you hearing, giving more.
in detail the matters you have gone over?
390
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. DE BERNARDI. No, sir; I just have one or two other points.
Mr. DECKER. Mr. Chairman, there is just one question that I
wanted to bring out. I talked to Mr. De Bernardi at some length be-
fore the hearing, and most of all of his propositions have been cov-
ered by other testimony that has been before the committee, but I
did suggest that he should appear on one point, and I don't know
whether he is right on it or not, but I think it ought to be brought
to the attention of the committee.
His understanding from the reading of the bill is that if his road,
for instance, under Government control, did not make enough to pay
the wages of the men, the brakemen, conductors, and station agents,
that the bill does not provide for the payment of that. My impres-
sion was that the Government would pay that in any event.
Mr. DOREMUS. That would be the 90 per cent. If they do not
come under the provisions of section 1 the President is authorized,
as I understand it, to pay this road 90 per cent of its standard return
for the last three years.
Mr. MONTAGUE. If they can not agree.
Mr. DECKER. Then I think he should state his proposition. State
what you said to me about the wages of the men.
Mr. DE BERNARDI. I have this in mind, that our earnings and our
expenses, including wages and fuel and such material as we can not
dispense with, are now so close that if the diversion of freight or the
disregarding of the shippers routing over our lines seriously affect
us, we will not earn enough money to pay our wages.
Mr. DECKER. And there is no use talking about the 90 per cent,
because it is 90 per cent of a deficit.
Mr. DE BERNARDI. Yes, sir; 90 per cent of a deficit for those three
years. And that is what I want to make clear to this committee, that
there should be some definite guarantee in order to stabilize us, so
that our men will stay with us. Now, they do not have to stay with
us. They can get positions elsewhere if we do not pay them
promptly. There is plenty of sale for coal if we can not pay
promptly and the Government can.
The CHAIRMAN. Have you been acquainted with the proposed
amendment to the bill as offered by the so-called Short Line Railway
Association?
Mr. DE BERNARDI. Not entirely so, but I understand that was to
leave it in the hands of the President, or some one person to deter-
mine what our compensation should be.
The CHAIRMAN. Well, it goes further than that, I think. It cov-
ers the question of guaranteeing interest on obligations also. Now,
you can look at the amendment and see. I though you might give
your opinion about it if you had already seen it.
Mr. DE BERNARDI. I am not very familiar with it.
The CHAIRMAN. Now, is there anything else that you wish to add
in connection with your testimony? I mean in the way of extension.
You have that permission if you desire to do so.
Mr. DE BERNARDI. Just a moment more-this has reference to the
question raised, I believe, since I have been here in regard to all the
lines being included. That point I understand has been raised.
We were instructed that all lines were in Government control.
The CHAIRMAN. You had formal notice from the Director General?
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 391
Mr. DE BERNARDI. Yes, sir.
The CHAIRMAN. Just as the others did?
Mr. DE BERNARDI. We did. And we believed that was the thought
the President had in mind when he issued the proclamation. We
believe it most important that all roads be included or none. I pre-
sume that has been discussed before the committee, so that I need not
enlarge on that at all, because any road that is left out might be
ruined.
The CHAIRMAN. You agree with that position taken by these other
roads?
Mr. DE BERNARDI. Yes, sir.
Mr. HAMILTON. Do you regard your railroad as a system?
Mr. DE BERNARDI. It is a through line, 740 miles, but particularly
in its unfinished condition it has no friendly connections, and our
competitors, if they are overburdened with business under the pres-
ent Government control, and routing of freight would give us busi-
ness. Otherwise they would not.
Mr. HAMILTON. You are not part of a system then?
Mr. DE BERNARDI. No, sir. I think I can better illustrate my idea
of what would result from separating one line by saying, for in-
stance, a surgeon might amputate that finger, and my system could
get along very nicely without it, but how about the finger? How
would it be supported?
The CHAIRMAN. I thought that, perhaps, your road going into
Mexico might be a system in itself in the sense in which the word
is used.
Mr. DE BERNARDI. If we were completed into Mexico it would
constitute a good system. But no one system can live within
itself. Neither can the country in general afford to have any one
system within itself. The laws in effect to-day are to prevent that.
Mr. PARKER. Isn't that word "system. a rather broad word?
For instance, isn't any stage-coach company a system of transpor-
tation-the company itself?
Mr. DE BERNARDI. I should say yes.
""
Mr. PARKER. Its board of directors and its arrangements for
handling passengers constitute a system of transportation if it
does transportation. Now, isn't a railroad company a system of
transportation? It has to take and arrange material and agencies
so that they constitute one system. Do you say yes to that?
Mr. DE BERNARDI. Yes; I do.
Mr. PARKER. And the system may be larger or smaller; they may
be more or less interconnected, but the moment that you have arrange-
ments which are bound to go and work together in the way that a
machine does, it is a system.
Mr. DE BERNARDI. Yes, sir.
Mr. PARKER. Now, I noticed that the bill itself in its first sec-
tion, on page 1, lines 4, 5, and 6, says: ..
That the President having, in a time of war, taken over the possession,
use, and control (called herein Federal control) of certain systems of trans-
portation (called herein carriers), is hereby authorized to agree with and to
guarantee.
It seems, therefore, as if the bill regarded not the track or the
cars or any particular piece of property, but the whole railroad
company or carrier as the "system.
392
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. DE BERNARDI. I think that is very clear and certainly correct.
Mr. PARKER. Under those circumstances then if it is merely taking
possession of a company and using it, the employees of that company
would remain employees of the company and not employees of the
Government, although the company is controlled by the Govern-
ment?
Mr. DE BERNARDI. That is a question that I would not feel justi-
fied in answering, because it is a very broad question, whether we are
employees of the Government or are not.
Mr. PARKER. I have not asked you that. As I understand this
view that the carrier is taken possession of, and not his property,
the employees of the carrier might remain its employees.
Mr. DE BERNARDI They might, but so long as its earnings are taken
charge of, the Government has practically taken charge of the prop-
erty, of course.
Mr. PARKER. Yes, it has, but it has taken charge of it through the
company which it has taken possession of.
Mr. DE BERNARDI. Yes, sir.
Mr. PARKER. Now, under those circumstances also, if it is only
using a company there might be no difficulty about State taxes, which
otherwise there might be some difficulty about.
Mr. DE BERNARDI. That is true.
Mr. PARKER. Well, I am only indicating a view, because they were
talking of a system to you as if it was necessarily a very long com-
bination of various railroads, whereas there may be one view in
which the railroad itself is a system, each particular company.
Mr. DE BERNARDI. That is true, and I don't think there is any
system to-day-I know there isn't-large enough within itself to
serve the public. There isn't a railroad short enough or small enough,
or whose gauge is so narrow that there isn't something originates
on that road for destination on some other. The roads of the United
States are all a system, one system.
Mr. PARKER of New Jersey. And also there are various systems
connected in one.
Mr. DE BERNARDI. Yes, sir.
Mr. PARKER. And this language of the bill is broad enough to cover
not only railroads under the words "system of transporation," but
boats, or stage coaches or anything the President chose to take.
Mr. DE BARNARDI. Yes, sir; and we just ask you gentlemen to
guarantee us that we can stay in that system and help serve it.
I only have one more thought, gentlemen, that you could take us
over in one night, and it seems to me there may be one day within
a period of not to exceed a year after the war closes but you may
safely return the roads to their owners, instead of leaving that in-
definite.
Mr. HAMILTON. I suppose the question of what constitutes a sys-
tem is a legal question, Mr. De Bernardi. Is that your understand-
ing?
Mr. DE BERNARDI. No, sir; I consider that a most practical ques-
tion.
Mr. HAMILTON. Well, the construction of the word as used in the
proclamation and in bill, I referred to.
Mr. DE BERNARDI. The construction of the word might be legal,
but the system is certainly practical. I say that the Government
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
393
may as well have said to the Santa Fe, "We only need a portion of
your main line. Your thin branch lines will be of no particular
benefit to us. They will be a burden to us, and you can take of them
the best way you can.
We don't want them."
Mr. HAMILTON. You know it has been contended before this com-
mittee on the part of the Government that under the proclamation
the Director General may take possession of a part of a railroad
and add it to another system of roads, as I understood him; and
that he may determine how much of a road constitutes a system, or
what part of a road constitutes a system, or whether a road in itself
constitutes a system.
One other question, Mr. De Bernardi-how long do you think the
Government should remain in control of the railroads after the war
ends?
Mr. DE BERNARDI. I will just state that in my opinion there
should be one day in not to exceed a year; and I think six months
would be better in which you could safely turn them back. It might
not be well to do so immediately on the close of the war. There
may be some conditions to adjust.
Mr. HAMILTON. But you think a definite time should be fixed in
the bill?
Mr. DE BERNARDI. Most certainly there should.
Mr. WINSLOW. In approaching this matter do you consider that
you are being taken over simply as a war expedient?
Mr. DE BERNARDI. Yes, sir; that is the only reason.
Mr. WINSLOW. And you assume, do you, that the roads are to be
given back to the owners, and not to be held on to as a part of
Government ownership?
Mr. DE BERNARDI. I assume they should be, but under article 13
I am not sure that is the intention.
Mr. WINSLOW. Would you approach this hearing in the same
spirit and with the same testimony if you felt you were to be taken
under Government ownership?
Mr. DE BERNARDI. I didn't get that.
Mr. WINSLOW. Would your argument before the committee be of
the same character if you thought you were to be taken over by the
Government for good and all?
Mr. DE BERNARDI. Exactly the same. I am only here in the in-
terest, not only of those who own this property, but the employees
who operate it, and likewise the communities it serves. They are
all interested alike.
Mr. WINSLOW. But you didn't get the gist of my question. Would
you feel that the statement which you have made with reference to
remuneration from the Government would be the statement which
you would make if you thought that this meant that you were to be
taken for all time by the Government?
Mr. DE BERNARDI. Oh, if we were to be taken over for all time by
the Government. We would then be definitely the Government's
child, and they would, of course, have to support us. You wouldn't
need that; that would be implied.
Mr. WINSLOW. Well, one is the question of maintenance and the
other is the question of buying the road. Would your financial view-
point be the same, regardless of whether you are being taken as a
war expedient or as part of Government ownership for all time?
394
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. DE BERNARDI. We are now in the hands of the Government
ownership, if you please, in the receivership; but I don't see that it
would make any difference.
Mr. WINSLOW. Well, that is a local court, isn't it?
Mr. DE BERNARDI. It is a United States court. I don't seem to get
that point.
Mr. WINSLOW. The proposition is this: If you are taken over as a
war expedient, you will be taken over under the general conditions
set forth in this bill, and you have explained that with certain modi-
fications you would be satisfied. Now, would you be willing to sub-
mit to the committee that you would be satisfied with the same finan-
cial considerations to hand your property over for good and all to
the Government, never to be returned?
Mr. DE BERNARDI. The consideration we are to receive under this
bill is very indefinite, and unless I knew, of course, what that was
definitely, I could not say whether we would be satisfied or not. But
so far as our road itself is concerned, I would not speak for them
other than we would be satisfied in compensation for its use with the
sum that might be appropriated by any informed, disinterested body
of men. Of course, for its compensation if they were to take it over
permanently, we would be compelled to be satisfied likewise with what
they gave us.
Mr. WINSLOW. Well, I didn't have any idea of compulsion so much
in my mind as I did as to whether or not your stockholders or the
courts will be satisfied to sell the road.
Mr. DE BERNARDI. Not at the present-about $7,000,000 stands
against it now as preferred securities, and there has been expended
in real money on it more than $22,000,000.
Mr. WINSLOW. Well, would you be making a different argument
before this committee if the proposition was one of sale to the Govern-
ment?
Mr. DE BERNARDI. Yes, sir; I will say to you that we not only want
pay for our preferred indebtedness, but likewise for what we have
in the property. I get your point now. We are only asking here
that you safely guarantee our operations through the period of the
war.
Mr. WINSLOW. As a war expedient?
Mr. DE BERNARDI. As a war expedient. And that only would in-
clude interest on the securities authorized by the court. But if I
came here to sell you the property I would say you owed us $22,000,-
000 instead of $6,000,000.
Mr. WINSLOW. Then you want the committee to understand that
you are approaching the subject only from the standpoint of a war
expedient?
Mr. DE BERNARDI. That is correct, sir.
The CHAIRMAN. Now, let me make a statement here. Yesterday
arrangements were made by myself with the chairman of the Senate
committee for Mr. Thorne to appear here to-day. He had already
arranged to appear before the Senate committee to-day, and we
didn't know we had any other witnesses at all. I therefore suggested
that Mr. Thorne appear here this morning, and then appear at the
Senate committee later, and they agreed to it. Now I have no
objection to this gentlemen going on indefinitely, but if he can sus-
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
395
pend until Mr. Thorne's statement is made, you can have all the time
you want. You were only asking a few minutes to begin with, but
it has already been some time. Mr. De Bernardi has been a very
illuminating and interesting witness, but if he could come back and
finish his examination later, we would be glad to have him do that.
Mr. DE BERNARDI. I have finished all I have to say.
The CHAIRMAN. But the members of the committee might want
to examine you more at length than they have. Mr. Doremus, I
think, wants to ask you some questions.
Mr. DOREMUS. If you are not coming back, I would like to ask
you two or three questions.
The CHAIRMAN. Will you be back later?
Mr. DE BERNARDI. Yes, sir; I intended to leave at 3 o'clock, but if
the committee wants to ask any questions, I will remain until to-night.
The CHAIRMAN. Suppose we hear Mr. Thorne then, and after
he gets through you can come back.
Mr. DE BERNARDI. That will be very satisfactory.
The CHAIRMAN. Mr. Thorne, you may proceed.
STATEMENT OF CLIFFORD THORNE, OF CHICAGO, ILL.
Mr. THORNE. Mr. Chairman and gentlemen of the committee, I
have reduced the opening portion of my remarks to writing.
During this period of mixed private and Government operation
of American railroads there are several hazards which it would be
well to guard against as far as that is possible. I will mention a few :
1. There is the possibility of the hurried adoption of a compensa-
tion in this huge transaction involving the rental of seventeen thou-
sand million dollars' worth of property, which may be very inadequate
or grossly excessive. Mature deliberation must be given to this subject
before the contract is closed.
2. Taking away the power of the Interstate Commerce Commission
over rates in the manner contemplated by this measure would in-
evitably work great injury to American business. If a new tri-
bunal is created without experience, precedents, laws, or rules of
procedure to guide it, freight rates may be juggled arbitrarily after
ex parte hearings by those not knowing and not having the time to
investigate adequately the effect on the industries involved.
3. A political machine may be built up among the railroad em-
ployees unless wage settlements entitled to the confidence of labor,
as well as that of the public, are positively divorced from politics and
are determined on their merits. This bill carries no provision con-
cerning this subject. However, the appointment of a wage board
during the war, which has just been announced by Mr. McAdoo, is
very admirable, and the personnel of the commission could not be
excelled. If this wage commission is to be a mere puppet of Mr.
McAdoo and he is to direct its findings and rulings, the whole thing
will be a farce. Labor will rightfully resent such interference just
as much as the railroads would if Mr. McAdoo were to direct what
findings the Court of Claims should make as contemplated in this
bill in regard to the compensation paid the railroads. The only
difference is that the railroads would have a full and adequate remedy
at law, while labor has none.
396
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
4. The railroads may seek in every possible way to make Govern-
ment operation distasteful, in order to insure the return of private
operation with its attendant and attractive opportunities for profits
on the side, going to the men in the control of the property.
5. Grave consequence may follow the removal of any incentive for
more efficient work on the part of the railway companies, when their
return is guaranteed, absolutely regardless of the service which they
may perform. That is not the basis upon which the highest efficiency
is obtained in any branch of human industry.
At this time I desire to suggest one amendment to the bill under
consideration. Of course, there are many matters that are worthy of
discussion and consideration. I can not hope to cover the entire field,
and if I did attempt to do so I would not do it nearly as adequately
as any man on your committee. I think I would accomplish very
little by taking your time, but I believe it would be possible to consider
one or two principal phases of the measure somewhat extensively.
This measure, as interpreted by the gentleman who is said to have
written the major portion of it, emasculates the power of the In-
terstate Commerce Commission and places, another tribunal in con-
trol over rates as well as operation.
On the whole subject of freight rates we insist that the rights
of the shippers deserve protection in an intelligent, efficient man-
ner just as much as those of labor and those of the railroads.
We freely concede the necessity for Mr. McAdoo to be in supreme
command over the operation of our railroads; but control over opera-
tion does not carry with it the control over either the compensation
of any individual service, or the compensation for the entire service.
It may be necessary to decide matters of operation instanter with-
out an adequate hearing. That is probably essential in the emer-
gency which confronts us. But that is not true of the compensa-
tion for that service.
If Mr. McAdoo is going to decide these rate cases, then we want
him to conduct the hearings. We do not want to try a case before
one tribunal and have another department or another man decide
the case. We do not quite see how the granting of a full hearing,
and the fair, reasonable sane determination of these issues in accord-
ance with the laws of the land is going to help the Kaiser. If
that be true, then abolish your courts and commissions and let us
revel in one grand spree of monarchical dictatorship and star-cham-
ber proceedings. In these days of confusion and excitement we
must remember that we still have a constitution. The citizens of
the United States still have rights that are worthy of your respect.
Under the compelling force of a war power it may become neces-
sary at some future time to abolish all ordinary methods of conduct-
ing business, making and administering laws, and hearing cases;
it may become necessary to eliminate State legislatures, governors,
Congress, courts. But I think we will agree that such an emer
gency has not arrived as yet.
We sincerely hope that you will preserve the existing govern-
mental machinery, not for controlling operation, but for control-
ling the rates of compensation for transportation services rendered
by railroad companies. This can be accomplished by adding a
clause of two or three lines reserving full jurisdiction in the Inter-
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
397
state Commerce Commission over rates for transportation in ac-
cordance with the provisions of the Act to Regulate Commerce and
the amendments thereto.
For 15 years the railroads have struggled to destroy the effective-
ness of the commission. First they sought to make the courts
supreme, but Congress and the Supreme Court have made the com-
mission's decisions final on matters of fact. That tribunal now
stands second in importance to none in the nation, save only that
of the Supreme Court. Next they tried to create and to pack
another tribunal known as the commerce court, which would be
superior to the commission and rob it of its power. Again they
failed. If this bill now pending becomes a law within six months
that commission as a vital force in our system of government, with
its history of splendid achievement, will have passed into oblivion
and will be classed as one of the "has beens," one of the curious
but interesting relics of other days.
If you place one man or a group of men over the commission,
you destroy its power and usefulness. It will become once more
an advisory body, industrious, well meaning, and with good inten-
tions perhaps, but helpless and ineffectual, just as it was during the
first 18 years of its history.
It is proposed to do this at a most crucial time, when the shipper
will need the protection of the commission more than ever before
in our industrial history.
It took years of bitter struggle, and many battles were fought
before legislatures and committees in Congress and in court before
that tribunal reached its present position of great power and use-
fulness. Disregarding all questions of a technical and legal char-
acter based upon the provisions of the Constitution and statutes—as
a simple matter of justice between man and man, why should the
rights of a railroad be any more sacred than are those of a shipper?
You disrupt the operation of railroads as they were formerly con-
ducted by these companies; and likewise you disrupt the manner of
shipping and routing of commodities which the shippers have en-
joyed in the past.
You leave the question of compensation as between the railroad
and the Government to a voluntary contract between them or to a
formal hearing before the Court of Claims, where the parties will
be given an adequate opportunity to be heard. Likewise you should
leave the question of compensation between the shipper and the Gov-
ernment to a full hearing before the Interstate Commerce Commis-
sion with an adequate opportunity for all parties to be heard. One
is just as reasonable as the other.
The determination by the proper tribunal after full hearing of
the compensation to be paid by the Government to the railroads does
not disrupt the Government operation of the railroads; and likewise
the determination by the proper tribunal after full hearing of the
compensation to be paid by the shipper to the Government will not
disrupt the governmental operation of the railroads.
What is the most efficient way to deal with operation during this
period of war? The shippers in the recent advance rate case urged
that the time had finally come for the Government to take over the
operation of the railroads. We are the true friends of this measure.
398
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
We were the first and the only ones in the case to make that proposal.
The railroads bitterly fought it in the newspapers and magazine ar-
ticles up until the time when the taking over of the railroads was a
certainty.
The question of what is the most efficient way to operate the rail-
roads, the necessity to unify them as one system under one man, that
issue is settled. Now the question comes, What is the most efficient
way of providing for the regulation of the rates? If the Interstate
Commerce Commission and its activities do not constitute the best
and most efficient way for dealing with that subject during the prog-
ress of the war, then we submit that we are mistaken, and that method
should be abandoned. But if the Interstate Commerce Commission
can more efficiently take care of that phase of railroading during this
period, then we submit that you ought to leave the law as it is on the
statute books so far as rates are concerned. How are you going to
determine that subject? The railroads in their statements before
the Senate committee, and in some of the statements before this
committee which I had the opportunity to hear, have apparently
gone out of their way to discredit the commission. They have at
great length presented to you statistics. There are three purposes
that I can conceive of for the presentation and discussion of those
statistics: First, to lay a foundation in your minds for a most lib-
eral treatment in regard to the matter of compensation, not for the
moment, not especially as to this bill, but as to any other plan or
change that might be suggested during your future deliberations.
Second, and incidentally, they have presented those statistics to
justify their claim that the year 1915 should be taken out of the
3-year average from which you compute the standard return.
Third, and incidentally, they have tried to lay a foundation for
bringing the 3-year period down to December 31, 1917.
In addition to their direct testimony, you gentlemen, of course, are
familiar with the many statements that have been made attacking the
commission. It has been pictured in the press of the country the de-
plorable condition of our railroads, the inadequacy of their revenue,
their inability to sell securities; and Mr. Trumbull stated before the
Senate committee and I presume he stated before you gentlemen-
that the Interstate Commerce Commission had found their revenues
inadequate, but had passed the burden of relieving the situation over
to Congress instead of courageously increasing their revenues as they
should have done. I claim that that interpretation of the communica-
tion that the Interstate Commerce Commission sent to this Congress is
absolutely fallacious. I have here the communication that they sent
to you-a copy of it-and there is not one sentence in it to the effect
that the revenues of American railroads are inadequate. They have
stated that the railroads could not sell securities for the purpose of
providing capital for the building of improvements and betterments;
and the same thing is true of practically all other industrials in the
country, as I will show you. Revenues and capital are two distinct
and different things. Revenues should come out of operation. Im-
provements and betterments ordinarily should not be built by a public
utility out of revenue. If you give an adequate return to the carrier
or the public utility the property should be constructed by the com-
pany owning the property and not by the public.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
399
I desire now to review concretely some of the facts on the other side
of this question than that which has been presented to you by the rail-
way companies. My purpose is, first, to show how liberal you are in
granting the 3-year average provided in the bill.
Second, in order to lay the foundation for a very substantial modi-
fication in the compensation which I shall propose for your consid-
eration.
Third, and most important to the industries of the country, is to
justify our proposition that so far as rates are concerned you should
leave that subject to the commission. It has performed its work well
and efficiently.
There have been so many scattered statements of individual com-
panies and different districts and short periods of time that I want
to present to you a table which shows to you the gross and net earn-
ings of American railroads as a whole since the organization of the
Interstate Commerce Commission. An examination of this table will
show you that the revenues during the last three years on an average
have exceeded those of any other similar period since the steam
engine was invented.
Mr. BARKLEY. Mr. Thorne, you have referred in you testimony to
the word "we.” Just whom do you mean by "we"? Do you repre-
sent the shippers of the United States or any portion of them?
Mr. THORNE. No; I wouldn't be so ambitious as to claim the first
alternative. I represent a certain rather large group of shippers
the National Federation of Shippers a voluntary organization of
several national associations. I was chairman of a committee repre-
senting them in the recent advance-rate case before the Interstate
Commerce Commission. I am general counsel for the Western Oil
Jobbers Association, and for the National Counsel of Farmers Coop-
erative Associations (an organization of several hundred thousand
grain shippers in the middle west). Then I am assistant counsel for
the National Live Stock Shippers Protective League, which is com-
posed of representatives of practically all of the live-stock organiza-
tions of any consequence in the United States.. I am general counsel.
for the Corn Belt Meat Producers' Association, consisting of about
4,000 stock shippers in the middle west.
I am also assisting Mr. Welch, representing the Western Petroleum
Refiners Association, an organization of practically all of the large
refineries independent of the Standard, in the West.
Mr. ESCH. You for years were chairman of the Iowa Railroad
Commission?
Mr. THORNE. Yes, sir; I was chairman of the Iowa commission for
four years. I was president of the National Association of Railway
Commissioners. I resigned from the Iowa commission January 1,
1917, and went to Chicago to practice law.
The CHAIRMAN. If you desire to offer this table to be printed with
the hearing, you may do so.
Mr. THORNE. No; I will not ask you to print it. I will just leave
it to your judgment.
The CHAIRMAN. I saw you handing them around and thought pos-
sibly you wanted to introduce it.
Mr. THORNE. I wanted you to see it, but use your own judgment
about printing it. That is immaterial.
Mr. ESCH. I suggest that it be printed.
The CHAIRMAN. With the suggestion of Mr. Esch that it be printed
400
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
as part of the hearing in connection with Mr. Thorne's testimony,
without objection, it will be so printed.
(The paper referred to follows:)
EXHIBIT No. 1.
[Sheet No. 1.]
The accompanying table labeled "Exhibit No. 1,' shows the tendency of
revenues, expenses, and net revenues of American railways since the organiza-
tion of the Interstate Commerce Commission.
It will be noted that the net revenues from operation, above all operating
expenses, during each succeeding five-year period have steadily increased. It
will also be noted that net revenues above all operating expenses in 1916 were
$300,000,000 more than during the preceding year. and $200,000,000 more than
during any other year in the history of American railways.
[Sheet No. 2.]
Tendency of revenues and expenses, American railways.
Year.
Operating
revenues.
Operating
expenses.
Net revenue
from operation.
Increase
over year
1890.
1890..
1891...
Average.
1892...
1893...
1894..
1,073, 361, 797
1895....
1896...
1,075, 371, 462
1,150, 169, 376
$1,051,877, 632
1,096, 761, 395
1,074, 319, 514
1,171, 407, 343
1,220, 751, 874
$692,093, 971
731, 887, 893
711,990,932
780, 997, 996
827, 921, 299
731, 414, 322
725, 720, 415
772,989,044
$359,783, 661
364,873, 502
362,328,582
390, 409, 347
392, 830, 575
341, 947, 475
349,651, 047
377, 180, 332
0.71
Average..
1, 138, 212, 370
767,808, 615
370,403, 755
2.95
1897....
1898....
1899...
1900..
1901.
1,122,089, 773
1,247, 325, 621
1,313, 610, 118
1,487,044, 814
1,588, 526, 037
752,524, 764
817, 973, 276
369, 565, 009
429, 352, 345
856, 968, 999
456, 641, 119
961, 428, 511
525, 616, 303
1,030,397, 270
558, 128, 767
Average.
1,351,719, 273
883,858, 564
467,860, 709
30.04
1902...
1903....
1904...
1905...
1,726, 380, 267
1,900, 846, 907
1,975, 174, 091
2,082, 482, 406
1, 116, 248, 747
610, 131, 520
1,257, 538, 852
643, 308, 055
1,338, 896, 253
636, 277, 838
1,390, 602, 152
691, 880, 254
1906..
2,325, 765, 167
1,536, 877, 271
788, 887, 896
Average..
2,002, 129, 768
1,328,032,655
674,097, 113
87.36
1907....
1908....
1909...
1910....
1911...
Average...
1912.
1913.
1914...
1915...
1916...
Average..
1916 (Class I).
1917 (Class I)..
2,589, 105, 578
2,393, 805, 989
2,418, 677, 538
2,750, 667, 435
2,789, 761, 669
2,588, 403, 642
2,842,695, 382
3, 125, 135, 798
3,047, 019, 908
2,956, 193, 202
3,396, 808, 234
3,073,570,505
3,407,507, 382
3,824, 419, 739
1,179,973,571
1,242,581, 228
(The 1916 and 1917 typewritten figures include switching and terminal com-
panies, but do not include Class II or III companies; one would tend to offset
the other the results are fairly comparable.)
Tendency of revenues and expenses.
[Sheet No. 3.]
NOTE.-Compiled from Reports of the Statistics of Railways in the United
States, prepared by the Bureau of Statistics and Accounts of the Interstate
1,748, 515, 814
1,669, 547, 876
1,599, 443, 410
1,822, 630, 433
1,915,054, 005
1,751,038, 308
1,972, 415, 776
2,169,968, 924
2,200, 313, 159
2,088, 682, 956
2,220, 004, 233
2, 130, 277, 010
2,227,533, 811
2,581, 838, 511
840,589, 764
724, 258, 113
819, 234, 128
928, 037, 002
874, 707, 664
837,365,334
132. 74
870, 279, 606
955, 166, 874
846, 706, 749
867, 510, 246
1,176, 804, 001
943,293, 495
162. 18
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
401
""
Commerce Commission, the text for the 1915 report, and the Annual Report of
the Interstate Commerce Commission to Congress for 1916. Statistics for 1913
and 1914 cover Class I and Class II roads, or those whose operating revenues
exceed $100,000. Earnings for 1915 cover Class I, II, and III railroads.
Statistics for 1916 are those shown in 30th Annual Report to Congress, and
only cover Class I railroads. The addition of Class II and III railroads will
further augment the earnings shown for 1916. The above figures represent
substantially all the mileage in the United States. The item “Net Earnings,'
used above, refers to the earnings from operation of all the railroads in the
United States after subtracting all operating expenses, which include: (1)
the cost of transportation, and traffic expenses; (2) the cost of maintenance of
equipment; (3) the cost of maintenance of way and structures; and (4) gen-
eral expenses. The statistics subsequent to 1907 are not compiled entirely
according to the rules of prior years because of changes in the rules of the
commission taking effect during the fiscal year 1908; but the final results in
the foregoing table are close enough to justify the comparison given above for
the purpose stated.
The foregoing table excludes "outside operations" between 1907 to 1914, in-
clusive, in accordance with the I. C. C. classifications and also excludes for the
years 1913 and 1914 figures for Class III roads and also excludes for the
years 1915 and 1916 figures for "Uncollectible Revenues.' But commencing
in 1915 a change in the classification and division of revenues and expenses
under the separate headings has occurred. This tends to make the figures
slightly less comparable. However, to meet any possible objections that may
chance to be raised, we here present the figures since 1907, including the
figures covering the above-named items. It will be noted that no change in the
tendencies occurs in any manner different than that shown in the original
table.
1908 and subsequent years do not include operations of switching and termi-
nal companies.
Year.
Increase
Operating
revenues.
Operating
expenses.
Net revenue
from operation.
over
year
1890.
1907..
1908..
1909..
1910.
1911..
Average.
1912..
1913..
1914.
$2,589, 105, 578
2,440, 638, 832
2,473, 205, 301
2,812, 141, 575
2,852, 854, 721
2,633,589, 201
2,906, 415, 869
3,208, 427, 649
3,127, 729, 588
$1,748, 515, 814
1,710, 401, 71
1,650, 034, 204
1,881, 879, 118
1, 976, 331, 864
1,793, 432, 558
1915.
1916..
2,955, 527, 224
2,035, 057, 529
2,248, 722, 702
2,280, 415, 791
2,088, 682, 956
3,454, 959, 223
2,263, 126, 234
Average..
3,130,611, 910
2,183,201, 042
947, 410,868
$840,589, 764
730, 237, 041
823,171,0 7
930, 262, 457
876, 522, 857
840, 156, 643
871,358, 340
959, 704, 947
847,313,7 7
866,844, 268
1,191,832, 989
133.52
163.33
AUTHORITIES.-Figures for years 1890 to 1915, inclusive, were taken from an-
nual statistical reports of the I. C. C. Figures for 1916 for Class I roads were
taken from bulletin consecutive No. 105 of the Bureau of Railway Economies
entitled "Summary of Railway Returns." Figures for 1916 for Class II
roads were compiled from the sworn individual reports of these carriers to the
Interstate Commerce Commission.
[Sheet No. 5.]
Sometimes it has been claimed that including taxes with expenses tends to
make a different showing. In order to conclusively demonstrate that this is not
correct, we call attention to the following table. It will be noted that the net
revenue of American railways above operating expenses and above taxes for the
year 1916 were $300,000,000 more than the year 1915 and $200,000,000 more than
during any other period.
Again please notice the constantly steady increases in the average for the 15-
year period.
40958-18-
-26
402 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
[Sheet No. 6.]
Tendency of revenue and expenses (including taxes), American railways.
[Includes outside operations.]
Year.
Total revenues.
Total expense
(including taxes).
Net revenue.
Increase
over year
1890.
1890...
1891.
$1,051, 877, 632
1,096, 761, 395
$723, 301, 440
765, 167, 988
$328,576, 192
331,593, 407
Average..
1,074, 319, 514
744, 234, 714
330, 084, 800
0.46
1892..
1, 171, 407, 343
815, 051, 491
356, 355, 852
1893..
1,220, 751, 874
864, 435, 988
356, 315, 886
1891..
1,073, 361, 797
769, 539, 596
303, 822, 201
1895...
1,075, 371, 462
765, 552, 848
309, 818, 614
1896...
1, 150, 169, 376
812, 959, 835
337, 209, 541
Average...
1, 138, 212, 370
805, 507, 951
332, 704, 419
1.26
1897..
1, 122, 089, 773
795, 662, 608
326, 427, 165
1898..
1,247, 325, 621
861, 801, 500
385, 524, 121
1899...
1900...
1901..
Average..
1902..
1903.
1904..
1905..
1, 313, 610, 118
1,487, 044, 814
1,588, 526, 037
1,351, 719, 272
1,726, 380, 267
1, 900, 846, 907
1,975, 174, 091
2,082, 482, 406
903, 306, 631
410, 303, 487
1,009, 760, 784
1,081, 341, 642
477,284, 030
507, 184, 395
930, 374, 633
421, 344, 639
28.23
1, 170, 714, 184
555, 666, 083
1,315, 388, 421
585, 458, 486
1,400, 592, 607
574, 581, 484
1,454, 076, 831
628, 405, 575
1906..
2, 325, 765, 167
1,611, 662, 886
714, 102, 281
Average.
2,002, 129, 768
1,390, 486, 986
611, 642, 782
86.15
1907.
1908.
1909.
1910...
1911.
1
Average...
1912...
1913...
1914.
1915.
1916.
Average..
1916 (Class I).
1917 (Class I).
2, 148, 876, 134
2,370, 728, 126
2, 420, 007, 311
2,226, 458, 215
2, 412, 335, 991
757, 539, 735
837, 699, 523
707, 722, 277
729, 069, 009
1,042, 623, 232
814, 930, 755
1,032, 001, 252
1,070, 543, 952
(The 1916 and 1917 typewritten figures include switching and terminal com-
panies but do not include Class II and III companies; one would tend to offset
the other the results are fairly comparable.)
[Sheet No. 8.]
The units of comparison generally adopted in disucssing tendencies of earn-
ings of railroads have been the mile of line, and the train mile.
The following table shows tendencies of earnings, both gross and net, on
American railways from the organization of the Interstate Commerce Commis-
sion down to and and including the year 1916. It will be noted that the net
revenues from 1892 to 1896, inclusive, a period of depression, declined approxi-
mately 7 per cent; during the next five-year period there was a very substantial
advance, amounting to over 7 per cent in excess of 1890; the next five year
period shows an increase of more than 38 per cent over 1890; the next five-
year period 42 per cent; and the next five-year period 62 per cent. The net
revenues from operation of American railways in 1916 were greater per mile
of line than during any other year in their history.
2,589, 105, 578
2, 440, 638, 832
2,473, 205, 301
2,812, 141, 575
2, 852, 854, 721
2,633, 589, 201
2,906, 415, 869
3, 208, 427, 649
3, 127, 729, 588
2, 955, 527, 224
3, 454, 959, 223
3, 130, 611, 910
3,407,507, 382
3,824, 419, 739
1,828, 828, 189
760, 277, 389
1,789, 075, 585
651, 563, 247
1,735, 173, 758
738, 031, 543
1, 979, 913, 711
832, 227, 864
2,078, 989, 021
773, 865, 700
1,882, 396, 053
751, 193, 149
128.62
2, 315, 681, 155
2, 375, 506, 130
2,753, 875, 787
148.02
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 403
[Sheet No. 9.]
Tendency of revenues and expenses per mile single track operated, all operating
railroads American railways.
Year.
Revenue
from
operation. operation.
Expense
of
Net rev- Increase
enue from
over
operation. year, 1890.
1890...
1891..
$6,725
$4,425
$2,300
6,800
4,538
2,262
Average..
Decrease
1892.
6, 763
4, 482
2,281
0.83
1893.
7,213
4,809
2,404
1894..
7.190
4,876
2,314
1895..
6, 109
4, 163
1,946
1896..
6,050
4,083
1,967
6,320
4, 248
2,072
Average.
1897..
6,576
4,436
2,140
6.96
1898.
6, 122
4, 106
2,016
1899..
6,755
4,430
2,325
1900..
7,005
4,570
2,435
1901...
7,722
4,993
2,729
8, 123
5, 268
2,855
Average.
Increase
1902.
7,145
4,673
2,472
7.48
1903..
8, 625
5,577
3,048
1904.
9, 258
6, 125
3, 133
1905.
9,306
6,308
2,998
1906.
9,598
6, 409
3, 189
10,460
6, 912
3,548
Average.
1907..
9, 449
6, 266
3, 183
38.39
1908...
11,383
7,687
3,696
1909.
10,589
421
3, 168
1910..
10, 506
009
3, 497
1911.
11,677
814
3,863
11,586
8,026
3,560
Average.
1912...
11, 155
7,597
3,558
54. 70
1913.
11, 633
8,145
3,488
1914...
12, 658
8,872
3,786
1915.
12, 192
8,889
3,303
1916..
11, 475
8, 109
3,365
13, 834
9,062
4,772
Average.
1916 (Class I).
12,353
8, 615
3,738
62.52
1917 (Class I).
14, 814
9, 683
5, 131
16, 563
11, 181
5,382
The foregoing are taken from the statistical reports of the Interstate Com-
merce Commission, and are subject generally to comments contained in the
footnote to the table shown on Exhibit No. 1, sheet 2.
The 1916 and 1917 typewritten figures include switching and terminal com-
panies but do not include Class II or III companies; one would tend to offset
the other-the results are fairly comparable.
[Sheet No. 16.]
The foregoing table showing the revenues, expenses, and net revenue per mile
of line includes outside operations. The cominission during the past two years
has included these with their operating revenues. In view of criticisms made
by some relative to revenues per mile of line including outside operations, we
here present the same figures excluding outside operations for the years 1908
to 1914, inclusive, the years when they were compiled in that manner in the
commission's reports. It will be noted this does not effect the tendencies.
American railways.
1908...
1909..
1910....
1911...
1912...
1913..
1914..
Year.
Revenue
from
operation.
Expense
of
operation.
Revenue
from
operation.
$10, 385. 54
10, 274.66
11, 421.58
11, 329.53
11, 377.51
$7,243.35
6, 794.52
7,568. 10
7,777.25
7,894.33
$3, 142. 19
3, 480. 14
3, 853.48
3,552, 28
3,483.18
12, 329.40
8, 561. 04
3,768.36
11, 877.04
8, 576.65
3, 300. 39
404 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
[Sheet No. 11.]
Tendency of revenues and expenscs per train mile, all operating railroads,
American railways.
?
Year.
Revenue
from
operation.
Expense of
operation.
Net revenue Increase
from
over
operation. Year 1890.
1890..
1891.
$1.44231
$0.96006
$0.48225
1.43345
.95707
.47638
Average..
1892
1.45675
.96544
.49131
1.88
1.44649
.96580
.48069
1893..
1.43229
.97272
45957
1894.
1.36958
.93478
43480
•
1895..
1.35947
.91829
.44118
1896...
1.39567
.93838
.45729
1 3.99
Average..
1.42228
.95977
.46301
1897
1.38194
92918
45276
•
1898.
1.45449
.95635
.49814
1899.
1.50436
.98300
.52046
1900...
1.65721
1.07288
.58433
1901..
1.72938
1.12292
.60646
214.38
Average..
1.59373
1.0421
.55162
1902...
1.82350
1.17960
.64390
1903..
1.91380
1.26604
.64776
1904.
1.93960
1.31375
62585
1905...
1.97906
1.32140
.65766
1906...
2.07547
1.37060
.70487
42.30
Average..
2.03815
1.35192
.68623
1907...
2.17741
1.46993
.70748
1908...
2.11269
1.47340
.63929
1909..
2.16789
1.43370
.73419
1910...
2.24618
1.48865
.75763!
1911
Average.
912....
913...
914...
915.
916.
Average..
1 Decrease.
2.24824
1.54338
.70486
48.66
2. 21600
1.49911
.71689
2.27259
1.59077
.70182
1
2.45387
1.70375
.75012
2.45024
1.76917
.68107
2.51895
1.77641
.74254
2.81146
1.84161
.96985
2. 54465
1.77457
.77008
58.99
2 Increase.
Mr. THORNE. The first sheet of statistics shows the operating reve-
nues, operating expenses, and net revenue from operation of all rail-
roads in the United States reporting to the Interstate Commerce Com-
mission since 1890, the two first years being omitted, as the account-
ing rules were not well settled by the commission. We get a very
complete picture from this, and if we had the first two years it would
simply accentuate what this exhibit shows.
The important fact disclosed is that there has been a constant
steady increase in the net revenues. The first five-year average, you
will notice, is 2.95 per cent greater than 1890, the next 30 per cent
greater, the next 87 per cent greater, the next 132 per cent greater,
and the next 162 per cent greater.
A five-year average is more significant that any individual year.
There are fluctuations up and down in every industry on God's
green earth, and merely because there is a drop at one time don't
mean anything. We were face to face with that in 1914. the rail-
roads showing a drop in their net earnings. We urged that that
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 405
was only a phase of commercial life that we must expect every-
where.
The CHAIRMAN. These are official figures, as I understand it?
Mr. THORNE. Yes; these figures are compiled from the statistical
reports of the Interstate Commerce Commission. There have been
some slight changes in the accounting rules, which are explained
somewhat in detail on the following page, and because of certain
important changes made in 1907 I have asked that those be recom-
piled from then on, so as to show that the effect of the changes in
the accounting rules have no effect on the presentation of the sig-
nificant facts which I have just related to you.
The second important fact is that 1916 is the most phenominal year
in the history of American railroading. You see, they had the ad-
vantage of the war profits, the enormous volume of business that the
war has brought, without the attendent costs of carrying on the war
that the industries of Europe had to bear. The 1916 figures are given
twice simply in order to make a comparison with 1917, we had to con-
fine it to class one roads. We had class two in the former figures.
The 1916 net revenues above all operating expenses were greater by
$300,000,000 than the preceding year, and greater by $200,000,000 than
any other year in their history.
In 1917 there was a slight drop, but still-1917, remember, is one
of these three years that has to be taken as a standard to determine the
standard rates-1917 shows the largest net of any other year in
their history except 1916.
Mr. PARKER. Isn't that greater for 1917?
Mr. THORNE. The net revenue is greater in 1917 than 1916, I see,
for the railroads as a whole. When you are talking about the calendar
year instead of the fiscal year there is a drop. The calendar year for
1917 is slightly under 1916. This is the year ending June 30.
Mr. STEPHENS. That is due to low business in 1915?
Mr. THORNE. But I say it is greater than any other year. I am
not confining it to 1915. This is best illustrated by the chart there
following, if you will notice those lines. The heavy line shows
the gross revenues and the dotted line represents expenses, and the
margin between those represents the net. If you will notice, that
net has been constantly expanding. Simply because the gross
and net goes downhill once in a while doesn't mean anything when
the constant tendency is upward. You gentlemen who are familiar
with business never expect every year to be a peak year, I hope.
The next sheet shows the same thing except that we have included
taxes. The commission does not include that under the term "operat-
ing expenses."
Mr. DOREMUS. Let me ask you right there, the taxes are included
in column 2, I say, of your first table?
Mr. THORNE. No, sir; they are included in column 2 on sheet 6.
Mr. DOREMUS. They are excluded?
*
Mr. THORNE. Simply because the commission's rules of accounting
do not provide for taxes to be included with expenses as a part of the
operating expenses. Some people make the point that the taxes
have increased greatly, and if they were included with expenses it
would show a contrary situation. I do not need to repeat the facts
that I related before. The same thing is shown in substance on that
406
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
·
exhibit. The percentage is constantly increasing-1917 is the great-
est of any year.
The diagram following presents the same situation.
Now, on sheet 9 we have presented the revenues, expense of opera-
tion, and net per mile of line. This shows the fiscal year 1917 is the
greatest of any year 1916 is the next greatest. If you will take the
time on any of these tables you will find that a three-year average
on those three years, 1915, 1916, and 1917, surpasses any other three-
year average in their entire history.
Then, on the following page, sheet 11, we have shown the same
situation per train-mile. The figures for 1917 are unavailable as yet
for train-mile earnings.
On sheet 14 you will find-we have omitted the statistics from the
exhibit the sheet is numbered 14, presenting a diagram showing the
situation in the eastern district. This diagram is compiled on the
same lines as those that we have presented for the United States as
a whole. It shows the same tendencies that I have been describing.
If you examine the next diagram the same thing is shown for the
district (sheet 26), and the next diagram shows the same thing in
the southern district (sheet 20), except that the southern railroads
have been on a lower level than the eastern and western, but they are
coming up and the result is that their increase in net is much greater
than the increases in net in the eastern and western districts; but
they are already on a much lower basis. You are, of course,
acquainted with the boundaries of the districts to which I have
referred. The eastern district is north of the Potomac and Ohio and
east of the Mississippi-roughly described, that is and the southern
district is east of the Mississippi and south of the Potomac and Ohio
Rivers, and the western district is west of the Mississippi. There
are exceptions to that. Illinois is the bastard State of the Union in
-nat situation. On traffic to and from the West the State is in the
estern district, to and from the South the State is in the southern
istrict, and to and from the East the State is in the eastern district.
The next exhibit that I want to call your attention to-
Mr. MONTAGUE (interposing). I understand from you, Mr. Thorne,
that the net operating revenue has been gradually ascending?
Mr. THORNE. Yes, sir.
Mr. MONTAGUE. And that the figures obtained from the official data
demonstrates that conclusion?
Mr. THORNE. Absolutely so.
Mr. MONTAGUE. Of all the railroads as a whole, including the east-
ern division?
Mr. THORNE. Yes, sir. You have asked that in the form of a
question. So that there may be no doubt about it, I heard Mr.
Kruttschnitt state before the Senate committee that while the West
was not troubled by congestion, the East has been troubled by the
recent congestion of traffic, and consequently the test adopted in the
measure pending is unfair perhaps to the eastern railroads. Let us
discuss that eastern situation a moment.
Mr. PARKER. Before you get to the divisions, have you any table
that shows net revenue per ton-mile? You have train-miles, but
not ton-miles.
Mr. THORNE. Not with me.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
407
Mr. PARKER. But trains have increased very much as well as the
revenues, have they not?
Mr. THORNE. Yes.
Mr. PARKER. You have operating expenses and operating revenues.
Capital has increased also very largely?
Mr. THORNE. Yes.
Mr. PARKER. So that those tables have to be modified for those
other increases?
Mr. THORNE. They do not have to be modified one iota, so far as
showing net revenue is concerned. I will proceed now and discuss
the other factors you have mentioned.
The average revenue per ton-mile in the United States to-day is
something like 25 per cent below what it was in 1890. Apparently,
it is stated, the railroads have shared with the rest of us much of the
benefit, inventions and improvements that have been made in the
railroad industry, and that we ought not to have any objection. But,
gentlemen, practically all of that decline occurred prior to 1899.
There are slight fluctuations since 1899 up and down occasionally,
but to-day it is within three-tenths of a mill per ton-mile of what it
was in 1899, and last year it was higher. From 1890 to 1899 there
was an increase in net revenues of American railroads of something
like $100,000,000, and there was a decrease in average receipts per
ton-mile of something like 25 per cent. The railroads did share with
the American people the advantages growing out of these improve-
ments, but since 1899 instead of net revenues increasing only $100,-
000,000 as they did from 1890 to 1899, their net revenues have in-
creased about $800,000,000, and the average charge per ton-mile is
almost identical with what it was in 1899. In other words, the
railroads have absorbed practically all the benefits growing out of
the revolution that has occurred in the transportation industry in
the last 18 years. Greater trains, larger engines, better roadbeds,
improvements of all kind and inventions-these companies have ab-
sorbed the benefit except as the dollar has depreciated. They have
been able to make up increased expenses out of increased volume of
traffic.
Now, if you will follow me a moment-I don't have extra copies
of this exhibit-I am going to refer to the poor, poverty stricken
eastern district, as that picture has been presented to you gentlemen.
I have before me an exhibit that was compiled by the railroads
themselves and offered in the 15 per cent case before the Interstate
Commerce Commission. Remember, I am not responsible for any
figure in this table. The railroads prepared it all. I have not com-
piled anything from it; I am going to state just what it shows, and
you people should have a copy of it. You can get them by applying
to George Stuart Patterson, general counsel for the Pennsylvania, or
the Bureau of Railway Economics, if they have extra copies.
This shows, gentlemen, that the net income of the eastern rail-
roads as a whole-the 38 eastern systems that took part in the 15
per cent case-amounted in 1917 to $253,000,000. Greater than any
other year in their history, except 1916. It shows that 1916 was the
greatest year in their history. It also shows that the net income
plus interest deductions has a ratio to total capital obligations in the
year 1917 of 6.18, and in 1916 of 6.89, the greatest in their history
408
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
so far as this exhibit shows, since 1900. The three-year average
for those three years amounts to 6.53, which is also the greatest
since 1900. In other words, in proportion to their total capital
obligations outstanding in the hands of the public, their net income
applicable to capital charges surpassed anything they have ever be-
fore had in the eastern district.
Now, after subtracting interest on debt you have another figure
which is called the ratio of net income to capital stock outstand-
ing. In 1917 that amounted to 9.04 per cent; in 1916 to 10.3 per cent,
for all the railroads put together. 1916 surpasses any other year,
and 1917 surpasses any year except 1910 and 1916. The three-year
average for thos three years amounted to 8.2 per cent, which also
surpasses any other like period.
In other words, in proportion to the capital stock outstanding, the
net income of the eastern railroads as a whole, including the rich and
the poor, amounted to over 8 per cent during this three-year pe-
riod, and surpassed any other three-year period in history, so far as the
exhibit shows. You are taking the most prosperous period in the
history of these railroads for the purpose of determining the standard
of returns during the most perilous time in the history of our country,
outside of the Civil War.
Mr. SWEET. Mr. Thorne, you refer to the net railway income when
you speak of the net income there?
Mr. THORNE. I said, "Net income."
Mr. SWEET. Well, is there a difference between the "net railway in-
come" and the "net income" as being discussed by you?
Mr. THORNE. If I used the expression "net railway income" I did so
inadvertently.
Mr. SWEET. I think you did not, but I was asking that question.
Mr. THORNE. "Net income" and "net railway operating income" and
"net revenues" all mean different things. The net revenues are what
you derive from operation above expenses. Net income is what you
derive from operation and outside sources after taking care of fixed
charges that is, interest obligations and taxes. Net railway operat-
ing income differs from net operating income by reason of the fact
that certain additional items have been included with expenses to get
another statistical factor. You add to the expenses lease of road,
rentals and hire of equipment. The final figure from operation is net
railway operating income, and the figure for the corporation is net
income, which takes into consideration outside investments, and inter-
est on all debt.
The CHAIRMAN. From which dividends or surplus are derived?
Mr. THORNE. Yes, sir. The net income is the last figure after you
have taken care of all your expenses and your taxes and interest on
debts, and your miscellaneous charges, like rentals, hire of equipment,
and lease of roads. The net income is the last figure. That is avail-
able for dividends, surplus, and reserve for miscellaneous purposes.
Mr. SWEET. In other words, it is the corporate income?
Mr. THORNE. Yes, sir. "Net corporate income" is the phrase they
used to use. Net income and net corporate income are synonymous.
Now there is another column of figures here, the net operating in-
come per cent of property investment. That leads to a consideration
of what we mean by "property investment." Gentlemen, this has
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
409
1
been one of the most confusing, misleading, deceptive terms that
have been forced upon the American people.
Since June 30, 1909, the railroads have kept their so-called property
investment figures more accurately than prior thereto, so far as
showing money going into the property is concerned, but all of the
errors existing in the figure representing property investment in
1909 are still there.
The CHAIRMAN. For all the years up to 1909?
Mr. THORNE. Yes, sir; except minor things, details that some com-
pany might write down as book value."
"book value." I am speaking in sub-
stance. All of the errors that were there in 1909 are still there, and
we have only added to that figure the money that has been put into
the property since then.
Now I want you to understand what that property investment was
that constituted your base figure that you have been adding to ever
since. That was their book value and is still their book value. Book
value is capable of adjustment. When they bought a property they
could put it in at the par value of the stocks and bonds issued, or the
actual value, or the cash paid the construction companies, and then if
it did not look right you could rewrite it. The figure was so unsatis-
factory that the Interstate Commerce Commission in its annual re-
port to Congress for 1909, page 85, refers in this manner that item,
which represents the cost of property, so-called:
Every balance sheet begins with cost of property, against which is set a
figure which purports to stand for the investment. This is no place to enter
upon an extended criticism of the practice of American railroads in the mat-
ter of their property accounts, nor is such a criticism necessary for the pur-
pose in hand. It is sufficient to refer to the well-known fact-
Now, mark me—
It is sufficient to refer to the well-known fact that no court or commis-
sion or accountant or financial writer would for a moment consider that the
present balance sheet statement purporting to give the "cost of property
suggests even in a remote degree a reliable measure either of money invested
or of present value.
And that is the figure which constitutes the basis for your property
investment figures that you are hearing quoted so constantly.
The CHAIRMAN. Mr. Thorne, is there any possible way to arrive
at what would have been a just and honest book value up to the
time the commission there refers to?
Mr. THORNE. There might be. It would be an extremely difficult
task and of course it has not been performed.
The CHAIRMAN. The valuation commission, as I understand it
now,
is not attempting, are they, to go beyond that as to property
values, only on the physical structure?
Mr. THORNE. They are attempting to find the elements that go
into the determination of what constitutes a fair value, which in-
cludes not only investment, but the present value of certain factors.
As that term "value" is defined by the Supreme Court of the
United States in Smyth vs. Ames (169 U. S. Reports), I believe.
that constitutes the best general definition. That definition of fair
value has practically been adopted ever since then by the Supreme
Court, and I think that that decision containing the outline of the
elements to be considered is practically the chief source of the
phraseology used by the bill passed by Congress providing for the
410
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
valuation of American railroads. Now, on June 30, 1909, the bal-
ance sheet was changed-the rules providing for the compilation
of the balance sheet and they provided for taking up improve-
ments and betterments built out of surplus earnings since June 30,
1907, so that the period really commenced with June 30, 1907. It
was permissive until 1909, and then the rules made it obligatory
to include additions and betterments built out of surplus earnings.
Since June 30, 1907, another defect almost as great if not greater
than the defects existing prior thereto has gone into your property
investment accounts, because of the fact that I have just stated to
you. Prior to 1907 there was no rule requiring them to put in addi-
tions and betterments built out of surplus earnings. Since 1907 they
have put them in, and since 1909 they have been obliged to put them
in. Consequently a comparison of the return on property invest-
ment since 1907 with the period prior to 1907 is not of very great
significance, because your base figures are compiled on a different
foundation; and every year after 1907 the farther you get away from
1907 the more additions and betterments you put into the property
out of earnings. So that the farther you get away from 1907 the
worse the comparison is, the more unfair it is.
Illustrating the point, the Interstate Commerce Commission in
their decision in the advanced rate case in 1911 defined the term
"investment 22
as you and I ordinarily understand that term. It is
just about five lines, and if I can get it quickly, I will read their
phraseology:
If from the cost of construction could be subtracted the amount entering
into that item which has come from the operation of the property itself, we
should have the investment in the property-that is, the amount of money
which has been actually contributed to the building and maintaining of the
railroads.
That is what investment really means, but you haven't got a figure
here that purports to represent that. "Property investment" is a
misnomer. It is not property investment; it is book value, if that
is what investment means.
Let me show you the magnitude the importance of that. The
Pennsylvania Railroad system has compiled an exhibit showing the
return on their property investment in this same exhibit to which I
have made mention. Now, one danger of comparing railroad com-
pany figures is that there are so many intercorporate relationships and
payments back and forth and duplications in accounts. A system
figure is the best figure, and that suggests to my mind the necessity
for discussion of these short lines in connection with these arguments
that I have been listening to. But I must not interrupt the line of
discussion that we are now following. I wish you would please
remind me of that later.
The railroads in the eastern district have prepared a set of sta-
tistical tables showing system figures for the 38 systems in the
eastern district that tried to secure general advances in freight rates.
This includes practically all of the companies of any consequence in
that territory. The Pennsylvania sheet is now before me. This
shows a gross investment for 1917 of $1,557,473,713.
The CHAIRMAN. That is the Pennsylvania Railroad?
Mr. THORNE. The Pennsylvania system east and west.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
411
Mr. DE WALT. Mr. Thorne, generally speaking, what would they
include in that property investment?
Mr. THORNE. I have a little document on that proposition. Gen-
erally speaking, up to 1907, as I previously said, they have included all
factors entering into the value of the railroad property according to
their judgment. If there is a consolidation or purchase, they enter
into the cost of property what they think should be entered. They
readjusted it from time to time. There are numerous ways in which
it became a padded account, practically synonymous with capitaliza-
tion-and you are aware of the history of the capitalization of our
railroads.
In that connection, you gentlemen are familiar with the Erie Rail-
road history, are you not, so far as its stocks and bonds are concerned?
Mr. Escн. You mean Cook's operations?
Mr. THORNE. Yes. You wouldn't think that the total capitaliza-
tion of the Erie Railroad system would be representative of its value.
Let me tell you what the property investment of the Erie is, com-
pared to its capitalization.
Mr. PARKER. Have you considered market value in the stock ex-
change?
Mr. THORNE. Oh, yes; I have several suggestions to offer you on
that. I will give you the par value. The outstanding capitalization
of the Erie system is $464,000,000 in round numbers. The total prop-
erty value is $475,000,000 in round numbers. In other words, this
investment figure, so called, is greater for the Erie Railroad than its
total capital obligations outstanding in the hands of the public, water
and all. And 25 out of 38 systems in these 38 systems show a larger
property investment figure than their total obligations outstanding
in the hands of the public.
The CHAIRMAN. And the stocks are below par on the market as a
general rule?
Mr. THORNE. I wouldn't say what the average was under normal
conditions-I would say the average was below par under normal
conditions on them all put together. The figure I have quoted to you
is par value.
Mr. DE WALT. My question was particularly directed as to what
the Pennsylvania did with regard to their investment figures there;
what they included in it generally speaking; and the thought is
brought to my mind by some testimony that we had here the other
day in reference to the valuation of rights of way. The New York
Central was illustrated as the example. Their terminal facilities in
the city of New York are worth many millions of dollars more to-day
than they were possibly when they purchased them. I was wonder-
ing whether in this investment item they included rights of way and
the present value thereof, or value as when they actually bought
them. Do you know anything on that subject?
Mr. THORNE. You know since 1907 they have not provided for any
increase in value because of the increase in the value of land.
So that that would offset, if you are going to take the present value
of land, it would offset to that extent the lower amount of the prop-
erty occasioned by the padding in the past.
Mr. DE WALT. Mr. Amory took the position that the right of way
ought never to be considered at all as capital in the investment; that
it was not properly in it.
412 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
43
Mr. DECKER. The increased value of the right of way, he said.
Mr. DE WALT. Except as it bore upon the earning power of the
road. I was confronted then with this thought, and perhaps I can
succinctly state it: When the New York Central bought its right
of way, including, we will say, the terminal facilities in the city of
New York, it either paid for the same in cash or it gave securities
equivalent to cash for that right of way. They were worth then,
we will say, $10,000,000, and they were assessed at $10,000,000, and
they pay taxes to the State upon that assessed valuation. In 1917
that same property, we will say for example, was worth $20,000,000,
and it was assessed for taxation purposes at that rate. The railroad
company, therefore, as a matter of consequence. through that assess-
ment in the rise in value, was obliged to pay the taxes upon that in-
creased valuation; yet Mr. Amory took the position that, although
the railroad company had purchased this right of way at a cer-
tain figure, they had no right to carry in their capital account or in
their investment account, and that they had no right to consider
the increased valuation thereof. Now, while I am not criticizing
Mr. Amory, because I admit that he knows more about the subject
in one minute than I might be able to acquire in one year, I am trying
to find out just how that should be treated in this question of valua-
tion, and how it bears upon the standard of rates which is to be
established and the standard of valuation in this question of com-
pensation. I took the position that it was entirely illogical that
if the corporation had purchased its right of way and is obliged to
pay taxes upon its valuation, and if it increased in assessment valua-
tion it is obliged to pay taxes upon that increase; of course, we must
take that into consideration. Mr. Amory said no. Now, what is
your answer to that?
Mr. THORNE. You have propounded a question very far reaching
and fundamental. In regard to your last point, however, please re-
member that the railroads are entitled to take expenses out of their
earnings before arriving at the income to which they are entitled.
The Supreme Court has especially referred to that-I think it is in
the Consolidated Gas case-so that the valuation for taxation pur-
poses and the factors to be considered therein are not necessary or
essential to the slighest degree in the determination of the value for
rate making or purchasing purposes. The Supreme Court so stated.
They said it must be remembered-they had under consideration then
the factor of what is known as "going value," and they said that be-
cause in taxing you include certain factors, it wasn't necessary to con-
sider it in arriving at the value for rate making purposes, because
after the payment of all those, taxes they were still entitled to a
reasonable return.
Now let me go ahead on the main proposition, property investment.
The increase in land values or the unearned increment may or may
not be a proper factor to be considered in the determination of values.
The decision of the United States Supreme Court in the Minnesota
rate case would indicate that the railroad was entitled to the present
value of land. However, it may not be definitely decided. It is
owing to how you interpret some of those clauses in that decision.
The proposition may not have been essential to the decision, con-
sequently what they did say may be dictum. The railroads, having a
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
413
mere right of way, and easement, must use the property for highway
purposes, and if it ceases to use it for that purpose ordinarily it re-
verts. There are facts there that would indicate that all the rail-
roads have is the use, and the use has not increased as the land values
have increased.
I want to read you two paragraphs written by Mr. Commissioner
Lane, who wrote the opinion for the commission in the western ad-
vanced rate case, decided in 1911, referring to the Burlington Rail-
road. This company insisted that the law entitled it to a return upon
its present value estimated at $530,000,000. Mr. Lane states:
Out of the difference between the original investment of $258,000,000 and
estimated the present value, $530,000,000, it has been estimated that the in-
crease in the land values amount to approximately $150,000,000.
And this property represents less than one-fortieth of the railway
capitalization in the country. The matter was not tested in the
courts.
This is what Mr. Lane says about that claim that land values
should be included:
In the face of such economic philosophy, if stable and equitable rates are to
be maintained, the suggestion has been made that it would be wise for the,
Government to protect its people by taking to itself these properties at present
value, rather than await the day, perhaps 30 or 50 years hence, when they will
have multiplied in value ten or twenty fold.
Mr. Lane then takes the position that the sacrifice of the investor
probably represents the correct test. For instance, if they have re-
frained from dividends, the cost during the development period
ought to be taken into consideration; the money actually put into
the property ought to be taken into consideration. The sacrifice of
the investor perhaps constitutes the best test, he says.
I do not desire to leave the impression upon your minds that I have
taken a position upon that question, because in order to take a posi-
tion I would have to argue an hour or two to sustain it, and I do
want to go on with the main discussion.
Now I will say this, that the increase up to 1907 is of little sig-
nificance, because they readjusted their property accounts then from
time to time. Since 1907 what has happened on the Pennsylvania
Railroad system in regard to their property? They have increased
their property about $500,000,000. The increase in their total capi-
tal obligations was approximately $150,000,000. There is a differ-
ence of $350,000,000. That didn't come out of the issuance of new
capital.
Mr. MONTAGUE. That went into the property ?
Mr. THORNE. Yes, sir. Their unappropriated surplus in 1917
was greater than in 1907 by $6,800,000 approximately, so they didn't
take it out of unappropriated surplus. Now we would be justi-
fied in the conclusion that all of that $358,000,000 came out of earn-
ings from the property, except that we must modify it slightly.
First, there may be some notes issued during 1917 that have not been
included.
Mr. ESCH. It might include income on holdings in other com-
panies.
Mr. THORNE. It might include income from outside investments.
Those are two factors that are modifying the statement that I made.
414 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Otherwise that would be the minimum amount which you could
safely say was put into the property out of earnings.
This question was put to Mr. Rea while on the witness stand
during the recent hearings, and this is what occurred:
Mr. THORNE. Now as to your property account, I notice if I am not in error
that you have increased your property since 1907 by approximately $500,000,000 ;
is that correct?
Mr. REA. Yes, sir.
Mr. THORNE. And during that time you have increased your total capital
obligations $150,000,000, approximately?
Mr. REA. Yes, sir.
Mr. THORNE. That leaves an increase of $350,000,000 that did not come from
the sale of securities?
Mr. REA. Not necessarily.
Mr. THORNE. I also find that your surplus, unappropriated surplus in 1917,
was greater than in 1907. Now, I ask you: Did that $350,000,000 come from
new money put into the property by the owners of the property purchasing
additional securities, or by the outsiders purchasing additional securities, or
did that $350,000,000 come from earnings?
Mr. REA. I could not say offhand. I would have to analyze the accounts.
Mr. THORNE. Where else could it have come from?
Mr. REA. It might have come from sale of property and securities in the
treasury.
Mr. THORNE. But your unappropriated surplus was greater than it was then,
and these factors are reflected in your surplus, are they not?
Mr. REA. Well, I could not say offhand, but certainly a large amount comes
from the earnings.
Mr. THORNE. Did not practically all of it, Mr. Rea? Where else could it have
come from. Your surplus is greater now than it was then.
Mr. REA. Well, I assume that you are right.
His answers there should probably be modified by the two fac-
tors that I named a few moments ago.
As to the amount of money that should have come from the issu-
ance of notes during 1917, Mr. Rea certainly was conscious of that
if there was any, and you will find that in 1917 the unappropriated
surplus was a little greater than in 1916; that they had a net corpo-
rate income for the year of $70,000,000, and the dividends declared
amounted to $40,000,000, leaving a balance of $30,000,000 approxi-
mately; and their property investment increased $50,000,000. So
only $20,000,000 of that property could have come out of notes issued
during the year. Then the other modification, income from outside
sources they have in the neighborhood, I think, of $70,000,000 to
$75,000,000 of outside investments. I think they earn on an average
between 4 and 5 per cent on it. I am not sure. You figure that up
for a period of 10 years and you have a modest sum compared to
$350,000,000. In other words, between $250,000,000 and $300,000,000
at the least has gone into this property investment of the Pennsyl-
vania system out of earnings, and only $150,000,000 has come out of
capital, the investors' money, the money that they put in. In other
words, the public has built almost twice as much of the Pennsylvania
Railroad system in the last 10 years as the owners of the property
have built. That is very large on the Pennsylvania, and it is not rep-
resentative of other companies. I call your attention to that fact
as illustrating the possibilities in connection with your property in-
vestment figure. If prior to 1907 you did not include such factors,
but subsequent to 1907 you did, what significance is the comparison
of ratio to property? And the farther you get away from 1907 the
more defective will such a comparison become.
FEDERAL OFERATION OF TRANSPORTATION SYSTEMS. 415
The CHAIRMAN. The farther behind, you mean?
Mr. THORNE. No; the more property investment out of surplus you
get subsequent to 1907, the more defective will be the comparison to
those years prior to 1907. Further, the maintenance allowances since
1907 have been much greater than prior to 1907.
In this connection I want to refer to certain comments by Mr. An-
derson relative to maintenance. Mr. Anderson stated that some rail-
roads allowed six per cent for depreciation, and other roads half of
one per cent on certain items in accounting; and that we ought to be
justified in assuming that the company that only allows half of one
per cent for depreciation of equipment was not allowing enough, and
that we should proceed to put that depreciation on a proper basis.
I want to call your attention to this phase of that depreciation item.
I believe if it is fully appreciated you will see how such a conclusion
is possibly in error. Practically all of these railroads are rebuilding
their cars and engines all of the principal railroads. They have
great shops where this rebuilding is in progress. I have tried my
best to get railroad witnesses to testify how much rebuilding is going
on, and they have refrained from answering, always. If you re-
build a car you thereby lengthen its life. You can take out of re-
pairs enough money to offset the total amount which should other-
wise be allowed for depreciation. That is the reason why some rail-
road officials have claimed it is an exact duplication to allow a cent
for depreciation. And the Burlington Railroad in 1911 deducted,
I believe I will say this roughly and subject to verification-de-
ducted approximately $8,000,000 from their allowances for deprecia-
tion in order to make the figures fairly comparable.
Another way of taking care of depreciation is under the head of
renewals.
Let me show you what can happen in renewals. This is a classic
illustration that I have given several times, but so long ago that I
don't know whether I can state it correctly. Suppose you and I
owned 100 bridges at a cost of $50,000 a piece, and we were rebuilding
them, replacing them about 10 a year. We have a net income, say,
of $500,000. We are running toll bridges. Suppose we came to a
time when the Government took over those bridges and we desire to
rehabilitate out of the pocket of the Government-out of the Gov-
ernment treasury-our whole system of bridges. Instead of rebuild-
ing 10 a year, suppose we rebuild 30 a year during a period of 3 years
while this rehabilitation is going on. We get a whole lot of cement
bridges instead of wooden bridges. Now we are entitled to charge
under the rules of accounting the total cost of those original bridges
to operating expenses when we replace them. In other words, in-
stead of deducting ten times $50,000, or $500,000, from operating ex-
penses, and get the net of $500,000 that I spoke to you about a moment
ago, under this new policy we are deducting thirty times $50,000, or
$1,500,000, as operating expenses. But our total net formerly was
only $500,000. In other words, by a simple change of policy our
accounts show a deficit of a million dollars on the same property,
operating under the same rates with the same volume of traffic. In
one case you make $500,000, and in the other case we have a deficit
of half a million dollars.
416 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
}
That is an extreme illustration of a very important point. The
railroads can by a system of renewals take care of depreciation.
Under the rules of the commission you have to deduct from the
original cost of equipment the accrued depreciations, which has been
set aside, so that if the carrier has commenced the account in the last
two or three years I think the New York Central commenced to
allow that on its equipment two or three years ago or if you have
been allowed an inadequate amount or too much, or if you haven't
taken care of that which had accrued prior to 1907, all of those factors
will modify your conclusion as to whether half of 1 per cent is an
adequate allowance for depreciation.
Out of repairs and renewals, gentlemen, you can more than take
care of a proper allowance for depreciation, and any allowance at
all would be an error.
The CHAIRMAN. Provided it was done?
Mr. THORNE. I say, if that was done. On the other hand, you
might not take care of it at all. You might skin your property and
not properly take care of repairs and renewals, let alone adequate
depreciation. In that case there would be justification for a very
large increase of depreciation. But until we can find out how much
they are rebuilding their cars and engines, and until we find out how
much the change in the policy as to renewals occur, we are not justi-
fied in reaching any conclusion as to the adequacy of any allowance
for depreciation. And that presents one of the grave hazards under
Government operation, that the railroads will start out to rehabilitate
their properties out of earnings, under maintenance, rebuilding their
properties, putting it in their operating expense account and getting
their net over and above that, unless in some way you make this in-
vestigation that I have outlined, which is extremely difficult. In
England that very contingency confronted the Government officials.
The railroads demanded a higher maintenance during Government
operation than prior to Government operation. The Government offi-
cials said, "No, you are going to make us rebuild your property for
you." They said, "Well, it is more expensive to operate under these
war conditions. You must certainly agree to that." They agreed
that that was true, so they compromised on an arbitrary allowance,
if I am informed correctly, of approximately 123 per cent over the
maintenance allowances prior to the war. Of course in that extra
allowance of 123 per cent are very many increases in the cost of ma-
terials and supplies and labor.
Mr. MONTAGUE. Mr. Thorne, I understand you to say, then, that
there is an intimate relation between maintenance and depreciation.
In other words, that depreciation may be embraced in the item of
maintenance?
Mr. THORNE. Under the rules of accounting it is.
Mr. MONTAGUE. There was a gentleman, an accountant, a Mr.
Amory, here day before yesterday, and I asked him the same ques-
tion, if there was any relation between maintenance and deprecia-
tion. He said there was not. And furthermore, that if the railroads
of this country kept a fair account-kept an item of depreciation as
that item of account should be kept, that to-day all the railroads of
America would be bankrupt.
Mr. THORNE. Perfectly absurd.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
417
Mr. DE WALT. In reference to this last point, Mr. Thorne, on page
2 of the bill, lines 19, 20, 21, 22, 23, and 24, we have the following
langauge:
During the period of such Federal control adequate depreciation and main-
tenance of the properties of the carriers shall be included as a part of the
operating expenses or provided through a reserve fund, in accordance with such
principles and rules as shall be determined by the President.
Wouldn't that clause be sufficient, in your judgment, to offset this
danger that you have in mind, to wit, that these railroad companies
would insist upon the Government rebuilding their roads, as you
say?
Mr. THORNE. It seems to be left to the discretion of the President,
so far as the law is concerned. I was merely speaking of the practi-
cal operation of the law-what might happen.
Now, so far as the law is concerned, I think there should be one
change there that has been suggested by Mr. Anderson. That is, if
you increase the maintenance allowance during the period-and
they have been inadequately maintaining their properties prior to
the period-you ought to correspondingly reduce the net income.
One should balance the other. If it has been inadequate in the past,
then their revenues net have been too great, and the standard return
is not a correct standard return. I think with that modification the
law would be all right.
The reason I have emphasized this question of maintenance is first
to show the unfairness of comparisons subsequent to 1907 and prior
thereto, because the maintenance now is on a very much higher basis
than prior to 1907. I have figures here that I will not take time to
go into on that. And then in connection with the property invest-
ment, I have shown you that additions and betterments built were
not generally included in their property accounts; but since 1909
they have been required to include such expenditures in their prop-
erty accounts (dating them back to June 30, 1907.).
The whole question of whether a company is entitled to a return
upon investment built out of surplus earnings I want to discuss later.
But if, as a matter of fact, they are not entitled to demand an ad-
vance in freight rate or to demand a return on additions and better-
ments built out of surplus earnings, then that is the third criticism
to any comparison on the property investment account.
Now, with those remarks in regard to property investment, I call
your attention to the fact that in the eastern district the net operat-
ing income per cent of property investment for 1917 is 5.86.
The CHAIRMAN. Mr. Thorne, I do not want to break in on a sen-
tence, but it is a quarter of 1 now, and I think the committee would
prefer to take a recess and we will hear you at 2 o'clock, if you can
return then.
Mr. THORNE. I will be glad to, but I am afraid I am boring you
gentlemen.
The CHAIRMAN. Not at all. We want you to complete the state-
ment you had in mind to make when you came here. I don't know
how much it will cover, but we want you to make it. Without objec-
tion the committee will recess now until 2 o'clock.
(Whereupon, at 12.45 p. m., the committee recessed.)
40958-18-27
418
FEDFRAL OPERATION OF TRANSPORTATION SYSTEMS
AFTER RECESS.
The committee reassembled at 2 o'clock p. m., pursuant to recess.
The CHAIRMAN. Mr. Thorne, you may proceed with your state-
ment.
STATEMENT OF MR. CLIFFORD THORNE-Continued.
Mr. THORNE. For the purpose of further answering a question
formerly addressed to me by Mr. Montague in regard to the relation
between maintenance and depreciation expenses, the record should
show reference to the fact specifically that depreciation is one of the
items allowed under operating expenses, under maintenance. On
equipment they are required to state depreciation, but the percentage
of allowance is not specified as yet. On maintenance of way and
structures it is optional and not obligatory.
Mr. SNOOK. In this connection I would like to ask you a question.
Do you have any practical suggestion to make as to the amend-
ment of that provision of the bill that provides for maintenance and
operation expenses?
Mr. THORNE. The only possible suggestion would be that you
should follow the example set by Great Britain and specify an
arbitrary allowance in lieu of the possibility that the carriers may
take advantage of it. And yet the determination of that allowance
is a matter of a technical character that I think very properly
should be referred to the Interstate Commerce Commission. I have
the utmost confidence in Mr. Anderson, here in this room, and hist
associates, and I really believe it comes under their department and
not Mr. McAdoo's nor anybody else's department that has charge of
this work. On the accounting proposition the commission is sup-
plied with the experts and has had the experience. Now of course
Mr. McAdoo may consult or he may not consult the commission.
Mr. McAdoo now, as you know, has lots of advisers aside from the
commission, and they are chiefly railroad men.
Mr. SNOOK. Well, this item, as I understand it under the English
method is allowed by giving a percentage over the amount that the
road has been charging?
Mr. THORNE. Prior to the war. I think that a provision that the
determination of all accounting questions should be left to the com-
mission would be very proper--not confined to just this one.
In that connection I want to say that in England they have had
a great deal of confusion and disagreement between representatives
of the Government and the carriers; and later I will call your at-
tention to some very strong language that the representatives of the
Government used in connection with the railroads under Govern-
ment operation and their attempt to put things over on the Govern-
ment. In England the ultimate appeal, as far as I can gather, is to
the commission, if there be disagreement. I don't know where you
have provided for the settlement of disagreements between Mr. Mc-
Adoo and the railroads on any of these things, except that Mr. Mc-
Adoo has complete charge. On the accounting proposition I don't
know whether Mr. McAdoo's decision would be binding. I think
the railroads would have their right to a hearing before a judicial
tribunal if Mr. McAdoo should adopt some accounting proposition
that was taking away property without due process of law.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 419
The place at which I discontinued my remarks before adjourn-
ment was in regard to the percentage of return, net income to prop-
erty investment, as shown for the eastern railroads.
In the light of the remarks and the other knowledge that you
gentlemen already have I call your attention to the fact that the
percentage of net operating income to property investment for the
eastern railroads as a whole for the year 1917 was 5.71, which was
lower than that of 1910 or 1907. In 1916 it was higher than all
other years. In the decision of the commission in 1911, the cases
commonly called the 1910 Advanced Rate case, Mr. Commissioner
Prouty, writing the opinion for the commission in the eastern cases
said that 1907 was an exceptional year; that it was not normal and
could not be accepted as the test of what is reasonable. You see
the railroads had been confronted with an enormous increase of
business without a corresponding increase in property, and Mr.
Prouty in writing the opinion said that even though there was no
increase in income, the carriers were under obligations to furnish
more equipment and more and better service. In other words, that
that return of 1907 was not typical of what would be reasonable.
That was the unanimous decision of the Interstate Commerce Com-
mission.
They also referred to 1910 as being abnormal, and the commission
in the recent 15 per cent case described the year 1916 as being phe-
nomenal. So we find the year 1917 exceeding every other year ex-
cept the three years which the commission itself has said are not
normal.
The CHAIRMAN. The commission said that they were abnormally
high?
Mr. THORNE. Abnormally high. And in 1916 the per cent of net-
operating income to property was 6.52 per cent, which is the highest
of any year; and the average for the three-year period contemplated
in the bill is 5.53 per cent, which is higher than any other three-
year period with the single exception of 1906 to 1908, in which you
have the abnormal year of 1907; in which you have the property
investment not built up out of surplus as it has been since, and
in which you have an extraordinarily low maintenance allowance as
compared with that of the present time.
The suggestion by the railroads that you should eliminate 1915
means that they would have you take the highest average net in-
come, the highest average rate of net income to property, the highest
average rate of net income plus interest to total capitalization, and
the highest rate of net income to capital stock outstanding in the
hands of the public that these carriers have ever seen. In the light
of those facts I hardly think there is very much occasion to give
serious consideration to that suggestion. I think it is camouflage
mostly or throwing dust in your eyes.
Mr. Escн. Well, they strongly urge, Mr. Thorne, that they ought
to be allowed to be credited with the $238,000.000 of additions and
betterments and extensions made since the 30th day of June, 1917,
eliminate 1915 and bring the matter down to the 31st of December,
1917. Otherwise they contend that they would not be getting any
return upon the investment of $238,000.000 made since the 30th of
June last. That was the contention made by Mr. Kruttschnitt.
420 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. THORNE. Of course, you woud be getting a return on the in-
vestment. He means that it ought to be that much greater, because
they had put that much more property into it. The method the bill
suggests will simply place the average net income and ratio to prop-
erty that much closer to a normal period if you leave out the last
six months—that is, the net result. If you put it in, you are that
much farther away from the normal condition. It is not a question
of not getting any return on it, because they are going to get a re-
turn, and the average return will be above normal.
Mr. DECKER. What do you say to this proposition—if it is not in-
terrupting your train of thought-what do you say to the proposi-
tion that they contend that the measure of what they are to get
ought to be the amount of service; and if during the crisis of war
they render more service-we will say extraordinary service-then
the compensation should be accordingly? In other words, the only
reason that they have gotten this higher return in 1917 and 1916
was because there was more service rendered. What do you say to
that, Mr. Thorne?
Mr. THORNE. The true test is the value of the use. We are facing
an impossibility when you adopt as the test the value of the service.
If value of service is the true test, you see railroad service is invalu-
able.
Mr. DECKER. Well, I don't know as I meant just that.
Mr. THORNE. (Interposing.) Just let me follow the line of
thought. In return for the use of the property you are giving so
many dollars, and if you keep the property you are giving them a
bond for the amount you say you will pay them. You are giving
them a Government bond in lieu of railroad stock, so in discussing
the consideration passed to the carriers, you should consider what
you are giving in return to them. Part of that is the Government
guaranty, tiding them over the most perilous time in their history;
a Government guaranty to maintain their property; the Govern-
ment guaranty sustaining their credit. When many other com
panies will find it impossible for them to secure the money neces-
sary, the railroads will be able to get the money that is necessary.
Those other factors must be considered in connection with the con-
sideration that you are giving the carriers.
If we return to the 3-year proposition, it has been stated that 1915
is the lowest in history. It was so stated by a gentleman over in the
Senate: The slight modification must be made that 1916 and 1917
were the highest, and 1915 was next to the lowest in the last ten or
fifteen years; 1914 was the lowest. If you take the annual report
of the Interstate Commerce Commission that has just been pub-
lished, the table would indicate that the rate to so-called property
investment was lower in 1915 than 1914; but that is due to what I
think should be described as a statistical error. If you will ex-
amine the table you will find it is computed by an average of aver-
ages. They found the average property per mile and the average
income per mile, and then they found the ratio of the average prop-
erty per mile and the average income per mile, resulting in the
showing of a lower rate of return in 1915 than in 1914. Using an
average of an average is a statistical error. If you use the entire
property and the entire net income you will find that 1915 is greater
than 1914, using the very same figures that that table presents. And
FEDERAL OPERATION OF TRANSFORTATION SYSTEMS.
421
on the other table introduced by Commissioner Anderson you will
find that they have used the totals, as I have just described, and in
his exhibit which he has presented to you-it is the same size as this,
only two or three sheets-you will find that the rate of income to
property is greater in 1915 than in 1914. So you are using the two
most prosperous years and next to the lowest year in the last decade
or so, making an average which is greater than any other 3-year
period.
Mr. DE WALT. Mr. Thorne, you have just stated that the true test
is the value of the use. That was substantially said by some other
gentlemen who appeared here. Now, taking your homely illustra-
tion, as you called it, of bridges-a bridge is in part a utility corpora-
tion. It spans, we will say, the Delaware River. It has a right to
charge toll. The public determines that that should be a free high-
way instead of a toll highway, and it is taken under condemnation
proceedings. Applying your test, namely, the value of the use, isn't
it true that as a reparation for the taking, the stockholders of that
bridge corporation should be paid, first, the cost of construction;
second, the value, if you please, of the franchise, which is to be de-
termined, how? To be determined by the tolls that they receive, we
will say, for. a definite period of years-as in this proposed legisla-
tion, for a period of three years.
Further than that, in settling the account in condemnation pro-
ceedings, it strikes me as a matter of law that there should be de-
ducted the necessary upkeep of this bridge structure. In other words,
this corporation would be obliged in the use of the structure to keep
it fit for the public. So the account, as I have tried to say, would
be the value of the structure, the value of the franchise, which is
to be determined by the amount of tolls they receive from time to
time, and then deducting what is necessary for the upkeep, better-
ment and improvements, or perhaps the necessity of a new structure
in part. Now if that was so in regard to bridges why isn't it so in
regard to railroads? Why shouldn't the same test be applied, namely,
cost of road, value of the franchise, determined by the emoluments
received, deducting therefrom betterments and improvements neces-
sary for the upkeep of the road, and strike a balance in that way-
and your balance is assessed in law according to those principles?
Isn't that correct?
Mr. THORNE. You have included in the statement, first, franchise
value. The rules for the determination of value under condemnation
proceedings, laid down by the courts, are somewhat different from
the determination of value for rate-making purposes, and in this
case you are neither fixing the rates nor buying the property. It is
a cross between the two.
Mr. DEWALT. I understand that. We are not buying the property,
but we are taking over the property, and your argument, as I under-
stood it, was that you wanted to divorce from this Government
operation or from this Government management-the operating
and the fixing of rates. In other words, you said, "Let Mr. McAdoo
operate the railroads, but have the Interstate Commerce Commission
fix the rate and leave that solely where it now is." Is that so?
Mr. THORNE. Yes, sir.
Mr. DEWALT. Now, whoever has this authority while it still re-
mains in the Interstate Commerce Commission, as to the fixing of rates
422
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS,
or whether it be with Mr. McAdoo under the general management of
the roads, aren't the principles that I have tried to lay down in
regard to condemnation proceedings, fixing of damages for taking of
a bridge in the illustration, on parallel lines with the case now
before us?
Mr. THORNE. That is what I was trying to illustrate as best I
could. You are not taking, in the illustration you give-you are not
purchasing the bridge; you are merely taking the use of it for a cer-
tain period of time, and you are agreeing to keep the bridge up to 100
per cent condition during that time, when many bridges are being
torn to pieces and lost. You are also agreeing with the owners of
that bridge to loan them this money that is necessary, when everybody
else is facing a terrible hazard, and possibly can't get money enough
to tide them over. Many, many industries will be prostrated before
the war is over. They already are in Europe. At the end of a given
period land values may have gone up, and I don't know what the
Supreme Court is going to say about that.
And again, maybe that bridge company didn't build all the bridge.
Maybe the locality helped to build the bridge upon certain terms
and conditions which prevented the bridge owner from getting
a return on the entire cost of the bridge. So that there are other
complications that enter into it than those of condemnation proceed-
ings. There is a partnership relationship that I desire to discuss be-
tween the railroads and the public. I am going to discuss that under
the second division of my remarks, which relates to the compensa-
tion you propose to give the railroads. I think it would be well for
what little sequence I have tried to maintain, if I could just be par-
doned a moment, and you will call me back to this if I neglect to
discuss it, completing my remarks now in regard to the wisdom of
keeping the rate-making power still with the commission.
I have shown you that under the existing system of regulation the
railroads have prospered. The most concrete demonstration of it is
that a few months ago when the rate case was being tried, I ventured
to say that two-thirds of the gentlemen here on this committee under-
stood that the railroads were very hard up--
Mr. MONTAGUE (interposing). Is not that a fair contention?
Mr. THORNE. And yet we find that now when you guarantee them
the average of the last three years, that the actual net income, net
earnings, and net revenue on any basis, is the greatest they have ever
had, and when you guarantee them you find that stocks immediately
advance. I am going to speak about that matter of stocks and credit.
Further, the railroads argue that as evidence of their poor condition
under our system of regulation as it has progressed there has been a
heavy decline in market values. Especially have they stated there
has been a heavy decline during the past year.
Of course, many criticisms are made of the stock market as re-
flecting values. I will not indulge in those criticisms. I am content
to take that as a test, if you like, of values. If you take a large num-
ber of securities over a somewhat extended period of time, you iron
out the enormous variation that may happen temporarily, so that you
have a somewhat fair index of tendencies.
This argument of market values has also been applied to bonds
as well as stocks. The bonds are less subject to those violent fluctua-
tions. They said, "We couldn't sell bonds." They have also said that
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
423
it was impossible to sell stocks, and that it was necessary for the proper
maintenance of their property and their finances that they should
sell stocks; that there is a danger line in issuing bonds to too great an
extent; that you come to a danger line, and if you go beyond it you
are sacrificing the interests of the public as well as of the carriers.
I think I have correctly stated in substance their position in regard
to those security values. If there is something of importance that I
have left out, I wish somebody would suggest it.
Now, let us analyze that statement. The market price of bonds or
stocks at any given time reflects not only the credit of a company, but
it is also a reflection of the general financial conditions. The fact that
the rate of interest you have to pay is lower than that which I have to
pay in order to borrow money would indicate that you had a better
credit than I. But the fact that you had to pay a higher rate for
money than you did five years ago does not prove that you have a
poorer credit than you had five years ago, because in the meantime
there may have been a change in financial conditions that has affected
that rate of interest and has affected everybody else likewise; and you
may be just as prosperous, you may be making just as much money
net as you did then, and yet have to pay a higher rate. If a person
could find what the pure money rate was--that is, the cost of money
independent of all hazard-and then if you could find out whether
your rate of interest has gone up faster than the pure money rate, then
we would know whether your credit had declined or not. The pure
money rate would be independent of all these hazards, and conse-
quently would represent the real cost of the money as affected by all
the multitudinous financial conditions in world finance. It is im-
possible to get the pure money rate, but we can approximate it. The
closest approximation to it is probably the Government rate, the rate
the Government has to pay for money, except where the bonds or
security is affected by deposit privileges or circulation privileges. In
such cases as that it would modify the Government rate as indicative
of the pure money rate. In other words, the Government rate would
be below the pure money rate.
Another close approximation of the pure money rate is the rate at
which the largest cities in the Nation can borrow money. Probably
that rate for the 20 largest cities would be indicative of the next
closest approximation of the pure money rate. That would be, per-
haps, somewhat above the pure money rate.
We made an analysis of the trend of the rate of interest that the
four greatest Governments in the world paid, considering as such
Great Britain, France, Germany and the United States, prior to the
war. Then we took the 20 largest cities in the United States and
found the trend of the rate of interest that they had to pay, and we
drew a line between those, as being the closest approximation to the
pure money rate that we could obtain. Then we took all of the rail-
roads in the East and West, dividing them accordingly, and we found
that the rate of interest in 1900 that the railroads had to pay had in-
creased less than the pure money rate had increased; less than that
the Government has had to pay, and less than the rate that the
municipalities, considered separately, had to pay. The increase in
the rate of interest that the railroads had to pay was less, proving
that the railroad credit had improved. Now, if the rate of interest
424
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
to the railroads as a whole had gone up more than that approxima-
tion, then it would prove that their credit had declined.
Mr. ESCн. Were those facts set forth in the so-called "Norton
tables"?
Mr. THORNE. Yes, sir. You have had those.
Mr. EscH. They were presented before the Newlands joint com-
mittee.
Mr. THORNE. Mr. Norton was our witness who compiled the data
under my direction.
Mr. DOREMUS. For the purpose of the record, could you give us
the reference?
Mr. THORNE. In the Advanced Rate case, 555, I. and S. 555, be-
fore the Interstate Commerce Commission.
Mr. STEPHENS. How do you account for the rate not rising pro-
portionately as fast for railroads as for Governments?
Mr. THORNE. Because the railroads have gradually gotten on to a
better basis; their credit has improved. It doesn't mean that the rail-
roads' credit is as good as the Government's; it means that railroad
credit, compared to the credit in former years, was better. For in-
stance, the southern railroads have increased more than the eastern,
and yet the southern have to pay more than eastern railroads for
money. That indicates that they have improved more than the east-
ern, compared to what they were before. Further evidencing that
fact, Mr. Rae has always frankly admitted that the credit of his com-
pany was A-1, and he has been challenged repeatedly to name any
company in any line of business in America that could borrow money
on as low a rate as his company could, and he couldn't name one
company in any line of business-at least, he never has done so.
Then there are others that are poorer. We took the average.
the same thought that I have here demonstrated to you, when it is
pressed home on any representative bankers or accountants, has been
frankly admitted. Mr. Oldham was the leading witness for the rail-
roads covering the financial proposition last spring, and Mr. Oldham
testified as follows:
And
Mr. OLDHAM. In normal times I should say the credit of all those roads is
such that they could borrow considerable amounts of money.
cerns.
Mr. THORNE. At rates of interest as low or lower than other industries?
Mr. OLDHAM. Certainly. Railroads borrow money better than industrial con-
That is perfectly true. I don't think that admits of any argument.
Mr. Robert F. Maddox, another banker, made an analysis of cer-
tain industrials and railroads representative of the territory, and on
cross-examination he admitted that the list of railroads was repre-
sentative, including both strong and weak roads. He further ad-
mitted that he had left out all weak industrials, and that those he
used were the strong companies, the majority of them being aided
by the war by reason of manufactures of munitions and war supplies.
He further testified that these yields fairly represented the credit of
the companies, and finally stated that his own exhibit proved the
credit of the railroads for every year during the past fifteen years
down to this present time has been better than that of industrials.
That is found at transcript page 5478, in Ex Parte 57.
Mr. STEPHENS. Has that fact any connection with the other fact
that the railroads are largely controlled by bankers? That is to
say, would not the railroads have a better opportunity to borrow
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
425
money in view of the fact that they are controlled by the banks
largely, than industrial organizations?
Mr. THORNE. I see no difference. Mr. Warburg told me that the
short term paper of railroads was frequently higher than indus-
trials, because industrials went into a competitive market for their
short-term paper, while railroads generally patronized their banks,
who had sort of a monopoly on handling their securities.
Mr. STEPHENS. I did not know but these banks might favor the
railroads in view of the fact that they speculate in them and control
them largely.
Mr. THORNE. I think they are as vitally and closely connected
with the large industrials. We have made an analysis and com-
parison of the largest industrials obtainable. We secured all the
sales of securities by the United States Steel Corporation and proved
the same thing, and we used all the industrials and utilities that
had marketed any securities, that would have to file reports with
the New York Public Service Commission in the city of New York,
and we proved the same thing.
The CHAIRMAN. Mr. Thorne, is it not usual for railroad compa-
nies to name some bank as their fiscal agent, through which bank
the railroad secures general marketing for its paper as it may need?
Mr. THORNE. So do the large industrials.
The CHAIRMAN. I mean that is the fact with the railroads?
Mr. THORNE. Yes, sir. The industrials do just the same.
The CHAIRMAN. But it would also be an inducement for the same
thing that you were speaking of awhile ago, that where they had
the absolute monopolistic control of securities they would get better
rates of interest than if the money was borrowed on the open market?
Mr. THORNE. They would get a better one if it was borrowed on
the open market, because there would then be competition.
The CHAIRMAN. But the way it was they could charge a higher rate
than they would if they didn't have absolute control of the marketing
of the securities?
Mr. THORNE. The banker who has control over the sale of the short-
time paper, if there is no competition for it, will demand a higher rate
from the railroads than he would if there was competition for the
paper.
The question then comes as to the decline in stock values. There are
many factors going into the decline of the market price of stocks.
You may take stock that is selling for 150 and you may sell it to
stockholders at 100. That is dividing up amongst your stockholders
the assets, the surplus assets of the property that made it go above
par. Then a corporation may buy other properties in which their
directors are officials, and they buy at fancy prices.
There are very many ways in which stock values decrease, and
they have decreased generally on industrials as well as utilities and
railroads.
A statement has been made that some of these railroads were unable
to market stock. A statement has been made before the committee
as to the New York Central, that it could not market its stock, and at-
tention has been called to the large ratio of bonds to total capitaliza-
tion as the reason why the New York Central could not sell its stock
at par.
426
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
The CHAIRMAN, Isn't another factor the fact that the New York
Central sold a very large volume of debenture 6 per cent bonds that
would come in for their 6 per cent ahead of the stock?
Mr. THORNE. That is one factor. And here is another factor: The
rate on the New York Central stock is 5 per cent. Now, if the con-
sensus of the investing public-the opinion of the investing public
is that 51 per cent should be the ordinary average yield on the stock of
a well-established railroad property, which would demand 100 cents on
the dollar, if that is the price at which the public is willing to invest
in stocks at par; and if your stock only yields 5 per cent and the
policy of the directors has become so thoroughly recognized that the
public can not with any degree of assurance expect a higher rate of
dividends, that stock is not going to command par. In other words,
if the prevailing yield is 53 per cent, a 5 per cent stock can not be ex-
pected to command par. The New York Central earned 18 per cent
on its capital stock last year. I don't care if it had earned 25 per
cent or 10 per cent, if it was a well-established fact that the rate of
dividend was going to be 5 per cent, the public wouldn't bid par on
that stock. Now, I am making a very positive statement there, and
it must be taken with the qualification that other factors remain the
same.
The best test of that proposition is this: You go through the prices
of stock and you find the 6 per cent stock of a company only earning
10 per cent. If it is a well-established railroad property and its net
earnings and physical conditions indicate that it is comparatively safe,
that it is going to continue to earn and pay that 6 per cent dividend,
you will find that 6 per cent stock selling higher than any 5 per cent
stock, even though the 5 per cent stock is earning 20 per cent or 15
per cent. In other words, the investor, in considering values, con-
siders surplus to the extent that that surplus is essential to maintain
the credit of the property and the prospect of an annual payment of
the dividends. The investor does not look at the property invest-
ment account hardly at all—that is, the average investor. You do
not find property investment accounts quoted in hardly any of the
financial publications in either volume or magazine form. They look
at the capitalization, the surplus earnings and the physical property
that is owned. They find out how much their earnings on capital
stock have been, whether they have paid the dividend in the past, and
have reasonable prospects of doing it in the future. The same factors
enter into the analysis of returns on the bonds, consequently I would
say that under normal conditions-of course, in war times we can not
tell anything about it-but under normal conditions during the past.
few years if the New York Central had been paying 6 per cent on
its stock, of course it would have sold above par.
Some statement has been made here as to the inability to sell
stock and the absolute necessity for the railroads to be so financed.
that their stock is attractive to investors. If you were a stockholder
and in control of the policy of a great railroad system, what would
be the most expensive way for you to get money, you having a rea-
sonably well-established property? The most expensive way if you
had a 6 or 7 per cent dividend, would be to sell stock, because that
would be taking a partner into a 7 per cent proposition. The next
most expensive way would be to sell bonds, because you get it at a
lower rate. The cheapest way would be to advance freight rates and
FEDERAL OFERATION OF TRANSPORTATION SYSTEMS.
427
build the property out of earnings-let the public build your prop-
erty, like the Pennsylvania has done. That being true, there is a
very great temptation to sell bonds and advance freight rates be-
fore you issue any stock. You will find many of these railroads
avoiding the issuance of stock, although they are in most elegant
condition.
Take the Southern Pacific, I believe that it has not sold any stock
for 10 years-unless very recently. Nobody questions the fact that
it could, if it wanted to, up to war time, but what is the use, if you
can get it out of earnings?
The Pennsylvania has been asked repeatedly to state when they
ever offered any stock that could not be disposed of at reason-
able prices. They have failed to indicate any. The statement of
facts by these railroad executives is far more impressive and per-
suasive than a generalization or an opinion.
The railroad presidents of the Pennsylvania and the New York
Central and the Baltimore & Ohio testified in 1911 before the In-
terstate Commerce Commission that unless they got an advance in
freight rates they were not going to be able to sell any securities.
That is in substance what they said. They didn't get the advance,
and in three years those three systems sold over $500,000,000 worth of
securities. The Interstate Commerce Commission commented on it
specifically as showing a very wide difference between the prophecies
of those railroad officials and what actually happened.
The ratio of stocks to bonds in the eastern district is indicated
by the following statement: Since 1906-that is, 11 years-the ratio
has remained somewhat constant. The per cent of capital stock to
total capitalization to-day in the eastern district is practically the
same as it was in 1906-40.3 in 1906—and 40.24 in 1917. Now, the
per cent of capital stock prior to 1906 was greater than subsequent.
In the United States as a whole the ratio of capital stock to total
capitalization was 44.42 in 1916, which is the lastest available figure,
as compared to 46.69 in 1906. In 1906 it was higher than in 1908.
The amount of stock to total capitalization was greater in 1916
than in 1908 by one-half of 1 per cent. They are all within 3 per
cent of the same figure.
I have a little table here which I will offer. This is not the net
capitalization; this is gross capitalization.
(The paper referred to follows:)
Statement of total capitalization, capital stock, and per cent of total capitaliza-
tion, 1906–1916, all railways in the United States.
1906.
1907..
1908..
1909.
1910.
1911.
1912.
1913.
1914..
1915.
Year.
zation.
Total capitali- Capital stock.
Per cent
of total
apitali-
zation.
$14, 570, 421, 478
16, 082, 146, 683
16, 767, 544, 827
17,487, 868, 935
18, 417, 132, 238
19, 208, 935, 081
19, 752, 536, 264
19,796, 125, 712
20, 247, 301, 257
19, 719, 893, 944
19, 681, 493, 092
$6,803, 700,093
46.69
7,356, 861, 691
45 75
7,373, 212, 323
43.97
7,686, 278, 545
43.95
8, 113, 657, 380
44.05
8,470, 717, 611
44.10
8, 622, 400, 821
43.65
8, 610, 611, 327
43.50
8, 680, 759, 704
42.87
8, 635, 319, 368
43.79
8,743, 406, 639
44.42
1916....
Authority: Interstate Commerce Commission's Annual Report of Statistics of Railways in the United
States.
428
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
The following table shows the ratio of ordinary stock to the total
capitalization of the railways in Great Britain. The relative pro-
portion of preferred stock being so much greater in Great Britain,
renders these two tables somewhat comparable:
Statement of total paid-up capital and ordinary stock, United Kingdom.
1906
1907.
1908.
1909.
1910...
1911..
1912.
1913...
Year.
Ratio of
capital.
Total paid-up Ordinary stock. to total
ordinary
paid-up
capital.
Per cent.
$1,286, 883, 341
$486, 720, 013
37.8
1,294, 065, 662
489, 188, 782
37.7
1,310, 533, 212
491, 633, 387
37.5
1,314, 406, 642
493, 120, 763
37.4
1,318, 515, 417
492, 079, 821
37.3
1,324, 018, 361
493, 484, 151
37.3
1,334, 963,518
493, 175, 985
36.2
1,334, 011, 000
493,064, 000
36.9
1,341, 222, 000
493, 791,000
36.8
1914..
Authority: Railway Returns of United Kingdom for years 1913 and 1914.
Bringing the figures down to date, it has been stated that the
railroads have suffered greatly during the past year; that their
securities have slumped enormously. We thought this was a case
where generalizations would not be so instructive as an analysis of
the facts. A very prominent banker made the statement on the wit-
ness stand under oath that he couldn't give any statistical figures,
but he said the general tendency had been that industrials had gone
up since the war commenced since the first of the year—while rail-
roads have gone down in the market. We asked him to name one
industrial that had gone up, that was not directly connected with
the manufacture of munitions. He named the United States indus-
trial alcohol, which is directly connected, in my mind, with the
manufacture of munitions. Later an analysis was made of all the
stocks quoted on the New York market-and published in the issue
of the Financial Chronicle, containing a summary comparing the
situation from January 2 to October 31, 1917. We had the pages of
the Chronicle photographed and made a large volume of them-this
is about a third of them. There are 25 pages like this. We made
an analysis and found, I believe, that out of something like 169, all
but eleven of the industrials had gone down. Most of the 11 were
connected with the manufacture of munitions.
Then we desired to make a more complete analysis-as intelligent
an analysis as possible of the relative credit of railroads, industrials,
and municipalities since the first of the year-to see if it was a fact
that the railroads had suffered enormously.
The Interstate Commerce Commission in denying the advance last
spring would be justly subject to criticism if they had not analyzed
the situation properly. The opposition, of course, claimed that mar-
ket prices on railway securities had gone down. That is not the
question. The question is, What is the cause of this-inadequate
earnings, or is it a reflection of a general financial situation? That
is, has the war affected other industries the same as railroads, more
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
429
than railroads, or less than railroads? If it is the war that is the
matter, the way to make those prices go back is to stop the war.
The commission could not do that. If the earnings caused them to
go down, then the thing to do was to advance rates.
Mr. Norton also made this analysis-by the way, Mr. Norton is
very competent at this work. He was assistant professor of eco-
nomics at the age, I think, of 23 in Yale. He resigned in two or
three years to become bond expert for two houses in New York.
He was the chief accountant for some policyholders of insurance.
companies and recovered over a million and a half of dollars. He
was then statistician for us in the Western Advance Rate case in
1915, and after that was put on the staff of the Wall Street Jour-
nal, where he remained for some time. He is living at West Haven.
He is not now connected with the Wall Street Journal. He made
this anaylsis of bonds as being the least subject to violent fiuctua-
tions on the market, the truest reflection of credit. He took all these
38 eastern systems that Mr. Kruttschnitt referred to as having
suffered he also took the 38 systems, less the New York, New
Haven & Hartford. He then took 14 systems handling 72 per cent
of the traffic in the eastern district. He used for comparison the
Panama threes, not having circulation or deposit privileges, which
would distort the situation as I described awhile ago; he used
municipal bonds of the 17 largest cities in the United States, the
other three not being quoted, and he took all of the industrials,
excluding the munitions. He found that the average price on the
bonds quoted in both January and October for the 38 railroad sys-
tems to be as follows: Those bearing a rate of 3 and 3 per cent
declined 10.9 per cent (there were 25 of those bonds). On 14
railroad systems the 3 and 3 per cent bonds declined 11.6 per
cent. The Panama threes declined 17.6 per cent. Government bonds
declined more than the railroads'. Municipal bonds declined 12.8
per cent. They declined more than the railroads'. The one indus-
trial did not decline as much. I don't know what industrial that
was. Of course, one bond would not be considered as representa-
tive of anything. The fact is that 3 and 3 per cent industrial
bonds are a rarity. That is not what the bulk of industrial bonds
are. They have to pay a higher rate than that. The 4 and 43
per cent railroad bonds declined less than the municipals. There
was no quotation for the 41 Government bonds outstanding Janu-
ary 1. The 4 to 4 per cent bonds of the 38 railroad systems de-
clined more than the industrials-this timė 34 industrials, while those
of the 14 systems declined less than those of the industrials or
municipals. The 5 and 5 per cent bonds of the railroads declined
less than either the industrials or the municipals. From 6 per cent
up the railroad bonds declined less than the industrials or the
municipals.
Considering it as a whole, approximately two-thirds of the indus-
trial bonds declined more than the railroad bonds. The Govern-
ment bonds declined more than the railroads, and the municipals
declined more than the railroads. This is an analysis of 812 bonds.
430 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Comparison of groups of railroads, municipals, industrials, etc.
Groups.
38 systems.
38 systems less New York,
New Haven & Hartford
14 systems..
Panama threes..
Municipal bonds of 17 cities
Industri.15, excluding muni-
tions..
Total bonds...
3 to 31
4 to 4
5 to 5$
6 up.
Number Per cent Number Per cent Number Per cent Number Per cent
bonds. decline. bonds. decline. bonds. decline. bonds. decline.
· •
20 2018
25
10.9
117
11.8
54
6.9
19
8.9
23
10.0
109
11.0
54
6.9
18
8.1
11.6
81
9.8
32
5.9
13
8.5
17.6
25
(1)
62
•(?)
6
(3)
2
(1)
1
93
.3
34
10.1
95
7.7
23
9.1
403
241
75
13.9 to 4.4; yield, 12.8. 2 3.8 to 4.3; yield, 13.2.
Total, 812 bonds.
* 4.1 to 4.7; yield, 14.6.
$3.9 to 4.3; yield, 10.3.
Concluding our discussion as to the wisdom of leaving this in the
hands of the Interstate Commerce Commission so far as rates are
concerned, we see that under our system of regulation, the railroads
have grown in prosperity. The Interstate Commerce Commission
has built up a statistical force which enables them to analyze these
questions carefully and intelligently. They have established some
precedents; their decisions have been reviewed by the courts; the
industrial public has some precedents to guide it in connection with
rate cases. Now, why should you suddenly take that power that is
established by statute, recognized by the Supreme Court, and make
it subordinate to some other man, some other department? The
other department that is suggested has no guiding precedents except
as it may make them. It may not even grant hearings. It may not
hear our side. We may have valid objections to a change, but if he
makes up his mind that he is going to act, we may not have a hearing.
Now, in what I say I desire not to be misinterpreted. No man
in the country has a higher admiration for the gentleman than I, but
circumstances force upon him a method of procedure that would not
be countenanced before the commission or any State commission, or
before the courts. We recognize the absolute necessity for that as to
matters of operation. In fact, the shippers were the ones that pro-
posed the operation of our railroads by the Government, but we do
not see the necessity for that as to rates. We are willing to waive
former conditions as to operation, but we would like to know why it
ought to be done as to rates.
Mr. EscH. Right in that connection, would you consider the safety
appliance act and the hours of service act as more part of operation
than of rate-making power?
Mr. THORNE. Of operation.
Mr. ESCH. And you would be willing that he should have that
power under the pending bill?
Mr. THORNE. Certainly.
Mr. BARKLEY. Might I ask you right there, what do you say about
the possible confusion or inconsistency of allowing him to have the
power to fix wages and not the power to regulate and fix rates?
Mr. THORNE. There must be some reason-there must be comity.
We have State courts and Federal courts; we have railroads with
FEDERAL OFERATION OF TRANSPORTATION SYSTEMS.
431
some jurisdiction over operation that the law never gave to the com-
mission, and they have gone along successfully. There are times
when disagreements have come up, but they have been settled, ad-
justed. The railroads have not been subordinate to the commission
on most of their operations. They have been subordinate to the
commission as to rates. The commission observes the line. Осса-
sionally there may be a difference. The only subject that I can recall
where it is close to the margin, relates to demurrage, and I have
asked, I expect, 25 experts along these lines to name anything else.
There may be some other things that come close to the line, but
nobody has suggested anything, and if anybody here thinks of any-
thing, including Judge Payne, I wish they would mention it.
Mr. ESCH. Routing of freight would be operation, too.
Mr. THORNE. Absolutely. Now in the case of demurrage, your are
proposing a charge not for transportation but a charge as a penalty
for the use of equipment for storage purposes, and consequently
I think that is a matter of operation.
Mr. MONTAGUE. Proposed to facilitate operation?
Mr. THORNE. Yes, sir. I have no fault to find with that.
Mr. BARKLEY. Now here is what I had in mind. It has been as-
sumed upon the part of some that the Director General has the right to
increase wages, and it has been stated through the press and other
sources than an increase is contemplated. Let us assume that wages
are increased 20 per cent by the Director General. Suppose that
increase in wages made necessary an increase in rate-I am not stat-
ing as to whether I thought it would or not, but we will assume that
the railroads could make the showing that might entitle them to some
increase in rates due to increase in wages. You have the increase in
wages fixed by one agency of the Government, and then the rail-
roads would go to the Interstate Commerce Commission, under your
plan, and lay all these facts before them, and they would grant them
or refuse them an increase in rates. Suppose they would decline to
increase rates, what sort of a situation would it bring about if one
agency of the Government has the right to raise expenses and another
agency of the Government fixing the rate, and if the expenses are in-
creased and the rates are not increased then there will possibly be a
deficit at the end of the year which would have to be made up by the
Government, if the net operating income did not amount to as much
as the standard return? We would have a situation where the Gov-
ernment itself had increased operating expenses and thereby lessened
the net operating revenue, but that part of the Government which
increased expenses had no power to increase the income. Had you
thought about the situation in that light?
Mr. THORNE. Oh, yes.
Mr. BARKLEY. I would like to get your idea about that.
Mr. THORNE. The real heart of your question is, what is the most
efficient way of determining whether the rates ought to be advanced
to take care of that increase in expense? You must remember that
there are other questions involved than the mere advance in the wage
and the advanced expenses that might completely offset that proposi-
tion. You are entitled to a fair hearing on that, and the Government
is going to determine how that hearing shall be conducted. Now, the
question is, what department of the Government is the best depart-
432 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
ment for the determination of that question, the department that in-
creases the wage, or another department?
First let us consider the character of questions that are liable to be
raised by that kind of a situation, and then decide for ourselves which
department of the Government should determine those questions as
they arise. I have stated it fairly, have I not?
Mr. BARKLEY. Yes; I think so.
Mr. THORNE. Last year we had an advance in wages, caused by the
Adamson law and other factors so the railroads claimed. It was
widely heralded in the newspapers that the advance would amount to
25 per cent, because of the Adamson law, and would cost the American
people, I think, it was $100,000,000 or $200,000,000-a very large
figure.
The CHAIRMAN. From $60,000,000 to $100,000,000.
Mr. THORNE. Well, I have seen larger figures.
Mr. MONTAGUE. Did the railroad men agree at all upon what would
be the advance due to the Adamson law?
Mr. THORNE. No, sir.
Mr. MONTAGUE. Weren't they very wide apart?
Mr. THORNE. Yes, sir.
Mr. MONTAGUE. There was no unanimity among them?
Mr. THORNE. No; now the question comes: Were those expenses
such as to justify an advance in rates? At first blush you might
be tempted to say yes, without reflection, but suppose it turns out
that right along with that advance in wages there is an enormous
increase of business that more than offsets the advance? Again sup-
pose it turns out that the net of the preceding year is not a normal
year. Then it is not fair to compare your earnings with that year.
Again suppose it turns out that the particular immediate effect may
be low, but it is not fair to take a short period as your test; you
ought to take a longer period of time. What would happen? The
railroads would come down to the Director General and make their
showing. Without hearing the other side, suppose he renders a
decision. The Director General has already done that in two mat-
ters, which were perfectly proper because they concern operations,
and the emergency of the situation demands immediate action as to
operations. But you are reserving the question of compensation to
be determined by Congress and later by the courts where you don't
agree. Just see what would happen. The Interstate Commerce
Commission last spring gave an audience to railroad men headed by
Mr. Rea, of the Pennsylvania. They came down and in a very
forcible and persuasive manner, before the commission, showed the
large increases in wages occasioned by the Adamson law. In addi-
tion to that, they showed the terrible congestion. This occurred
about the latter part of March. The February figures were just
coming in. The fall in the net of Eastern railroads for February
was appalling, evidently confirming the position of the railroad
executives completely. Now if it had been a gentleman without
former experience on the commission, knowing the fluctuations of
net and volume of traffic, the tendency might well have been to im-
mediately have granted the advance to take care of the situation.
Mr. Holden I think can be directly referred to as the leading man
on behalf of the Western roads urging this, and Mr. Rea possibly
1
433
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
the leading man for the Eastern railroads. Their net in February
fell below any February, I guess, in their history. The papers were
demanding an immediate advance to take care of the situation. It
was the general consensus of opinion, "Why, of course, you ought to
put it in."
Shippers' organizations met, passed resolutions indorsing the ad-
vance; city councils met-
Mr. ESCH. (Interposing.) You mean they were solicited to?
Mr. THORNE. Yes. Chambers of commerce were approached. I
know one man who was approached by 22 different railroad men to
get him to indorse the advance to take care of the crisis.
Mr. MONTAGUE. Did the United States Chamber of Commerce,
the national chamber of commerce, indorse that, too?
Mr. THORNE. I don't know. Mr. Rea and the other gentlemen
stated it was a crisis, and they wanted immediate relief without a
hearing. Now imagine the force of that put up to you or to any
other gentleman who had not been through the mill before.
We had a national conference of shippers out at Chicago, with
100 or 150 representatives present. (These gentlemen were the
authorized representatives of organizations having a combined mem-
bership of over 1,000,000 shippers.) A resolution was passed ask-
ing for an investigation before any conclusions were reached, pur-
suing the normal methods ordinarily followed by a tribunal in
passing upon any grave question. There were something like 30
shippers in that group that were opposed to the resolution, who
wanted immediately to give the railroads what they thought was
wise. They retired from the conference. The balance went ahead
with their resolution asking for hearing. The commission granted
the hearing.
Now I have a concrete illustration of how absolutely fallacious
a conclusion would be arrived at by a short ex parte investigation.
I will ask you, gentlemen, to look at the second page of the exhibit
I have handed to you. I asked our accountant to make an analysis
of the net income of the Pennsylvania System during the past 10
years for the first four months of each year. We did not cover
every subsidiary, but we covered the subsidiaries handing 92 per
cent of the traffic, the object being to make it as complete as possible
within the limits of our time.
(The paper referred to follows:)
NATIONAL SHIPPERS' CONFERENCE-EXHIBIT NO. 9.
[Sheet 1.]
Mr. Patterson, general solicitor for the Pennsylvania Railroad, criticized
our exhibit showing the railway operating income, above all operating expenses
and taxes, for the month of April on the grounds that we included the Northern
Central Railway in 1916 and 1917 and it was omitted from the Pennsylvania
for prior years. On July 1, 1914, the Pennslyvania Railroad took over the
lines of the Northern Central Railway. Consequently Mr. Patterson's objec-
tion is correct to the extent that the figures should be added for prior years.
But to show the absolutely insignificant effect on the results we have here
presented revised figures of the Pennsylvania system including the Northern
Central Railway. These will be found on the second sheet of this statement.
Further, relative to the Northern Central purchase by the Pennsylvania we
call attention to the following significant facts:
40958-18-28
434
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
On November 2, 1910, the stockholders voted to lease the road to the Pennsyl-
vania Railroad Co. for 999 years from January 1, 1911, the holders of the
$19,342,550 stock to receive a stock dividend of 40 per cent; also 10 per cent in
cash from treasury assets, and a guarantee of 8 per cent on all the stock dur-
ing the lease. However, several suits brought by minority stockholders pre-
vented the lease from being entered into until July 1, 1914. The stockholders
in August, 1914, received, in addition to the extra dividends called for by the
lease named above, a cash payment at the rate of 8 per cent yearly (28 per
cent) on the 40 per cent stock dividend for the three and a half years between
January 1, 1911, and July 1, 1914, representing accrued rental under the
lease. Annual rental calls for 8 per cent dividend on the capital stock, interest
on bonds and a further sum of $5,000 payable January 15 and July 15. The
Pennsylvania owning the majority of the stock of the Northern Central gets
back more than half the amount, paid in dividends to the Northern Central
as rentals.
But even assuming that it was a bona fide transaction with an entirely dis-
tinct corporation and not this intercorporate payment which we have just
stated, even then we find that the Pennsylvania system had a railway operating
income, above all operating expenses and taxes, in April, 1917, which was
greater than for any preceding year in their history except 1916. On the ad-
joining statement we have also added up the figures for the Pennsylvania sys-
tem for each month. It will be noted that the railway operating income above
expenses and taxes for the Pennsylvania system, covered by the exhibit, is
greater in March than for the corresponding month of any previous year, ex-
.cepting only that of 1916, and it is greater for the month of January than for
any preceding year except 1916. The month of February (figures in italic)
is the only one of the four months that failed to make this splendid showing.
We have not had time to cover the entire system but the accompanying state-
ment shows the figures covering 92.79 per cent of the tonnage and 74.38 per cent
of the mileage of the system as shown in the Carriers' Exhibit prepared by
the Bureau of Railway Economics for this case.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
435
Road.
Miles
operated
June 30,
1916.
[Sheet No. 2.]
Tendency of railway operating income-Pennsylvania system.
[Including Northern Central; Vandalia.]
[Minus (-) signifies loss.]
10 miles
revenue
freight
June 30, 1916.
Month.
1908
1909
1910
1911
1912
1913
1914
1915
1916
1917
i
Dollars.
Dollars.
Dollars.
Dollars.
Dollars.
Dollars.
Dollars.
Dollars. Dollars. Dollars.
Pennsylvania R. R.. 4,534. 29 25,842, 287, 529 Jan...2, 187, 477. 42 2,355, 492. 192, 915,335. 55 1,785, 027. 89/1, 522, 168,04 2,351, 143. 161,572, 043. 76 1, 175, 071. 84/3, 792, 590. 083, 484, 339. 32
Feb... 1,480, 809. 41 1,761, 902. 72 2,470, 179. 09 1,608, 723. 322, 331, 779. 912, 159, 182. 11
2,459, 249. 672, 892, 687. 053, 866, 746. 13 3, 341, 167. 213, 304, 278. 38 2, 419, 349. 192,
65:3, 698. 223,152,618.5 3,030,040,36 3,549,832. 142, 479,312.752, 892, 915.95 3,
135, 401.65
39,953. 54
221,952.11
281,070.65
Mar
Apr
Philadelphia, Balti-
717. 14 1,414,674,323 Jan.
m re & Washing-
ten.
Feb...
Mar.
Apr.
Pennsylvania Co.
1,754.64 8,741, 568, 841 Jan...
305, 196. 36
Feb...
412,459.71
Mar..
Apr
Feb..
Mar..
711, 338. 65
511,205. 61
542,447.07
643, 045. 17
896, 395.95
127, 113. 70
138, 691.50
314,009. 31
328,752.35
434,414. 27
376,513.44
706, (80. 25
775,518.94
202,789.59
117, 656. 18
155,300.95
136, 015. 59
297,225.94
308, (52.36
916, 257.42
732.978. 27
937, 265. 10
255, 723. 78
355,458. 26
395, 949. 20
420, 200.86
814, 249.98
628,875. 111,056, 596. 65
113, 233. 02
>
162,006. 40
249, 148. 67
318,706.00
510, 443. 54
472,924. 77|
869, 777.35
444, 234. 13
418, 475. 62
128, 100.25
390,766.00
574, €35. 06
58,935.26
46, 610. 45
170, 143. 72
335, 072.16
339, 468. 81
299,771.59|
476, 614. 71
614, 311. 94
99, 214. 491,
129, 187. 20
264, 717. 19
507, €89.23
841,041. 01
904, 636. 21
163,091,
655,014. 541,005, 346. 163, 091, 074. 80 729, 369. 12
493, 667. 842, 161, 231.984, 136, 341. 02 4, 218, 389.50
336, 736. 163,353, 528.99 4,648, 429. 79,3,960, 087.53
94, 292. 61
3,958.81
127,845.83
337, 919. 71|
500, 908.97
26,705.84
636,027.67
518, 649. 08
785,026.48
251,575.48
708, 180. 83
350, 261. 64
>
244,093.88 934, €86. 46—673,541.21
658, 789. 06 1, 461,386. 58
729, 413. 021, 527, 209. 15
>
>
166, 644. 98
110,034. 25
249,841. 11!
203, 709. 17
759, 653. 86
272,530.89
301,537.75
301, 537.75
387, 886. 01
859, 304.28|
636,574.97
216, 640. 43
597, 782. 36|1, 109, 361. 751,272, 880. 12
Apr. 556,068.68
675,820. 14-197, 632. 49|
692,663.82 960,045.58 1,440, 806. 15
503, 092.724,
Total Pennsylvania 8,495. 05 41, 389, 518, 895 Jan... 3, 170, 522. 50 3, 517, 693. 405, 091, 791. 65 3, 054, 237. 862, 903, 092. 72 4, 127, 746. 282, 952, 271. 82 1, 748, 862. 98 6, 406, 549.99 5, 072, 168.34
system.
Feb...2,576, 267. 83 2, 906, 465. 964, 087, 968. 882, 651, 366. 24 3, 749, 595. 40 3, 178, 322. 22| 929, 337.05|1, 725, 540. 94|5, 253, 815. 48 533,397.50
4, 288, 936. 38 | 1, 751, 905. 695, 160, 812. 80|5, 318, 317.33 5, 523, 039. 14 3, 187, 368. 48|3, 965, 722. 17 3, 587.947. 12 7, 183, 704. 06|6, 389, 724. 85
Apr... 4,002, 043. 16|1, 909, 686. 13 4, 622, 838. 44 5, 906, 128. 19 4, 418, 073. 02 3, 286, 878. 64 4, 543, 566. 59 5, 110, 677. 997, 749, 996. 46 6. 816, 569. 75
Pittsburgh, Cincin- 1,488. 98 5,390,988, 202 Jan.
nati, Chicago & St.
Louis.
74.38
92.79
Total Pennsylvania 11, 421.00 44, 603, 366, 875
System as per Car-
rier's Exhibit.
Per cent total Penn-
sylvania system as
shown above to
total Pennsylvania
system as per Car-
rier's Exhibit.
Mar
600, 673. 24 1,057, 409. 09
629, 358.31 767, 155.34
838, 529. 08 1,059, 575. 63
652,766. £2 616, 270. 61
717,959.82
485, 426. 47
907, 176. 36
944, 241.14]
757, 248. 12
782, 884. 32
1,099, 834. 74
415.641 391, 145, 303.90
429,490.45 928,282.63
349,469.34
The rail operating expenses were (for 1913) $36,349,121.66, an increase, of $4,166,158.81, of which $1,683,637.78 was in maintenance of way and structures, for $1,520,103 of which
the March floods were responsible. The principal divisions of your main line were put out of service on March 25 and the service was not restored throughout until April 13, although
in the meantime service was resumed between principal points by detouring over such other connecting lines as could be used.
Authority: Annual Report P. C. C. & St. L. for year ending December 31, 1913, page 6.
436
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
[Sheet No. 2]-Continued.
Tendency of railway operating income-Pennsylvania system-Continued.
PER CENT OF INCREASE OVER PRECEDING YEAR.
April.
1915.
1914..
1913.
1912.
51.64
33.38 1911.
70.57
50.03 1910.
135.79
107.39
1909
75.42
54.29
1908.
April.
31.22
15. 42
67.65
47.45
57.85
38.84
93.65
70.33
1
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
437
Glancing over the exhibit the morning after it was compiled I
chanced to notice that the month of February-those figures were
just coming in, remember, when Mr. Rae rushed down to the com-
mission on March 22 and demanded an immediate advance without
investigation.
Mr. MONTAGUE. That was February, 1917?
Mr. THORNE. Yes, sir. I noticed that the net income of the Penn-
sylvania Railroad-which is the parent company-was less than a
fourth what it was in January; less than a fourth what it was in
the same month of the preceding year, February, 1916, and about
one-sixth what it was in March. The same ratio more or less is
true of each of the other three subsidiaries. The Pennsylvania
Company actually showed a deficit for the month of February,
something that had not happened for many years. Think of a great
railroad property like that showing a deficit for the entire month's
operations. And the exhibit showed that the system as a whole
earned practically one-tenth of the net income which they earned in
the month of January; practically one-tenth what they did in the
month of February of the preceding year, and less than one-twelfth
of what they did the next month.
Now, if you will look back over the preceding years you will
see that there are only two occasions when anything like that hap-
pened before. One was during the month of March, 1913, on the
Pittsburgh, Cincinnati, Chicago & St. Louis. I looked in the
report to their stockholders for that year and found that the de-
cline was occasioned by the flood, with which you gentlemen are fa-
miliar, the flood of 1913. Then there was one other time when it oc-
curred.
The CHAIRMAN. What month do you refer to there?
Mr. THORNE. The month of March, 1913, on the Pittsburgh, Cin-
cincinnati, Chicago & St. Louis.
One other time when it occurred was the month of February,
1914, not to the extent that it occurred in 1917; but there was a very
remarkable decline in February, 1914.
Then I looked up the record of the advanced rate case of 1914,
and I found it was just when those figures were coming in that the
railroad attorneys demanded an immediate submission of the five
per cent case without argument. They didn't even want to give
me 20 days to get a brief ready, they were up against such a crisis.
I do not want to charge these gentlemen with being crooked; J
just simply want to call your attention to the fact that those gentle-
men failed to tell the Interstate Commerce Commission that the Feb-
ruary figures were not typical or representative. It is possible to
juggle statistics. It is possible to have the phenomenal operating
conditions extraordinary operation conditions that are not typi-
cal. You must consider more than a month or several months to
know fairly what the tendency is. I say it would be a national
calamity to leave the determination of such issues to any man who
would be apt to decide them without a public hearing and let all
sides be heard in evidence and argument.
There are two incentives that will cause the railroads to try to
push rates up on individual commodities, as well as on traffic as a
whole, regardless of what you do to the net income; regardless of
438
FEDERAL OPERALION OF TRANSPORTATION SYSTEMS.
і
the fact that they won't get any of the surplus during the three-
year period but that their net income is assured during the three-
year period.
First, if Government ownership follows the war, they will want
their net income on just a high a plane as possible immediately prior
to taking over the railroads by purchase, because in every principal
nation on earth where they have taken over the railroads, the capi-
talization of the net income immediately prior to the actual pur-
chase (regardless of the conditions as to the operation by the Gov-
ernment or the private company), the capitalization of the net in-
come immediately prior to actual purchase has been the controlling
or one of the controlling factors in the determination of the price
to be paid.
Second, if private ownership and operation follows the war, then
the railroads will be doubly anxious to have the net income on just
as high a plane as possible and the rates on as high a basis as possible,
because it is lots easier to put rates down than up for a railroad that
has no limitations on putting them down, and has them on putting
them up.
Mr. STEPHENS. I would like to ask you, Mr. Thorne, to suggest,
if you know, the striking relation of the February receipts there in
1914 and 1917. Why are they so similar? Why is the loss in re-
ceipts so great in those two months so widely separated?
Mr. THORNE. Of course, incidentally because there were two gen-
eral advance rate cases pending at those two time, some persons
might say. I would not think of making any such charge. In fact,
those were the two greatest cases, measured in dollars and cents, in
the history of civilization, but I would not presume to make that
claim. It has puzzled me very greatly. I hardly know how to ac-
count for it. It is a remarkable coincidence.
Mr. STEPHENS. Is it a matter of juggling the books, or is it a
matter of shifting the freight for the accounting for that money,
dividing it up or shoving it back into December or forward into
the month ahead?
Mr. THORNE. There are various methods by which you can do to
that. In the first place, there was an actual congestion both times.
The congestion can be facilitated. In the second place, you can di-
vide overhead expenses in different ways. For instance, in February,
1917, the wage increase for both January and February was put into
the February account by many roads. And you can do more re-
newing in that month. You can do more repairing in that month.
There are many different factors that may go into the equation.
It may be that they had congestion to a remarkable extent for both
months. The only point I am making, gentlemen, is that it was not
representative either time, and that no railroad official said it was
not representative until after it was all over. But they used that par-
ticular crucial time to demand an immediate advance without any
hearing.
Now, I urge again the necessity to consider conditions over more
than a month-over several months, and perhaps over several years,
as necessary.
I have another exhibit that I don't have copies to leave with you.
It shows the variations by months. Take just one month, for ex-
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 439
ample, January, 1897, which was less than the preceding year. In
1898 the net revenue was greater than during the preceding year by
24 per cent, the next time 5 per cent greater, the next time 40 per cent
greater, the next time 9 per cent greater, and in 1902 there was a
deficit. Now, there was no general advance in freight rates, and the
next time there was a decline of 19 per cent; the next time an in-
crease of 10 per cent; next an increase of 45, and next a decline of
6; next an increase of 13; next a decline of 6; next a decline of 17;
next an increase of 42; next a decline of 18; next a decline of 1; next
an increase of 53 per cent in January, 1916, over the preceding year.
Here was an increase in net of 53 per cent on one month.
The Interstate Commerce Commission, in the 1910 advance rate
ase said this:
It is urged that the seven months beginning April 1, 1910, do not show as
favorable net results as the corresponding period in 1909 after all allowances
have been made for the increase of wages. But if an examination of the fig-
ures presented in this proceeding demonstrates anything, it is that no reliable
inference can be drawn even from a single year, much less from only a few
months.
That is found in 20 I. C. C. reports, page 290.
The Director General recently made an order in regard to fur-
ishing cars without anybody being given a chance to be heard in
regard to it. The representatives of the National Industrial Traffic
League went before him yesterday or the day before and he was busy.
They went before him the next day. They were given a few minutes'
time with no opportunity to present the facts and arguments which
they thought were persuasive-that the abrogation of the rules would
not accomplish what he thought they would.
A few days ago a large oil jobber in St. Paul wired me- or wrote
me-in regard to the terrible effect of cutting out the right to recon-
sign would have on his business.
Mr. DEWALT. The right to what?
Mr. THORNE. To reconsign. He said that cars came up from the
Oklahoma fields to St. Paul, and he couldn't tell when they were
going to arrive at St. Paul. He has a large number of distributing
stations, and if one of these stations is out of oil when the car gets
to St. Paul, he sends it to that point; but if in the meantime another
station needs it more, he sends it to that other point. If he could
tell when a car was going to arrive at St. Paul, he could tell the point
of destination when the car left Oklahoma, but his absolute inability
to tell when the car is going to arrive at St. Paul absolutely prevents
him from telling where to send the car, and he doesn't have large
enough storage facilities and can not possibly get them at the pres-
ent time, to take care of an unlimited supply." He has enough to take
care of the oil under ordinary operations, but if he has to tell the
ultimate destination of that car when it leaves Oklahoma, it means he
will have too much oil at some places and not enough at others to
supply his customers. He urged me to present that to Mr. McAdoo.
I wrote a letter to Mr. McAdoo and this is his reply:
Your esteemed favor of December 29, re through billing. Matters of this sort
can not be decided without mature consideration, and other matters are so
pressing that I probably will not get around to that for some time. Before any
order is made touching the subject matter of your letter, your suggestions will
have consideration.
440
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
An eminently proper letter, but, gentlemen, that case is closed. I
don't know what Judge Payne or some other ex-railroad official will
tell Mr. McAdoo. He may tell him something that I will have a
complete answer to, but I will have no opportunity to give it. The
record in that case is closed. The evidence is in and the argument.
is made and brief submitted. He is going to tell me his decision after
a while.
Now, I say that that method of procedure as applied to rates or
operation is extremely unfortunate. But I say as to operation that
method of procedure is absolutely necessary, and I haven't the slight-
est criticism in regard to it, because those kinds of matters must be
decided instanter. We don't have time to conduct a public hearing
on all questions of operation that may arise, but there is nothing to
prevent the adequate hearing of the subject of compensation for an
individual service or the service as a whole.
Now, if there is any other question in regard to that subject, I
should be very pleased to answer it if it is possible for me to do so.
Mr. STEPHENS. I would like to ask one question-not exactly in
connection with that-but practically so. You referred to it anyway.
Have you any figures in regard to the extra cost that it has been to
the railroad companies on account of the Adamson law?
Mr. THORNE. It is hard to say what the cost was, if you consider
that all other wage advances are the result of the Adamson law.
Now, the Adamson law itself-
Mr. EscH (interposing). Didn't the Adamson Act provide for the
appointment of a commission, of which Gen. Goethals was to be the
chairman, and it was to report within nine months? The nine
months have elapsed, and has the report been filed?
Mr. THORNE. I have not seen it. Other advances have occurred
during this same time. Now those other advances to individuals.
shop men and to other employees in all different departments of
the work, might have been made whether the Adamson advance
went into effect or not. They might have been made to a less extent
than they were actually, because the Adamson law was sort of a
precedent. But if you confine your statement to just the advances
fixed by the Adamson law, and consider those other advances sepa-
rately, we have the statistics offered by the railroads showing what
they claim to be the effect of it. The employees never agreed to
their interpretation of the figures, however. I think it amounted to
about 12 per cent of their revenues in the eastern district.
Mr. STEPHENSON. Operating revenues?
Mr. THORNE. Yes, sir. The other advances exceeded that per-
centage very largely. May be it is 10 per cent. I have forgotten
the exact figures. I can give you the figures later. But the Adam-
son law was held forward as the chief reason for the 15 per cent
advance in freight revenues.
Mr. STEPHENSON. You can put those figures in the record?
Mr. THORNE. I will be very glad to do so.
The first report of the Eight-Hour Commission has not been
made public; but I understand that the report shows that the so-
called Adamson law has caused "the addition of over $61,000,000
annually to railroad operating expenses. To what extent economies
may be introduced to affect this increase in expense can not be stated."
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
441
The sum of $61,000,000 constitutes approximately 2.47 per cent of
the total freight revenues of the railway companies reporting to the
Interstate Commerce Commission, and 1.76 per cent of their total
operating revenues.
Mr. SANDERS. I would like to ask just one question, Mr. Chair-
man. Speaking of the fixing of the rates by the Director General,
as distinguished from fixing rates by the Interstate Commerce Com-
mission, as I understand it, the Interstate Commerce Commission
fixes the rates to-day under statutes that have been passed by Con-
gress.
Mr. THORNE. Yes, and the decisions of the courts and commis-
sions.
Mr. SANDERS. Where has the Director General of Railroads any
authority to fix any rates on any road or any transportation sys-
tem? Where does he get any such authority?
Mr. THORNE. You have presented a mooted question.
Mr. SANDERS. I am asking for information. If you can point out
where he gets it I would like to find it.
Mr. THORNE. Some parties have interpreted the act of 1916 as
carrying with it the control over rates as well as operations, and the
rates are an incident necessary to operation. Other parties claim
that rates are not an incident to operation; that the railroads were
operating their properties before they were turned over to the
Government; that they did not have final jurisdiction over the rates,
and it is possible for the Government to take the place of the rail-
roads in control of operation without this particular individual in
the Government having control of the rates. Therefore other parties
claim that under the statutes the Director General has no legal
authority over rates of transportation.
Mr. SANDERS. Have you been able to find any affirmative confirma-
tion of such power anywhere upon the Director General to fix rates?
Mr. THORNE. You mean as to the claim of the Director General?
Mr. SANDERS. Yes.
Mr. THORNE. Of the power to fix rates?
Mr. SANDERS. Yes; is there any affirmative grant of power by Con-
gress?
Mr. THORNE. Grant or claim?
Mr. SANDERS. I say, have you been able to find any affirmative
grant of power by statute which confers upon the Director General
the right to fix rates-the right of the Federal Government to fix the
rates?
Mr. THORNE. I must say that he and several other distinguished
gentlemen who know far more than I do about the matters involved
have taken a position contrary to that which others have taken.
Flatly speaking, there is a difference of opinion on that, and I have
tried to state both sides-the claims made.
Mr. SANDERS. Can you find any affirmative grant of power to sus-
pend any of the civil or criminal laws of the United States lodged
in anyone's hands?
Mr. THORNE. I should say that as to any control over operation
possessed by the Interstate Commerce Commission under former acts,
that would seem to me to pass to the President upon his taking over
the roads; but in my judgment there is nothing on the statute books
442 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
that repeals, modifies, or changes the power of the Interstate Com-
merce Commission over rates.
Mr. SANDERS. That is my opinion. I just wanted to know whether
you agreed with it.
Mr. MONTAGUE. Following up the question just suggested by my
colleague, do you know whether or not the Director General or any
of the associates with him contend that they have power to fix rates?
Mr. THORNE. I understand there is no doubt but what that claim is
is made by the Director General. Is that correct, Judge Payne?
Mr. MONTAGUE. I just wanted to know.
Mr. THORNE. I thought Judge Payne could speak more advisedly
on that than I could.
Mr. PAYNE. I do not care to enter into this controversy.
Mr. THORNE. Well, you see, with that kind of an attitude from
the officials representing the department of the administration, it
might be well to clarify it by a clear-cut statute reserving the power
in the commission, if it is your thought that that is the wise thing
to do:
Mr. MONTAGUE. I just want to get the facts.
Mr. THORNE. Well, you have seen the demonstration of it. If the
officials of the department decline to state, it leaves it in a very
ambiguous state. I have been informed that they so claim.
Mr. SANDERS. I have been trying to get some affirmative answer
to my question from everyone that has been here, and that is why I
asked you.
Mr. STEPHENS. Have you submitted the question to Judge Payne?
Mr. SANDERS. I have.
Mr. DECKER. I think we ought to be entirely fair in this matter,
and there is a misunderstanding here. I think Judge Payne just
meant that he didn't want to speak at this time. Judge Payne, to
my personal knowledge, has answered that question at least once,
and I think twice, in the affirmative; and in fairness to Judge Payne
I do not think he has avoided saying anything we have asked him,
and he has answered that the same as you have stated-that they do
claim that right to fix rates.
Mr. SANDERS. In so many words?
Mr. DECKER. I think it has been asked him twice, and I know
once, and the record will show it.
Mr. PAYNE. All I want to say is-I hope I will not be misunder-
stood-I am here because the committee has asked me to be here.
I am not here to enter into a controversy with Mr. Thorne. I deny
Mr. Thorne's right to catechise me here. If any member of the
committee wants to ask me a question I am here to answer.
Mr. SANDERS. I would like to get the matter settled in my own
mind. Does the Director General claim the right to make rates,
Judge Payne?
Mr. PAYNE. The war power under which the proclamation of the
President was issued, in the opinion of the Director General, carries
with it the necessary power. But if Mr. Thorne would answer your
question specifically he would have to say that there is no affirmative
statute on that subject.
Mr. SANDERS. Then, again, I ask the question, does the Director
General claim the right under the power conferred in the bill of
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
443
last year, under which the President took over the roads, and under
the present proclamation, does he claim the power to fix rates?
Mr. PAYNE. Yes.
Mr. SANDERS. That is all I want to know.
Mr. Escн. And in view of the fact that the bill guarantees com-
pensation fixed by the adequate return, there would be every induce-
ment for the Director General to increase rates in order to lessen the
charge on the Treasury?
Mr. THORNE. Yes. And let us consider the fairness of that, gentle-
men. You must recognize the fact that there will be a large inter-
ference with ordinary traffic; there will be costly disturbances in the
movement of trains and in the handling of terminals in order to ev-
pedite the governmental transportation of troops and munitions, a
thing that is inevitable and perfectly proper. But is that diversion
of traffic an interference with the ordinary usual operation which will
increase expenses and decrease the net-is that the fault of the
shippers, or is that a matter of government occasioned by the war,
which the people as a whole should bear instead of the fellows that
have to absorb the freight rates? Isn't that a matter that should be
equitably distributed out among the people as a whole? Those in
Great Britain who wrestled with the same problem so decided. In
England the cost of the service occasioned by the war conditions has
been absorbed by the Government instead of by advancing freight
rates.
In 1913, if I remember correctly, there was approximately a 4
per cent advance granted. Some parts of it-or the major part of
it-possibly did not become effective until later. The war commenced
in the summer of 1914, and the advance of 4 per cent in England was
about the time the advance of 5 per cent was made in the eastern
district in the United States. Since that advance there have been a
few slight modifications up and down, as goes on in this country
constantly, as well as in England, but there has been no general ad-
vance in freight rates in Great Britain since that time. There has
been an advance in passenger fares, and the reason for that, as stated,
was not so much the matter of revenue as it was to discourage pas-
senger traffic. I don't put that forward as a claim. It is found in
documents here that I am going to file with you. Believing that it
might be of some significance for you gentlemen to know authori-
tatively what was done in Great Britain when the railroads were
taken over, and desiring to know it myself, through Senator Kenyon
we asked the legislative reference department of the Congressional
Library to prepare a monograph on just what happened in Great
Britain. I have the monograph so far as it has been prepared as to
Great Britain, and it is a very able statement. It recites the situa-
tion substantially as I have given it to you.
Also Mr. Parmelee and Mr. Dixon, of the Bureau of Railway
Economics, which is sustained by the railroads, prepared a very able
description of the situation in Great Britain.
Then the librarian for the Interstate Commerce Commission has
prepared an able monograph on what occurred in Great Britain, at
the request of one of the members of the commission. If that mem-
ber of the commission gives his consent, I desire also to file that
with you.
444
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
I think that the policy adopted in Great Britain as I have described
it is the correct policy. It will be very difficult to estimate the in-
creased expense and the decline in net occasioned by this interference
with traffic. Isn't that a burden of government? And if that is the
cause, ought not the Government to bear the expense and tax the
people to make it up out of a general taxation affecting the public
generally, rather than those who have to absorb the freight rates?
Some absorb it and some do not. The situation in Great Britain,
however, as a net result, has been satisfactory. I understand that the
British officials claim it was a good bargain that they made with the
carriers when they took them over. I don't whether they consider
a part of the cost taken over that extra special service they have
received. For instance, if a train load of freight is moved from
Chicago to New York other trains must be sidetracked; other traffic
that bears more revenue must give way to this movement; cars must
be taken from other railroads to enable them to make up that train.
Those other railroads will not be able to have any revenues from
those cars that they would otherwise have. Now, is it right that
the cost of that special service should be determined by the average
freight rate, the ordinary freight rate on the ordinary movement of
a train between Chicago and New York under peace conditions, or
is there special service there that would justify a higher rate than the
normal rate? If so, then your accounting system that has been
adopted for the separation of these accounts during the war will
not show a complete picture by any manner of means, because you
will have to make some increase in those ordinary rates for the special
services.
-
The second proposition that I desired to discuss related to the
amount of compensation.
Were there any other questions that you desired to ask in regard to
the wisdom of leaving with the Interstate Commerce Commission the
jurisdiction over rates?
Mr. DOREMUS. Have you placed in the record your suggested
amendment to this bill regarding the regulation of rates?
Mr. THORNE. I have not prepared such an amendment. I under-
stand that there are amendments that amendments have been pre-
pared or are in the process of being prepared. My effort has been
rather to present the thought.
Mr. DOREMUS. I understood you to say some time back that you
intended to submit an amendment to it.
Mr. THORNE. No, no; I said it could be accomplished by the addi-
tion of two or three lines to one of the sections.
Mr. DOREMUS. Have you given the committee the definition of
pure money rates?
Mr. THORNE. No; I haven't framed such a definition.
Mr. DOREMUS. Well, you have discussed it, but have you given us
a definition?
Mr. THORNE. I make the suggestion with very great hesitancy that
the framing of definitions without careful reflection and consideration
is a dangerous task. I will give you my ideas in just as few words
I can, and I do it with great hesitation, however.
as
The pure money rate is the rate at which money can be secured
without the consideration of such factors as the hazard or personal
credit of a person or government as compared to other persons or
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
445
governments. It is that rate which represents the cost of money
independent of the personal hazard.
Mr. DOREMUS. Would this be a fair definition for the pure money
rate: The price of money as fixed by the law of supply and demand,
uninfluenced by any other consideration?
Mr. THORNE. That seems to be a very fair statement.
Mr. PARKER. Would it be the rate at which in the market money
could be had or borrowed, and will be borrowed, without risk, where
there is no risk?
Mr. THORNE. The only objection I would have to the last quali-
fication is that there are risks other than the personal equation, which
is reflected in the pure money rate: For instance, that rate would
be affected by the probable future supply or lack of gold. There is
always a risk that is reflected in the pure money rate. If you confine
your risk to the risk due to the individual or company or government,
as distinguished from others generally, I would agree with you.
Mr. PARKER. I meant risk of not getting it back.
Mr. THORNE. You mean getting all of it back?
Mr. PARKER. The risk of not getting your loan repaid.
Mr. THORNE. No; I wouldn't say that. For instance, suppose you
and I concluded that the supply of money was going to be very
greatly increased during the next fifty years the supply of gold—
and that the dollar was going to depreciate. We would know that
we were going to get all of the money back in a given instance, but
we would also know that we were going to get a cheaper dollar back.
That would consequently affect or modify the pure money rate.
Mr. PARKER. Well; wouldn't the pure money rate be the market
rate for money in cases where there was no risk that the loan and
interest would not be repaid?
Mr. THORNE. I have just tried to indicate to you that there is a
risk.
Mr. PARKER. But that would modify the market rate for money,
but I have taken that modification into account in taking the market
rate.
Mr. THORNE. I thought you said there would be no risk.
Mr. PARKER. I said no risk that you wouldn't get your dollar back.
It might not be as valuable a dollar, but that goes into it. It is the
market rate for money, but I think you have got to consider in the
determination of pure money rates certain risks-not the risk of not
getting the dollar back, however.
The CHAIRMAN. Now, Mr. Thorne, is there something you have
not developed so far?
Mr. THORNE. I have not discussed at all the question of the amount
of compensation.
The CHAIRMAN. Well, that looks to me to be more important than
speculating on the pure money rate, so why not get at it?
Mr. THORNE. I will be very glad to do so.
Mr. DECKER. Are you going to touch on section 13, Government
ownership?
Mr. THORNE. No.
The CHAIRMAN. There are some other witnesses who gave way in
order to let you go on, who wanted to finish up after you got through.
Mr. THORNE. I will cease,
desire.
if you
446
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
The CHAIRMAN. No; we want you to finish.
Mr. DECKER. Could you be here Monday?
Mr. THORNE. I might come back Monday.
Mr. SWEET. Mr. Chairman; I would like to hear Mr. Thorne fully
on the question of compensation.
The CHAIRMAN. Then if you can come back Monday morning, Mr.
Thorne, we will excuse you now and hear Mr. Barrett.
STATEMENT OF THOMAS F. BARRETT, PITTSBURGH, PA.
Mr. BARRETT. Mr. Chairman and gentlemen, either fortunately
or unfortunately, I was selected as chairman of a coal operators' com-
mittee to appear before the committee of the Senate this week that is
investigating the coal situation, and I have not had an opportunity
for that reason to be present at any of these hearings and to hear
what has been said here, whether there have been some hearings in
behalf of the short-line railroads.
The CHAIRMAN. You are interested in the question of compensa-
tion of short-line railroads or weak railroads?
Mr. BARRETT. I am interested in only two features, Mr. Chairman,
if you please, affecting the future of the short-line railroads.
The CHAIRMAN. Now I want to make this suggestion. There is an
amendment that has been proposed-has been framed for the pur;
pose of curing any defect in the bill of that sort, and if you would
rather know what that amendment is before you make your state-
ment, I was just going to ask Judge Payne to read it.
Mr. BARRETT. I thank you very much.
The CHAIRMAN. Judge Payne, if you will do so, I will get you to
read the suggested amendment touching this question, because I sup-
pose you would rather have it before than after you make your
statement?
Mr. BARRETT. Yes, sir.
Mr. PAYNE. This is contained in section 1, and I will only read
so much as answers the specific question:
But if the President shall find that the condition of any carrier was during
all or a substantial portion of the period of three years ended June 30, 1917,
because of nonoperation, receivership, or other undeveloped or abnormal condi-
tions, so exceptional as to make the basis of earnings hereinbefore provided
for plainly inequitable as a fair measure for just compensation, then the Presi-
dent may make with such carrier such agreement for such an amount as just
compensation, as under the circumstances of the particular case he shall find
just.
Now in section 3 this provides for trading section 1; and section 3
is also broadened so as to cover the special circumstances of any road.
Mr. BARRETT. Regardless of whether it is under the control of the
Director of Railroads or not?
Mr. PAYNE. Manifestly if it is not under the control of the Direc
tor General we could not deal with it.
Mr. BARRETT. Now, Mr. Chairman, it will only take me a moment.
to make suggestions that I want to make. I expect to leave the city
to-night, and not be back here any more until after these hearings
are over.
I am the receiver appointed by the court in Pennsylvania for one
of the short-line railroads in that State, and I also have under my
>
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
447
control another railroad of some importance—that is, I mean, under
my control for a bondholders' committee. We are going through a
reorganization.
I had the pleasure of listening this morning over at the Senate
committee to the testimony given by the Director General of Rail-
roads, Mr. McAdoo, and I gleaned from what I heard there that it
would be the policy of the Director General, unless it is otherwise
provided, perhaps in this law, in this bill when it becomes a law,
that the short-line railroads generally would be left outside of the
control of the Director General of Railroads. That being true,
there are just one or two suggestions that I wanted to make as a
practical railroad man, who has had a good deal to do with the op-
eration of short-line railroads in the past and has had to nurse their
troubles for some years, that I think ought to be provided for in the
act of Congress, and not left to the discretion of the administrative
officers of the Government who may have charge of the situation
under this bill when it becomes a law.
What I have in mind is this: The short-line railroads with per-
haps a good many semitrunk line railroads, outside of the operation
of this law and outside of the control of the Director General of
Railroads, will of course naturally have to shift for themselves so
far as financial support is concerned during the war. Under these
circumstances I feel that in my particular part of the country the
short-line railroads will be able to take care of themselves and get
along during the period of the war, provided there was some certain
arrangement provided for in this bill when it becomes a law to the
effect that there might be a fair distribution-or at least a general
distribution such as might be necessary for the short-line railroads--
of equipment, in order that they might be able to have cars without
any question for loading on their lines; and also that there might
be a fair division of the through rate, taking into consideration all
of the circumstances involved during this period of war-high prices
of material and labor, and all the other burdens more or less onerous,
under which the short-line railroads as well as the trunk lines must
operate.
Now, I think it ought to be, perhaps, particularly taken care of by
Congress in this bill for this reason: So far as I have had any time to
devote to these matters to date I have observed that the Director Gen-
eral has already appointed as his assistants, his entire corps of assist-
ants practically, from among officials of the trunk-line railroads. I
never have been able to understand and I can't understand-why it
has been, but that has been my experience, that there has been a feel-
ing of hostility, or rather of semihostility, on the part of the trunk-
line railroads to the independent short-line railroads. I mean those
short-line railroads that are owned independently of trunk-line con-
trol; stand on their own feet and operate and perform the service to
the communities they reach, and take what they get for doing it.
Necessarily they must join in all through shipments of freight, and
in many instances they make joint passenger rates with the trunk-line
railroads. But whether we choose to do so or whether we do not, we
must join in the through rate on freight.
Now, it is a fact-I am not going to take up your time to any great
extent that the short-line railroads have not been able to make a liv-
ing scarcely from the division of the through rates that they have
448
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
been allowed heretofore, either by the ordinary concessions of the
trunk-line railroads or by the divisions allowed by order of the Inter-
state Commerce Commission. Therefore I think it would be only an
act of simple justice and I think it ought to be taken into considera-
tion now, considering what I have observed since I have been in Wash-
ington during the past week, and what I have learned with respect to
the attitude that has been assumed by the administrative officers of
the Government in respect to the operation of the Lever bill, and the
difficulties that the coal men are now being confronted with-I don't
want to go into that subject and take up your time with it, but if we
ever were placed in the same position, we people who own short-line
railroad properties up there, that the people are who own coal mines,
we would be in a very unfortunate position, indeed. We have not been
able to get the hearing, to get the attention that we feel our cases
have merited. That is very largely because of the administrative of-
ficers of the Government charged with these duties being so occupied
and overwhelmed with things to do that they simply can't get to use,
and we have naturally go to wait until sometime in the future when
we can reach the point where our interests may be presented in the
proper way and some action taken in connection therewith.
Now it is a very serious question, not to the owners of short-line
railroads alone, and I want to say to you in most cases those owners
are the people who live practically in the vicinity of where the rail-
roads are operated. It is a very serious question to the public at
large what becomes of this proposition. Take in my own neighbor-
hood, for instance, a combination is now being made of this railroad
of which I am receiver with one or two other short-line railroads
which will make a continuous line of 60 to 70 miles long, located in
the bituminous districts, and the best lumber district that yet remains
in the State of Pennsylvania, where million of feet of lumber are
being cut, and where other products necessary for the country at
large are being produced; and if after this bill becomes law and the
authority of the director general over the railroads has been com-
pleted and perfected-if under the advice of his assistants, if he sees
fit to listen to it—and of course we can not tell what will happen in the
future or what he may listen to-if the short line railroads are not
participating in the government's financial support which is being ac-
corded to the railroads, or will be accorded to the railroads directly
under his control; but if they must shift for themselves, then it is
my honest opinion that they could yet make a living and get along
and survive the period of the war and come out of it intact, pro-
viding there is some arrangement through which they can be recog-
nized with respect to equipment and also with respect to a proper
division of the through rate. And inasmuch as the entire situation
is an emergency I think it would be a particular hardship if the short
line railroads under such circumstances would have to resort to long
hearings, either before the Interstate Commerce. Commission or the
Director General of Railroads, in order to secure that recognition.
Of course in our section of the country we have begun to realize that
if the reorganization of all these railroads, which are now in my
hands as receivers, will have to be accomplished entirely by local capi-
tal; and the people in that section of the country in the preservation
of their property, which is located along the line of these railroads.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
449
and the manufacturing interests and the mines, the lumber and
farms, and so forth, which would be entirely destroyed if these rail-:
roads ceased to operate, they will go down into their pockets and put
up the money necessary to complete the reorganization and save those
railroads from being scrapped. There isn't a single one of them
today that we couldn't take up the rails and materials and such en-
gines and cars as we have, and sell them for second hand material
and pay off the bonded indebtedness and leave something yet for
the stockholders and creditors. We have some creditors also as well
as stockholders. And that is one of the peculiar things about a short
line railroad; it always has stockholders and bondholders and
creditors.
Now, under the circumstances, we feel that we are not going too
far when we bring to the attention of the Members of Congress-
and of course we are all aware of the fact that a great many Members
of Congress live in some of the counties that are served by the short-
line railroads, and they know better from experience than others do
from hearing about it the service which these railroads perform to
the various communities which they serve-and I think it would be
a great mistake if these railroads are left out of the benefits which
may be derived from the financial backing of the Government, which
will be accorded to some other railroads, to leave out some provision
of some kind that would protect them in the matter of securing
equipment and a proper division of through rates.
The CHAIRMAN. Do you want the short-line roads-if the Govern- ·
ment takes over the trunk lines-to have the same right to participate
in the through and joint rates that they now have, or did have under
the law before they were taken over; is that what you mean?
Mr. BARRETT. I do, Mr. Chairman; but I would consider that the
present division of through rates would be wholly inadequate. The
rates and divisions that now exist were based upon conditions that
existed before the war, when the price of labor and material was a
great deal lower, of course, than it is now. Therefore, there ought to
be a readjustment in behalf of the short-line railroads.
The CHAIRMAN. But if the trunk lines had not been taken over,
and with the hostility toward the short lines which you refer to,
would you hope to get a readjustment with the trunk lines, and an
increase in the amount that you would receive in the participation
of through rates over what you are now receiving?
Mr. BARRETT. No; I don't think so, Mr. Chairman; and I don't
believe that they would be asking for it now, and I don't believe that
we would attempt to go on with the reorganization of the railroads
and expand them if conditions remained just as they were. But
now we are reaching a new epoch in the history of railroading, and
some help is going to be accorded to some railroads by the Federal
Government upon the theory that those railroads are necessary in the
efficient prosecution of the war and have been placed under Govern-
ment control in order that their equipment and lines may be coordi-
nated for effective direct use when needed and as needed; and in order
to render that service it is necessary for them in a certain measure
and in some sections of the country, to a considerable extent, to de-
pend upon the traffic which is turned over to them by the short line
railroads.
40958-18-29
450
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Now the question is going to come up, where are the short-line rail-
roads going to secure their money from to aid in their refining and in
their maintenance, and in fact, in operation, unless there is something
provided for in this bill, or else the Director General sees fit out of
the goodness of his heart to direct that these trunk line officials who
are advising him create a policy of greater liberality in the division
of through rates.
I don't want to use this word "hostility " in any offensive sense, but
just for lack of a better word-"semihostility." It is not hostility at
all, but just simply a case of a man running his business and wanting
to get all he can out of it, and is going to get it if he can in a fair
way. He is generally an ambitious fellow, and has got the most
power and can either give or take.
The CHAIRMAN. You might refer to it as a discouraging attitude?
Mr. BARRETT. Yes, sir.
Mr. DEWALT. I understand that all you are asking for is some
provision in the bill looking toward the readjustment of the rates in
conjunction with the through lines, and some provision as to equip-
ment for the short lines.
Mr. BARRETT. That is exactly it.
Mr. DEWALT. You are not asking for a provision in the bill which
provides for the issuing of new obligations for maturing obligation,
or anything of that kind?
Mr. BARRETT. No; as I understand it we could not ask for that
unless we came within the railroads that were placed under the con-
trol of the Director General of Railroads. In other words, the Gov-
ernment has practically nothing to do with us, anything more than it
had before the Director General was appointed or the President's
proclamation taking over the roads was issued. But it is going to
leave the thing that I wanted to emphasize—it is going to leave these
short-line railroads and some of them serve very populous dis-
tricts-in fact, there as millions of dollars of property in our own
State of Pennsylvania, the future of which depends entirely upon the
way these short-line railroads will be left to handle the transportation
moving in and out of those districts after this bill becomes a law
and the administrative officers of the Government have fixed their
policy under it and have begun the work of administering the rail-
roads under the authority vested in them by the Government.
The CHAIRMAN. We are very much obliged to you, Mr. Barrett.
Now, without objection, the committee will adjourn until 10.30
o'clock Monday morning, when Mr. Thorne may proceed with his
testimony.
(Whereupon, at 5:40 o'clock p. m., the committee adjourned until
10.30 o'clock a. m., Monday, January 21, 1918.)
COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE,
HOUSE OF REPRESENTATIVES,
Monday, January 21, 1918.
The committee met at 10.30 o'clock a. m., Hon. Thetus W. Sims
(chairman) presiding.
The CHAIRMAN. The committee will please come to order. Mr.
Thorne, you may proceed.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 451
STATEMENT OF MR. CLIFFORD THORNE-Continued.
- Mr. THORNE. Mr. Chairman and gentlemen of the committee, much
of what I shall say today will have reference to the plan that was
adopted in Great Britain, which it is stated was publicly used as a
suggested precedent for our action. It will be remembered that
within 48 hours after the war commenced, Great Britain took over
the railroads. Several weeks elapsed before any definite terms were
announced providing for the compensation. Those terms were sub-
sequently modified several times. In view of that situation I
thought it would be well to have an authoritative statement to pre-
sent to you as to just what occurred in Great Britain.
The document produced by the Bureau of Railway Economics is
somewhat extended-100 or 200 pages of printed matter dealing
with a large number of facts that are not of special significance, but
it is a very able production-I mean it is not of special interest to
you gentlemen at this time, and through Senator Kenyon I asked
the legislative reference department of the Congressional Library to
prepare a statement that would be trustworthy and confined, so far
as possible, to a discussion of the compensation agreed to be paid by
England for the use of the railroads during the war.
The CHAIRMAN. You have the preparation referred to?
Mr. THORNE. I have it in my hands. If I may read certain signifi-
cant portions of this I think it would be better than for me to state
it offhand.
The CIIAIRMAN. You are submitting it as a whole?
Mr. THORNE. Yes, sir.
(The document referred to follows:)
GOVERNMENT CONTROL OF RAILWAYS IN GREAT BRITAIN IN ITS FINANCIAL
ASPECTS.
CONTENTS.
Introduction.-The assumption of control by the Government.
I. Legal provisions for compensation to be paid the railway companies for
losses occasioned by Government control:
A. Provisions of the regulation of the Forces Act, 1871.
B. Possibility of a resort to railway and canal commissioners as arbitrators.
C. Uncertainty as to the method, amount and time of compensation: (1)
Resulted in holding up contracts; (2) resulted in a withholding dividend an-
nouncements.
II. Agreement as to compensation arrived at between the companies and the
Government:
A. Terms of the agreement.
B. Interpretation of the agreement. 1. All receipts belong to Government.
2. Monthly distribution to the companies: (a) How the compensation is com-
puted; (b) approximate amounts of monthly compensation; (c) method of
distribution among individual companies. 3. Interpretation of the "proviso":
(a) The deduction applies to the companies taken as a whole; (b) its amount.
4. Scope of the agreement: (a) Enterprises of the controlled Government in-
cluded under the guaranty; (b) enterprises not included; (c) the question of
hotels.
III. The amendment to the agreement, March, 1915:
A. The terms of the amendment.
B. Interpretation of the amendment.
C. Financial effect of the amendment on the companies.
IV. Controversies between the Government and the companies and their
settlement.
452
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS:
A. Concerning new works: (1) Contention of the companies; (2) concession
by the Government-The supplementary agreement; (3) interpretation of this
agreement; (4) its effect on the companies' finances.
B. Concerning maintenance and repair: (1) Work postponed till after the
war; (2) contention of the companies; (3) position of the Government; (4)
concession by the Government; (5) its effect on the companies.
INTRODUCTION.
The assumption of control by the Government.
Immediately upon the declaration of war against Germany, the British Gov-
ernment assumed control of practically all the railways, exclusive of tram-
ways, in England, Scotland, and Wales. An Order in Council to this effect
was issued on August 4, 1914,' and on the same date the Prime Minister is-
ued an warrant empowering the President of the Board of Trade to take pos-
session of the entire railway system of Great Britain and to make use of it for
the transportation of troops and supplies "or in any other manner for or in
which it is expedient to use it for His Majesty's service." "
3
This warrant, in accordance with the terms of the regulation of the forces act,
1871, under the authority of which it was issued, is valid only from week to
week, renewable by indorsement in the form provided on its back.* It has been
so renewed, as a matter of routine, and the Government is now pledged to con-
tinue its renewal until the end of the war and for a short time thereafter."
The Government exercises its control of the railways through the railway
executive committee, a body composed of the general managers of several of
the most important of the railway companies. The chairman of this committee
is the president of the board of trade. Its working head, the deputy chairman,
is general manager of one of the companies."
I. LEGAL PROVISION FOR COMPENSATION TO BE PAID THE RAILWAY COMPANIES FOR
LOSSES DUE TO GOVERNMENT CONTROL.
7
A. Provisions of the regulation of the forces act of 1871.-There shall be paid
to any person or body of persons whose railway or plant may be taken possession
of in pursuance of this section, out of moneys to be provided by parliament, such
such full compensation for any loss or injury they may have sustained by the
exercise of the power of the secretary of state under this section as may be
agreed upon between the said secretary of state and the said person or body of
persons, or, in case of difference, may be settled by arbitration in manner pro-
vided by "The Lands Clauses Consolidation Act, 1845.”
B. Possibility of a resort to the railway and canal commissioners as abi-
trators.—In 1888 the provisions of the lands clauses consolidation act regarding
arbitration were superseded in this, as in other railway matters, by provisions
giving jurisdiction in such cases to the railway and canal commissioners.9
C. Uncertainty as to the method, amount, and time of compensation.—The six
weeks which followed the assumption of control by the Government were a time
of anxiety for railway directors and shareholders. The terms of the act of 1871
do not expressly require payment of compensation until after the termination of
Government control. It was clear that if the Government did not make the rail-
ways an offer sufficiently liberal to warrant its immediate acceptance the matter
would fall to be decided by arbitration. This process would in all probability
be a long and tedious one, and in the meantime the railways would be a double
loses: First, from unfavorable war conditions; and, second, from its obligation
to carry Government troops and supplies, on which the Government was making
no immediate payments.
1 Statutory Rules and Orders, 1914, No. 1300.
2 Manual of Emergency Legislation, p. 369.
834 and 35 Vict., ch. 86.
4 Manual of Emergency Legislation, p. 370.
5 Statement of Sir Albert Stanley, president of the Board of Trade, Aug. 15, 1917,
97 H. C. Deb., p. 1163.
• Railway News, Aug. 8, 1914, p. 267.
"It has been said that "The control by the State of the British railways is mainly one
of finance; the transportation of troops. munitions, etc., calls for little interference by
the Government." Engineer, Mar. 9, 1917, p. 223.
Part IV, sec. 16.
"Railway and canal traffic act, 1888, 51 and 52 Vict., ch. 25.
FEDERAL OFERATION OF TRANSPORTATION SYSTEMS.
453
¿
Results of this uncertainty:
1. It was brought to the attention of the House of Commons that because of
the uncertainty as to what compensation the railways would receive, the rail-
way companies had had to suspend contracts with many large contractors.¹
2
2. The uncertainty also resulted in the postponement of the dividend an-
nouncements of some of the Scottish companies. Most of the other railways
had announced their dividends before the Government assumed control.
II. AGREEMENT AS TO COMPENSATION ARRIVED AT BETWEEN THE COMPANIES AND
THE GOVERNMENT.
On September 15, 1914, it was announced that the Government and the com-
panies had come to an agreement. This agreement, although amended half a
year afterwards, and later modified in certain important respects, continues to
form the basis of the financial arrangement between the Government and the
railways down to the present time.
A. THE TERMS OF THE AGREEMENT.
His Majesty's Government have agreed with the railway companies concerned
that, subject to the undermentioned condition, the compensation to be paid
them shall be the sum by which the aggregate net receipts of their railways for
the period during which the Government are in possession of them, fall short
of the aggregate net receipts for the corresponding period of 1913. If, however,
the net receipts for the first half of 1914 were less than the first half of 1913,
the sum payable is to be reduced in the same proportion. This sum, together
with the net receipts of the railway companies taken over, is to be distributed
amongst those companies in proportion to the net receipts of each company dur-
ing the period with which the comparison is made.
The compensation to be paid under this arrangement will cover all special
services, such as those in connection with military and naval transport ren-
dered to the Government by the railway companies concerned; and it will, there-
fore, be unnecessary to make any payments in respect of such transport on the
railways taken over.
B. INTERPRETATION OF THE AGREEMENT.
1. All receipts belong to the Government.-It has been said that under this
agreement" every penny taken on the British railways goes into the pockets of
the Government." The Government, as guarantor, pools the receipts for the
purpose of making such proportionate contributions as are allottable to the
different companies.*
2. Monthly distributions to the companies.-The net receipts are distributed
among the companies each month, together with the Government compensa-
tion."
(a) The amount of the Government compensation under the original agree-
ment was such that when added to the receipts it assured the companies the
same average monthly receipts as in 1913, subject to the reduction correspond-
ing to the lessening of net receipts in the first half of 1914.
(b) Between the assumption of control by the Government and March 31,
1915, there were paid out by the Government to the railway executive com-
mittee for distribution among the railways taken over, in addition to the re-
ceipts, monthly sums amounting to £6,852,000. These payments were pro-
visional, subject to a test audit by the Government accountant.”
In the year ending March 31, 1916, the monthly advances amounted to
£5,879,876. Thus during the period August 4, 1914, and March 31, 1916, there
had been advanced in all by the Government to the railway executive committee,
subject to audit, an aggregate sum of nearly £12,732,000. Only about half of
165 H. C. Deb., pp. 2324–2325, Aug. 10, 1914.
2 Railway News, Sept. 19, 1914, p. 401.
3 Statement of Curtis Bennett, representing Great Western Railway at an inquiry at
Fishguard Jennings, H. J.. Home railways during the war, Nineteenth Century, April,
1915; Engineer, Jan. 29, 1915.
4 Jennings, Home railways during the war.
5 Statist, Feb. 6, 1915, p. 207.
White paper showing the estimated amount of war charges incurred up to the 31st
day of March. 1915, House of Commons, 323, 1915.
Railway News, Mar. 25, 1916, p. 491.
454
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
this sum, however, had been certified at the end of that period, much time
having been taken up with inquiries and investigations.¹
(c) In the distribution among the different companies of the aggregate sum
guaranteed by the Government, the amount which each company shall receive
is not determined, nor affected in any way, by the amount of traffic it carried
during the period of Government control, as compared with the traffic of the
other companies during that period. The money is "distributed among the
companies in proportion to the net receipts of each company for the com-
parison period."
3. Interpretation of the "proviso.”—The clause providing that the compensa-
tion be reduced in proportion to the difference between the net receipts of the
railways in the first half of 1914 and in the first half of 1913 has become
known simply as "the proviso." It remained effective only for the period of
about five months from the outbreak of the war to the end of 1914, being then
superseded by the companies' agreement with the Government as to the pay-
ment of a share of the war bonus to railway men.³
(a) There was at first some misapprehension as to the operation of "the
proviso." It was read by some as applicable to each company's individual posi-
tion during the first half of 1914. This was not its meaning. "The effect of
the arrangement," according to the Statist,* "is to create a pool, into which
will be placed the net receipts of all the companies and the Government com-
pensation. The aggregate amount will be divided in proportion to each com-
pany's net receipts for the corresponding period of 1913. Each company will
share in the amount by which the Government compensation is reduced, no
matter whether, during the first half of 1913 the receipts were up, as in the case
of the Great Western, or down, as in the case of the majority of lines.'
(b) The proportion by which the net receipts for the first half of 1914 were
less than those for the first half of 1913 was found to be about 21 per cent."
The Statist assumes aggregate net receipts Aug. 5, to Dec. 31, 1914, to be
about £8,000,000. The deduction at 21 per cent, according to this reckoning,
amounted to £240,000, a sum which, when divided between all the companies,
could not materially affect the dividend-paying power of any of them."
4. Scope of the agreement:
(a) In addition to the net receipts of railways themselves, the Government
guarantees the net receipts of the following six classes of enterprises, when
carried on by railway companies included in the agreement:
8
(i) Omnibuses and other passenger vehicles not running on a railway;
(ii) steamboats; (iii) canals; (iv) docks, harbors, and wharves; (v) hotels,
refreshment rooms, and cars; (vi) other separate businesses carried on by the
companies.
(b) On the other hand, "rents, interest, transfer fees, and canals where the
dividends are guaranteed are not affected by Government control of the rail-
ways." And "Where a company has leased its hotels or refreshment rooms, the
Government will not
* * make good any reduction or remission in the
amount payable by the lessee to the company.
(c) The hotel business suffered because of the war, and it appears not un-
likely that, but for the application of the government guarantee, hotels owned
by railways would have shared in the general falling off in profits. In Ireland,
for example, where the Government did not assume control of railways until
the beginning of 1917, the North Counties Committee of the Midland Railway
reported that the profit of £2,011 from hotels and restaurant cars in 1913 was,
in 1914, converted into a loss of £2.700.“
One of the chief causes of the falling off in hotel receipts in Great Britain
was the Central Control Boards Regulations as to liquor traffic.
Hotel pro-
prietors in general regarded it as unfair that they should be suffering as a
result of these regulations, while those hotels which belonged to railways had
their old profits guaranteed. As some 55 hotels are included under the Govern-
ment's guarantee to railways, the matter assumed not inconsiderable propor-
tions. It finally reached the House of Commons, in the form of a question put
to the president of the Board of Trade. The reply was a refusal on the part of
1 Engineer. Apr. 27, 1917, p. 379.
2 Statist. Feb. 6, 1915, p. 207.
8 See below, Section IIT.
Feb. 6, 1915, pp. 207-208.
5 Statist, Mar. 3, 1917, p. 365.
• Ibid., Feb. 6, 1915, pp. 207-208.
? Economist, Feb. 6, 1915, p. 224.
8 Railway News, Feb. 5, 1916.
° Engineer, Mar. 5, 1916, p. 226.
10 Engineer, Apr. 9, 1915, p. 357.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
455
the Government "to alter the terms of compensation to the railway com-
panies." 1
2
III. THE AMENDMENT TO THE AGREEMENT, MARCH, 1915.
On February 13, 1915, as a result of demands for higher wages based on
the increased cost of food, it was agreed between the railway companies,
the Government, and the railway men that a special war bonus should be
granted to the most important classes of railway men, amounting to 2s. a week
for men whose weekly wage was 30s. or more, and 3s. for those whose wage
was less. The question of who was to bear the financial burden of this bonus
was for a time in doubt. But in March it was known that the government
and the companies had reached an understanding which involved an amend-
ment of the original agreement for compensation and the terms of this amend-
ment were announced in the Board of Trade Journal of April 22, among the
"Orders in council and Government notices affecting trade," as follows:
3
A. The terms of the amendment-Government control of railways—Altera-
tion in terms of compensation. With reference to the notice on page 749 of
the Board of Trade Journal of September 17 last, relative to compensation in
connection with Government control of the railways of Great Britain, it is
notified that an alteration has been made in the agreement between His
Majesty's Government and the railway companies, whose undertakings have
been taken possession of under the regulation of the forces act, 1871.
Under the original agreement the sum paid in compensation to the com-
panies concerned was the sum by which the aggregate net receipts of the rail-
ways for the period during which the Government were in possession of them
fell short of the aggregate net receipts for the corresponding period of 1913,
subject, however, to a proportionate reduction if the net receipts of the com-
panies for the first half of 1914 were less than the net receipts for the first
half of 1913.
It has now been agreed that this reduction shall not in future be made, but
that 25 per cent of the war bonus granted to railway employees who come
within the railway conciliation scheme shall be borne by the companies and
not by the Government.
This withdrawal of the "proviso" was effective as from January 1, 1915,*
B. Interpretation of the amendment.-The method by which the companies'
agreement to pay one-fourth of this first war bonus was put into effect under
the arrangement between the companies and the Government was by excluding
that amount from the working expenses of the railways for the purposes of
that arrangement. The remaining three-fourths of the bonus were included
in the companies' statements of working expenses. It thus became necessary
that gross receipts be correspondingly increased in order that net receipts be
kept up to the guaranteed level. The Government made no special grants to
the companies for the purpose of paying the bonus.' The obligation it as-
sumed to pay the bonus was not a direct obligation either to the men or to
the companies, but worked out indirectly as part of the Government's responsi-
bility as guarantor of the companies' net receipts.
66
The withdrawal of the proviso" simplified the general arrangement be-
tween the Government and the companies. Thereafter the sum which the
Government guaranteed the companies as net receipts was to be equal to
their aggregate net receipts in 1913, subject to a deduction amounting to one-
fourth of the first war bonus.
From time to time increases were made in the war bonus. But of these the
Government bore the full financial burden. In order that the amount which the
companies were responsible might remain fixed, the proportion of the bonus
paid by them had to be decreased as the amount of the bonus increased. Thus
in October, 1915, when the bonus was doubled, the proportion of it which the
companies had to pay was cut in half; that is to say, they were responsible for
121 per cent of the increased bonus. A further doubling of the bonus reduced
1 H. C. Deb., 81, pp. 47-48, Mar. 21, 1916.
2 Railway News, Feb. 20, 1915, p. 282.
3 Ibid., Mar. 13, 1915, p. 2452.
Board of Trade Journal, v. 89, 223.
5 Railway News, Feb. 5, 1916, p. 219.
Mr. Pretyman, parliamentary secretary to the Board of Trade, in the House of Com-
mons, Oct. 21, 1915, 74 H. C. Deb.. p. 1978.
7 Mr. Roberts, parliamentary secretary to the Board of Trade, in the House of Com-
mons, Oct. 21, 1917, 90 H. C. Deb., pp. 1336-1337.
8 Railway News, Feb. 6, 1915, p. 219.
456 -FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
ட்
the proportion to 6 per cent. When, in April 1917, the bonus was increased
by one-half, the proportion was correspondingly reduced 4%, etc.
2
C. Financial effect of the amendment on the companies.--In answer to a ques-
tion put to him in the House of Commons while the amendment to the Govern-
ment agreement with the companies was under consideration, Mr. Runciman,
president of the board of trade, declared that “the net effect of the proposed
variation in the original agreement which is now under discussion is not to
increase the scale of compensation payable by the Government." That is to
say, the deduction of 23 per cent from the net receipts of the companies in 1913
required by the "proviso" before the amendment was to be approximately
equal to the deduction of one-fourth of the first war bonus from the net receipts
of the companies in 1913, required by the amendment itself.*
(C
It has, however, been estimated by the Statist," that the amendment results in
a slight advantage to the companies," since 23 per cent of the net receipts for
1913 amounts approximately to £1,300,000, while one-fourth of the first war
bonus amounts only to about £1,000,000.
IV. CONTROVERSIES BETWEEN THE GOVERNMENT AND THE COMPANIES AND THEIR
SETTLEMENT.
6
Referring to the arrangement between the railways and the Government, the
Engineer has stated that "with such vast business transactions as pass be-
tween the two parties, financial disputes must continually arise. * *
Every pound is more or less scrutinized by the treasury." * *
Sir Gilbert
Claughton, chairman of the London and Northwestern Railway, told the com-
pany's shareholders in February, 1916, that if they "only knew the number of
negotiations which were already going on between railway companies and the
Government they would quite realize that the Government would quickly wish
every official connected with the railway companies to be interned.”
At least one such controversy reached the acute stage where a resort to arbi-
tration, as provided for in the regulation of the forces act of 1871 for cases
in which an agreement with the Government could not be reached, was threat-
ened. But, so far as has been announced, no actual appeal to the railway and
canal commissioner, who would be the official arbitrator in such a case, has
yet been made.
A. CONCERNING NEW WORKS.
1. Contention of the companies.—Not long after the Government had come to
its main agreement with the railways, the question arose as to who was to pay
the interest on the capital expended for new works which came into operation
during or immediately preceding the period of Government control. Such sums
were not included as working expenses in the agreement between the railways
and the Government, and the burden would, therefore, fall upon the companies."
The companies, however, protested that, since it was the Government which
was deriving the entire benefit from these new works, and not the companies,
the Government and not the companies should pay the interest charges.
For some two years the Government held out against this contention. The
result was the new construction "cut down to the lowest possible limits.” 10
This result, in view of the increasing shortage of men for the army, was pre-
sumably not displeasing to the Government."
But there was a certain amount of construction work and capital expenditure
which could not be abandoned nor postponed. The Metropolitan, the London &
Southwestern, the Southeastern & Chatham, and many other companies had
new works in progress at the end of 1913, and had to raise capital to meet the
1 Mr. Roberts in the House of Commons, Feb. 21, 1917, 90 H. C. Deb., p. 1339.
2 Railway News, Apr. 14, 1917.
8 Mar. 4, 1915, 70 H. C. Deb., p. 952.
4 Railway News, Feb. 5, 1916, p. 219.
5 Apr. 17, 1915, p. 85.
• Feb. 23, 1917, p. 172.
? Engineer, Sept. 22, 1916, p. 249.
Ibid., the particular issue was a sum of £100,000 spent by the North British Co. for
wagon repair.
0
Engineer, Mar. 5, 1915, p. 226.
10 Inventors' Review, Aug. 21, 1915, p. 226.
11 See replies to a question put to the president of the board of trade, Apr. 19, 1916
(81 H. C. Deb., p. 2336), and to a question put to the Secretary for Ireland, May 24, 1917
(93 H. C. Deb., p. 2486). See also Engineer, Jan. 5, 1917, p. 16.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
457
/
66
extra expense. Any advantage derived therefrom," declared the Statist, at
the end of 1916, goes to the Government, but the burden of the additional
interest charges falls entirely upon the holders of the junior securities.'
The Metropolitan, for example, had raised a good deal of capital on widening
some of its lines." "Although the new works are now earning revenue of which
the Government gets the benefit," declared Lord Aberconway, the company's
chairman, at a shareholders' meeting early in 1916, "we have been left to bear
the interest on the new capital." As a result, there was a falling off in the
1915 dividend from 13 to 1 per cent.³
2. Concession by the Government-The supplementary agreement.-Early in
1917 it was announced that the difficulty had been removed by a concession
on the part of the Government. It consisting of "a supplementary agree-
ment * *** * providing for the payment to the railways as from August 4,
1914, of interest at the rate of 4 per cent upon capital expended upon new
works that have been brought into use since December 31, 1912.” *
This agree-
ment had been concluded several months before the date of its announcement,
but had not been made public.
5
4
3. Interpretation of the supplementary agreement.—It is believed that the
liability of the Government to pay the 4 per cent does not under this supple-
mentary agreement depend upon the nature of the new works, but solely upon
the time they came into operation, and upon their representing a real capital
expenditure. According to this interpretation, terminal enlargements, or even
unusual acquisitions of rolling stock, would come under the provision."
4. Ils effect on the companies' finances.-Part, at least, of the sums due to
some of the companies under this supplementary agreement were paid at once,
producing important changes in their balance sheets and affecting dividend
rates.' It was announced that the remaining sums for the period August 4,
1914, to December, 1916, would be turned over to the railway companies
shortly." For the future the payments are to be made yearly, as long as the
railways remain under Government control.
(6
8
The heaviness of the burden of which the railway companies have been
relieved by this supplementary agreement is indicated by the fact that, in the
case of a group of 25 of the most important railways taken for purposes of
comparison, the net earnings were only about £600.000 less in 1916 than they
were in 1913, while the net profits were over £1,050.000 less, notwithstanding
the employment of the companies' funds in hand at better rates of interest.
11
B. CONCERNING MAINTENANCE AND REPAIR.
1. Work postponed till after the war.-Owing to a shortage of men in the
railway shops and to the fact that many railway establishments have, since
early in the war, been devoted to the making of munitions 10 and other Govern-
ment supplies " nearly all the railway companies have been forced to defer
much of their "repair and maintenance" work until after the war. The
question of the burden of payment for this deferred work arose early in the
war, and was not definitely settled until 1917.
2. Contention of the companies.-The companies contended that their inability
to make the ordinary repairs and renewals was no fault of theirs, and that
they should not be penalized for it by having to make large outlays on this
score out of their own funds immediately after the war, when the repairs and
renewals would have to be made.
3. Position of the Government.-The Government, on the other hand, was on
guard against the danger that the companies would make use of the period of
1 Statist, Dec. 23, 1916, p. 1419.
2 Ibid.. Feb. 3, 1917, p. 184.
8 Economist, Feb. 12, 1916, p. 260.
4 Statist, Feb. 3, 1917, p. 184.
5" It is somewhat surprising that the intimation regarding the revision of the agree-
ment *
* was not made by the railway executive committee some months ago,
when such action was decided upon.
* The public learn of the revision for the
first time through the dividend announcement of one of our smaller railway under-
takings."-Ibid.
• Ibid.
7 E. g., in the case of the. Hull & Barnsley Co. See British Railways in 1916, Engineer,
Mar. 2. 1917, p. 206.
8 Statist, Feb. 3, 1917.
Statist, Mar. 3, 1917, p. 365.
10 Cf. 76 H. C. Deh., p. 2375, Dec. 17, 1915.
11 Cf. Statement of the Great Southern & Western Co., Engineer, Feb. 19, 1915, p. 183.
458
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Government control as a means of getting its own work done gratis under the
pretext of being ordinary “maintenance and repair" work. The North British
Co., for example, which ordinarily had about 1,000 wagons awaiting repair, had
in October, 1915, five times that number. It would appear that, unable to get
this work done in its own shops, the company had it done by outside firms,
The cost of this work, an additional £100,000, was "called in question by the
railway executive committee of the Government." The entire difficulty was
attributed by the Engineer¹ to the failure of the Government to announce in
exact terms what it meant to do about the whole matter of arrears of main-
tenance.
4. Concession by the Government.-Early in 1916 the Government conceded
the general principle of its responsibility in respect of such maintenance work
as in the ordinary course of events would have been undertaken, but which,
owing to the war, was being deferred. There was a long delay in stating the
precise terms and in making payments. But finally the Government acknowl-
edged its liability, not only for what the deferred work would cost at ordinary
prices but for the probable increased cost of the work, due to higher prices of
labor and material which are expected to prevail after the war. The allow-
ance for this increase in cost is made in the form of a percentage added to
allowance covering what the work would have cost if done on time. Payments
in respect of this allowance were under way at the beginning of 1917.³
5. The effect on the companies.—The combined effect of this concession` and
the Government's concession as to interest on the capital for new works has
been that the companies "are now full of funds, which they have temporarily
placed in Government securities." The amounts involved are large, and the
money thus received from the Government is thought to be sufficient to raise
the net earnings for 1917 above those for the year preceding.³
Mr. THORNE (reading from the document just submitted):
Immediately upon the declaration of war against Germany the British Gov-
ernment assumed control of practically all the railroads, exclusive of tramways,
in England, Scotland, and Wales. An order in council to this effect was issued
on August 4, 1914, and on that same date the prime minister issued a warrant
empowering the president of the board of trade to take possession of the entire
railway system of Great Britain and to make use of it for the transportation
of troops and supplies, " or in any other manner for or in which it is expedient
to use it for His Majesty's service."
There, you see, it includes the commercial operation of the rail-
roads as well as the use for transportation of troops and munitions.
[Reading:]
This warrant, in accordance with the terms of the regulation of the forces
act, 1871, under the authority of which it was issued, is valid only from week
to week, renewable by indorsement in the form provided on its back. It has
been so renewed as a matter of routine, and the Government is now pledged
to continue its renewal until the end of the war and for a short time thereafter.
The Government exercises its control of the railways through the railway
executive committee, a body composed of the general managers of several of
the most important of the railway companies. The chairman of this committee
is the president of the board of trade. Its working head, the deputy chair-
man, is general manager of one of the companies.
Now this is the provision on the subject of compensation:
There shall be paid to any person or body of persons whose railway or plant
may be taken possession of in pursuance of this section, out of moneys to be
provided by Parliament, such full compensation for any loss or injury they
may have sustained by the exercise of the powers of the Secretary of State
under this section as may be agreed upon between the said secretary of state
and the said person or body of persons, or, in case of differences, may be set-
tled by arbitration in the manner provided by "the lands clauses consolida-
tion act, 1845.”
Possibility of a resort to the railway and canal commissioners as arbitrators:
In 1888 the provisions of the lands clauses consolidation act regarding arbi-
tration were superseded, in this as in other matters, by provisions giving juris-
diction in such cases to the railway and canal commissioners.
1 Sept. 21, 1916, p. 249. 2 Ibid.
3 Statist, Mar. 10, 1917, p. 298.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
459
The railway and canal commissioners are analogous to our Inter-
State Commerce Commissioners. [Reading:]
The six weeks which followed the assumption of control by the Government
were a time of anxiety for railway directors and shareholders. The terms of
the act of 1871 do not expressly require payment of compensation until after
the termination of Government control. It was clear that if the Government
did not make the railways an offer sufficiently liberal to warrant its immediate
acceptance the matter would fall to be decided by arbitration. This process
would in all probability be a long and tedious one, and in the meantime the
railways would be a double loser-first from unfavorable war conditions, and
second from its obligation to carry Government troops and supplies on which
the Government was making no immediate payment.
The CHAIRMAN. The Government was paying nothing for the car-
rying of munitions and troops?
Mr. THORNE. Yes, sir.
The CHAIRMAN. You mean, was paying nothing current?
Mr. THORNE. Yes, sir. And there was a double way in which the
railroads were losers. [Reading:]
It was brought to the attention of the House of Commons that because of the
uncertainty as to what compensation the railways would receive, the railway
companies have had to suspend contracts with many large contractors.
The uncertainty also resulted in the postponement of the dividend announce-
'ments of some of the Scottish companies. Most of the other railways had an-
nounced their dividends before the Government assumed control.
On September 15, 1914, it was announced that the Government and the com-
panies had come to an agreement. This agreement, although amended half a
year afterwards and later modified in certain important respects, continues to
form the basis of the financial arrangement between the Government and the
railways down to the present time.
Mr. PARKER. Where is this printed?
Mr. THORNE. I can give you the authority if you desire. It will
take considerable time. The one I am now reading is taken from
the "Royal proclamation and Government notices affecting trade." -
in Board of Trade Journal, volume 86, page 749, September 7, 1914.
[Reading:]
His Majesty's Government have agreed with the railway companies con-
cerned that, subject to the undermentioned condition, the compensation to
be paid them shall be the sum by which the aggregate net receipts of their rail-
ways for the period during which the Government are in possession of them, fall
short of the aggregate net receipts for the corresponding period of 1913. If,
however, the net receipts for the first half of 1914 were less than the first
half of 1913, the sum payable is to be reduced in the same proportion. This
sum, together with the net receipts of the railway companies taken over, is
to be distributed amongst those companies in proportion to the net receipts of
each company during the period with which comparison is made.
The compensation to be paid under this arrangement will cover all special
services such as those in connection with military and naval transport rendered
to the Government by the railway companies concerned, and it will, therefore,
be unnecessary to make any payments in respect of such transport on the rail-
ways taken over.
B. INTERPRETATION OF THE AGREEMENT.
1. All receipts belong to the Government.-It has been said that under
this agreement "every penny taken on the British railways goes into the pocket
of the Government." The Government, as guarantor, pools the receipts for
the purpose of making such proportionate contributions as are allotable to the
different companies.
Then follows a discussion of the payments in order to carry on the
subsequent distribution of compensation provided. If it is not boring
460
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
you too much, I would like to read most of this, but if it is, I will
suspend and state it in substance.
The CHAIRMAN. Use it as you think best to clarify your own
statement. Make it plain to the committee and to anybody else who
may read it.
Mr. THORNE [reading]:
The net receipts are distributed among the companies each month, together
with the Government compensation.
(a) The amount of the Government compensation under the original agree-
ment was such that, when added to the receipts it assured the companies the
same average monthly recepits as in 1913, subject to the reduction correspond-
ing to the lessening of net receipts in the first half of 1914.
(b) Between the assumption of control by the Government and March 31,
1915, there were paid out by the Government to the railway executive com-
mittee for distribution among the railways taken over, in addition to the re-
ceipts, monthly sums amounting to £6,852,000. These payments were provis-
ional, subject to a test audit by the Government accountant.
In the year ending March 31, 1916, the monthly advances amounted to £5,879,-
876. Thus, during the period August 4, 1914, and March 31, 1916, there had been
advanced in all by the Government to the railway executive committee, subject
to audit, an aggregate sum of nearly £12,732,000. Only about half of this sum,
however, had been certified at the end of that period, much time having been
taken up with inquiries and investigations.
-
(c) In the distribution among the different companies of the aggregate sum
guaranteed by the Government, the amount which each company shall receive
is not determined, nor affected in any way, by the amount of traffic it carried
during the period of Government control, as compared with the traffic of the
other companies during that period. The money is "distributed among the com-
panies in proportion to the net receipts of each company for the comparison
period."
3. Interpretation of "the proviso."-The clause providing that the compensa-
tion be reduced in proportion to the difference between the net receipts of the
railways in the first half of 1914 and in the first half of 1913 has become known
simply as the proviso." It remained effective only for the period of about five
months from the outbreak of the war to the end of 1914, being then superseded
by the companies' agreement with the Government as to the payment of a share
of the war bonus to railway men.
(a) There was at first some misapprehension as to the operation of "the pro-
viso." It was read by some as applicable to each company's individual position
during the first half of 1914. This was not its meaning "The effect of the ar-
rangement," according to the statist, "is to create a pool, into which will be
placed the net receipts of all the companies and the Government compensation.
The aggregate amount will be divided in proportion to each company's net re-
ceipts for the corresponding period of 1913. Each company will share in the
amount by which the Government compensation is reduced, no matter whether,
during the first half of 1913, the receipts were up, as in the case of the Great
Western, or down, as in the case of the majority of lines."
(b) The proportion by which the net receipts for the first half of 1914 were
less than those for the first half of 1913 was found to be about 21 per cent.
That item is worth remembering. [Reading:]
"The statist assumes aggregate net receipts August 5 to December 31, 1914,
to be about £8,000,000. The deduction at 23 per cent, according to this reckon-
ing, amounted to £240,000, a sum which, when divided between all the companies,
could not materially affect the dividend-paying power of any of them.
4. Scope of the agreement.-(a) In addition to the net receipts of railways
themselves, the Government guarantees the net receipts of the following six
classes of enterprises, when carried on by railway companies included in the
agreement:
(1) Omnibuses and other passenger vehicles not running on a railway.
(ii) Steamboats.
(iii) Canals.
(iv) Docks, harbors, and wharves.
(v) Hotels, refreshment rooms, and cars.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 461
(vi) Other separate businesses carried on by the companies.
(b) On the other hand, "rents, interest, transfer fees, and canals where the
dividends are guaranteed are not affected by Government control of the rail-
ways." And "where a company has leased its hotels or refreshment rooms,
the Government will not make good any reduction or remission in the amount.
payable by the lessee to the company.'
(c). The hotel business suffered because of the war, and it appears not
unlikely that, but for the application of the Government guarantee, hotels
owned by railways would have shared in the general falling off in profits.
In Ireland, for example, where the Government did not assume control of
railways until the beginning of 1917, the North Counties Committee of the
Midland Railway reported that the profit of £2,011 from hotels and restaurant
cars in 1913 was, in 1914, converted into a loss of £2,700.
The next paragraph is a discussion of hotels, and I will omit that.
Some hotels that were not getting any guarantee objected. [Read-
ing:]
On February 13, 1915, as a result of demands for higher wages, based on
the increased cost of food, it was agreed between the railway companies, the
Government, and the railway men that a special war bonus should be granted
to the most important classes of railway men, amounting to 2s. a week for men
whose weekly wage was 30s. or more, and 3s. for those whose wage was less.
The CHAIRMAN. The term "railway men " means the employees of
the railways?
Mr. THORNE. Yes, sir. [Reading:]
The question of who was to bear the financial burden of this bonus was for
a time in doubt.
Now, here we have one of the bones of contention at the present
time. [Reading:]
But in March it was known that the Government and the companies had
reached an understanding which involved an amendment of the original agree-
ment for compensation, and the terms of this amendment were announced in
the Board of Trade Journal of April 22, among the "Orders in Council and
Government Notices affecting Trade," as follows:
A. THE TERMS OF THE AMENDMENT.
GOVERNMENT CONTROL OF RAILWAYS.
Alternation in terms of compensation.-With reference to the notice on p. 749
of the "Board of Trade Journal" of 17th September last, relative to compensa-
tion in connection with Government control of the railways of Great Britain,
it is notified that an alteration has been made in the agreement between
H. M. Government and the railway companies whose undertakings have been
taken possession of under the regulation of the Forces act, 1871.
Under the original agreement the sum paid in compensation to the companies
concerned was the sum by which the aggregate net receipts of the railways
for the period during which the Government were in possession of them fell
short of the aggregate net receipts for the corresponding period of 1913, sub-
ject, however, to a proportionate reduction if the net receipts of the companies
for the first half of 1914 were less than the net receipts for the first half of
1913.
It has been agreed that this reduction shall not in future be made, but
that 25 per cent of the war bonus granted to railway employees who come
within the railway conciliation scheme shall be borne by the companies and not
by the Government.
This withdrawal of the "proviso" was effective as from January 1, 1915.
B. INTERPRETATION OF THE AMENDMENT.
The method by which the companies' agreement to pay one-fourth of this first
war bonus was put into effect under the arrangement between the companies
and the Government was by excluding that amount from the working expenses
462
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
of the railways for the purpose of that arrangement. The remaining three-
fourths of the bonus were included in the companies' statements of working.
expenses.
Now, note, gentlemen, that caused a net deduction in the guaranteed.
return going to the carriers of 25 per cent of the wage paid labor.
The CHAIRMAN. Twenty-five per cent of the increase or of the
total?
Mr. THORNE. Of the increase. And 75 per cent. of the increase
was assumed by the Government. No rates were advanced to take
care of either. [Reading:]
It thus became necessary that gross receipts be correspondingly increased in
order that net receipts be kept up to the guaranteed level. The Government
made no special grants to the companies for the purpose of paying the bonus.
The obligation it assumed to pay the bonus was not a direct obligation either to
the men or to the companies, but worked out indirectly as part of the Gov-
ernment's responsibility as guarantor of the companies' net receipts.
The withdrawal of the "proviso" simplified the general arrangement between
the Government and the companies. Thereafter the sum which the Government
guaranteed the companies as net receipts was to be equal to their aggregate
net receipts in 1913, subject to a deduction amounting to one-fourth of the first
war bonus.
The CHAIRMAN. Which meant that the war increased the wages.
That is really what the bonus means.
Mr. THORNE. The guaranty going to the railroads because of this
war bonus was reduced.
The CHAIRMAN. I know, but the word "bonus" there would be an
increase of wages?
Mr. THORNE. The bonus was an increase in the wage of labor.
[Reading:]
From time to time increases were made in the war bonus. But of these the
Government bore the full financial burden.
The CHAIRMAN. Further increases were not put upon the railroads
after the 25 per cent?
Mr. THORNE. No, sir.
[Reading:]
In order that the amount which the companies were responsible might remain
fixed, the proportion of the bonus paid by them had to be decreased as the
amount of the bonus increased. Thus in October, 1915, when the bonus was
doubled, the proportion of it which the companies had to pay was cut in half;
that is to say they were responsible for 123 per cent of the increased bonus. A
further doubling of the bonus reduced the proportion to 6 per cent. When, in
April, 1917, the bonus was increased by one-half, the proportion was corre-
spondingly reduced to 43, etc.
C. FINANCIAL EFFECT OF THE AMENDMENT ON THE COMPANIES.
In answer to a question put to him in the House of Commons while the
amendment to the Government agreement with the companies was under con-
sideration, Mr. Runciman, president of the board of trade, declared that "the
net effect of the proposed variation in the original agreement which is now
under discussion is not to increase the scale of compensation payable by the
Government." That is to say, the deduction of 24 per cent from the net receipts
of the companies in 1913, required by the "proviso" before the amendment, was
to be approximately equal to the deduction of one-fourth of the first war bonus
from the net receipts of the companies in 1913, required by the amendment itself.
It has, however, been estimated by the Statist that the amendment results in
"a slight advantage to the companies" since 24 per cent of the net receipts for
1913 amounts approximately to ₤1.300,000, while one-fourth of the first war
bonus amounts only about to $1,000,000.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
463
CONTROVERSIES BETWEEN THE GOVERNMENT AND THE COMPANIES AND THEIR
SETTLEMENT.
* *
""
*
Referring to the arrangement between the railways and the Government, the
engineer has stated that "With such vast business transactions as pass between
the two parties, financial disputes must continually arise * * Every pound
is more or less scrutinized by the treasury
Sir Gilbert Claughton,
chairman of the London & Northwestern Railway, told the company's share-
holders in February, 1916, that if they "only knew the number of negotiations
which were already going on between railway companies and the Government
they would quite realize that the Government would quickly wish every official
connected with the railway companies to be interned."
At least one such controversy reached the acute stage where a resort to
arbitration, as provided for in the regulation of the forces act of 1871, for cases
in which an agreement with the Government could not be reached, was threat-
ened; but, so far as has been announced, no actual appeal to the railway and
canal commissioners, who would be the official arbitrators in such a case, has
yet been made.
You see, instead of putting their commission down below every-
body else—a subordinate bunch of clerks they put their commission
at the very top. They would be the final arbitrators of disputes. It
is natural and wise that that should be. The commission has the
expert training, the experience, and the assistants; and they are dis-
interested. [Reading:]
Concerning new works.-Not long after the Government had come to its
main agreement with the railways the question arose as to who was to pay the
interest on the capital expended for new works which came into operation
during, or immediately preceding, the period of Government control. Such
sums were not included as working expenses in the agreement between the
railways and the Government, and the burden would, therefore, fall upon the
companies.
The companies, however, protested that, since it was the Government which
was deriving the entire benefit from these new works, and not the companies,
the Government, and not the companies, should pay the interest charges.
The
For some two years the Government held out against this contention.
result was the new construction "cut down to the lowest possible limits."
This result, in view of the increasing shortage of men for the army, was pre-
sumably not displeasing to the Government.
But there was a certain amount of construction work and capital expenditure
which could not be abandoned nor postponed. The Metropolitan, the London
& Southwestern, the Southeastern & Chatham, and many other companies
had new works in progress at the end of 1913 and had to raise capital to meet
the extra expense. "Any advantage derived therefrom," declared the Statist,
at the end of 1916, " goes to the Government, but the burden of the additional
interest charges falls entirely upon the holders of the junior securities."
The Metropolitan, for example, had raised a good deal of capital on widening
some of its lines. "Although the new works are now earning revenue, of
which the Government gets the benefit," declared Lord Aberconway, the com-
pany's chairman, at a shareholders' meeting early in 1916, "we have been left
to bear the interest on the new capital." As a result, there was a falling off in
the 1915 dividend from 1 to 1 per cent.
2. Concession by the Government: The supplementary agreement.
Early in 1917 it was announced that the difficulty had been removed by a
concession on the part of the Governinent, it consisting of “ a supplementary
agreement *
providing for the payment to the railways, as from August
4, 1914, of interest at the rate of 4 per cent upon capital expended upon new
works that have been brought into use since December 31, 1912.”
That is a very significant fact. The interest rate is only 4 per
cent during the period when the Government was having to pay a
great deal more than that; and the companies, of course, that would
borrow would have to pay still more.
464
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Another significant phase of that is that it goes to a period prior
to the taking over of the railroads. I presume that is on the assump-
tion that the property had not been, in actual use, earning anything
for the railroads before they were taken over; and I presume it is
also by way of compromise. [Reading:]
It is believed that the liability of the Government to pay the 4 per cent does
not, under this supplementary agreement, depend upon the nature of the new
works, but solely upon the time they came into operation and upon their repre-
senting a real capital expenditure. According to this interpretation terminal
enlargements, or even unusual acquisitions of rolling stock, would come under
the provision.
4. Its effect on the companies' finances.
Part, at least, of the sums due to some of the companies under this supple-
mentary agreement were paid at once, producing important changes in their
balance sheets and affecting dividend rates. It was announced that the re-
maining sums for the period August 4, 1914, to December, 1916, would be turned
over to the railway companies "shortly." For the future, the payments are to
be made yearly, as long as the railways remain under Government control.
The heaviness of the burden of which the railway companies have been re-
lieved by this supplementary agreement is indicated by the fact that, in the
case of a group of 25 of the most important railways taken for purposes of
comparison, the net earnings were only about £600,000 less in 1916 than they
were in 1913, while the net profits were over £1,050,000 less, notwithstanding
the employment of the companies' funds in hand at better rates of interest.
B. CONCERNING MAINTENANCE AND REPAIR-WORK POSTPONED TILL AFTER THE
WAR.
Owing to a shortage of men in the railway shops and to the fact that many
railway establishments have since early in the war been devoted to the making
of munitions and other Government supplies, nearly all the railway companies
have been forced to defer much of their "repair and maintenance" work until
after the war. The question of the burden of payment for this deferred work
arose early in the war and was not definitely settled until 1917.
2. Contention of the companies.-The companies contended that their ina-
bility to make the ordinary repairs and renewals was no fault of theirs, and
that they should not be penalized for it by having to make large outlays on
this score out of their own funds immediately after the war, when the repairs
and renewals would have to be made.
3. Position of the Government.---The Government, on the other hand, was
on guard against the danger that the companies would make use of the period
of Government control as a means of getting its own work done gratis under
the pretext of its being ordinary "maintenance and repair" work. The North
British Co., for example, which ordinarily had about 1,000 wagons awaiting
repair, had, in October, 1915, five times that number. It would appear that
unable to get this work done in its own shops the company had it done by
outside. firms. The cost of this work, an additional £100,000, was "called in
question by the railway executive committee of the Government. The entire
difficulty was attributed by the engineer to the failure of the Government to
announce in exact terms what it meant to do about the whole matter of arrears
and maintenance.
""
Unless you gentlemen can see your way clear to get that thing
settled as a matter of legislative policy in advance, the same thing is
going to be the source of innumerable controversies, unless you sim-
ply avoid controversies by giving everything the railroads want. Of
course if you want to start out on that policy you can easily get rid
of any of these vexatious problems. [Reading:]
Early in 1916 the Government conceded the general principle of its responsi-
bility in respect of such maintenance work as in the ordinary course of events
would have been undertaken, but which, owing to the war, was being deferred.
There was a long delay in stating the precise terms and in making payments.
But finally the Government acknowledged its liability, not only for what the
deferred work would cost at ordinary prices-
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
46,5
1
Mark you, not at excessive prices of the war period-
but for the probably increased cost of the work, due to higher prices of labor
and material which are expected to prevail after the war.
Now, they get both factors in there definitely, and they make a
blanket allowance for that increase instead of estimating it.
[Reading:]
:: The allowance for this incvrease in cost is made in the form of a percentage
added to allowance covering what the work would have cost if done on timė.
Payments in respect of this allowance were under way at the beginning of 1917.
Mr. Parmelee and Mr. Dixon state that percentage as 123 per cent
over the ordinary maintenance, but this document does not state the
percentage. [Reading:]
66
The combined effect of this concession and the Government's concession as
to `interest on the capital for new works has been that the companies are now
full of funds, which they have temporarily placed in Government securities."
The amounts involved are large, and the money thus received from the Goy-
ernment is thought to be sufficient to raise the net earnings for 1917 above
those for the year preceding.
Now, I am not going to burden you, of course, with reading this
'other document, but this document is prepared by the librarian of the
Interstate Commerce Commission, and gives in detail the acts and
orders much more fully than that which I have just read, which is a
digest. The commission itself is not responsible for the document.
It is an able review of what occurred in Great Britain, prepared
by the librarian to the commission, Mr. Boyd.
•
Mr. ESCH. How many pages are there in that document?
Mr. THORNE. Twenty-nine pages.
Mr. MONTAGUE. Will you make that a part of your hearing?
Mr. THORNE. Yes.
Mr. Escн. I move that it be printed as an exhibit.
The CHAIRMAN. Without objection, that may be done.
(The paper referred to follows:)
Memorandum to Commissioner Aitchison-British railways in the European war.
I. How GoVERNMENT CONTROL WAS ASSUMED.
Government control of railways was assumed in accordance with an act of
Parliament, approved August 17, 1871, 34 and 35 Vitcoria, chapter 86, entitled
"An Act for the better regulation of the regular and auxiliary forces of the
Crown; and for other purposes relating thereto (so far as relates to rail-
ways)."—Biggs' General Railway Laws, 15th edition, 1830-1898, pages 580-581.
16. When Her Majesty, by order in council, declares that an emergency has
arisen in whihc it is expedient for the public service that Her Majesty's Gov-
ernment should have control over the railroads in the United Kingdom, or any
of them, the secretary of state may, by warrant under his hand, empower any
person or persons named in such warrant to take possession in the name or on
behalf of Her Majesty of any railroad in the United Kingdom, and of the plant
belonging thereto, or of any part thereof, and may take possession of any plant
without taking possession of the railroad itself, and to use the same for Her
Majesty's service at such times and in such manner as the secretary of state
may direct; and the directors, officers, and servants of any such railroad shall
obey the directions of the secretarty of state as to the user of such railroad
or plant as aforesaid for Her Majesty's service.
Any warrant granted by the said secretary of state in pursuance of this
section shall remain in force for one week only, but may be renewed from
week to week so long as, in the opinion of the said secretary of state the
emergency continues.
40958-18- -30
466 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
There shall be paid to any person or body of persons whose railroad or
plant may be taken possession of in pursuance of this section, out of mon-
eys to be provided by Parliament, such full compensation for any loss or
injury they may have sustained by the exercise of the powers of the secre-
tary of state under this section as may be agreed upon between the said sec-
retary of state and the said person or body of persons or, in case of differ-
ence, may be settled by arbitration in manner provided by "The Lands
Clauses Consolidation Act, 1845.”
Where any railroad or plant is taken possession of in the name or on
behalf of Her Majesty in pursuance of this section, all contracts and engage-
ments between the person or body of persons whose railroad is so taken
possession of and the directors, officers, and servants of such person or body
of persons, or between such person or body of persons and any other per-
son in relation to the working or maintenance of the railroad, or in relation
to the supply or working of the plant of such railroad, which would, if
such possession had not been taken, have been enforceable by or against the
said person or body of persons, shall during the continuance of such pos-
session be enforceable by or against Her Majesty.
For the purposes of this section "railroad" shall include any tramway,
whether worked by animal or mechanical power, or partly in one way and
partly in the other, and any stations, works, or accommodation belonging
to or required for the working of such railroad or tramway.
"Plant" shall include any engines, rolling stock, horses, or other animal
or mechanical power, and all things necessary for the proper working of a
railroad or tramway which are not included in the word "railroad."
In pursuance of an order in council, August 4, 1914 (Statutory Rules and
Orders No. 1300, 1914), and section 16 of the act of 1871, quoted entire above,
the secretary of state by warrant dated August 4, 1914, empowered the
president of the board of trade to take possession of all railroads (exclud-
ing tramways) and of the plants belonging thereto, in Great Britain. In pur-
suance of a further order in council, December 22, 1916 (Statutory Rules
and Orders No. 93, 1917), the secretary of state by warrant, dated December
29, 1916, empowered the president of the board of trade to take possession
of all railroads in Ireland and of the plants belonging thereto. These war-
rants, which remained in force for one week only, have in pursuance of the
empowering sections been respectively renewed each week by indorsement
upon the back of a form especially prepared for the purpose.
Great Britain declared war against Germany on August 4, 1914. The first
movement for taking over the railways was by order in council, No. 1300,
upon the same date, as follows:
At the Court of Buckingham Palace, the 4th day of August, 1914.
Present: The King's most excellent Majesty in Council. Whereas by virtue
of section 16 of the regulation of the forces act, 1871, it is lawful for the
secretary of state, when His Majesty, by order in council, declares that an
emergency has arisen in which it is expedient for the public service that
His Majesty's Government should have control over the railroads in Great
Britain, or any of them, by warrant under his hand to empower persons to
take such action in relation to any railroad in Great Britain as is mentioned
in that section:
Now, therefore, His Majesty, by and with the advice of His Privy Council,
is pleased to declare, and it is hereby declared, for the purposes of the said
section 16, that an emergency has arisen in which it is expedient for the
public service that His Majesty's Government should have control over the rail-
roads of Great Britain.
ALMERIC FITZ ROY.
(Great Britain-Manual of Emergency Legislation, 1914, p. 368.)
This was followed immediately by the warrant of the secretary of state
(being in this case the Secretary of State of Home Affairs), as follows:
"Whereas by virtue of section 16 of the regulation of the forces act, 1871,
it is lawful for the secretary of state, when His Majesty, by order in council,
declares that an emergency has arisen in which it is expedient for the public
service that His Majesty's Government should have control over the railroads
in the United Kingdom, or any of them, by warrant under his hand to empower
any person to take possession in the name or on behalf of His Majesty of any
railroad in the United Kingdom, and of the plant belonging thereto, or of any
part thereof, and to take possession of any plant without taking possession of
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
467
:
the railroad itself, and to use the same for His Majesty's service at such times
and in such manner as the secretary of state may direct.
"And whereas His Majesty, by order in council made this 4th day of August,
1914, has declared, for the purposes of the said section, that an emergency has
arisen in which it is expedient for the public service that His Majesty's Govern-
ment should have control over the railroads of Great Britain.
Now, therefore, in pursuance of the said enactment, I, Herbert Henry Asquith,
a secretary of state, hereby empower the president of the board of trade to
take possession on behalf of His Majesty of all the railroads, excluding tram-
ways, in Great Britain and of the plant belonging thereto or any part thereof
and to use the same at all times during which this warrant or any renewal
thereof remains in force for the conveyance of any of the naval or military
forces of His Majesty, or of any goods, stores, merchandise required for the
use of His Majesty's fleet, or for the use of any of His Majesty's said forces, or
to use the same for any other purpose, or in any other manner for or in which
it is expedient to use it for His Majesty's service.
Fourth day of August, 1914.
*
'H. H. ASQUITH."
(Great Britain.-Manual of Emergency Legislation, 1914, p. 369.)
This warrant of August 4, 1914, running for a week only, as provided in the
forces act of 1871, has been renewed weekly by indorsement on a specially
prepared blank form (Army Form A 2030A), as follows:
•
"I,
a secretary of state, being of opinion that the emergency
continues, hereby renew this warrant for a further period of one week from the
day of
day of
44
19-
(Signed)
(Great Britain.-Manual of Emergency Legislation, 1914, p. 370.)
By virture of an order in council, December 22, 1916 (Statutory Rules and
Orders, No. 93, 1917), the secretary of state, by warrant dated December 29,
1916, empowered the president of the board of trade to take possession of all
railroads in Ireland and of the plants belonging thereto. Copies of the order in
council and the warrant of the secretary of state, as relating to Ireland, have
not been located, after a very patient search, but it is assumed that they are
identical in form with those pertaining to taking over the railroads of Great
Britain, viz, for England, Scotland, and Wales, which have been given in full.
When war was declared the War Office made the following announcement:
'WAR OFFICE, August 4, 1914.
“An order in council has been made under section 16 of the regulation of the
forces act, 1871, declaring that it is expedient that the Government should have
control over the railroads in Great Britain. This control will be exercised
through an executive committee composed of general managers of railways
which has been formed for some time, and has prepared plans with a view to
facilitating the working of these provisions of the act.
"Although the railway facilities for other than naval and military purposes
may for a time be somewhat restricted, the effect of the use of the powers
under this act will be to coordinate the demands on the railways of the civil
community with those necessary to meet the special requirements of the naval
and military authorities.
More normal conditions will, in due course, be restored, and it is hoped that
the public will recognize the necessity for the special conditions, and will, in
the general interest, accommodate themselves to the inconveniences involved.
(The Railway Year Book, 1915, page 16. London.)
II. HOW ADMINISTERED.
Since 1859 there have been in England certain volunteer companies of troops
in addition to the regular standing army; and among the former have been
regiments of Royal Engineers, like the regulars in the Royal Engineers, which
have had companies for railway construction, etc. In 1865 there were estab-
lished an Engineer and Railway Volunteer Staff Corps, which made the opera-
tion of railways for military purposes a study. They were purely voluntary
and unofficial, and not for 30 years was anything done to establish any
official connection between the military authorities and the railways. In 1896
there was established a war railway council, composed of high administrative
468
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
•
officers of the army and the railways. In the fall of 1911 there were two
events that almost caused the Government to take over the railroads, the gen-
eral railway strike and the Agadir incident in Morocco, which almost in-
volved Germany and France in war, with Great Britain siding with France.
These events led in 1912 to the creation of the railway executive committee,
superseding the war railway council, composed of the general managers of the
leading railway lines, which was to act as a central organization, to give instruc-
tions and to coordinate the activities of the different railways in time of war.
Working with ít in cooperation was the Engineer and Railway Volunteer Staff
Corps, above mentioned. These organizations, year by year, before the present
war, worked out schemes for war-time operation, in conjunction with the
Director General of Military Transport. In 1912 all plans had been perfected,
and every railway manager had in his safe confidential sealed document de-
tailing a plan of mobilization. So far as the operation of railways was con-
cerned, Great Britain was prepared,
THE RAILWAY EXECUTIVE COMMITTEE, 1914-1917.
On behalf of the Government, under direction of the board of trade, the
control of the railways in Great Britain (not including Ireland) was vested, on
and from August 5, 1914, in a committee composed of the following general
managers:
Mr. John Burns, president board of trade, chairman; succeeded by Right
Hon. Walter Runciman, president of the board of trade, chairman; succeeded by
Sir Albert Stanley, metropolitan district of London, chairman; Sir H. A.
Walker, London & Southwestern Railway, acting chairman; Mr. J. A. F. Aspin-
all, Lancashire & Yorkshire Railway (a prisoner of war in Germany from
August 17 to September 21, and during his absence Mr. A. Watson, superin-
tendent of the line, acted in his place; Mr. Watson was subsequently made a
permanent member of the committee); Mr. A. Watson, Lancashire & Yorkshire
Railway; Sir A. K. Butterworth, North Eastern Railway; Sir Robert Turnbull,
London & North Western Railway; succeeded by Mr. Guy Calthrop, London &
North Western Railway; Mr. C. H. Dent, Great Northern Railway; Mr. F. H.
Dent, South Eastern & Chatham Railway; Sir Sam Fay, Great Central Rail-
way; Sir Guy Granet, Midland Railway; Mr. D. A. Matheson, Caledonian Rail-
way; Mr. F. Potter, Great Western Railway; Mr. W. Forbes, London, Brighton
& South Coast Railway (whose name was added a few days after the first list
was announced); Mr. H. W. Thornton, Great Eastern Railway (an American,
former general superintendent of the Long Island Railroad Co., added as a
temporary member two days after the first announcement, since made a per-
manent member); Mr. Gilbert S. Szlumper, secretary. (Railway Year Book,
1915, p. 17; 1917, p. 16; London.)
It will be noted that the original committee consisted of 10 members, soon
increased to 13, not counting the chairman. The personnel of the committee
has remained practically unchanged to date. The official chairman of the rail-
way executive committee is the president of the board of trade, but the real
presiding officer is understood to be the acting chairman, Sir H. A. Walker,
general manager of the London & South Western Railway Co. Under this
committee there are groups of committees of railway experts. The War Office
and Director General of Military Transport are in touch with the central com-
mittee. The main plans of war policy have, of course, to be approved by the
Government.
The Government first did not announce any terms with the companies,
leaving this for another time. The lines remained the property of the com-
panies. They retained management, subject to the control of the railway
executive committee. Government control did not mean Government owner-
ship. The whole administration of the railways went on as before. The sole
purpose at first was the movement of troops, but as the war developed, as
economy became more and more essential, the scope of the railway executive
committee, now in supreme control, became greatly extended.
: Immediately upon the announcement of the personnel of the railway execu-
tive committee, there was issued by this committee the following notification,
signed by Sir H. A. Walker, acting chairman:
"In view of the announcements made that the Government have taken over
the control of the railways, it is desirable that the public should understand
exactly what this means. The control of the railways has been taken over
by the Government for the purpose of insuring that the railways, locomotives,
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
469
•
rolling stock, and staff shall be used as one complete unit in the best interests
of the state for the movement of troops, stores, and food supplies.
'The necessity for this action must at once become apparent when it is
realized that certain ports, through which the bulk of our food supplies entèr
this country, may be closed for the purpose of such food supplies, and in that
event the rolling stock, locomotives, etc., may have to be diverted to other
lines for the purpose of serving other ports.
"The staff of each railway will remain under the same control as hereto-
fore, and will receive their instructions through the same channels as in the
past.
"We are officially advised that in order to give due effect to the instruc-
tions received from the War Office and admiralty for the movement of troops,
etc., it may be necessary to discontinue at short notice a portion of the adver-
tised service, or to close certain of the lines against ordinary traffic. Under
these circumstances no responsibility can be accepted for any delay or loss that
may arise." (Railway Year Book, 1915, page 16, London.)
IRISH RAILWAY EXECUTIVE COMMITTEE.
As before stated, by virtue of an order in council, December 22, 1916 (Statu-
tory Rules and Orders, No. 93, 1917), the secretary of state by warrant dated
December 29, 1916, empowered the president of the board of trade to take pos-
session of all the railroads in Ireland and of the plants belonging thereto. Ac-
cordingly, in December, 1916, the following committee was appointed to admin-
ister the railways of Ireland on behalf of the Government, on terms similar to
those applying to England, Scotland, and Wales:
}
Chairman, Sir William Byrne, under secretary for Ireland; acting chairman,
Mr. E. A. Neale, general manager Great Southern & Western Railway; sec-
retary, Mr. Joseph Ingram, secretary Irish Railway Clearing House; other
members, Mr. J. Bagwell, general manager Great Northern Railway; Mr.
M. F. Keogh, general manager Midland Great Western Railway; Mr. J. Cowie,
general manager Northern Counties Committee. (Railway Yearbook, 1917,
p. 17, London.)
IÍI. BASIS OF COMPENSATION TO THE RAILWAYS AND PROTECTION OF THE STOCK-
HOLDERS.
Under the terms by which the railways were taken over for the war, the
Government guaranteed to the owners that their net revenue for each year
should be the same as for 1913, the year before the war, except when the net
receipts for the first half of 1914 were less than the net receipts for the first
half of 1913, and in that case the sum payable was to be reduced in the same
proportion. On April 14, 1915, this exception or proviso was abolished, in view
of the railways' paying 25 per cent of the war bonus given by the Government
to railway employees.
The entire Government traffic-passenger and freight-was to be carried by
the railways without any direct charge therefor or any accounts rendered.
The one weak side of the agreement was that it made no allowance to cover
increased interest payments on account of new investments and new capital
expenditure since the war began. This point was afterwards met by an arrange-
ment that the Government should pay interest of 4 per cent on all new capital
invested since August 4, 1914, on new lines, branches, terminals, equipment, or
other facilities put into use since January 1, 1913.
The original terms of remuneration, as issued by the board of trade on Sep-
tember 15, 1914, were as follows:
"The regulations of the Forces Act, 1871, under which His Majesty's Govern-
ment have taken possession of most of the railways of Great Britain, provide
that full compensation shall be paid to the owners for any loss or injury they
may have sustained thereby, the amount of such compensation to be settled by
agreement, or if necessary, by arbitration.
His Majesty's Government have agreed with the railway companies con-
cerned that, subject to the undermentioned condition, the compensation to be
paid them shall be the sum by which the aggregate net receipts of their railways
for the period during which the Government are in possession of them fall
short of the aggregate net receipts for the corresponding period of 1913.. If,
however, the net receipts of the companies for the first half of 1914 were less
than the net receipts for the first half of 1913, the sum. payable is to be reduced
in the same proportion.
i
470
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
"This sum, together with the net receipts of the railway companies taken
over, is to be distributed among those companies in proportion to the net receipts
of each company during the period with which comparison is made.
66
The compensation to be paid under this arrangement will cover all special
services, such as those in connection with military and naval transport rendered
to the Government by the railway companies concerned, and it will therefore
be unnecessary to make any payments in respect of such transport on the rail-
ways taken over." (Railway Year Book, 1915, p. 16; 1917, p. 16, London.)
On April 14, 1915, as above stated, the board of trade issued its revised terms
of remuneration relative to net receipts for the first half of 1914, as compared
with the first half of 1913, as follows, the language employed being a commen-
tary upon the order:
"On April 14, 1915, the board of trade announced that an alteration had been
made in the agreement between His Majesty's Government and the railway
companies whose undertakings have been taken possession of under the Regu-
lation of Forces Act, 1871.
"Under the original agreement the sum to be paid in compensation to the
companies concerned was the sum by which the aggregate net receipts of their
railways for the period during which the Government were in possession of
them fell short of the aggregate net receipts for the corresponding period of
1913, subject, however, to a proportionate reduction if the net receipts of the
companies for the first half of 1914 were less than the net receipts for the first
half of 1913.
"According to the new arrangement this reduction will not in future be made,
but 25 per cent of the war bonus granted to railway employees who come
within the railway conciliation scheme is borne by the railway companies, and
not by the Government." (Railway Yearbook, 1916, p. 21; 1917, p. 16. London.)
In the Railway Age Gazette of August 11, 1916, page 244, Mr. Julius H. Par-
melee, statistician of the Bureau of Railway Economics, Washington, D. C.,
writing of war payments to British railways, says:
The fiscal year of the British railways closes on March 31. Returns for the
first fiscal year under the war agreement, ending March 31, 1915, have re-
cently been made public in a Government White Paper. From August 4, 1914,
to March 31, 1915, a period of about seven months, the Government advanced
the railways £6,851,957, or about $33,350,000 to offset the reduction of their net
revenues. These advances were made monthly to the railway executive com-
mittee, for distribution among the individual railways. This amount is sub-
ject to an adjustment after an audit of the yearly accounts of the railways
by a chartered government accountant
It is difficult, on this side of the Atlantic, to analyze the bargain between the
British Government and the railways without having more detailed informa-
tion regarding railway operations in England than has thus far been vouch-
safed. Since the war began, the English railway reports have been shorn of
practically all details regarding traffic handled, receipts and expenses, and
it is next to hopeless to attempt an analysis of the situation from the Ameri-
can point of view. At first sight $33,000,000 does not appear a heavy charge
to the Government for the services of the British railways during the early
months of the war. This feeling is amply borne out by the comments of various
English journals regarding the situation.
the market values of
* *
standard British railway stocks have greatly fallen off.
EFFECT ON WAGES AND LABOR.
At the outbreak of the war the railways and their employees were engaged
in a wage controversy. A scheme of conciliation drafted by a Royal Com-
mission had come into effect in 1912, to continue until November 6, 1914, but
either side could terminate the agreement by a year's notice. The employees
gave notice in November, 1913, that they would withdraw, as they wanted
the conditions revised. A temporary arrangement was made in October, 1914,
by which the agreement was continued, subject to a six week's notice by
either side. The employees were convinced that since the Government was
virtually in control of the lines that their wages demands would be met. The
rapid increase in the cost of living made it obvious that something must be
done. The railways felt that even if the Government paid the increased de-
mands, after the war was over that the increased wages would be a burden
to the lines.
On February 13, 1915, terms of settlement were arranged. A weekly bonus
was to be paid to all employees of 18 years of age and upward engaged in
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
471
railway operation. All those whose standard rate of wages was under 30 shill-
ings a week were to receive a weekly bonus of 3 shillings, and those earnings 30
shillings or more were to be paid 2 shillings per week. The payment of this
bonus was to be divided, one-fourth by the railway companies and three-fourths
by the Government. A modification of an original agreement by which the Gov-
ernment was to pay all of the bonus was consequently made. This agreement
was afterwards revised in 1915, by which all employees of 18 years of age and
upward would receive a bonus of 5 shillings per week, and those under 18
years of age would receive 2 shillings 6 pence per week. The understanding
was that this wage agreement would not be altered during the war. The
National Union of Railway Men and the Associated Society of Locomotive
Engineers and Firemen agreed to this formally.
The increased cost of living, however, made further wage increases necessary.
In September, 1916, a second bonus of 5 additional shillings was added to the
wage increases as above; and in April, 1917, the war bonus was increased to
15 shillings per week for employees over 18 years, and 7 shillings 6 pence per
week under 18 years.
It is estimated that the total expenditure, additional, on account of the
increase will be £23,000,000. The whole of these later increases are to be borne
by the Government.
In December, 1915, Mr. Bonar Law, speaking officially in the House of Com-
mons, stated that the Government agreement with the railway companies, not-
withstanding the grant of the war bonus, had "involved no financial loss, but
probably some gain.”
A few months after war was declared 66,000 railway employees out of a total
of 645,135 joined the colors. At the end of 1916 this number had increased to
150,000, close to 50 per cent of the employees of military age. The shortage
of railway labor became very serious.
The railway executive committee supplemented the army pay of their em-
ployees in the military service so that their families at home could maintain
themselves. Occupants of railway company houses were not disturbed, and a
reduced rate for coal was given them, and the positions of railway employees
in the service of their country were guaranteed to them at the end of the war.
Army pay of such employees was augmented to four-fifths of their old railway
salaries.
The scarcity of male labor compelled the railways to employ women in many
positions almost at the beginning of the war. The experiment was a great suc-
cess. The labor unions asked that the employment of women would not pre-
judice railway labor after the war as against the employment of men or the
reemployment of men who had gone to war. The pay of women in grades
in which they were not engaged in August, 1914, was fixed at the minimum pay
of the grade. At first women were not granted a war bonus, but in November,
1916, it was arranged that women of 18 years of age and upward should be
given a bonus of 3 shillings a week and those under 18 a bonus of 1 shilling 6
pence a week. This amount was later increased to 5 shillings 6 pence for the
first class, and 2 shillings 9 pence for the second.
It is believed that any attempt to revert to a prewar wage scale will bring
on a war with the labor unions. The railways claim that they can not maintain
the present wage scale with the 15 shilling weekly bonus after the war.
As to the women employees, the railways have promised to take their old male
employees back into the same positions they occupied before the war. But
many of the men will never return. Women have been found efficient and will
undoubtedly be retained. But this will doubtless cause some strife. The
changed conditions after the war, demanding the employment of thousands of
men to restore destroyed towns and cities and the general waste of war to be
repaired in various lines, will occasion a greater demand for labor than ever
before. The British railways may at least hope that, having solved the prob-
lems of war traffic in unequaled fashion, they will master the lesser problems
after the war is over.
V. EFFECT ON RATES AND SERVICE.
RATES.
-
A careful examination fails to disclose that freight rates have been advanced
in the United Kingdom during the war. There has been more uniformity in
rates, and rebating has ceased.
472
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
In January, 1917, passénger rates were increased 50 per cent. The rise in
passenger rates is said to have been for the purpose of discouraging travel, and
not to increase revenues. The Government appealed to the peaple not to travel
éxcept when absolutely necessary. It was urged that travel for pleasure was
unpatriotic. Soldiers on leave from the front are given preference in passenger
congestion. The increase in passenger fares does not apply to workmen's
tickets, season tickets, traders' tickets, or zone tickets, nor to local traffic in.
towns; nor does the increase apply to tickets issued to relatives desiring to
visit wounded soldiers or sailors in hospitals.
SERVICE.
British railways were built for commercial purposes, while the German rail-
ways were constructed for war purposes, as shown by uniform gauge, heavy
trucks for carrying large guns, lines built entirely for eventual military uses,
the German general staff in direct control of the lines, etc. War was de-
clared against Germany on August 4, 1914, yet without any interruption of rail
and water traffic the British Army landed in France a few days thereafter and
was marching into Belgium before the Germans realized where they had landed
or what their numbers were.
*
Competition among the railways ceased.
✔
Interline settlements ceased. Hundreds of clerks had been employed at the
railway clearing house at London dissecting payments covering the various
lines. They were no longer needed.
Canvassing by agents for securing freight shipments ceased.
Publicity departments of the railways, costing thousands of dollars annually,
were closed.
Weekly traffic returns of the various railways were no longer compiled or
published. Directors' reports were published in small quantities, and only sup-
plied upon request.
་་
Tickets to a common destination on competiting lines could be used on any
line.
Restaurant and sleeping car services were cut down or suspended altogether.
Excursion and week-end tickets were ordered suspended when necessary.
Passenger trains were reduced in number.
Train speed was greatly reduced, increasing the number of trains upon the
tracks thereby and avoiding long waits upon sidings, every train being kept
on the move at a reduced speed.
Way stations closed and some branch lines abandoned.
Preshipment of personal baggage was discontinued, and passengers requested
to take as little baggage as possible. Later passenger baggage was limited to
100 pounds, and no excess baggage free, as formerly.
-
Pooling of freight cars on January 2, 1917, a great economy. Formerly empty
cars had to be returned to the company to which they belonged, and now they
are loaded again and sent in any direction. At first the pool did not include
the 600,000 to 700,000 privately owned cars, a distinct feature of British
railways.
From January, 1917, the sender or shipper of packages or parcels by pas-
senger train was required to prepay all charges, thus at one sweep wiping out
the cumbrous system of bills and accounts for small-goods traffic on passenger
trains corresponding to the American express system. Reformers are insisting
that this shall also be done for small traffic by freight trains. It was also.
decided that claims for loss and damage should be dealt with by the com-
pany on which the claim was made, without any division between the lines over
which the traffic had moved.
The saving in print paper was so great that one railway company placed on
the market tons of paper at a time when it was scarcest.
In the early stages of the war ammunition and supplies were carried to the
fighting front by motor cars, but this has in a measure been superseded by
tearing up certain lines in England and rebuilding the lines in France.
It is believed that a new era in railway management has begun, and that it
will be impossible to revert to prewar conditions. According to some writers it
would not be desirable. It is believed that there will be greater unity of ad-
ministration after the war, and that cooperation has proven better than cut-
throat competition. It is believed that the railway executive committee is
lmost certain to develop into a permanent organization, a supreme court of
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
473
appeal among the railways. Such a plan, it is believed, will promote efficiency
and economy, and prevent extravagant and excessive competition. The rail-
way men, however, believe that they will have to face many difficult probleins
after the war, including the likelihood that many of the present regulatory
measures will be retained.
One illustration may be made among many of the salutary effect of regula-
tion. On July 4, 1917, the controller of coal mines promulgated a scheme
for the transportation and distribution of coal. England, Scotland, and Wales
were divided into 20 districts or areas, and each had to take its coal sup-
ply from certain fixed districts of production. It is estimated that this plan
would effect a saving in transportation of not less than 700,000,000 ton-miles
anually. The scheme is based on four main issues:
1. The consumption of coal should take place as near the producing point
as possible.
2. That in view of the superior facilities offered by the main traffic lines
the movement of traffic should follow these routes wherever possible.
3. That the movement of coal should, as far as possible, be in well-defined
directions-north to south, north to southeast, north to southwest, and east
to west.
4. That an area producing less coal than suffices for its own need should
not send any portion of its output to other areas. That an area producing
more coal than it requires for consumption within the area itself should only
distribute to adjacent or convenient areas.
This scheme did not affect water-borne coal, anthracite or coke of any de-
scription.
VI. STATISTICS.
Since the beginning of the war the British Government, through its board of
trade, has issued but one report on railways, being a two-page report for the year
1914. A footnote to this report states that no further reports will be issued.
Unofficial figures, annually, are given in the Railway Year Book, published in
London, which are not given here.
Official figures, 1913 and 1914.
1913
1914
Mileage, all track..
Authorized capital ¹.
Paid up capital.
Added during vear.
Total engine miles..
Total receipts.
Expenditure.
Net income.
55, 405
£1,412,552,000
£1,334, 011, 000
£198, 721,000
628, 324, 000
£139,451,000
£87,320,000
£52, 131, 000
55,663
£1,447,557, 000
£1,341, 222, 000
£199, 203,000
621, 239, 000
2 £139 098, 000
£88,173,000
£50,925,000
¹ Including nominal additions to the amount of £29,315,000, which were excluded from the total for 1913.
2 Included the estimated amount receivable by the companies, under agreement with the Government,
in respect of the control of British rai'ways during the period from August 5 to December 31, 1914. (Great
Britain railway returns, 1914, London, 2 p.)
BIBLIOGRAPHY.
Biggs' General Railway Acts, 1830-1898, London.
Great Britain-Manual of Emergency Legislation, first edition, 1914. London.
Great Britain-Manual of Emergency Legislation, fourth edition, 1917, Lon-
don. (Important references in this edition are not to be found therein, being
in the first edition.)
Railway Year Book, annual, London, for 1914, 1915, 1916, 1917.
British Railways and the War, by F. A. Mackenzie, London: The Menpes
Printing & Engraving Co., 1917.
f
(Reprinted, in part, in the New York Tribune, Dec. 9, 1917, p. 4.)
1
· British Railways in War Time, by H. Raynar Wilson.
In Railway Review, April 21, 1917, page 562; May 12, 1917, page 668: War
Payments to British Railways, by Julius H. Parmelee.
In Railway Age Gazette, August 11, 1916, volume 61, page 244.
Great Britain Railway Returns, 1914. London, 2 pages.
474
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Many other publications have been consulted, which are of little or no value
or the material therein is repeated in the publications referred to above.
NOTE.-The most comprehensive publication upon the subject is one recently
prepared by Mr. Julius H. Parmelee, statistician of the Bureau of Railway
Economics, under date of December 12, 1917, being a monograph on British
railways during the war, upon which he has spent two years. It was gotten
up for publication by the Carnegie Institution of Washington, D. C., and will
shortly be published. This monograph was not consulted in preparing this
paper, which was completed before the monograph was issued. Copies of, the
monograph have been presented to the Commission for its use, although at this
time the monograph is of a confidential nature, being the unprinted property of
the Carnegie Institution.
SUPPLEMENT.
ه ذ
Functions of the British railway governmental regulating bodies during the
great war.
1. The body in England that more nearly corresponds with the Interstate
Commerce Commission is the board of trade, railway department. It is an
administrative body only, with no judicial functions. The board of trade as a
whole corresponds very much with our Department of Commerce. The presi-
dent of the board of trade, having many departments under him, is a member
of the British Cabinet, and during the war is chairman of the railway executive
committee which is directing the operations of all the railways in the United
Kingdom.
So, in the present crisis, the board of trade, through its president as chair-
man of the railway executive committee, composed of 13 general managers of
British railways, occupies a very conspicuous position in the railway world.
As to the actual war-time work of the board of trade during the war, we
can only judge by the great efficiency in moving troops and supplies without
disarranging other railway traffic in the United Kingdom. As to any reports
of the board of trade during the war outlining in general or in detail anything
relating to transportation ´since the outbreak of the war, there is absolutely
nothing, save a one-page report made for the year 1914, which shows only
mileage, capitalization, locomotive ton mileage, revenue receipts, and expenses,
with a footnote to the effect that the board would publish nothing more during
the war. As the British board of trade, especially its railway department, has
always been very active, it is assumed that its activities have continued.
This much may be said, however, that the railway executive committee,
composed of 13 general managers of British railways, is operating the rail-
ways effiiciently as one system. The president of the board of trade is the
only Government official on this committee. He doubtless takes his orders from
the military and naval departments, or is influenced by them. According to
law and orders he does not have to do so, as he was directed by the secretary
of state for the home department, according to the forces act of 1871, section
16, to take over and run the railways. He could have done this without co-
operating with the railway. executive committee already in existence, or by
the creation of a new committee. He could have placed the control entirely
within the board of trade without going on the, outside for assistance.
It is generally understood, however, that the leading figure in war railway
control in England is Sir H. A. Walker, acting chairman of the railway execu-
tive committee, who is general manager of the London & South Western
Railway.
It is stated that the board of trade has organized a few committees of experts
to take over certain duties or to advise with the railway executive committee
as to proper methods to pursue. But it is not shown what these duties are,
nor the names of such committee, are not available. Generally speaking, there
has been no great change, if any, in the prewar personnel or scheme of interior
administration of the railways, or the board of trade; nor of the operation of
the railways, except as outlined briefly under the head of rates and service
at page 18 hereof.
2. As stated, the board of trade is an administrative body, and can be com-
pared with the Interstate Commerce Commission in that respect only. But in
England the judicial powers exercised by the Interstate Commerce Commission
as to rates are vested in a railway and canal commission, composed of five mem-
bers holding office for life, at a salary of $15,000 each. Two members are
nominated by the board of trade, one of whom must be a lawyer. The other
three are judges of superior courts of England, Scotland, and Ireland, and no
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
475
member who is a judge sits outside of his own jurisdiction. The court is a
traveling court, and thus never has more than three members present, one of
whom can render decisions. If it sits in Scotland, the English and Irish judge-
members are not present, etc.
Its chief jurisdiction is over rate and service questions. A few cases can
come on appeal of administrative questions from the Board of Trade.
The operations of the railway and canal commissioners since the war began
can not be determined with accuracy. I can only say that before the war be-
gan we received the bound decisions of this court regularly and they stopped
coming at the end of 1914. The bound decisions cover two or three years in
each volume. Judging from the statements seen in print that rates have been
equalized in England since the war began, and rebating has been stopped, it is
quite safe to say that the railway and canal commissioners have not been very
active during the war, although this is a mere guess.
One thing is patent, however. The railways of the United Kingdom have
legally been turned over to the board of trade, a Government institution. The
board of trade could have operated them under that department, but chose
rather to call in the assistance of the general managers of the leading British
railways. There is undoubtedly great Government pressure brought to bear
upon the general managers, known as the railway executive committee, through
its chairman, the president of the board of trade, who is a cabinet minister.
But the leading feature is that the railways are controlled by a Government
department already in existence when the war began, and which by existing law
was well fitted for the purpose.
BIBLIOGRAPHY.
Biggs's General Railway Acts, 1830-1898.
London.
Law and Practice of the Railway and Canal Commissioners Court.
Ernest E. G. Williams, London, 1913.
By
Public Regulation of Railway Rates and the Control Exercised over Railways
by the Railway and Canal Commission and the Board of Trade in Great Britain
and Ireland. By Franklin K. Lane (Washington, September, 1908).
Interstate Commerce Commission Library.
Prepared by Leroy S. Boyd, Librarian.
Printed circular follows, headed:
December 14, 1917.
"Chamber of Commerce of the United States of America. War Bulletin No.
10. August 3, 1917. Riggs Building, Washington, D. C."
Mr. THORNE. He also gives some expression from officials as to the
profitableness of the contract made by the Government-that it was
a good contract. It is interesting to note the effect that this has had
on the dividends of the railroads in England.
Mr. MONTAGUE. You say it is interesting to note the effect that this
has had in England. Just what do you means by "this"?
Mr. THORNE. This arrangement as to compensation between the
English railways and the Government.
Mr. ESCH. Which would include the matter of wages?
Mr. THORNE. Yes, sir. If you will turn to the second sheet of
what I have given you it will illustrate that.
The CHAIRMAN. Under the title of "War-time dividends of Brit-
ish railways"?
Mr. THORNE. Yes, sir. James H. Oliphant & Co., of New York,
have had their statistical department make a compilation of the divi-
dend rates of representative railroads in Great Britain. I could do
the same thing from current journals, but I would rather take as my
authority a third party, in order to avoid the accusation of selection.
It will be noted that the Caledonian, Great Eastern, Great Western,
Great Northern, London & Northwestern, Midland, Northeastern,
and Southeastern, in 1916 were paying the same or less than in 1913,
prior to the war, while one company, the London & Southwestern,
paid more by 1 per cent.
476
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
The average decline for these nine principal systems was from
4.82 to 4.58 per cent. You see there is a decline of less than three-
tenths of 1 per cent in the dividend rate. But notice the effect of
the general financial conditions on the market value of the securities.
Now just connect those two facts in your mind. You have a Govern-
ment absolutely guaranteeing the income, and you have a decline
in the dividends of less than three-tenths of 1 per cent, and yet there
is a decline in the market value of British securities of 32 per cent.
The CHAIRMAN. Since 1913?
:
Mr. THORNE. Yes, sir.
Mr. MONTAGUE. You mean the market value of the securities has
declined 32 per cent?
Mr. THORNE. Yes, sir; railway securities.
Mr. MONTAGUE. The dividends on those securities have declined
what per cent ?
Mr. THORNE. Well, this would be the total of the representative
companies. The decline was only three-tenths of 1 per cent-less
than three-tenths of 1 per cent that is, in rate. It is about 9 per
cent of the dividend. Let me state that again: A decline in the divi-
dend of 0.24 of 1 per cent is equivalent to a decline of between 4 and
5 per cent of the total rate.
(The paper referred to follows:)
Bank rates during war.
Bank rate..
Loans to stockbrokers.
Three months' bills.
January-
July, 1914,
average.
1915 aver-
age.
January-
July, 1916,
average.
July-De-
cember,
1916, aver-
1917 to
date.
age.
Per cent.
Per cent.
Per cent.
Per cent.
3.52
2. 13
2.52
5.00
5.00
5.95
Per cent.
1 5.20
4.73
5.00
5.87
5.50
3.70
4.88
5.55
I 5.00
1 Estimated. Bank of England rate was reduced to 5 per cent Apr. 5, 1917, at about the time of the
entrance of the United States into the war. (From War's Effect on British Securities.-James H. Oli-
phant & Co., New York, p. 23.)
War-time dividends of British railways.
[There follows a selected list of the common or ordinary stocks of several of the most important British
railways, together with their dividend records, 1913 to 1916, inclusive.]
Caledonian..
Great Eastern…….
Great Western
Great Northern
London & North Western..
London & South Western.
Midland...
North Eastern..
South Eastern.
Average..
1913
1914
1915
1916
Per cent. Per cent. | Per cent. | Per cent.
31
2
-41-42
31
3262654
73014
32637B474
3
2
3252ONTO M
7
4
63
31
31/1
2
252C
463
61
31
31
་
4.82
4. 48
4.40
.4.58
(From War's Efect on British Securities, James H. Oliphant & Co., New York. p. 25.)
$
FEDERAL OPERATION. OF TRANSPORTATION SYSTEMS.
477
[The total par value of all secutities listed in London, including American securities, but excluding all
excepting the earlier war lcans, is approximately $58 000,000,000. Omitting American securities from
the list, the following estimated advances and declines have resulted.]
British funds (Government).
Municipal and county bonds...
Colonial bonds..
Foreign Government and municipal..
British railways.
Colonial railways.
Foreign railways (not United States).
Banks..
Public utilities.
Financial trusts, lands, etc..
Commercial, industrial, etc..
Insurance..
Iron, coal, and steel.
Nitrate...
Oil..
Shipping.
Tea, coffee, and rubber.
Mines, included unlisted...
Total...
•
Approximate
amount listed.
$6,000,000,000
1,300, 000, 000
3,400, 000, 000
16, 000, 000, 000
6, 200, 000, 000
2,300, 000, 000
3,800, 000, 000
1,500, 000, 000
2, 000, 000, 000
1,200, 000, 000
Aggregate decline
(estimated).
300, 000, 000
800, 000, 000
3,500, 000, 000
2, 000, 000, 000
350, 000, 000
1, 000, 000, 000
375,000,000
400, 000, 000
200, 000, 000
Aggregate advance
(estimated).
Per cent.
Per cent.
$1,400,000,000
23
23
23
22
32
15
26
25
20
17
3, 000, 000, 000
600, 000, 000
20
350,000,000
600, 000, 000
10, 000, 000
3
40, 000, 000
$60, 000, 000
2,000,000
10
5
150, 000, 000
280,000,000
*15, 000, 000
5
120,000,000
60,000,000
50
620, 000, 000
6,000,000
1
48,860,000,000 10,935, 000, 000
22.38
143,000,000
.29
露
​The approximate net decline, as above, is $11,292,000,000, equal to approximately 23.1 per cent of the
total par value of all securities listed excluding Americans. At what exact aggregate figure these secur-
ities were selling before the war, it would be difficult to ascertain. It is, however, safe to say that the aver-
age would not be so high as par. British funds, municipals, colonials, home railways, colonial railways,
and foreign governments usually sold at a discount; bank, insurance, and a fair proportion of commer-
cial and industrial securities were at a premium.
American rails listed in London amounted to more than $8,000,000,000. These were mostly, however,
listed on the New York Stock Exchange also. Other Americans listed, but also quoted on the New York
Stock Exchange. including United States Steel, would probably amount to nearly $2,000,000,000. Owing
to the fact that a vast percentage of British holdings in American securities were sold in early war days, it
is probable that losses have also been realized in this class of securities.
ain.
A portion of the $16,000,000,000 foreign government and municipals is certainly not held in Great Brit-
This estimated aggregate total, includes Russian and Latin American bonds, a portion of which
are held in France and Holland. It also includes certain French, German, and Hungarian bonds, and
$62,000,000 American bonds. It is possible that fully $4,000,000,000 of these bonds are not held in Great
Britain.
(From "War's Effect on British Securities"-James H. Oliphant & Co., New York, pp. 22-23.)
The CHAIRMAN. Now your reference under the head of "War-time
dividends of British railways" is a decline, measured by 1913 to
1916, of the difference in dividends earned or paid. Now did these
railroads under Government operation earn a surplus in the way of
a net that wasn't distributed in these dividends?
Mr. THORNE. Yes. Of course that brings us to one of the great
topics which I want to present, the matter of surplus.
The CHAIRMAN. Well, don't discuss it now if you intend to dis-
cuss it later.
Mr. THORNE. I intend to take that up later, but since you have
brought it up I might make a statement about it.
The surplus at the time the railroads were taken over amounted
in England to about one-half of 1 per cent. And that is not only the
average surplus, but it is a typical surplus, which is an entirely differ-
ent thing from an average. An average may be the result of very wide
fluctuations, but it is the typical surplus-a half of 1 per cent.
Now subsequent to 1914 we do not have any official figures. The
Railway and Canal Commission of England ceased publishing their
annual report. I hold in my hand the report for the year 1913,
and in 1914 they issued a one-sheet document, two pages. I have
had both pages photographed. I would like to introduce that in
the hearing.
(The paper referred to follows:)
[Title-page: Railway returns.-Return relating to the railways of
the United Kingdom for the year 1914.-Presented to both Houses
of Parliament by command of His Majesty.-London: Printed under
478 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
the authority of His Majesty's stationery office.-By Darling & Son
(Ltd.), Bacon Street, E.-To be purchased, either directly or
through any bookseller, from Wyman & Sons (Ltd.), 29 Breams
Buildings, Fetter Lane, E. C., 28 Abingdon Street, S. W., and 54 St.
Mary Street, Cardiff, or H. M. Stationery Office (Scottish Branch),
23 Forth Street, Edinburgh, or E. Ponsonby (Ltd.), 116 Grafton
Street, Dublin, or from the agencies in the British colonies and de-
pendencies, the United States of America, and other foreign coun-
tries of T. Fisher Unwin (Ltd.), London, W. C.-1915.—[Cd. 8039.]
Priced.]
Railway returns for the United Kingdom.
[Summary for the year 1914, with comparative figures for 1913.]
1913
1914
Mileage of lines open for traffic:
Running lines-
First track.
Second track.
Third track.
Fourth track…….
Over four tracks reduced to single track.
Sidings reduced to single track..
Total of single track, including sidings..
Authorized capital:
By shares of stock..
By loans and debenture stock..
Total..
Paid-up capital (the figures in italics show the nominal additions to
capital included in the figures in roman type):
Ordinary.
...
Preferential....
Guaranteed.
Loans.....
Debenture stock..
Total...
Engine mileage:
Train miles, including empty trains run for traffic purposes on
either the forward or the return journey—
Coaching..
Goods..
Mixed.
Total..
Shunting miles-
Coaching...
Goods..
Mixed..
Total.
Other miles (assisting, light, etc.)...
Total engine miles....
Revenue receipts and expenditure:
Total receipts (including miscellaneous net receipts)……….
Expenditure..
Net income.
Miles.
Miles.
23, 691
23.701
13,392
13,403
1,619
1,648
1,254
1,277
700
706
14,749
14,928
55,405
55,663
£1,005, 243, 000
407,309, 000
1 £1,038,275,000
409, 282,000
1 1,447,557,000
1,412,552, 000
493,064,000
92,826,000
354,796,000
43,982,000
124, 335, 000
17,365,000
12, 103, 000
349,713,000
44,550,000
1,334,011,000
198,721,000
Miles.
273, 495,000
161,684, 000
672,000
435,851,000
18,665,000
119, 142, 000
58,000
137,865,000
493, 791,000
98,317,000
358,005,000
43,972,000
124, 334,000
17,383,000
12,924,000
352, 168,000
44,551,000
1,341, 222, 000
199,203,000
Miles.
273,659,000
156,007,000
666,000
430,332,000
18,910,000
116, 110, 000
59,000
135,079,000
54,608,000
55,828,000
628,324,000
621,239,000
£139, 451,000 2 £139,098,000
87,320,000
52, 131,000
88,173,000
50,925,000
1 Including nominal additions to the amount of £29,315,000 which were excluded from the total for 1913.
2 Including the estimated amount receivable by the companies, under agreement with the Government,
in respect of the control of British railways during the period from August 5 to December 31.
NOTE.-In consequence of the war no further returns will be published for the year 1914 regarding the
statistics of the railway companies of the United Kingdom.
H. FOUNTAIN.
COMMERCIAL Department, Board of Trade,
August, 1915.
(5779-14.) Wt. 21382-4278. 1625. 8/15. D & S. G. 4.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
479
There have been no subsequent official publications as to the reve-
nue of English railways, and these figures that we are using are taken
from semiofficial organs, but recognized as authoritative.
The CHAIRMAN. Well, Mr. Thorne, what I wanted to get in my
mind clearly was: The bill proposes the method of standard return
based upon net operating income, and it may have been paid out of
dividends or it may not, but it would still be a portion of net income.
I didn't know whether these figures marked here as "dividends"
were not in addition to a net income that was kept by way of surplus
to pay some other railroad, for instance.
Mr. THORNE. It is probably an addition, and I will say, judging
by what I have just outlined to you, that it is less than one-half of
one per cent in addition.
Mr. DOREMUS. Your tables showing the total par value of securities
listed in London do not indicate the period which is covered.
Mr. THORNE. Well, both of these are taken from a publication of
James H. Oliphant & Co., of New York, entitled “War's effect on
British_securities, copyrighted 1917."
Mr. PARKER. I notice that that third one averages the average
instead of averaging totals, as you said the others do so far as de-
clines and advances are concerned. For instance, the total of the
stocks of those that advanced is only $1,810,000, 000, and the advance
is $143,000,000, which makes 8 per cent. But by averaging the av-
erages they got 29 per cent in that total there.
Mr. THORNE. Just where is that? You mean $143,000,000?
Mr. PARKER. On the third page. That 29 per cent should be 8 per
cent, because that $143,000,000 is only 8 per cent, or less than 8 per
cent, of the $1,810,000,000 of capital included in the companies that
made the advances, and it is made by taking the tea, coffee, and rub-
ber, which went up 50 per cent on a capital of only $120,000,000, and
averaging the averages, instead of averaging the finding-finding
the total advance and getting the per cent.
Mr. THORNE. What did you add together there?
Mr. PARKER. Iron, coal, steel, nitrates, oil, shipping, tea, coffee,
and rubber, and mines.
Mr. THORNE. In the first column?
Mr. PARKER. Yes. Those are the only ones that made advances.
They make $1,810,000,000; and the advance is $143,000,000, which is
8 per cent or less.
The CHAIRMAN. Mr. Thorne, what relation to this question of rail-
way dividends and the decline in the market value of stocks do all
these other stocks mentioned-banks, public utilities, insurance,
nitrates, oil, shipping, etc.-what bearing do they have upon the
question of railroad stocks, or the decline in railroad stocks?
Mr. THORNE. I will come back to your question, because I want
to answer it. The showing there is that the decline has been very
general, outside of the articles directly connected with war, if you
exclude a few miscellaneous commodities down there at the bottom.
You have iron, coal, steel, nitrate, oil, shipping, rubber, mines, all
directly connected with the manufacture of munitions and the fur-
nishing of war supplies. Now, the other securities which have un-
questioned credit, such as British funds, foreign government muni-
cipals, British railways, that are guaranteed-they all show enor-
480
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
mous declines, therefore demonstrating conclusively that the decline
is the effect of the war and not the credit.
Now, as to your proposition, if it is an average of an average, there
is a just criticism of the gentleman's computation to whom I referred.
If it is an average of an average, I would therefore say that we ought
to recompile that one figure.
Mr. PARKER. That is what I say, that's one figure, and the other
one that went into the 38. I make it less than 8 per cent advance.
Mr. THORNE. Less than 8 per cent?
Mr. PARKER. $1,810,000,000 is the total capital; $143,000,000 is
the total advance, which makes less than 8 per cent.
Mr. THORNE. Subject to check, I would accept your one-ninth
statement.
-
Mr. PARKER. On further check I find the figure as stated in the
exhibit itself to be correct. And the other one is somewhat too
small. That is to say, there was more decline, somewhere about
23 per cent or more.
Mr. THORNE. I will have that figure checked.
Mr. PARKER. If you will have that done I will be much obliged
to you. I know you did not intend that average of averages. It
has been done by somebody else.
Mr. STEPHENS. You would give the same answer, Mr. Thorne, I
presume to this question, that you did to the chairman's question:
Why should the British railway stocks sink 32 per cent, in value,
whereas they are only earning 0.24 of a per cent less than they
earned before the war?
Mr. THORNE. The two figures that you have recited are substan-
tially comparable, but of course this includes all railways. The
others only include six. However, the decline, if you used exactly
the same companies, would be just as you have stated it in sub-
stance. The cause of it is the effect of the war on values. As you
increase interest rates values decline.
The CHAIRMAN. Market values?
Mr. THORNE. Market values decline. For instance, if to-day the
rate of interest on Government bonds was 4 per cent, if that climbed
up to what the foreign Governments have to pay, it will increase.
the interest rate that industrials would have to pay up to 10 or 15
per cent. And if a company is declaring 6 per cent dividends to-day,
and that stock commands par to-day, and later the prevailing rate
goes up to 12, you will find the value of that reduced to somewhat
near 50 cents on the dollar. In other words, the yield will be re-
flected constantly in the ratio of the market price of the securities
to that rate which that security bears. If the prevailing yield on
Government securities goes down to 3 per cent, you will find in sub-
stance throughout the country a corresponding decline in industrials;
and as that declines you will find a corresponding advance in the
market prices of those securities.
The first page of the exhibit shows the prevailing interest rates
to which I have just referred.
The CHAIRMAN. Dividend rates, you mean?
Mr. THORNE. These are bank rates during the war. You will notice
there that the average in 1915-the bank rate-increased not quite
one-half. The "loans to stockbrokers" rate more than doubled, and
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
481
"three months' bills" increased almost one-half. Now, after that sud-
den change the subsequent changes are more uniform until our en-
trance into the war, and then there was a decline. We may anticipate
something very similar to that, I should judge; during the first year
of our entrance into the war there will be a very heavy increase in
rates and a very heavy decline in values. But after that, if the con-
ditions in this country are analogous to those in Great Britain, we may
expect a more constant situation.
Of course, those suggestions are merely suggestions. In war you
can't tell what is going to happen. I am just outlining what ex-
perience Great Britain had, and if things continue along the same
lines, what we can reasonably expect.
The CHAIRMAN. Mr. Thorne, on the page we have just been dis-
cussing, British railways are put down, then colonial railways, and
then foreign railways, with $3,800,000,000 listed shares. Does that
mean the amount held in Great Britain or is that the total capitaliza-
tion of these foreign railways whereever situated?
Mr. THORNE. That is on the market in London.
The CHAIRMAN. It says here "approximate amount listed."
Mr. THORNE. That is in London.
The CHAIRMAN. The entire volume of shares have been listed so,
I suppose, and these do not represent holdings, then, exclusively in
Great Britain, of these foreign railways?
Mr. THORNE. They are listed for sale, exchange.
The CHAIRMAN. But the whole volume, presumably, is not being
dealt in on the English market?
Mr. THORNE, No. And in order to show the effect on British se-
curities they have eliminated the United States securities.
Now another thing on that table, you will notice there its a decline
in values there of $10,000,000,000.
The CHAIRMAN. Nearly $11,000,000,000.
Mr. THORNE. Whatever you may do, gentlemen, there is going un-
questionably to be a decline in values after the immediate effect of
your act is passed. Now, for instance, when the President made his
proclamation, within 48 hours it has been estimated that there was an
increase of from $500,000,000 to $1,000,000,000 in the value of railroad
securities on the market. Since then there has been a decline. It is
still higher than it was before. In Great Britain there was no sub-
stantial change in the market value like there was in the United
States. Of course the exchanges closing prevented us from getting of-
ficial figures immediately afterwards, but we can secure them within
six months or nine months afterwards, and they are almost uniformly
lower than the market prices immediately preceding the war. I can't
see how any gentleman can reasonably expect you people to force up
the market prices on railway securities at a time when everything else
except that connected with the manufacture of munitions must reason-
ably be expected to go down-speaking in general-not everything,
but substantially everything else.
Mr. MONTAGUE. Why did railroad securities go up after the Presi-
dent's proclamation?
Mr. THORNE. Because of the enormous guarantee that was proposed
to be given to the railroads. You were transferring this anticipates
my future discussion.
40958-18-31
482 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. MONTAGUE. I beg your pardon. I don't want to disarrange
your argument.
The CHAIRMAN. Mr. Thorne, I do not want to interfere with the
general range of what you expect to present to the committee, but we
do not know how long we can have you or how long we can hold the
session to-day. I would be glad if you would put in that which you
regard as the most valuable and the most important in the time that
you have to-day, and if you have to leave anything out you can file it
in the way of supplemental matter. If you have to leave out any-
thing, leave out that which you regard as the least important.
Mr. THORNE. All right, sir. With these facts in regard to the situ-
ation in Great Britain in mind, I now desire to proceed to a discus-
sion of the pending measure and the probable effect of the character
of the compensation that has been suggested in this measure.
Mr. PARKER. Before you go on, might I ask you on that point,
how did our railway securities behave during the Civil War? Did
they go up and down?
Mr. THORNE. You are better acquainted with that than I.
Mr. PARKER. I don't remember that at all. I didn't speculate in
securities when. I was 12 years old.
Mr. THORNE. Well, I will have to leave that for you to answer.
Mr. ESCH. In view of the fact that our Government bonds sold
down as low as 38 cents on the dollar, you can imagine what effect
it would have.
Mr. THORNE. This measure involves the greatest financial transac-
tion in recorded history. Those for whom I am speaking are in
hearty accord with the main purpose of this legislation, but it would
be strange indeed if the first draft of a bill involving a matter of
this magnitude were perfect in every respect.
We should approach the question of compensation, not in a spirit
of dickering, of making a trade, but with the object of dealing with
the subject along broad lines, of trying to render substantial justice
to these railroads and to the public.
The basis provided in this bill for arriving at the compensation
to be paid by the public for the use of a governmental agency is con-
trary to the principles laid down in the unanimous decision of the
Interstate Commerce Commission in the 1910 Advance Rate Case.
Mr. Secretary Lane wrote that opinion while he was a member of the
commission. At that time he was not in politics, but was acting in a
judicial capacity, after the evidence and argument had been sub-
mitted in one of the greatest cases of this generation. This method
of determining the compensation to which a railroad is entitled is
based upon principles which Mr. Lane branded as unreasonable and
unjust.
If the railroads demand this return I deliberately charge them
with bad faith, a breach of trust with the American people. Under
oath on the witness stand in the year 1910 the leading witness for
the western railroads, and the leading witness for the eastern rail-
roads, both asked for a surplus for the purpose of laying up a fund
to tide them over lean years, to build nonrevenue-producing improve-
ments, and to maintain their credit; and both of these gentlemen de-
clared they would not ask for this surplus to be capitalized. They
wanted the public to pay them a reasonable dividend and to go into
partnership with them on these nonrevenue-producing improvements,
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
483
etc. Now it is proposed to repudiate that partnership and to have
Congress place on the statute books a provision which capitalizes
these surplus earnings. It is proposed to make the public pay all
the interest on their debt, pay them a reasonable dividend on their
stock, keep their properties up to 100 per cent of their present con-
dition, tide them over these perilous times during the war, maintain
their credit for them, build nonrevenue-producing imporvements on
their properties, give them a surplus with which to build railroad
properties for them, and then to pay them a return on what we build.
Certainly this is a most delightful, fascinating, and charming pro-
position-from the railroad standpoint.
I do not believe you gentlemen will dare to stand sponsor for that
proposition before the American people when the railroad presidents
themselves have made these admissions under oath.
This bill furnishes absolutely no inducement for the railway com-
pany to be efficient in the performance of its duties to the public.
You make a flat, inelastic, fixed guaranty regardless of the service
which the railroad may perform.
There is no uniformity in the proposed compensation. Several
railroads are guaranteed annual deficits. The Colorado Midland
will have to pay the Government $10,000,000 a year for the oppor-
tunity to turn its property over to the public during the war, while
the Pittsburgh & Lake Erie will be guaranteed a profit of more than
14 per cent on its so-called property investment. These guarantees
are subject to amendment by the audit committee. The Cumberland
Valley is to receive a guaranteed return in proportion to the alleged
value of its property, which is twenty-five times as much as that
guaranteed to the Quincy, Omaha & Kansas City. But objections
of this character can be made against any plan that has been or will
be proposed. The other objections to the measure of compensation
under consideration which I have stated are far more fundamental
in character.
It has been stated that we are following the precedent established
by Great Britain. This bill guarantees to American railroads in
proportion to their total capitalization over $250,000,000 more than
Great Britain saw fit to guarantee her railroads.
It is proposed in this measure to guarantee to the bondholders in
American railroads all of their interest, to guarantee the stock-
holders all of their dividends at a rate much higher than the rate
of dividends prevailing in Great Britain, and on top of that you
propose to guarantee these stockholders a surplus above dividends
approximately eight times as large as the surplus guaranteed to
British railroad stockholders on the average.
While the war lasts it is proposed in effect to substitute Govern-
ment bonds for railroad stocks. If this measure is passed, it will
suddenly transform seventeen thousand million dollars' worth of
railroad stocks and bonds into the equivalent of seventeen thousand
million dollars' worth of Government bonds as long as the war lasts,
and these securities will inevitably be in keen competition on the
market with any new war bonds offered by the Government. It is a
fundamental proposition that can not be contradicted that the higher
you make the prevailing rate on securities generally the more difficult
will it be to sell Government bonds carrying a less rate.
484
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
In return for the 6 per cent railroad stock of the Santa Fe Rail-
way Co. you give practically a Government bond for 10 per cent
during the war. With all the wealth and power of the United States
Government back of them, you give, in exchange for the stock of
the companies handling 72 per cent of the traffic in the eastern
district, 10 per cent Government bonds, in effect, while the war lasts.
You guarantee more than a 20 per cent return on the capital stock of
the Burlington Railroad.
It is true that dividends can not be increased during the war
except with the consent of the President, but after the war is over
there is nothing whatsoever to prevent the New York Central from
distributing these surplus earnings which will have been accumu-
lated during the war. What a handsome return this will be during
these perilous times when so many industries will inevitably be driven
to the wall, as has occurred in England, Ireland, France, and other
great nations.
What industries in the United States outside those directly con-
nected with the manufacture of munitions would not gladly welcome
such a guaranty during the period upon which we are now entering.
It is not strange that 200 industrial, logging, and trolley com-
panies scattered over the United States have petitioned Mr. McAdoo
to let them in on the guaranty. They want to be taken over by the
Government-God bless them for their patriotism. And two weeks
ago the great express companies of the Nation had a meeting and
decided to beg to be taken over by the Government on these condi-
tions. The country is just full of this brand of patriots wearing the
dollar sign.
I suggest that the standard return to any carrier paying dividends.
of 5 per cent or more shall be confined to a payment of all of their in-
terest and dividend obligations, in addition to a guaranty that we will
keep the properties in good condition and maintain their credit. Let
the surplus above dividends be divided equally between the railroads
and the Government. That will furnish a fund for the building of
improvements on the railroad property and provide a reserve to
take care of the weaker lines. The stockholder and hondbolder
should be content if we give them a Government bond for their se-
curities while the war lasts.
Now, gentlemen, I am prepared, I think, to sustain every allega-
tion I have stated, in substance.
I want to refer, first, to what Commissioner Lane, now Secretary
of the Interior-
Mr. ESCH (interposing). Give the date and the number of the
decision. This is the 1910 decision, isn't it?
Mr. THORNE. Yes; the 1910 advance-rate case, reported in volume
20, I. C. C., pages 339 and following. He discussed the claim of
the Burlington Railroad for an advance in rates for the purpose of
making a return on the entire alleged value of the property, which
includes something over $300,000,000 in addition to that which the
stockholders and bondholders had invested in the property. He
cites the cases that the Burlington Railroad cited, and then closes
with this statement:
Notwithstanding these decisions, it remains for the Supreme Court yet to
decide that a public agency, such as a railroad created by public authority,
vested with governmental authority, may continuously increase its rates in
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
485
proportion to the increase in its value, either (1) because of betterments which
it has made out of income or (2) because of the growth of the property in value
due to the increase in value of the land which the company owns.
He refers again to the claim of the railroads:
The stockholders, it is said, have chosen to waive their rights to distribute
this to themselves in the form of dividends and have reinvested it in property.
Without questioning the right of the stockholders to exercise this option and
without denying the right to them, the right to a return upon any investments
which they make, this must be clear: That if the investment in a railroad at a
given time is $100,000,000, upon which it yields a net revenue of $25,000,000,
the stockholders may take that $25,000,000 entirely to themselves. But if they
choose to take but one-half of this amount as their return from their investment
and to reincorporate in the same property the remaining half of the net earn-
ings, they may not for this reason increase rates during the succeeding year so
as to give them a return on $112,500,000. It is idle to spend time in nice proc-
esses of reasoning over such a condition of fact. Public policy—the welfare of
the State-forbids the adoption of any such working theory.
Again he says, page 342:
We are not here dealing with the value of this property nor with the defini-
tion of value, whether value means investment, cost of reproduction, or some-
thing else; our position is that a railroad may not increase rates upon ship-
pers for the reason and as an outgrowth of the fact that it has accumulated
out of rates a balance of profit which has been invested in the property. This
investment must take care of itself; it must bring a return for itself, either in
increased traffic or in the reduction of expenses of operation. There is no
justification for the investment of this surplus if it is to have the effect of
increasing the rates upon the shippers over the original line.
The point was made in that case that if you gave the railroads a
surplus and the company invested it in the property, the company
would claim a constitutional right to a return on the value of that
property. That proposition was put up to Mr. Willard and Mr.
Ripley. Mr. Willard was chairman of the committee representing
the eastern railroads, and Mr. Ripley was the leading witness for
the western railroads. Mr. Willard is president of the Baltimore &
Ohio, and was at that time. Mr. Ripley is and was president of the
Santa Fe.
These gentlemen were asked if the public is willing to pay a
reasonable return to the investors, and, in addition to that, should
build property for the company, would the company then insist on
that being capitalized? His claim was that because of the public
character of their business, there were certain improvements that
were demanded by the public that would not produce revenue, and
that the public ought to stand for that. Mr. Ripley also stated they
needed a surplus to tide them over lean years-to protect their credit.
Now, rather than to state it in substance, I think it would be far
better for me to give his exact statement in the language he used:
Mr. NORTON. What is your idea as to what improvements should be made
out of the earnings, and what out of the capitalization? That is to say, should
the rates in this case be increased so that improvements may be made directly
from the earnings?
Mr. RIPLEY. Well, in part. There are certain classes of expenditures that
should be made from earnings always rather from the sale of either stocks or
bonds.
Mr. NORTON. For example?
Mr. RIPLEY. Well, for example, a very large class of expenditures that return
no interest, upon which there is no possible-no probability and no possibility
of any direct return either in saving of expenditures or increasing the earnings.
In that class are the various restrictions and improvements demanded by
486
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
ì
municipalities. Where we are obliged, for instance, to elevate our tracks in
the cities. That is something that the return from which financially, from
a railroad standpoint, amounts to nothing. It is of safety to the public-
convenience to the public, and, in a certain way, it is à convenience to the
railroad-but the interest on the cost of an improvement of that kind is 10 to
20 or 30 times any benefit that accrues from it to the railroads themselves.
The building of fine stations, while it gratifies the local pride of a com-
munity-while every little town along the lines wants a station which shall
be the pride of the place, and in most cases the very best building in the city;
does not sleep nights, so to speak, until it gets something of that kind, par-
ticularly if another town has it-all those things cost the railroad a great deal
of money, yet pay the railroad absolutely nothing in return.
The same is true with the paving of streets. The communities all along our
line--and they improve as they grow up from country villages to would-be
metropolises-demand all manner of improvements in the way of gates, in the
way of paving of crossing, in addition to stations and all that sort of thing;
and they ask for it properly; it is a proper municipal regulation. But there is
no return to a railroad company, and all those things, in my judgment, ought
to be met very largely out of earnings.
The question of the proper distribution between capital and earnings is one
that can be argued on both sides and argued almost indefinitely, but it is my
belief that the present generation should join in the expense of those matters;
that the railroads should be allowed to pay for them out of earnings in order
that the entire burden may not be settled on posterity.
When a municipality builds a waterworks, or issues bonds for the improve-
ment of its streets, it begins at once to apply a certain amount of the taxes to
the extinction of those bonds. The railroad companies should be permitted to
do the same thing. A portion of the income derived by these municipalities
from taxes is immediately set aside as a sinking fund to extinguish that debt.
Unless the railroad company is permitted to earn sufficient margin over and
above its dividend requirements, assuming always that its dividend require-
ments are reasonable, unless the railroad company is permitted to earn a sub-
stantial margin over and above that, it not only loses its credit, but it is unable
to meet the class of expenditures that I have been discussing without the sale
of additional bonds, the placing of additional mortgages on its property, and the
consequent transferring of a certain burden which ought to be borne by the
present generation on to posterity. That is what has been done in England.
The policy of paying everything out in dividends, putting nothing back into the
property out of earnings, has been pursued to an extent that there has rendered
the capitalization of those railroads so large that it is almost impossible for
them to earn anything on it. (S. Doc. 47, pp. 23, 24, Western Advanced Rate
case, 1910.)
.
Mr. LYON. But take the condition of the road; we are assuming as the case
where you have a dividend of $10,000,000, and you collect from the public an
additional $10,000,000, and that pays for all necessary improvements demanded
by that particular line of railway.
Mr. RIPLEY. Well, it might.
Mr. LYON. I said assume that it would.
Mr. RIPLEY. Yes.
Mr. LYON. Then in the future in determining the rate you would not consider
the value of that property acquired through the $10,000,000 taken from the
public previously for that purpose?
Mr. RIPLEY. No.
Mr. LYON. And then your rates would be based upon the original investment?
Mr. RIPLEY. My rate would not be based on any investment whatever.
Mr. LYON. I understand; but I mean from those who possibly have a different
view and following the usual method of determining what should be the return
upon property or an investment, they do take into consideration, and to that
class of people you would not have them consider this money taken from the
public and invested for public purposes?
Mr. RIPLEY. No; the public would get the benefit of it and get much the best
end of it.
Mr. LYON. It is their money and they have invested it and you would not
expect any return upon it?
Mr. RIPLEY. No.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
487
That is found in Senate Document 47, pages 79 to 80, and this is
an extract from the record in that case, the Eastern Advanced Rate
case, 1910:
Mr. WILLARD. In that connection I would like to say that since the reorgani-
zation of the Baltimore & Ohio Railroad the company has earned and applicable
for dividends, above its fixed charges, $125,000,000. Of that amount, $26,400,-
000 has been paid in 4 per cent dividends 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, 44, and 5 per
cent, up to 6, and nothing higher than 6 per cent. The balance of the sum,
$34,000,000 out of the surplus, has gone into the property, and to that extent our
property is that much more valuable to-day. The capital assets of the company
to-day exceed the capital liabilities by that amount, $35,000,000.
Commissioner LANE. None of the surplus which you have put into the prop-
erty has been capitalized?
Mr. WILLARD. No, sir.
Commissioner LANE. What about those notes you have out against the prop-
erty?
Mr. WILLARD. That money, of course, represents new capital, and the money
will be spent in the purchase of new equipment and distinct additions to the
property. that, under the 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 eleva-
tions, which does not add to the earning power, 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 under-
stand you to say?
Mr. WILLARD. None of the surplus that has been spent so far on the Balti-
more & Ohio 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 that I speak of
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.
That is from Senate Document 725, volume 4, page 2358.
Mr. ESCH. That is different from the English system, is it not?
They capitalize practically all of those things.
Mr. THORNE. Yes.
Mr. STEPHENS. That accounts for the railroads having a capital
stock of between $200,000 and $300,000 a mile in England, doesn't
it?
Mr. ESCH. $272,000 a mile.
Mr. THORNE. That statement that the capitalization in England is
$272,000 a mile entirely overlooks and ignores the fact that in
proportion to the mileage there are many times-there are many
more miles of double tracks, three tracks, and four tracks in Great
Britain than in the United States. It ignores the fact, by way of
comparison, that the number of train miles per mile of line in Great
Britain is a great deal larger than in the United States. It overlooks
the fact that the terminal values are vastly greater because of the
close proximity of the cities to each other. Consequently, the ratio
of $252,000 a mile to $50,000 or $60,000 a mile in the United States
does not reflect the fact that in England they have put that much
more of their improvements into their capital.
Mr. ESCH. It also follows grade crossings in this country, and
they have practically no grade crossings in England.
488
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. MONTAGUE. Aren't the roadbeds of England better and do
they not cost more per mile to construct than those in America?
Mr. THORNE. I can not say as to that.
Mr. DECKER. Just let me ask you a question there, Mr. Thorne.
If you have a railroad and capitalize it at $100,000,000 and it earns
$25,000,000 a year, and if they should take $12,500,000 of that profit
and put it back into the road and ask for increased rates on
$12,500,000, what difference does it make if they do that or if they
distribute that twelve and a half million to their stockholders and
they put it back in in some other way as capital? They would get
rates on it then, wouldn't they?
Mr. THORNE. There would be no distinction if they could get the
additional money. There is this fact, however: Every railroad
realizes the necessity of building these nonrevenue-producing im-
provements, and if they can get the Government and the public will-
ing to pay them a return sufficiently large to give them a reasonable
dividend on their own investments, and also to build these improve-
ments, it is a better policy than to put in all of the money out of
capital and not have the public build any of the improvements.
Second, every company knows it is wise to have a surplus to tide
over lean years. If they distribute that in dividends, there is no
certainty of getting it back into the property or into their treas-
uries for the purposes of that surplus to tide them over the lean
years. They should have it. The security of the company demands
it, and the public in its decisions has recognized the wisdom of
that policy, and the carriers consequently have pursued that policy.
Now, let me state the comparison between England and the United
States.
In the United Kingdom the capitalization per mile of all tracks
was approximately $117,000 per mile in 1915. In the same year the
capitalization of the railroads in the United States, as a whole, per
mile of line, all tracks, was approximately $50,000 per mile. In
other words, the excess in the United Kingdom over the average
in the United States was about 134 per cent. But the number
of train-miles per mile of line in the United Kingdom was approxi-
mately 236 per cent greater than in the United States, while the
capitalization per mile of line in the United Kingdom was approxi-
mately 134 per cent greater than in the United States.
In addition to that you have the other factors that were previously
mentioned the expensive terminals, the close proximity of cities,
the very rare grade crossings.
Mr. Escн. And double and triple and quadruple tracks.
Mr. THORNE. That is reflected in the figure I gave.
Mr. Escн. Does the former figure include passenger-train mile-
age also?.
Mr. THORNE. It includes all trains. I have here a statement show-
ing the average rate of dividends in England since 1870, and I will
state the range. It was from 4.41 in 1870 to 3.91 in 1913.
The CHAIRMAN. What is that now?
Mr. THORNE. The rate of net receipts to paid-up capital, analo-
gous to what with us would be the total net income ratio to total
capitalization outstanding.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
489
!
(The table referred to follows:)
Summary table for United Kingdom.
Authority: Railway returns of the United Kingdom for the year 1913.]
Working expenditure.
Net receipts.
Year.
Total
receipts
from all
sources.
Total.
Proportion
to-
Total.
receipts.
Proportion
to paid-up
capital.
1870..
£45,078, 143
£21,715, 525
48
£23,362,618
4.41
1871
48,892, 780
23, 152, 860
47
25,739,920
4.66
1872..
53,235,510
26, 277,640
49
26,957, 870
4.74
1873..
57,742,000
30, 752, 848
53
26,989,152
4.59
1874.
59, 255, 715
32, 612, 712
55
26, 643, 003
4.37
1875.
61, 237, 000
33, 220, 728
54
28,016, 272
4.45
1876.
•
62, 215, 775
33,535, 509
54
28,680,
28, 680, 266
4.36
1877.
62, 973, 328
33,857, 978
54
29, 115, 350
4.32
1878.
62,862, 674
33, 189, 30S
53
29,673, 306
4.25
1879
1880..
1881..
1882.
1883.
1884.
61,776, 703
65, 491, 625
66,557, 442
69, 377, 124
71,062,270
70,522, 643
32,045, 273
52
29, 731.430
4. 15
33, 601, 124
51
31, 890, 501
4.38
34,602, 616
52
31,954,826
4. 29
36, 170, 436
52
33, 206, 688
4.32
37,368, 562
53
33,693, 708
4. 29
37,217, 197
53
33,305, 446
4. 16
1885.
69,445, 774
36,787,957
53
32,767,817
4.02
1886
69,591, 953
36, 518, 247
52
33,073, 706
3.99
1887
70,943, 376
37,063, 266
52
33, 880, 110
4.00
1888.
72, 894, 665
37,762, 107
52
35, 132, 558
4.06
1889.
77,025, 017
49,094, 116
52
36,930,901
4. 21
1890.
79, 948, 702
43, 188, 556
54
36,760, 146
4.10
1891.
81,860, 607
45, 144, 778
55
36, 731, 624
4.00
1892.
82,092,040
45, 717, 965
56
36,374,075
3.85
1893.
80, 631, 892
45, 695, 119
57
31,936, 773
3.60
1894.
84, 310, 31
47, 208, 313
56
37, 102, 518
3.77
1895.
85,922, 702
47,876, 637
56
33,046, 065
3.80
1896..
1897.
1898.
1899.
1900.
1901..
90, 119, 122
93,737,054
96, 52, 501
101, 667, 065
104, 801, 858
106,558, 815
50, 192, 424
56
39,926, 698
3.88
53,083, 804
57
40,653, 250
3.73
55, 960, 543
58
40,291, 958
3.55
60,090, 687
59
41,576, 378
3.61
64,743, 520
62
40,058, 338
3.41
67, 489, 739
63
39,069, 076
3.27
1902..
1903.
1904.
1905.
1906.
1907.
1908.
1909.
1910.
109, 469, 720
110,888, 714
111,833, 272
113, 531, 019
117, 227, 931
121, 548, 923
119,894, 327
120, 174,052
123,925, 535
67, 841, 218
62
41, 628; 502
3.42
69,561, 855
62
42,3 6,859
3.43
69, 172, 531
62
42,660, 741
3.39
70,061,663
62
43,466, 356
3.42
72,781, 854
62
44,446, 077
3.45
76, 609, 194
63
44,939, 729
3.47
76, 407, 801
64
43, 486, 526
3.32
75, 037, 588
62
45, 136, 464
3.43
76,569, 676
62
47, 355, 889
3.59
1911.
•
1912.
1913.
127, 199, 570
128, 553, 417
139, 451, 000
78, 617, 824
62
48, 581, 746
3.67
81, 224, 343
63
47,329,074
3.55
87,320,000
62.62
52,131,000
3.91
As comparable to the foregoing, we submit the following tables showing
ratio of net income plus interest to total capitalization on all 38 systems in the
eastern district, ratio of net income to capital-stock ratio of net operating
income to the co-called property investment in the same territory. We also
submit a table showing the ratio of dividends to capital stock outstanding and
the ratio of net operating income to the "book value" of American railways
as a whole.
.490.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Average rate per cent on all stock and on dividend-yielding stock of all railways
in the United States.
[Authority: Interstate Commerce Commission's Annual Reports of Statistics of Railways in the United
States.]
Average rate
Year.
Average
rate of
dividend
of dividend
on dividend-
yielding
stock.
on all
Year.
Average
rate of
dividend
on all
stock.
Average rate
of dividend
on dividend-
yickling
stock.
stock.
1888.
2.08
5.38
1903
3.20
5.70
188).
1.93
5.04
1904.
3.50
6.09
1890..
1.97
5.45
1905.
3.63
5.78
1891.
2.05
5.07
1906..
4.01
6.03
1872..
2.11
5.35
1907.
4. 19
6.23
1873..
2.16
5.58
1908..
5.30
8.07
1834.
1.97
5.40
1909..
4. 18
6.53
1875..
1.72
5.74
1910.
5.00
7.50
1896..
1.68
5.62
1911..
5.43
8.03
18)7..
1.62
5.43
1912..
4.61
7.17
1878.
1.78
5.29
1913.
4.22
6.37
1879.
2.01
4.96
1914.
5. 13
7.97
1900..
2.39
5.23
1915..
3.80
6.29
1901..
2.70
5.26
1916...
4.71
7.98
1902..
3.08
5.55
Combined statement of 38 systems.
[Authority: Carriers' Exhibit Vol. 11, covering 38 railway systems operating in official classification terri-
tory, before the Interstate Commerce Commission in the rehearing of Ex Parte 57.]
Year.
Net income
total capital outstanding.
Net operat-
per cent of
property
investment.
plus interest | Net income;
deductions:
per cent of
ing income;
per cent of
capital stock
obligations.
1900...
1901.
5.08
5.70
5.20
5.33
6.46
5.35
1902...
5.51
6.89
5.54
1903.
5.76
7.51
5.63
1901.
5.25
6. 69
5.32
1905.
5.45
7.31
5.57
1903..
5.84
8.74
6.08
1907..
5.76
8.31
6.02
1908.
5.03
6.53
5.04
190)...
5.33
7.41
5.33
1910..
6. 14
9.21
6.05
1911.
5.23
6.87
5.05
1912.
5.30
7.15
5.02
1913.
5.57
7.71
5. 19
1914.
4. 17
4.09
3.88
1915..
4.53
4.97
4.35
1916..
6.89
10.50
6.52
1917...
6.18
9.01
5.71
1900-1902.
5.31
6.36
5.37
1903-1905.
5.48
7.18
5.51
1903-1908.
5.54
7.84
5.70
1903-1911.
5.59
7.83
5.47
1912-1914.
5. 01
6.31
4.68
1915-1917..
6. 52
8.20
5.53
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
491
Book cost of road and equipment and income from operation of all railways in
the United States.
{ Authority: Thirty-first Annual Report of the Interstate Commerce Commission to Congress, Dec. 1, 1917.}
(1)
(2)
Year.
Income from
operation.
(3)
(4)
(5)
(6)
Book cost of
road and
equipment.
Average in-
come per mile
op-rated,
adjusted to
eliminate ef-
fect due to
duplication
on account
of trackage.
Average
book cost
of road and
equipment
per mile
of road.
Ratio of
column 4 to
column 5.
1891
Per cent.
1892.
1893.
1894.
1895
Total..
$331,593, 407
356, 355, 852
356,315, 886
303, 822, 201
309,818,614
$8,738,533, 165
8,564, 394, 830
$2,106
2.149
$59,675
3.77
8,937, 545, 760
2, 151
55,424
3.88
9,073, 470, 532
1,771
55,323
3.20
9, 203, 490, 619
1,786
54,867
3.26
1,657,905,960 |
135,778,901,741
2,006
56, 210
3.57
1896.
337, 209, 541
9,500, 327, 733
1,902
1897.
54, 644
3.48
326, 427, 165
9,709, 329, 228
1,830
1898.
55,586
3.29
385, 524, 121
9,760, 581, 424
1899
2,150
57,395
3.75
410,303, 487
9,961,840, 805
2,252
1900.
56,079
4.02
477,284,030
10,263,313,400
2, 554
56,567
4.52
Total...
1,936,748,344
49,195,392, 590
2, 143
56,052
3.82
1901.
507, 184, 395
10,405, 095, 085
2,670
1902.
56,941
4.69
555,666.083
10,658,321,376
2,853
1903.
56,862
5.02
585, 458, 486
10,973,504, 903
2,936
1904.
56,616
5.19
574, 581, 484
11,511,537, 131
2,794
1905.
57,893
4.83
628, 405, 575
11,951,348,949
3,001
58,808
5.10
Total..
2,851, 296, 023
55, 499, 807, 444
2,854
57,449
4.97
1906.
714, 102, 281
1907..
12, 420, 287, 938
3,330
59,624
5.58
760, 277, 389
13, 030, 344, 328
3,170
1908 2
61,816
5.61
645,681, 895
13, 213, 766, 540
2,952
1909 2
61, 779
4.78
732, 642, 083
13, 602, 183, 515
3,276
•
1910 2
61,391
5.34
826, 466, 756
14, 387, 816, 099
3,644
63,631
5.73
Total...
3,679, 170, 404
66,661, 398, 420
3,337
61,679
5.41
1911 2
768, 213, 345
3 15, 195, 262, 635
1912 2
3,304
67,883
4.87
751, 266, 806
4 15,874,579, 626
3,190
1913 5
69,049
4.62
829,863, 248
3 16, 351, 639, 266
3,584
1914 5
0,042
5.12
704, 685, 079
3 16,936, 697, 840
3,000
1915 2
71,770
4.19
728, 212, 079
3 17, 247, 101, 881
2,972
72,689
4.09
Total..
3,782, 240, 557
81, 605, 281, 248
3,208
70, 321
4.56
1916 2
1917 6
1,043, 839, 822
1,069, 750, 514
3 17,525,576, 903
4,247
73,209
5.80
7 4,851
7 74,500
7 6.50
1 Does not include figures or 1891, as no mileage is stated for that year.
2 Returns do not include data for switching and terminal companies.
3 Represent returns for Class I and Class II roads and their nonoperating subsidiaries.
4 Represent returns for Class I and Class II roads and their nonoperating subsidiaries. Figures are taken
from the 1913 statistical report.
Returns for operations, columns 2 to 4, are based on figures which exclude returns for so-called small
roads and switching and terminal companies.
• Figures in column 2 are from monthly reports of revenues and expenses of Class I roads, excluding
switching and terminal companies.
7 Based on estimated figures.
The figures are more intelligible if you compare individual rail-
roads, representative railroads. I have used formerly-and de-
scribed my reason for it-an exhibit prepared by the railroads show-
ing system figures, where they combine all companies into a system,
and that exhibit shows that 72 per cent of the traffic in the eastern
district was handled by 14 railroads.
492
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
The CHAIRMAN. In the eastern district of the United States?
Mr. THORNE. Yes, sir. The Bessemer & Lake Erie Railroad
earned a net income per cent of their capital stock outstanding
amounting to 19.98 per cent in 1915, 35.16 per cent in 1916, and 29.23
per cent in 1917.
The New York Central earned in 1915 5.98 per cent; in 1916, 18.28
per cent; and in 1917, 15 per cent.
That is from operation of property as well as outside income. The
principal objection heretofore to that figure has been that you have
included other income. It is true, however, that some of the capi-
talization must necessarily have been issued for the making of those
outside investments; and if the capitalization was not issued for that
purpose, then they were purchased out of earnings. However, to
completely meet that objection, we have subtracted all other income
just taking the net income from operation after paying all taxes,
operating expenses, interest on debt; and we then find that these
14 systems as a whole in the three years (1915-1917) earned on their
capital stock 10.3 per cent net.
Mr. DOREMUS. That is, after paying interest on the bonds?
Mr. THORNE. Yes, sir.
The CHAIRMAN. And taxes, depreciation, and maintenance?
Mr. THORNE. Yes, sir; lease and road rentals, and hire of equip-
ment.
The CHAIRMAN. That is absolutely net?
Mr. THORNE. Yes, sir; applicable to investments, dividends, addi-
tions, and betterments, reserves for the retiring of capital obliga-
tions-any disposition that you desire to make of it. That is the net
figure. And if you allow us to include in your net income the income
from outside sources, those 14 railroad systems earned 12.26 per cent
on their capital stock.
Now, gentlemen, you don't guarantee to the individual stockholder
a return of 10 per cent; you don't give him a Government guaranty,
as I have said, during the war for 10 per cent, but you give to the
stockholders as a whole in any company of those 14 a Government
bond in effect for over 10 per cent while the war lasts, under the
provisions of the bill as proposed.
+
The CHAIRMAN. That includes what per cent of the entire busi-
ness in the eastern district?
Mr. THORNE. Seventy-two per cent of the business.
Mr. WINSLOW. What per cent do you think they ought to have?
Mr. THORNE. I thing that if you consider a Government bond
worth anything-the guarantee of the Government worth anything—
that if you guarantee to keep their properties up to 100 per cent of
their present condition; if you guarantee to get them all the money
that they may necessarily require reasonably require for addi-
tions, betterments, and improvements; maintain their credit, tide
them over lean years-the hazardous times that we are now entering
upon-that if you guarantee to these bondholders their interest dur-
ing the war, while the Government operates the roads, and if you
guarantee to the stockholders the dividends which they have been
receiving, that that ought to be abundantly sufficient.
Mr. WINSLOW. Don't you think any business enterprise is entitled
to the accumulation of a reserve or surplus?
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
493
Mr. THORNE. Certainly I do. And my proposition contemplated
that.
Mr. WINSLOW. Your answer didn't provide for that?
Mr. THORNE. Absolutely so.
Mr. WINSLOW. Wherein?
Mr. THORNE. The surplus is to take care of the factors that I
named. We are tiding them over the lean years-the hazardous
times. That is what the surplus is for, chiefly.
Mr. WINSLOW. Now, wherein do you create a surplus in the propo-
sition you made?
Mr. THORNE. The surplus is the boundless resources of the United
States Government for building the nonrevenue-producing improve-
ments and tiding them over the lean years. In addition to that, I
have suggested in the original statement that I read to you, by way
of a compromise on that proposition, that the surplus might be
equally divided-one-half going to the railroad company, to be used
by it; the other half going to the Government, to be used to build
necessary improvements on weaker lines and to constitute a reserve
to take care of this guarantee.
Mr. WINSLOW. Well, assuming that that is all true-
Mr. THORNE (interposing). One upon which no return should be
guaranteed.
Mr. WINSLOW. Assuming that that is true, wherein do you provide
for a surplus in the statement you made to me in reply to the
inquiry?
Mr. THORNE. I think that I have answered your question.
Mr. WINSLOW. Well, it doesn't seem so to me. I am looking for
information, and if you say that the average earnings for three years
ought to be taken as a basis-or any given time-for the payment
of dividends to stockholders, then go on and enumerate the various
things that the Government is to keep up by virtue of the contract
and stop there, wherein do you provide for the accumulation of a
surplus?
Mr. THORNE. I have stated the surplus and how it should be
divided.
Mr. WINSLOW. Yes; you are dividing it all right, but how do you
get it?
Mr. THORNE. Out of earnings. It must be earned, and I have
stated how it should be divided if earned.
Mr. WINSLOW. How do you set it aside, Mr. Thorne?
Mr. THORNE. It comes from earnings. If a given company is able
to earn $15,000,000 in addition to paying the dividends and interest
which I have described out of its operations, $7,500,000 would go
to the company and $7,500,000 would go to the Government. There
is this advantage to that arrangement: It furnishes some induce-
ment for these railroads to perform service. Here you have a mix-
ture of Government and private operation. You have one man in
charge. He is retaining practically the entire onerating forces of the
railroads in their present various positions. Those companies who
retain the practical operation of their properties under the pro-
visions of the bill are absolutely guaranteed a return regardless of
what happens, regardless of what work they may perform. My sug-
gestion is that you do absolutely guarantee their interest and divi-
494
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
dends, in order to stabilize the market, and because we have taken
over the operation. But I suggest that the additional surplus shall
be dependent upon what they do.
Take a practical illustration: Suppose the Burlington Railroad
is handling grain for farmers in the Middle West. What induce-
ment is there for those railroad men to perform their work indus-
triously and diligently as they have in the past? They are going to
get the same income whether they do it or not. Private business has
never been operated on that basis, and here we have a mixture of
private and Government operation. It is a dangerous experiment,
especially so if the head officials of those carriers undertake to make
Government operation distasteful to the public. They can handle
less traffic. In fact, there is no benefit from handling more traffic.
The less work they would have to do, the less trouble they would
have; the less wear and tear on their properties; and yet their income
net would be just exactly the same.
Mr. DOREMUS. Pardon an interruption right there, Mr. Thorne.
Isn't the condition that these roads will be in after Government
operation terminates the consideration on the part of the roads to
maintain them at the highest point of efficiency during the war?
·
Mr. THORNE. Physically, yes. What inducement is there for a
company to handle more traffic, to treat its patrons with better serv-
ice? If you add to that guarantee of dividends and interest this
proposition, that they will have one-half of the surplus earned over
and above that, then you do have an inducement, concrete and
tangible, in a financial way, because they can put that much money
into their property. In France the surplus was divided two-thirds
to the Government and one-third to the company. We have sug-
gested here a more liberal surplus than that. In France the divi-
dend rate for the six principal railroads is around-I figured it out
around 12 per cent. You will notice here these 14 principal roads
in the eastern district, their guarantee of dividends would be around
12.25 per cent, including income, and 10 per cent excluding income.
The difference, however, is that in France, after a certain period of
time, the railroads became the property of the Government, and in
our plan here they still remain the property of the company.
The CHAIRMAN. Also stock issues in France, as I understand it,
are very small. Of course the value of the roads are very small
compared to what they are in this country, and the total sum that
has to be devoted to dividends is much smaller per earnings than it
is in this country.
Mr. THORNE. I can't state that authoritatively.
The CHAIRMAN. That is my information.
(The table referred to follows:)
NOTE. The following tables have been compiled from the exhibits offered by
the railway companies in the Fifteen Per Cent Case last November-the case
being tried before the Interstate Commerce Commission.
66
We show the rate of return which was earned by 14 of the principal railroad
systems in the eastern district. These roads handled 72 per cent of the traffic
in said district last year. Net income includes income from operation as well
as that which is received from outside investments, known as other income."
First, we show the ratio this factor, known as net income, bears to the capital
stock outstanding; second, we have subtracted from the net income all income
from outside sources. This leaves only the earnings derived from operation of
the railroad property after all interest charges are paid. We then show the
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
495
rate that this net income from operation bears to the capital stock. It will
be noted that these 14 eastern railroad systems, handling 72 per cent of the
traffic in the East, earned last year over 10 per cent net on all of their capital
stock outstanding in the hands of the public.
Statement of net income and capital stock, eastern railroads.
Rate
of
Rate
Name of road.
Capital stock
outstanding.
Net in-
come.
return
(per
cent).
Other
income.
Net in-
come less
other
income.
of
return
(per
cent).
Year ended June 30, 1915.
Bessemer & Lake Erie R. R
Central R. R. of New Jersey.
Delaware & Hudson Co.
crn R. R.
Lehigh Valley R. R.
New York Central System.
Norfolk & Western Ry..
Pennsylvania R. R. System..
Reading System..
Chesapeake & Ohio Ry
R. R...
Lehigh & New England R. R.
Hocking Valley Ry..
Lehigh & Hudson River Ry.
Total..
Year ended June 30, 1916.
$12,500,000
$2,498, 019
19.98
$130
$2,497,889
19.98
28,716, 800
5,291, 711
18.43
1,715,041
3,576,670
12.46
56, 814, 200
6,864, 645
12.08
Delaware, Lackawanna & West-
2,456, 678
4,407,967
7.76
74,464, 428
13,506,383
18. 14
3,853, 123
9,653, 260
12.96
62, 139, 998
6,322, 444
10. 17
2,328,095
3.994, 349
6.43
382,911,364
22,914, 121
5.98
9,038,910
13,875, 211
3.62
131, 146, 200
10,409, 904
7.94
755,368
9,654, 536
7.36
625, 684, 179
45,067, 704
7.20
11,524, 763
33.542.941
5.36
98,440,837
6,507,326
6.61
60, 573
6,446,753
6.55
62,786,000
2,663, 536
4.24
Buffalo, Rochester & Pittsburgh
984, 974
1,678, 562
2.67
16,500,000
912, 719
5.53
93,549
819, 170
4.96
6,000,000
692, 946
11.55
46,169
646, 777
10.78
10,999, 500
495, 131
4.50
66,843
428, 288
3.89
1,340,000
261, 298
19.50
3,590
257,708
19.23
1,570.443,506 | 124,407,887
7.92 32,927,806
91,480, 081
5.83
Bessemer & Lake Erie R. R....
12,500,000
4,394, 483
35.16
91, 335
4,303, 148
34.43
Central R. R. of New Jersey.
28,716,800
5,957, 296
20.74
668,473
5,288,823
18.42
Delaware & Hudson Co.
56, 855, 500
7, 178, 238
12.63
1,617,327
5,560, 911
9.78
Delaware. Lackawanna & West-
ern R. R...
86, 463, 428
16, 000, 007
19.55
3,905, 601
12,994,406
15.03
Lehigh Valley R. R.
62, 111, 798
7,666,439
12.34
3,092, C01
4,573,538
7.36
New York Central System.
382,768, 557
69.984,700
18.28
11,439,353
58, 545, 347
15.30
Norfolk & Western Ry
141, 199, 200
20.624, 058
14.61
887,785
19,736,273
13.98
Pennsylvania R. R. System
Reading System..
Chesapeake & Ohio Ry
Buffalo, Rochester & Pittsburgh
R. R...
Lehigh & New England R. R
Hocking Valley Ry
627,501, 935
84.017, 123
13.39
11,807, 138
72,209,985
11.51
98,441.237
14,536, 465
14.77
284,236
14,252,229
14.48
62,786, 000
6,879, 215
10.96
928,380
5,950, 835
9.48
16,500,000
1, 964, 137
11.00
77,088
1,887,049
11.44
6,000,000
939,708
15.66
29.614
910,094
15. 17
10,999, 500
Lehigh & Hudson River Ry.
1,340,000
1,254, 433
483,299
11.40
18, 096
1,236,337
11.24
36.07
5,493
477,806
35.66
Total......
1.594, 183.955 | 242,779, 601
15.23 34,852, 820 207, 926, 781
13.04
Year ended June 30, 1917.
Bessemer & Lake Erie Railroad...
12,498, 850
3,653,979
29.23
Central Railroad of New Jersey..
94, 122
3,559, 857
28.48
28,716, 800
5,543, 945
19.31
507, 202
Delaware & Hudson Co..
5,036, 743
17:54
56,855, 500
5,366, 866
9.44
2,049, 438
Delaware, Lackawanna & Western
3,317, 428
5.83
Railroad
87,048, 638
19, 231, 156
22.09
6,404,955
12,826, 201
14.73
Lehigh Valley Railroad.
62, 110, 998
New York Central System.
7,090, 067
11.42
4, 117, 211
2,972, 856
4.79
•
Norfolk & Western Railway
-
Pennsylvania Railroad System...
369, 239, 457
143, 397, 200
620,588, 186
55, 379, 058
15.00
9,686,447 | 45,692,611
12.38
20, 990, 438
14.64
818,477
20, 171, 961
14.08
70, 170, 703
11.31
Feading System.
12,784,645
57,326,058
9.25
98,558, 337
13,354, 966
13.55
Chesapeake & Ohio Failway
333, 553
13, 21, 413
13.71
Buffalo, Fochester & Pittsburgh
Railroad.
Lehigh & New England Railroad.
Hocking Valley Failway...
Lehigh & Hudson River Railway.
Total.
62,786,000
7,991, 516
12.73
1,042, 337
6,949, 179
11.07
16,500,000
1,803, 207
10.93
73,257
1,729, 950
10.48
6,000,000
825, 778
13.76
27, 782
797, 996
13.30
>
10,999, 500
2, 189, 822
1,340,000
1,576,630, 466
378,643
213,970, 144
19.91
28.26
14,494
2, 175, 328
10.78
6, 401
372, 242
27.78
13.57 37,960, 321
176, 009, 823
11.16
Total for 3 years, 1915, 1916.
1917..
4,741, 257, 927 581, 157, 632
12.26 105,740,947 475,416, 685
10.03
496
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Railways in United Kingdom whose gross receipts for year 1913 exceeded £1,000,000.
Rate
Dividends
Name of road.
Gross Ordinary Preferen-
receipts. stock. tial stock.
Guaran-
teed stock.
Total
stock.
Dividends on prefer-
on ordi- ential and
nary
stock.
1
of
Total
di vi-
guaran-
teed
stock.
dividends.
dend
Net
income.
Fixed
charges.¹
Net
income
Rate
of
(per
less fixed
charges.
return
(per
cent).
cent).
Great Central.
£5,929,558 £10,658,020 £17,185,428
Great Eastern
6,015,142
15,362,886
14,731,708
Great Northern.
6,742, 119
22,454, 250
Great Western
London and Northwestern
•
North Staffordshire.
Lancashire and Yorkshire.
I.ondon and Southwestern.
London, Brighton & South Coast.
Midland.
North Eastern..
Southeastern and Chatham Rail-
15, 431, 412
6,595, 159
36, 695, 210
18, 821, 470
16,326, 621
42, 890, 095
5,414,019
22, 189,814
3, 534, 118
10.447,085
19,759, 520
11,936,348
29, 104, 816
27,873,631
18,700, 226
10, 121, 672
25,555, 191
2,596, 012
15, 100, 406
797,980
£31,225,509
36, 189, 221
45,649,510
74, 186, 749
50,522, 298
£3,382,061
£3, 3S2, 061
£866, 076
£866, 076
2.77 £2,218,221 £1,352,885
£865,336
2.77
6,094,627
3,435, 740
£384,072
788, 838
825,228
1,209,300
3.34
2,173,330
950,385 | 1,222, 945
3.38
910,910
1,699, 748
3. 72
2,463, 016
700, 189
1,762,827
3.86
2,284, 451
1,874, 577
4, 159, 028
5.61
5,929, 031
1,574,657
4,354,377
5.87
846,966
|
1,019, 267
1,866, 233
3. 69
2,602, 111
713, 811
1,888,300
3.74
85,864, 132
3,002,306
1,718, 962
4,721, 268
5.50
6,334, 595
1,512, 792
4,821,803
5. 62
41,688, 020
851, 199
738, 526
1,589, 725
3.81
2, 190, 502
595,021
1,595, 481
3.83
15, 129, 136 | 78, 195, 397
11,315, 130
1,058, 978
32, 036, 605
3,594, 650
63,988, 974
16,273, 797
3,317,483
1,955,860
18,089, 560
22,524, 617
548, 472
603, 876
1,152,348
5.12
1,534,911
378, 445
1,156, 466
5. 13
160, 273,931
2,636, 194
2,069, 951
4,706, 145
2.94
6,362,738
1,434, 787
4,927,951
3.07
8,503, 295
56, 813, 6972, 242, 142
991,046
3, 233, 188
5.69
4,454, 968
914, 869
3,540, 099
6. 23
1,710,000
8,082, 133
179, 732
158, 024
337, 756
4. 18
441, 288
95,071
346, 217
4.28
way Companies
Managing
Committee.
4,890, 589
London, (hatham & Dover.
11,259,282
7,878, 832
122,313
19,260, 427
331, 107
331, 107
1.72
816, 193
483, 253
332,940
1.73
South Eastern.
10,049, 230
12, 286, 385
1,784,300
24, 119, 915
401,969
533, 940
935, 909
3.88
1,416, 960
483,537
933, 423
3.87
Total England and Wales.. 98,381, 981
98,381,981
314, 653, 994
314,653,994
253, 158, 820
253, 158, 820
88,587,345
356,400,
356, 400, 159 '14, 166, 34112, 641, 490
26,807,831
4.08 38,937,867 11,189, 702 27, 748, 165
1.23
Caledonian
5, 129, 155
Glasgow and Southwestern
2,012,737
North British
5, 254, 607
35, 569,256
12,654, 790
21,579, 157
Great Northern of Ireland
1,191, 286
4,049, 989
14,526, 437
5,491,091
27,575,987
1,749, 005
9, 268, 154
2,260,450
59,363, 817
646, 311
968, 183
1,614,494
2.72 | 2,334, C41
707,851
1,626, 190
2.71
20,406,331
314,052
301,962
616,014
3.02
825,933
229,969
595,599
2.92
49, 155, 144
437,361
1,078, 830
1,516, 191
3.08
2,427.282
857,725
1,569,557
3 19
869,270
6,668, 264
242,997
104, 730
347, 727
5.21
457,631
103, 788
351,843
5. 28
Great Southern and Western
1,630, 766
5,479, 800
1,696, 765
2,896, 181
10,072, 749
266,276
184, 196
450, 472
4.47
716,018
215,362
500, 656
4.96
Total United Kingdom.... 113, 600, 532
393,
393, 986, 986 304, 198, 105 103,881, 403
802,066, 494 16,073, 338 15,279,391 31,352, 729
3.91 45, 698, 407 13,306,397 32,392,010
45,698,407
32,
4.04
1 Includes interest on loans, debenture stock, and miscellaneous fixed charges.
Per cent of gross receipts of all railways in United Kingdom, 86.60. Gross receipts of all railways as follows: England and Wales, £109,908,244; Scotland, £13,642,742; Ireland,
£4,623,167, total; £128,174,163. Authority, Railway Returns of the United Kingdom for the year 1913.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
497
Mr. WINSLOW. Do you assume that under this bill the management
of every railroad has it within its rights to spend for upkeep or
development any sum that it sees fit out of the earnings?
Mr. THORNE. No.
Mr. WINSLOW. As you understand it, they are going to be more or
less under the control of the Director General in respect to the
amount that they appropriate for such purposes?
Mr. THORNE. That is correct.
Mr. WINSLOW. Well, if the Director General were disposed to be
niggardly and use the railroads just as a war expedient, for war
purposes, regardless of the future, they might run down very prop-
erly and naturally rather than to go on and be ultimately handed
over in as good condition as they were when the Government took
them on. Wouldn't you consider that factor?
Mr. THORNE. I think that the bill contemplates that the improve-
ments shall be subject to the approval of the President.
Mr. WINSLOW. Well, I can't make out from your answers whether
you are with me or against me on that proposition.
Mr. THORNE. Well, I am not quite sure of your position.
Mr. WINSLOW. I haven't any. I am trying to find out something
from an expert.
Mr. THORNE. The bill provides, as I remember, that the improve-
ments shall be subject to the Director General's orders.
Mr. WINSLOW. That is the impression I had of it. So that they
could be very easily run down without any breech of contract.
Mr. THORNE. No; I would hardly say that. Let me see if that is
correct. The bili says:
During the period of such Federal control adequate depreciation and main-
tenance of the properties of the carriers shall be included as a part of the
operating expenses or provided through a reserve fund in accordance with such
principles and rules as shall be determined by the President.
Mr. WINSLOW. Well, call it the President, then; not the Director
General; but it is the Government.
Mr. THORNE. Yes; the Government there undertakes the task of
maintaining the property adequately.
Mr. WINSLOW. Yes; but there is no standard set there and no
appeal. It is whatever the President in his view of things may see
fit to allow.
Mr. THORNE. Well, then, there is a provision for the payment of
damages.
Mr. WINSLOW. Well, I don't think you could call it damage-wear
and tear of a property.
Mr. THORNE. If they have impoverished the property, they can
certainly recover damages.
Mr. WINSLOW. Impoverishment in the way of ordinary wear and
tear is a mighty difficult thing to estimate in any physical property—
manufacturing, railroad, or what you will.
Mr. THORNE. I think your accounts would demonstrate that very
quickly, as to how much had been spent in maintenance and depre-
ciation. Section 6 provides in the third paragraph:
Any loss claimed to accrue to any carrier by reason of any such additions
or improvements so ordered and constructed may be determined by agreement
between the President and such carrier; failing such agreement, the amount of
such loss shall be ascertained as provided in section 3 hereof.
40958-18-32
498
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Again it provides:
The President may also on or in connection with the property of any carrier
make or order any carrier to make any additions and improvements necessary or
desirable for war purposes or in the public interest.
Mr. MONTAGUE. Where is that section?
Mr. WINSLOW. That is the thirteenth section, the question mark.
Mr. THORNE. No; I am not referring to that.
Mr. WINSLOW. Don't you think it is a fair proposition as a busi-
ness proposition that some reasonable provision should be made to
increase the surplus account of all these roads, as you would of any
commercial organization, from year to year, so that it would fairly
appear in the accounting at the time when the contract might be
terminated, as contrasted with the accounting at the time when they
take the roads over? There isn't any business, in other words, a
going business, but is entitled to a distinct addition to its surplus, if
it is properly handled in the interests of everybody.
Mr. THORNE. I will answer that question by asking you what you
consider in ordinary business the purpose of a surplus?
Mr. WINSLOW. Well, I am perfectly willing to discuss it, but I am
wondering if we will get along in the long run, as you are an expert
witness, if you ask me back every time I put a question to you. That
is one way of answering the question, but I was born in that business,
and I know the game.
Mr. THORNE. Let me answer the questions, then, if I may.
Mr. WINSLOW. Certainly; I would be delighted to have you.
Mr. THORNE. Mr. Rea, president of the Pennsylvania Railroad Co.,
was on the stand in a recent case and I asked him that series of ques-
tions. Mr. Rea is a pretty good authority, and if I may I will read
his answers:
Mr. THORNE. Mr. Rea, in your original testimony several matters were gone
into somewhat at length. I see no occasion for going through all of those sub-
jects again. You reaffirm what you testified to at this time, I presume?
Mr. REA. I do.
Mr. THORNE. There are one or two subjects that I want to cull out briefly
from the record. I think we can save time if the answers you give are substan-
tially in accordance with what I understand to be the record; therefore, I do
not want to consume time in discussing them-as to what is the purpose of a
surplus. I would like to read to you a passage from a decision and ask you
whether, in your judgment, this fairly expresses it:
"We think that a railroad in ordinary years should be permitted to show
a substantial surplus over and above the payment of a reasonable dividend.
This is necessary to provide for interest on capital invested in improvements
which will not yield an immedite return, to take care of the element of abso-
lescence, and to tide over years of depression."
Does that fairly express the legitimate object of a surplus?
Mr. REA. I think it does.
Mr. THORNE, There is one other passage here with reference to the testimony
of Mr. Ripley:
"He thought that the stock of the Santa Fe should pay 6 per cent in order
to make it reasonably attractive and keep up the credit of the road. and that
another 6 per cent should go into improvements of a nonrevenue-producing char-
acter, such as track elevation, passenger stations, and safety appliances, which
should not be capitalized. Mr. Ripley's statement was made upon the assump-
tion that the stock of the Santa Fe road represented investment."
Do you agree with that position?
Mr. REA. Substantially.
Mr. THORNE. Just one more question, and I am through with that subject:
“A railroad is justified, no doubt, in maintaining a surplus which will insure
dividends to its stockholders during lean years; and it may accumulate through
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
499
the years funds to meet obsolescence in plant, unless this charge is taken care of
in maintenance. The one other legitimate end for which a surplus may in reason
be accumulated is to supply facilities in the nature of luxuries, which can not be
made to yield adequate return upon the capital invested.”
You agree substantially with that?
Mr. REA. Except as to the first proposition. Does that refer to annual surplus
or accumulated surplus?
Mr. THORNE. I will read the sentence again:
“A railroad is justified, no doubt, in maintaining a surplus which will insure
dividends to its stockholders during lean years; and it may accumulate through
the years funds to meet obsolescence in plant, unless this charge is taken care
of in maintenance."
Mr. REA. Yes; that is substantially correct, too.
(Record of the Fifteen Per Cent case before the Interstate Commerce Com-
mission, Ex parte 57, p. 7349.)
Now, my answer to you is that all those functions of a surplus are
being taken care of by the Government under the provisions of this
bill, and this carrier having the surplus accumulated in former years
undisturbed, the carrier, in addition to being protected during this
period, is not getting somebody else's contract to pay but is getting
the equivalent of a Government bond for all of the regular dividends
and interest it has distributed. Now, certainly you will concede that
in addition to performing those functions of a surplus, if you also give
them all the surplus they have had in former years, there is some
duplication.
My suggestion, by way of compromise, is that half of the surplus
that they earn shall go to the company, and the other half to the
Government for taking care of the weak sisters—the short lines and
other roads not having the money-and to constitute a reserve for
taking care of the guarantee. I think that that is fair. If you do
more than that, if you give them, in addition to all of this Govern-
ment protection and these guaranties, the surplus that they have had
in the past and then pay a return, as this bill provides, for additions
and betterments built out of that surplus, you are going directly con-
trary to what Mr. Lane said should happen. You are capitalizing
additions and betterments out of surplus; you are going directly con-
trary to what Mr. Ripley and Mr. Willard both said they would
ask for.
Mr. WINSLOW. Aren't you getting away from the proposition that
I made? I will agree with you, in the main, with just what you said,
but as I understood you some time back when we began this discus-
sion, you didn't really provide, so far as I could see, for any surplus
whatever to be arranged for the benefit of the roads, and I raised
the question as to whether or not you thought that provision should
be made, and since then we have been wondering about interestedly—
your part of it--but I haven't been able until this last statement you
have made to find out that you really think that a surplus ought to
be provided for. As to how it should be distributed-that is another
question which could be discussed. If that is your feeling, why we
can agree that the railroads should be entitled not only to the divi-
dend rate of 10 or up which is spoken of, but there ought to be a
surplus allowance somewhere.
Mr. THORNE. I have stated to you-I thought I did clearly-that
the surplus should depend upon the amount earned. You thereby
have an inducement for efficient service, which is entirely lacking
under the provisions of the bill.
500
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. WINSLOW. Well, if I have interrupted you correctly, I think
we agree on the proposition.
The CHAIRMAN. I want to see if I understand your theory of
compensation as compared with that in the bill. The bill, as I
understand it, provides a standard return which shall be equal to the
net carrier operation-I mean as carriers during the three years
mentioned. It shall be equal to that, regardless of whether the com-
panies heretofore paid a dividend equal to that or not. And then,
if the Government makes something over and above that, the Gov-
ernment gets it all under the bill. Now, your proposition, as I get
it, is different in this: That you would pay, first, the interest on
the obligations that the railroad would have to pay interest on, or
obligations that I would call "carrier" obligations-not the owner-
ship of hotels or anything of that sort—and then pay a dividend on
the stock equal to the average for the three years.
Mr. THORNE. No; equal to the dividend of the last of the three
years, and also equal to the dividend on any new securities issued
the proceeds of which went into the property before January 1, 1918.
The CHAIRMAN. You guarantee them a dividend equal to the divi-
dend that they paid for the fiscal year ending June 30, 1917?
Mr. THORNE. For the calendar year 1917.
The CHAIRMAN. That brings them up to include December, which
they have been wanting to include?
Mr. THORNE. Yes, sir.
The CHAIRMAN. Then all over and above that, instead of the
Government taking it all, you would have the railroad companies
have half of it and the Government the other half?
Mr. THORNE. There is an error there in your last sentence. Under
the bill not only the dividends and interest goes to the railroad; for
instance, on the Burlington, the dividend of 8 per cent would go to
the Burlington, and under the provisions of the bill the surplus of
12 per cent also would go to the Burlington. In other words, the
Government guarantees 20 per cent to the Burlington during the
war. Now, my suggestion is that we guarantee the interest to the
Burlington and the 8 per cent dividend to the Burlington, and then
that surplus should be divided equally.
The CHAIRMAN. Between the Government and the Burlington?
Mr. THORNE. Yes..
The CHAIRMAN. And the way it is now-I mean the way it is pro-
vided under the bill-if there is any surplus made over and above
the amount provided to be paid to the railroad, or intended for them
in this bill, the Government gets it all?
Mr. THORNE. On that last clause I am not sure whether we are
clear together or not.
Now, take the concrete illustration: The Burlington earns 20 per
cent on its stock, say, during the last three years it is somewhere
near 20 per cent.
The CHAIRMAN. Its net for carrying operations.
Mr. THORNE. The 1917 figures we don't have, but it will be in the
neighborhood of 20 per cent. They earned 27 per cent the last fiscal
year.
The CHAIRMAN. On book value or capital, stock?
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 501
Mr. THORNE. On capital stock. Now, this bill provides that the
Government guarantees to pay that interest that the Burlington
earns--guarantees a sum necessary to pay the interest.
The CHAIRMAN. And the dividend.
Mr. THORNE. And the dividend and surplus of 12 per cent; and
then the balance over 20 per cent goes to the Government.
The CHAIRMAN. In full?
Mr. THORNE. Yes, sir.
The CHAIRMAN. And your position is that it should pay the in-
terest on the bonds, the dividends which they did pay, and then what
about the surplus?
Mr. THORNE. Divide it equally.
The CHAIRMAN. Then all over and above that the Government
gets one-half and the railroad company the other half?
Mr. THORNE. Yes, sir.
The CHAIRMAN. You think that the railroad owners having a
contingent benefit, they may make it larger by more vigorous opera-
tion; that they will have the spirit of private enterprise and private
hope connected with Government operation?
Mr. THORNE. Yes; while this dual relation continues.
The CHAIRMAN. I mean during the war.
Mr. THORNE. Yes, sir. If we had complete Government ownership
you might put it on a new basis, but we don't have that. We have
the companies operating the properties; the stockholders owning the
properties, and at the end of the war the contingent possibly that
the Government will take it and possibly the railroads. And the
president of the railroad is hired by the directors.
The CHAIRMAN. Now, there is another question I want to ask you.
In your discussion that the power to make rates should remain in the
Interstate Commerce Commission you made no exception at all in
behalf of the Government or Director General as to the exercise of
this power regarding pure Government shipments and not ordinary
commercial business.
Mr. THORNE. I am very glad you mentioned that. I am not insist-
ing, on behalf of those for whom I speak, that the Interstate Com-
merce Commission should retain the power to fix the rates on the
transportation of Government troops or munitions or perform any
service for the Government.
The CHAIRMAN. Or Government supplies of any kind?
Mr. THORNE. No; I confined my proposition to the commercial
transportation of freight and passengers. There are two distinct
policies to be considered. If there is a great interference with the
operation of the trains and various other factors render the operation
more expensive because of the war, you can push that burden on to
the shipper, or you can say, "This is a part of the war emergency
and it should be borne by the people as a whole, of which the shipper
will bear his fair share instead of all of it." Now, if you make the
shipper bear all of it, what happens? Under the commercial condi-
tions as they exist in the United States to-day some shippers are
able to pass it on and some shippers are not able to pass it on to the
consumer. If every shipper could pass it on to the consumer, it
wouldn't make much difference.
502
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
The CHAIRMAN. To the shipper?
Mr. THORNE. To the consumer. But it is an absolute fact, and
nobody can contradict it successfully, that that is not the practical
situation which exists. This is a real live proposition. You take an
oil jobber or an oil refiner that is independent of the Standard. The
Standard has a vast network of pipe lines all over the United States.
It pays the bulk of its transportation charges in the maintenance of
a pipe, and the report of the Federal Trade Commission said a few
years ago that they are making over 60 per cent on the investment
in that pipe line, and yet the rates are 50 per cent lower than our
railroad rates. But they hedge around it certain conditions that
make it impracticable for the ordinary shipper to use the pipe line.
For instance, I think they require 100,000 barrels in one shipment,
and other conditions that make it practically impossible of operation
as a common carrier. The result is that an advance in freight rates
will not be borne by the Standard as it will by the independent.
Then the independent, in order to meet the Standard's prices, will
have to absorb the freight rate, the major portion of which will not
be borne by the Standard. It was demonstrated that it would put a
lot of men out of business if there was an advance of 15 per cent in
freight rates on petroleum and petroleum products. Conclusive
figures were introduced in the record on that proposition.
Then take the live stock and grain shippers. The grain shipper's
price at a country station is dependent upon the price at the market
less the freight, the cost of transportation, ordinarily. Now, there
are exceptions. Ordinarily the grain shipper, the producer, pays
the freight. There are many commodities that the manufacturer
sells f. o. b. cars at point of origin; and if he is on an equality with
his competitors in freight rates, he don't have to absorb any of the
freight rate. If his competitors have a slight advantage, he has to
absorb that advantage.
you would
Now, I say it would be almost a national calamity if
compel some shippers to bear the burden of an advance to help
carry on the war.
That being true, I think the wise policy would be if you could say,
so long as the war lasts there shall be no general advances in freight
rates. These extraordinary conditions that may develop are surely
the result of the war, in which the whole country is involved. The
policy that I have just announced there is precisely the policy
adopted by Great Britain.
As to the other question, the Government transportation of sup-
plies and men, I am not prepared to say. I think that you could
transport them for nothing if you desired, and let the Government
make up the deficit out of the Treasury. That is the way Great
Britain has done. I have stated to you the reasons and principles
justifying the policy. Or, on the other hand, you could let the Govern-
ment fix prices which it thinks it ought to pay.
I think that you should also avoid trying to fix prohibitive rates
in order to discourage travel, for instance. If it is desirable to cut
out passenger traffic I wouldn't see the slightest objection from any
source in the country, if the facts justified it, to the cutting out of
passenger traffic, reducing the number of passenger trains. I would
not see any legitimate objection to a certain method of securing per-
mits to travel on passenger trains if it got serious, but when a man
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
503
does travel he ought not to be required to pay more than a reasonable
fare for his trip.
I have a concrete illustration of what the Director General has
done last Saturday in regard to this bunching rule in the handling
of cars. If a shipper gets a larger number of cars than his capacity
will provide for; if he can't handle them and they are in greater
number than he ordered, the present rules protect him against de-
murrage charges running against him—the former rules did-but
last Saturday or Friday that bunching rule was abolished without
hearing. We had no chance to state the reasons why we thought
that should not be done. We had no chance to state the effect on the
shipper. We had no chance to state any substitute measure. I think
under the act to regulate commerce a full hearing would be requisite,
but there was none such.
Mr. MONTAGUE. That relates to operation.
Mr. THORNE. We would not cbject to that method of procedure in
regard to operation, because that is an exigency of the situation that
we have to reckon with and those are burdens which we must bear;
but we do think it would be a very serious error to make it possible
for such methods of procedure to be adopted in connection with the
rates. You don't require that of the railroad company as to the
compensation it is to receive from the Government; you don't require
that method of procedure from labor when it gets compensation for
its services, and on matters concerning compensation from the
shipper to the railroad we think we are entitled to a hearing.
The CHAIRMAN. Mr. Thorne, I know I express the feeling of the
committee when I say that we are very much obliged to you indeed.
We are very grateful to you for the information that you have given
us, and we will be glad to hear you at any length on any proposition
that you may have to present, but six members of this committee
have to appear at 2 o'clock as members of the Water Power Com-
mittee. I therefore suggest that if you have anything else that you
would like to put in, or that any member of the committee wants.
you to put in, I assume that you will have unanimous consent to
do it.
Mr. ESCH. There was one matter when you were discussing the
investment proposition that you asked to be reminded of with ref-
erence to the short lines, and you did not go back to it, I think.
Mr. THORNE, In view of the chairman's statement, I guess I will
have to omit it.
Mr. ESCH. Well, that is entirely at your discretion.
The CHAIRMAN. He can answer that if he desires. I said that only
because I didn't know whether you were through with your general
statement.
Mr. THORNE. I am through.
Mr. SWEET. Mr. Thorne, have you prepared any amendment to
this bill setting forth your view in regard to compensation?
Mr. THORNE, Yes.
Mr. SWEET. And have you any objection to submitting that amend-
ment to the committee?
Mr. THORNE. Yes; I can submit that to you individually.
Mr. MONTAGUE. I will ask you, Mr. Thorne, if vou won't make
copies and put it in the record.
504 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
•
Mr. THORNE. I would be very pleased to do so.
The CHAIRMAN. To-morrow Mr. Plumb will be before the commit-
tee, and a gentleman from Boston, and perhaps some gentlemen
from New Orleans, and, without objection, the committee will stand
adjourned until 10.30 to-morrow morning.
(Whereupon, at 1 o'clock p. m., the committee adjourned until
10.30 o'clock a. m., Tuesday, January 22, 1918.)
Hon. THETUS W. SIMS,
House Office Building, Washington, D. C.
THE NEW WILLARD,
Washington, January 23, 1918.
DEAR MR. SIMS: Inclosed please find a copy of this adjusted bill (pending)
concerning Government operation of American railroads. That carries out the
idea which I suggested the other day before that committee.
Cordially, yours,
C. THORNE.
Substitute a colon for the period after the word " return," in line 10, page 2,
and add the following:
(6
“Provided further, That the standard return to any such carrier whose
average rate of net income to capital stock for the years aforesaid has been
more than 5 per cent shall not exceed the net railway operating income for the
calendar year 1917, after deducting therefrom the amount available out of
earnings for investment, surplus, and miscellaneous reserves for the retirement
of capital obligations as the same shall be determined by the Interstate Com-
merce Commission: Provided, That this further limitation of the standard
return to companies earning over 5 per cent on their capital stock outstanding
shall not reduce the net income of the said carrier (as that term is now defined
in the accounting rules of the Interstate Commerce Commission without any
readjustments) below what is required in order to pay what are known as the
regular dividends declared during the calendar year 1917 (exclusive of all
extra dividends ") plus the same rate of dividends on such additional common
stock, and the regular dividends on such preferred stock as may have been
issued during the calendar year 1917, but upon which no dividends were
declared during said year, providing, and to the extent that, the proceeds from
the sale of said securities have been invested in the railroad property of said
carriers prior to January 1, 1918; the surplus over and above the standard
return of carriers earning more than 5 per cent on their capital stock shall be
divided as follows: One-half (or so much of said one-half as the company may
desire) shall be appropriated to the construction of improvements and exten-
sions on the railroad property of the company earning such surplus, and the
balance shall go to the Government for the purpose of improvements and
extensions on other railroad property or as a reserve for meeting the obliga-
tions incurred under the guarantees provided by this act, on condition, how-
ever, that all the property built out of said surplus shall belong to and shall
be held in trust for the public, and no return to any railway company shall
be paid thereon.
Strike out the words "net railway operating income" in line 16, page 2, and
substitute the words "standard return."
COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE,
HOUSE OF REPRESENTATIVES,
Tuesday, January 22, 1918.
The committee met at 10.30 a. m., Hon. Thetus W. Sims (chair-
man) presiding.
The CHAIRMAN. The committee will come to order. You may pro-
ceed, Mr. Plumb.
STATEMENT OF MR. GLENN E. PLUMB, CHICAGO, ILL.
Mr. PLUMB. Mr. Chairman and members of the committee, I ap-
pear here formally representing the Brotherhood of Locomotive En-
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
505
gineers, the Brotherhood of Locomotive Firemen and Enginemen,
the Order of Railway Conductors, and the Brotherhood of Railroad
Trainmen. These four organizations represent directly a member-
ship of approximately 400,000 employees of the railroads which are
now under Government control, and this is nearly 25 per cent of the
total number of men employed in this industry. Indirectly, we rep-
resent all employees, whether directly authorized to do so or not.
The economic results of the theories which we advocate will be felt
by all employees as directly as they will be felt by our own member-
ship, and, in fact, the economic results of these theories are as of
much importance to the entire public as they are to the employees
in that the employees will receive no special benefit from the
application of the theories which we advocate other than that
which they will receive as a part of the general public.
The query naturally arises in your minds, What interest can the
employees of these railroads have that would warrant their appear-
ance in this investigation advocating any theories whatsoever regard-
ing the relation of the Government to these properties?
I wish to set forth clearly just what our interests are so that you
may understand why we are here and what induced us to present the
theories that we advocate to this committee for your consideration.
First. I would have you clearly understand the financial magnitude
of the interests which we represent directly and indirectly. There are
to-day, as estimated by the experts who have testified before you,
1,700,000 men directly employed in railroad transportation. Allow-
ing an average of three dependents to each employee, we estimate
that 6,800,000 citizens are directly dependent for their livelihood
upon the operation of these public highways. That is, about one-
sixteenth of the total population of the United States is more directly
interested in the correct solution of these problems than any other
question of governmental action unless it be the single problem of
successfully prosecuting the war.
The general public who are taxed to pay the expenses of railway
operation by the imposition of rates and charges pay to the 1,700,000
employees a sum of $1,500,000,000 per annum. The public paid dur-
ing the year 1916 as compensation for the use of the capital invested
in these railways, both interest on bonds and dividends on stock,
$827,000,000. We paid to the labor invested in these railways nearly
twice as much as we paid for the use of the capital, and once and a
half as much as the total net earnings of the railroads. If we were
to capitalize the amount paid to labor on the same basis as the car-
riers have capitalized the amount paid to capital, you would find that
there was a labor investment of upwards of $30,000,000,000 in these
properties, as against a capital investment of $20,000,000,000. This
explanation presents both the social and financial magnitude of the
interests now appearing before you.
I wish now to state the reasons why labor should be heard in the
determination of the policies which shall control the governmental
functions of directly operating these properties. While these public
highways were under the control of private capital, operated through
corporate organizations, the employees have had to deal with the
corporate representatives when they asked for an improvement of
working conditions or an increase in the scale of wages.
506
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Under past conditions rates and charges which these corporations
receive for the use of these public highways have been fixed by law.
Whenever the representatives of these organizations have dealt with
the owners of the railways in regard to wages they have invariably
been met with the statement by the owners that-
Since our rates are fixed by law and we can not increase our receipts without
legislative sanction, and since our outstanding issues of securities, to wit, our
capitalization, requires in the way of the payment of interest and dividends all
that we now earn over and above operating expenses, it is impossible for us to
increase your wages unless you can help us to procure an increase in rates.
When the same owners of these properties are dealing with the
Government in regard to the fixing of rates or in regard to the
amount of compensation which they are entitled to receive for the
services which they render in operating these highways, their position
invariably is-
The rates which are now fixed by the Government are not sufficient to per-
mit us to pay interest on our bonds and a fair dividend upon our outstanding
stock out of the amount remaining from gross receipts after the payment of
operating expenses. Either you must increase our rates or we must reduce
operating expenses by cutting down the service we are now rendering to the
public.
In the present hearing representatives of these corporations have
asserted before this committee that they have a legal right to appro-
priate to themselves as the property of the stockholder all earnings
under established rates in excess of absolute operating expenses and
that the Government must pay to the owners of these properties as
the value of the use of the property a sum fully equal to the net
operating income and that such net operating income may not be de-
creased in any manner by increasing operating expenses over and
above such expenses as they existed on the date of taking over of thẹ
properties.
In every such negotiation in the past, whether between the em-
ployees and the owners of the railways in regard to increased com-
pensation or between the Government and the owners of the rail-
ways in regard to existing rates or the establishment of new rates,
every attempt of the employees to improve their condition has been
exploited before the American people as a demand made by the
employees for an increase in rates. Under the new conditions im-
posed by Government control, if the railroads are permitted to ap-
propriate to private profit the total net operating revenues as they
existed prior to the taking over, then again any increase in operating
expenses because of an increase in wages, must be borne entirely by
the Government. And again the public interest and the interest of
the employees are placed in direct opposition, one to the other.
A year ago the brotherhoods, by permission of the Interstate Com-
merce Commission, entered their appearance in the valuation pro-
ceedings then being carried on by that body. We had made what we
considered a complete study of the history and legal principles gov-
erning the relations of private interest in railroads as public high-
ways and the public interest in such instrumentalities. We became
firmly convinced that there was a great misapprehension as to the
extent of the private interests so conferred upon railroad corporations
and much doubt and obscurity as to the extent of the public interest
which had been retained by the Government in these public high-
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
507
ways. We found that, while gross receipts were definitely known and
ascertainable to the last penny, and that while the operating expenses
could be ascertained with like exactness, the amount of capital in-
vested in the service of the public, not only could not be ascertained
with the same exactness as the other two factors, but that the entire
accounting methods of these corporations from their inception down
to the present time were intended to prevent the obtaining of such
information. We believed that the ascertaining of this information
was absolutely essential to any determination of the extent of the
private interests in these public highways or the limitations imposed
thereby on the public interests which had been retained.
We found that there were two cardinal principles established
from the foundation of the Government that seemed clearly to define
the extent of the private interest held in these highways and the
limitations which such private interests imposed upon the public
interest out of which the private interests had been carved. We are
convinced that when these two principles are understood and cor-
rectly applied to the problems now in hand, it will be found that
full justice can be done to the demands of the employees without in
any way increasing the burden of taxation placed upon the people
for the use of these highways; that full and adequate justice can be
done to the capital invested in these highways, insuring it a full and
fair return upon everything which by right and law belongs to it;
and that full and adequate justice can be done to the public in secur-
ing them against unjust taxation in the form of rates and charges
which produce an income greater than may be required to meet the
legitimate operating expenses and all legitimate returns for capital,
and at the same time permit a legitimate reduction of rates. A recog-
nition and application of these principles-which have been estab-
lished by the earliest decisions relating to railways and which have
been laid down in legislative enactments and ordained in constitu-
tions will forever prevent the levying of a tax in rates and charges.
of more than is required to meet all lawful expenses of operation
and the payment of all legal returns on capital and will prevent the
absorption by capital of any amounts collected in excess of such
lawful demands.
The first principle we have stated as follows:
Railroads are public highways. They are so in the nature of things; they
have been so declared by the Supreme Court from the beginning. It is so
ordained in nearly every State constitution that has been adopted since rail-
roads became known to the American public.
This constitutional declaration, however, is merely the embodiment
of a principle which was clearly and firmly established before such
constitutions were adopted. From the earliest days of history it has
been deemed one of the functions of the State to preserve the rights
of way across and over privately owned lands for the purpose of
affording to the subjects of the State a free and uninterrupted right
of passage. The development of any nation toward higher civili-
zation has always been very correctly measured by the number, ex-
tent, and condition of its public highways. Lord Bacon said:
There be three things which make a Nation great-good roads, good laws,
and a contented people.
508
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
The first of these prerequisites to national greatness is "good
roads." The exhibit introduced by Mr. Thom shows a total of
258,000 miles of railroads in the United States which constitute the
extent of the public highways, the operation of which has been
reassumed by the Federal Government as a direct governmental
function. The Supreme Court very early held, in the case of Alcott
v. Supervisors, 83 U. S., 678, that-
*
*
*
Such a road is a highway, whether made by the Government itself or by the
agency of corporate bodies or even individuals, when they obtain their power
to construct it from legislative grant.
No matter who is the agent,
the function performed is that of the State.. * * They (public highways)
have always been governmental affairs and it has always been recognized as one
of the most important duties of the State to provide and care for them. * * *
In their very nature they are public highways. * True, they must be
used in a peculiar manner and under certain restrictions, but they are facili-
ties for passage and transportation afforded to the public, of which the public
has a right to avail itself.
A railroad built by a State, no one claims,
would be anything else than a public highway, justifying taxes for its con-
struction and maintenance, thought it could no more be open to public use than
is a road built and owned by a corporation.
*
And again, in Smyth v. Ames (169 U. S., 466, p. 544), the court
said:
A railroad is a public highway and none the less so because constructed and
maintained through the agency of a corporation deriving its existence and
powers from the State. Such a corporation was created for public purposes; it
performs a function of the State. The only difference in public highways de-
voted to railroad purposes and public highways used as streets lies in the
peculiar manner in which they must be used. A public highway, built by the
State for railroad purposes, would have to be used in the same identical manner
and under the same identical restrictions as would be imposed upon a public
highway built for railroad purposes by a corporation.
The railroads, therefore, being public highways, their operation
being a function of the State, are, in the nature of things, matters
purely of public concern. No individual could acquire a public high-
way or any right or interest in the use of a public highway, differing
in any degree from the right or interest which all other individuals
held in the same highway unless such right or interest had been
granted to a particular individual by legislative enactment. There
is no such thing as an inherent individual right in the ownership or
use of a public highway. Only such rights or privileges in public
highways can be claimed or exercised by private individuals as have
been expressly granted by the State. All rights and privileges which
do not pass by the express terms of the grant still remain a part of
the public domain, out of which such private interests have been
carved by legislative enactment.
However, as applied to railroads, we are not dealing with any in-
dividual interest whatsoever. At the present time all railroads are
owned and operated by corporations. Therefore the questions of in-
dividual interests as distinguished from corporate interests do not
arise in present-day conditions. I therefore come to the second fun-
damental proposition which we have stated, as follows:
A railroad corporation, like other corporations, as against the State, can
acquire no property, interest in property, rights, privileges, or franchises other
than those expressly conferred in its charter. Where the privileges conferred
upon such corporation are carved out of the public domain, nothing passes in
excess of the express terms of the grant, and all that is not included within
the grant still remains a part of the public domain.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
509
This principle has been repeatedly declared and firmly adhered
to by our Supreme Court ever since the decision in the Dartmouth
College case. In Knoxville Water Co. v. Knoxville (200 U. S., 22,
p. 33), the court said:
The doctrine is firmly established that .only that which is granted in clear
and explicit terins passes by a grant of property, franchises, or privileges in
which the Government or the public has an interest.
And again, in Blair v. Chicago et al. (201 U. S., 400, p. 471),
the court declared:
Concurrent with this principle and to be considered when construing an
alleged grant of this character is the equally well-established rule which re-
quires such grants to be made in plain terms in order to convey private rights
in respect to public property, and to protect future control of such privileges in
the public interest,
And again in the same case the court said:
The principle is this: That all rights which are asserted against the State
must be clearly defined and not raised by inference or presumption; and if the
charter is silent about a power, it does not exist.
From the two fundamental principles which I have just announced,
if they are to be accepted, it necessarily follows that any right of
property, franchise, or privilege which are carrier asserts against the
Government must be clearly and fully expressed in the grant under
which the right is asserted. If no authority is expressly given in the
charter of the corporation for the assertion of such right, then it can
not be successfully asserted against the Government or the public,
and the value which would accrue to the corporation by reason of the
successful assertion of such right, lacking express authority therefor,
must be a value which was retained by the Government on behalf of
the public when it made the grant.
Courts can not grant corporate franchises, and he who claims a
privilege must assert the legislative grant upon which the privilege
is founded. If his assertion rests upon a court's judicial determina-
tion, and in that determination no construction of the grant is in-
volved, then, as against the State, no right is vested in the corpora-
tion by reason of such judicial determination.
Constitutions do not grant any powers to corporations; they merely
guarantee the protection of the powers, rights, or privileges which
have been granted; and when a carrier asserts a right or privilege
as coming within the protection of the constitution, in order to bring
it there the carrier must show the express terms upon which such
right or privilege is founded. Rights once granted and within the
constitutional protection can not be taken away by legislative enact-
ment without making due compensation therefor; but any legislative
enactment without making due compensation therefor; but any legis
lative action which may be construed as expressly recognizing a privi-
lege asserted against the State can frequently be made the basis for a
further claim of vested right, as being a legislative recognition of a
franchise asserted against the State and therefore equivalent to a
legislative grant of such franchise.
In the bill now pending before you, it is proposed to guarantee to
each and every carrier the payment of an annual sum equivalent to
the average annual net operating income for the past three years.
The language of the bill perhaps does not expressly recognize the
510
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
existing legal right of the carrier to receive such compensation, but
it does recognize the right of the carrier, and it does in itself ex-
pressly confer such a right to receive such an amount annually so
long as the properties are operated by the Government under the
provisions of this bill.
The representatives of the carriers have appeared before this com-
mittee and have vehemently asserted that the compensation provided
in this bill is not sufficient because the carriers have a legal right to
all of the net earnings, and that in so far as this bill deprives them of
that legal right it is an unwarranted exercise of governmental power.
If this bill be enacted in its present form, then it should contain
proper provisions that it is a war measure purely, that the compensa-
tion therein provided shall be construed purely as a war measure,
and that nothing contained in the entire bill shall be construed as a
legislative recognition or declaration of any corporate or public inter-
est in railroads, and providing for a complete restoration of the.
status quo ante without permitting any provision of the pending bill
to be used by either the public or private interests as a precedent for
the determination of what those public and private interests might ac-
tually be before the taking over or upon the restoration of the
status quo ante.
In the absence of such salutary safeguards we will find at the
conclusion of the period of Government operation and the beginning
of the period either of private ownership and operation or Govern-
nent ownership and operation that there has been such a recognition
of private interest in these public highways as will have validated all
claims made by the corporations as to the present existence of their
private interests and as effectually to legalize the issuance of all se-
curities heretofore emitted without regard to the question of the ac-
tual investment made in the public service by the recognition of this
principle in the pending bill. The carriers will have reduced to their
private ownership all accrued increment in value of land, labor, and
materials; and all work that has been done by the Interstate Com-
merce Commission for the purpose of determining the fair value of
the investments in these properties will have gone for naught.
We have submitted an amendment to sections 1, 2, and 3 of the
present bill intended to prevent any legislative recognition of the
rights, privileges, and franchises of the carriers in excess of those
already granted. As I have said before, all private corporate inter-
ests in railroads must rest upon legislative grant or sanction. The
extent of these property interests and franchises must be determined
from the existing legislative grants, but without full investigation
and recognition of such grants there can be no basis for determining
the extent or value of the grants now in existence or the basis which
the carriers have been granted for demanding from the public rev-
enues for the use of their properties.
We recognize that this is an extraordinary situation, calling for ex-
traordinary relief, and that in taking over the property of the rail-
roads as a war measure there is not time to determine immediately
just what private interests exist in these properties. We recognize
that when the Government does resume the exercise of these govern-
mental functions which it has delegated to private corporate interests
it must make due and adequate compensation for the resumption of
such functions.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
511
We have therefore adopted the plan suggested by the President as
an interim arrangement requiring the payment to the carriers until
a final legal determination of the extent of their rights can be had-
of a sum equivalent to the average net operating earnings for the past
three years. This might be sanctioned as an emergency compensa-
tion; it can not be justified as a permanent arrangement. We have
also provided that before the 1st day of July, 1918, each and every
carrier shall file with the Interstate Commerce Commission its peti-
tion in the form prescribed by the commission for the purpose of
Escertaining the total amount of money upon which the corporation
is entitled to receive a return under the provisions of its charter as of
the date of January 1, 1918, and that upon the ascertainment of that
amount it shall receive a sum equivalent to such a per cent as Con-
gress may deem fair upon the amount so ascertained and that proper
adjustments shall then be made to cover the payment of temporary
compensation theretofore made.
I wish to submit copies of this proposed amendment. The italic
type contains the additional matter; the type not in italic is identical
with the bill as introduced. If I may take the time now I will read
the bill. [Reads:]
AMENDMENT TO SECTIONS 1, 2, AND 3, H. R. 8172.
Be it enacted by the Senate and House of Representatives of the United
States of America in Congress assembled: SECTION 1. That the President, hav-
ing in a time of war taken over the possession, use, and control (called herein
Federal control) of certain systems of transportation (called herein carriers),
is hereby authorized to agree with and to guarantee to any such carrier, that
during the period of such Federal control it shall receive as its just compen-
sation an income at an annual rate to be determined as hereinafter provided.
That the carrier owning each and every system of transportation now under¸
Federal control is hereby authorized and directed to file its petition before
the Interstate Commerce Commission before the first day of July, Anno Domini
nineteen hundred and eighteen, for the purpose of having the Interstate Com-
merce Commission to ascertain the total amount of money upon which said
corporation is entitled to receive a return under the provisions of its charter
(herein called total amount), as of January first, nineteen hundred and eighteen.
That upon the determination of such total amount by the Interstate Com-
merce Commission, the carrier, or the United States, or both, may appeal to
the Supreme Court of the United States for a review of the decision of the
Interstate Commerce Commission.
That upon the final determination of such total amount by the Interstate
Commerce Commission or the Supreme Court in case an appeal is perfected
and prosecuted to a conclusion, the United States shall pay to said carrier a
sum equal to
per centum per annum upon the amount so fixed (hcrein
called the return upon total amount), such amount to be paid in two semi-
annual payments upon such dates as the President may direct.
That pending the final determination of such amount, the President is
hereby authorized to agree with and to guarantee to any such carrier, that shall
file its petition with the Interstate Commerce Commission as hereinbefore
provided, that during the period of such Federal control and until such total
amount shall have been finally determined, as hercinbefore provided, such
carrier shall receive as its just compensation an income at an annual rate
equivalent as nearly as may be to its average net railway operating income
for the three years ending June thirtieth, nineteen hundred and seventeen
(called herein standard return); said net railway operating income for the
purposes of this act shall, as to carriers making returns to the Interstate Com-
merce Commission, be computed from such returns, excluding, however, debits
and credits arising from the accounts, called in the monthly returns “leased
road rents and miscellaneous rents," provided, however, that no Federal taxes
in excess of taxes assessed during the year ending June thirtieth, nineteen
512
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
:
hundred and seventeen, shall be charged against revenue in computing such
standard return.
Any net railway operating income in excess of such standard return shall
be the property of the United States; the amount of such standard return as
accruing during said period of three years shall be determined by the Inter-
state Commerce Commission, and the certificate of said Commission as to the
amount of said net railway operating income shall for the purpose of such
agreement and guarantee be taken as final and conclusive.
Upon the final determination of such total amount, as hereinabove pro-
vided, the United States shall be credited in its account with cach carrier with
the excess, if any, of the sum of the standard returns over the sum of returns
on total amount that would have accrued at that date, together with six per
centum upon such excess, and shall be debited with the sum of the excess of
the returns on total amount over the sum of the standard returns paid by
such carrier by the United States, together with six per centum upon such
exccss.
The Interstate Commerce Commission is hereby authorized to prescribe the
form of the petition to be filed by the carrier and the procedure thereon by
which such total amount shall be determined.
SEC. 2. That if no such agreement is made for the payment of standard
returns, as above provided, the President may nevertheless pay or cause to be
paid to any carrier that shall file its petition with the Interstate Commerce
Commission as above provided, while under Federal control and pending the
final determination of the total amount as above provided, an amount not
exceeding ninety per centum of such standard return; any difference between
the amount of the standard return so paid to such carrier and the total sum
of the returns on total amount which may have accrued at the date of the
final determination thereof shall be adjusted by proper debits and credits as
provided in the preceding paragraph hereof.
Strike out all of Section three.
(NOTE.-Words in italic type are new matter.)
This amendment strikes out all of section 3. Section 3 in the origi-
nal bill provides for the means for determining all questions that
have not been agreed upon. Sections 1 and 2 of the amendment
which we submit do provide for the determination of all questions
and all interests, leaving nothing undetermined to be passed upon by
any other tribunal.
This proposed amendment does not purport to confer any rights
upon the carriers in excess of those already expressly conferred by
law; neither does it purport to deprive them of any right, interest, or
privilege which has already vested under the law but permits each
and every carrier to assert before the tribunal provided for that pur-
pose all of its rights, privileges, and franchises which it claims and
the value thereof, which can be sustained by competent evidence.
This amendment preserves to every carrier all values of property,
interest in property, rights or privileges which have been conferred
upon it by its charter or the laws under which it operates and there-
fore is in full accord with the Constitution. If this proposed amend-
ment should cause any embarrassment whatsoever to the carriers such
embarrassment would arise only because the carriers might be unable
to point to the grant that would sustain their extraordinary claims to
all elements of value which appertain to their properties, and, failing
to find a grant to sustain their claims, it might, and undoubtedly
would, be held that although the values existed as proven by the evi-
dence submitted, still, lacking a grant to convert such values into
private interest, it must follow that the values so proven and not
granted were inherent in the public interest which had been retained
in these public highways.
If this proposed amendment should meet with your approval, and
it should be written into the legislation to be enacted by Congress,
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
513
then the extent of the corporate interest in every system of transpor-
tation taken over by the Government must be determined and defined
by the terms of the charter under which that property is now held
and operated.
Of course, the term "charter" includes not only the certificate of
incorporation, if the corporation be organized under general laws,
and the act of incorporation if it be organized under a special grant
of the legislature, but also all laws relating to the ownership of said
property and the exercise of the privileges conferred, including all
limitations imposed by the Constitution under which the corporation
is created or exercises its functions.
With but two or three exceptions, all corporations now operating
railroads are created under State charters, and the limitations im-
posed upon the extent of the privileges granted are to be found in
State constitutions and State enactments.
It will immediately occur to you that these charters will not be
uniform; that special charters will contain provisions. different from
those imposed by general laws; and that the laws of the various
States differ from the other; that some States have granted ex-
tremely liberal charters; others have made very limited grants.
This is undoubtedly true, but it is also true that a company given
broad powers by the State which created it is just as much bound
by the limitations of another State within which it operates as
would be the creature of that other State, and that a corporation
which was given its existence by a State imposing strict limita-
tions carries those limitations with it wherever it goes for the
exercise of the functions conferred upon it. For instance, a railroad
corporation turned loose by the State of New Jersey under the old
régime, with the broadest possible powers conferred by its charter,
when it enters the State of Illinois and there operates a railroad sub-
jects itself to all of the limitations imposed upon railroad corpora-
tions by the State of Illinois through its constitution and statutes.
A corporation like the Southern Pacific, created under the strict limi-
tations of the Kentucky constitution and carrying on its business
wholly without the State of Kentucky, carries those limitations with
it wherever it goes and can not exercise in a State which grants
greater freedom to its corporations any powers which the State of
Kentucky has denied to it when it was created.
Quite naturally you will ask, "What has the Federal Government.
to do with these State corporations and State-imposed limitations? "
The answer is perfectly obvious. Originally, all sovereign power
resided in the States as separate Commonwealths. By the adoption
of the Federal Constitution these separate Commonwealths conferred
upon the Federal Government all of their sovereign power relating
to interstate commerce and the establishment of post roads. Under
the delegation of the States' sovereign powers the Federal Govern-
ment undoubtedly could have required corporations engaged in in-
terstate commerce to be organized under a Federal incorporation
act, but up to the present time the Federal Government has not so
exercised this sovereign power, but has permitted corporations or-
ganized under State governments to occupy the entire field of inter-
state transportation. The limitations which the State has imposed
upon railroad corporations have been imposed for the benefit of the
40958-18-33
·
514
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
inhabitants of that State and the public generally, wherever that
corporation transacted its business.
In the Federal regulation of these creatures of the various States,
the United States Government is authorized by the State to exert
all of the State's power over such corporations. This includes the
power of the States to insist upon the full observance of the limita-
tions which they have imposed upon railroad corporations. The
Federal Government undoubtedly might have conferred upon in-
terstate carriers broader powers than those conferred by the States,
but it has not done so. Federal legislation has been restrictive and
in many instances has imposed upon interstate carriers burdens and
obligations in excess of those imposed by their State charters, but in
no instance has the Federal Government, by legislative enactment,
attempted to grant to such corporations any powers in excess of those
conferred by their charters.
The Federal Government, therefore, stands in the same position
in its relation to these corporations that the States would stand in
had they not delegated their sovereign power over interstate com-
merce to the Federal Government.
The Federal Government has full power to enforce all charter
limitations imposed by the States upon railroad corporations, and
in so far as the Federal Government fails to regard these limitations
it must fail in protecting the public interest by the proper exercise
of the sovereign power which the States have delegated to it in the
matter of interstate carriers. The Federal Constitution does not con-
fer any rights upon such corporations whatsoever, but merely guar-
antees the protection of rights which the various States have con-
ferred upon these corporations, and obviously the Federal Constitu-
tion just as much guarantees the protection of the public rights
which the States have retained in the public highways in which they
have granted private interests.
Although there is a wide variation existing between charters
granted under special acts and those granted under the general in-
corporation laws of the various States, still there are some general
principles which are common to all charters and which must obtain
unless there be a special exception made in special charters granted
in a few individual cases.
I wish to call your attention to some common law, constitutional
and statutory limitations upon the right or privilege of issuing
stocks and bonds.
Corporations, being created by statutes, do not derive any interests.
in property from the common law; such interests must be based solely
on legislative grants. The common law, however, has imposed many
limitations upon the powers of corporations, limitations which the
experience of mankind under the English system of government, has
found necessary to preserve public rights against the encroachment
of granted privilege. Among these limitations so imposed by the
common law, is the principle recognized by all writers on the common
law and clearly stated by the Supreme Court of Alabama in Com-
mercial Fire Insurance Co. v. Board, 99 Ala., 1, at page 4:
Capital stock is the sum fixed by the corporate charter as the amount paid in,
or to be paid in, by the stockholders, for the prosecution of the business of the
corporation, and for the benefit of corporate creditors. The capital stock is to
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
515
be clearly distinguished from the amount of property possessed by the cor-
poration.
* * *
At common law the capital stock does not vary, but remains fixed, although
the actual property of the corporation may fluctuate widely in value, and may
be diminished by losses, or increased by gains.
When we speak of capital stock of a corporation we are understood to refer
to the sum subscribed in its organization. When we speak of stock we mean
the certificate issued by the corporation to the shareholders, which certificates,
like titles to property, furnish the evidence of ownership of the shares of stock.
Capital stock is the aggregate of money or other valuable things contributed,
or paid into the common treasury, as condition of the exercise of corporate
functions, and a security for their faithful and prudent exercise. It is the
property of the corporation, charged with a trust, it is true; but nevertheless,
in its possession and control.
This common law requirement that the amount invested in the
exercise of the corporate franchise should be the exact equivalent of
the par value of the corporate securities issued was, in the early
years of railroad history, modified to some extent by the different
State legislatures. The abuses resulting from the legislative privi-
leges so granted became so scandalous that, beginning with Illinois
in 1870, the people of the various States, through their constitutions,
restored this old common law limitation to its former vigor and
effect and at the same time deprived the legislature of any power in
the future to in any way abate this requirement.
Railroad history began about the year 1830. This common law
limitation upon the privilege of issuing stocks and bonds was then
fully recognized.
Railroad builders, recognizing this limitation and faced with the
difficulty of financing their promotions if held to this strict letter of
the law, began to include in the charters which at that time were
directly granted by legislative enactment, provisions authorizing
them to issue their stocks and bonds for a consideration less than
par. In many instances these charters specifically provided that
such securities might be issued for any price the directors saw fit to
accept and that, when so issued, they should have the same validity
as though issued at par. The legislative authority so conferred upon
these corporations was in abrogation of the common law and un-
doubtedly made legal the issuance of what would otherwise have
been fictitious securities.
At the close of the Civil War, although we were then in the early
stages of railroad development, there had been many scandalous
omissions of watered securities which called forth a tremendous
popular protest. At that time the railroads claimed that they had a
right to earn a reasonable return upon the par value of the securities
so issued. Many of the States faced this problem in the constitu-
tional conventions called to frame new constitutions. Illinois, in
1870, adopted its present constitution in which it embodied the
following provision:
No railroad corporation shall issue its stock or bonds except for money,
labor, or property actually received and applied to the purpose for which such
corporation was created. Any stock, dividend, or other fictitious increase of
capital stock or indebtedness shall be void.
The right asserted by the railroads at that time was that they
had conferred upon them by their charters the right or privilege of
charging such toll as would afford them a reasonable return upon
516
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
the par value of the securities which they had issued. In the con-
stitutional debates, this assertion of right was met by the declaration
that in order to prevent unjust taxation the people would provide
in their constitution that the issuance of securities must exactly cor-
respond with the actual investment made, in order that the returns
received by the holders of such securities might be accurately known
to the public and in order that the power of regulation might be
intelligently exercised. At that time no railroad company had ever
asserted that it was entitled to receive a return upon the value of its
property.
In the Illinois constitutional debates, Judge Elliott Anthony in
discussing the proposed adoption of the provision limiting the issu-
ance of securities, said:
I wish to explain for a moment where the evils come into the community
by the increase of the capital stock. The managers care nothing about the
public, but in order to keep up the stock, they raise the rates of freight in
order to declare dividends upon the watered stock. It is a fact well known
that the moment these managers, who care nothing for the public, get control
of the railroads and its earnings, they use them for the purpose of making
money and stock manipulating. Rates are increased largely, by which they
seek to make their watered stock pay dividends and keep it up in the market,
and the injury to the public is very great.
-
Shortly thereafter Pennsylvania incorporated a like proivsion in
its new constitution, and Mr. Howard, in addressing the convention
in the debates on this provision, said:
But hereafter it should be known that the stock will not be allowed to be
increased without limit. We should know that the stock is to be used for a
legitimate and a valuable purpose; that it is to build railroads; that the issue
of stock is necessary to build them, and that it is not the intention to water
the stock or increase it unnecessarily. After this stock is increased it must
be made to earn dividends, it must make its proper interest, and the people
of the Commonwealth must be taxed in the price of transportation for the
purpose of raising money to pay dividends on that stock, and, therefore, it
is the right of the people to know that those issues of stock are necessary and
that the proceeds are to be used for legitimate and proper improvements.
In the Kentucky constitutional debates, in discussing a like pro-
vision, Mr. Clardy said:
Now, it is a fact that a great many corporations in this State and elsewhere
would show a much larger dividend, and the people would be able to see to
what extent they had been imposed upon by these corporations, if it was not
for the fact that the stock represents something which does not really exist;
and this we seek to avoid in this fifth section.
Time will not permit me to go further into this phase of the
historical development of constitutional provisions. Enough has
been shown to demonstrate that the people, in the adoption of these
provisions, clearly intended to compel railroad companies to make
the par value of the securities issued by them coincide with the
amount of investment made by the subscribers to such securities,
and that the corporation's right or power to tax the people by the
imposition of tolls and charges should be strictly limited to such
exercise of that power of delegated taxation as would procure a
reasonable return upon the investment which the subscribers to such
securities had made in the corporation.
This constitutional provision has been embodied in nearly every
new State constitution adopted since 1870, with the exception of
the States of New York and Ohio, and in Ohio similar provisions
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
517
are embodied in that portion of the constitution authorizing the
creation of the State utilities commission.
In many other States in which no new constitutions have since
been adopted, like limitations have been established by legislative
enactment. The effect of this constitutional provision was to restore
to full force and vigor the former common-law limitation imposed
upon all corporations, and it had the further effect, in the various
States which had adopted this provision, of depriving the legislature
of any power thereafter to remove the limitation so imposed.
The Supreme Court of Illinois, in the case of People v. Union Con-
solidated Elevated Railway Co., 263 Ill., held that by this provision
of the constitution:
The State retains the right to regulate rates charged by railroads, but it has
not the power to fix tolls or charges at so low a rate as to destroy the invest-
ment or deprive the company of its right to a reasonable return on the in-
vestment.
No matter what statutes may have been enacted by the legisla-
tures of the various States having such constitutional provisions, no
grant could be made to the corporations which would impair or re-
move the limitations so imposed by the constitution, but in my study
of the statutes, I have been unable to find any provision which pur-
ports to lessen this constitutional restriction.
This constitutional declaration that issues of securities of a par
value in excess of the investment actually made and applied to cor-
porate purposes should be void now prevails in some 26 States.
The common law prevails in all States except Louisiana and some
code States, but in Louisiana the constitution prescribes the same
limitation and in many of the code States like provisions have been
supplied by the legislature. In many States that have not adopted
new constitutions since 1870 this limitation has been imposed by
statute. The purpose of this limitation, as construed by the Supreme
Court of Illinois, was to preserve in the State a right to regulate the
use of these highways, provided that in such regulation the State did
not deprive the carrier of its investment or a fair return upon the in-
vestment.
The full extent of the private interest which the legislature has
granted to carriers in public highways, under such a limitation, is
measured by its investment devoted to the public service, and any
regulation of the use of the highways which preserves to the carrier
the integrity of its investment and a fair return upon that investment
secures to the corporation all of the rights which are guaranteed to
it by the constitution.
All railroad charters, whether granted by State legislatures under
special act or organized under general law, have this provision in
common: That corporations so organized are authorized to acquire,
construct, maintain, and operate a railroad. Some States, like Mis-
souri, have added to this general authority the words "for public
use."
There are certain other provisions imposed-and I refer to main-
tenance as one, because it is necessary in order to get a correct defini-
tion of investment. It is one of the elements that must be included.
The authority so conferred to acquire and construct imposes a corre-
sponding obligation to acquire and construct the particular railroad
518
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
defined in the charter. For a failure to so acquire and construct
within a reasonable time, or within the time fixed by law, the char-
ter would be forfeited. The franchise of operating the railroad
carries with it an obligation to operate, and for a failure to operate
the charter would be forfeited. The privilege or franchise of main-
taining the railroad carries with it a like obligation to so maintain,
and a failure to observe this obligation would undoubtedly be a cause
warranting the institution of quo warranto proceedings by the State.
The Supreme Court in the Knoxville Water case has defined the ob-
ligation to maintain as being an obligation to preserve the integrity
of the original investment. A failure to observe this charter obliga-
tion would result in a diminution of the original investment by the
extent to which the corporation had failed to preserve the integrity
of such investment.
The Supreme Court has repeatedly said that the total investment
could not be the basis upon which the State should regulate the use
of the railroad, because the investment might have been dishonestly
expended, or imprudently made, and the public does not under-
write such losses. It is only so much of the actual investment
made as has been honestly and prudently applied to the purposes
for which the corporation was created. Such subsequent dealings
are purely transactions between private individuals, and the con-
sideration paid for the transfer of the security is a consideration
between individuals, in which the State has no interest. Such sub-
sequent transactions in no wise affect the investment which has been
devoted to the purposes for which the corporation was created and
in no wise measure the amount of money which has been devoted
to the public service. The State, however, is a party to the original
issuance of such securities, and under all constitutions such as that
of Illinois the State has declared that any fictitious increase in
capital stock or indebtedness shall be void. So far as this provision
was intended to protect the public against a fictitious inflation of
securities that intent can not be defeated by the voluntary agreement
between the corporation and private individuals that they will dis-
regard this constitutional limitation. So far as the limitation was
intended to protect individuals against the purchase and sale of
such spurious securities individuals have the power to waive by their
own agreement any constitutional or statutory provision intended
to protect them against the wrongdoings of others, but if stock-
holders agree amongst themselves to issue and accept securities which
are in whole or in part fictitious, and that ultra vires act is consum-
mated, neither the corporation nor the individuals can afterwards
be heard to say that their act was unlawful and the securities so
issued were void, but in so far as their action affects the public.
interests nothing that they do can prevent the State from asserting
the invalidity of the securities so issued or give to the holders of
such securities any advantage over the State in any right to demand
a greater return than they would have had had the securities actually
corresponded with the investment which they made in such secu-
rities at the time they were issued.
Another general principle that is common to all charters relates
to the issuance of bonds. Railroads are authorized to borrow such
sums of money as may be necessary for their corporate purposes
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
519
at such rates of interest as the directors may fix. Of course this
authority would not authorize the directors to disregard any usury
laws which were in force at the time of their action, so this must
mean that they are authorized to fix legal rates of interest.
The corporation is authorized to mortgage its property and fran-
chise to secure "the amount so borrowed." There is no authority to
issue a mortgage to secure any other or different amount than the
exact amount so borrowed. If a corporation borrows a million
dollars in actual money, which is devoted to its corporate purposes,
and issues a mortgage to secure the payment of bonds for a million
and a half, it has exercised a power which its charter has not con-
ferred upon it, and in so far as the exercise of that ultra vires power
is prejudicial to the interests of the public and in violation of the
limitation which the State has prescribed, the public interest must
remain wholly unaffected.
The provisions in all charters relating to the interest which rail-
road corporations may acquire in the property held by them are
identical in principle, though differing in phraseology. The most
common provision is, that such corporation shall have power to
acquire all real and personal property necessary for its corporate
purposes and to sell the same when no longer necessary for railroad
uses. Railoads are commonly authorized to take and hold such
voluntary grants of real estate and other property as may be neces-
sary for their corporate purposes and to condemn any real estate
necessary for such corporate purposes where it can not agree with the
owner as to the compensation to be paid.
It must be remembered that in all States railroads are either
specifically declared by the constitution to be public highways or are
so held by judicial decision; that the corporation is authorized to
acquire real estate only for the purpose of maintaining and operating
a public highway, not for any other or different purpose, and that
it has but a limited power of disposition over the property which it
so acquires that is, the power of sale can be exercised only when
the use to which the property is devoted has been terminated. Here
is a distinct difference between the power of an individual over land
which he owns and the power which the State has conferred upon
railroads over the land which it acquires for railroad purposes. The
individual may sell when he pleases for such price as he may obtain
and to whoever desires to purchase, and may place the land to any
use for which it may be adapted. Not so with the railroad. Its
charter limits the use of the land which it acquires to the single
purpose of being used as a public highway, and it can be put to no
other use whatsoever so long as its use as a highway exists; so long
as that use is in existence there is no power of disposition in the
owner and no power to divert the land to any other use, no matter
how profitable that other use might be, and this is necessarily so.
In all land used for highway purposes in the ordinary road or
street in rural districts the title is owned by the abutting landowner,
but he has no power of disposition over the land to which he has this
title, except subject to the use. His title is held subject to the public
use of the land for highway purposes. When that use is abandoned,
his right of reversion becomes effective, and he can then, after the
abandonment of the use, sell or transfer the land and the right of
520 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
possession thereof, or place it to any use whatever for which it is
adapted; but so long as the right of the use of the public to require
that it shall be used exclusively for highway purposes exists, his fee
is a mere inactive right of reversion.
The carriers claim that they are entitled to possess as their private
property the value of the land which they devote to highway pur-
poses for railroad uses, just as an individual owner of the land, unin-
cumbered by such a public use. Let us see if this claim can stand
analysis. The claim is made as to all lands which the carrier owns,
regardless of the source of its title, and the carriers are possessed of
many kinds of title. A portion of their lands they occupy by reason
of the exercise of the State's delegated power of eminent domain;
another portion they occupy under deeds which they have purchased
but which convey to them merely the use of the land for highway
purposes, reserving the fee subject to such use in the grantor; other
lands have been donated to them for highway purposes; other lands
they occupy by reason of a public grant of a right of way; and other
lands they own outright, having acquired from the previous owner
a warranty deed conveying all of his rights and title in the property
to the railroad corporation as between the railroad and the grantor.
That is, as between the former owner and the railroad corporation
and between the railroad corporation and the rest of the world. He
owned the fee simple which the former owner conveyed tỏ him.
In such a deed the title is complete as against all other claimants,
but under the charter of the corporation the State has permitted it
to acquire this land only for highway purposes, and the purchase of
that land by the corporation is in effect a dedication of the land to
the public as a public highway for railroad purposes, with certain
private rights reserved to the railroad company, which we will here-
after discuss. The interest of the public, however, in the land so
held by a warranty deed are the same identical interests which the
public hold in lands which the corporation has acquired by con-
demnation. Let us take for illustration a case where the railroad has
acquired all of its lands used for railway purposes by condemnation.
The fee of such lands would remain wholly in such persons as pos-
sessed it prior to its condemnation. It is the law of condemnation
that there can be but one assessment of damages when private
property is taken for public use and that that judgment must in-
clude the full value of the land so taken at the time of its acqui-
sition.
Suppose in the case just proposed that many years after the con-
demnation had been completed the owners of the fee were to assert
against either the railroad company or the State a right to further
compensation for the use of their lands on the ground that the
abutting and adjoining lands had greatly increased in value. Would
such a claim for further compensation on behalf of the owners of
the fee obtain any consideration in any court whatsoever? Suppose,
on the other hand, that the corporation operating this property, for
which we will say it had paid to the original owners $1,000.000, had
now asserted a right against the public to be recompensed for the
use of this land on the basis of its present value and brought proof
that the present value of the land for purposes other than that of a
railroad was $10,000,000. This claim would necessitate a determina-
tion of what interest the railroad had in the lands which it obtained
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
521
by condemnation. It could not by the exercise of the States' dele-
gated power of eminent domain acquire a private interest in the
lands which was adverse to the interest of the public, for it is incon-
ceivable that the State's power of eminent domain could be exercised
by an agent of the State to acquire a private interest against the
State. The utmost that could be claimed by such an agent of the
State would be a right to recover all moneys which had been ex-
pended by such agent on behalf of the public, together with the
proper interest or profit on such moneys.
It is clear that the accrued value in lands acquired by condemna-
tion for public use, conceding that there is an accrued value, is not
a property right which the State has conferred upon the corporation
through its delegation of the power of eminent domain. Interests in
property have a given, definite value, which can be defined and ascer-
tained, and that value inheres in the interest no matter who the
individual may be who is the owner of that interest at the time the
valuation is made.
Assuming that the fee of railroad property is an interest which
has only a nominal value in the hands of the abutting owner, can it
be converted into a valuable interest when it is acquired by the cor-
poration that is exercising the public easement? Suppose this
railroad company that has acquired all of its real estate by con-
demnation subsequently purchases from each abutting owner his
fee, would the railroad company as the assign of the abutting
owner have any greater right to recover against the public any
values for that fee than the original owner would have had? That
fee becomes of value only when the public have abandoned the use
for which the property was condemned, and that fee will have the
same value under such circumstances in the hands of the corporation
that it would have had in the hands of the abutting owner, and no.
more. If the railroad company, holding only the public easement
as the agent of the State, could not recover from the public the
value which had accrued to the land since its condemnation for
public use and the abutting owner could not recover additional
damages from the public for the additional value which he claimed
accrued to the fee, could the corporation, by joining these two
estates in one ownership, be in any better position than were the
separate owners of the two estates before they were joined? The
railroads interest in lands acquired by condemnation is identical
with its interest in lands which it holds for right of way purposes
only. When the use ceases the interest which the corporation holds
in the lands ceases. A railroad company does not own its lands as
lands, but only for railroad purposes. It is not entitled to recover
the value of its land as land in a condemnation case, but only the
damage which it suffers by reason of the diminution in its use of
the land.
This is the doctrine that has been held by the Supreme Court in
the only case where such charter limitations were before the court for
its decision. In 1892 the city of Chicago condemned a strip of land
through a subdivision and across the right of way of the C., B. & Q.
Railway Co. The owners of the private property so condemned re-
covered the full value of the lands taken. The C., B. & Q. Railway
Co. held this land by deed and sought to prove value of the land
522
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
taken for a street by the same evidence that was introduced on behalf
of the owners of the private property. That evidence was excluded
on the ground that the railroad company could only acquire land
"whether by voluntary purchase or otherwise for railroad purposes
as defined in its charter," that it did not hold the land as land.
The Supreme Court held:
It is manifest that the appellant is restricted in its use of the right of way
over which this street is to be extended for those purposes for which such right
of way is now used; the future use must be the same as is the present use so
long as the appellant continues to operate this railroad, unless the legislature
shall permit it to change its route. The Supreme Court of Illinois therefore
held that the trial court did not err in excluding evidence to show the general
salable value of the right of way included in the crossing or its general value
for other uses than that to which it was applied. *** To what extent
was the value of the company's right to use the land for railroad tracks unduly
diminished by opening across it a public street? Under all the circumstances,
in view of the purpose for which the railroad company obtained the land, and
for which the land was in fact used and for which it was likely to be always
used—which purpose is the most valuable one for the railroad company-that
was the only question to be determined by the jury, and in that case a verdict
of $1 was sustained as adequate compensation. And in that case the jury
brought in a verdict of $1, which was sustained by the Supreme Court of Illi-
nois and the Supreme Court of the United States as being adequate compen-
sation for the taking of this land for street purposes, as measuring the full
damage which the railroad company would suffer by reason of the interrup-
tion of the exclusive use of the land which it owned by deed.
There are many cases which have held that the lands owned by rail-
road companies were private property and that the corporation
was to be protected in its ownership of such lands the same as individ-
uals, but in no such case was the court's attention called to the charter
limitations by which the corporation's interest in the property had
been restricted to the use of the land for highway purposes.
Personal property is held by exactly the same title. Under the
charter the carrier is entitled to acquire all necessary personal prop-
erty for its highway uses and to sell the same when no longer neces-
sary for such use. It is denied any power of sale over its personal
property until it is no longer useful for the purpose for which it was
acquired. If it is denied all power of merchandising such property,
then value, except as reflected by the actual purchase price, can in
no wise affect the interest which the corporation holds in that prop-
erty so long as it is employed in the public service. Value is defined
by the carriers in the valuation proceedings as "power in exchange."
In relation to money it is the amount in dollars which a purchaser
not under compulsion to buy will part with to obtain title to property
and which the seller not under compulsion to sell will accept for it.
This definition is based upon the power of exchange. That is a power
which is inherent in the individual's ownership of property but
is a power which is denied to railroad corporations. If there is no
power to exchange, then value in the sense of market value can not
exist in railroad property because the owner is denied the power to
exchange, it necessarily follows that fluctuations in market value
due to an increase in the units of labor or material or increase in
land values can in no wise affect the interest which the corporation
has in the property which it has purchased and subjected to the
public use.
For some unknown reason-probably because the most obvious
thing is frequently the last to occur to an ingenious mind-this ques-
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
523
tion of charter limitations has not been presented in any rate case
or any valuation case heretofore, but on the few occasions when they
have been presented to the Supreme Court of the United States, as in
the C., B. & Q. case to which I have referred, the Supreme Court's
construction of these limitations is wholly in accord with the views
which I have submitted to you and that decision is irreconcilable
with any other view or any other theory and directly opposed to
the theories so vehemently urged by the carriers. The first time
the effect of the constitutional limitation forbidding the issuance of
stocks or bonds in excess of investment was presented to a State
supreme court its decision was wholly in accord with the views which
I have presented to you, and it must be remembered that the Illinois.
constitution was the first constitution embodying this provision. The
Supreme Court of Illinois has construed it to mean that the State's
power of regulation is limited only by the investment which was
made as a consideration for the original issuance of the stocks and
ponds. That construction of the constitution of Illinois must be fol-
lowed by the Supreme Court of the United States. The 25 other
States which have copied the Illinois constitution, according to the
principles controlling the effect of judicial decisions, must construe
this copied provision in the other constitutions in the same manner
as it was construed by the Supreme Court of Illinois.
I think that I have demonstrated that by this provision limiting
the issuance of securities to investment and by the limitation which
railroad charters impose upon the interest which railroads can acquire
in the property which constitutes a public highway. I have shown
first that investment, meaning thereby the actual amount of money
or money's worth devoted to the public service, undiminished by a
failure to maintain the integrity of that investment, constitutes the
full extent of the property interest which railroad corporations are
authorized to acquire in the public highway, which under their
franchises they are permitted to operate; that the charter limitations
imposed upon this interest forbid such corporations to appropriate
any accretions in value which might be found in the property if it
were held in private ownership unencumbered by the public's right
to use it for highway purposes; that such values if they exist are re-
tained by the public as a public interest in a public highway, and have
not been granted to the private corporation.
The carriers, however, urge that there is a tremendous investment
in their properties of moneys actually and honestly expended in the
public service, not contributed by the original purchasers of securities
but invested out of earnings, and just as effectively devoted to the
public service as though such funds had been furnished by the origi-
nal purchasers of the securities. The carrier further claims that the
earnings so diverted from dividends to investment were, in fact, the
property of the stockholders and might have been declared as divi-
dends during all the years that they have been returned to the prop-
erty. Again we must look to the charters to see if there is any pro-
vision therein or any grant whereby the moneys so diverted can be
used to increase the amount of stock or the amount of bonds outstand-
ing or as a basis for increasing the rate of return.
Referring again to the constitutional limitation, we find the provi-
sion that any stock dividend or other fictitious increase of capital
524
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
stock or indebtedness shall be void. This language prohibits a stock
dividend and prohibits the issuance of stock to anyone who has not
subscribed and paid for it, by no method of conjuring could such an
investment out of earnings increase the indebtedness of the corpora-
tion to its bondholders nor can it increase the investment which any
stockholder has devoted to the public service. The corporation itself
expended these moneys on the improvement of its property. There
is no provision which permits the corporation to issue stocks or bonds
to itself by reason of such an investment. Any investment so made
in excess of the amount of money required to preserve the integrity
of the original investment must be considered an expenditure made
by the corporation for the purpose of increasing the security of the
investment made by its stockholders or increasing the credit upon
which the corporation could secure additional funds by the issuance
of bonds or as a means of increasing earning power. Such expendi-
tures undoubtedly increase the earning power of the corporation, but
the corporation has not by reason of such expenditures had conferred
upon it any authority to increase its taxing power against the public.
The power to tax the public, which the State has delegated to the
corporation is limited to such an exercise as will protect the original
investment and provide a reasonable return thereon. It may not be
exercised to increase the original investment, thereby increasing the
delegated power of taxation.
The bill now under consideration by this commitee is a war
measure, an emergency matter required by the exigencies which the
war has forced upon the American people. In this emergency there
is no attempt to have determined all of the questions of law and
equity which must be ascertained before the rights of each and all
of the railroad corporations can be properly adjusted, and some
means must be provided that will take the place of the usual orderly
legal procedure for determining such rights. If the conditions cre-
ated by this act were to last only through the emergency and old con-
ditions could be restored as soon as the emergency had passed, it
might not be necessary to determine the rights of either the cor-
porations or the public in these public highways, but we all realize
that this is a transition period.
The bill itself does not pretend to say how long it shall be in force,
whether it shall cease with the termination of the war or whether it
shall extend over into that unknown future which portends Govern-
ment ownership. Since the bill is undefined in this regard it does be-
come essential to have ultimately determined the relative rights of
private and public interests in these public highways, and to that end
we have offered the proposed amendment. It serves the purpose of
providing temporary relief during the existing emergency just as
asked by the President. It also serves the purpose of having the full
rights of the corporation and of the public in each system of trans-
portation taken over for Government operation, finally and fully de-
termined under due process of law, preserving to every corporation
all of the rights protected by the constitution, and at the same time
such final determination protects the public interest against any per-
manent invasion or encroachment. It fully protects the public in-
terest against any loss or diminution by reason of any claim that
might subsequently be made that the carrier's rights to the full net
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
525
earnings of its property and to the value of the use of its property
have obtained legislative recognition by the passage of this bill.
Anything more than this amendment grants to the carriers would
be unjust to the public; anything less than the protection thereby
provided for the carriers would be unjust to the private interests.
The amendment we believe provides justice and equity for all.
Now, Mr. Chairman, I should like yet, at an afternoon session, if
there is one, or at a later session, to present an analysis of the exhibit
introduced by Mr. Thom, showing the property investment account-
the alleged property investment account-and the rate of return
thereon for the past three years. The exhibits will be printed and
will be ready at 1 o'clock. The holiday season and the shutting down
of industry almost excluded us from the printing offices, but last night
and this morning, and those exhibits will be ready at 1 o'colck. Dr.
Warne, statistician, has prepared them, and I should like to take
about half an hour of your time to present his analysis of that exhibit.
The CHAIRMAN. Let me make this inquiry first. Is Dr. Warne
here in Washington?
Mr. PLUMB. Dr. Frank Warne, yes; he is permanently located here.
The CHAIRMAN. Now, Mr. Amster is here from Boston, and per-
haps some others who were here last week, and I thought we might
give them some time to-day. I don't know what their wishes are,
whether they want to return to Boston to-night or not, and I want to
inquire about that and in case they do want to return we might let
Mr. Amster go on for a limited time, as it does not break the connec-
tion between what you have said and this other matter-if that is
agreeable. Perhaps there will be enough time for both of you this
afternoon.
Mr. PLUMB. I think Dr. Warne has some Government matters that
he has to attend to in New York Thursday.
The CHAIRMAN. Well, we want to get through with all of the testi-
mony by Thursday if we can. Now, let me inquire from Mr. Amster;
Mr. Amster, did you come with the expectation of proceeding to-day?
Mr. AMSTER. Yes, sir; and my statement is very short. It will not
occupy many minutes.
The CHAIRMAN. Then, with that understanding, we will adjourn
until 2 o'colck and have both of you present at that time.
(Whereupon, at 12.15 o'clock p. m., the committee recessed until
2 o'clock p. m.)
AFTER RECESS.
The CHAIRMAN. The committee will come to order.
You may proceed, Mr. Amster.
STATEMENT OF NATHAN L. AMSTER, 67 MILK STREET, BOSTON,
MASS.
Mr. STEPHENS. Before you begin, Mr. Amster, what is your
business?
Mr. AMSTER. I am an investor in securities. I am a director in the
Rock Island Railway Co.; I am president of the Investors' Protective
Association of America.
1
526 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
ป
The CHAIRMAN. And you publish a paper, a magazine, or journal,
don't you?
Mr. AMSTER. We publish, in the interest of this Protective In-
vestors' Association, à monthly publication known as the Investors'
Protector-not for profit, however.
The President's bill relating to Government control of railroads
now before Congress is, in my opinion, of greater importance to the
welfare of our people and our Nation than any bill in the history of
the country and accordingly deserves the most serious consideration
at the hands of Congress, whose great privilege it is to enact it.
The bill not only definitely and effectively solves the transportation
question, so vitally necessary in the conduct of the war, but offers a
solution of the serious problem that has confronted the American
people for generations as to how to free themselves from the intoler-
able wrongs which have been heaped upon them for more than half
a century by a coterie of Wall Street financiers who have intrenched
themselves in the control and management of our railroads.
The three most important provisions in the bill, as I see them, are:
First. The unification of the lines, equipment, and terminal fa-
cilities.
Second. Compensation to security holders.
Third. Period of Government control and conditions under which
the railroads shall be returned to their owners.
On the first there seems to be no difference of opinion. Everybody
agrees that in the interest of public safety and in the interest of
economy and efficiency there is no alternative. The wonder is that
this has not been done years ago.
On the second there are differences of opinion. Some feel that the
compensation provided for in the President's bill is more favorable
to the security holders than it should be. My own opinion is that the
compensation provided in the bill does not do full justice to the
security holders of railroads as a whole and is entirely inadequate and
unfair to security holders of some roads, which were confronted with
unusual conditions and problems during a part or the whole of the
three years upon which their compensation will be based.
This will work great hardship on many men, women, and insurance
institutions, and I feel that Congress should modify the bill to the
extent that the security holders of those particular roads should not
be deprived of a reasonable return on the money actually invested.
I am, however, frank to say that that is not nearly of as much impor-
tance as is the provision relating to the time and condition under
which the railroads shall be returned to the owners.
I see by the press that certain railroad executives and financiers
have appeared before your committee or before the Senate Interstate
Commerce Committee in an effort to have the President's bill modi-
fied to the extent of setting a definite date when the roads are to be
returned to the owners. To modify the bill in that respect would, in
my judgment, be a serious and grievous mistake. It will be harm-
ful not only to the real owners of the roads-the stockholders-but
to the hundred million or more of our population.
To return the roads to the owners on any specific date without en-
acting some form of legislation to safeguard the owners would mean
reintrenching a group of Wall Street financiers in the control of the
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
527
$18,000,000,000 of American railroads that rightfully belong to mil-
lions of investors, insurance policyholders, and savings-bank deposi-
tors, who are scattered all over the face of the globe, and who have
never been able to assume the responsibility of proprietorship of their
vast properties. The result of this scattered and transitory owner-
ship is well illustrated in the management of the New Haven, Rock
Island, Pere Marquette, Cincinnati, Hamilton & Dayton, and the
Frisco as recently brought to light by the Interstate Commerce Com-
mission investigations. No railroad security holder or thoughtful
citizen reading the Interstate Commerce Commission reports, result-
ing from their investigation of those roads, would countenance a con-
dition under which there was the slightest possibility for the rail-
roads to revert into the hands of these self-appointed guardians of
railroad stockholders, who proved so absolutely unworthy of trust
and positively incompetent to manage the railroads either in the
interest of the stockholders or of the public.
It is no point of wonder that as soon as the financiers and their
railroad executives became aware that unification of the railroads
and Government financial aid-which railroad executives advocated
at the Interstate Commerce Commission's hearing on November 15—
would carry with it Government control, and that that would mean
loss of their mastery over $18,000,000,000 railroad property—and
the power and profit that always went with it-they immediately
set to work to retract the position they took at the Interstate Com-
merce Commission's hearing, and prepared to oppose the commis-
sion's recommendation to suspend the antipooling law and for the
Government to furnish financial assistance to railroads. But we all
know that the railroad executives are not reflecting the wish of the
real owners the stockholders. I am sure that if they seek to insert
a clause in the President's bill which would compel the Government
to surrender the control of the roads without having an opportunity
to consider some legislation to safeguard the owners and the public
they have not in mind the best interests of the stockholders, who
in the last analysis pay the executive salaries. The reason most of
the railroad executives are dominated by the interest of the banker
directors and Wall Street financiers, and not by the interest of the
stockholders, is, in my opinion, due to the fact that they never come
in touch with the stockholders.
1
I am sure that if the question of returning the roads to the same
interests that mastered them in the past, without some safeguarding
legislation, was to be put up to the security holders or to the public
for a vote, few, if any, would vote in favor of it.
In coupling railroad executives with the financiers, I do not mean
to infer that as a whole railroad executives have been to blame for
the glaring exploitations of security holders and the wrecking of
many of the railroads, as shown by the Interstate Commerce Commis-
sion investigations. On the contrary, railroad executives as a whole
have been perfectly honest, and in many instances have shown marked
ability. But since they owed their positions to the Wall Street banker
directors, they were obliged to submit to their dictates. In my opin-
ion, if some of these directors were permitted to have a free hand in
the management of their properties and had not the yoke of allegiance
to the self-seeking financial interests, they could perform valuable
528
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
and efficient service to the stockholders and the public. Such ideal
conditions, however, are impossible under the old order of things,
and it would be a distinct calamity if the railroads are ever re-
turned to the custody of people who in the past have utterly disre-
garded the interests of the public and the rights of security holders.
It is an acknowledged fact that for generations railroad control
in this country has been in the hands of a certain exclusive caste,
whose chief concern has been the opportunity afforded for personal
enrichment at the expense of security holders. No one outside that
ruling caste has ever been permitted to serve on the boards of directors
of our railroads, and, in consequence, the rights that go with owner-
ship have existed only in theory.
The archives of Congress bear record as to how railroad directors
have enriched themselves at the expense of their companies, as, for
instance, in Union Pacific, as far back as 1880, when the Credit
Mobilier Construction Co., the principal owner of which construc-
tion company was one of the Union Pacific leading directors and a
Member of Congress was proved to have made $25,000,000 profit on
a $42,000.000 Union Pacific Railroad job, which finally led to his
impeachment.
Recently the same condition was brought to light in the case of the
Hampton Railroad, where the Woronoco Construction Co., in which
the Hampton road's directors were interested, made such large profits
on the construction of the road as to make the Hampton Railroad a
hopeless bankrupt and its securities worthless.
As an illustration of how directors have wrecked great railroads,
I quote from the Interstate Commerce Commission's report on the
New York, New Haven & Hartford Railroad Co. in connection with
the New York, Westchester & Boston Railway Co.:
The Westchester is a story of profligate waste of corporate funds. The road
was not necessary as a part of the New Haven system. It parallels other
lines already owned by the New Haven and traverses territory which the New
Haven already served.
The enormous sum of $36,434,173.25 was expended for a road only 18.03 miles
in extent.
The New Haven stock was considered a gilt-edged investment and
sold at over $250 per share. It is now selling under $30. The com-
pany's books show that 26,000 defenseless men, women, and insurance
companies own the stock of the company, and that very little, if any,
is held in the name of the banker directors who managed the property
during its prosperous period. One insurance company-the Mutual
Life whose president, Charles A. Peabody, is a warm friend of the
great banking firm that handled the New Haven finances, owns
35,000 shares at an average cost of $155 per share, but this poor
investment, and doubtless other railroad investments of this in-
surance company, belongs to the policyholders and not to the presi-
dent or trustees of the company.
Further illustrations of how the public has been abused by the
class of directors which have presided over American railroads dur-
ing the past two generations are found in the Pere Marquette and
the Cincinnati, Hamilton & Dayton episodes, where a certain syndi-
cate of bankers bought control of the Pere Marquette common stock
in 1902 at under $85 per share, then sold 110,000 shares to the Cin-
cinnati, Hamilton & Dayton in 1904 at $125 per share. The result
FEDERAL OPERATTON OF TRANSPORTATION SYSTEMS.
529
was that the Cincinnati, Hamilton & Dayton was forced into re-
ceivership in 1905.
The road was then reorganized in 1907, at which time security.
holders again put in many millions of dollars, only to have their
company again put into receivership in 1912.
No better example of high-handed methods which banker directors
and financiers have used to exploit security holders and wreck their
own company can be found than in the case of the Rock Island. A
board of directors consisting of some of the best-known bankers and
financiers in this country, created and fostered the Rock Island
Holding Co. with $170,000,000 preferred and common stock and
$73,000,000 collateral bonds. The only assets back of all these $243,-
000.000 securities was $73,000,000 par value of Chicago, Rock Island
& Pacific Railway Co. common stock, the same stock that is now
selling around $20 per share.
So long as these people had securities to sell, the holding company
was given all the credit it needed, and more. When they succeeded
in unloading the holding company securities on the public, and the
directors formulated plans to reorganize the railway company, the
Rock Island could not get a dollar credit; and when the holders of
the collateral bonds, which were secured by the railway company
common stock, made an attempt to defend themselves, practically
every prominent Wall Street bank president, and some of the most
important financiers and presidents of leading insurance com-
panies, were formed into different committees to oppose them, and
the committee headed by Charles A. Peabody, who were sup-
posed to represent the refunding bondholders, although owning but
a small fraction of the outstanding issue, urged the court to order a
default on these bonds, which was denied by the court in a notable
decision, a copy of which I wish to submit here.
(The paper referred to follows:)
DECISION OF HON. GEORGE A. CARPENTER, UNITED STATES DISTRICT JUDGE FOR THE
NORTHERN DISTRICT OF ILLINOIS, MARCH 22, 1916, RELATING TO THE CHICAGO,
ROCK ISLAND & PACIFIC RAILWAY Co.
(There is also herewith appended extracts from letters written by the Central Trust Co.
of New York and Ex-Gov. David R. Francis, of Missouri, the two trustees under the
first and refunding mortgage.]
A petition was filed in this case on February 29, 1916, by Jacob M. Dickinson,
the receiver, setting forth the income account of the trust estate from July 1,
1915, to December 31, 1915, inclusive, and giving an estimate of the net income
from January 1. 1916, to June 30, 1916. That petition also shows the maturing
obligations of the defendant company and of the receiver up to August 16,
1916 and the means available for meeting the same. No exception has been
taken by any one of the parties interested to the figures set forth in the petition.
The only question raised on the argument was as to whether or not the basis
for depreciation charges was correct. This, however, would have no effect
upon the actual available means of meeting the maturing obligations.
The receiver's petition shows also that upon examination the income account
for the fiscal year ending June 30, 1916, interest will have been earned upon
the first and refunding bonds and upon the 20-year debentures of the de-
fendant. It shows that because of expenditures for additions and betterments
amounting to $2 281,491.37 upon lines subject to the first and refunding mortgage,
and of $267.133.83 upon lines not subject to that mortgage, expenditures which
were necessary for the purpose of keeping the properties in proper condition
for public service (and which under ordinary circumstances would have been
fundable) there will not be on hand sufficient available cash to meet the in-
stallment of $500,000 debenture interest due January 15, 1916, upon which
40958-18—————34
530
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
1
default becomes final March 15. 1916; and the interest upon the first and
refunding bonds amounting to $1.898 820, which is due April 1, 1916, and upon
which default becomes final October 1, 1916.
The receiver in his petition asks to be instructed by the court what course
he should pursue with reference to the payment of the interest on the de-
bentures and the interest on the first and refunding bonds.
At the hearing representatives of the stockholders and of the debenture
holders insisted upon the debenture interest being paid-the debenture hold-
ers, because it is due and has been earned; and the stockholders, on the ground
that if it be not paid default will, on March 15, 1916, become final upon the
$20.000.000 of debenture bonds, which. by the action of the bondholders, can be
matured, and this fact, it is said, will be embarrassing and probably very in-
jurious to the stockholders in their attempt to refinance or reorganize the com-
pany. I may add here that since this memorandum was written arrangements
have been made for an extension of the final default period until April 15 next.
I get that from the newspapers.
Counsel for the Central Trust Co., one of the trustees of the first and refund-
ing mortgage, and counsel for David R. Francis, the other trustee, both insist
that the debenture interest should not be paid if its payment in any way would
interfere with the payment of the interest on the first and refunding bonds
and that the interest on the first and refunding bonds should be paid as it
matures, if the receiver shall have funds in his hands which are legally avail-
able therefor.
It is also urged by counsel for the refunding trustees that by a former order
of this court no moneys coming into the hands of the receiver shall be used
or applied to the interest due July 15 on the 20-year debentures of the defend-
ant railway company, unless the court shall hereafter determine that the earn-
ings of the property in the hands of the receiver are sufficient for that purpose
and properly applicable thereto." And that when in September last the
question again arose, this court issued series B certificates to pay that July
interest on the debentures, making those certificates a lien on the property of
the railway company, subject to the existing mortgages, and specifically pro-
vided in its order "that said certificates and the debts secured thereby shall
be and they are hereby ordered to be a lien upon all the railroad property and
all property of the defendant in the hands of the receivers, but not upon the
earnings thereof.
* No moneys in or coming into the hands of the receivers shall be
used or applied to the payment of the principal or interest of said certificates
unless the court shall hereafter determine that the earnings of the railroad
and the property in the hands of the receivers are sufficient for that purpose
and properly applicable thereto.
So far as these former orders are concerned, they must be construed in con-
nection with the present situation, which shows that the earnings of the road
in the hands of the receiver will justify the payments. The earnings have
been more than sufficient, according to the methods of accounting used by the
court through its receiver. That is not disputed. Nor has any serious effort
been made to show that those methods are not correct methods, although it is
said that the question of earnings is one upon which there may be a difference
of opinion. However that may be, it must be assumed that until it is shown
that the methods of accounting used by the receiver are incorrect, the court
will be guided by the results as they appear upon the receiver's books; and
there it appears that there have been earnings sufficient to justify the payment
of the debenture interest, and at least the interest upon the series B certificates.
It must not be overlooked that there were earnings otherwise applicable to
the operation of the road and income which have been invested in capital
account; and if the cash account is replenished by the receiver for permanent
improvements and betterments there will be plenty of money in the treasury
earned and “properly applicable" to the payment of the debts under discussion.
Counsel for the Central Trust Co. argues that their mortgage is a first lien
upon the earnings, and that because the owners of the debentures have no
such lien their interest should not be paid.
It is true that the deed of trust securing the refunding bonds provided that
under certain circumstances the income of the road should be applied to the
payment of the bonded indebtedness. It is settled law, however, that the con-
veyance of income gives the trustee and hondholders secured by the trust deed
no interest whatsoever in the income until entry is made for default, or until
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
531
a bill to foreclose has been filed, and in some manner the interest has been
impounded for the benefit of the holders under the conveyance which creates
the lien on the income. This is clear, and is necessarily the law, because a doc-
ument which leaves the income from the mortgaged property or the revenues
from the mortgaged property in the hands of the mortgagor, for use, gives no
right or control to the mortgagee, until that mortgagee has placed himself in a
position to demand that income.
Counsel appearing for the Peabody Protective Committee, which, accord-
ing to his statement in open court, by actual deposition and so-called "adhe-
sions" represents only approximately one-fourth of the first and refunding
bonds, not only opposed the payment of the debenture interest, but stated that
the first and refunding bondholders did not want their interest paid, and that it
would be better for all concerned if a default should be made thereon.
Why he urges default in the payment of interest due his clients he does not
tell us exactly. Considering, however, the large equity behind his bonds we
will only surmise.
Counsel for the Bondholders' Committee of the Consolidated Indiana Coal Co.
opposed the payment of the debenture interest, contending that the debenture
interest represents simply a general claim against the railway company, which
stands upon the same footing as the claim against any other general creditor.
such as the claim of the Consolidated Indiana Coal Co. bondholders on account
of the railway company's guaranty of their interest; and this committee
insists that it would be an unwarranted preference to pay the debenture in-
terest without at the same time making provision for the payment of the
interest upon the coal bonds.
It is not clear to the court how a default on the debenture interest would be
to the advantage of the bondholders of the consolidated Indiana Coal Co., for
the coal company bondholders have no lien upon the Rock Island properties,
having simply an unsecured obligation; and the maturing of $20,000,000 would
certainly seem to put their claim in jeopardy.
The record shows that since the appointment of receivers in this cause there
has been a great improvement in the condition of the property constituting the
trust estate, and a marked improvement in the earnings. So far from there
being any complaint as to the management of the properties all of the counsel
representing the various interests expressly commend it.
The net income of the system for the six months ending December 31, 1915,
as shown by the income account, was $900,087, as compared with $531,799 for ·
a similar period in the preceding fiscal year under the old management; an
increse of approximately 63.1 per cent. The net income for the present fiscal
year is estimated to be approximately $175,000, as compared with a deficit in
the preceding year of $734,678.52, as shown by the last annual report; and this,
notwithstanding a loss of approximately $1,000,000 during the summer of 1915,
on account of unprecedented flood conditions, and the making up of a large
amount of deferred maintenance, in addition to the ordinary repairs necessary
to maintain the property in good physical condition. It is estimated that the
deferred maintenance on freight cars alone, which was made up during the last
six months' period, was $400,000. This amount was paid from earnings, and
represents an actual betterment of the property. In addition there was de-
ducted from the earnings of the first six months of the present fiscal year the
sum of $326,000 for rail and tire arbitraries, which should have been charged
against the earnings of the prior fiscal year.
Since the appointment of receivers herein, and up to and including December
31, 1915, in addition to the making up of deferred maintenance, there has been
expended for additions and betterments to the property, such as for bridges,
heavy rails, the widening of banks, new ballast, the extension of block signal-
ing, and the improvement of equipment, as well as repairs thereof, $2,281,481.37,
all of which was expended upon property subject to the lien of the first and
refunding mortgage.
There was also expended upon the Rock Island, Arkansas & Louisiana Rail-
road and the St. Paul & Kansas City Short Line, $267,130.83. The stock of both
of these companies is owned and held by the defendant; and while these addi-
tions and betterments to their lines are funded in their own bonds, the bonds
when issued become the property of the defendant.
The receiver also has expended money for new equipment. Four thousand
box cars were purchased, 15 per cent of the purchase price, or $580,833.51,
being paid in cash, the balance secured by equipment trust certificates. The
cars, however, having been bought upon vendor's lien contracts, do not become
532
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
subject to the mortgages of the defendant, but their purchase undoubtedly has
strengthened the defendant's bonds, because it has resulted in an increase of
the earning capacity of the road. The same is true with reference to the pay-
ment made by the receiver on account of maturing installments of principal
on equipment notes, the payments made aggregating, up to February 1, 1916,
$2,460,000. This equipment is in service upon the defendant's lines and the
payment by the receiver of these installments of principal represents an invest-
ment in road and equipment, and has added just so much to the property of the
railroad company, although the cars themselves may not be directly and pri-
marily subject to the mortgages.
The effect of all these expenditures for additions and betterments made for
the safe operation of the railroad was to strengthen the defendant's securities.
The total of expenditure for capital account from the date of the appointment of
receivers up to December 31, 1915, including the equipment trust notes paid
January 1 and February 1, 1916, amounts to $9,993,702.90, against which the
capital liabilities issued on account of the receivership amount to only $7,392,-
109; an increase in the investment in the property of the defendant since the
appointment of receivers of $2,601,593.90, in addition to the deferred mainte-
nance made up.
To this extent, therefore, as well as to the extent represented by the making
up of deferred maintenance, and by the improvement in its physical condition
the defendant's property is better off than at the date of the appointment of
the receivers.
The payment of the pending installment of interest upon the 20-year de-
bentures of the defendant presents a grave question. If that interest is not
paid by April 15, the holders of these debentures may declare due the principal
amount of $20,000,000. Such a declaration would constitute a serious obstacle
in the way of reorganization of the company by the stockholders, and would
jeopardize the value of $75,000,000 of capital stock, which is junior in rank to
the debentures and the general creditors, and might seriously impair the equity
in the property which is now represented by the stock, and which the earning
power of the trust estate while in the custody of the court indicates to be of
substantial value.
On the other hand, if the receiver should pay from the funds in his possession
the current installment of debenture interest, and should also pay the $500,000
receiver's certificates, series B, due March 16, 1916 (issued Sept. 16, 1915, and
being a lieu inferior to everything save the debenture bonds and stock), it would
entirely absorb the working capital fund of $1,000,000 which the receiver shows
is necessary to the proper operation of the railroad, and which no interest
here represented has claimed to be more than sufficient, and would leave sub-
stantially no funds to meet the installment of interest upon the bonds of the
defendant due April 1, the principal one being $1,898,820, representing the
semiannual interest upon the first and refunding mortgage bonds. The default
period under this mortgage is six months, and although, if the interest were
not paid, the trustees could not declare a default on account of its nonpayment
until October 1, 1916, yet the failure to pay the interest when due would be very
injurious in is effect upon the credit of the defendant's property, and would be
greatly to the disadvantage both of the stockholders and the holders of the
20-year debentures.
The receiver has in the past arranged for extensions of certain loans made to
the company. There will be due March 28, to the Bankers' Trust Co., $1.600.000;
on March 30, to the Central Trust Co., $2,500,000; on August 16 $7,500.000, for
two-year collateral gold notes. The Bankers' Trust loan, the Central Trust Co.
loan, and the two-year collateral gold notes are secured, among other things, by
$16.199.000 of the defendant's first and refunding mortgage bonds.
It must be apparent, therefore, that if default is made on April 1, 1916, in
the payment of the semiannual interest upon the first and refunding mortgage
bonds, and especially if that default is continued for six month, the value of
the security for the company's loans will be materially diminished and the
possibility of renewing them practically extinguished.
There appears to the court to be a large equity over and above the bonded
debt of the defendant; an equity which it is the duty of the court to preserve,
so far as legally it can be done. The stockholders are numerous, and it is
difficult for them in a crisis of this character to have prompt and concerted
action in the way of refinancing the property or of terminating the receiver-
ship. Different committees have been organized having different views as to
the character of the reorganization. They have not until lately acted in
harmony. Stockholders have already suffered heavily, and should, so far
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
533
as the court may do so without infringing on the legal rights of others, be
given an opportunity to save themselves, or be saved, perhaps, from further
loss. If there were here no equity, or if the property were running down, if
the future were not hopeful, the court could not legally seek to avert the
inevitable. All of the conditions now, however, seem favorable. Between now
and October 1, which is the expiration of the period of grace provided in the
trust deed for the payment of interest on the first and refunding bonds, are
some of the best months of the railroad year; and it is not unreasonable to hope
that there will be an increase of business during these months, and that the
condition of the property, under the receivership of this court, will be mate-
rially better than it is now. The court feels that it is just and fair to the
stockholders, if it can be done, to raise the money for their protection. The
court appreciates also the difficulty of securing the cooperation of such a large
body of stockholders, widely scattered, and whose holdings in many instances
are comparatively small. A reasonable time, therefore, should be given to them
to prepare a plan for the protection of what the court believes to be their sub-
stantial equity in this large property.
The court should so operate the road that no undue advantage will result
to any one interest, or class of interests. I realize that the court can not post-
pone indefinitely the day of foreclosure. In case of default the bondholders
have their rights, and the law will protect them. The court, however, would
fail far in its duty if it sat by and permitted a situation to arise which would
enable bondholders to foreclose a very substantial equity of a solvent railroad.
After the bonded indebtedness of this road comes securities of the value at
present prices on the New York Stock Exchange of upward of $50,000,000.
If the interest on the first and refunding bonds is not paid on April 1, or within
the period of grace thereafter provided by the trust deed, the trustees will be
in duty bound to ask for a foreclosure of that trust deed, and will be entitled
to a sale of the property to reimburse its bondholders. If such a course were ·
pursued, we know, as a practical matter, that the bondholders, being in a posi-
tion to bid the amount of their enormous claim, will make good their bid by
the turning in of their bonds as a sort of check or counter instead of money.
We know that at such a foreclosure sale the general public, while it may be
intensely interested, has not the separate financial ability to purchase. We
know that if all the foreclosing bondholders are in combination it is imma-
terial to them whether they bid the full amount of the decree or a sum that will
pay only 1 cent on the dollar of their bonds. They are in a position to force
any outside combination to offer the full amount of the decree without danger
or expense to themselves.
Under such a sale the rights of the unsecured creditors and the equity of the
stockholders, if any ever existed in actual value, will vanish.
The court, believing that there is a very substantial equity in this railroad
for the stockholders, and that presupposes that the unsecured creditors have
valuable claims, feels justified in directing its receiver to see to it that for
the present at least there is no default in the interest on the first and refund-
ing bonds.
Now, gentlemen, that is the attitude of the
has been presented up to the present time.
that, so when you address yourself to this
some idea of what my point of view is, the
have to look.
court toward this situation as it
I thought you were entitled to
other proposition you will have
perspective through which I will
Mr. KRAUTHOFF. Your honor does me an injustice in quoting me as saying
something that I did not say. You say that my motive is ulterior. I never had
any ulterior motive in view, and the record will show that I made no such
remark.
The COURT. I think, Mr. Krauthoff, I merely stated here that you said that
your bondholders did not want their interest paid, and that it would be better
for all concerned if a default should be made.
MARCH 27, 1916.
EXTRACTS FROM LETTERS WRITTEN BY THE CENTRAL TRUST CO., OF NEW YORK, AND
EX-GOV. DAVID R. FRANCIS, OF MISSOURI, TRUSTEES, UNDER FIRST REFUNDING
MORTGAGE.
Ex-Gov. David R. Francis, writing to Mr. Charles A. Peabody, chairman
so-called protective committee first and refunding gold bonds, March 8, says:
"I was startled when informed by the court that your attorney, Mr.
Krauthoff, had petitioned or requested in open court that the April 1 interest
534
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
on the first and refunding fours be defaulted on. I hope in this he does not voice
the sentiment of your committee and the bondholders you represent, as I
can not believe that any material number of bondholders would so desire. It
is impossible for me to account for Mr. Krauthoff's position in this connection,
unless it be with a view to enabling the holders of first and refunding fours to
become possessed of the property through a forced sale.
"I feel convinced that the interest of the first and refunding mortgage bond-
holders is not only not in jeopardy, but is being protected more and more
securely from month to month or from week to week. It would probably
result in or accrue to my personal interest to have a foreclosure of this
mortgage, but that is no reason for my becoming a party to a plan which would
be open to charge of being formulated for the purpose of procuring possession
and ownership of the property for much less than it is really worth and to the
exclusion and great injury of the holders of junior securities, as well as to the
stockholders themselves who own the equity in the property, which equity in
my judgment is very large."
Again, on March 11, ex-Gov. Francis, writing to Mr. Peabody, says:
"When first requested by your committee to petition the court to decree
foreclosure I was surprised, and after investigation concluded your bonds
were not in jeopardy; the interest had been paid, and consequently I did not
comply with your request. My attorney, Mr. John F. Lee, and I have kept
advised concerning the operation of the road and its physical condition. I
have had no desire or intention to protect the junior securities at the expense
of the refunding fours or as to their detriment. I have been careful to take
no step that would expose me to the charge of being party to a scheme to get
possession of the road at much less than its value and to the serious injury of
the thousands of innocent stockholders.
"Nor have I at any time been willing to be used by reorganizers or syndicate
managers or attorneys, all of whom generally charge exorbitant fees for under-
writing and for services, and therefore impose unnecessary burdens on the
property. The equity in the Rock Island Railway is large, and I have believed
that the stockholders, if given an opportunity, could meet all requirements by
an assessment on the stock. This view is concurred in by the board of
directors and also, I am told, by the holders of all junior securities."
Extract from letter written by the Central Trust Co., of New York, to Mr.
Charles A. Peabody, chairman, March 16, 1916:
"We do not believe that the interest of the holders of the first and refunding
mortgage bonds would be advanced or promoted by the institution at the
present time of proceedings for the foreclosure of the mortgage, or that the
institution of such proceedings is now necessary or advisable, and beg to advise
you that we can not therefore at present accede to your request that such
proceedings be instituted."
CENTRAL TRUST COMPANY, OF NEW YORK,
As trustee of the first and refunding mortgage of the Chicago, Rock
Island & Pacific Railway Co., dated April 1, 1904.
By GEORGE W. DAVISON, Vice President.
Mr. AMSTER. After the collateral bondholders succeeded in pro-
tecting their rights and had the collateral stock distributed to them,
the directors promptly plunged the company into the receiver's hands,
as shown by the Interstate Commerce Commision report, which I
hereby offer at this point, to be inserted in the record.
(The report follows:)
[House Document No. 643, Sixty-fourth Congress, first session.]
REPORT OF THE INTERSTATE COMMERCE COMMISSION ON THEIR INVESTIGATION OF
THE FINANCIAL TRANSACTIONS, HISTORY, AND OPERATION OF THE CHICAGO,
ROCK ISLAND & PACIFIC RAILWAY Co. (DOCKET No. 6834.)
[Submitted June 5, 1915.
Decided July 31, 1915.]
M. L. Bell and White & Case for Chicago, Rock Island & Pacific Railway Co.
Roberts Walker for the Rock Island Co. of New Jersey, and Chicago, Rock
Islnad & Pacific Railroad Co. of Iowa.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
535
Walker D. Hines for L. F. Loree.
Samuel Untermyer for protective committee of stockholders of the Chicago,
Rock Island & Pacific Railway Co.
Silas H. Strawn for Robert B. McLain, George E. Scott, and S. M. Felton.
REPORT OF THE COMMISSION.
By the commission: Pursuant to an order entered on April 24, 1914, the com-
mission has investigated the financial transactions, history, and operation of
the Chicago, Rock Island & Pacific Railway Co., and makes the following report
in respect thereto :
The initial hearing was held on October 16 and 17, 1914. Thereupon the
hearing was adjourned until February 25, 1915, to enable the accountants of
the commission to complete certain investigations suggested by the facts dis-
closed. On that date the hearing was resumed and continued through the 25th,
26th, and 27th of February. On May 22, 1915, the commission ordered the hear-
ing reopened for the purpose of further inquiry. Additional hearings were held
on June 4 and 5, 1915.
In 1902 the main line of the Chicago, Rock Island & Pacific Railway Co. ex-
tended from Chicago to Denver, with branch lines to St. Paul, Minneapolis,
and Kansas City. The territory served is one of the richest and most pros-
perous in the country and the system's ramifications of branch lines insures
to it a large volume of tonnage. It was then thriving and its prospects were
promising, its stock selling in the markets of the world at more than $200 a
share. In 1914 the shares had fallen to $20 and the road is now in receivers'
hands. The evidence shows that the earnings of the railway company have
steadily increased, and that in 1914 they were the largest in its history.
The results of the management, which is the subject of this investigation,
may be seen from the statement above made as to the market value of the stock,
and from the table below, showing the capitalization, indebtedness, and operat-
ing accounts for the years 1901 and 1914:
Capital stock.
Funded debt...
Loans payable….
Operatinė revenue.
Operating expenses.
Interest on funded debt...
Rentals
Net income..
Surplus.....
Mileage owned.
Mileage operated...
1901
1914
$49,921,400.00
63,538,000.00
None.
26,075,574.00
17,096,066.00
2,931,980.00
473.962.00
5,306,519.00
10, 263, 184. 55
3, 128
3,772
$74,995, 122.50
235,216,000.00
3,500.000. 010
65.848, 258.00
49,517,948.00
9,934, 169. Co
1,881,651.00
395.915.00
6.264, 208. 84
5,367
7,729
SYNDICATE CONTROL.
In 1901 Daniel G. Reid, W. H. Moore, J. H. Moore, and W. B. Leeds pur-
chased about $20,000,000 of stock of the company, and by the use of proxies
they soon became members of the board of directors, W. B. Leeds being made
president and D. G. Reid chairman of the executive committee. This syndi-
cate procured the selection of other members of the board of directors, notably
F. L. Hine, George McMurtry, and George T. Boggs, each of whom appears to
have acted and voted in accordance with the wishes of the members of the
syndicate. One other director stated that he knew but little of what was being
transacted in the affairs of the railway company, and that he was a member
of so many other boards of directors that he had no opportunity to examine
into things for himself, but had to take the word of those in authority. Thus
the syndicate controlled the board through the directorships held by themselves
and by those subject to their wishes.
At a stockholders' meeting held June 5, 1901, at which an increase of the
capitalization of from about $50,000,000 to approximately $60,000,000 was au-
thorized, W. H. Moore was elected a director of the company, and at a directors'
meeting held on the same date Daniel G. Reid was also elected a director. At
536
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
the former meeting a 10 per cent stock dividend was declared. On July 31
W. B. Leeds was elected by the board a director to succeed W. A. Nash, resigned.
On October 24 the articles of incorporation of the railway company were
amended to provide for an executive committee to consist of the president and
six directors, to be designated by the board, and to be invested with all of the
powers of the board when it was not in session. W. H. Moore and W. B. Leeds
were appointed on this committee on the day it was created, and on December
12 following W. B. Leeds succeeded K. G. Purdy as president of the railway
company. Then D. G. Reid became a member of the executive committee and
J. H. Moore a member of the board. On January 30, 1902, J. H. Moore was
elected by the board to the executive committee in place of H. R. Bishop,
resigned. The other members of the executive committee at this time were
R. R. Cable, Marshall Field, and A. R. Flower.
•
On June 4, 1902, the capital stock of the railway company was increased to
$75,000,000 and the board authorized President Leeds to sell to certain indi-
viduals portions of this increased stock at par, although at the time the stock
was quoted on the market above 175.
ORGANIZATION AND USE OF HOLDING COMPANIES.
In July, 1902, the syndicate organized two holding companies, the Chicago,
Rock Island & Pacific Railroad Co. of Iowa, and the Rock Island Co. of New
Jersey. The railway or operating company will be referred to hereinafter as
the railway company, and the holding companies as the Iowa company and
the New Jersey company, respectively. The St. Louis & San Francisco Rail-
road will be referred to as the Frisco.
·
The authorized capitalization of the Iowa company was $125,000,000 in stock
and $75,000,000 in 4 per cent collateral bonds. That of the New Jersey com-
pany was $150,000,000 in stock, of which $54,000,000 was preferred and $96,000,-
000 common. In the latter company the preferred stock only had voting power
to elect directors of the first class, which directors under the by-laws constituted
a majority of the board. The directors of these two corporations first elected
were merely figureheads, but later members of the syndicate became directors
of both companies and controlled them. The New Jersey company and the
Iowa company each issued their stock as fully paid, whereas no payment was
made on either. Then upon motion of D. G. Reid, the Central Trust Co. of
New York, of which J. N. Wallace was and is president, was selected as trustee,
and an arrangement was made with that company whereby the entire bond
issue of the Iowa company and stock issue of the New Jersey company were
placed with it under an agreement that they were to be exchanged for stock
of the railway company in the proportion of $100 in Iowa company bonds, and
$70 in preferred and $100 in common stock of the New Jersey company for
each $100 in stock of the railway company, or $270 face value of the holding
company securities for each $100 par value of the railway company stock.
Under this agreement the members of the syndicate deposited railway stock
as follows:
D. G. Reid
$5, 915, 437. 50
6, 118, 975.00
J. H. Moore_
W. B. Leeds____
$3,059, 262.50
5, 597, 100.00
W. H. Moore___
making a total of $20,690,775, for which they received $20,690,775 in the Iowa
company's bonds and the same amount in the common and $14,483,542 in the
preferred stock of the New Jersey company, a total of $55,865,092.
The 10 per cent stock dividend declared by the railway company on June 5,
1901, had the apparently intended effect of creating a demand for the stock of
the holding companies, the only revenue of which was from dividends on the
stock of the railway company, and practically all of the stockholders
of the railway company exchanged their stock, the total mount deposited being
approximately $71.000,000, or all but about $4,000,000 of the total railway stock.
The par value of the holding companies' securities issued in exchange amounted
to about $191,000,000.
Under the terms of the trust agreement the railway stock deposited was to
be held by the trust company as collateral to secure the Iowa company's bonds,
and the trust company was authorized to sell the railway stock upon default
of payment of interest on any of the bonds.
Thus by the organization of the two holding companies the syndicate, the
members of which held but little more than one-fourth of the railway stock.
secured control of and dominated the affairs of this transportation system.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
537
1
A significant transaction at this time is that growing out of the action of
C. H. Venner, a stockholder of the railway company. He made demands upon
the officers of the railway company in December, 1902, and in January, 1903,
for a list of its shareholders. Being ignored he instituted on January 31, 1903,
a proceeding in a State Court of Illinois to enjoin the organization of the
holding companies and the exchange of railway company stock for their securi-
ties. In February and March, 1904, the railway company paid Venner $291,000,
ostensibly in consideration of his delivery to it of securities of the New Jersey
company and of the railway company valued at $91,000 and stock of the Ne-
braska Central Railway and of the Nebraska Construction Co. of a nominal
value of $200,000. Thereupon the suit to restrain the holding companies' plan
was dismissed. Neither the Nebraska Central Railway Co. nor the Nebraska
Construction Co. had any road or other tangible assets, and their stock is
therefore considered to be without value. The conclusion is obvious that the
payments to Venner were in consideration of his refraining from further prose-
cuting in the courts his opposition. to the syndicate plans. The railway com-
pany incurred in this litigation expenses amounting to about $17,000.
The expense of incorporating the holding companies, $218,000 for the Iowa
company and $120,000 for the New Jersey company, was paid by the railway
company, but these amounts were returned to it three years later without
interest, the necessary funds having been secured by the holding companies
from dividends on the stock of the railway company.
Practically the entire expense of renting, fitting up, and furnishing the quar-
ters occupied by the holding companies for the first four years of their exist-
ence was sustained by the railway company. During the next four years, or
until 1910, the proportion of this expense borne by the holding companies was
slightly increased, the balance being distributed between the railway company,
the Frisco, the Chicago & Eastern Illinois Railroad, the Evansville & Terre
Haute Railroad, and the Chicago & Alton Railroad. From 1910 to 1914 the
expenses of the offices were prorated on the basis of 50 per cent to the railway
company, 371 per cent to the New Jersey company, and 12 per cent to the
Iowa company. On the basis of apportionment adopted in 1910, the overcharge
paid by the railway company prior to that year would amount to approxi-
mately $290,000. That amount was improperly diverted from the treasury of
the railway company.
SALARIES OF AND CONTRIBUTIONS TO OFFICERS AND DIRECTORS.
The salaries paid to some of the principal officers at various periods were as
follows:
H. U. Mudge, president.
Per annum.
L. F. Loree, chairman executive committee (one-half to be paid by
the Frisco) ---
R. A. Jackson, vice president and general solicitor.
R. R. Cable, member of board of directors_.
W. B. Leeds, president__.
B. I.. Winchell, president..
B. F. Yoakum, chairman executive committee___.
Daniel G. Reid, chairman board of directors.
C. H. Warren, first vice president_--
$60,000
75,000
50,000
32, 000
32,000
40, 000
30,000
32, 000
35,000
W. G. Purdy, upon his retirement from the presidency, was given two years'
salary at $22,500 per annum.
Mr. Mudge, president of the railway company and now one of the receivers,
asserted that the troubles of the railway were in a measure due to increase of
wages and governmental regulations. When asked what wages he referred to as
being increased he pointed out the wages of clerks, telegraph operators, con-
ductors, and brakemen. While he regarded the wages of these minor employees
as having partially sapped the financial strength of the railway, he declared
that the salaries paid to the higher officers of the company had no appreciable
effect on its expenses.
D. G. Reid upon the witness stand was interrogated and answered as follows:
Question. Mr. Reid, do you think these men earned these high salaries?
66
"Answer. I do not think there is a man who did not earn more than he was
getting.
Question. In other words, you defend paying these high salaries?
538
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
"Answer. I defend nothing. Here is 8,000 miles of railway; a man who can
run 8,000 miles of railroad is worth all he can get."
Many large contributions were made to officers and directors of the railway
company. George T. Boggs, a director and secretary to the board of directors
of the railway company, and also a director in the two holding companies, ad-
mitted that he served in these capacities merely as a dummy for the syndicate.
On the question of the rights of the public to have corporate funds of common
carriers properly applied, he testified as follows:
Question. Do you consider that the directors of a railway company, a public-
service corporation, have the right to do whatever they please with the money
of the railway company?
"Answer. As in their judgment seemed right; yes.
Question. Did it ever occur to you that the money in the tresaury of the
railway company was the result of taxation of the public in passenger and
freight tariffs, and that the public had an interest in the funds in the treasury?
"Answer. I don't know that I ever thought of it particularly.
Question. And that the public had a concern in the funds of the railway com-
pany not being dissipated in order that they might be applied to improvements
and betterments and to proper purposes?
"Answer. I never considered that they were dissipated.
"Question. And did it ever occur to you that in taking money from the treas-
ury of the railway company, a public-service corporation, an additional burden
was placed upon the passenger and freight traffic in order to make good the loss?
"Answer. No; I never thought of it in that light.
"Question. You don't believe it now, do you?
"Answer. No."
This opinion was also expressed in effect by other officers and directors. It
appeared to be the idea of those in control of the railway that it was no concern
of the public what became of the corporate funds so long as rates were reason-
able. Those stating this opinion apparently did not take into consideration
the fact that if the funds derived from transportation services are expended
wastefully or corruptly the inevitable result must be either increased charges
in order to enable the railway company to obtain money to pay operating ex-
penses, or bankruptcy.
Following are specific instances shown of record of the contributions re-
ferred to:
J. E. Gorman, first vice president in charge of freight and passenger traffic,
was secretly paid $18,750 per annum, making his total compensation $43,750,
whereas the pay roll showed $25,000.
C. A. Morse, chief engineer, received a salary of $15,000 per annum and a
secret bonus of $3,000 on the first of each year.
Upon the retirement of R. A. Jackson as general solicitor he was given
$100,000 in cash.
As an inducement to L. F. Loree, chairman of the executive committee, to
relinquish, after 10 months' service, a joint contract with the railway company
and the Frisco under which he was to receive a salary of $75,000 per annum
for a period of 5 years and in addition was to be paid a bonus of $500.000 at
the expiration of the contract, he was given bonds of the railway company of
a par value of $450,000. This was borne equally by the two companies, and the
proportion of the railway company was charged to profit and loss. The total
amount borne by the railway company in this transaction exceeded $250,000.
C. H. Warren, vice president, was given by the railway company $150.000 in
par value of the common and $105,000 in par value of the preferred stock of the
New Jersey company and $50,000 in cash. There was no board authorization
for the latter expenditure, the item being represented in the records of the
railway company merely by a voucher signed by D. G. Reid.
R. R. Cable,a member of the executive committee, received from the rail-
way company $30,000 in bonds of the Iowa company, then worth $24.500. for his
services in the acquisition of the Burlington, Cedar Rapids & Northern Rail-
way Co., and he was paid by the latter company $85,000 in the same transaction.
Mr. Cable also received another contribution, which will be referred to later.
Robert Mather, vice president, was given $25.000 in cash.
George T. Boggs, director and secretary of the board of directors of the rail-
way company, was given $15,000 in cash when he retired from the secretary-
ship of the railway company..
As hereinbefore indicated, when the capital stock of the railway company
was increased to $75,000,000, shares of the par value of $880,500 were placed in
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
539
the name of the president, to be thereafter distributed in accordance with the
following resolution of the executive committee passed at a meeting held in
New York July 1, 1902:
66
Resolved, That such portion as the president may determine of the shares of
the increased capital stock of the company not required for the purpose of the
foregoing resolutions shall be disposed of at par by the president for the benefit
of such officers of the company as the president shall elect and determine."
This stock was later exchanged for securities of the Iowa and New Jersey
companies in the same manner as was stock of the stockholders of the railway
company.
Following this exchange R. R. Cable received securities of a market value
of $368,300 for which he paid $200,000.
H. A. Parker, first vice president, received securities then worth $27,900, for
which he paid but $15,000.
Robert Mather received securities of a market value of $145,912 above his
payments therefor.
The contributions to officials of the railway company in excess of their sala-
ries aggregated about a million dollars.
IRREGULAR VOUCHER PAYMENTS.
Unexplained vouchers for amounts aggregating $72,523.45 were disbursed to
the officers of the railway company for purposes not clearly defined. One such
voucher for $6,823.12 was drawn apparently to reimburse W. H. Moore for
losses sustained by him in " supporting the market while bonds of the railway
company were being sold." The voucher was certified by D. G. Reid
the benefit of the railway company." No papers were attached to the voucher
and no other information was available with respect to the disbursement.
66
for
Another voucher in favor of the Liberty National Bank of New York City,
in exchange for a cashier's check issued to Robert Mather for $25,000, is
charged to general expenses" under “operating expenses.' This voucher re-
fers to a miscellaneous file shown by the index thereto to have comprehended
contributions to campaign committee." The file, however, was not produced,
and a diligent effort on the part of the accountants to secure it was unavailing.
Without this file it is impossible to state the purpose for which the money was
expended, but the generalization "contributions to campaign committee," in
the light of the practices indulged in by the syndicate in question, is clearly
suggestive.
The books of the railway company reveal payments aggregating $44,066.05 to
the Denver Post. The vouchers attached read, "for advertising in editorial
and news columns." Other entries show that three of these vouchers, aggre-
gating $20,000, cover a refund that this newspaper received at the rate of 25
cents per hundred on its freight carried over the lines of the railway company
from points in Wisconsin.
Another voucher is for $50,000 to S. M. Felton, for the railway's proportion
of amount "paid by E. H. Harriman and his associates for money expended by
them to secure the discontinuance of a line of road being constructed in 1900
between Peoria, Ill., and Clinton, Iowa, as per agreement between R. R. Cable,
chairman of the board, and E. H. Harriman.”
The St. Louis & San Francisco Railroad Co.-On May 6, 1903, an agreement
was executed between the Iowa company, the New Jersey company, and J. P.
Morgan & Co., wherein it was agreed that the common stock of the Frisco
would be exchanged for securities of the Iowa and New Jersey companies.
The terms of the agreement provided that for each share of the common
stock of the Frisco there would be exchanged $60 par value in 5 per cent bonds
of the Iowa company and $60 par value of the common stock of the New
Jersey company. Pursuant to this agreement Frisco common stock in par
value of $28,940,300 was exchanged for securities of the Iowa and New Jersey
companies in par value of $34,728.360, equally divided between stock and bonds.
The Frisco stock thus exchanged was deposited as collateral for the bonds
of the Iowa company, and in December, 1909, was resold to B. F. Yoakum for
$37.50 a share, or $10,852,000. This amount was insufficient to redeem the
Iowa company bonds, which was necessary in order to make delivery of the
Frisco stock, and the Iowa company, having no resources, issued to the railway
company its bonds, which now appear to be worthless, to an amount in par
value of $7,500,000 and received therefor $7,300,000 in cash, the net proceeds
from a loan of $7,500,000 made to the railway company by the First National
540
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Bank of New York. Of these bonds $1,388,000 were subsequently retired, leav-
ing in the possession of the railway company $6.112,000, which the Iowa com-
pany has no assets to retire. The latter amount was thus taken from the
treasury of the railway company to meet an obligation of the Iowa company
for which the railway company was in no way responsible and from which it
derived no apparent benefit.
The final result of this transaction is that the railway company has sustained
a loss estimated to be about $6,500,000.
Chicago & Alton Railroad Co.-In November, 1903, an account styled "B. F.
Yoakum advances was opened on the general ledger of the railway company
to cover amounts advanced by it for the purchase of stock of the Chicago &
Alton Railroad Co., hereinafter referred to as the Alton company.
As a result of transactions in the Alton stock the railway company acquired
48,800 shares of preferred and 144,200 shares of common at a total cost of
$9,709,876.49. These shares were bought principally in 1903, but sundry pur-
chases were made after that time until June 30, 1907, when the above total
amount had been accumulated.
In October, 1907, the railway company delivered to the Toledo, St. Louis &
Western Railroad Co. 41,100 shares of the preferred and 144,200 shares of
the common stock of the Alton company, receiving in exchange for the former
4,110 series "A" $1,000 bonds and for the latter 5,047 series "B" $1,000 bonds
of the Toledo, St. Louis & Western.
On November 28, 1908, the executive committee of the railway company au-
thorized the sale of the remaining shares of the preferred stock of the Alton
company held by the railway company, together with sundry bonds, series "A"
of the Toledo, St. Louis & Western Railroad Co. Pursuant thereto, 3,200
shares of the Alton preferred were sold at a loss of $45,527.69, and the sale
of 3,710 of the series "A" bonds of the Toledo, St. Louis & Western resulted in
a loss of $393,572.44.
On June 30, 1914, the railway company owned 400 series "A" and 5,047 series
"B" bonds of the Toledo, St. Louis & Western, and 4,500 shares of Alton pre-
ferred, which in the aggregate had cost it $6,193,240.36, whereas on the date
named their market value was $1,582,400, a difference of $4.610.840.36. In addi-
tion, the money with which the Alton stock was originally purchased was se-
cured from the sale of bonds, the interest on which to June 30, 1914, less divi-
dends on the stock and interest on the bonds secured, amounted to $1,320.644.76.
From the foregoing it will be noted that the total loss sustained by the rail-
way company as a result of the disastrous Alton deal was approximately
$6,370,000.
Trinity & Brazos Valley Railway Co.-A contract was entered into under date
of March 31, 1906, between the railway company, the New Jersey company, the
Colorado & Southern Railway Co., and the Frisco. The last-named carrier's
participation was only to the extent of through traffic arrangements.
The cost of construction of the Brazos line, which is practically the entire
line of the Trinity & Brazos Valley Railway, was borne by the Colorado &
Southern Railway, and under the terms of the contract the latter company and
the railway company were to share equally the profits or losses of the Trinity
& Brazos Valley, and on May 1, 1935, the railway company was to pay to the
Colorado & Southern one-half of the entire cost of the Brazos line, receiving in
return one-half of the bonds of the Trinity & Brazos Valley and one-half of
other evidence of debt included in the total cost of the Brazos line. The con-
tract further provided for the delivery to the New Jersey company of one-half
of the stock of the Trinity & Brazos Valley, the former to make payment only of
such amounts as are defaulted by the railway company.
A supplemental contract was entered into on June 1, 1914, wherein the rail-
way company and the Colorado & Southern release each other from the obliga-
tion to make any further payments to or for account of the Trintiy & Brazos
Valley, and the railway company agrees to pay to the Colorado & Southern one-
half of the interest at the rate of 4 per cent per annum on the total cost of the
Brazos line to May 1, 1935. The total cost of the Brazos line approximated on
June 30, 1914, $11.000,000.
In accordance with these agreements the railway company advanced to
June 30, 1914, to and for the account of the Brazos line, $3,729,863.87. For all
but $35.000 of this the railway company holds certificates of indebtedness of
the Trinity & Brazos Valley on which there has accrued unpaid interest
charges of $774,918.20. The total investment of the railway company, there-
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
541
fore, is $4,504,782.07, and in view of the fact that the Trinity & Brazos Valley
is now in the hands of a receiver and the operation of its property has for
some time resulted in a deficit, it appears that this investment is of very doubt-
ful value.
Consolidated Indiana Coal Co.-The Consolidated Indiana Coal Co. was in-
corporated under the laws of Maine April 29, 1905, by interests affiliated with
the railway company. Although R. A. Jackson, vice president and general
counsel of the railway company, was receiving a salary of $50,000 a year, he
was paid $10,000 by the railway company to draw up the incorporation papers.
The coal company sold to certain New York bankers bonds of a par value of
$2.500,000 and capital stock of a par value of $1,000.000, for $2,375.000. The
remainder of the capital sock, of a par value of $2,400,000, was then delivered
to the railway company in consideration of its guaranty indorsed upon the face
of the coal company's bonds of payment of interest accruing thereon. The
price paid for the coal property owned by the consolidated company was esti-
mated to be substantially more than it was actually worth, and ever since its
incorporation it has been operated at a loss.
Prior to June 30, 1914, the railway company had made advances to the coal
company aggregating $2,354,453.19. The railway company received interest on
these loans at the rate of 4 per cent per annum computed monthly up to June
30, 1910, when all such interest payments were discontinued. The loss on the
part of the railway company attributable to this venture can not be computed
exactly, but the loss in interest charges alone since 1910 has amounted to more
than $400.000. As the operation of the coal company has for some time been
conducted at a loss, there is little prospect of the railway company being reim-
bursed for the advances made by it.
Dering Coal Co.-The incorporators of the above-entitled company, which
was incorporated in 1905 under the laws of Delaware, were parties affiliated
with the Chicago & Eastern Illinois Railway Co. and their original plan was
that it should be owned jointly by the railway company and the United States
Steel Corporation, for the purpose, primarily, of furnishing fuel to those com-
panies and their associated interests. The coal company went into the hands
of a receiver on March 1, 1909, principally on account of an unremunerative
contract with the steel corporation whereby the purchase price of coal by the
latter was fixed at a maximum which necessarily entailed a loss in operation.
The railway company, upon the organization of the coal company, acquired
bonds to the extent of $450,000 and stock of par value of $1,700,000 at a net
cost of $981,000. It received no interest on the bonds subsequent to September,
1908, and in 1912 it sold to J. K. Dering for $225,000 all of its stock and bonds
of the coal company. Its net loss from this transaction, including interest, was
$906,420, and this, added to its loss in connection with the other coal company
above referred to, makes a total loss of more than $1,300,000 as a result of its
coal deals. If the advances to the coal companies can not be collected, it will
result in an additional loss of nearly $2,500,000.
Choctaw, Oklahoma & Gulf Railroad Co.-On April 11, 1902, the executive
committee of the railway company authorized the president and the secretary
of that company to engage with Speyer & Co., New York bankers, to assume a
contract previously entered into between that firm and the Choctaw, Oklahoma
& Gulf Railroad Co. covering the purchase of the stock of the latter company.
Under this contract Speyer & Co. purchased for the railway company 192.958
shares of common and 118.871 of preferred stock of the Choctaw, Oklahoma &
Gulf Railroad Co. Each of these shares was of $50 par value. Speyer & Co.
received from the railway company $80 per share for the common and $60 per
share for the preferred, or $22.568,900. Additional shares, 3.592 common and
1,129 preferred, were purchased by the railway company from various persons
at a total cost of $430.415. In order to provide funds for this deal, 4 per cent
bonds were authorized by the railway company to the extent of $24,000,000.
The bonds were secured by the capital stock of the Choctaw, Oklahoma & Gulf
Railroad Co. and $23.520,000 in par value of these bonds were sold to Speyer &
Co. at 963 and accrued interest. In the consummation of this transaction the
railway company paid a commission of more than $113.000, a discount on the
sale of bonds of $824,325 and incidental expenses, including attorneys' fees and
brokerage, of about $27.000, making a total expenditure of approximately
$24,000.000 for stock of the Choctaw, Oklahoma & Gulf Railroad Co. of a par
value of $15,827,000.
On March 24, 1904, the lines of the Choctaw, Oklahoma & Gulf Railroad Co.
were leased to the railway company for a term of 999 years. Since that date
542
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
the railway has advanced to the Oklahoma company a net aggregate of $1.293,-
229.58 as of June 30, 1914. No interest has been paid to the railway company
on account of these advances, and the corporate records do not disclose any
liability on the part of the Oklahoma company therefor.
Whether or not a loss has been sustained by the railway company as a result
of this transaction is not demonstrable for the reason that the accounts of the
carrier are not kept in such a manner as to permit the segregation of items
by corporate lines. There is abundant reason to believe, however, that the
disbursements made by the railway company in acquiring the Oklahoma com-
pany are far in excess of the actual value of the property and disproportionate
to the returns accruing from the investment therein.
Rock Island Improvement Co.-The Rock Island Improvement Co., incorpor-
ated under the laws of the State of New Jersey, is primarily a creature of the
holding companies, designed to acquire, on behalf of the railway company,
transportation equipment and facilities. Prior to June 30, 1914, the railway
company had invested in the improvement company nearly $12,000,000. The
purchase of equipment by the improvement company is covered by equipment
notes which were guaranteed as to principal and interest by the railway com-
pany, the equipment purchased with the funds so secured being thereupon
leased to the railway company. The equipment is held in the name of the
improvement company until the notes are paid, when the title vests in the
railway company.
As an incident to these transactions, the railway company in one instance,
at least, sold bonds of the improvement company at less than par, and six
months later bought them back at more than par, notwithstanding the general
tendency of bonds to approximate par as they approach maturity.
The only justification offered by its sponsors for the existence of the im-
provement company is that by means of its operations the equipment of the
railway company is exempted from the lien of a bond issue of 1898 covering
all property then held by the railway company, or subsequently acquired by
it or its successors.
In the absence of specific figures, it is impossible to determine the difference
between the ultimate cost of equipment furnished the railway by the improve-
ment company and what such cost would have been had such equipment been
purchased directly by the railway company, but it is plain that the procedure
cntailed an added cost, and that to that extent the railway company sustained
a loss by reason of its affiliation with the improvement company.
AGGREGATE OF LOSSES.
The aggregate losses sustained by the railway company in connection with
the foregoing transactions may be summarized as follows:
Expenses of maintaining and housing holding companies, more
than
Frisco deal, approximately--.
Alton deal, approximately.
Trinity & Brazos Valley Railway deal, more than___
Consolidated Indiana and Dering coal companies, at least..
Contributions or gratuities to officers and directors, about__.
Venner transaction__.
Miscellaneous and unexplained expenditures__
$290,000.00
6, 500, 000. 00
6, 370, 000. 00
4, 500, 000. 00
1, 300, 000. 00
1, 000, 000. 00
217,000.00
72, 523. 45
These items show an aggregate loss to the railway company of more than
$20,000,000. In addition thereto it is to be noted that prior to June 30, 1914,
the railway company paid to financial institutions, in connection with the
issuance of bonds, commissions aggregating more than $1,600,000, and suffered
discounts of more than $17,700,000.
INDIVIDUAL PROFITS OF PROMOTERS, OFFICERS, AND DIRECTORS OF THE HOLDING
COMPANIES.
The amount of gains accruing to W. B. Leeds, D. G. Reid, W. H. Moore, and
J. H. Moore through their control and manipulation of the railway company
are probably not ascertainable. Reid, when interrogated with a view to ascer-
taining his profits from the various transactions, explained that he always
burned his books at the end of each month.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
543
The quotations placed in the record from the stock market of the New Jersey
company stock and the railway company stock showed wide fluctuations. What-
ever have been the gains realized by these persons, it is certain that the present
holders of the stocks and bonds of the holding companies have that which is of
little or no value.
REPORTS TO STOCKHOLDERS.
Misrepresentation of assets in reports to stockholders appears to have been a
practice of the directors of the railway company. On June 30, 1904, a book
surplus was claimed for the railway company of $22,343 955.26. By June 30,
1914, the company conceded a reduction of this surplus to $6,199,841.08, and even
this amount was fictitious.
Thus the railway company included among its assets certificates of indebted-
ness of the Trinity & Brazos Valley Railway Co. carried at a book value of
$3,694,863.87. The Trinity & Brazos Valley Railway was then in the hands of
a receiver and was already facing a deficit of $8,000,000, with a practical cer-
tainty that this amount would increase from year to year. It is apparent,
therefore, that this item of more than $3,500,000 was based upon securities
which were known to be practically worthless.
The railway company carried as assets bonds of the Toledo, St. Louis &
Western Railroad Co. at a book valuation of $6,000,000 secured only by stock of
the Chicago & Alton Railroad Co. which had a market value on June 30, 1915,
not in excess of $1,600,000.
The railway company also carried as an asset of $200,000 the stock of the
Nebraska Central Railway Co. and the Nebraska Central Construction Co.,
acquired as an incident to the compromise with C. H. Venner. These so-called
securities were reported to the stockholders as having a par value of nearly
$370,000; that they were in fact worthless is indicated by an official suggestion
on behalf of the Nebraska Central Railway Co. that the commission be advised
that that carrier had "no existence except on paper, having no railroad in
operation or other tangible property."
The directors also reported as assets the 5 per cent debenture bonds of the
Iowa company, which were in fact worthless, but which were reported as worth
nearly $6,000,000.
(6
In view of the fact that the reported value of the securities listed for
the year 1914 was nearly $18,000,000 in excess of their actual value, instead of
a surplus of more than $6,000,000 claimed by the railway company, there should
have been shown a deficit of over $11,600,000.
Another misleading and objectionable practice of the railway company offi-
cials was the failure to state on the pay roll the true amounts paid to its
officers.
The publication of misleading reports to stockholders can not be too severely
condemned, and the individuals guilty of such acts should be subject to ade-
quate penalties.
PRESENT STATUS OF THE RAILWAY.
The original articles of consolidation provided that the maximum of indebted-
ness to which the company might subject itself should not exceed two-thirds
of its outstanding capital stock. This maximum has been increased from time
to time until the funded debt of the railway on June 30, 1914, was $238,746,000,
an increase of nearly $175,208,000 over the amount outstanding on June 30,
1901. On June 30, 1914, the total capitalization of the railway company was
$313,741,000. Of this amount only $75.000,000, or 28.73 per cent, was capital
stock on which dividends might or might not be paid, according as the net
earnings of the company might or might not warrant. The remaining 71.27 per
cent of the total capitalization consisted of interest-bearing debt, including
$3.500.000 of short-term loans, on which interest was required to be paid re-
gardless of earnings.
The Iowa company being wholly dependent for earnings upon the dividends
paid by the railway company, the passing of the railway company dividends in
May, 1914, resulted in a default of interest on the bonds of the Iowa com-
pany.
Pursuant to foreclosure proceedings instituted on behalf of the bond-
holders, the United States district court for the southern district of New York
ordered the sale in one block of $71,353,500 par value of the railway company
stock deposited with the Central Trust Co. of New York as collateral for the
bonds of the Iowa company.
544
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
•
Some time previous thereto J. N. Wallace, president of the Central Trust
Co. of New York, which, it will be remembered, was trustee by virtue of the
agreement between the holding companies and the railway company, having
been selected upon the suggestion of Daniel G. Reid, a member of the syndicate,
organized a self-appointed bondholders' protective committee, the members
consisting of himself and five other men of his selection. This committee ad-
vertised extensively for Iowa company bonds to be deposited in trust with it
for the benefit of the bondholders, but after five months succeeded in getting
only about $23,000,000 out of $75,000,000. Under the terms of the order of the
district court the purchaser of the railway stock at foreclosure was to deposit
$1,000,000 in cash or $10,000.000 in Iowa company bonds. In November, 1914, the
circuit court of appeals permitted N. L. Amster, of Boston, a minority stock-
holder in the railway company, to intervene in the foreclosure proceedings,
thereby postponing the sale as scheduled. Following the decision of the circuit
court of appeals an adjustment was reached with the Wallace committee in
the interest of all undeposited bonds, and an order was entered by the court
on December 31, 1914, pursuant to which the stock was sold to Mr. Wallace,
who was the only bidder, for $7,135,350.
RECEIVERSHIP.
The syndicate decided to put the railway into a receivership. The general
counsel of the railway company at the suggestion of W. H. Moore, a member
of the syndicate, drew the bill asking for a receivership and engaged an attor-
ney ostensibly to represent the other side. The bill was placed in the hands
of this attorney with the name of the complainant omitted and he was instructed
by the general counsel to locate some creditor of the railway company willing
to act as complainant. There was an agreement between the general counsel
and this attorney as to the parties the latter would recommend to the court
as receivers, the general counsel agreeing to instruct the attorney appearing
for the railway company to acquiesce in the recommendations so made.
The board of directors of the railway company was not informed of the in-
tention to file a bill for receivership and at no meeting of the board was any
authority ever given for such action. Members of the board of directors not in
the confidence of the syndicate were kept in ignorance of the fact that such
a bill had been prepared. The stockholders had no information of the purpose
to put the railway company into a receivership, although a stockholders' meet-
ing was held after the date upon which the receivership bill was completed
by the general counsel, and this general counsel attended the meeting. Accord-
ing to the testimony the bill was completed by the general counsel March 29,
1915, and the fact that it was to be filed whenever desired by those in authority
was known only to certain insiders. The testimony clearly establishes the fact
that the railway company could easily have paid the debt of $16,000 upon which
the receivership application was based, and that arrangements probably could
have been made to meet all pressing obligations of the railway company.
The creditor at whose instance the receivership application was filed ap-
peared as complainant by request. R. P. Lamont, the president of the Ameri-
can Steel Foundries, the complainant, testified that he would not have thought
of bringing such a proceeding against the railway company unless he had un-
derstood that it would be regarded as not unfriendly but as a friendly act to
oblige the railway company. He only consented that his company should appear
as complainant when he was assured that this course was in accordance with the
wishes of the railway company and that his company was not to have any
care or expense in the preparation of papers or payment of counsel fees. The
suit was not a bona fide proceeding to collect a debt, but was instituted to carry
out the purposes and schemes of the syndicate controlling the railway.
N. L. Amster, who was elected to the board of directors of the railway com-
pany by the minority stockholders at the stockholders' meeting held in Chicago
April 12, 1915, believing, according to his testimony, that no sincere effort was
being made by other members of the board to finance the obligations of the
railway, undertook to assist in raising about $6,000,000 needed by the railway
to meet obligations soon thereafter to mature. On April 16, 1915, he met and
conferred with Messrs. James, McLean, and Schumacher, all directors of the
railway and members of the executive committee, and discussed the company's
finances. These three expressed approval of his purpose to negotiate for the
money. Amster testified that he had secured assurances for the furnishing
of the money from responsible Boston bankers on securities which the railway
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
545
company had. When he arrived in New York on the morning of April 20 to
report this fact he went to the office of the railway company and, quoting his
testimony, could not find anybody there that would say anything, except a lot
of people moving back and forth. I left the office and found on the ticker that
the Rock Island had been put in the hands of a receiver." This, Amster testi-
fied, was the first information he had of the receivership or that such a step
was in preparation, yet he was a director of the road and after the stock-
holders' meeting in Chicago, April 12, traveled from Chicago to New York with
Roberts Walker, the general counsel of the railway company.
It will be remembered that the bill was completed by the general counsel on
March 29, this fact being known only to a special few. The bill was filed April
20. The records of the New York stock market reveal that the railway stock
was inactive until the day this bill was completed, March 29. Then the stock
began to be largely dealt in, and the price increased from $20 to $39 a share.
When the bill was filed and receivers were appointed the stock dropped from
$39 to $20 a share.
The daily sales and the selling prices of the market stock from March 22,
1915, to April 20, 1915, are shown below:
Daily sales and selling prices of the Chicago, Rock Island & Pacific Railway Co.
stock as reported by the Wall Street Journal.
Date of sale.
Number
of shares
sold.
Selling
price.
Date of sale.
Number
of shares
sold.
Sel'ing
price.
High. Low.
High. Low.
1915.
1915.
Mar. 22...
400
211
201
Apr. 8....
14, 250
321/
301
Mar. 23...
2,700
211
20
Apr. 9...
68,900
351
31
Mar. 24....
2,850
221
211
Apr. 10……..
68,000 39
341
Mar. 25....
900
221
21
Apr. 12....
18,600
36
34
Mar. 26...
7,050
21
191
Apr. 13...
16,556 357
32
Mar. 27...
5,400
21
191
Apr. 14.
78,000 381
343
Mar. 29...
28, 360
26
193
Apr. 15..
45,600
38
35
Mar. 30...
73,576
31/
28
Apr. 16..
32,900 38
35
Mar. 31..
106,800
363
319
Apr. 17...
16, 100
38
36
Apr. 1...
62, 642
33
28
Apr. 19...
37, 700
331
33
Apr. 2 (holiday).
Apr. 20...
251,400
323
211
Apr. 3...
18,700
291
261
Apr. 5...
15,000
30
273
Apr. 6....
Apr. 7...
6, 200
41,000
291
27
Total sales within 30
days..
1,019, 584
32吋
​28
Total capitalization, $75,000,000, represented by 750,000 shares.
Total sales within 30 days preceding receivership, 1,019,584 shares.
The sales aggregated more than one and one-third times the total capitalization of the railway.
It is a forceful commentary on the methods by which a great railway may be
manipulated into a receivership when it is noted that the general counsel, after
drawing the bill for a receivership, sold his stock, and the local counsel, who
represented the railway company in the receivership proceedings, owned no
stock in the railway company, and that none of those directly participating in
the receivership proceedings had any financial interest in the railway company.
The real owners of the railway, the stockholders, the security holders, and the
directors, except those composing the syndicate and in its confidence, were in
ignorance of the receivership application. Mr. Mudge, former president of
the railway company, is one of the receivers.
The general counsel for the railway company, who planned the receivership
in obedience to the will of the syndicate, is now counsel for the receivers.
The property of the railway company will be called upon for many years to
make up the drain upon its resources resulting from transactions outside the
proper sphere in which stockholders had a right to suppose their moneys
were invested. This record emphasizes the need of railway directors who
actually direct. There are too many passive directors who acquiesce in what
is being done without knowledge and without investigation. A director of a
railroad is a quasi public official who occupies a position of trust. A director
who submits. blindly to the exploitation of his company is a party to its undoing
and he should be held responsible to the same extent as if he had been a
40958-18-35
546 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
principal instead of an accessory before the fact. The greater his prominence
the greater his responsibility and the greater his dereliction. Obviously a man
of large affairs could not attend to all the details in intricate transactions, but
it is inconceivable that a director of ordinary business prudence and sagacity
would sanction large expenditures without any inquiry as to the purposes of
such disbursements. So long as this situation exists, however, it suggests the
need of a law to charge such directors with individual responsibility for the
dissipation of corporate funds.
The Clayton antitrust act, which becomes effective October 15, 1916, will make
it unlawful for any person at the same time to be a director in two or more
competing corporations, any one of which has a capital, surplus, or undivided
profits aggregating more than $1,000,000, but common carriers are expressly
exempted from its application. It should be just as grave an offense for an
official of a railway to be faithless to his trust for financial gain as it is for an
elected official of the Government to betray his trust for money reward.
By this case the need of some limitations on the issuance of stocks and bonds
by common carriers, whether directly or through holding company devices or
otherwise, is again demonstrated.
Mr. AMSTER. This receivership practically obliged the stockholders
who formerly were the collateral bondholders to furnish $30,000,000
of new cash to the company, for which they took preferred stock at
$100. Even then the old interests, working through their various
affiliations, succeeded in gaining control of the board of the reorgan-
ized company, and used their efforts to prevent stockholders from
receiving dividends on their new preferred stock, for which they
paid $100 per share, and through inferences and implications they
continued to undermine the company's credit and the value of its
securities to the extent that the preferred shares for which the stock-
holders paid $100 cash in July, 1917, was depressed to below $44 in
November of the same year.
These are some of the reasons why investors in railroad securities
and the public welcome Government control and why they would look
upon the return of the railroads to former control as a distinct
calamity.
I am opposed to Government ownership in the strict sense of the
word, and so, I believe, is every thinking man. But I heartily indorse
permanent Government control under some form of Federal cor-
poration, the securities of which should be exchanged for the present
outstanding railroad stocks. The corporations could be governed
by four or five trustees elected by the stockholders, the chairman to be
appointed by the President. The formulation of such plans requires
time and serious study, but I am sure Government control on the lines
above indicated can be worked out, which will have all the benefits
of Government ownership and none of the weakness that Government
ownership of railroads would carry.
It is for this reason that I am, as must be every thoughtful citi-
zen, opposed to having the railroads returned without some legisla-
tion to prevent a recrudescence of former intolerable wrongs.
To revert again to the proposed compensation which the bill pro-
vides and which to the best of my knowledge would figure out about
51 per cent on actual investment of all railroads, I wish to say that
I know of no industry, corporation, or individual who would be satis-
fied with such an income, even if guaranteed, during a period of un-
usual prosperity and when their plant were operated beyond capacity
limit, as are the railroads to-day. That 51 per cent is not an adequate
income on invested capital is evidenced by the fact that Congress in
its tax act provided that only income in excess of 6 to 9 per cent on
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
547
invested capital were to be subject to tax. If in the wisdom of Con-
gress 6 to 9 per cent is a reasonable income on capital investment in
other industries, why only 51 per cent on railroad investments? I
am sure no one would claim that railroads as an industry are not as
legitimate or as useful as other industries and, therefore, capital in-
vested in railroads is not entitled to the same consideration and pro-
tection as capital invested in other business or industries.
I am not unmindful of the facts that the compensation as now pro-
vided in the bill will figure out more than 54 per cent on the capital
investments of some railroads, but where there are a few of those
there will be many that will earn much less than 5 per cent.
•
It may be argued that some railroad securities are "watered," but
this can be easily proved not to be the .case now, because whatever
watering there might have existed in the past has been well elimi-
nated through reorganization, scaling down of securities, payment of
large assessments, and increases in property values. Moreover, what-
ever watering there may be, if any, in railroad securities it must be
admitted that it would be small when compared with securities of
other great industries, whose earnings are from 20 per cent to 100
per cent on their capital stock.
Now, then, in view of the fact that Congress has in its tax bill set
6 to 9 per cent as a reasonable income, and in view of the fact that the
packing industry is earning from 30 to 40 per cent on its invested
capital, that the sugar, the steel, the mining, and other great indus-
tries are earning from 20 to 40 or 100 per cent on their capital, does
it not afford ground for honest difference of opinion as to whether
the bill now before Congress should not be modified with respect to
compensation so that railroad stockholders may get a more adequate
return on their property investment than the bill provides for, or
that those stockholders who, under the proposed compensation, would
get less than 6 per cent, may be assured at least 6 per cent on their
investment.
May I, in conclusion, point out that in dealing with railroad stock-
holders at this time we are not dealing with the Rockefellers, the
Morgans, the Goulds, the Harrimans, and other great and influen-
tial financiers of the past, who were were able to protect themselves?
Those people have been from under railroad stocks for many years,
or since 1907, when the Interstate Commerce Commission tightened
its lawful grip on railroad lawlessness. Since that time, however,
railroad stocks have been owned, as they are to-day, by the investing
public, and it is well known that the railroads are to-day law-abiding.
These small stockholders are certainly not only entitled to your con-
sideration, but are actually dependent upon your protection, and I
am sure that Congress, in legislating these people's property rights,
will be conscious of these facts.
Mr. Escн. Mr. Amster, you say you are editor and publisher of
the Investors' Protector?
Mr. AMSTER. No; I am neither the editor nor the publisher.
Mr. ESCH. You are connected with it, aren't you?
Mr. AMSTER. If you will permit me, I will explain. As a result
of the Rock Island protective committee, of which I was chairman,
when we made the fight for protection we organized a permanent
stockholder's protective committee, of which I am president. This
548 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
protective association is known as the Investors' Protective Associa-
tion of America. The association publishes a paper monthly known
as the Investors' Protector. Mr. Young is the editor of that paper.
Mr. Escн. You are not connected with the National Association
of Owners of Railroad Securities, of which Mr. Warfield, of Balti-
more, is the president:
Mr. AMSTER. I am not. Would you like to know why I am not
connected with that?
Mr. EscH. Why, I have no objection to your giving any reasons.
you want to.
Mr. AMSTER. Because that association is headed by the same class
of people that have run the railroads in the past; the same class of
people that I, in the interest of small stockholders, have had to con-
tend with. You will find the very same Mr. Peabody that I have
mentioned here, who wanted to foreclose a perfectly solvent mort-
gage that always paid its interest and earned it, is one of the trustees
of that association. It is more of a banker's, investor's, and bond-
holder's association than a stockholder's association.
Mr. ESCH. I notice there are three Boston men in the executive
committee, Gordon Abbott, Charles F. Adams, and A. L. Aiken.
Mr. AMSTER. Yes, sir; those are of the class we have had to con-
tend with for 50 years. Those are the people who control the securi-
ties to-day that are in such disrepute with the public. Those are the
people that have caused all the trouble to the railroads. The rail-
road operatives have never wronged the public; it is the people that
managed them. And then it was always the poor investors who put
in the assessments and got less valuable securities. That is the reason
I kept away from those people that association. Our association is
one of real stockholders, no bankers nor any great, illustrious names
connected with it.
Mr. ESCH. Then you represent really the small holders?
Mr. AMSTER. Not necessarily the small holders, no; because at the
last meeting of the Rock Island I represented 400,000 shares of
stock-some very large holders, but not this class of holders.
Mr. STEPHENS. Were those 400,000 shares held by many individ-
uals?
Mr. AMSTER. Yes, sir; 26,000 stockholders sent us their proxies.
Mr. STEPHENS. Those were small stockholders?
Mr. AMSTER. Well, most of the people that are with us are natu-
rally the under dogs, the small people, but we have been able to call
attention to what we have been doing and we couldn't have repre-
sented 400,000 shares unless we had a great many large stockholders,
and we had them, but not of this certain class of people that have in
the past managed and controlled these railroads.
Mr. STEPHENS. Was it these 400,000 shares you represent that suf
rered the greatest in this Rock Island disruption?
Mr. AMSTER. Yas; I think it was. I think they all suffered. But
there are ways and means to control stocks by those bankers through
proxies to influence the voters. So I am frank to say that if we should
get at the people that own all those shares we would have had about
90 per cent of the stock voting with us.
Mr. STEPHENS. What percentage of the stock did these railroad
wreckers own themselves?
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
549
Mr. AMSTER. None--maybe 1 per cent, or maybe one-fourth of 1
per cent.
Mr. STEPHENS. So they controlled the whole Rock Island system
on 1 per cent?
Mr. AMSTER. Through proxies, yes. That is a known fact.
Mr. STEPHENS. Is that about an average percentage of stock held by
these Wall street bankers who control the various railroad companies
of the country?
Mr. AMSTER. I think that is a good average. I don't think they
control more than 1 per cent.
Mr. SANDERS. Own, you mean?
Mr. AMSTER. Yes; I mean own. Some of them only have one share
in their name, and it is very seldom you will find a director who has
more than 100 shares in his name. Of course, they may be interested
marketwise in stocks that they don't put in their name, but that is for
speculative purposes.
Mr. STEPHENS. Do you think it is a good thing for a corporation
to be controlled by men who hold such a small amount of its stock?
Mr. AMSTER. I think it is a very poor thing, sir.
Mr. ESCH. Would many of these evils have been eliminiated if
Congress had passed a law giving the Interstate Commerce Commis-
sion power to regulate the securities?
Mr. AMSTER. I don't think there has been any lessening of those
exploitations.
Mr. ESCH. Well, we have not passed such a law. If Congress had,
five years ago, passed a law giving the Interstate Commerce Com-
mission power to regulate the issuance of securities, would the Rock
Island have met its fate, and the Pere Marquette, and the Frisco?
Mr. AMSTER. I think they would, and I will tell you the reason.
It is not a question at what price the securities were issued; it is a
question entirely of credit and the power to control boards. All the
troubles that I can trace have had their origin with the bankers that
floated these stocks. It wouldn't make any difference whether they
floated it at 100, 90, or 20. When they once get rid of the stock and
they sit around the board they seem to have but one object in view,
and that it to protect themselves and to get some benefit. I don't
mean to say that they are all robbers or all have an intention to
get the people's money, but that is the way it has worked out. First,
they sell you the stock and then they are ready to reorganize, and
when trouble comes they don't let you have money or credit and you
have to be reorganized. And they are usually the reorganizers, and
then they are usually again the directors, etc., repeating it over and
over again.
Mr. STEPHENS. First, they sell the stock, then they reorganize to
destroy it-to eliminate it?
Mr. AMSTER. Yes, sir.
Mr. SANDERS. That gives them a chance to sell it again, does it
not?
Mr. AMSTER. Yes, sir. And you will find the trouble in railroads
is this: That where in the copper industries you have got the Gug-
genheims, Phelps-Dodge, the Aggasizs, the Lewisohns owning large
interests, they make a success of their business and you seldom see
scandal there. You go into the steel business and you find Schwab
550
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
and Carnegie of old, and Frick, and some other large owners. They
are in the business. They own large blocks of their own stock, and
their business seldom has a scandal. You will find the same thing in
the packing industry with Armour and Swift and those fellows.
You will find the same thing in the sugar industry with Havemeyer
and Spreckels and those fellows. But when you get into the rail-
roads you don't find any of them that own any stock. They just sit
around and get the money, and the small shareholders, being widely
scattered and unorganized, have no way of asserting themselves, and
they have been plundered and milked and bled to death for the last
50 years. And that is the greatest danger of our democracy, because
there have been just a few people that have had the handling of these
things, and they allowed no outsiders in it, and those people, through
putting out these securities and bringing them back, have accumu-
lated billions of dollars. The Pujo committee's report will show you
all about it. They are a powerful oligarchy in this country, as pow-
erful as the Prussian King and the military caste in Germany. And
it is a godsend to us to have a war to change these conditions. It
has directed the attention of the big fellow at the top to the little fel-
low at the bottom. If we had to have a war, I am almost glad that
we had it if it is going to bring about this change.
The CHAIRMAN. We are much obliged to you, Mr. Amster.
Now, Mr. Plumb, you have a gentleman who wishes to make a
statement?
Mr. PLUMB. Yes; I wish to introduce to the committee Dr. Frank
J. Warne.
Mr. DECKER. Have you concluded your statements, Mr. Plumb?
Mr. PLUMB. I have concluded my argument, and after Dr. Warne
submits the evidence, if the committee wishes to ask me any ques-
tions I am at their disposal.
Without taking the time to examine Dr. Warne I will merely
state to you his qualifications and his experience and what it is that
he has done.
Dr. Warne is a graduate of the University of Pennsylvania and
has taken postgraduate work in that university in economics, poli-
tics, and American history, paying special attention to the science
of transportation. He holds the degree of doctor of philosophy in
addition to the degree of master of arts. For four years thereafter
he was managing editor of the Railway World, and for the past
10 years has been engaged in many important investigations as
statistician. He was statistician for the board of arbitration ap-
pointed by President Taft to pass upon the wage-movement demands
of the eastern railroads. He served as statistician in the Adamson
case investigation-the labor investigation of last year.
The CHAIRMAN. On the Adamson law?
Mr. PLUMB. On the Adamson law; yes. He was also engaged in
the Coal Rate case and the 15 Per Cent Advance Rate cases. He is
remarkably familiar with the statistics and history of transportation
matters. I submitted to him this exhibit, which was introduced by
Mr. Thom, showing the average so-called property investment ac-
counts in various railroads for the preceding three years, and the
earnings, the net operating earnings, of these roads and their aver-
age net earnings. I have asked him to reanalyze this exhibit and
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
551
show to you some of the things that we think should be made plain.
I will not say they are artfully conceived, but they are successfully
conceived in the exhibit as it stands.
The CHAIRMAN. We will be glad to hear you, Mr. Warne.
STATEMENT OF FRANK J. WARNE.
Mr. WARNE. Mr. Chairman and gentlemen of the committee, in
support of Mr. Plumb's able presentation this morning of certain
legal and economic aspects of the American railway problem there
are certain phases of it that the railway brotherhoods believe to be
of tremendous importance to this committee and which they have
learned through past experience since 1910, and these what are
known as 66 concerted movements."
Our first experience was to meet the capital obligation accounts
and property investment accounts of the railroads in these boards of
arbitration, and of course at first we hadn't the experience nor the
investigations to meet successfully those contentions. Briefly, how-
ever, I venture to say that in the last four arbitrations the property
investment accounts and capital in obligations accounts of the rail-
roads have played very little part. In fact, in none of those arbi-
trations have the railroads contended their inability to pay wages
because of their property investment account or because of their
capital obligations account.
I do not wish in any way to lay personal claim to the credit, but I
think the activities of the brotherhoods in those directions, the
necessity of analysis of the intercorporate railway ownership of
stock of every important railway system in the United States, and
tracing the machinery of interlocking directorates of these owner-
ships, which is the machinery by which intercorporate ownership
operates, has had some effect on the attitude of the railroads in
these arbitrations. I have brought from my office some selections
of charts-about 150 charts that the brotherhood had made and
compiled at the expenditure of a large sum of money and about eight
or nine months' work of a large staff of men [producing charts].
These are the intercorporate railway-stock ownerships. Every im-
portant railway system in the United States is shown, and if the
committee wishes it can be supplied with as many of these copies
as it desires. I only brought three, because we had not time to get
them up.
I present these for the simple reason that in analyzing this table
that the railroads have presented intercorporate railway stock owner-
ship plays a very important part.
This committee is sufficiently well informed and is intelligent
enough to recognize as a truism the statement that the most impor-
tant single fact in connection with railway earnings is not the
earnings themselves of a particular railroad but those earnings con-
sidered in relation to the ownership of that particular company.
This is all the more important when this ownership is intercor-
porate; that is, when the ownership is vested in another railroad
company.
I shall not take up the time of this committee in a discussion of
intercorporate railway stock ownership. Its great importance in
552
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
relation to the subject matter now before this committee is briefly
indicated in the fact that in the eastern territory 12 systems control
68 per cent of the companies and 79 per cent of the single-track
mileage; in the western territory 13 systems control 24 per cent of
the companies and 78 per cent of the mileage, and in the southern
territory 6 systems control 31 per cent of the companies and 74 per
cent of the mileage. In the eastern territory the number of separate
companies so controlled is 598; in the western, 188; and in the
southern, 159. These figures include only majority owned com-
panies and do not account for the very large number of companies,
and the extensive mileage in which the systems have minority stock
representation, in many cases resulting in joint control. Nor are
terminal and switching companies included. A total of 2,187 sepa-
rately incorporated railway companies with owned single-track
mileage of 246,817 miles, excluding switching and terminal com-
panies, report to the Interstate Commerce Commission. As many
as 945 of these companies with a single-track mileage of 191,000
miles are controlled through majority stock ownership by the 31
systems; that is, nearly four-fifths of the single-track mileage of
the United States is to-day controlled directly by 31 systems.
A fact I wish to emphasize a fundamental fact dominating all
other facts upon which this committee is called upon to frame legis-
lation-is this concentration through intercorporate railway stock
ownership and lease of the steam rail transportation interests of the
country. This ownership affects capitalization, property invest-
ment, earnings, rates State versus Federal regulation-in brief,
virtually all the various economic, political, and social aspects which
give us our present-day railway problem. This relationship is to-
day the dominant underlying characteristic of the transportation
industry in every section of the United States. It affects virtually
all the issues involved in the relation of these instrumentalities of
commerce to the National and State Governments, to the great
majority of shippers, to the wage earners, and to the public. It
dominates and determines nearly every important question affecting
interstate commerce and its regulation. Its ramifications are so
intricate, complex, confusing, and bewildering that it is not always
possible to secure a clear perspective of their far-reaching effects.
By means of it railway companies, brought into existence and given
a legal individuality by a State charter, are welded and held together
and their individuality destroyed or merged into highly centralized
systems extending over many States. One of the results is that
many railway companies legally "independent" are economically
dependent and are mere parts of a larger whole.
This brings me to a fundamental criticism of the statistical com-
pilation of the railroads presented in evidence before this committee
and which purports to show the per cent return to the various car-
riers by relating their net operating income to their property invest-
ment accounts. Without accepting these figures as representing
the facts I wish to emphasize as strongly as possible the grievous
error of such a presentation. Its purport is to give to this com-
mittee an idea of the per cent earnings of these separate properties;
that is, the return upon investment. But under the system of inter-
corporate ownership many of the railway companies in the com-
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 553
pilation should not be regarded from the purely investment stand-
point. This is true because of the important fact that such owner-
ship has no relation to and is not based upon the principle of
investment that prevails in ordinary circumstances. We have as
authority this statement of the Interstate Commerce Commission in
its special report on "Intercorporate relationship of railroads":
The conclusion is indisputable that railway corporations do not purchase rail-
way stock widely for purposes of investment, but that the holdings in the stock
of other railways are rather for the purpose of controlling or influencing the
management of corporations whose operations are of real concern to the holding
company. Such holdings are either majority holdings which insure control or
minority holdings of sufficient amount to guarantee an effective influence in
management.
By and of itself it is of little importance to this committee in the
ascertainment of the true facts to be told in a statistical exhibit that
the Baltimore, Chesapeake & Atlantic earns 1.16 per cent on its prop-
erty investment. It does become of importance, however, when it is
disclosed that that company is owned and controlled by the Pennsyl-
vania Railroad, which, according to the exhibit, earns 5.48 per cent;
and that this parent company also owns and controls the Cumber-
land Valley, which earns 12.46 per cent, as well as other subsidiaries.
The point is that the earnings of any particular property should
be considered in connection not only with the earnings of its holding
or parent company but also with the earnings of all other subsidiary
companies owned by the same parent company. I have taken the
railroads as presented on this exhibit, and I have used exactly the
same figures, and all I have done has been to rearrange the grouping
of those roads.
Mr. ESCH. I assume when you say that these companies purchased
stock in other companies for purposes of control that they only pur-
chased stock with the voting privilege?
Mr. WARNE. That is nearly always true.
Mr. ESCH. Have you any data showing the relative amount of vot-
ing stock and nonvoting stock purchased by other roads?
Mr. WARNE. You will find on those charts the figures showing ex-
actly the percentage of the total amount of stock that the road owned
in the subsidiary company. You will find, for instance, there is a
chart showing the intercorporate ownership of the New York Central
system. In this column [indicating] you will find the figures "58.5,"
which means that the New York Central owns 58.5 per cent of the
stock in the subsidiary company, as shown by these lines. It owns
that amount in that particular company. So all the way through
here on the first column you will find the percentage of the total
amount of stock which the holding or owning company owns in that
particular company.
Mr. Escн. That explains it to me. But if it is for the purpose of
control they wouldn't bother with stock that didn't have voting privi-
leges?
Mr. WARNE. As a general proposition they do not. As a general
proposition it is only the voting stock that they purchase.
Mr. ESCH. As a rule, the preferred stock does not have the voting
privilege, does it?
Mr. WARNE. No; only the common stock, usually.
554
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. Escн. So they don't deal in the preferred stock?
Mr. WARNE. No; it is common, almost entirely; because you will
find that the only object of controlling the stock is to elect the board
of directors. That shows the interlocking directorate of the New
York Central system [indicating], which is the machinery on which
this whole system here operates. In other words, without the inter-
locking directorate ownership of stock would not be of any impor-
tance. It permits them to elect directors to the board which controls
the companies.
Mr. ESCH. Is there any way in which they seek control by securing
bonds of another company?
Mr. WARNE. Sometimes; but that is not practiced as a rule. There
are cases like that, but they are exceptions. I will distribute these
to the members of the committee, so that they may see what has been
done there.
(The papers referred to follow :)
EXHIBIT A.
Roads grouped according to stock ownership.
[Three-year averages.]
Road.
Net
operating
income.
Property Per cent.
investment.
West Jersey & Seashore.
Pennsylvania Co..
Vandalia).
Michigan Central……
Pittsburgh & Lake Erie.
Manistique & Lake Superior..
Pennsylvania Railroad.
Baltimore, Chesapeake & Atlantic.
New York, Philadelphia & Norfolk.
Cumberland Valley..
Long Island.
Philadelphia, Baltimore & Washington....
Grand Rapids & Indiana
Toledo, Peoria & Western 1
Pittsburgh, Cincinnati, Chicago & St. Louis (includes
New York Central.
Lake Erie & Western.
New York, Chicago & St. Louis.
Rutland 2
Monongahela.
Toledo & Ohio Central.
Kanawha & Michigan.
Cleveland, Cincinnati, Chicago & St. Louis.
Cincinnati Northern.
Baltimore & Ohio
Pittsburgh & West Virginia.
Staten Island Rapid Transit...
Chesa eake & Ohio....
Hocking Valley..
Ann Arbor Co.:
Ann Arbor Railroad..
Chicago & North West rn..
Chicago, St Paul, Minneapolis & Omaha..
Cripple Creek Central: Cripple Creek & Colorado Springs.
Canadian Pacific:
$46,382,852
$846,823,658
5.48
48, 394
4, 186, 783
1.16
999, 103
1,298, 202
3, 187, 404
3,787, 440
10,866, 687
9.19
10, 420, 968
12.46
80, 384, 108
3.97
75, 115, 111
5.04
961, 252
21,627, 178
4.44
14, 814, 421
236, 489, 892
6.26
944, 743
23, 113, 776
4.09
158,504
10,029, 946
1.58
11, 375, 084
55, 972, 807
1,678, 807
8,073, 874
2, 134, 612
1,029, 450
9,071, 679
224, 457,345
5.07
919,502, 504
6.09
43, 680, 573
3.84
146, 135, 571
5.52
66,965, 760
3.19
23,080, 440
4.46
61, 834, 965
14.67
583, 174
1,098, 283
12, 353, 471
4.72
26,875, 337
4.09
1,305, 229
20,016, 640
6.52
9,998,008
190,016, 828
5.26
325,553
4,532, 019
7.18
25, 348, 113
298, 704
346, 040
13, 268, 096
547,842, 127
4.63
46,707, 119
.64
7,580, 786
4.56
231, 563, 982
5.73
2,668, 017
43, 954, 788
6.07
531,583
24, 891
17,404,824
3.05
1,438, 417
1.73
23,405, 992
381, 542, 655
6. 13
4,970, 796
76, 267,674
6.52
549, 075
10,544, 953
5.21
Minneapolis, St. Paul & Sault Ste. Marie……..
10,445, 395
182,018,693
5.74
Spokane International..
192, 604
10, 198, 633
1.89
Duluth, South Shore & Atlantic.
594, 780
Mineral Range.
48,349, 534
1.23
147,307
El Paso & Southwestern Co.: El Paso & Southwestern.
International & Great Northern (Corp.): International & Great
Northern.
3,523, 119
4.18
·
4,237, 117
52, 833, 436
8.02
1,423, 702
Kansas City, Mexico & Orient.
Kansas City, Mexico & Orient of Texas.
37,908
$ 3,010
39, 460, 201
22,028,719
6,527,848
3.61
.17
8.03
1 Owned jointly with the C. B., & Q. 2 Fifty per cent owned by the New Haven.
8 Deficit.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
555
EXHIBIT A-Continued.,
Roads grouped according to stock ownership-Continued.
Road.
Atlantic Coast Line Co.:
Net
operating
income.
Property
investment.
Per cent.
Charleston & Western Carolina..
Atlantic Coast Line Railroad.
Louisville & Nashville..
Georgia Railroad.
Louisville, Henderson & St. Louis.
Nashville, Chattanooga & St. Louis.
Western Railway of Alabama……..
Chicago, Indianapolis & Louisville.
Illinois Central.
Central of Georgia.
Mississippi Valley Co.-
Yazoo & Mississippi Valley.......
Richmond-Washington Co.:
$487, 001
10,351, 243
17,310,665
884, 551
341, 404
3,212, 321
$8,380, 405
5.81
179,819, 029
5.76
278, 070, 522
6.23
4,526, 195
(1)
7,666,826
4.45
37,583,962
8 55
294, 737
5,828, 025
5.05
2 632, 272
39, 925, 179
4.09
16,549,399
301,361,500
5.49
3,388, 244
68,854, 256
4.92
3,900, 363
62,904, 315
6.20
Richmond, Fredericksburg & Potomac.
1,195, 905
8,846, 133
13.52
Washington Southern..
8,315, 146
8, 330, 187
5.99
Southern Pacific..
47,933, 196
956, 211, 005
5.01
Northwestern Pacific 3
Toledo, St. Louis & Western..
Grand Trunk Railway of Canada:
New Orleans, Texas & Mexico.
Beaumont, Sour Lake & Western..
St. Louis, Brownsville & Mexico....
Chicago & Alton...
Detroit & Toledo Shore Line 5
Atlantic & St. Lawrence……….
Chicago, Detroit & Canada Grand Trunk Junction..
Detroit, Grand Haven & Milwaukee.
Grand Trunk Western.
1,224, 164
60, 905, 531
2.01
211,925
4 80, 291
993, 246
15,556,396
1.36
4, 229, 379
41.90
15,544, 732
6.39
1,000, 761
30, 501, 310
2.53
3,211,453
121, 610, 372
2.64
461, 179
4,632, 233
9.96
42,039
9,007, 096
. 02:
194, 798
3,481, 3.0
5.60
125, 231
7,036, 727
1.78
1, 115, 483
Central Vermont.
Detroit & Toledo Shore Line e
31, 23), 735
3.26
756, 882
17, 008, 831
4.45
•
Philadelphia & Reading..
Reading Co.:
Atlantic City.
Central Railroad of New Jersey..
Port Reading..
New York, New Haven & Hartford.
Central New England...
New York, Ontario & Western.
Rutland 7
Boston Railroad Holding Co.-
461, 179
4,632, 233
9.96
227,967
9,357, 288
16,012, 462
9,527,352
2.39
132, 777, 668
195, 315, 644
7.05
8. 21
·
188,379
17,499, 450
1,493, 320
4,816, 135
3.91
291, 143, 332
6. 01
26,631,839
5. 61
2,039,90)
90,469, 116
2.32
1,029, 450
23,080, 440
4.46
Boston & Maine.
Wabash.
Wabash, Pittsburgh Terminal Ry. Co.-
Wheeling & Lake Erie..
Pittsburgh Terminal R. R. & Coal Co.-
9,820, 057
201, 413, 544
4.80
5,804, 034
200, 052, 151
2.90
1,605, 996
69,628, 331
2.31
(Ltd.):
Alabama & Vicksburg...
Vicksburg, Shreveport & Pacific.
Atchison, Topeka & Santa Fe...
St. Louis Southwestern of Texas.
West Side Belt...
Alabama, New Orleans, Texas & Pacific Junction Railways Co.
189,832
5,333, 644
3.56
342,983
5,537,571
6. 19
356, 413
9,013, 267
3.95
Northwestern Pacific 8,
St. Louis Southwestern….
Union Pacific System.
St. Joseph & Grand Island...
Great Northern...
Northern Pacific...
Spokane, Portland & Seattle..
Chicago, Burlington & Quincy..
Toledo, Peoria & Western 9.
Quincy, Omaha & Kansas City.
Colorado & Southern.
...
42,398, 406
688, 749, 805
6.16
1,224, 164
60,905, 531
•
2. 01
3,398, 024
70,950, 212
4.79
561,541
30,029, 113
1.87
38,567, 303
573,885, 057
6.72
369, 025
18, 425, 401
2.00
29,063, 529
433, 599, 261
6.70
30,690, 489
489, 457, 224
6.27
1,840, 591
34, 008, 645
61, 125, 699
3.01
484, 507, 951
7.02
Fort Worth & Denver City.
Trinity & Brazos Valley 10
Wichita Valley.
158,504
31,416
2,502, 493
1,886, 241
10,029, 946
1.58
6, 468, 954
.49
82, 238, 700
3.04
25, 245, 533
7.47
6 238,907
150, 009
11,663,611
5,478, 677
42.05
2.74
1 Property investment of Georgia Railway nto available. Figures shown include only net expenditures
for betterments to leased property. Rate or return not computed and figures omitted from total.
2 Control is joint with Southern Railway.
3 Owned jointly with the Atchison, Topeka & Santa Fe.
1 Deficit.
• Owned jointly with Grand Trunk Western.
* Owned jointly with Toledo, St. Louis & Western.
750 per cent owned by the New York Central.
8 Owned jointly with the Southern Pacific.
9 Owned jointly with the Pennsylvania Co.
10 In hands of receiver. Owned jointly with Rock Island.
556
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
1
EXHIBIT B.
Roads controlled by construction and industrial companies.
Road.
[Three-year averages.]
Net operat-
ing income.
Property
Investment.
Per cent.
United States Steel Corporation:
Bessemer & Lake Erie..
Elgin, Joliet & Eastern.
Duluth, Missabe & Northern.
Federal Steel Co.-
Minnesota Iron Co.-
Duluth & Iron Range.
Lehigh Coal & Navigation Co.: Lehigh & New England.
Lehigh & Hudson River..
Utah Copper Co.: Bingham & Garfield.
Cherokee Construction Co.: Midland Valley…………
$4,745, 188
2,732.657
$46,987, 219
5,374, 561
41, 989, 323
37,975, 004
10.10
6.51
14. 15
2,413, 243
27, 329, 825
8.83
1, 154, 357
13, 772, 892
8.38
525, 314
6, 213, 194
8 45
1,206, 721
446, 605
6,872, 337
17, 541, 228
17.56
2.55
EXHIBIT C.
Roads recently or at present in hands of receiver.
Road.
[Three-year averages.]
Net
operating
Property
investment.
Per cent.
income.
Atlanta, Birmingham & Atlantic.
Chicago, Peoria & St. Louis..
Chicago, Rock Island & Pacific..
Chicago, Rock Island & Gulf.
Trinity & Brazos Valley¹.
Cincinnati, Hamilton & Dayton (Inc. C. I. & W.)……….
Colorado Midland 3.
Denver & Salt Lake..
Ft. Smith & Western..
Gulf, Mobile & Northern 4.
Missouri & North Arkansas.
Missouri, Kansas & Texas..
Missouri, Kansas & Texas of Texas
Missouri, Oklahoma & Gulf..
Missouri Pacific..
New Orleans, Texas & Mexico.
Pere Marquette..
Pittsburg, Shawmut & Northern.
St. Louis-San Francisco 5.
Chicago & Eastern Illinois.
Fort Worth & Rio Grande.
St. Louis, San Francisco & Texas.
San Antonio, Uvalde & Gulf..
Tennessee Central.
Texas & Pacific.
Toledo, St. Louis & Western.
Western Pacific..
1 Owned jointly with Colorado & Southern.
2 Deficit.
·
$358,376
167,865
2 238,907
1,082, 550
2 24,466
336,9°0
$38,467, 001
0.93
8, 267,715
2.03
15,074, 232
319, 131, 430
4.72
971, 223
17,439,594
5.57
11, 663.611
22.05
55, 238, 687
1.96
15,041,472
2.16
26, 945, 119
1.25
82, 171
11,662, 042
.70
23, 220, 541
2.42
18, 001, 294
.08
170,363,565
3.46
65, 485, 295
.95
11,737, 163
2.71
324, 208, 653
4.42
15,556,398
1.36
91, 618, 914
4. 10
512,470
35.603,331
1.44
286, 113, 393
4.70
80,749, 949
3.72
1,892
8,097, 543
.02
2 316.807
56, 119
163,753
10,314,420
23.07
4,757,513
1. 18
19,717,591
.83
4, 138, 784
110, 182, 255
3.76
1,000, 761
1,897, 506
39,501, 310
2.53
83,078, 292
2.28
562.361
13,775
5,889, 730
619, 678
2 83,702
14,346, 131
211,925
3,758,969
13,453,378
3,001,026
3 One-half of stock owned by Denver & Rio Grande.
1 Formerly New Orleans, Mobile & Chicago.
Includes Brownwood North & South and Paris & Great Northern.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
557
EXHIBIT D.
Independent companies.
[Three-year averages.]
Road.
Net operat-
ing income.
Property
investment.
Per cent.
•
Arizona & New Mexico..
Atlanta & West Point.
$302, 645
259,838
$4,504, 258
3,798, 880
6.72
6. 84
Buffalo, Rochester & Pittsburgh.
3,275, 017
59, 535, 704
5.50
Buffalo & Susquehanna R. R. (Corp.)....
594,620
10,652,427
5.58
Carolina, Clinchfield & Ohio...
1,615, 619
58,552, 914
2.76
Chicago (reat Western.
Chicago, Milwaukee & St. Paul…….
Chicago, Terra Haute & Southeastern..
2,976,371
27,343,308
931,342
167,836, 512
1.77
580,3-18, 423
4.71
24, 861, 261
3.75
Coal & Coke..
281, 251
8,311, 032
3.38
Delaware & Hudson.
7,526, 294
103,022, 797
7.31
Delaware, Lackawanna & Western.
15,989,315
212, 033, 142
7.54
Denver & Rio Grande.
8,351, 140
175,913, 464
4.75
Detroit & Mackinac.
314, 158
6,505, 052
4.83
Detroit, Toledo & Ironton.
205, 362
21,730, 991
.95
Erie System.
16,874, 521
472,579,990
3.57
Florida East Coast...
Gulf & Ship Island..
Kansas City Southern.
Lehigh Valley
Los Angeles & Salt Lake ¹
Louisiana & Arkansas.
Louisiana Railway & Navigation Co.
Maine Central.
Minneapolis & St. Louis..
New Orleans Great Northern
2,353, 888
603,637
3,546,351
47,826, 901
4.92
14, 168, 200
4. 26
81, 195, 069
4.37
10, 535, 073
204, 188, 111.
5.16
3,414, 343
77,623, 910
4.39
408, 715
361,697
2,954,685
2,642, 611
577,356
12,086, 769
3.38
20,849, 415
1.73
57,715,375
5.12
67,879,614
3.89
16,071, 807
3.59
Texas Midland.
Norfolk & Western.
Norfolk Southern.
San Antonio & Aransas Pass
Seaboard Air Line...
Ulster & Delaware…..
Virginian.
Western Maryland..
20,918, 830
264, 792, 196
7.90
1, 178, 171
31,023, 401
3.80
373, 125
24, 212, 173
1.54
176, 523, 516
3.66
2,751, 264
1.59
5,772, 995
87,747,661
2. 14
3.73
119,767, 915
2.58
6, 454, 649
43,675
123,596
3,270, 017
3,090, 247
¹ Reorganization of San Pedro, Los Angeles & Salt Lake. Oregon Short Line owns one-half of stock.
I would like to say in regard to these exhibits they are not pre-
pared in the exact form that we would like to have them. We had
great difficulties with the printers on account of the unusual condi-
tions. We had to do the very best we could.
In other words, the earnings of subsidiary companies should not
be shown separate and apart from those of the parent company. It
would be something like showing the earnings of the different divi-
sions of the same road without presenting the earnings of that road
in its entirety. Some divisions may have small earnings and other
divisions large earnings, but the important fact is the earnings of the
railroad company. So it is with the subsidiary companies in relation
to the system. The real situation as regards the earnings of a sub-
sidiary company can not be disclosed without a knowledge of the
earnings of its parent company and of other subsidiary companies in
the same system. It will be noted in the revised tabulation that in a
number of instances the earnings of the parent or owning company
are not disclosed in the original tabulation of the railroads presented
before this committee.
If you will take that first exhibit that we have marked" Exhibit A,"
you will see that there we have taken 11 companies of the Pennsyl-
vania system that are scattered throughout the East and have placed
558
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
•
them together under the Pennsylvania Co. The arrangement means
this: That the Pennsylvania Railroad is the holding or owning com-
pany, and that the companies beneath, the first indentation, are com-
panies that are owned by the Pennsylvania Railroad. Where there is
a second indentation it means that a subsidiary of the Pennsylvania
Railroad owns the third subsidiary, and when there is a fourth or fith
indentation it simply means that the company immediately preceding
owns that company. In other words, on the Pennsylvania Railroad,
the Grand Rapids & Indiana is not owned by the Pennsylvania Rail-
road, but is owned by the Pennsylvania Co., whose stock is owned by
the Pennsylvania Railroad. The same is true with the New York
Central.
You will find on the first sheet there the Ann Arbor Railroad and
the Manistique & Lake Superior assembled under the "Ann Arbor Co.”
The majority of the stock of those two companies are owned by the
Ann Arbor Co., but there is no way in this exhibit to find out what
are the earnings of the Ann Arbor Co. The same thing is true of the
Cripple Creek Central, the Canadian Pacific, El Paso & Southwestern
Co., International & Great Northern (Corp.), Atlantic Coast Line
Co., Richmond-Washington Co., Grand Trunk Railway of Canada,
Reading Co., and so on through. The owning or holding company
a great many instances is not given, and you can not ascertain the
true situation as regards any subsidiary unless you can find out what
the earnings of that holding company were or are.
in
Another important fact in connection with this grouping is that
you will find under the Pennsylvania Railroad their subsidiaries earn-
ing all kinds of rates of return, according to this tabulation on this
sheet, running from 1.16 per cent to as high as 12.46 per cent.
There are in the total number of companies presented on this sheet
159 separate and distinct companies.
Mr. MONTAGUE. If it doesn't trouble you, on page 3, Exhibit A, the
Richmond-Washington, are those figures a misprint in the second
line?
Mr. WARNE. I might say that you will probably find errors in some
of these figures, because they were checked up very hurriedly. I
don't know anything about those figures. My figures are taken from
this large sheet presented by Mr. Thom.
Mr. MONTAGUE. I am speaking of the ones you handed to the com-
mittee.
Mr. WARNE. I am trying to see if that is a mistake, because we
took the figures from this sheet itself.
Mr. BARKLEY. It shows on this that the net operating income was
more than the capital investment.
Mr. WARNE. For the Richmond, Fredericksburg & Potomac?
Mr. BARKLEY. No; the Washington Southern.
Mr. WARNE. For the Washington Southern the net operating in-
come should be $499.242. Yes; that is a mistake.
Mr. MONTAGUE. That is a very short road, not more than 35 miles.
Mr. WARNE. Yes; that is the net operating income, $499,242. And
the property investment is $8,330,187; and the per cent, 5.99.
Mr. MONTAGUE. Is that property investment, $8,337,000, right?
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
559
Mr. WARNE. According to the sheet of the railroads. We have not
attempted in any way to change any of these figures, and if there
are any figures on these exhibits that are not right, it is simply a
mistake.
Mr. MONTAGUE. That is just a misprint then?
Mr. WARNE. Yes; if there are any changes on this sheet it is a
misprint. I, myself, have not gone over these to check them up and
see if they are right.
Mr. SANDERS. Every one of these figures, net operating income and
property investment, you took from the railroad sheets filed here by
Mr. Thom?
Mr. WARNE. Every figure on these exhibits is taken from that
sheet. All I have done is simply to rearrange the roads, regroup
them under the holding companies.
Now, another grouping of the roads that I think will appeal in-
stantly to this committee as being a grouping that should be made
is the grouping of roads that are owned by construction companies
or by industrial companies. That is Exhibit B. In a great many
instances where this situation existed the railroad is merely one
instrument in industrial production. On this exhibit of the rail-
roads there are four railroads owned by the United States Steel
Corporation. Now, I submit that it is of very little importance to
this committee to know the earnings of those individual roads-that
is, under Exhibit B-and you will find it in the first grouping. The
United States Steel Corporation owns the Bessemer & Lake Erie,
the Elgin, Joliet & Eastern, the Duluth, Missabe & Northern, and
the Federal Steel Co. Then the Federal Steel Co. owns the Minne-
sota Iron Range Co., which owns the Duluth & Iron Range. The
earnings of all those roads should be considered in connection with
the earnings of the United States Steel Corporation, and the earn-
ings of the United States Steel Corporation are not shown on the
charts of the railroads.
The CHAIRMAN. The railroads left those out?
Mr. WARNE. They do not include those; no. Nor do they include
earnings of the Federal Steel or the Minnesota Iron Co.
Mr. DECKER. They are in that list, aren't they?
Mr. WARNE. No; the earnings of the United States Steel Corpora-
tion are not shown here.
Mr. DECKER. I mean the roads.
Mr. WARNE. The earnings of these roads are shown there; yes.
You will find wherever there are blanks following the name of the
road or company that we give on these sheets, with no figures, that
the figures are not given on this sheet furnished by the railroads, and
we didn't attempt to get the property investment account of these
other roads, because here later I am going to criticise their accounts.
There is one mistake on Exhibit B that I should like to call to the
attention of the committee. The Lehigh & Hudson River, which is
the second line below the Lehigh Coal & Navigation Co., should be
indented identically with the Lehigh & New England, because the
Lehigh & Hudson River is 38 per cent controlled by the Lehigh Coal
& Navigation Co.
560
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
The same criticism applies to the Utah Copper Co. The earnings
of that company are not shown; and the Cherokee Construction Co.'s
earnings are not shown.
sir.
Mr. SANDERS. But the Midland Valley is shown.
Mr. WARNE. The Midland Valley is taken from this sheet; yes,
Now, another very important grouping that has a very serious re-
lation to earnings are roads that are in the hands of receivers. In
the wage movements we have come to call these roads the "red
roads" because in our first experience in wage arbitrations we had
sheets, similar to this printed by the railroads with all the roads.
showing deficits written in red, and when we began to separate the
red roads from the other roads we found in most cases they were all
in the hands of receivers. A road that is in the hands of a receiver
is not in a situation to be compared with the earnings of roads that
are absolutely separate and apart from a system in which those roads
may be apart, and which are operating under entirely different con-
ditions. In other words, the inclusion of these 27 roads which are
to-day-or have been until very recently-in the hands of receivers,
is in the earnings of other roads and the attempt to deduce an aver-
age from said earnings is not by any means a representation of the
situation. It simply means that these roads that are in the hands
of a receiver with low earnings force down the other roads in the
system that may have had very much higher earnings-do have much
higher earnings. For that reason we have grouped all the roads in
the hands of receivers in our Exhibit C.
Mr. ESCH. Of course now the Rock Island and the Pere Marquette
are out from under receiverships.
Mr. WARNE. You will find that the heading is "Roads recently or
at present in hands of receiver."
Mr. DECKER. In the hands of a receiver during a three-year
period.
Mr. WARNE. Nearly all of them have been in the hands of a re-
ceiver in the three-year period.
That left only 33 roads, which we have grouped as "Indeppendent
companies," meaning by "independent" that they are not related to
the other systems.
Mr. MONTAGUE. I noticed, Mr. Warne, that some very important
railway systems do not seem to be in these figures presented by Mr.
Thom.
Mr. WARNE. I should like to say that in going over these exhibits,
only by accident-I have not had time to compare these lists of
roads with all the important railroads in the United States to see if
any are omitted-but accidentally I did find that the Southern Rail-
way is not on this list.
Mr. MONTAGUE. Do you know what the total mileage of the South-
ern it?
Mr. WARNE. I don't have it in mind, but it is one of the biggest
systems of the South.
Mr. ESCH. Ten thousand miles.
Mr. WARNE. I mentioned that fact to a party in the presentation
of those figures, and he said that was a matter that if explained would
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
561
be to the advantage of the railroads. Well, of course, I am not here
to either plead to the advantage of the railroads or to plead against
the railroads, but the fact is that the Southern system is not mentioned.
on this table of statistics showing the earnings of the American rail-
roads; and without stating it as a fact-because, as I say, I have not
examined to find out-there may be other roads not on that list.
The CHAIRMAN. That is the sheet presented by the railroads?
Mr. WARNE. Yes, sir.
The CHAIRMAN. And the Southern is left out?
Mr. WARNE. Yes, sir; the Southern is out-not included.
Mr. SANDERS. I believe Mr. Thom said that the roads represented
there were about 86 per cent of the estimated mileage in the United
States.
Mr. WARNE. Now, in support of the contention that subsidiary
companies should be regarded in connection with the earnings in
relation to the earning companies, I might say this, that every day—
using "every day
every day" in a generalization-the subsidiary companies
are being taken over and merged into the parent company and be-
coming practically divisions of the roads. The New York Central,
the Pennsylvania, and the big systems in the last four or five years.
have merged into their holdings or parent company a great many of
these subsidiary companies. The same thing is true of the Union
Pacific, which has taken over the Oregon Short Line and the Oregon-
Washington Navigation Co.
Now before proceeding to the property investment account of the
railroads as presented in this table, I should like merely to emphasize
one point. Those familiar with the accounts of American railroads
know that there is absolutely no relation between operating income
and property investment account, as regards these two accounts-
technically. And I think that contention will be made by individuals
who will appear before you on this subject. But here is one thing
that must be kept in mind; the net operating income of any partic-
ular year of any railroad has had in mind the property investment
account and the capital obligation account of the railroad, for the
simple reason that through experience the managers of that road
know that at the end of the year they must have a certain amount
with which to meet the capital obligations and the property invest-
ment interests. And they have in mind during the entire operation
of the system during the 12 months the fact that at the end of those
12 months they must have a certain net operating income, because
they do have certain capital obligation accounts and certain property
investment accounts. So that as a matter of practice in American
railroads there is a very close relation between the property invest-
ment accounts, the capital obligation accounts, and the net operating
income.
Now an instance of that that will make it striking is the 1913 ad-
vance rate case. When the railroads started on that case the condi-
tions were bad and earnings were poor. Before the case came before
the Interstate Commerce Commission earnings jumped by leaps and
bounds, so that if the case had gone before the commission in 1914
the railroads would have shown larger net operating incomes than
any other year of their history. The reason they did not was be-
40958-18 -36
562
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
cause, seeing the operating income increasing very rapidly, they
began to put money into maintenance and equipment to such an ex-
tent that 1913 and 1914 figures represent larger investiments of
American railroads in their maintenance and equipment accounts
than any other single year in their history; and if those large sums
had not been turned into maintenance and equipment, the net operat-
ing income would have been the largest in that year of any year in
the history of American railroads.
Mr. DEWALT. May I ask a question right there? Has your in-
vestigation informed you as to whether or not the system adopted
by these various railroads-particularly the large trunk lines-is
similar in computing this property investment account?
Mr. WARNE. Since 1907 it is.
Mr. DEWALT. Now, one more question. What does your investiga-
tion show goes into that property investment account? I asked that
the other day of another witness.
Mr. WARNE. I am very much obliged to you. That is exactly the
point that I am going to take up now. I merely wanted to show the
fact that there is actually, in the practice of American railroads, a
relation between net operating income and property investment ac-
counts.
In general, the property investment account of the railroads is
the same as that of road and equipment of the commission. In their
reports of this Federal body, it is required of them that this account
shall include the accounting company's investment in road and equip-
ment-including that held under contract for purchase-in existence
at the date of the balance sheet. This requirement was first made
of the railroads in 1907 and the reports to the commission usually
show the accumulation of such investments up to that time and sub-
sequently. It is important, however, to recognize the fact that up
to June 30, 1907, the great majority of the American railroads did
not base their investment in road and equipment on cost.
Mr. William E. Hooper, associate editor of the Railway Age, in
his book Railroad Accounting, page 235, says:
The figures that were given were in most instances derived figures. A group
of men decided to build a railroad. They got together certain franchises,
options on right of way, etc. They then issued a certain amount of stock with
a nominal par value, and borrowed money, issuing bonds secured by a mortgage
or some other form of indenture on the property, which they turned over to
the company. When the books of the company were opened the property
which was turned over to it was entered on the debit side of the balance sheet
as the first asset, not at what it cost anybody in money but at a figure expressed
in dollars and cents, which corresponded with the nominal par value and face
value of the total securities issued.
In consequence of this method constructing a balance sheet that
was in common use by the American railroads up to 1907, the figures
reported by the roads to the commission as property investment,
necessarily contain errors of great importance.
It is with no desire to muck-rake or to criticize the railroads that
we call attention to these errors. Reference will not be made to all
of them in detail, but only a sufficient number of illustrations have
been selected to indicate to this committee the character of the prop-
erty investment account.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 563
The cost of construction as given by the books of the Baltimore &
Ohio Railroad is not probably of much significance, says the Inter-
state Commerce Commission in its report of the Advance Rate case
of 1910:
The system is made up of a great number of smaller properties constructed
as independent lines? According to our understanding the cost of construction,
as shown by the books of the Baltimore & Ohio, is simply an aggregate of that
shown by the books of these subsidiary companies and under the circumstances
could hardly represent the actual fact.
In 1899 the Baltimore & Ohio was reorganized and taken out of
the hands of the receivers. Says the commission:
There is nothing before us to show the terms of the reorganization. There
was no foreclosure sale, and whatever was done in the matter of changing or
scaling securities was by agreement. It does not appear what the $152 000,000
of common stock actually represents, nor what it cost the owners of that stock,
by the terms of the reorganization. The capital account materially exceeds the
cost of production, as shown by the books of the company, and the per mile
capitalization strikes us as rather high.
The commission further says:
The Cincinnati, Hamilton & Dayton, located in a territory of constantly
growing traffic, was mismanaged by financiers and was exploited by them for
speculative purposes during several years prior to 1905 when it was placed in
the hands of receivers. The receivership was not closed until in 1909, when the
Baltimore & Ohio Railroad Co. was induced to assume control of the Cincin-
nati, Hamilton & Dayton. This involved advances by it in cash aggregating ap-'
proximately $22,000,000 to meet the maturing notes and current needs of the
Cincinnati, Hamilton & Dayton; it also involved the guaranty by the Baltimore
& Ohio of a large part of the inflated securities of that company. The sums so
advanced have been carried in the accounts of the Baltimore & Ohio as assets,
and, until the fiscal year 1913, the interest due on the advances was credited to
the income account of the Baltimore & Ohio. The consequences to its income
and surplus from this unfortunate alliance are therefore not shown in the
annual reports of the Baltimore & Ohio to its stockholders or in its reports to
this commission. Nor do they appear in the statistics offered by the Baltimore
& Ohio in this proceeding-referring to the 1914 Advance Rate case-to show
its need of greater revenues. The burden proved, however, to be so great that
the management of the Baltimore & Ohio recently determined to withdraw its
aid, and the Cincinnati, Hamilton & Dayton has again passed into the hands
of receivers. The income account of the Baltimore & Ohio for 1914 will begin
to show this drain,
The Interstate Commerce Commission, although unable to secure
complete information of the financial affairs of the Louisville &
Nashville, nevertheless feels itself justified by the facts of which it
does have knowledge, to state officially that the cost of road account
of this company "is heavily burdened with charges which do not
represent actual construction cost."
From incomplete information it is concluded that, "at least
$16,000,000 shown in the cost of road account, covers items which
should not be charged as a part of the costs of this carrier's road."
A stock dividend of 100 per cent was declared by the Louisville &
Nashville on October 6, 1880. According to a corporate history of
this railroad, which was found in its office, 10 stock dividends were
declared by this company between 1860 and 1891. To make possible
the stock dividend of 100 per cent referred to, the amount of surplus
was arbitrarily increased by raising the book value of certain assets.
1
564 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
#
The commission states that permanent improvements on the Louis-
ville and Nashville have, in the past, to a large extent, been made out
of earnings and subsequently charged to the capital account. (See
Interstate Commerce Commission report on financial relations of
the Louisville & Nashville Railroad Co., p. 170.)
It seems appropriate at this point to call attention to certain facts
incident to the issuance of capital stock and the acquisition of prop-
erty by the Nashville, Chattanooga & St. Louis, a subsidiary of the
Louisville & Nashville. The issued capital stock of this carrier, says
the commission, amounts to $16,000,000, par value; of which
$15,984,787.50, par value, is outstanding. It appears that cash aggre-
gating only about $9,831,840.77 was received for this stock, while an
amount exceeding $8,107,398.50 was given to stockholders in the form
of stock dividends and by the sale of stock at prices below par and
also below market value. Included in this amount is the stock divi-
dend of 200 per cent on the outstanding capital. The dividend as
originally declared amounted to $4,324,032.96, which was charged to
the carrier's property investment account as an offset to the carrier's
liability for stock issued from which no funds were derived.
We do not desire to burden this committee with a recital of all the
individual and particular acts of the railroads that have tended to
make their present property investment of little value in determining
fair and just earnings. The history of American railroads is replete
with such transactions. If the committee so desires, however, in-
numerable other illustrations can be submitted from the records of
the New York Central, the Erie, the Pennsylvania, the New Haven,
the Chicago & Alton, the Rock Island, the St. Louis & San Francisco,
the Pere Marquette, and so on.
Mr. DEWALT. Now, Mr. Warne, does that condition still exist?
Mr. WARNE. Yes, sir; and I will tell you why directly.
Let me next explain the successive steps in the development of the
authority of the Interstate Commerce Commission to deal with ac-
counting practices of interstate carriers. These are described in the
report of the commission in the St. Paul and Puget Sound cases,
No. 933, 29 I. C. C., 508–510.
As originally enacted the act to regulate commerce required inter-
state carriers to file annual reports with the commission covering
specifically defined items. It also provided that the commission, in
its discretion, might prescribe a uniform system of accounts for
carriers subject to its jurisdiction. But the act contained no provi-
sion for the enforcement of the orders of the commission in such mat-
ters. This defect was remedied by the amendment of 1906, which not
only prescribed penalties for the violation of the rules and regula-
tions of the commission but established a process by mandamus for
enforcing its orders. It also provided for a force of examiners.
having authority to inspect the accounts, records, and memoranda
of carriers. This gave to section 20 a vitality that was theretofore
lacking and put the commission in a position effectively to administer
the law respecting the accounts of interstate carriers. Says the com-
mission:
Beginning with the year 1888 the steam railroads were required to render
annual statistical reports of their operations on blanks provided for the purpose
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
565
by the commission. So far as mere form was concerned these reports were
therefore uniform. They did not inspire public confidence, however, because the
commission, as just stated, was then without effective authority for the en-
forcement of any accounting rules had such rules been promulgated. It is true
that classifications of operating expenses were issued in 1888 and reissued in
revised form in 1892. There was also a classification of expenditures for
construction. But those classifications were not issued under order, and all the
commission could do to secure their observance was to request the carriers to
comply with them, in order, so far as possible, to secure uniformity in their
reports to the commission.
Immediately after these defects in the act were corrected by the Hepburn
amendment of 1906, the commission entered actively upon the work of formu-
lating a system of accounts for steam railroads. The cooperation of the rail-
roads through their association of accounting officers was enlisted, and the
result was that three important classifications were issued under an order of the
commission on June 3, 1907, to become effective on July 1 following. These
were the classifications of operating expenses, the classification of operating
revenues, and the classification of road and equipment expenditures.
It is not our purpose here to discuss the principles underlying these classifica-
tions. It will suffice to say that one of the points in greatest need of regula-
tion from an economic point of view, as disclosed by previous delinquences in
the accounting of railroad companies, was the drawing of a direct line between
expenditures for property and expenditures for operation. The need of such
a distinction in railroad accounts is elementary; nevertheless, all students of
railroad economics are well aware of the fact that, prior to 1907, when the
commission was given real power to control such matters, the accounts of car-
riers in many cases were influenced more by other considerations than by a
desire to reflect the actual facts. A financially strong road making large net
earnings would not hesitate to conceal the facts by adding to its operating-
expense accounts sums dispersed in improving property; on the other hand, a
financially weak road, seeking to enhance its credit by a good showing of
operating results, would include its its property accounts sums expended in
operation. The result was that a carrier's annual and monthly statements of
net revenue often reflected nothing more than the particular showing desired
by its executive. These reports were often used, for speculative purposes, and
the stockholders and the general public were left without any assurance as to
whether the dividends declared were paid from income or surplus or out of
capital.
A correct statement of the property account of a carrier is of scarcely less
importance than a correct statement of its expenditures for operation. It is
our undersanding that prior to 1907, when the commission had no efficient
control over such matters, the accounts representing the cost of road of many
steam railway companies had substantially no real significance, except as they
demonstrated the utter disregard of all accounting principles. As a rule they
represented neither investments nor assets. Although described as cost of road
and equipment," they frequently bore no relation whatever to cost. They often
included at par value large amounts of stock issued as premiums to promotors
and investors in bonds or held in the treasury of the issuing company, in the
hope that the future growth of the company's traffic, or the exigencies of corpo-
rate control, might give them some value. But in promulgating its classification
of expenditures for road and equipment in 1907, at which time the commission
was given effective authority to prescribe a system of accounts and to enforce
its observance, the fundamental rule laid down by the commission was that all
entries in the accounts of a carrier under that head should be in terms of cash
only, thus showing what it cost to create the property at 100 cents on the
dollar. The general basis for the rule was that a correct statement of the
investment is the beginning of correct accounting; and this sound principle
gives us a balance-sheet statement of cost that is a record of the actual invest-
ment.
Mr. PLUMB. May I ask you there, were the accounts prior to 1907
rewritten on this new basis, or were the accounts accepted as of 1907
and then continued on the basis of the showing of actual investment.?
566 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. WARNE. The accounts were accepted on the basis of 1907.
They didn't go back and rewrite them:
Notwithstanding this more rigid control of the accounts of the car-
riers, there have been important instances of serious departures from
its accounting regulations. One of these was the Chicago, Milwaukee
& St. Paul and its subsidiary, the Chicago, Milwaukee & Puget
Sound, reported upon by the commission.
Now, we have had in history-not very recent history-an exact
duplication of what this committee is called upon to pass judgment
upon, and the Interstate Commerce Commission has officially passed
upon exactly this kind of material that this committee is called upon
to pass upon; and because of that fact and because of its importance,
I am going to call your attention to what is known as the Anthracite
Carriers' Case, technically known as 4914, In the Matter of Rates,
Practices, Rules, and Regulations Governing the Transportation of
Anthracite Coal (35 I. C. C.), the carriers submitted statistics show-
ing their alleged investments in road and equipment and in working
capital, their net operating income, and the ratios of net operating
income to this alleged investment for a number of years, just as they
have done in the present instance before this committee. The report
of the commission said:
Most of the large railway systems of this country were made up by consoli-
dating and merging many lines of railway which started as independent com-
panies. Other lines came under the control and domination of an operating
company at fixed rents or rates of compensation payable on their securities by
the operating company. The tendency has been for the great systems to acquire
control of their poorly placed, indifferently operated, or isolated feeders or
competitors not at their original cost but at a cost either higher or lower than
the constructive cost. They have often been purchased at receivers' sales for
much less than their original cost and the loss was borne by the original
investors.
The investment shown in the carriers' statements does not represent cost of
property nor an approximate figure of cost, so we will dismiss from further
consideration the questions as to the cost of the properties to the operating
company or the present owners.
At the outset of this inquiry, in December, 1912, the commission endeavored
to ascertain from the carriers the cost of the properties used by these carriers
in their operations, but we were informed by the several carriers in January,
1913, that their books did not contain that information, and not one of them
was in a position to show the cost of their property. The reasons advanced for
this were that the construction books of the original lines were not in the
possession of the present operating companies, and that the figures in the old
books were not translatable into the cost of property as defined in the present
classification of accounts, as well as many other reasons showing the impossi-
bility of ascertaining property costs.
In the Five Per Cent Case (31 I. C. C., 351) we expressed our dissatisfaction
with the property investment as presented by the carriers. The figures pre-
sented in that case included the property investments of the several respond-
ens in the present case. During the proceedings in this case we decided to
ascertain, so far as it was possible without unduly delaying the determination
of this case, the character of the property investment as presented by these
carriers. We directed the commission's examiners to make a brief examina-
tion of the carriers' books and ascertain, so far as it was possible, the charac-
ter of the costs submitted to us as representative of property costs. The re-
sults of these examinations made during the hearings show that the statement
of Reading Railway property costs contained items aggregating $38,000,000
which represented operating deficits, bonus stock issued, arbitrary write-ups of
road accounts, cost of securities which apparently had no value but which were
charged off to road account, and similar items which had been included in the
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
567
book accounts of the property costs, all of which inflated the cost of road and
equipment as shown in the carriers' books, but did not actually represent ex-
penditures for road and equipment. Most of these items were included in the
road prior to 1907. Obviously, present-day rates should not be expected to
earn a return on property costs inflated by the inclusion of such items. Other
amounts included in cost of road as shown by "road accounts were: For the
Pennsylvania, cost of coal-producing lands, $1,642,149, on which no income has
been receievd in recent years, and bonus stock, $1,565,527; for the Lackawanna,
bonus stock, $426,355, discounts and commission on securities, $795,329; for
the Central Railroad of New Jersey, an arbitrary write-up of cost of road,
$2,757,643. As the carriers, by amended exhibits or upon their briefs, have
adopted these reductions from their property costs, and as a reduction of
$33,000,000 has been made in the cost of the property of the New York, Ontario
& Western Railway, the property costs in the instant case differ from the
property costs presented in the Five Per Cent Case. In the Five Per Cent Case
(32 I. C. C., 328) we stated that the property investment accounts as now
standing on the books of the carriers can not be accepted as accurately repre-
senting the fair value of their property devoted to serving the public.
The evidence shows that the road account, now designated "cost of road,”
was used prior to 1907 as a general clearing account into which was charged
valueless and uncollectible items and liabilities which could not conveniently
be absorbed into other accounts.
Property costs deduced from the old books of these carriers are not reliable.
The fault is back of the books. This is well illustrated by the cost of construc-
tion of the Port Reading Railroad, which the carriers' experts have ascertained
from its books to have been $3,025,000. This railroad is of recent construction,
being completed in the year 1894. The commission's examiners found, by
their review of the construction contracts and records, that the actual cost of
constructing this railroad was $1,525,000, and that the book cost included
$1,500,000 representing a bonus payment in securities to the construction com-
pany. Such practices were so prevalent in railroad construction in former
years that we must regard property costs deduced from the old books as very
unreliable.
Says the annual report of the Interstate Commerce Commission
(pages 75-76):
The balance sheet is, perhaps, the most important of the statements that may
be drawn from the accounts of corporations, for, if correctly drawn, it contains
not only a classified statement of corporate assets and corprate liabilities, but
it provides in the balance that is to say, the "profit and loss "-a quick and
trustworthy measure of the success that has attended the operation and man-
agement of the property. Every balance sheet begins with "cost of property,'
against which is set a figure which purports to stand for the investment. This
is no place to enter upon an extended criticism of the practice of American
railways in the matter of their property accounts, nor is such a criticism neces-
sary for the purpose in hand. It is sufficient to refer to the well-known fact
that no court or commission or accountant or financial writer, would for a
moment consider that the present balance-sheet statement purporting to give
the "cost of property" suggests, even in a remote degree, a reliable measure
either of money invested or of present value. Thus, at the first touch of
critical analysis the balance sheets published by American railways are found
to be inadequate. They are incapable of rendering the service which may
rightly be demanded of them.
•
The construction accounts promulgated by the commission lay
down the rule that all charges to property should be the money
value and not the debt value of the transactions recorded. This means
that so far as construction accounts are controlled by the commis-
sion's orders, the "cost of property," which is the first item on the
asset side of the balance sheet, must be the cost in money and not the
cost in debt. "The beneficial effect of this rule," says the commission
in its annual report, "is limited by the fact that the jurisdiction of
568 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
the commission does not extend to construction companies, nor does
there seem to be any feasible means, without further legislation, of
controlling charges to the property accounts of a carrier which rep-
resent a lump sum for the purchase of constructed properties."
The accounting rule promulgated by the commission further pro-
vided that all additions and betterments, regardless of the source
from which the money to pay for such additions and betterments
may be derived, shall be made a charge to the property account.
The purpose of this rule is to prevent the accumulation of what
have sometimes been called "secret reserves," and thus obviate the
danger of having these reserves restored to the books at some future
time and made the basis of speculative manipulations. This was
not the practice prior to 1907.
The present accounting orders of the commission also require that
all additions and betterments paid for out of revenues rather than
from the proceeds of securities sold should be set up on the liability
side of the balance sheet as a specific item. But this was not the
practice prior to 1907. This rule does not decide, but it at least raises
the question of the equity in value of such improvements. "Is this
an equity of the stockholder or of the public?" inquires the com-
mission.
The railroads are now required to state in their statistical returns
to the commission the cost of their properties. If this account were
correctly kept it would show the money expended from the first in
building and equipping the railroad.
Mr. DEWALT. Now, I would like to understand this point. It is
not clear in my mind. In response to a question of Mr. Plumb, I
understood you to say that the accounts as tabulated prior to 1907
were still continued as a basis for the accounts after 1907. Am I
correct in that?
Mr. WARNE. That is true. In other words, if the railroad reported
a property investment account in 1907 as $10,000,000 and to-day it is
$15,000,000 the $10,000,000 is still there. The $5,000,000 is new
investment.
Mr. DEWALT. And you allege now that the $5,000,000 is a fair
representation of what the actual investment in property since
1907 is?
Mr. WARNE. Yes.
Mr. DEWALT. But prior to that time it is all subject to this adverse
criticism?
Mr. WARNE. Exactly; yes, sir.
Now, the commission says, in referring to this building and equip-
ment of road (this is in the commission's report No. 3400, Advance
in Rates, Eastern Case, pp. 257–259):
In point of fact this item is not reliable. The present railroad systems in
official classification territory have usually been formed by the combination of
a large number of smaller railroads, which were built as independent prop-
erties. The Baltimore & Ohio system, for example, embraces more than 100
such properties. The only information which the present system has of the
original cost of construction is that derived from the books of the various
companies which have been absorbed. These books were seldom accurately
kept and often represent as money what was, in fact, something else.
beginnings of this account, therefore, are very imperfect and unreliable.
The
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 569
I might just take time enough to say that if the committee has a
desire to find what the difference is between the actual investment
in some of these properties and the investment as represented by the
statistics of the railroads they will find, I believe, by communicating
with the Interstate Commerce Commission approximately 10 roads
have been examined by the commission, and you can probably find
the difference between the property investment of those accounts as
reported by the roads therein and the actual property investment in
those roads as found by the commission.
The CHAIRMAN. We are very much obliged to you, Mr. Warne.
Now, gentlemen, to-morrow Mr. Cowan, representing the live-
stock associations of the West, will appear before the committee;
and Mr. Prouty, former Interstate Commerce Commissioner, now
director of the valuation work of the commission, will appear. Now,
I don't know whether those New Orleans people will be here to-mor-
row or not.
Mr. SANDERS. I think they will be here to-morrow.
Mr. BARKLEY. I want to ask Mr. Plumb one question before we
adjourn. You stated that as a lawyer you would advise the employees
that the Federal Employees Commission had no authority to include
them within the provisions of the act of 1916. Have you given any
thought to the propriety of this language in the bill as it is, giving the
President authority to cover them in if it should become necessary?
Mr. PLUMB. Yes; I gave a great deal of thought to that.
Mr. BARKLEY. I would like to have your view about that.
Mr. PLUMB. We have not yet been informed whether we are to be
considered as Federal employees or employees of the corporations.
Until that question is absolutely determined and we know whether
we are still employees of private corporations or whether we are now
employees of the Federal Government it would be impossible to decide
the question you have asked.
Mr. MONTAGUE. You are now in the twilight zone?
Mr. PLUMB. Yes; and now we will step out of the twilight zone and
assume that we are Federal employees. I am informed that an
amendment has been drafted which will be submitted by the ad-
ministration adequately covering that proposition.
Mr. BARKLEY. I was going to ask you whether you thought it
would be a good idea to put something in this bill, either saying that
they are or are not Government employees.
Mr. PLUMB. I think that should be a definite declaration, so that
there can be no possibility of doubt; but I wouldn't think it would
be wise to encumber this bill by adding to it provisions for employees'
compensation.
The CHAIRMAN. It has been suggested that Mr. McAdoo be re-
quested to appear before the committee at 10.30 o'clock to-morrow
morning, and the committee will now stand adjourned until that
time.
(Whereupon, at 4.15 o'clock p. m., the committee adjourned until
10.30 o'clock a. m., Wednesday, January 23, 1918.)
570 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE,
HOUSE OF REPRESENTATIVES,
Wednesday, January 23, 1918.
The committee met at 10.30 o'clock a. m., Hon. Thetus W. Sims
(chairman) presiding.
The CHAIRMAN. The committee will please come to order.
Mr. Secretary, you may take your own method of presenting your
views to the committee on the bill before us.
STATEMENT OF HON. W. G. McADOO, DIRECTOR GENERAL OF
RAILROADS.
Mr. McADOO. May I ask, Mr. Chairman, if there are any par-
ticular points upon which you wish me to speak?
The CHAIRMAN. Well, when Mr. Anderson was before the com-
mittee and questions were asked him in reference to the appropria-
tion provided, and the financial features and maturing obligations,
he said that you would discuss those features. So I suppose that is
something we might say was left specially for you to discuss, but the
committee will be glad to hear from you on any part of the bill.
Mr. STEPHENS. I would like to hear from you especially on sec-
tion 13, Mr. Secretary, when you get to it.
Mr. McADOO. I asked the question merely because you have had
so much testimony that I didn't want to repeat anything that you
have already heard, and I do not want to encumber the record with
unnecessary matters.
The CHAIRMAN. Well, naturally, I suppose that the compensation
feature of the bill, the standard return, and features of that kind are
things that the committee would like to hear you on.
Mr. McADOO. Addressing myself to your question about the ap-
propriation that this bill carries, I should like to say that the pur-
pose of that, as indicated in the bill, is to provide a sufficient fund
out of which any deficiency that may arise from the guaranty the
Government gives-whatever that guaranty may be may be best.
I am hopeful that no deficiency will result. I am expressing a hope,
of course, when I say that. It may be possible, through economies
that can be practiced under combined and coordinated operation of
the railroads of the country, to overcome any advances that may
have to be made in wages and in the extra cost of material and sup-
plies, due to the very high prices prevailing throughout the country.
I again say I express that hope, and I think there are good grounds
for that hope.
Furthermore, since we shall compensate the railroads under the
proposed plan-if that should be carried out as the result of the
action of Congress-upon a basis which shows that the railroads
earned in the last fiscal year-that is, the fiscal year ending June 30,
1917-approximately $100,000,000 more than the proposed guaranty,
it seems to me that there is a reasonable expectation that no deficiency
may arise under the proposed guaranty; so that we probably shall
not have to resort to the fund to make good a deficiency. However,
it is essential that a fund should be provided to meet a deficiency
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
571
#
if it should arise. This is the first purpose of the $500,000,000 ap-
propriation.
The second purpose is to have a fund from which essential im-
provements and betterments may be made during the time of gov-
ernmental control, and from which also essential equipment may be
bought. I do not know how much will be required to provide for
such improvements, extensions, and equipment. That will have rela-
tion to the period of such control, and that, in the very nature of
things, is indefinite.
Mr. Escн. Mr. Secretary, right in that connection, very early in
this month, you requested Commissioner Daniels to telegraph all the
railroad executives as to the returns that they would need to meet
maturities and betterments. Have those figures come in so that they
could be laid before the committee?
Mr. McADOO. No; we have not received those reports yet. Neces-
sarily that will take a reasonable amount of time, but as soon as those
figures come in I shall be glad to submit them.
Mr. JOHN BARTON PAYNE. They will be at your service in a day or
two.
Mr. McADOO. As soon as they are received we will submit them.
In the meantime I have figures here that will give you the problem
in its general aspects.
I have stated that the control was of necessity indefinite, because
regardless of any legislation that Congress may enact, we can not
estimate the duration of the war. If it continues for two or three
years it would mean the amount the Government would have to ex-
pend in improvements and betterments, equipment, etc., would have
to cover that length of time-assuming the control lasts that long-
and I assume that it undoubtedly will.
1
Now, with respect to the improvements and betterments that may
be needed, I should like to submit a statement of the expenditures
made by the railroads, themselves for the last five years, each year
ending June 30. Beginning with 1912, the annual increase in prop-
erty investment, as shown by the railroads in their reports to the
Interstate Commerce Commission, was $477,000,000, in round num-
bers. I will omit the thousands. In the year 1913 it was $600,-
000,000; in 1914, $550,000,000; in 1915, $263,000,000; in 1916, $281,-
000,000. For the fiscal year ended June 30, 1917, I have no figures.
You will observe that for 1915 and 1916 the amount expended each
year by the railroads in improvements, etc., was about half the
amount expended annually theretofore, and that those decreased ex-
penditures were at a time when the business of the railroads was
increasing very greatly. I present these figures because I think they
have great significance, and give us a line upon the probable demands
to be made upon the Government while it is in control of the
properties.
If the expenditures to be made by the Government shall amount
to $500,000,000 in the next fiscal year, then, of course, this fund would
be entirely absorbed and we should have to return to the Congress
for an additional appropriation. I am in hopes, however, that it
will not be necessary to make expenditures in excess of the amount
suggested in the bill, and that it will be sufficient as a basis of work-
572
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
ing credit and working capital, and as a general fund for all these
purposes to carry these railroads for the next 12 months at any rate.
In any event, I wish to say that the appropriation is not too large,
and I have felt that it was the minimum that we ought to begin with.
Mr. BARKLEY. You suggest that the $500,000,000 might cover the
amount for betterments and improvements in addition to the normal
replacements that might be expected to be made out of current reve-
nues of the railroads themselves?
Mr. McADOO. Yes; that is exactly what I had in mind.
Mr. BARKLEY. In other words, this $500,000,000 is to cover what
the Government itself shall authorize or do?
Mr. McADOO. Might do; yes.
Mr. ESCH. Do you anticipate any considerable additions to the
$500,000,000 out of surplus or profits?
Mr. McADOO. I hope that we can show profits. Certainly every
effort will be made, consistent with good management and with the
public interests, to make the roads earn a surplus. Naturally we
want to do that, but I have not felt that we ought to rely too much
upon that possibility. If that is in the situation, it will be developed.
If it, does not develop, we must be prepared to act without reference
to it.
This fund also is intended to be available for assistance to any
railroads which the Government takes over which are now in the
hands of receivers or which are so placed that they need credit to
put themselves in good condition again. There are some such prop-
erties, and, as you will recall, the provision of the bill authorizes the
use of this appropriation-or such amount of it as may be neces-
sary to purchase securities or to extend credit to railroads that
may be reorganized.
Then, again the railroad companies have maturing obligations.
for the next three years. I have an approximate estimate of the
amount of such maturing obligations. They stand in another class.
Those are obligations already outstanding and maturing this year.
Some of them are for equipment. Some are for bonds secured by
liens upon the property. Some are bonds that were issued perhaps
20 years ago and are just maturing now. I will give a statement of
those.
For 1918 the estimate is that the maturing obligations of the
railroads total $222,000,000. Of that amount, $57,000,000-omitting
the thousands-represent equipment trust and $164,000,000 other
obligations.
In 1919 the total is $228,000,000, of which $14,000,000 represents
equipment trust and $83,000,000 other obligations.
In 1920 the total is $215,000,000, of which $39,000,000 represents
equipment trust and $175,000,000 other obligations.
Now, with respect to those maturities, I believe that the railroad
companies themselves will be able to do their own financing, pro-
vided, of course, they have a guaranty from the Government which
is sufficient to supply them with the means of protecting the interest
on their obligations and to take care of their ordinary charges. I
think their credit will be so improved that they ought to be able to
take care of those debts themselves in large part and that it will not
be necessary to report to this fund to any considerable extent in any
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
573
case. If it should be necessary, the Government ought to be in a
position to help them protect their credit. I assume that a railroad
company which has a first-mortgage bond maturing this year which
is secured by a lien upon railroad tracks, terminals, etc., worth many
times the amount of the indebtedness will have no difficulty in re-
funding that obligation, and I think they ought to be encouraged
to refund them if there is no other way in which the debt can be
provided-I mean if they have no sinking funds or assets from
which the debt can be paid.
So I feel that as to these maturities the Government probably
will have to extend very little assistance.
That, in general, is the use to which that $500,000,000 appropria-
tion will be devoted.
The CHAIRMAN. Now, Mr. Director, if I understand it, it is not
contemplated that any portion of that $500,000,000 or other Gov-
ernment aid will be a loss to the Government? It is practically a
loan to the railroads until such times as they can replace it to the
extent that may be necessary to use it?
Mr. McADOO. Of course the funds will be employed in such im-
provements and betterments as will, I hope, be repaid. And I think
that can be worked out, except to this extent: Wherever the money
must be expended upon a character of improvement or additions
which are valuable only for war purposes, and be of no value when
peace is restored, I think the Government would have to absorb that
loss. But wherever improvements are of value to the railroads, un-
doubtedly the Government will be reimbursed for them.
Mr. BARKLEY. Do you think the taking over of the roads by the
Government does not necessarily interfere with the railroads them-
selves making such arrangements as to take care of their maturing
obligations as they would have made if the Government had not taken
them over?
Mr. McADOO. I think not.
Mr. BARKLEY. Is it not to be presumed that the stability that may
be produced in the stock market, or the value of their obligations, by
reason of this guaranty, may rather aid them in doing that?
Mr. McADOO. I think so; and that is just what I have said. I
think their credit will be so stabilized and improved, once this guar-
anty is given, that they ought to be able to take care of these matur-
ing obligations. Of course the Government will cooperate with the
railroads in bringing about that result. We will assist them in every
way we can.
And I may say in that connection that of course the Government's
own finances must be protected. We must engage in operations
upon such a colossal scale while this war continues that it is very
important that we should have a very considerable control over all
the capital expenditures of the country, and of course the railroads
would have to consult the railroad administration about the manner
in which these maturing obligations should be dealt with.
Mr. MONTAGUE. Mr. Secretary, these obligations would not be re-
newed by the railroads without the approval of the Government?
Mr. McADOO. I think in some instances they could be, Mr. Mon-
tague. For instance, suppose we take the Richmond, Fredericksburgh
& Potomac-and I take it merely as an illustration-suppose it had
· 574
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
a million-dollar bonded indebtedness secured by lien upon the main
line of that road, maturing this year on a mortgage issued 20 years
ago. I think that they could renew that mortgage without any
action on the part of the Government. The Government is merely
in possession of the physical property and operating it and control-
ling it at present.
Mr. MONTAGUE. Without consultation with the authorities of the
Government?.
Mr. McADOO. I think they are entitled to protect their credit to
that extent. It would not alter the status so far as the Government
is concerned, but of course they would consult the railroad adminis-
tration.
Mr. DEWALT. Mr. Secretary, referring to page 2 of the bill, lines
19, 20, 21, 22, and 23-" during the period of such Federal control
adequate depreciation and maintenance of the properties of the car-
riers shall be included as a part of the operating expenses or pro-
vided through a reserve fund, in accordance with such principles and
rules as shall be determined by the President.'
""
Now your section-I say "your" section-section 6 of the bill
provides the sum of $500,000,000, which is in part to be devoted for
the provision of terminals, improvements, engines, rolling stock, and
other necessary equipment; such terminals, improvements, and equip-
ment to be used and accounted for as the President may direct. Con-
struing those two clauses together or separately, as you choose-
what relation has this reserve fund, if any, to this $500,000,000, and
how is this reserve fund to be created?
Mr. McADOO. That has no relation to the $500,000,000 fund what-
That is a reserve to be created out of earnings.
ever.
Mr. DEWALT. And yet it is to be devoted in part to maintenance,
and do you consider that terminals, improvements, engines, rolling
stock, etc., would be maintenance?
Mr. McADOO. No; I think only to the extent of replacement-roll-
ing stock and equipment.
Mr. DEWALT. It would have no relation at all to reserve fund?
Mr. McADOO. None; and it was not so intended. It is intended to
apply to equipment over and above the usual and necessary replace-
ments that become a part of the operating expenses.
Now you wished me to speak about section 13, was it?
The CHAIRMAN. That is the last question.
Mr. BARKLEY. Before you get to that, Mr. Secretary, I would like
to ask your opinion about a feature of the question which does not
occur in he bill at all, and which has developed here in the discus-
sion. Perhaps it has been raised collaterally and may not have any
direct bearing upon what ought to be in the bill, but it has naturally
arisen by reason of the Government control. The question is whether
the railroad employees by the taking over of the railroads become
Government employees, and whether the revenues of the railroads
become Government money and therefore must go through the Treas-
ury to be appropriated by Congress, and whether the bill ought in
some way to stipulate the status of the railroad employees and the
railroad earnings with reference to this matter. I would like to
get your views on that if you have thought it out.
Mr. McADOO. The way that stands in my mind is this: The Gov-
ernment has not taken permanent possession, so far as any authoriza-
FEDERAL OPERATION OF KANSPOL, 1ATION SYSTEMS. 575
tion is concerned, and may never take permanent possession. That
is to be determined by Congress in the future. But it has not taken
permanent possession of these properties now; it has taken them.
under an act which authorizes it for war purposes. It, therefore, is
of course anticipated, as things stand, that the properties will be
returned to the owners after that emergency is ended, or within such
time as Congress may prescribe. Now the proclamation of the Presi-
dent provides specifically that the operation of the railroads shall
be continued under the management of the boards of directors and
officers of the different corporations until the Director General shall
otherwise provide. I think it is important that the railroad man-
agements of the different companies shall continue in the responsi-
bility of operating the properties-of course under the direction of
the Federal control-and for such length of time as may be necessary
to demonstrate whether that is the best thing to do or that some other
thing is better to do.
The railroad corporations, therefore-the corporate manage-
ments are operating these properties now for the benefit of the
Government, and I think the legal status of these employees with
respect to the corporations has not been altered. They are employing
them just as heretofore. The agreements between the employees and
the corporations stand just as they did before, and they are operating
under precisely the same conditions. All of that is being done, it is
true, for Government account, but I think-and I am merely express-
ing an opinion-there may be a legal question involved here, and
I don't attempt to pass upon that-that while the employees and the
officers are in effect Government employees, they are not technically
so. I think that if we had to operate the 250,000 miles of railroad
in the United States, with all the infinite detail involved, and carry
every employee directly upon the Government pay rolls as a Federal
employee, and then subject all the accounting of these railroads to
the Federal Treasury system of accounting-which was not designed
to meet a situation of this kind at all-it would lead, perhaps, to
very great confusion and difficulty. I believe that question will solve
itself. I think it is not going to cause any trouble or inconvenience.
Mr. BARKLEY. The question was raised by a provision here of the
bill which authorizes the President to place all the railway employees
within the employees' compensation act if he should see fit to do so.
The Federal Compensation Commission by resolution of its own has
already covered them in by assuming authority over them. Of
course I think they did that without mature deliberation, but if later
the courts should hold that they had the authority to do that, and
that they were actually Government employees, I was wondering what
sort of confusion might arise by reason of there being no legislative
provision on the subject at all.
Mr. McADOO. I think that provision of the bill ought to be amended.
As a result of the discussion before this committee and the Senate
committee-we have evolved a suggested substitute for section 9.
May I read it?
Mr. BARKLEY. I wish you would.
Mr. McADOO (reading):
The President may prescribe a reasonable system and schedule of compen-
sation for the disability or death resulting from an injury occurring or that
may have occurred at any time after the beginning of such Federal control and
576
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
sustained in the course of employment by a person employed either directly
by the United States or indirectly through such carrier in connection with
such Federal control and operation; and may likewise prescribe the means and
methods for the administration of such system and the determination and
adjustment of any claim for such compensation and the payment thereof, as
well as the expenses of the administration thereof, out of the operating rev-
enues derived from the Federal operation of the carrier, out of any reserve fund
or funds created therefrom. The President may from time to time revise and
modify such system, schedule, means, and method. He may in his discretion
transfer the administration thereof to the United States Employees Compensa-
tion Commission. The rights and remedies so provided shall exclude all other
rights and remedies of the person injured, his personal representatives and
dependents or next of kin, either at common law or by statute, whether Fed-
eral or State, against either the carrier or the United States on account of
such injury or on account of the disability or death resulting therefrom.
The President may further prescribe that a reserve fund or funds shall be
created to be charged to operating expenses for the commuted value of any and
all claims for compensation allowed or accrued during such Federal control.
I think that some such amendment as that would be desirable, and
I think it puts the matter in a way where a satisfactory solution can
be had. I do not think that the status of these employees in respect
to compensation ought to be left in any uncertain condition.
Mr. BARKLEY. Do you believe that if that amendment should be
adopted, that so long as the President did not see fit to exercise the
authority conferred upon him the employees remain in the status
which they occupied prior to the taking over?
Mr. McADOo. I think so.
Mr. BARKLEY. They have their legal remedies just as they have
always had, so long as the President does not by proclamation make
provision for them?
Mr. McADOO. Precisely. And the President's proclamation, I think,
fixes that very clearly.
Mr. WINSLOW. Mr. Director General, the report has long been
abroad and I should feel from my own experience was rather
growing rapidly-that the railroad employees, on the strength of
being taken over and made Government employees, were growing
lax in the discharge of their duties. If that is true-or even if it is
not true-wouldn't it be well in the interests of the public and for
the well-being of the railroad operatives to have that point deter-
mined as soon as possible, in order that everybody might know
whether or not the employees were those directly under the control
of the Government or under the control of the railroads?
1
Mr. McADOO. I think the status is pretty clear as it is, Mr. Wins-
low. I don't believe there is any laxity of the kind you describe. I
have had occasion to look into that somewhat carefully, and my
reports do not confirm it. I think that immediately following the
proclamation there was doubt in the minds of officers and employees
as to just where they stood. But I think that is pretty well elimi-
nated now, and, as far as I can discover, the spirit and disposition
both of the officers and the employees has been improved already. I
think they begin to realize that it was a very essential thing for the
Government to do, to try to coordinate these properties and get as
large a degree of efficiency out of them for the purposes of the war,
as well as in the common interest, as possible; and I have had the
most gratifying reports from all parts of the country and assurances
of cooperation and support of the Government in this movement
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
577
from the officers of the railroads, from labor organizations, and from
individual employees.
So I do not think we need to feel any apprehension on that score.
Mr. ESCH. Mr. Secretary, there has been considerable concern ex-
pressed by witnesses before us-and through State commissions and
executives of some of the States-with reference to the taxing power;
whether or not under the proclamation and under the act of 1916 the
powers you are to exercise would give you authority over the question
of taxation of property of common carriers within the States.
Mr. McADOO. I don't think there is anything in that at all, and I
think that the executives of the different States are satisfied now that
there is no reason for anxiety. I have answered specifically a num-
ber of the executives about that. My own view is that the power of
the States to tax property-impose reasonable taxation—is not af-
fected by the possession and control of the Government. I think the
taxation must be reasonable, however. I do not think that the
States could lawfully impose arbitrary and unreasonable taxation
and confiscate property under Federal control any more than they
could under private control.
Mr. Escн. Well, where it would be an unreasonable burden upon
interstate commerce, you would feel that you could exercise some
power and control over it?
Mr. McADOO. Yes. I think we would in any case have the same
power to appear and resist unreasonable taxation as the owners of
the property would.
Mr. PARKER. Mr. Secretary, on this matter of taxation, it has oc-
curred to me that as we pay a fixed revenue, net revenue, for the
railroads, it might be possible to say that in the operating expenses
the United States would pay in each year exactly the same amount to
cities and States as was assessed during the year, say, 1917, so as to
get rid of all that question.
Mr. McADOO. Well, that could be done; but I don't know just how
far Congress would have the power to impose such a decision on the
States. That is a legal question. It would, of course, afford abso-
lutely a certain basis; but my own judgment is that the basis already
established by the States for taxation of these properties will be
substantially maintained while they are in the possession of the
United States for war purposes. There is, of course, a natural con-
cern about the taxing power of the States from this angle: If the
States could tax as far as they pleased while these railroads are
under Federal control and being operated under a Federal guarantee
of income to the carriers, they could create deficiencies in the Treas-
ury against that guarantee, and would indirectly have power to take
money out of the Federal Treasury without an appropriation by
Congress. This, of course, could not be permitted. But, for my
part, I apprehend no difficulty there. I think that can be easily
adjusted as between the States and the Government.
Mr. PARKER. I have found that some of the laws, at any rate of
some of the States, already prescribe a percentage of gross receipts;
and under those circumstances the amount of gross receipts would
vary so much under Government use that it might become exceed-
ingly onerous and troublesome. Also, I know there is in some of the
States that taxation is based not upon the value of the property
40958—18—37
578
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
but upon the value of the franchises, which includes so much of the
question of the use of the railroads from year to year that it has
begun to be a dangerous thing in the hands of assessors, even with-
out any legislation, and it had struck me that if the Government had
the right to fix the income-or rather the rent-to be paid for these
roads, it might also fix the operating expenses which would be paid
in this regard to the States; and that the power that it has against
the individual would also, during the time of war, exist against the
State to fix a reasonable compensation for peace use.
Mr. McADOO. I think it is clear that the States have no power to
tax the earnings of the interstate carriers. They can only tax the
property. I presume you are referring more particularly to public
utility corporations, are you not, which are solely within the control
and jurisdiction of a State?
Mr. PARKER. I am so far as the tax on gross receipts is concerned,
but the tax on franchise is a very common one.
Mr. McADOO. Oh, yes.
Mr. PARKER. At any rate, I only wanted to ask whether you saw
any objection to the inclusion of this simple provision in this bill to
be used, we might say, if the State authorities should consent thereto,
or should not object thereto.
Mr. McADOO. I should like to let counsel deal with that, as they
have gone into it more particularly. I feel very confident that we
shall have no trouble with States about the taxing power and the
taxation feature.
Mr. DECKER. Mr. McAdoo, there was one question that I wanted
to ask with relation to the question of fixing rates. I would like to
have your views as to the necessity and the wisdom of the Director
General of Railroads having the right to fix the rates. I mean trans-
portation rates.
Mr. McADOO. I think that so long as the railroads are, by author-
ity of Congress, in the possession of the President and are being
operated by the President as Commander in Chief of the Army and
Navy of the United States for the war purpose, he is bound to have
a paramount control of the properties, so that he may exercise that
power in any way that the public interest or any emergency that
may arise may require.
Now as to the rate-making power, I think the President undoubt-
edly has the power to control rates during the time of Federal pos-
session, under the present law. I think, one the other hand, that
that power ought not to be exercised—and I am sure it will not be
exercised-except in such cases as may be necessary in the public
interest. I think it would be very unwise for the Federal Govern-
ment to undertake through the Director General of Railroads-who
merely represents the President in this control-to pass upon all the
rates in the country, either de novo or as questions may arise con-
cerning them. I think that the agency of the Interstate Commerce
Commission ought to be employed, and that it ought to hear these
questions from time to time as the public interest requires, and that
the views of the Interstate Commerce Commission or their judgment
as to what ought to be done in the circumstances ought to prevail,
and I think would undoubtedly be permitted to prevail, except in
so far as it might be wise, for the President to modify or to change
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
579
them.
In other words, I feel that the commission ought to act in
an advisory capacity while the President is in control of the rail-
roads, and that its advice and suggestions about rates will be of
great value.
Now, that applies to interstate rates. As to intrastate rates I
think that the State commissions ought to continue to consider such
questions as they arise. Innumerable questions affecting local con-
ditions are coming up from time to time, and they ought to hear
them and pass upon them; and so long as their views and judgment
do not run counter to the common interest, they will be regarded
and accepted just as heretofore.
I had a conference with, I think, about 20 of the representatives of
the State commissions recently, and I told them that I thought that
they ought to go forward just as usual—and, in fact, the President's
proclamation so provides-and hear cases and exercise their powers
as they have heretofore done, always, of course, with the understand-
ing that the President has the power to override any decision they
may make when he thinks it necessary to do so in the public interest.
The State commissions have jurisdiction over many other questions
besides intrastate rates. They have the right to pass upon local ques-
tions like the construction of a switch to an industrial plant, side-
tracks, and things of that kind.
Mr. MONTAGUE. And crossings?
Mr. McADOO. Yes. I think all those powers ought to be exercised
by them as heretofore, subject to the Federal control.
Mr. ESCH. How about the power granting to many commissions
the right to issue certificates of convenience and necessity with refer-
ence to stock and bond issues?
Mr. McADOO. I think they ought to be permitted to continue that.
Of course, I should feel that it was necessary to be consulted about it.
During this war, and especially because the Government is very
vitally concerned in the expenditure of new capital in the country,
we must have as much control of such questions as we possibly can in
order to carry forward the Government's own financial operations.
Returning to the rate-making power, so far as State commis-
sions are concerned, as to intrastate rates, suppose that the President
had no control over rates during this period of Federal control, and
that the Congress of the United States had authorized a guarantee to
the carriers. It would be within the power of the State commissions
to alter rates to such an extent as to enforce deficits upon the Federal
Treasury. I do not mean to insinuate that they would abuse that
power, or that they would use it for the purpose of creating such
deficits, but it would leave in their hands the power to do it, which,
if exercised, would in effect be taking money out of the Federal
Treasury without any appropriation having been made by Congress.
I think that Congress can not place that sort of power in the hands
of any State authority or anybody else. There again, however, I
think there will be no difficulty about harmonious relations with the
various State commissions. They have given me every evidence of a
desire to cooperate, and I am quite sure that they will.
I should like to bring to your attention a recent very striking in-
stance as to the importance of Federal control with respect to these
matters where the paramount authority of the Government not only
580
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
¿
ought to have been exercised but was very beneficially exercised.
The Pennsylvania tunnels running under Manhattan Island, New
York, have always been used for passenger traffic. As a matter of
fact, the franchise granted to the Pennsylvania Co. expressly pro-
vides that freight trains or freight shall not be carried through those
tunnels. We have had, as you know, the most extraordinarily diffi-
cult weather for the last 30 days-successions of blizzards, and before
the railroads could dig out of one they were hit by another. Bliz-
zards have been frequent, and with low temperatures the operation
of trains has been extremely difficult, and the worst of it has been the
freezing over of some of the waters in and around the harbor of New
York and the great amount of floating ice, which has added very
much to the difficulty of handling railroad cars on floats about the
harbor. Nearly all the coal that goes to Long Island-all, in fact, that
goes to Long Island and New England through the New York gate-
way, as they call it, has to be carried on floats across the river and
delivered to the rail connections for New England and Long Island.
The ice in the river and the harbor of New York was so great that
the coal could not be delivered to Long Island and New England ex-
cept in very small quantities, and there was great danger of people
freezing on Long Island and in the military camps on Long Island.
I immediately ordered coal trains to be carried through the Penn-
sylvania tunnels. Suppose the Government had not had the power
to order that step? Suppose we had been obliged to apply to the
local State commission for permission to operate coal trains through
those tunnels? The delay, no matter how promptly they might
have acted, even assuming they would have acted favorably-the
delay might have had a most serious effect upon the public interests:
People would probably have frozen to death before you could have
gotten permission from the State commission; so the Federal power
was asserted immediately, and everybody approved it. It was obvi-
ously the thing to do.
Mr. SANDERS. Isn't that the power of operation, however, and not
the power of fixing rates?
Mr. McADOO. I am speaking of their control, the right to regulate,
both operation as well as rates, and to determine questions of that
character.
Mr. SANDERS. Using the tunnel as you have just described was
purely an operative question and not a question of fixing rates?
Mr. McADOO. Yes; I will now give you an illustration about rates.
One of the greatest abuses in the railroad business in this country
is the use of freight cars for warehouse purposes. I have no doubt
that the usefulness of the freight equipment of the carriers of the
United States is reduced easily 25 per cent because of this abuse, the
holding of cars by consignees in terminals for warehouse purposes
because of the free time allowed by law in some of the States, and
in other instances by virtue of regulations of State railroad com-
missions. Then, because of the low demurrage charge imposed,
varying in nearly all the States, it has been impossible to enforce
the unloading promptly of freight by consignees.
Now, the congestion is so great and the shortage of equipment is
so great in the country that it is imperatively demanded in the public
interest that this abuse be corrected. There are 48 States in the
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
581
Union, and each have charge under the laws of their respective
States of this question of demurrage and the rates that shall be
imposed after the free period, with respect to intrastate traffic.
The Interstate Commerce Commission has charge of the question
with respect to interstate traffic. We have 49 different powers to
deal with to get any understanding about uniform demurrage rates
or uniform demurrage regulations.
The number of loaded freight cars in the great terminal or port
of New York is to-day extraordinary-and I am not speaking of
export freight. That is controlled by the shipping in the harbor,
but I am talking about domestic freight. It was necessary to take
some effective measures immediately to correct the abuse. Exercis-
ing Federal power I issued a demurrage regulation, which went into
effect yesterday, making uniform free time and rates in all the
States of the Union.
Mr. Escн. Monday, was it not?
Mr. McADOO. Yes; day before yesterday-fixing a uniform free
period, applicable in all the States of the Union, of 48 hours after a
car is placed-subject, of course, to the usual exceptions on account
of bad weather, etc.; and also providing for a progressive increase
in the demurrage charge after the second day, running up to $10
at the end of the eighth day, and thereafter at the rate of $10 per
day until the car is unloaded. That is, of course, a drastic regula-
tion. It is essential in the circumstances, but if you had endeavored
to get the consent of every railroad commission in the United States.
and then the Interstate Commerce Commission beside, there is no
telling how long it would have taken to do it. The emergency is
upon us. It has to be dealt with immediately. The effectiveness
of the troops in the training camps and the necessity for supplying
them as well depend upon the ability to get to them the things that
they absolutely require.
There is a very striking instance, gentlemen, of the necessity of
controlling rates while the roads are under Federal control-not only
the necessity for making regulations that will be effective, but of
imposing rates that will make the regulations effective.
Mr. SNOOK. In connection with this question of demurrage, what
consideration have you given to the question of reconsignment of
cars along the same lines?
Mr. McADOO. That is under consideration. There are so many
things to be done, and the time has been so short thus far.
Mr. SNOOK. That is almost as bad as the demurrage question, is
it not?
Mr. McADOO. Yes; in some respects that is a very great abuse and
will have to be dealt with, and will be dealt with.
Mr. Escн. Mr. Secretary, in that connection will you use the same
methods in case you find it necessary to issue orders increasing rates
that you used with reference to putting into force and effect your
demurrage order? You requested the Interstate Commerce Čom-
mission, as I understand it, to pass or to make the change in the
rules as to demurrage upon one day's notice. That, of course, insures
very prompt action. Would you use the same method in case you
wished to order an increase of rates?
582
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. McADOO. I would do this: If a situation developed-I can't
visualize one just at the moment--but if any situation developed
where, through the rate-making power, relief should be had in any
situation where the Army or the Navy or the troops needed some-
thing, I should not hesitate to resort to it and use it. But ordinarily
if a question came up of readjustment of commercial rates and there
was time to consider it and deliberate about it, I should, if it was an
intrastate matter, ask the State railroad commission to examine into
it, report upon it, and give the benefit of its views and advice. If it
was an interstate matter I should ask the Interstate Commerce Com-
mission to do exactly the same thing; and then I should pass upon
their advice and recommendations in such a way as I thought was
in the public interest. I think, by the way, that that method is
acceptable to the State railroad commissions-at least, they gave me
every indication that it was acceptable when I discussed it with
them the other day; and I, for my part, do not see that any conflict
need arise out of that.
Now, I have had the suggestion made to me by very high-minded
and patriotic citizens that the rates of passenger fares ought to be
increased very largely for the purpose of repressing unnecessary
travel on the railroads during this time. There is a precedent for
that. England did put up the passenger rates promptly for the
purpose of discouraging passenger travel, so as to free the railroads
for the movement of freight and essential supplies. I don't think
it necessary to consider that just at the moment. We have already
reduced the passenger-train service in the congested district very
decidedly, and that has given a certain measure of relief. It has
released labor and equipment for freight service, which is of value.
I mention this question merely to say that if it became necessary to
order an increase in the passenger rates for the purpose of dis-
couraging travel and releasing equipment for this superior war need,
I think it ought to be done. If, on the other hand, it was a question
of schedules or local rates that had application purely to a com-
mercial situation, I should feel that the State commissions ought
to be consulted about it and their advice had before action was taken.
Now, the managers of the railroads-some of the railroads-imme-
diately after the assumption of Federal control, in their eagerness
to adopt suggestions which had appeared in the prints and otherwise.
for reduction of passenger service, went at its rather drastically and
somewhat intemperately. They were slashing around and reducing
passenger service in every direction, with the best of intentions, with-
out submitting schedules to the State commissions or to the Director
General. I had to call a halt on that and direct that no such changes
in schedules should be put into effect until they had been submitted
to Washington.
Mr. DILLON. Mr. Secretary, I would like to ask you, there being
some question as to what powers have been specifically granted to you
as director of railroads, would you favor a provision in this bill
granting absolute power to you as director to fix rates-freight
rates and passenger rates-and compensation of employees?
Mr. McADOO. I think the President has the power with respect to
rates already.
Mr. DILLON. Now, in that connection, will you specify specifically
where that authority comes from, so that we may know?
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
583
Mr. McADOO. I think it comes from the Federal control, by virtue
of the act under which the President took possession of the railroads.
It is inconceivable that if he has them in his control for the war pur-
poses he can not operate them as he thinks necessary for that war
purpose.
Mr. DILLON. You think, then, the original act as passed by Con-
gress, authorizing him to take over the railroads, would in itself
repeal or set aside the laws granting power to the Interstate Com-
merce Commission to fix rates?
Mr. McADOO. I don't think the Interstate Commerce Commission
has any power to regulate the President in the exercise of his war
powers. That is my view of it, and I express it, I may say, gentle-
men, with some diffidence, because I am only a one-horse lawyer and
my statement may not be worth anything. But I would assume that.
Mr. DILLON. Well, if there is no specific provision in reference to
these powers made in this bill, you would assume to have that
authority?
Mr. McADOO. Yes; I think he has that authority as it stands now.
But if there is any doubt about it, I think he ought to have the power.
Mr. STEPHENS. He has exercised it, hasn't he?
Mr. McADOO. He has exercised it; yes, sir.
Mr. DILLON. Now I want to ask another question in this connec-
tion. It was stated here by some of the witnesses that the board
having control of the Federal workmen's compensation act had de-
cided as a board that all employees of these railroads were within the
meaning of the Federal compensation act, and they had approved
some 9 or 10 cases and had sent them over to the Treasurer's office
for the issuance of warrants in payment thereof. I would like to ask
you, Mr. Secretary, what you have done in reference to those claims
and what your position is in reference to them, as to whether that
board has exceeded their authority, or whether they have power to
go on and classify these persons as those coming under the Federal
compensation act?
Mr. McADOO. I am frank to say that I think that is a legal ques-
tion, and I have already expressed myself about it as fully as I can.
I think that these railroad employees are, in effect, but not technically
and literally, employees of the Government, and I doubt if the action
of the compensation board is valid. Although, as I say, it is a legal
question and I would not attempt to pass on it offhand. I think
the provision I have suggested the suggested amendment, rather-
would cure all possible difficulty in that direction.
Mr. DILLON. Then you favor a specific provision in this bill that
would clarify that subject and to bring them clearly within the
rights of this board to treat them all as coming under the Federal
compensation act?
Mr. McADOO. I think the President should have the power, because
I think we ought to work out an intelligent plan by which that could
be accomplished, and this provision I have suggested would make
that possible.
Mr. DILLON. I mean the Federal workmen's compensation act.
Mr. DEWALT. May I be permitted there-Mr. Secretary, I under-
stand your position to be this: That under the act of 1916, which
gave to the President the power to manage and control the railroads,
that by the use of those words " manage and control
""
584
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. McADO0. Possession and control.
Mr. DEWALT (continuing). There was carried with it the power
to fix rates. Now, there was a gentleman who appeared before the
committee and who evidently represented the interests of shippers-
at least, I gathered that from his remarks. He thought--and it ap-
pealed to me individually with some force-that the interests of the
shippers would be best conserved by leaving the question of the
fixing of rates where it now is, namely, with the Interstate Com-
merce Commission; and that as this bill seemed to contemplate-
and really did contemplate-the power in the President to fix rates,
that there ought to be an amendment to this bill reserving to the
Interstate Commerce Commission the right which it still has, namely,
the fixing of rates; and one of the reasons which he gave for that
was this: That if the rates were fixed by yourself, we will say, as
Director General of Railroads, that these large shippers would not
have the opportunity of a hearing, whereas they have already had
hearings and these matters have been gone over before the Inter-
state Commerce Commission. Now, would you be against the in-
sertion of an amendment in this bill which still reserves the right
to the Interstate Commerce Commission to fix rates, or do you believe
that the President's authority ought to be paramount?
Mr. McADOO. I would be against it. I think the President's au-
thority must be paramount; his control must not be susceptible to
question anywhere for the war purpose. That is the fundamental
purpose of the taking possession and the use of the railroads, and
I can see where some independent power of that kind might be used
very seriously to the disadvantage of the public interest-even unin-
tentionally.
Take the demurrage case, to which I referred. Suppose that order
could not have been made until after hearings by the Interstate
Commerce Commission and public service commission of various
States. It might have been six months or a year before the Presi-
dent could have acted in this emergency, when immediate action was
imperative. Now, I don't know what other situation may develop
where similarly immediate action might be imperatively demanded
as a war necessity. It would be an extraordinary and most anomalous
situation if the President, as Commander in Chief of the Army and
Navy of the United States, was subject to regulations by the Inter-
state Commerce Commission in the exercise of his powers over and
control of one of the most important military instrumentalities of
the country, the railroads of the United States.
Mr. DEWALT. I am confining my suggestion merely to the question
of rates.
Mr. McADOO. But these rates affect the commercial questions you
suggest, and yet I think that the military necessity must determine
the whole thing.
Mr. DEWALT. In other words, you are holding out for the exclusive
and paramount authority of the President through his Director Gen-
eral to take cognizance of and management of rates as well as all
other operation of roads.
Secretary MCADOO. I think the Commander in Chief of the Army
and Navy of the United States in a great war like this, of such fear-
ful consequences, must have the power to use these railroads in any
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
585
way that is necessary to serve and supplement the military demands
of the Nation, with the same freedom and the same lack of hampering
restrictions that he can control and direct the armies and Navy of
the United States. There can bé no question about the paramount
necessity that the Commander in Chief shall have these powers.
Now, as I said before, the President is not going to exercise those
powers in any arbitrary fashion. On the contrary, wherever it is
possible to take the advice of these commissions it is going to be done.
I think it is very desirable that it should be done. But where it is
necessary to act regardless of regulations of State commissions or of
the Interstate Commerce Commission to meet the supreme military
needs of the Nation, the President must be unhampered in the exer-
cise of that power.
Mr. DECKER. Mr. Secretary, as I started this discussion and asked
the question on that, I think it only fair to state-not expressing any
views myself or of the committee-but in fairness to the man who
raised the question here, to state to you that this gentleman agreed
entirely with you as to your statement about the fixing of rates or do-
ing any conceivable thing that affects operation. In other words, you
could move all the trains in the United States, either intrastate or
interstate, for the purpose of getting equipment to a camp or reliev-
ing a coal situation, or do anything that facilitated the efficient opera-
tion of the roads. But his contention was-and I felt it my duty to
call your attention to it, because he presented it with much force and
it seemed to me in a patriotic spirit, too-that he could conceive of no
way that the question of the rates paid for commercial could weaken
or in any way affect the efficiency of your operating plans. In other
words, you are given the power to move the trains any way you
please, but when it comes to the question of commercial shipping, as
to how much a farmer shall pay to move his grain, or a miner to move
his ore, or a merchant to pay freight on the goods, that no harm can
be done to the Government by allowing the same agency that has
done that heretofore to pass on it.
Mr. McADOO. Well, they ought to pass on it in an advisory way,
undoubtedly.
Mr. DECKER. Now, I am just stating his proposition, and he men-
tioned that. He said, of course, he didn't deny or didn't expect that
they would not act under an advisory capacity, but he was afraid
that this organization of the Interstate Commerce Commission that
had grown up in this country to become second in power only to the
Supreme Court, would be relegated to a very minor position, which
would have a very bad effect after the war was over, no difference
what becomes of the railroads.
Mr. McADOO. The Interstate Commerce Commission will be kept
very busy considering just those questions. As a matter of fact, we
are building up straw men to knock them down when arguments
like that are made. I don't say that discourteously, but I say it is,
as a matter of fact, a straw man, because in the very nature of things,
the Director General of Railroads, acting for the President, can not
go into all these rate hearings. They are very intricate problems.
I should welcome the assistance of these agencies, and the Interstate
Commerce Commission is already busy with many questions that
have arisen out of this control, and I am sure that they can perform
586
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
an immensely useful service, and I am glad to have the privilege of
calling on them. But I think anything that will impose limitations,
or will likely impose or might have the effect of imposing limitations,
upon or hampering the Commander in Chief of the Army and Navy
of the United States in doing whatever is necessary to be done in his
judgment for the purposes of this war, in the use of these transpor-
tation facilities, would be extremely unwise.
Then, as I said before, incidentally, if you concede the power while
these railroads are under Federal control for somebody else to deter-
mine the rates and create deficiencies against the guarantees the Gov-
ernment is giving, you are really leaving a very dangerous power in
the hands of other agencies to determine what the result of the oper-
ation of these railroads shall be upon the Federal Treasury. Now,
the Federal Treasury is already tremendously overburdened with
the colossal demands that are being made upon it in every direction,
and therefore I feel that for reasons I have given about the Presi-
dent's military power, and from the financial standpoint as well, the
power of the President to visé or control the making of rates during
this period of Federal control ought not to be impaired. It is a
very essential thing for the protection of the Treasury.
Mr. BARKLEY. Mr. Secretary, we have heard here that the railroads
have fixed wages but that the Government has fixed rates, so that the
two balanced each other. Now, the Government having taken over
the railroads, the Government may have the power to fix both rates
and wages. Now, would it be wise to divide that power so that one
authority may fix wages and a still different authority fix rates, be-
cause of the fact, as you say, that the question of income has a very
direct bearing upon the situation in the Federal Treasury. For in-
stance, I understand that a commission has been appointed to look
into the question of wages for the railway men. We can not assume
what action they will take, but suppose that you, as the Director
General, or the President, exercising his paramount authority, should
raise railway wages, say, 20 per cent or any other per cent. That
might create a situation that would justify an increase of rates in
order to protect the Treasury against a deficiency. Now, do you
think it would be wise to divide that authority or to leave the power
in the hands of the President finally in fixing both compensation and
rates?
Mr. McADOO. I think he ought to have the power, because if it
were necessary to increase rates, or the suggestion of rate increases
was made in the usual way, the Interstate Commerce Commission
ought to hear the cases just as heretofore, and that when they have
reached a conclusion it ought to be in the form of a recommendation
to the President as to what action should be taken about rates. Now,
if in his judgment it would not be wise during the period of Federal
control to put that rate into effect, he ought to have the power to say
so. I think too frequently in war time troubles come from too much
division of power. Somebody has got to exercise it. The Constitu-
tion has put the chief power in time of war in the hands of the Com-
mander in Chief of the Army and Navy, and I don't think we are
taking any risk in letting him exercise that constitutional power.
Mr. SWEET. Mr. Secretary, do you at this time suggest any legis-
lation in regard to the roads that are not taken over by the Presi-
dent's proclamation?
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
587
Mr. McADOO. I don't suggest any legislation. I don't think any
is necessary. Their status is not going to be affected. They are left
just as they are now. I understand the suggestion has been made.
that the Government take over these railroads whether it needs them
or not, and pay 6 per cent on the amount of investment in the rail-
roads. To my mind, that is an unthinkable proposition, because if
the Government does not need them, the Federal Treasury ought not
to be drawn upon. If the Government does need them, then just
compensation will be paid. As to which such railroads are required
will be determined by investigation as we go along, and such as are
needed will be taken over under the terms of this act, if you pass it,
and compensation will be fixed accordingly, and those that are not
required will be left just as they are and will not be disturbed.
Mr. REYBURN. Now, do you think that is possible, to leave them
just as they are? That is the thing that has been bothering a lot of
these short-line people.
Mr. McADOO. I don't see why not. I understand they have some
fear that they will not be treated by connecting lines with the same
consideration as they have been heretofore. I don't see what ground
there is for that fear. There isn't any. As a matter of fact, I think
the Government will be a far more benevolent master or partner
than the private managements have been with these short-line rail-
roads. And then, again, suppose they are incidentally affected.
Suppose they are incidentally subjected to some loss or inconvenience.
We are all subject to it in time of war. Should the Federal Treas-
ury provide compensation for every man or corporation or citizen
who may find himself hurt inevitably by the war condition? I con-
fess I have no patience with the argument. I don't see why we
should lose time considering the taking over of a railroad, big or
little, that is not needed for the purposes of the country in this time,
and paying them a large compensation for it, any more than we
should consider taking cripples and putting them into the Army.
We must only take men who can fight, and we must only take rail-
roads which can help men fight. That is my general view.
The CHAIRMAN. Mr. Secretary, one thing has been emphasized by
gentlemen who have come before the committee-or at least some
of them-that much of their earnings have depended upon their
personal solicitations for freight and the ability of shippers to direct
shipments; and that your orders to them have stopped them from
soliciting anything of that sort, and therefore they are crippled
already to that extent, because they claim that the amount of freight
they get by reason of solicitation is a considerable portion of the
whole service that they render.
Mr. McADOO. They have had no such order from the Director
General, and I have not even contemplated giving such an order.
But suppose that in order to get an expeditious movement of freight
for the superior claims of the Army, and to meet the supreme mili-
tary necessities of the country, essential freight must be routed dif-
ferently. They must take their medicine along with the rest of the
country. Why, the investment bankers of the United States-and
there are a great number of them whose business has consisted wholly
in selling bonds to investors have found their business practically
destroyed from one end of the country to the other. Why? Be-
588
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
cause the Government of the United States has had to sell its bonds:
and to make the sale of its bonds a paramount necessity, and to make
them paramount they have made a patriotic appeal to the people of
the country. Now, it certainly could not be argued and no invest-
ment banker has asked for it by the way-that because their business:
has been hurt they ought to be compensated in some way for it. On
the contrary, let me say for them-and I am glad to have the oppor-
tunity of saying it-I know of no men in the country who have more
patriotically submitted to great losses in their business than these in-
vestment bankers, and I know of no men who have turned in and done-
as much really excellent work in placing Government bonds.
The CHAIRMAN. One of these gentlemen made the statement in sub-
stance that the attitude of the trunk lines has been anything but
friendly to these short lines and independent roads, and the trunk
lines being managed very largely by the same men who had heretofore
managed them, that perhaps they might get even less encouragement
during the use of the roads by the Government than they have before.
Mr. McADOO. My feeling about all of those railroads I mean those
that may not be included in the Federal control-is that we ought to
help them in every way possible. Certainly my disposition as long as
I am here will be to do that. I think they ought to be encouraged and
assisted in every way possible. The Government has no desire to
break anybody down. On the contrary, the purpose is to build up.
and to protect them so far as it is possible to do so, compatible with
the supreme needs of the Nation.
Mr. WINSLOW. What is the status of those roads now in respect to.
being under the Director General?
Mr. McADOO. They have been told to operate-specifically told by
the President's proclamation-just as they have heretofore, where-
they are not otherwise ordered.
Mr. WINSLOW. Have they had directions from your headquarters to
the effect that they were under your direction, and to govern them-
selves accordingly?
Mr. McADOO. Well, Mr. Winslow, I believe that matter has been
gone over very fully. I am very willing to cover it if you want me-
to. Of course the President's proclamation had to be in general
terms, and to embrace all the transportation systems of the United
States. Whatever is part of the transportation systems, undoubtedly
is included in the proclamation. The Interstate Commerce Commis-
sion was requested to send out printed notices conforming to the
President's proclamation, and I presume they sent it to every railroad"
on the list of railroads in the United States, and I suppose they all got
such a notice. I think it is a question of fact which must be deter-
mined as we go along as to whether any railroad receiving that notice
is comprehended within the proclamation. We have got to determine
whether it is part of the system of transportation or a system of
transportation within the meaning of the proclamation. That process
is under way and we are progressing as rapidly as possible with all
such questions. In the meantime their managements have been left
undisturbed and they are carrying on business just as they have here-
tofore, so far as I know. And I don't think they have been prej-
udiced by the action taken thus far. Obviously the President could'
not, before he took action, review the whole railroad situation in the
•
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
589
United States and determine what railroads were useful for the
purpose. He had to act immediately and make those investigations
afterwards.
Mr. WINSLOW. You probably have some way of determining
whether they are working for the Government or for themselves?
Mr. McADOO. They are all operating just as they have heretofore.
Mr. WINSLOW. But they are all operating under the Director Gen-
eral?
Mr. McADOO. They are operating under the President's proclama-
tion, which left their corporate managements in charge of their own
officers. They were directed to proceed just as they had done here-
tofore. Every railroad system in the United States is operating the
same way that it has been, except under such general directions as
have been given.
The CHAIRMAN. Mr. Secretary, you have been very kind and have
given us a great deal of your time, and we would be very glad to
remain here all day and hear the very interesting statements made by
you, but you have been before the Senate committee, and I under-
stand went over very fully there your views with reference to sec-
tion 13, or the substitute for it, which is the section in which Mr.
Stephens was particularly interested. He did not know that you
had done that, and since that he tells me that he finds you went into
it over there very completely and we can use that in connection with
your statement here. In other words, we will not ask you to go into
that so extensively here.
Mr. STEPHENS. Unless you desire to make some statement.
The CHAIRMAN. The only object, of course, is that we are desiring
to save your time.
Mr. McADOO. You are very considerate, Mr. Chairman, and if you
could release me at 12.45 I should be very happy to stay until that
time and to come back again if you should need me.
The CHAIRMAN. That is the last section of the bill before us now.
Now, if there are other provisions of the bill that you have not
already discussed to the committee, upon which you think it is im-
portant to make a statement, we should be glad to hear it. One ques-
tion has been raised before the committee and a great deal said on
it-the question of standard return in the three-year period proposed
in the original bill.
Mr. McADOO. I dealt with each of those sections before the Senate
committee, and I should be very glad to put in here what I said
before the Senate committee on section 13.
The CHAIRMAN. Very well; you can put anything in this hearing
that you desire to. Any statement that you made before the Senate
committee you can incorporate in this statement if it will save you
time. The committee is not so anxious to save its time as it is to save
your time.
Mr. McADOO. You are very considerate, indeed, Mr. Chairman,
and I appreciate it very much.
For convenience, I will insert in the record a statement I made
to the committee of the Senate on section 13.
Section 13, as it stands, is, in my judgment, clearly in the in-
terest of both the public and the owners of the railroad securities.
From the public standpoint it is necessary that Government posses-
590
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
sion and control of railroads shall be employed to remove for the time
being competitive practices and wasteful duplication of effort to the
end that every energy shall be mobilized upon the production of the
greatest amount of transportation, with the least expenditure of la-
bor, material, and money. The result of this process of unification
will be that when the war ends the railroads will be, to a large extent,
disabled for the immediate resumption of their old competitive status.
It will be clearly contrary to the public interests that the railroads
thus hampered in their ability to compete shall be returned to pri-
vate management before the adoption of proper methods of public
control to take the place of the competition which will have been
substantially extinguished.
The adoption of a proper measure of public control to deal with
this new condition will require careful study and discussion. The
period immediately succeeding the war will present numerous prob-
lems of the gravest sort, some of them very grave economic prob-
lems, which will demand immediate consideration by the Congress.
In such circumstances it is not only probable, but almost certain
that Congress will not find the time immediately after the close of the
war to adopt a comprehensive plan for controlling the railroads in
the new environment in which they will find themselves, and at the
same time to deal with all the other complicated economic problems
which will undoubtedly confront it.
If this bill, as enacted, requires the railroads to be turned back to
their owners within say a year, as I have heard suggested, or other
comparatively short period after the return of peace, the result
will be that the railroads, with competition largely extinguished, will
go back into private control without legislation to protect the pub-
lic, or legislation designed to protect the public will have to be en-
acted hastily in the midst of other problems which will be demand-
ing the entire time and attention of Congress. Neither result can be
in the public interest.
At the same time, it should be borne in mind that shippers and the
public generally will be accustomed to new methods of doing busi-
ness with the railroads. They will find that the old methods under
which they have been routing freight and have been doing business
will be substantially and perhaps permanently altered, and the con-
fusion which would arise from the attempt to suddenly restore the
old competitive status, the status that existed prior to December 28,
1917, would be aggravated very greatly, and perhaps would offer
quite insuperable difficulties, if legislation was not enacted in the light
of conditions as they exist at that time, such as would facilitate
that process of restoration and conserve the interests of the ship-
pers and the public generally. I think myself that ample time will
be required to deal with the new railroad status with which the
country will be confronted after the return of peace.
I have used this three-year period arbitrarily and merely for pur-
poses of illustration, and I have proceeded upon the theory that
possibly $500,000,000 per annum might have to be expended upon
betterment, improvements, equipment, and extensions-necessary ex-
tensions for the purpose of the war. Of course if the control, lasted
only one year or two years the amount of the Government investment
in roads would be correspondingly less.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
591
It is impossible to deal with that matter adequately under existing
laws and impossible now to forecast how the matter ought to be
dealt with. It will be a subject for thorough study and careful
and just legislation to be adopted after the war.
To put a time limit upon Government possession may make it
impracticable and certainly will make it exceedingly difficult to deal
with this important subject in an adequate manner before posses-
sion is automatically restored to private management. To fix an
arbitrary limit, it seems to me, is to put the public at a great dis-
advantage in dealing with this important phase of the problem-that
is, the adjustment of the debt which the railroad companies will owe
to the Government for the advance which must be made to them
during the period of Government control. Such improvements, in
the hands of the Government, without possession of the railroads,
will be of little value. The Government would therefore be in a
difficult situation to protect the public interest with respect to those
advances, because the minute the railroads are returned auto-
matically to the control of the railroad companies with no settlement
effected of that large indebtedness, the Government would not be
in position to protect adequately its rights nor to protect the public
interest. It seems to me, therefore, that there is every disadvantage
to the public interest in risking a limitation upon the time of Govern-
ment control of the railroads, and no possible advantage to the people
in fixing that time limit now.
As long as the Government is in control of the properties, and
the important problems can be discussed dispassionately, and not
under the pressure of a stop watch or time limit, it will be possible,
I think, to liquidate the Government's interest upon a more equitable
basis, not only to the public but to the railroad owners themselves.
For my part, I do not see why we should now undertake to de-
termine an arbitrary limit which might put the public as well as the
private interests in jeopardy, but every consideration, it seems to
me, justifies, as well as demands, that the question be left in such
situation that it can be dealt with intelligently by the Congress in
the light of conditions as they then exist.
Mr. STEPHENS. Have you finished your statement on section 13?
Mr. McADOO. Yes.
Mr. DEWALT. I would like to ask you just one question there.
Referring to that section 13, would you be radically opposed to this-
I am reading: "At the Federal control of transportation systems
herein and heretofore provided for shall continue for and during
the period of the war, and for a reasonable period after peace is
declared, not exceeding
years"—say, not exceeding three
years- during which time Congress may by proper legislation fix
the termination of such control?"
66
Now, my thought in that, Mr. Secretary, is this: While this bill
says that the absolute control of the Government shall be during the
period of the war, the amendment that I had in mind proposes in
brief this: That the control shall continue for a reasonable period
after peace is declared, not exceeding three years, during which
time Congress may, by proper legislation, fix the termination of
such control. Would you be radically opposed to such an amend-
ment?
592 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. McADOO. I should not feel that it would be proper for me to
say that I was opposed to any amendment the committee might
recommend.
Mr. DEWALT. Well, but what are your views, generally speaking,
upon such an amendment?
Mr. McADOO. My feeling about it is that the interests of everyone
are better protected without a time limit than with a time limit. If
you fix one year, two years, or three years, the disposition always is,
I find not speaking of Congress, but of human affairs generally-
to put off the thing to the last, and you might not get your legislation
underway until toward the latter end of the period, and with an
arbitrary limit which will come into effect, whether the Congress has
acted or not, you may find that a very serious injury will result to the
public interest and to the security holders of the railroads. I can
not help feeling that this status which is already created and is going
to develop very definitely under Government control ought to be pre-
served until you establish a new status; and I don't believe you will
get the new status without very intelligent and comprehensive legis-
lation on the part of Congress. I think you are really handicap-
ping future Congresses if you impose an arbitrary time limit now,
which can have no relation whatever to the conditions that may de-
velop and which might turn out to be the very worst thing you could
possibly have done. In other words, if you leave it in the hands of
Congress or a future Congress-without a time limit, it can pro-
ceed with the matter without any handicap so far as a limit is con-
cerned. And I just want to add this one other thought: We are all
interested not only in protecting the public interest on account of the
great investment the people of the United States may have been
forced to put into these properties during this period of public con-
trol-and the investment will be greater as the time is longer-but
we are also interested in preserving and conserving the financial and
economic situation of the country after the return of peace. If this
war lasts three years, the financial problem which will confront not
only America but the world will be a tremendously difficult and
colossal one, and these railroads, the sixteen billions of railroad
securities which constitutes a very large part of the credit structure
and foundation of the country now, will be inevitably involved in
that general situation.
I think that if the Congress should not by appropriate legislation
have established a new status for the railroads, determining not alone
what that status was to be for the future, but how it should be directed
and controlled for the future, before the time limit, if you should fix
one, became operative and cut off any further action, leaving all
holders of railroad securities in the United States without any sup-
port in the situation, deprived of any guaranty, with the properties
thrown back to their respective owners under the laws now existing,
requiring the reestablishment of the old competitive status, and the
operation of many autonomous systems, you might precipitate a finan-
cial problem of very grave character and hurt the public interest
seriously by not having been able in the meantime to liquidate or
adjust with these railroad managements the great investments the
Government will have to make in the properties. These investments
will amount to $1,000,000,000 to $1,500,000,000 if Government control
should last three years.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
593
Mr. DEWALT. Now, Mr. Secretary, conceding all that you have
said, what I have in mind is this: What would the Supreme Court say
about a provision as broad as the thirteenth section now is? Admit-
tedly, the taking over of these railroads is under the war power
which is given to the President of the United States. There is no
other authority conceivable except that. It is an emergency matter
given to the President under the war powers, and solely by that if
given at all. Now, logically, it follows that if that be sold-of which
there can be no doubt in my mind that, then, that power ceases when
the war ceases, except with this limitation, that no doubt the Supreme
Court would say that in this readjustment a reasonable time would
have to be given, because all laws must be reasonably construed under
the circumstances. It then follows clearly to my mind that that rea-
sonable time must be governed by the circumstances of the case, but
if you leave the field wide open without fixing any definite time, it
seems to me that this bill would be faulty for the reason that I have
said, that primarily this power being given to the President under
the war power of the Constitution, that power would logically cease
and determine when the war ceases and is determined, except with
the limitation that I have given; and therefore, in my judgment as a
legislator, it would become necessary to fix some definite time, stating
that during that time and not later than that time these roads should
be restored to their corporate owners. In the meanwhile Congress
may have the power-certainly has to legislate in reference to how
that control should be restored. Now, the thought may be worth
nothing, or it may be worth much, but to me it certainly appeals as a
lawyer.
Mr. McADOO. Well, I think that without further legislation by the
Congress you are unquestionably right. The court would hold that
these properties should be restored to their owners within a reason-
able time after the return of peace. But I think it is within the
power of Congress to alter that situation by this legislation if it
wants to, and I think a provision in this bill that the control shall
continue until such time as Congress may direct is a perfectly valid
provision, and I think the courts will, of course, sustain it.
The CHAIRMAN. Mr. Secretary, may I ask you a question here?
We will assume that you are going to remain in your present position
until the war is over and until the settlements that are necessary to
be made under whatever legislation we may make shall have been.
made. Now, it is natural to suppose that the managerial element of
the railroads and perhaps some of their stockholders and bond-
holders-will be exceedingly anxious to resume private operation,
and that that may be the situation with reference to all of them.
Now, without a time fixed in advance as to when they will be restored,
supposing that you are going to settle with them just as fast as you
can and in justice to the roads and the country, wouldn't the fact
itself of having no time definitely determined by which they would
go back automatically be of very great assistance in making settle-
ments necessary to make in protecting the Government as well as the
stockholders of the roads?
Mr. McADOO. Yes; decidedly. I think it would be a distinct ad-
vantage to the Government to remain in control until a settlement of
its claims against the railroad was effected.
40958-18- -38
594 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
The CHAIRMAN. In the way of securing settlements permitted un-
der the law as they may be then.
Mr. McADOO. Yes. My deliberate judgment-it is only an opinion
and may not be worth any more than that of anybody else in fact,
it may be worth less-by own opinion is that the public interests
would be advantaged by not having a time limit, rather than by hav-
ing it.
The CHAIRMAN. That is exactly what I said.
Mr. McADOO. The interest of the people of the United States in
these properties—I mean in their proper operation, management, and
control is a fundamental interest, a very vital interest; but,
in addition to that, the people will have invested a very large amount
of public money in these properties, consisting of extensions, connec-
tions that will be very valuable in general railroad operation, im-
provements, additions to general facilities, etc., which would be of
great value to the railroads, but in the hands of the public-divorced
from the railroads, deprived of the control of the railroads-might
be of no value whatever. Now, if a time limit is imposed, and it
should be impossible to adjust these questions with the various rail-
road managements within the time prescribed by Congress, and the
railroads went back automatically into private control, the Govern-
ment would be put out of control, and you might have a very difficult
time liquidating the Government's one billion to one and a half bil-
lion dollar investment in these properties. I can not see where any
possible advantage could come to the public interest-or, in fact, to
the private interest involved-in fixing now a time limit which has
no reference whatever to any conceivable condition that we could
imagine. I think it is probably tying our hands in a way that might
operate very disastrously.
Let me illustrate what I mean. At the outbreak of the war we
found that American ships-the few we had-were not willing to
put to sea because they could not get war-risk insurance. And the
British and German and French vessels, upon which we had relied
for the carrying of our commerce, had all taken refuge in friendly
harbors, afraid to sail because German and British and French
raiders were at large; all merchantment were anchored fast in port.
The only vessels that could go out with safety were our vessels-
and we had pitiably few-but as to those it was most important that
they should be encouraged to sail the seas. So we proposed a war-
risk insurance bill, under which we could insure simply the war
risk on our vessels. Of course, the war risk could not last any
longer than the war lasted, because as soon as peace returns there
isn't any war risk to insure. But it was insisted that a provision,
an arbirtary limitation, of one year be put in that bill whether the
war lasted longer or not, and it was impossible to prevent it. I
urged very strongly that no limitation be put in the bill, but without
avail, and the life of the bureau was limited to one year.
Near the end of that first year we had to ask for an extension of
time. We succeeded in getting an extension for one more year.
Every year we have had to ask for an extension of time to let this
bureau operate, notwithstanding the fact that tremendous interests
are concerned, interests very vital to the American people, as well as
to vessel owners and shippers. Suppose that Congress had not been
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
595
in session when that time limit expired. Or suppose Congress had
been in session but had adjourned without extending the life of the
War-Risk Bureau, or suppose that there was a division of opinion
between the two Houses, or suppose it was a short session of Con-
gress and somebody interested in preventing action on the bill should
filibuster so that Congress could not get action and the time limit
became effective and the War-Risk Insurance Bureau was rendered
impotent to serve the American people. It would constitute a very
grave injury. It is because I don't know what the future is going
to develop nor how vital the situation might be at that time, nor
how imperative the public necessity might be for the continuance of
this railroad control until right measures could be adopted by the
Congress to regulate it and determine it that I feel profoundly con-
vinced that we should be taking a very grave risk in putting a time
limit in this bill.
Mr. EscH. Yet the British president of the board of trade issues
his certificate for the Government control of the British roads for
one week at a time.
Mr. McADOO. Well, I have been told that it was a month or a
week. Whatever it is, it is a mere formality.
The CHAIRMAN. He has the power to renew it.
Mr. McADOO. Yes; he has the power to renew it indefinitely, with-
out further legislation, and that is indefinite control. But even if
that were true, gentlemen, that need not necessarily determine our
action as to what would be wise for us, because the situation in
America, is very different from that in England. Here we have 48
sovereign States in a Federal Union, and the conditions of operation
in the different States are affected very much by the laws of the dif-
ferent States. In England, of course, the realm is smaller and the
laws are uniform, and it would be a very much simpler matter to
regulate the situation in England than it would be here, without very
definite laws on the part of the Federal Government.
And so, while the English practice may be, as you say, simply to
give a certificate each week as a pro forma matter-or each month-
that is an argument really in favor of the indefinite rather than the
definite control.
The CHAIRMAN. Limit of control.
Mr. STEPHENS. Of all the witnesses we have had here, Mr. Secre-
tary, testifying on that point, among the railroad representatives,
I think, the only argument they offered against the section 13, as it
stands, was, first, their fear of Government ownership; and, second,
the unsettled values, as they alleged, that would result as the cause
of not having the date fixed. Now, you attach no importance what-
ever, I assume, to their fear that values would be unsettled as a result
of the country not knowing definitely that we were not going into
Government ownership.
Mr. McADOO. I attach not the slightest importance to that. As
a matter of fact, values have increased since the Government took
control of the railroads under the present indefinite plan.
Mr. STEPHENS. I offer that as an evidence.
Mr. McADOO. But, gentlemen, this fear of public ownership-how
do you resolve that fear by putting a time limit in this bill? That
would not foreclose discussion of it. If the issue comes up you have
596
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
got to deal with it any way, and I don't see how or why this Con-
gress should attempt to foreclose discussion of public ownership or
anything else. And I don't see that it is in the public interest to
attempt to foreclose or forestall such discussions. I said before the
Senate committee, when I was there discussing that very question,
that I did not think we should hesitate to do what is imperatively
demanded in the public interest now, for fear that Government
ownership might be created as an issue hereafter. We can not take
counsel of fear in what we do. We are at war. We must take
counsel of anything but fear in doing things that are necessary to
be done in the interest of the Nation.
·
I may say that I was somewhat interested when the Senate, a short
time ago, passed a resolution to investigate the reasons why we
haven't gotten ships. We have not gotten ships, and they are not
sailing the high seas to-day, gentlemen, because the very fear of
Government ownership we are now discussing led to the filibuster
and death of the ship bill which was introduced by the administra-
tion in September, 1914, to authorize the Government to buy and
build ships and put them on the ocean under the American flag, and
which, if it had been enacted instead of being defeated in the short
session in March, 1915, would have stimulated our shipyards and
increased their facilities to such an extent that we would have had
many ships upon the waters to-day that are now only on the stocks.
That is an illustration of what I have in mind about this time limit.
It is possible to filibuster a bill at a short session, a bill that may be
imperatively needed in the public interest. I do not question any-
body's motives in filibustering the ship bill. I am only emphasizing
the fact that at a short session a bill can be filibustered. Although
there were votes enough to pass the ship bill in the Senate in March,
1915, as it had already passed the House, a vote could not be had and
the result was that we lost two vital years in starting on a shipbuild-
ing program for the American people. The bill was subsequently
passed, I think, in September, 1916, and the Shipping Board got
organized and under way in the early part of 1917, about two years
afterwards.
Mr. RAYBURN. Mr. Secretary, may I ask you this: When Mr.
Anderson was before the committee he was arguing the proposition
of a definite tenure-making the conditions indefinite. I haven't
been able yet to understand that. Now you say you think that in
the interests of the security holders--the interests of everybody, the
Government and all-that it would be better not to have a definite
tenure. I can not understand how an indefinite tenure of the rail-
roads would have a less disturbing effect upon their property and
securities than a definite tenure, for this reason: You say you don't
know what Congress is going to do in the future. Of course, that is
true. You don't know whether Congress would act within a certain
time or not—that is, if you had a definite date set-whether it would
pass all laws necessary, but within six hours before the discussion
closed a concurrent resolution could be passed extending the act, so
far as that is concerned.
Mr. McADOO. If everybody agreed to it; yes.
Mr. RAYBURN. Yes; if they agreed to it. And then, on the other
hand, what I am coming to is this: Suppose you have a bill here to
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
597
:
turn these railroads back to their owners, and that would create a
condition in the financial centers and among the markets of the
country; it would be so indefinite. Suppose it passed one House
and everybody would believe that probably it would pass the other
House, but probably in the last hours of that session it would be
surprisingly and suddenly defeated in that House by a filibuster, do
you think that condition would create more disturbance than if
we had a definite time set and that we were framing legislation
simply to follow up and take care of the things that ought to be
taken care of, so far as administration is concerned?
Mr. McADOO. I have a very decided opinion, Mr. Rayburn, for
this reason: You have got now a stabilized status, and it is sta-
bilized because there is a belief that a reasonable compensation is
going to be given to these railroad owners by action of this Con-
gress. Suppose that is done? Then, all railroad security holders
who accept the plan have assurance of a definite return upon their
properties until Congress otherwise determines; and in the mean-
time you are perfectly free to readjust the operations of these
various railroads, to cut out competitive traffic and everything. that
now prevents a more efficient operation of the properties and that
will enlarge capacity and increase transportation production on
the part of all these properties. All rails, all locomotives, and all
equipment look alike in the present situation. They have all, figura-
tively speaking, got "U. S." on them-Pennsylvania, B. & O., Santa
Fe, Union Pacific, all have disappeared for the purposes of this
control. Now, if you restore those properties to their several owners
without a reasonable period of time within which the old traffic
conditions and the old methods of doing business can be restored,
the security holders will find properties on their hands, with thor-
oughly disorganized business and a mad scramble everywhere to
get business again and to secure earnings enough to make their
holdings good.
Now, if, on the other hand, this Government guaranty continues
until the new status after the war is worked out, the security holders
need not feel concerned. They will feel that they are protected
until something definite is done. On the other hand, the public
interest is protected, as I have said before, because until the new
status is worked out, the Government is in possession of the property
and in position to protect the investments of the people and is also
in a position to continue to stabilize the situation.
Mr. RAYBURN. Well, this scramble is going to come sometime when
they are turned back, within any period at all set for them to be
turned back. They are going to get into a schamble, as you say, for
business.
Mr. McADOO. Not unless you restore the old competitive status as
it was before December, 1917. My own judgment is, gentlemen, from
what I can see already of railroad operation in this country, from
what I happened to know in an academic way about it beforehand,
and what I know from actual experience with the problem already
gained, that it is going to be impossible ever to restore precisely the
same unsatisfactory competitive status of the railroads that existed
before the 28th of December, 1917. I believe that a very much larger
measure of strong, effective, intelligent Government regulation and
598 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
control of these properties is going to be inevitable in the future, and
I favor such control. That must be determined by the Congress in
the light of conditions as they develop, and in the light of experience
gained in the operation of these properties. If it turns out that
public operation of railroads in the United States is beneficial to the
common interest, the public interest, I think the people are going
to demand that Government control be retained upon some terms
which Congress must determine at the time and in the light of ex-
perience then existing; and my feeling is that any time limit imposed
now might turn up to plague us and might operate disastrously upon
the public interest. I don't see any possible advantage in fixing a
time limit in the bill, and I see every advantage in leaving it out.
You can not eliminate the question of Government ownership by
putting in a time limit, because it will be just as freely discussed with
or without it. My own conviction is that if public control has worked
beneficially in the public interest-has been demonstrated to have
done so by actual experience-and a subsequent Congress must deter-
mine the new status within one year after the return of peace, be-
cause you put such a limit in this bill, you may find that the necessity
for action in a year would force Government ownership rather than
the reverse; that will be the short-cut solution for a time-limited dis-
cussion and action. But I think that with a longer or indefinite
period to work out a form of control that does not necessarily in-
volve the Government taking actual title to railroad properties, you
may get every result that the public interest requires without actual
Government ownership.
Mr. RAYBURN. But the way I view it, the proposition in this bill
is strictly a war measure. It is not a question of taking over the
railroads to test out a scheme and hold them after the war is over,
or long enough to test out whether or not they can be more efficiently
operated under private or public ownership.
Mr. McADOO. No; but that inevitably follows the war control.
You can not operate these roads merely for the military necessity.
You have got to take care of the commerce and industry of the
country at the same time. So it all comes out of the same crucible.
It is all involved in the same problem. We can not escape that.
I should like to say to the committee that I do not for a moment
wish you to infer that I think my views are entitled to any particular
consideration by the committee. I am expressing opinions merely
for what they may be worth. I have thought of this question a great
deal, as you could naturally imagine, and my sincere conviction is
that it is in the interest of the great public and the security holders
as well that the Congress be permitted to deal with this problem
when peace is restored in the light of conditions as they then exist,
without any arbitrary limitation.
The CHAIRMAN. Mr. Secretary, we are very much obliged to you
for this very interesting statement.
Mr. McADOO. May I say one more word, Mr. Chairman, before I
go? I want to advert just a moment to the very great importance
of the earliest possible settlement of this question. Whatever action
you take I beg of you most earnestly to take it promptly for this
reason: Great financial operations must be carried forward.
may have to raise, as you know, under the authorizations already
We
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
599
made by the Congress, disregarding altogether the supplemental
and deficiency estimates that have been presented since the opening
of this session, something like $10,000,000,000 between now and the
30th of next June. We can not progress in these great financial
operations of the Government with this element in the situation
undetermined and in an uncertain state. The railroad securities of
the country, aggregating something like eleven billions of bonds and
five billions of stock, constitute a very large part of the credit foun-
dation of the country, and the savings banks and the trust com-
panies and the national banks and the fiduciary institutions of this
country hold something like $4,000,000,000 of railroad bonds. Now,
as long as the status of all those securities is uncertain, so long as
banks and fiduciary institutions do not know what income or return
they are going to get from these securities, and so long as investors
who hold them-big and little alike-do not know what dividends
they are going to get, naturally they are in no position to buy the
Government bonds which we have to offer, and I feel that it is of the
utmost importance to the Government in carrying forward these
great financial operations that this question shall be settled promptly.
Whatever you may decide is the right settlement I shall, of course,
accept loyally and proceed upon that basis with all of my power,
but it is very important to get this behind us as soon as we can.
The CHAIRMAN. I want to say for the committee, so far as my
knowledge goes they are all attending all of these hearings and
giving, of course, all their time and attention to this legislation, and
will continue to do so until the House acts upon it.
Mr. McADOO. I hope, Mr. Chairman, that no inference will be
drawn that I did not realize that that is the fact. I am only urging
that it be progressed as rapidly as possibly.
The CHAIRMAN. The committee will take a recess until 2 o'clock
this afternoon.
(Whereupon. at 12.50 o'clock p. m., the committee recessed.)
(Secretary McAdoo requested that there be added to the record
the following statement made by him before the Senate Interstate
Commerce Committee:)
The administration was confronted with the necessity of taking an extraor-
dinary step to solve an extraordinary transportation problem. What I have
already said has emphasized some of the controlling needs which could only
be met by putting the power of the Government back of railroad operation.
The absolute coordination and, as far as necessary, common use of all railroads
and their rolling stock regardless of any private interests; the entire disregard
of established routes for the movement of traffic when other routes would
insure more or quicker service; the necessity for economy in the use of labor
and material so as to do all that might be necessary for transportation with
the least drain on the country's other demands for labor and material; the
need for insuring the supply of capital necessary, notwithstanding the impaired
credit of many railroads; the coordination of the Government demands for
priority in shipments-impossible under private railroad management—the
absolute necessity for assuring railroad labor that its just demands would be
met without necessity for strikes or threats of strikes. All these things and
others which I shall not attempt to enumerate made it imperative that the
Government should, without delay, assume possession and control of the
railroads as a war measure. It did this, and thereby brought into existence
full governmental power to readjust methods of railroad operations and
the currents of railroad traffic absolutely regardless of the interests of any
particular railroad company or of any private or selfish interest.
This extraordinary step being necessary, it was essential that it should be
taken in a manner calculated to help rather than to hurt a financial situa-
600
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
tion of fundamental importance. Such action was calculated to cause the
gravest disturbance to the whole financial structure of the country unless un-
questioned assurance could be given by the Government of an adequate protec-
tion to the holders of railroad securities, representing something like $16,000,-
000,000 in bonds and stocks. Even in time of peace the public interest would
have made it highly important to avoid any such financial disturbance, but in
the present war, when success can not be achieved without the raising of un-
precedented amounts of capital, it would have been unthinkable and self-
destructive for the Government in taking over the railroads to do so in such a
way as to disturb rather than reassure the general financial situation.
·
The Government had to take the step to promote the successful conduct of
the war, and it would have been, in my judgment, most unfortunate if the step
had been taken in such a way as to make the winning of the war more difficult.
After a careful study of the situation, I have reached the conclusion that the
three-year basis, as proposed, would not only be reasonable and just, but that
it would give the necessary stability to the general financial situation, and that
it would carry with it the financial reassurance which was necessary in order
to help the great financial undertaking which the Government itself must carry
forward. It must be remembered that the step which has been taken is not
intended to be a permanent one and therefore the proposed guarantee of an
income is not intended to be permanent. The Government has acted with
respect to an existing emergency, has taken temporary possession and control
of the railroads, and has the right to turn them back to the owners at any
time it sees fit, even during the period of the war, under the law as it now
stands, and in the meantime it has the option to readjust, according to its own
judgment of the necessities, the currents of traffic and the methods of opera-
tion. The measure is an emergency measure and the compensation is upon
an emergency basis and can not be correctly put upon exactly the same founda-
tion or basis which might be proper if the assumption of possession and control
were permanent and the guaranteed income were perpetual.
You have heard the arguments of the carriers as to why the proposed guaran-
tee is too small, and you have heard and doubtless will hear arguments as to
why it is too large. Any matter of such complexity might be made the subject
of endless debate, and there might be a hundred different views, each perfectly
honest and well informed as to the precise basis that would be the best, but
after hearing all that has been suggested from every standpoint since the Presi-
dent's proclamation, I have remained convinced that the basis proposed is fair
and reasonable, and that is what the Congress ought to direct their attention to,
and that is what the courts would impose if the question were remitted to the
courts. I am particularly convinced that it is fair and reasonable in view of
the optional character of the possession and control. Moreover, a just basis
promply provided and accepted will aid the Government incalculably in carry-
ing on successfully the stupendous financial undertakings essential and in fact
vital to the success of the war. That, in general, is the principle which I have
felt should animate us in dealing with this very vital problem. I do not attempt
to state the figures with accuracy, although I could do so by referring to memo-
randa, but I may say that in a general way the net income of the railroads, the
character of net income we are dealing with here, was something like a billion
and thirty-five million dollars in the fiscal year ended June 30, 1917. Upon the
basis of guaranty proposed, the Government commits itself to a guaranty out
of the revenues of the railroads of about $935,000,000. Am I right about that?
Senator KELLOGG. That is about right.
Secretary McADOO. In other words, we are taking the railroads over under a
guaranty of about $100,000,000 less than they earned in the last fiscal year of
the period, and in addition to that excess profits taxes are to be paid out of
that guaranteed income.
If the Government, with its powers of coordination and common use of facili-
ties, with the probable economies that may be practiced under its control of the
situation, and with an advantage of $100,000,000 over the proposed guaranty
as shown by the earnings of the last fiscal year ending June 30, 1917, has not
made a fair trade upon the merits of the proposition for a temporary use of
these properties, then I am frank to say I do not know what would be fair. I
say this notwithstanding the fact that railroad earnings show a large decline
during the last six months of 1917.
After all, this is merely an expression of my opinion. I do not say my opin-
ion is worth more than that of anyone else, nor even as much, but I feel that
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
601
upon the merits of the case and for the character of use the Government is
making of the properties and the fact that it has been able to get possession
immediately, without regard to the interests of stockholders or bondholders,
that it has a right to turn the properties back at any time under the law as
it now stands with any alteration it may have made of existing or preexisting
methods of doing business, which would have to be readjusted by the carriers
themselves-I think the basis is fair, and the Government must be fair and
just in this situation.
There is another reason: Whatever you propose to these railroads is not
something that you can impose merely because you propose it. You can merely
suggest a fair basis of compensation to them, with the expectation and hope
that they will all take it promptly and put at rest all the uncertainties and
anxieties with respect to the securities these railroads have issued, and which
are held in large part by banks and fiduciary institutions throughout the coun-
try as well as by individual investors, and which constitute a very considerable
and vital part of the credit foundation and structure of the country.
I would rather err on the side of liberality and get an agreement with every
one of these corporations as quickly as possible and set those questions at rest
so that the great financial operations of the Government may proceed without
having this cloud on the financial horizon than to try and pare the thing down
and be illiberal about it and remit these companies to the courts for this
remedy, and thus keep the whole financial situation in suspense and doubt
until decisions of the courts are rendered.
I think there is one thing that the Government can not stand for, and that
is deliberate injustice to any interest, public or private, especially in circum-
stances of this character where so much is at stake; and I feel, therefore, that
if we can offer what would be generally regarded as a fair basis for the use
of these properties so that the carriers would be willing to accept promptly
and keep the matter out of litigation, remove all uncertainties, it would be the
best thing we could do, not only for them but for the protection of the Govern-
ment itself in the matter of damages that may be claimed and in the common
interest as well.
AFTER RECESS.
The hearing was resumed at the expiration of the recess.
The CHAIRMAN. Mr. Cowan, before you proceed, Mr. Clark has a
statement he desires to make which, he says, will require only a
minute; so we will hear him first.
STATEMENT OF MR. W. M. CLARK, WASHINGTON, D. C., VICE
PRESIDENT AND NATIONAL REPRESENTATIVE ORDER RAIL-
WAY CONDUCTORS.
Mr. CLARK. Mr. Chairman and members of the committee, on
account of the sudden adjournment of the committee yesterday after-
noon Mr. Plumb, who is the counsel for the railroad brotherhoods,
failed to state the attitude of the brotherhoods in regard to section
13 of H. R. 8172. I desire to go on record in behalf of the four
train-service brotherhoods that they are in absolute accord with the
provisions contained in section 13 of H. R. 8172.
The CHAIRMAN. You will speak for the four organizations?
Mr. CLARK. The four train-service organizations. I simply want
to put myself on record as being in favor of that section.
(The committee then proceeded to hear the statement of Hon.
S. H. Cowan, of Fort Worth, Tex., whose statement was subsequently
interrupted for the purpose of permitting the committee to hear
the statement of Hon. C. A. Prouty, director of valuation, United
States Interstate Commerce Commission. Mr. Cowan's statement is
printed in full following that of Mr. Prouty.)
602 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
STATEMENT OF HON. C. A. PROUTY, DIRECTOR OF VALUATION,
UNITED STATES INTERSTATE COMMERCE COMMISSION.
Mr. PROUTY. Mr. Chairman, I was requested to come here by Mr.
Anderson, and I understood from him that the committee desired
perhaps to ask me some questions. I asked Mr. Anderson if he knew
why the committee desired my attendance, and he said he thought
it was because they thought I was an "antique"; I suppose he meant
because I had been in this business a long time before I got out of
it. I have no propaganda which I desire to present to the com-
mittee, but if you and your associates desire to ask me any questions
I shall, of course, be very glad to answer them.
The CHAIRMAN. Mr. Prouty, I believe you are the oldest living
member of the Interstate Commerce Commission?
Mr. PROUTY. Yes; still on the roll.
The CHAIRMAN. When did you become connected with the Inter-
state Commerce Commission?
Mr. PROUTY. I was appointed in 1896.
The CHAIRMAN. And served until when as an active member of
the commission?
Mr. PROUTY. Until about three years ago.
The CHAIRMAN. Since which time you have been director of
valuation?
Mr. PROUTY. Yes, sir; I resigned as Interstate Commerce Com-
missioner to become director of valuation.
The CHAIRMAN. Mr. Prouty, you have read the proposed legisla-
tion-the substance of it?
Mr. PROUTY. Yes; I have.
The CHAIRMAN. What seems to be the matter of the greatest con-
cern to the committee is, first, the three-year period-I mean as to
what is the proper basis of compensation of railroads while they are
used and occupied by the Government. We call it in this bill the
"standard return." Another question that seems to have been pressed
a good deal here is as to whether or not, barring actual war trans-
portation, the question of rate making or adjusting rates should re-
main with the Interstate Commerce Commission just as it is now.
Mr. Esch, what other matter, except section 13, have you in mind?
Mr. ESCH. I think that Judge Prouty would be a very competent
witness in reference to the $500,000,000 appropriation and the devel-
opment of the revolving fund.
The CHAIRMAN. As to that, I believe the Secretary of the Treasury
wanted to use as little money as he could.
Mr. PROUTY. It is gratifying to know that somebody wants to use
as little money as he can.
The CHAIRMAN. I mean in the way of appropriations. They
wanted the appropriation to be as small, especially in this initial bill,
as was safe and at the same time sufficient to meet the necessities of
the question.
Mr. PROUTY. Mr. Chairman, as to the standard return, I do not
understand that anybody believes that to be a proper basis necessarily
on which to compensate the carrier. If it were possible to determine
a proper basis, as I understand the matter, that is an expedient which
is resorted to as the best expedient which can be found for the
moment.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 603
The CHAIRMAN. For the purpose of making an agreement with the
carriers?
Mr. PROUTY. Yes; for the purpose of an agreement with the car-
riers. That is not a very satisfactory arrangement, because I am in-
clined to think that all those carriers who are getting a good thing
under that arrangement are going to take it, and those who are not
will probably want more. But, at the same time, after having given
the matter considerable consideration, I hardly know what more
satisfactory basis could be suggested to-day than something of that
kind. As to what the roads have earned on an average in the last
three years, I have not looked carefully at the figures, but my gen-
eral understanding is that one year was a rather poor year and two
years were rather good years. But if there were any way in which
the roads could get no more than that standard return amounts to,
I, as a member of the public, would be glad to give them that. The
only trouble with that is that the carrier who will get the fine
thing under this agreement will take it, and the carrier that does not
get anything may make a claim to secure something more. Just how
much there will be of that I do not think anybody can tell.
The CHAIRMAN. There have been several methods suggested as to
compensating the railroads, and that is one of them which is in the
bill. There have been amendments suggested, one by Mr. Plumb and
one by Mr. Thorne.
Mr. PROUTY. I am very familiar with the position of Mr. Plumb.
Mr. Plumb's claim comes to this, that the value of a railroad is
determined by the amount of money which has been invested, and,
therefore, if you can determine the amount of money which has
been invested you have the value of the railroad and you have the
sum on which the railroad ought to be compensated. Undoubtedly
what the railroad ought to be paid is a fair return upon its value.
The trouble is, we do not know what the value is. One man says
the value is the cost of reproduction new, and another man says it
is the cost of reproduction new less depreciation. Mr. Plumb says
it is the money which went into the road. No people agree about
that. The Supreme Court has apparently said that you are obliged
to take these figures and put them together and see what is a fair
value of the property.
But looking, now, to my own valuation work, it will be some time
before we get a value passed upon by the courts and determined by
them to be a proper value of these properties, and it rather seems
necessary in the meantime to agree on some other basis. As I under-
stand the theory of this bill, it is that what these carriers have actu-
ally earned under competitive conditions for the last three years is
about the most satisfactory test of what they are entitled to earn.
The CHAIRMAN. That is proposed as such?
Mr. PROUTY. Yes.
The CHAIRMAN. If I understood Mr. Thorne's amendment cor-
rectly, his basis of compensation was that you pay them the interest
accruing currently on their interest-bearing obligations, pay the
same dividends to stockholders that they had received in the year
1917, all over and above that to be divided equally between the
Government and the stockholders of the railroads, so as to give an
incentive to the railroad people, acting as the Government's agents,
604
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
to try to give the best service in order that they might add to their
earnings. That is Mr. Thorne's basis of compensation, if I cor-
rectly understood it.
Mr. PROUTY. Yes; I heard him testify for a few minutes before the
Senate committee, and I understood that to be his proposition.
Of course, I have thought a good deal about what ought to be done
with this valuation when we know just what the value of the rail-
road is, and it has come to be one pet theory of mine that the railroad
should be allowed to earn a certain per cent on its actual value, and
if it earns more than that you should in some form or other divide
that between the railroad and the Government in some proper pro-
portion, because that puts upon the railroad an incentive to earn
something more.
But in this case we are obliged to pay the railroads fair compensa-
tion. The stocks and the bonds of a railroad are in no way a meas-
ure of its value, and the dividends which have been declared and
the interest which has been paid or the stocks and bonds are in no
sense a measure of the value of the use of that property. So it seems
to me that Mr. Thorne's claim, while it is a good one when you know
what the value is, is not a very satisfactory one for the purpose of
determining the value.
The CHAIRMAN. But of the three plans, your judgment is that
the one most practicable and most easily applied now as a basis is the
three-year period that has been mentioned?
Mr. PROUTY. That is rather the way it struck me, Mr. Chairman,
but I do not think you ought to take my opinion about it, because
I have not given the matter as much consideration as you have. In
order to come to a satisfactory conclusion about it, you would have
to take all these figures.
Mr. HAMILTON. Then, you think it would be the best plan as an
emergency plan?
Mr. PROUTY. Yes; it rather struck me so. That is to say, what these
roads have actually earned in the last three years under competition
is the best measure of what they are entitled to earn. That is the
way it impresses me.
Mr. HAMILTON. But you treat this situation now as an emergency
situation?
Mr. PROUTY. Entirely. I would not for a minute suggest that as a
proper method of determining the method of compensation which
these railroads should finally have.
Mr. HAMILTON. No. There is a question associated with that,
Judge Prouty, which I might perhaps just as well ask now, because
somebody will ask it probably before you finish. It is in relation to
section 13. Do you think there should be a definite time fixed in the
bill when the Government should cease to operate and control the
roads under this arrangement?
Mr. PROUTY. It seems to me that what should be done with these
railroads when the Government ceases to operate them depends very
largely on how long the Government operates the roads. If this war
should end within a month, as we all hope it will, and as it may, I
do not see any reason why these roads should not be passed right back
to their owners without very much question about it. Their organi-
zation is the same, and there has not been anything done which would
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
605
´´interfere with their being passed back to their owners. But if this
war goes on for a couple of years and if the Government operates
these roads for two years, you have an entirely different situation.
You have a new organization. You have a new system of operation.
Your traffic takes new routes. Your shippers have become accustomed
to a new order of things. In fact, if that ever happens, I do not be-
lieve you are going to pass these railroads back to their owners until
you have revised a new system of regulation, or until you have per-
fected and changed the present system of regulation. By that time
you are going to have the value of these properties. There are a great
many reasons why I think a different system would have to go into
effect. It seems to me, that being true, the roads probably ought not
to be passed back until you have determined what system shall go
into operation and what shall be done with them.
Mr. HAMILTON. Could you not fix a time far enough ahead for
safety in that respect, Judge Prouty?
Mr. PROUTY. Of course, if you made it a year, I expect that would
be setting it far enough ahead, in all probability; but on the other
hand, if the war were to stop now, it would be altogether too long a
period.
The CHAIRMAN. Not exceeding a year, Judge Prouty?
Mr. PROUTY. Who is going to say what the time shall be? The
President? Not exceeding a year?
The CHAIRMAN. Not exceeding a year after the conclusion of the
war.
Mr. PROUTY. You gentlemen can judge about that better than I can.
It would seem to me that the time which ought to elapse will depend
upon the length of time the railroads are in the hands of the Govern-
ment and upon the conditions which have developed in the mean-
time. If you think that Congress can handle that and fix a definite
time and that that is the best way to meet that situation, of course,
you ought to put in some definite time.
Mr. HAMILTON. What do you think about the legal question in-
volved as to the right of the Government to control the railroads after
the war ceases?
Mr. PROUTY. I think the Government would have a right to con-
trol the railroads long enough to pass them back, but not any longer;
of course, this is a war measure, and they must be passed back within
a reasonable time, unless the Congress takes some different action
now. You may pass any kind of law that may put them into the
President's hands permanently.
Mr. BARKLEY. Do you mean, if Congress did not enact additional
legislation the roads ought to be passed back to the owners?
Mr. PROUTY. Yes, sir.
Mr. BARKLEY. But if Congress can legislate so as to postpone that
turning back to a day certain-
Mr. PROUTY. You can do anything you want to with them.
Mr. HAMILTON. Did I understand the gentleman's question to be
whether Congress could arbitrarily say that the Government might
hold onto and control the railroads indefinitely, and that you an-
swered that they could?
Mr. PROUTY. I do not just see any reason why not. And I do not
see any reason why, if you gentlemen said the Government was to
606
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
continue to operate these railroads, by proper compensation to the
owners, it would not be constitutional.
Mr. HAMILTON. Indefinitely?
Mr. PROUTY. I do not see any reason.
Mr. HAMILTON. After the war had ended?
Mr. PROUTY. I had not thought about that at all, but I expect Con-
gress could say, with the approval of the President, that the Govern-
ment should take the roads over permanently.
Mr. PARKER of New Jersey. Could that be done in the case of
State roads?
Mr. PROUTY. As a practical matter, there are no State roads. You
might find some little road wholly within a State, but I have had
occasion under this valuation act to determine what roads are State
roads and what roads are interstate roads. The act requires that all
roads subject to the jurisdiction of the Interstate Commerce Commis-
sion shall be valued, and I have only found two or three railroads
which could be regarded as State roads. All the other roads publish
tariffs with the Interstate Commerce Commission and handle traffic
under those tariffs.
Mr. SWEET. You do not mean the Government should take these
roads over without condemnation proceedings after the war is closed?
Mr. PROUTY. I do not mean that the Government should take them
over without proper compensation.
Mr. SWEET. But in order to provide that proper compensation you
would have to have a proper condemnation proceeding?
Mr. PROUTY. That depends upon what you mean by condemnation
proceedings. If the Congress of the United States says that the
roads are to be taken over, that takes them over, and then you must
provide some way by which the owner can be paid. The Congress
might not itself fix the condemnation proceeding, but there must
undoubtedly be some method by which the proper compensation shall
be determined. I think Congress might fix the compensation.
Mr. SWEET. I want to ask you another question. When will we be
able to fix the physical value of these railroads? When will the
work be completed?
Mr. PROUTY. Broadly speaking, we expect to finish our field work
in about two years, and it will take about one year more to complete
our office work.
Mr. SWEET. Then, it will take about three years?
Mr. PROUTY. It will be about three years from the present time be-
fore the whole work will be completed.
Mr. SWEET. Is there any system in which the work is completed?
Mr. PROUTY. Yes; there are systems where the work has been com-
pleted and a tentative valuation has been made. The law requires
the service of that tentative valuation on the carrier, on the Attorney,
General, etc., and that service has been made.
Mr. SWEET. On what roads have you completed that work?
Mr. PROUTY. Tentative valuations have been served in the case of
the Texas Midland, the Kansas City Southern, the Winston-Salem
Southbound, the E. J. & D., and the New Orleans, Texas & Mexico.
I do not think any tentative report has been served in the case of
the Norfolk Southern, although it has been prepared and ready for
service and was to have been served. And that is also true of the
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
607
San Pedro & Los Angeles, or the Los Angeles & Salt Lake as it is
called now.
Mr. SNOOK. Those are roads that have been very recently built, are
they not?
Mr. PROUTY. The Kansas City Southern is about a quarter of a
century old. The Norfolk Southern is partly a very old road and
partly a very new road. We have practically completed, and just as
soon as the commission decides some of these preliminary questions
so we can go ahead and put our work on paper in final form, we have
such systems as the Rock Island, the Santa Fe, and the Boston &
Maine and the Great Northern ready to work on.
Mr. SWEET. Now, would it be feasible or practical to base the com-
pensation for the temporary use of the roads during the war upon
the physical valuation already made on these particular roads?
Mr. PROUTY. I think you might in the case of the Kansas City
Southern do that, but if you did it you would need to go a step
further with the valuation itself. The Interstate Commerce Commis-
sion has held up to the present time that the valuation act does not
require the commission to put a value in dollars on the railroad prop-
erty; it simply requires us to collect all that information which
would be necessary. We show the cost of the reproduction new, the
cost of reproduction new, less depreciation; the original cost; the
financial history; the value of the land, and all that. Now, it is neces-
sary for somebody to take that information and put it together and
say that the road is worth so much, and the commission has said that
it is not required to do that by the valuation act. If you gentlemen
here wanted to make our report on the Kansas City Southern a basis.
of compensation it would be necessary for you to provide that the
Interstate Commerce Commission should state the value of that road.
They have all the information and they can do it in five minutes.
Mr. SWEET. I want to ask another question in this connection.
What discrepancy is there between these valuations you have ascer-
tained and the book valuations?
Mr. PROUTY. That depends entirely on the property.
Mr. SWEET. Could you answer that question in a general way?
Mr. PROUTY. It is very difficult to get an answer in a general way
because it runs all the way from nothing to a good deal. In the case
of the Kansas City Southern, which is perhaps the most significant
property that we have valued, the capitalization was $99,000,000.
We found the cost of reproduction, including lands, a little over
$50,000,000. We found the cost of reproduction, less depreciation,
about $7,000,000 or $8,000,000 less than that. We found the original
cost-that is, the actual money put into the property-to be about
$47,000,000. In addition to that, I had a computation made showing
the value of the stocks and bonds of the Kansas City Southern at the
market value on the day of the valuation and that the value was
about $60,000,000. And so we had a capitalization of $99,000,000, a
stock and bond valuation of $60,000,000, cost of reproduction
of $50,000,000, and a cost of reproduction less depreciation about
$40,000,000.
Now, the other day I said to our people, "Tell me to-day how much
the stocks and bonds of the Kansas City Southern are worth," and
the report came back $47,000,000. In the meantime these prices have
608 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
;
gone up, so that the cost of reproduction would be to-day $5,000,000
while the stock and bond value is $13,000,000 less. That shows how
these things can be juggled.
Mr. PARKER of New Jersey. You are talking about the stock and
bond market value?
Mr. PROUTY. The stock and bond market value of the Kansas City
Southern Railroad on the 1st of January, 1918, was about $47,000,000.
On June 30, 1914, it was $60,000,000.
Mr. DEWALT. Judge Prouty, you have said that the capitalization
of a railway company, the bonds issued by a railway company and
the dividends paid on the stock are not a true criterion of the value
of the property. Admitting that to be true, could you state briefly
and succinctly what items you take in in this valuation? You have
said you included lands, and I would like to know just exactly what
you did take in in this valuation.
Mr. PROUTY. We are required by the valuation act to report to
Congress certain facts. We are required to report the cost of repro-
duction new, the cost of reproduction new less depreciation, and the
original cost of the property. Sometimes we can show original cost,
and sometimes we can not. We are also required to show the financial
history of the company, which means to trace the history of the prop-
erty from the first, and show, if we can, the amount of money which
has actually gone into that property, and for what it went in. We
also show the present value of the land. We show the original cost
of the lands. We are required to show the cost of condemnation;
that is, what it would cost to condemn those same lands to-day. We
show the gifts and grants which the company has. received. Those,
I think, are the principal things we are required to show.
We are also required to show other values and elements of value,
which would include franchise value, going concern value, and things
of that sort.
Mr. DEWALT. Who is the final arbiter of this valuation? You
say you are instructed to find the facts; who makes the valuation?
Mr. PROUTY. Well, I supposed when that valuation act was passed
it was incumbent on the commission to fix that value. I remember I
made an address to the United States Chamber of Commerce on this
valuation question, and I said that when all these facts had been col-
lected then the commission has to take these facts and put them all
together and say this property is worth so many dollars. But the
commission has held, and I think rightly, that the valuation act does
not require that. Congress may do this.. You gentlemen may do it.
You gentlemen may say to the Interstate Commerce Commission,
"You are to do it.” It may be done in various ways. Some tribunal
must do it.
Mr. DEWALT. In these instances where you say you have substan-
tially completed the valuation, have you fixed the value?
Mr. PROUTY. No, sir; we just report these facts.
Mr. ESCH. The commission, however, determines the principles
that are to be applied to the units of the valuation?
Mr. PROUTY. They determine the principle which is to be applied
in showing cost of a reproduction new.
Mr. ESCH. You do not determine the ultimate value, do you?
Mr. PROUTY. No, sir.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
609
Mr. PARKER Of New Jersey. Judge Prouty, I am going back to one
of your previous statements. I understood you to say that you
thought that as an emergency valuation for this matter, for the three-
year period; that was probably the best thing that could be done.
Do you mean to say that the income for a proper and reasonable
period before taking it is the proper way, or do you mean to limit
this to a three-year period?
Mr. PROUTY. I would not mean to limit myself to any period neces-
sarily if the framers of this act have selected a period of three years.
Mr. PARKER of New Jersey. Have you any opinion as to whether
it ought to be the last year, which was high; the next to the last year,
1916, which was light; 1915, which they say was very low, subject to
the effects of the European war; 1914, which came in for other rea-
sons have you any opinion as to which period ought to be selected?
Mr. PROUTY. I do not see how anybody could have an opinion
about that without taking the figures and looking at them carefully,
and I have not done that.
Mr. PARKER of New Jersey. You do not mean to express an opinion
in favor of three years?
Mr. PROUTY. No; I do not know anything about that, sir. All I
mean is this: It seems to me that what the railroad had earned in the
past under competitive conditions is about the best measure you could
take of its earning capacity to-day.
Mr. SWEET. What suggestion would you make as to those roads
that are in a constructive period, that have earned nothing, where
their earnings have gone into betterments?
Mr. PROUTY. They have got to be dealt with by themselves, of
course.
Mr. SWEET. How would you deal with this?
Mr. PROUTY. I believe that this bill provides that the President
may make an agreement, if he and the carrier can agree; and if not,
it may be referred to a tribunal, and from that tribunal it goes to
the Court of Claims. That might be well enough. If there were no
provision about it at all the carriers would simply go to the courts.
If not, I do not know whether it would go to the Court of Claims
or not.
Mr. ESCH. The carriers contend that the three-year term provided
in the bill was unfair to them, in that it ignored the investment of
$213,000,000 since the 30th of June last.
Mr. PROUTY. That investment comes from two sources, I suppose.
It is partly from the sale of securities; that is to say, it is partly from
new money. It is partly from earnings; that is to say, it is partly
from income. I do not believe that as a matter of principle à rail-
road ought to be allowed to earn on improvements to its property
which have been made out of income; that is to say, the public have
contributed that, and I do not see any reason why the public should
be required to pay on it. Time after time in my discussions with
railroad men I have told them that the great objection to allowing
these advances in rates was the fact that they were piling up that
kind of a fund on which the public must pay a return. But at the
same time, I have always been unable to see how, as long as we leave
the thing as it is to-day, we are going to escape allowing earning on
improvements which have been made out of income. The carrier
40958-18-39
1
610
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
has that property-it is the property of the carrier-and it seems
to me, whether the property has been given to it or whether it has
earned it, or however it has got it, the courts are disposed to say that
whoever takes it must pay on the value of the property now being
devoted to the public service. Consequently, if it went to a court the
court would be likely to say that the public must pay on that
$235,000,000 for this time; but it ought not to. It ought not to pay
on that part of the $235,000,000 which the public contributed, and
that is the part which has gone in out of income. If I had the re-
sponsibility I would not object at all to trying to find out how much
of that was new money and how much was income and pay them a
return on their new money.
Mr. DEWALT. Somebody has said before us here that the true meas-
ure of compensation was the value of the use. What would you, as
an expert, take into consideration in estimating the value of the use?
Mr. PROUTY. Well, sir; I am not an expert on that.
Mr. DEWALT. For the time being let us consider you such.
Mr. PROUTY. But it occurs to me that the carrier would be entitled
to be made whole.
Mr. DEWALT. That is broad, but that is what I want to know. How
is he to be made whole?
Mr. PROUTY. I do not know. In the first place, you may say that
the carrier would have made so much money out of his property
and that it ought to be paid the same. In the next place, you may
say that the value of this property is so much, and that the carrier is
entitled to compensation by a return upon that value. But back of
that there is another question; as to what there is in it I do not know.
The Government takes this property. It is a growing property.
It is an established business. It has an established organization. It
operates that property for a couple of years; it rips the organiza-
tion to pieces; it diverts the traffic which was flowing over a certain
line, which would naturally choose that line; it has benefited one
road and it has injured another road. I do not see how you are going
to lay down any rule that will make that road whole. Perhaps no-
body will let us say anything about it; there may not be enough of
it to talk about, but I think you can all see that there might be a
question there.
Mr. DEWALT. They would be entitled to a compensation ultimately,
as a legal proposition, if they were deprived of trade by this process
of Government control.
Mr. PROUTY. It seems to me that is one of the questions that have
got to be decided when you pass these properties back.
Mr. DEWALT. Yes; that is what I say.
Mr. PROUTY. You may conclude that there is so much of a question
there that you never will pass them back. I have never favored Gov-
ernment ownership, but I have always said that it would come just
as soon as the railroads were not competent to handle the traffic.
The time has come when the railroads are not competent to handle
the traffic. It comes in time of war, and the emergency is such that
the people of this country will take these railroads over as a war
measure, but whether they will ever go back again I do not know.
If the thing runs along well and long enough, they perhaps never
would. But, at any rate, it seems to me that question has got to be
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
611
decided whend they go back, and that you can not decide the ques-
tion in advance. For that reason I have thought in my own mind
that perhaps the provision in this bill that Congress should deter-
mine after the conclusion of the war when they should be returned
might be wise.
The CHAIRMAN. Mr. Prouty, you may be conversant with the fact
that the railroad companies, represented through their committee
authorized to represent them, began what I call a campaign or a
propaganda before even the war in Europe began, seeking legislation
which, compared with the past, was radical; based upon the theory
and upon the fact, as alleged by them, that with the 48 States exer-
cising some power, and potentially at least, being capable of exercis-
ing a great deal of power, and the United States exercising through
its Interstate Commerce Commission other power, conditions were
such that the railroads could no longer readily market their securi-
ties; that on this account they had reached a state of arrested devel-
opment; that in order to double track, to build new roads and equip
them with additional terminals and all that they were in need of a
vast sum of money, running into the billions of dollars, and it would
be impossible for them to sell their securities under the conditions
then exitsing at such a price as would enable them to make those
necessary improvements; and that without them they would reach a
state of arrested development which meant the arrest of the progress
of the whole United States in a commercial way.
They then proposed that every railroad in the United States should
be compelled to take out a Federal charter, that the commission
should be rearganized, regional commissions established, and a very
ambitious program of new legislation undertaken to enable them to
serve the country at all. That was before the war came on. Now
the war has come, and on account of very greatly increased business,
due to the war, even before we got into the war, their conditions
have vastly improved; but even before that and for a number of
years before the war the roads, or some of them, were continually
asking for an increase in their rates in order to enable them to serve
the public. Now the war has come along and we have got into it,
and it has been proven by actual occurrences that the railroads as
competitors with each other for business, under laws that have been
designed to promote and emphasize competition, and with improved
equipment, etc., have been unable to render any service to the country
such as they should in time of war. The crisis is upon us.
Now, whatever may become of this operation-whether it is an
argument for Government ownership or an argument to continue
private ownership-judging the railroads' position by their own
utterances or by the utterances of the men authorized to represent
them, to return them to the condition existing before this war began
would be to return them to a condition in which they themselves
admit and claim it was utterly impossible to serve the public or
further improve their facilities for serving the public. So, in view
of the fact that they are taken over temporarily and for war pur
poses, is it not reasonable to suppose that legislation would have to
follow before these railroads could go back to their owners under
conditions different from the conditions that existed when they were
taken over, judged by their own record and their own utterances?
612
FEDERAL OPERATION OF TRANSPORTATION. SYSTEMS.
Why should not a future Congress be trusted to enact such legis-
lation as will enable the railroads to operate as privately owned
roads, with the information they will then have from actual experi-
ence? And that Congress may pass such legislation to remove, if
possible in its judgment, the difficulties which they themselves said
were insurmountable. Why should we name a specific date now in
this initial legislation that is to be regarded one way or the other
as an argument on permanent Government ownership? I have never
advocated Government ownership as such, and I have never ad-
vocated private ownership as such, but when the railroads them-
selves came before the joint committee of the House and Senate
before the war ever commenced and stated that legislation of the
kind they asked, or some other legislation that would give them the
relief they sought, must be had or Government ownership would be
inevitable without any war, it strikes me, and it can not help but
strike me, that we should not now undertake to name the time when
Congress would have to legislate.
Mr. PROUTY. I have tried to say that the thing strikes me just
like this: As you say, when these railroads go back into the hands
of their owners they have got to go back under a new system of
regulation. I think I started out with that proposition. Now then,
if you can fix a definite time to-day, without interfering with the
ability of Congress to deal with that question when it comes, I do
not see the slightest objection to putting in a definite date, and that
might ease the mind of somebody as to this legislation, because
Congress may not be able to agree when the time comes. But it
does seem to me that the legislation which must be enacted then may
very likely depend upon the time that the railroads are operated by
the Government and on conditions which exist at the end of that
period, and, of course, Congress would be entirely free to act if no
period were fixed. It seems to me that the committee has simply got
to make certain that there will be an opportunity for legislation
when that time comes, because it will be absolutely necessary.
Mr. MONTAGUE. And Congress would be just as free to act.
Mr. PROUTY. Just as free. The only trouble with that would be
this: As I have said, you might not be able to get together and
the thing might necessarily be deferred, so that you would not act
and the railroads would then go back without any proper legisla-
tion. But I suppose that even in that case Congress would agree
upon some provision by which the time might be extended. It is
all in the hands of Congress in either case.
Mr. Escн. Then what are your ideas, Judge Prouty, with reference
to the appropriation of $500,000,000?
Mr. PROUTY. I do not believe I have any opinion on that subject.
It depends upon what you use it for. If the Director General is go-
ing to use that $500,000,000 to take care of maturing obligations that
is one thing; if he is going to use it simply to make the necessary im-
provements, that is another thing. If he is going to use it to help out
the financial necessities of the railroads in meeting their maturing ob-
ligations, it would not seem to me any too big. If he were going to
use it for improvements, extensions, and all that, I would not have
much notion about it. Perhaps it would not be too big in that case.
We undoubtedly ought to go to work at once to increase our facilities
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
613
and the President should have whatever money is necessary to that
end.
Mr. Escн. This provision also gives him power to use the money to
purchase securities of the carriers at par and not to sell them below
par. Now, if he can not sell them below par might not that mean an
indefinite holding on the part of the Government?
Mr. PROUTY. It provides, I believe, he shall purchase them at not
above par and that he shall sell them for nct less than he gives. Is not
that it?
Mr. Escн. For not less than par.
Mr. PROUTY. My recollection was that the President was to buy at
not exceeding par, and he was allowed to sell at not less than he paid.
Mr. ESCH. That is correct; "not less than the cost thereof."
Mr. PROUTY. Yes. Of course you have to leave a good deal to some-
body's discretion. It makes a man's head swim to think of the power
one man must have, but perhaps there is no other way.
Mr. WINSLOW. Judge Prouty, under this bill would you consider
that the railroad employees were at this time under the Government
employ or under the employ of the railroads?
Mr. PROUTY. Well, that question lies at the basis of this whole
discussion. As I look at it, there are two ways in which the Govern-
ment, may take over these railroads. The railroad corporation is a
Government agency. Now, the Government may say to that railroad
corporation, "You, as a corporation, will do this thing. You handle
this car load of coal. You do this thing with your engines or with
your cars." It may say that to the corporation and the corporation
ought to do it if it is properly compensated. In that case the em-
ployee is the employee of the corporation. If the corporation loses
my freight my claim is against the corporation. On the other hand,
the Government may take over the railroad and operate the railroad.
In that case the employee is the employee of the Government. If you
want to know what is happening, I think you will have to ask the
Director General and not me. I can tell you this, I think the Director
General has absolutely got to make up his mind what the situation is
and let everybody know it. I do not know which it is.
Mr. WINSLOW. According to the testimony here of all the railroad
presidents who have testified, and there were many of them, they had
all received original notifications from the Director General that he
had taken over their roads. They subsequently received various gen-
eral orders, five or six at the time they were here, and they all testi-
fied that they thought they had been taken over. The personal coun-
sel of the Director General and the Director General himself to-day
affirmed that they have not been taken over. Would it be proper to
ask if you have any opinion as to how that ought to be construed by
the committee?
Mr. PROUTY. I have not known anything about this legislation; I
never saw this bill until a day or two ago; but I did happen to see
that proclamation before it was ever issued, and I was talking with
the gentleman who showed it to me and I said, "Now, here, as I un-
derstand it, when this proclamation is issued the status of every
railroad in the United States remains exactly as it is to-day, until
the Director General does something. He may under this proclama-
tion take over the operation of these railroads. He may under this
614
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
proclamation leave their operation exactly where it is now; but until
he acts the operation is left where it is now, so that every employee
is the employee of the corporation." And the gentleman with whom
I was talking, who is one of the men responsible for this whole thing,
said, "That is as I understand it." In talking with that same gentle-
man yesterday, he told me that he now understood the proclamation
made every employee the employee of the Government. So I do not
know.
Mr. WINSLOW. They admit that the Director General sent to every
railroad an order to the effect that he had taken them over. The
presidents of the roads testified to the same effect, and they filed
the orders with the committee, and they were to be embodied in the
record.
Mr. PROUTY. Well, it is a great question which plan ought to be
followed, but it seems to me, gentlemen, that to say to the railroad
corporations of this country, "You will take these railroads, operate
them as you see fit, carrying out the purposes that we indicate to you,
and we will pay you so much money, whether you earn it or not," is a
very dangerous experiment. If the Government is going to take
these properties over, I believe myself it is better to take them and
operate them. I should be afraid of the result in the other case.
Mr. WINSLOW. Would you feel that the services of the employees
would be as efficient under the present method as it has been under
the past method?
Mr. PROUTY. Do you mean, sir, that their services would be as
efficient if they were Government employees?
་
Mr. WINSLOW. Just as they stand to-day.
Mr. PROUTY. I do not know; it would depend. If these were not
war times, I should say no. Under present circumstances I would
not like to say. I have talked with railroad employees. I went up
to New York the other night and talked before the Railroad Im-
provement Society there, which is made up of employees, and I told
them that the best service they could render the Government-they
wanted to know what they could do to help the Government, and I
said, "The best thing that you can do is to do the thing you are paid
to do. If you do that and do it well, the Government will get along."
In talking with those employees I thought they were very largely
actuated by that thought-that they felt it was somehow their duty
to do as well as they could. That same feeling may run through all
the railroad employees. If it does, their service would be efficient.
But, ordinarily, I should say it would be suicidal to let this go on.
Mr. WINSLOW. There is, of course, an opportunity for slacking
and wasting time?
Mr. PROUTY. Yes, sir; the corporation does not care anything
about it, as it is going to get its pay, anyway.
Mr. WINSLOW. That would all tend to slowness in freight deliv-
eries and higher cost for doing business?
Mr. PROUTY. That is why I say I should think the Government had
better take this thing over and become responsible and let it be
understood that the employee is responsible to the Government. The
Government does not get very efficient service out of its employees.
At least they do not out of me [laughter], and I guess they do not out
of the rest of them. But that is the history of this thing, and I ex-
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
615
pect it would apply to the railroads. That is the objection to the
operation of railroads by the Government.
I was talking with a gentleman from Italy a short time ago and
he said this thing was bad and the other thing was bad, and I said,
"What in the world is the reason that your people, if these things
are so bad, do not sell these railroads to somebody else?" He said,
"Good Heavens! You could not get one man in a hundred to vote
for that." So I do not believe if we ever got to operating these rail-
roads they should take them back. The Italian Government did
operate their railroads and it was not very satisfactory. They sold
them to a private corporation, but it was not very long before they
bought them back, as they had a right to do under the agreement
which was made. There is something about the Government control
and operation that the people like. That is, they seem to like to
think," This is mine," and they really put up with a good deal they
would not put up with if it belonged to somebody else.
Mr. WINSLOW. On the assumption that the public will get some
advantage by virtue of different routing, etc., is there any good rea-
son to feel that the cost of it would be any less by virtue of economies
that are going to be worked out as proposed by the administration?
Mr. PROUTY. I do not want to express any opinion about that. In-
deed that is the whole question of Government ownership.
Mr. WINSLOW. Have you ever in your investigations followed out
the history of big commercial undertakings which have resulted from
the combination of units which were going to work great economies
with a view to noticing how they turned out?
Mr. PROUTY. No, sir. But I think I know this: Take a great railroad
corporation like the Canadian Pacific, for example, which operates up
in my country in northern Vermont. That corporation is so big that
their activities are about like Government activities. I am not cer-
tain that they get any greater efficiency than the Government. They
have put into effect certain rules, and there is no feeling on the part
of the employee that he should do his best. I was brought up on the
old Central of Vermont Railroad. Every prominent man on that
railroad had been an employee; he had come up from the bottom.
Every employee on the road knew all the officers of the road and
there was an espirit de corps on that road which undoubtedly pro-
duced results. But when you get up on the Canadian Pacific there is
nothing of that. They all hate the corporation; they would rather
see it lose money than not.
Mr. WINSLOW. Do you believe Government direction can take up
the slack as quickly as private direction?
Mr. PROUTY. That will depend on the man who has charge for the
Govenrment. The Intercolonial Railway of Canada, 1,000 miles
long, is operated by the Government. That railroad had never paid
operating expenses until recently. It was purely a political machine,
and a man was employed there because of his pull.
Mr. MONTAGUE. That is rather unusual, is it not?
Mr. PROUTY. I do not suppose that would apply in the United
States.
Mr. MONTAGUE. It happens everywhere except in our country.
Mr. PROUTY. Yes. They went to a friend of mine and wanted
him to become general manager and operator of that railroad, and
616
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
he said, "I won't do it; I don't stand any chance." They said to
him, “You go in there as the general manager of the railroad, and
you shall have a free hand. You shall employ no man unless you
want him. You shall be allowed to discharge any man if you want
to." He went there, and in one year he converted the thing from a
nonpaying to a profitable institution. The road was operated as
efficiently as the Grand Trunk. He told me he found no difficulty,
although it was a Government road.
Mr. MONTAGUE. The analogy is not at all perfect, but you will
recall a few years ago the agitation of the trust question. There
seemed to be a general concensus among the best economists of our
country that if the unit exceeded such a size it would cease to be
economically efficient?
Mr. PROUTY. Yes, sir.
Mr. MONTAGUE. Do you believe that would apply to railways?
Mr. PROUTY. I have just indicated that it does; that it applies to
railroads that are 1,000 miles long or over.
Mr. MONTAGUE. Mr. Thorne appeared here and made an interest-
ing argument, and one of his chief contentions was that the rate-
making power should be left in the Interstate Commerce Commission,
and that operations along should be given to the Director General or
the President acting through the Director General. What do you
think of that?
Mr. PROUTY. It seems to me that there ought to be just as little
disturbance as possible in the relations of the public to these rail-
roads. I believe-I do not know whether this satisfies anybody or
not, but of course I have got to state the thing as I believe it-I
believe the schedules which are now in effect should be continued in
effect; that they ought not to be altered until they are altered by the
Interstate Commerce Commission or by the State commissions. If a
man wants his rate altered he ought to go to the Interstate Com-
merce Commission and have it altered, and that tribunal should not
alter it until after there has been a hearing.
So, ordinarily speaking, it seems to me that that whole thing ought
to go right along as it does now, and the Interstate Commerce Com-
mission and the State commissions ought to discharge just about the
functions that they do now. But there are circumstances under
which that ought not, perhaps, to be true. There are certain incidents
to the rate which the Director General, perhaps, ought to control.
One of those things is demurrage-
Mr. DOREMUS. Do you call that a rate?
Mr. PROUTY. Yes; that is a rate; the Interstate Commerce Com-
mission has power over it, and it is not only a rate, but a rate of tre-
mendous consequence. That one item sometimes determines whether
a man shall do business or not. The distribution of cars is another
incident of the rate, and a tremendously important thing, but I am
inclined to think that has got to be taken care of by the Director Gen-
eral. The routing of traffic is an incident of the rate, and I think
that has got to be taken care of by the Director General. Whether
there is any case where the mere rate itself, the difference the shipper
is required to pay, ought to be under his direction, I do not know.
If such a case should arise in a war emergncy, h ought to have the
power to fix the rate. But I am strongly of the opinion that for the
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
617
most part the Interstate Commerce Commission, under some order
of the Director General or some provision of the bill, ought to go
ahead and discharge substantially its present functions.
Mr. SNOOK. You do not consider demurrage a rate, do you?
Mr. PROUTY. Yes, sir.
Mr. SNOOK. Is it not more in the nature of a penalty?
Mr. PROUTY. It enters into the rate and is a part of the rate. You
may call it a penalty.
Mr. SNOOK. Judge, if I get a carload of freight and unload it
promptly, I have to pay no demurrage, do I?
Mr. PROUTY. No.
Mr. SNOOK. Then it does not affect my rate at all, does it?
Mr. PROUTY. It does not affect your rate if you unload your car
within the stipulated time.
Mr. SNOOK. But if a get the car of freight and use that car as a
warehouse, I am penalized?
Mr. PROUTY. That is a rate. Your demurrage is a rate fixed by the
Interstate Commerce Commission and varied by the Interstate Com-
merce Commission.
Mr. SNOOK. Not for transportation, but for the detaining of the
car.
Mr. PROUTY. But the Supreme Court of the United States has held
that transportation does not stop until you get your stuff out of that
car.
Mr. SNOOK. I understand that, but is it not a penalty?
Mr. PROUTY. You may call it a penalty. It is a part of the whole
transaction and it is part of the money which you pay as a condition
of getting your freight.
Mr. BARKLEY. It is rent for the use of the car, even after it has
stopped rolling?
Mr. PROUTY. Well. I have never thought so, but it makes no differ-
ence how you define it. It is a thing over which the Interstate Com-
merce Commission has always had jurisdiction, and it is one of the
things I am inclined to think the Director General ought to have ju-
risdiction over.
Mr. SNOOK. I am inclined to agree with you on that, but the reason
is because it is not a rate.
Mr. BARKLEY. Do you think it would be wise for Congress to at-
tempt to stipulate in this bill things for the Director General to do?
Mr. PROUTY. I do not attempt to say about that. I do not know
what the ideas of the Director General are, nor what his plans are.
If I were the Director General, the first thing I did would be to issue
an order requiring schedules to remain in effect and requiring them
to go to the Interstate Commerce Commission if they were in doubt
about it.
Mr. BARKLEY. You were not here this morning?
Mr. PROUTY. No; I have not been here at all.
Mr. BARKLEY. In the statement of the Director General he out-
lined a plan—perhaps not exactly a plan, but his idea, which would
probably coincide with yours-and gave certain instances, one of de-
murrage and one of diverting of freight through a tunnel that was
exclusively for passenger traffic, as instances where he thought he
ought to have authority; and he made the statement that in all cases,
618 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
except some emergency matters, even if he had the right and the
President had the right to fix the rates, it ought to be left to the In-
terstate Commerce Commission to make the investigation, to hold
hearings, and things of that sort.
Mr. PROUTY. I did not know what the feeling of the Director Gen-
eral might be. I was asked my own feeling.
Mr. BARKLEY. In view of that, do you think it would be wise for
Congress to attempt to say just what things shall be left to the
Interstate Commerce Commission and just what things the Presi-
den shall act upon on his own initiative?
Mr. PROUTY. That is a thing I had not thought about. I think
you leave it as it is the Director General probably will take care
of it.
if
Mr. SNOOK. Do you think that is a wise thing to do for the
law-making branch of the Government to leave things to other
people and assume that things will go along all right?
Mr. PROUTY. No; not unless there is some necessity. But the
danger, if any, might be if you undertook to define the exact thing
which the Director General could do, or the President, and the
exact thing which the Interstate Commerce Commission could do,
you might unintentionally cut off something that the Director General
ought to have power to do, and unless that is necessary it would
not, perhaps, be wise to do it. I just meant to say that if you would
leave things as they are, in view of what the Director General has
said, there probably would not be any difficulty about it.
Mr. SNOOK. Mr. Barkley and I do not coincide about what the Di-
rector General said.
Mr. Escн. If the Director General exercised the power of fixing
rates or a system of rates, might it not destroy the whole relation-
ship of rates and bring about possible chaos?
Mr. PROUTY. Yes; but on the other hand you must understand that
we are in a war and that the conditions and the considerations which
ordinarily apply to the fixing of rates do not necessarily apply now.
For example, I went down to Chattanooga the other day. The
sleeping car was jammed full, and I had some curiosity to find out
what all those people were traveling for. Most of them had no
business; they were just merely floating around. It would have been
better for everybody if they had stayed at home. Now, it might be
desirable to do what has been done in other countries, to increase pas-
senger fares for the mere purpose of keeping people at home, but if
that were done as a war measure it would not be done on a con-
sideration of what ordinarily enters into the fixing of a passenger rate
at all. I merely cite that as an illustration of what might happen if
things got bad enough.
Mr. HAMILTON. Mr. Prouty, have you any means of knowing how
many cars are now in use carrying munitions and Government sup-
plies?
Mr. PROUTY. I have not the slightest idea.
Mr. HAMILTON. And therefore no means of knowing how many
of these cars are on sidings?
Mr. PROUTY. No, sir; I know it is very bad, but I do not know the
details of it.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
619
Mr. HAMILTON. I was asked to inquire about that of some witness
who might have information. I do not suppose there is any way of
getting definite information in regard to that, is there?
Mr. PROUTY. Why, certainly there is. I suppose the director gen-
eral ought to know that now. I do not know whether he does or not.
Mr. ESCн. The Bureau of Car Service in the commission would
know?
Mr. PROUTY. Yes; the Bureau of Car Service ought to know it.
Mr. HAMILTON. In that case, as you will be going over your re-
marks, why could you not incorporate in them at about this place a
statement showing about how many cars are now in use carrying
munitions and Government supplies, and, second, how many cars,
approximately, are now being held on sidings-
Mr. PROUTY. You mean all kinds of cars?
Mr. HAMILTON. Freight cars. Then there is the further question
whether it would conduce to more speedy disposition and transporta-
tion of supplies if there could be warehouses for the storage of sup-
plies instead of holding cars, as is being done now.
Mr. PROUTY. Of course I can answer that last question now. I
know that it would, and probably nothing would operate more to
relieve immediately the present congestion than the building of
warehouses at proper points.
Mr. HAMILTON. That answers the third question. As to the other
two questions, if you can get the information I would be glad.
Mr. PROUTY. I can only get it from somebody else. They may
tell me and they may not.
Mr. DEWALT. Some one here I will not mention his name-took
this ground, that under the act of 1916, by which the President took
the management or had the right to take the management and con-
trol of railroads, he inherently had the right to fix rates; inherently,
because the act gives him the control and management. The same
gentleman went further, in answer to a question, and stated that he
believed that the authority of the President or the director general
in regard to the fixing of rates should be paramount; and even fur-
ther, that it should be exclusive if necessary; in other words, by
analogy of argument, that the functions of the Interstate Commerce
Commission should be nullified.
Mr. PROUTY. He was probably right on that, was he not?
Mr. DEWALT. I am not saying who he was.
Mr. PROUTY. It sounded familiar to me; that was all. [Laughter.]
Mr. DEWALT. Do you take that ground?
Mr. PROUTY. NO; I have been taking the other ground a good many
years. But I ought to qualify that in this sense. The President
has taken over these railroads, and if that proclamation amounts to
this, that the Government is in possession of the railroads and is
operating the railroads, and if the employees are Government em-
ployees, I do not know that these rates which have been put in effect
are obligatory on the Government. It may be that as the situation
exists the Director General has the power to fix the rates. I would
not like to say that was not so; I am rather inclined to think it is so.
But I understood you gentlemen to inquire what the situation ought
to be, not what it was to-day.
620 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
The CHAIRMAN. As I understand it, the Interstate Commerce Com-
mission, in passing upon a rate, either passenger or freight, could
not take into consideration any question of discouraging the trans-
portation of passengers or one kind of freight over another, but
would simply have to fix a reasonable rate?
Mr. PROUTY. I think so.
The CHAIRMAN. In other words, it could not have a policy to dis-
courage travel or shipment?
- Mr. PROUTY. No, sir.
Mr. BARKLEY. And if during the war a question of rates should
come up before the Interstate Commerce Commission it could only
take into consideration the same things it had heretofore taken into
consideration in fixing rates?
Mr. PROUTY. That would probably depend on how it came up. If
the United States Government were to see fit to suggest to the com-
mission that it would like to have these rates advanced for a certain
purpose I should have no doubt about the right of the commission to
permit the advance or to advance the rates, because the carrier is
no longer interested in that rate. It is not a question of compensa-
tion any longer; it is simply a question of policy. At the same time
these rates are all built up as one scheme. They are largely com-
petitive, commodity against commodity and locality against locality,
and to allow anybody to autocratically and empirically slaughter
these rates and disarrange all this harmony would be wrong to the
shipper and wrong all around.
•
The CHAIRMAN. If there is nothing further you wish to say, Mr.
Prouty, we thank you. I do not think there is any man in the
United States whose opinion I would rather the people of the United
States would know than your own.
Hon. THETUS W. SIMS,
·
INTERSTATE COMMERCE COMMISSION,
OFFICE OF THE DIRECTOR OF VALUATION,
Washington, January 25, 1918.
Chairman Interstate and Foreign Commerce,
House of Representatives, Washington, D. C.
Dear Mr. CHAIRMAN: I have been thinking about the matters underlying the
bill upon which you were good enough to hear me more since I gave my testi-
mony than I had before, and I wish to be presumptuous enough to call your
attention to one phase of this matter.
I am told that there is a strong probability that Congress may incorporate
in this bill some sort of a provision requiring the Director General to take over
short lines and probably other lines which desire to be taken over. Now, you
should clearly understand that if the Director General is obliged to take over
all the railroads of the United States, and if he is obliged to pay the prosperous
railroads on the basis of their returns for the last three years while the im-
pecunious railroads have a right to go into court and say, "Here is an actual
investment upon which I am entitled to earn whether I have or not in the
past," a situation will be presented which will involve possibly the payment of
millions in excess of what has been earned by our railroads as a whole in the
past.
It seems to me that if the President is required to take over a rail-
road that should be upon condition that he can first make with that rail-
road a fair bargain for its use. If he can not agree upon the terms of the use,
then he ought not to be required to take over the property unless the emergency
demands it.
Respectfully,
C. A. PROUTY, Director.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 621
STATEMENT OF HON. S. H. COWAN, FORT WORTH, TEX., REPRE-
SENTING AMERICAN NATIONAL LIVE STOCK ASSOCIATION AND
NATIONAL LIVE STOCK SHIPPERS' PROTECTIVE LEAGUE.
The CHAIRMAN. Mr. Cowan, if you are ready you may proceed.
Mr. CowAN. My name is S. H. Cowan; place of residence, Fort
Worth, Tex.; I appear in representation of shipping interests which
I have represented for a long period of years, sometimes regularly
and sometimes not, but in particular for that interest, which I have
represented continuously for 25 years or thereabouts, and actively,
in matters pertaining to railway operation and railway rate prob-
lems and legislation concerning the same, before the Interstate Com-
merce Commission, and in the State of Texas before State commis-
sions in numerous cases. I refer to the live-stock interests, princi-
pally in the western part of the United States, which are organized
into various State organizations and into the organization known as
the American National Live Stock Association, with headquarters at
Denver, which I represented for some 12 or 14 years as its general
counsel, and late the organization known as the National Live Stock
Shippers' Protective League, which is composed of substantially all
the State and National organizations of live-stock producers, feeders,
and shippers; and the shipping and marketing interests as repre-
sented by the live-stock exchanges at all of the principal live-stock
markets of the United States, the headquarters of that organization
being at Chicago.
These organizations, I might explain to the committee, comprise
the largest and most important organization of shippers that exists
in the world. I do not mention that to brag about it; I mention it
as a fact and in order to emphasize the importance of the resolutions
and actions of these various bodies which are taken at their con-
ventions. They are always carefully considered by the leading men
of the country from the various States, whose opinions and judg-
ment are entitled to consideration.
Beginning at about the year 1914, when the advances of rates were
being made throughout the country, practically all the live-stock
organizations as then organized, though not so extensive and strong
as at present, aided in bringing about a general organization of the
shipping interests throughout the western part of the country.
The CHAIRMAN. Mr. Cowan, would it discommode you to allow
Mr. Prouty to go ahead?
Mr. COWAN. I will be very pleased to do so.
The CHAIRMAN. Mr. Prouty has come here from the Interstate
Commerce Commission and desires to return as soon as possible, and
I understand he will not require much time.
Mr. PROUTY. It is very immaterial to me, Mr. Chairman. I am
perfectly willing to speak either first or afterwards.
The CHAIRMAN. You being an official and a very busy man, I
think we had better hear you first.
Mr. PROUTY. Mr. Cowan is a busier man, perhaps, than I am,
although not an official.
(The committee then proceeded to hear the statement of Hon. C. A.
Prouty, director of valuation, United States Interstate Commerce
Commission, after which Mr. Cowan resumed his statement as
follows:)
622
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. COWAN. Mr. Chairman, I believe when I stopped I was brag-
ging somewhat about myself and the associations I represent. I was
just saying, when I gave way to Judge Prouty, that about the time
of the combined effort, after the days of rebating were practically
over, the various organizations of the country-shippers, who be-
longed to that class that can not pass the buck-sought the power in
the hands of the Interstate Commerce Commission to hear and deter-
mine these questions and decide what the rate ought to be. That
brought on a warfare, some witnesses to which are members of this
committee. I am one of the survivors of that warfare, and my
organizations have been continuously in that controversy, and it is
not very strange that I am somewhat familiar with what has hap-
pened. I would be a competent character witness for the gentlemen
who were on the other side, having knowledge of their habits, their
surroundings, and what they had done. That may be taken into con-
sideration, gentlemen, when you consider that I speak with more
assurance about the habits of these gentlemen than otherwise one
would be justified in doing. I am a good deal like a good coon dog;
1 know the trail when I strike it.
Hence I see some things in this bill not put in there by the pro-
ponents of the bill for the purposes which I see in the bill, but which
will have an effect which, in my mind, is calculated to be very disas-
trous to the country and very profitable to the railroads, and which,
if you view it as I do, you will not put in the bill. In addressing my-
self to the bill H. R. 8172 it is no part of my object to oppose the bill
as such, but to aid, if I may, in a proper consideration of the objects
to be attained and to obtain the best results; at the same time to
protect the shippers in their fundamental rights of just, fair, and
reasonable rates that are nondiscriminatory and to have them deter-
mined by the best tribunal that we have been able to establish for
that purpose.
It is necessary to bear in mind the objects of the bill. If one
clause would determine the objects of the bill-that is to say, the
objects that we have in framing the bill under the emergency-we
can find language then to put it into effect as a law, but we must first
come to a uniform idea as to what object it is we expect to accom-
plish and what dangers we expect to avoid. I am in sympathy with
the legislation for the Government operation of the railroads, and
what I shall say is addressed as much to those who framed the bill
as it is to the committee, believing, as I do, that they would welcome
the suggestion if they will lead to the best results in the public
interest and in the equitable and fair treatment of the railway cor-
porations and of the individuals most interested.
The first public announcement which led to the proclamation of
the President and the appointment of the director general, and the
action that is now proposed in the passage of this law, was the report
of the Interstate Commerce Commission to Congress growing out of
a hearing in the Fifteen Per Cent case, with which I have been con-
nected all through, upon an application of the railroads of the eastern
district for a rehearing in that case. It will scarcely be proper to here
point out the detail of all that was said in that case, but it is sufficient
to point to the fact that it was asserted by the eastern carriers that
the burdens of the war had so congested the traffic, owing to the
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
623
difficulty of handling it at terminal ports-most of it undoubtedly
due to the inability of the Government and others to secure shipping
at those ports-that they were unable to efficiently operate the rail-
roads, although they had a maximum of tonnage on their lines, but
they could not efficiently operate, partly because of their insufficient
power. Then following that the insufficient number of cars to accom-
modate the traffic in the manner in which it was handled, and they
were held an unreasonably long time at the point of destination.
Then they were confronted with the labor conditions that made the
labor difficult to handle, difficult to procure labor; the loss of much
of their labor of the skilled class of men who went to other em-
ployments.
It was not so much a situation, therefore, with which the par-
ticular rates or the fabric of rates had to do, as the conditions which
had come upon the country by reason of a multitude of things, in-
cluding the exigencies of the war.
Cooperation as between the carriers and the operation of them as a
whole and under one systematized agency which would efficiently
use all the equipment and tracks to the best advantage and pool the
interests of the railroads and consolidate their management was
discussed at the hearing and seemingly thought to be desirable on
the part of least some of the prominent representatives of the carriers.
Upon the part of the shipping interests represented by a few of us
there was a general concurrence of opinion-and it was so ex-
pressed—that it would be advantageous to have Government opera-
tion of the railroads during the war. As to the matter of prescribing
rates, I scarcely believe it entered into the minds of any man present
then had anything to do with the matter at all, or that anyone sup-
posed that there would be a different method of prescribing rates than
that which had been provided and which the Interstate Commerce
Commission was administering. True, they wanted higher rates;
they have always wanted that, and they were wanting it before the
commission in the hearing of the Fifteen Per Cent case in the begin-
ning, and it was the subject matter before the commission at this hear-
ing. But the standads which were used to measure rates the earnings
of the railroads, the monthly reports which the commission had stated
in its previous opinion it would give consideration to in determining
whether it might modify its original decision of July-were before
the commission, and taking it all together it was quite evident that
the carriers had not shown a condition which justified a general ad-
vance in freight rates more than they had already received, which in
the merchandise rates had amounted to probably about $100,000,000
when all of them should become affected, part of which not yet being
in effect.
The carriers contended that they were facing a calamity, pros-
pectively. The commission found that that was not justified by the
circumstances, and they passed up their decision in July and held
open the monthly report that is to say, they would determine from
them whether the amount of net earnings therein shown would jus-
tify a modification of the decision. Mind you, the railroads prepare
and put out their monthly reports. The policy of each railroad com-
pany with respect to how much expenditures are charged to operat-
ing expenses and thus deducted from the gross revenue was a matter
624
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
of their own volition, not being limited by any very substantial or
certain rules. It was quite possible, therefore, to adopt a policy
which would charge everything that was possible to the operating
expenses and thus reduce the net earnings month by month. To some
extent that took place, yet the gross earnings per month increased
enormously. As I said, you might as well turn a nigger loose in a
watermelon patch and tell him not to take one as to hold out that
inducement, "if your monthly report shall show a less net, then we
may consider whether you will be entitled to an increase in rates.”
Of course the monthly reports showed a less net, and they came for-
ward with an application for an advance in rates, which some of
them begun within a month and a half after the printing of the
opinion of the commission rendered in July.
Now, I don't say that they didn't have a right to do that, and I
don't say that it is not always proper for the representatives of a cor-
poration to want to make more money. It is the sole object of the
organization of the corporation, and the more capable the man is
who operates that business to secure gross returns and net returns the
better it is for the company he represents. But it may be the worse
for the public. So it will not do to place too much reliance upon their
opinions as to what you ought to do. An opinion, as a matter of fact,
can always be testified to without the fear of contradiction, because
you can hold the same opinion still, notwithstanding the facts that
may confront you.
It requires the most elaborate preparation and analysis of these
figures to determine whether or not these opinions are justified. Now
who does that? The Government hasn't anybody to do it; the public
is not represented at these hearings; there is nobody who supervises
the actual expenditures of the money or keeping the accounts, so that
you can not tell, except by what they say about it, what the real net
earnings are. But taking what they said about it, it is difficult enough
to analyze their figures, but when they were finally analyzed and
printed they didn't justify the advances which they claimed nor
did they furnish a basis for the prediction of the calamity which they
said was about to befall them beginning last February and coming
cn down to this date.
Previous to the enactment of the Elkins bill in 1903 the rebates,
discriminations, and preferences prevailed universally to a greater or
less degree. The object of the bill was to prohibit these wrongs and
punish both carrier and shipper-at least to make them afraid. In
other words, to make them afraid to buy the business. Hence it was
quite immaterial in those days what the paper rate was. It was a
paper rate for most large shippers. When that condition played out,
then there came on this systematic effort to advance the rates, and so
far as I know they have worked day and night shifts at that up to
this date.
Now they call into their aid-or rather, there came into it in the
course of events-the unparalleled skill and legerdemain of the great-
est prestidigitators of the world, the New York bankers who owned
control of the railroads, yet did not own the railroads. That was an
education to the public. And among other evidences of this education
were letters addressed by bankers everywhere to their corresponding
bankers throughout the country, and so it came about that the bank-
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
625
ers nearly all over the country believed the railroads were being
badly treated. That was not the fact, but after the decision in the
15 per cent rate case and the disappointment, some of the railroad
presidents-for example, Mr. Rea-took the Interstate Commerce
Commission to task for its inability to discern the necessities for the
public to advance rates; and continuously they have lambasted the
commission for not having granted these advances. Of course, the
commission was impotent for a long time to prevent advances in
rates. At that time they paid but little attention to it.
After the commission became an effective board, anyone who has
had occasion to do much business around the interstate commerce
office has found, constantly almost, an army of representatives of the
traffic departments and various other departments of the railroads,
in the offices and before all the boards and bureaus of the commis-
sion-appropriately so. They have a right to be there; they should
be there, but the constant dripping of the water upon the stone wears
it away, so that I may say that the Interstate Commerce Commis-
sion-honest and honorable as it is, and each of the members could
not help receiving information and being affected more or less by
statements constantly made to them, undoubtedly, about the bad
treatment that the railroads were receiving, and how bad off they
were.
Now, there were but very few persons representing the shippers
about the interstate commerce office, because the shippers relied, of
course, necessarily, upon the ordinary course of events in transacting
their business, and they could not afford to be present. I wish to read
to you something that was said in this case with regard to the activity
of shippers in defending their rights in regard to advances in rate.
Mr. Underwood, of the Erie Railroad, in making a statement before
the commission, said:
Denying a rate advance at this time is not in the real interest of anyone.
That position at all times is largely fallacious, for the reason that the real
payer of the rates is never represented here. The burden of rates paid becomes
so delicately adjusted, so finely apportioned, that it is a matter of financial
consquence to no particular person; hence, the real rate payers, the public,
will neither come himself nor pay a representative to.appear here in the matter
of advancing rates.
The CHAIRMAN. That is Mr. Underwood?
Mr. COWAN. This is Mr. Underwood, of the Erie. So we have it
from him that the shippers are not there, but the others are.
Now, it can not be said that the Interstate Commerce Commission
has not been in the end, and as an ultimate result of the work, more
favorable to the railroads than to the shippers-not intentionally
doing a wrong to the shippers, but out of the very force that naturally
surrounds them in this campaign of education of which I have
spoken-and I am not mentioning these matters idly, because I will
refer you a point on that subject in a moment, I think, of importance.
The commission became tired of the continuous statements through-
out the country, by the press, of the terrible condition of the rail-
roads; that they were going into bankruptcy, and pointing to the
fact that some railroads were in the hands of receivers, and the like.
So, when they made the order granting the rehearing in the 15 per
cent case, they pointed to the fact that it was time that the facts be
placed before the public, and that many misleading statements had
40958-18-40
626
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
been published in the papers. Now, that campaign of education has
led a great many people to believe that the railroads have not been
earning enough money.
The standard return as provided here is the highest average of
any three years, I think, that can be found, estimated upon the basis
of the single-track mileage. That is to say, reduce the railroad mile-
age of each one of the systems in a given district-there being three
of the subdivisions, eastern, western, and southern-and put it upon
a single-track mileage basis-that is the only unit you can use. You
can not use the unit when you pass over two, or three, or four years
of a railroad company earning so much this year, so much the other
year, and so much the other year, because of the additions in the way
of mileage or the additions of double track and the like. They ask
you, therefore, to guarantee now that the railroads will earn the
highest amount they have heretofore earned and I believe they
claim that that will be inadequate. Now, I say that the records
before the Interstate Commerce Commission in these cases, presented
by the shippers, is an analysis of the returns from the result of
operation under adverse conditions and circumstances, so far as our
ability to analyze them and to get the figures is concerned-the
facilities to get figures-satisfied the commission, although acting
under the greatest pressure from all over the country to advance
rates, that it was out of the question to do it, unjust and unreason-
able.
Now let us see what the situation is in regard to rates and what it
was then. We are paying to-day in this country on the base rate per
hundred pounds between the principal commercial centers, on the
principal commodities, the highest rates we have ever paid-with
some rare exceptions where rates have been advanced, and then cut
down by the commission-and nearly all the base rates throughout
this country from one end of it to the other are rates that bear the
stamp of approval of the Interstate Commerce Commission as to
interstate rates, and the approval of the State commissions as to
State rates; and have been subject, had the railroads desired to do it,
to bringing a suit before the United States Court to enjoin these
rates on the ground that they were confiscatory and did not afford a
just compensation for the service. Now I say those rates are higher
by 20 or 25 per cent, than they were 20 years ago. The proposition
therefore involved you creating a vested interest under the Consti-
tution, a vested right to have this Government pay on that basis
without a chance of revising the amount you pay at any time within
the period of the Government control.
I wouldn't hesitate to take a gambler's chance on granting them
that amount if it would only last two years, and I know it would
only last two years; but when I consider that I don't know how long
this war will last, and no legislator knows how long it will last, you
are doing the most dangerous thing I have ever heard proposed.
Now I don't believe that Mr. Payne, Mr. McAdoo, and Mr. Ander-
son have given a thought to this thing. As I said at the outset, it is
my desire to help; it is the desire of the people I represent to help
in this emergency; to aid all we can. But we want to aid in avoid-
ing a calamity to the country and the turning over to these rail-
roads of a vested interest that we can not shake off or get away from.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
627
Now under the rule I will say that we are giving them the highest
amount. If they went into court to have determined what is reason-
able compensation or what is a just compensation under the Consti-
tution, it wouldn't be based upon the highest amount they have ob-
tained. You want to get an average return from what a railroad
earns of the net earnings, and you can not take three years. That
does not accomplish it. The Supreme Court of the United States
in the Tift case and other cases has held that the making of extensive
improvements ought to be distributed out over a period of years
and not charged out in operating expenses as it was done in the
Southern Yellow Pine case in a single year. I should say that the
method this committee ought to adopt, in order to ascertain what was
the earning capacity of these railroads-I don't mea to say you shall
adopt the earning capacity as a standard, but you want to ascertain
that fact as one of the prime factors in arriving at what standard you
would grant—that you should take the years 1908 to 1917, inclu-
sive-the fiscal years. I use that period because it brings it down
to the present and takes it continuously back during a period where
the railroads were operating under rates largely prescribed by the
Interstate Commerce Commission and the State commissions, not
materially different to what they are to-day; and because the ac-
counting of the Interstate Commerce Commission-the new system-
went into effect in 1908, and you would have the same method of
finding what the return was, the net return, by the same character
of deductions upon the same plan from the gross.
The CHAIRMAN. You say from 1908 to 1917?
Mr. CowAN. That will make 10 years, from 1908 to 1917, inclusive.
That would be 10 years. The accounting system began in 1907, and
1908 shows a full year of the new accounting.
Now, when that is done you will have arrived at what the rail-
roads did during that period as reported to the commission, what
they earned in net revenue and in net operating income after deduct-
ing taxes, the two items sometimes being interchangeably used. But
the net revenue from operation is what remained from the process of
deducting from the gross revenue from operation the operating ex-
penses reported, as made up in the report as required by the rules
of the commission.
+
Now, that is all the earnings of a railroad. That is one thing that
you gentlemen should bear in mind. It may be all the earnings;
it might be somewhat more. That depends on the policy of the
given system of railroad as to how much is charged in operating
expenses, how much of deferred maintenance there may be, and the
condition in which it may keep its property. But presuming that
it keeps its property in as good condition as when it started, presum-
ing that it complied with the rules of the commission, then it is as
near as we can get at it in determining how much they did in fact
earn in net. I know of no other way to do it, although you can take
individual railroads and sift it out and find a great many corrections
that ought to be made to that.
To show you how that may be I will bear in mind a decision of
the commission rendered in the investigation in the Southwestern
rate advances, beginning in 1903, where it was found by the com-
missioner-Judge Prouty having rendered the decision that on
628
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
the Gulf, Colorado & Santa Fe Railway in Texas the earnings, in-
stead of being a certain amount, should have been $1,000 per mile
greater, because they expended during that period in betterments on
the property at least a thousand dollars per mile.
The CHAIRMAN. Out of earnings?
Mr. Cowan. No; charged in operating expenses-yes; it was out
of earnings. It was charged in operating expenses and reduced
what the net would have been had the thousand dollars been added
to it.
Mr. DEWALT. Just let me ask you a question. Taking all their
revenue and their net income from 1907, could that be attacked as a
basis because of this fact: It seems that prior to 1907 the accounting
system of these various railroads took into account large capitali-
zation and bond issues and betterments and improvements, and that
system of accounting actually remained; that is, that system of ac-
counting up to 1907 is now a part of the basis which is being carried
on since that time.
The CHAIRMAN. As part of the investment?
Mr. COWAN. As applied to property investment, you are correct;
but the property investment in the balance sheet of a railroad as á
general proposition-that is, the cost of the property is entered on
the first item, I believe, in the balance sheet is what a railroad has
been able to get in debt. The face value of the securities and what-
ever it has been able to get in debt is entered up as the cost of the
property. Now, of course, that is somewhat of a facetious remark,
but it would be rather surprising to investigate to find how nearly
true it is. Of course, it is not altogether true. Some of the roads
are not overcapitalized. Some of them are. So that the item of cost
of property as it appears in the balance sheet is unsafe to use for
any purpose, so far as I know.
Mr. DEWALT. But I understand from the testimony that that is
still used and that the figures prior to 1907 are carried on the books.
Mr. CowAN. They are brought right on down; yes, sir. That is all
included in that, but that does not affect the statement that I made,
that when you undertake to ascertain what the earning power of the
railroad is it would be better to take the 10 years, reducing it to a
single-track mileage basis, find what it was per mile of line for the
average of the 10 years, rather than to take the 3.
Mr. DEWALT. I understand.
Mr. CowAN. Now, in the case of the Santa Fe I haven't figured it
out. I have got the figures here for all the western roads, so it would
be figured up, but I didn't have any machine to operate with, and I
couldn't operate it if I had it. I will have it done though and fur-
nish it to the committee.
In the case of the Santa Fe it amounts to about $500 per mile
less than the three years, and would be somewhere around $3,600 per
mile, say, of net, which would amount to-well, it would represent
property worth something around $60,000 per mile. Of course, the
property is not worth that per single-track mile.
Now, I say that this measure of return that they propose invites
a deficit, which is to be supplied in the end by general and large
increases in rates, and I say it might as well be the declared purpose
of the bill as to be its necessary result.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
629
There are two controlling factors underlying the bill and under-
lying this feature of it; first, the sustaining of the credit of the rail-
road securities by practical underwriting; and, second, should it
become necessary then to tax the shipper, regardless of the reason-
ableness of the rate the shipper pays, there is nowhere in the bill—
and there isn't much in the proclamation, if anything—with respect
to the doing of some act or the carrying on of some particular process
simply for the benefit of the shipper. The financial end of this propo-
sition is the one that has been a leading one all the time. It has
always been so when it comes to an advance in rates.
The right and necessity of taking over the railroads, of course,
means, as I take it, that it should be upon reasonable terms, and that
should not involve requiring the shipper to pay an unreasonable
rate, and therefore it should not involve setting aside the laws that
provide the method of determining what that rate should be.
Now, the public duty of a railway corporation and the duty of the
public to it, and of the shippers, and all of the rights pertaining to
the transactions, whatever it may be, whether it be between the
State and the railroad, between the shipper and the railroad, or
between the railroads and each other, is involved in that term
"reasonable," which we have inherited from the common law. Now,
is that so? How does it happen to be so? Ordinarily the law will
sustain the contract whether it is reasonable or not, if the parties that
make it are competent, but the Supreme Court of the United States
in the Lockwood case, along in Eighty-fourth United States, hold
that a contract which would result in requiring the shipper to do an
unreasonable thing is not valid, and as far back as that they point
out that the railway and carrying companies are in the hands of
great corporations, and the shippers and the corporations are dealing
on unequal terms; that the shipper must patronize the corporation
whether he wants to or not, or forego his business, and he must do it
on such terms as the corporation names; and therefore that the ob-
ligation is inherent in the transaction that the corporation names
no more than is reasonable.
Now, if the law, the common law, as administered by the Supreme
Court, and the declaration of each statute of each State, and the
declaration by Congress in the act to regulate commerce that these
rates must be reasonable is to be set aside; it means then that the
Government may do or bring about the doing of what this Govern-
ment has condemned and what every State has condemned and what
the common law has condemned, namely, the requiring of the doing
of an unreasonable thing by the shipper and authorizing the rail-
road companies to receive an unreasonable reward. The war power
doesn't involve that; the war power requires nothing but the oper-
ation of the railroads, and I can't imagine a case where the matter
of the amount of the rate is necessary or can become necessary, unless
it would be in the shipment by the Government of Government
material.
I agree with the gentleman who asked Judge Prouty the question
in regard to the demurrage penalty. The nature of it is apparent,
but it is a charge of which the Interstate Commerce Commission was
given jurisdiction. Of course it is inherent in the transaction of
handling freight. It arises when the shipper is not able to unload or
630
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
does not see fit to do it; that he can use the car practically as a ware-
house by paying so much for it, but he is penalized, according to the
common expression of the shippers and traffic men, for doing it.
Now that could be fixed as a penalty, but that is only a means to an
end. The object sought in that case is to compel the unloading. The
exercise of the war power can unload it in the same manner that
the Director General said, "Carry this train of coal under the
city, although it is a violation of the law." They could unload
it for him-unload it anywhere they pleased. Of course, as Judge
Prouty has said, the providing of warehouse room is the most im-
portant thing in the whole transaction, and if there were ample
warehouses for unloading to-day there are ample cars in this country
to handle all the business, provided there is expedition in the move-
ment of these cars.
Now, I think the case of demurrage, therefore, is one where it was
not necessary in the exercise of a war power-if that is what it was
for-to increase the rate in order to induce the shipper to do the
thing. The war power means, make the shipper do it. That is all
there is to it-exercise the military authority to make him do it. If
he don't do it, do it for him yourself and get your car.
Now, as to the routing of traffic, that was appropriately put under
the authority of the Interstate Commerce Commission, but there are
no penalties for routing traffic.
The rate is not changed by routing traffic, unless one chooses to
take some route where there is no through rate. But that wouldn't
be an important part of the equation, because the shipper is not going
to do that. Besides, if there is a route which is reasonable, appro-
priate, and the Interstate Commerce Commission, on application,
would require the making of a joint through rate, and those joint
through rates I don't suppose the Government would think about dis-
turbing for a moment, because they might want to use them them-
selves. They might want the people to use them.
The general supposition-and it seemed to be uppermost in the
mind of the director general, from his testimony-was that he
would change immediately the routing of freight in this country.
That is the greatest mistake that has been presented to these com-
mittees. I have been listening to the Senate committee for several
days, and here somewhat. You may assume that the shipper knows
his business better than anybody else knows it. You may assume
that he will choose the line of least resistance to that business in
order to get it from the place where he starts it to where he lands.
it. And he can choose the best routing better than anybody else. A
chicken generally knows where to go to roost better than somebody
knows where to tell him; and there will not be I can make this pre-
diction—there will not be any considerable changing of the routing
of freight, except that which is to be exported, which will have to be
diverted to ports where there isn't a congestion-if they can get the
vessels there, if they can get the bottoms there. Now, that naturally
would have been done if they had gotten the vessels there, but they
couldn't.
Mr. Escн. They might change the routing in order to avoid con-
gested terminals.
Mr. COWAN. Yes; I was going to say that.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 631
Mr. Escн. Around Chicago or Pittsburgh, for instance.
Mr. CowAN. Certainly. That is not so much a changing of rout-
ing as it is a change in the place of export. Now, in the routing of
traffic through Chicago it does appear to me and I suppose that is
well known, of course I know it is to you, Mr. Esch-that traffic
could be moved around the city there, or can be moved to some other
junction point; and I don't think very much traffic ever moves
through Chicago—that is, through traffic, I mean-affecting the ter-
minals in Chicago. But, at all events, I have heard of no disturbance
there in regard to that.
Now, you can see the injury that might be done by fixing a demur-
rage rule of the sort that the Director General fixed. He fixed it.
because of the conditions in New York, perhaps, more largely-
partly because of the conditions in Chicago, Pittsburgh, or possibly
St. Louis and a few important terminals. But you take the thou-
sands of cases-hundreds of thousands of industries-where in the
ordinary course of business they have been in the habit of paying so
much per day if they can unload in a certain time, and where the
arrangement of the merchant and the dealer and the miller is to
handle his business so as to be able to utilize the car, may be; for one
or two days longer without any extraordinary penalty, and competi-
tion with some one at some other place, this demurrage rule of $10
a day would simply be prohibitive on his business. He couldn't take
a chance on it wherever in the handling of traffic he might have more
cars than he had room to unload. In the heavy wheat season it
would deprive the local points where there are small elevators of any
chance to handle even half the business of the ordinary kind.
Mr. EscH. What, in your opinion, would be the effect of the latter
part of the demurrage order recently issued, and which became effec-
tive last Monday, to the effect that the Director General, through his
agent, could embargo shipments to dilatory consignees after the tenth
day? You notice that was in the order?
Mr. COWAN. Well, I wouldn't want to express an opinion about
that. I wouldn't say. It may have been justifiable, of course, but
when the shippers all over the country, as was shown by Luther
Walter the other day, speaking in behalf of the Industrial Traffic
League before the Senate committee, that when the railroads had
been acting under demurrage rules and the State commissions have
approved demurrage rules and the conditions necessary to handle
the commerce of this country, which is enormous, and they come to
a conclusion as to what it ought to be, all trying to act for the best
interests, it is going a good ways to upset that throughout the entire
country under the war power.
Now, I say the war power can be exercised for these exigencies at
given localities as a penalty to simply force them to unload the cars,
rather than to upset the entire commerce of the country under the
exercise of the war power. Now, it may be that the Director Gen-
eral would do that in the best way, but it is scarcely possible that I
or you, not familiar with the matter, could make as good a rule as
these commercial people who have met together and arranged this
for the purpose of suiting the commerce of the country.
So my appeal to you, gentlemen, is to let the Interstate Commerce
Commission regulate all of the matters of rates and the regula-
632
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
:
tions and practices with respect thereto in the commercial traffic of
the country; but I think a clause can be so drawn that it will have
a provision or a proviso sufficiently definite for all probable expecta-
tions that will reserve to the director general the power to do such
things as may be necessary in the exercise of the war power without
disturbing the rates and the regulations and practices prescribed by
the Interstate Commerce Commission.
Mr. MONTAGUE. Have you formulated any section to submit to the
committee?
Mr. CowAN. No; I have not. I have preferred to confer with the
attorneys who have drawn this bill rather than to bring in something
to add to their structure.
Mr. ESCH. Well, if it is the result of such conference, and you
agree upon such a matter, will you make it a part of your hearing?
Mr. CowAN. Well, I don't know how it would get to you.
Mr. MONTAGUE. The attorneys might never bring it to the consid-
eration of the committee.
Mr. CowAN. If they don't, I will undertake to formulate a section
that would, in my opinion, accomplish that end. I want it
definitely understood, and no mistake about it. I desire the exer-
cise of all the war power that any reasonable necessity requires, but
I don't want to go to the extent, on a mere guess that it might be
required in some instances, to deprive the shippers of the oppor-
tunity of having the Interstate Commerce Commission and the
State commissions fix the just and reasonable rates throughout the
country for its commerce, in order that it may be carried on.
Mr. DEWALT. I suggest, in order that there may be no mistake
about that matter, that you draft such a proviso or such an amend-
ment.
Mr. COWAN. Well, I will endeavor to do so.
Mr. DEWALT. It might be overlooked.
Mr. COWAN. I will endeavor, at the request of the committee, to
do so; but I don't want the director general or the attorneys who
drew this bill to feel that I am in the attitude of opposing the power
which they say is the power they want to exercise. My criticism of
it is that they say, "We are in favor of the commission fixing these
rates; we are not going to disturb them in doing that; they will not
be disturbed, but we want the supreme power left with us with
respect to all of it." I say we should leave them just such supreme
power as they probably ought to have, but let the business of the
country go on like the President said, with as little disturbance as
possible.
Mr. RAYBURN. You don't think you can get them to present your
amendment, do you?
Mr. COWAN. Well, as Mark Twain said, I believe, you never can
tell from the looks of a frog how far he can jump. "I don't know
whether I can or not. I can try it.
Mr. RAYBURN. You are not going to make a man give up power
that he has, unless he has to do it.
Mr. CowAN. Now, in regard to the short-line railroads, I hold no
brief for them. I do not represent any railroad in any sense about
anything; I wouldn't mind doing it if they would pay me enough,
but it seems to me incomprehensible to undertake the Government
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
633
·I
operation of the railroads of this country in any other manner
mean the successful operation-than seemed to have been subscribed
to by Judge Prouty. If the Government operates the railroads, and
when you undertake to operate the corporation-or, rather, operate
the railroads through the corporation that is now operating it-and
you pay a fixed sum of money that they know they are going to get
anyhow, whether school keeps or not, you are going to produce a
calamity in this country; and if you do it-I mean to say, if you
adopt that plan of compensation-and take away the incentive for
the performance of individual effort and man power behind it, you
will lose such a large per cent of efficiency that the Government oper-
ation will be a complete failure, and an enormous tax will be coming
out of the Treasury or the pockets of the shippers. Innumerable
things can happen.
I want to read into the record here—it is so important that I don't
want to overlook it—a letter which I received stating actual facts.
Now, we can make many guesses on these things, but get down to the
actual thing of doing a thing, and you find out how it is. This is a
letter written by Mr. John K. Rosson, who was formerly live-stock
agent for the M., K. & T. Railroad and for many years in the railroad
service in actual handling of live stock, going with the trains and
looking after that business throughout Texas, Kansas, Oklahoma,
and partly in Missouri. He is now in the live-stock commission busi-
ness at Fort Worth:
Mr. WILLIAM G. MCADOO,
Railroad Director General, Washintgon.
•
DEAR SIR: Now that the Government has taken control of the railroads, which
I advocate as being the proper thing to do, I desire to make a few suggestions
from practical experience which I am very sure will benefit the service, elimi-
nate claims for damages to the producer and shipper, and relieve the present
and future congestion.
The first thing that should be done is to cut down the tonnage to the engine,
to the extent that a train crew over a division of 120 miles, which is an average,
can make the run on through freight in six to eight hours. This condition
would encourage your trainmen to make an effort, would prevent your engine
being overworked, it would come out of the shop with less repair, and make
three trips where now it is making two. Any practical railway man that hasn't
the tonnage bee in his bonnet will tell you these are the facts.
I wish to digress here long enough to say that Mr. Gardner, who
was general manager of the Chicago & North Western Railroad, tes-
tifying before the Interstate Commerce Commission in Chicago-I
am not sure whether Judge Prouty was holding the hearing or not-
on inquiry with regard to the effect of the tonnage system that had
been then in vogue for two or three years, perhaps, on the North
Western Railroad, said that he had been in the service-I think he
said 20 years or 25 years-whatever time it was he was then general
manager of the North Western-and that when they ran little en-
gines, shorter trains, and got over the road, they got along better
than they did with the heavy power and the heavy train loading.
I mention that to bear out what Mr. Rosson says:
I can recite many instances where within the last 30 days, and go back 12
months, if you desire, where trains of live stock, which are perishable freight,
have consumed 75 to 120 hours in making a trip of 400 miles and being fed
once en route. You can readily see the heavy loss sustained by the producer
and shipper, to say nothing of the deterioration of the animals and the number
of pounds of beef that is lost in the shrinkage, which is in these times a detri-
634
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
ment and a waste to our country. This condition is what is causing a real
shortage in equipment, as these cars would be used three times where they are
being used twice. The same applies to dead freight as well, as I can recite
an instance where wheat was shipped from a station 13 miles to Fort Worth
and was not delivered at the elevator until eight days, when it should have
been unloaded the next morning.
When I was in the railroad service 20 years ago we handled shipments of
cattle from on the Denver, Fort Worth to St. Louis, without feeding in 44 to
46 hours, making the second morning market after loading at 10 a. m., the
date of loading, and this was done most every week in the shipping season.
In handling this live stock we reduced the tonnage 25 per cent, which elimi-
nated all claims and made satisfied customers, and the company made money.
I feel very much interested in the Government taking the railroads, and
any assistance I can be able to render will be done, in behalf of the producer.
And so forth.
Now, if the operatives of the railroads have the stimulus to do
that thing that he pointed out, they car. accomplish that, but if they
have no stimulus to do it, it will not be done. It is an illustration
of how the incentive should always be carried in mind. Now, if a
railroad company has no motive or incentive to do more than just
go ahead and handle as little traffic as they can, and induce as little
movement over the road as they can, and the employees do as little
work as they can, and create overtime when they can, I say it will
be a calamity to the country. Now, they all agree that that is the
case-everybody that I have talked to--but they say, "How are you
going to help it? If we make this guarantee to the railroads, what
they ought to have, how are you going to help it? The director gen-
eral is going to divert traffic, and how can you create an incentive?"
I have studied over that a good deal, with a view to trying to pre-
sent something, and I haven't anything precisely to present, but
after discussing it with several gentlemen and discussing it with
Mr. Thorne, we came to the conclusion--and I concur in what I sup-
pose he presented here-as he did to the Senate committee-that
after paying the interest and the customary dividends and all of the
fixed charges, that the surplus-that is to say, the amount remain-
ing over and above that, within that "twilight zone," it might be
called, for want of a better term-of what the public is interested
in or ought to have some right in, and what the railroad company
ought to have a right in, that you divide that in some sort of a per-
centage basis.
I have thought that you should give the railroads 75 per cent of it
and the Government 25 per cent; so that all of the big systems of
roads at least would be vitally interested in securing the most active
operation; the most efficient operation to the end of making that
much more money for their companies and for their stockholders. I
would no more turn the Santa Fe System-and I think it is the best
operated one in the United States-I would not think of turning
that_system loose to its two or three or four thousand employees-
maybe 5,000-and in effect say to those employees, many of whom I
know personally, "It don't make any difference to us whether you
earn any money or not." It is true Mr. Ripley will never say that;
Mr. Story wouldn't say it; neither will the managers of the road, but
they all know it, and you might just as well say it to them—“ It
don't matter whether we haul any freight over this road; we get so
much money from the Government; if we can play on the job, that's
all right." And you needn't doubt that they do play on the job
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
635
very often.
You can not get efficient service unless the man has
some sort of responsibility that he is bound to fulfill in order to hold
his job.
Now, let me give you an illustration of that from actual experi-
ence-actual practice to emphasize what I have said. Mr. Brooks,
who is now with the Food Administration in the matter of trans-
portation of live stock in particular, a very capable man, was made
the general live-stock agent of the Santa Fe System at Kansas City.
It had come about that you couldn't ship a trainload of cattle 500
miles or so, say from Denever or Fort Worth to the Missouri River,
without unloading these cattle en route and feeding them. Investi-
gation of the stockmen led to the information that many of these stock
pens were rented out to men who furnished the feed, and the charge
for it was a dollar a bale, when it cost about 20 cents. Well, you can't
keep an engineer and conductor from falling down and not being able
to get there within 28 or 36 hours, as the case might be, and the law
required them to be unloaded and fed.
So nothing could pass by Emporia, 108 miles from Kansas City.
Nothing could pass Grand Island, Nebr. You couldn't get into
Chicago without stopping out somewhere to feed when you shipped
from the Missouri River. Complaint was made but it didn't do any
good. Finally, we got a meeting of the operating men-some of
the live-stock agents suggested that we get that and there were
general managers of all of the southwestern lines present, representa-
tives of the various live-stock organizations throughout the different
States, and the national organizations. They met at the Santa Fe
offices in Chicago and this matter was taken up and the instances
given where trains had stood waiting to be unloaded at Herrington,
Kans., for example, and whole trains of cattle, for 8 hours. They
could run on to Kanasas City in less time than that. They were held
there because they didn't have room in the pens to unload them, and
the law says you must stop and feed and rest. It developed then
for the first time to these managers what was being done. The
Herrington pens were leased out so that the lessee got the dollar a
bale for the 20-cent hay, and there was some sort of a game that
stopped these cattle there all the time. It was an enormous loss,
and caused loss and damage, and the railroad company had to pay
it. Mr. Brooks was directed by the Santa Fe and other men repre-
senting the other roads were directed by them to adopt a system to
stop that, and here was the system adopted by the Santa Fe: Every
conductor had to make a report at the end of his division run, which
divisions are generally 100 to 120 miles, of exactly what took place
on the run and of the exact condition of the cattle, and if there was
a slow down or stop why it was.
And Mr. Brooks testified before the Interstate Commerce Com-
mission in regard to the proposed advance in rates from the Pan-
handle of Texas to Kansas City, that he had reduced the claims for
damages to such an extent that he was ashamed to tell it. The fact
is they reduced it to 50 cents a car, when it had been $2 or $3 a car
in previous times. Now, there is the man power in it. If there wasn't
a motive behind that to reduce loss and damage, which is always
charged up as an operating expense, then you will have loss and
damages increased in this country 100 per cent. Perishable freight
636
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
will be thrown away and there will be an actual loss to the country of
accumulated labor, live stock, and perishable freight, the like of
which you never saw.
Now, if there is any appeal that I can make to this committee that
would be worth while to the public, and I would be serving this Gov-
ernment in war time, it would be that you do not leave this case
where there is no motive on the part of the operatives of a railroad
to perform an efficient service, and if you do, gentlemen, you are
not doing your duty, in my opinion, as Congressmen.
The CHAIRMAN. May I interrupt you just a moment there, Judge?
Gentlemen of the committee, when Judge Cowan is through, this
closes our hearings. We have promised to hear Judge Thom make
an argument to the committee at the close of the hearing on the bill
as it might be then with any proposed amendment up to that time.
Is that right, Mr. Rich?
Mr. RICH. Yes, sir; Mr. Chairman, Mr. Thom desired to make an
argument as soon as the bill which has been drawn by the administra-
tion was in its final form, and that bill, I understand, is now in its
final form, and Mr. Thom to-day, this noon, was furnished with a
copy of it. I would like to say, however, that Mr. Thom has been
almost continuously before the Senate committee, and he has been
requested by the Senate committee to make his argument there on
Friday, and he wanted me to say to you that he hoped he would be
excused from further appearance here until after his argument
before the Senate committee.
The CHAIRMAN. Well, the way the matter has been arranged it
was that the hearings would close to-day with Judge Cowan and that
to-morrow we were to hear Judge Thom for one hour and Mr. An-
derson for one hour, unless the committee, after hearing them, de-
termined to extend the time. We wanted to close this up so that we
could begin considering it as a committee after to-morrow, hoping
that we might get the hearings printed by Saturday, at least. Now,
if Judge Thom is going to make an argument to the Senate com-
mittee, it will be along the same lines on the completed bill.
Mr. RICH. I understand that he desires to discuss various features
of this bill in its final form.
The CHAIRMAN. You mean as proposed now?
Mr. RICH. As proposed now.
The CHAIRMAN. Couldn't he deliver that argument before this
committee to-morrow?
Mr. RICH. He told me to-day that he desired to take all of to-
morrow for the preparation of his argument before the Senate com-
mittee and before this committee.
The CHAIRMAN. Well, his argument before the Senate committee
will be printed, will it not?
Mr. RICH. I presume so; yes, sir.
The CHAIRMAN. Then we could have the use of it.
Mr. RICH. Of course, this committee would have the use of it.
The CHAIRMAN. It is nearly 5 o'clock now. Judge Cowan, will
you finish in the morning?
Mr. CowAN. I desire to finish in the morning, but I wish to say
that there is some data which Mr. Cary, who is here, and is my
assistant and has been all though the 15 Per Cent case, has and
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
637
which he has not had the time to present to the Senate committee,
and I want that in this record and I would like for the committee
to now give Mr. Cary five minutes to present that. It is in regard
to the surplus that has been earned by the principal lines of railroad,
which was used in the 15 Per Cent case, and these tables have not
otherwise been presented in the record either before the Senate
or before this committee. We can present that in the morning,
however, if you desire.
The CHAIRMAN. Then the committee will stand adjourned until
10.30 to-morrow morning, to meet in the committee room in the
Capitol building.
(Whereupon, at 4.45 o'clock p. m., the committee adjourned until
10.30 a. m., Thursday, January 24, 1918.)
COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE,
HOUSE OF REPRESENTATIVES,
Thursday, January 24, 1918.
The committee met at 10.30 o'clock a. m., Hon. Thetus W. Sims
(chairman) presiding.
The CHAIRMAN. The committee will come to order. You may pro-
ceed, Mr. Cary.
STATEMENT OF GRADDY CARY, OF LOUISVILLE, KY.
Mr. CARY. Mr. Chairman and gentlemen, I will try to be just as
brief as possible. Judge Cowan tells me that he wishes to discuss.
this question of surplus at some length, and he aked me to take the
stand and put in certain figures that I had compiled and used in the
15 Per Cent case, which appear to have considerable bearing on the
matter you are now considering.
I would like to offer in evidence an exhibit that was filed in the
15 Per Cent case and was designated "Cary Exhibit No. 1." The
purposes of that exhibit as used then were somewhat different from
the purposes that we now wish to use this exhibit, but it sems to be
pertinent at this time.
When this exhibit was prepared we were undertaking to show that
two-thirds of the traffic or the great bulk of the traffic of the coun-
try—was being handled by a comparatively few roads, and that those
roads were in a good condition financially, and in addition to paying
their regular dividends-and in a good many instances extra divi-
dends they had built up their surplus in the last 10 years to figures
astonishing.
The CHAIRMAN. Do you want to present that exhibit in full and
then comment on it?
Mr. CARY. I would like to, if it meets with the approval of the
committee. It is not very long, and while it looks large, there is not
very much on each page.
The CHAIRMAN. Without objection, that may be done. You can
put it in here, and then your comments and explanations will follow.
(The paper referred to is as follows:)
638
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
CARY EXHIBIT NO. 1.
THE FIFTEEN PER CENT CASE-BEFORE THE INTERSTATE COM-
MERCE COMMISSION, EX PARTE 57-IN RE APPLICATION OF THE
RAILWAYS OF THE UNITED STATES FOR A GENERAL ADVANCE IN
FREIGHT RATES OF 15 PER CENT.
[Compiled by the National Shippers' Conference, S. H. Cowan, Clifford Thorne, Luther M.
Walter, Graddy Cary, Clyde L. King, Committee. Authorities: Reports of Interstate-
Commerce Commission; Carriers' Exhibits in Ex Parte 57; Carriers Reports to Stock-
holders.]
STATEMENT RELATIVE TO REVISION OF EXHIBIT CARY No. 1.
In order that there may be no possible confusion about the ultimate
showing of this exhibit, we here present a revise of said exhibit to
conform to suggestions made by Mr. Nay, the witness for the rail-
roads.
This exhibit, as now revised, adopts every figure suggested by Mr.
Nay, with the one exception of a deduction of $35,418,052 for the de-
preciation of securities of unaffiliated companies held in the treasury
of the Union Pacific. We did not make this deduction for the reason
that Mr. Nay admitted on cross-examination that $50,000,000 had
been appropriated and set aside out of surplus by the Union Pacific
in 1913 to cover a depreciation on these very securities. Having been
once deducted, it would be an error to again deduct it.
Certain it is that if the above item is deducted from the unaffiliated
securities of the Union Pacific it should at the same time be added
to the unappropriated surplus of the Union Pacific.
""
Mr. Lamb, witness for the southern carriers, undertook to point
out errors in the exhibit upon the ground that "company figures
and not “system figures" had been used. The exhibit as originally
prepared clearly shows "company figures" to have been used and the
figures originally used were and are correct.
Every figure on this exhibit as now offered, with the exceptions
above mentioned, has been approved by the carriers in the testimony
of their witnesses.
The purpose of this exhibit is to show that the carriers handling
two-thirds of the traffic have enormous sums immediately available;
that their property investment since 1907 is greatly increased out of
earnings; and that if an advance should be granted two-thirds of the
total advance would go to carriers whose present financial condition
is such that they are not in need of any relief.
The volume of the traffic is handled by carriers now in a prosperous
condition and whose net income in the past have not only been suf-
ficient to pay them a handsome return but have enabled them to
accumulate out of earnings funds immediately available to more than
adequately meet any emergency, even one founded on mere pre-
dictions.
EASTERN DISTRICT.
Bessemer & Lake Erie Railroad.
Year.
Total capital
obligations.
Property
investment,
book value.
Unappro-
priated
surplus.
$32, 200, 333
44, 913, 296
$1,172,993
3,053,000
12,712,963
4,672, 358
3,499, 365
1907....
1916....
Increase 1916 over 1907....
$31,577,000
34, 630, 000
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
639
Dividends declared:
1909
1910-
1911___.
1912___
Per cent.
Dividends declared-Contd.
2
1913___.
1000
1914__.
1915____
1916____.
Per cent.
8
8
9
9.36
2, 320, 737, 556
1.26
$4,394, 484
Ton-miles handled, 1916___
Percentage of total for all railroads in eastern district parties
to this case_.
Net corporate income, 1916____
Total net operating income, 1916_
Percentage on capital stock, 1916.
Percentage on property investment, 1916.
Unappropriated surplus, June 30, 1916__.
Available funds:
Cash____
Investment in unaffiliated companies__.
Total amount available___
Net balance current assets over liabilities__
1907..
1916, June 30………….
$5, 441, 924
35. 16
12. 12
$4, 672, 358
$3, 662, 194
13, 010
$3,675, 204
$5, 109, 505
Central Railroad Co. of New Jersey.
Year.
Increase 1916 over 1907..
Total capital
obligations.
Property
investment,
book value.
Unappro-
priated
surplus.
$78,963,400
75, 489, 800
$76, 335, 651
$6,687, 577
101, 304, 921
9,369, 032
3,473, 600
24, 969, 270
2,781, 455
Dividends declared:
Per cent.
•
Dividends declared-Contd.
1908_.
7.87
1913_
1909
7.87
1914
1910____
11.69
1915
1911.
11.70
1916___.
1912___
11.68
Tons miles handled, 1916_
Percentage of total for all railroads in western district, parties
to this case-.
Net corporate income, 1916.
Total net operating income, 1916_
Percentage on capital stock, 1916__
Percentage on property investment, 1916_
Unappropriated surplus, Dec. 31, 1916____.
Available funds:
Cash_.
Investments in unaffiliated companies.
Total amount available__
Net balance, current assets over liabilities..
Per cent.
11.68
11.68
11.68
11.68
2,650,847, 345
1. 44
$5, 957, 297
$10, 201, 224
20.74
10. 67
$11, 546, 991
$2, 155, 239
4, 708, 765
$6,864, 004
$3,500, 000
Year.
Delaware & Hudson Co.
Total capital
obligations.
Property
investment,
book value.
Unappro-
priated
surplus.
$7,824, 858
1907
1916, June 30...
Increase 1916 over 1907....
$88, 143, 450
128,722, 500
40,579, 050
$83,912, 205
111,504, 937
18, 957, 592
27,592, 732
11, 132, 734
640
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
C
Dividends declared:
1908__.
1909
1910___
?
1911___.
1912___.
Per cent.
Dividends declared-Contd.
8.74
1913____
8.83
1914
8. SS
1915___
8.63
1916____
8.63
Ton-miles handled, 1916_
Percentage of total for all railroads in eastern district parties
to this case_-
Net corporate income, 1916-
Total net operating income, 1916.
Percentage on capital stock, 1916–––
Percentage on property investment, 1916_---
Unappropriated surplus, Dec. 31, 1916_
Available funds:
Cash___
Per cent.
8.63
8. 63
8.83
8.82
3, 322, 996, 646
1.81
$7, 178, 238
$8, 767, 697
12. 63
7.86
$21, 046, 651
$1, 166, 262
Special deposits
Investments in unaffiliated companies_-_-
1, 009, 563
22, 500, 000
$24, 675, 825
Total amount available
Net balance current assets over liabilities not shown separately.
Delaware, Lackawanna & Western Railroad Co.
Year.
Total capital
obligations.
Property
investment,
book value.
Unappro-
priated
surplus.
1907.
1916.
$120,660, 528
140, 484, 028
$145, 520, 801
203, 571, 960
$28,274,900
43, 644, 435
Increase 1916 over 1907..
19,823, 500
58,051, 159
15, 369, 535
Dividends declared:
1908___.
1909.
1910___
1911___.
1912___
Per cent.
Dividends declared-Contd.
12. 46
1913___
12.46
1914__
39.74
1915___.
12.91
1916____
29.87
Ton-miles handled, 1916___
Percentage of total for all railroads in eastern district, parties
to this case
Net corporate income, 1916____
Total net operating income, 1916….
Percentage on property investment, 1916–
Per cent.
13.94
12.41
14.88
12.79
5, 010, 072, 493
2.72
$16, 900, 007
Percentage on capital stock, 1916_---
$17, 339, 667
19.55
8.52
Unappropriated surplus, June 30, 1916_.
Available funds:
$43, 644. 435
Cash__
$4, 112, 435
Investment in unaffiliated companies.
13, 511, 683
Total amount available__.
Net balance current assets over liabilities..
Lehigh Valley Railroad Co.
$17,624, 118
$8,035, 034
Year.
Total capital
obligations.
Property
investment,
book value.
1907..
1916..
$166,553, 294
191, 894, 467
$157,958, 024
192,805, 768
Unappro-
priated
surplus.
$13,858, 992
22, 114, 005
Increase 1916 over 1907..
25,341, 173
34,847, 744
8, 255, 013
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
641
Dividends declared:
1908___
1909.
1910_____
1911___.
1912____
Ton-miles handled, 1916----
Per cent.
Dividends declared-Contd.
5.79
5.79
1913____
1914__
5.79
1915____
6.83
1916____
24. 38
Percentage of total for all railroads in eastern district, parties
to this case_
Net corporate income, 1916.
Total net operating income, 1916.
Percentage on capital stock, 1916.
Per cent.
9.75
9.75
9.75
9.76
5, 990, 465, 278
3.26
$7,666, 439
$11, 040, 290
12. 34
5.73
$22, 114, 005
Cash___.
Time deposits_-_-
Percentage on property investment, 1916.
Unappropriated surplus, June 30, 1916.
Available funds:
$15, 026, 595
100, 000
293, 869
$15, 420, 464
$13, 351, 729
Investment in unaffiliated companies_-_.
Total amount available_____
Net balance current assets over liabilities__
1907.
1916.
Year.
New York Central System.
Total capital
obligations.
$1,026, 569, 516
1,453, 422, 194
Property
investment,
book value.
Unappro-
priated
surplus.
Increase 1916 over 1907………..
Dividends declared-
1908.
1909.
1910_
1911.
1912___
$1,017, 406, 318
1,441, 817, 332
$57,726, 499
103, 278, 018
426,852, 678
424, 411, 014
45, 551, 519
Per cent.
Dividends declared-
Per cent.
5. 14
1913_
5. 44
5. 17
1914_.
4. 90
6. 35
1915_.
4. 51
6. 07
1916____
4.79
5.98
38, 306, 163, 656
Percentage on capital stock, 1916.
Tons miles handled, 1916-
Percentage of total for all railroads in eastern district, parties
to this case_.
Net corporate income, 1916_---
Total net operating income, 1916_
Percentage on property investment, 1916.
Unappropriated surplus, June 30, 1916….
20.82
$69.984, 700
$109, 364, 623
18. 24
7.59
$103. 278, 018
Available funds, December 31, 1916:
Cash
$24, 218, 000
Time deposits___
Investments in unaffiliated companies---
1, 934, 000
48, 079, 000
Total amount available_-_-
74, 231, 000
Net balance current assets over liabilities_.
Norfolk & Western Railway Co.
37, 600, 000
1907.
1916.
*
Year.
Total capital
obligations.
Property
investment,
book value.
Unappro-
priated
surplus.
Increase 1916 over 1907.
$187, 212, 800
236, 759, 700
49,546, 900
$164, 004, 234
249,069, 522
$4,012, 583
16,990, 752
85,065, 288
12,978, 169
40958-18-41
642
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Dividends declared:
1908__
1909
1910___
1911___.
1912____
Per cent.
Dividends declared―Contd.
4.37
4. 53
1913__
1914_
4. 59.
1915_
4.54
1916____
5. 14
Ton-miles handled, 1916_
Percentage of total for all railroads in eastern district, parties
to this case
Net corporate income, 1916.
Total net operating income, 1916_.
Percentage on capital stock, 1916……….
Percentage on property investment, 1916-
Unappropriated surplus, June 30, 1916_
Available funds:
Cash__.
Time deposits_-_-
$4, 961, 705
2, 000, 000
13, 894, 420
Per cent.
5.45
5. 49
5. 64
6. 54
11, 795, 891, 557
6. 41
$20, 624, 058
$24, 101, 200
14. 61
9.68
$16, 990, 752
Investments in unaffiliated companies___
Total amount available
Net balance current assets over liabilities_.
1907.
916.
Year.
Pennsylvania Railroad Co.
Total capital
obligations.
$1,163, 313, 471
1,267, 824, 606
Property
investment,
book value.
$1,059, 314, 444
1,507, 857, 127
20, 856, 125
9,532, 115
Unappro-
priated
surplus.
$69,054, 021
74, 168, 142
Increase 1916 over 1907.
Dividends declared:
1908___
1909.
1910____
1911___.
1912____
Ton-miles handled, 1916_
104, 511, 135
448, 542, 683
5, 114, 121
Per Cent.
Dividends declared-Contd.
Per cent.
6. 46
1913__
5.67
6. 26
1914__.
5.93
6. 53
1915__
6.71
5. 68
1916___
6. 09
6. 07
44, 603, 366, 875
24. 24
$84, 017, 123
Percentage of total for all railroads in eastern district, parties
to this case_.
Net corporate income, 1916.
Total net operating income, 1916.
Percentage on capital stock, 1916_-.
Percentage on property investment, 1916‒‒‒‒
Unappropriated surplus, June 30, 1916, as shown on Parmalee
Exhibit, volume 2, system figure___
Unappropriated surplus, June 30, 1916, Pennsylvania System
roads owning 100 miles or more of line___
Available funds:
Cash___
Time deposits
Investment in unaffiliated companies.
Total amount available_.
Net balance current assets over liabilities____
$29, 147, 987
26, 322, 945
112,704, 339
$103, 489, 749
13. 39
6. 86
$74, 168, 142
$35,854, 553
$168, 175, 271
$48, 613, 853
Year.
1907...
1916.
Increase 1916 over 1907....
Reading System.
Total capital
obligations.
$178, 410, 884
182, 367, 757
3,956, 873
Property
investment,
book value.
Unappro-
priated
surplus.
$202, 460, 106
227,737,496
$6,084, 354
8,432, 528
25, 277,390
2,348, 174
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
643
Dividends declared:
1908__.
1909.
1910___
1911__.
1912___
Per cent.
Dividends declared-Contd.
8. 22
1913____
7.20
1914___
7.15
1915____
5. 51
1916_-_.
6.92
Per cent.
6.92
9.06
6. 85
7.42
Percentage on capital stock, 1916.
mileage
Ton-miles handled, 1916.
Percentage of total for all railroads in eastern district, parties
to this case_
Net corporate income, 1916_
Total net operating income, 1916_
Percentage on property investment, 1916_.
Unappropriated surplus, June 30, 1916, as shown on Parmalee
Exhibit, volume 2, system figure---
Available funds:
Cash
Investment in unaffiliated companies___
Total amount available_
Net balance current assets over liabilities_.
6, 818, 086, 735
3. 71
$14, 536, 465
$23, 030, 452
14. 77
10. 11
$8, 432, 528
Unappropriated surplus, 1916, as shown according to owned
$18, 223, 101
$5, 285, 443
996, 938
1
$6, 282, 381
$7,781, 762
)
1907.
1916
SOUTHERN DISTRICT.
Alabama Great Southern R. R. Co.
Year.
Increase, 1916 over 1907.
Dividends declared:
Preferred-
1908___
1909_.
1910_
1911_
1912__
1913__
1914_.
1915.
1916___
Total capital
obligations.
Property
investment,
book value.
Unappro-
priated
surplus.
$18,565, 950
$16,060, 955
20,863, 493
20, 838, 892
$785,144
3,644, 052
2,297,543
4,777,937
2,858,908
Dividends declared-Continued.
Common--
Per cent.
6
6
1909___
1910
6
6
1911_.
1912__.
6
1913____
1914__
6
1915__.
6
1916___.
7
Per cent.
2
41/2
5
5
LO LO LO LO LO
Total net operating income, 1916.
Percentage on capital stock, 1916.
Ton-miles handled, 1916__
Percentage of total for all railroads in southern district, parties
to this case_-
Net corporate income, 1916_
Percentage on property investment, 1916_
659, 556, 493
2.08
$1, 460, 691
$1,681, 301
13.03
8.07
Unappropriated surplus, June 30, 1916-
Available funds:
$3, 644, 053
Cash
$497, 207
Investments in unaffiliated companies.
Total amount available_
$1,532, 089
Net balance current assets over liabilities--
$2,029, 296
$1, 142, 466
644' FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Year.
Atlantic Coast Line R. R. Co.
Total capital
obligations.
1907.
1916..
Increase, 1916 over 1907.
Dividends declared:
1908.
1909
Per cent.
21
51
1910__
1911__.
12-2
2566
Property
investment,
book value.
Unappro-
priated
surplus.
$190, 979, 750
$138,663, 345
$9,099, 543
212, 331, 907
178, 568, 333
33,583, 626
21,352, 157
39,904, 988
24, 484, 083
Dividends declared-Contd.
Per cent.
1913__.
7
1914__
-ง
7
1915____
5
1916____
5
1917__.
31
2, 146, 812, 435
6.76
1912___
Ton-miles handled, 1916____.
7
Percentage of total for all railroads in southern district parties
to this case_.
Net corporate income, 1916.
Total net operating income, 1916_.
Percentage on capital stock, 1916.
Percentage on property investment, 1916.
Unappropriated surplus, June 30, 1916__.
Available funds:
Cash___
Time deposits
-
Investments in unaffiliated companies___
Total amount available__
Net balance, current assets over liabilities__
1
$15, 763, 640
446, 814
1, 639, 738
Cincinnati, New Orleans & Texas Pacific Ry. Co.
•
$7, 755, 536
$9,838, 805
10.27
5.51
$33, 583, 626
$17, 850, 192
$17, 497, 977
1907.
1916...
Year.
Decrease, 1916 over 1907…….
Dividends declared:
1908__
1909_
1910__.
1911.
1912
1913____
1914____
1915____.
Per cent.
5
Total capital
obligations.
Property
investment,
book value.
Unappro-
priated
surplus.
$8,681, 159
$739,978
7,743, 400
$12, 275, 286
6,610, 039
937, 759
12, 275, 286
5,870, 061
Dividends declared-Contd.
1916___
Extra dividends-
Per cent.
6
1912_
5
1913_
6
1914_
6
1915_.
6
1916___
6
5
5
6
10 10 10 LO CO
Ton-miles handled, 1916___
Percentage of total for all railroads in southern district parties
to this case_.
Net corporate income, 1916_
Total net operating income, 1916_
Percentage on capital stock, 1916____
Percentage on property investment, 1916–
Unappropriated surplus, June 30, 1916---
Available funds:
Cash
$2,479, 577
Time deposits
Investments in unaffiliated companies..
Total amount available_.
Net balance current assets over liabilities___.
587, 911
854, 534
1, 177, 933, 883
3. 71
$2, 254, 623
$3,087, 016
41. 42
25. 15
$6, 610, 039
$3, 922, 022
$3, 150, 744
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
645
1907..
1916...
Florida East Coast Ry. Co.
Year.
Increase, 1916 over 1907
Dividends declared: None.
Total capital
obligations.
Property
investment,
Unappro-
priated
book value.
surplus.
$14,259,000
$15, 217, 202
47,300,000
48, 207, 859
$997
1,050,049
·33,041,000
32,990,657
1,049, 052
Ton-miles handled, Dec. 31, 1916--
Percentage of total for all railroads in southern district, parties
to this case_.
Net corporate income, 1916-
Total net operating income, 1916-
Percentage on capital stock, 1916----
Percentage on property investment, 1916-
Unappropriated surplus, June 30, 1916_
Available funds:
Cash
Investments in unaffiliated companies.
Total amount available_.
Net balance current assets under liabilities….
281, 387, 457
0.89
$882, 889
$2,881, 418
8.82
5.98
$1,050, 049
$838, 372
$563, 247
$1, 401, 619
$2,083, 181
1907.
1916...
Year.
Increase 1916 over 1907.
Dividends declared:
1908.
1909.
1910.
1911.
1912.
Illinois Central R. R. Co.
Total capital
obligations.
Property
investment,
Unappro-
priated
book value.
surplus.
$224,859, 275
$107,578,361
$5,521, 145
263, 554, 232
158,873, 132
10,092, 236
38,694, 957
51,294,771
4,571,091
Per cent.
Dividends declared-Contd.
Per cent.
7
1913_-
6
7
1914____
5
7
1915____
77
1916___
LO
5
8, 514, 498, 948
Ton-miles handled, 1916_
Percentage of total for all railroads in southern district parties
to this case_
Net corporate income, 1916_
Total net operating income, 1916.
Percentage on property investment, 1916.
Percentage on capital stock, 1916.
Unappropriated surplus June 30, 1916.
Available funds:
Cash___
Investments in unaffiliated companies___
Total amount available_.
Net balance, current assets over current liabilities.
$5, 637, 521
36, 741, 506
Louisville & Nashville R. R. Co.
1907...
1918, June 30...
Year.
Increase 1916 over 1907.
26.81
$11, 807, 565
$14, 155, 087
10.80
8.91
$10, 092, 236
$42, 379, 027
$9, 248, 702
Total capital
obligations.
Property
investment,
book value.
Unappro-
priated
surplus.
$187,932, 500
250, 242, 529
62,310, 029
$166,667, 129
271,683, 491
105,016, 362
$20,827, 513
50, 172, 752
29,345,239
646
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Dividends declared:
1908___
1909.
1910___
1911___.
1912___.
Per cent.
Dividends declared-Contd.
51
1913__.
51
1914_
7
1915_-_-
7
1916__.
7
Per cent.
7
7
5
6
Extra, 1 per cent in stock of Louisville Property Co. in 1908.
Ton-miles handled, 1916.
Percentage of total for all railroads in southern district, parties
to this case...
Net corporate income, 1916_-
Total net operating income, 1916_
Percentage on capital stock, 1916_
Percentage on property investment, 1916.
Unappropriated surplus, Dec. 31, 1916__.
Available funds:
Cash_.
Time deposits
Investments in unaffiliated companies.
Total amount available__
Net balance current assets over liabilities____
$20, 103, 502
3, 242, 708
5, 450, 053
6, 511, 946, 570
20.51
$14,039, 130
$18, 265, 906
19.50
6.72
$56, 631, 786
$28, 796, 263
$25, 969, 793
Mobile & Ohio R. R. Co.
Year.
Total capital
obligations.
Property
investment,
book value.
Unappro-
priated
surplus.
1907.
1916..
Increase 1916 over 1907.
Dividends declared:
Per cent.
1908.
4
1913_..
1909
5.
1914
1910___
4
1915__
1911
4
1916___
1912___
4
$32,805, 410
38,340, 800
$28, 199, 709
45,885, 741
$2,167,553
5,822, 852
5,535, 390
17,686,032
3,655, 299
Dividends declared-Contd.
Per cent.
4
AAAA.
4
4
4
1,597, 736, 390
Ton-miles handled, 1916.
Percentage of total for all railroads in southern district parties
to this case
Net corporate income, 1916.
Total net operating income, 1916_
Percentage on capital stock, 1916.
Percentage of property investment, 1916_
5. 03
$853, 130
$2,925, 200
14. 18
6. 38
Unappropriated surplus, June 30, 1916_
Available funds:
$5,822, 852
Cash__.
Investments in unaffiliated companies_
$951, 044
242
Total amount available
Net balance current assets over liabilities_
Nashville, Chattanooga & St. Louis Ry.
$951, 286
$1, 402, 317
1907.
1916...
Year.
Increase 1916 over 1907.
Total capital
obligations.
Property
investment,
book value.
Unappro-
priated
surplus.
$26, 005, 000
27,041, 805
1,036, 805
$28, 140, 103
36, 496, 340
$4,312, 322
10,932, 849
8,356, 237
6, 620, 527
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
647
Dividends declared:
1908.
1909_
1910__
1911__
1912____.
Per cent.
5.5
Dividends declared--Contd.
1913.
5
1914.
1915.
6
1916__
6.5
Per cent.
7
7
LO
5
6.5
891, 137, 739
Ton-miles handled, 1916__.
Percentage of total for all railroads in southern district, parties
to this case_
Net corporate income, 1916_
Total net operating income, 1916_
Percentage on capital stock, 1916.
Percentage on property investment, 1916.
Unappropriated surplus, June 30, 1916_.
Available funds:
Cash___
Time deposits
Investment in unaffiliated companies_
Total amount available_.
Net balance current assets over liabilities.
1907...
1916...
WESTERN DISTRICT.
1
2.81
$2, 337, 518
$2,926, 956
14.60
8.02
$10,932, 849
$1, 118, 983
510,000
641, 000
Atchison, Topeka & Santa Fe R. R. Co.
Year.
Total capital
obligations.
Property
investment,
book value.
$493, 853, 783
601, 394, 674
$2, 269, 983
$2,961, 283
Unappro-
priated
surplus.
$20,066, 874
26,681,975
Increase 1916 over 1907..
Dividends declared:
1908___
1909.
1910
1911
1912___
$894, 443, 780
640,088, 554
145, 644, 774
107, 540, 891
6,615, 101
Per cent.
Dividends declared-Contd.
5
1913_
Per cent.
6
51
1914_.
6
1915.
1916__
6
Ton-miles handled, 1916__
Percentage of total for all railroads in western district parties to
this case_
Net corporate income, 1916_
Total net operating income, 1916-
Percentage on property investment, 1916_
Percentage on capital stock, 1916.
Unappropriated surplus, June 30, 1916.
Available funds:
Cash___
Time deposits_
7,844, 315, 019
6.98
$32, 825, 355
$39, 732, 857
9.70
6. 61
$26, 681, 975
$42, 553, 671
650, 000
695, 221
$43, 898, 892
$44,868, 227
Investment in unaffiliated companies.
Total amount available_.
Net balance, current assets over liabilities_
Chicago & North Western R. R. Co.
Year.
Total capital
obligations.
Property
investment
book value.
1907
1916..
Increase 1916 over 1907...
$269, 785, 484
363, 853, 807
94,068, 323
$243,904, 818
375,529,534
131,624, 716
Unappro-
priated
surplus.
$21,787, 208
41,017, 807
19, 230, 599
648
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Dividends declared:
Preferred-
1908____.
1909____.
1910____
1911___.
1912_____
1913____
1914___.
1915____
1916___.
Per cent.
8
8
8
∞ ∞ ∞ ∞ ∞ ∞ ∞ ∞ ∞
Dividends declared-Continued.
Common
1908__.
1909__.
1910____
1911___.
1912___.
1913___
1914.
1915_
Per cent.
7
7
7
7
7
7
7
Ton-miles handled, 1916_.
1916___.
Percentage of total for all railroads in western district parties
to this case_
Net corporate income, 1916_---
Total net operating income, 1916_
Percentage on capital stock, 1916.
7, 412, 265, 747
6. 60
$17, 282, 510
$24, 606, 707
11. 32
6.55
$41, 017, 807
Percentage on property investment, 1916.
Unappropriated surplus, June 30, 1916.
Available funds:
Cash
Investments in unaffiliated companies_
Total amount avialable_
Net balance current assets over liabilities___
$14, 475, 623
3, 910, 576
$18, 386, 199
$14, 230, 257
Chicago, Burlington & Quincy R. R. Co.
Year.
Total capital
obligations.
Property
investment,
book value.
Unappro-
priated
1907.
1916..
Increase 1916 over 1907..
Dividends declared:
1908____
1909
1910____
1911___
1912___.
surplus.
$279,529,100
$345,281,500
$47,032,730
290,787, 600
447,346, 163
105,088, 276
11,258,500
102,064, 663
58,055, 546
Per cent.
Dividends declared-Contd.
∞ ∞ ∞ ∞ ∞
8
1913_____
8
1914
Per cent.
8
8
1915___
1916___
∞∞∞
8
Ton-miles handled, 1916_
Pencentage of total for all railroads in western district, parties
to this case, 1916-
Net corporate income, 1916_.
Total net operating income, 1916.
Percentage on capital stock, 1916.
Percentage on property investment, 1916-
Unappropriated surplus, June 30, 1916_.._.
Available funds:
Cash___
Time deposits.
Investments in unaffiliated companies.
Total amount available_.
Net balance current assets over liabilities.
$15, 200, 768
12, 301, 342
343, 425
10, 087, 483, 894
8.98
$29, 846, 270
$36, 186, 894
26.93
8.09
$105, 088, 276
$27, 845, 535
$33, 149, 107
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
649
1907. -
1916...
Chicago, Milwaukee & St. Paul Ry. Co.
Year.
Total capital
obligations.
Increase 1916 over 1907.
Dividends declared:
Preferred-
1908.
1909.
1910___
1911.
1912___.
1913.
1914.
1915.
1916
Property
investment,
book value.
Unappro-
priated
surplus.
$250,260,000
$259, 148, 727
$38,862, 461
589,436, 239
580, 467, 862
38,749, 292
339, 176, 239
321, 319, 135
113, 169
Dividends declared-Continued.
Per cent.
7
Common-
1908___
Per cent.
7
7
1909.
7
7
1910____
7
7
1911_
7
7
1912____
5
7
1913____
7
1914
7
1915__
7
1916___.
41
5
Percentage on capital stock, 1916….
Ton-miles handled, 1916_
Percentage of total for all railroads in western district, parties
to this case_-
Net corporate income, 1916_-
Total net operating income, 1916.
Percentage on property investment, 1916-
10, 043, 235, 657
8.94
$16, 860, 684
$31, 222, 860
7.23
5. 38
Unappropriated surplus, June 30, 1916-
$38, 749, 292
Available funds:
Cash____
$12, 635, 516
Times deposits investments in unaffiliated com-
panies
316, 596
Total amount available_
Net balance current assets over liabilities.
$12,952, 112
$19, 000, 946
1907
1916.
Chicago, St. Paul, Minneapolis & Omaha R. R. Co.
Year.
Increase 1916 over 1907..
Dividends declared:
Preferred-
1908
1909.
1910_.
1911__.
1912
1913.
1914_.
1915
1916__
Total capital
obligations.
Property
investment,
book value.
Unappro-
priated
surplus.
$57, 176, 799
$62, 408, 611
$3,856, 211
71, 205, 946
76, 471, 861
4,646, 942
14,029, 147
14,063,250
790, 731
Per cent.
Dividends declared-Continued.
Common-
Per cent.
7
1908
7
7
1909.
7
7
1910__
7
I
222~~~
7
1911___
7
7
1912___
7
7
1913.
7
7
1914__
7
7
1915__
7
7
1916_
7
}
650 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Ton-miles handled, 1916.
Percentage of total for all railroads in western district, parties
to this case_.
Net corporate income, 1916_
Total net operating income, 1916–
Percentage on capital stock, 1916__
Percentage on property investment, 1916.
Unappropriated surplus, June 30, 1916
Available funds, cash.
Net balance current assets over liabilities___
1, 578, 936, 405
1.41
$3, 003, 027
$5, 535, 335
10. 07
7.23
$4, 646, 942
$2,515, 826
$1,524, 312
1907..
1916.
Year.
Increase 1916 over 1907
Dividends declared:
1908.
1909
1910__.
1911.
1912__
Great Northern Ry. Co.
Total capital
obligations.
$257, 112, 300
500, 787, 604
387, 185, 029
243, 675, 304
349, 158, 884
Property
investment,
book value.
$38,026, 145
Unappro-
priated
surplus.
$23,766, 719
68, 783, 782
45,017,063
Per cent.
Dividends declared-Con.
Per cent.
7
7777
1913
1914____
7
1915____
1916__
7
777
Tons-miles handled, 1916__.
Percentage of total for all railroads in western district, parties
to this case__
Net corporate income, 1916.
Total net operating income, 1916.
Percentage on capital stock, 1916_---
Percentage on property investment, 1916_
Unappropriated surplus June 30, 1916___
Available funds:
Cash___
Time deposits_
Investments in unaffiliated companies___.
Total amount available.
Net balance current assets over liabilities_
1907..
1916 (Dec. 31)..
$8, 280, 963
7,725, 000
5,672, 681
Minneapolis, St. Paul & Sault Ste. Marie Ry. Co.
Year.
Total capital
obligations.
Property
investment,
book value.
7,809, 816, 834
6.95
$27, 625, 169
$32, 234, 834
11. 07
8.33
$68, 783, 782
$21, 678, 644
$16, 554, 953
Unappro-
priated
surplus.
$6,183,096
19, 894, 837
Increase, 1916 over 1907.
Dividends declared:
1908
1909__.
1910___.
1911___.
1912___
$76,337,795
115, 335, 400
$69, 238, 052
115,830, 297
38,997,605
46,592, 245
Per cent.
Dividends declared-Con.
6
1913___
6
1914
61
1915.
7
1916___
7
Ton-miles handled, 1916.
Percentage of total for all railroads in western district, parties
to this case….
Net corporate income, 1916.
Total net operating income, 1916_
Percentage on capital stock. 1916_
13,711,741
Per cent.
7
7
7.
7
3, 539, 115, 548
3. 15
$6, 169, 576
$14, 391, 284
16.31
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
651
Percentage on property investment, 1916_
Unappropriated surplus, Dec. 31, 1916–
Available funds:
12.42
$19, 894, 837
Cash
Investment in unaffiliated companies_.
$7, 133, 734
30, 301
Total amount available_
Net balance current assets over liabilities___.
$7, 164, 035
$9, 231, 997
Year.
Northern Pacific Ry. Co.
Total capital
obligations.
Property
investment,
book value.
Unappro-
priated
surplus.
1907..
1916..
$443,789, 602
561, 535, 500
$355,684, 163
488,984, 795
$44,595, 707
90,898, 737
Increase, 1916 over 1907.
117,745,898
133,300,632
46,303,030
Dividends declared:
Per cent.
Dividends declared-Contd.
Per cent.
1908_
7
1913__
7
1909.
7
1914
7
1910__
7
1915.
7
1911___
7
1916___
7
1912__
7
Percentage on capital stock, 1916_
Ton-mileage handled, 1916__.
Percentage of total for all railroads in western district, parties
to this case_.
Net corporate income, 1916.
Total net operating income, 1916_
Percentage on property investment, 1916_
7,017, 609, 074
6.25
$25. 729, 874
$30, 493, 190
10. 37
Unappropriated surplus, June 30, 1916_-_
Available funds:
6. 24
$90,898, 735
Cash
Investments in unaffiliated companies___.
$18, 305, 323
25, 001
Total amount available_
Net balance current assets over liabilities.
$18, 330, 323
$15, 159, 417
1907.
1916..
Year.
Increase, 1916 over 1907……….
Ton-miles handled, 1916_.
Southern Pacific system.
Total capital
obligations.
Property
investment,
book value.
Unappro-
priated
surplus.
$979,087,050
$717,621,760
$97,098,454
1,282,785, 945
939,971,725
159,778,466
303,698,895
222,349,965
62,680,012
10, 400, 349, 856
9.24
Percentage of total for all railroads in western district, parties
to this case
Net corporate income, 1916_
Total net operating income, 1916___.
Percentage on capital stock, 1916––
Percentage on property investment, 1916_
Unappropriated surplus, June 30, 1916-
Available funds:
Cash
$13, 528, 303
$29, 950, 416. 00
$46, 812, 319. 00
10.98
4.98
$117, 219, 274. 00
Time deposits
Investment in unaffiliated companies.
Total amount available__
Net balance current assets over liabilities_.
5, 000, 000
14, 708, 208
$33, 236, 511. 00
$17,838, 076. 00
652
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
}
1907.
1916 (Dec. 31)………….
Year.
•
Increase, 1916 over 1907.
Dividends declared:
Preferred-
1908
1909_
1910
1911___
1912______
1913____
1914
1915.
1916____
Union Pacific R. R. Co.
Total capital
obligations.
Property
investment,
book value.
Unappro-
priated
surplus.
$496, 123, 710
$403,518, 613
$52,977, 821
656,803, 905
576, 251.771
138,739, 916-
160,680, 195
172,733, 158
85,762,095
Dividends declared-Continued.
Per cent.
4
4
4
4
Common-
1908__
1909.
1910_.
1911___
4
1912__.
4
1913____
4
1914__
4
1915___
4
1916___.
Per cent.
10
10
10
10
10
10
19.
8
Ton-miles handled, Dec. 31, 1916_..
Percentage of total for all railroads in western district, parties to
this case
Net corporate income, 1916-‒‒‒
Total net operating income, 1916.
Percentage on capital stock, 1916-
Unappropriated surplus, Dec. 31, 1916–
Available funds:
Percentage on property investment, 1916.
9, 510, 219, 144
8.46
$43, 183, 409
$45, 056, 670
13. 42
7.82
$138, 739, 916-
Cash___
Time deposits
Investments in unaffiliated companies.
Total amount available.
Net balance current assets over liabilities.
$17, 170, 065
11, 000, 000
153, 179, 679
$181, 349, 744
$27,883, 785
In 1914 extra dividend on common of $12 par Baltimore & Ohio preferred.
and $22.50 par Baltimore & Ohio common, and $3 in cash.
SUMMARY.
Increase in
property
investment
since 1917.
Increase in
capital
Increase in
book value
(property
invest-
capital
obligations
since 1907.
obligationsment) over
since 1907.
Increase
in unap-
propriated
surplus
since 1907.
Total unap-
Net bal-
ance cur-
propriated rent assets
surplus
1916.
over cur-
rent lia-
bilities.
Eastern district
Southern district.
Western district..
Total.
$1,141,470, 243
í 260, 026, 984
1,600, 747, 539
13,002, 244, 766
$670, 190, 709
1 164, 267, 881
1,468, 974, 880
12,303, 433, 470
$471, 279, 534
1 95, 759, 103
131, 772, 659
1698, 811, 296
$107, 030, 085
78,454, 260
338, 052, 749
523,537, 094 1,
$301, 626, 862 $133, 523,999
121,908, 455 59, 290, 101
694, 280, 058 199, 441,077
117, 815, 375
1 Does not include C., N. O. & T. P. (Data not available for 1907.)
392, 255, 177
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
653
SUMMARY—Continued.
Funds immediately available.
Eastern district.
Southern district.
Western district.
Total...
Ton-miles
hauled by
carriers in
Cash.
Time
deposits.
Securities,
this exhibit
unaffiliated
companies.
in 1916.
Per cent
of total
ton-miles
hauled in
district.
$89, 735,860 $31, 366, 508 $216, 702, 024
47,389, 846 4,787, 433 47, 422,409
151,799,792 36,676,342 178,881, 688
288,925, 498 72,830, 283 443, 006, 121
120, 818,828, 141
21, 781, 009, 915
75, 243, 347, 178
65. 67
68.60
66.95
217,843, 185, 234
$1,117,815, 37 5
361,755, 781
443, 006, 121
Total unappropriated surplus (latest available figures).
Available:
Cash and time deposits..
Investments in unaffiliated companies.
Total immediately available..
804, 761,902.
Mr. CARY. This exhibit treats the roads under the three divisions
adopted by the Interstate Commerce Commission, the eastern, south-
ern, and western.
The CHAIRMAN. They are called districts, aren't they?
Mr. CARY. Districts, yes. We find that in the eastern district nine
roads are handling two-thirds of the tonnage. Of course that was
reduced to ton-miles. These roads in the last 10 years-the roads in
the eastern district-have increased their property investment out
of earnings and over and above what they put into their property out
of capital, $471,279,534.
In the southern district this increase has been nearly $96,000,000
and in the western district nearly $132,000,000. I am dealing in
round figures.
The CHAIRMAN. For what period of time?
Mr. CARY. Since 1907.
The CHAIRMAN. For the last 10 years?
Mr. CARY. Yes. These 27 roads, handling two-thirds of the total
tonnage, since 1907 put approximately $700,000,000-to be accu-
rate, $698,811,296-out of earnings into their property investment;
and in addition to this enormous sum their unappropriated surplus
has increased $523,537,094. So you see, gentlemen, their increase in
unappropriated surplus and the amount they have put out of sur-
plus into property aggregates one billion two hundred and twenty-
two million-odd dollars, and at the time this exhibit was compiled,
which was offered in evidence in June, their current asset account
exceeded their current liability account over $392,000,000; and they
had then on hand $1,117,815,000.
Mr. SWEET. Now, this unappropriated surplus that you refer to,
is that in cash, in the form of cash?
Mr. CARY. We don't know just what form the unappropriated
surplus may be in, but as far as we could ascertain from their reports
here is what the unappropriated surplus was at the time this report
was gotten up. At that time the unappropriated surplus was over
$5,000,000,000, of which $361,755,781 was in cash, and $443,006,121
was in the form of unpledged securities in unaffiliated companies.
654
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Now, that left about $250,000,000 that was probably in the form of
securities in affiliated companies, but you see they had at that time
over $800,000,000 in cash and securities, unpledged securities, of un-
affiliated companies.
Now, gentlemen, I might add this about this exhibit, that the
exhibit was attacked, and after the attack was made on it, we recast
the exhibit to conform to the objections made by the carriers, and
as stated in the preface to this recast, we understand that the figures
in this exhibit have been now approved by the carriers. There was
only one change that was suggested that we did not make, and that
was this: Mr. Ney, who undertook to criticize this exhibit, says that
we should have depreciated the securities in unaffiliated companies
held by the Union Pacific, something over $35,000,000. We then
asked Mr. Ney if it was not a fact that in 1913 the company had set
aside and appropriated out of surplus $50,000,000 to cover any de-
preciation that might arise in those securities, and he said they had.
So either we should not deduct the $35,000,000 or we should add the
$50,000,000 which they had deducted to cover any depreciation that
might arise in those securities.
Now, gentlemen, I offer this in evidence that Judge Cowan sug-
gested, as he wishes to talk about this surplus proposition.
Mr. PARKER of New Jersey. I want to ask you one question, Mr.
Cary: How is this consistent with the fact that equipment had run
down on the railroads?
Mr. CARY. I don't undertake to answer that. In the first place, I
am not convinced that equipment has run down on the railroads.
These figures are nothing in the world but a statement of what the
railroads have sworn to in their report to the Interstate Commerce
Commission. Now how that is reflected in run-down equipment I
am not prepared to answer.
Mr. PARKER of New Jersey. I am asking rather direct questions,
and I think they can be easily answered. Do you know whether these
assessments you speak of went into new buildings, like the Pennsyl-
vania Terminals, or the Union Terminal here, or things of that sort;
or whether they went into equipment?
Mr. CARY. I assume the carriers kept their accounts in accordance
with the rules of the Interstate Commerce Commission.
Mr. PARKER of New Jersey. I say, do you think they went into
those things? Now I ask you whether the amount of money you speak
of went into bridges, buildings, etc., or whether it went into equipment
and cars?
Mr. CARY. I have not the slightest idea where any of it went. It is
carried under their capital account. If they have not properly
charged it to capital account, of course that is something I had
nothing to do with.
Mr. PARKER of New Jersey. Would you charge renewals of equip-
ment to capital account or not?
Mr. CARY. Renewals of equipment?
Mr. PARKER of New Jersey. Replacing equipment.
Mr. CARY. It depends entirely on whether the cost of the new
equipment exceeded the cost of the old equipment. If they replaced
it in kind, then there will be nothing to charge.
Mr. PARKER of New Jersey. You don't know whether these things
were in these matters or not, and you have no details of the accounts?
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 655
Mr. CARY. I have all the details that were given by the carriers.
Mr. PARKER of New Jersey. I mean you have no details of their
expenditures? You have not received, for instance, from a certain
railroad a statement that so much went into capital account; you don't
know what it went into?
Mr. CARY. I haven't the slightest idea. It came out of the earn-
ings of the railroad.
Mr. PARKER of New Jersey. You don't know what it went to?
Mr. CARY. No; I haven't the slightest idea.
Mr. PARKER of New Jersey. Do those accounts show what they
owed in certificates of indebtedness or notes-short-term obligations?
Mr. CARY. Those are usually carried under balance current assets
over current liabilities account, and that was over $300,000,000 from
those roads. So, as a matter of fact, that should be added to that
amount, to make a billion and a half instead of $1,117,000,000.
Mr. PARKER of New Jersey. I don't know how much of that was in
answer to my question. I asked whether it showed-you say it does
show?
Mr. CARY. Yes.
Mr. PARKER of New Jersey. Do you know anything about the truth
of rumors that I have heard, that the railroads were just now em-
barrassed because the banks would not renew these short-term liabil-
ities?
Mr. CARY. Ever since the railroads first began to ask increases in
freight rates we have heard various and sundry rumors about them.
I have heard that rumor with other rumors.
Mr. PARKER of New Jersey. Do you know anything about the
truth of it?
Mr. CARY. No, I do not. I don't know anything about that.
Mr. PARKER of New Jersey. I think that is all I have now.
The CHAIRMAN. Is there any further statement you wish to make,
Mr. Cary?
Mr. CARY. No, that is all; gentlemen. I would like to say this,
that I have not undertaken to discuss policies at all. I have merely
placed in evidence an exhibit that I understand has been admitted to
be correct by the carriers. I only offer it for what it may be worth
in this connection.
The CHAIRMAN. Judge Cowan, you may proceed now with your
statement.
STATEMENT OF S. H. COWAN-Resumed.
Mr. COWAN. Mr. Chairman and gentlemen of the committee, re-
ferring to the matter of surplus, I have this to say in regard to the
standard of return as affected by the matter of surplus.
We start with a hypothesis which I think no one can gainsay, that
the right of the carrier-between the carrier and public-with re-
spect to the earnings that the regulating bodies of the public, whether
State or interstate, must permit, is limited-I will say that right is
limited to a fair return upon the fair value of the property. That
has been repeatedly decided, and there can be no question about it,
although the public does not guarantee any return to a private cor-
poration growing out of the rates and the business of that corpora-
tion. What the public is obliged to do is to permit the carrier, so
656 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
long as it charges reasonable rates, to earn what it can. It does not
guarantee it.
Now, we are taking in this case a position never taken by the Gov-
ernment before. We are proposing here a contract with the carriers
whereby we guarantee a certain return for the use of the property
that is taken under the exigencies of the war; and the question at
issue is what would be a fair return for it? We either have a right
to take it or we have not. If we have the right to take it, we have
the right to take it at a fair return. Of course, if we have no right
to take it, that would be an entirely different proposition. It would
then be a question as to whether they were willing to lease it to us
or not, just as it would be between private individuals with respect
to their own properties. But here we are exercising a power to
which they are subject when they take cut their charters and enter
upon the business of common carriers, to take the use of the prop-
erty under these exigencies.
Mr. MONTAGUE. What do you mean by "we"?
Mr. COWAN. I speak of the United States--the Government. The
obligations which the law and the Constitution lay on us is the right
which they have to require us to pay a reasonable return. In other
words, you may say reasonable damages, compensatory damages, for
what we do to them by that taking. When it comes to determining
how much that damage is, estimated presently for purposes of a
present contract, we resort to those evidences customarily used to
establish a given fact, bearing in mind, of course, that facts are
never capable, outside of pure mathematics, of absolute demonstra-
tion or absolute proof. They always depend upon a multitude of
circumstances; and the law of damages and the rights of parties
with respect to the liabilities which each owes to the other could
never be enforced at all-could not exist-were it not that we have
a means of fixing presently in money how much the thing is worth.
That is arbitrary in one sense. It is arbitrary in the sense that it is
certain not to be exact. It is exact in the dollars and cents that the
law prescribes, but as to whether it would happen for the future,
no one can know, because you can not know the future. What has
happened in the past is therefore not an exact guide for the future.
but it is one of the nearest things we can get at what has been done
in the past.
If we take a parallel-in a death case by negligence the earnings
which were devoted by the husband, we will say, to the wife and
family, necessarily would be a matter of some degree of uncertainty
in the future. Still, of course, the courts would have to pass or that,
and in determining that they take the mortality tables, the ex-
pectancy of life, and estimate what in money presently would com-
pensate for the probabilities. So at last the evidence of these facts
becomes a matter of accumulated probabilities, and never a certainty.
Now, we are confronted with exactly the same principle here. It
is accumulative probabilities; how much probably are they damaged
when it is presently taking their property to use for an indefinite
period of time? We relieve the probabilities so far as time is con-
cerned by estimating it upon a yearly basis. So far as the number
of years are concerned, we have no means of limiting that or esti-
mating it upon that basis, but how much ought they to have, as
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
657
nearly as we can tell? How much can they show us that they think
they are entitled to-or, rather, how much can they show us they
are entitled to? To do that they make use of what they have earned
heretofore. As I said yesterday, I think that element of it should
be a period of 10 years, from 1908 to 1917, inclusive. That is only
a matter of evidence. That is not a matter of certainty. Of course,
we could guarantee that. We could guarantee more, if we thought
they could do it in a contract; but here we are trying to determine
what ought we to contract to do. The Congress, acting for the
public interest and for the interest of the railroads as well in the
proposal which your bill will contain, you can not fix the amount
nor prescribe it; you may propose the contract, which they may agree
to or not, as they see fit; you can not prescribe it, because the deter-
mination of how much is a just compensation is a judicial question
and not a legislative one. It may become certain through the act of
the legislature through the provisions for making a contract, and
that is what we have before us.
What are the probabilities with respect to the amount of the
traffic from which these earnings will flow? Heretofore we know
what it has been because there is a record kept of it. We know how
much money it has produced in gross because we have kept a record
of it. We estimate how much that net amounted to under a certain
system of accounts, assuming that system of accounts to have been
correctly followed and applied, has amounted to so much net as
shown by the records. That net involves a reasonable return to some
companies; it probably does not involve a reasonable return to other
companies which would not by anyone be considered as being a
reasonable, ordinary interest upon the value of the property or the
amount of money invested. But these companies, as I say, engage in
business, taking their chances as to whether they can earn or not,
providing they charge only reasonable rates, but under superlative
obligations to charge only reasonable rates.
The CHAIRMAN. Judge Cowan, let me interrupt you there. Judge
Thom asked permission to address the committee when we were
through with the hearings, and we agreed to have him do so, and we
have just now learned that Judge Thom can come as soon as you are
through, and I just wanted to get some idea about how long you
think it would take you to finish, so that I can notify him and Mr.
Anderson to be here when you are through.
Mr. COWAN. I will get through by your noon adjournment.
The CHAIRMAN. Mr. Clark, what time do you want?
Mr. W. M. CLARK. Mr. Doak, as I informed you, desires to present
the views of the brotherhoods on the compensation clause as it ap-
pears in section 9, and I assume he will not take over half an hour.
The CHAIRMAN. Proceed, Judge Cowan.
Mr. CowAN. I want to call your attention to some important fea-
tures in connection with the matter of the surplus, which I think lies
very close to the roots of the real controversy of the real parties at
interest.
The subject of surplus has been very much discussed by Members
of Congress, by those connected with the great controversy, by com-
missions, publicists, railroad representatives, and others, so it has
come about that there is a common understanding of two conten-
40958—18—
42
658
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
:
tions. One is that the surplus, being produced from the operations
of the common carrier whose obligation is to perform its service only
at a reasonable rate, and the reasonable rate is to be measured in some
degree at least by the amount of return on the value of the property
devoted to the public service; that if the surplus is large, beyond
providing for lean years-we will use the term-in operating ex-
penses, so as to keep up reasonable dividends, it is so evident at least
that the rates charged for that service were too high, providing the
traffic should continue in volume or increase.
For my own part, in consideration of this subject, having read con-
siderably upon it and heard a good deal about it, I believe that a
carrier is entitled to a fair return on the fair value of the property
that it owns, whether it stole the property or how it got it.
The CHAIRMAN. Property devoted to the public use?
Mr. COWAN. Devoted to the public use. That controversy has been
more accentuated in Texas than in any other part of the country
or any other part of the world, perhaps, because we valued the prop-
erties there under the provision of the law and limited the amount of
the issuance of stocks and bonds; and it was the subject matter of
discussion during the canvass in the case of Jim Hogg as to the
amendment to the constitution under the well-known term there of
"Hogg and the commission."
Mr. MONTAGUE. How long ago was that?
Mr. COWAN. Mr. Rayburn is an older man than I. He probably
recollects.
Mr. RAYBURN. I think it was in 1893.
Mr. CowAN. Somewhere in the very early nineties. It became
the subject of discussion in the Supreme Court in the rating case
decided in One hundred and fifty-fourth United States, when the
injunction was granted restraining the rates prescribed by the Texas
commission. We had given the railroads their property; we gave
them the right of way; we gave them 16 sections of land on the
mile in some cases and 20 in others, and exempted some of the roads
from taxes for 25 years-and the lands from taxes. The county
couldn't issue bonds, but they gave in money, work, labor; their ter-
minals in the towns were given to them. Through the town of Fort
Worth, where I live, the Texas & Pacific had a quarter of a mile
wide, 2 miles in length, that is now worth $3,000,000 if measured
by the value of the abutting property. It cost them nothing. In
fact, part of the land was laid off and sold in town lots by the Texas
& Pacific Co.
There was devoted to the Texas & Pacific a reservation 16 miles
wide through the State, we will say, substantially, from Fort Worth
to El Paso; and at the Colorado River it widened out to 80 miles,
and they took each alternate section of land, or such as they chose—
an empire in itself. So you can readily see that the subject as to
whether or not the railroads should be permitted to charge on prop-
erty that was given to them in estimating the returns on the value
of the property devoted to public use has been a matter of great dis-
cussion in our State. But after giving it full consideration and
indulging in argument in a great many cases before the commis-
sions and the courts, I have come to the conclusion that there is but
one standard with respect to that-that it does not matter whether
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 659
the property was given to the railroad or whether it stole it, no
matter how it got it, that if it is devoted to the public use it is
entitled to a reasonable return on the fair value of it.
If I have property which I have stolen, I did not steal it for you,
so if you take it away from me you owe me for the property. [Laugh-
ter.] So I go the full length that the railroads demand in that
particular of according to them the right to have an earning upon
the fair value of the property, no matter howsoever they may have
gotten it. But I do not concur in any theory which involves the
right to earn a surplus on that property and then again turn around
and charge the public a return upon the surplus. Still, if that sur-
plus is invested and they devote that property to the public use, they
are entitled to a return upon that.
But the point I make and wish to impress upon the committee is
that when we are taking a period of time-three years or ten years—
during which a surplus has been earned, to presently estimate the
dollars and cents we are to pay in the future, we are under no obliga-
tion to put it on the basis that will produce that surplus again for
those purposes. Hence the amount the railroads would be entitled to
recover in a suit in court for this taking by the Government of their
property and the use of it, would be the fair return on the value of the
property during the period; or in other words, the value of the use
of the property while they have it, which is to be determined upon a
per cent that would be considered fair and reasonable for that service,
but not to produce a surplus.
Mr. WINSLOW. Judge, would you be willing to make a hypothetical
case for that, substituting figures to illustrate it?
Mr. COWAN. Well, to illustrate, I will take one of the greatest
systems of road, which I mentioned yesterday, and I will just take
that because it is very representative and a well-managed property.
Take the Santa Fe, for example. Now, I may be mistaken—Î will
be mistaken about the precise figures, but it is hypothetical as ap-
plied to the Santa Fe. Assume that the Santa Fe earned and had
paid a 6 per cent dividend on its stock for a period of 10 years. I
think there was one year of that time one six months-that they
paid 21 per cent instead of 3 per cent. They pay it semiannually, I
believe. And in addition to that they laid up 10 per cent. They then
would have paid the interest on all the bonded indebtedness, the
taxes, the interest on any floating indebtedness-in other words, their
fixed charges, as we use that term-and 6 per cent on the value of
their stock. Now, we will assume that the stock represented the value
of the property of the company, and they laid up 9 or 10 per cent-
say 10 per cent as a surplus, and reinvested it from time to time.
They are entitled to that property, no matter however they got it.
They are entitled to the property that they reinvested that surplus in,
in the same manner as if they had paid that surplus in dividends, and
the stockholders had paid it back for additional stock and invested
it in the property. It is precisely the same thing. One is a transmu-
tation and the other is a direct application of the surplus.
At the root of the proposition lies the question, What is the
Santa Fe entitled to as between it and the public in order to charge
rates that would produce that surplus? The public having fixed the
rates, they were presumably reasonable. The Santa Fe therefore
660
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
reasonably could take that, but when you come to fix a standard now
for the Santa Fe Railroad for the future, the next two years, we
will say, should you not fix it upon the basis of a fair return upon
a fair value of the property devoted to the public use, so far as your
guarantee is concerned?
Now, my proposition is to go further than that in order to create
the incentive for a good public service for the utilization of all
efficiency and man force, and if it is earned upon that road, let them
also have 50 per cent or 75 per cent-if the figures will work out, all
right-of the surplus that may be produced in addition to the guaran-
tee that you make.
Mr. WINSLOW. Going at it a little more fundamentally, would you
feel that in making an allowance for the railroads that they should
be entitled to an accumulation of some surplus from year to year
as one of their rights?
Mr. CowAN. I think that is good public policy and should be
accorded as a right.
Mr. WINSLOW. And it would be in a commercial sense and in at
manufacturing concern as the only thing to do in the sense of good
management, would it not?
Mr. COWAN. Yes, sir; and I think in the case of railroad manage-
ment as well.
Mr. DECKER. May I ask you a question right there? This surplus
that you speak of, would you let each railroad's surplus be considered
by itself? For instance, if the Santa Fe-if the business over the
Santa Fe during this period of public control brought a 10 per cent
surplus, would you give them 50 per cent or 75 per cent of that sur-
plus; or would you take all the surplus of all the railroads and divide
it up among them?
Mr. COWAN. No; I would give it to each one.
Mr. DECKER. Then, here is a question that has been bothering me,
and I want to ask you about it. What if it should turn out that the
Government men in the public interest should decide to divert the
traffic largely over a few roads, wouldn't it turn out that those few
roads would make a great surplus, and some other roads that perhaps
were just as useful and just as prosperous in peace times would not
have any surplus?
Mr. COWAN. That is a possibility, and a possibility to a limited de-
gree only. I had thought of that point which you mention, but I
know of no way out of it. But that does not militate, in my mind, in
the slightest degree against commandeering the man force of the
Santa Fe to render the best possible service for the Government and
the public by holding out an inducement-" if you do it you will get
paid for it.' And I don't believe, as I said yesterday, there will be
as much diversion of traffic as you might imagine. Now, I hope I
have made myself clear on that, and that lies at the fundamentals of
this bill.
Mr. Escн. Before you go on, Judge, would the doctrine you have
announced be changed in its application as to land-grant roads which
now get the preferential rate from the Government?
Mr. CowAN. Well, of course, the Government has a contract with
the land-grant roads. I don't believe that it is a contract that the
Government ought to enforce.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 661
Mr. ESCн. You mean in time of war, or any time?
Mr. COWAN. In time of war or any other time. The reason for
that, Mr. Esch, is this: The people have donated as much as the Gov-
ernment ever donated to the railroads. The people have got no
chance to get the advantage of that. Every town and hamlet has
overstepped itself; poor people and everybody else have subscribed
money for the building of the railroad and its facilities into the
town. Farmers have given the right of way through their farms all
over this broad land; and the fact that the Government has given
some public land that was not worth anything to amount to much
then, for the want of transportation-and in those times when those
grants were given conditions seemed to justify-would not seem to
me after 50 or 75 years 50 years, we will say—call for treating those
railroads-the Union Pacific, for example, or the Iron Mountain and
Southern Pacific-any different to what they would treat any of the
other roads in the matter of the amount they pay them for the service
to be rendered. And I don't think the people living on those roads
are entitled to any better system of rates than other people are, or to
pay more to make up for the Government contract shipments.
Now, taking it all into consideration, I do not believe that in the
final wind-up you can figure out that in justice those contracts
ought to be enforced, and certainly I would not undertake to do it
during the period of this war, when we want to commandeer every
possible man power we have got.
Mr. DECKER. Well, Judge, I am not entirely satisfied with that
question about the surplus yet. One of the reasons for taking over
the roads was given as a fact that it was necessary to divert traffic and
that this would injure some roads at the expense of others, and what
do you say to the proposition of dividing this surplus that you speak
of among them all? In other words, what would be the injustice
of taking whatever surplus is made by all the roads and dividing it
up? All the roads used by the Government, I mean. Wouldn't that
be an incentive to all of them to work hard and do their best?
Mr. COWAN. I don't think that it would be much of an incentive.
Of course, we look at things through different glasses, and you think
somewhat differently. Each individual among us all desire to
reach the best conclusions, and so one man's views may be as good as
another, and better perhaps; but to my mind the organization which
is operating a given system of railroads is a kind of a family organi-
zation that belongs there and is acquainted with the whole situation
of that system of railroads that they operate. There is an inter-
relation, one with another and the company and the managers and all
that enables them to work-to do teamwork, we may call it—and the
desire for teamwork and the best individual work will be obtainable
by giving the best incentive you can to each one of the teams that
are doing it.
Now, another matter in answer to your question: Many of these
roads can not produce much surplus, however much traffic the Gov-
ernment may divert. The Government may divert to some railroad
an excessive amount of traffic but not traffic that pays much profit for
the transportation. For example, coal might be diverted to a large
measure over a given road and yet there would be very little increase
in the net earnings, whereas the road that is left to handle commercial
662
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
traffic of the country, which pays a higher rate, may make more
money out of less tonnage than the one to which the traffic is diverted.
It is a very complex proposition when it comes to the diversion of
traffic and outside of the relief of terminals at ports I don't believe
in actual practice that traffic will be diverted away from these prin-
cipal lines that handle 80 per cent of the traffic of the country because
they are equipped to do the business. The people patronizing them
are accustomed to do it. They have their customers located upon
these lines, and each road has its circle of influence in transporta-
tion and the people will go to it preferably. They want good service
when they go there.
Mr. DEWALT. Will you allow me to interrupt you a moment? Do
you know how the British Government has handled that situation?
Mr. COWAN. I have no information whatever except what I have
heard at these hearings about either Great Britain or France, though
I fancy that the situation in Great Britain is so entirely different ·
from what it is in this country, with respect to the commercial rela-
tions to the railroad operation and the length of the haul and the
comparative large amount of terminals to the long line haul in this
country, that not much can be drawn by those comparisons.
Mr. DEWALT. I was only speaking of this surplus fund that you are
speaking of.
Mr. Cowan. No; I don't know. I have heard it said that in Eng-
land they have pursued the policy of capitalizing whatever surplus
they put into the property, so as to unduly increase the par value
of the capital stock; and that has been deemed poor policy for this
country, we having the different idea of trying to reach a point where
we are undercapitalized rather than being overcapitalized. While
that has been the case with regard to some roads, I have no doubt, I
know that was the opinion of Chairman Knapp of the Interstate
Commerce Commission, that it was better to allow in the operating ex-
pense accounts of the interstate commission-a uniform account sys-
tem-a very liberal allowance that might go into operating expenses,
and yet really embrace accumulations of property, contrary to the-
as he said, to the practice in England. I quite agree with that idea.
Now, it does not upset this bill nor the objects to be accomplished
by this bill to use the same standard return guaranty of interest and
dividends-I am speaking now of dividend-paying railroads-that
will embrace those carrying 75 or 80 per cent of the traffic, and give
to each road a large per cent of the surplus which it produces. The
Government may direct the movement of traffic over the poorer
roads to such an extent as to somewhat build up their traffic and build
up their business. If they do, however, they will have to take quite
a large amount of equipment from other lines, the use of which will
be so charged up that at last it is a question as to whether in the
commercial transportation of the country there will be a diversion of
traffic that would very much change the relative ultimate net earn-
ings of the carriers to what they are to-day.
Mr. SNOOK. In that connection didn't the Director General indi-
cate by his testimony yesterday that there would not be near so
much of this diversion of traffic as the public might anticipate?
Mr. COWAN. I think what he said was that there would not be so
much change in the situation. I suppose he meant that. I said that
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
663
there would not be so much, and I think that he concurs in that
idea, as to the relief of terminals that will be necessary, and I think
Judge Prouty struck the keynote when he said that if the warehouses
are established and additional terminal tracks it will very much
relieve that situation.
The pooling proposition and the elimination-of-competition propo-
sition I wish to refer to. Of course the very framework of this bill
eliminates that at once-it eliminates all question of the antitrust
law and all of that which would have to be done under Government
operation-but when it comes to turning the roads back and leave.
them noncompetitive for the public interest-when that time comes
I don't think it will be done, because certainly we have by long les-
sons learned too much of the necessity of competition to suddenly
come into any knowledge that would induce us to say that it is not
a good thing.
Mr. STEPHENS. Judge, did I understand you to say that you
thought that we must come back to the old competitive system after
the war?
Mr. COWAN. Well, if by competitive system you mean competition
between carriers, I should say so; undoubtedly.
The CHAIRMAN. Of course under such ownership as has heretofore
prevailed.
Mr. CowAN. If they are turned back into the hands of the com-
panies which own them.
The CHAIRMAN. You think competition or competitive methods
ought to continue if that kind of ownership continues?
Mr. COWAN. That is the only kind of competition we have that
insures carrying on of the service.
Now, I want to speak of the subject of loss and damage. Loss and
damage is a very large item of operating expense, and it is an abso-
lute complete waste, a waste of energy and waste of labor, a waste of
money. It is the sum total of loss-complete loss. There is a vast
amount of perishable traffic. Until you investigate it you might
not think there is so much, and it is very important traffic. It is im-
portant in every part of the country. It is produced everywhere.
It is produced by the people who till the soil, and they are greatly
interested in getting their products carried to the place where people
can buy them and use them, and get them in good condition and
have a market for them; and the people who buy those products and
use them are greatly interested in securing from the place of pro-
duction the best at the cheapest price and in the best condition pos-
sible; and when it comes to losing trainloads-literally trainloads-
of vegetables by neglect, by failure in icing, failure to furnish cars
in time, and the like of that, it is a matter of very great importance.
It was shown before the Interstate Commerce Commission in the
western rate cases that below San Antonio in the onion district one
year there were about 1,000 carloads of onions rotted in the fields
because of the inability to get those onions moved to market. It was
shown that on the Brownsville road in the Brownsville district there
were innumerable carloads of cabbages that rotted.
Now, the people wanted to sell that produce and the people wanted
to buy it; and if there isn't great care, proportionate to the necessi-
ties of the case in the handling of perishable freight, there will be
664 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
I
an enormous loss in the sum total in this country, and we can not
stand that loss, and if you do not have the incentive on the part of
the men who are handling it-the individual who is actually doing
the work in handling it-from the time it is taken out of the ground
until it reaches the consumer there is going to be that great loss,
and we ought not to invite it. And that is another reason for my in-
sistance that you commandeer the man power by not adopting the
method that is provided by this bill for the guaranty, but, rather, the
one which I have suggested, or something along that line.
I have a letter that I would like to read to you as to how this will
turn out and is turning out to-day. This letter is addressed to me
from Fort Worth, from Mr. J. K. Rosson. He also sent a similar
letter to the Director General and inclosed me a copy of it. I read
one letter yesterday:
I have just addressed Mr. McAdoo with reference to the condition existing
on the Cotton Belt Railway, which I gleaned from overhearing a conversation
between railroad men yesterday, which lasted most all day. Some of these
men requested and received transportation to go back to Pine Bluff, where
their families lived, claiming that their expenses were in excess of the amount
they were receiving for their services. They said that they were going to resign
and take up some other kind of work.
I think matter of this kind needs some investigation, as already terminals are
blocked with freight, and there can be no excuse of a legitimate nature for this
action.
Then he goes on to say in the letter to Mr. McAdoo in regard to
these railroad men:
They were advancing the theory that the railroad company as well as other
companies were doing—
I will read the whole letter:
I spent the day yesterday in Texarkana, and a large part of the time in the
hotel. I overhead a conversation between railroad employees with reference
to the treatment they were receiving from the Cotton Belt Railroad. From a
conversation I understood that their headquarters were at Pine Bluff, where
their families lived, and that beginning with last Thursday, January 10, that
seven crews were run out of Pine Bluff south of Texarkana, and so sent back.
Yesterday morning there was another crew deadheaded from Pine Bluff to
Texarkana, and I am writing you to give this information, as they were advanc-
ing the theory that the railroad company, as well as other companies, were
doing this to cause dissatisfaction and defeat the Government action in taking
over the railroads, they further stating that the yards there in Texarkana
were congested with freight, and there were seven engines and crews laying
idle that length of time. Of course, part of them were only there from Sunday
till Monday afternoon, which was the time I overheard this conversation, but
in that time not one of them had been sent out.
I heard them further state that the engines were badly overloaded with
tonnage, and that they were unable to make any kind of time, and that 8
miles out from the division headquarters they were tied up on account of the
16-hour law; laid there five hours before a crew came after them to pull
them in, and it appears that another train got within less than half a mile
of the division headquarters and tied up on the main line, which required a
crew to come after them; and I heard them say that each man of the crew
that came after these got 100 miles pay for this service, further indicating that
this was making a bad showing in the expense account of the Government.
I thought at first I would wire you in reference to this matter, but on further
consideration, realized the letter might be better.
Now, undoubtedly that is true. It is just an incident that hap-
pened that I happened to know purely by accident, but if you turn
these crews loose-turn all of these operating men loose-to accumu-
late expense accounts in that fashion and a thousand and one others,
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 665
this will be the greatest mistake that the Government ever made. Of
course if the Government does not utilize the organized force of the
railroad companies and their management to handle the business, but
should itself take over completely, as the railroad company does, the
management and operation of the property; they might make it dif-
ferent by keeping a very close watch on it. But at last it would be
fairer to adopt some such method as I have suggested.
Mr. STEPHENS. Do you judge from that letter that that general
situation is prevailing throughout the various railroad systems of the
country? That is, that there is a disposition to queer the Government
in the management of the railroads?
Mr. CowAN. I would not like to say that. I have no information
that would lead me to say that.
Mr. STEPHENS. This is the only instance you have?
Mr. CowAN. I just happen to have that by accident. It was sent
me here at Washington.
The CHAIRMAN. Purely accidental?
Mr. CowAN. I never inquired for it. But of course I know some-
thing about human nature, as you do. I do know this: That there
has been very little effort made during the last fall to perform service.
I can not account for it. I do not know whether it is purposely done
or whether it is negligence. There has been a great deal of failure
of service.
Mr. MONTAGUE. To whom has that failure been due?
Mr. COWAN. Well, all of the railroads in the country where I am
located, at various times. I have heard a great deal of talk about
it among live-stock shippers in particular. I know an instance of
this character that was related to me, where a man shipped a train
load of cattle-probably two train loads from western Texas, in
the drouth district, to Missouri to pasture, to keep them from starv-
ing. There came rain in the Davis Mountains, in that mountainous
country this side of El Paso, and the grass came and there were no
cattle on it, so he moved his cattle back from Missouri-I traveled
with the man coming to get his cattle from Fort Worth en route to
Waxahachie. That was along in the fall-not the last trip-and it
was reported that it took those cattle a week to get back after they
were started somewhere not far from the Sedalia district on the
M., K. & T.. I think it was, to western Texas; and they unloaded,
I was told, five times en route for rest, feed and water. That was
extremely bad service.
I have heard it stated by the live-stock commission men at Fort
Worth that the Texas & Pacific has been consuming 24 hours to make
what was ordinarily a 10 to 12 hour run from that drouth district
into the market. I know in one instance-just these little things
happen that I hear of, and I have not investigated it-I shipped from
my farm 12 miles south of Forth Worth a carload of wheat on the
18th day of August. I took the bill of lading to the miller and came
to Washington City, and I came back, and it had only been delivered
two or three days before I got back. It was out 12 days in the 12
miles, in an A., T. & S. F. car.
Mr. MONTAGUE. How long ago was that?
Mr. Cowan. That was in August. It was loaded on the 18th of
August and delivered to the mill on the 30th. I never heard any ex-
666
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
cuse for it. Trains were passing every day. It was on the main line
of the Santa Fe, 12 miles south of Fort Worth.
Mr. EscH. Is there any improvement in that section, the Pan-
handle section of Texas, in regard to the cattle situation immediately
following Judge Lovett's priority order-I think it was No. 4?
Mr. COWAN. Oh, yes; they moved cars out there and they had more
facilities than they had had for a long time. But, mind you, a great
many of the cattle had been moved out and a great many were so
poor in the western Texas country-not so much in the upper Pan-
handle country—that they couldn't be shipped, and this blizzard that
came recently has been killing thousands of them.
Mr. MONTAGUE. Judge, from what you gathered, is this due to in-
difference or purposeful neglect?
Mr. COWAN. I don't think it is purposely done by any head of any
department. I think the live-stock agents of the railroad there have
done everything they possibly could. I think there is a great indif-
ference on the part of the operating men on the railroads.
Mr. MONTAGUE. How long has that existed?
Mr. CowAN. Well, that has been growing a good while. It is very
difficult to say when it began, but there has been great indifference all
during this year at least during the latter half of last year. But
whether that would continue, I don't know; but I don't think we
want to invite it.
Mr. MONTAGUE. Is that coincident with, prior, or subsequent, to
the war?
Mr. COWAN. Well, that is difficult to answer. Our-live-stock ship-
pers in our part of the country could not get cars to ship out at all,
so in many cases the cattle were held for 10 days, and I know in some
instances three weeks, to get cars that they were expecting but did
not get, and they had to be turned loose, because they would die if
they were not turned loose. And some of them are being carried
through this winter on seed cake. Now, the reason given by the men
of Fort Worth, which is a very large live-stock market—1,500,000
cattle put through there in the last year, and probably 500,000
slaughters there was, "Well, the Government is interfering with
us," and so on. That was in connection with the transportation
probably of troops and war materials and things of that kind.
There was doubtless a very considerable amount of congestion and
too much traffic for the locomotives. They were unprepared to
handle so much traffic, and naturally the men would give the reply
or made some excuse -we all make some excuse for what we do, and
they would give the reply, "It is on account of the Government.”
As a matter of fact, railway companies had provided means to cure
that, and the American Railway Association, with its committee here
in charge of car distribution in Washington, has never received up
to October, I think it was, a single complaint from that country with
respect to not being able to get cars-except one letter. I was down
there to see about it myself, and that letter was written to Mr. Culli-
nan, who is on the Council of Defense, by a man who wanted to ship
a thousand cattle from Texas over to Mississippi, and asked if he
couldn't see some way or other to get him some cars. Mr. Cullinan
took it up with the proper board and they furnished the cars and he
shipped the cattle. Mr. Summerville told me that was the only com-
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
667
plaint he had had at all up to that time. He was surprised at the
situation. The fact is the people I don't believe understood that they
could write to Washington and get anything done, so that committee
didn't have very much to do with it until after they got stirred up,
and they got hold of it, and Judge Lovett made his priority order,
and Mr. Brooks and Chambers, I think, sent cars down off of the
Burlington, Pennsylvania, and other roads, and the cattle were han-
dled in as good shape as it was possible to do, considering the condi-
tion they were in.
Mr. HAMILTON. Judge Cowan, if there is indifference, or was in-
difference, what was the cause of it?
Mr. CowAN. Oh, I can't tell. There are so many causes for these
things-possibly the temptation in the way of higher wages that
might be obtainable if they were to quit the railroad company. Lots
of their employees undoubtedly left and went to other service. And
nearly every railway employee is somewhat of an expert-freight
handlers even are in the nature of experts, because a raw man does
not do as well as a man who has been at work at the business. And
there are a multitude of reasons of that kind, and the country all
seems to be upset wherever I have been in that particular, and I be-
lieve the statements of the railroad presidents to the commission were
to that effect.
Mr. HAMILTON. Now, in relation to this indifferent service, there
was a good deal of trouble, I suppose, about getting cars, wasn't
there? There was a car shortage, wasn't there?
Mr. COWAN. Yes; we call it a car shortage. It was about the same
trouble we had in 1907.
Mr. HAMILTON. That means bad distribution of cars, doesn't it?
Mr. Cowan. Yes; about the same as it was in 1907. There was
more traffic than they expected to have to handle, and they were not
very well prepared for it, and when the yards get congested and the
engines are used more than they ought to be before they go into the
shop, they don't perform as much service, they don't get over the road
as rapidly, and the railroad car don't perform as much service. I
think it was shown in the investigation of 1907 that cars only made
about an average of 20 miles a day, and it was claimed that the roads
didn't have the cars. Then they established the system of checking
and keeping tab on the empty cars that were not being used, and it
was only a few months after that until they relieved the situation.
There are probably enough cars to handle all the traffic in the country
if there was enough motive power and enough terminal room and un-
loading facilities.
Mr. WINSLOW. Judge Cowan, has the shortage of labor been as no-
ticeable in the southwest part of the country as in the north and
east?
Mr. COWAN. Not by any means.
Mr. WINSLOW. In the last couple of years?
Mr. Cowan. No, sir; there is not much shortage of labor there that
I know of. There are at some particular periods of certain classes of
labor. For example, in our country I think there is more farm labor
than there is employment. It is so in our immediate locality that
I know of, but during the time they were building these canton-
ments
668
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. HAMILTON (interposing). May I interrupt there? Is that
largely negro labor?
Mr. COWAN. Not in our immediate locality. Farm labor in south-
ern Texas is negro labor nearly all together, but not in north Texas.
The fact that the Government was building these cantonments ab-
sorbed a vast amount of labor at very high wages. They paid $7.20
a day to any man that could drive a nail at Forth Worth-and he
didn't drive many nails-and double that for Sundays and overtime,
but that probably was necessary in order to induce the prompt build-
ing of those cantonments. I don't know about that. I have no
criticism to make of it except that it attracted the labor there, of
course, as long as they could get employment. And then it got so
that they didn't want to work at ordinary prices. But that is be-
coming very different now because the people in town have used up
what they got for the wages, and stuff to east is so high and rent is
so high that they have to get out. That is all there is to it. So that
everybody that can get a farm-I have got some farms out south
there-and there are more people begging to get out on farms than
you ever heard of before. I suppose that is the case all over the
central-western country. I believe it is.
Now, in regard to this bill on another feature, there is a provision
in this bill that the maintenance is to be kept up according as the
President may direct. I wish to call your attention to that, to say
that I think all of the laws and the system of accounting which we
have now should be observed; and that they be not changed, and the
discretion lodged with anybody else. I can see no necessity for it.
These systems of accounts have been made up by the Interstate Com-
merce Commission at the consultation with the auditors of all the
railroads, after the passage of the Hepburn bill. I think they took a
year to get up the system of accounting.. It is a wonderful system
of accounting, and it is pursued and is uniform throughout the
United States. It leads to a method of having a basis of comparison.
It is supposed to represent what is liberally fair to the railroads
in operating expenses, and it ought not to be changed, and the bill
ought not to contain that provision.
As to the State rates, I wish to address myself-as time is
growing very short. I have a telegram which I wish to read into the
record, dated San Antonio, Tex., January 22, 1918, addressed to
S. H. Cowan, Washington:
Texas Industrial Traffic League demands State and Interstate Commission
retain full power over rates; that their authority be not diminished or weak-
ened. Please represent the league. Wiring Shepherd and Slayden to assist in
maintaining status of the commission.
Signed
U. S. PAWKITT (Prest.).
The Industrial Traffic League is composed of the chambers of com-
merce and boards of trades of all the principal commercial cities of
Texas, and a large number of manufacturing and other industrial
concerns, and is a strong organization and is representative.
Mr. Escн. It is a national association, isn't it?
Mr. COWAN. No; this is the Texas Industrial Traffic League.
Mr. Escн. Well, there is a national traffic league?
Mr. CowAN. Yes; they belong to that also. They are component
members of that.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
669
1
Texas is peculiarly situated. It has a domain so much larger
than any other State that there is no comparison; with almost every
sort of production that can be had anywhere, producing a third of
the cotton, probably 15 per cent of the cattle that go ultimately into
the surplus beef of the country-moving out, it is true, as calves and
yearlings and so on-and with 16,000 miles of railroad, with 500
miles of coast line, a thousand miles of international boundary, and
with a railroad system built upon the plan that we have of regula-
tion, all roads being incorporated under our State laws, with the
exception of the Texas & Pacific, which is incorporated under an
act of Congress and did have a charter under the Texas law, but
operated under the other, I believe, now. All of their stocks and
bonds are issued and regulated and certified; new roads when con-
structed are valued and their bonds and stocks secured and certified
to the public; with a vast traffic that moves to the ports; and the
largest undeveloped country, the State owning the lands that have
not been taken up and purchased, and vast territories of public land
belonging to the school fund for development; and our people know
better how to handle these railroads and to handle the transportation
subjects and our own commerce than anybody else could possibly
know.
-
And certainly the powers of our State ought not be interfered with
further than is absolutely necessary. It is not necessary to interfere
with it for war purposes, because if we have not been first in peace
we have always been first in war; and if we have the opportunity,
we can lick Mexico again, and a good many people are spoiling for
the fight now. We will respond immediately to any demand of the
Government with respect to the war power. Our commission will
make the order upon receipt of the telegram from the Director Gen-
eral as to anything that needs to be done in aid of the operation of
the railroads through the war, respecting rates or otherwise. if such
a thing should arise.
There is no occasion to interfere with the State rates there—or, in
my opinion, most anywhere else—although some of the States are so
extremely small that nearly all of the traffic is interstate, and it might
be different there. Our rate has been the subject of controversy for
years, and they all bear the stamp to-day of authority. They have
been tested in the courts every time, and it either bears the stamp of
the decree of the court, or of the Interstate Commerce Commission,
or the State commission, or they are involved in court to-day. Grow-
ing out of the Shreveport case we have an important question as to
whether the standard should be raised. In some cases it would have
to be, or changed as to the method of making the rates in other
instances to conform to the view of the Interstate Commerce Com-
mission, which, in my opinion, are not nearly so good as the views of
the Texas commission on that particular subject.
It would be nothing less than a calamity to our country if the
power is in the hands of the director general for him to exercise it to
prescribe the rates in our country, because he could not possibly know
how to do it to the best public interest of a producing country where
we must produce a large amount of the stuff to supply the war.
Now, another point in regard to that: I don't believe that we
ought to suppose that these rates should be changed-State and
670 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
•
interstate-materially during the period of our experimentation in
operating the railroads and see the operating results. We are taking
as a standard what has been the result of operation under certain sys-
tems of rates. We may assume that those rates will continue sub-
stantially as they are. They should continue substantially as they
are because we have guaranteed a certain standard, and if the traffic
remains in volume as much as it has been during the past-during
the time that we have used for getting our standard-our results
ought to be as good as the railroads made; and if our results are not
as good as the railroads', why then we will have shown that we are
not as capable of handling it as they were. So I don't think the power
ought to be there.
Now, they say the power is already there, and all this bill is in-
tended to do is to provide a method of agreeing upon a compensation
to be paid for the use of the railroads, and such details with respect
to what may be done with the appropriation that you are asking to
make. The theory of this bill assumes that the power now exists to
make the rates. I can't take the time to read from the act of Con-
gress and the proclamation of the President, from which they say this
power grows. I only take time to refer you to those documents, to
say that if you will read them you will find that there is nothing there
indicating that any such power was necessary or existed; was con-
ferred by Congress or asserted by the proclamation.
Mr. DEWALT. Pardon me just a moment. What do you say as to
the intention of the director general that under the phrase "control
and management" as given in the act of 1916, there inherently is
given to the President the right to fix rates?
Mr. COWAN. I say that if Congress was that blind and intended
thereby to repeal the provision of the act to regulate commerce that
was fought out here for 15 years, they are too blind to serve in Con-
gress. They didn't intend to do it, and they didn't use language
that did do it, and I think the director general is mistaken.
Mr. DEWALT. You think that is a violent construction of that
phraseology in the act?
Mr. COWAN. Yes, sir; it is a terrible challenge to the intelligence of
Congress.
Mr. DEWALT. I am only talking about the legal proposition.
Mr. Cowan. As a legal proposition, I answer that, in my opinion,
no such construction could be placed upon it.
Mr. EscH. Judge, from what you say, would it be wise-would it
be necessary-in this bill to insert a clause something like this:
Nothing herein contained shall be construed as denying the right of State
commissions or of the Interstate Commerce Commission to exercise the powers
granted to them for commercial traffic.
Mr. COWAN. It should be in the bill, but in a little different form
than what you say.
Mr. Escн. Well, what would you suggest?
Mr. CowAN. The act to regulate commerce-let me read that, if I
can take the time, just to show you what I mean exactly. Take the
first section of the act to regulate commerce:
That the provisions of this act shall apply to any corporations or persons
engaged in transportation.
À
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
671
So that unless you make it specifically applicable to the Govern-
ment, engaged in operating transportation, it is so much waste paper.
I don't suppose that has been explained to you before called to your
attention-but if the bill were passed as it is now, then the act to
regulate commerce has nothing to which it applies, unless the cor-
porations acting as a common carrier. So that what you have to
do in order to make this act applicable is that this act shall apply in
like manner to the rates, rules, regulations, and practices concerning
rates and commercial traffic in the operation under this bill or under
the proclamation of the President, as with the carriers operated by
the corporations owning them or operating them.
Mr. RAYBURN. Do you believe that would have been necessary,
though, if this construction had not been put on it by the Director
General-to have said anything like that?
Mr. COWAN. Yes; it would be necessary to say it in any event, be-
cause when the Government becomes the operator of the railroad-
suppose the Government bought a railroad from here to Chicago
this act would not apply to that railroad. Suppose the Government
bought and operated a railroad-no war times about it. This would
not apply to that operation unless there was some language that
would make it apply.
Mr. ESCH. Would you draft such language and make it part of
your hearing?
Mr. CowAN. I am intending to do so. I wanted first to confer
with Mr. Payne and Mr. Anderson. Now, I don't believe for a mo-
ment that the gentlemen who are the proponents of this bill intend
the consequences which I have pointed out may flow from this bill.
Mr. PARKER of New Jersey. May I ask you a question on that
point? If the Government is simply a sort of receiver, operating
the railroads for its benefit, but through the railroad management
and with all of the railroad provisions applying, why don't the rate
provision apply still?
Mr. CowAN. Because the terms of the statute make it applicable
to certain named things.
Mr. PARKER of New Jersey. It applies to the corporation which
is being operated by the Government.
Mr. COWAN. Well, but there is the question, whether the Govern-
ment is operating the corporation or operating the railroads. The
President's proclamation says he takes over the railroad lines.
Mr. PARKER of New Jersey. And the bill says that it takes over a
system of transportation and calls that system of transportation a
carrier; and there is a view of this case which would say that every
carrier is a system of transportation in itself, because it is organ-
ized for transportation.
Mr. COWAN. That is quite correct, and if the construction which
I think would be placed upon it, were there no language in the act
to make this act to regulate commerce applicable-if that is a mis-
taken view it certainly is only a matter of a superabundance of cau-
tion that we put into the bill express language that leaves it not in
doubt.
Mr. PARKER of New Jersey. Would it be worth while to provide in
the bill that all matters-that is to say, provide in the bill that unless
otherwise ordered all the systems of transportation involved in cor-
672 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
porate government, and so forth, should remain subject to the control
of the Director General, much as a bank is made a fiscal agent some-
times?
Mr. CowAN. No; I should think it ought to be put the other way.
Of course we can not hardly discuss language until it is written
down, and you know how difficult it is to do that.
Mr. PARKER of New Jersey. Yes; I was only speaking of whether
it was worth while to direct your attention toward seeing that the
corporate existence and management and system was not destroyed
under this act without reason.
Mr. CowAN. Well, I think myself that if the war is not going to
last long-say two years-that is time the railroads said before the
commission that they were preparing for. They thought it unsafe
to make preparations for less than an expectancy of two years. In
that case I think that is fairly reasonable. And if it is not going to
last more than that time I think it would be a calamity on the coun-
try to destroy the organized corporate transportation systems of
the country. That is my opinion. Others may hold a different view,
and the Director General, it did not seem to me, had made up his
mind whether he was operating the railroads or operating the cor-
porations that operate the railroads. And it does make a great differ-
ence when you come to determine many questions, some of which were
put by Mr. Winslow, with regard to whose employee is a railroad
employee, the Government or the railroad companies? And there
will be many cases where it will be a very important matter to de-
termine that. It may even become fundamental, and it ought to be
set at rest in this bill, in my opinion.
Now, let me state one point for fear I overlook it. Never saddle
this country with an obligation of a guarantee that does not contain
within the contract a provision for recasting the basis of that return
that is to be paid by the Government to the carriers periodically;
so that you may take advantage of the conditions as they may arise.
It is quite conceivable we will have a financial panic. We may not.
Now, it is said we are not to build anything to discourage build-
ing. Now, if you stop all the construction work of this country and
labor gets out of employment and unrest comes, as it would, and we
are devoting our energies entirely to munitions, training soldiers,
manufacturing guns and ships and the like, and producing things
only for our soldiers and for our allies-and we have stopped the
development of localities and the country-we might very easily have
a panic which would so lessen the volume of traffic that the earnings
of the railroads would drop to a point where you would have to in-
crease rates tremendously, and in turn that increase of rates would
again stop development of the country; and a panic, though it starts
like a bad habit, easily before you find it out, yet once it gets settled,
still like a bad habit, it is hard to get rid of.
So that I plead with you gentlemen to see to it that the bill pro-
vides that this contract between the Government and the railroads
with regard to the guarantee on whatever basis it is determined have
periods at which it may be recast.
Mr. DECKER. Judge Cowan, do you mind making a suggestion of
an amendment along that line and embracing it in your hearing?
Mr. COWAN. I will be glad to do it. Of course it takes time to do
these things.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
673
Mr. RAYBURN. I wish that in your extension of your remarks you
would express your opinion on section 13.
Mr. COWAN. You have reference to the length of time they should
be retained?
Mr. RAYBURN. Yes.
Mr. COWAN. The exigencies under which these properties are
taken over involves, as a matter of constitutional law, in my opinion,
that the railroads have a right to require of the Government-and
the Government is under the obligation-to return these roads to
the railroad companies in a reasonable time; such reasonable time
being measured by the necessity that will undoubtedly arise of
making the transfer with as little damage to the railroad companies
and as little injury to the public interest as is practicable. Some-
body has to have the discretion to determine how long a time that
will take. It is a matter of judgment for the committee to deter-
mine what would probably be the limit if any is placed.
·
The temptation on the part of the carriers to so handle the matter
as to compel a retention-say, during a panic-say a panic is on
and they are getting a whole lot more than the Government, and
they could get out of the business-that temptation should not be
there. The temptation to make use of this situation to further the
Government-ownership propaganda should not be there.
Now, what should be done with regard to a named date or not
naming a date is a question that it is impossible to answer, because
this Congress can not bind the next, and it would simply be per-
suasive. I should think that those who want to help railroad se-
curities so they say-by this process, and desire therefore to have
a no-time limit, would be accomplishing precisely the result that
they say they don't want to accomplish, because I think the uncer-
tainty would have more to do with upsetting the financial confidence
of financial men in the securities if there were fixed a date. I don't
consider that there is very much to be gained on one side or the other
with respect to the time limit, but it looks to me that this bill ought
to bear the impress that it is not a means to furnish a clinic or teach
a public school in favor of or against Government ownership in
these abnormal times, and hence that the railroads should be turned
back just as promptly as it is practicable at all to do it. And you
may conclude that in order to better accomplish that you will name
a fixed, comparatively short period, expecting that if they should
require a longer period Congress will extend it. But you might
assume that you may name what you think would be a short period
and a reasonable period, and yet it might be desirable to turn them
back much earlier.
I really don't believe that I could be of advantage to the committee
in any opinion that I hold on that subject, because I scarcely have
one other than the general proposition to avoid making this a clinic
for the purpose of determining whether we would have Government
ownership or not.
The CHAIRMAN. Either promoting it or preventing it.
Mr. COWAN. Yes, sir; either way.
The CHAIRMAN. I agree with you exactly on that.
Mr. WINSLOW. Judge, I want to call your attention to a paragraph
in a letter which I received. You have spoken a good deal about the
40958-18—43
674 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
human factor all along in your argument-your statement. Now
comes a little story which I want to submit to you for consideration,
as to the probability of the general essence of the suggestion becoming
perhaps a fixture in the operation of railroads as affecting the human
factor. I quote from this letter. My correspondent writes as follows:
Incidentally, perhaps, you would like to know information which has come
to me direct from a locomotive engineer on the B. & A. Railroad-meaning
the Boston & Albany-as to the effect of the Government taking over the roads.
(This was dated within three or four days of this time.) Apparently the
supervising officials of the railroads have let up on their system of running the
road and are allowing the men to run about as they please. At present it
takes about one-third more time on a freight-train run than before. There is
no pressure on them. Of course, that means just so much more overtime, all of
which the men are quick to take advantage of. That means reduction of trans-
portation facilities probably 30 per cent, and a very great increase in the cost
of maintenance of the road. As the engineer said, before the road was taken
over, the authorities were very keen and compelled these men to make their
runs within a certain time, to cut overtime to the limit; and now they are con-
scious of the fact that that pressure is all removed, and they are taking advan-
tage of it.
I merely introduce that to get your thought, if you are willing to
express it, as to the likelihood of that situation becoming general.
Mr. COWAN. I think it is certain to follow any plan that does not
place in the mind of the manager, and from the manager down to the
superintendent, from the superintendent to the conductor and the
train despatcher-it is certain to follow just as you have read and
will be the greatest calamity that has ever happened to the country.
Mr. WINSLOW. Now without going too far into the various charges
of the accounts, would it be fair to assume that as a result of some such
tendency as that described in this paragraph, that any advantages
which might accrue by virtue of rerouting freight over shorter runs
might be overcome and more than overcome by such conditions as
this would indicate?
Mr. Cowan. It would be more than overcome, because the rerouting
will not work the economy in operations that persons not familiar
with the transportation facilities suppose. The short line does not
mean the shortest line in miles, necessarily. The nearest way home
may be the longest way round, and frequently it occurs-I will giye
you an illustration of that. The Santa Fe Railroad owns a fine
track from San Angelo, Tex., down to Temple and up to Fort Worth,
a hundred miles farther than it is to come by way of Brownwood
over the Frisco line into Fort Worth; and the matter has often been
up in the transportation of the cattle, San Angelo being the largest
live-stock loading point in the world-has been, at least, until the time
of the drought in that country-and the Santa Fe Railroad could
take a train of cattle from San Angelo destined to the pastures in the
Indian Territory, carry them down to Temple, somewhat of a back
haul, and run them a hundred miles farther before they got to Fort
Worth, more satisfactorily to the live-stock shipper than if they were
diverted at Brownwood, as is done in small shipments, and saved
100 miles of the run.
Now there are many factors that enter into that. One is the
Frisco road from Brownwood to Fort Worth, 150 miles long-a
poorly constructed road. It hasn't very heavy rails; it hasn't got
heavy ballast; it hasn't got so many reinforced concrete culverts, and
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
675
if there comes a heavy storm or rain, you may be laid out for a day
or two. You may suffer a wreck. So the safest thing is to go the
longest way round. The rates are the same. And I dare say that
if the Government were shipping horses from San Angelo which
they conceivably might be to Fort Worth for the Government post
there in large quantities, they would ship them certainly by Temple
to go 100 miles farther than to ship them by Brownwood and divert
the traffic there certainly in bad weather. And you can find those
illustrations all over this country, so that the general order to route
by the short line should be subject to compensations, provided that
is the best way to carry it. The shipper finds out the best way, and
he routes that way.
So you will not find very many routes changed in the shipment of
perishable freight.
Mr. WINSLOW. Again, Judge, if you please, would it be your
judgment that if rates were the only matter of consideration at this
time, that shippers would not find rates running lower by virtue of
the proposed management of the roads by the Government, as pro-
vided, generally speaking, in this bill?
Mr. COWAN. You are correct about that. The danger point is this,
that if you make this guaranty, conditions may arise by reason of a
failure of efficiency, and by reason of the increased operating ex-
penses from loss and damage and a thousand other things-increase
in labor cost for overtime and the like of that-that the net results
will put it where you have either got to take the money out of the
Treasury or raise the rates. Having raised the rates to a level, then
when you turn the roads back, as the public would demand, of course,
the railroads would get the roads back with a higher level of rates
than they had before, and they would have accomplished that which
they have not been able to do so far before the Interstate Commerce
Commission, and thus have surrounded the head of the stream. I
base that on the effect of the proposed guaranty.
Mr. WINSLOW. At the risk of reviewing or repeating testimony
which you have given, I would like to ask you this question: If the
rates should be raised by virtue of this arrangement, and the man
factor entering into it, and complaints began to be made frequently
and persistently by the shipping public; and if the President had
the sole power to adjust rates, could he obtain anywhere, so far as you
know, so well advised a body of men to advise him as the present
Interstate Commerce Commission?
Mr. COWAN. I hope not.
占
​Mr. WINSLOW. Well, that is a hope.
Mr. COWAN. He has appointed a good many of them, and ap-
pointed them for their qualifications, I suppose. They have cer-
tainly had the experience, and they are surrounded by a great many
examiners and others who are men well experienced. He would
surely not find any better authority to resort to.
Mr. WINSLOW. Can you imagine that any President of the United
States, regardless of the one that is now in the chair, could under-
take, either from training or the time at his disposal, to investigate
specifically any contention over freight rates?
Mr. COWAN. No, sir.
Mr. WINSLOW. So that he ultimately would have to come to some
advisory body for assistance?
676
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. COWAN. He is bound to do it. Life is too short, and it is a
difficult subject. Rates very largely make themselves. You can not
just turn loose without any regulation, for there is a limit to rates.
For example, the railroads in the Southwestern Rate case ad-
vanced the rates on iron piping from Pittsburgh to Texas points.
Immediately the iron pipe stopped moving because it moved to At-
lantic seaports and by boat to Galveston and New Orleans, and then
by rail to the points of destination. The result was that they could
not advance those rates. They had to reduce those rates back in
order to get a division of the traffic. They have divided the country
on that basis, running a line, you may call it, somewhere about
McKeesport, east of Pittsburgh. All east of that point the rates are
made that would have a tendency to move the freight to the Atlantic
ports and down to Galveston or New Orleans. West of that, the
rates are on a basis which have a tendency to move them all rail.
And all over this country you will find rates adjusted for the pur-
pose of moving the traffic in order to satisfy the competitive desire
of the manufacturer to supply a given territory, and of the railroads
serving that factory to handle the traffic moving to certain territory.
Now, you take rails f. o. b. Pittsburgh, $28-it was for 28 years or
longer-$45 now. You want to deliver rails somewhere in Texas,
New Mexico, Arizona. You could take them either from Pueblo or
from Pittsburgh through Galveston, and you get the rails at the
same price. So it is if you buy those shoes in Joliet or if you buy
them in Pittsburgh.
Mr. WINSLOW. If the various elements which we have spoken of
should appear de facto later on, would they not have a great deal
of bearing, likely, in respect to conditions-establishing conditions
for the remuneration of the roads for their use?
Mr. COWAN. They would. And I want to say in that connection,
about the short lines-I must not overlook that. Our State is greatly
interested in that subject. I concur in it as a national theory that
has been spoken of before you. I can't conceive how it is possible
to commandeer the resources of this country and to consolidate the
railroad operation without the utilization of the short lines. Be-
sides, we will have to pay the short lines and we might just as well
take them into this fold. If a short line is cut off from traffic be-
cause it is all routed on a Government. line reaching into terminii,
and it don't get any traffic, and Government had done that, whereas
if they had left the whole thing alone it would not have happened,
what difference would there be between that case and the one where
you own a piece of property and the right of eminent domain is as-
serted and the railroad is built where the property is taken? Your
property was not taken, but it was nearby, and you suffer conse-
quently in damages. The books are full of cases where recovery has
been had. The obligation is there, and we ought to realize that.
These short-line railroads, gentlemen, develop the country that needs
development. It is taking away the chance of development from the
people; it is stopping completely the building of these short-line
roads.
Now, let me give you an example there in Texas: This road is in
the drought district, from Midland northwest to Seminole, the county
seat, 75 miles of railroad. The Santa Fe Railroad projected its line
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
677
The
from the Panhandle and are building down to the same place.
Santa Fa Railroad will be under Government control. They will
handle all the business there, and the short line, which is entirely
independent and built out of the pockets of the people of Midland-
they can not scrap it because our constitution does not permit it, and
it will be absolutely worthless except for mere local traffic from Mid-
land up to Sominole, and it could not get any through traffic hauling
out there because it would not be routed that way to Seminole. It
would be routed over the Santa Fe and diverted over it at Sweet-
water and go on around that way. There are thousands of cases in
that way where the country would be ruined and people deprived
of a chance for development along that short line. The Government
being a guarantor to a line, would route over it.
Mr. DEWALT. Judge, there was one gentleman who appeared for
the short lines, and he suggested that that evil, if it came, might be
cured by regulation in regard to the diversion of traffic, and also a
regulation in regard to the adjustment of rates and compensation
from the trunk lines to the short lines, and really that was all that
he was claiming should be done for the short lines. Does that meet
with your ideas?
Mr. COWAN. It might fit some cases. My analysis of the short-line
proposition is this-I give it to you for what it is worth, and I think
if the Director General would give it consideration he would at once
conclude that was the proper thing to do. Of course they ought not
to be paid any more for their use than they are worth, but they ought
to be used for the purposes for which they are appropriate.
Take the case of that road from Midland that runs out 75 miles to
Seminole, connecting with the T. & P. at Midland. When the
Director General takes over the T. & P. and takes over the short line,
just let the short line be operated as a part of the T. & P. operations.
You take away all its company organization and overhead expense.
There is nobody to do anything except the T. & P. Road, so that road
is simply used just as the Santa Fe uses its line down to the same
place from its main line, precisely, and if it is has got terminals in
some city use them. Simply use it as a part of the trunk line it
connects with by the Director General, and your trouble is all re-
lieved, and you pay what the thing is reasonably worth.
Mr. DEWALT. Suppose he does not choose to do that, and that is
what he specifically declared here. He says he does not want any
cripples.
Mr. COWAN. It wouldn't be a cripple in that case.
Mr. DEWALT. He illustrated it. I am merely paraphrasing what
he said. He said, "We don't want cripples in the Army to fight,
because they can not fight; therefore we do not want to have these
short lines because they are of no use at all in the transportation
that we proposed to take over." Now, suppose he says he won't
take them over. I have a line in the section of the country where I
live; it is called the Ironton Railroad. Suppose he absolutely re-
fuses to take that over. It is the termini of one or two trunk lines,
and supposing the trunk lines do not choose to use it? What remedy
would you then suggest; any further remedy than the remedy sug-
gested by the gentleman from Pittsburgh who appeared before us,
saying that there should be a compulsory arrangement between the
678
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
trunk lines and the short line in regard to the diversion of freight and
also in regard to the division of compensation? Or is there some
other remedy in your mind? Your remedy, as I understand it,
is that they should all be included whether they are cripples or
whether they are not?
Mr. COWAN. I think they should, and I think the Director General
wants to do the best for the country. I do not want to eliminate
the development of the country at these outer edges of the developing
territory. He don't want to destroy investments that people have
taken out of their pockets and made. He can keep it from being a
cripple just as much as the Santa Fe keeps its little branch lines
that run out from being cripples. When he takes it over, just let
the T. & P. operate that up to the place I am mentioning. There
will be no cost to it except the mere matter of maintenance, and the
maintenance and the operation-there is no organization to keep up.
Mr. PARKER of New Jersey. There are bonds, aren't there, and
things of that sort?
Mr. COWAN. Yes, sir; things on which interest will have to be
paid.
Mr. PARKER of New Jersey. I suppose they are overcapitalized on
bonds?
Mr. COWAN. They are not in Texas, because they valued the prop-
erty for just what was put into it.
The CHAIRMAN. Have you any chief subject that you have not yet
discussed that you wish to discuss, or have you covered your entire
contemplated outline?
Mr. CowAN. I have covered my contemplated outline. There are
a good many things that I could say, but it would take too much of
your time.
Mr. ESCH. Have you expressed your views on section 13?
Mr. COWAN. Yes, sir. Now, I think the people in these localities
where the short lines are ought to discuss this matter with the
Director General, with the view that he pay what the line is rea-
sonably worth for the use. Now, if in some instances it would not
pay the interest on the bonds, if the plan I have suggested in regard
to the surplus were adopted, that could be taken care of. We do
not want to get to a position, gentlemen, where there will be no more
railroad development in territory to which branch lines perhaps
ought to be built by the trunk lines, and let the strong take care of
the weak in that way, where people are discouraged from building
them with the expectation of turning them over when they get them
in operation to the trunk lines, as nearly always happens; deprive
them of a division of rates which they get for traffic originating and
delivered on their lines that enables them to live, and holds the
country back and allow nothing to go to this undeveloped country,
would be a piece of public policy that I think would be ruinous to us
in time of war or any other time.
And if we commandeer, as I said, the entire resources of the coun-
try, why let us do that. That would be my position. Of course, you
can not compel the Director General to do that, but your provision
for some equitable method of compensation for the short lines would
go a long way in removing the objection that he has not taken them
over. His objection seemed to be sound, but still it will bear com-
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
679
plete investigation and analysis, with a view to doing the best for
the country. Of course, he says that they must expect to suffer in
times of war; that everybody is expected to suffer somewhat. If
that is the case, I would like to see that apply to the trunk lines, as
well as to the others, and not let the bill be apparently for the pur-
pose of preserving the credit of the trunk lines and at the same time
destroying the ability of the people to build little lines and destroying
the credit and the opportunity to sell their bonds that they put out
under just as much right as the others were put out.
Mr. DILLON. I would like to ask just one question. What would
be the objection of placing an amendment in this bill of this char-
acter, limiting the control and the possession to the transportation of
war material and for war purposes?
Mr. COWAN. Why, you could not do that, because the railroad has
to be operated at the same time for all purposes. It moves in the
same trains and under the same management and the same loco-
motive.
Mr. DILLON. But you do not catch my idea. That is limiting the
Government's control and possession to those purposes alone and
leaving the balance of it in the original railroad company.
Mr. COWAN. You mean operation for commercial purposes?
Mr. DILLON. Yes.
Mr. COWAN. I don't think that would do at all, because that would
be two persons doing the same job at the same time in such a way
that I don't think it would work. I think if the Government has
control of a railroad it must control it for all its usefulness and
purposes. But I don't think it is necessary, because it has got con-
trol of the management, of the operation, declaring what it shall
do and how it shall do it; that it should control the making of the
rates that pay for the commercial service. If you have reference to
rates, you are correct. If you have reference to operation, you could
not divide that.
Mr. DILLON. But you think that could be applied as to rates?
Mr. CowAN. Well, I have dwelt on that considerably, that there
should be no other way to do it.
The CHAIRMAN. I wish to make a statement, for fear I will forget
it. Now, you represent a great number of shippers in this country.
You represent a product which is essential to the life of the people
in war and in peace. Now, Mr. Thorne represents a large number
of shippers of various kinds and Mr. Plumb represents the four
brotherhoods' interests. You have all been here at length before the
committee, and you are all of you capable of giving advice more or
less technical, and I was just going to suggest that if you three gen-
tlemen-and others that can do the same thing, who may not have
been before the committee at all-if you could remain in Washington,
where it is convenient in case the committee gets ready to consider
the bill by paragraph, where you might be consulted in regard to
any proposed amendment, I think that might be a service to the
committee of great value in working up and perfecting the final draft.
of the bill.
Now, if it would not inconvenience you and these other gentlemen,
or any other gentleman that can give us information that we might
need in perfecting the language of any paragraph or section, if you
680
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
could remain here so that the committee could consult you we would
appreciate it. It is often done with conference committees, and I do
not see why it should not be done if the committee feels the need of
such information. They might call on Mr. Thom or anybody repre-
senting the railroad side on perfecting the final draft of the bill to be
reported.
Mr. COWAN. Well, I will be subject to the request of the committee
as nearly as it is possible for me to do-of course, under the neces
sary direction, I might say, in some particulars, of my employers-at
least I always say I will obey them. I don't generally do it.
The CHAIRMAN. I would not ask you to sacrifice any other interests
you have, but if you could remain over for a few days in Washington
so you could be reached it is better than writing or telegraphing. We
would like to have you do so.
Mr. Cowan. Whatever the committee desires in regard to that I
should be glad to do.
The CHAIRMAN. I am only expressing my own ideas about it, but I
believe it might be valuable. We thank you very much for your
statement, Judge.
Mr. COWAN. I wish to thank the committee for the patience with
which you have listened to me.
EXHIBIT TO S. H. CowAN'S TESTIMONY.
SUMMARY.
Analysis of railway operating income and railway operating income per mile
of line operated for the principal railroads and systems of railroads in the east-
ern, southern, and western districts, as classified by the Interstate Commerce
Commission and the railroads of the United States as a whole. For the fiscal
years ending June 30, 1917, 1916, 1915, and 1914, and the three-year average for
the years 1917-1915, compared with the three-year average 1916-1914.
These figures were compiled from the sworn statement as published in the
New York Commercial and Financial Chronicle taken from the railroads' sworn
report to the Interstate Commerce Commission.
NATIONAL LIVE STOCK SHIPPERS' PROTECTIVE LEAGUE,
I. A. RICE, Statistician.
Eastern district.
Railway oper-
Eastern roads.
Fiscal year
ending
June 30-
Mileage of
single track
operated.
Railway
operating
income.
ating income
per mile of
single track
operated.
Baltimore & Ohio…………
1917
4,545. 23
1916
4, 539.38
1915
$28,657, 509
28, 639, 064
$6,305
3-year average, 1917, 1916, 1915...
3-year average, 1916, 1915, 1914...
4, 535.27
6,309
1914
24, 581, 697
5,478. 22
5,420
21, 506, 370
27, 92, 757
4,803
6.011
Boston & Maine..
24,909, 044
5.511
1917
2, 301.99
1916
12, 419, 251
2, 301.05
5,395
1915
13, 888, 579
2, 301.90
6,036
3-year average, 1916, 1915, 1914.
3-year average, 1917, 1916, 1915.
1914
8,779, 110
2, 301.90
3,814
7,245, 050
1,695, 646
3, 147
5,082
Central R. R. of New Jersey...
9, 970, 913
4,332
1917
683.75
1916
9,815,000
683.93
1915
10, 505, 758
680.65
14,355
15,361
3-year average, 1916, 1915, 1914..
3-year average, 1917, 1916, 1915..
1914
8,357, 126
677.93
12,278
8, 169, 794
12,051
9,559, 295
13,998
9,010, 893
13,230
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
681
Eastern district-Continued.
Eastern roads.
Railway oper-
Fiscal year
ending
Mileage of
Railway
ating income
June 30-
single track
operated.
operating
per mile of
income.
single track
operated.
Cleveland, Cincinnati, Chicago & St. Louis.......
1917
2,385.58
$13, 159, 838
$5,516
1916
1915
2, 382.96
2,372. 74
12, 717, 953
5,337
7, 242, 192
3,052
1914
2,363. 16
2,669, 692
3-year average, 1917, 1916, 1915.
11,039, 994
3-year average, 1916, 1915, 1914..
1, 130
4,635
7,543, 279
3, 173
Delaware & Hudson.
1917
882.30
6,607, 606
7,489
1916
895.63
8,891, 456
10,040
1915
880.55
7,339, 504
8,335
1914
850.55
3-year average, 1917, 1916, 1915.
7,105, 339
8,069
7,612, 855
3-year average, 1916, 1915, 1914…….
8, 621
7,778,766
8,815
Delaware, Lackawanna & Western.
1917
955. 12
16,780, 213
17,569
1916
956.54
17,609, 604
18, 410
1915
958.84
13,526, 152
14, 111
1914
959. 31
3-year average, 1917, 1916, 1915.
3-year average, 1916, 1915, 1914.
12,515,985
13, 041
15,971, 900
16, 697
14, 550, 580
15,187
Erie R. R..
1917
1,987.84
12,389,589
1916
1,987.84
20, 333, 154
6,236
10, 229
1915
1,987. 84
11, 807, 039
5,940
1914
3-year average, 1917, 1916, 1915...
3-year average, 1916, 1915, 1914…….
1,987.84
13, 294, 526
6,688
14, 843, 261
7,468
15, 144, 906
7,169
Lehigh Valley.
1917
1,443. 12
11,046, 283
7,654
1916
1,443. 69
12,574, 714
8,710
1915
1,443. 52
10,871, 803
7,531
1914
1,439.99
3-year average, 1917, 1916, 1915.
10, 423, 461
7,239
3-year average, 1916, 1915, 1914.
11,497, 600
7,965
11, 289, 993
7,860
Michigan Central……...
1917
1,853. 84
12,549, 691
6,760
1916
1,803. 26
12, 398, 101
6,875
1915
800.04
7,350, 275
4,083
1914
3-year average, 1917, 1916, 1915.
1,799. 74
5,870, 141
3,262
3-year average, 1916, 1915, 1914..
10,766, 022
5,906
8, 539, 506
4, 740
New York Central.
1917
6, 139.70
60, 801, 787
9,903
1916
6,031.22
67,509, 927
10,895
1915
4,801.89
34, 481, 709
7,273
1914
3-year average, 1917, 1916, 1915..
3,753.67
20,516, 290
5,465
3-year average, 1916, 1915, 1914..
54, 264, 474
9,357
40,835, 975
7,878
New York, Chicago & St. Louis...
1917
570.67
2,808, 673
4,922
1916
569. 44
3,967,070
6,967 ·
1915
567.89
1,895,989
3,338
1914
3-year average, 1917, 1916, 1915.
566. 12
1,560,064
2,756
3-year average, 1916, 1915, 1914...
2,890, 577
5,076
2,474,374
4,354
Pennsylvania Co...
1917
1,754.67
15, 116, 331
8, 615
1916
1,758.08
21,402,493
12, 174
1915
1,757.47.
10, 510, 141
5,980
1914
3-year average, 1917, 1916, 1915...
1,749.55
11,678, 708
6,645
3-year average, 1916, 1915, 1914..
15,676, 322
8,923
14,530, 447
8,266
Pennsylvania Railroad..
1917
4,536.18
50, 192, 739
11,065
1916
4,541.04
56, 949.999
12, 541
1915
4, 527.81
36, 372, 879
8,033
3-year average, 1917, 1916, 1915.
1914
4,083.54
35, 782, 443
8,762
3-year average, 1916, 1915, 1914.
47, 338, 539
10,546
433, 035, 107
9,779
Philadelphia & Reading..
1917
1,127.27
1916
1,127.27
1915
1, 119.75
3-year average, 1917, 1916, 1915.
1914
1,119.75
3-year average, 1916, 1915, 1914...
21,925, 535
22, 499, 699
14, 416, 848
14,656, 676
19, 614, 027
19,450
19,959
12, 875
13,089
17,428
17, 191, 174
15,308
682-
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Eastern district-Continued.
Fiscal year
Mileage of
Railway
Eastern roads.
ending
single track
operating
June 30-
operated.
income.
Railway oper-
per mile of
single track
operated.
ating income
Pittsburgh & Lake Erie..
1917
2,224.56
$9,297, 813
1916
$41, 405
224.56
11, 614, 177
1915
51,720
224.91
4,802, 908
21,354
3-year average, 1917, 1916, 1915………….
3-year average, 1916, 1915, 1914....
Philadelphia, Baltimore & Washington.
1914
224. 13
6, 029, 201
26, 900
8, 571, 633
38, 159
7,482, 095
33, 325
1917
717.86
5,836, 855
1916
8, 130
717.14
5,816, 899
1915
8, 111
717.07
3, 161, 192
3-year average, 1917, 1916, 1915..
1914
4, 408
717.12
2,890, 856
4, 031
3-year average, 1916, 1915, 1914.
4,938, 315
6, 883
3, 956, 316
5,517
Pittsburgh, Cincinnati, Chicago & St. Louis..
1917
2,398.94
13, 530, 135
1916
5,640
1,488.98
11, 501, 395
1915
7,724
1,478.75
7,334, 262
3-year average, 1917, 1916, 1915.
3-year average, 1916, 1915, 1914.
1914
4,959
1, 472. 19
6,979, 807
5,486
10, 788, 597
6, 108
8, 605, 155
6,056
Recapitulation, 17 roads.
1917
34, 508.62
302, 934, 848
1916
9,779
33, 442. 01
338, 820, 042
1915
10, 132
32, 156. 69
212, 830, 826
3-year average, 1917, 1916, 1915.
3-year average, 1916, 1915, 1914.
1914
6, 619
30, 575. 21
188, 894, 403
6, 178
284, 861, 905
8,843
246, 848, 424
Total, eastern district.
7,643
1 1917
59, 253. 40
1 1916
418, 252, 558
7,059
58, 963. 34
457, 141, 240
2 1915
7,753
64, 805.03
3-year average, 1917, 1916, 1915.
3-year average.
8 1914
300, 680, 798
62, 781.42
4,640
261, 826, 416
4, 171
392, 024, 865
6, 484
339, 882, 818
5, 521
Railway operating in-
Railway operating income.
come
Eastern roads.
per mile of
single track oper.
ated.
3-year
average,
1917-1915.
3-year
average,
1916-1914.
3-year
average,
1917-1915. 1916-1914.
3-year
average,
Baltimore & Ohio.
Boston & Maine.
Erie R. R..
•
New York, Chicago, & St. Louis.
Pennsylvania R. R…….
Philadelphia & Reading.
Pittsburgh & Lake Erie..
Philadelphia, Baltimore, & Washington..
Pittsburgh, Cincinnati, Chicago, & St. Louis.
Recapitulation, 17 roads...
Total, eastern district
15,676, 322
47, 838, 539
19,614,027
8,571, 633
4,938, 315
10,788, 597
Central R. R. of New Jersey
Cleveland, Cincinnati, Chicago, & St. Louis.
Delaware & Hudson.
Delaware, Lackawanna & Western...
Lehigh Valley...
Michigan Central..
New York Central.
Pennsylvania Co.
$27, 292, 257
11,695, 646
9,559, 295
$24,909, 044
$6,011
9, 970, 913
$5,511
5,082
9,010, 893
4,332
11,039, 994
13,998
7,543, 279
13,230
7,612, 855
4,635
7,778, 766
3,173
15,971, 990
8, 621
14,843, 261
14,550, 580
8,815
16,697
15, 144, 906
15, 187
11, 497, 600
7,468
11, 289, 993
7,619
10,766, 022
7,965
8,539, 506
7,860
54, 264, 474
5,906
40,835, 975
4,740
2,890, 577
9,357
2,474, 374
7,878
5,076
14,530, 447
4,354
8.923
43,035, 107
8,266
10,546
17, 191, 074
9,779
17,428
7, 482, 095
3,956, 316
8, 605, 155
15, 308
38, 159
33, 325
6,883
5,517
6, 108
6,056
284, 861, 905
246,848, 424
8,843
7,643
392,024, 865
339,882, 818
6, 484
5, 521
1 Class I roads.
2 Class I, II, and III roads.
3 Class I and II roads.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
683
Southern district.
Fiscal year
Railway oper-
Southern roads system.
Mileage of
Railway
ating income
ending
single track
June 30-
operated.
operating
income.
per mile of
single track
operated.
Alabama, New Orleans & Texas Pacific Junction..
1917
873.78
$6, 199, 490
$7,095
1916
873.78
4,806, 311
5,501
1915
873.78
3,067,929
3,511
1914
703.48
3,807, 302
3-year average, 1917, 1916, 1915..
3-year average, 1916, 1915, 1914..
Atlantic Coast Line..
5,412
4,691, 243
5,369
3,893,847
4,808
1917
12,999.00
42,005, 470
3,231
1916
12, 884.82
36, 294, 684
2,817
1915
12, 861.61
21,860, 080
1,700
1914
12,841.75
27, 678, 848
3-year average, 1917, 1916, 1915..
2,155
33,386, 745
3-year average, 1916, 1915, 1914..
2,583
28, 611, 204
2,224
Chesapeake & Ohio
1917
2,555.00
15,821, 152
6, 192
1916
2,551.80
16,033, 976
6,283
1915
2,545.80
11, 259, 441
4,423
1914
2,543.97
10,497,396
3-year average, 1917, 1916, 1915....
4, 126
14,371, 523
3-year average, 1916, 1915, 1914.
5,636
12,596, 938
4,944
Florida East Coast.
1917
765.00
4, 149, 720
5,424
1916
744.89
2,881, 418
3,868
1915
744.76
1,857,999
2,495
1914
695.92
1,441, 715
3-year average, 1917, 1916, 1915..
2,071
3-year average, 1916, 1915, 1914...
2,963,046
3,929
2,060, 377
2,811
Illinois Central.
1917
8,308.00
25, 268, 013
3,403
1916
8, 264. 08
21, 218, 229
2,568
1915
8, 265.53
16, 334, 830
1,976
1914
5,263.74
18, 033, 001
3-year average, 1917, 1916, 1915...
2, 181
3-year average, 1916, 1915, 1914...
21, 940, 357
2,649
18, 528, 687
2,242
Norfolk & Western..
1917
2, 179.00
21, 990, 006
10,092
1916
2,153. 17
23, 226, 551
10,787
1915
2, 134.95
13,382, 678
6,268
1914
2, 103.24
3-year average 1917, 1916, 1915.
12,981, 099
6, 172
19, 533, 078
3-year average 1916, 1915, 1914..
9,049
16, 530, 109
7,742
Seaboard Airline….
1917
3,523.00
7,656, 028
2,173
1916
3,511. 29
6,865, 486
1,956
1915
3, 167.59
5, 270, 365
1,664
1914
3,241.24
7,040, 070
3-year average 1917, 1916, 1915
2,172
3-year average 1916, 1915, 1914
6,598, 260
1,931
6,392, 974
1,930
Southern Ry...
1917
9,608.00
30, 373, 008
3, 161
1916
9, 844. 78
27, 134, 176
2,756
1915
9, 854.06
17,955, 712
1,822
1914
9, 871.30
3-year average 1917, 1916, 1915.
21, 122, 671
2,140
3-year average, 1916, 1915, 1914..
25, 154, 332
2,580
22,070, 853
2,239
Recapitulation, 8 systems..
1917
40, 810. 78
156, 462, 887
3,834
1916
40, 828. 61
138, 463, 831
3,391
1915
40, 448. 08
90,989,034
2,250
3-year average, 1917, 1916, 1915.
3-year average, 1916, 1915, 1914.
Total southern district.
1914
40, 269.64
102, 602, 102
2,548
128, 638, 584
3, 158
110,351, 656
2,730
1 1917
42,690.85
162, 884, 345
3,815
1 1916
42,298.42
145, 014, 040
3,428
2 1915
49, 500.49
97, 160, 848
1,963
3-year average, 1917, 1916, 1915..
3-year average, 1916, 1915, 1914.
1 Class I roads.
8 1914
46,587.73
112, 107, 287
2,406
135,019, 744
3,069
118,094, 058
2,599
2 Class I, II, and III roads.
8 Class I and II roads.
684 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Southern district-Continued.
Railway operating income.
Railway operating in-
come per mile of
single track operated.
Southern roads system.
3-year
average,
1917-1915.
3-year
average,
1916-1914.
3-year 3-year
average, average,
1917-1915. 1916-1914.
Alabama, New Orleans & Texas Pacific Junction...
Atlantic Coast Line….
Chesapeake & Ohio.
Florida & East Coast...
Illinois Central...
Norfolk & Western..
Seaboard Air Line.
Southern Ry....
Recapitulation, 8 systems..
Total southern district.
$4,691, 243
$3,893, 847
$5,369
$4,808
33,386, 745
28, 611, 204
2,583
2,224
14,371, 523
12,596, 938
5,636
4,944
2,963,046
2,060, 877
3,929
2,811
21,940, 357
18, 528, 687
2,649
2,242
19, 533, 078
16,530, 109
9,049
7,742
6,598, 260
6,392, 974
1,931
1,930
25, 154, 332
22,070, 853
2,580
2,239
128,638, 584
110,351, 656
3,158
2,730
135,019, 744
118,094, 058
3,069
2,599
Western district.
Railway oper-
Fiscal year
Mileage of
Western roads system.
ending
single track
June 30-
operated.
Railway
operating
income.
ating income
per mile of
single track
operated.
Atchison, Topeka & Santa Fe....
1917
11, 274.00
$51,951,671
1916
$4,610
11, 252.11
43.779, 991
1915
3,892
11, 118.55
36,051, 400
3-year average, 1917, 1916, 1915.
1914
3,242
10, 902. 64
32, 103, 929
2,945
3-year average, 1916, 1915, 1914..
43,927, 687
3,915
37, 311, 773
3,360
Chicago & Northwestern
1917
10, 174.00
32, 342, 515
1916
3,180
10, 174.00
30, 225, 933
1915
2,972
10, 174.00
24, 677, 431
3-year average, 1917, 1916, 1915.
1914
2,426
10, 161. 12
24,541, 124
2,415
3-year average, 1916, 1915, 1914..
29,081, 960
2,859
26, 481, 494
2,604
Chicago, Burlington & Quincy.
1917
9,632.00
41, 188, 434
1916
4,276
9,635.80
33, 815, 150
1915
3,509
9, 606.97
24, 919, 503
3-year average, 1917, 1916, 1915.
1914
2,594
9, 532.33
26, 440, 782
2,753
3-year average, 1916, 1915, 1914..
33, 307, 697
3,460
28, 391, 813
2,952
Chicago, Milwaukee & St. Paul..
1917
10, 455.00
30,060, 870
1916
10,361.93
2,874
31,366, 904
1915
3,028
10, 284.43
24,757,853
3-year average, 1917, 1916, 1915...
1914
2,408
10, 219. 15
26, 830, 429
2,625
3-year average, 1916, 1915, 1914..
28, 728, 542
2,770
27,651, 729
Chicago & Alton.
2,687
1917
1,052.00
5,092,812
1916
4,841
1,052.00
4, 147, 140
1915
3,942
1,052.00
2,660, 583
3-year average, 1917, 1916, 1915.
1914
2,529
1,033.48
1,557,588
1,507
3-year average, 1916, 1915, 1914..
3,966,845
3,771
2,788, 437
2,659
Great Northern.
1917
8,288.50
28,959,594
1916
3,494
8, 117.51
32, 250, 667
1915
3,973
8, 125.95
25,699,839
3-year average, 1917, 1916, 1915.
1914
3, 163
7,869.05
24, 297,990
3,088
3-year average, 1916, 1915, 1914.
28,970, 033
3,543
27, 416, 165
3,408
Missouri, Kansas & Texas....
1917
3,865.06
7,610, 332
1916
1,969
3.865.06
5,029, 972
1915
1,301
3,865.07
8,584, 604
3-year average, 1917, 1916, 1915..
1914
2,221
3,865.07
7,191,570
1,861
3-year average, 1916, 1915, 1914…….
7,074, 969
1,830
6,935, 382
1,794
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
685
Western district-Continued.
Railway oper-
Western roads system.
Fiscal year
ending
Mileage of
Railway
ating income
single track
June 30-
operated.
operating
income.
per mile of
single track
operated.
Missouri Pacific.....
1917
7,426.50
$20,529, 628
$2,764
1916
7,387.52
13, 189, 773
1,782
1915
7,331.34
13, 058, 203
1,781
1914
7,330.83
3-year average, 1917, 1916, 1915..
14, 109, 621
1,925
3-year average, 1916, 1915, 1914.
15, 592, 535
2, 109
13, 452, 532
1,829
Northern Pacific.....
1917
6.748.50
33, 181,971
4,916
1916
6,732.00
30, 75%, 667
4,539
1915
6, 691.56
21, 849, 703
3.266
1914
6,896.35
22, 612, 645
3-year average, 1917, 1916, 1915.
3,279
3-year average, 1916, 1915, 1914...
23,596, 780
4, 250
25,073, 672
3,705
Southern Pacific.....
1917
11,043.50
60,078, 257
5,442
1916
10,941 90
47,948, 967
4,383
1915
10, 473. 49
35, 627, 331
3,403
1914
10,572.39
3-year average, 1917, 1916, 1915.
37, 620, 033
3,559
3-year average, 1916, 1915, 1914...
47, 884, 852
4, 409
40, 398, 777
3,782
Texas & Pacific…….
1917
1,986. 00
6,363, 711
3,204
1916
1,985. 27
4, 432, 549
2,233
1915
1,942.32
3, 268, 173
1,6×3
1914
1,925.85
3-year average, 1917, 1916, 1915..
3,636, 804
1,888
3-year average, 1916, 1915, 1914...
4,688, 144
2,373
3,779, 175
1,935
Union Pacific...
1917
7,957.00
45, 223, 051
5,684
1916
8, 165. 66
40,804,
40, 804, 635
4,997
1915
8,048.64
30, 168, 971
3,748
1914
7,969.63
3-year average, 1917, 1916, 1915..
31,742, 739
3,983
3-year average, 1916, 1915, 1914...
38, 732, 219
4,810
34, 238, 782
4, 243
Chicago, Rock Island & Pacific……….
1917
8,094.50
21,069,695
2,603
1916
6,098.88
17, 206, 970
2,125
1915
8, 331.31
14,043, 493
1,686
1914
3-year average, 1917, 1916, 1915.
3-year average, 1916, 1915, 1914..
8,320. 20
13,718, 060
1,647
17,440, 053
-
2, 138
14,989,508
1,819
St. Louis & San Francisco.....
1917
5,219.00
16,750,685
3,209
1916
5, 232.32
13,448, 303
2,568
1915
5,342.37
11, 121, 903
2,082
1914
3-year average, 1917, 1916, 1915.
6,291.07
10,770, 389
1,712
3-year average, 1916- 1915, 1914..
13,773, 632
2,620
11,780, 200
2, 121
Recapitulation, 14 systems..
1917
103, 212.50
400, 403, 226
3,880
1916
103, 006.96
348, 405, 621
3,383
1915
102, 388.00
276,489,000
2,700
1914
3-year average, 1917, 1916, 1915.
3-year average, 1916, 1915, 1914...
Total, western district...
3-year average, 1917, 1916, 1915.
3-year average, 1916, 1915, 1914..
1 Class I roads.
2 Class I, II, and III roads.
3 Class I and II roads.
102, 898. 16
277, 173, 703
2,693
341,765, 949
3.321
300, 689, 441
2,925
1 1917
128,962. 06
488, 613, 611
3,789
1 1916
2 1915
3 1914
127,967.33
141, 908. 09
136,255.40
427,086, 524
3,337
331, 227, 363
2,334
331,691, 431
2,434
415,642, 499
363, 385, 106
3, 153
2,702
686
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Western district-Continued.
Railway operating income.
Railway operating income
per mile of single track
operated.
Western roads system.
3-year
average,
1917-1915.
3-year
average,
1916-1914.
3-year
average,
1917-1915.
3-year
average,
1916-1914.
Atchison, Topeka & Santa Fe....
Chicago & Northwestern.
Chicago, Burlington & Quincy
Chicago, Milwaukee & St. Paul
Chicago & Alton.
Great Northen.
Missouri, Kansas & Texas
Missouri Pacific
Northern Pacific.
$43,927, 637
29,081,960
$37, 311, 773
$3,915
$3,360
26, 481, 494
2,859
2,604
33, 307, 697
28, 391, 813
3,460
2,952
28, 728, 542
27,651, 729
2,770
2,687
3,966, 845
2,788, 437
3,771
2,659
28,970, 033
27, 416, 165
3,543
3,408
7,074, 969
6,935, 382
1,830
1,794
15,592, 535
13,452, 532
2,109
1,829
Southern Pacific.
Texas & Pacific.
Union Pacific.
28,596, 780
47, 884, 852
4,688, 144
25,073, 672
4,250
3,705
40, 398, 777
3,779, 175
4, 409
3,782
2,373
1,935
Chicago, Rock Island & Pacific
St. Louis & San Francisco.
Recapitulation, 14 systems.
Total, western district.
38, 732, 219
34, 238, 782
4,810
4, 243
17,440, 053
24, 989, 508
2,138
1,819
13, 773, 632
11,780, 200
2,620
2, 121
341,765, 949
300,689, 442
3,321
2,925
415, 642, 499
363, 335, 106
3, 153
*2,702
RECAPITULATION.
Eastern district, 17 roads.
Increase, 1917-1915 average over 1916-1914.
Southern district, 9 systems.
$284, 861, 905
$246, 848, 424
$8,843
$7,643
38, 013, 481
1,200
Increase, 1917-1915 average over 1916-1914..
Western district, 14 systems.
128,638, 584
110,351, 656
3,158
2,730
18, 286, 928
428
Increase, 1917-1915 average over 1916-1914..
341, 765, 949
300, 689, 441
3, 321
2,925
41,076, 508
396
Total, above roads and systems, all dis-
tricts....
Increase, 1917-1915 average over 1916-
1914.
755, 266, 438
657, 889, 521
4, 063
3,749
97, 376, 917
314
Total, all districts, all roads.
Increase, 1917-1915 average over 1916-
1914..
942, 687, 159
821, 311,982
3,990
3, 403
121, 375, 127
587
Mr. RICH. Mr. Chairman, I would like to make one remark about
this question as to the time when Mr. Thom is to appear. He re-
quested that the time be postponed until Monday. Of course he
acquiesces in anything that is determined by the committee, and for
that reason he offered to be here this afternoon if compelled to;
but may I suggest that in a matter of this supreme importance that
time will be saved if an opportunity is given for the most careful
consideration of the bill as it is now proposed? May I suggest
further that Mr. Thom is placed in a peculiar position because of the
vast number of clients whom he represents? It is not his ideas
which must prevail-although we all recognize him as the master
mind-but he has to confer with his associates, many of whom are
in Washington now and with whom he is conferring and wants to
confer this afternoon before making his presentation to the Senate
committee. I hope, therefore, that the committee, when it goes into
executive session, will give careful consideration to this request of
Mr. Thom, that his presentation to this committee be made on
Monday.
The CHAIRMAN. Well, if he can not come this afternoon, there is
no use in the committee having a session. If he can not come, that
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 687
ends it. But there is a very great reason, very great pressure for
the early termination of these hearings and the report of the bill,
and I understood that Mr. Thom and Mr. Anderson were to present
arguments upon the conclusion of the hearings. The Director Gen-
eral suggested that until some legislation is had upon this matter
there is no stability to the values of bonds of railroads held by
national institutions. They want to know what we are going to do.
Mr. Escн. Mr. Chairman, there is proposed a new draft of this
bill, I believe, and it is just being circulated. We have just gotten
copies of this bill. Now, to have an argument upon this proposed
new draft before we practically have had a chance to read it will
make a large part of the argument not understandable. If we could
have a little time to read the bill, a day or two, I think it would add
to expedition. I am willing to have the argument Saturday.
The CHAIRMAN. I am not insisting upon having it this afternoon.
I just got word that Mr. Thom would be willing to go on this after-
noon. Without objection, the committee will take a recess until 2
o'clock, at which time Mr. Doak can proceed with his statement.
(Whereupon, at 1 o'clock p. m., the committee recessed.)
AFTER RECESS.
The committee reassembled at 2 o'clock p. m., pursuant to recess..
The CHAIRMAN. The committee will please come to order. You
may proceed, Mr. Doak.
STATEMENT OF WILLIAM N. DOAK, REPRESENTING THE
BROTHERHOOD OF RAILWAY TRAINMEN.
Mr. DOAK. Mr. Chairman and gentlemen of the committee, in ap-
pearing here to-day I do so in behalf of the four railroad brother-
hoods, and especially for the purpose of discussing briefly the pro-
visions pertaining to workmen's compensation.
When the original bill was brought out there was a provision in
there, contained in section 9 of the bill, dealing with the question of
compensation for injuries and death of employees. We were as-
sured, however, after some hearings, that Mr. Anderson or some one
would bring up an amendment to this section, and until this amend-
ment came out we were not in a position to say anything definitely
with reference to it. We secured this morning a copy of this pro-
posed amendment to section 9.
The CHAIRMAN. What section is it now?
Mr. DOAK. It is still section No. 9. In the first place, I want to
say, Mr. Chairman and gentlemen, on behalf of the railroad em-
ployees which possibly may be in direct conflict with a possible im-
pression that has been given-that it is our desire and has been the
honest, earnest effort of the employees to cooperate with the adminis-
tration in every way, and, contrary to what some may believe, the
fault is not with the employees, if there is any trouble in handling
traffic at this time.
We were assured, before even the railroads were taken over, that
our present laws would not be affected in any way, nor would the
provisions of the existing schedules governing conditions on the
688
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
individual railroads be interfered with under Government operation.
We also thought-and had every reason to think-when this bill
came to Congress it would only deal with the question of guaranties
to the railroads for the operation of Government control, and we are
very much surprised to find that any reference was made to the
question of compensation. But immediately after this bill was intrɔ-
duced, containing provisions set forth in section 9, we tried to get a
pronouncement from some one in authority as to whether or not we
were Government employees. At first we were practically assured by
the Director General that we were. Later we understood that The
Adjutant General of the United States had ruled we were not. The
employees compensation commission came before your committee
and said that we were.
We went further and asked more than two weeks ago for a declara-
tion as to this section. I know that members of this committee-
as well as, I believe, the Senate committee-have attempted to get
this. It is not deemed advisable, possibly by the administration or
some, I believe, to give this information out at this time, and we found
ourselves in a very peculiar position. If we are Government em-
ployees, probably an entirely different machine or machinery must
be established in dealing with these questions. If we are employees
of the individual properties, I see no reason why the old status of
things should not be maintained. At any rate, we are of the opinion
that section 9, or any other reference to the question of workmen's
compensation or employers' liability, should not be contained in the
bill.
If there is to be a change in the liability laws, or a change in the
method of compensating these men for injuries sustained, we believe
it should be met in a straightforward, man fashion; that every one
would know exactly what we were getting. The provision in the first
bill, section 9, apparently was clouded enough and we didn't know
where we stood, but by looking at the second draft you will find
still it is a more complex question. And the significant part of this
new section is probably the last or next to the last sentence of it,
which reads as follows:
The rights and remedies so provided shall exclude all other rights and
remedies of the person injured, his personal representatives, dependents, or
next of kin, either at common law or by statute, whether Federal or State,
against either the carrier or the United States, on account of such injury or on
account of the disability or death resulting therefrom.
Other provisions of this bill declare specifically that when any
question arises as to property rights during this Federal control that
they will be adjusted through the courts. In other words, when it
comes to the question of property, all the rights are preserved; when
it comes to the question of damages other than for personal injuries,
it seems that all rights are preserved, but when it comes to dealing
with this 700,000 railroad employees, then you have taken absolutely
away from them all rights to bring suit. And you have done it before
you have made a declaration as to whether or not they were Govern-
ment employees.
The question has been asked if we have not implicit confidence in
the President, and we answer yes; but by looking at this provision
in this bill you will find that it leaves to him the right to say what
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
689
compensation, if any, will be allowed the employees for injury; or
that he can turn it over to the Federal Employees' and Workmen's
Compensation Commission; or he can suspend, alter, or amend at any
time, after he has put any form in effect, any of the benefits or
remedies under the law. There is such a thing possible as a con-
tinuance of this war possibly beyond the term of the present Presi-
dent of the United States, and this thing then, of course, we wouldn't
know exactly where we stand, and we don't know now where we
stand, as a matter of fact.
This bill furthermore provides that he can extend this compensa-
tion remedy after his proclamation back to the beginning of the time
that the Government took control of the roads. We are to-day, as
we see it, right here that we don't know what we have, just because
this is in here.
Complaints have already come in, as a matter of fact, that it is said
the men will have to take compensation under the State compensation
laws or they won't get any at all. Suppose it is some time before-
if this is to go into effect-before the proclamation is issued? Cer-
tainly, it makes it retroactive. It goes back. Suppose the President
was to extend this authority by proclamation to the employees' work-
inen's compensation commission, and we were to operate under the
provision of the present law. No doubt, as we told you, there is a
movement on foot to increase the minimum and maximum amount.
Well, regardless of that, I represent about 75,000 men-probably
100,000 men-directly. These are road brakemen, and their average.
compensation is $2.70 a day. If the provisions of this bill were ex-
tended to those men, and one of them was to get killed, and he had a
wife and no children, the wife would get the sum of 94 cents a day
and not to exceed $100 funeral benefits.
Mr. DECKER. Ninety-four cents a day for how long?
Mr. DOAK. That would continue indefinitely in her case unless she
was remarried.
Now, in case this man was to get killed and had a mother-and she
must be wholly dependent on him-under the provisions of this bill
that mother would get 67 cents a day for a period of eight years, at
which time compensation would cease. If the man was to get in-
jured, lose a limb, through defective equipment or otherwise, that he
could recover unquestionably for under the employers' liability act
that is now in effect, he would receive 663 per cent of the $2.94 for
such period as he was able to take some position that would be given
him. ˆ And after he was given this position he would get 663 per cent
of the difference between what his old wage was and what he received
under this as compensation.
You can readily see about where it is heading to when those facts
become known to this army of railroad men. No doubt the argument
will be advanced that there are cases under the employers' liability
act where no recovery is had. That is true; but here is the significant
thing: In an organization that I represent of 160,000 men, in conven-
tion assembled, where the delegates to that convention were men off
of the footboards and the box cars-men out of active service; men
right at that time out of active service they voted almost unani-
mously at three conventions of our organization as opposing work-
men's compensation and favoring employers' liability. And that in
40958-18——————44.
690
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
view of the exhaustive study that the Federal Workmen's Compen-
sation Commission, created under an act of Congress and appointed
by President Taft, after about three years study of the question and
had reported back. Some of the other organizations indorsed the
principle of workmen's compensation with proper schedules. Others
favored the elective feature, or a double remedy. One of the organi-
zations to-day stands in the position of the discretionary power being
vested in the president of the organization. But when it comes to
this one bill, or this provision in here, and inserting it in the bill, and
not meeting the question of compensation fairly and squarely, letting
us know—in other words, not giving us a pig in a poke, that we don't
know what it is the four railroad brotherhoods, representing ap-
proximately 500,000 men, are unalterably opposed to the section in
either one of the bills as presented.
Mr. DEWALT. Now, just one moment, Mr. Doak-leaving out of
consideration for the moment this section itself, I have seen it stated
that Mr. Gompers said that the large majority-in fact, I think the
statement was 90 per cent of the injured men upon railroads sought
their remedy through the compensation acts instead of the employers'
liability act. What is your information on that?
Mr. Doak. In our case it is absolutely wrong. There could not be
any such thing as that, because the Supreme Court has declared in a
series of hearings before it, decided last May, that you could not re-
cover under any State workmen's compensation law-that is, the men
that we represent.
Mr. DEWALT. That is, those engaged in intrastate traffic, but I am
speaking generally of the compensation law throughout the States.
Mr. DOAK. I presume that the shopmen and the men that were en-
gaged exclusively in intrastate work-that the large percentage of
them are compensated under the compensation laws, because a great
many of the States have the compensation laws, and that class come
in the same as anybody else.
Mr. DEWALT. Then this objection you have would be remedied if
there was a table of compensation commensurate as you think it
ought to be? Isn't that so?
Mr. DOAK. Not exactly. I couldn't say that so far as the train-
men, the largest organization of the four, is concerned, because they
have gone on record as being opposed to workmen's compensation
supplanting the employers' liability act; because they don't think
that in these cases where men-for instance, you take a man that is
crippled, who loses a limb or an arm, and then is given a job tending
switches, and is only paid the difference of compensation there,
which amounts to in the final analysis-and this is about the best
law, I understand the best law that has ever been gotten up-
Mr. DECKER (interposing). The Federal compensation law?
Mr. DOAK. The Federal compensation law has the highest sched-
ule and the most liberal provisions possibly of any of them; and I
had a list the other day of all of them, a comparative statement of
all the compensation laws as compared with this bill.
Mr. MONTAGUE. But the men you represent would rather take their
chances by suits at law than under that bill?
Mr. DOAK. Exactly so, Governor. For instance, we have had
the Federal employers' liability act, and as you know, in a case in
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
691
Virginia it has been extended down and practically carried-I think
it is carried in the constitution of Virginia-the liability laws, and
in a number of States and especially in Virginia is this true, that we
have tried each the Federal law was amended to get the State law
amended to conform with the Federal law, so it would take care of
any intrastate men that we had. In other words, to prevent, when
we would go in with a case, them saying that the man was engaged
in intrastate traffic.
Mr. MONTAGUE. If the State of Virginia would adopt the Federal
law, that would not be satisfactory to you, would it?
Mr. DOAK. No; I am speaking of the liability law.
Mr. MONTAGUE. You want a larger return than that?
Mr. DOAK. So far as the State of Virginia is concerned, they are
now considering the question of compensation which excludes rail-
way employees, the same as they have in Ohio, which specifically
excludes them from the operation of it. They might just as well be
excluded under the provisions, or under the decision of the Supreme.
Court, because all of these cases were thrown out. And for instance
in the State of New York I understand there were possibly several
hundred men that the commission was paying them compensation,
and when this decision was rendered they had to take them all.
Now my authority for that is Mr. Mitchell, who I believe is chair-
man of that commission. The same case, I think, applied to Cali-
fornia, as Mr. Pillsbury, chairman of the California commission
stated; that they had to cut them off after these decisions. Then the
seamen after the decision of the court passed the Johnson bill, which
provided that men engaged in the admiralty service would be placed
back. Of course that hasn't been tested in the court.
Mr. MONTAGUE. Will you put those cases in your remarks, in your
testimony, the Supreme Court case? Have you cited it?
Mr. DOAK. No; I have not. I am just referring to them. The
decision, I think, was on May 21-a series of decisions, of which I
have been unable to get a copy, only from the reporter. There were
several cases-there was a series of them.
Mr. SNOOK. Mr. Doak, what proportion of railroad employees as a
whole have signified that they are opposed to the law-the work-
men's compensation law-if it was given liberal schedules?
Mr. DOAK. The 160,000 members of the B. R. T., according to the
best information we can get, which is their supreme body.
Mr. SNOOK. How do the other organizations stand?
Mr. DOAK. The engineers favored a reasonable form of compensa-
tion.
Mr. SNOOK. How about the firemen ?
Mr. DOAK. The firemen are passive on the subject. They simply
vested discretionary power in their president.
Mr. SNOOK. They have not signified, then?
Mr. DOAK. No; he has not so far as I have heard yet said. And
the conductors are in favor of compensation, provided they can
retain the employers' liability as well.
Mr. SNOOK. Do you think that if this provision were retained
in the bill and it was left up to the President or director general,
whoever might administer it, they would be inclined to follow the
schedules that are in this Federal compensation law now? Wouldn't
692 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
they be inclined to make more liberal schedules to railroad employees
than that?
Mr. DOAK. I don't know what they would do, but I have heard
that some certain folks have in mind raising the minimum amount of
compensation to $50 instead of $33.333 and the maximum to $100.
In other words, raising the minimum wage to $75 and the maximum
to $150. But my objection to that would be just the same as to this.
You will have practically the same result. Here is a man in there
working at $2.70 a day, and about what he gets under this is about
what he would get under that. And the larger class of employees
would find themselves with a mighty insignificant remedy, even if
that principle was adopted.
Mr. BARKLEY. Have you seen the amendment that was suggested
to this section of the bill?
Mr. DOAK. Yes; that is what I am criticising now.
Mr. BARKLEY. The amendment in the completed bill?
Mr. DOAK. Yes.
Mr. BARKLEY. The language as it was originally drawn authorizes
the President to cover railroad employees in under the Federal em-
ployees compensation act, which would have required him to have
perhaps followed the schedule of that act, but doesn't this amend
ment isn't it, without mentioning this act and without having any
relation whatever to it-doesn't that authorize the President to go as
far as he may think wise in ignoring it or fixing new schedules or
new conditions under which these employees might be taken in?
Mr. DOAK. Certainly; and it does this in addition to that: You
are delegating every bit of right you have. Congress is delegating
to the President all the rights they have over this question entirely.
Mr. BARKLEY. Well, do you think Congress ought to attempt to
work out some compensation scheme in this bill?
Mr. DOAK. If the direct representatives of the people that come
in contact with them are not better qualified to work it out, I don't
see that any appointed commission by the President would be any
better qualified than you gentlemen are.
Mr. BARKLEY. Well, it is not so much a question in my mind as to
who is the best qualified to do it, but do you think that Congress at
this time ought to take the necessary time which would be required to
deliberate and work out the comprehensive scheme of workmen's
compensation incorporated in this bill?
Mr. Doak. Oh, no; I say that this question should not be in this
bill at all. It has absolutely no business in it.
Mr. DECKER. Let me ask you a question there. Suppose it shall
be determined, judicially or otherwise, that the railroad employees-
that employees who have heretofore been employees of the railroad
companies-shall be regarded as the employees of the Government.
Then they would not have any remedy at all, would they?
Mr. DOAK. No.
Mr. DECKER. Or, in other words, until we passed the Federal com-
pensation law, if a man was injured in the Government service he
would have no remedy?
Mr. DOAK. No; I don't think he would have any remedy; but the
railroad employees in this country are not in a position to-day to
buy a pig in a poke. If we are Government employees, why don't
!
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
693
you so declare before you start to pass legislation that, if we are not
Government employees, takes away the right from us that we would
enjoy as civil employees, or not employees of the Government,
private employees? That is exactly what you do, Mr. Decker, in
this bill. You are silent on the question of whether or not we are
Government employees, and we tried hard enough to get some dec-
laration on that, but you are going to pass a law here if I have not
missed my guess-and it is known now that we are going to be
declared Government employees, and then we will have our remedy,
our present remedy, taken away from us absolutely under this law.
Mr. BARKLEY. Not unless the President should act under the lan-
guage of the original section.
Mr. DOAK. Well, I just answered that a minute ago. My criti-
cism of that feature of it is there will be a period in here-you don't
know whether he is going to act or not, and every time a fellow
comes up with a claim he is going to be confronted with the state-
ment, "Well, we don't know this and that." And it is going to make
an endless lot of trouble, and I dare say that the operating officials of
the railroads, or the men that are handling this situation, would
like to have that determined, because they wouldn't know what to
do. They may be on just grounds awaiting and contending for a
decision on it.
Mr. BARKLEY. So long as nothing is done whatever you have your
remedy just as you did at the time the railroads were taken over?
Mr. DOAK. Yes; and if there wasn't going to be anything done,
don't put anything in any law, any bill, dealing with the question.
Mr. BARKLEY. Suppose that the committee or the House or both
Houses should conclude that in order to clear up the uncertainty
that seems to exist as to whether these men might be considered
Government employees by some courts who interpreted the language
of the act-in order to clear up any uncertainty about that, Congress
declared specifically that they are not technically Government em-
ployees such as we understand by civil employees of the Government;
then there would be no occasion any further for anybody to have any
doubt as to his rights as against the railroads?
Mr. DOAK. No; I think you are correct in that. I just called atten-
tion to that before you came in. You go ahead in other sections of
this bill and provide that when the question of property rights is in-
volved, or anything like that, you can go ahead in the usual way and
bring suit, but then you come over here in another part of the bill and
specifically take that right away from the employees to sue.
Mr. DECKER. Mr. Doak, you ask a declaration from Congress as to
the exact status; but suppose it is impossible to define that status
exactly, any more than as the Secretary of the Treasury did define it
yesterday, as sort of an indirect employment by the Government; and
suppose we say nothing then about your compensation. Then, of
course, you will maintain that you have the same rights that you had
hitherto, to sue the railroad company. Have you thought of some of
the things that you might run up against as a lawyer when you
went to sue the company?
Mr. Doak. Unfortunately, I am no lawyer.
Mr. DECKER. Now, suppose you would run up against this proposi-
tion: That an employee was suing a railroad company for damages
694
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
caused by negligence—which is the only ground he would have to re-
cover on-he would have to prove the negligence. He sues the com-
pany, and suppose you run up against the question as to whether the
negligence alleged was the negligence of the railroad official or of a
Government official, or the mixed negligence of both of them? In
other words, suppose it is some injury occasioned by mismanagement
of trains, and the railroad company would come in and say, "If we
had been running this the same as we had before, it wouldn't have
happened, but we got a telegram from Mr. McAdoo to get this coal
to New York, and we had to do an extraordinary thing." Now, what
would a jury say about that?
Mr. DOAK. Just exactly the same position that a postal clerk occu-
pies to-day on a railroad. If it is through the negligence of the
railroad, he can sue the railroad for damages and recover.
.have been numbers of those cases tried in courts.
There
Mr. DECKER. That doesn't answer the point at all. Suppose that
he sued the railroad company, but in his suit it developed that it is
the incompetence of a Government official that has caused his injury-
which it strikes me may well happen.
Mr. PARKER of New Jersey. That is the same as the post-office clerk.
Mr. DECKER. No; in the case of the post-office clerk, before we
passed the Federal compensation law, if it was not the negligence of
the railroad, then the employee got nothing. Now he is asking us to
leave out all mention of compensation to these men, and I am raising
the question what will happen if you do leave it out and the man is
injured by the negligence of a Government official in the management
of these trains?
Mr. Doak. As a matter of fact, how are you going to handle any
other suit? The same thing could be alleged in a suit for damages
any other way, and you have provided in one section of the bill that
they can go ahead and sue the carrier. If it is good in one section of
the bill-if it is good in one class of damages, it ought to be good in
the other.
Mr. DECKER. What class of damages?
Mr. DOAK. Why, you provide over here that they can go ahead and
bring suits under other provisions of the bill.
Mr. DECKER. For property rights; but this is a question of negli-
gence. There is a difference between negligence and property
rights. You have got, in the first place-
Mr. DOAK. There is a difference, I agree with you there is a dif-
ference in a way; but I don't see that there would be any difference
when it came to this particular question of having the right to bring
suit. I can't go with you on that, Mr. Decker. They have got a
right to sue them in one instance and they have not got the right to
sue them in another instance.
Mr. BARKLEY. Wouldn't the question of negligence not resolve
itself around the propriety of the Director General's order, but the
manner in which the employee carried out the order?
Mr. DOAK. Well, wouldn't the same thing happen in a damage suit
for property rights?
Mr. BARKLEY. I say the fact that the Director General. has given
an order for a certain train to be carried to a certain place would not
involve the question of negligence, but the manner in which the rail-
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
695
way company carried out the order involved the question of negli-
gence, if somebody was injured, would it not? So that, after all, it
would come right down to where it is now.
Mr. DOAK. I think so; yes. As I understand the provisions of
the bill here dealing with proparty, it simply permits you to go
ahead just the same as it is under private ownership and bring suits
and have them adjusted, just as in the usual way against the carrier,
just the same as was done before. If that is good in one case, my
contention is, Why wouldn't it be equally good in another case?
Mr. DECKER. Which section is that, about the property? I want
to refer to that.
Mr. DOAK. I don't know in this new bill.
Mr. Escн. Let me interrupt you right there. Mr. Chairman, Mr.
Thom is here now. In conference with the committee, à number of
members of the committee on both sides, I believe it is the feeling
that we should defer the final arguments to Monday, beginning at
10 o'clock. I make a motion to that effect. I think it will lead to a
better understanding of the bill, because it will give us a couple of
days to study these amendments as suggested and to read testimony,
the first part of which is only being printed now. I am as anxious-
and I know members on this side are as anxious-as anybody to
expedite the consideration of the bill, and we do not wish to put any
obstacles in the way; and I think that in the orderly procedure of
deveolpments we can well afford to leave arguments until Monday,
and I make that motion.
Mr. MCNAMARA. In connection with the question that has been
put by Congressman Barkley, I will say to you that Mr. Doak is
representing the four brotherhoods and we are not going to take up
any more of your time.
The CHAIRMAN. He can have all the time he wants.
Mr. MCNAMARA. We are together on those things, and so in order
to facilitate matters we have got one man to represent us. Mr. Clark
and myself will not appear before you.
Mr. BARKLEY. My motion is simply that the colloquy here about
fixing the time should not be in the hearings.
Mr. MCNAMARA. Well, we will try to facilitate business all the way
through, so that one will not interrupt the other.
The CHAIRMAN. Now, Mr. Doak, you may proceed.
Mr. DECKER. Mr. Doak, I wanted to call your attention to the
fact or to have you consider it, if you have not considered it, con-
sider it and let us know later-what would be the position of the
laboring men on the railroads if this section 9 were left out, as to
whether you think they would still have the rights then that they do
under the law at present? In other words, I was afraid, to be frank
with you, that by making no reference to the question of compensa-
tion the men whom you represent would really be at a disadvantage?
Mr. DOAK. I think so, Mr. Decker.
Mr. DECKER. Because, as you say, in another part of the bill we
have specifically made provision for other suits as to property. Now,
if we leave out section 9 as to compensation, should there be some-
thing in the bill that would specifically state your rights as to dam-
ages for injury and procedure to recover them should be as they
are now?
696
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. DOAK. Probably you are right, I don't know; but this is one
thing I do think should not go into the bill, to announce one position
on one subject and an entirely reverse position on another subject.
Mr. HAMILTON. Just what do you mean by that, Mr. Doak?
Mr. Doak. I just stated a while ago.
Mr. HAMILTON. I would like to have you make a little résumé of
what you mean.
Mr. DOAK. In one section of the bill they provide that yon can go
ahead and recover damages just as usual, by suit for property dam-
ages, and so on, against the carriers, just the same as if they were
in private ownership. Then you turn around and in another section
of the bill provide take away that remedy; that right from the
employees to recover damages for personal injuries.
Mr. BARKLEY. Do you think there is any analogy between the sys-
tem for affirmatively providing that the property rights may be sued
for, and also a similar provision with reference to personal rights,
the rights of individuals injured? Now what I mean is. this: If the
President's proclamation and the law already in existence does not
preserve the rights of men who have claims against the roads for
property, is it certain that the same situation would not exist with
reference to injury?
Mr. DOAK. I don't know on that point, Mr. Barkley, because the
committee or whoever drafted the bill has seen fit to put that lan-
guage in this bill. It might be proper that a similar provision be
put in here for the employees.
Mr. BARKLEY. It has been my idea that the President's procla-
mation, as a matter of fact, preserved all the legal rights of every-
body, both as to property and as to injuries; but in view of the fact
that this insertion has been made with reference to property, it
raises the question in my mind whether personal rights might not be
placed upon the same basis.
Mr. DOAK. I think that is a proper criticism myself.
Mr. MONTAGUE. Your apprehension, as I understand it, is that to
express the right in one instance it may be excluded in the other?
Mr. DOAK. Well, I don't know whether it would or not.
Mr. MONTAGUE. That is your apprehension, I said?
Mr. DOAK. Yes.
Mr. MONTAGUE. That is, if you express the right for property, you
fear it may be excluded for personal injury?
Mr. DOAK. Yes; but I further go with the gentleman in saying
that I believe the President's proclamation covers everything. That
is my personal opinion of it, because, as I understand it, the procla-
mation was that everything was to remain in effect-status quo-un-
til such time as the Director General ordered differently.
Mr. DECKER. Now, just to bring out the point that it is very diffi-
cult to leave it in status quo and still have the Government run the
railroads, suppose a hypothetical question: Suppose that we needed
to get coal or munitions to New York City to export, and suppose
that there was a scarcity of good rolling stock, or for any other rea-
son in the judgment of the Director General he would request or
order a crew of men to take a trainload of munitions from Pittsburgh
to New York City; and through a defect in the equipment, which
everybody knew was there, there should be an injury to one of the
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
697
employees, if the law is the same as it has always been, who would
you sue for damages?
Mr. DOAK. Sue the railroad company.
Mr. DECKER. But the railroad company didn't order it. Suppose
that the railroad company, the superintendent, or whoever was in
charge, knew that the equipment was defective, and they wouldn't
take the responsibility of sending that train out, but that the Director
General, owing to the emergency, and the laboring men on the train,
from patriotic motives, would say, "We will risk this old equip-
ment to get these munitions there." Doesn't that change the status
from what it was before the Government took control? I just want
you to think of that.
Mr. DOAK. Answering you fully, whenever the Director General
tells the men to take the train, they will take it.
Mr. DECKER. I know that; but that don't mean that they shouldn't
be paid for injury.
Mr. DOAK. I will try and answer you. But suppose in that train
they take something else they take some freight for somebody-
considering a concrete case. It goes in that train, and part of it is
damaged. Who are you going to sue?
Mr. DECKER. That is just the point that I am asking you, to bring
out the fact that I am afraid it would not do to be silent on the ques-
tion of compensation. Something has got to be done.
Mr. DOAK. To save my life, though, Mr. Decker, I can't see where
the line of demarcation between property rights and personal rights
gets into this thing.
Mr. RAYBURN. Isn't this an answer to Mr. Decker's question? The
Government is going to take these railroads and pay them so much
money. If the Government makes more than operating expenses out
of them, that is the Government's money; if it loses, it is the Govern-
ment's loss. If it pays a man for personal injury, that comes out of
the money that the Government gets, out of which it must pay oper-
ating expenses and pay the railroads a net sum. Then when they sue
the railroad and take it out of the railroad, it is just the same as if
they were getting it out of the Government.
Mr. DOAK. That is right, I think.
Mr. DECKER. That is all very true, but it doesn't touch the question.
I haven't made myself understand yet, because I know it is my
fault instead of that of my colleague. Now, I am not in any doubt
as to where the money is to come from. The money will come from
the revenue of the railroads, and if not from there, it will come from
the taxpayers. There is no question about that. I represent rail-
road men the same as you, and I am here to look after their interests
as well as the interest of all other people in my district, and I don't
agree with you—that is, on the spur of the moment-that it will do
at all to say nothing on the question of compensation, because you
not only have got to have a place to get the money from when you are
injured, but you have got to have a cause of action. You have got
to base it on negligence under the present law. You have got to
specifically state your negligence and whose negligence it is.
You have not answered the hypothetical case that I gave, where
the Director General might give an order to move a train, and as a
result of that movement some one was injured. This is not just an
698
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
argument between us; we are searching for some light for the benefit
of the laboring men. Now, then, we will say the Director General,
through good and sufficient reasons to himself, elects to choose the
best material that he can get to get munitions to New York from
Pittsburgh. He necessarily, I assume in this case, takes equipment
that the railroad men know is defective; that the superintendent of
the railroad in times of peace would not think of using.
Mr. HAMILTON. Mr. Decker, will you permit me to interrupt you
there in your hypothetical, question?
Mr. DECKER. Yes.
Mr. HAMILTON. Do you think that the Director General would go
to the extent of prescribing just what sort of train could be used in
the transportation of munitions, or would he direct a certain railroad
company to transport certain munitions from Pittsburgh to New
York? Therefore it would become an affair of the railroad com-
pany as to how the munitions reached New York. Your question, of
course, as every lawyer understands, goes to the question of who is
responsible for whatever negligence there might have been in the
premises.
Mr. DECKER. To be frank with you, I think before this war is
over we might have to use anything we could get our hands on at
times to get munitions to the ports.
Mr. HAMILTON. Precisely; but the railroad company that used
them would be responsible for the use of them.
Mr. DECKER. There is just where you and I differ.
Mr. HAMILTON. The railroad is the instrumentality through which
the transportation is brought about?
Mr. DECKER. It is, if we so define in this bill. If we state in this
bill that for any negligence of a railroad officer-or master, as we
call it the master in the capacity of the railroad superintendent, or
of a Government official, must be answered for in damages to the
employee who works under him, then right and good; but the gen-
tleman speaking for the railroad employee says that if we leave out
section 9 without reference to compensation the old status will
remain. I am afraid it will not remain.
Mr. HAMILTON. Exactly. That is what I was calling your atten-
tion to.
Mr. DECKER. I will ask you again. If the boys needed munitions
over there, there is not an engineer in the United States who wouldn't
take any old engine and run it to New York City for them. Now,
who is going to pay him or who is he going to sue in case he is hurt
by the defective engine?
Mr. HAMILTON. Where does he receive his orders from?
Mr. DECKER. He receives his orders from the Director General.
Mr. HAMILTON. No; he receives his orders from the railroad man-
agement.
Mr. DECKER. Well, that is simply evading the question.
Mr. HAMILTON. No; that goes right to the direct question of
negligence.
Mr. DECKER. Then, let's follow it your way. The Director Gen-
eral tells the superintendent of the Pennsylvania Railroad Co.-
Mr. HAMILTON (interposing). To move munitions.
Mr. DECKER. Yes; the superintendent of the railroad company
wires back and says, "We have no train that is safe to take them."
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
699
The director wires back and says, "Take any equipment you have."
Now, then, can you come into a court after being injured and say the
superintendent of the railroad is responsible? You can if we say so
in the bill, but can you if we do not say so in the bill?
Mr. DEWALT. Will you allow me to interrupt for just a moment?
Mr. DECKER. Yes.
Mr. DEWALT. I suppose you will agree with me that the servant
acting in the scope of his employment would be responsible to the
master, would he not?
Mr. DECKER. Most certainly.
Mr. DEWALT. I suppose you will agree with this, that the master
is responsible for the act of the servant within the scope of his
employment?
Mr. DECKER. Certainly.
Mr. DEWALT. I suppose you will agree with this, that there are
such things known in law as vice principals?
Mr. DECKER. There are.
Mr. DEWALT. Now, let us follow that out. The Government or-
ders, as in your instance, that certain freight shall be carried from
Pittsburgh to New York. Whom does it order? It orders the rail-
road company. By that very act the Government makes the railroad
company its servant.
Mr. DECKER. Correct.
Mr. DEWALT. If, then, the railroad company acts within the scope
of the authority given, and injury is caused, it follows logically from
the principles of law that the Government would be responsible for
the act of its agent?
Mr. DECKER. Correct.
Mr. DEWALT. If the principal in the transaction is the Govern-
ment, then the railroad company, following the instructions of the
Government, stands in the position of vice principal. A vice prin-
cipal in law is one who is given the management and the direction of
any specific thing which he is commanded to do. Therefore it fol-
lows again logically that if in your instance the railroad company
carried out the orders, or attempted to carry out the orders, of the
Director General, and an injury happened to any workman by reason
of the employment that he had in that carrying out of that order,
the Government would be responsible as the master and as the prin-
cipal in the transaction.
Mr. DECKER. That is just exactly correct; but let me ask you a ques-
tion there then. If nothing is said in the bill, I want to know under
what law anybody can sue the Government? That is the point I
make. Before we passed the compensation law nobody could get
damages through the negligence of the Government.
Mr. DEWALT. Now you are coming down to another phase of the
question. The compensation law-the Federal compensation law-by
its provisions includes the civil employees of the Government and
the railway employees of the Panama Canal. I conclude as a matter
of law that the Panama Canal Railway, being specifically mentioned
in that bill, excludes all other railway companies and does not in-
clude these general railway companies which are now in contempla-
tion of being taken over.
Further than that, the Supreme Court has decided that workmen
who are engaged in interstate traffic can not have their remedy before
700
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
the State courts-that is under State compensation laws. There-
fore, these men who are now in the employ of the railway com-
pany are in rather a peculiar position, in my mind as a lawyer.
They are not civil employees; they are not employees of the Panama
Railway, and, therefore, although I may be mistaken, I don't think
I am, they do not fall within the provisions of the compensation law.
But, nevertheless, Mr. Decker, the principles of the law and the
common law itself would fix the liability upon the Government, the
Government being the master in this transaction, the railroad com-
panies following the orders of the Government, and acting as vice
principal.
Mr. DECKER. Where would they bring their suit?
Mr. DEWALT. It would be wise, and I think these gentlemen who
are protesting against a provision in this bill with reference to fixing
compensation or fixing the liability of the Government in this way
are honestly mistaken. They are honestly mistaken. I agree with
Mr. Decker that there should be some provision in this bill by which
these men, 1,700,000, should have their status definitely fixed in
some way, either as Government employees or that they had the
right of suit against the Government, or that they have the dual
right of suit-that is, to take their rights under the State compensa-
tion laws, or to take their choice with the Federal compensation law.
Now, I do not advance these arguments at all as being a man who
is engaged for labor, because I am not. I do not represent any par-
ticular class. It has been said Mr. Decker represents the laboring
people. I do not, but I try to represent what I believe to be my
honest sentiment, and that is all there is to it.
Mr. DECKER. Don't any laboring people live in your district?
Mr. Dewalt. I was one of these same men myself, at one time.
Mr. DECKER. And you do, like myself, represent everybody?
Mr. DEWALT. I try to represent everybody in my district.
Mr. DECKER. That is what I mean. I don't mean that I am an
employee of the labor unions or anything of that kind, but it is just
as much my duty, and your duty, and the duty of this committee,
to look after the rights of the railroad men in the country as it is
of everyone else.
Mr. DEWALT. But outside of that consideration, I was only trying
to answer what I believed was your suggestion in reference to their
right of remedy.
Mr. DECKER. You do agree with me, then, that if we knock out
the section as to compensation, and still say nothing as to defining
their status, they are in a bad fix?
Mr. DILLON. Now, I do not see that there is any difference between
you two gentlemen. I think you are both in the same position.
The CHAIRMAN. I want to make a suggestion, if I may, that we
let this witness continue, and then we can discuss this matter after-
wards, when he doesn't have to wait on us.
Mr. DOAK. I am very glad to hear the discussion. Now, I said
I didn't know. Now, Mr. Dewalt, I hope you don't misunderstand
me. I said in answer to that question that I didn't know whether it
was necessary or not, but I did say that I thought it was unnecessary
to specify that we would have to come under a workmen's compen-
sation law; that we had an absolute right—or that Congress had an
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 701
absolute right-to declare, as it had in the case of property, that we
had the same right in the case of a personal injury to sue under
Government regulation. I don't see that it has changed that at all.
You both possibly are right. And on this question probably there
should be something stipulated in there preserving the right to sue
under the employers' liability act. But on the point of the neces-
sity of specifying in there that we have got to come under compensa-
tion, and then over somewhere else that you have a right to sue in
another instance, I say they are inconsistent, and there is no justifi-
cation for the two being in the bill.
Mr. BARKLEY. As between all these remedies that have been sug-
gested, the men whom you represent prefer to be left in their present
status, do they not, with the right to sue the railroad company just
as they have heretofore?
Mr. DOAK. Absolutely.
Mr. BARKLEY. And wouldn't any provision which gave them the
double right to sue the railroad company or the Government, or both,
create so much confusion in their minds that they would not know
which one to sue; and they might overlook some of their legal reme-
dies in determining whether they should sue the railroad company
or the Government or both of them jointly?
Mr. DOAK. Yes; and our attorneys on both sides would no doubt
take advantage of that situation, and they would have all kinds of
complications, just like we had in the history of the employers' lia-
bility laws from the beginning-our national laws. I think it was
about 10 years, if my memory serves me right, before the first case
that came under the law was finally decided in the Supreme Court,
because of the hedging and dodging around and the uncertainly of
of the proposition.
Now, we have a well-established basis of employers' liability.
They don't want that right taken away from them.
Mr. Barkley. And as long as that right exists, you don't need any
other remedy?
Mr. DOAK. Well, I don't say we don't. There is no demand for it,
and the very fact that this matter has been presented to Congress-
bills have been introduced some three or four times and defeated, or
failed of passage, dealing with the question of workmen's compen-
sation for these very employees, and it seems it has some significance.
The CHAIRMAN. Mr. Doak, have you now covered what you wanted
to present?
Mr. DOAK. I have just one more point. The question was asked
what the men thought of this thing back at home. I shall try, since
this came up, to let you gentlemen hear from your constituents at
home, because we will immediately send out a letter stating the status
and asking them to express to you directly what they think about
compensation. Possibly in that way you can get the latest thing on it.
Mr. HAMILTON. Well, if you express your views, why isn't that
more direct, as you are the representative of these men?
Mr. DOAK. We do represent them, but the question was asked.
Mr. BARKLEY. I hope you won't take advantage of that question to
flood us with telegrams and letters when you yourself know what
their opinion is.
:
702
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. Doak. I know that will be the result, I will say that to you
frankly, gentlemen, because I have already got a stack of them. They
are coming in every morning by the wholesale.
Mr. BARKLEY. We will take your word for it.
Mr. DOREMUS. Mr. Doak, I understand from what you said that
you think section 9 ought to come out of the bill?
Mr. DOAK. Yes, sir; I do.
Mr. MONTAGUE. You think it ought to come out and that no sub-
stitute should be made therefor?
Mr. DOAK. Absolutely none providing for compensation at all.
Mr. MONTAGUE. That is your position?
Mr. DOAK. Yes.
Mr. DOREMUS. Then, under section 11, as I interpret it, all your
rights to sue for personal injuries would be preserved, the same as
they are now?
Mr. DOAK. Mr. Doremus, pardon me, but I have not read section
11 yet.
Mr. DOREMUS. Let me read it:
•
SEC. 11. That carriers while under Federal control, shall, in so far as is not
inconsistent therewith, or with the provisions of this act, or any other act ap-
plicable to such Federal control, or with any order of the President, be subject
to all laws and liabilities as common carriers, whether arising under statutes or
at common law; and suits may be brought by and against such carriers and
judgment rendered, as now provided by law.
I assume that that refers to all causes of action, whether brought
for the recovery of property rights or whether brought for the re-
covery of personal injuries. Have you any doubt about that?
Mr. DOAK. I believe it does.
Mr. DOREMUS. Then with section 9 stricken out, the rights of the
employees upon railroads in this country-their right of action in all
our courts, both common law and statutory-will be preserved as
fully as those who are seeking redress for injuries to private prop-
erty?
Mr. DOAK. That is our position.
Mr. DEWALT. Let me ask, Mr. Doremus, that section 11 has been
changed from what the original bill was.
Mr. DOREMUS. This is the proposed section.
Mr. DOAK. It is broader than the other one, so it covers the point
we were discussing.
Mr. DEWALT. I had not seen that new provision.
Mr. W. M. CLARK. The fact of the matter is, Mr. Chairman, we
just about had time to read section 9, and it was so different from the
other section that we concentrated all our thoughts on that.
Mr. BARKLEY. This section as it is now proposed meets the conten-
tions of you gentlemen with reference to the rights to sue for personal
injury, does it not?
Mr. DOAK. Yes, sir; I think so.
Mr. BARKLEY. And eliminates the necessity for the original sec-
tion 9?
Mr. DOAK. Yes, sir; I think so. I think that is absolutely pre-
served under that.
Mr. DECKER. Under section 11 as now written?
Mr. DOAK. Yes, sir..
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
703
Mr. SNOOK. These words "be subject to all laws and liabilities as
common carriers, whether arising under statutes or at common law,"
will cover your case?
Mr. DOAK. Yes; it is very materially changed. I didn't know that,
because I read the old draft and have not had time to go over that
at all. It answers all the questions, so the objection we have is that
we don't want our present status interfered with, and by striking out
section 9, with this provision in section 11-which I am certainly
obliged to Mr. Doremus for calling my attention to striking out
section 9 I think we now have everything just as it was before-all
of our rights preserved. Therefore we will appreciate very much
your consideration of that.
The CHAIRMAN. But you want the new section 9 stricken out?
Mr. DOAK. We want section 9 stricken out of the bill.
The CHAIRMAN. And nothing substituted for it?
Mr. DOAK. Nothing substituted for it.
The CHAIRMAN. Now, if you are through, Mr. Doak, we will hear
Mr. Slayden.
STATEMENT OF HON. JAMES L. SLAYDEN, A REPRESENTATIVE
IN CONGRESS FROM THE STATE OF TEXAS.
Mr. SLAYDEN. Mr. Chairman, I only wanted a minute or two to
ask you to insert in the record a letter, with a table, which I have
received. It is not a very elaborate table. I have received it from
the vice president and general manager of the San Antonio & Aran-
sas Pass Railway Co., a road that operates in, I think, about 800
miles of track, and the major part of which is in my district.
This road is in a very peculiar situation. It has not rained much
in that section of the country for over two and a half years-three
years. Two years before that we had a flood that washed out the
railway bridges and caused great loss of revenue to them, and we
are now in the third year of the most disastrous drought in the his-
tory of the State. Now, I don't know whether the arrangement with
this committee squares with the original suggestion that the com-
pensation to the railways under the Government control shall be an
average of the last three years' earnings or not, but if so it would be
a most inequitable basis for this road and for other roads in that
section of the country. The business of all the railroads in that sec-
tion has been disastrously affected by the floods at one period and
drought at another, and by the persistence of the revolutionists in
Mexico, who have practically abolished the movement of commerce.
Will you kindly consent to have that inserted in the record?
The CHAIRMAN. Without objection, it will be inserted as a part
of your hearing.
(The matter referred to follows:)
THE SAN ANTONIO & ARANSAS PASS RAILWAY Co.,
San Antonio, Tex., January 18, 1918.
Hon. JAMES L. SLAYDEN,
House of Representatives, Washington, D. C.
DEAR MR. SLAYDEN: On the 10th instant Mr. Boyle and I sent you the fol-
lowing telegram:
'We understand railroad bill as presented very unfavorable to short roads,
including San Antonio & Aransas Pass. Our earnings past four years much
704
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
less than 1912 and 1913. Please confer with C. E. Ingersoll, of Midland Valley
Railway, New Willard, and take such action as possible and necessary to pro-
vide better protection to short-line roads."
Your telegraphic reply of the 11th instant was duly received, and we thank
you very much for the interest which you have taken.
I have not seen a copy of the bill as introduced, but assume that it was based
upon President Wilson's proclamation of December 26, in which he proposed
guaranteed compensation to the railroads, above accruing depreciation and
maintenance of their properties, equivalent, as nearly as may be, to the average
of the net operating income thereof for the three-year period ending June 30,
1917.
I am inclosing herewith a statement showing the general results of operations
of the San Antonio & Aransas Pass Railway Co. for the fiscal years end-
ing June 30, 1910 to 1917, both inclusive. The amounts shown under the head
of " Gross income (net operating income), are, I take it, the figures upon
which the compensation of this railroad would be based if the President's recom-
mendations were carried out. It will be noted from the attached statement that
the revenues of this company increased very materially from the year 1910 to
the year 1913, showing a total increase in three years of $1,172,993, or an average
of $390,998 per year. This gain from year to year was undoubtedly due to the
gradual development of our country. As a matter of fact, taking the nine years
from 1904 to 1913, the business of this road showed an average increase per
year of approximately 10 per cent. If the same average gain per year, as shown
in the attached statement, had been maintained for the four succeeding years
ending June 30, 1917, our railway operating revenues for the year 1917 should
have been $6,673,271 instead of $4,351,065, the actual amount.
Beginning soon after the close of the fiscal year ending June 30, 1913, as you
will remember, our line suffered severe losses, both in decrease of business and
increase of operating expenses, due to unusual floods, which caused great
damage to our properties, and caused practical suspension of business for con-
siderable periods of time. These conditions prevailed also to a certain extent
during the year 1914. Since that time our revenues have been very greatly de-
creased, on account of climatic conditions, drouths, crop failures, and the
troubles in Mexico, causing the great falling off of earnings shown, instead of
the increase of business, due to the continued development of the country,
which we had every reason to expect.
During the fiscal year ending June 30, 1916, we earned from the movement of
Government supplies and troops $31,121.66, and during the year ending June
30, 1917, we earned $123,830.21. Aside from the earnings from these troops and
supplies, which you will note is relatively small, this line has not profited from
the movements of munitions, supplies, foodstuffs, etc., as have the lines in the
North and East; nor can we expect to do so, on account of the fact that these
commodities are not produced along our lines, nor do they originate at points
where our line could profit by being an intermediate carrier of the same.
With the return of normal climatic conditions, insuring increased crop pro
duction, the settlement of the troubles in Mexico, restoring to us a normal
movement of traffic to and from that country, which we formerly enjoyed and
which is likely to be increased in the future, and with the continued increasing
development of the country along our lines, it is entirely reasonable to expect
that in succeeding years, regardless of the continuance of the war, our earnings
should increase to and far surpass the earnings for the years 1912 and 1913.
While it might appear reasonable to allow the larger lines in the north and
east, which have so greatly profited by the traffic conditions arising from the
war during the past two or three years, earnings based upon the average earnings
of those years, it would be manifestly unjust to limit the earnings of the San
Antonio & Aransas Pass Railway, or of other roads where conditions are
similar, to an average based upon the earnings of the same years, when, for the
reasons given above, our earnings were not increased by such conditions, but,
on the other hand, were, as shown, greatly decreased by natural conditions,
and which were not affected in one way or the other by those which affected
the northern and eastern lines; but it would appear to be reasorable that we
should be guaranteed an amount equal to our average earnings for the years
1912 and 1913, which were not affected by any abnormal conditions (except
as they were affected adversely by the conditions which during those years
prevailed in Mexico), and that we should be even allowed to earn from year
to year an amount over and above the earnings for the years 1912 and 1913 of,
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
705
say, 10 per cent per year over the earnings of the previous year, which in-
crease, as I have shown, was normal in the preceding years, and due entirely
to the development of the rich country tributary to our lines, of which territory
it has been estimated that only about 20 per cent is at the present time under
cultivation and producing crops, but which is being developed in increasing
ratio from year to year, and which increasing development will undoubtedly
result in our revenues being increased in even greater proportion in future
years.
I would be very glad if you would give the foregoing very careful considera-
tion, and, if an opportunity should offer, endeavor to have proposed legislation
so shaped as to provide for just compensation for this line and other lines which
may be similarly situated. I am sending a letter similar to the above to Con-
gressman J. J. Mansfield, with a request to cooperate in endeavoring to obtain
the suggested legislation.
Yours, very truly,
J. S. PETER,
First Vice President and General Manager.
The statement referred to in the above letter follows:
40958-18-45
706
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS,
959, 812.84
Item.
Railway operating revenues.
Less railway operating expenses..
Net revenue from railway operation...
Less railway tax accruals..
Less uncollectible railway revenue.
Railway operating income..
SAN ANTONIO & ARANSAS PASS RAILWAY Co.
General results of operations for the fiscal years ended June 30, 1910 to 1917.
1910
$3,936, 286.02
2,8.55, 309.66
1,0 0,976.36
111, 163.52
1911
$4,164, 436. 17
3, 180, 500. 73
983, 875.44
132,985. 39
1912
1913
1914
$4,619, 502.69
$5, 109, 279.41
$4,648, 196.99
3, 405, 608.06
3,775, 657. 23
3,984, 756.40
$3,797,055. 06
3,620,004. 56
1,213,894.63
.144,031.71
1,333, 622. 18
663, 440.59
139,719. 22
160, 563.05
43,808.04
5,078.25
10.00
17,949.36
928, 890.91
701,760.00
203, 920.00
20, 329.63
203, 920.00
17,801.29
A
Add equipment rents (net).
Add joint facility rents (net).
Add miscellaneous rents (net).
Add other miscellaneous income..
Gross income (net operating income).
Less interest on first mortgage bonds.
Less interest on notes.
Less interest on equipment obligations..
Less interest on unfunded debt
Less miscellaneous deductions.
Total deductions from income.
926, 009. 63
Net profit (in roman) or loss (in italic).
2,881.28
923, 481.29
122,111.36
920, 980.84
88, 246. 15
Office of first vice president and general manager, San Antonio, Tex., January 17, 1918.
53, 192.95
23, 194.60
39,502.05
817,649.60
202, 511.38
473,033.07
701,760.00
110,315.43
44, 645. 76
7,511.49
41.00
864, 276.68
391,243.61
146,042 82
850,890. 05
60,317.61
1,069,862.92
1,193, 902.96
502, 877.54
84,627.06
195,368.71
36,271.41
4,927.15
160.50
15,564. 14
801,369.93
701,760.00
23.00
27,782.38
1,009,226.99
701,760.00
203, 920.00
15,300.84
3,311.36
18.00
21,951.09
1,020,160.98
3,767.65
3, 158.20
9, 585. 14
31,778 20
321,002.61
701, 760.00
701,760.00
701,760.00
1915
177,050.50
159,978 82
864.58
16,207.10
2,050. 59
8, 176.97
264.00
5,607.54
36,325.83
8,708.38
812.04
1916
$3,862, 745. 20
3, 104, 593.63
458,151.57
183,932.49
826.96
273, 392. 12
16,925.43
25,968.46
705.00
191,522.56
25, 774.54
1,178. 13
1,238.77
893, 649.07
861,870.87
921,474.00
600,471.39
1917
$4,351,065.45
3,498, 536.69
852, 528.76
190,979.40
591.16
660, 958. 20
84, 208.69
31,267.54
1,121.95
5,057.60
བ
780,370.08
701,760.00
218, 532.99
17,217.45
1,762. 22
1,010.61
940, 283. 27
159,913.19
5,421.60
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
707
Mr. W. M. CLARK. Mr. Chairman, may I make a statement of just
a minute?
The CHAIRMAN. Yes, sir.
Mr. CLARK. Mr. Chairman, I went on record before this commit-
tee yesterday, speaking for the four railroad brotherhoods, to the
effect that they were in accord with section 13. That was of the other
bill, and that section provided that railroads should not go back to
private ownership until passed upon by Congress, and that was the
part of the bill or section that the brotherhoods were agreeable to.
But section 13 of this bill is much longer and much different.
The CHAIRMAN. You mean in the proposed bill?
Mr. CLARK. In the proposed bill. And I wanted it understood
that that was what I went on record for.
The CHAIRMAN. What you said applied to the original section 13?
Mr. CLARK. Yes.
Mr. ESCH. Have you anything to say to the present section 13
as it is now drafted?
Mr. CLARK. Like Mr. Doak, it was sprung on us so suddenly this
morning that we knew nothing about it before, and we have not had
time to read the bill, because the first I knew about it was when I
came into the committee room this morning.
Mr. Escн. Mr. Plumb, I suppose, will advert to it in his argument?
Mr. CLARK. Yes.
The CHAIRMAN. Now, gentlemen, if there is no one else to come
before the committee, we will adjourn until Monday morning at 10
o'clock, at which time the argument will begin.
(Thereupon, at 4.50 o'clock p. m., the committee adjourned until
10 o'clock Monday morning, January 28,
18.)
(The following communications are ordered printed and made a
part of these hearings:)
Hon. THETUS W. SIMS,
INTERSTATE COMMERCE COMMISSION,
Washington, January 21, 1918.
Chairman Committee on Interstate and Foreign Commerce,
Washington, D. C.
MY DEAR JUDGE: I received on Saturday your request of January 18, and
transmit herewith a brief abstract prepared in our bureau of law, responsive
to your request. If information in further detail is desired, an endeavor will
be made to supply it.
Very sincerely, yours,
HENRY C. HALL, Chairman.
INTERSTATE COMMERCE COMMISSION,
Washington, January 22, 1918.
Memorandum to the chairman in re State taxation of railroads.
In response to the letter to you signed by Congressman Sims, chairman of
the House Committee on Interstate and Foreign Commerce, I attach hereto
statement compiled by Mr. Hull showing how railroad properties are taxed in
the various States.
FOLK, Chief Counsel.
Memorandum to the chief counsel, State taxation of railroads.
Arizona, 1914, ad valorem tax.
Alabama, 1915, advalorem tax, capital stock tax.
Arkansas, 1915, ad valorem tax, capital stock tax.
California, 1914, ad valorem tax.
Colorado, 1914, ad valorem tax, capital stock tax.
708 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Connecticut, 1913, ad valorem tax, franchise tax ("corporate excess tax ").
Delaware, 1913, lump-sum tax in lieu of others.
Florida, 1915, ad valorem tax, license tax on mileage.
Georgia, 1915, ad valorem tax, capital stock tax.
Idaho, 1914, ad valorem tax, capital stock tax.
Illinois, 1913, ad valorem tax, tax on gross receipts.
Indiana, 1913, ad valorem tax.
Iowa, 1912, ad valorem tax.
Kansas, 1912, ad valorem tax.
Kentucky, 1915, ad valorem tax, capital stock tax.
Louisiana, 1915, ad valorem tax.
Maine, 1913, ad valorem tax, tax on gross receipts.
Maryland, 1913, ad valorem tax, tax on gross receipts.
Massachusetts, 1913, ad valorem tax, franchise tax (called corporate excess
tax. Derived by estimating value of stock, deducting property taxed locally and
out of State, and taxing the residue).
Michigan, 1913, ad valorem tax, capital stock tax.
Minnesota, 1912, ad valorem tax, tax on gross receipts.
Mississippi, 1915, ad valorem tax, license tax on mileage.
Missouri, 1913, ad valorem tax.
Montana, 1914, ad valorem tax, tax on gross receipts.
Nebraska, 1912, ad valorem tax, capital stock tax.
Nevada, 1914, advalorem tax.
New Hampshire, 1913, ad valorem tax, tax on gross receipts.
New Jersey, 1913, ad valorem tax, capital stock tax.
New Mexico, 1914, ad valorem tax.
New York, 1913, ad valorem tax, capital stock tax, tax on gross receipts.
North Carolina, 1915, ad valorem tax, license tax on gross receipts.
North Dakota, 1912, ad valorem tax.
Ohio, 1913, ad valorem tax, tax on gross receipts.
Oklahoma, 1915, ad valorem tax. (Act of 1910, provided for tax on gross
receipts. In litigation.)
Oregon, 1914, ad valorem tax, capital-stock tax.
Pennsylvania, 1913, ad valorem tax, capital-stock tax, tax on gross receipts.
Rhode Island, 1913, ad valorem tax, tax on gross receipts.
South Carolina, 1915, ad valorem tax, tax on gross receipts, special tax for
support of railroad commission, based on mileage.
South Dakota, 1912, ad valorem tax.
Tennessee, 1915, ad valorem tax, capital-stock tax.
Texas, 1915, ad valorem tax, capital-stock tax (not assessed on roads with
Federal charter).
Utah, 1913, ad valorem tax, capital-stock tax.
Vermont, 1913, ad valorem tax, capital-stock tax (may elect to pay tax on
gross receipts in lieu of ad valorem).
Virginia, 1915, ad valorem tax, franchise tax on gross receipts, capital-stock
tax.
Washington, 1914, ad valorem tax, capital-stock tax.
West Virginia, 1915, ad valorem tax, capital-stock tax.
Wisconsin, 1913, ad valorem tax.
Wyoming, 1914, ad valorem tax.
Hon. T. W. SIMS,
HARVARD UNIVERSITY,
GRADUATE SCHOOL OF BUSINESS ADMINISTRATION,
Cambridge, Mass., January 24, 1918.
House of Representatives, Washington, D. C.
·
DEAR SIR: I have received your letter of January 18 on the advisability of
inserting in the measure now before Congress a definite date for the termina-
tion of the operation of the railroads by the Government.
A choice between three policies must be made: The return of the roads to
their owners (1) at the conclusion of the war; (2) at some definite date there-
after; or (3) not until otherwise ordered by Congress.
To return the roads to their owners immediately upon the conclusion of peace
would seem to me unwise from every point of view. The railroad situation
had been unsatisfactry for years before we entered the war. No one desires
•
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
709
to return to former conditions entirely unmodified. Experience with the work-
ing of the roads under uniform management will doubtless suggest desirable
changes in present legislation and practice, but this experience will hardly be
conclusive while the country is at war. Moreover, Congress will be too much
preoccupied with war measures to handle the subject in any comprehensive
fashion. The continuance of the Government guaranty of income during the
period of economic reconstruction after the war should be welcomed by in-
vestors in railroad securities, and may equitably be allowed, since the organiza-
tion of each separate company will be in some measure disintegrated under
unified Government management.
If the railroad bill contains a provision for the return of the roads to their
owners at some definite date after the return of peace, say two years, probably,
though not certainly, there would be sufficient time to frame and secure the
passage of permanent new legislation. It does not, however, seem to me par-
ticularly important that the present bill should contain such a provision. In
any event it will be necessary for Congress to enact additional legislation at
some time not long after the return of peace. As a war measure taking over
the operation of the railroads by the Federal Government is no doubt con-
stitutional, but the indefinite continuance of such an arrangement does not
seem to be within the constitutional powers of Congress and the Executive.
The desire for a definite date for the termination of Government operation
seems to be due to a vague impression that in some way or other it would
serve as an obstacle to the adoption of the policy of Government ownership.
I do not share this view, but at the same if a large and influential body of citi-
zens is of this opinion it might well be wise to insert a time limit. During the
war it surely is inadvisable to antagonize unnecessarily any class or group of
citizens.
It would be entirely on this, ground that I should be inclined to regard favor-
ably an amendment which would provide for the return of the roads to their
owners within two or or perhaps three years after the return of peace.
Very sincerely, yours,
O. M. W. SPRAGUE.
UNITED STATES. SENATE,
COMMITTEE ON PUBLIC LANDS,
Washington, D. C., January 18, 1918.
MY DEAR MR. SIMS: I desire to call your attention to the inclosed telegram
from Mr. Clarence M. Oddie, of San Francisco, relative to short-line railroads
under the present Government control.
You will note Mr. Oddie states that the short-line roads will receive no
guaranty, although they are feeders for the trunk lines. This he claims is a
discrimination in favor of trunk lines and will most disastrously affect the
short-line interests.
He requests that I call the above matter to your attention, and I accordingly
take pleasure in transmitting to you his telegram.
Yours, most cordially,
Hon. THETUS W. SIMS,
IIouse of Representatives.
H. L. MYERS.
(The telegram referred to in the above letter is as follows:)
Hon. HENRY L. MYERS,
SAN FRANCISCO, CAL., January 17, 1918.
United States Senate, Washington, D. C.:
You are familiar with conditions surrounding western short-line railroads.
Western association short-line railroads, having 55 short-line railroads as
members, comprising practically all such railroads of Montana; we understand
Director General officially announced some 600 short lines will receive no guar-
anty. Short lines are feeders for trunk lines, and both are so interdependent
that curtailment of trunk-line service as war measure or discrimination in
favor trunk-line industries would most disastrously affect short-line inter-
ests. While trunk-line earnings would be protected, regardless of loss of busi-
ness, no protection would be given short lines. Will therefore greatly appre-
ciate it if you will call attention to this condition to Chairman House Committee
Interstate Commerce, and urge equitable compensation be guaranteed in each
710
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
case, as we believe hasty action would be unfair to short lines. Desire aid
Government every possible way, but can ill afford large loss of revenue, as
prosperity of country in general has not reached them. I'lease wire my ex-
pense what you think prospects are.
·
CLARENCE M. ODDIE.
Hon. T. W. SIMS,
PHILADELPHIA, PA., January 15,-1918.
Chairman Committee on Interstate and Foreign Commerce,
House of Representatives, Washington, D. C.
DEAR SIR: As a shipper and one who is practically being forced out of busi-
ness as a result of the present transportation conditions, I have followed closely
and with a great deal of interest the events of the past three weeks. I have
noted the meeting of railroad executives in New York on Sunday, and also
the hearing on the administration bill which took place before your committee
yesterday.
I trust you will not consider it presumptuous for me to inclose a copy of my
letter of January 14 addressed to Mr. W. H. H. Willis, D. F. A., of the Penn-
sylvania Railroad. I have marked certain paragraphs to which I wish to call
your particular attention.
I take the position that it is unnecessary to specify certain limits in the bill,
as the status of the railroads after the war will depend entirely on their present
attitude.
Very truly, yours,
Mr. W. H. H. WILLIS,
ALLAN C. WOOD.
PHILADELPHIA, PA., January 14, 1918.
Ș. F. A., Pennsylvania Railroad, Philadelphia, Pa.
DEAR SIR: You will recollect that I called at your office on January 9 and
showed you letters from Judge Robert S. Lovett, from the Assistant Director
General of Railroads, and from the Interstate Commerce Commission's bureau
of car service. At that time you stated that the reason I could not get some
lumber shipped was because of congestion on southern lines.
I felt very
certain that you were misinformed and accordingly wrote to several of the
southern railroads, giving them lists of cars awaiting shipment from points
on their lines and asking them if there was any reason why these cars should
not come forward. I have received replies from the Coast Line and the
Southern Railway.
I quote a telegram from J. T. King, G. S. T., Atlantic Coast Line:
"Your letter ninth. There are no A. C. L. embargoes which would prohibit
the movement of shipment referred to. R. F. & P. not accepting any freight
whatever account inability of connections to accept promptly. Potomac yard
and. N. Y. P. & N. closed account weather conditions. Suggest you secure
special permit."
I quote from a telegram from J. H. Drake, G. F. A., Southern Railway:
"Your letter ninth. On account of accumulation and failure of connecting
railroads' lines to accept we have found it necessary to place embargoes on
all north and east bound freight for delivery to connecting lines at Virginia
gateways, also junction points farther south.'
I have not heard, as yet, from the S. A. L. Railway, to whom I also wrote.
The two telegrams quoted above show beyond question that the reason why I
can not get shipments is on account of congestion at Potomac yard and Norfolk,
and not due to any fault of the southern lines. In other words, the Pennsyl-
vania Railroad is not taking freight at Potomac yard and Norfolk, which is
resulting in an accumulation at these points. I am forwarding a copy of this
letter to the Director General of Railroads in order that he may see where
the congestion actually is and take the necessary steps to relieve it.
•
I see in this morning's paper that the railroad executives oppose the pending
railroad legislation and intend to ask Congress to limit Government control
to the period of the war. This is wasted effort, as it will make no difference
whatever in what form the bill is passed. If the shippers and the general
public get a square deal the railroads will be turned over to their owners at
the close of the war. If not you might as well make up your mind to see your
cars repainted with the letters "U. S. A.," regardless of whether the bill reads
"for the duration of the war," or no limit is specified.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
711
I know positively that the Cape Charles yard is clear, and you know as well
as I do that you can clear up l'otomac yard in 48 hours if you wanted to do so.
For your information I quote from an editorial in the Lumber Trade Journal
of December 15:
"It is essentially true that the railroad men, if they will, can operate the
railroads if anybody can.”
It has not been lack of motive power, lack of equipment, or lack of money,
but simply lack of will which has brought about the intolerable conditions
which have existed for almost a year.
Respectfully,
ALLAN C. WOOD.
Hon. T. W. SIMS,
BIRMINGHAM & NORTHWESTERN RAILWAY Co.,
Washington, D. C.
Jackson, Tenn., January 22, 1918.
MY DEAR MR. SIMS: Please let me thank you most heartly for the courtesy and
assistance which you gave me in Washington.
Since I talked to you I have given considerable thought as to what should be
the attitude of our railroads in reference to the legislation now pending. I
have been asked to join in a meeting of the short lines to protest against the
position assumed by Mr. McAdoo and Judge Payne in reference to these short
lines. I have reached the conclusion, however, that unless there is some special
request for a statement as to our particular situation we are not going to do
anything further at this time.
**
I do think that the short lines are entitled to more consideration and liber-
ality than the larger ones. It is the rarest exception when the builders of a
short line fail to lose money. The real beneficiaries are the people living in
the contiguous territory and the large connecting lines. This is certainly true
in the case of the Birmingham & Northwestern, even though our earnings ap-
pear to be above those of the average short line. We have quite a large number
of stockholders throughout this section who will never either directly or indi-
rectly get as much benefit from the road as will the people of this community
who are not stockholders and the five or six large lines with which we connect.
This is true in spite of the most careful management and economy possible for
us. I myself have received a salary of $1 (one dollar) per month for the past
five years.
But now we are at war, and those men who are directing the affairs of our
Nation at this time have as weighty responsibilities as men ever had. I believe
in these particular men, and I believe in my Government as a whole. Sooner
or later I am satisfied that justice will be accorded all of us, if it should appear
that we are not already getting justice. In the meantime, I have decided that
I am not justified in worrying anybody in Washington concerning our situation,
unless, as I say, you or some one else in authority asks for a presentation of
our position.
Cordially, yours,
I. 3. TIGRETT.
COMMITTEE ON APPROPRIATIONS,
HOUSE OF REPRESENTATIVES,
Washington, January 23, 1918.
Hon. T. W. SIMS,
Chairman, Committee on Interstate and Foreign Commerce,
House of Representatives.
MY DEAR MR. CHAIRMAN: Permit me to call the attention of your committee
to the inclosed letter from Gov. Frederick D. Gardner of Missouri, which may
be of interest in connection with the proposed railroad legislation.
Yours, very truly,
WM. P. BOrland.
Hon. WILLIAM P. BORLAND,
EXECUTIVE OFFICES, STATE OF MISSOURI,
City of Jefferson, January 16, 1918.
Washington, D. C.
MY DEAR MR. BORLAND: I do not know that any legislation is contemplated
which would interfere with State rights in regard to the taxation of railroads,
712
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
}
}
but, in order that the States may not be embarrassed, I kindly ask that no
action be taken which would in any manner decrease the taxation which the
State received from railroads.
In Missouri, like other States, large sums of money are received from the
taxation of railroads, and it would be very burdensome and annoying if the
State should be compelled under any circumstances whatever to shift this
taxation to some other source.
I simply call this to your attention so that in the discussion of railroad
legislation, the right of the State in the matter will not be lost sight of.
Trusting for favorable consideration upon your part, I am,
Faithfully yours,
FREDERICK D. GARDNER, Governor.
MEMPHIS, TENN., January 22, 1918.
Hon. T. W. SIMS,
Washington, D. C.
MY DEAR MR. SIMS: I received the copy of the House bill No. 8172 which
you sent me, and thank you for sending it to me.
I believe that certain amendments ought to be made to the bill: For instance,
section 9 instead of leaving the employees remedy as therein provided, I think
it should specifically and exclusively apply the Federal workmen's compensa-
tion act to railway employees.
Further, it should provide, that no more litigation or claims against the
carriers will be allowed. In lieu of claims and litigation a proper form of
insurance should be provided, at a very reasonable cost, by the Government or
by private corporations, as may be deemed best, to protect passengers and
others rightfully using the railway property against injury, or, rather to in-
demnify such persons for injuries sustained by them. As to loss and damage
to property, the same form of insurance now applicable to the parcel post
could be used.
This would not only save to the Government, operating the railroads, at
least $100,000.000 per annum, but it would save to the people a large sum of
money now squandered in litigation, much of which is frivolous.
These items of expense, whether paid as claims or as insurance, must be
paid by the traveling and shipping public, and the public would rather pay
this as insurance than to have the freight charges increased.
I hope I am not burdening you. I feel a keen interest in these matters, but
do not want to become obnoxious with my suggestions.
Sincerely, your friend,
D. B. SWEENEY.
NEW YORK, January 23, 1918.
Hon. THETUS W. SIMS,
Chairman of the House Interstate Commerce Committee,
Washington, D. C.
DEAR SIR: Government interference with the business of the railroads and
the refusal of the Interstate Commerce Commission to allow them sufficient
remuneration has, as all far-seeing business men predicted, resulted in so
crippling the railroads that they are almost helpless at this time, when the
greatest demands are being made upon them. It is therefore with the most
supreme disgust that the business men of the country note such arguments as
are put forward by Mr. Clifford Thorne and other men of his limited vision
to continue their starvation.
As president of a company paying freight bills amounting to about $100.000
per year I am writing to say that the most patriotic and most intelligent in-
terests in this country demand that the railroads be built up and not further
starved. We will pay any reasonable freight charges necessary to allow this.
and in view of the almost criminal policy of our Government in the past toward
the railroads the least it can now do is to award proper compensation to the
owners of the roads in taking them over.
I hope your committee will stand squarely for common honesty in this
matter.
W. A: GARRIGUES.
Sincerely, yours,
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
713
HOUSE OF REPRESENTATIVES OF THE UNITED STATES,
Washington, D. C., January 22, 1918.
Hon. THETUS W. SIMS,
Ilouse of Representatives.
MY DEAR MR. SIMS: I beg to invite your consideration of a letter from the
governor of Illinois, of which I inclose a copy.
Very truly, yours,
MEDILL MCCORMICK.
STATE OF ILLINOIS,
OFFICE OF THE GOVERNOR,
Springfield, January 15, 1918.
MY DEAR MR. MCCORMICK: A large portion of the revenues received by the
taxing bodies in Illinois is paid by the various railroad corporations doing
business in this State. In this amount is included approximately $2,000,000
per annum paid directly into the State treasury by the Illinois Central Railroad
Co. These different amounts are taken into consideration in the levying of
taxes.
It would, therefore, seem important that careful thought should be given to
any proposed legislation in Congress in connection with governmental control
of the railroads. In my opinion, any law which would disturb the receipt of
such revenues would cause great embarrassment.
Very sincerely, yours,
Hon. MEDILL MCCORMICK,
House of Representatives,
FRANK O. LOWDEN.
Washington, D. C.
1
Hon. THETUS W. SIMS,
COMMITTEE ON VALUATION OF RAILROADS,
New York City, January 24, 1918.
Washington, D. C.
MY DEAR SIR: I have your letter of the 23d instant, and regret that it is too
late for me to appear before your committee with reference to the proposal for
governmental control and ownership of the railroads in connection with the
railroad bill now before the House committee.
In conformity with your suggestion, however, I am inclosing a letter sent to
the President and Members of Congress, regarding the railroad bill, of which
I think you may have already received a copy. I inclose also an article from
the New York Times last Sunday, January 20, which I should like to have
read into the record, together with the letter previously referred to if that is
possible. In any case, I should like to ask whether you could have the follow-
ing excerpts from the Times article printed with the hearing of yesterday?
Therefore the Missouri, Kansas & Texas, although in receivership during
nearly all of the three-year period, will probably be returned to its owners at
the end of the war, if anything, in better shape than when it was taken over."
"Therefore, under Government control, the Rock Island can pay all its fixed
charges, including preferred dividends, and count upon an annual surplus of
about $1,595.000.”
Of the Missouri Pacific Railroad, the article states:
"The road can be counted upon, therefore, under Government control to
continue to pay its interest charges, with a surplus of $4,700,000, which would
pay its preferred dividend of $3,594,000 and leave a balance of well over
$1,000,000 a year.”
Of the New Haven Road, the article states:
The interest charges, amount, in round figures, to $11.000.000, so that
approximately $4,636,000 a year will be left for the stockholders—equal to 3
per cent on the capital stock. The New Haven has paid no dividend since 1914,
in which year it paid 11 per cent."
The article was written by a very careful student with whom I have dis-
cussed the situation at length. The article shows how the proposed bill would
guarantec relatively large earnings for these four typical railroads, at least two
of which have been looted outrageously in the past.
t
714
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
It would be difficult to conceive how Government can justify giving such
priority to profits of speculators over the rights of the people of this country.
Very truly, yours,
BENJAMIN C. MARSH,
Executive Secretary.
COMMITTEE ON VALUATION OF RAILROADS,
New York City, January 10, 1918.
To the President and Members of the Congress.
GENTLEMEN: We beg to submit for your consideration suggestions regarding
Federal operation of the railroads.
The principles adopted by Congress in this matter are of great importance
because they may serve as a precedent for Federal ownership, not only of the
railroads, but of telegraphs and telephones, and the natural resources of the
country, and for municipalization of public utilities.
As we construe it, the proposal before the Congress is to pay each railroad
the average of the net earnings for three years prior to our entrance into the
war. This will permit each railroad, regardless of its physical value, to pay
its stockholders (1) on watered stock for which there is no physical basis;
(2) on increases in the value of land owned by the railroads over the price they
paid therefor; and (3) on improvements, extensions, etc., paid for out of sur-
plus earnings—an unjustified subsidy to privilege. The average net earnings
for 1915, 1916, and 1917 were much greater than for the preceding three years,
i. e.. the three years before the European war began. The most important fact
is that the proposed basis for compensation treats property needed for the
Government more tenderly than human life is treated.
Government has not only a legal but a moral right to commandeer human life
in war time. If drafted soldiers were paid as it is proposed to pay owners
of railroad stocks they would receive an average of their earnings for the three
years before we entered the war plus a bonus as an equivalent for the guaran-
tee of net earnings received in the three years period, to pay dividends on the
three items mentioned.
The Government should not have a dual standard, one for people and a more
favorable one for property, particularly for speculative property values.
If the basis for remuneration of the railroad stockholders were applied for
Government acquisition of the railroads, of all natural resources, telegraphs
and telephones, and of land needed to produce essential food supplies, the peo
ple of the United States would be saddled with a debt of over $100,000.000.
In the case of the railroads, as is true of all natural resources in and on land,
and of all natural monopolies, a very few people would receive most of the
benefit. The returns of ownership of railroad stock made to the Interstate
Commerce Commission by several railroads show that 74 individuals, owners
of stocks in these railroads, own nearly 23 per cent of the total value of the
outstanding stock of all railroads. There are several million stockholders.
We earnestly ask that you will amend the proposed legislation, and so dis-
prove the charge of indifference to the righteous claims of the workers, and
too great concern for property ownership.
Very truly, yours,
JOHN J. HOPPER, Chairman.
RAILROAD CONTROL PUZZLES FINANCIERS-BANKERS SEEK TO ANALYZE RESULT
ON SECURITIES OF WEAKER LINES-TAKE FOUR ROADS AS TYPICAL-EARNINGS
OF NEW HAVEN, MISSOURI, KANSAS & TEXAS, MISSOURI PACIFIC, AND ROCK
ISLAND CAREFULLY STUDIED.
[New York Times, Jan. 20, 1918.]
One of the most interesting questions to the financial world arising from
the passage of the railroads of the United States under complete Government
control for the duration of the war is that of the probable effect of this great
change in status on the "weak sisters" of the railroad world. What will the
effect be on their operating efficiency and what is the outlook for their stock-
holders are questions which are interesting financiers.
"net
The President, in his proclamation and in his message to Congress, proposed
to guarantee to all the railroads an annual sum equal to their average
operating income" for the three fiscal years 1915, 1916, and 1917, and it
appears probable that Congress will accept his recommendations. But there
were a number of railroads for which these very three years were the most
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
715
disastrous in their history. Several large systems during this period went into
receivership and others saw their earnings go down and their expenses mount
up at a rate which indicated that the same fate for them was not long delayed.
Of the roads of the first class some had been reorganized and had better pros-
pects for the future, when the President's proclamation apparently threw them
back into their lean period; others are still in the receivers' hands.
1
There has been much intensive study, both of the President's plans and of
the position of these railroads, going on in the financial district in the last two
weeks. Compilations of figures from every conceivable angle have been made
in banking offices, with a view to throwing as much light as possible on the
prospects of the holders of their securities.
FOUR ROADS CHOSEN FOR ANALYSIS.
In order to present a fair summary of the results of this study in the form
of the general opinion of leading financiers upon the subject and some of the
data upon which this opinion is based, four fairly typical railroads, whose dif-
ficulties have been extensively aired before the public, were selected for detailed
analysis. The problems which these four roads present were laid before a num-
ber of the ablest railroad financiers in New York, and the figures which they and
their assistants have compiled to assist in studying the problem obtained.
Some of them are given below.
The four roads selected as fairly typical are the New York, New Haven &
Hartford, the Missouri, Kansas & Texas, the Missouri Pacific, and the Chicago,
Rock Island & Pacific. Among them are representatives of all classes of rail-
roads which have been in financial difficulties in the last three years. The New
Haven was selected because it has the largest outstanding interest-bearing obli-
gations, which mature in the year 1918-close to $50,000,000—and because its
financial troubles have recently been increasing at a rate, which has caused talk
of receivership ahead; the Missouri Pacific and Rock Island because both under-
went a long receivership and reorganization in the three-year period, and the
Missouri, Kansas & Texas because it went into the receiver's hands during this
period and still remains there.
Before going into a detailed analysis of the position of these roads, some gen-
eral figures may be given regarding the capital requirements of American rail-
roads in the year 1918, which must, under Government control, be handled by
the Diretcor General of Railroads. A recent compilation shows a total of
$215,791,905 worth of securities of American railroads which mature in 1918.
These do not, of course, represent the total probable capital requirements of the
railroads, but any estimate beyond this would involve too elaborate an investi-
gation into the state of the equipment and operating efficiency of each road,
and a correlation of individual estimates of their needs by the operating officers,
which it would probably be impossible to make.
NEW HAVEN NEEDS $47,745,000.
Of the four roads analyzed, the New Haven needs a total of $47,745,000 to
meet its outstanding and maturing obligations in 1918; $45,000,000 in a single
issue of notes falling due May 1, which the directors had planned to meet by an
issue of preferred stock, but for which they had not, when taken over by the
Government, succeeded in arranging. The remaining $2,745,000 represents obli-
gations of some of its subsidiaries. The Rock Island needs $8,994,000 to meet
its outstanding obligations maturing in 1918; the Missouri, Kansas & Texas
needs $2,166,000; the Missouri Pacific has no obligations maturing in the current
year.
One of the difficulties in the way of analysis of the railroad situation is the
difference of opinion as to what the President meant when he said “net operat-
ing income.' The phrase is well known in the railroad world, but each rail-
road in the past has made its own definition of the term. The official definition
of the Interstate Commerce Commission is income remaining after the deduction
of current operating expenses and taxes. But many financial men doubt if
Congress will accept a definition which would mean, in practical application,
exempting the railroads for the period of the war from any future increases in
taxes, including any increases after June 30, 1917. There is also a great deal of
difference of opinion among financial men as to just what deductions are prop-
erly allowable in calculating "net operating income," such as deductions for
716
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
maintenance, equipment, and depreciation. These differences are widest among
the very roads in question, because the receivers of these railroads which are
under a receivership have often pursued a very drastic policy in putting practi-
cally all earnings back into the property, and consequently, on rigid interpre-
tation, making the statement of "net operating income" much poorer than it
otherwise might have been. It is hoped the Government does not adopt a policy
which would virtually amount to penalizing these roads for the conservatism
with which they were managed in the critical period, but there is no assurance
as yet on this point.
M., K. & T. INCOME VARIES.
Thus the Missouri, Kansas & Texas, which went into the receivers' hands on
September 26, 1915, shows a net operating income for the year 1915 of approxi-
mately $7,955,000. But for 1916, because of the drastic policy of the receivers in
putting everything back into the property, this fell off to $4,712.000 (these
figures represent an approximate average of calculations made by two leading
railroad banking concerns). It is hoped that the Government will calculate the
income for this year more liberally, but these figures were based upon the most
conservative possible estimate. For 1917 the net operating income was about
$7,536,000. Thus the average for the three years was about $6,734,000.
The fixed interest charges, which still remain against the road. according to
the receivers' annual report of December 31, 1916, amount to $6.514.361. Thus
there is on this average sufficient income guaranteed to the Missouri, Kansas &
Texas to meet all its interest charges and leave an annual surplus of about
$220,000 for the sinking fund. It will hardly fall below this, and if some allow-
ance is made for the extraordinary expenditure of more than $2,000,000 in the
year 1916 by the receivers for maintenance, structures, and equipment-in other
words, for improving the physical condition and efficiency of the property and
making it a better instrument for the Government-it will be better than this by
more than $600.000. Therefore, the Missouri, Kansas & Texas, although in
receivership during nearly all the three-year period, will probably be returned
to its owners at the end of the war, if anything, in better shape than when it
was taken over.
The Rock Island went into receivership in the summer of 1915,
about the same time as the Missouri, Kansas & Texas was reorganized
in November, 1916, and has since been considered in sound financial
condition. Its net operating income for 1915 was about $11,200,000;
for 1916, $15,285,000, and for 1917, $19,400,000. There is a greater
difference of opinion as to the proper estimate for the Rock Island's
income than for the Missouri, Kansas & Texas, but these figures rep-
resent an approximate average. The average for the three years was
about $15,295,000. Fixed charges for this road, including the
prom-
ised return of 7 per cent and 6 per cent on the two classes of pre-
ferred stock, which, in view of the guarantee which accompanied
their issue as part of the reorganization plan, may be considered
fixed charges, amount to about $13,700,000. Therefore, under Gov-
ernment control, the Rock Island can pay all its fixed charges, in-
cluding preferred dividends, and count upon an annual surplus of
about $1,595,000.
BALANCE OF MILLION ASSURED.
The Missouri Paicfic went into receivership on August 19, 1915,
and was reorganized in the fall of 1916. Its net operating income
for 1915 was about $12,050,000, for 1916 about $12,080,000, and for
1917, after reorganization, about $19,360,000. The average was thus
about $14,500,000. Interest charges amounted to about $9,800,000.
The road can be counted upon, therefore, under Government control
to continue to pay its interest charges, with a surplus of $4,700,000,
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
717
which would pay its preferred dividend of $3,594,000 and leave a bal-
ance of well over $1,000,000 a year.
The New Haven earned a net operating income in 1915 of $9,-
825,000, in 1916 of $11,765,000, and in 1917 of $11,700,000. It is no
secret that the net earnings of this road have fallen off worse in the
last half year than those of perhaps any railroad in the country, so
that Government control and a guarantee of its income may prove a
life-saver. The average for the three-year period is $11,076,000,
and the company also receives an annual income, in interest payments
and dividends of its subsidiaries, of $4,560,000, giving a total income
to be expected under Government control of $15,636,000. Its interest
charges amount, in round figures, to $11,000,000, so that approxi-
mately $4,636,000 a year will be left for the stockholders-equal to 3
per cent on the capital stock. The New Haven has paid no dividend
since 1914, in which year it paid 1 per cent.
SAN ANTONIO, TEX., January 20, 1918.
CHAIRMAN HOUSE INTERSTATE COMMERCE COMMITTEE,
Washington, D. C.:
On account of enormous increase in salaries and material, with no advance in
rates, all railroads in bad shape financially. Manifestly unjust for Government
to discriminate against the short line, which is just as important to the country
as the larger. I ask, in all fairness and patriotism, that you insist that short
and long lines be given same Government protection.
Col. EARL D. LUCE.
Representative SIMS,
PHILADELPHIA, January 17, 1918.
Chairman House Committee on Interstate Commerce,
Washington, D. C.
DEAR SIR: I desire to supplement my statement before your committee on the
14th instant in behalf of the short-line railroads by adding that the amend-
rents offered by Commissioner Anderson to the railroad-control bill should be
sufficiently elastic to take care of maturing obligations of all railroads taken
over by the Government and maturing after the 28th of December, 1917;
otherwise the present cwners of these properties may be forced into bank-
ruptcy. The President should be given authority to advance the necessary
amount of money to preserve the physical property and to take care of the
interest of the present holders and owners of these securities. If this object
is not attained, under the bill and amendments offered, incalculable injury and
injustice will be done, with no remedy except a resort to the courts, which
will mean an endless chain of lawsuits and unnecessary suffering on the part
of the present owners.
The business conditions of the country should not be disturbed and specula-
tion in the securities should not be allowed to result from a policy of nig-
gardliness on the part of the Government.
The President, I assume, was advised as to the enormous increase in the
cost of operating and maintaining the railroads and the grave crisis impending
in relief was not forthcoming. Realizing the necessity of stabilizing the securi-
ties, the proclamation was issued by authority of which the Director General,
Mr. McAdoo, has taken control of the physical properties. If the act of Con-
gress authorizing the President to take over the railroads and other trans-
portation systems was intended to leave out some of the short lines, then, I
submit, that the authority delegated to the President by Congress permitted
him to discriminate against a large number of railroad security owners and
holders in favor of those who may be taken over by the Director General at
his discretion, and thus favored by the Government. Is this not indirect class
legislation?
718
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
I see no reason why a short-line railroad, supplying a rural community
with agricultural implements, fertilizer, etc., and transporting the products of
the farm to market and to the fighters in the trenches, is not one of the most
important factors in winning the war and is just as necessary to the Govern-
ment as is the trunk line that gathers the fruit produced on the short line and
transports it to the port where it may be forwarded to our own fighting forces
and our allies.
This country was developed by pioneers who had the initiative, energy, and
courage to build railroads into the rural communities, and if the value of these
securities should be destroyed at the will of the Director General, the incentive
to further development and progress will be destroyed.
If the authority delegated to the President by Congress is not broad enough
to take in all of the transportation systems, including all the short-line rail-
roads, then the Congress that gave the President the authority to issue his
proclamation of December 28, 1917, should interpret the law and should by that
interpretation include every separate railroad corporation engaged in inter-
state commerce.
I would suggest as an alternative amendment to Commissioner Anderson the
following:
Amend section 1, after the word "exclusive," at the end of lines 17 and 18,
as follows:
66
Provided, however, That the method above set out for arriving at a just
and fair compensation for the use of the property shall not apply to railroads
or parts thereof under construction during the three-year period ending June 30.
1917, and for this reason had only nominal earnings. With this particular class
of railroads the President is authorized to deal separately and pay for the use
thereof a just and reasonable compensation during the Federal-control period,
payments to be made at the end of each six months from December 28, 1917."
I desire to further suggest that it would be manifestly unfair for the Presi-
dent or the Interstate Commerce Commission to appoint all of the auditors,
referees, or board who shall examine the facts in each particular case and
possibly hold their sessions in Washington, thereby forcing the railroads to the
expense of bringing their attorneys and witnesses, and perhaps their books of
accounts to Washington for the purpose of proving and demonstrating to the
Government that they have been damaged and are entitled to just and fair com-
pensation. I suggest to this committee that the board of referees should be
appointed, one by the President, one by the Interstate Commerce Commission,
and the other by the railroads, and that they should hold their hearings at the
principal office of the railroad company and thus avoid unnecessary delay and
expense incident to the taking of proof and to the hearing.
Respectfully submitted.
Ó. H. ANDERSON, President O. & W. R. R.
ANN ARBOR RAILROAD Co.,
New York, January 17, 1918.
IIon. THETUS W. SIMS,
House of Representatives, Washington, D. C.
DEAR MR. SIMS: Referring to my testimony before your committee and your
request to file with you the statistical information to which I referred in my
statement, I now give you herewith the following:
Statement of mileage earnings, funded debt, and capitalization.
[Classified in groups.]
Roads having operating-
revenue per mile.
Number of Mileage
roads operated.
Capital stock.
Funded debt.
Total
capitalization.
Less than $5,000
$5,000) tʊ $7,500..
7,500 to $10,000.
$10,000 to $15,000.
$15,000 to $20,000...
$20,000 to $30,000.
$30,000 and over
Total..
20
3588222 8
829
97
62
28,839
30, 368
77, 143
72, 200
9,831
19,935
15,363
254, 179
$467,576, 580
609, 116, 921
1,685, 164, 914
2,308, 020, 023
331, 6! 0, 733
907,952, 294
1, 161, 722, 266
$398, 217, 436
992, 582, 814
3, 185, 571, 005
2,742,081, 523
552, 625, 822
1,415, 338, 879
1,181, 770, 156
7,471,243,731 | 10,398, 197, 635
$865,791,016
1,601,699, 735
4,870, 735, 919
5,050, 101, 546
884,326, 555
2,253,291, 173
2, 343, 492, 422
17,869, 441, 366
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 719.
Also the following statement:
Ratio of net income and dividends, respectively, to total operating revenues,
fiscal year 1914: Roads grouped according to revenues per mile.
Per
Per
cent
cont
total
net in-
Dividend Dividend
Total
divi-
Class and district.
Total
operating
Net
income.
come
is of
revenues.
oper-
ating
appropri- appropri- dividend
ation out ation out | appropri-
of income. of surplus.
dnds
is of
tions.
rǝv-
enue.
ofer-
ating
rev-
enues.
Roads having operating rev-
enues less than $5,000 per
mile:
United States..
Fastern district..
Southern district.
Western district..
Roads having operating rev-
enu's from $5,000 up to
$7,500 per mile:
United Stat^s…..
$74,290,813 $12, 162, 237
16.37
$794,679
13,871,251
$506,721 $1,301, 400
1 75
1,438, 469
10.37
271,493
19,384, 563
945, 151
4 88
167,165
32,083
192, 921-
393, 5:6
2 19
41,034,999
360, 086
1.86
9,778,617
23.83
356,021
281,717
637,738
1.55
1,589, 358
194,885,660
12,247,838
6.28 1,041,945
3,191,476
4,233,421
2 17
Fast rn district...
Southern district.
41,854, 482
6,837,313
16.34
159, 693
92,973
252,666
.tio
36,133,070
1,034, 046
2.S6
513, 832
301, 562
815,394
2 26
Western district..
116,898, 108
6,444, 571
5.51
368,420
2,796,941 | 3,165,361
2.71
Roads having operating rev-
enues from $7,500 up to
$10,000 p r mile:
United States..
688,898,136
53,714,592
7.80 22,538,161 22,675,579 45, 213, 740
6.56
Fastern district..
38,589, 199
1,236,042
3.20 1,497,642
Southern district.
151,771,495
14,140,966
9.32 2,713, 200
450,600 1,948, 212
5,725,780 | 8,438,980
5.05
5 56
Western district..
498,537,442
40,809,668
8.19 18,327,319 16, 499, 199 34,826, 518
6 99
NOTE. This statement does not cover returns of railways having operating revenues per mile above
10,000.
On the subject of equipment, I now supply the following:
Summary showing the number of cars and locomotives built during the years
1899 to 1916.
1916 1
1915 1
1914 1
1913 1
1912 I
1911 2
·
1910 2
1909 2
1908 2
1907 2
1906 2
1905 2
1901.
1903.
1902.
1901.
1900.
1899.
Total...
Year.
Locomo-
tives.
Number
passenger
cars.
Freight
cars.
4,075
1,839
135,001
2,085
1,949
74,112
2,235
3,691
101,541
5,332
3,296
207,684
4,915
3,060
152,429
3,530
4,246
72,161
4,755
4,412-
180,945
2,887
2,489
93,570.
2,342
1,716
76,555
7,362
5,457
284, 188
6,952
3, 167
240, 503
5,491
2,551
165, 155
3,441
2,144
60,896
5, 152
2,007
153, 195
4,070
1,948
162,599
3.384
2,055
136,950
3,153
1,636
115, 631
2,475
1,305
119,886
73,636
49,328
| 2,535,911
1 Includes Canadian output and equipment built in railroad shops.
• Includes Canadian output.
720. FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Summary of passenger and freight cars and capacity of latter from 1902 to
1916.
Freight service.
Year.
Passenger
service.
Average. Company's
service.
Number. Capacity.
Tons.
Tons.
Number.
1916, reported to bureau
53,296
12,283, 830
|
92, 466,857
40.5
126,966
1915, reported to bureau.
54,378
2,362, 914
93, 935, 881
40
124,826
1915, official.
55,810
2,341,567
92,848,095
40
1914, official 2 3.
127,717
53,466
2.325,647 90,977, 098
39
1913, oficial 2 3
124, 709
51,700
2,273,561 486, 988, 595
38
1912, official ³
120, 244
51,490
2,215,549
82, 976, 895
37
115, 635
1911, oficial 3
1910, official 3
1909, official 3
1908, official 3
1907, official.
1906, official.
1905, official
1901, official
1903, official.
•
49,818
2,195,511
81, 083, 695
37
114,006
47,095
2, 135, 121
76,864,356
36
108, 115
45,584
2,073, 606
73, 216, 926
35
99,090
45, 117
5 2, 100, 784
73,245, 777
35
96.762
43,973
42,262
1,991,557
1,837,914
67,218, 144
34
91,064
59, 196, 230
32
78,736
40, 713
1,731, 409
53,372,542
31*
70,749
39,752
1,692, 194
50,874,723
30
66,615
38, 140
1,653, 782
48, 622, 125
29
1902, official.
14 years' increase.
36,987
1,546, 101
43, 416, 029
28
61, 467
57.097
-per cent..
44. 1
47.7
113.0
44.6
122.4
1 Of these, 1,079,063 were box and refrigerator cars, capacity 37,779,193 tons; 893,229 were coal cars, capac-
ity 42,018,442 tons, and 131, 858 were flat cars, capacity 4,881,149 tons.
2 Class I and II roads only. Class III roads in 1912 reported 915 passenger and 12,126 freight cars. In
1914 they reported 11,807 freight and passenger cars unclassified in official statistics.
8 Does not include cars in service of switching and terminal companies.
4 This column 1913 and prior thereto includes allowance for some cars not covered by official capa
figures.
5 Includes 11,067 cars of switching and terminal companies.
Summary showing number, power, and weight of locomotives in the United
States during the years 1916 to 1902.
Tractive
Weight
without
Average
Year.
Number.
power
tender
weight
(pounds).
(tons).
(tons).
1916, reported to bureau.
62,709
2,038, 862,000
5,490,000
87.5
1915, reported to bureau.
1915, official
1914, official.
64,950
2,061, 053, 000
5,470,000
84.2
1 2 63, 850
2,014, 201,500
5,490, 512
86.0
1 2 63, 510
1,931, 953, 982
5,271, 123
83.0
1913, official.
1 2 62,211
1,847,798,393
5,004,720
80.0
1912, official.
2 61,010
1,746, 964, 128
4,719, 251
77.0
1911, official.
1910, official.
260,162 | 1,681, 495, 905
4,537, 653
75.0
2 58,240 | 1,588, 894, 480
4,274,208
73.5
1909, official
1908, official.
1907, official.
1906, official.
256,468
1,503, 971, 444
4,056, 733
72.0
456,867 1, 498, 793, 551
4,012, 553
71.0
55,388
1,429, 626, 658
1,828, 045
69.1
51,672
1,277, 865, 673
3,459, 052
66.9
1905, official.
48,357
1,141,330,
082
3,079, 673
63.6
1904, official
46,743
1,063, 651,261
2,889, 492
62.1
1903, official
43, 871
953, 799, 540
2,606, 587
59.4
1902, official..
41, 225
839,073, 779
2,323, 877
56.3
Increase in 14 years to 1916...
..per cent..
52.1
143.0
136.2
55.4
Unclassified.
Mallet...
Switch and terminal.
Electric..
1909
1910
1911
1912 1913 1914
1915
744 707
730 718 450 475
435 534 717 775
95
1,394
273
1 Class I and II roads only. Locomotives of omitted Class III roads were: In 1912, 986; in 1913, unre-
ported; in 1914, 898; 1915, 890.
2 Excludes locomotives of switching and terminal companies; also excludes unclassified and Mallet loco-
motives, numbering as follows:
• Bureau figures.
Excludes 831 unclassified locomotives, but includes 838 locomotives of switching and terminal com-
panies. Previous years include both switching and terminal companies and unclassified.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
721
I wish in this connection to point out that we built 94,112 freight cars in 1915
and 135,001 in 1916, and yet had no more freight cars at the end of that year
than at its beginning. We use up over 5 per cent of our freight equipment each
year. We therefore must add at least 100,000 cars annually to meet the de-
mands of our growing population and developing commerce, certainly during the
progress of the war.
When we come to locomotives we find a similar failure to keep abreast of the
country's needs. With 56,867 locomotives in service in 1908, we had increased
to 62,211 in 1913, and then only had 63,850 in 1915, with an actual decline for
the year 1916; all of which is corroborative of my statement that we require
immediately at least 200,000 freight cars and 10,000 locomotives to meet the
needs of Government and of our internal commerce.
Very truly, yours,
NEWMAN ERB.
COMMERCIAL CLUB OF NASHVILLE,
January 19, 1918.
HON. T. W. SIMS,
Washington, D. C.
DEAR MR. SIMS: The executive committee of the Commercial Club, at a meet-
ing to-day, unanimously voted to request you to use your influence to pass House
bill 8172, particularly that part of it regarding the operation of transportation
systems by the Government, in which, among other appropriations, it provides
for assistance in river transportation.
We are much interested in this part of the bill in view of the fact of the recent
establishing here of the Government powder plant.
I will much appreciate it if you will and can support the bill.
Yours, very truly,
Hon. T. W. SIMS,
House of Representatives.
W. R. MANIER, Secretary.
HOUSE OF REPRESENTATIVES,
Washington, D. C., January 22, 1918.
MY DEAR COLLEAGUE: I hand you herewith letter from Messrs. Burdick &
Wilcox, attorneys, of Stillwater, Okla., expressing some views in reference to
legislation which is now pending before the Interstate and Foreign Commerce
Committee.
Would you be good enough to see to it that the same is given careful consid-
eration and attention?
Very sincerely, yours,
SCOTT FERRIS.
Hon. SCOTT FERRIS,
STILLWATER, OKLA., January 15, 1918.
Member of Congress, Washington, D. C.
DEAR SIR: The situation in regard to damage suits against the railroad com-
panies seems to be rather uncertain under the present conditions. The Govern-
ment doubtless does not want to have anything to do with claims against the
railroad company occurring prior to its regulation and control, and it may be
that it will want to shift the burden of these claims under the present con-
ditions; but, be that as it may, the question of liability and procedure against
the railroad companies for damages occurring prior to Government control
should be left in the same condition as it was prior to Government control.
You readily appreciate the fact that under the procedure heretofore followed
you can sue a railroad company in any county through which the road runs and
obtain service by leaving summons with the agent to sell tickets, or some one in
charge of its depot. The corporation itself is, of course, a resident only of the
State of its incorporation, and the present conditions seem to render it doubtful
as to where suit can be brought on these old claims.
We would suggest that an act be passed which, in general terms, would pro-
vide that the same procedure could be followed, and suit could be brought in the
same courts against the railroad corporation itself as prevailed prior to the
Government taking over the roads, and that service of summons could be. ob-
40958-18-46
722
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
tained in the same manner as provided by the laws of the State in which suit
was brought and make the agents the employees of the railroad company for the
purposes of bringing suit.
It may be that the Government control and regulation may not change the
relation existing between the employees and the corporations for which they
were formerly working, but there is considerable doubt among the attorneys that
we have talked with as to whether the employees are now employees of the
Government or employees of the railroad company.
Would thank you for your suggestion and opinion as on the advisability of an
enactment clearing up this situation whenever any railroad legislation is
taken up.
Yours, very truly,
Hon. T. W. SIMS,
House of Representatives.
BURDICK & WILCOX.
By BURDICK.
HOUSE OF REPRESENTATIVES,
Washington, D. C., January 16, 1918.
MY DEAR JUDGE SIMS: Please find inclosed copy of letter under date of Jan-
uary 9 from the Maney Bros. & Co., of Oklahoma City, which is self-explanatory.
You will observe that Mr. Maney owns 49 per cent of the stock in a new
road, which has had no earning capacity during the past 36 months. I assume
you will insert some paragraph or provision in the legislation to take care of
roads having a status of this kind, but I am sending Mr. Maney's letter to
you with the request that you have one of your clerks write Mr. Maney what
is being done along this line.
I would also thank you to have a copy of the pending bill sent to him, and if
you will be good enough to mark the paragraph which covers this situation,
and which has to do with new lines, I will appreciate it very much.
Very sincerely, yours,
Hon. SCOTT FERRIS,
Washington, D. C.
SCOTT FERRIS.
MANEY BROS. & Co., GENERAL CONTRACTORS,
Oklahoma City, January 9, 1918.
DEAR MR. FERRIS; I have read the newspaper draft of the bills which have
been introduced in Congress, prescribing the rules and regulations as. well as
compensation for the Government. taking over the transportation lines over
the country. I observe that the compensation to be awarded the various car-
riers will be based upon their prewar earnings, figuring 36 months back from
July 1, 1917.
I own 49 per cent of the stock and bonds of a little railroad in the State
of Oklahoma, being the C. & O. W. Ry. Co.
During the month of May, 1917, we took over the extension of the rails
of this road, adding about 8 miles to the road. This extension consisted of an
incomplete railroad, which had been built by the citizens of Cheyenne, Roger
Mills County, Okla., giving the county seat a connection with the C. & O. W.
at Strong City, Okla. This road was operated up to the time we took it over
and rebuilt it, not as a public carrier, and was not a party to any of the State
or interstate tariffs, although it had a charter in the State of Oklalioma. About
the time above mentioned we took the property over and took out a new charter
under the laws of the State of Oklahoma, the name in the charter being the
Cheyenne Railroad Co. We built this property and put it in first-class shape,
and it is now a first-class railroad for that country. The ownership of the
Cheyenne Railroad is exactly the same as the ownership of the C. & O. W., and
not caring to amend the charter of the C. & O. W. so as to absorb this addi-
tional mileage, the ownership of the Cheyenne Railroad leased same to the
C. & O. W., and it is operated as one property.
Due to the fact that this 8 miles of railway was not operated or really did
not exist until about May, 1917, it goes without saying that it had no previous
earning capacity, made no reports to the Interstate Commerce Commission,
and therefore, in so far as the bill which is now before Congress is concerned,
did not exist and would not be entitled to any earnings under this bill.
It occurs to us that this being new mileage and in effect being an extension
of the rails of the C. & O. W., that it should be at least accorded the same ratio
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
723
of net earnings per mile that may be awarded the C. & O). W., whose reports
are on file with the Interstate Commerce Commission.
My object in writing you is to call your attention to the fact that there seems
to be no provision made for taking care of the new mileage, either upon the
arbitrary basis, as to net earnings per mile, or by awarding to new mileage
the same mileage ratio of net earnings as the parent line, which may have
been under operation the three years specified in the bill.
It occurs to me that the measure, as reported by the press, is incomplete,
since it does not make any provision for according any earnings to the new
mileage. It is true that there is very little new mileage to be taken care of.-
At the same time, what little new mileage there is is entitled to such con-
sideration at the hands of Congress and at the hands of the administration.
.
I will thank you, if you can find time to do so, and if it would appear con-
sistent to do so, that you present this thought to the proper committee, that it
may have due legislative consideration.
Thanking you in advance for what you may do in the matter, and with
kindest regards, I am,
Yours, truly,
J. W. MANEY.
Hon. T. W. SIMS,
UNITED STATES HOUSE OF REPRESENTATIVES,
Washington, D. C., January 7, 1918.
Chairman Committee on Interstate and Foreign Commerce,
House of Representatives.
MY DEAR MR. CHAIRMAN: I am inclosing for consideration in connection with
the railroad legislation now pending before your committee telegram from Mr.
W. T. Kemper, president of the Southwest National Bank of Commerce, of
Kansas City, Mo., regarding the needs of the smaller roads.
With kindest regards, I remain,
Yours, very truly,
WM. P. BORLAND.
KANSAS CITY, Mo., January 5, 1918.
Hon. W. P. BORLAND,
Washington, D. C.:
In considering proposed railway legislation earnestly hope you will impress
upon committee that weak roads must be protected in whatever is done. Kan-
sas City is vitally interested in the Kansas City, Mexico & Orient. If that road
can be preserved and completed it means more to Kansas City and its trade
territory than any other single enterprise that has ever been launched in this
section of the country.
Hon. THETUS W. SIMS,
W. T. KEMPER.
SAN FRANCISCO, CAL., January 15, 1918.
Member of Congress, Washington, D. C.:
A conference held by the tax commission with attorney general and Railroad
Commission of California decided that the adoption of the following amend-
ment to Federal railroad bill is urgently necessary to safeguard revenues of
all States: "It shall be the duty of the Director General to cause to be paid all
taxes levied by the State and local taxing authorities upon railroads pursuant
to the laws of the several States. Such taxes shall be paid in the manner and
at the times provided by the taxing laws of the States." Please advise me at
Sacramento as to probable action.
E. A. DICKSON,
State Tax Commissioner.
RICHMOND, VA., January 14, 1918.
Hon. CARTER GLASS,
House of Representatives,
Washington, D. C.
DEAR MR. GLASS: The so-called "standard return," provided by the railroad
bills now before Congress, would inflict such hardship on the common stock-
holders of the Southern Railway Co., and would, in its application to those
724
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
stockholders, be so utterly at variance with the President's determination that
fair treatment shall be accorded the owners of railroad securities, that, as a
director of that company, I want those who shape or influence the proposed
legislation to know the facts.
The Southern Railway Co. has earned since its organization (in 1894)
$94,000,000 over and above its interest charges. While this amount represents
the fund from which dividends might have been declared, only $31,358,000 of
cash dividends have been paid on the preferred stock (an average of 23 per
cent a year), and no dividends whatever have been paid on the $120,000,000 of
common stock. Not only these earnings, but large sums of borrowed money as
well have been spent in improving and enlarging the railroad and its equipment
under a policy which has had for its aim the provision of a physical plant
which could be so operated as to afford good and sufficient service to the public
and ultimately, through the efficient and economical handling of the expand-
ing traffic of the rapidly developing South, return to the owners of the property
an income upon their investment. The public-service motive for this policy has
been amply justified; indeed, it is painful to contemplate what existing trans-
portation conditions might have been in a territory alive with training camps
and seething with military activity had a less constructive policy been pursued
by the Southern Railway Co. The just expectations of the owners of the
property of some return upon their investment also were fairly along the road
to realization, as a glance at the earnings during the last two and a half years
will readily show, although those earnings by no means reflect the full measure
of reasonably anticipated return upon the large expenditure of new capital re-
cently made on which the company must pay interest out of its income return
under Government control, notably the appropriation of $20,000,000 to finish
the double tracking of the main line between Washington and Atlanta now
nearly completed.
In the year to June 30, 1916, the property earned $9,333,898 over interest
charges; in the following year to June 30, 1917, $12,360,161; and in the five
months to November 30, 1917, $5,777,617, or at the rate of $13,866,000 for the
current fiscal year. Under the proposed Government guaranty plan these earn-
ings for the calendar year 1918 would be less than $6,000,000 about one-half of
what they have been during each of the last two years. The inclusion of the
12 months to June 30, 1915, in the computation of the standard return is re-
sponsible for this. While that first year of the war in Europe was a bad year
generally for business in this country, the bitter experience through which the
South, more than any other section, then passed is too well remembered to
require more than passing comment. The revenues of the Southern Railway
Co. dropped $8,551,000 below the preceding year, and after the payment of in-
terest on its debt there remained the relatively insignificant sum of $1,656,000.
I respectfully submit that these stockholders are entitled to an assurance of
income based upon current earnings. Surely it is not desired to say to those
who have invested their money in the stock on the faith of those earnings, as
well as to those who have had their money so invested for the many years they
have been building for the future: "The compensation for the use of your
property during the first year of Government operation shall be less than one-
half what it has been during the past year of private operation," but that is
just what the proposed standard return" would amount to if applied to the
stockholders of the Southern Railway Co.
Sincerely, yours,
66
JOHN LAND.
HOUSE OF REPRESENTATIVES,
Washington, D. C., January 21, 1918.
Hon. T. W. SIMS,
Chairman Committee on Interstate and Foreign Commerce,
Washington, D. C.
MY DEAR MR. CHAIRMAN: Herewith I have the honor to inclose a telegram
from Hon. M. F. Harrington relative to H. R. 8172. Mr. Harrington is consid-
ered a very competent authority on railway legislation.
I will appreciate your consideration of his views. I am
Yours, very truly,
•
C. O. LOBECK.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
725
hun. CHARLES O. LOBECK,
Washington, D. C.:
O'NEILL, NEBR., January 17, 1918.
H. R. 8172 contains section 9, authorizing President to put in force a compen-
sation measure. This section is being supported by those who opposed Federal
employers' liability law. safety-appliance law, the ash-pan law, and other
measures for protection of railway employees. The four big railroad brother-
hoods are on record opposed to these compensation measures which attempt to
fix before an injury the price to be paid for an injury. This section plainly
in interest of railroad financiers, who seek thereby to pull the teeth of all the
laws passed by Congress in the last 10 years for benefit of railroad employees.
I hope you can see your way clear to oppose this section of the bill.
Chairman SIMS,
M. F. HARRINGTON.
LA GRANDE, OREG., January 15, 1918.
House Interstate and Foreign Commerce Committee,
Washington, D. C.
DEAR SIR: It is with great admiration that I read of your attitude against
the policy of the railroads wanting guaranteed dividends and future prospects as
well.
You have the whole West with you (I am speaking for the masses), and I
will say this, that 9 out of 10 want Government ownership of all the railroads,
telephones, and telegraphs. I am not a socialist either. I ask practically
every man I come in contact with, and only now and then will you find a man
in favor of private ownership of railroads. You will find some money lenders
in favor of private ownership. Every railroad employee I have asked wants
Government ownership. Some, however, did not venture an opinion, and then
I would say: "Well, I think it would be a good thing for the country, and
immediately their faces brightened and they spoke for Government ownership.
They are afraid of their bosses.
This administration has done more for the cause of men than any since
Lincoln's, and I am not a Democrat either. However, I voted for Wilson.
I would appreciate any of your pamphlets, etc. I congratulate you on your
good work.
Yours, very truly,
1
E. W. EASTMAN.
HOUSE OF REPRESENTATIVES U. S.,
Hon. T. W. SIMS,
COMMITTEE ON EXPENDITURES ON PUBLIC BUILDINGS,
Washington, D. C., January 19, 1918.
Washington, D. C.
MY DEAR COLLEAGUE: I am pleased to inclose you communication I have
received from the governor of the State of Oklahoma, in which he makes cer-
tain statements relative to legislation which will probably be considered by
your committee relative to the regulation of the railroads under Government
supervision. Inasmuch as Governor Williams has been closely associated with
State affairs in Oklahoma for a number of years, and was at one time a member
of the Supreme Court, I will be very thankful if his statements in this con-
nection can receive proper consideration. I am,
Cordially and sincerely, yours,
JVM-EC
JIM MCCLINTIC.
STATE OF OKLAHOMA,
Hon. JAMES V. MCCLINTIC,
Washington, D. C.
EXECUTIVE OFFICE,
Oklahoma City, January 14, 1918.
MY DEAR SIR: May I be permitted to call your attention to the importance
that any congressional action, re governmental railroad control, does not in-
terfere with existing methods or privileges of individual States and local units
726
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
of taxation on railroad property or receipts. At this time in our State, a large
portion of the State's revenue is derived from taxation paid by railroads, and
to amend in any form would greatly embarrass this State, necessitating new
methods of taxation which would probably force the calling of an extra session
of the legislature and would be most burdensome and unfortunate to the people
of the State.
I do not know that any legislation contemplated will interfere with the State,
rights in this respect, but inasmuch as the Government is assuring stockholders
a certain profit, it would seem at least wise to present our responsibility in
order that any regrettable situation may be prevented. It is important that
the present State rights and privileges relative to taxes from railroads, either
by receipts or ad valorem taxation, be not amended or interfered with, but be
saved and provided for in Federal legislation relative to taking over the rail-
roads.
Pardon me for calling this matter to your attention, but its importance
prompted my doing so.
Very truly, yours,
R. L. WILLIAMS.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE,
HOUSE OF REPRESENTATIVES,
Monday, January 28, 1918.
The committee met at 10.20 o'clock a. m., Hon. Thetus W. Sims
(chairman) presiding.
The CHAIRMAN. The committee will come to order. Gentlemen,
the chairman has no desire or power to arrange this argument between
the gentlemen who are going to make it. The committee by vote
set 10 o'clock to begin this argument, with no limit as to the duration
of it. I have got nothing to say about who speaks first or who
speaks last, or how long each man shall speak, or anything about it,
and it is now 20 minutes past the time for us to begin, and I would
like the gentlemen who are going to address the committee this
morning to arrange among themselves, if they can, as to who shall
speak first.
STATEMENT OF MR. A. P. THOM, GENERAL COUNSEL RAIL-
WAY EXECUTIVES' ADVISORY COMMITTEE.
Mr. THOм. Mr. Chairman, I believe I am to speak first.
The CHAIRMAN. Are you going to address your statement as to the
proposed bill, or on the two together?
Mг. THом. What I have to say will be mostly on the law, the legal
argument.
Mr. Chairman and gentlemen of the committee, it has occurred to
me that possibly it would save the committee trouble and might be
of some assistance to it if I were to attempt to lay before the com-
mittee some of the legal points which it seems to me they will have to
consider in determining upon this legislation. I was not fortunate
enough to hear the development of the case as it was made before
this committee. I can only speak in respect to that from my
general information as to what was presented, and on the supposition
that what was presented in the Senate was doubtless presented here.
As the members of the committee know, I got caught in the Senate
committee before this committee began the consideration of the bill,
and was consequently kept there more or less continuously.
From what I do know of the case as presented, I feel safe in saying
that much has been brought to the attention of this committee which
upon consideration will be found irrelevant and immaterial. The
temptation to everyone, including, of course, myself, in the prepara-
tion or the presentation of a case is to be more elaborate than the case
requires, and often we will present facts or statistics in deference to
a supposed desire on the part of members of the committee to have a
broad and comprehensive view of all the questions, notwithstanding
that much of it may be entirely useless in the final consideration of
727
728
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
the case. To my mind the case lies within the narrowest kind of
compass. When you come to determine it there will be very few
facts for you to consider. You will have to ascertain at the outset
what the legislative function is in respect to the matter and then to
determine your legislation upon a clear recognition of what that
function is. I think it is demonstrable from the law that the com-
mittee has nothing to do with the matter of compensation; that its
power and the power of Congress extend merely to the determina-
tion of the question of policy as to whether these roads should be
taken over, and that the question of compensation is entirely judicial,
which you can neither limit nor extend, but which stands alone as a
judicial question, to be determined on its merits when it is brought
into court, if it must be brought into court.
That proposition is well stated, it seems to me, in the case of Monon-
gahela Navigation Co. v. United State, 148 U. S., p. 327). That was
a case in which the United States attempted to obtain title to the
docks in the Monongahela River, which belonged to the Monongahela
Navigation Co. The Monongahela Navigation Co. owned a franchise
which had been conferred upon it by the State of Pennsylvania, a
franchise to use that river as a highway and to take tolls for the use of
the locks and for the use of the river. For some purpose the United
States desired to take those locks, and an act of Congress was passed
which authorized the offer to the owners of the locks of a fixed sum,
and in the event of the nonacceptance of that offer, authorized a
condemnation proceeding to acquire the title, but provided that
in the court proceedings no allowance whatever should be made for
the franchise which the company enjoyed. It was tried; the value
of the property exclusive of the franchise was ascertained, the fran-
chise was excluded, and the case was carried to the Supreme Court
of the United States on the question of the power of Congress to
require the exclusion of the franchise. The case then presented the
question as to the power of the legislative branch of the Government
in dealing with these questions, and as to the power of the judicial
branch of the Government in dealing with them. It was necessary
to assign to the judicial branch its powers, and to assign to the legis-
lative branch its powers.
Now on page 327 of that volume that matter is determined.
The court says:
By this legislation Congress seems to have assumed the right to determine what
shall be the measure of compensation, but this is a judicial and not a legislative ques-
tion. The legislature may determine what private property is needed for public
purposes. That is a question of a political and legislative character, but when the
taking is ordered, then the question of compensation is judicial. It does not rest with
the public taking the property, through Congress or the legislature, its representatives,
to say what compensation shall be paid or what shall be the rule of compensation.
The Constitution has declared that just compensation shall be paid, and the ascer-
tainment of that is a judicial inquiry.
I will read further on the same page a quotation which the Supreme
Court of the United States made from the Supreme Court of Missis-
sippi, and indorses, as properly stating the law:
The right of the legislature of the State by law to apply the property of the citizen
to the public use, and then to constitute itself the judge in its own case to determine
what is the just compensation which it ought to pay therefor, or how much benefit
it has conferred upon the citizen by thus taking his property without his consent, of
to extinguish any part of such compensation by prospective conjectural advantage,
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
729
or in any manner to interfere with the just powers and province of the courts and
juries in administering right and justice, can not for a moment be admitted or tolerated
under our Constitution. If anything can be clear and undeniable upon principles
of natural justice or constitutional law, it seems that this must be so.
Now, the Monongahela case has been referred to with approval
down to the present day by the Supreme Court of the United States,
and stands as a perfectly settled and accepted statement of the law
on this question. We must bear in mind, then that the entire
legislative function is exhausted in declaring that certain property
should be taken for public use, and in providing the means for paying
the compensation that may ultimately be agreed upon or be awarded
by the court. But when the question of compensation is involved,
there is no legislative power in respect to that either to fix it or to
declare the rule by which it shall be fixed. The moment it becomes
a litigated or disputed question, it passes entirely from the legislative
field and is transferred to the judicial field.
I think it important, gentlemen, for us all in dealing with this
question to bear this principle fully in mind, to assimilate it com-
pletely, because by reference to it the course which you would pursue,
it seems to me, must inevitably be guided.
As I understand it, the bill which has been presented here by the
Government is a complete acceptance of that proposition of con-
stitutional law. It does not undertake to declare what the compen-
sation shall be; it does not undertake to declare the rules by which
the compensation shall be determined; it is framed upon the theory
that an offer may be made by the Government, on which a voluntary
agreement can be entered into. And if this effort of agreement
which is authorized by the bill should fail, then the bill proceeds to
establish a method of due process of law by which in the courts the
amount of compensation may be determined.
In the first section of the bill we find that the President is au-
thorized to agree with the carriers on the basis there set out. The
entire scope and purpose of that section, as I read it, is to afford an
opportunity for a voluntary agreement. It has no reference to what
may be done under the third section. It does not undertake to es-
tablish a rule of compensation in the courts. It simply affords an
opportunity to keep this whole matter out of litigation by author-
izing the President to make an agreement within the limits here pre-
scribed; and failing that agreement, the whole suggestion of settle-
ment disappears and the entire field of compensation is transferred
to the judiciary.
This is in direct accordance with the principles of law which
govern it as declared by the Supreme Court and accepted throughout
the ages in respect to the taking of the property of private individuals
for public use. As I interpret the President's proclamation and the
memorandum which accompanied it, there was a twofold purpose
in the President's mind. He found it necessary under this concep-
tion of public duty to take over the control of the railroads. He did
that to strengthen this Nation in this time of war. He did it because
he believed that transportation lies at the basis of the mobilization
of our resources as a Nation, and that it must be strengthened and
utilized and made efficient up to the highest point of the national
necessities. That was one purpose of his proclamation, but he had
another, and one but little subordinate to that, and that was that
730 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
this national act should be accomplished without the destruction of
the financial power of this Government to support the war from a
financial standpoint.
As I read his proclamation and the memorandum accompanying
it—and I have only the means of interpreting his mind that is open
to every citizen of the American Republic-but as I read those his-
toric documents, I am convinced that he is of the opinion that the
efficiency of the transportation of the country which he sought to
establish must not be neutralized and destroyed at the same time,
breaking down the financial competency of the American people.
He stands upon a great eminence. He had an opportunity to see on
all sides of the question, while we in our humbler walks in life may
only be able to see a single side. He can not lose sight of the due
proportion of things, if he is to perform his tremendous function as
the Commander in Chief of the Army and Navy of the United States
and as our leader in this time of war, and he must not by establishing
one power destroy another power of this Nation equally as essential
to its welfare and success. So that in creating a system of highest
efficiency of transportation, he would be doing a blind and a futile
thing if he at the same time and by that act should break down and
destroy the power of this Government to support in a financial way
the Army and the Navy, and to bring them the supplies and to feed
this Nation and sustain, as we must sustain, our part in respect to
the allied nations of the world.
Now, what was his scheme for avoiding danger to the financial
structure of the country by this tremendously revolutionary change
which he has thought it proper to inaugurate? Let us look at the
problem. Here the Government has taken over what is estimated
as one-seventh of the national wealth. He found and has said that
the railroad securities are at the very heart of every investment,
large and small, by institutions and by individuals.
The latest statistics which I have show that $818,000,000 of these
securities were in the year 1915 held by the mutual savings banks of
this country alone, and that such securities constitute 32 per cent
of the total assets of the savings banks of the State of Connecticut.
I give those figures as illustrations. The seventeen to twenty billions
of these securities are distributed not only among the individuals
of the country, but stand and constitute the very foundation of the
solvency of all our institutions. There is not a bank, national,
State, or savings; there is not an insurance company, fire or life;
there is not an institution, business or benevolent, that is not
founded in large measure upon this great mass of securities out-
standing in the hands of the public. Suppose anything happens to
reduce their value abnormally? Suppose by some governmental
action an immense shock is given to the financial institutions built.
upon the securities. What is to become of the power of the institu-
tions thus undermined, and of the individuals whose financial capacity
is thus impaired to deal with the financial needs of this Government,
which must be met if we are to sustain our civilization?
I am told that there are few institutions in this country to-day
which dare sell out one of its patrons whose indebtedness is secured
by this class of securities. I am told that they must be held and that
the financial strain must be lived through, unless universal bank-
ruptcy and universal financial incapacity is to be the result.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
731
Now, I do not doubt that the President was fully alive to these
conditions, for he said in his address to Congress and in the memo-
randum accompanying it what I shall now read. I will first read
from his proclamation:
The director shall, as soon as may be after having assumed such possession and
control, enter upon negotiations with the several companies, looking to an agreement
for just and reasonable compensation for the possession, use and control of their re-
spective properties, on the basis of an annual guaranteed compensation above accruing
depreciation and the maintenance of their properties equivalent, as nearly as may be,
to the average of the net operating income thereof for the three-year period ending
June 30, 1917. The results of such negotiations to be reported to me for such action
as may be appropriate and lawful.
He follows that then by this, the only purpose of which must have
been to give assurance and to establish confidence in respect to this
vast mass of property holders:
But nothing herein contained, express or implied, or hereafter done or suffered
hereunder, shall be deemed in any way to impair the rights of the stockholders, bond-
holders, creditors, and other persons having interests in said systems of transporta-
tion, or in the profit thereof, to receive just and adequate compensation for the use
and control and operation of their properties hereby assumed.
That is the law independent of that proposition. Why was it
put in? What was in the President's mind to suggest that a proposi-
tion of that sort, universally accepted as part of our constitutional
safeguards, should be thus brought out and coupled with the act of
taking over these properties, except to give assurance to the public
which would establish and maintain confidence in this class of
property holders?
Then the question arose, doubtless, in his mind-as it must arise.
in the mind of every thoughtful man, how is this assurance to be
given? What course must be pursued that will sustain this vast
mass of securities so essential to the public's welfare? Can it be
done by litigation? Can it be done by referring this whole matter
to the courts? Or had it better be done by reducing the number
of cases that must go into the courts to a minimum; by affording a fair
basis for a voluntary agreement; by making a suggestion which the
holders of these securities can accept; and thereby at once bringing
stability and strength to the financial situation, which would be
utterly destroyed if it were a matter of litigation?
Gentlemen, it seems to me that the first thing for you to determino
is this, bearing in mind that it is not necessary as a matter of con-
stitutional law to make any offer for these properties; bearing in
mind that all that is constitutionally incumbent upon you is to
provide methods of ascertaining just compensation which will
measure up to the requirements of due process of law-the first
question which you will have to determine is whether or not you
deem it wise that this whole matter shall be sent to litigation, or
whether you believe that in the public's welfare that instead of it
being confined to the uncertainties and delays of litigation, it is
better to see if the whole thing-or such a large part of the problem
as to make it controlling-can not be settled by voluntary agreement.
Now, if you are of the opinion that the public interests will be
best served by throwing this seventeen to twenty billions of dollars.
into litigation; that the financial strength of this country can be
best established, or even can stand the strain of litigation, the pro-
732 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
.
longed period of uncertainty, then your function is a very simple one.
All you would have to do would be to establish a method of having
this value ascertained in a court. You could do it in a very few lines.
Your problem would not be difficult. Any one of you lawyers could,
in half an hour, draft such a measure, if all that the public need
require is that the whole matter shall be sent to litigation.
But if, on the other hand, you determine that the effect of such
universal litigation would be disastrous, then you are brought face
to face with this question: What ought to be done? What had better
be done in the public interest to bring about a voluntary agreement
between the Government and these parties, and thus save the prob-
lem from litigation?
Evidently the President of the United States thinks it most im-
portant that there shall be a voluntary agreement. I have already
read you one extract from his proclamation. I will now read you an
extract from the statement which accompanied it:
Investors in railway securities may rest assured that their rights and interests will
be as scrupulously looked after by the Government as they could be by the directors
of the several railway systems. Immediately upon the reassembling of Congress
I shall recommend that these definite guarantees be given:
First, that the railway properties will be maintained during the period of Federal
control in as good repair and as complete equipment as when taken over by the Gov-
ernment; and,
Second, that the roads shall receive a net operating income equal in each case to
the average net income of the three years preceding June 30, 1917; and I am entirely
confident that the Congress will be disposed in this case, as in others, to see that
justice is done and full security assured to the owners and creditors of the great sys-
tems which the Government must now use under its own direction or else have a
serious embarrassment.
I think, therefore, that I am safe in saying that the President was
deeply convinced that the only way of safeguarding the financial
strength of this Nation is to have a voluntary agreement quickly
reached between these carriers and the Government, so that their
financial status shall be at once assured and not kept in the region
of uncertainty and debate. I believe that the President is right in
the opinion that a voluntary agreement is one of the fundamental
needs of this hour. I can not imagine greater financial chaos than
would ensue if there should be no agreement and this whole matter
should be thrown into the delays and uncertainties of litigation.
Assuming the soundness of that proposition, may I ask you to
put yourselves in the attitude of an adviser, a legal adviser, to these
corporations on the problems which they have now to confront?
May I ask you to consider what a conscientious lawyer would be
obliged to advise a client in respect to the kind of agreement which
ought to be made? We must bear in mind, in considering that
matter, that manifestly in the public interest no agreement ought
to be made which would have the effect of destroying the financial
capacity of this Government. If the suggestion was made that
there ought to be a patriotic sacrifice of this whole volume of secu-
rities, and that nothing should be asked for these properties, I do
not believe there is a thoughtful man anywhere who would say it
would be in the public interest that that should be done. He
would at once say "Why, what is going to become of the savings
bank yonder that thereby would lose its solvency? What is going
to become of this insurance company, or this business, or benevolent
institution which would be financially destroyed? How would the
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
733
strength of this Nation, the financial strength of this Nation, be
promoted by an entire surrender of this vast mass of securities ?
If they are the foundation of our financial power; if they are inex-
tricably associated with our financial strength, then the acceptance
of any terms in respect to them which would not be a fair recogni-
tion of their inherent value would not be in the public interest.
,,
Therefore it seems to me that the lawyer in considering what
advice he should give to his client is brought face to face with the
problem of what is fair and just in respect to the matter. No
public interest can be subserved by accepting less; no public right
can be established by requiring more.
Now, what are the just rights of these carriers? What is the
measure which the law attributes and requires in the ascertainment
of what is fair and just in respect to them? What ought we to
advise our clients to accept, even under the compelling force of this
great national emergency? We ought not to advise them to accept
anything that will undermine public confidence or weaken the public's
financial power. Now, what is the measure that they ought to have?
There is but one precedent in the world, and that is the precedent
of England. Nothing approaching this tremendous exercise of
power in all history has taken place except that which took place
a few years ago in Great Britían. And there it was determined
that it was fair and right to pay the carriers their demonstrated
earning capacity over a chosen period. It happened that in Great
Britian the year that was chosen was the highest in earning capacity
of any in the history of the English railroads, but the principle
which was accepted and which was acted on was that the demon-
strated earning capacity of the carriers was the measure of what
ought to be paid them for their use.
In this country we have the declaration of the President that
the fair measure to be paid for the use is likewise the demonstrated
earning capacity of the railroads. I am not now referring to the
amount. I am discussing the matter merely on principle. The
President of the United States has said that that is fair and that
is what the security holders are entitled to; to enjoy during the
period of Federal control the demonstrated earning capacity of the
carriers while in private hands.
The Secretary of the Treasury, knowing all the financial needs of
the Government, has come before the committees of Congress and
has declared that the fair measure of compensation for the use of
these properties is their demonstrated earning capacity over a
selected period.
All three of these forces, the force of the only known precedent,
the opinion of the President, and of the Secretary of the Treasury,
are all in accord with the fairness of the principle that the compen-
sation must be the demonstrated earning capacity of these carriers
over a selected period; and that, gentlemen, is sustained, both by
reason and authority.
In the case of the Monongahela Navigation Co. v. the United States,
to which I have already referred, we find, on page 328, the following
announcement of principle:
How shall just compensation for this lock and dam be determined? What does
the full equipment therefor demand? The value of property, generally speaking,
is determined by its productiveness the profits which its use brings to the owner.
734
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Various elements enter into this matter of value. Among them we may notice these:
Natural richness of the soil as between two neighboring tracts one may be fertile
and the other barren; the one so situated as to be susceptible of easy use, the other
requiring much labor and large expense to make its fertility available. Neighbor-
hood to the centers of business and population largely affect values. For that prop-
erty which is near the center of a large city may command high rent, while property
of the same character, remote therefrom, is wanted by but few, and commands but a
small rental. Demand for use is another factor.
The commerce on the Monongahela River, as appears from the testimony offered,
is great; the demand for the use of this lock and dam constant. A precisely similar
property in a stream where commerce is light would naturally be of less value, for the
demand for the use would be less. The value, therefore, is not determined by the
mere cost of construction, but more by what the complete structure brings in the way
ol earnings to its owner.
For each separate use of one property by others, the owner is entitled to a reason-
able compensation, and the number and amount of such uses determine the produc-
tiveness and the earnings of the property, and therefore largely its value.
So that if this property, belonging to the Monongahela company, is rightly where
it is, the company may justly demand from everyone making use of it a compensa-
tion, and to take that property from it deprives it of the aggregate amount of such
compensation, which otherwise it would continue to receive.
What amount of compensation for each separate use of any particular property may
be charged is sometimes fixed by the statute which gives authority for the creation
of the property; it sometimes is determined by what it is reasonably worth, and
sometimes, if it is purely private property, devoted only to private uses, the matter
rests arbitrarily with the will of the owner. In this case, it being a property devoted
to a public use, the amount of compensation was subject to the determination of the
State of Pennsylvania, the State which authorized the creation of the property.
The prices which may be exacted under this legislative grant of authority are the
tolls, and these tolls in the nature of the case must enter into and largely determine
the matter of value.
Again, on page 329:
So, before this property can be taken away from its owners the whole value must be
paid, and that value depends largely upon the productiveness of the property, the
franchise to take tolls.
Mr. DOREMUS. Will you read that last sentence again, Mr. Thom?
Mr. THOм (reading):
So, before the property can be taken away from its owners the whole value must
be paid, and that value depends largely upon the productiveness of the property, the
franchise to take tolls.
Commissioner ANDERSON. In that case, Mr. Thom, the tolls were
not subject to regulation by the same governmental power that took
the property, were they?
Mr. THOм. Only so far as they were interstate, and they of course
were interstate; but that aspect of the case is dealt with, page 341:
The theory of the Government seems to be that the right of the navigation company
to have its property in the river, and the franchises given it by the State to take tolls
for the use therefor, are conditional only; and that whenever the Government in the ex-
ercise of its supreme power assumes control of the river, it destroys both the right of
the company to have its property there and the franchise to take tolls. But this is a
misconception. The franchise is a vested right. The States had power to grant it.
It may retake it, as it may retake every other private property for the public use,
upon the payment of just compensation.
Now there the court was dealing with the power of the State,
that granted the franchises and had power to fix the tolls, to retake
them, and it declared that it also must pay just compensation, though
a superior power exists in the National Government. It may take it
for public purposes and take it even against the will of the State, but
it can no more take the franchise which the State has given than it
can any private property belonging to an individual.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
735
I refer the committee also to the case of Cleveland, etc., Railway
Co. v. Backus (154 U. S., 445), where it is said:
But the value of property results from the use to which it is put and varies with
the profitableness of that use, present and prospective, actual and anticipated. There
is no pecuniary value outside of that which results from that use. The amount and
profitable character of such use determines the value.
I also refer to the case of the Northern Pacific Railway v. North
American Telegraph Co. (130 Fed. Rep., 237). The judges sitting
in that court were Sanborn, Carland, and Lewis.
Where real property about to be taken by condemnation has no market value, the
amount of rent or of income it has produced, and is producing, and is capable of pro-
ducing, and the opinions of men who have had experience in dealing in it and who
have knowledge of its value are competent and material evidence to determine what
is just compensation for the taking; in other words, what damages may be inflicted
by that taking.
I also refer the committee to the case of Johnson v. the United
States, Second Court of Claims Reports, 391, where it is said this is
where the damages were being determined for a temporary taking:
We therefore think that the measure of the damages should be limited to the value
of this temporary occupancy, as though the claimants had leased it and the Govern-
ment had rented the premises, regard being paid to the nature of the occupancy and
the fact that the Government had the option of discontinuing the implied tenancy
on any day or retaining it indefinitely. This also is a rule which courts have adopted
as the measure of damages in actions for mean profits, and the only rule which can be
made applicable to this case.
I then skip and will read further:
We therefore must assume that at the time of the entry upon the premises the
claimant was willing to lease and the Government was willing to rent the premises,
with the rights and privileges and upon the conditions before enumerated, at the
fair or market value of an annual rent, and we must regard the claimant as bringing
his action to recover the rent, etc.
Again, it says:
The amount thus found may be regarded in future as the established and agreed
rent of the premises so long as the Government shall elect to occupy them under the
implied lease. What the value of this annual rent was in 1856 we will now proceed
to inquire.
I ask the attention of the committee to the case of Vincent v. New
York, New Haven & Hartford Railroad Co. (77 Conn., 431), and I
will read a brief quotation from that case:
But where premises are used for manufacturing or business purposes and have been
constructed for or adapted to such use, and for that purpose have been furnished
with expensive fixtures, machinery, and appliances, and a permanent and profitable
business has been established at that place, compensation for the diminution in the
market value of the premises or in the mere rental value during the period of the
interrupted access is not just compensation for the injury caused by temporarily
depriving the owner of the right of access. When the owner is making such a use
of the land, it is that use of which he is temporarily deprived, and for the loss of or
injury to which he is entitled to compensation.
Another quotation from the same case reads:
The reasonable value of the use of the premises to the plaintiffs for the purposes
of the business for which they were using them is the value for the diminution of
which caused by such temporary interruption of access the plaintiffs are entitled
to compensation.
I also refer you to the case of Doremus v. City of Paterson (73 N. J.,
Eq., 474).
736
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
From all of these cases it is apparent that not only was England
right when it adopted the demonstrated value of the use in the
hands of the owners; not only is the President right when he recom-
mends that measure to Congress; not only is the Secretary of the
Treasury right when he comes before you and tells you that in his
opinion that is just and fair, but the principle is absolutely the only
one that finds any recognition in the authorities which must deter-
mine it.
The demonstrated value of the use is sustained and established as
the lawful measure of just compensation. Now in view of all this,
in view of all that has occurred in history, in the administrative
councils of your own Government, and in view of all these authori-
ties, and in view of your own reason, if you had the responsibility
of advising what principle should be adopted to ascertain the just
compensation for this use, could you advise your client that he was
not entitled to the fair application of the principle that the demon-
strated value of the use in his own hands and under his own use was
the fair measure of right? As I say, I am not now referring to any
amount. I an not now referring to any period of test; I am refer-
ring merely to the principle that granting that the period is fairly
chosen; granting that the value of the use is fairly exhibited under
lawful conditions, could any of you advise a client that that was not
the measure of his rights in respect to compensation?
Mr. DILLON. Before you leave that question, Mr. Thom, I would
like to ask you a question. Going back to the first case that you
quoted, in which the Supreme Court decided the value of the fran-
chise should be considered, how would you consider, in a temporary
taking, the value of a franchise?
Mг. THOм. By the demonstrated value to the owner of the use of
that franchise during a fair test period. Here is a railroad company
that has been using its franchise to take tolls, and the Government
takes temporarily that power away? What is the value it ought to
pay? You would see what it itself had been making out of that
franchise under lawful conditions, and when you find what the
company itself has been making out of them under lawful conditions,
you at once determine that that is the value of the thing you are
taking away, because that is the thing you have deprived them of.
The CHAIRMAN. Mr. Thom, so far as you have gone, is there any-
thing in this proposed bill that seriously controverts the position
you have taken?
Mr. THOм. No; I think it sustains it.
The CHAIRMAN. In other words, there seems to be no great contro-
versy about that?
Mr. THOM. No. But this committee has had various other propo-
sitions made to it, and in order to show that those propositions are
not tenable I feel that I must first show a proposition that is sound.
The CHAIRMAN. In other words, there might be amendments
insisted on that would controvert the position you are taking?
Mг. THOм. Yes; there have been several suggestions made before
the committee of the Senate, and I assume have been made here, of
the different measure of compensation. Now, I shall try to show
that there is no justification in law for them. In order to do that
I am first going to show what the correct and sound principle is.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 737
Mr. HAMILTON. Mr. Thom, would you kindly recapitulate those
methods that have been suggested, so that you may have them in
the record?
Mr. THOм. I will do so at this point, although I shall read them
and discuss them in detail as I go on.
Mr. HAMILTON. Well, then, if you propose to do that, do not do it
now.
Mг. THOм. I propose to come to them and discuss them in detail
after I have finished this point.
Now, what I have said seems to me to be especially applicable to
a case where the earning capacity that is being used as a measure
is an earning capacity that has been already and for many years
regulated by law. If the Government had limited the earning
capacity of these carriers and had made lawful the earnings which
they made by declaring the rates that they were charging were legal,
then however much greater the earning capacity might be; however
much more the value of the use might be worth, in a proceeding by
the Government to take the properties, it seems to me incontro-
vertible that the earning capacity which the Government itself has
by law limited is the minimum value of that earning capacity. The
Government has no right to complain of it, because its representa-
tives have fixed it. It can not be tarnished with any taint of ille-
gality, because the law has already ascertained what each charge
should be. The earning capacity of the carrier, whatever it is, is
one that in advance has been declared to be legal by the system of
regulation. For 30 years these carriers have been regulated, at
first with one degree of regulation, with gradually varying and
strengthening power of regulation, until for 10 years there has been
strict regulation of these charges, so far as these charges were inter-
state, and in most of the States for a much longer period their rates
have been fixed by law so far as they were intrastate.
So it does not seem to me that you gentlemen, whose responsi-
bility it is to act on this matter, can find the slightest difficulty in
reaching the conclusion that, whatever the demonstrated earning
capacity is, is legal; because through your delegation an authority
of your Government has fixed it.
I call your attention to what the Interstate Commerce Com-
mission says at page 78 of its report of 1916. I quote:
All rates, fares, and charges have been open to complaint for a period of more than
ten years, within which the commission had the power to fix the fair maximum rates.
For a period of more than six years all proposed increased rates have been subject
to protest and suspension before becoming effective. Obviously there should be a
time when, as to the past, the general level of the rates and the relationship of rates
should be fixed as reasonable. We are convinced that the best interests of the entire
public, of the system of governmental regulation of rates, and of the railroads, will
be served by the enactment of a statute which as of a specified date fixes the existing
interstate rates, fares, classifications, rules, regulations, and charges as just and
reasonable for the past, and which provide that after that date no change therein
may be made except upon or of the commission.
We have then a case in which the earning capacity of these carriers
is determined and limited by law, and which is approved as reason-
able by the regulating body, and which that body announced to
Congress ought now to be recognized in an act as reasonable and
just for the past.
40958-18 47.
:
738
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Now, under those circumstances, how does the case stand for the
method of ascertaining the just compensation for this use? How
does the case stand for the ascertainment of the amount that must
be paid, and that you as counsel for one of these carriers would have
to advise your clients should be paid for this use? The principle is
the ascertained and demonstrated value of the use under rates thus
limited and made legal by law which must be considered a minimum.
Commissioner ANDERSON. Why a minimum, Mr. Thom?
Mr. THOM. Because there may be conditions in which the play
of those rates has not had a fair opportunity.
Mr. ESCH. That is, the rates may have been too low in many
instances because of competitive conditions?
Mr. THOм. No; I mean have not been in operation during the test
period, or something of that sort.
Commissioner ANDERSON. I do not desire to interrupt you, but I
intended to dissent to that before the Senate committee and forgot
it. It seems to me that it can not be anything other than highly
persuasive evidence. Just compensation might be either more or
less than the return on the outstanding rates.
Mr. THOм. At least we have your authority, Mr. Commissioner,
that it is just in this case.
Commissioner ANDERSON. No, sir.
Mr. THOм. Didn't you draw this bill?
Commissioner ANDERSON. I took the average of the three years'
net earnings as being in the war emergency legislation the best prac-
ticable basis for the use now to proceed in war time to reach an
adjustment with the carriers, with as little disturbance as possible in
the financial market. But I did not intend thereby to commit
myself to the proposition that outstanding rates were necessarily the
minimum of just compensation. I do not, however, intend to inter-
rupt you there, Mr. Thom. I stand back of the bill, however.
.
Mr. THOм. Well, that is all that I am at this point of my argument
doing.
Mr. DALE. Mr. Thom, as I did not arrive at the meeting until a
little after 10 o'clock, I would like to ask you this question for my
own benefit, and it may be for the committee, too.
Has any reference been made by you regarding the rule as estab-
lished by the Court of Appeals in the State of New York, in reference
to just compensation for property taken?
Mr. THOм. I made no reference to it.
Mr. DALE. You have not made any reference to that?
Mг. THOм. No, sir. Now instead of this measure, which Mr.
Anderson, notwithstanding his protest, accepts and recommends to
the committee, and notwithstanding the indorsement which it has
had, as I have mentioned, and the authorities which will support it,
my understanding is that this committee has been asked to depart
from it and to establish a basis something like this: Of guaranteeing
the interest on the bonds and a dividend on the stock, and taking the
balance of the earnings of the carrier and dividing them between the
Government and the carrier, with some string, I believe, attached to
the part of it which goes to the carrier as to how it shall use it.
That is a radical departure from the principle for which I have been
arguing. That denies that the measure of just compensation requires
the payment of the demonstrated earning capacity. That takes part
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
739
of the demonstrated earning capacity and gives it to the Govern-
ment. To go down to the fundamental principle upon which it rests,
it is a denial of the right of the carrier to such part of its earnings as
are over and above its dividends-its reasonable dividends. It puts
all over what is declared as a reasonable dividend in the region of
governmental discretion as to what shall be done with it. It denies
the title of the carrier to that as a part of what is just compensation.
Now, let me see what the law is in respect to the title of the carrier
to surplus earnings over its dividends under rates legalized by the
Government. I heard one of the Senators say that the Interstate
Commerce Commission had at one time been on one side of that
subject and at another time had been on the other side of the subject,
and now was on neither side. I make that explanation because
I am going to read, not as a holding of the Interstate Commerce
Commission but because of its inherent force, what was said by
Judge Prouty when a member of that commission, in the case of the
City of Spokane v. Northern Pacific Railway Co. (15 I. I. C., 415, 416).
Judge Prouty said:
The
We come now to the complainant's claim that the surplus which has been accumu-
lated by the defendants from earnings should be first subtracted from the value of their
properties in determining the amount upon which they may properly earn.
contention of counsel is that this surplus is a fund held by the railway company as
trustee for the public, which this commission should in some way manage to redistribute
to the public in the establishment of just and reasonable rates. The railway is cer-
tainly an agent of the Government in the construction and operation of its property,
and it is only allowed to charge for its services a reasonable compensation. Does it
from this follow that the surplus of the Great Northern Railway, for example, which
is said to be $70,000,000, is held by that company in trust for the public? Does it
follow, even, that the value of this property to-day should be decreased by $70,000,000
upon the theory that the public has paid into the property that amount? It is well
understood that rates by all lines to Spokane from a given eastern destination must
be the same.
We have already held that in establishing a reasonable rate the strongest lines
should not alone be considered; the necessities of the weaker lines must also be taken
into account. In the application of this principle it is evident that a rate might be
fixed which would pay a very moderate return by one line and a very handsome
return by another. Under the operation of these rates of the Great Northern, by
reason of its cheaper construction and its easier operation, might accumulate a sur-
plus, while the Northern Pacific did not. If so, could it be said that the surplus of
the Great Northern had been improperly accumulated when its rates had been just
and reasonable? Does the mere fact of the accumulation of a surplus by a particular
road show that the rates upon that road have been excessive? But assume that they
have been. This $70,000,000 to which the complainants refer in case of the Great
Northern surplus, is a result of the operations of the Manitoba and the Great Northern
companies since the year 1880-that is, for 27 years. During ail that period this sur-
plus has been gradually accumulated and has gone into the property. Should the
Government to-day take note of that surplus for the purpose either of so reducing the
rates of the company that no earnings can be made upon this much of the property, or
with a view to in some sense turn that surplus back again into the hands of the public?
There is no absolute test of a reasonable rate, and the Government has supplied none.
During all this period the excess has gone into the property, which has gradually
become more valuable, and this increased value has been reflected in the market
prices of the securities of that company. It is impossible to restore what has been
improperly taken in the way of excessive rates to those persons from whom it has been
received. The Government under these circumstances can not lay hold on this
surplus as a fund held in trust for the public.
The CHAIRMAN. Mr. Thom, do you concur with what Judge Prouty
said as to the railroads being agents of the Government?
Mr. THOM. Not entirely. I think the railroads are private prop-
erty which have been devoted to public use.
740
FEDERAL OPERATION OF TRANSPORTATION SYSTÉMS.
The CHAIRMAN. They are not agencies of the Government, as
stated by Judge Prouty, then?
1
Mr. THOм. I don't think they are agencies of the Government.
That is further than I am willing to go.
Mr. DOREMUS. Are they agencies of the Government now?
Mr. THOм. I do not think there is a doubt of that, Mr. Doremus,
under the present status.
The CHAIRMAN. You read what Mr. Prouty stated and did not
comment on that feature of it. That was the only reason that I
made the inquiry. I supposed you approved it, by not having
excepted any portion of it in comment.
Mг. THOM. NO. Mr. Prouty's statement of their being govern-
mental agencies was the strongest possible case for considering the
surplus as belonging in some sense to the public. Now, there is no
use of my trying to object to that, when he was putting it in the
strongest way to support the proposition which he rejects, and tor
which I was reading the extract as authority for its rejection.
I refer to the Passaic gas case, First Public Utilities Commission
of New Jersey, page 433:
In making a valuation of the gas plant for the purpose of fixing rates, the board of
public utilities commission of New Jersey held that the valuation must include all
structures constructed out of earnings. If in the past this gas company, out of the
rates exacted from consumers had met its operating expenses and depreciation, and
in addition thereto had obtained enough to pay returns to investors, and to build an
actual structure used in its business, would this structure aforesaid be the lawful
property of the company? The answer, it seems to us, must be in the affirmative.
If the company had paid out, in addition to other payments to investors, dividends
equal to the cost of building this structure, and then had issued additional stock in
value equal to the cost of the structure, in order to repossess itself of the money re-
quired to build it, there can be no doubt that the structure built out of the proceeds
of the additional securities thus sold would be the lawful property of the company.
It would be none the less the company's lawful property if built out of current earnings
without the issue of additional securities.
1
In the case of Charlesworth v. Omro Electric Light Co., Public
Utility Reports of Wisconsin of 1915-B, page 1, the same principle
is announced.
In Stennerson v. Great Northern Railroad (69 Minn., 353) the same
proposition is announced; the case of Brymer v. Butler Water Co.
(179 Pa.), is the same; Garden City v. Garden City Telephone, Light
& Manufacturing Co. (236 Fed., 693), and also the Minnesota Rate
case (230 U. S.).
In the last one of these cases the question here is not discussed, but
it will appear from the records in the case that the surplus earnings
were regarded as part of the property invested, and the case was dis-
cussed and decided on the basis of accepting them as such, and not
differentiating them from the other part of the investment.
Now, gentlemen, for the purposes of my argument, it is not neces-
sary to determine this question that I am now discussing one way or
the other. No authority can be adduced which puts this part of the
lawful earnings of a carrier in any other position than that of its
other assets. The doctrine that the company does not own its earn-
ings, any part of them, the part over and beyond the dividends, as
well as every other, must universally be admitted to be an entirely
novel doctrine. It must universally be admitted to be an unsettled
proposition on that side. There can be no contention that there is a
recognized difference in the relationship of the company to that part
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
741
of its earnings from its relationship to any other part. The most that
can be claimed is that there will in the future, when cases begin to
be decided right-that this principle will be recognized. No man
can contend that it has already been recognized and that it is settled
law.
Now, I come again to your position as advising the client. In
that state of law, would you advise a client to make a voluntary
agreement which accepts that unaccepted proposition? Would you
be willing to advise a client to surrender by agreement its right to
this part of the earnings, sustained by the authorities as belonging
to the company, as I have read to you, unestablished in the juris-
prudence of this country by any condition whatever?
If it is desirable in the public interest to reach an agreement; if
the strength of this Nation in war will be promoted by a voluntary
settlement and agreement in respect to this matter, all of the chances
of a voluntary agreement under such advice as you would give a
client-would that be promoted by asking a surrender of the title
to this much of the earnings of these companies?
Now, I understand that Mr. Commissioner Anderson thinks the
law ought to be the other way. I have heard him so state. I have
heard him state that for 25 years he has held that opinion, but he has
not felt that this was a time, in this emergency war legislation, to
demand the surrender of that principle in its present unsettled
state-unsettled from his point of view; settled according to my
idea. And he has therefore put an amendment to section 14 of this
bill which declares that nothing in this act shall commit the Gov-
ernment one way or the other on this or any other question involved
in the bill; and that the legislation must be considered as war emer-
gency legislation and not as declaring rights or principles which are
to govern in time of peace. That is as far as he has thought it wise
to go.
Now, are we to be expected-would you advise me as your client
to accept and enter into a voluntary agreement which makes that
surrender of these substantial rights? I do not believe that any such
advice could be given by any conscientious lawyer. Now, that is
one of the things that you have to do.
Now, another thing that you are asked to do is this, as I under-
stand it: You are asked to give this measure of compensation em-
braced in this bill as a temporary measure of compensation, and then
to refer the whole matter to the Interstate Commerce Commission
to determine how much money has been put into these properties,
and on the amount of money that has been put into these properties,
less any amount by which that money has depreciated, or as to which
there has been a failure of maintenance, that you would allow a
certain per cent say, 6 per cent. Now, what does that proposition
involve? It involves acceptance of the principle that the measure
of right which one of these carriers has in his property is the cost less
depreciation. It denies all accretions to value; it denies considera-
tion of the value of these properties as of the present day; it cuts you
back to your investment, no matter when made, and allows you a
fixed per cent on that investment. To accept it would be to accept
this proposition that these carriers have no interest in these proper-
ties which have come to them in the way of growth; that it has no
742
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
interest in these properties which must be estimated as of the value
at the present day. It strips them of the attributes of property,
which every other property owner in the land possesses. It takes
them back to an undeveloped age, to the time of lower prices; to the
period of actual cost, and asks that these carriers shall accept that as
à full measure of their property rights.
When the enormous sacrifice that that suggestion involves is
considered; when the enormous deduction from what every other
man in the land considers his own in respect to his property is appre-
ciated, you can at once perceive the importance of the sacrifice
which these carriers are asked thus to make. It must indeed be
clear law; the status of this property must be clearly established by
undisputed precedents and authority, to justify such a subtraction
from what they supposed to be their rights.
Let us see how the law stands in respect to it. Remember that the
carrier's right to his property is confined and restricted to the amount
of actual investment in it, less depreciation; that the property now
is not being considered as of the present day; that no allowance can
be made for growth of values, but that it must be restricted, as I have
said, to the cost less the depreciation which has not been repaired.
Mr. DEWALT. Will you let me ask you a question there? In one
instance, Mr. Thom, you used the words "actual investment."
Then you used the expression, "the cost." There is a distinction,
in my mind, between the two.
Mr. THOм. What is the distinction in your mir d?
Mr. DEWALT. In the first place, you said the actual cost as at the
time of the purchase, we will say. Then you say as to the actual
investment in the property. That might include investment after
the actual cost-the first cost. I suppose you wanted to confine it—
that is, their proposition-to the cost at the time of the purchase,
we will say.
Mr. THOM. I think they admit that anything that has been put
into the property since the first cost in the way of additions and
betterments and not merely in the way of replacements would be
cost.
Mr. DEWALT. Yes; that is true, I think.
Mг. THOм. I think that is what they intend and I am considering
it within that meaning.
Commissioner ANDERSON. Not to interrupt too much, I do not
want to be understood as having committed myself to that because
if what you say has reference to the theory that the return is limited
to the cost less depreciation I do not think that depreciation is a
proper charge against capital account.
Mг. THOм. I am not discussing that point any more. I have gone
to a new one, Mr. Commissioner. I am not referring now to the
question of surplus at all. I have finished with what I wanted to
say on that subject. I am now on this other proposition, which is
entirely distinct from the one in respect to the surplus, and I am
reading some authorities from the Supreme Court of the United
States to show what the interest of one of these companies is in its
property; whether it is in fact confined to its actual cost or invest-
ment however considered or whether it must always make allowance
for the increased value which has come to it in common with all the
properties in the land.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
743
The first case I call your attention to is the San Diego Land Co. v.
National City (174 U. S., 756). Justice Harlan, speaking for the
court, says:
What the company is entitled to ask for is a fair return upon the value of that which
it employs for the public convenience. On the other hand, what the public is entitled
to demand is that no more be exacted from it for the use of a public highway than the
service rendered by the railroad is reasonably worth.
There he puts the measure of value upon the value of that which
it employs. Now the question comes up as of what time is that
value to be determined?
In San Diego Land & Town Co. v. Jasper (189 U. S., 439), Mr.
Justice Holmes said:
The main object of attack is the valuation of the plant. It no longer is open to
dispute that under the Constitution what the company is entitled to in order that it
may have just compensation is a fair return upon the reasonable value of the property
at the time it is being used by the public. That is decided, and is decided against
the contention that you are to take actual cost of the plant and annual depreciation
and allow a fair profit on the footing over and above expenses.
That is a quotation from the Supreme Court.
Now in Wilcox v. Consolidated Gas Co. (212 U. S., 41), Mr. Justice
Peckham, speaking for the court, says:
There must be a fair return upon the reasonable value of the property at the time
it is being used for the public, and we concur with the court below in holding that the
value of the property is to be determined as of the time when the inquiry is made
regarding the rates. If the property which legally enters into the consideration of
the question of rates has increased in value since it was acquired, the company is
entitled to the benefit of such increase. This is at any rate the general rule. We
do not say that there may not possibly be an exception to it, where the property
may have increased so enormously in value as to render a rate permitting a reason-
able return upon such increased value unjust to the public. How such facts should
be treated is not a question before us, as this case does not present it.
But we are told that those are cases which did not arise in respect
to a railroad.
Now I refer you to the Minnesota Rate case (230 U. S., 434), which
was a railroad case. Mr. Justice Hughes says, in delivering the
opinion:
There
The property of the railroad corporation has been devoted to a public use.
is always the obligation springing from the nature of the business in which it is engaged
which private exigency may not be permitted to ignore, that there shall not be an exor-
bitant charge for the service rendered. But the State has not seen fit to undertake
the service itself, and the private property embarked in it is not placed at the mercy
of legislative caprice. It rests secure under the constitutional protection which
extends not merely to the title but to the right to receive just compensation for the
service given to the public.
That is on page 454.
Now it continues:
It is clear that in ascertaining present value we are not limited to the consideration
of the amount of the actual investments. If that has been reckless or improvident,
losses may be sustained which the community does not underwrite, as the company
may not be protected in its actual investment, if the value of its property be plainly
less. So the making of a just return for the use of the property involves the recognition
of the fair value if it be more than its cost. The property is held in private ownership,
and it is that property and not the original cost of it of which the owner may not be
deprived without due process of law.
In San Joaquin Co. v. Stanislaus County (233 U.S., 454), claim was
made by the county in its efforts to regulate water rates that certain
water rights belonging to the plaintiff were acquired without invest-
ment, and the value of such rights should not be included in deter-
744
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
mining what constituted reasonable compensation for the services of
the water company. To this contention Mr. Justice Holmes said, at
page 459:
It is not disputed that the plaintiff has a right as against riparian proprietors to
withdraw the water that it distributes through its canal. Whether the right was
paid for, as the plaintiff says, or not, it has been confirmed by prescription, and is
now beyond attack.
The same principle is held in the Reagan case (154 U. S.) and the
Smyth v. Ames case (169 U. S.).
Now, gentlemen, I ask you again to assume the position as adviser
of a client with those authorities, could you advise a client to volun-
tarily surrender all of that part of the value of his property which is
measured by the increase, over and above its investment years ago
Would you justly expect a voluntary agreement to be made on the
basis of such a surrender? If you think that the principle is wrong,
you must at least admit that the contrary principle has no authority
to support it; that it is not an established principle, and now the
question comes up, with these authorities to support the property
right growing out of increased value in respect to these properties, as
well as in respect to all others, would you advice a client to sign a
paper deeding that part of its property value away? If not, if you
would not advise à client to accept that novel and unsustained
proposition, then what do we do? Where do we come to in respect
to the desirability which the Government has told you they had,
that these matters should be settled by agreement rather than by
litigation? Would you think yourself justified in the advice that
these novel and unsustained propositions of property rights should
be accepted by agreement? If not, if you could not do that, how
can you expect an agreement to be made except upon the principle
which the President has recommended to you, that the well-recog-
nized measure of the ascertained earning capacity shall be taken as
the value of its use? Is there any one of these other suggestions
which have been made which you would advise a client to accept
voluntarily?
Mr. DILLON. Mr. Thom, those authorities seem to indicate a dis
tinction between the value of use during occupancy and value of the
use at the time of taking. Is there any distinction between those
two?
Mr. THOM. I do not think that those authorities make that dis-
tinction, Judge. Of course, the authorities which I am reading to
you are in reference to a situation where the value of the whole
property is involved.
Mr. DILLON. Well, is there any distinction between those two
propositions, the value of the use at the time of the taking and the
value of the use during occupancy? For instance, suppose that
occupancy should continue five years. There might be an increase
during that period of occupancy.
Would that be a proper con-
sideration?
Mr. THOм. I think that any court in determining the value of the
use must try to arrive at what the value of that use would be during
the time of the occupancy.
Mr. DILLON. Rather than the time of taking?
Mr. THOм. Yes; and use the
as evidence of what it would be.
value at the time of taking merely
Now, the value that we are entitled
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
745
to is the value at the time of taking. When we come to determine
that question, of course, it requires a judgment as to what the value
at the time of taking is, considering a just and reasonable forecast
of the future. But the thing that we are entitled to, as has been
determined here-and I think I had better give you gentlemen the
authority it may be of some use to you-is that the value of the
property must be ascertained as of the date of taking. I will read
from section 436, of Nichols on Eminent Domain, as follows:
The value of real estate is by no means constant, and before compensation can be
intelligently assessed for the taking of land by eminent domain, a point of time must
be fixed as to which the property is to be valued. And it is the value at that time
which the owner is entitled to receive, even if the value of the land rises or falls before
the money is actually paid to him. Upon this proposition all are agreed, but there is
a great diversity of opinion as to just when that point of time occurs. It was said by
Chief Justice Shaw in an early Massachusetts case:
"The true rule would be, as in the case of other purchasers, that the price is due
and ought to be paid at the moment the purchase is made, when credit is not specially
agreed."
And if a pie-powder court could be called on the instant and on the spot, a true rule
of justice for the public would be to pay the compensation with one hand, whilst they
apply the act with the other; and this rule is departed from only because some time
is necessary, by the forms of law, to conduct the inquiry; and this delay must be
compensated by interest. But in other respects the damages must be appraised
upon the same rule, as they would have been upon the day of the taking.
This precedes the quotation from Nichols, which follows:
In cases in which the taking is effective by administrative order, leaving the com-
pensation to be subsequently ascertained by judicial proceeding, there is no difficulty
in the application of this rule, and damages are assessed as of the date of the taking.
Now, gentlemen, that becomes important in this aspect of the case.
Someone has suggested that these properties are still subject to the
power to regulate commerce; that the rates hereafter may be con-
trolled by the legislative power, and that therefore these properties
may not be worth hereafter what they have been worth heretofore.
But the principle is that you must ascertain this value at the date
of the taking, which was the 28th of December, 1917. That is the
value you are obliged to ascertain-I mean that the court is obliged
to ascertain.
Some man may say: "But those values must be fixed in con-
templation of an existing power to reduce the rates, and consequently
they are not final." My answer to that is that if that be so, they
must be taken in contemplation of an existing power to increase
the rates. It can be no more safely predicted by the one man that
the rates will be reduced than by another man that the rates will
be advanced. If they are advanced, ought we to be entitled to the
increase? This authority says, No; what takes place thereafter to
increase the value of the property is a matter of no concern to the
party who lost it on a fixed date. If it be true that we are not entitled
to the increase after that date, are we to be subjected to the con-
jecture that the values might be reduced by a reduction of rates?
Is not that whole field of what might be done in regard to the earning
capacity of these carriers involved in conjecture and doubt? And
it is so uncertain as to afford no basis whatever for an ascertainment
of the value at the time of the taking, which is now past and which
can not be reached by legislative authority. Their earning capacity
then was permitted by law. That earning capacity which was in
the hands of private owners is now beyond reach of the legislative
746 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
power, because the properties have now passed out of the private
control and operation. Are we to take that value and increase it
or diminish it according to the conjectural or prophetic anticipation
of any of us as to whether hereafter the rates are to be increased or
decreased? Or must we stand as the law says we must stand,
upon the value at the time that the property was taken from us?
Mr. RAYBURN. Do you intend to take up a new phase of the sub-
ject now, Mr. Thom?
Mr. THOм. I intended to make some recapitulation and then to
take up a new phase, and I presume it will not take me long to con-
clude; but I would rather have an adjournment now, as I am a little
tired.
The CHAIRMAN. And make your recapitulation then immediately
after recess?
Mr. THOм. Yes.
The CHAIRMAN. The committee, then, will stand in recess until
2 o'clock.
(Whereupon, at 12.30 o'clock p. m., the committee recessed.)
AFTER RECESS.
The committee reassembled at 2 o'clock p. m., pursuant to recess.
The CHAIRMAN. If you are ready, Mr. Thom, you may proceed in
your own way and in your own time.
STATEMENT OF ALFRED P. THOM, ESQ.-Resumed.
Mr. THOм. I was discussing at the hour of adjournment, Mr.
Chairman, one of the propositions that has been made in opposition
to the President's suggestion of the method of asertaining the value
of this use. The author of that suggestion, Mr. Plumb, tells me that
I attributed it to the Government instead of to him. I, of course, did
not intend to do that. That suggestion involves the acceptance of
the view that the entire interest of the carrier corporation in its
property was limited to the dollars invested, less depreciation, and
the suggestion was that.a flat percentage should be allowed upon that,
and that should be the limit of the value of the use of the carrier's
property. It also involves a novel suggestion as to the character of
the estate which the carrier had in its property. In that latter
aspect, namely, the character of the estate which the carrier has in
its property, I desire to refer the committee to the case of the Western
Union Telegraph Co. v. Pennsylvania Railroad Co. (195 U. S., 540).
In this case it was contended by the telegraph company that the right
of way of the railroad company was a public highway, and that inas-
much as Congress had granted it the right to erect poles on public
highways, that it had the right to erect its poles on the right of way
of the Pennsylvania Railroad Co. as a public highway without
securing the permission of that company. In denying this conten-
tion the Supreme Court of the United States said, at page 569:
In Sweet v. Rechel, Cherokee Nation v. Kansas Railway Co., and Kohl v. United
States, all cited supra, the property to which the constitutional protection was applied
was property in private use. Their doctrine [the doctrine of those cases] applies as
well to private property devoted to a public use. There is no difference whatever
in principle arising from the difference in the usage. A railroad right of way is a
very substantial thing. It is more than a mere right of passage. It is more than an
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
747
;
easement. We discussed its character in New Mexico v. United States Trust Co.
(172 U. S., 171). We there said (p. 183) that if a railroad right of way was an ease-
ment, it was one having the attribute of the fee, perpetuity, and exclusive use and
possession; also, the remedies of the fee, and, like it, corporeal, not incorporeal.
((
Then, after some omissions which it is unnecessary to read, the case
proceeds:
A railroad's right of way has, therefore, the substantiality of the fee, and it is private
property even to the public in all else but an interest and benefit in its uses.
It can
not be invaded without guilt of trespass. It can not be appropriated in whole or in
part except upon the payment of compensation. In other words, it is entitled to
the protection of the Constitution and in the precise manner in which protection is
given.
You gentlemen will recall that I have attempted to discuss this
case so far from a practical standpoint. I understand what the
President has determined is essential to the support of the financial
structure of this country is that this vast mass of property should
not be thrown into litigation, but that, as a means of promoting the
national welfare, of providing the Nation with financial strength
essential at this time to its existence and its power in this war, a
fair basis of voluntary agreement must be reached.
Now, in opposition to the President's proposal these gentlemen
come and say to Congress, "You must," or "You should engraft
upon your legislation novel doctrines which cut down the useful and
the valuable estate of these carriers in their properties, which require
the acceptance of new theories of property"; that demand of them
the sacrifice of the substance of their rights as at present understood,
and suggest the propriety of their agreeing to a basis never yet
entertained in any court and never yet conceded by any living
property owner.
That means that this great national emergency must be made the
opportunity of engrafting upon the substantive law of this country
new and wild theories, and those that have never succeeded in any
court, which have never yet succeeded in any legislative body, must
find at your hands the approval of doctrines in regard to substantive
and vested rights which would be destructive of their value and
would undermine the very citadel of the Nation's strength in this
time of war.
I repeat, as I said before, if these carriers were to adopt and to
accept a surrender of their rights as they understand them, to the
extent of declaring they had no estate in a certain and substantive
part of their earnings, or that their rights are confined to the actual
investment, the whole fabric built upon these securities would crum-
ble into dust, because the securities have been purchased upon a
different understanding. Money has been loaned upon them upon a
different understanding. A higher basis of value has been obtained
in all the commercial transactions on which they are based, and now
to accept these novel theories would simply be to subtract immense
volumes of value from the securities upon which the financial
strength of the Nation is built, and by wrecking the confidence of the
public in the stability of the things that they have bought and on
which they have borrowed, or on which they have loaned, would
simply be to incapacitate the country for further financial ability
in this great crisis.
748 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
The President from his great eminence sees this, and yet these
gentlemen, clothed with none of his responsibility, the disciples of
new and untried theories and principles of property, are seeking to
get you to adopt their theories in defiance of the expressed views of
the man responsible for our suggestion while we are at war, and to
plunge this nation into ruin which the adoption of those principles
would involve. They are strong men, but we must remember the old
story of the man strong enough to place his arms around the pillars
of the temple and to tear it down to ruin. But, gentlemen, he was
blind. And we stand at a period in our history fraught with anxiety
and uncertainty. We all of us ought to be marching shoulder to
shoulder, to strengthen our resources and to make us capable of
developing civilization, and that moment is seized by these gentlemen
to bring forward these untried and unsupported theories, and to
engraft them upon our legislation. Which will you follow? Will
you follow your Commander in Chief in his ideas and standards of the
measure of justice? Or will you follow these gentlemen who are
clothed with none of those responsibilities, and who are in no position
to work them out to successful termination?
Some gentlemen feel that the inequality of earnings between these
carriers requires the rejection of the standard of the demonstrated
value of the use. Some are small earners and some are large earners;
some show a small percentage on stock, and others a large percentage
on stock; some show a small percentage on property investment,
others a large interest on invested capital. An effort is sometimes
made to confuse the mind and to appall the understanding by sug-
gesting that the earnings of some of these companies show a very
large percentage on capital stock. I have one case in my mind where
perhaps there is 30 per cent shown upon the limited amount of
capital stock that the company has issued, but when we come to
property investment we find that it is 7 per cent instead of 30. But
they tell us that the property investment is not reliable; that nobody
knows what the property investment is. In a great many of the
cases that is true, if nobody knows how little it is, then likewise
nobody knows how much it is. The lack of knowledge is not simply
on the one side. The lack of knowledge is also on the other side.
The books representing what is supposed to be the cost of the
property may overstate it, but likewise the books may understate it.
As to what the values actually are will not be known for three or four
years, granting that the Interstate Commerce Commission finally
finds what they are. The original cost perhaps will be never found,
because it is an unattainable figure; but at any rate the valuation of
the properties under Federal valuation can not be known for years.
Now, are we to wait for that? Are we to wait to stabilize these
securities until that conclusion can be announced? Or are we to take
a practical view of this question, to take, as you would, in ascertaining
the value of a warehouse on Pennsylvania Avenue, find out what its
fair use has brought to the owner when he could manage it and award
to the owners of these properties that ascertained and demonstrated
use. Are we to be driven to an impractical thing of trying to wait
until this value can be ascertained by Federal means? Two years
and more perhaps have already elapsed since this valuation was
begun. I understand that the director of valuation has testified
before you that three years more must elapse before these values are
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
749
found by the Federal authorities. How can you wait for such a
standard as that? If you had it ought you to use it? Because you
are not taking the properties, you are taking their use, and we can
demonstrate the value of their use by what has taken place in the
use of them by their owners already.
Now, I was diverted from what I desired to say with respect to
how these differences arise in respect to the value of the use; why
these earnings are so different. No way has yet been found to regu-
late the charges of these carriers for use except to attach the charge
to the service. The Federal authority says how much you may
charge for carrying a passenger a mile; how much you may charge
for this commodity a mile; how much you may charge for that com-
modity-not a mile, but for the service between two points. Now,
then, they say this finding of the charge for the service is reasonable.
They can not make a different one for one railroad over what they
make for another. They can not make a different charge for the
railroad that offers the best service and carries the largest volume
of business, lower than for the one that carries less, because if the
better carrier has the lower rate, it will get all of the traffic. So that
they have to put a fixed charge for a service. Now, one carrier
serves a community where there is a vast amount of business. An-
other carrier serves a community where there is a small volume of
business. The result is that in the same charge which the Interstate
Commerce Commission says they must make, one will have large
earnings and the other small. So that in the very nature of cases
there is a difference in the legitimate earning capacity of the various
carriers. It can not be escaped without a violation of the law.
And when you find what the earning capacity of a special carrier is
at legal rates, you have at once reached a legitimate earning capacity
of that carrier.
Suppose that you had two carriers that cost exactly the same
money, but they are differently situated in regard to business. One
of them does twice the business or the other. They do it under
compulsion of law at the same rates. Now is it legitimate or pos-
sible to say that the one that does double the service must do it at
half the rate; is it necessary to say that in order to make their earning
capacity the same? But if so, what will you do? You will make
every man upon the road of large traffic get his transportation at
half the price that the man living on the road of small traffic gets it,
and you would make it absolutely impossible for the man on the
road with small traffic to compete with the man on the road with
heavy traffic. You must have equality of opportunity. To get
that you must have equality of rates for the service. And when
you give that equality of rate for the service, you are entered upon
a field, the inevitable consequence of which is that there shall be a
diversity of earning capacity, in large earnings, for the road, with a
great volume of traffic, over the road with a small volume of traffic.
So that it seems to me, Mr. Chairman and gentlemen, that from
whatever standpoint we view the principle involved in this case, we
are driven back to the soundness of the principle of determining the
value of the use as the President has suggested to you, by finding
out what is the fair demonstrated earning capacity of the carrier in
the hands of its owners.
:
750
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
And now let us look at the suggestion of the President as to the
application of this principle. It seems to me as to the soundness of
the principle there can not be two opinions. Let us look at its
application.
The President has suggested that three years be taken as the test
period, the year ending June 30, 1915, June 30, 1916, and the year
ending June 30, 1917, and the result shall be averaged. I have
already stated to the committee my view as to whether that gives.
us an adequate expression of our earning capacity at this time.
I shall be brief upon it now, because I have argued that matter before
you already.
Our objection to that is on its merits, that by taking the year 1915
you reduce what seems to me ought to be a proper standard by
$100,000,000. That was a year of great depression. The whole
cotton section of the country was prostrated because its crop could
not move. Consequently it was deprived of the purchasing power
of that crop, because there was no transportation comparable then
with the years which have followed. And the same was true of
other industries at the same time.
We think, too, that it is inadequate, because the plant that you
took over on December 28, 1917, was not the plant that made the
earnings in 1915. It is $900,000,000 greater. It was not the plant
that made the earnings in the year 1916. It is $600,000,000 greater.
And this basis makes no allowance for that improved and larger
earning plant which you receive.
Our third reason for deciding it inadequate is that, as well as we
can forecast the volume of business, the number of services that
these carriers will be called upon to perform during the period of
Government control will be at least equal to-in my opinion, will
probably be greater than in the year 1916 and in the year 1917.
The service they will render the country will not be diminished, and
if the operating ratio of those years was fair and the same operating
ratio is maintained in the coming years, the service will be as great
or greater than in those years, and much greater than in the year
1915.
Now, that is a brief summary of the reasons why we think the
application of the principle has brought about an inadequate esti-
mate of our earning capacity.
Mr. Escн. Your plan allows you some return upon investment
made since June 30, 1917?
Mr. THOм. Yes, sir; and therefore I did not mention that it was
not the same as the year ending June 30, 1917. I note that differ-
ence in the bill.
·
Mr. BARKLEY. That plant of which you speak earned about
$121,000,000 less in November last than it did in November, 1916,
did it not?
Mr. I HOм. Yes; but much more than it did in 1915.
The CHAIRMAN. That was net, though, wasn't it?
Mr. THOм. I don't know the figures. You are doubtless right as
to the figures.
Mr. RAYBURN. Mr. Thom, the earnings for the calendar year,
say of 1917, were less than they were for the calendar year of 1916,
were they?
Mr. THOM. I think likely; yes.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
751
Mr. RAYBURN. Do you think congestion had anything to do with
that?
Mr. THOм. Yes; I think it had.
Mr. RAYBURN. Well, I want to ask you another question. The
congestion in this country has been on the east and west haul alto-
gether, has it not?
MI. THOм. It has been almost entirely in the eastern section.
Mr. RAYBURN. There has never been any congestion on the north
and south hauls, that I have heard of, especially.
Mr. THOM. You mean in the southeastern district or the western
district?
Mr. RAYBURN. I mean going south. Why has it been that the
ports of the Gulf and the South Atlantic ports, where there has
never been any congestion-why haven't they been used?
Mг. THOм. Well, of course-
Mr. RAYBURN (interposing). In Galveston, now, there is no con-
gestion whatever. I understand that there is practically none in
any of the Gulf ports.
Mг. THOм. I can only give you my surmise about that, Mr. Ray-
burn, and my surmise is this, that of course you can not move traffic
to a port unless there are ships there to take it; that the railroads
did not control the ships; that there was great indisposition on the
part of shipping to go to these unaccustomed ports, and until that
could be arranged the north and south haul could not be adequately
available. I am told that the war board, the railroad management,
was attempting to bring that about at the time that the Government
control began,. and I am further told that the Director General is
now attempting to bring about the same thing.
Mr. RAYBURN. Mighty little progress has been made at it.
Mr. THOм. I don't know; but I understand that he has that earn-
estly in hand and will do all that he can. Mr. Anderson will probably
be able to tell you more about that than I can, but that is what I
understand to be the result of his testimony.
Mr. RAYBURN. It does seem to me that it will always be the case
as long as the shippers in this country and those to whom shipments
are going, and who order it, do not know that there are but three
or four ports in this country.
Mr. MONTAGUE. Have you terminal facilities in these ports sug-
gested by Mr. Rayburn?
Mr. THOM. In some of them. But that has been one of the diffi-
culties, too, Governor.
Mr. RAYBURN. There is room for 50 ships to load at one time down
there.
Mг. THOм. Some of the ports have not got adequate terminal facil-
ities. Others I think have. But there has been an indisposition to
send ships to these other ports, due somewhat to the longer ocean
voyage that it would involve in getting there, and to habits of com-
merce, desiring to go where the best facilities are-and to many con-
siderations of that character. I am very much in sympathy with
the views that it is certainly to be hoped that the result of this war
will be to distribute more equitably among different sections of the
country and different ports of the country the business of the country.
Mr. PARKER of New Jersey. How about the domestic use? I
think all commerce brought for domestic use goes to the factories of
the Northeast, but for foreign use it could go to the southern ports.
752
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. THOм. That must go, of course, where it is wanted.
Mr. RAYBURN. But what goes for domestic use does not crowd the
seaport terminals.
Mr. THOм. Now, gentlemen, I have given you my reasons why I
think this suggested amount is lower than the demonstrated earning
capacity. I would not be farnk with you-and I have made it always
a rule to be entirely frank with every committee that I have ever
addressed I would not be frank with you if I did not say that I
think this amount is a fair subject of adjustment. I do not think
the principle to which I have addressed my remarks heretofore is a
matter of fair surrender, but I think that the amount, as between
what I think is adequate and what has been suggested, is a fair
matter of adjustment. And I would find no difficulty in advising
my clients to make sacrifices from what I consider to be just, in order
to reach an adjustment on that basis.
Now, there is one other subject, and one other subject alone, on
which I wish to make a single remark, and that is the new section 14.
You gentlemen are already aware that my belief is that there should
be a limitation in time. I have sufficiently argued that already
before this committee, and I will leave it with you where I have already
put it.
Mr. MONTAGUE. Do you think the language of section 14 mate-
rially alters the original section 13 as it stood in the former draft?
Mr. THOм. I do, Governor. I think that it may have been that
the original language of section 13 would have had possibly the
effect of requiring the Government to keep these properties, and all
of them, until Congress acted. Now, as I understand Mr. Ander-
son's amendment, he gives the discretion to the President to sur-
render any of these properties prior to the action of Congress, but
does not require the surrender of them until Congress has acted.
Am I correct in stating that, Mr. Anderson?
I
Commissioner ANDERSON. Í doubt, Mr. Thom, whether you and
the governor are not rather speaking at wrong purposes. I suppose
the governor referred to the printed amendment which is in the
.redraft of the bill, which contained the caveat to the effect that this
is emergency legislation and nothing herein is to be deemed to affect
the future policy of the country. I think Mr. Thom is referring to
a further amendment which was suggested before the Senate Com-
mittee the other day, it there being pointed out that under section 1
of the act there is reference to the fact that the President has taken
over certain carrier systems, and that under section 14 he is pro-
hibited from relinquishing any of those. Thereupon I did suggest the
possibility of section 14 being further amended not now in printed
form by providing that the President might relinquish the control
of any properties, further Federal control of which he did not deem
needful or desirable.
Mr. THOм. That is what I was referring to. Now as to this amend-
ment, Governor, that you were referring to, I understand that that
might just as well have been made an independent section, as to
have been made a part of that section. I think it is a declaration of
policy intended to apply to the whole bill and to all its provisions,
and to prevent anything done in this legislation or under it from
being taken as a precedent or as a declaration by Congress of a policy
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
753
which is to be adopted for the future. I do not think it at all affects
the period of limitation.
Mr. MONTAGUE. Assuming, therefore, that that amendment-for
the sake of argument-that that amendment will be acceptable, do
you still think there should be a period in section 14?
Mr. THOм. That is my own judgment, that there should be a
period stated.
Mr. BARKLEY. But the language of the amendment as it is now
printed, Mr. Thom, does eliminate the construction that you put
upon it in the beginning, when you said that to leave section 13 as
it was meant Government ownership.
Mr. THOм. In what respect does it change from that?
Mr. BARKLEY. That it does by declaring that this does not fix the
policy of the Government-it eliminates that objection which you
had?
Mr. THOм. It does not declare any policy on that subject.
Mr. BARKLEY. You stated in the beginning that the effect of sec-
tion 13 upon the public mind meant Government ownership.
Mr. THOм. Well, my argument there was that if the possession of
this property was to be held until Congress declared otherwise, that
it made it so easy for Congress not to declare otherwise that it would
be a pathway in that direction.
Mr. BARKLEY. And that that practically meant-indefinite control
meant-permanent control?
Mr. THOM. Yes.
Mr. BARKLEY. The amendment as now printed, though, relieves
the section of that construction?
Mr. THOм. Of any declaration of policy on that subject.
Mr. RAYBURN. Well, you do not think, though, that this mere
assertion here, which is, you might say—well, I might make a speech,
and somebody else might make a speech, but the mere assertion here
that this does not mean one thing or does not mean another, that
does not have anything to do with the proposition of limitation.
It doesn't put any time limit upon the President. Mr. Anderson's
suggested amendment in the Senate just puts the President where
if he has got some little road that he wants to turn loose, he can shed
it off. But it doesn't change the principle, as it appears to me,
in section 13, at all. Before the President can be forced to turn
the railroads loose, there has got to be affirmative action on section
13, just like it is now.
Mr. THOM. I so stated, Mr. Rayburn. I think that is true, and
my answer here was in reference merely to the declaration of policy.
The practical difficulty of preventing it from being a step toward
Government ownership I think remains the same as it was before.
Mr. STEPHENS. Mr. Thom, I think I have not heard you answer
a question that was raised last week by one of the witnesses, in which
he assumed that there might be conditions after the war, and before
Congress could get to the place where it could act on this matter,
when if the Government turned these roads back, it would cause
untold injury to the roads themselves as well as to the country,
and would afford opportunity for speculation and for certain roads
to take possession of other roads, on account of market conditions,
and such things as that. Now, I think I have not heard you say
what you think about the possibility of a condition like that arising,
40958-1848
754
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
and also the possibility of Congress getting in a deadlock and not
being able to act quick enough to avoid the confusion that might
arise by these roads passing back to their original owners in case
a limitation was put in the statute.
Mг. THOм. I assume that you are referring to the views which
were expressed by the Director General before your committee.
Mr. STEPHENS. And I think also by the commissioner here, Mr.
Anderson.
Mr. THOм. I think Mr. Anderson also advanced those same views.
Undoubtedly a situation may arise where legislation may be desir-
able before these railroads can be turned back to their owners safely
I will illustrate what I mean. The financial markets of the world
are closing down to the railroads. It may be that all of the new
money that will go into them during the period of Federal control may
have to be advanced by the National Treasury. There will be two
ways by which that can be advanced. One would be to take their
long-time bonds. The other would be to lend them the money and
let it stand as a charge against them without the terms of payment
being definitely agreed upon, because it is possible to conceive that
the strongest of these roads may have to do that, because the financial
markets of the world may be closed against them. And at the end
of Government control it may become necessary to adjust with the
Government the terms of repayment of those amounts, so as to
enable them to handle this indebtedness. So that it is very possible
to conceive that some action by Congress may become very desirable,
and it may be even further said that some action by Congress might
become essential. But my view has been that there should simply
be a reasonable time for such legislation.
Mr. STEPHENS. Suppose there was a deadlock then, and we could
not get it, then what would happen?
Mr. THOм. Well, I have thought of a deadlock in the event that
you can not get legislation through to turn them back. If that
comes to be the case, of course the process of disintegration of organ-
ization and all that sort of thing is going on in the meantime, and it
would be harder the longer the time is harder to get them back
into manageable shape.
Mr. HAMILTON. Mr. Thom, if a definite time were fixed, wouldn't
there be a tendency for the adjustment of things with reference to
that time?
Mr. THOм. That has been the feeling that I have had. Now,
gentlemen, you will see that I have not been too insistent on this view
at this argument, and I want frankly to state the reason to you.
There is a possibility of a very considerable delay in this legisla-
tion, if there are many disputed and irreconcilable views. I believe
that the absolute safety of this nation depends upon quick settlement
of this matter, and there is hardly any limit to which I myself and
those I represent would not go for the purpose of getting this matter
out of the way of our National Government. My belief is, as I have
stated to you, I think there should be a limit upon this time. But
my failure to be more insistent is because of the larger question which
confronts you, with your responsibility, and us with ours, as to how
far the whole matter may be jeopardized of getting the strength under
our financial institutions of a very acute difference of opinion on
these subjects.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
755
I believe that the first need of this country now is to have a quick
and complete adjustment that will stabilize this immense financial
contribution which the railroad securities make to the strength of
this Nation.
Mr. DEWALT. May I ask one question? Would you care to express
your views as to the constitutionality of the bill unless section 14
contains some time limit?
Mr. THOм. I do not think I have any very definite view on that
subject, Mr. Dewalt. I have never studied it from that standpoint.
Mr. DEWALT. Pardon me just a moment. Conceding for the
purposes of argument that the taking over of these roads is purely
a war measure, then it seems to me that it would follow that im-
mediately upon the declaration of peace that power of control
would logically cease, subject, however, to this limitation: That
the courts would say that the control would remain for a reasonable
time thereafter, but that reasonable time, of course, would have to
to be governed by circumstances. My thought was that if no definite
time was fixed within which that discretion must be used, that it
would be against the idea of the war power from which this control
is certainly derived, and from no other source, and therefore it occurs
to me that an amendment of this sort to this section might be had;
that the control should continue until the declaration of peace, and
for a reasonable time thereafter, not exceeding so many years. It
strikes me that the Supreme Court would hold that that was certainly
a valid provision, and certainly not subject to the objection that
there is in my mind.
I only throw that out, and I only wanted to know whether you had
any ideas upon that subject.
Mr. THOм. Mr. Dewalt, that is what I had hoped that Congress
would see fit to do-just what you have said. But I have heard
the view expressed that this war power of taking these roads must
be simply during the war, and for a reasonable time thereafter;
and that if Congress should decline for more than a reasonable time
to return them, that it would be possible for them to secure the return
as a matter of legal right. Of course, that does not get us very
far, because nobody can afford to sue the Government for the rail-
roads to return them, and the litigation would probably take longer
than for Congress to settle the whole business. I refer to it merely
as the expression of legal opinion, that the duration must be, under
the constitutional law, for a reasonable time after peace comes, so
as to perfect the exercise of the war power.
Mr. PARKER of New Jersey. I find in the President's proclama-
tion the following words on page 2:
And by subsequent order and proclamation, possession, control, and operation
in whole or in part, may also be relinquished to the owners thereof of any part of the
railroad systems or rail and water systems, possession and control of which are
hereby assumed.
Those words are not in either of these bills, so far as I can dis-
cover. I would like your opinion as to whether that delegation of
power in the President's proclamation would stand, unless the bill
in some way should ratify that proclamation or that clause.
Mr. THOM. I think it would stand without a ratification. I do
not think it would stand if it was negatived by the bill. And so,
I understand that the Government itself, realizing that, has offered
756
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
ג
to the Senate committee an amendment which I understand Mr.
Anderson will also offer here, so as to bring the bill in accord with the
President's message in respect to that matter. I would rather Mr.
Anderson would speak of his own purposes, but that is the way I
interpret his action in the Senate committee.
Mr. PARKER of New Jersey. I see also that the proclamation says:
Until and except so far as said director shall from time to time otherwise by general
or special orders determine, such system of transportation shall remain subject to all
existing statutes and orders of the Interstate Commerce Commission and to all statutes
and orders of regulating commissions of the various States in which said systems or
any part thereof may be situated. But any orders, either general or special, hereafter
made by said Director shall have paramount authority and be obeyed as such.
Now, I do not find a precise statement in the bill that the roads
are to remain subject to these regulating commissions in the same
words. Do you take it that the bill in its provisions in that regard
varies that and abolishes it because there is some reference to the
Interstate Commerce Commission? Do the terms of that proclama-
tion still remain in force?
Mr. THOм. My understanding-and I hesitate very much to give
my interpretation of the Government purposes, because I do not
know them, except as they have been developed in argument. My
understanding from answers that Mr. Anderson made in my presence
before the Senate committee, is that section 11 of the bill was in-
tended to cover the law on that subject. That section provides that
carriers while under Federal control shall, in so far as is not incon-
sistent therewith-which means with such Federal control-
or with the provisions of this act or any other act applicable to said Federal control,
or of any order of the President, be subject to all laws and liabilities as common car-
riers, whether arising under statutes or at common law.
Now, I understand that the Government- as Mr. Anderson said,
in fact that the Government construes that to subject these carriers
to the control of the statutes, including the statutes of the interstate
commerce act, except in so far as that might be at variance with
the Federal control, or this act, or with some order of the President;
and that if it was inconsistent with any of those three suggested
powers, that those powers would prevail instead of the statutes
themselves. That is what I understand to be the effect, and that
I understand to be what the President said in his proclamation.
Mr. EscH. Does the proclamation broaden the act of 1916 and our
declaration of war against Germany, our declaration of war against
Austria, in respect to the power of the commission as to rates?
Mr. THOм. In respect to the power of the commission?
Mr. EscH. As to rates. Do you think that under those acts and
declarations of war, the power of the commission as to rates, is for
the time, rendered nugatory in case the Director General wants to fix
the rates?
Mr. THOм. Do you mean now without any reference as to the wis-
dom of such an exercise of power? You are asking about the power
itself?
Mr. ESCH. Yes.
Mr. THOм. My own idea about the power is that it is a war power;
that it becomes a national agency, and that that national agency,
having become the exercise of war power, takes precedence over all
statutes. That is my idea as a lawyer of the power.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
757
Mr. EscH. The proclamation contemplates that the Director
General might have such control over rates, and I was wondering
whether he could get that power in the act of 1916, or in either of the
declarations of war.
Mr. THOм. That is my view of the law, that the power follows the
war power.
Mr. MONTAGUE. The power to fix rates?
Mr. THOм. Yes; because it is a power to operate.
Mr. MONTAGUE. He gets the power to fix rates?
Mr. THOм. Yes, sir; because that is a governmental function.
Mr. DEWALT. Therefore, Mr. Thom, if we wanted to retain in the
Interstate Commerce Commission the fixing and regulation of rates,
there should be something in this bill to designate that fact.
Mr. THOM. I think that is undoubtedly the law.
Commissioner ANDERSON. May I ask Mr. Thom one question? If
you do not object, I want to ask you if there was the slightest doubt
in your view of the power of Congress under the commerce clause to
retain these interstate carriers that the Government may have taken
over under the war power? The act of 1916, of course, is a war
power. You can pass a commerce act now that would keep or take
the same interstate carriers that were taken over under the war
power, without any doubt, could you not?
Mr. THOм. Do you mean that upon making just compensation the
same power of taking over these properties could be exercised in time
of peace under the commerce power?
Commissioner ANDERSON. Yes.
Mr. THOM. I think so.
Mr. DILLON. Mr. Thom, if I understood your general trend of argu-
ment, it was that in view of the Government control that the ques-
tion of fixing of the wage for labor and of the freight rates becomes
immaterial, so far as the railroads are now concerned?
Mr. THOM. Yes; I think so. The railroads do not enjoy their reve-
nues during the time of Government control.
Mr. DILLON. In other words, the railroad companies are not now
interested in the fixing of freight rates or passenger rates or of the
rates of labor?
Mr. THOм. Not during the war period. They are interested as a
practical matter from this standpoint-
Mr. DILLON (interposing). And that if there is any loss coming by
reason of that rate fixing, that it must be borne by the public or by
the Government, and not by the railroads?
Mr. THOM. Under this scheme it would be so borne.
I was about to say the practical way in which the railroads have
an interest in this matter-when these carriers come back into the
hands of their owners, and it is of course essential to them that they
shall come back with the proper relationship between their expenses
and their revenues. If the expenses are increased without an in-
crease of the level of the rates, and consequently of the revenue,
it may be that the carriers would find it absolutely impossible to
reduce the expenses. And if they have not the power to make cor-
responding charges, private operation would become impossible.
Consequently it is of the greatest importance that when these carriers
are handed back to their owners, there should be a proper relationship
758 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
between the level of their expenses and the level of their revenues.
During Government control the burden of that falls on the Govern-
ment under this scheme. After they are handed back, that burden
becomes a burden of the carriers, and the carriers not having the
affirmative power to adjust their rates, and not having as a practical
matter the power to reduce their expenses, would be in a very serious
situation unless the due relationship between those two things was
preserved.
Mr. DILLON. Your position is that the Government must preserve
that relationship?
Mr. THOм. It ought to.
Mr. DILLON. And hands them back with that standard preserved?
Mr. THOм. With the proper relationship between those two
things.
Mr. DILLON. I want to ask you one other question. Do you think
that it is wise that Congress should expressly provide in this bill
that the Interstate Commerce Commission shall retain its rights to
fix rates-freight rates-and to perform its functions in that regard as
heretofore?
Mr. THOм. Judge, that is a matter which the carriers, I think,
ought not to express an opinion about. It is a matter between the
Government and the shippers. The result of whatever the Govern-
ment does is a matter which the shippers will be affected by. For
the carriers to intervene in that controversy would, it seems to me,
be a very improper thing; and I would like, therefore, not to express
an opinion from that question of policy, if you will excuse me.
Mr. DEWALT. One of the gentlemen who gave us his views, in talk-
ing of the surplus earnings which you referred to this morning-and
I did not care to interrupt you then gave us this idea: That he
thought it would be wise to divide the surplus earnings in due pro-
portion between the Government of the United States and the car-
riers. And he advanced this reason for it: He said that he believed
that this might arise, that if the carriers were assured of certain
compensation they might say, "Well, we have no further interest in
this matter; we are guaranteed by the Government so much for this
service; therefore the service we render, whilst it may be efficient,
perhaps may not be as efficient as it might be if we had an interest
in these surplus earnings." And he argued that the carriers by hav-
ing this incentive of gaining these surplus earnings would render more
efficient services. Furthermore, he said, that unless this division
of the surplus earnings was had, it would lead to a lack of efficiency in
the men who were the workmen upon the road; that they would not
be driven to give efficient service, and there would be laxity of dis-
cipline. Have you any view upon that subject?
•
Mr. THOM. Yes, I do not agree with that view at all, Mr. Dewalt.
Mr. DEWALT. I do not mean to say that I have given his exact
views, but I have paraphrased it as nearly as I could.
Mr. THOм. I do not agree with that view at all. I think there is a
tremendous incentive for efficient service on the part of these carriers
now. These representatives of the carriers do not all the time keep
their eyes upon the Treasury. They are men like the rest of us.
They have some conception of duty: They know that they have been
taken over as a part of a great war movement. Now, I trust their
TEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 759
patriotism and their sense of duty and their pride of country to
spur them
Mr. DEWALT. I suppose you would go further and say that you
would be willing to trust the patriotism of the men who are handling
the brakes and running the engines and feeding the fires?
Mr. THOм. That is what I say, all of them. I think that is the
incentive, and it is a tremendous inventive, and we have no right
to sit here and cast that slur upon the men who are performing the
duties, from the track men up. They are going to do their duty
during the war.
Mr. PARKER of New Jersey. Isn't there always the practical incen-
tive to the railroad company to hand back a live road to their own
people at the end of the time?
Mг. THOм. Undoubtedly that is so, and I want to say in connection
with that, what is the need now to allow these earnings, if they come
within the measure which I have mentioned of the ascertained value
of the use-what is the reason for it on the part of these carriers?
They say "every office of the surplus is now satisfied by the Govern-
ment. The Government must keep up these properties; the Govern-
ment must lend its service; during the period of the war all the things
that you have heretofore been using your surplus for are being done
by the Government. Now what is the use of the surplus ?" Gen-
tlemen, if we are not allowed during this period to provide a fund that
will take care of these companies when they come back into private
hands; if we can not accumulate something to provide for that great
contingency of increased debt, of larger commercial demands; if we
have these properties turned back to us penniless, we can not take up
and perform successfully the commercial and transporation business
of this country. We are bound to have something and to accumulate
something that will enable us to deal effectively with the situation
that will confront us when we resume the duty of doing the trans-
portation business of the public. If you only give us our interest
and our dividends, or cut down what we are entitled to accumulate
from our earnings, you are making governmental ownership abso-
lutely certain, because this country is never going to be contented with
an incapable transportation machine, and we are obliged to have some
accumulation in order to perform our duties of transportation when
the properties come back to us.
Mr. DECKER. Mr. Thom, do you agree with the statement that dur-
ing the period of control the Government will perform the functions
which are ordinarily performed out of the surplus by the companies?
Mr. THOм. I think it may or may not. I do not think it will do
it all.
Mr. DECKER. If it does its duty and as the bill says?
M₁. THOм. The bill says merely that it shall keep the property in
as good order and condition as it was before. But no property can
be efficient that does not grow over and above its previous standards
as the commerce grows and as the needs of the public grow.
Mr. DECKER. I will be frank with you. The argument ably pre-
sented here at least it seemed able to me was that if there was a
way to devise a practical monetary incentive to produce efficiency
in management it would be no more than right and wise to do so.
But I think you are a big enough man to make an argument, or make
a suggestion that was true, even though you did not agree with the
760 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
conclusion that it would lead to, so I am going to ask you another
question: Suppose that you were like myself and wanted to devise
some practical incentive, and this question of dividing the surplus
after paying dividends and interest were suggested to you, could
you meet the proposition that occurs to me, 'hat if the Government
handles the roads and diverts the traffic over a few roads, those few
roads will get all the surplus and the others would not get any—or
it might happen that way? What do you think of that?
Mr. THOм. I think that the surplus may be entirely dislocated by
the needs of the Government control and conduct of transportation.
Mr. DECKER. Do you think it is likely to be that way?
Mr..THOM. Yes, sir; I do. I think it is very likely to be. I think
that the road which to-day is, under legitimate commercial condi-
tions, earning well, may find itself to-morrow having its traffic so
diverted that its earnings will be very different and will be trans-
ferred to some other company.
Mr. DECKER. Well, how would it do to take the surplus made by
all of them and divide it between them all pro rata?
Mr. THOм. Now, let we tell you why I think that would not do.
It would not do to do that, because you have no power to take from
one what belongs to them and give it to another. The only way
that you can deal with this question as having the Government take
all over a certain amount is to get an agreement, and that agreement
vests the public with the authority to take all the earnings over an
ascertained amount. Now, can you expect an agreement which
would involve a surrender of the ownership in surplus which the
roads understand that they now have? Now, is it legitimate to
expect the roads to agree to throw away a right so substantial as
the ownership of its own earnings?
Mr. DECKER. Weil, I thought perhaps in view of the fact that
during these troublous times they get a Government guaranty
which amounts to a Government bond, to stabilize their securities;
and in view of the fact that they are guaranteed the same dividends
and interest on their indebtedness that they have had before; in
view of the fact that in England and all of the European countries
the value of all properties has decreased, that perhaps that would
not be an unfair thing to ask of them. I am just considering that.
Mr. THOM. Now let us look at that, Mr. Decker. You speak of
our receiving a Government bond, of stabilizing our values. You
are not making a permanent arrangement with us. You are making
an arrangement which may be terminated at your pleasure if this
bill stands as it is-which will be terminated at a fixed date, if you
amend section 14 to that effect. But at any rate, you are dealing
with a very brief period, considered from the standpoint of the value
of a Government guaranty. You give us your guaranty for that
brief period.
Would you like to go and buy-would any man like to go and buy
a railroad security which has the Government behind it for two years
or three years on the basis of it being a Government bond? Or
wouldn't you say "What is going to be the effect of this after I get.
the returns while the Government has it? It is coming back to me.
How I can use it I don't know. It will depend upon the conditions.
of that day. The Government makes no guaranty against that.
The Government does not make a final guaranty of payment. It
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 761
merely bridges over for the brief period of Government control the
matter of an income on the securities. When that period is over all
the desirability of the Government guaranty is gone; you are rele-
gated back to getting the money out of your bonds or out of your
stock to commercial conditions which you can not foresee." And
the theory that we are getting a Government bond or a Government
guaranty that means anything to us except for the brief period that
this Government control lasts is misleading, as it seems to me, in
the last degree. We are getting nothing of the sort. All that we
get is a return during the brief period the Government controls us
and then for our values and for our incomes we are thrown back
upon ourselves with all the uncertainty of the future and all its
hazards. Now that seems to me to be a very different proposition,
and my plea to you is in the matter of justice not to turn these
properties back to us penniless. If our earnings will justify our
having a fund when your guaranty is gone and our responsibilities
are resumed, then do not return them to us incapacitated to perform
their duties with their securities undermined and their credit gone.
The CHAIRMAN. Turn them back in a shape to remain penniless?
Mr. THOм. Yes, sir. And consequently it seems to me that we
must not for a minute indulge the view that we are getting or that
we are offering or that we are guaranteed a Government security.
The Government when it issues its bonds agrees to pay them and
meanwhile to pay interest. When you give us this guaranty all
you do is to say that if your earnings are sufficient during the test
period we will take care of the interest during that time. But when
you return the properties to us you get from behind our securities.
You are not responsible for that principal; you are no longer responsi-
ble for the interest and you return them back to us with all the
hazards and with the future unknown, and unless you give these
earnings which we are entitled to with the future unprovided
against-
Mr. DOREMUS (interposing). In answer to a question propounded
by Commissioner Anderson I understood you to say that in your
opinion Congress at the conclusion of the war could, under the com-
merce clause of the Constitution, continue the same power that the
Federal Government is now exercising as to interstate trade.
that correct?
Mr. THOм. I think that Congress can condemn an interstate
carrier, or condemn its use, for a limited period under the commerce
power.
Mr. DOREMUS. Well, if that is so and Congress at the conclusion of
the war should decide to continue Federal control, how would the
railroads get their property back?
Mr. THOм. How would they get it back?
Mr. DOREMUS. Yes.
Mr. THOм. They would have to pay just compensation for it.
Mr. DOREMUS. I understood you to say, in answer to Mr. Ander-
son's question, that the same powers that were now exercised in time
of war could be exercised in time of peace under the commerce
clause of the Constitution. Wasn't that the question you asked, Mr.
Anderson?
Commissioner ANDERSON. That is pretty close to it, I think.
762
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. DOREMUS. And I understood Mr. Thom to say that Congress
had that power.
Commissioner ANDERSON. Essentially that was the statement.
Mг. THOм. I mean this: Suppose that it was a time of peace. Sup-
pose that the railroads had not been taken over; suppose Congress
were to declare in favor of Government ownership?
Mr. DOREMUS. I am not talking abour Government ownership.
Mr. THOM. I am getting to it-declare in favor of Government
ownership Congress could either agree with the roads to purchase
them or could send them through the condemnation tribunal for the
purpose of ascertaining what the just compensation is.
Suppose that Congress, in the fair exercise of its power, under the
commerce clause, should find a situation in which it deemed it neces-
sary to take possession of the roads for a definite period instead of
taking the fee in them; that they might find a situation of congestion
in which the business of the country was not being done, and it might
come to the conclusion-Congress might come to the conclusion that
in order to deal with that congestion they would take over these
roads for a year.
Mr. HAMILTON. That would be the regulating power.
Mr. THOM. Under the regulating power, and would then provide,
either by agreement or by proper judicial proceedings, for payment
for the use of them for a year. In my opinion they could do that
under the commerce power, as much as they can under the war power.
The CHAIRMAN. They could do that in time of peace?
Mr. THOм. They could do that in time of peace under the com-
merce power.
Mr. DOREMUS. If Congress could do it for a definite period under
the commerce clause, why couldn't they do it for an indefinite period?
Mr. THOм. I think they could, upon paying. I think whether it
is a definite period or an indefinite period would merely affect the
question of compensation. If you did it for a year you would have
to find out what the value of that use was for a year. If you made
the period indefinite, you might have to pay for the fee, because
would have there a right to keep them for all time, and that might
be equivalent to the taking of the fee. But that would affect merely
the question of compensation.
you
Mr. BARKLEY. It would not reach the question of power at all?
Mr. THOM. No; it would reach the question of compensation.
Mr. DOREMUS. You did not understand my question. It was not
to the question of Government ownership at all. It was merely a
question of the power of Congress to continue this present situation
after the war is over under the commerce clause of the Constitution,
and I understood you to say that you thought Congress did have that
power.
Mr. THOм. Well, I answered it in this view: I don't mean to say
that Congress, without action at all, can continue as a regulating
power the possession of these properties during times of peace for
an unreasonable period because you have undertaken to exercise a
war power. The compensation which you are paying depends upon
the power which you have undertaken to exercise. It depends
upon the period which is set for it. Now, when you have once set
that, and that compensation has been paid, that satisfies that situa-
tion. Now suppose you want to establish a new status, and you
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
763
appeal to the commerce clause for authority to do it, then you will
have to provide anew for the compensation that arises under that
new status and to be proportionate to the requirements of the new
status.
Mr. DOREMUS. Just let me ask you one more question: Supposing
that at the termination of the war Congress, the public, and the rail-
roads, want government control to continue. That possibility may
arise. If that situation should arise, what do we gain by fixing in
this bill a definite time within which Federal control must cease?
•
Mr. THOм. I can tell you what I think you gain, Mr. Doremus.
I think you gain the opportunity of dealing with that question on the
merits when it arises. Now, at this time, you are face to face with
a great war emergency. You are dealing with that in view of the war
emergency. Now, all of us, it seems to me, ought to be able to deal
with a new emergency under the conditions of the merits of the case
as it is then presented.
Mr. DOREMUS. I agree with you there. That is the reason why I
can not think we ought to fix any definite time.
Mr. THOм. That you do not think you ought to fix any definite
time?
Mr. DOREMUS. No. That is my view of it now.
Mr. THOM. Well, I have given my reasons why I think the definite
time desirable.
Mr. RAYBURN. Outside of the war power, the exercise of the power
under the commerce power, do you think that would have to be
exercised for a definite period?
Mr. THOм. For a definite period or indefinite, and if an indefinite
period, then that means the fee.
Mr. RAYBURN. I meant tenure subtracted from ownership. In-
definite tenure is equivalent to ownership.
Mr. THOм. Indefinite tenure is equivalent to ownership, and there-
fore your compensation would be determined by whether it was a
fee or whether it was for a definite period.
Mr. MONTAGUE. Mr. Thom, I understand from you that under
the commerce clause of the Constitution, irrespective of war, Congress
could assume Government ownership and operation of all the railroads
of this country.
Mr. THOм. That is my judgment, although there is a very interest-
ing argument made on that subject by Senator Sutherland, in which
he takes the other view. I do not agree with that view. I think it
.can.
Mr. MONTAGUE. Now, secondly, if the Government has the right to
do that, it has the right to do the lesser thing, namely, to regulate it
without ownership. That is your argument and construction?
Mr. THOм. Yes, sir.
Mr. MONTAGUE. But, broadly speaking, you think the power to
regulate would carry with it the power to own?
M. THOM. I do.
The CHAIRMAN. Mr. Thom, I am satisfied that every member of
the committee feels very much gratified that you have appeared before
ns and made your statement so clear, whether they agree with you or
not.
Mr. THOм. I thank you very much, Mr. Chairman.
764 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
The CHAIRMAN. Now, gentlemen of the committee, Judge Cowan
and Mr. Thorne and Mr. Plumb have all appeared before the com-
mittee, and they now wish to make some additional and supplemental
statements All three of them are here, and for the rest of the
afternoon they may have all the time. I would just ask you three
gentlemen, if it is satisfactory to you, Mr. Anderson, that you agree
among yourselves who shall appear this afternoon before the com-
mittee. You all stand in exactly the same light before the com-
mittee.
Mr. RAYBURN. How much time do you want, Mr. Plumb?
Mr. PLUMB. I should like about 30 minutes. But I would like
to state that Mr. Thorne has to leave this evening, and I would
like to suggest that he have the privilege of being heard first.
The CHAIRMAN. How does that suit you, Judge Cowan?
Mr. COWAN. That is satisfactory to me.
The CHAIRMAN. Very well; you may proceed, Mr. Thorne.
ADDITIONAL STATEMENT OF CLIFFORD THORNE.
Mr. THORNE. Mr. Chairman and gentlemen of the committee, it is
with considerable hesitation that I have asked for an opportunity of
replying to the argument that has been made. The committee was
exceedingly generous at the former hearing. I have no speech to
make to you. I have no additional exhibits to present to you, but
there are some phases of the question at issue that I want to talk
over with you briefly this afternoon. Whatever I may say I do not
want to reflect in the slightest extent upon either the representatives
of the carriers or the gentlemen who drew the major portion of this
bill. I have the very highest regard for these gentlemen, and what
I say must not be interpreted as reflecting on their motives. Mr.
Anderson has shown a magnificient candor and frankness in discussing
the bill-willing to amend it in places-and Mr. Thom has honestly
and frankly stated the position of the carriers.
However, there is a difference of viewpoint. The carriers and the
public have interests that are diametrically opposed on one subject.
That is the matter of compensation. There is nothing dishonest
about it. They want to secure just as much as they reasonably can,
so it does not violate what they concede to be the principles of
justice. It is to the public interest to get transportation service on
as reasonably low a basis as will not seriously interfere with the
growth and development of the railroads, and which will not render
injustice to them. It is the same old principle of purchaser and
seller that exists in all business.
Mr. Thom, for the carriers, stated in substance that we ought to
agree on the compensation; that it is our duty in face of the war
emergency to come to an agreement without a prolonged litigation.
Scarcely are those words out of his mouth when he says, "If you
don't agree to the adoption of the demonstrated earning capacity
of the carriers we can not agree."
I say, gentlemen, the issue is not what this gentleman, as counsel
for the railroads, says we must agree to. The issue is what
plan will be fair and just? If we can then agree, very well and
good; if we can not agree then it must go to the proper tribunal to
be decided. This gentleman has described the suggestions that have
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
765
been offered as "novel." He has stated that we have been unable
to get any legislative body or judicial tribunal to adopt these sug-
gestions; he has stated that it means ruin to the railroad industries.
I have used his exact words. I desire to consider those two proposi-
tions.
He has discussed the questions broadly from the standpoint of
what is their legal right, as well as from the practical standpoint,
and we want to consider the subject from both of those viewpoints.
I have in my hands drafts of bills that I understand Senator Cum-
mins and Mr. Esch are going to offer. They, as I understand it, are
alternative propositions.
Mr. MONTAGUE. Bills or amendments?
Mr. THORNE. Amendments to the bill. This is the first alternative:
Insert, before the sentence commencing with the words "the stand-
ard return," in line 17, page 2, the following:
Provided, however, That the standard return to any such carrier whose average rate
of net income to capital stock for the three years aforesaid has been more than
five per centum shall not exceed the net railway operating income for the year nine-
teen hundred and seventeen, after deducting therefrom the amount available out of
earnings for investment and surplus: Provided, however, That this further limitation
shall not reduce the net income (above all operating expenses, taxes, interest, and
all other fixed charges) of any such carrier below what is required to meet its regular
dividend accruals on all capital stock outstanding December thirty-first, nineteen
hundred and seventeen. The earnings of the property over and above the standard
return as so computed shall be paid into the revolving fund hereinafter created, or
such part thereof as may be necessary shall be used in additions, betterments, and
extensions to said property. All of said property constructed out of or purchased by
the said surplus earnings shall belong to and shall be held in trust for the public,
and no return to any railway company or its assigns shall ever be paid thereon.
The other alternative is substantially like that which I have just
read, excepting it provides for a division of the surplus. It may be
better understood if I should read the whole document rapidly:
Provided, however, That the standard return to any such carrier whose average rate
of net income to capital stock for the three years aforesaid has been more than five per
centum, shall not exceed the net railway operating income for the year nineteen hun-
dred and seventeen, after deducting therefrom the amount available out of earnings
for investment and surplus. Provided, however, That this further limitation shall not
reduce the net income (above all operating expenses, taxes, interest, and a'l other
fixed charges) of any such carrier below what is required to meet the regular dividend
accrua's on all capital stock outstanding December thirty-first, nineteen hundred and
seventeen. The surplus over and above the aforesaid standard return shall be divided
as follows: One-half shall go to the company earning such surplus, and the balance
shall be paid into the revolving fund created by this act, all of said surplus and all
property constructed out of or purchased by the same shall belong to and shall be
held in trust for the public, and no return to any railway company or its assigns shall
ever be paid thereon.
Commissioner ANDERSON. May I ask a question there, Mr. Chair-
man? Am I correct, Mr. Thorne, in understanding that you mean by
that I want to get this before I leave as I understand that plan it
leaves each separate carrier interested in the earnings during Federal
control, so that the men who remain corporation officials, the same
personnel will remain largely in charge during Federal control as are
in charge during private control, and will be interested, as now, in
getting all the traffic possible, in getting as high rates as possible in
every aspect of operation, except that they only get one-half of the
surplus earnings, whereas under the present private divided control
they get all the surplus earnings. Is there any other difference?
If there is, I would be glad to understand it before you leave town.
766
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. THORNE. One alternative makes no provision whatever for
the carrier having any share of the earnings. That is the first docu-
ment that I read.
The other one does provide that the carrier making the earnings
gets one-half of the surplus.
Mr. BARKLEY. That means a surplus over and above the standard
return?
Mr. THORNE. Over and above the interest and dividends, yes, sir;:
the standard return for the carriers earning over 5 per cent net shall
be defined as the fixed charges plus dividends.
Commissioner ANDERSON. Standard return, as we have defined it
here, based on three years' net earnings, goes out entirely under your
plan, does it, your standard return of fixed charges and regular
dividends?
Mr. THORNE. Oh, no; you have not grasped the full force of it
yet, Mr. Anderson. The standard return remains just as it is in the
bill for all carriers earning 5 per cent or less on their capital stock.
And for all others the standard return is reduced-I mean the amount
provided in the bill is reduced-by the amount of the surplus in
order to produce a standard return for those carriers.
The CHAIRMAN. Making over 5 per cent?
Mr. THORNE. Yes.
Mr. BARKLEY. In other words, your amendment would guarantee
them 5 per cent if they had been heretofore making more than 5 and
would divide all above 5 per cent between the Government and the
roads?
Mr. THORNE. No. Let me state it with a concrete illustration. All
carriers earning 5 per cent or less on their capital stock would
continue under the plan of the bill, the thought being that in order
for the Government to share any of the surplus it must be a surplus
over a reasonable dividend, and if a carrier has sacrificed its divi-
dends it does not have a surplus under the interpretation of that
term as made by the courts, commissions, and railway officials.
Now, for a carrier earning more than 5 per cent on the capital stock,
it does not say that they shall not receive any over 5 per cent. It
says the net railway operating income for 1917, less the surplus for
1917, shall be the maximum, representing the standard return; that
the surplus over that shall be divided equally as I have described.
Now, as to a given carrier, for instance, the Burlington earned, I
believe, 22 per cent on its capital stock during the last three years.
The dividends of 8 per cent would continue to be paid by the Burling-
ton and its interest and its fixed charges. The surplus of 14 per cent
would be divided equally, 7 per cent going to the carrier and 7 per
cent to the Government, to take care of other properties or for reserve
cash to take care of the guaranty. The improvements built out of
this surplus, either by the Government or the carrier, should not be
capitalized in the future. This does not affect surplus that has been
accumulated in the past. It refers to the surplus accumulated
during the period of the war.
Now, what will be the effect of that?
Mr. COWAN. What do you mean by 1917, the calendar year?
Mr. THORNE. Yes; it says so. The idea of taking the 1917 figure
was to include all the capitalization that was outstanding December
31, 1917, and it simply reduces the standard. It makes the standard
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 767
return only include a guarantee of operating expenses, taxes, interest,
fixed charges, and dividends. It only takes the balance, over and
above that, so that the carrier is assured of that return, and before
I get through I will show you that is a more liberal return—that is a
more liberal guarantee than Great Britain has given. I will also
show you that that idea is not novel by any manner of means.
Most of you gentlemen heard my testimony the other day. I do
not want to bore you with a repetition of the extracts from the
record, but as typical, representative of that testimony, I want to
read you one of these passages which I read to the Committee on that
occasion. Mr. Ripley on the stand in 1911 testified concerning this
very subject, the right to the surplus over a reasonable dividend.
I can not conceive of how any railroad counsel or any man in the
railroad industry would dare to brand this as a novel idea which
would mean ruin to the carriers. Here is his testimony:
Mr. LYON. But, take the condition of a road, we are assuming, as the case where
you have a dividend of $10,000,000 and you collect from the punlic an additional
$10,000,000, and that pays for all necessary improvements demanded by that particular
line of railway?
Mr. RIPLEY. Well, it might.
Mr. LYON. I said assume that it would.
Mr. RIPLEY. Yes.
Mr. LYON. Then, in the future in determining the rate you would not consider the
value of that property acquired through the $10,000,000, taken from the public pre-
viously for that purpose?
Mr. RIPLEY. No.
Mr. Lyon. And then your rates would be based upon the original investment?
Mr. RIPLEY. My rate would not be based on any investment whatever.
Mr. LYON. I understand; but I mean from those who possibly have a different view
and following the usual method of determining what should be the return upon prop-
erty or an investment, they do take into consideration, and to that class of people you
would not have them consider this money taken from the public and invested for
public purposes?
Mr. RIPLEY. No; the public would get the benefit of it and get much the best of it.
Mr. Lyon. It is their money, and they have invested it, and you would not expect
any return upon it?
Mr. RIPLEY. No.
Now, gentlemen, that did not refer to a condition which we are
going to have during the next three years, when their dividends and
interest are guaranteed. That did not refer to a period when the
Government undertook to maintain the property and to turn it back
at the end of the period in just as good condition as it was in the be-
ginning. And that did not refer to a period when the Government
guaranteed to let them have all the money that was necessary to
buy improvements and construct extensions. That was under private
operation when there were no such guarantees, I say the reasons
why that principle should be followed during the next few years while
we are in this war are doubly cogent.
Counsel for the railroads has read an extract from the Spokane
Rate case, written by Mr. Commissioner Prouty. I am not going into
a discussion of that rate case, save to suggest to your minds there
were such peculiar facts there in relation to the situation between the
Northern Pacific and the Great Northern, and it involved one of
those carriers. There may be facts that would make the guarantee
here proposed inapplicable under certain conditions. I am not
going into the process of reasoning before Mr. Commissioner Prouty at
that time. I don't know the precedents and the admissions of
768
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
•
!
railroad officials that were presented to him for consideration. But
I do know this, gentlemen: Mr. Prouty himself, on a later occasion,
in another case, writing an opinion for the Interstate Commerce
Commission, unanimously decided by the commission, stated the
following:
Those who oppose the increase in these rates answer that improvements of this
character, which add to the permanent value of the property, ought not to be paid
from the current returns of the railroad, but should rather be paid out of new capital,
and they point to the previous decisions of this commission and to the approval of
those decisions by the Supreme Court of the United States as confirming their position.
Then he discusses the Yellow Pine Lumber case, which holds that-
Instrumentalities which are to be used for years should not be paid for by the
revenues of a day or a year, and this is the principle of returns upon capital which
exist in durable shape.
Summarizing these decisions, the commission stated, in the language
of Mr. Prouty—
It would appear, therefore, that both the courts and the commission are committed
to the proposition that in fixing a fair return upon railroad properties for the purpose
of determining whether a given advance is reasonable the railway ought not to treat
as a part of its operating expenses the cost of permanent improvements or extensions—
And, mark you--
This must of necessity mean that the rates should not be sufficient to allow both the
payment of dividends to stockholders and interest to bondholders and an additional
sum for the purpose of improving and increasing the value of the property. Theo-
retically this would seem to be just. Each generation may well be required to bear
its own burden, and the stockholder should not obtain both an adequate dividend
upon his stock in addition to the value of his property.
In regard to the question of public policy involved, the commission
concluded in the following language:
It is evident that until the status on which a surplus is determined by legislative
action or judicial interpretation, this commission can not properly permit an advance
in rates with the intent to produce an accumulation of surplus for this purpose.
In the western case, decided unanimously by the commission on
the same occasion, Mr. Lane wrote the following passage:
There is no justification for the investment of surplus if it is to have the effect of
increasing the rates upon the shippers over the original line. If the theory is to be
recognized that by increasing the value of their property, by putting back operating
revenue into the property, the carrier may as a legal right increase rates, then the ship-
per is worse off each time he pays a rate which allows a revenue over and above a rea-
sonable return upon original investment.
The concrete effect of this bill as now framed in the amended
form will be-if Mr. Anderson's views are adopted by the com-
mission-that any deficit in meeting this guaranty should be made
up by an advance in freight rates. Mr. Anderson stated before the
Senate committee that the railroads must be self-sustaining. It
means if the Government gets the same rate that the ordinary shipper
has to pay, that the Government will get special expedited service,
discommoding other people, putting off passenger trains and put-
ting off other freight trains, and the extra cost of this special expe-
dited service will be borne by the shipper. It will mean, under the
provisions of this bill, that a return upon the value of all additions
and betterments built out of surplus must be paid, as provided in sec-
tion 4 of the bill.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
769
Commissioner ANDERSON. Ought you not to add to that, Mr.
Thorne, "Built out of any part of the standard return; not paid out
of revenues from leased line rents, interest, and the regular dividends,
and any other dividends which may be permitted by the President
under section 5?" Surplus, as you have been arguing it-and there
was a great mixing up of the two things when Mr. Thom was arguing
it-that is an entirely different thing from something left out of the
standard return after the regular charges have come out.
Mr. THORNE. Is there anything here confining the return to be used
on improvements to those built out of standard return? Is there any
clause in that bill as you have now framed it that does not give to the
carrier the entire surplus, whether it is in his standard return or not?
Commissioner ANDERSON. Oh, certainly there is.
Mr. THORNE. Where is the clause?
Commissioner ANDERSON. All the money coming into the carriers
the minute the trade was made, and even before the trade was made,
is Government money. Those that trade get the basis of the trade,
to wit, the standard return, as their entire compensation. Whether
the returns accruing on the operation of that particular carrier are
more or less is immaterial to that carrier. Every other carrier whose
just compensation is settled by due process of law is likewise limited
to that just compensation. The Government continues to make
rates, and what we have hitherto called surplus no longer has it a
being. There may be what I call in the original draft "excess earn-
ings" on all the carriers, or there may be a deficit if the roads should
not be made self-supporting. But there no longer is anything under
Federal control to which the word "surplus" applies, except to such
balance as may remain in the standard return accruing to the more
prosperous carriers in excess of the fixed charges and the regular
dividends that they have hitherto been paying; and we ought not to
mix the two things up in the discussion again. Pardon me again for
interrupting you, but the fact that you are going to-night makes it
fit, I think, Mr. Chairman, that I should have an understanding with
Mr. Thorne.
Mr. THORNE. I am very glad, indeed, to have you do so.
Mr. THOм. Who has the right in the bill to the excess over the
standard return?
Commissioner ANDERSON. The Government.
Mr. THORNE. The bill as originally framed had a clause to that
effect in section 1, which has been omitted in the redrafting.
Commissioner ANDERSON. Simply because apparently it was surplus,
and the results necessarily are the same. It has not been omitted
because of any change in the financial result intended.
Mr. THORNE. Frequently ambiguities creep into an act. I believe
that the specific language might help. But however that may be,
Mr. Anderson, as to my use of the word "surplus," kindly under-
stand it to mean the use of the term as adopted by Mr. Ripley and by
the commission in former decisions, and not the surplus above your
standard return in this bill.
Commissioner ANDERSON. Or in the standard return, which?
Mr. THORNE. Neither. I am not referring to either one.
Commissioner ANDERSON. Well, the old-fashioned surplus you and
I both understand.
40958-18-49
770 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. THORNE. I am talking about the use of the word "surplus,'
Mr. Anderson, in the old-fashioned sense. It is surplus over reason-
able dividends.
I have read to you testimony of Mr. Ripley and the statement of
Mr. Prouty. Now, counsel for the carriers have cited to you a decision
of the Supreme Court of the United States in the Monongahela case
(248 U. Š.).
Mr. THOм. One hundred and forty-eight?
Mr. THORNE. Yes; 148. He cites this decision in support of the
proposition that a company has a franchise of value which is re-
flected in the earnings, and that you can not take that franchise value
away without just compensation. I need not refer to the numerous
decisions upon that proposition involving the taking of purely pri-
vate property. There will be no difference between us on that
score, I presume. It would not be applicable to the subject here
under consideration.
Let us see whether that doctrine is sound, that in taking the prop-
erty or the use of the property the company is entitled to consider as the
value of the use, the demonstrated earning capacity. I think I have
fairly stated the thought. In 212 United States the Supreme Court
in the Consolidated Gas case had that very proposition submitted to
them, and the Monongahela case was cited as a precedent in support
of the proposition. This is the way the Supreme Court dealt with
the issue [reading]:
Mr. SNOOK. What page is that?
Mr. THORNE. Page 44-
It can not be disputed that franchises of this nature are property and can not be
taken nor used by others without compensation. [Citing the Monongahela Co. v.
The United States, 148 U. S., 312; and People v. O'Brien, 111 New York, 1.] The
important question is always one of value. Taking their value in this case as arrived
at by agreement of their owners at the time of the consolidation, their value has been
increased by the finding of the court below, the sum of $12,000,000 at the time of the
commencement of this suit.
Just a word in explanation before I read further. In New York
they had a provision for the determination of the value of the prop-
erty by consolidation, a statute or provision which was followed in the
consolidation resulting in the Consolidated Gas Co. corporation, and
the securities were dealt with on the market on the basis of that
value. That value was approximately $7,000,000. The consolida-
tion occurred, and the agreement which I have just referred to con-
sumated in 1884. Now, in 1905, or thereabouts, the company came
in with the claim that their business had increased since 1884-
trebled or quadrupled, whatever it may be and that therefore the
company was entitled to an increase in value of that franchise in
harmony with the business that they were doing. Here is what the
court said, the trial court:
If, however, complainant's franchises were worth $7,781,000 in 1884, and the
tangible property at the same time appraised, as appears to me, at $30,000,000, in
round figures, then since complainant's business in sales volume has in 23 years
almost quadrupled, and its tangible assets grown to $47,000,000, it appears to me that
a fair method of fixing the value of the franchises in 1905 is to assume the same grow th
in value for the franchises as is demonstrated by the evidence in the case of tangible
property. If, therefore, the franchise valuation of 1884 was proportionate to realty
of $30,000,000, a franchise value proportionate to $47,000,000 in 1905 would be over
$12,000,000. This I think a logical result from the assumption I am compelled to
start with; that is, that franchises have a separate and independent value. But there
is, however, no method of valuing franchises except by a consideration of earnings.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
771
Now, I think that the trial court in those terms adopted exactly,
almost, the position that Mr. Thom has presented to you, and has
adopted precisely the position taken by the Consolidated Gas Co. in
that case, which was sustained by the lower court and reversed by
the Supreme Court. The trial court continues:
Earnings must be proportionate to assets, and both kinds of assets, tangible and
intangible, must stand upon the same plane of valuation. Having, therefore, a meas-
ure of the growth of tangible assets from 1884 to 1905, the franchise assets must be
assumed to have grown in the same proportion. I find that the value of complain-
ant's franchises at the date of inquiry was not less than $2,000,000, making the total
valuation $59,000,000, upon which property the return was $3,000,000, or very con-
siderably less than 6 per cent.
The corporation commission reduced the price of gas to 80 cents,
thereby producing a return which was less than 6 per cent on this
value. The Supreme Court then states:
The judge stated his own views as opposed to including these franchises in property
upon the value of which a return is to be calculated in fixing the amount of rates, but
held that he was bound by decided cases to hold against his personal views. We
are not prepared [says the Supreme Court] to hold with the court below to the increased
value which it admitted to the franchises. It is not only too much a matter of pure
speculation, but we think it is also opposed to the principle upon which such value
should be made. This corporation is one of the class which is subiect to regulation
by the legislature in the matter of rates, provided they are not so low as to be con-
fiscatory. The franchises granted various companies and held by complainant con-
sisted in the right to open the streets of the city and lay down mains and use them to
supply gas, subject to the legislative right to so regulate the price for the gas as to per-
mit not more than a fair return, regard being had to the risk of the business, upon the
reasonable value of the property at the time it is being used by the public. The
evidence shows that from their creation down to the consolidation in 1884 these com-
panies had been free from legislative regulation upon the amount of the rates to be
charged by them for gas. They have been prosperous and have divided very large
earnings in the shape of dividends to their stockholders; dividends which are charac-
terized by the Senate Committee appointed in 1885 to investigate the facts surrounding
the consolidation, as enormous. The report of the committee showed that several
companies averaged from their creation dividends of over 16 per cent, and six com-
panies in the year 1884 paid dividends upon capital which being increased by earnings
in the case of the Manhattan of New York amounted to 18 per cent, and had it been
upon money actually paid in, it would have been nearly 25 per cent.
I will omit then a certain passage, going down to what I think is
pertinent to the subject under consideration:
"This price may have been too high and the dividends were excessive," said the
committee making a report in 1884, “but they were not illegal, and the valuation of
the franchises computed upon these dividends, and this state of facts can not be called
a violation of the law that expressly authorizes it to be done, unless such valuations
was too high.'
""
The Supreme Court then states:
We think that under the above facts the courts ought to accept the valuation of the
franchises fixed and agreed upon under the act of 1884 as conclusive at that time.
The valuation was provided for in the act, which was followed by the companies,
and the agreement regarding it has always been recognized as valid, and the stock
has been largely dealt in for more than 20 years past on the basis of the validity of the
valuation of the stock issued by the company, but although the State ought for these
reasons to recognize the value agreed upon in 1884 as part of the property upon which
reasonable return can be demanded, we do not think an increase in that valuation
ought to be allowed upon the theory suggested by the court below. Because the
amount of gas supplied has increased to the extent stated, and the other intangible
property of the corporations has increased so largely in value is not, as it seems to us,
any reason for attributing a like proportional increase in the value of the franchise.
Real estate may have increased in value very largely, so also its personal property,
without any increase in the value of the franchises. Its past value was founded
upon the opportunity of obtaining these enormous and excessive returns upon the
772
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS,
property of the company, without legislative interference with the price for the sup-
ply of gas, but that item for the future was of course uncertain, and the moment it
ceased and the legislature reduced earnings to a reasonable sum, the great value of
the franchise would be at once unfavorably affected, but how much so it is not for
us now to see. The value would most certainly not increase. The question of the
regulation of rates did from time to time thereafter arise in the legislature, and finally
culminated in the acts which were in existence when the court below found the
increased value of the franchises. We can not in any view of the case concur in that
finding.
The court then confines those words to the particular case then
under consideration, and does not attempt to make any hard and fast
rule on the whole subject.
I call your attention to the fact that the court did not consider the
trebling and quadrupling of the business of this company as any
justification for an increase in the value.
Concerning that reasonable rate of return, before I forget it, the
rate in this case was approximately 5 per cent. In discussing that
the court has this very significant comment:
There is no particular rate of compensation which must be in all cases and in all
parts of the country regarded as sufficient for capital invested in the business enter-
prise, and such compensation must depend greatly upon circumstances and localities;
and among other things, if the amount of risk in the business, a most important factor,
as well as the locality where the business is conducted and the rate accepted and
usually realized there upon investments of a somewhat similar nature, with regard to
the risk attending them.
Mr. DILLON. May I ask you a question there, Mr. Thorne? How
is the question of franchise material under the terms of this bill?
They are to be paid according to what they have been earning. Now
that franchise proposition does not enter into the question, does it?
Mr. THORNE. In order to determine the value of the use it is sug-
gested that you should take their demonstrated earning capacity.
say that in the Consolidated Gas case, in determining the value of
the property, they declined to accept the demonstrated earning
capacity as the standard. There are other bases for the determina-
tion of the compensation that should rightfully go to the companies.
Now, what are the elements that should be considered? We are not
only giving to the companies so much money and taking the title, but
we are leaving the title in the possession and ownership of the com-
pany. Any increase in the value of that property held under that
title will accrue to the company and not to the public. Therefore I
say
Mr. DILLON (interposing). You are dissatisfied entirely with this
measure, if I understand you, then, as provided in the bill?
Mr. THORNE. I am very much pleased with the taking over and
the operation of the railroads. The calamity and the emergency
facing us demanded it. As to the amount of compensation, I think it
is excessive for the larger companies that have been making exces-
sive earnings. Under private operation the weak line argument has
been a powerful factor. Rates have been placed high enough to
yield adequate returns to the weak systems, regardless of the earn-
ings to the great companies. The result is that such companies as
the Union Pacific have been able to declare enormous dividends, not
only, of course, out of earnings on the property, but investments in
other railroad properties.
If this bill becomes a law, you will guarantee a return to the roads
handling two-thirds of the traffic in the eastern district 10 per cent
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
773
and over on all of their capital stock outstanding in the hands of the
public.
Mr. THOм. Mr. Thorne, you did not mean, I suppose, to say to the
committee that the rates had been fixed on the weak lines? You
are acquainted with the fact that in the Eastern Rate case they took
three roads as typical-the New York Central, the Pennsylvania, and
the Baltimore & Ohio. They did not take simply the weakest lines.
Mr. THORNE. I stated this, that the weak line argument had been
a powerful factor in forcing rates up in certain localities. That
proposition, I think, will not be questioned by you.
Mr. DECKER. Right there let me ask you one question: Do you
maintain that under this bill as amended the railroads will get more
than they have been getting on the average for the last three years?
In other words, I got the idea from some witness-I don't know
whether it was you or not-that by the way the Government will
take care of the roads and perform the function that surplus has
performed heretofore that under this bill the railroads get to keep
their surplus and put it in their pockets. Is that the idea? Or is
that exactly right?
Mr. THORNE. There is no question but that you are absolutely
correct; that under the provisions of this bill the railroads are getting
more than they did before, in this way: Before the Government took
over the operation of the railroads they accumulated this surplus
for the purpose of stabilizing the values of their securities, of building
nonrevenue-producing improvements; creating this fund to tide
them over lean years. Now, the Government is doing that precise
thing under the provisions of this bill, and in addition to that
Mr. DECKER (interposing). We only tide them over during the
period that we have them.
Mr. THORNE. During the three years or four years or one year,
while the war lasts,
And in addition to that we are giving them the surplus which was
formerly given to them for that purpose.
Mr. DECKER. Just so I will be clear on that, do we also under the
bill as we understand it put more into the railroads in cash, and not
charge them for it?
so.
Mr. THORNE. No; I think that under the maintenance you may do
It requires under the provisions of the bill for adequate, reason-
able maintenance. Now before that, before we took them over,
they may not have adequately maintained their properties. We are
going to give them their standard return. There is no provision in
there for a reduction of the standard return.
Mr. BARKLEY. Is that ordinary maintenance to be charged up
against operating revenues in arriving at the standard return, just
as heretofore it has gone into operating expenses?
Mr. THORNE. Pardon me just a moment, on that proposition I
don't want to get led off of the main thought, but I think I can
express it very clearly in one sentence. If a company has under-
maintained its property by a million dollars it has shown a net
revenue one million dollars greater than it otherwise would show,
has it not?
Mr. BARKLEY. Yes.
774 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. THORNE. Then the standard return going to the carrier will
be a million dollars greater than if it had been properly maintained,
would it not?
Mr. BARKLEY. Well, it might be for any particular year, but stretch
it out over a period of years.
Mr. THORNE. Then it would be, if it was three years, three times
one.
Mr. BARKLEY. Well, if that same ratio was maintained in all
three years.
Mr. THORNE. Then the other carrier that has properly main-
tained its property and has spent that additional million will get a
million dollars less standard return than the company that has
skinned its property.
Commissioner ANDERSON. You don't mean to say that is under
the bill as now drafted?
Mr. THORNE. Absolutely.
Commissioner ANDERSON. Line 22, et sequitur, on page 3-
Mr. THORNE (interposing). Will you please read that?
Commissioner ANDERSON (reading):
The President further authorizes in such agreement to make all reasonable pro-
visions for the maintenance and repair and renewals of the properties, and for the
creation of reserve funds therefor, and for the depreciation thereof, to the end that at
the termination of such Federal control either the property shall be returned to the
carrier in substantially as good repair and substantially in as complete equipment
as at the beginning of Federal control, or that just payment shall be made therefor.
Reasonable provision necessary to put the carriers as to star dard
return and maintenance on an even keel is now authorized under
section 1 of the bill.
Mr. THORNE. Now I ask you where is there any sentence in all
that you read, including the last sentence-where is there any sen-
tence in that bill providing for a reduction in the standard return to
go to the carrier? The only thing there stated is that the mainte-
nance and depreciation can be properly adjusted.
Commissioner ANDERSON. May I interrupt again? Because, Mr.
Chairman, I don't think this is quite fair.
The CHAIRMAN. If Mr. Thorne is willing, of course you may.
Mr. THORNE. Certainly.
Commissioner ANDERSON. The original bill was open to the vice
that it had, and I was stupid that I did not see it when I was before
you. I saw it when I was explaining it to the Senate committee that
we had mixed up two things in this section 1. Section 1 has, as Mr.
Thom put it, one sole function, authority to make a trade with the
maximum standard or limit within which we must make it. If
they do not make it, they may have the process of law right.
Now, we mixedup a species of regulation under Federal control with
the trading power in section 1. We have now redrafted it, with tho
help of some others to whom I will give credit if I do not forget it
to-morrow. Section 1 is now consistent that the President may
make a trade with agreeing carriers on a standard return which does.
not exceed the three years-I use the term "net earnings" for the
present purpose-including in your contract all reasonable provisions
relative to depreciation and maintenance, to the end that they may
got their property back in as good shape, or a depreciation fund may
be provided. Now, reasonable provisions may go up or they may
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
775
go down. If you find a concern that is undermaintained, a reasonable
provision may be made requiring that their standard return shall be
diminished pro tanto; if you find that a carrier has overmaintained,
a reasonable provision would include a variation in some fashion to
meet that condition. It was found that section 1 as we had it before
you before was too inflexible. It did not do what it ought to have
done with relation to the fact that the different carriers have had no
uniform or regular method of taking care of maintenance and de-
preciation, and we have remedied it in this section, and I think
Mr. Thorne is in error in his interpretation of it and I do not want
him to finish his argument on an erroneous basis.
Mr. THORNE. Upon the interpretation of words and phrases many
times lawyers and even courts differ. I submit that you do not
want an ambiguous sentence to go to trial. The phraseclogy as
read by Mr. Commissioner Anderson, to my mind adequately pro-
vides for the President to increase or reduce the maintenance
allowances and depreciation so that there shall be a reasonable
expectation at the end of the period that the property will be in as
good condition as it was in the beginning.
Now, I am calling your attention to another proposition. I am
calling your attention to the fact that where a property in the past
has been undermaintained, has shown a net greater by a million
dollars than it ought to, you have not provided here-unless you
leave the brcadest kind of field for the President to do what he likes
to in regard to the compensation. This paragraph refers to main-
tenance. I will read the sentences and ask you to consider carefully
where there is any provision for a corresponding reduction in the
standard return going to the railroads: "The President is further
authorized in such agreement," to do what? "To make all other
reasonable provision for the maintenance, repair, and renewals of
the property, and for the creation of reserve funds therefor, and for
the depreciation thereof, to the end that at the termination of such
Federal control either the property shall be returned to the carrier
in substantially as good repair and with essentially as complete
equipment as at the beginning of Federal control, or that just pay-
ment shall be made therefor.'
Mr. BARKLEY. That relates entirely to maintenance and deprecia-
tion from now on.
Mr. THORNE. Yes, sir.
Mr. BARKLEY. It has no relation to anything in that line that has
happened heretofore?
Mr. THORNE. That is the way I would interpret it.
Mr. THOм. May I ask you a question there? I understood you
to say in answer to a question, that if the railroads had been under-
maintained, that their net income would be correspondingly in-
creased Now the contrary is true, is it not? If they had been
overmaintained, the net income would be to that extent reduced.
Now am I correctly informed that your contention has always been
in the rate cases that the railroads were overmaintained?
Mr. THORNE. Oh, not at all. I have stated repeatedly that the
maintenance in recent years is far more liberal than in the earlier
years, which you gentlemen delight to make comparisons with. And
if the properties had been adequately maintained in their earlier
776
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
years, their net would not be as great as their showing. Consequently
you get an erroneous idea as to tendencies.
Mr. THOм. In other words, that the standard of maintenance has
greatly improved in recent years?
Mr. THORNE. Yes, sir.
Mr. THOм. And therefore the net income has been correspondingly
reduced?
Mr. THORNE. Yes, sir; by bookkeeping figures.
Mr. SANDERS. I want to ask a question on that. Is there any
provision in this bill-and I have read it over to the best of my
ability time and time again—is there any provision in this bill that
provides any safeguard that would prevent the Government from
paying to the roads that have been skinned by their management
greater earnings than they ought to receive?
Mr. THORNE. That is just the proposition we are speaking of.
Mr. SANDERS. Well, is there any affirmative statement in the bill?
Mr. THORNE. I can not find it.
Mr. SANDERS. I can not find it either.
Mr. THORNE. I agree with you.
Mr. SANDERS. Now, one more question and I am done. Does
not this bill treat the roads that have been honestly administered
on identically the same basis as the road that has been dishonestly
administered?
Mr. THORNE. Except as it helps the latter by making an agree-
ment that it would maintain them.
Mr. SANDERS. Don't it treat them the same on the standard return ?
Mr. THORNE. Yes, sir.
Mr. SANDERS. There is no distinction made at all.
Mr. THORNE. That is correct.
Mr. SANDERS. That is the way I read it.
The CHAIRMAN. It seems that you and Mr. Anderson propose to
reach the same end.
Mr. THORNE. Yes, sir.
The CHAIRMAN. And to accomplish the same purpose, but it seems
as though you two authorities might agree on the language to do it.
Mr. THORNE. I would like to get to the more fundamental things
of the bill.
Mr. DECKER. Would you be satisfied if the bill could be so drawn
that during this time of prices the railroads would get substantially
what they have been getting for the last three years before we took
control, and leave the adjustment of these other things to times of
peace?
Mr. THORNE. If you give proper recognition to the value of the
Government's credit and if you give proper recognition to the rail-
roads' lack of title to earnings over and above a reasonable return
on the money they have put into the property, as evidenced by their
stocks and bonds, I will agree with you. Now, as to this other
proposition, if I may proceed with the discussion of that, the surplus
over and above reasonable dividends, I have shown you that the
two leading railroad witnesses of the country, in testimony under
oath before the commission candidly stated that they would not ask
for a return on additions built out of surplus; that they would not
ask for the capitalization of surplus earnings, and notwithstanding that
statement now at the crucial moment when we are taking over the
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 777
operation of the properties that statement is deliberately repudiated.
I have shown you that Mr. Prouty and Mr. Lane have both said it was
unjust to give a surplus if it should be capitalized, and thereby force
the public to pay a return.
Now, as to the position of the Supreme Court, the Minnesota rate
case has been cited. I.want to show you that the Supreme Court
has left that issue for future consideration; that it has not decided
against the position that I have taken, nor has it decided in favor of it.
Under peace conditions, mind you, under conditions where the
Government gives no guaranty at all, the Supreme Court has refused
to say they are entitled to a return on additions out of surplus.
During war times we are not only giving them a guaranty, but also
going to give them a surplus, according to this bill. In the Cum-
berland Telephone and Telegraph case, reported in 112 U. S., page
524, the Supreme Court discusses the return to additions and better-
ments built out of reserve for accrued depreciation, which is anal-
ogous to surplus but not the same. It is analogous, Mr. Anderson,
in that it is a trust fund. Under the interpretation of Mr. Ripley's
testimony that is all a surplus is.
Mr. ANDERSON. I did not really notice what you said, Mr. Thorne.
What was the point?
Mr. THORNE. "If the onus rested upon the commission to show
these facts, it is evidence that the obligation has not been fulfilled,
but it is just here that the difficulty lies. It was obligatory upon the
complainant to show that no part of the money raised to pay for
depreciation was added to capital, upon which a return was to be
paid to the stockholders in the way of dividends for the future. It
can not be left to conjecture, but the burden rests with the com-
plainant to show it." The decision says:
It certainly was not proper for the complainant to take the money or any portion
of it which it received-
Mark the words-
which it received as a result of the rates under which it was operating, and so to use
it or any part of it as to permit the company to add to its capital account upon which
it was paying dividends to shareholders.
If I would stop there I would leave the impression that the Su-
preme Court had definitely decided the issue that we have under
consideration now, but the court proceeds to say:
We are here dealing with funds allowed by the commission to be set aside for taking
care of depreciation. We are not considering a case where there are surplus earnings
after providing for a depreciation fund, and the surplus is invested in extensions and
additions. We can deal with such a case when it arises.
Leaving the issue unsettled.
And in the Minnesota rate case (230 U. S.), I must beg leave to
differ with the interpretation made by the distinguished counsel for
the carriers. The Supreme Court has not decided that issue. Here
is the language:
Finding this defect in the proof-
There are other defects that were pointed out in the case-
Finding this defect in the proof, it is not necessary to consider the objections which
relate to the sources from which the property was derived, or its mode of acquisition
or those which are urged to the inclusion of certain lands which it is said were no
actually used as a part of the plant, and we expressed no opinion upon the merits of
these contentions.
778
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
The issue is still left open with the Supreme Court and reserved
for future determination, as to public utilities and railroads generally.
And the Supreme Court, I reiterate, was then dealing with peace
conditions, when there was no guaranty taking the place of the sur-
plus.
Mr. THOM. You do not understand me. I did not say it had been
decided by the Supreme Court.
Mr. THORNE. I beg your pardon.
Mr. THOM. I said that in 230 United States, in considering the
value it had included it without saying anything on the subject.
Mr. THORNE. It did say it reserved that for future decisions.
In 236 Federal, the Garden City case, decided by the Federal
court, Judge Smith sitting, they have taken a position opposite to
what I stated. The Federal courts have shown a tendency to take
the position on some questions quite generally that are later reversed.
In the question of the division or apportionment of value between State
and interstate traffic you will remember that practically every Federal
court in the country decided the case exactly as the railroads insisted
it should be apportioned, in harmony with the revenue, and the
Wisconsin commission was the champion of the same proposition,
and later in the Minnesota rate case the Supreme Court specifically
repudiated that proposition and reversed all of the lower court's
decisions.
Now if you come to decisions of commissions, I will show you a
decision of the public service commission, first district of New York,
a very reputable tribunal in this country, in which they state in the
Queensboro Gas and Electric case (2 Public Service Commission,
P. 575):
It is not reasonable to require consumers to pay higher rates than they would other-
wise be required to pay in order that these higher rates may provide funds from which
to construct additional plants, which becomes the property of the company.
The doctrine there stated is precisely the doctrine stated by Mr.
Ripley, Mr. Willard, Commissioner Lane and Commissioner Piouty.
And again, incidentally, the New York commission says:
The company has not suggested that if such contributions be made, stocks, bonds,
notes or other liabilities, will be issued to those who provide the funds.
Here is another case. If you want a State supreme court I will
give a citation of the San Diego Water Company v. The City of San
Diego (118 Cal., 556). It is written in the concurring opinion of
Justice Drew. (?)
The CHAIRMAN. Mr. Thorne, personally I have got to leave now
and Mr. Doremus will preside. Do you think you will get through
to-night? If you do not, you can finish in the morning.
Mr. THORNE. What is the desire of the committee? I would not
wish to impose upon you a moment longer than it is your wish.
The CHAIRMAN. We have been accustomed to adjourn at 5 o'clock;
not later than that. You may proceed until that time.
Commissioner ANDERSON. May I say one word? I have been
rather insistent that the proponents of the bill-as I have had the
honor in large part to prepare it-be fully heard, but I can not be
oblivious to the fact that the Secretary of the Treasury has far
greater responsibility than I, and he thinks we ought not to delay here
any longer than is necessary. Now, I venture to suggest that, in view
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
779
I do
of the fact that the committee's hope of finishing with all of us to-day
has been disappointed, and that there still remains two counsel
opposing the proposition which has been suggested here, called the
Government proposition, who remain yet to be heard, that I may
fairly ask that I begin the discussion, which is almost certain to result
in considerable colloquy, not later than 2 o'clock to-morrow.
not think it is quite fair or would be quite fair and just to the interests
that are involved and the responsibility that I have to take that I
should have less than to-morrow afternoon to state the things that
ought to be stated, which have grown out of the discussions in the
two committees, and answer the questions which I am sure, in the
light of what happened heretofore and what happened in the Senate
committee, you will ask me why we did certain things.
•
The CHAIRMAN. I think, Mr. Anderson, you can be reasonably
assured that you can begin at 2 o'clock. Proceed, Mr. Thorne.
Mr. THORNE. I call your attention to the fact that if the guarantee
is made as provided in this amendment to the bill, it will be more
liberal than that which has been given to the railroads in Great
Britain. At the outset the stockholders and bondholders of the
British railroads thought that they were guaranteed their dividends
and interest before the war. But it developed that the proviso
which was later stricken out, caused a reduction because of absorb-
ing one-quarter of the bonus paid labor. It caused a reduction in
earnings, and there not being a surplus in Great Britain it caused a
reduction in dividends to British railroad stockholders. I will read
an extract from the report of the legislative reference department of
the Congressional Library to that effect:
The proviso was based upon the fact that during the first half of 1914, although
passenger traffic had increased, there had been a sericus falling off in freight traff c,
due to the reaction in the iron trade and still more serious inactivity in the cotton
trade. This resulted in the lowering of the net earnings of all the carriers. Dividends
fell off to an even greater extent, apparently because it was expected that net carnings
might suffer still more through new demands from the railway men's unions. There
is no doubt that before the war broke out railway directors had expected a further
falling off in all traffic, and therefore regarded 1913 earnings, even as modified in accord-
ance with the first half of 1914, as a standard to which no objection can be taken.
That proviso was eliminated, and in lieu of that, as the legislative
reference report outlined in full, citing authorities, resulted in a re-
duction of the net of 1,000,000 pounds approximately, and that
caused a falling off of dividends; so that we find that in the year 1916
the dividends averaged less in England than before the war, and it
was less on all of the principal railroads, with only one exception.
The guaranty provided in this amendment to the bill will absolutely
prevent that contingency.
Second, the amendment to the bill makes a better proposition than
the British railroads, because of the large dividend returns in this
country. The provisions of the bill as it now stands make a guar-
anty which in proportion to the total capitalization outstanding
will yield a return to American railroads of approximately $250,000,-
000 more than the rate earned by the British railroads as a whole.
Mr. DEWALT. May I interrupt you there with this thought? I
want to get back before you leave us on this question of the value of
franchise, but I do not want to interrupt your current thought.
Take it as admitted that the way to find this compensation is to
780
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
ascertain the demonstrated value of the use, and take it further as
admitted that the compensation must be fixed as of the time of the
taking, and take it further as admitted that the value of the fran-
chise is determined by the privileges contained in the franchise, and
further that the demonstrated value of the use at the time of the
taking is dependent largely upon the exercise of those privileges, then
I ask you what relation has this value of franchise in regard to the
earning power of the railway company?
-
Now, I can see how it might and does, because one of the privileges
of a franchise is the power to collect tolls; but I can see also that in
many instances the value of a franchise as a whole would not be ap-
plicable to the earning power of the railroads. For instance, there
is a large right of way here on each side of the railroad, 20 miles on
each side, we will say, in some instances. It has no actual value as
to the earning capacity of the roads. It has value as a salable article
hereafter. Or take your Consolidated Gas case. The franchise there
was the privilege to lay sewers and pipes through all the streets of the
city named. But the Consolidated Gas Co. might not use a great
many of those streets for an indefinite length of time, and if the rules
as laid down by Mr. Thom-which I accept are that we must
ascertain the demonstrated value of the legal use at the time of the
taking, then isn't it right to say that if Mr. Thom wants to take into
consideration the value of the franchise, he must take into con-
sideration only the value of the franchise as it is actually used at the
time of the taking? Now, that is the question in my mind.
Mr. THORNE. I want to say, in regard to that subject, the value of
the use I think is the correct test. It is not a condemnation proceed-
ing and it is not a rate case. It is a cross between the two. We
can not accept the doctrine used in a condemnation proceeding to
guide us. We must be very careful not to fall into that error.
I call your attention to the fact that the Supreme Court has
declined to consider the demonstrated earning capacity as an evidence
of the value of the use of the property upon which it is entitled to
earn a return in the Consolidated Gas case. And the only purpose
of that was to show that the court was not in sympathy with that
idea. If that was the correct test, then your proposition, as the
corollary would be absolutely logical.
The statement has been made that we must not leave them penni-
less. I am going to read you here a list of roads that last year
had over $800,000,000 of unappropriated surplus shown on their
books. They had over a billion dollars of surplus altogether but over
$800,000,000 of unappropriated surplus. And in 1916 these were
their earnings. It will be cut down by 1917 and 1915 to some extent.
They earned on capital stock-I will read this very rapidly and
then insert it in the record.
(The paper referred to follows:)
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
781
Name of road.
Ratio of net income to capital
stock outstanding.
1915
1916
1917
New York Central system..
Eastern District:
Bessemer & Lake Erie.
Delaware & Hudson.
Lehigh Valley..
Norfolk & Western.
Pennsylvania R. R. Co..
Reading system.
Chesapeake & Ohiɔ.
Buffalo, Rochester & Pittsburgh.
Lehigh & New England..
Hocking Valley..
Lehigh & Hudson River..
Southern Distri´t:
19.98
35.16
29.23
Central Railroad of New Jersey..
18.43
20.74
19.31
12.08
12.63
9.44
Delaware, Lackawanna & Western.
18. 14
19.55
22.09
10.17
12.34
11.42
5.98
18.28
15.00
7.94
14.61
14.64
7.20
13.39
11.31
6.61
14.77
13.5
4.24
10.96
12.73
5.53
11.90
10.93
11.55
15.66
13.76
4.50
11.40
19.1
19.50
36.07
28.20
Alabama Great Southern…..
Atlantic Coast Line..
Florida East Coast....
Louisville & Nashville..
5.59
13.03
5.87
Cincinnati, New Orieans & Texas Pacific
Illinois Central...
10.27
23.25
41.42
2. 13
8.82
6.28
10.80
6.88
19.50
5.46
14. 18
5.15
14.00
7.73
9.70
7.81
11.32
Chicago, Burlington & Quincy.
17.18
26.93
5.19
7.73
7.44
10.07
8.19
11.07
7.87
16.31
7.58
10.37
11.95
10.95
8.82
13. 42
Mobile & Ohio..
Nashville, Chattanooga & St. Louis.
Western Distri t:
Atchison, Topeka & Sata Fe.
Chicago & North Western.
Chicago, Milwaukee & St. Paul..
Chicago, St. Paul, Minnesota & Omaha
Great Northern..
Minnesota, St. Paul & Sault Ste. Marie.
Northern Pacific..
Southern Paciic system..
Union Paciîc R. R…………
•
Authority: The above percentages showing the amount earned on capital stock of the various railroads
is taken from (1) the statistics compiled by the eastern railroads in Ex parte 57 before the Interstate Com-
merce Commission, (2) from the annual reports of the railroads to the Interstate Commerce Commission
and to their stockholders as reported in Poor's Manual of Railroads. The figures for the western and south-
ern roads have not been reduced to system basis as are those of the eastern carriers. 1917 figures were not
available for the western and southern carriers.
Mr. THOM. You do not mean there that those figures represent
cash on hand?
Mr. THORNE. The unappropriated surplus is investments in
property other than railroad property, or in cash on hand. Unap-
propriated surplus means not put into railroad property.
Under the terms of this bill, during the perilous war period your
guarantee
Mr. THOм (interposing). We do not think the figure you have given
is correct.
Mr. THORNE. Well, it is a matter of evidence. As the exhibit was
finally filed there was no objection taken.
Mr. WINSLOW. You speak of a surplus. Would that surplus be in
the form of quick, available assets?
Mr. THORNE. Yes; either in the form of cash or securities of un-
affiliated companies.
Mr. WINSLOW. But would they be quick; available?
Mr. THORNE. That is the term that we apply to them. It might
have been hard to dispose of some of them.
Mr. WINSLOW. Well, that would not be very pertinent, then.
Mr. THORNE. It shows they were not poor. The only thing I
am insisting on is that they are not quite pauperized, as the gentle-
782 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
man said, as is shown by their earnings in 1916 on their capital stock,
in the table which I have presented.
Now, gentlemen, you are giving practically, in effect, a Govern-
ment bond to these companies while the war lasts-not after the
war for a sum approaching what I have read to you; and those
companies handle two-thirds of the traffic in the United States. It
is true they can not raise the dividends while the war lasts, but after
the war is over there is nothing to prevent these railroads distributing
their accumulated surplus in dividends. I can not bring myself to
believe that after you give this matter careful, deliberate considera-
tion, that during this perilous time when other industries, many of
them, will go to the wall-as they have in France and England-
that you are going to shield the railroads from the effects of the war
and given them such guarantees as that-guarantees which in pro-
portion to the capitalization is over $250,000,000 greater than the
British Government gives.
Commissioner ANDERSON. I want to ask Mr. Thorne one question.
A great deal has been said about the dumping of seventeen to twenty
billion dollars of railroad securities, unless they are stabilized, and
that chaos and ruin and death and desolation will stalk through the
land. I just want to ask this one question: If the Government
guarantees the interest on the bonds of all bonds that have been
carning the interest; and if the Government guarantees the regular
dividends upon all stock that has been earning those dividends,
would that create ruin and havoc, as has been depicted here to-day,
or not?
Mr. THORNE. No; emphatically no. In addition to that, we say
that although your business may fall off, although your expenses
may mount skyward, we will keep your property in just as good
condition as it was before the war. After the war is over we will
guarantee it will be in as good a condition, and we will build all the
improvements that are necessary.
Commissioner ANDERSON. Personally I could not understand how
the Government guaranteeing interest on bonds and dividends on
stock would create chaos in the stock market.
Mr. THORNE. There is this additional statement about that which
I wish to speak of. It has been said it is necessary for the Govern-
ment to float large war bonds in the very near future. It has been
suggested the amount will be $10,000,000,000 during the first six
months of the year and $10,000,000,000 in the next six months,
making $20,000,000,000. That means that approximately $20,000-
000,000 out of a total estimated income of the citizens of this Nation
of 40,000,000,000 will have to go into the one channel of taking care
of this war. A half of the net income, on the average, of every
citizen will have to go into the war, either in the purchase of bonds
or the payment of taxes. That means that you will divert from
many other industries and manufactures, funds that have formerly
sustained them. When we really get into this terrible catastrophe,
think what that is going to mean to the industries of this country.
The Government wants to float bonds. If you increase the rates
prevailing on securities, do you impede or facilitate the sale of Gov-
ernment bonds at a lower rate? Where under the shining canopy
is there any logic or reason to the statement that by making these
securities still more attractive than they are we are going to facili-
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 783
tate the sale of Government bonds? If you have a hundred horses
to sell, would you like to have another man come up with another
hundred horses a little better than yours, when the market was
already glutted?
Under this proposition, as this bill contemplates, there was neces-
sarily an immediate advance in the prices of securities to a higher level.
After the Congress has acted immediately thereafter there may be an
advance in the price of securities, but the effect of the war conditions
throughout the world will inevitably cause that rate that people de-
mand on money to go up and values to decline. The British and
French Governments last fall had to pay 8.6 per cent for their money,
with the credit of both nations back of it. The Bethlehem Steel
Corporation had to issue preferred stock bearing 8 per cent and
paid 4 per cent commission, making 12 per cent for the first year.
The city of Paris sixes sold on a 12 per cent basis. When our Gov-
ernment commences paying such figures, as is possible after we have
been in the war an extended period, think what it will cause on the
market in the values of other securities. You are giving here the
equivalent of even higher figures than those to these railroads, and I
maintain that the giving of an excessive guaranty to the railroads
will impede the sale of Government bonds on a reasonable basis
instead of facilitating it.
Commissioner ANDERSON. Your amendment, Mr. Thorne, guaran-
tees the dividends and the interest, doesn't it?
Mr. THORNE. Yes, sir.
Commissioner ANDERSON. That did not create any havoc, did it?
Mr. THORNE. No, sir; absolutely no.
Mr. DECKER. If the railroads have been making those high divi-
dends on their stock-
Mr. THORNE (interposing). Those are earnings, not dividends.
Mr. DECKER. I mean earnings-it has been done under the sanction
of law and with the permission of the Interstate Commerce Commis-
sion, has it not? Aren't you asking us to legislate away an evil
that has been committed by a tribunal that really ought to know
more about it than we do and asking us to do it at a time of stress
and crisis.
Mr. THORNE. Not at all. The Interstate Commerce Commission,
as has been stated, has been on both sides of this proposition. The
railroads and the Interstate Commerce Commission have asked for
certain carnings and have not declared that those should be capital-
ized, have they? This bill as now proposed will go on the statute
books and absolutely capitalize additions and betterments, built
out of surplus, and that has never been done before.
·
Mr. DECKER. Well, you turn this surplus, as you call it, over to
the railroads. Whether that will be capitalized or what will be done
with it at the end of the war is another question.
Mr. THORNE. Section 4 provides that the return shall be paid on
additions and betterments built, and the original draft of the bill
provides
Mr. DECKER (interposing). But before we turn those betterments
back to then, wouldn't we provide how we shall pay for them, at
the end of the war?
Mr. THORNE. There is no provision of that character.
784 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. DECKER. Yes, there is. It says that they shall be returned to
the railroads.
Mr. THORNE. May I state the wording of the original bill and now
as it is reframed? The original bill specifically provided that the
Government shall pay a return on additions and betterments built
out of surplus. Now, under the redraft of the bill tney have left out
the word "surplus" and just left it generally to pay a return on
additions and betterments which have been built.
Mг. THOм. The limitation on that is that they have to be done
with the approval or by the order of the President.
Mr. THORNE. Well, who would not approve it, if he were President,
the building of additions and betterments?
Mr. BARKLEY (presiding). If you are through, Mr. Thorne, I
believe that under the arrangement we are to adjourn now until
10.30 o'clock to-morrow morning.
(Whereupon, at 5.15 o'clock p. m., the committee adjourned until
10.30 o'clock a. m., Tuesday, January 29, 1918.)
COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE,
HOUSE OF REPRESENTATIVES,
Tuesday, January 29, 1918.
The committee met at 10.30 o'clock a. m., Hon. Thetus W. Sims
(chairman) presiding.
Gentlemen of
The CHAIRMAN. The committee will come to order.
the committee, it has just been stated to me by Judge Cowan and
Mr. Plumb that they have agreed to take one hour each and that
Judge Cowan will open. You may proceed, Judge.
ADDITIONAL STATEMENT OF S. H. COWAN.
Mr. CowAN. Mr. Chairman and gentlemen of the committee, I
want to submit some arguments here this morning in regard to these
two matters, which I deem to be the matters in which the shipping
public are vitally interested and as to which I very greatly fear that
the proponents of the bill and the committee, being urged by them
with the natural great force of their position in public service and
public life, are liable to make some very serious mistake which you
will find it hard to undo.
I stated in the outset, in appearing before this committee and the
Senate committee, that it was our desire to help in every way we
can adequate Government control, to the end of the best interests
of the country. That best interest concerns war and concerns the
arts of peace; because if in the exercise of the war power the arts of
peace are destroyed, we will have done a great deal more harm by
attempting to now transfer to the exercise of an undefined war power
the operation of the ordinary business of the country than would
possibly be gained or could be remedied in the future.
It was not my understanding at the start that there was a desire on
the part of those who proposed the bill and who have prepared it to
take away from the Interstate Commerce Commission the power to
fix rates. I did not at the start understand that it was their desire
to fix a basis of compensation to the railroads above what is just and
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
785
reasonable, or, in fact, to fix at all anything except the consideration
of a contract between the Government and the railroads under which
this governmental control should be operated; and that the considera-
tion in that contract was desired on their part to be just and reason-
able. At the present view-and I must speak plainly on this matter,
because I am speaking for people who are vitally interested in it and
who, in my opinion, are in grave danger of being very seriously
injured, not from the desire of these gentlemen to do that, but from
the natural result that must flow from their contention, if I under-
stand them--I have not yet ascertained whether it is desired to legis-
late in this bill-I mean desired by the proponents of the bill-to
affirmatively legislate in this bill that the Interstate Commerce Com-
mission shall have what they say they expect it to have, namely, the
general control over rates and charges as they have had heretofore,
except in some peculiar or exceptional instances where it was neces-
sary for the Director General to order otherwise; or where the bill
proceeds upon the major premise that already, having taken over
the control of the railroads, the power of rate making is in the Director
General. Now, which is correct, Mr. Anderson, according to your
opinion?
Commissioner ANDERSON. The latter is correct. Will you state
that again, please, Judge? I did not know you were going to direct
your question to me, and I was not listening as carefully as I other-
wise would.
Mr. COWAN. Whether it was desired that this bill should give to
the Interstate Commerce Commission the general power over rates
and charges of the character which it has been asserted by the pro-
ponents of the bill they expect the commission to exercise, subject
only to such exceptional cases of necessary interference by the
Director General as the exercise of war power might reasonably
require. Now, that is the first proposition. Or whether the bill
proceeds upon the major premise that already, having taken over
the control of the railroads, the power of rate making is now lodged
in the Director General.
Commissioner ANDERSON. Well, if there be any difference between
the two propositions, I am somewhat in doubt about it. I think the
latter is probably the correct proposition. I have no doubt that the
power of rate making, to the extent that it be found necessary for
efficient and adequate use of the war power granted by Congress to
the President, inheres in the President; and the purpose of this bill
is in section 11, not to disturb the war power of the rate making,
but to provide that except so far as the exercise of the war power
may cut down or cut into the rate-making power, the tribunals now
having the regulation of rates shall continue the regulation of rates.
I think that is a statement of the case as I understand it.
Mr. DOREMUS. Will you permit me to ask Mr. Anderson a ques-
tion? I think we all want to be clear on this point. Under this
bill, if it should become a law, if a shipper or a body of shippers de-
sired to protest against existing rates, to whom would they apply
in order to get relief?
Commissioner ANDERSON. To the Interstate Commerce Com-
mission.
Mr. STEPHENS. Does the bill so specify?
40958-18-50
786
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Commissioner ANDERSON. If the Interstate Commerce Commission
made a rate decision, if the war necessities of the country demanded
it, I think it could be overridden by the President. If the Interstato
Commerce Commission made a rate decision which ran athwart of
the necessary war powers of the President, I think he could override
it and suspend it. “I think it would be a suspension during the war-
power period.
Mr. SWEET. Mr. Anderson, I would like to ask a question, with
Judge Cowan's permission. Suppose an amendment were proposed
to the bill as follows: Insert in section 11, line 9, after the words
"subject to," the following: "All provisions of the act to regulate
Interstate Commerce and all amendments thereto."
Commissioner ANDERSON. I do not see, if I got the significance of
that, that it means any more than you now find in lines 24 and 23,
which provide that except as inconsistent, and so forth, the carriers
shall remain subject to all laws and liabilities as common carriers,
whether arising under statutes or common law. That is an all-
inclusive phrase, and if I get your suggestion, yours goes no further.
Mr. HAMILTON. Where are you reading from, Mr. Anderson?
Commissioner ANDERSON. Page 11, lines 9 and 10, in the House
bill: "subject to all laws and liabilities as common carriers, whether
arising under statutes or at common law." Everything which is not
inconsistent with the Federal control, with this act or with the act
of August, 1916, or with any order of the President made under
either of those acts-all the rest of the law remains unchanged.
That is the purpose of section 11 as now drawn.
And I want to add one thing, now that you have called me up in
Judge Cowan's time. I have asked Judge Cowan, and I have asked
various others to draw an amendment or an act to that section
which would leave untouched the necessary war powers and give
larger ones to the State commissions and the Interstate Commission,
and no one has yet presented me any suggestion or language which
could be inserted here, which would not obviously cut the war power
below the standard of necessary efficiency. If any one can work it
out, I should be glad to present it to you.
Mr. COWAN. Now, I do not want to take up all of my time in
questions, but there are some things that are fundamental to this
proposition. I want to inquire of Mr. Anderson if he did not state to
the Senate committee, at the last day's hearing, I believe it was,
that if there should be a deficit grow out of the guarantee that this
power in the Director General would extend to declaring a general
advance in rates to produce the money to make up the deficit.
Commissioner ANDERSON. The record will show, Mr. Chairman,
what I stated. If I did not state it, I do state it now.
I have no
doubt that the President, being responsible for the financial results,
has power, unless you take it away from him, to make the railroads
self-supporting instead of unloading upon the general taxpayer any
deficit.
Mr. Cowan. And in that connection, did not Mr. Underwood, of
the Senate committee, say, "Then you would extend the taxing
power to the President?" And you answered in the negative, and
he remarked, "That is what your argument leads to."
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
787
Commissioner ANDERSON. I think you better look at the record.
I know Senator Underwood and I did not quite agree as to the extent
of the taxing power.
Mr. COWAN. Well, I will state in substance that is what took
place. Now in discussing the matter with Mr. Anderson-and he
has been abundantly frank about this, but I think he has been
abundantly mistaken-I have no hesitancy in stating that Mr.
Anderson in all particulars manifested the greatest degree of mental
honesty, and I understand his character and reputation and honesty
is beyond question, but it is a difference of opinion about what
ought to be done, and I have tried to analyze it and get it down to
the point of finding what was the intention lying underneath the
bill, and those intentions, as I understand them to be from what has
been said frequently before you in one form and another, and before
the Senate committe, and what the Director General stated his
understanding of the matter to be-particularly before the Senate
commitete-is that if it shall become necessary to raise revenue to
meet the deficit that may arise out of this guarantee and operation
of the railroads under the Federal control, not only has the President
power to do it now, but that he should have it because he can better
exercise that power than could the commission. That is the language
as nearly as I can state it, the latter sentence, of the Director General
to the Senate committee.
Now I mention these things not by way of criticism of these
gentlemen at all, but in order that when I direct my argument to
you I shall direct it at a point where the danger lies. That is the
reason.
Now, there is another proposition that I think is fundamental in
this, and that is when you come to write a bill and give application
to the language of that bill, is this a Government operation through
and by the instrumentality of the railroad company? Is it a govern-
mental operation by that method so long as the Director General
shall see fit to do it? Is it a governmental operation partly through
such direction of the railroad company and partly by the Director
General? Or is it a governmental operation independent of the
railway corporation, but with the expectation of employing those
men who work for the Government? Now, that becomes extremely
important when you come to determine what is the meaning of these
exceptions, or this exception in section 11: "That carriers while
under Federal control shall, in so far as is not inconsistent therewith,
or with the provisions of this act, or any other act applicable to such
Federal control, or with any order of the President, be subject to
all laws and liabilities as common carriers," etc. Now, if the President
undertakes the operation of the railroads by the Government, it is
merely discretionary or not for him to employ as he pleases the
employees of the railroad companies? If that is the meaning of
an order of the President for the control and operation of the rail-
roads, then the statement that these common carriers shall be subject
to all laws and liabilities is not of any value whatsoever, for the
reason that all the regulatory laws are applicable to corporations,
persons and others engaged in the business of transportation as
common carriers. It does not apply to the Government as a com-
mon carrier; it does not apply to the governmental operation of a
railroad as a common carrier, and the act to regulate commerce
788
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
would not be applicable at all, and it will not be unless Congress
specifically makes it so. I trust it is not necessary to repeat that
statement.
Commissioner ANDERSON. May I ask a question there, Mr. Chair-
man?
The CHAIRMAN. Certainly.
Commissioner ANDERSON. Do you mean that section 11 as now
drawn does not make the act to regulate commerce applicable to
these carriers, within the limits that I said a few minutes ago?
Mr. CowAN. Absolutely it does not, if the carriers are being
operated by the Government and not operated in the sense of oper-
ating the common carrier corporation. If the corporation is operat-
ing the railroads at the direction of the Government, they may be
treated then as a common carrier for the purposes of this act. If
the Government is operating them directly, suppose every man on
the railroads were dismissed, for example, and the Government went
out and employed a new set of men entirely, then I say the act to
regulate commerce has no application, and you can read it through
and check it and see. It was to define the rights, the duties, the
liabilities, and the relation as between 'shipper, the public on one side
and the private corporation or the common carrier on the other, and
has no other design, and is applied to that entirely. Now, then, the
other result was to obtain the making of rates. That is one of them.
It has already been stated that as to that, if the President wills it,
that can be wiped out.
Mr. SNOOK. I take it from what you say then, that you have doubt
in your mind as to the way that these roads are being operated.
Mr. COWAN. I have, because Mr. Anderson answered in the Senate
committee that they were operating as he understood-through the
instrumentality of the common carriers. Am I correct about that,
Mr. Anderson, operating presently through the instrumentality of a
common carrier?
Commissioner ANDERSON. Yes; I think so.
Mt. COWAN. But not bound to do so, because the war power is
supreme.
Now, gentlemen, the question is before you. What ought to be
done? There does not appear to be in this exigency anywhere any
evidence, any facts, any suggestions that the taking over of the rail-
roads was necessary except for the purpose of operating them as a
combined unit to secure the greatest officiency in transportation,
avoid congestion, use all of the facilities wherever they can best be
used, and thus relieve the railroads from the difficulties under which
they are operating under the competitive system of each man trying
to run his own business and get the most out of it. Am I not correct
about that, gentlemen? It was not even remotely hinted at in the
proclamation of the President; it was never dreamed by Congress
when you enacted the law under which the proclamation was made
that there was any expectation of using that as a means of making
the rates of this country. If there is a man among you knows of
any such thing having been in your minds as the intention either of
Congress or the President, I wish you would say so.
When we come here, though, to determine what sort of a law shall
be passed, we find the proposition uppermost, supreme, superior, that
that power to make the rates must rest with the President, and the
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
789
expression of the Director General before the Senate committee was
that he could better do it and more satisfactorily to the people.
Mr. BARKLEY. May it not be presumed, Judge, that Congress had
it in mind that the President would have all the powers necessary to
carry out the specific powers granted to him in the act? Wouldn't
that necessarily follow?
Mr. COWAN. Yes, sir; but no Member of Congress would inten-
tionally have repealed the act to regulate commerce as between the
shippers and the railroad corporations, whether they are operated by
the Government or not. No Member of Congress would have thought
of repealing the interstate-commerce act or suspending it for the time
being.
Now, what were the powers that were necessary to be exercised?
They were the powers to utilize these facilities for the transportation,
and not to regulate the cost to the shippers of shipping his goods.
It ought not to be done. Of course, you have the power, gentlemen,
to do it. You have the responsibility on you when you do it, and
there are none of you who will live long enough to see the people of
this country submit to the abolition of the Interstate Commerce Com-
mission for the purposes of determining the ordinary rights between
the railroad performing the service and the shipper with respect to
rates. They will be willing and glad to submit anything necessary
under the war power but not to the making of rates, because if it is
necessary to make rates under the war power, it would lie in the nature
of a tax to pay for this operation over and above what the present
rates would afford money to pay.
The CHAIRMAN. Judge, might it not also occur that in order to
move, say, coal, or something of that kind, that a rate would have to
be reduced below what would be a fair adequate rate in ordinary
times?
Mr. COWAN. Not under the Government control. The Government
control can direct them to move it just as the Director General moved
the coal through the tunnel into New York.
The CHAIRMAN. He can move it regardless of the cost or expense
of moving it?
Mr. COWAN. Certainly. He has the power to do.
The CHAIRMAN. For private use?
Mr. COWAN. He has the power to do it, because you can not
figure—no railroad can figure—whether it is making a profit out of a
given transaction or not. That is impossible to know. You can
fix rates on the basis of what are reasonable rates. Now, I say that
anything above a reasonable rate is in the nature of a tax, and the
taxing power ought to be with Congress, and that tax ought not to
be levied on simply a few of the people who may have to bear it,
or on a large portion of the people who would have to bear it and
others escape it. It ought to be by the regular method of providing
what is just and reasonable as a rate.
Mr. HAMILTON. Judge Cowan, in what contingency do you figure
that the President would have the rate-making power?
Mr. COWAN. I can not conceive of any conditions that could arise
under which the President ought to have-or any other man, apart
from the Interstate Commerce Commission, the State commissions
within their jurisdiction-the power to prescribe rates on account.
of the war.
790
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
1
Mr. HAMILTON. But you are assuming that he might have the
power to do so, are you not?
Mr. CowAN. I am assuming that they contend that the power
now rests in him by virtue of the proclamation, and that was Mr.
Anderson's answer.
Mr. HAMILTON. But to be exercised-not to be exercised until the
railroads' management ceases to be operative, practically?
Mr. Cowan. No; not so far as the existence of the power is con-
cerned. I understand it is contended—and if they are correct about
the contention-that the power now exists in the Director General
to make any rates in the world he wants to, absolutely, and without
asking anything about it.
Mr. STEPHENS. Your contention is that if the President has power
to move what he wants to move and where he wants to move it, that
there is no occasion for him to have as a war power the rate-fixing
power, not at all. The power to move it if he pleases, where he
pleases and when he pleases, dispose of the property as he pleases—
in other words, perform all the offices of transportation-all
power that was ever thought of as necessary in this matter.
the
Mr. BARKLEY. Do you say, Judge, that the fact that this railroad
revenue is practically Government revenue, because of the fact that
the Government guarantees a certain amount of revenue, based upon
a certain period, and that the rates might have a very important
bearing upon the question as to whether the Government should be
able to recoup whatever it was out on account of the management,
would have anything to do with the power of the President or the
Government to the right to fix rates?
Mr. COWAN. It would have to do with the propriety, but that does
not have anything to do with the power. It has been generally
stated to me by all these gentlemen that I have talked to about it,
quite frankly, that this business will have to be self-supporting, and
if the rates are not high enough to do it they will have to make them
higher, and the Director General is the man to do it.
Mr. DECKER. Why would they have to be self-supporting?
Mr. CowAN. They say so. I say that if you go above a reasonable
rate you levy a tax then, and the taxing power should determine—
the standard of the law is what is reasonable.
Mr. BARKLEY. If the railroad revenues as operated by the Gov-
ernment are not sufficient to pay the expenses, then the rest of it
must come out of the people, and that is a tax also, isn't it?
Mr. COWAN. Yes, sir.
Mr. SWEET. Why should it be put upon the shippers instead of
upon all the people?
Mr. CowAN. I contend it should not, and we contended in the 15
per cent case before the commission that if the exigencies of the war,
as the railroad presidents had said, were the occasion of an inability
to efficiently operate, that produced the congestion, and the pref-
erence orders that were given, and the like, put them in a position
where they could not efficiently operate their roads and therefore
would lose money, compared to what they had made in previous
years, that that was an exigency of war that all the people owed for,
and not those shippers who, if rates were advanced, would have to
pay it; whereas other shippers in many instances would not, because,
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 791
as I have used the expression several times, they could "pass the
buck."
Mr. BARKLEY. Isn't it a fact that the railroad rates charged to
the shippers are borne by the people that buy the things that are
shipped? In the end the people pay it all anyway, don't they?
Mr. COWAN. Well, if you extend it over a period of 50 years, I should
say so. But if you take it presently, it is not so. The producer who
sends stuff to a central market and sells it always pays the freight.
A manufacturer who sells f. o. b. factory may or may not, according
to the conditions of competition, so complex that you never could
trace it out. In the ultimate end, as an economic proposition cover-
ing a long period of years, the public pays the freight rate, of course,
but it takes a long time for you to get the adjustment of farm prod-
ucts, we will say, and various things of that kind. So that they are
produced or not in greater or smaller amount, according to the freight
rate. You can take for a period of a few years, a short period of time,
and the cotton grower, the wheat grower, the cattle grower,
the hog
producer, the corn grower, the melon and vegetable grower pays it
out of his own pocket, because he sells on the basis of a delivered
price at the central market where the price is fixed. The producers
at the factories do not do that, generally speaking. So it is with coal
and lumber. The price is f. o. b. where it is produced.
The CHAIRMAN. If every rate was made during the war, during
Government control, by the Interstate Commerce Commission in pur-
suance to the existing law and regulations, and then there was to be
a loss over and above revenue received therefrom; that loss, whatever
it would be, would be paid by the public taxpayer, would it not?
Mr. COWAN. I don't know that I quite follow you.
The CHAIRMAN. I say, if all rates of every kind and character
continued to be paid by the Interstate Commerce Commission under
existing laws, rules, and regulations, supposing they are not suspended,
and then that a loss should occur upon the whole proposition,
wouldn't the Government loss have to be made up by public
taxation?
Mr. COWAN. Yes; it would have to be. Now, that is the reason
for the most important part of the argument I wish to make before
the committee. Do not put that guarantee, gentlemen, above
what it ought to be. I can not see for the life of me why it is that a
railroad should be selected as the preferred class in this country,
and to ask that their return be made above what is reasonable for
the service. Not what might be good policy in times of peace in the
way of laying up surplus, but what would be reasonable for the
service. Because the service is being performed for the shipper, and
the shipper is suffering all these difficulties of the war, why should
the railroad be accorded the right to get more than is reasonable for
the service? They never can recover it in any court. They can
not recover it in any action, and Mr. Thom is playing behind a bob-
tail flush when he proposes that he would advise his company that
they would not accept less than what they have been getting before.
There is nothing to that, not a thing. I will devote my time, so far
as that is concerned, to a defense of the Government without com-
pensation, other than my expenses, in such a case as that. There
will never be any such case.
792
FEDERAL OPERATION. OF TRANSPORTATION SYSTEMS.
Mr. MONTAGUE. Judge, do I understand from you and from Mr.
Thorne that the contention of both of you coincides with this idea,
that the rates now prescribed, generally speaking, are already reason-
able and sufficient?
Mr. CowAN. The basic rates of the country that represent 85 per
cent, probably, as nearly as we can get at it, of the ton-miles carried
have already received the sanction of and have been prescribed by
the Interstate Commerce Commission for the interstate rates, and
by the State commissions or fixed by legislation for the States.
And they have been the subject of controversy in this instance, of
course. The Interstate Commerce Commission in the Fifteen Per Cent
case was confronted by the claims of the carriers that disaster was
about to befall them on account of the war, presenting, as they did,
the earnings they had made for 1916 and some previous years, but
particularly 1916, as being the standard they ought to have. The
commission turned down that proposition and said that 1916 was a
peak year and was not entitled to be used as a standard; and that
the amount of rates were reasonable or at least not unreasonable
not unreasonably low-but that on account of the peculiar conditions
of the eastern carriers they would allow them an increase in the
merchandise rates, which they did. It would amount to about
$100,000,000. That was for the eastern carriers only. Now, there-
fore, the rates as they stand to-day bear the stamp of the Inter-
state Commerce Commission as being sufficient, but they will not
produce to the railroads the amount the railroad companies then
claimed they were entitled to, nor the amount they are asking to
be put in this contract.
Mr. MONTAGUE. Do I understand from you then to say this, that
exclusive of the Eastern railroads, the general rate is reasonable?
Mr. COWAN. It is reasonable, if you are to measure it by the
aggregate of the returns for the last two years. There are many
instances in which it is unreasonably high, but we must expect to
allow the railroads to have the benefit of laying up something for
for a rainy day. But I don't want them to be always laying up
for a rainy day and no rainy day ever comes to spend it.
Mr. MONTAGUE. I infer from your answer that if there be any
doubt in your mind about the reasonableness, it is that it is too
high instead of too low?
Mr. CowAN. If there is any difference, that would be the case.
Mr. MONTAGUE. May I ask you one other question? Do you
concur—this is my recollection of what was the argument or con-
tention of Mr. Thorne-that the general net revenue of the railroads
has been ascending for some years instead of decreasing?
Mr. CowAN. Generally speaking, that has been the case.
Mr. MONTAGUE. You understood that to be his contention?
Mr. CoWAN. I think so. Generally speaking, I think that has
been the case. There were many railroads a good many years ago
which were not receiving any adequate compensation for their
service, and the answer that I give to your question does not carry
with it the idea that because they have been ascending, that there-
fore they have been too high. It has been a process where business
has made railroad rates larger, due to competition between manu-
facturers to supply a given dis rict; the inability to get the traffic to
move, you might blot out every railroad rate law there is, and every
FEDERAL OPERATION OF TRANSPORTATION 793
•
SYSTEMS.
railroad rate regulation there is, and within themselves they contain
their own limitations to a large extent. If you make the rates too
high on brick, there will be brickyards built nearer by. You will
transfer the place of manufacture. Now, that is one illustration of
which I might give a million, I guess, if I had the time. But we
have received throughout nearly every part of the United States
some advances in rates, and to-day they are at a higher level than
they were 25 years ago. The Interstate Commerce Commission had
prepared, when they didn't have very much to do, a review of the
rates for 25 or 30 years. They published a number of volumes of it,
and they were quite widely distributed, giving rates all over the
country, and it would be interesting for you to read that to see how
that comparison was made out-which was about 15 years or 18
years ago with the rates at the present time. For example, the
rates on live stock or cattle, we will say, from Chicago to Atlantic
seaports, was 28 cents for 20 or 25 years, but in the last two or three
years it was raised 5 cents to make it 33 cents. Packing-house
products and fresh meats have been raised. Grain rates are higher
then they used to be. The grain rate is higher for export from Gal-
veston from the Missouri River than it used to be. Local rates in
the States have not been reduced, generally speaking, within 20
years. They have been more generally raised then reduced, but
there are exceptions as to that. Traffic, though, has increased
enormously. Competing lines of railroad have been built, however,
and often divided the traffic, so that the earnings of a railroad may
be affected by not getting the traffic which it would have had were
it not for the competing lines of railroad.
Mr. MONTAGUE. Then, if I understand you, the general level of
rates has raised in the last 25 years?
Mr. CowAN. In cents per hundred pounds; yes, sir.
Mr. MONTAGUE. And the general net producing income of the
railroads has likewise gone up in the last 25 years?
Mr. CowAN. Generally speaking, but taking in these present times
of extraordinary high prices for steel and coal and labor and various
other things, the operating expenses have enormously increased,
and you can hardly compare these abnormal times of prices of sup-
plies with a period going over a normal condition.
Commissioner ANDERSON. May I interrupt you there? I think
you made an inadvertent statement a moment ago. You said that
the present rates would not be adequate to produce the amount
called for by this contract, referring to the standard return, section 1,
as I understood. Now, I can hardly think you meant that, because
the standard return provided for in section 1 carries, if accepted,
just about one hundred millions less than their average net earnings
for 1916 and 1917. Did you mean that, that rates had got to be
raised in order to provide the standard return?
Mr. COWAN. Exactly. If you took in all the railroads, Mr. Ander-
son, and if all the railroads would become part of the contract, you
may be correct; but mind you, this is a voluntary matter, and as I
inquired at the Senate, I would like to know who it is that proposes
to accept this contract? It looks like kind of a foolish thing to me.
Our Texas Legislature would not do that, to pass a bill with the
expectation that the railroads will agree to it without knowing
794
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
whether it will do it or not. We had that in the case of the I. & G. N.-
Mr. Rayburn is well acquainted with that-and in the settlement of
the old M., K. & T. there, and we want to know whether they are
going to accept it if you pass the law. What is the use of passing
a law if they are not going to accept it? Now, they had it within
their power, as I understand it and I don't think these gentlemen
ought to put up to the public such a dangerous point as that-that
those who believe thay can most profit by it, can accept the contract,
and those who think they can get more without it, if they are within
the category of those who could accept or not, will not accept. So,
to use a familiar phrase, where are we at when we pass the law?
Now, I say that it is just certain to result in a deficit; that it invites
a deficit; because it leaves these railroad corporations where the
operators do not care whether they move the traffic or not.
Now it is all right for Mr. Thom to say that I cast a slur upon the
railroad men. I can tell Mr. Thom who begun that. That was begun
when the railroad presidents presented their printed documents to
the Interstate Commerce Commission, in which they said they could
not control them-could not control their labor. Mr. Anderson said
that. They are the ones that started it, if it is a slur. It is not a
slur. It is an exhibition of human nature, and no man ever downed
old human nature. If he did, I would like to see the color of his hair-
unless he is baldheaded. You can not down human nature, and that
is what you have got to do or if you don't you will have a deficit.
Now, gentlemen, what I plead for is that the railroads be given
that standard of reasonable return by contract and the offer of this
Government in times of war, which would be reasonable in times of
peace. I want to read a little from a case that settles the whole
matter of the law upon that subject. This is the case of Smyth v.
Ames, in the Nebraska Rate Case, following and occurring with the
decision in the Ragan case in the Texas rate law.
Mr. DEWALT. From what volume are you reading?
Mr. COWAN. Volume 169, page 543.
It appears from what has been said that if the rates prescribed by the act of 1893
has been in force during the years to June 30, 1891, 1892, and 1893, the Fremont Co.—
That is, the Fremont, Elkhorn & Missouri Valley, which now be-
longs to the Northwestern, I believe-
in the years ending June 30, 1891, June 30, 1892, and 1893, and all the years up to 1892
and 1893, would have received more than enough to pay operating expenses. Do
these facts affect the general conclusion as to the probable effect of the act of 1892?
In the discussion of this question the plaintiffs contend that a railroad is entitled to
exact such charges for transportation as will enable it at all times not only to pay
operating expenses, but also to meet the interest regularly accruing on all its out-
standing obligations, and to justify a dividend upon all its stock; and that to prohibit
it from maintaining rates or charges for transportation adequate to all these ends will
deprive it of its property without due process of law, and deny to it the equal protec-
tion of the law.
This contention was the subject of elaborate discussion, and as it bears upon each
case in its important aspects it should not be passed without examination. In
our opinion the broad proposition advanced by counsel involves some misconception
of the relations between the public and the railroad corporations. It is unsound
that it practically excludes from consideration the fair value of the property used.
It omits altogether any consideration of the right of the public to be exempt from
unreasonable exactions, and makes the interest of the corporation to maintain the
public highway the sole test in determining whether the rates established by or for it
are such as may rightfully be prescribed as between it and the public. A railroad
is a public highway, and none the less so because it be constructed and maintained
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
795
through the agency of the corporation deriving its existence from the powers of the
State. This corporation was created for a public purpose. It performs a function
of the State. Its authority to exercise the right of eminent domain and charge tolls
was given primarily for the benefit of the public. It is under governmental con-
trol, though such control must be exercised with due regard to the constitutic nal
guaranties for the protection of its property. It can not therefore be admitted that
a railroad corporation maintaining a highway under the authority of the State may
fix its rates with a view solely to its own interest and ignore the rights of the public.
But the rights of the public would be ignored if the rates for the transportation of
persons or property on a railroad are exacted without reference to the fair value of
the property used for the public, or the fair value of the service rendered, but in
order simply that the corporation may meet operating expenses, pay the interest
on its obligations, and declare a dividend to its stockholders.
There is much more in that decision on the following pages, up
to page 547, and I ask the members of this committee to read it,
instead of taking the time now to read it. Suffice it to say that when
the Interstate Commerce Commission last June decided that these
rates were reasonable, it exercised the power which Congress conferred
upon the commission to do as between the railroads and the people,
and the standard is already fixed by that decision, and if you go away
from it, gentlemen, you do a wrong to the people of this country
who pay the freight. Now, nothing has happened since that time
that entitles them to a greater return than they were at that time
presently making and prospectively would make, and it was upon
those things that the commission based that decision. I now request
of the committee permission to procure a copy of that decision and
file it as apart of my remarks in the record in this case. It will show
you that the standard of what is reasonable has already been deter-
mined; and how can you escape it? You can not do it, gentlemen,
unless you want to open the door for the railroads to fix, as a vested
interest by contract, that you shall pay them more than under the
due process of law has been found they are entitled to rceeive. Now,
that is why I complain of the proposition presented in this bill.
Now let me digress a moment on the subject of service. The
previous earnings which they then presented to the commission as the
basis upon which they were asking an advance in rates equivalent to
what they had been earning-those previous earnings involved not
only the operating expenses, the interest obligations, fixed charges,
taxes, but a surplus over and beyond that. Now let me impress
upon you who think that public policy should not require that a rail-
road company will be able in addition to its fixed charges, taxes, and
regular dividends to have some surplus. I think it is best for the
country to have a good railroad, to have a railroad which is able to
take care of the exigencies when they arise; which can perform a good
service for the public, and when you furnish them with the means of
doing it, make them perform a good service for the public. But
when it comes in time of war to guaranteeing what we will pay them,
I do not believe in putting in there more than what their necessities
are to pay out to make the interest, taxes, and the dividend that is
reasonable. I say reasonable, because that character of dividends
which they have heretofore been paying. There can be no honest
excuse, gentlemen, it seems to me, for the railroads asking more than
that in this exigency, and I would no more sit in Congress and vote
for it than I would vote for taking the dollars out of your pocket.
They are making use of an exigency here to accomplish that which
796
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
they failed to accomplish before the Interstate Commerce Commis-
sion. They presented their case with great force, with the best
lawyers in the country, with unlimited expense gone to for the purpose
of preparation; with the greatest advertising that ever went broad-
cast over this country; with thousands, and I expect hundreds of
thousands, of communications to the commission from various ship-
pers, individuals, banks, and everybody to do something for the
railroads to help the railroads out.
The commission was swamped with it, and a comparatively few
of the people who have been overcharged in freight rates ever came
back for it. Why? Just for the reason as stated in the last 15 per
cent case when the application was made for advancing rates on
commodities, in November, Mr. Underwood, of the Erie, said that
in these rate cases, criticizing the fact that we appeared representing
a few of the commodities-that the public, the people interested,
the payers of the freight, were not present. That is true. They
depend upon the Government to protect them, because they can not
afford to pay the money to be present. He said they did not employ
counsel and appear. Of course, they do not, except where there
happens to be a sufficient organized interest in the country to do it.
Now, having a standard fixed there by a decision, not holding that
they were entitled to receive what they had been receiving, but hold-
ing what they were getting then and prospectively would be sufficient,
for what? Not to produce a surplus, because the commission, in my
opinion, would never go to the extent of saying that in war times
you are entitled to earn or have rates increased in order to earn a
surplus. You have already got high-level rates; you have got rates
which we hold have been sufficient in normal times here to pay you
enormously, and you would not be entitled to have these rates
increased in order that you may make something beyond which you
customarily paid out in dividends to the stockholders.
Mr. EscH. Judge, were you present when Mr. Thorne read his
proposed amendment?
Mr. COWAN. Yes, sir.
Mr. Escн. What are your views on it?
Mr. COWAN. I have not analyzed it, but, if I understood it right.
I think it accomplishes a part of what I thought ought to be ac-
complished.
Now, gentlemen, I have presented that in order that you will
not give the opportunity to put in a contract, a consideration that is
manifestly unjust; which the people do not want to pay. They have
got to take whatever you give. You are in a position of trust.
You should be bound by the law of what is necessary and reasonable.
They should be bound by the law of what is necessary and reasonable.
It is decided by the Supreme Court in the case to which I have
referred, absolutely, as to the standards. The Intersate Commerce
Commission in pursuance of its duty, long experienced, able to handle
these matters, as the court in this book says, better than a court can
under due process of law, fixed the limit of what this consideration
ought to be in this contract. I can not see how you can go above that,
gentlemen, and do your duty to the country.
"
Now, what I am afraid of is this: It has been said in the public
press Stop building." I believe the public records show that the
building trades have fallen off over 40 per cent. Mr. Winslow,
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
797
you probably know more about that than I do. I think these publica-
tions show it has fallen over 40 per cent. There is not any construc-
tion work going on in the country. Material is so high that it is
no time to buy it. Labor in all localities is scarce, and the condition
of affairs is uncertain. So that we have what invites less traffic
in the country, invites less manufacturing of the ordinary sort,
confining ourselves to the necessities of the war. There will be many
localities where the rates, by reason of the falling off of the traffic,
will become too low to produce either the amount which I have
stated ought to be a standard.
In such cases the Interstate Commerce Commission is open to a
hearing as to what ought to be done. The State commissions are
open to consideration as to what ought to be done, and the railroads
have no right to assume that these people are not on that high
plane which public officers ought to be and to substitute their
judgment and contentions for the public service. They have stood
out against any law to regulate them; they have stood out against
the efficiency of the law to regulate them; they have stood out
against the efficiency of the regulation by the regulating body; they
have enforced their great power upon the utility bodies of the country
in every way that was imaginable, until now they come with the
last appeal to you to underwrite them, to underwrite the securities.
of their stockholders, lest the financial fabric of the Government fall.
We come to the point where we must take their word for what we put
in a contract as the consideration for the use of their property,
where we must levy rates against the public above what is reasonable,
as determined by the best tribunals, in order that we may give
currency to the securities of their stockholders. Have we come to
that? If we have, then the day of Government ownership has
arrived, and as has been long ago said by some members of the Inter-
state Commerce Commission in public utterance-I don't recollect
for sure who it was that Government ownership would come, if it
did come, by reason of the acts of the railroads and not so much the
demand of the public. I am not a believer in Government owner-
ship. I believe in private operation. I believe in controlling it,
but I do not believe in private operation and private corporate
existence in this country which itself controls the Government or
controls the Government control.
·
Now it would be beyond the power of the Director General to so
operate these railroads, in my opinion, so as not to produce a deficit.
He believes and all those surrounding him believe, and they have so
expressed themselves, and I think most men believe-that the rail-
roads must be made self-supporting, I believe they must be made
self-supporting under this exigency, but I do not believe it necessary
to increase rates to do it, and the necessity of increasing rates will
never arise unless you put this consideration in that contract that
compels them. Now one other thing and I am through. Would you
saddle upon the future an obligation the character of this, or any
obligation where you fix the consideraton? Are you going to saddle
that upon the future? I say you have no right to do that. You
ought not to make the guarantee last more than two years. You can
not tell earlier than a year's operation whether there is going to be a
deficit on the whole or not. You would not know how many rail-
roads were going to be brought in. You don't know how much
798
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
traffic is going to be moved; you don't know how much economies can
be had until you try it out. You don't know what weather conditions
are going to be. I look for the absolute sweeping of all these river
valleys in floods in less than six weeks from now, if we have a heavy,
warm rain upon these great snows throughout the length and breadth
of this country, such as to increase expenses of maintenance immeas-
urably beyond what it has ever been before. The Government has
got to stand behind them, and they ought not to go one farthing
beyond what is the necessary thing to do in order to give the railroads
as a maxmum only the reasonable return that will pay the interest,
pay the dividends that customarily have been paid; and in my
opinion, as I have repeatedly expressed it, give to each railroad such
portion of the surplus as may happen to be earned above that, to
induce the greatest efficiency on such lines on the part of the employees
so that if we should turn them back in a short time, we would have
turned the whole family back and restored it to its own, and not have
disrupted it and caused that damage which Mr. Kruttschnitt testified
about at length.
I wish to thank the committee for your consideration, and I ask the
privilege of filing these proposed amendments after I have examined
Mr. Esch's amendment, with the memorandum.
The CHAIRMAN. You have that privilege, Judge.
Mr. DEWALT. I would like to inform myself at least upon one
subject. I suppose, Judge, that you will agree with me in saying
that primarily the rate-making power is a legislative function?
Mr. COWAN. Yes, sir.
Mr. DEWALT. I suppose you will agree with me in saying that
Congress has the power and has exercised the power to delegate that
legislative function?
""
Mr. CowAN. No, sir; not just precisely within the legal meaning
of the term "delegate.' It has provided an administrative depart-
ment to execute and carry out its laws.
Mr. EscH. Congress would have to fix the standard?
Mr. COWAN. Yes, and provide means of carrying it out. But it
is scarcely a delegation.
Mr. DEWALT. Well, it has given to the Interstate Commerce Com-
mission that power to fix and regulate rates, has it not?
Mr. CowAN. Yes, sir; to the extent prescribed by law-reasonable
and nondiscriminatory
Mr. DEWALT. Now, if Congress has that power, which it has exer-
cised, and the constitutionality of that power has not been seriously
questioned-although it was mooted at the time-why does Congress
not have the power to delegate to the President that same power?
Mr. CowAN. Absolutely, it has-no; now wait a minute. It would
have the power to delegate to a man, to some other man, any one
individual outside of the commission, but when it comes to delegat-
ing to the Executive power, or to the judiciary, the administration
of a legislative function, I would not want to answer you one way
or the other, unless I made an investigation of it.
Mr. DEWALT. Well, isn't the true distinction just this: The true
distinction, as Judge Ranney laid down, was as between the dele-
gation of power to make the laws, which necessarily involves a dis-
cretion as to what it shall be, and conferring authority or discretion
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
799
as to what is shall be, and conferring authority or discretion as to its
execution to be exercised under and in pursuance of the law.
Mr. COWAN. That is correct.
Mr. Dewalt. The first can not be done. To the latter no valid
exception can be taken.
Mr. COWAN. Yes, and that was done in the case of the Agricultural
Department and Post Office Department, and has been passed on by
the Supreme Court.
Mr. DEWALT. Now, if your contention be correct, that there would
be a deficit caused by the operation of these roads by the Govern-
ment; and if there was a deficit, naturally the President would have
the power to raise or lower these rates. Then if I understand your
argument, it is this: That you give to the President the taxing
power, in effect.
Mr. COWAN. It would, in effect, do that.
Mr. DEWALT. That would merely be a legislative function?
Mr. COWAN. Yes, I understand that. I am not contending that
he could exercise the taxing power.
Mr. DEWALT. But in Field against Clark it has been held that the
President may suspend the operation of the taxing laws. That was
in the sugar case where the President, by reason of reciprocity
arrangements, suspended the tax upon sugar that came in from
certain ports, and the Supreme Court held that that was an exercise
of the power which he had. Now if he can suspend these rates, why
couldn't he alter them, except for the objection which seems to be
in your mind and which has some weight in my opinion-that it
is a delegation of legislative power to the executive branch of the
Government? That is what I wanted to inform myself on.
Mr. COWAN. Well, I am not proceeding in my argument so much
upon the want of the power in the President under the President's
proclamation as I am the impropriety of letting the matter go
without providing in this bill where this regulation of rates shall be,
and let it be just as it has been by the legislative declaration in this
bill, that it shall be there, subject, of course, to the war power which
has nothing to do with these other matters we have been talking
about.
Mr. WINSLOW. May I ask you one question, Judge? Would you
feel that the return of the railroads to their own direction, whenever
the time might be, would be attended by any extraordinary expense
to the railroads in taking them over, in the matter of taking them
over and getting them going again? I don't think the matter of
taking them over will be any extraordinary expense, and the question
is whether the taking of them back, if we turn over the railroads, will
be an extraordinary loss or not, growing out of the time we shall have
operated them and the manner of our operation will depend upon
whether all the organized force is disrupted by operating the rail-
roads, say, for five or six years, and those who might have been work-
ing for the roads and have no hope of getting back would be working
for other concerns, would seek other employment and scatter about,
as they would, and then we turn the railroads over to the company
with its traffic arrangements and everything disrupted.
Mr. COWAN. I can well see where it might take them a good while
to get them back again, and they would not have the earning power
•
800
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
•
during that period that they would otherwise have. It is not so much
an expense of being able to earn.
Mr. WINSLOW. But that condition would take away their receipts.
Mr. COWAN. I think so. I think that is manifestly too true.
Mr. WINSLOW. Their case there would seem to be some reasonable.
excuse for providing some sort of a surplus for them against that day?
Mr. CowAN. Well, that might be, that you should provide some
sort of a surplus, but if they do run along a while, for a period, say, of
five years, they will receive regular dividends, which they have been
getting, and the property will have been kept up in time of war;
while if they had been operating them themselves, they would have
been under the necessity, perhaps, of sustaining the losses which they
stated to the Interstate Commerce Commission were imminent
because of the difficulties under which they were operating, without
the coordinations which the Government would bring about, and one
probably would somewhat offset the other. I wouldn't want to say
that there ought to be any figures made to add to the consideration in
this contract. Those uncertainties may or may not arise. I would
cut that contract right down to what is the reasonable amount of
consideration.
Mr. WINSLOW. In all commercial contracts between the Govern-
ment departments and those who have the contracts with them it is
clearly apparent that the buyers appreciate the fact that there will be
expenses at the end of the execution of the orders, and they are
allowing the bidders to take that into consideration. They admit,
for instance, that they will have to have new machinery, new build-
ings, and so far as I can observe the Government is allowing those
who make the bids to take those matters into consideration in making
prices.
Mr. COWAN. I don't think that is parallel at all, though between
the Government and the railroads on the one hand, and the shippers
on the other, as to how much they shall pay, because the shipper is
millions of people all over the country that have nothing to do with
the making of the contract and reap no reward from it. Besides, you
must readily understand that many businesses and many shippers
are going to be very much interrupted in their business, and the
efficiency of the service to them will oftentimes be interfered with on
account of the necessities of the Government during the operation
of the war.
Mr. WINSLOW. The people of the country pay the freight, whether
it is in the cost of running the railroads by the Government or the
cost of buying commodities. It comes out of the purchaser in the
end.
Mr. Cowan. I don't think so. I don't think you could afford, even
all other things considered-I think it would be perfectly proper to
pass an act that no advances should be made during the war on
stuff going to feed the armies. I don't believe you ought to permit
an increase.
Mr. SWEET. Mr. Chairman, there is just one question I would
like to ask the Judge with the permission of the committee. Now,
in addition to what Mr. Dewalt has said, without any infringement
upon the war power to be exercised by the President, suppose it
were left to the President to determine whether or not it was neces-
sary to increase the rates for the purpose of raising $100,000,000 to
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
801
meet a deficit, and that the President had the right to say that that
amount should be raised by increasing the rates, but leave abso-
lutely to the Interstate Commerce Commission the right to pass
upon the rates necessary to raise the $100,000,000 and in that way
giving to the shipper or any one that might be interested a right to
be heard before the Interstate Commerce Commission. Would
that be an objectionable provision?
Mr. CowAN. Well, it would not be objectionable unless it were
done to procure the money to pay an exorbitant consideration named
in the contract. If you will put the contract right, the balance of
it will take care of itself, because the President should not go beyond
the Interstate Commerce Commission in these complex matters of
fixing rates unless he felt it imperative to take such action because
of the necessity of meeting this contract. As long as the public gets
a reasonable rate, they can not ask anything more, and would not.
They ought not to have to in advance make an unreasonable con-
tract and risk it as to whether the amount of the traffic, the volume
of the traffic, and the economies of the operation will be sufficient to
meet them. What I want is to keep the contract down to the point
where it is not above the point that is reasonable, and then to have
the power left in the commission, in the first instance, to proceed as
it now would in regard to advances in rates; and if these extraor-
dinary conditions arise which you have named, they would be about
equivalent to about what the railroads contended in the Fifteen Per
Cent case they needed a general advance on account of their earnings.
In such a case the commission is already vested with the authority
and, of course, would coordinate with the President. Another thing
is, they would undoubtedly respond to any exigency which would
be put up to them where it was necessary to change the rates, rules,
regulations, or practices in order to accommodate the business to
the war power, as I think any commission of any State is ready to
do, as they did do in this demurrage case, which I found now they
have concluded was wrong, and they are going to change that and
leave it as it was before.
SUBSTITUTE FOR SECTION 1, SUGGESTED BY MR. S. II. COWAN.
:
Be it enacted by the Senate and House of Representatives of the United States of America
in Congress assembled, That the President is hereby authorized to enter into an agree-
ment with any common carrier owning or operating any railroad or system of trans-
portation now under, or which shall hereafter come under, the control, possession, or
operation of the President, or the control, use. possession, and operation thereof taken
by him for pub'ic use (hereinafter called Federal control) by virtue of the act of August
twenty-ninth, nineteen hundred and sixteen, and the joint resolutions of April sixth,
nineteen hundred and seventeen, and December seventh, nineteen hundred and
seventeen, declaring a state of war, and the proclamation of the President of December
twenty-sixth, nineteen hundred and seventeen, for just compensation to be paid or
secured to such common carriers or other person, firm, or corporation, the owner of
any railroad or system of transportation or any part thereof, such agreement to provide
for the just compensation to be paid or secured for the use of the railroad or other prop-
erty of such carrier or system of transportation, or any part thereof, devoted to public
use during the period of Federal control. Payment thereof to be guaranteed by the Gov-
ernment to the party entit'ed thereto as herein provided. The amount of such com-
pensation so guaranteed not to exceed the sum per annum, or proportionate part for fraç-
tions of a year, the equivalent of the average yearly operating income (as that term is
use in the accounting system of rules prescribed by the Interstate Commerce Commis-
sion) for the period July first, nineteen hundred and fifteen, to December thirty-first,
nineteen hundred and seventeen, such payment to be made at such stated periods
10958-18-51
802
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
•
as may be agreed upon, quarterly or annually, in the amount sufficient to pay the
interest on outstanding bonds or other evidences of indebtedness or obligations of the
carriers on which current interest has been paid during said period, and in addition
to such interest an amount sufficient to pay the same per centum of dividend on out-
standing stock of such carrier company issued and sold prior to December sixth, nine-
teen hundred and seventeen, as has customarily been paid, not exceeding the average
percentage of dividend paid during such period since July first, nineteen hundred
and seventeen.
The net revenue from operation of each of such carriers owning or operating such
system of transportation, or part thereof, under Federal control, as aforesaid, in excess
of the amount guranteed to be paid, as aforesaid, as interest and dividends, to be
retained by the President, the Director General, or other agency, as may be deter-
mined by the President for maintenance other than ordinary current expenditures
required for maintenance to keep the property in the usual state of repair or for addi-
tions and betterments, equipment or new trackage or facilities or for general uses of
administration not included in operating expenses, or to aid in paying such interest
dividends as guaranteed, such excess net revenue, less the amount expended for the
aforesaid purposes, shall, on final settlement, or at periods provided herein for set-
tlement between the Government and such carriers, be paid over to each of such car-
riers earning the same or on whose line it was earned; and the President is further
authorized under such agreement to make all reasonable agreements for the main-
tenance, repairs and renewals of property of such common carriers, charging to operat-
ing expenses the amount properly chargeable thereto, and to capital account such
expenditures as under the accounting rules of the Interstate Commerce Commission
should be charged to additions and betterments, the cost of such additions
and betterments to be deducted out of the standard return upon the final
settlement with such carrier, or at periodical settlements as may be pro-
vided for by such agreement; and the President may by such agreement pro-
vide for the creation of such reserve funds for renewals, replacements, and better-
ments and for the depreciation, if any, of the property and equipment to the end
that at the termination of such Federal control the property shall either be turned
back to such common carrier or party entitled thereto in substantially as good state
of repair and as complete equipment in as good state of repair, as at the beginning of
Federal control, or that failing to do so just payments shall be made therefor to such
common carrier, and in the event such property is turned back in a better state of
repair or with additions and betterments, or additions of equipment reasonably nec-
essary in the operation of such property, due allowance shall be made therefor, to be
deducted out of the standard return.
If the President should find that the condition of any such carrier or its property
was during all or a substantial portion of the period of time subsequent to July
first, nineteen hundred and fifteen, because of such carrier not having kept such
property in such state of repair or because of delay in operation or repairs or other
exceptional condition then the President may make with the carrier such agreement
for just compensation as under the circumstances of the particular case shall seem just.
The President is further authorized in such agreement to make all other reasonable
provisions not inconsistent with the provisions of this act or the act of August
twenty-ninth, nineteen hundred and sixteen, that he may deem necessary or
proper for such Federal control or for the determination of mutual rights and obliga-
tions of the parties arising out of such Federal control but which will not obligate the
Government to exceed the gurantee herein provided for.
SUBSTITUTE FOR SECTION 11, PROPOSED MR. BY S. H. COWAN.
SEC. 11. That carriers while under Federal control shall, notwithstanding such
Federal control in whatever form it may be exercised, in so far as not inconsistent
with or contrary to this act or any order of the President in the necessary exercise of the
military power directing or regulating "transportation," as that term is defined in the
first section of the act to regulate commerce or requiring or directing the performance
of any service or the doing of any other thing for military purposes otherwise necessary
for the purposes of the war, be subject to all laws, duties, and liabilities as common
carriers, whether arising under statutes or common law, in the same manner as if such
property under Federal control were operated by the corporations or persons owning
the same as common carriers: and all suits, actions. and proceedings to enforce such
duties, or recovery for any liability, or the enforcement of any other right, may be
brought by and against such carriers and judgment rendered, decrees and orders
made as provided by law. The possession, control, and operation by the Director
General of the property used in the transportation service and the operation thereof
1
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
803
shall be deemed to be that of such carriers with respect to the property operated by
such carrier at the time of taking such Federal control. Put no process, mesne or
final, shall be levied against any property under such Federal control or the possession
and operation thereof in any wise interfered with. The Fresident shall prescrite
the means and methods of payment out of operating revenue derived from such Federal
control of any judgment or the enforcement of any decrees or orders that may be ren-
dered or made against any such carrier, the charging against the standard return the
amounts which may be paid on account of liabilities accruing prior to the taking of
such Federal control, and as to the payment of judgments or satisfying the decrees
or orders for liabilities accruing during such Federal control, the amount paid shall
be charged against the operating expenses under such Federal control.
Provided, That the act to regulate commerce, approved June twenty-eighth, nine-
teen hundred and six, and acts amendatory thereof, and the laws of the several States
or the administrative orders or requirements made in the administration thereof
shall not as to rates, fares, and charges be superseded by anything in this act con-
tained or any order of the President, but the power to make rates and regulations
thereof shall remain as it was at the time of taking Federal control of any common car-
rier, except in special or exceptional cases, where it shall be imperatively necessary
in the transportation of troops, Government employees or officials, munitions, sup-
plies, or other traffic for the Government or for the Army and Navy, or any special
cases of calamity or other imperative necessity where in order to relieve such excep-
tional conditions it may be necessary to require traffic to be moved without compen-
sation, or that charges different from the regular and established rates be made; then
in all such cases the President, or Director General acting under authority of the Pres-
ident, may make such orders as will meet the emergency. Nothing in this proviso
shall be held to affect or in any wise limit the right or power of the President, or the
Director General acting under authority of the President, with respect to the routing
of traffic or changing its destination or placing embargoes when necessary to prevent
congestion or the impeding of traffic or the doing of any other thing that may be neces-
sary under the war power with respect to the control of such "transportation.
""
All pending cases and proceedings before the Interstate Commerce Commission
shall proceed as heretofore or as may be directed by the commission, and all proceed-
ings which under the act to regulate commerce may be brought against or by a carrier
either before the commission or the courts may be brought by or against such carrier
under Federal control in the same manner as it might have been brought without
such Federal control.
The Director General shall be authorized to bring and defend all suits and proceed-
ings in like manner and to the same effect as the carrier not under Federal control.
NOTE.-The foregoing probably will have to have added to it a proviso stating
carriers shall be liable for valid claims arising during control but not put into judg-
ment or paid, that is, they take back the property with those liabilities.
No. 57 (Ex Parte).
THE FIFTEEN PER CENT CASE.
PROPOSED INCREASES IN FREIGHT RATES IN EAST-
ERN, WESTERN, AND SOUTHERN TERRITORIES.
Submitted June 12, 1917. Decided June 27, 1917.
All schedules naming increased rates within the western district, and all
schedules excepting only those applying to bituminous coal, coke, and iron
ore, naming increased rates within the southern and eastern districts are
suspended until October 28, 1917, but the eastern carriers are permitted
to increase their class rates upon short notice given in the usual way.
George Stuart Patterson for eastern carriers.
R. Walton Moore, Charles J. Rixey, jr., and Edward II. Пart for
southern carriers.
Charles Donnelly, C. S. Burg, W. F. Dickinson, O. W. Dynes,
II. G. Herbel, T. J. Norton, II. A. Scandrett, R. B. Scott, and Fred
I. Wood for western carriers.
Hugh L. Bond, jr., William Ainsworth Parker, and George M.
Shriver for Baltimore & Ohio Railroad Company.
T. II. Burgess for Erie Railroad Company.
II. M. Griggs and Clyde Brown for New York Central lines.
J. J. Campion for Carolina, Clinchfield & Ohio Railway.
W. J. IIarahan, C. R. Capps, and II. W. McKenzie for Seaboard
Air Line Railway Company.
-
George Dailas Dixon for Pennsylvania Railroad Company.
Howard Elliott for New York, New Haven & Hartford Railroad
Company.
1
Henry J. Ilart for Bangor & Aroostook Railroad Company.
Henry G. Herbel, Fred G. Wright, and J. M. Johnson for Missouri
Pacific Railway Company and its receiver; St. Louis, Iron Mountain
& Southern Railway Company and its receiver; Arkansas Central
Railroad Company; Natchez & Southern Railway Company; Natchez
& Louisiana Railway Transfer Company; and Union Railroad Com-
pany.
George S. Hobbs for Maine Central Railroad Company.
C. W. Huntington and S. M. Adsit for Virginian Railway Com-
pany.
George W. Lamb and William A. Northcutt for Louisville & Nash-
ville Railroad Company.
L. F. Loree for Delaware & Hudson Company.
A. II. Lossow and A. R. Marshall for Minneapolis, St. Paul &
Sault Ste. Marie Railway Company.
C. C. McCain for Trunk Line Association.
James L. Minnis for Wabash Railway Company.
805
806
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS,
F. W. Kirtland for Florida East Coast Railway Company.
George F. Randolph for Lines in Official Classification Territory.
B. M. Robinson for Tennessee Central Railway Company and its
receiver.
Lincoln Green for Southern Railway system.
T. J. Shelton for Arkansas & Louisiana Midland Railway Company.
Benjamin I. Spock for New York, New Haven & Hartford Rail-
road Company and Central New England Railway Company.
R. V. Taylor, C. B. Ilayes, and S. R. Prince for Mobile & Ohio
Railroad Company.
W. S. Bronson for Chesapeake & Ohio Railway Company.
Levy Meyer and H. S. Noble for Great Lakes Transit Corporation.
George F. Brownell and H. A. Taylor for Erie Railroad Company
and New York, Susquehanna & Western Railroad Company.
Jackson E. Reynolds for Trunk Lines on Anthracite Coal Rates.
George M. Cummins for United Light & Railways Company.
Frank Hagerman for National Association of Owners of Railroad
Securities.
Clifford Thorne, Luther Walter, Graddy Cary, S. H. Cowan, and
Clyde L. King for National Shippers Conference.
William A..Wimbish and Challen B.Ellis for Southeastern Shippers.
T. K. Riddick for Memphis Freight Bureau.
Cassoday, Butler, Lamb & Foster, W. E. Lamb for California
Fruit Growers' Exchange, California Walnut Growers' Association,
California Almond Growers' Exchange, De Laval Separator Com-
pany, and Iola Cement Traffic Association.
:
Ilance II. Cleland for Washington Public Service Commission, and
Public Service Commissions of Idaho and Oregon.
R. II. Countiss for Trans-Continental Freight Bureau.
P. W. Coyle for St. Louis Chamber of Commerce.
Conrad W. Crooker for Boston & Maine Minority Stockholders
Protective Association.
Henry C. Flannery for State of Minnesota, and Railroad & Ware-
house Commission.
G. II. Albee and W. II. Chandler for Boston Chamber of Com-
merce.
Frank Reeves for fruit industries of States of Washington, Oregon,
and Idaho.
C. B. Bee for Public Service Commission of Missouri.
Harrison A. Bronson for State of North Dakota.
B. Gilham, Macon, Ga., Chamber of Commerce.
Thomas L. IIall for Nebraska State Railway Commission.
Arthur B. IIayes for Rising & Nelson Slate Company, Sea Green
Slate Company, Florida Growers & Shippers' League, and Indiana
Limestone Shippers.
1
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
807
A. E. Helm for Public Utilities Commission of the State of Kansas.
II. D. Hughes for American Cast Iron Pipe Company.
Francis B. James, E. E. Williamson, Wayne P. Ellis, and C. B.
Hewes for National Association of Paving Brick Manufacturers.
James C. Lincoln for Merchants Association of New York.
II. C. Lust for Corporation Commission of Arizona; Northern
White Cedar Association; Mason City, Iowa, Chamber of Commerce;
Alexandria, La., Chamber of Commerce; Boise, Idaho, Chamber of
Commerce; Green River Chair Company; Perfection Biscuit Com-
pany; Lamb-Fisher Lumber Company; Pierce-Williams Company;
Union Petroleum Company; Contact Process Company; United
Light & Railway Company; William Galloway, Waterloo, Iowa;
Western Chemical Mfg. Company; Union Stock Yards; Charcoal
Iron Company of America; American Live Stock and Loan Com-
pany; Iowa District Gas Association; and Iowa Section National
Electric Light Association.
Seth Mann for San Francisco Chamber of Commerce and Cali-
fornia canning interests.
A. G. T. Moore for Southern Pine Association.
W. II. Miller for Indian Refining Company.
Ira B. Mills, Charles E. Elmquist, and II. B. Warren for Minne-
sota Railroad and Warehouse Commission.
C. W. Nash for Rising & Nelson Slate Company and Sea Green
Slate Company.
N. B. Kelly for Philadelphia Chamber of Commerce.
F. E. Paulson for Lehigh Portland Cement Company.
II. C. Reynolds for Pocono Mountain Ice Shippers.
W. II. Sears for The Sears & Nichols Canning Company.
C. B. Stafford for Louisville Board of Trade.
E. C. Southwick for Providence Chamber of Commerce.
Clifford Thorne for Western Oil Jobbers Association, National
Live Stock Shippers Protective League and Corn Belt Meat Pro-
ducers' Association.
John R. Walker and Claude W. Owen for Southern Pine Lumber.
George B. Webster for Associated Cooperage Industries of
America.
E. R. F. Wells for Southern Produce Company.
R. L. Welch for Western Petroleum Refiners Association.
Frank E. Williamson for Buffalo Chamber of Commerce.
George P. Boyle and II. B. Arnold for Sunday Creek Coal Com-
pany.
James C. Jeffery and F. C. Gifford for National Assocation Box
Manufacturers.
J. A. Morgan for Houston Chamber of Commerce.
808
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
C. D. Chamberlin and F. W. Boltz for National Petroleum As-
sociation.
W. E. MacEwen for National Refining Company and Western Pe-
troleum Refiners' Association.
Edward A. Thurston for Traffic Committee, Arkwright Club.
G. R. C. Wiles for Public Service Commission, W. Va.
W. C. McCulloch for West Coast Lumbermen's Association.
Alfred Brandeis for A. Brandeis & Son.
William A. Wimbish for Chattanooga Manufacturers' Associa-
tion, Chattanooga Chamber of Commerce, Chattanooga Retail Mer-
chants' Association, Chattanooga Wholesale & Jobbers' Association;
Nashville Traffic Bureau, Atlanta Retail Merchants' Association,
Atlanta Freight Bureau, Columbia Chamber of Commerce, Tampa
Board of Trade, Montgomery Chamber of Commerce, Columbus
Chamber of Commerce, Shippers & Manufacturers Association,
Fayetteville Chamber of Commerce, Pensacola Chamber of Com-
.merce, Mobile Chamber of Commerce, Sanford Board of Trade,
Savannah Traffic Bureau, Selma Chamber of Commerce, and the
Georgia-Florida Sawmill Association, protestants.
C. W. Wickersham and John A. Kratz for National Biscuit Com-
pany and Biscuit & Cracker Association.
S. J. Wettrick for Seattle Chamber of Commerce and Commer-
cial Club.
A. D. Phillips for Fiske Rubber Company.
Claude II. Reigart for Bethlehem Steel Company.
Oliver E. Sweet and L. R. Bitney for State of South Dakota and
Board of Railroad Commissioners of South Dakota.
Clyde B. Aitchison for West Coast Lumbermen's Association,
California Redwood Association, Western Pine Manufacturers Asso-
ciation, and Western Red Cedar Association:
II. C. Barlow for Chicago Association of Commerce.
Frank Barry for Merchants & Manufacturers Association of Mil-
waukee.
C. S. Bather for Rockford Manufacturers & Shippers Association
and Federation of Furniture Manufacturers.
J. II. Beck for St. Paul Association of Public & Business Affairs.
Borders, Walter & Burchmore for Procter & Gamble Distributing
Company, Globe Soap Company, N. K. Fairbanks Company, Louis-
ville Soap Company, Peet Bros. Soap Company, Kirk Soap Com-
pany, Kerr Bros. Mfg. Company, Keer Glass Company, Indiana
Northern Railway Company, and Prescott & Northwestern Railroad
Company.
.
George P. Boyle for Hormel & Company, Rucckheim Bros. &
Eckstein, and Shotwell & Company.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
809
George T. Bradley for Colorado State Public Utilities Commis-
sion.
A. J. Branscom for Commercial Club, Aberdeen, S. Dak.
A. B. Caswell for National Association of Tanners.
W. F. Clarke for B. F. Sturtevant Company and Sanford Riley
Stoker Company.
II. II. Corey for State of Oregon.
John B. Daish and Albert C. Ritchie for State of Maryland and
State Roads Commission.
John B. Daish, N. B. Wescott, and J. Raymond Iloover for Eastern
Shore of Virginia Produce Exchange.
John B. Duish and J. Raymond Iloover for Birdsboro Stone Com-
pany.
John C. Graham for Jackson Chamber of Commerce.
C. B. Ileinemann for The National Live Stock Exchange.
Geo. F. Ilichborn for United States Rubber Company.
C. L. Hillary for F. W. Woolworth Company.
Edward A. Ilaid for Southern Hardwood Traffic Association and
other hardwood lumber interests in the southwest.
J. II. IIenderson, Dwight N. Lewis, E. D. Chassell, and John A.
Guiher for Iowa Railroad Commission.
Jay W. McCune for Traffic Bureau of Tacoma Commercial Club
and Chamber of Commerce.
C. D. Mowen and W. M. Taylor for Arkansas Wholesale Grocers'
Association; Merchants' Freight Bureau, Little Rock, Ark.; Fort
Smith Traffic Bureau, Fort Smith, Ark.; and Pine Bluff Traffic
Bureau, Pine Bluff, Ark.
J. S. Marcin for National Automobile Chamber of Commerce.
F. W. Maxwell for The Denver Transportation Bureau.
D. F. Ilund for Cleveland Chamber of Commerce.
C. S. Keene for American Tobacco Company.
Everett Kent for Chestnut Ridge Lumber Company.
Ilerman Mueller for Lansing Chamber of Commerce.
J. V. Norman for Southern Hardwood Traffic Association and
Southern Hardwood Mills.
L. C. Parshall for Battle Creek Chamber of Commerce.
A. D. Phillips for Fisk Rubber Company.
R. W. Potect for Stanley Works.
Albert L. Vogl and S. II. Babcock for Colorado Fair Rates Asso-
ciation.
J. Prince Webster for Railroad Commission of Georgia.
·E. E. Bockstedt for Columbia Rope Company.
S. II. C'owan for American National Live Stock Association, Texas
Industrial Traffic League, Texas Live Stock Shippers League, Cattle
1
810
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Raisers Association of Texas, and National Live Stock Shippers Pro-
tective League.
R. G. Phillips, R. S. French, and L. A. Kinney for National League
of Commission Merchants of the United States, International Apple
Shippers' Association, and Western Fruit Jobbers' Association of
America.
W. II. Young for Western Fruit Jobbers' Association and Ne-
braska-Iowa Fruit Jobbers' Association.
J. A. Little and D. J. Crandahl for Board of Railroad Commis-
sioners of North Dakota.
T. W. Tomlinson for American National Live Stock Association.
O. W. Tong for Northern Potato Traffic Association and Libby
Lumber Company.
C. II. Rodehaver for National Basket and Fruit Package Associa-
tion.
C. E. Childe for Traffic Bureau of the Sioux City Commercial
Club.
R. D. Sangster for Chamber of Commerce, Board of Trade, Live
Stock Exchange, and Hay Dealers Association of Kansas City, Mo.
T. C. Tipton for Jacksonville Traffic Bureau.
Ernie Adamson for McNeil Marble Company, Georgia Marble
Company, and Georgia Marble Furnishing Works.
II. M. Wade for Ewauna Box Company, Klamath Mfg. Company,
Algoma Lumber Company, Axelson Mfg. Company, D. & B. Pump
Company, Motor Car Dealers Association, Whiting-Mead Commer-
cial Company, Pacific Coast Tanners Association, Western Pipe &
Steel Company, and Oakland Chamber of Commerce.
Shelby Taylor for Railroad Commission of Louisiana.
W. M. Barrow for Mississippi Cotton Seed Crushers Association;
the Railroad Commission of Louisiana; and Attorney General's De-
partment, State of Louisiana.
S. J. Bolton for Chamber of Commerce, La Crosse, Wis.
Walter E. McCornack for American Sand & Gravel Company,
National Sand Company, and J. N. Bos Sand Company.
James C. Jeffery for Northwestern Terra Cotta Company and
others.
Thomas S. Kennedy for Utilities Service Association of San Fran-
cisco, California.
Benjamin C. Marsh for the Committee on Valuation of Railroads.
R. Rosenbluth for Institute Public Service. New York City.
G. J. Bradley for Merchants and Manufacturers Association, E.
Clemens Horst Company, Wolf Hop Company, Mebius & Drescher
Company, L. D. Jacks, T. A. Liressey & Company, Lillienthal
Brothers, Incorporated, Hugo V. Loewi, Elmer E. Fingarr, Benj.
Schwarz & Sons, and Otto Seidenberg.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 811
J
James A. Keller for Pacific Portland Cement Company, Consoli-
dated.
C'assoday, Butler, Lamb & Foster, William E. Lamb for Cali-
fornia White and Sugar Pine Manufacturers' Association.
Cassoday, Butler, Lamb & Foster, William E. Lamb, George E.
Farrand, and II. C. Lust for California Fruit Growers' Exchange,
Mutual Orange Distributors, Randolph Marketing Company,
Stewart Fruit Company, Redlands Orange Growers' Association,
and American Fruit Distributors.
William Langer for State of North Dakota.
James L. Cowles for World Postal League.
William II. Sears for Sears & Nichols Canning Company.
G. F. Thomas for Arkansas Soft Pine Bureau.
T. Noel Butler for Wistar, Underhill & Nixon.
J. II. Fishback and B. L. Glover for Iola Cement Mills Traffic
Association.
J. S. Brown for Chicago Board of Trade.
George J. Kindel for Colorado Granger Association.
E. C. Iloskins for Florida Growers & Shippers League.
BY THE COMMISSION:
REPORT OF THE COMMISSION.
On March 22, 1917, carriers in official classification territory. here-
inafter designated eastern carriers, represented to the Commission in
a public conference that an emergency had arisen in their operation.
which required prompt remedial measures. Similar representations
were similarly made on March 27 by the carriers in western classifi-
cation territory, hereinafter referred to as western carriers, and on
April 10 by carriers in southern classification territory, hereinafter
referred to as southern carriers. In all of these conferences we
were urged to act promptly, because, it was asserted, the situation
had become critical and delay would detract from the beneficial
effects of the remedial measures proposed.
Under authority delegated by the act the Commission has estab-
lished rules governing the publications and filing of rate schedules,
which rules have been modified from time to time. At the pre-
liminary conferences we were asked to modify those rules so as to
permit the filing in simplified form of schedules proposing a gen-
eral and horizontal increase in all freight rates except upon certain
designated commodities, and to permit such rates to become effective
on less than statutory notice. The publication of all the necessary
iariffs in the form required by the rules would have involved an ex-
penditure of hundreds of thousands of dollars and consumed much
time. We were therefore urged to permit the filing of schedules.
providing for a percentage increase in rates. The request that in-
812
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
1
creased rates be permitted to become effective on short notice was
not granted.
On April 10 and 20, 1917, conferences between representatives of
shippers and of carriers and the Commission were held to consider the
form of the proposed publications. As a result of these conferences,
at which practically no objections were raised to the proposed per-
centage form of publication, a permissive order was entered on April
23, 1917, granting to the carriers authority to publish and file sup-
plemental tariffs proposing the increased rates in the simplified form
requested. Such tariffs were filed on behalf of all, or practically all,
the railways in the United States, to become effective July 1, 1917.
Whether these tariffs shall be permitted to become effective as pro-
posed or shall be suspended in whole or in part is the question im-
mediately at issue.
In some quarters it has been alleged that the Commission has
abrogated the law and the tariff rules in order to make the filing of
these tariffs possible. It should be needless to state that nothing has
been done by the Commission in violation of any provision of the
statute. We were not asked to transgress or set aside the law and
we would certainly not have done so if we had been asked.
We modified certain of our tariff rules as the act authorizes us to
do. This we have done in other instances, and no doubt the future
will develop instances in which further modifications of these rules
will be warranted. The permissive order referred to authorized car-
riers to file the tariffs proposing horizontal increases in rates on not
less than 50 days' notice, whereas the statutory period is not less
than 30 days.
Many of the protestants requested us to suspend these tariffs in
order that an investigation might be had, as in their view is con-
templated by the statute, the implication being that an investigation
would be impossible without suspension. This view is erroneous.
We have sat as a body for practically a whole month listening to
testimony and arguments favoring or opposing these proposed in-
creased rates. More than 6,000 pages of testimony have been re-
ceived and a mass of statistical and other exhibits has been made a
part of this record.
The form of the investigation which we adopted fitted the sub-
ject to be investigated. Had these proceedings been conducted sub-
sequent to a suspension of tariffs they could not properly have been
materially different from what they have been. Everyone who ap-
peared and expressed a desire to be heard was heard and no one
was denied a fair hearing. We might have sat for months listening
to detailed testimony relating to specific rates and localities, but such
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
813
testimony could have been of little assistance to us in arriving at a
proper conclusion with reference to the propriety and reasonableness
of the increased rates here proposed covering the entire country. An
investigation of such a detailed character is neither necessary nor
useful in the exercise of the functions which we are called upon to
perform in a case of this character.
During the preliminary conference above referred to authorized
representatives of carriers in each of the three rate territorial dis-
tricts expressed the willingness of all the carriers in the United States
to waive all technical requirements and guaranties in order that an
expeditious and practicable procedure might be adopted. With this
in view they agreed upon the record that if the Commission should
authorize an increase on such a proceeding as we have conducted in
the instant case they would, if at a later date the situation should
change and the Commission should be of the opinion that the in-
creased rates were, in whole or in part, no longer just and reasonable,
reduce them on an expression from us to that effect, following a pro-
ceeding no more extensive than or different from that in which the
increase was permitted. It was the desire of the carriers to bring
the issue of the increased rates before us in the simplest, most direct,
and economical manner. To this no substantial objection was ex-
pressed by any of the protestants.
As stated, the first representations were made on behalf of the
eastern carriers on March 22. This is about the time in each month
when the officials of the carriers generally get the statistical returns
showing the results of operation during the preceding month. The
operating results for the month of February, 1917, may well have
startled the railway executives because, generally speaking, they
were, for the castern district especially, extremely unfavorable. The
weather conditions had been severe. In many sections the difficulties
of operation had been unprecedented. Furthermore, as a result of
the congestion of traffic on the eastern roads and the various operat-
ing difficulties arising out of the shortage of cars, the movement of
empty cars westward reached extraordinary proportions over some
lines. Because of the severe weather conditions the expenses of the
movement were greater than usual, and, of course, the movement of
empties adds nothing to the revenues. Finally, increased wages
directly and indirectly resulting from legislation first appeared in
the operating accounts of a number of the carriers for the month
of February. While some carriers made no charges in their accounts
for increased wages, resulting directly or indirectly from the legis-
lation referred to, other carriers charged estimated amounts for both
January and February. These three causes, severe weather, rela-
814
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
tively heavy movement of empty cars, and increased wages, together
with increases in the cost of materials and supplies, and to some
extent of fuel, made the operating results of the eastern carriers for
February alarmingly unfavorable. Under stress of these conditions
the railway executives made their first appeals for relief in the
emergency in which they believed they found themselves. If these
unfavorable tendencies had continued and the operating results for
the succeeding months had perpetuated tendencies of the month of
February, a problem very different from that which now confronts
us would have been presented. That carriers have been obliged to
pay increased prices for materials and supplies can not be questioned.
It is difficult to characterize with moderation the increases in the
prices of metals as well as the prices which have been demanded in
various localities for fuel. Tables 1 to 7, inclusive, in the appendix,
illustrate the prices of some of the more important commodities
which the railways must purchase in large quantities and which
consequently have an important effect upon their operating results.
The emergency which the carriers believed existed when these pro-
ceedings were initiated was attributed by some primarily to the war
in Europe. Various statements relating to a causal connection be-
tween the war and the railway emergency led us to include in a cir-
cular of interrogatories submitted to the carriers a question relating
to the burdens which it was believed the war would cast upon them.
While a number of witnesses referred to the burdens to the carriers
of the war, viewing the record as a whole no such burdens have been
shown to exist nor has the probability of their development been
demonstrated. It was not shown that military transportation had
been in the past, or is likely to be in the future, a financial burden.
to the carriers. On the contrary, certain facts were referred to which
indicated that the transportation of troops had been more remunera-
tive during certain mobilizations in the past than ordinary passenger
transportation. In so far as anything that is here asked of us might
contribute to the success of the war we should respond unhesitatingly
to the fullest extent of our lawful authority. We are not unmindful
of the fundamental and immensely valuable service which the car-
riers perform in times of peace and even more in times of war. No
one will deny that the successful operation of the railways is vital
to our national welfare. We fully appreciate the services which the
railways are performing, and the unusual efforts they are making to
secure a maximum of efficiency. But this record does not convince
us that the suspending or refusing to suspend the proposed rates,
or the granting or refusing to grant increased rates, will facilitate
or retard the successful prosecution of the war.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
815
An examination of the results of operation during 1916 as pic-
tured in the reports of carriers to the Commission shows that that
year was as a whole more profitable for the carriers than any pre-
ceding year, and it may be assumed that they might suffer some
abatement of the prosperity of that year without being crippled or
in any way incapacitated. In Tables 8 to 11, inclusive, in the
appendix are shown monthly averages per mile of road for operating
revenues and operating income for all class I roads in the United
States and for those in the several districts before mentioned. The
table for the country as a whole goes back to July, 1907. Owing to
the fact that the reports for the earlier years were not classified with
respect to districts, the figures by districts have been shown only
from January, 1911. With respect, however, both to the country
as a whole and to the several districts, the relation of the figures for
operating revenues for each calendar year to those for the first four
months, January to April, inclusive, is seen to be rather remarkably
uniform, enabling one to expect with considerable confidence that
the operating revenues for the calendar year 1917 will be in excess
of those of any preceding calendar year covered by the series of
reports. An estimate of operating income for the year is also shown,
but, owing to the fact that a considerable number of increased costs
that may reasonably be expected had not become effective prior to
April 30, this estimate is not entitled to so much confidence as that
of operating revenues.
A study of the figures contained in these tables suggests that, bar-
ring unforeseen contingencies and unusual disruptions of commercial
affairs during the remainder of the year 1917, we shall find as results
of the year's operations of class I roads figures about as follows:
United Fastern Southern Western
States. district. district. district.
Average operating revenues per mile of road.
Average operating income per mile of road
1
$17,101
4,334
$29,432 $13,610
5, 802
3,872
$12.597
3,813
¹ Based on costs represented in accounts to April 30, 1917. Anticipated increased costs, if realized, will
operate to reduce somewhat the estimated figures for operating income per mile.
It is not practicable to determine from figures now compiled the
book values of investment in road and equipment per mile of road
prior to June 30, 1915, for roads in the several districts, but those
for the United States cover a longer period. While these figures can
not be accepted as reflecting accurately the actual cash investment
they may be taken as significant for purposes of comparison. The
figures for operating income per mile of road for calendar years
when compared with those for book value of investment in road and
equipment per mile of road at June 30, give for class I carriers for
816
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
the United States as a whole the following ratios, using the estimated
figures for 1917:
1917 1916 1915 1914
1913
1912 1911 1910 1909
1908
Ratio of operating income to Per ct. Per ct. Per ct. Per ct. Per ct. Per et. Per ct. Per c. Per ct. Per ct.
investment.
15.817 6.400 5.210 4.091 4683 5.300 5.070 5.519 5.866 4.941
1 Based on an estimate of $4,334 operating income per mile of road and boo in estment of $71,500 per mile
of road. Increasing costs subsequent to Apr. 30, 1917, will probably operate to diminish this figure some-
what.
The estimate of operating income for 1917 may be considerably
diminished and still exceed the average for any three consecutive
preceding years.
In Table 12 of the appendix the total number of tons of revenue
freight originated by the carriers in the respective districts for the
fiscal year 1916 is compared with the corresponding figures for the
fiscal year ended June 30, 1913, the latter having been the largest
prior year with respect to freight traffic. The totals for the respec-
tive districts show that the eastern roads originated 39,253,873 more
tons during the fiscal year ended June 30, 1916, than in 1913, the
southern roads 20,438,186 more tons, and the western roads 21,091,749
more tons. The increase in the tonnage of bituminous coal was
6,849,600 tons for the eastern district, 20,751,461 tons for the south-
ern, while for the western there was a decrease of 1,949,606 tons.
Similar increases are indicated in the tonnage of other commodities
and groups of commodities originated in the respective districts,
with the exception of forest products, with respect to which a de-
crease in the tonnage originated is observed for each of the districts.
In this connection it should be recalled that the total number of
revenue ton-miles of all carriers in the United States earning more
than $100,000 per annum for the fiscal year ended June 30, 1916,
was 343,099,937,805 compared with 301.398.752,108 revenue ton-miles
for the fiscal year ended June 30, 1913, the largest preceding year
with respect to freight traffic.
The consideration of a general increased rate case is necessarily a
study of tendencies. The trend of the curves shown in the different
diagrams for the respective periods of time is unmistakably in a
certain direction. It will be observed that there have been numerous
ups and downs, but the general tendency has been favorable, includ-
ing, for the country as a whole, the first four months of 1917. These
figures and diagrams do not suggest a country-wide emergency.
Emergencies of greater or less intensity may have existed with re-
spect to individual carriers during various limited periods, but the
direction of the curves shows recovery in each instance before the
lapse of extended periods of time. The general trend has been dis-
tinctly favorable.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 817
An examination of the operating results of individual carriers
shows that certain of them have lacked prosperity while others have
been affluent. The reasons for lack of prosperity on the part of some
of them are well known. The great majority of them show a healthy
condition from financial and operating standpoints. We must con-
sider not only the successful and strong but also the unsuccessful and
the weak. The needs of certain weak lines, however, can not jus-
tify a course of action that is unwarranted by the condition of the
larger number of strong and successful lines. This record shows that
many of the carriers are in a most prosperous condition. They have
been managed by men of conspicuous ability and integrity, in whose
achievement the whole nation may well take pride. It is certainly
desirable that successes of this character which mean efficient service
shall continue.
A number of witnesses laid stress on the land grants received by
various carriers and upon large accretions to their property which
many of them have been able to make out of earnings. Under the
system of uniform accounts adopted by the Commission in 1907 all
expenditures of this character out of earnings are shown in the
annual reports. A compilation made from these reports shows
that as of June 30, 1916, class I carriers had expended for
“additions to property through income and surplus" a total of
$503,651,510, of which the eastern carriers had expended $295,-
476,596, the southern carriers $47,880,932, and the western car-
riers $160,293,982. These sums "include such amounts of income
and surplus as have been definitely appropriated or set aside and
expended since June 30, 1907, in the acquisition of property the
cost of which is included in property investment accounts other
than those for securities, etc."
The theory of this character of testimony seems to be that prop-
erty donated and property paid for out of revenues of carriers
does not in fact become their property in the sense that they may
be permitted or are entitled to earn a reasonable return thereon,
and that the public having donated certain property or having
contributed to the revenues of the carriers through the payment
of freight charges and passenger fares in reality owns such property
and therefore can not lawfully be asked to pay rates and fares which
will yield a return on such property. These are questions of large
import which have been directly raised in valuation proceedings now
pending before us and which will not be discussed here.
All the carriers expressed their willingness to begin immediately
upon a revision of the horizontally increased rates with a view
to reestablishing existing relationships between competitive locali-
ties, commodities, and territories, thus recognizing the commercial
40958-1852
818
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
disturbances which would certainly follow the proposed increases.
It was generally admitted that a percentage increase would de-
stroy existing rate relations, and in all cases where the amount
of the charge is appreciably large and where the differences in dis-
tance between competitive localities are relatively great a 15 per
cent increase would seriously affect competitors in a common mar-
ket. It is probably due to this fact that with respect to certain
important commodities the protests came from persons located at
the greater distances from the markets.
Only a most urgent and extraordinary situation would justify
permitting tariffs carrying a large percentage increase to become
effective. This record does not disclose the existence of a situation
requiring so heroic a remedy.
The absence of protests against the proposed rates from many
interests and localities affected received some attention upon the
record. Certain witnesses were questioned respecting the extent of
the clientele for which they were authorized to speak. The relative
absence of protests from certain large traffic areas was likewise
brought to our attention. The extent to which individuals, firms,
and localities refrained from protesting against the increased rates
on the theory that increased rates would result in an increase in the
car supply and improvement in service can not be stated; nor can
it be known to what extent public sentiment may have been influ-
enced by those who could without serious difficulty pass along to
others the burden of increased rates. The record also shows that
some individuals and firms who could not so shift the burden favor
the, increases and are willing directly to bear the higher charges
in the belief that such burden will be offset by advantages to them
and to the country at large.
These facts are not without significance in so far as they indicate
an existing state of the public mind. They are quite without sig-
nificance as a basis for determining the propriety and reasonable-
ness of the proposed rates. The statute does not authorize us to
arrive at a decision with respect to the reasonableness of rates on
the basis of preponderating views. It may be admitted that facts
of this character reflected in the record indicate a somewhat different
state of public opinion from that which has heretofore prevailed
in connection with similar issues before us. Representatives of
insurance companies and bankers appeared to favor permitting the
rates to become effective as a means of stabilizing their investments
in railroad securities and stocks.
While the instant case transcends all that have preceded it in the
magnitude of the sums involved and the spontaneity and univer-
sality of its precipitation, it is in its essential characteristics and
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
819
fundamental factors identical with other great rate-increase cases
which have been considered.
From the proceedings of 1910 and 1911 to the present time all such
cases have involved the consideration and weighing one against the
other of certain fundamental factors. The essential character of
these primary factors was the same in all the cases, but the attendant
circumstances, the relation of the factors to one another, and certain
significant secondary factors were not the same in all. This lack
of identity in the relationship and surroundings of the individual
factors accounts for the different conclusions arrived at in different
proceedings.
In this connection we refer especially to Tables 13 to 21 in the
appendix, which reflect operating results through the entire period
embracing all of the important increased rate proceedings. They
are the tables used in our reports of July and December, 1914,
brought down to date. Tables 13, 14, 15, and 16, show those
things which strikingly reflect the improvement in operating results
following December, 1914.
From a technical standpoint the question at issue is that of sus-
pension of the proposed increased rates. In substance the issue is the
reasonableness of those rates. That is the issue which was tried on
this record. The investigation which generally follows the suspen-
sion of tariffs in the instant case preceded their suspension. The
reasons for this have been suggested in this report. As a matter of
law we can not require cancellation of these rates at this time.
From the beginning of this proceeding the carriers, the shippers, and
the Commission alike have dealt with the essence of the economic
problems presented rather than with legal questions.
We are not unmindful of the fact that plausible and persuasive
arguments may be buttressed upon selected statistics taken from this
record. The compilations upon which we rely in arriving at our con-
clusions were made in our division of statistics, based upon the sworn
reports filed by the carriers. All the statistical exhibits introduced
by carriers and protestants have been carefully checked, just as far
as checking was possible, from the annual and other periodical and
special reports filed with us by the carriers. There can be no question
regarding the fundamental accuracy of the statistical summaries
upon which we have primarily relied in this respect.
As we have said, if the unfavorable results of February had con-
tinted our conclusion must have been different. Those unfavorable
tendencies, however, did not continue. The general operating re-
sults, looked at in the large through a series of years, show on the
whole substantial improvement, general prosperity, and, by compari-
son with former years, ample financial resources with which to con-
duct transportation.
820
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Increased prices of materials and supplies, the increased cost of
fuel, and increased wages are all significant and extremely important
factors in the situation which we are here considering. Some of the
symptoms are unquestionably unfavorable. Much or all of what
some of the railway officials believe will occur may occur in the
future. No one can know in advance. Higher prices are being paid
to-day, and still higher prices may have to be paid in the future,
but that these higher prices will have that unfavorable effect on the
general operating results which some believe they will have is by no
means certain.
We have carefully considered the expenditures made by the car-
riers in 1916 for maintenance of way and structures and for main-
tenance of equipment. These indicate that no undue or dispropor-
tionate outlay was made in 1916 for these purposes. This question
was carefully considered in the 1915 Western Rate Advance Case,
35 I. C. C., 497, 514, 515. In the western district the ratio of main-
tenance expenditures to total operating revenues in the fiscal year
1916 was less than for the average of the years 1914 and 1915; and
in general we do not think that the outlay for maintenance has been
excessive, either relatively or absolutely.
In a general way both the fiscal year ended June 30, 1916, and the
calendar year 1916 were remarkable years in the history of American
railroads. The volume of tonnage was never before equaled, and
the gross receipts, as well as the net receipts, in each of the three dis-
tricts were greater than ever before. Thus the average operating
revenue per mile of road operated for the calendar year 1916 was
$15,715 as against $13,455 for 1915, $12,885 for 1914, $13,819 for
1913, and $13,237 for 1912. Similarly, the average operating income
per mile of road operated in 1916 was $4,723, as against $3,827, $2,964,
$3,347, and $3,599 for the four preceding years, respectively. The
ratio of operating income to average investment, or book cost, for the
calendar year 1916 was 6.40 per cent, as against 5.24, 4.09, 4.68, and
5.30 per cent for the preceding calendar years, respectively.
A notable difference began to manifest itself in October, 1916, per-
sisting, and on the whole growing accentuated, during the first four
months of the current calendar year as between the eastern district
and the southern and western districts. Table 22 in the appendix
indicates per mile of road operated the railway operating revenues,
the railway operating expenses, the net revenue from railway opera-
tions, and the railway operating income for carriers in the United
States as a whole, for carriers in the eastern, southern, and western
districts, comparing each month beginning in July, 1916, through
April, 1917, with the corresponding month of the previous year.
An inspection of the table will disclose that the carriers in the
eastern district down through September, 1916, showed an increase
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 821
!
in net revenue and in operating income over the corresponding month
of the previous year. Beginning, however, with October, 1916, and
continuing through April, 1917, this tendency is reversed for the
eastern carriers, whereas with few exceptions the southern and west-
ern carriers continued to show comparative increases in these items
for each successive month. Thus, in October, 1916, the eastern car-
riers showed a decline in net revenue per mile of road from $840 to
$821, and in operating income from $760 to $726.
For November, 1916, the eastern carriers showed a decline in these
two items from $800 to $720 in net revenue, and from $721 to $623
in operating income.
For December, 1916, the same tendency persisted, showing a decline
in net revenue from $706 to $630 and a decline in operating income
from $625 to $532.
The increasing tendency in these items for the months of July,
August, and September, 1916, sufficed for the last six months of the
calendar year 1916 to make a slightly better aggregate showing as
contrasted with the last six months of the previous calendar year.
But so far as the eastern carriers are concerned, the decline for the
last quarter of 1916 was continued for the first four months of 1917
and in increasing ratio.
Thus, in January, 1917, net revenue per mile of road operated
declined from $608 to $531, and operating income from $520 to $434.
For February, 1917, exceptional operating conditions exaggerated
the decline and rendered it more pronounced. The February re-
turns show a decline in net revenue from $576 to $271, and in
operating income from $489 to $176.
March showed the same comparative decline, although upon a less
intensified scale than in February. Net revenue declined from $666
to $557, and operating income from $578 to $460. The returns for
April indicated the same tendency, net revenue declining from $686
to $611, and operating income from $599 to $512.
Summarizing the four months ended with April, 1917, the de-
cline in net revenue per mile of road was from $2,536 to $1,970,
and in operating income from $2,185 to $1,581. If we compare the
relative decline in the last quarter of 1916 when this tendency be-
came noticeable, we find that the falling off in operating income from
the operating income of the last quarter of the previous year was
approximately 17 per cent, whereas for the first four months of the
current calendar year the decline in operating income as compared
with the first four months of the previous calendar year amounts to
about 27.5 per cent.
In interpreting these figures it must be borne in mind that the
gross revenue in each of the three districts showed for each month
822
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
from July, 1916, to April, 1917, a comparative increase, except only
for the month of February in the eastern district. In the southern
and western districts the results, so far as net revenue and operating
income are concerned, show an almost unbroken contrast to the re-
sults for the eastern district.
If on the basis of the first four months of the current calendar
year we estimate the total gross revenue in the eastern district for
the entire year, we find indicated an average operating revenue per
mile of road of $29,432, as against an average operating revenue for
the preceding year of $27,688. Despite this increase in the gross
operating revenue the average operating income per mile of road
estimated for 1917, on the basis on the first four months of the
calendar year, amounts to but $5,802, as against $7,782 for 1916.
This indicates that the ratio of operating income to average in-
vestment in the eastern district will be but 4.893 per cent, as against
6.662 per cent for 1916.
In other words, using the actual figures for the first four months
of the present calendar year, it would appear that although the gross
revenue for the carriers in the eastern district would exceed that for
the calendar year 1916 by approximately 7 per cent the operating
income per mile of road will be but $5,802, as against $7,782 in 1916.
This is only 75 per cent as much net income per mile of road in
1917 for performing about 107 per cent of the service performed in
1916.
The returns for the first four months of the calendar year 1917
for the roads in the southern district and in the western district
disclose a different tendency and outlook. Common alike to the
three districts is the probable increase in gross operating revenues.
Thus, the first four months disclose average operating revenues
per mile of $4,388 in the southern district as against $3,960 for
the corresponding period in 1916, and $3,705 as against $3,288
in the western district. But in both the southern and western
districts the first four months of the current calendar year presage
not only an increase in the average operating income per mile of
road, $1,222 as against $1,181 for the first four months of 1916 in
the southern district and $930 as against $877 for the roads in the
western district, but in both an increase in the ratio of operating
income to average investment is indicated, rising in the case of the
southern district from 6.390 per cent to 6.453 per cent and in the
western district from 5.953 per cent to 6.217 per cent.
It may very pertinently be asked how it results that with the car-
riers in all three districts confronting increased expenditure for
labor, fuel, and supplies, the prospective effect upon their respective
net income is so markedly different. To this inquiry it is probably
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 823
too early to make a completely satisfactory answer. Among the
factors the following may be suggested as highly probable contrib-
utory causes. The ratio of increased wages may have been greater
for the eastern carriers. The eastern carriers have encountered
earlier and to a more complete degree the increase in prices of mate-
rials and supplies. The volume of traffic which has congested cer-
tain of the roads and terminals in the eastern district would seem to
indicate that with their present facilities they can perhaps take on
additional traffic only at an increasing cost per unit. In this respect
they present a somewhat sharp contrast to roads in the southern
and western districts. Congestion at eastern ports and terminals
has led to the diversion of some traffic to Gulf and south Atlantic
ports. Significant, too, is the testimony of Mr. Fairfax Harrison,
president of the Southern Railway, who stated:
I think I am quite safe in saying that we have no such troubles. We could
get along with a much larger volume of business than we are doing to-day, and
do it economically. Our trouble is that we are met by embargoes at boundary
points, at Potomac Yard, at Cincinnati, and at other places where we have to
get into the congested territory. For example, at the moment our normal pre-
ponderance of tonnage is northbound, but we are moving very little northbound
to-day and our preponderance is southbound. It is an uneconomical displace-
ment of our operating situation; it is more expensive. But we have not had in
the south yet, fortunately for us, the causes of the congestions which have
affected the whole country elsewhere.
In the western district the transcontinental roads, particularly the
Southern Pacific and the Santa Fe, are now carrying a large volume
of traffic which would normally move via the Panama Canal. This
they are apparently able to handle without great difficulty. What-
ever may be the other contributing causes to the divergent tendencies
manifested in the three districts, the existence of agencies making
for radically diverse results in the eastern district from those likely
to appear in the southern and western districts would seem to
be substantiated by the following table, which gives the ratio of
net operating income to property investment in the three districts
from 1900, with the probable results indicated for 1917. The esti-
mates for 1917 are based on the monthly reports of carriers to the
Commission, and thus relate to operating income rather than to net
operating income, the distinction being that net operating income is
derived from operating income by adjusting the last-named item for
hire of equipment and other rents. For the purposes of this table
the distinction is negligible, and the 1917 item is restricted to oper-
ating income only, because the monthly reports do not include data
for rents.
1
824 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Net operating income per cent of property investment.
Fiscal years ending Eastern | Southern Western
June 30-
district. district.
district.
Fiscal years ending
June 30-
Eastern Southern Western
district. district. district.
1900...
5.27
1910.
6.16
5. 19
5.06
1901...
5.49
4.46
4.84
1911...
5. 13
6. 22
4.68
1902...
5.69
4.77
5.29
1912...
5.10
4.40
4.24
1903...
5.77
5.01
5.30
1913...
5.28
4. 55
4.91
1904.
5. 44
4.87
5.03
1914.
3.95
4.25
4. 24
1905..
5.70
5.15
5.25 1915..
4. 42
3.41
4.14
1906...
6.21
5. 26
5.90
6.64
5. 26
5.43
1907...
6. 14
4. 67
6.19
1916....
1 6.42
15. 27
15.29
1908..
5. 14
3.87
4.87
2 6.61
1909.
5.43
4.72
5.34
1917 (estimated)....
4.89
6.45
2 5.45
6. 21
¹ Average based on gross property investment.
2 Average based on property investment less reserves for depreciation.
The protestants do not dispute the fact of large increases in the
prices of supplies, although there is, perhaps naturally, a divergence
of opinion between the carriers and certain of the protestants as to
the average percentage of such increases; but whether that percent-
age be taken at approximately 30 per cent, as certain of the prot-
estants insist, or at 42 per cent or higher, as the carriers assert,
the general increase is undeniable. The aggregate of the increased
expenses thus imposed can not be predicted with any satisfactory
degree of certainty. We can not know what the future fluctuations
in the prices of such supplies may be. With respect to them, as
with railway fuel, there is a remarkable difference in the figures and
estimates of the various carriers. Some have contracted for fuel or
supplies upon a lower price level, and others are without the pro-
tection of such contracts or have contracts to expire at an early date.
Without in any wise impugning the estimates of the carriers or
criticisms thereof offered by the protestants, we prefer to confine our
forecast to the basis of actual experience for the 10 months from
July 1, 1916, including the first four months of the present calendar
year.
For these reasons, necessarily stated in somewhat general terms,
we are led to the conclusion that no condition of emergency exists
as to the western and southern carriers which would justify per-
mitting a general increase in their rates to become effective. In
the eastern district increased rates have recently been permitted to
become effective generally on bituminous coal, coke, and iron ore.
We think that similar increases may properly be permitted in the
southern district on coal, coke, and iron ore, and in the western dis-
trict on coal and coke. This will preserve rate relationships between
the several districts. In the southern district the proposed increased
rates on coal are on the basis of 15 per cent, with a maximum of
15 cents per ton. These tariffs we shall permit to become effective.
In the western district the increases are based upon 15 per cent, with
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
825
a minimum of 15 cents per ton. These tariffs will be suspended, but
the western carriers may, if they so elect, file new tariffs carrying
increases in rates on coal and coke not exceeding in any case 15 cents
per ton. All of the tariffs included in this proceeding of the western
lines will be suspended. All of the tariffs included in this proceed-
ing of the southern carriers will be suspended, excepting those apply-
ing on coal, coke, and iron ore.
In connection with our investigation as to rates on bituminous
coal certain proposed increased rates on bituminous coal were sus-
pended in Investigation and Suspension Docket No. 774. Subse-
quent to the institution of that proceeding conditions surrounding
the production, transportation and sale of bituminous coal became
so unusual that the principal protestants before us voluntarily con-
ceded that the conditions were abnormal and that the rates might
appropriately be increased, some of them, however, contending that
the existing relationships of rates from certain coal-producing dis-
tricts should be preserved. Pending further consideration of that
proceeding and of the instant case, the carriers parties to the tariffs
referred to voluntarily postponed the effective date thereof to Au-
gust 1. Since that time increases have been filed, to become effec-
tive July 1, to destinations intermediate to those covered by the
tariffs of which the carriers postponed the effective date to August
1. It is therefore consistent and appropriate that those carriers be
permitted, on short notice, to advance the effective dates of such
tariffs, and they are hereby authorized so to do.
For reasons indicated in this report, we shall suspend all of the
tariffs before us in this proceeding of the eastern carriers, excepting
those applying on iron ore. As has been indicated, however, the
conditions confronting the eastern carriers are substantially different
from those confronting the southern and western carriers, and we
are persuaded that they are entitled to increased revenue beyond and
above that which they are securing and will secure from the increased
rates on bituminous coal, coke, and iron ore. By recent act of Con-
gress we have been given jurisdiction over the movement, distribu-
tion, exchange, interchange, and return of freight cars. The obvious
intent of this legislation is that cars shall be so used by the carriers
as to secure the performance of the largest possible amount of trans-
portation in needed and equitable ways. Shortly following the out-
break of the European war an unprecedentedly heavy movement of
freight to the eastern district began, and that district in large part
has been badly congested ever since. Hopeless congestion has been
avoided only by a practically continuous condition of operating
under embargoes. The result has been that while roads in other sec-
tions have generally been short of cars and in possession of less
826
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
cars than they owned, the carriers in the eastern district have been
in possession of substantially more than their ownership of cars.
The hauling of empty cars is expensive and productive of no revenue.
Railroad operating officials naturally and properly endeavor to avoid
all unnecessary hauling of empties. There has been reason to believe
that this disinclination to haul empties has caused the detention on
the eastern roads of many cars that were badly needed in the west
or south. It is probable, if not certain, that in administering the
duties laid upon us by the legislation referred to we shall find occa-
sion to require a very unusual haul of empty cars by the eastern car-
riers for the purpose of getting them promptly to western or south-
ern localities where they are needed. In this way important addi-
tional expenses will probably fall upon the eastern carriers.
As we have indicated, percentage increases, especially where the
percentage is substantial, can not fail to disrupt competitive com-
mercial relationships. A general increase in class rates, which pre-
serves existing relationships, distributes itself more generally and
more equitably than would general increases on commodity rates.
It also affords relatively equal benefits to all of the carriers parties
thereto. Among the eastern carriers those located in New England
appear to present the most serious condition. They are not carriers
of large volumes of heavy loading commodities that move under
commodity rates. It is not possible to estimate with confidence and
accuracy the amount of additional revenue that will accrae from in-
creased class rates, but from the best information at hand we con-
clude that the eastern carriers should be permitted to increase their
class rates between New York and Chicago to the following scale,
and to correspondingly increase their other class rates applying intra-
territorially between points in official classification territory, observ-
ing the established relationships between ports and localities:
1
2
90
3 4
79 60 42 36
5
6
30
Such tariffs may be made effective upon not less than five days' notice,
given in the usual way.
Special emphasis has been laid upon the unusually heavy increased
expenses that have been laid upon the carriers by water, which, be-
cause of arrangements for through carriage with rail carriers, are
subject, as to part or all of their rates, to our jurisdiction. Ordinarily
rates via rail-and-water routes are maintained at a lower level than
via all-rail routes. Largely increased costs of operation, the diver-
sion of traffic to other channels because of war conditions, and the
attendant increased marine insurance have laid upon such rail-and-
water routes unusual burdens. We think that existing conditions
justify the maintenance of rates via such routes on a level not higher
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
827
than the all-rail rates between the same points. Carriers in the east-
ern, southern, and western districts parties thereto may, if they so
elect, file and make effective, upon not less than five days' notice,
tariffs increasing existing joint rates between rail-and-water carriers
to a level not higher than the all-rail rates between the same points.
It is not improbable that some of the rates which we are authoriz-
ing to be increased are held by unexpired orders of the Commission.
If that is true in any case, parties to such orders must, before filing
such increased rates, apply for and secure specific modification of
such orders.
The carriers were clearly within their rights in bringing these mat-
ters to our attention when they did. We do not question their good
faith in anything they have done in this connection. Their action is
an added evidence of the farsightedness and sense of responsibility in
the performance of their duties toward the public with which so
many of their officials are managing and administering the affairs
of their respective properties. The things which they believed several
months ago would happen have not happened. None of us know
what the future may develop. We do not believe that it would be in
the interests of anyone to now resume hearings in detail as to the
suspended tariffs. As stated, we believe that the facts which have
been developed constitute a full and sufficient basis for arriving at a
just conclusion with respect to the proposed increased rates. We
shall, through the medium of the monthly reports of the carriers,
keep in close touch with the operating results for the future, and if it
shall develop that the fears which have prompted the carriers are
realized or that their realization is imminent, we shall be ready to
meet that situation by such modification or amplification of the con-
clusions and orders herein reached and entered as are shown to be
justified. If it shall develop that what has been accorded herein is
more than is appropriate or that the increased rates are no longer
warranted, we shall depend upon the pledges of the carriers to re-
spond promptly to an announcement by us of a conclusion to that
effect. Inasmuch as a general percentage increase is so undesirable
because of its serious effect upon commercial conditions and estab-
lished relationships, it would seem to be appropriate for the carriers
to cancel the tariffs which we suspend herein, and permission is
hereby accorded them so to do. The record will be available for con-
sideration in any further proceedings that may be necessary or
appropriate in this connection in the future, and any substantially
changed conditions which may develop can be promptly, adequately,
and fairly dealt with. The foundation for any such action can doubt-
less best be laid in conferences between the Commission and repre-
sentatives of the carriers and of the shippers. The existing public
828
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
sentiment to which we have referred and the manner in which the
proposals of the carriers have been presented and handled by them
indicate a feeling of mutual confidence, which at many times in the
past has been regrettably absent.
An appropriate order of suspension of the proposed schedules will
be entered.
HARLAN, Commissioner, concurring:
Under the law, this Commission may act only upon a concurring
vote of at least four of its members, and, in view of the recent
death of COMMISSIONER CLEMENTS and of the varying conclusions
entertained among my colleagues on the important questions pre-
sented by the record, it became necessary, in order that some af-
firmative results might follow from this extended and laborious in-
vestigation, that I should concur in the course outlined in the
Commission's report. I did this, however, because its findings are
in the direction of what the record seems to me to justify and re-
quire and not because I regard the relief granted as adequate.
Under the circumstances I venture briefly to explain my individual
convictions in the case.
That a full hearing has been had, as the report finds, will be ob-
vious to anyone who followed the proceeding or has examined the
record. All shippers, either individually, by counsel, or through
the traffic and commercial organizations to which they belong, were
given an opportunity to be heard; and the shippers who testified
were many in number and representative of their respective indus-
tries. In addition, a mass of statistical exhibits was introduced in
evidence. In this way every aspect of the situation was carefully
examined and illustrated. The result is a record that is entirely
sufficient to enable us not only to decide whether or not the proposed
rates should be suspended, but also to determine, as the Commission
in fact has done, whether the present rates in any of the three great
rate districts of the country might properly be increased and, if so,
to what extent. The report of the Commission therefore brings the
case to a conclusion at this point and, wisely in my judgment, does
not undertake to continue the investigation as a suspension case
under the suspension orders that are now to be entered.
From the mass of statistics offered in evidence on both sides it is
not difficult, as the Commission's report indicates, to compile figures
to illustrate almost any theory respecting the troubles of the carriers
of the country. It is not my purpose, however, in this brief expres
sion to deal much in statistics. It will suffice to say that laying some
stress upon the figures for the last four months, the Commission's
finding upon the whole record is that the fears of the railroad offi-
cials, when they laid their request for increased rates before us, have
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
829
not been realized. The report, then, indicates the purpose of the Com-
mission to follow the developments through the medium of the
monthly reports of the carriers, and should their earnings make it
appear that the dangers feared by the carriers are imminent, the
Commission will then meet the situation by promptly amplifying
the limited relief now permitted to them.
This month-to-month and purely statistical view of the matter
seems to me to be wholly inadequate. Nor do I regard that course
as altogether safe. We are facing a much larger problem, and
it must be approached in a much broader way if we are to reach
a sound solution. The report of the Commission states that some
of the symptoms disclosed of record are unquestionably unfavor-
able. As I read the record, that is undoubtedly the case and, being
so, the wisdom of deferring full relief is not apparent to me.
What the country as a whole needs, as all participating in the hear-
ings seemed to agree, is much larger terminals, more tracks, more
cars, and more locomotives. This enlargement of our facilities is
not required merely to meet the exigencies growing out of the war,
but to keep our transportation facilities up to the measure of the
country's growing volume of business. We are now a creditor nation,
and it may reasonably be expected that the trade balance in our
favor will continue at least for some years. With the aid of our new
merchant marine, this may become a more or less permanent condi-
tion. With such a prospect before us, a foundation should be laid
without delay for a definite plan for the development and building
up of our transportation system. For seven or eight years, compe-
tent railroad officials have been warning us that the carriers are not
keeping abreast of the requirements of the country. It is true that
there are periods when a substantial part of the carriers' equipment
is lying idle. On the other hand, the carriers can not prudently
undertake to meet extreme and extraordinary demands.
But a
rough estimate of a billion dollars has been suggested as the yearly
expenditure necessary to enable them to open up new territory and
to enlarge and extend their present facilities in order to meet the
rapidly growing volume of the general commerce of the country.
No such investment, however, has been or is being made in our rail-
roads. On the contrary an exhibit of record shows that beginning
with 1895 the new construction increased year by year until 1910,
while from the latter date it has steadily diminished. In other words,
our population and commerce have largely expanded, but there has
been no expansion, relatively speaking, in our transportation facili-
ties.
For two years the commerce of the country has been moving under
intermittent embargoes, an experience, as must be observed, that we
830
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
J
have had in the past not only while we were at peace, but while the
world at large was also at peace. Great losses have resulted to the
whole country. The producer and manufacturer, with ample supplies
which the public was demanding, have been unable to make deliv-
eries. The coal operator, with no shortage of coal at the mine, has
not been able to deliver it promptly to those needing it. Prices for
the necessities of life have increased, partly at least because existing
supplies could not be brought to the consumer; and the speculator
has been enabled to demand unreasonable prices because inadequate
facilities have prevented the competition in the consuming markets
of those who were prepared to furnish the same commodities at lower
prices. Large industries have been greatly embarrassed. It was
stated of record, for example, that the producers of lumber in one
territory alone, with the materials at hand, have fallen 30,000 car-
loads short in meeting their orders during the past 12 months. Many
other instances of car shortage and of extraordinary delays in the
delivery of traffic are related of record, but they need not be detailed
here. It will suffice to say that, while the strains of the war have
much to do with the present transportation conditions, the one out-
standing fact during the hearing, as to which there was no disagree-
ment, was that our transportation system is lacking in the capacity
to meet the demands of the shippers and that the resulting loss to the
general public has been very large. This condition is one of present
danger, with a possibility that it may even become disastrous during
the war period. But aside from this military influence, the record
leaves no doubt that our transportation system, as a whole, must be
promptly enlarged and expanded.
The shippers of the country recognize the danger and have given
expression to this apprehension upon the record. They regard a
prompt and sound cure of the trouble as being as vital to them as to
the carriers. Representatives of some of the largest industrial cen-
ters, officers of some of the largest traffic organizations, and officials
of some of the most important shippers of the country, availed them-
selves at the hearing of the opportunity to refer to the situation, and
to point out that in their own interest as shippers, and in the interest
of the general shipping public, the rates of the carriers might well
be increased in order that they may be put in a position to increase
their terminals and facilities. Many earnest objections were of
course made to any increase. Other shipping interests were ready to
acquiesce in an increase provided no discriminations against them
were involved. But the whole discussion, unusually free from selfish
contentions on the part of the shippers, and approached by the car-
riers, as I understand the record, in no selfish spirit, leaves me with
the conviction that the shippers at large are ready for a substantial
increase in their rates, provided it will result in an early betterment
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
831
of their transportation service and in a rate structure free from
discriminations. The record in my judgment demonstrates a proposi-
tion that has long been clear to me, namely, that a rate is a public
question and that the existing rates, aside from any interest that the
owners of our railroads may have in the matter, could well be ad-
vanced in the public interest, in order that assurance may thus be
given for the early enlargement of our transportation facilities.
I express the thought in that way because it is clear that so long
as we look to private interests to furnish a transportation service for
the country we must see to it that the rewards are sufficient to attract
capital for its further development. Under present conditions this
appears not to be the case. Executives of great insurance companies
and of great savings institutions testified during the hearings that
the volume of their holdings in railroad securities has been steadily
diminishing and that they and other large investors are looking with
decreasing favor on railroad securities. Possibly this may result to
some extent from an impression, which I think is very erroneous,
that this Commission takes too narrow a view of such questions as
are before us here. But, in any event, we must not overlook the
fact that at this time, and apparently for the next few years, new
capital must be sought by the carriers in competition with the de-
mands of many governments for war loans and in competition with
the very large returns of industrial companies. Nor must we over-
look the fact that the returns on property investment in railroads,
even under the unusually prosperous year 1916, were not such as to
give any preference to the railway investor, and for the last 16 years
this average return has been, using the principal and representative
roads, for the eastern district 5.48, the southern 4.69, and the western
5.04 per cent.
Without extending this brief expression of my conception of the
case, it will suffice to say that from the whole record it is clear to me
that the 15 per cent increase proposed by the eastern carriers which
in its actual results would probably not exceed 10 per cent should
be permitted to become effective, subject, of course, to the under-
standing reached at the opening hearing that the carriers would
later reduce them or restore the present rates if so requested by the
Commission. The record shows that conditions with the western and
southern lines are somewhat better than with the eastern carriers.
Nevertheless, in my judgment, they also should be permitted some
increase in their rates on the general grounds that I have attempted
briefly to outline. In view, however, of the findings of the Commis-
sion's report, it will not be necessary to discuss the extent of the
increase that they should have.
In the light of the refusal by the Commission of what, in my judg-
ment, is sufficient additional revenues to the carriers, it seems appro-
832
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
priate again to call attention to the economies that may be and
should be effected through the coordination of terminals, the elimi-
nation of unhealthy competition, the waste in service through the
light loading of cars, and the performance of special services for
particular shippers without charge. These matters I have discussed
at some length elsewhere, and since my views upon them are more
or less understood I will not enlarge upon them here. Much of the
service at the larger industrial centers and ports is special in
character and the heavy terminal cost encountered by the carriers
in performing them is spread over the rate structure instead of being
compensated under a special charge. The smaller communities
grouped with the larger centers thus bear burdens that should be
borne by others. Sooner or later matters of this kind must have
serious attention by the Commission, and they will open sources of
substantial additional revenues to the carriers.
MEYER, Commissioner, dissenting in part:
I concur in the conclusions with respect to carriers in western and
southern territories. I dissent from the conclusion of the majority
that an emergency exists in regard to carriers in the eastern district
of such a character as to make it imperative to authorize at this
time the increased class rates sanctioned by the majority.
Five members of the Commission, including myself, have virtually
addressed the carriers in the western and southern districts as fol-
lows: "The things that you believed several months ago would hap-
pen have not yet happened. You therefore have not justified these
increased rates. If any or all of the untoward events upon which
your application for increased rates was largely based should
occur in the future you may then bring them to our attention. In
the light of what we have learned in this proceeding and in the light
of what we may learn from your monthly reports as they will reach
us from time to time hereafter we will be in a position on short
notice, and with only brief supplementary proceedings, to decide
whether, as a matter of justice to all, our orders of suspension should
be vacated with respect to some or all of the suspended tariffs carry-
ing the increased rates. This will enable us to protect the interests
which you represent, in so far as we may lawfully do so, and the
entire people of this country against any possible situation which
might cripple your respective properties in the performance of their
public functions during this critical period of American history.'
This same language should be addressed to the eastern carriers.
""
I recognize freely that the results of operation for eastern carriers
during recent months have been less favorable than for the western
and the southern. Certain tendencies are unmistakably unfavorable.
It is difficult to characterize with moderation many of the prices of
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
833
materials and supplies and fuel which these carriers have paid and
which apparently they will pay for some time to come. These to-
gether with higher wages tend with certainty toward more unfavor-
able operating results. We have authorized increases in the rates
on bituminous coal, coke, and ore which will add to the operating
incomes of these carriers many millions of dollars and which will
bring the estimated return on the book cost of the carriers up to a
level which in my judgment disproves the theory of an acute
contemporary emergency demanding drastic action at this moment.
In spite of increased and increasing expenses, there is nothing before
us to prove conclusively that the net returns of carriers in the
eastern district for the calendar year 1917 may not be more favorable
than the net returns for all but a very small number of years
during their entire history. But even if the contrary could be
demonstrated, it does not necessarily follow that the increases
authorized by the majority should be authorized at this time.
Whenever the time may come, if it should come, that a real
emergency can be shown to exist, we can then do promptly what
justice and the law may demand. Before important action like
this is taken the most conclusive proof of its necessity should be be-
fore the Commission. If I apply to the facts now before us the same
test which I applied to the facts before the Commission in the great
advanced rate cases that have preceded this one I am forced to a
different conclusion regarding eastern carriers than that reached by
the majority.
As stated in the majority report, while the instant case transcends
all preceding ones in the magnitude of the sums involved, in its
essential characteristics and fundamental factors it is identical with
them.
From the proceedings of 1910 and 1911 to the present time all of
these cases have involved the consideration and weighing one against
the other of certain common fundamental factors. The relation of
these factors to one another, and certain attendant features alone
have varied, not the factors themselves. This lack of identity in the
relationship and surroundings of the individual factors accounts for
the differences in the conclusions arrived at by us in the successive
proceedings.
In the advanced rate cases which terminated in February, 1911,
we considered gross operating revenues, operating expenses, net op-
erating income, operating ratios, rates of interest, rates of dividend,
book costs and book values, the volume and character of securities,
and allied factors during a succession of years, and interpreted these
in the light of numberless other facts of record. As an attendant
feature much consideration was given upon the record to questions
of economy and efficiency. At that time we considered earnestly
40958-18-53
834
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
whether or not in the light of all the facts before us certain increases
should be authorized. In a separate proceeding involving the
southwestern lines we then authorized increases, but finally con-
cluded that conditions as a whole did not demand authorization of
increases in the official and western classification territories. As is
attested by the language used and unanimously approved by us in
various proceedings affecting the rates on commodities which move
in great volume, the facts established in the proceedings of 1910 and
1911 left their impress upon our minds, and to a certain extent
shaped our action during the period intervening between February,
1911, and July, 1914, the date of the report in the second great
advance movement.
In July, 1914, we again had before us a voluminous record upon
which carriers based their claims for increased revenues. After
considering the same group of factors which we had considered in
1911 but which had changed to a certain extent in their relative
weight and relationship, and which were accompanied by the spe-
cial features of allowances to industrial railways and the perform-
ance of accessorial services, we arrived at the conclusion that the
increased rates prayed for had not been justified in their entirety.
Six months later, in December, 1914, in a further hearing, for
the third time we had before us the same prayer of the carriers
and the same group of factors which had been given consideration
during the previous proceedings. The hearings which followed
our decision of July, 1914, added to the record as made prior to
July, 1916, certain significant facts. These, together with the in-
tervening suspension of various tariffs in which it was proposed to
assess charges on certain accesorial and so-called free services and the
course of the proceedings with reference to industrial railways, com-
pelled a modification of the conclusions reached in July, 1914, with
respect to sources through which the carriers might augment their
revenues and of our specific findings in that case. The relative
weight of fundamental facts of record had changed, which in turn
required a changed conclusion. In this connection I refer to Tables
13 to 21, inclusive, which reflect operating results through the entire
period embracing all of the important increased rate proceedings.
They are the tables used in our reports of July, 1914, and December,
1914, brought down to date. I direct especial attention to Tables 13,
14, 15, and 16, which clearly indicate the improvement in operating
results following December, 1914, and likewise reflecting the decline
since the fall of 1916.
During 1915 we dealt with two similar proceedings, one involv-
ing freight rates and the other passenger fares. Once more we con-
sidered the identical set of factors. We weighed and compared
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
835
as we had weighed and compared in 1911 and 1914. Our conclu-
sions differed from the conclusions in the earlier proceedings to the
extent to which the weight and relationship of these factors differed
from the weight and relationship of the factors in the antecedent
proceedings.
In the instant case we have before us once more the now familiar
aggregation of basic factors. Again we have considered them by
themselves and in their relationship to one another, and we have
assessed them in the light of the attendant facts and circumstances
of record. Applying the same kind of reasoning and the same
methods which have prevailed in the earlier proceedings to the facts
upon the present record, I have reached the conclusion that the
proposed increased rates have not been justified. The majority holds
that the eastern carriers have justified certain increased rates. My
convictions are to the contrary.
The year 1916 is admitted by all to have been an abnormally
prosperous year for the class I railways of the eastern district, as
well as for those of the entire country. The banner year prior
to 1916 was 1913. In 1913 the operating revenues in the eastern
district amounted, for the four months January to April, inclusive,
to $7,241 per mile of road; the next best year prior to 1916 was
1915, in the corresponding four months of which this item was
$6,653, although for these four months it was surpassed by 1914,
in which the item amounted to $6,850. For the like period of 1916
the item had risen to $8,528, an increase of 17 per cent over 1913,
and for the like period of 1917 it had further risen to $9,056, an
increase more than 6 per cent over the figure for 1916.
It is argued, however, that expenses are rising much faster than
revenues and that the outlook is so unfavorable that in the opinion
of the majority it is necessary at once to authorize an increased
class scale of rates.
The carriers are primarily interested not in operating revenues nor
in operating expenses, but in the margin between them, in what re-
mains of operating revenues after operating expenses and taxes have
been deducted, or operating income. The operating income per mile
of road in the eastern district for the first four months of 1916 was
far in advance of that of any prior year for which the figures have
been compiled from our monthly reports, being $2,188 as against
$1,394 for the like period of 1911. The largest figure for this period
for any of the intermediate years was $1,340 for 1913. The corre-
sponding figure for the like period of 1917, within which the flood
of increasing costs was expected to be upon us, was $1,582, an amount
more than 13 per cent better than for that period of any of the pre-
ceding six years except the abnormal year of 1916.
836
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
It is too early for most of the May reports of the large carriers to
have reached us, and at the time of writing only two of the principal
carriers have filed their reports for May. While it probably would be
incorrect to say that these two are typical, it is not without signifi-
cance to point out that the operating income of the Southern Pacific
Company for May, 1917, is more than 30 per cent greater than
for May, 1916, and that while that of the Delaware, Lackawanna
& Western, the only large eastern carrier whose last monthly report
has been received, shows a falling off, it is yet substantially greater
than for any May in the four years preceding 1916. The figures
for the Delaware, Lackawanna & Western for the month of May
for the last 10 years are shown hereunder:
May.
revenues.
Operating Operating
income.
Miles.
May.
Operating Operating
revenues. income.
Miles.
1917.
$5,052, 622
$1,546,259
955. 12
1912...
$2.406,372❘ $ 353.995
958.60
1916.
4.463,151
1,618.061
955.06
1911.
3,110.664
1.075.911
930.09
1915.
3,713, 265
1,243, 873
958.63
1910.
3.079 225
1.200.412
930.79
1914.
3.706,838
1,046,880
959.81
1909..
2. 819,060
1.142.954
893.18
1913..
3,569, 323
1, 166, 203
958.20 1908...
2,955, 361
1, 162, 602
893.18
In our reports relating to advanced rate cases which have preceded
this one more or less has been said about operating ratios. I fully
appreciate the limitations inherent in the use of operating ratios.
However they have been among the more prominent factors which
appear upon the respective records and in our reports. The table
below states the operating ratios for all class I carriers in the eastern
district for the first four months of each of the last 10 years:
Table of operating ratios for class I steam railways, eastern district.
Month.
1917
1916. 1915
1914
1913
1912
1911
1910 1909 1908
January.
February.
March.
April....
76.35 70.66 80.68 83.91 76.44 79.16 77.34 72.44 74.71 79.75
86.15 71.78 79.77 88.97 78.01 77.10 77.97 73.12 75.01 80.82
77.04 69.98 74.04 78.31 78.87 71.94 71.47 68.47 68.88 73.99
74.79 68.73 70.97 76.47 78.06 77.61 69.23 70.30 68.52 71.85
An examination of this table shows conclusively that so far as
operating ratios may be used as a barometer, the first four months
of 1917 do not necessarily predict unfavorable results for the entire
year. In fact it will be observed that for the banner year 1913,
three out of the four operating ratios were more unfavorable than
the corresponding ratios for 1917. I would be unwilling to state that
this necessarily indicates that 1917 will result in larger net incomes
than 1913, but I am equally unwilling to agree that the ratios for
1917 and the relatively unfavorable indications of certain other fac
tors together support the conclusion that an emergency now exists
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
837
which requires an immediate increase in the scale of class rates.
Future events may justify this increase. Events up to the present
have not done so.
McCHORD, Commissioner, dissenting:
Upon the facts before us, I concur in the dissent by COMMISSIONER
MEYER. The issue presented is in reality one largely of governmental
policy, rather than a question whether the rates sought to be made
effective July 1 are reasonable for the service of transportation. The
nation is at war, costs of fuel and other commodities are abnormal,
the conditions affecting the volume and movement of traffic are with-
out precedent. The future of these conditions, immediate or remote,
can not be predicted with even a fair degree of certainty. Thus the
situation before us is not sufficiently normal or stable in character
to make possible an intelligent inquiry into the reasonableness of
rates. That the operating costs of certain carriers, particularly in
eastern territory, have been substantially increased by the increased
costs of fuel and supplies is apparent.
Should this Commission upon the showing here made approve an
increase of rates predicated in a large measure upon prophecies for
the future, to strengthen the credit of the carriers, or should the
prices of fuel and supplies be supervised by governmental authority?
It is argued with much force that this is a question for the Congress
to determine and that until it is clear that such control will not be
exercised and that the carriers' fears as to what may happen in the
future have been realized, this Commission can not be justified in
placing the burden upon the general public in the form of increased
rates, especially in view of the showing made by the carriers as to
their earnings. At the present moment it appears probable that the
Congress will act in the matter. The Committee on Interstate and
Foreign Commerce of the Senate is now holding hearings on the
general subject of the control of prices. Coal operators have been in
conference with the Federal Trade Commission and other govern-
ment officers on the same subject. It appears that a special com-
mittee representing coal operators in all sections of the country has
proposed that prices of coal during the war be fixed by a joint.
governmental commission. Congress has now before it the report
and recommendations of the Federal Trade Commission on the
bituminous coal situation. No report has yet been made to the
Congress by the commission appointed by the President to observe
the operation and effects of the so-called Adamson law. It may be
fairly said that the matter of the governmental control of prices of
various important commodities affecting these carriers is now before
the Congress.
45 I. C. C.
838
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
With reference to the assertion that prices of certain commodities
are affected by car supply it should be remembered that by the car-
service act, approved May 29, 1917, the Congress has given this Com-
mission full authority over the movement, distribution, exchange, in-
terchange, and return of cars, and I do not doubt that through a vig-
orous exercise of that authority substantially better transportation
conditions and additional revenue can be secured.
It is my judgment, therefore, that this Commission should report
to the Congress the essential facts disclosed by this record. If it
should be determined by that body that the prices demanded of the
carriers for fuel and supplies are reasonable under present conditions,
or are not such as to warrant control by the government, and it
should hereafter appear that the apprehensions expressed by the
carriers have been realized, then I am prepared to sanction such rate
increases as will permit the carriers to so equip themselves as to
enable them to perform, in the most efficient manner, the trans-
portation required of them. Those apprehensions were expressed by
the chairman of the carriers' presidents committee on March 22, 1917,
in the opening paragraph of his statement to the Commission in
this case, as follows:
Mr. CHAIRMAN AND GENTLEMEN OF THE COMMISSION: We are here on what
we regard as a very serious question. We realize that the conditions of the
railroads to-day present a menace to the country, not alone to the owners of
the properties, but as affecting directly the international situation. It is abso-
lutely essential that the railroads of this country shall be in splendid working
order, not merely workable physically, but in a position to fulfill their full
duties to meet what we all believe is coming—a crisis in our history; and to do
it effectively and properly.
Operating revenues sufficient to enable the carriers to perform their
full duties are unquestionably required. In the event that the appre-
hensions expressed by the carriers are realized and increased
charges for transportation become necessary, I would not limit those
increases to certain classes of traffic, nor, in the absence of very clear
proof of differences in conditions, to particular sections of the coun-
try. Rate increases, made necessary by war conditions, should be
borne by all sections of the country and all classes of traffic, in so far
as influences of those conditions are national in scope.
It is admitted by the carriers that they do not seek the increase in
freight rates for the purpose of purchasing additional equipment,
motive power, or extension of terminals, but for the sole purpose
of paying increased cost of wages, material, fuel, and supplies.
•
DOLLARS PER TON
90
APPENDIX.
TABLE NO. 1.-Iron and steel prices, Dun's Review.
80
70
60
50
40
30
Structural Beams, Pittsburgh
Billets,O-H, Philadelphia.
20
Billets, Bessemer, Pittsburgh
Foundry No.2, Philadelphia
10
3
3
ო
6
3
/
5 2
/
5 3
출력​을 ​체계적 ​광복​점​· 동호​로 ​북편​을 ​체술 ​불험​을 ​충분할 ​블록​한 ​일​이
​1915
с
4916
839
1.9.1-7 comm
840
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
£
30
TABLE No. 2.-Dun's index number of metal prices.
DOLLARS
0.10
1
20
16.296
16.163.
+16.343
15.942
JAN. *
FEB./
MAR. I
AFR. I
MAY I
JUNE I
48851
1. ՈՐ
16.138
16.607
16.6/6
16.956
17.065
94821
10.328
€68.8/
61861
20.387
20.643
20.889
121.656
121.174
21.057
21.326
21.224
86472
£89.93
24.451
25.029.
25.977
23.390
·AUG. I
SEPT. I
OCT. I
NOV. I
DEC. I
JAN. I
FEB..I
MAR. I
APR.↓
MAY I
JUNE I
JULY I
AUG. I
SEPT. I
OCT.
NOV.
I
I
·DEC.
I
JAN. I
FEB. I
MAR. I
APR. I
1915
-1916
-1917-
Metals include various quotations of pig iron and partially man-
ufactured and finished products, as well as minor metals, coal and
petroleum.
TABLE NO. 3.-Statement slowing cost of freight cars in 1917 as compared with prices in
1916 or prior thereto.
2,475.00
Remarks.
Gondolas. Last lot purchased in
1913.
Refrigerator cars. Lastlot purchased
in 1913.
Carrier.
Unit.
1916
1917
W. Md. Ry. Co.....
No. Pac. Ry. Co...
Each....
$1,034.69
1 1,041.98
$1,529. 1
2, 175.00
Coal cars.
do..
1 1,558.67
Peerless Transit Line.
..do....
$900 to $1,100
Pa. Lines East.
.do....
1,466.00
3,742.00
1,000.00
Ill. Central R. R. Co.. ...do.
1,681.95
C. & O. lines...
...do....
948.80
1,531.03
31,540.00
C., B. & Q. R. R. Co......do....
2 808.00
21,637.00
$3,750 to
over $1,000
3,555.00
2,000.00
$900 to $1,100 shown simply as "for-
mer price." The "over $4,000" is
price for immediate delivery.
Steel coal cars.
Steel box cars.
Box cars.
3 1,891.00 Gondolas.
A., B. & A. Ry. Co.......do.... (This company has had bid submitted in 1917 of $42,510 for 2 combined
So. Pac. Co.....
1 1913.
..do.
steel baggage, mail, and express cars. This compares with the price
paid the same company in 1916 for 2 units of same equipment of
$23,640.)
$1, 468.05
1.294.76
9,785.54
2 1915.
$2,806.96
1,918.60
12, 319.26
Oil tank cars.
Gondola cars.
Combination baggage and mail cars.
1916 price is for 1917 delivery.
*
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
841
TABLE NO. 4.-Statement showing prices paid for locomotives in 1917 as compared with
1916 or prior thereto.
1917
Remarks.
Carrier.
Unit.
1916
D. & H....
Each....
W. Md. Ry. Co….
...do..
T., St. L. & W. R. R.....do...
$37,276.11
19, 452. 74
[142, 025.76
No. Pac. Ry. Co…..
...do.
127,977.40
42, 700.00
Union Pacific.
.do..
14,913.00
N. Y. C. & St. L..
.do..
19, 250.00
26, 780.00
23,375.00
Pa. Lines east..
..do....
C. I. & L. Ry. Co..
...do.....
39,000.00
31, 300.00
12 22, 205.00
Ill. Central R. R……..
..do.....
212, 400.00
26, 756.26
27, 818.00
42, 934.99
C. & O. lines..
..do.....
N. & W. Ry. Co..
So. Ry. Co....
C. B. & Q. R. R. Co……….…..do……….
Pere Marquette Ry. Co....do...
do....
31, 019. 41
2 26, 518.00
222, 017.00
43, 360.34
(Not shown
..do..
48, 138.66
3 46, 450.00
8 42, 505.00
..do....
38, 400.00
25, 483.10
35, 850.00
$66,531.14
24, 315.92
61, 200.00 |
42,700.00
61,950.00
63,000.00
59,000.00
41, 660.70
77,500.00
56, 250.00 |
38,900.00
73,850.00
Price of a locomotive 25 per cent larger than
former ones is 200 per cent higher...
Glass Z-2 locomotives.
Class W locomotives (January delivery).
Class W locomotives (April delivery).
Switching locomotives.
1917 locomotives bought under option given
November, 1916. Ifbought in open market
would have cost $31,750.
Freight locomotives.
2-10-2 type.
Mikado locomotives.
Switching locomotives.
Pacific passenger locomotives.
Freight and switching locomotives.
Type 2-10-2 freight.³
Mikados.
Quotation not accepted and none bought.
2-10-2 type.
Switchers.
Santa Fe type.
8-wheel switchers.
I 1913.
2 1915.
3 1916 price for 1917 delivery.
TABLE NO. 5.-Comparison of fuel prices per ton.
EASTERN DISTRICT.
1916
1917
N. Y., N. H. & H..
Water freight charges.
Rail freight charges.
B. & O.
Philadelphia & Reading...
Central of N. J.
Do...
Great Lakes Transit Corporation.
Erie Railroad..
Do..
Pennsylvania Lines West
Pennsylvania Lines East
Chesapeake & Chio.
Boston & Maine.
$1.25
$3.98
.60
4.50
1.50
1.50
1.10
1.58
1.56
2.355
2. 462
3.334
1.15
2.68
2.75
5.25
1.35
2.50
1.20
2.05
(1)
1.0552
1.50
1.25
3. 15
Added water freight...
Maine Central..
Bangor & Aroostook.
.60
4.50
3.54
5.54
3.37
4.81
SOUTHERN DISTRICT.
Norfolk & Western...
$1.26.
$2.24
Central of Georgia..
Southern Ry...
Do..
Seaboard Air Line.
A. B. & A.
Atlanta & West Point
·
Contract expires July, 1917, and will thereafter be higher.
.94
1.61
2.00
1.076
2. 169
1.338
2.16
1.20
2.05
1.26
1.66
Chicago & North Western...
Do..
Chicago & North Western Lake Coal.
So. Pac. Co.
St. L. & S. F.
Northern Pacific.
Union Pacific.
Do....
WESTERN DISTRICT.
1 Increase of 68 cents.
2 Increase of 90 cents.
$0.90
1.90
3.00
3.27
1.65
11
3.05
1.18
1.42
$1.25
2.70
6.00
5.15
2.20
6.00
1.535
2.45
842
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
200
TABLE No. 6.—Dun's index number of prices.
164.840
168.090
169.562
176.273
186.244
190.012
100
·JAN:I
FEB.I
MAR.I
DOLLARS
124.168
125.662
124.158
150
APR.I
125.090
MAYI
126.649
JUNE 1
125.992
JULY I
124.958
AUG. I
125.079
SEPT.I
124.684
OCT. 1
126.663
NOV. !
130.467
DEC.!
133.146
JAN. I
137.666
FEB. I
142:260
MAR.1
APRI
.MAYI
JUNE I
JULY 1
142.1.10+
145.690
146.197
145.397
145.142
AUG. I
SEPT. 1
OCT.!
143.930
152.018
152.355
NOV.I
DEC. I
JAN. 1
FEB. 1
MAR.!
APR. I
1915
1916
917-
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
843
+
JAN. 1
FEB. 1
MAR.I
APR. I
MAY I
JUNE I
JULY I
AUG. I
SEPT. I
OCT. I
NOV. I
DEC./
JAN. I
FEB. I
-1915
·1916
1917→.
fertilizers and drugs, and does not include metals.
Tumber, lath, brick, lime, glass, turpentine, hemp, linseed oil, paints,
The miscellaneous class embraces many grades of hard and soft
DOLLARŠ
20
21.794
21.654-
21.855
22.383
22.385
22.507
22.561
30
22.676
22.742
23.177
23.878
24.100
24.820
26.025
26.101
26.043
26.002
26.175
25.799
TABLE NO. 7.-Dun's index number of miscellaneous prices.
MAR./
APR.!
MAYI
JUNEI
JULY I
AUG. I
SEPT.I
25.277
25.024
OCT. I
NOV. I
DEC.I
JAN.I
25.373
25.63.5
25.802
FEB. I
MAR. I
APR
25.762
26.5/5
27.217
27.354
844
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
TABLE No. 8.-United States Class I carriers by railway.
AVERAGE OPERATING REVENUES PER MILE OF ROAD.
1917
1916
1915
1914
1913
1912
1911
1910
1909
1908
1907
Average, Average, Average,Average,
1908-1910. 1911-1913. 1914-1916. 1915-16.
January
$1,301
$1,133
February.
$939
$1,021
1, 147
$1,087
$931
March
1,141
$930
900
$923
914
$822
1,011
$795
1,373
964
April
1,260
861
1,015
887
1,092
782
1,383
1,223
1,081
736
1,051
981
$847
J2
$983
$1,031
$1,036
1,013
1,038
1,064
1,043
945
922
985
8.8
1,021
974
942
934
988
882
1,038
1,122
799
1, 137
4 months.
$90
5, 204
4,757
993
3,867
1,091
4,065
4,243
1,118
3,920
3,714
3,841
May.
June..
3,408
3,168
3,472
1,307
1,044
3,959
4,230
1,047
4,312
1, 150
July.
August.
1,302
1,030
990
1,094
1,097
1,025
901
1,135
796
1,315
1,075
998
907
1, 130
1,127
1,040
941
1,057
1,183
837
1, 133
1,175
1,418
1,112
1,025
September.
1,190
1,016
939
1,069
1,174
977
1,241
882
1,164
1,211
1,409
October
1,251
1,119
$1,056
1, 198
958
1, 110
1,107
1,185
1,257
1,044
934
1, 191
November.
1,466
1,206
1,137
1,112
1,223
1,029
1,323
1,117
1,190
1,171
1,314
1,085
1,261
1,396
1,311
990
December.
1,303
1,175
1,080
1,304
1,345 1,253
1,026
1,146
1,064
1, 180
1, 147
1,200
1,213
1,048
1,282
1,330
1,093
1, 152
1,079
1,114
993
1,116
1,090
1,267
955
1,320
1,159
1,046
1,028
1,013
1,395
1,041
969
1,162
926
1,242
892
1,349
12 months end-
ing Dec. 31..
974
1, 107
1, 197
1,299
1 17, 104
15,715
13,455
12, 885
13, 819
13, 237
12, 297
12, 402
11,562
Ratio 12 mos./4 mos.
10,536
1 3. 287
11,500
3.303
13, 118
3.479
14,018
14,585
3.170
3. 256
3.377
3. 311
3.230
3.393
3.326
3.312
3.313
3.315
3.383
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
845
AVERAGE OPERATING INCOME PER MILE OF ROAD.
January.
February.
March
$311
$281
$172
$176
$238
$158
$194
$214
$194
$160
$189
$197
$210
$227
188
286
171
118
212
208
176
211
183
141
180
199
192
229
319
361
244
240
235
260
260
304
281
223
269
251
282
302
April
332
342
240
206
214
212
241
254
249
203
235
222
263
291
4 months.
1, 150
1,270
827
740
899
838
871
983
912
727
874
869
946
1,049
August.
May.
June.
July
September.
October
395
259
195
273
250
262
275
263
201
246
262
283
327
392
311
256
284
293
276
291
292
242
275
284
320
351
411
329
291
298
་་
319
287
286
315
276
$321
292
301
344
370
476
375
336
338
394
353
354
368
312
362
345
362
396
425
468
425
352
354
387
370
363
386
341
331
363
370
415
447
495
455
333
372
441
381
369
423
-
November.
370
355
387
398
428
475
441
449
243
284
363
314
327
•
380
305
276
337
320
378
445
December
12 months end-
ing Dec. 31.
Ratio 12 mos./4 mos..
375
397
218
245
314
280
264
262
279
210
268
280
330
386
14,334
4,723
3,827
2,964
3,347
3,599
3,394
3,512
3,601
3,053
3,389
3, 446
3,838
4,275
1 3.769
3. 718
4. 628
4.006
3.728
4. 294
3.897
3.572
3.948
4.200
3. 877
3.966
4.039
4. 077
Average investment
per mile of road at
June 30
1 74,500
73, 789
73,055
72,466
71, 434
67,902
66,943
63,631
61,391
61,779
Ratio operating in-
come to average in-
vestment, per cent..
1 5. 817
6.400
5. 240
4. 091
4. 683
5.300
5.070
5. 519
5. 866
4.941
Estimated.
846
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
TABLE No. 9.-Eastern district-Class I carriers by railway.
AVERAGE OPERATING REVENUES PER MILE OF ROAD.
1917
1916
1915
1914
1913
1912
1911
January
$2,245
February.
$2,073
$1,591
March.
1,961
$1,700
2,041
$1,870
1,506
$1,596
1,507
$1,587
2,426
1,718
April.
2,219
1,612
1,742
1,849
1,443
2,424
2, 195
1,814
1,794 1,845
1,808 1,836
1,678
1,583
1,659
4 months..
9,056
8,528
6,653
6,850
7,241
6,627
6,367
May
June.
2,370
1,873
1,818
2,022
July...
2,363
1,728
1,973
1,905
1,751
1,999
August..
2,380
1,897
2,011
:
1,776
1,935
2,087
September....
2,504
1,923
2,120
2,043
1,753
2, 185
October.
2,451
2, 185
2, 108
1,929
2,022
2,142
November...
2,482
2,021
2,296
1,903
1,958
2,184
2, 142
December.
2,353
2,232
1,916
1,715
1,949
2,257
1,997
2,175
1,655
1,787
1,878
1,928
1,741
12 months ending Dec. 31. 1 29,432
27,688
23,518
21,901
23,687
22,371
20,923
Ratio 12 months/4 months.
1 3.250
3.247
3.535
3. 197
3.271
3.375
3.286
AVERAGE OPERATING INCOME PER MILE OF ROAD.
January.
$434
$520
$227
$195
$376
$267
$291
February..
176
489
227
88
311
306
247
March..
460
578
372
321
315
456
412
April...
512
601
447
343
338
294
444
4 months.
1,582
2,188
1,273
947
1,340
1,323
1,394
May.
721
483
317
468
402
483
June.....
699
590
422
484
549
505
July..
August..
September..
October.
741
613
485
506
560
507
807
691
589
577
695
630
745
740
569
529
609
590
726
760
496
493
658
567
November.
December.
623
721
330
347
533
478
532
625
277
318
450
434
12 months ending Dec. 31.
1.5, 802
7,782
6, 496
4,432
5,062
5,780
5,588
Ratio 12 months/4 months..
Average investment per mile of
road at June 30……
1 3.667
3.557
5.102
4.681
3.778
4.368
4.009
1 118,600
116,800
115, 080
Ratio operating income to aver-
age investment………...per cent..
1 4.893
6.662
5.644
1 Estimated.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
847
TABLE NO. 10.-Southern district-Class I carriers by railwuy.
AVERAGE OPERATING REVENUES PER MILE OF ROAD.
1917
1916
1915
1914
1913
1912
1911
January.
February.
$1,111
$956
$796
$933
$931
$799
$843
1,012
967
764
850
890
843
796
March.
1,145
1,050
867
981
954
904
882
April.
1,120
987
850
901
854
855
792
4 months.
4,388
3,960
3,277
3,665
3,629
3,401
3,313
May.
June...
July.
...
1,024
833
889
922
857
803
968
817
865
862
820
769
931
842
887
875
837
787
August
1,028
874
889
908
892
845
September.
1,028
925
862
943
875
867
October
1,116
980
863
1,042
980
901
November.
1,113
981
792
985
939
874
•
December.
1,129
1,012
829 1,011
958
889
12 months ending Dec. 31. 113,610
Ratio 12 mos./4 mos....
13.100
3.216
12,297 10,541 10,541 11,177
3.105
10,559
10,048
2.876
3.079
3.105
3.036
AVERAGE OPERATING INCOME PER MILE OF ROAD.
January
$335
$273
$168
$201
$224
$143
$230
February.
269
285
156
168
219
207
215
....
March.
328
328
221
249
248
233
261
April....
290
295
211
185
164
196
199
4months.
1,222
1,181
756
803
855
779
905
May
317
202
174
201
200
197
June...
294
189
175
189
191
182
July..
240
202
184
180
181
196
August.
309
227
193
198
229
230
September..
307
268
182
232
223
253
October.
371
292
191
294
280
261
November.
374
299
165
254
246
227
December.
386
330
205
278
273
251
12 months ending Dec. 31.
1 3,872
3,779
2,765
2,272
2,681
2,602
2,702
Ratio 12 mos./4 mos.......
1 3.168
3.200
3.657
2.829
3,136 3.341
2,986
Average investment per mile of
road at June 30.
1 60,000
59,140
58,385
Ratio operating income to aver-
age investment.....per cent.. 16.453
6.390
4.736
1 Estimated.
848
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
TABLE No. 11.—Western district-Class I carriers by railway.
AVERAGE OPERATING REVENUE PER MILE OF ROAD.
1917
1916
1915
1914
1913
1912
1911
January
February.
March.
$930
$759
$684
$733
$770
$658
$693
818
783
663
659
719
694
649
964
888
728
776
781
725
733
April...
993
855
697
733
768
722
700
4 months.
3,705
3,285
2,772
2,901
3,038
2,799
2,775
May
912
730
742
816
755
743
June.
924
780
798
820
770
759
July.
951
819
830
861
818
757
August.
1,047
866
865
910
892
825
September.
1,057
929
904
948
930
861
October.
1,116
988
908
998
1,029
912
November.
1,050
980
784
886
934
835
December.
998
909
740
795
865
768
12 months ending Dec. 31. 112,597
11,340
9,773
9,472
10,072
9,792
9,235
Ratio 12 months/4 months...
13.400
3.452
3.525
3.265
3.315
3.498
3.328
AVERAGE OPERATING INCOME PER MILE OF ROAD.
January.
$247
$174
$148
$159
$178
$111
$145
February.
167
193
150
116
163
162
139
March
251
272
192
199
192
176
203
April.
265
238
154
149
173
179
174
4 months...
930
877
644
623
706
628
661
May.
272
174
145
206
194
197
June..
282
223
205
222
205
217
July...
316
241
236
241
250
213
August.
380
278
267
273
306
262
September.
394
332
308
312
338
304
October.
November.
December.
430
369
304
340
392
333
379
372
229
265
322
266
300
314
196
200
263
217
12 months ending Dec. 31.
13,813
3,630
2,947
2,513
2,765
2,898
2,670
Ratio 12 months/4 months!
1 4. 100
4. 139
4.576
4.034
3.916
4.614
4.039
Average investment per mile of
road at June 30.
161,330
60,985
60,630
Ratio operating income to aver-
age investment.....per cent..
1 6.217
5.953
4.861
1 Estimated.
TABLE No. 12.¹—Comparison of tons of revenue freight originating on the lines of carriers
having operating revenues in excess of $100,000 per annum, during the year ended June
30, 1916, with those for the year ended June 30, 1913, the best prior year with respect to
amounts of freight carried.
Commodity.
Year ended June 30, 1916.
Year ended June 30, 1913.
Eastern
district.
Southern
district.
Western
Eastern
district.
district.
Southern
district.
Western
district.
Grain.
Fruit and vegetables....
Tons.
11,611, 473
6,692, 047
Tons.
39,376,450
9,493, 018
Tons.
4,975, 023
1,754, 720
Tons,
35, 133, 842
8, 265, 274
Total products of agricul-
ture..
28, 374, 843
64,979, 845
Total products of animals.
10, 548, 878
14,920, 900
Anthracite coal..
75, 998, 331
Bituminous coal..
Coke...
Total products of mines..
Total products of forests
Total manufactures.
Grand total.
189, 260, 756
29, 644, 219
371, 626, 877
21,705, 556
128,359, 103
617, 636,659
Tons.
4, 169, 693
1,779,324
13,717,806
2,466, 126
43,290
96,318, 879
4,733, 384
122, 645, 664
29, 967, 633
20, 009, 709
199, 126, 576
199, 126, 576
70, 188, 813
16,688, 041
3, 193,751
51,213,937
2,996, 119
208,079,980
52,086, 844
37,868,922
408,860, 876
Tons.
10,825,799
6,079, 360
26,973,005
8,926, 737
76, 274, 039
182, 411, 156
29,726, 373
359, 230,979
23, 431, 387
110, 483, 255
578,382,786 |
"
14, 114, 467
2,598, 745
51,49
75,567, 418
4,925, 607
101,003,003
30,789,088
19, 641, 814
178, 688, 390
178, 688,390
3,233, 517
53, 163, 543
2,909, 688
190, 706, 271
57, 858, 689
35, 406, 966
387,769, 127
1 These figures are from the reports as of the date of this report. They are subject to some changes
due to corrections made.or to be made by individual carriers.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
849
(6299)
(67.40)
66.29--,
969)
K6%
70.75
70.71
71.77
'12 '13
'14
'15
'16 17
$5.96
(75.89)
JONE SO
APRIL 30
DEC. 31
11. 0161
67.97
67.27
70.97
60.
80
ZO. 90.
67.88
18.89
TABLE No. 13.—Ratio of operating expenses to operating revenues.
YEARS
'02 '03
'04 '05
64.62
64.82
65.49
67.15
.68
.67
.66
.65
.64
.63
69
.76
.75
.74
.73
.72
.71
10. 0061
Curve for 35 Eastern railway systems, based on figures shown in exhibits of carriers. (See 32 I.C.C.325)
39 11
"
#1
from reports of carriers to I.C.C. (Figures in parentheses)
PER CENT
40958-18
54
850
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
TABLE NO. 14.-Comparison of increase in property investment and traffic.
YEARS
1900 01 02 03 04 'C5 '06 '07 '08
·
'09 1910 1
12 13 14 '15 '16
'230
220
210
200
190
180
PER CENT
170
160
150
140
130
120
110
100
PASSENGER TRAFFIC
FREIGHT TRAFFIC
PROPERTY INVESTMENT
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
851
15
16
17
17.16
PER CENT
19
18
20
24
22
#7.85
10.83
23
24
PER CENT
·4,00
3.50
5.00
4.50
5.50
1900 '01 '02
6.50
6.00
5.28
5.50
TABLE NO. 15.-Ratio of net operating income to property investment.
5.70
5.85
YEARS
'03 '04 '05 '06 '07 '08 '09 1910 '11 12 $13
6.31
5.26
5.55
6.28
5.19
5.36
TABLE NO. 16.-Ratio of total operating revenue to property investment.
YEARS
1900 'or '02 '03 '04 '05 06 07 08
'09 1910 '11 12 13
'14
15
'16
20.32
20.52
21.69
20.82
22.0
≤21.02/21.12)
(19.46).
(23.05)
(3.94)
14. 15 '16
852
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
PER CENT
3
2.831
2
5
22
PER CENT
13
PER CENT
14
15
14.05
3.83
16
17
PER CENT
13
72.64
12
11
12.88
13.43
TABLE NO. 17.—Ratio of groups of operating crpenses to operating revenues.
YEARS
1900 '01 '02 '03 '04 '05 '06 '07 '08 '09 1910 '|1 12 13 14 15 16 17
MAINTENANCE
TENANCE OF WAY AND STRUCTUR
15:
14
DEC. 3/
PRIL 30
13.25
12.48
12.43
19
TENANCE OF EQUIPMENT
18
13.89
15.04
(2.97)
1:72
158
(12.89),
36.82
15.38
15.531
12.43
15.62
12.36
38.64
16.18
11.94)
36.16
$5.891
(1.26
15.80
11.74
37.38
16.07
16.59
39
38
37
36
35
TRANSPORTATION AND TRAFFIC
35.13
35.2
35.16
36.95
34
33
6
GENERAL AND MISCELLANEOUS OPERATIONS
2.70
3.06
3.27
3.25
3.12
4.66
4.55
4.74
468
4571
TOTAL
64.62 64.82 65.49 67.15 68.87 67.88 66.83 68.45 70.97 67.97 67.27 70.71 70.75 71.77 75.96 (72.06) (66.85),
(75.39/(/2.09)/(66.65)
4.09
(463))
(46.2)
13.08)
37661
37.19
39.34
(39,02)
(36.04)
(35:05)
(38.7
18.76
110.44
(17.36K
Контора
(17.57)
$110.83)
(17.78)
(801)
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
853
Per Cent
60
70
TABLE NO. 18.-Ratio of (a) maintenance of way and structures; (b) maintc-
nance of equipment; (c) other operating cxpenses to operating revenues.
Relative figures, the operating ratios of 1901 being taken as 100 per cent.
Data from Table 6 for 41 roads.
.160
150
140
130
120
110
Years
1901
1902
1903
1904
1905
1906
1907
1908
1909
1910
1911
1912
1913
1914
2
100
C.
90
A
1915
B
1916
854
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
CENTS
2.15
2.10
2.05
2.00
1.95
4
BILLIONS
7
6
ساد
TABLE No. 19.—Passenger traffic and revenue per unit.
1900 '01
'02 '03 '04 '05
17
16
15
14
13
12
=
10
9
PASSENGER MILES (Bittions)
10803
+1205-
16811
∞
8728
932
1.90 RATE PER MILE (Cente
1.85
1,80
1.854
1.856
0087
2007
YEARS
'06 '07 '08 '09 1910 'IJ '12 '13
'14 '15
12416
13481
3854
14640
15/85
-(068%)
15361
16055
(16580) -
10 (86/51)
15946
'16
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
855
4.50
$400
G4.00
PER CENT
3.5.0
3.00
2.50
TABEL NO. 20.—Ratio of taxes to operating rcvenues.
1900 '01
'02 03 04 '05 06 07
YEARS
'08
'09 1910 II 12 13 14
'15
'16
5.50
5.00
3.181
3.16
2.96
1900 '01
.900
'02
'03
.850
.800
.750
PER CENT
700
.650
.600
.550
#595
665
3.22
3.49
3.61
3.96
அச3.
TABLE No. 21.-Ratio of taxes to property investment.
YEARS
'04 05 06 '07 '08 '09 1910 '11 12 13
'14
700
1693
.732
خيوط
:640
499
15 16 17
.879
(881)
Forgy
12.7917
(3.88)
1966)
DE C. DI
'17
856
Federal OPERATION OF TRANSPORTATION SYSTEMS.
FEDERAL
}
TABLE NO. 22.
Per mile of road operated.
Month.
United States.
Eastern dis-
trict.
Southern dis-
trict.
Western dis-
trict.
1916
1915
1916
1915
1916
1915
1916 1915
July, 1916.
Railway operating revenues..
$1,315
$1,130
$2,380 $2,011
$931 $842
$951
$819
Railway operating expenses.
848
750
1,551
1,318
649
602
590
536
Net revenue from railway oper-
ations..
467
380
$29
693
292
240
361
283
Railway operating income.
411
329
741
613
240
202
316
241
August, 1916.
Railway operating revenues..
1,418
1,190
2,504
2,120
1,028
874
1,047
866
Railway operating expenses..
882
764
1,607
1,348
675
609
617
546
Net revenue from railway oper-
ations.
536
426
897
772
353
265
430
320
Railway operating income.
476
375
807
691
309
227
380
278
September, 1916.
Railway operating revenues..
1,409
1,251
2,431
2,185
1,028
925
1,057
929
Railway operating expenses.
881
774
1,612
1.366
676
618
614
553
Net revenue from railway oper-
ations...
528
477
839
819
352
307
443
376
Railway operating income.
468
425
745
740
307
268
394
332
October, 1916.
Railway operating revenues..
1,466
1,323
2,482
2,296
1,116
980
1,116
988
Railway operating expenses.
910
815
1,661
1,456
699
649
636
575
Net revenue from railway op-
erations...
556
508
821
840
417
331
480
413
Railway operating income.
495
455
726
760
371
292
430
369
November, 1916.
Railway operating revenues..
1,396
1,303
2,353 2,232
1,113
981
1,050
980
Railway operating expenses.
894
801
1,633
1,432
691
642
623
563
Net revenue from railway op-
crations..
502
502
720
800
422
339
427
417
Railway operating income.
441
449
623
721
374
299
379
372
December, 1916.
Railway operating revenues..
1,345
1,253
2,257 2,175
Railway operating expenses..
905
802 1,627 1,469
1,129 1,012
998
909
694
641
643
550
Net revenue from railway op-
erations.
440
451
630
706
435
371
355
359
Railway operating income.
375
397
532
625
386
330
300
314
For six months ending with Decem-
ber, 1916.
Railway operating revenues.
Railway operating expenses.
8,348 7,450 14,415 13,013 6,345 5,615 6,219 5,491
5,320 4,706 9.683 8,384 4,083 3,761 3,722 3,323
Net revenue from railway op-
crations..
Railway operating income.
January, 1917.
2,666
2,430 4,170
3.028 2,744 4,732 4,629 2,262 1,851
2,497 2, 169
4.148 1.987 1,618
2.198
1,905
Railway operating revenues..
1,301
1, 133
Railway operating expenses.
930
2,245 2,073 1,111
798 1,714 1,465
956
930
759
729
641
036
5-13
Net revenue from railway oper-
tions..
371
335
531
608
382
315
294
216
Railway operating income..
311
281
431
520
335
273
247
174
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
857
TABLE NO. 22-Continued.
Per mile of road operated.
Month.
United States.
Eastern dis-
trict.
Southern dis-
trict.
Western dis-
trict
February, 1917.
1916
1915 1916
1913
1916
1915
1916 1915
Railway operating revenues…..
$1,147
$1,141 | $1,961
$2,041
$1,012
$967
$818
$783
Railway operating expenses..
839
801 1,690
1,465
694
610
604
548
Net revenue from railway oper-
ations..
248
340
271
576
318
327
214
235
Railway operating income.
188
286
176
489
269
285
167
193
March, 1917.
Railway operating revenues..
Railway operating expenses..
1,373
1,260 2,426
2,219
1,145
1,050
964
885
992
814
1,869 1,553
762
679
664
573
Net revenue from railway oper-
#
ations.
381
416
557
GGG
383
371
300
315
Railway operating income.
319
361
460
578
328
328
251
272
April, 1917.
Railway operating revenues.
1,383
1,223
2,424
2, 194
1,120
983
993
Railway operating expenses..
856
7
986
827
1,813
1,508
769
648
678
573
Net revenue from railway oper-
ations..
397
396
611
686
351
335
315
283
Railway operating income.
332
341
512
599
290
294
265
238
For four months ending with April,
1917.
Railway operating revenues...
Railway operating expenses..
5, 201
3,807
4,758
3,271 7,088
9,058 8,526 4,388 3,956 3,705
5,990 2,954 2,608 2,583
3,288
2,238
Net revenue from railway oper-
ations...
1,397
1,487 1,970
2,536
1,434
1,348
Railway operating income..
1, 122
1, 150
1,269
1,581
2, 185
1,222
1,178
928
1,050
877
ORDER.
At a General Session of the INTERSTATE COMMERCE
COMMISSION, held at its office in Washington, D. C.,
on the 27th day of June, A. D. 1917.
No. 57 (Ex Parte).
THE FIFTEEN PER CENT CASE.
It appearing, That on May 7, 1917, the Commission entered upon
an investigation concerning the propriety of certain increased rates,
charges, regulations, and practices for the transportation of freight
stated in schedules filed to become effective July 1, 1917, and at sub-
sequent dates, by carriers in eastern, southern, and western districts
and by duly authorized agents for and on behalf of said carriers, said
schedules being designated as "special supplements to tariffs,” and
which special supplements provide, in the form permitted by Inter-
state Commerce Commission Special Permission No. 41750 of April
23, 1917, that the rates in tariffs and supplements therein listed are
increased to the rates shown in column B of rate table contained in
said special supplements; also schedules not so designated, but which
state new individual and joint freight rates and charges increasing
said rates and charges 15 per cent by specifically showing the pro-
posed increased rates without reference to said special supplements;
It further appearing, That a full investigation of the matters and
things involved has been had, and that the Commission, on the date
hereof, has made and filed a report containing its findings of fact
and conclusions thereon, which said report is hereby referred to and
made a part hereof:
It is ordered, That the operation of the said schedules be, and they
are hereby, suspended until October 28, 1917, in the following partic-
ulars:
First. All schedules naming increased rates within the western
district as designated in this proceeding;
Second. All schedules, excepting only those applying to bitumi-
nous coal, coke, and iron ore, naming increased rates within the
southern district as designated in this proceeding;
Third. All schedules, excepting only those applying to bitumi-
nous coal, coke, and iron ore, naming increased rates within the
eastern district as designated in this proceeding;
858
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 859
Fourth: All schedules naming increased rates applying interter-
ritorially between the said districts, excepting only those applying
to bituminous coal, coke, and iron ore between the said eastern and
southern districts.
It is further ordered, That the use of the rates, charges, regu-
lations, and practices stated in such suspended schedules be de-
ferred upon interstate traffic until the said October 28, 1917, unless
otherwise ordered by the Commission.
And it is further ordered, That a copy of this order be filed with
said schedules in the office of the Commission, and that copics hereof
be served upon all carriers named in said schedules and their re-
spective publication agents.
By the Commission.
[SEAL.]
GEORGE B. MCGINTY,
Secretary.
860
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
}
The CHAIRMAN. You may proceed now, Mr. Plumb.
STATEMENT OF GLENN E. PLUMB, REPRESENTING THE FOUR
RAILROAD BROTHERHOODS.
Mr. PLUMB. Mr. Chairman, the issues, to my mind, have been
greatly reduced during these hearings, and just to clarify the issues
I want to make a little résumé of what, to my mind, are the im-
portant matters now before you.
There are three propositions that are offered, one by the Adminis-
tration, which provides for the fixing of an agreement upon the
standard return as determined in the bill, and relegates those carriers
who are not satisfied with the terms so provided to their remedy
before the Court of Claims.
The proposition which I have submitted permits the fixing of a
tentative agreement upon the same terms that the Administration
bill offers, and then instead of providing a forum for those carriers
only who are dissatisfied with that agreement, requires that all the
carriers, whether they enter into the agreement or not, shall go before
the forum provided, in order that the exact extent of their rights may
be determined, and when so determined the contract compensation
shall be adjusted to the basis of that which is determined by that
forum.
The essential difference between our program and the administra-
tion program is that instead of providing a forum only for those who
are dissatisfied with the agreement, we provide a forum where all
rights shall be determined, whether the carrier accepts the agreement
or not.
Mr. MONTAGUE. Have you formulated an amendment covering
that?
Mr. PLUMB. I have, and I submitted it in my argument to this
committee.
Mr. MONTAGUE. Oh, yes; I recall that. You allude to that?
Mr. PLUMB. Yes. The third proposition pending is the proposition
submitted by Mr. Thorne, and relates purely to the terms of the agree-
ment, suggesting that instead of the standard return for which the
bill now provides, other and different terms shall be agreed upon.
And as I understand his suggestion, it not having been crystallized in
an amendment to be offered, it is that the Government shall pay to
the carriers their fixed charges, and the average dividend payments.
which have been made during the past three years; and that if there
be a surplus over and above that amount, it shall be divided between
the Government and the corporations on some agreed proportion.
I think that clearly defines the various issues which have been
presented. Now, I would rot eliminate all issues presented by my
amendment, absolutely. When my amer dmert was presented, it
was an amendment to a bill which was indeterminate in time; which
proposed on its face to fix the just compensation to which the car-
riers were entitled, and which to my mi d would have been a deter-
mination of what that just compensation was, and I suggested to
this committee in the oper irg of my argume t that if the bill in
those terms were to be adopted, then there should be added to it a
saving clause that this was a war emergency; that you did not attempt
in this bill to define and determine either public or private rights,
1
861
· FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
but you were giving such compersation as the exigencies of the
occasion required, and that this bill should not hereafter be con-
sidered a legislative precedent for the final determination of public
ar d private rights in these properties.
The bill as now amended before this committee contains a clauso
to that effect.
Mr. MONTAGUE. What section is that?
Mr. PLUMB. Section 14. I want to make a suggestion on that a
moment or two later, but I want to explain why the issues presented
by my ame dment are now so important.
The determi ation of the extent of public and private rights in
the great public highways is a question but little less momentous
in importance to the American people than is the question of the
prosecution of the war, and to my mind and the minds of the people
whom I represent we must concentrate on the one purpose that is
before us at this time-that is, the prosecution of the war-every
energy which we have, and it would be unwise at this time to divert
from the energies which are necessary to that end the great amount
of time and investigation and talent that would be necessary to
determine finally the public and private rights in these highways.
A d we did not urge that in our amendment at this time urless it
was necessary to protect public interests. If you had sufficiently
protected the public interest in the amendment to section 14, it
seems to me it would be unwise at this time to embroil all of the
interests of the Nation in the determination of the extent of private.
ard public rights in railroads as highways.
Now, turning to section 14, I know that it is the intention of Mr.
Anderson, who has drafted this section to effectually provide for the
protection of all rights, so that they shall not have been ascertained
or determined by this bill, and I have some doubt as to whether that
has been done in all the completeness that the situation requires,
and therefore I would suggest that at the end of section 14 there
should be added these words, or words of like import:
Nothing in this bill contained shall be contsrued as determining any public or pri-
vate rights in any of said systems of transportation, nor shall said bill constitute any
precedent for the final determination of the extent of either public or private rights
in said systems of transportation.
Commissioner ANDERSON. Brother Plumb, hadn't you better limit
that? Otherwise you cut your bill all to pieces. You mean noth-
ing shall be done here affecting public or private rights at the ex-
piration of Federal control, don't you?
Mr. PLUMB. Yes; that is what I mean. I mean at the expiration
of the term of the contract provided in this bill. Then the deter-
mination of the extent of public and private rights shall be made
upon the state of the laws and upon the facts as they existed prior
to the taking over of these properties.
Mr. MONTAGUE. Would you submit that amendment to the com-
mittee when you get through?
Mr. PLUMB. I will be very glad to.
Mr. MONTAGUE. I would like to have a copy of it myself.
Mr. BARKLEY. Do you mean, Mr. Plumb, that Congress nought not
to take into consideration the new conditions that may exist at the
end of Federal control, but only consider conditions that exist prior
to this public control, in determining public and private rights?
862
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. PLUMB. That is a fair question, and it requires consideration,
and this is the way my mind faces that problem. Of course rights
as they existed, we will say, on January 1, 1918, must be fixed and
determined by the facts and the laws as of that date. Now those
rights as they existed at that date will be modified and changed
during the period of Federal control, perhaps, if the Government
loans to these corporations during the period of Federal control
moneys for corporate purposes. That would be an added obliga-
tion of the corporations when the period of Federal control has
elapsed. If the carriers have invested out of capital funds during
that period moneys in their systems, then they are entitled to a
credit of that investment. So that the rights as determined as of
January 1, 1918, will be modified by the things done since that date,
but they will not be modified by any new laws or any different inter-
pretation put upon previous laws.
Mr. BARKLEY. So that in determining finally, at the end of the
public control, the rights of the public and the carriers, we must
consider the combined conditions of the facts and law previous to
Federal control, and the conditions that exist at the end of Federal
control?
Mr. PLUMB. Certainly; the condition of facts existing at the end
of Federal control.
Mr. BARKLEY. That is what I mean.
Mr. PLUMB. They must be taken into account. But we can not
consider the laws existing prior to Federal control as having been
modified by this bill.
Mr. BARKLEY. In other words, neither public nor private rights
should be prejudiced by any act of Congress during Federal control?
Mr. PLUMB. That is it exactly.
The CHAIRMAN. They should be treated in the measure of tempo-
rary measures, the time being the end of the control?
Mr. PLUMB. Yes, sir. That is, any right recognized in their in-
terest is recognized for the exigency of the situation, and such rec-
ognition should not extend beyond the time of temporary control.
But any facts which arise, of course, can not be changed, because
you can not change a fact.
The CHAIRMAN. By "fact" you mean conditions?
Mr. PLUMB. Conditions, yes; amounts of investment.
Mr. ESCH. Would that give stability to the financial markets that
the Director General contended before our committee as a reason
why we should take prompt action on this bill?
Mr. PLUMB. Mr. Esch, I am just coming to that. I do not feel
that it is my duty or would it be proper for me to offer anything in the
way of criticism of the administration's measure. I know that that
measure has been drafted by the ablest minds that the administra-
tion could procure. It does not need any testimony from me to add
nything to the purity of their motives; and anything that I ofer
for the administration bill is merely by way of suggestion. How-
ever, conceding like purity of motives and like integrity to the prop-
osition that has been presented by Mr. Thorne, there is one criti-
cism which I must offer to that proposition, and then I want to take
up the administration bill.
It is proposed under Mr. Thorne's program to divide a surplus be-
tween the railroads and the Government, in order that you may
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 863
stimulate the interest of those who carry on transportation. To
whom will this surplus go? It will go to the savings banks and to the
life insurance companies and to the fire insurance companies; and all
of them together, according to Mr. Thom, own $818,000,000 worth of
these securities, or about 4 per cent. And the rest of it will go to the
private owners of these securities-and I wish you had before you
a statement introduced by Dr. Warne before the Senate committee
on his cross examination, giving a tabulation of the 10 largest indi-
vidual holders of securities in all of the principal railway systems in
this country, and you will find that 10 single individuals or institu-
tions control from 10 to 100 per cent of the securities of the great
systems of railways in this country. I have not heard anything
mentioned about those 10 individual holders here.
The CHAIRMAN. Can you give them offhand?
Mr. PLUMB. I can not, but I can furnish that statement if the com-
mittee so desires.
Mr. STEPHENS. I would like to have it.
Mr. HAMILTON. I wish that would go into the public record.
The CHAIRMAN. Well, it is a matter of public knowledge; you may
put it in the hearing.
(The matter referred to follows.)
Proportion of total stock held by 10 leading stockholders in principal railway systems, 1915.
Pennsylvania R. R....
Baltimore & Ohio.
New York Central..
New Haven.
Philadelphia & Reading.
Erie..
Delaware & Hudson.
D., L. & W.
Chesapeake & Ohio..
Norfolk & Western
Western Maryland..
Wabash
Lehigh Valley.
Southern Railway.
Illinois Central..
Atlantic Coast I inc.
Seaboard Air I ine.
..
Den er and Rio Grade.
M.. K. & T…………
Missouri Paci c...
Name of road.
Chicago, Milwaukee & St. Paul..
Chica o, Rock Island & Paci.c
St. Louis & San Francisco..
Union Paci c....
Northern l'aci`c………….
Grand Trunk Western ¹.
Chicago, Burlington & Quincy...
Southern Paciˆc...
Great Northern..
Chicago & North Western.
Canadian Paci`c in Maine….
...
Atchison, Topeka & Santa Fe.
1 In hands of receiver.
Total stock
outstanding.
Stock held
by 10 leading
stockholders.
Per
cent.
$506, 457, 848
210,811, 885
24), 593, 514
157, 117, 900
42, 481, 700
176, 271, 300
42, 503, 000
42, 291, 10
62,786,000
131, 146, 200
59,428,098
92, 104, 127
60,618,000
42, 481, 631
37, 40, 300
3, 644, 600
13,039,300
12, 166, 900
$27,327,000
5.40¹
45, 923, 100
6), 967, 700
21.78
28.03.
21,386, 500
13.61
100.00*
21.22
8.57
30.83
19.38
64,577,600
49.24
37,672, 100
63.39
'64.55
9,935,550
16.39
185,650, 200
87,576, 900
47.17
109,291,717
38,592,600
35.31
68,754, 700
60,913,500
87,775,670
76,309,857
82,702, 585
26, 105. 100
37.97
35,017, 100
57.49
47,496, 700
54.11
29,447.900
38.59
10, 735, 100
12.98.
233, 201,900
23,371, 400
10.02
74,875, 200
90,671, 762
321,835, 100
247,946, 000
6,000,000
110,839, 100
272,674, 406
249, 129, 962
14, 166, 300
18.92
50, 192, 800
15.60
31,038,600
12 52
6,000,000
100.00
110,040, 100
99 28
53,573,800
19 65
31,222,000
12 53
152,509, 500
24,391, 400
15.99
2,273,000
314,663, 230
34,078, 100
10.83
Mr. MONTAGUE. You were speaking of Mr. Thom, or Mr. Thorne ?
Mr. PLUMB. Of Dr. Warne.
Mr. MONTAGUE. I mean you said some gentlemen who concurred
in the suggestion of Mr. Thorne or Mr. Thom. Do you mean Mr.
Thorne or Mr. Thom?
864
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
··
Mr. PLUMB. I mean Mr. Thorne made the suggestion as to the divi-
sion of surplus. Now, not one single savings bank, not a single life
insurance company, not a single fire insurance company, not a single
stockholder or bondholder moves a car or drives an engine or throws
a switch. There are 1,700,000 citizens of this country who move,
those trains, who do the work on the tracks, who drive the engines,
and who are in the final analysis responsible for every transportation
problem before you. And they do not own securities and they would
not be benefited by the division of surplus. Mr. Thom has testified
to the patriotism of these employees. I assure you his testimony is
not misplaced. Patriotism is the one great overpowering emotion.
It must not be hindered by any tic. The patriot who regards the
ties of his home as exceeding the demands of patriotism falls below
that standard which the situation calls for. These men are willing
to serve their country; they are anxious to serve their country. You
will find as pure devotion in the workmen on the railroads as you
will find in the trenches, and that service is just as necessary to win-
ning the war as is the service in the trenches.
The CHAIRMAN. And almost as hazardous ?
Mr. PLUMB. The man at the brakes runs a greater percentage of
danger than the man in the trench, and his devotion must be supreme.
No man can serve two masters, and if you impose upon these men
the duty and obligation first of producing a surplus for those who
render no service to the Nation, you have dimmed their patriotism,
just as much as you would have dimmed the patriotism of the soldier,
if you required him to earn money for those who financed the opera-
tions of the army. You must imbue these men with the single idea
that they are working for the Government, for their Nation, and that
they owe no allegiance to anybody else; that they are not bound to
produce a private profit for those who do not also serve.
Mr. Esci. How about the patriotism of the railroad officials?
I call your attention to an article which I saw in a paper recently, in
which reference is made to a statement of W. G. Lee, president of
the Brotherhood of Railroad Trainmen, wherein it said that "the
differences on the part of the railroad operating heads, coupled with
an apparent desire to teach the public an object lesson in the need
of increased rates has been noticed by railroad employees for many
months." President Lee said the general opinion prevails among
railroad workers that the alleged object lesson that the railroads
attempted to teach got beyond their control.
Mr. PLUMB. Mr. Esch, I shall not read the letter which I have in
my pocket. I will say this, we are getting reports daily by telegraph,
by letter, by various communications, cf crders which have been
issued, which to the employees seem to be intended to embarass
Federal operation and control. And those in due season will be
presented to the Director General. It may be that the orders of
which complaint is made are not so intended, but the complaints are
piling up before us by the hundreds, by the thousands, and all that I
want to say is that the very fact that we are getting that information
from the employees demonstrates their patriotism.
"
Mr. DECKER. How would you fix an incentive, then, for these
officials, providing that after investigation you find cut that these
complaints are well founded?
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
865
Mr. PLUMB. Why, if I were fixing an incentive for those officials it
would be an incentive for them to get just as far away, just as fast as
they could, because there are innumerable men in official capacities
in the railroads that have just as high ideals of patriotism as have the
employees.
Mr. DECKER. In other words, you would put other men in their
places?
•
Mr. PLUMB. I would put a patriot in their place, and you can find
plenty of them that have just as great operating ability as the men.
who may have disregarded their duties heretofore. And I think it is
due for me to say that as to the men selected by Mr. McAdoo to
direct operations in the three districts, it is our opinion that no
better men could have been selected out of all the forces from which
he could choose. I do not want any one-
Mr. DECKER (interposing). Who are those three men?
Mr. PLUMB. Mr. Aishton, Mr. Markham, and Mr. Smith.
Mr. Escн. Aren't they security holders?
Mr. PLUMB. No.
Mr. BARKLEY. Who was the first man you named?
Mr. PLUMB. Mr. Aishton, of the Northwestern Railway; Mr.
Markham, of the Illinois Central; and Mr. Smith, in the eastern district
of the New York Central.
Now, I come to the amount of compensation which should be
allowed, and that is the real thing. That is the only point on which
there can be any difference, and there are some very peculiar things
developed. A Mr. Prosser appeared before the Senate committee
a few moments before it adjourned. I don't know whether he
appeared before the House committee or not. I doubt if he did,
because he got here so late. He introduced some tables to show that
the cost of maintenance on railroads was 80 per cent higher than
the cost of maintenance on these railroads three years ago, or during
the three-year period; that the cost of labor and materials had so
risen that in order to do one dollar's worth of maintenance or to
do the equivalent of what $1 put into the roads three years
ago would have done you must now spend $1.80. And he urged
that the allowance for maintenance under Federal control should
be increased accordingly. Now, there is no warrant for a rate
which will produce more than a reasonable return on the investment,
and I insist on that-I will take that up later-unless the surplus
over and above that amount-which we will call the surplus-
is required for the maintenance of the road, to provide a fund which
shall take care of increased maintenance, and which shall provide
for renewals and emergencies.
Mr. MONTAGUE. Would that include depreciation?
Mr. PLUMB. That includes depreciation. If you provide more
than that, then the public is entitled to have the rate reduced. If
you provide less than that, the carriers are entitled to have the rate
increased.
Now during the past three years they have produced an enormous
surplus over and above their dividend and interest requirements.
On their very own showing, if the cost of maintenance is now increased
80 per cent, that surplus for this year would be reduced by the amount
of that increase in the cost of maintenance, and yet they ask you to
guarantee them a return which shall include that surplus of the past
40958-18-55
866
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
three years, and in addition provide that their property shall be main-
tained, although the cost has increased 80 per cent, and that their
surplus shall not be diminished thereby, or that the standard return
shall not be diminished. Is that fair? Can that be sustained?
Again, Mr. Thom says that the question of surplus and the right
of the carrier to enjoy that surplus is undetermined. It has not yet
been decided, and the administration seems to agree that at least it
has not been decided that it is the property of the carrier, and I assert
it never has been decided that it is the property of the carrier. Mr.
Thom says: "Since our title to this surplus is in doubt, you have got
to give it all to us, because if you don't give it all to us I am surren-
dering my claim to the surplus." And yet we have amended section
14 so that no claims are surrendered.
Now, I have always been of the opinion that the powers of the
Government in time of war exceeded the powers of the Government
in time of peace by whatever the emergency required. Mr. Thom
concedes that in times of peace we could take his properties and just
pay him what the law required for them, and that we have got the
same powers in times of war that we have in times of peace; and yet
must we concede every doubtful question in times of war to the car-
riers, the owners of these securities? If we preserve their rights
under section 14 and also provide that we will pay them their fixed
charges and their average net returns for the three years, and if
there is a surplus we will use it for the betterment of their properties,
and if they are not satisfied with that, let them go into the Court of
Claims and establish a greater right. Then we will recognize it.
But why must we by an agreement concede every doubtful point to
the carriers at the expense of the public?
But that does not seem to be the main point. The main reason
urged in support of the standard return determined as provided in
the bill is that it is necessary to support the market values of the
securities which have been issued, and Mr. Thom says that I come
forward with a lot of radical notions about investment being the
measure of their rights. Nobody ever heard of such claims, he says;
there is no decision to support it; there is no declaration of law on
which such a claim is based. And yet it is provided in the constitu-
tions of 26 States that investment shall be the basis of regulation;
that securities issued in excess of investment shall be void. The
Supreme Court of Illinois has so held. He says they are entitled to
all the value of their property, as is any individual holder; and yet
in the C., B. & Q. case which I cited to you the Supreme Court said
they did not have any such interest in their property at all; that the
property which they held for railroad purposes could not be valued
as was property held in private ownership, but should be valued only
for the use to which it was put.
So I submit that there are very respectable authorities-if a con-
stitution is an authority-in support of the proposition which I have
presented. But he says these securities have been issued on a different
basis, and have been recognized by the public on a different basis
for all these years. Yet he introduces an exhibit before you—I wish
I had it here, but I have not, but you will remember, I think,
exhibit of four pages, which is labeled "property investment account"
of all these railroads. In that property investment account he shows
that what they report to be money invested in their properties is the
an
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
867
equivalent to the par value of the securities which they have issued.
In every statement which they have made to the trusting people
who have bought these securities you will find that they have re-
ported that their investment in dollars did equal the par value of the
securities which had been put out, and that was the understanding
on which they sold their securities, and that was the understanding
on which the purchasers of the securities when they finally got into
the hands of the public, bought them. Now, he says, "Of course,
our investment is not that much, but nobody knows how little it is,
and if they don't know how little it is, then they don't know how
near it comes to being that much." Well, we know in some instances.
In the Chicago & Alton, the Interstate Commerce Commission in
1906 had an investigation, and there it was determined that the
securities which were outstanding were $121,000,000, just the amount
reported in its property investment account, varied by a few hundred
thousand dollars And Mr. Harriman admitted on the stand that
$60,000,000 of those securities didn't represent any investment what-
soever. Well, that is a pretty considerable lie. If they told the
public they had an investment of $121,000,000, when in fact they
had $60,000,000-and the records show they did not have much
over $60,000,000-then they lied to the public to that extent. And
they now come before Congress and say, "If you don't make our lie
good, the entire financial structures of this country are going to
tumble, and you can not finance the war, and if you don't give us
enough to make our lie good, we won't accept your contract." Of
course, those are not the words that he puts it in, but that is the
hand back of the glove. If this house of cards that they have erected,
built of fictitious securities, a structure that looks as though it had
been built of 20 billion dollars-and that actually has been built
with much less-if the perpetuation of this Nation depends upon our
making that structure imperishable, I doubt if the Nation is worth
perpetuating.
Mr. Thom referred to the representatives of labor as tearing down
this structure, and, like Samson, they tore it down because they
were blind. Samson lives in history only because, being blind, he
destroyed a temple of infamy, and those who suffered by that de-
struction were the worshipers of Moloch. And by that act the
chosen people of Israel survived and freedom was preserved. If we
are to serve the purpose of a blind Samson, we shall have served our
country well.
If we do pay the fixed charges on these legal obigations outstanding
during this period, will they suffer any diminution? If we pay the
average rate of returns which the stocks have received, will they suffer
any diminution in value? Will there be a financial crisis upon this
country? It is inconceivable. We have had marshaled before this
committee and the Senate eommittee, out in front of Mr. Thom's
army, the widows and orphans, the poor, who have invested in these
securities; and back of that in the next line, the savings banks that
protect the savings of the world; and back of that the insurance com-
panies, whom we all rely upon to care for us after death; and back of
that the fire insurance companies, that restore losses when our homes
are destroyed. And there the defenses stopped, and those defenses,
according to his statement, owned 4 per cent of these securities.
But if we could see over the tops of those defenses and see what lay
868
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
·
behind them we would see these groups of ten, whose vast interests
were hiding behind the widows and orphans, the fire insurance
companies, the life insurance companies. We have heard some re-
ports in the past about how the armies of the Hun invaders in Bel-
gium marched the women and children in front of them to protect
them against the bullets of France and England. And you know how
we condemn that kind of military tactics. Have we heard of any-
body that would suffer any injury in these hearings but the widows
and orphans, the insurance companies, and the savings banks? And
have you heard yet explained whether the savings banks and insur-
ance companies hold anything other than bonds and guaranteed
stocks?
Commissioner ANDERSON. May I ask a question there?
Mr. PLUMB. Certainly.
Commissioner ANDERSON. I thought you were satisfied if you got
the caveat at the end of section 14, possibly modifying it if you
conclude you can strengthen it. Now I don't understand what you
would substitute in section 1. I would just like to know what you
would really like to have in section 1.
Mr. PLUMB. We are satisfied with the administration bill, with the
caveat, provided you have not overloaded it with compensation;
and we believe you have overloaded it with compensation, and there-
fore we are offering these suggestions, to meet the reasons advanced
for that immense compensation.
Commissioner ANDERSON. What would you cut it, to be concrete?
Mr. PLUMB. I would cut it to the fixed charges on bonds outstand-
ing that have been paying fixed charges; to the stocks outstanding,
the average dividends for the three-year period that have been
paying dividends; I would retain all surplus over and above that in a
fund to be expended on the properties for their maintenance and
improvement, and then when you come to turn the properties back
to the owners, the amount so expended by the Government will not
be an indebtedness which the owners must repay.
Commissioner ANDERSON. You think you could trade with any of
them? Or would they all go into the Court of Claims?
Mr. PLUMB. If they wanted-as Judge Thom said yesterday, if you
want a fight, let's have a good fight, and if you can not trade with
them, they know what they have got to face this year, or else they
are lying to us. They know that the cost of maintenance has ad-
vanced 80 per cent, or else it has not, one of the two. They know
that their surplus for the coming year and the coming period will be
infinitely reduced below what it has been for the past three years.
Either they know it or they have falsely misrepresented it. And if
they do know that, the bob-tail flush will be laid on the table and they
will take what they can get. And I do not mean by that that we
shall drive a hard bargain. I mean they will take what we offer,
which is all which in justice they can demand; and if they are not
satisfied with that, they can go into the Court of Claims, because
we have preserved our rights. If they have not the patriotism to
offer to the Government this necessary service which the Government
must have in this exigency; if they are going to demand every last
right before they will permit the Government to take these properties,
then let us have those rights determined. The Government has no
hesitation in exercising its war powers in other fields; it fixes the
price of wheat at $2, although it could have been sold at $2.40.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
869.
The CHAIRMAN. Congress fixed that.
Mr. PLUMB. It could have been sold at $2.40, $2.50, or perhaps $3,
and yet no one is heard to object to that. Nobody has gone into the
Court of Claims to collect what they might have had. And if you
will only make a reasonable compensation, we have no objections to
the bill as it now stands, but when you throw upon all of the people
and the employees the burden of protecting these properties against
loss whatsoever, of providing profits which exceed any profits which
they have ever had in their experience before the war in Europe
broke out, then you have made a class in this country that is ex-
empted from the burdens of the war, and their burden is shouldered
upon us.
Commissioner ANDERSON. That is not quite fair, in view of the
fact that section 1 provides that the contract shall leave them sub-
ject to all war taxes. You don't quite mean that last statement,
Mr. Plumb, if you mean to be fair.
Mr. PLUMB. I think I mean it, and I think I am fair, Mr. Anderson,
because if we must pile up a surplus for them, and in addition pay
our war taxes, and they pay the same war taxes that we do out of
that surplus which we have provided, then they are a class and are
exempt.
Commissioner ANDERSON. They pay the war taxes out of the
standard return.
Mr. PLUMB. Certainly they do, but that standard return protects
them from all losses and guarantees a return in excess of anything
that is guaranteed to any other class.
Mr. SANDERS. Might I ask you a question there? Why should the
United States Government, representing 100 million people-why
should it be afraid to go into court with these people, rather than to
be held up by these people? Why should it be?
Mr. PLUMB. Well, I represent one-sixteenth of the population of
the United States as I stand here, and not one individual out of that
one-sixteenth harbors any such fear. And if we go into court on
that question I expect to be there.
Mr. SANDERS. I will ask you the same question that I asked Mr.
Thom yesterday. If the Government, wiping out section 1-if the
Government rewrites that section along this line, that we will pay
the interest on the bonded indebtedness that has been paid, and that
we will pay the dividends on stocks that have been paid, how in the
world can that create chaos in the financial markets of this country
or in the world?
Mr. PLUMB. It is beyond my comprehension.
Mr. SANDERS. Now, should we go further in that and guarantee
dividends upon stock that has never yielded a dividend before, and
guarantee interest on bonds that have never been declared in any
of the previous years? Aren't we taking money out of the people's
pockets then to build up this separate and distinct class of securities
that you just spoke of?
Mr. PLUMB. To my mind you are. You are creating a protected,
specially privileged class of individuals, or class of investments.
Mr. SANDERS. Has the Government offered to do that to any other
class of property or citizenship in this country?
870
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. PLUMB. Not that I am aware of. And I do not think the
Government intends to do that here.
Mr. SANDERS. When I say the "Government" I am thinking of
this Congress, this committee, and should this Congress do that for
this class of citizens and property which it has not done for any other
class of citizens?
Mr. PLUMB. I could not justify such an action, and I do not believe
that the administration for one minute contemplates it.
Mr. SANDERS. Neither do I.
Mr. PLUMB. Contemplates that the effect of this bill will be to pro-
duce such a class.
Mr. SANDERS. But wouldn't that be the effect of it?
Mr. PLUMB. But to my mind it will inevitably be the effect of it, and
I am convinced that if the administration for one moment thought
such results would flow from the passage of that bill, they would
offer another suggestion immediately.
Mr. SANDERS. I agree with you fully.
Mr. DECKER. When it comes to guaranteeing dividends and thereby
making a class, or guaranteeing too high a compensation, isn't it a
fact that if under your plan we guarantee any dividends of the stock
or interest on the bonds, would that be treating them as a separate
class, because we do not do that for anybody else?
Mr. PLUMB. It would be, Congressman, merely an interim arrange-
ment, with a provision that adjustment should be made.
Mr. DECKER. Is it the fact that we have got to treat them as a
separate class, due to the fact that we are taking their property? For
instance, if we took the farmers' property, his land, we would have
to make some kind of a guarantee, wouldn't we?
Mr. PLUMB. Congressman, you are not taking their property.
Mr. DECKER. Well, if we took the use of the farmers' property we
would have to pay for it.
Mr. PLUMB. There is still a wide distinction there. Their property
from the time they acquired it was devoted to the public for highway
purposes. All the right they have is to exercise a governmental
function, to wit, the operation of the public highway, and that right
we are now reassuming in the Government for the period of the war.
Mr. DECKER. Well, I understand that-your theory, I mean-
but you also say that it is inconceivable to you that there should bo
any disturbance in the securities if we guarantee the dividends on
the stock and the interest on the bonds. What do you say to the
answer of Mr. Thom that the limited and indefinite time of that
guarantee enters into the equation, and that the holders of these
socurities are left in uncertainty unless they are allowed to accumu-
late some surplus to take care of the situation that will arise when
the Government gets from behind them? I am just asking this
question or rather asking your impression on his statement, as
near as I can put it.
Mr. PLUMB. The railroads now have a surplus, some of them a
great surplus; some no surplus; some have a deficit. We are not
disarranging that situation by taking that property. They have got
that, be it surplus or deficit. Now, if we took their properties and
expended on the properties all of the surplus which accumulated
during that period, and then turned the properties back to them,
unless they had dissipated the surplus which they now hold, you
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
871
just simply cut out this period in between and bring the two ends
together and go right on. They have got the surplus that they now
have if they have got it—and they have got a situation that does
not call for expenditures and more expenditures out of surplus than
the present situation calls for. They have been carried through the
great emergency without any diminution of their properties or any
diminution of their return.
Mr. DECKER. Well, I want to get this idea to you-and your
answer is at least pertinent to the statement of Mr. Thom, and well
put-but there is another idea in my mind; and I am afraid I do
not get your viewpoint clearly. If the bill could be so framed that
we could take the railroads and give them substantially what they
have been getting for a reasonable period before the war, and leave
to times of peace the settlement of these questions and reforms which
you advocate, would you be satisfied, or would you be dissatisfied?
Mr. PLUMB. If you will give to the stockholders and the bond-
holders what they have been getting yes. But if you give to the
corporations a great sum in excess of what the real parties in interest
have been receiving-no. Now, there is a tremendous difference be-
tween the funds which have gone into corporate control and the
funds which have gone to the security holders.
Mr. DECKER. Well, I can not see why if we take the railroads and
under this system of standard return expend the same proportionate
amount for maintenance that they spent during the three-year period
and give them the same returns that they got during the three-year
period, after deducting the maintenance-I can not see why we would
not be complying with your statement that the thing should be left
in statu quo until after the war, and leave all rights as they were
before the war began?
Mr. PLUMB. Because the railroads have told us that the same per-
centage of receipts expended for maintenance will not produce the
same standards of maintenance, because of the increased cost. You
must increase the percentage for maintenance in order to produce
the same standard, because with the same amount of money you can
only buy half as much maintenance. And if we are to maintain
them on the same standards, we must meet that increased cost of
maintenance out of the surplus which remains after paying fixed
charges and dividends, and there won't be the surplus there.
Mr. DECKER. Let me ask you another question, so I will get your
views perfectly clear. Suppose after we paid the fixed charges and
put all in for maintenance and betterments that the Government
thought was wise; suppose that there was a surplus at the end of
the period, what would we do with that?
Mr. PLUMB. That ought to be retained in Government control
until the period had been ended, expended if necessary for improve-
ments, and if unexpended, to be turned back with the property to
the owners and then let the rights be determined. But it ought not
to be passed over to the owners in the meantime, so that the Govern-
ment will be deprived of that asset to meet increased operation and
maintenance expenditures, and tax the public in increased rates to
make up that deficiency while private owners are retaining this fund
and perhaps expending it themselves. I would rather trust that sum
with Uncle Sam than I would with some other uncle.
872 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. DILLON. You do not anticipate there will be any surplus, do
you?
•
Mr. PLUMB. Not if you pay the standard return contemplated in
this bill there will not be.
Mr. DILLON. There will be a deficit, won't there?
Mr. PLUMв. In my mind there will be a deficit.
Mr. DALE. But, Mr. Plumb, that is purely speculative, of course.
There is nothing upon which you base that, is there?
Mr. PLUMB. Yes, sir. I base it on the showing which the railroad
companies have made. They show that the cost of maintenance
has increased 80 per cent. The cost of buying new equipment has
increased from 80 to 150 per cent for renewals. They say the cost
of labor has increased 15 or 20 per cent, and will increase 30 or 40 per
cent more. Now, all of those expenses must come out of what has
heretofore been the standard return.
Mr. BARKLEY. What is your view as to the correctness of the
statement as to these increases?
Mr. PLUMB. Well, I think probably the cost of material and labor
that enter into maintenance have increased approximately what they
say they have. I have no reason to doubt that figure. I know that
the cost of locomotives and cars and equipment has increased tre-
mendously. I think 100 per cent is not too high a figure to put on
that. We know that applications are now pending for an increase
in labor to keep pace with the cost of living, which will probably
bring that up 15 or 20 per cent, and those things must be taken out
of the standard return.
Mr. BARKLEY. Well, now, under your plan would it not be possible
for some road which has heretofore been paying a certain rate of divi-
dend, to receive more compensation under Government control
than it would receive if it had remained under private control?
Mr. PLUMB. Why, there is not any doubt in my mind at all that if
you adopt the standard return as provided in this bill, every road
will receive a greater rate of return during the period of Federal con-
trol than it would have received had it remained under private
control.
Mr. BARKLEY. You do not answer my question. I asked if, under
your plan, some roads which had been paying a definite dividend on
their stock heretofore, will receive more under Government control
than they would have received for the same period if they had re-
mained under private control?
Mr. PLUMB. I think there are many roads which are now on the
dividing line, which under my plan would receive more, but they
would receive infinitely less than they would receive under the
Administration plan.
Mr. BARKLEY. Now, under the Administration plan, of course it is
not contemplated, I presume, that roads that have not had net oper-
ating incomes, will receive net operating incomes under the standard
return plan, unless they can bring themselves within such special
circumstances as the President might feel justified in awarding
compensation to them?
Mr. PLUMB. Yes; he determines from all the facts and circum-
stances what would be fair for that road.
Mr. SANDERS. I want to ask Mr. Plumb one more question. Under
section 1, as I read it-and I am asking this question to see if your
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
873
reasoning and mine coincide-under section 1, as I read it, we not
only pay the interest on the bonds of a road that has been paying
interest on the bonds; we not only pay the dividends on the stock
that has been receiving a dividend on the stock, but irrespective of all
the conditions that exist during governmental control-the period of
governmental control-we also guarantee them any surplus that they
have made in the past.
Mr. PLUMB. That is the way I read it.
Mr. SANDERS. That is the way I read it also. So we guarantee
them under section 1 interest on the bonds, dividends on the stock,
and surplus whether they make it or not.
Mr. PLUMB. I will tell you what you are doing, Congressman.
You are entering into a contract with these carriers that during the
period of Federal control you shall not exercise your sovereign power
of control over rates in such a manner as to diminish their present
return.
Mr. SANDERS. That is what it means exactly.
Mr. BARKLEY. Does that depend a good deal on whether if they
had remained under private control their surplus would have been as
great as heretofore, which is purely a speculative matter?
Mr. PLUMB. No; what is done in the future nowise affects the
standard of this return.
Mr. BARKLEY. No; it does not affect the standard of the return
which is fixed or based upon the three-year period, but the specu-
lative circumstances brought about by increased cost of maintenance
and operation and so forth; and that relation to income does have an
important bearing upon what, if they were to remain under private
control, they might be able to earn during this period?
Mr. PLUMB. Certainly. Then what those uncertainties are, of
course, must be considered.
Mr. DALE. They are in possession of the facts.
Mr. PLUMB. Yes, and they have exhibited such facts as will tend
to increase what they want to get, and unwittingly they have thereby
disclosed how much our receipts will be increased.
Mr. DALE. Kind of advance information?
Mr. PLUMB. Yes..
Mr. SNOOK. Have you an amendment to section 1 to propose?
Mr. PLUMB. I have not. I have offered my suggestions on that.
The CHAIRMAN. If you are through, Mr. Plumb, the committee
will meet at 2 o'clock, when Commissioner Anderson will close the
argument.
(Whereupon, at 1 o'clock p. m., the committee recessed.)
(In accordance with requests from members of the committee Mr.
Plumb submits the following amendments:)
Amendment to be inserted in section 1, page 2, line 3 (committee substitute), after
the words "average annual:"
"Payments out of net operating income of interest on outstanding indebtedness and
dividends on outstanding capital stock for the three years ending June 30, 1917.”
(Foregoing amendment to take the place of the words beginning in line 3 with the
words "railway operating income" and ending in line 8 with the words "1917.”)
Amendment to section 1, page 3, beginning line 22:
"The President is further hereby authorized to retain all amounts of money remain-
ing in the net operating income (herein called surplus) in excess of the standard return
hereinbefore provided for and to expend out of such surplus such amounts as may be
required for the proper maintenance and renewals of said carriers while under Federal
874
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
control; the amount of money remaining in said surplus at the end of the period of
Federal control to be accounted for to the carriers by the expenditures so made for
maintenance and renewals, and by proper credit and debit adjustments."
(The foregoing amendment to take the place of the language in lines 22 to 25,
page 3, and lines 1 to 5, page 4.)
Amendment to section 11, page 11, line 9: After the words "subject to," insert:
"All provisions of an act entitled "An act to regulate commerce," in effect
and all amendments thereof and to."
Amendment to section 14, page 13: Add at the end of section 14 the following:
"Nothing in this act contained or any of the provisions thereof shall be hereafter
construed as determining any of the public and private rights of any of the systems
of transportation coming thereunder, except for the period of the duration of the
Federal control therein provided for. Nor shall this act or any of the provisions
thereof be construed as à precedent for the final determination of any public or
private rights of said systems of transportation.
AFTER RECESS.
The committee reassembled at 2 o'clock p. m., pursuant to the
recess.
The CHAIRMAN. The committee will come to order.
Anderson, you may proceed.
Commissioner
STATEMENT OF HON. G. W. ANDERSON, INTERSTATE COM-
MERCE COMMISSIONER.
Commissioner ANDERSON. Mr. Chairman and gentlemen of the com-
mittee: It is, I suppose, somewhat unusual for a member of the
Interstate Commerce Commission to appear before a congressional
committee in a matter of legislation almost as though he were counsel.
The fact that this is a time of war in which precedents are rightly
disregarded if they obstruct the effective and speedy prosecution of
public business, would be, I apprehend, a sufficient excuse-if any
excuse be needed for the unexpectedly prominent (and in some
respects disagreeably prominent) part that I have been compelled to
take in the preparation and presentation of this bill. But I venture
to add that in my view the functions of the Interstate Commerce
Commission are far more like the functions of a standing committee
of Congress than they are like those of a court. Rate making is, as
has been here observed, legislative and not judicial. Most of the
functions of the Interstate Commerce Commission are legislative,
administrative, executive, and not judicial. It is therefore, in my
opinion, fit that those of us to whom have been delegated such re-
sponsibility concerning transportation problems should take those
problems most seriously and most actively in this time of national
stress and need.
I might put it in this fashion: It is the duty of Congressmen to
know everything about everything. I do not venture to suggest
that any of you ever fell short of the full performance of your duty.
It is the duty of the Interstate Commerce Commission to know some-
thing about transportation; and, when there are national needs
concerning transportation, it is our duty, as I apprehend, to have
views and to express those views where they may be of import.
I will add also that mere pressure of labor has prevented my having-
what I hoped to have-the benefit of full conference with my associates
on the commission concerning all the provisions of this bill. It is
almost literally true that for some six weeks I have been working
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
875
night and day on the proclamation and on the bill, and in the en-
deavor to explain it to the two committees and to redraft it in the
light of suggestions coming from the two committees. It follows-
and I may as well repeat it- tht views here expressed by me, although
those of an Interstate Commerce Commissioner, are not to be taken
as the views of the Interstate Commerce Commission. The tribunal
as a tribunal has not studied the bill in detail.
It may tend to clarity of thought and to brevity of expression it
we recall that the gist of the present matter is to provide legislation
for four chief purposes: (1) Convenient and adequate machinery for
determining the constitutional right of the owners of private property
taken for public use, to just compensation.
(2) Setting maximum limits within which a trade or settlement
may be made, litigation avoided, the security market stabilized, and
helped to bear the burden of the next Liberty loan.
(3) Absolutely necessary-and only absolutely necessary-legis-
lation determining the nature and extent of Federal control during
the period of control.
(4) Determining the duration or the means of ascertaining the du-
ration of Federal control pending adequate post-war legislation.
Every controversial question should if possible be avoided. This
is no time nor occasion for urging our various pet economic or political
theories. War-emergency legislation is the need. The need should
set the limit. Nothing petty, personal, partisan, political, or other-
wise extrinsic to this war-emergency legislation is tolerable or should
be tolerated here and in this connection.
Much of the discussion-and it is difficult to distinguish between
what is called argument and evidence-has taken a wide range.
Most of it has been interesting. Comparatively little of it has been
relevant or helpful; except that if you learn all there is to be learned
about the railroads, their past sins, their present merits, their strength,
their weakness, their charters, their relations, theoretical and actual,
to the Nation and to the various States-you may conceivably out of
a somewhat richer and better informed mind deal with the compara-
tively narrow, although immensely important, problems that are yours
now to deal with.
As I addressed this committee in what you call here evidence, I
think at least 10 or 12 hours, I can not conceive that it is your desire
or that it is in any sense desirable that I should not now undertake to
repeat, in any substantial detail, the views that I have already
expressed, even though that expression was feeble and inadequate.
The bill as originally presented, and as now somewhat modified, is the
expression of my views, and speaks in large measure for itself.
There are, however, some points that I desire to bring to the atten-
tion of the committee, and then I shall be glad to be asked any ques-
tions if thereby I can illuminate any point still remaining in the realm
of doubt in the mind of any member of the committee.
Of necessity this bill was produced under great pressure. I took
to-day from my files some of the memoranda indicating the processes
through which the bill had come. My impression is, looking at the
memoranda, that the earliest of them was made on November 18,
Sunday afternoon. Between November 18 and this 29th day of
January, I have been trying to think my way through the essential
problems of the President's power to take control of the railroads;
876
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
the reasons for exercising that power; of the proper method for and
limitations upon that exercise; leading up to the proclamation;
and then drafting the requisite supplementing legislation.
-
Now, that is a pretty large problem in which to have to take a
considerable part during this period of less than two months and a
half. By that I do not mean that I have done all the work; or that
the ideas presented in this bill are my sole product. Not at all. I
do mean to say that I have had to take a large part-and I desire
to shirk no responsibility for that part. But during this time I
have felt that if I met a man on the street who looked as though he
had an idea worth anything, I would commit assault and battery
on him to get the idea. I have had much assistance in the work I
have done, particularly from Judge Payne, who has been before you,
and in the later stages of the bill from Judge Mack. Some others
have contributed. Many who have talked much have not contrib-
uted. That you will easily understand. It is much easier to criti-
cize and particularly is it easier to go into long denunciatory talk
about the railroads and their past sins than it is to sit down and
draft a clear, adequate bill with relation to 'present Federal control,
and the necessary supplementing legislation, that and that only.
This general consideration I do venture: This bill has stood the test
of two exceedingly intelligent and alert committees, and the criti-
cism of counsel, better than I expected it would when we brought it
out as the best that we could do in the short time at our command.
We found less of real substance obviously defective than I ventured
to hope would be the fate of a product of such short gestation. By
that I do not mean that I believe the bill is either idea perfect or
word perfect now. I do say that the essence of the propositions
contained in that bill, worked out from first one memorandum and
then another memorandum, indicates that our thinking was along
lines essentially accurate, and that we phrased our thinking as well
as you would expect us to phrase it, considering the difficulty and
complexity of the subject, and the time at our command.
If you look over the field of discussion and criticism, the points
made against the bill are really very few. No one really denies that
it is desirable to provide a means and method by which the Govern-
ment may settle with the standardizable carriers. "Standardizable"
is not a good word, but it is a useful one in this case. Everybody
admits that having taken the property, the owners are entitled to
just compensation. It follows, of course, that you must either throw
them into court for “ one process of law," or you must provide a plan
of trading which is likely to command the assent of a good share
of them.
*
Starting from that basis, what are presented as alternatives to the
plan which we have presented, after we had rejected various plans
that we had formulated amongst ourselves and discussed amongst
ourselves? Only two propositions entitled to any consideration have
come in as substitutes for section 1. One was made by Mr. Plumb—
I was at his morning address both pleased and disappointed. At
the beginning of his address he admitted, as I understood him, that
he did not expect or desire the committee to adopt his plan at the
present time; that all he thought it fit to urge in this time of war was
the insertion of an adequate caveat, so that, without prejudice in
time of peace, his theory-which is ingenious and entitled to some
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
877
serious consideration-can be urged upon an unprejudiced Congress.
I had already undertaken in the addendum to section 14-to which I
will come a little later to provide such a caveat. I do not think his
suggested amendment, as I listened to it, is either safe or adds any
additional protection to his future discussion of his theories. But
that I am prefectly willing to consider with him, formally or in-
formally.
But after he had abandoned his view that these carriers should
now be given only a guarantee upon their stocks and bonds during
the war-precipitating them all into court for litigation as to their
right to anything more than interest and regular dividends-he
proceeded nevertheless to argue his theory. So that he left himself,
as it seemed to me-I regret he is not here-in a quite inconsistent
position-saying at the beginning of his address that the Govern-
ment was in substance right-assuming this to be a Government
bill-and then proceeding to say that the Government was wrong,
and that you ought not to permit, even as a war measure, any pay-
ment to or for the benefit of these carriers in excess of interest and
regular dividends, with the possible exception as to some of those
that can not be standardized, upon which I will not now pause.
I do not need to say anything further to this committee than that
plan is an utterly unworkable plan, utterly inconsistent with the
war needs of the Nation, and that even if you hold Mr. Plumb's
view, his first statement that this is not the time in which to press
that view, is clearly the only sound and sensible attitude to take
toward the interesting question that he raised.
I pass, then, from Mr. Plumb's theory as being one which ought
not to be given serious present consideration.
Mr. Thorne has submitted in alternative form an amendment
which I understood him to say Senator Cummins would offer in the
Senate, and Mr. Esch in the House. I do not have it before me.
The language did not seem to me quite happy as it was read; but I
understand it to mean in substance this: That during the war period
there shall be guaranteed fixed charges and dividends up to 5 per
cent on carriers that have been paying dividends-no more than
5 per cent. Whether he meant all regular dividends that have
hitherto been paid, I was not quite certain. It is not material for
me now to undertake to state it with accuracy.
The first alternative was that after you had paid these fixed charges
and regular dividends-without now undertaking to be exactly accu-
rate all the surplus was then to go to the Federal Treasury, or to
be held in trust. I understood it was all to go permanently as public
property, thus depriving the carriers, the prosperous carriers, of any-
thing at any time in excess of fixed charges and the regular dividends
that they have been paying. This observation may be made as to
that alternative: If they are to have no interest on the surplus, as he
calls it, they will have none of that incentive which is one of the
objects of his amendment, as he claims. But the other and the in-
superable difficulty to that whole plan is this: In the present state of
the law the owners of the securities of the great and the prosperous
carriers would never accept it; you would enact legislation which
would result in the greatest mass of litigation ever seen in this or in
any other country. I need not pause to express any personal view
as to the intrinsic justice or injustice of the proposition that we should
878
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
"}
now as a war measure take away from those corporations that have
been used hitherto as the instrumentalities of interstate commerce
every kind of return, direct or indirect, present or prospective, for
taking care of their post war needs, except regular dividends. But
as a certain gentleman of great eminence once wrote to another
gentleman of great eminence, "We are practical men.
As a prac-
tical business proposition there is not a lawyer on this committee but
what knows that there is no use in talking about settling a lawsuit or
a prospective lawsuit, even in time of war, unless you approximate
to what your opponent thinks he will get in court. You do not go
quite as high as you think the court may go, because you would thus
throw away your chances in court; for you never know quite what a
court and jury will do. But there is not any experienced, sound-
thinking lawyer in this country, representing either public interests
or corporate interests, that would expect to make a trade with any
substantial number of those carriers on those terms, taking away
from them everything except the money that they have been dis-
bursing as interest and dividends.
If you care to see what that would involve as to the eastern car-
riers I will put into the record at this time, without stopping to read
it, a table which was offered in evidence in the Fifteen Per Cent
Case, compiled by the Bureau of Railway Economics. The Bureau
of Railway Economics is a bereau maintained by the carriers, so that
the figures are carrier figures, although not, as I understand it, in
question among our own statisticians. Would you like to have that
inserted in the argument, Mr. Chairman?
The CHAIRMAN. Yes; I would like to have it.
(The paper referred to follows.)
Dividends and surplus, 38 systems.
[Compiled from Bureau of Railway Economics, Exhibit, Vol. I.]
Fiscal year ending June 30-
Dividends
declared.
Surplus above
dividends for the
year, applicable
to additions,
betterments,
reserve funds,
etc.
Miscellaneous
profit and loss
items, net.
Surplus above
dividends and
miscellaneous
profit and loss
items.
1900..
1901..
1902.
1903..
1901..
1905..
1903..
1907.
1908...
190)...
$52,866, 658
56,710, 663
67,0 2,054
69,831, 635
80,071, 439
91, 744, 244
94,868, 085
107, 712, 547
102, 292, 723
100,033, 353
137, 525, 145
123, 100, 998
1910...
1911...
1912…….
149, 423, 532
1913..
1914.
1915..
1916..
1917...
130, 021, 605
118, £03, 640
117, 212, 317
117,598, 137
126,005, 903
$49,714, 505
58,947,640
62,003,653
78, 414, 854
58, (35, 323
63,314, 851
93, 001, 267
79, 228, 905
45,598, 895
67,477, 937
90,749, 433
56, 319, 316
37, 252, 251
75, 383, 749
Dr. 9,314,967
17, 164, 691
172,756, 247
127,756, 247
Dr. $6,332, 619
Dr. 5,074,224
6,554, 286
16,431,915
5, 208, 910
Dr. 5, 180, 820
5,887, 123
21, 541, 918
Dr. 2,907, 860
Dr. 6, 269, 577
11,685, 072
Dr. 2,440, 639
Dr. 12, 018, 087
Dr. 37, 377, 275
Dr. 17, 678, 003
Dr. 30, 018, 541
Dr. 25, 587, 684
17, 253, 116
$43,881, 886
53,873, 416
68,647, (39
94, 849, 769
64, 145, 233
58, 164, 031
98,891, 390
100, 770, 823
42, 691, 035
61, 208, 360
102, 435, 05
53,908, 677
25, 201, 164
38,003, 474
Dr. 26,992, 976
Dr. 12, 883, 850
147, 168, 563
145, 003, 363
That table shows dividends and surplus of the 38 systems in the
eastern district for the fiscal years ending June 30, 1900 to 1917.
The dividends declared run from a little under $53,000,000 in 1900
to about $149,500,000 in 1912. Last year, 1917, they were about
$126,000,000. The surplus above dividends for each year, applicable
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
879
to additions, betterments, reserve funds, etc., runs from a debit in
914 of over $9,000,000 to a credit in 1916 of nearly $173,000,000.
In the year 1917 it happens that the dividends declared were, in round
figures, $126,000,000, and the surplus above dividends about
$127,750,000. There are some other figures, miscellaneous profit and
loss items, which are generally debits, so that you have a surplus above
dividends in miscellaneous profit and loss items running all the way
from debits (the greatest debit is nearly $27,000,000 in the year ending
June 30, 1914) to a credit of $147,000,000 in 1916. That is the
balance wheel. It is the buffer in the carrier systems. It un-
doubtedly is a source of a good deal of financial strength in the long
run, if the carriers are to continue in private control and do their
own financing.
I could talk to this committee for a week about surplus. The
question as to the proper amount of surplus, the proper use of surplus,
its relations to capitalization, is a question with which I have had to
deal for over 25 years. It has been suggested that I have drafted a
bill which involves capitalization of the surplus or something very
nearly the equivalent of capitalization under certain contingencies.
That is true.
I am not going to ask this committee to listen to me at great length
in discussing surplus problems; but as I am a public official, as you
are, and as I have drafted this bill as war emergency legislation, I do
desire the record to show that-the fact that I have drafted a bill
and presented it to the committees of Congress, which involves, as I
will point out as I go through the bill, allowing a return upon addi-
tions to property paid for out of surplus, and is to that extent a cap-
italization of surplus-is not because I have changed any essential
view that I have hitherto held and expressed. Those views are
pretty fully expressed in the Middlesex & Boston rate case (2
Public Service Commission Reports of Massachusetts, 111 and 112,
and opinion written by me). They are further expressed in this
article entitled "How to get rid of the reproduction cost theory,"
which is a reprint from the Proceedings of the Valuation Conference
at Philadelphia in January, 1916, and was printed in volume 1, No. 3,
of the Utilities Magazine. In that article I undertook to point out
what I believed to be the only proper way or method of dealing with
surplus. I shall ask to read into the record only one or two sentences
from it, in order to make it quite clear that what I have put before
you in this bill is, as I have already said, simply my notion of war
emergency legislation, and not at all my notion of what should be
the permanent, sound, just, public policy. The real difficulty, gentle-
men, about the surplus theories in the country is not so much that
the courts have erred or usurped power. The real difficulty is that
the legislature has not performed its function of making a reasonably
complete public policy as to the capitalization of public-service
corporations. So far as I know, in this article I have made the only
concrete suggestion that has been made anywhere as to a practical
method of getting rid of our troubles in the future concerning surplus.
This would be accomplished if Congress and the various States were
to enact concerning their regulating commissions something sub-
stantially like this:
The commission shall, for the purpose of determining whether the aggregate return
derived from rates, fares and charges is sufficient to yield a reasonable compensation
for the service rendered by any public utility, take as the controlling factor under
8.80
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
normal conditions for computing the basis of such rates the amount of cash capital
paid into the treasury for securities lawfully issued, provided that the proveeds of
such securities shall have been used honestly and with reasonable prudence in pro-
viding these facilities of such utility.
I have sometimes been almost tempted to suggest that some char-
itably minded Congressman should have that article reprinted in the
Congressional Record, because I think it is one of the few real con-
tributions that I have made to this important subject.
I have said this much, gentlemen, about the surplus, because I do
not care at the beginning of my service I know not how long in the
Interstate Commerce Commission, to have any misapprehension as
to my views on that point. They were fully expressed when I wrote
the opinion in Massachusetts. They were restated in this article.
They have not been changed in any essential respect. But I have
been drawing war legislation, not peace legislation; I am not under-
taking to use war legislation as a vehicle for incorporating into the
body of our law view of my own that I profoundly believe to be im-
portant and sound-just as Mr. Thom, on the other hand, believes
they are unsound and ought not to be in the law. This is not the
time for Brother Thom and myself to be fighting for our respective
theories as to public policy relative to surplus. This is the time for
us to agree-and for you and every other man to agree to find some
common ground upon which the necessary war legislation can be
enacted, leaving for peaceful times the settlement of those important
controversial questions.
Now, gentlemen, I think I probably may be of more use to you
than in any other one way if I take up the reprint of the bill, and di-
rect your attention to the changed made and to the reasons that have
led us to make those changes.
I find, however, that I digressed before I had completed dealing
with Mr. Thorne's second alternative to stating my own views
relative to surplus. Let me return to that one moment. Mr.
Thorne's second alternative is that you should pay fixed charges
and the regular dividends of the more prosperous carriers, and
divide the surplus into two parts, one part of which would accrue
to the benefit of the corporation, and the other part to the Govern-
ment, half and half. Now observe, gentlemen, what that really
involves. It reduces Federal control merely to a pooling of facilities
and equipment. It leaves the officials and employees (who will con-
tinue, of course to act in the actual administration of each of these
carrier properties, whether you regard them as carrier employees or
as Federal employees) still bound to obtain all possible traffic, at
the highest possible rates for their separate carriers, in order to
get the largest amount of so-called surplus. They merely chase
half a dollar, instead of a whole dollar, so far as the financial aspect
of their undertaking is concerned. It removes all incentive on the
part of the officials and employees to act solely for the Government.
It leaves them bound by law as well as by sentiment, to act for the
separate carriers, just as they were formerly acting. In other
words, it destroys Federal control. It in effect repeals, or at any
rate substantially modifies, the act of August, 1916, under which
the President is now in general control of all the chief carrier systems
Manifestly Federal control involves not merely the pooling of the
equipment, but the pooling of other facilities (if you may use that
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
881
phrase), rerouting, carrying by water, sending in the way you may
get the stuff there the quickest, without regard to the profits which
may accrue on the lines of any one carrier during Federal control,
or the effect upon the future earnings of the roads. This is a propo-
sition to keep the earnings separate. The only distinction, so far as
earnings are concerned, between Mr. Thorne's proposition and the
present status is that you take away from the separate carriers one-
half of their surplus above their present capital disbursements.
You do put them under a sort of general control which would cut
across the antipooling section and permit a general use of equipment
wherever the Government chose to send it.
Mr. PARKER of New Jersey. May I ask you this question? Do you
understand that Mr. Thorne meant to take the earnings under Gov-
ernment control? I thought he was only dealing with the standard-
ized return in making that statement.
Commissioner ANDERSON. I understood he proposed to have each
carrier continue as hitherto, striving to get the largest possible sur-
plus in order that that surplus might be divided half and half between
the Government and the corporation. There was to be no three-
year basis or standard return, except as to the poorer carriers. He
would go up to 5 per cent Mr. Esch will correct me if I am wrong-
and then above 5 per cent the division of the surplus, half and half,
was to be the scheme. It operates as I have stated.
As I say, gentlemen, returning from my digression, neither the plan
of Mr. Plumb nor the plan of Mr. Thorne will stand analysis. They
must-I say it with all respect-go into the waste-basket; where we
put a lot of our own earlier ideas.
Mr. DECKER. Before you leave that, I do not quite understand
Mr. Plumb that way.
I understand his idea was to put all the surplus
back into the road.
Commissioner ANDERSON. Belonging to the Government.
Mr. DECKER. What was left to be held in trust and given back to
the railroads at the end of the war?
Commissioner ANDERSON. No, I do not so understand Mr. Plumb's
notion at all. I understood that all the surplus above capital dis-
bursements would be taken by the Government and spent upon
the railroads generally; this would result in taking the surplus of the
more prosperous roads and using it wherever the Government thought
wise, leaving the ultimate title to it to be fought out in the courts
hereafter. That is the way I understand his plan. I think I am
correct in that.
Mr. STEPHENS. He is present now. He has just arrived.
Commissioner ANDERSON. Well, I do not think; in view of the
other matters that are to be discussed, that it is worth while to spend
further time on that point. I can only say that, looking candidly,
and in a certain way sympathetically, at very much that Mr. Plumb
urges, and also candidly and in a certain way sympathetically with
very much that Mr. Thorne urges, their plans are, as applied to
present conditions, utterably unworkable. They would not accom-
plish any of the things which are sought to be accomplished by this
bill, except to provide "due process of law." And as Mr. Thom
said yesterday and in that I agree with him, although I differ with
him in a great many things-if all you want to do is to provide "due
40958-18---56
882
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
process of law," any one of you lawyers can draw a statute of six
lines; and we can end this discussion.
Coming now, gentlemen, to the reprint of the bill, let me direct
your attention to some of the more important points. Note at the
outset that the amended bill is in substance the original bill. The
changes are in effect of comparatively minor consequence. Many
of them, perhaps most of them, are merely perfecting verbal amend-
ments.
Section 1—and bear in mind that the purpose of section 1 is simply
to state the outside limit for a trading power-is the alternate to a
lawsuit. It is not a code of carrier administration. It is a power
given the President within which he may, but need not, trade with
the carrier corporations. It is not unimportant to note that it is
quite conceivable that there will be carriers that ought not to get as
much as section 1 authorizes the President to allow. If such facts
appear, he is under no compulsion. It is quite conceivable that he
will find that there have been certain smaller carriers that have had
tremendous earnings during a large part of the three-year period,
growing out of war conditions, far in excess of just compensation.
The value of those properties for transportation purposes may not
equal the average of their net earnings as shown in their returns for
the three years. The President is given an entirely free hand up to
the limit that you set. But you set the outside limit. It will clarify
your thinking very much if you remember that that is the function
of section 1; that it is the sole function. I fell into grievous errors
in some of my earlier thinking by mixing up a trading power with a
sort of administration code; and many people that I have discussed
the measure with have fallen into the same error. We can generally
narrow the difficulties of a complicated case down to certain ele-
mental principles. I think some people have even ventured to say
that if we learned and obeyed the Ten Commandments we should
not need any of your codes. And so, if we bear in mind that there
are only the four things to be done that I outlined a few moments
ago in this bill, we shall have a good deal less difficulty in thinking
our way through the bill.
Now, section 1 asserts exactly the same basis of three-year average
net earnings (and I use that phrase without now stopping to define
it) as did the original bill, except in one particular. We have
changed the method of expressing the net earnings from "net rail-
way operating income, excluding debits and credits arising from the
accounts called in the monthly returns leased road rents and mis-
cellaneous rents," to "annual operating income, including equip-
ment, rents, and joint facilities rent.' This is the same thing
expressed, as we have concluded, in a more convenient fashion.
There is no change whatever of a financial kind. You need not
trouble yourselves about that point, for I have tried it out with our
Bureau of Statistics. They tell me that as now expressed there is
not the slightest difficulty in their understanding it and in their
understanding being the same as that of the auditors of the railroad
companies.
Mr. MONTAGUE. In one way you make the computation by the
process of exclusion, and in the other by the process of inclusion?
Commissioner ANDERSON. Yes, sir; but it comes to the same
thing.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
883
Mr. PARKER, of New Jersey. That is, if a road receives 10 per cent
a year income under a lease, we would support that lease?
Commissioner ANDERSON. There would be absolutely no change.
Roads that are leased and have fixed incomes of that kind will not
be affected. I think we shall probably ask you to insert in the bill
before the word "returns", in line 7, the word "operating," so that
it will read "operating returns," to make clear (what I supposed
was clear before) that it is only the operating companies that will
really make the trade. Take the Boston & Maine, that has a lot
of leased lines; you would not trade with any leased lines. You
would simply trade with the Boston & Maine, which is an operating
company; and it would disburse the standard return as it has hitherto
disbursed it, except as limited by section 5.
But there is one addition to the three-year basis, and that is, that
there is a return at a rate to be fixed by the President on the cost of
additions and improvements less retirements made during the last
six months of 1917. That has been included in the interest of
equality. I included it reluctantly, but it is alleged, with apparent
truth, that a few of the carriers have in the last six months put into
additional property now devoted to national use about $240,000,000.
If this sum had been put in by most or all the carriers, in proportion,
I should be opposed to changing the basis from the flat three-year
basis. But it seems hardly fair to treat the comparatively few car-
riers that have been in the last six months improving their property
to that extent,' in the same way that you treat those that have done
substantially nothing for their properties in the same period. Con-
sequently we have added to the power given the President authority
to allow a return upon the cost of such additions. If he should allow
5 per cent and I should hope he would allow no more--it would
add about ten or twelve million dollars to the standard return,
which you will remember figures on all the carriers, excluding the
Pullman Co., on the sheet which I put in the other day, at about
$935,000,000.
Next, the method of stating that the standard return is to bear the
war taxes has been greatly improved in the interest of clarity. Note
also that assessments for public improvements and any taxes charge-
able to capital account are not assumed by the Government. You
will find the reference to taxes on page 2, line 24, down to the end of
line 21 on page 3. In lines 11 and 12, page 3, you will see in paren-
thesis the words "not including, however, assessments for public
improvements or taxes assessed on property under construction and
chargeable under the classification of the Interstate Commerce Com-
mission to investment in road and equipment. That was an over-
sight in the first bill and now it is corrected. There is no intent of
allowing payment from operating revenues for anything that is
properly capitalizable under the rules of the Interstate Commerce
Commission.
""
I think we have now stated in a way that nobody can misunder-
stand that the ordinary taxes, Federal and State, and municipal and
county, are to be paid by the Government and charged, as they now
are in operating expenses; that the war taxes are to come out of the
standard return. And I may add that there is no reasonable possi-
bility of there being any disturbance in the power of the State and
subdivisions thereof to proceed with taxation on the same general
884
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
principles as hitherto. I put into this record, I think I did in the
Senate committee the opinion of the chief counsel on that point.
It was printed in your records, I believe.
Mr. BARKLEY. I don't think you did.
Commissioner ANDERSON. Then we will produce the chief coun-
sel's opinion, and have it printed as part of my argument.
I asked Gov. Folk as chief counsel of the commission to prepare
an opinion on that point. He prepared an opinion which fully sus-
tains the views that I have expressed before this and the Senate
committee with abundant citations of authorities, which I think
will satisfy all of you, lawyers and everybody else, that there will be
no disturbance of taxation by this bill.
The CHAIRMAN. In the States?
Commissioner ANDERSON. In the States; yes, sir. Perhaps I
ought to add that there is no doubt that if some State or govern-
mental division thereof should undertake in effect to tax the Federal
Treasury, because if the Government is to become the guarantor
that is what it would amount to, that would be unconstitutional taxa-
tion. The Government could stop it.
Mr. RAYBURN. Would the States be competent to levy a higher tax?
Commissioner ANDERSON. Of the same general kind and in pro-
portion to taxes on other than carrier properties.
Mr. PARKER. I find that 20 States levy taxes on gross receipts,
and if the gross receipts grew a great deal and the taxes were larger,
it has struck me that all questions might be avoided by putting in a
proviso that all taxes during the period of Federal control payable
to the States or other than the Federal Government should be exactly
the same amounts of money that were paid in 1917, so as to standard-
ize that too.
Commissioner ANDERSON. Well, I should doubt if it would be
quite fair to say that they should not increase taxes on railroad
properties and railroad revenues in the same general way that they
are likely to increase taxes of about every kind on every other kind
of property. I think the States would have some pretty sound
objections to not having the same proportionate increases made upon
railroad properties and railroad revenues that will be the fate of
other industries and other properties.
Mr. BARKLEY. I want to put another question to you. In some of
the States they have the whole value of the railroads for purposes
of taxation, and the State board of assessors has a very large power
that they are all fighting about as to valuation. It does not mean
that the value of the increase in railroad property ought to be in-
creased or decreased by the Government operation, and it was with
that view that I suggested those questions about putting on a pro-
vision that the States should get just the money that they got before.
Mr. EscH. Notwithstanding that there might be a large increase
in the property of the railroad in the State?
Commissioner ANDERSON. Well, the most I can say about that,
is that I thought there would be a serious objection to saying to the
States and subdivisions thereof "during Federal control you shall
not increase by a dollar of your taxation on any railroad property or
railroad revenue. You can make a good argument for it, but I
think the weight of the argument is leaving it where it is.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 885
Mr. PARKER. You standardized the return to the railroads, and I
thought the return against the railroads might be standardized also.
Commissioner ANDERSON. I know, but we have not standardized
the rates, and the ordinary situation is this: As taxation goes up it
comes out of the returns, and rates go up This appeared in the
hearing of the 15-per cent case. Mr. Rea of the Pennsylvania was
on the stand; figures were going in as to the returns of the carriers
during recent months; I noticed a very large increase in the expenses;
I therefore asked Mr. Rea, in substance, if they had charged up the
war taxes as part of their operating expenses; after a little inquiry,
it appeared that they had. I asked him if he thought that the war
taxes levied upon the railroads should by them be passed on the to
shippers; after a little consideration he said no, he thought that the
owners of railroads securities ought to stand war taxes, like other
folks But they had been charged in-naturally enough. I am not
criticising; I am simply stating the fact Now, if the Government
had not taken over the railroads, it would be almost certain that in-
creased taxes would accrue to the States and to subdivisions thereof.
I see no controlling reason why railroad properties and railroad reve-
nues, although there be Federal control, should not be treated, as to
State and local taxation, as they would have been treated if there had
not been Federal control If they undertake, however, to increase
it disproportionately, to levy new taxes in kind or degree, that they
would not have levied if the money were not coming from the Federal
Treasury, then the Government is not helpless. The power is in the
Federal Government to protect itself against that species of indirect
taxation.
Mr. DECKER. By refusing to pay it?
Commissioner ANDERSON. By litigating it; by testing its consti-
tutional rights in the Supreme Court if necessary. If it appears that
the States have levied taxes which are such, in kind or degree, that
it is really a taxation upon a Federal agency and not within the
implied or expressed power of this bill, then the court would hold
that it is unconstitutional.
Mr. PARKER. Mr. Anderson, if the business of the companies
would have increased if peace had remained, by reason of war muni-
tions being sent to Europe, etc., ought it to be taken into account in
fixing the standard against the railroads, and it seems to me that
because this was necessary Government business, everybody ought
to be as free as they can; and it seems to me that State taxes ought
not to hit additional business put on by the Government itself, and
for that reason where these taxes were upon gross receipts, or the
taxes were upon value estimated by the roads, that it might be fair
to say that taxes ought to remain in exactly the same amount as they
were before the war.
Commissioner ANDERSON. I think you can make a very powerful
argument in favor of that view. The most I can say about it is, that
I think the argument the other way is more weighty; that I think
you get into less misunderstanding, and perhaps friction, with the
State authorities if you do not now, as an incident of Federal control,
undertake to limit the kind and amount of taxation we would have
had if there had been no Federal control. Conflict between State
and Nation is not desirable.
886
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. MONTAGUE. As I understand it, you leave it in status quo in
respect to taxation?
Commissioner ANDERSON. Yes; in the status quo not merely of
present taxes, but in power to tax.
Mr. MONTAGUE. I mean in power to tax, and you will only take
care here that that power shall be exercised in the way you exercise
Federal power?
Commissioner ANDERSON. That is my idea.
Mr. MONTAGUE. I agree with you. I just wanted to catch your
idea.
Commissioner ANDERSON. That is exactly what we want to do.
The opinion of Gov. Folk, now put into the record, shows beyond a
reasonable doubt we have accomplished it.
Mr. MONTAGUE. That is section 1. Is that the only provision
in the bill dealing with the question of State taxation ?
Commissioner ANDERSON. Yes.
Mr. STEPHENS. I wanted to ask you a question about section 1,
Mr. Anderson. Does it provide that a railroad making, say, for
instance, 1 per cent on its fixed debt, will receive 1 per cent from
the Government, guarantee?
Commissioner ANDERSON. No, sir. The fact that it gets 1 per
cent on its fixed debt has no relation at all to the trading power
in section 1.
Mr. STEPHENS. Well then, in other words, does the Government
guarantee that this road will get exactly what it got before, during
the three-year period, whether it be 1 per cent or 5 per cent? The
maximum, I understand, is 5 per cent the maximum guaranty
of standard return.
Commissioner ANDERSON. Oh, no; there is no 5 per cent about it
at all. You take the three years of net earnings of a carrier-
not now stopping to define "net earnings"-that is your maximum
standard return. The President may make a trade to the effect
that in lieu of taking their rights under "due process of law,"
as provided in section 3, they shall receive as an annual return,
an amount not exceeding its average earnings for the three years
ended June 30, last. Now those "net earnings" for three years
with all the carriers that are reasonably prosperous, would go in
this wise: (1) For leased line rentals. (2) For interest on their
bonds. Leased line rents, by the way, are generally interest upon
the bonds of the lessor companies, plus fixed dividends upon the
stock of the lessor companies. (3) For interest upon any other
debt obligations. (4) For regular dividends and only regular
dividends, unless there be an express permission given under section
5 to increase the dividends; in cases of carriers that have had no
regular dividends, they may be put upon a dividend paying basis.
The balance of the standard return, if there be any balance, would
belong to the carrier company, and might be used for additions,
betterments, and extensions of its property or for any other proper,
legal corporate purpose.
Mr. STEPHENS. Then, in other words, the carriers would be in
practically the same condition under this Government control that
they are now, relatively? In other words, one of the witnesses this
morning stated in effect that certain roads would accept this contract
of the Government and others would not, leaving the impression in
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
887
my
mind that the roads that were making the most money now would
be most apt to accept the contract with the Government under the
terms of this bill, more so than those that are not making the profit
now. Is there any advantage under this contract for a road that is
making large profits accepting it over a road that is making a smaller
profit?
Commissioner ANDERSON. No; I don't think there is any such
advantage. I should think it was rather the reverse.
Because you
will certainly find this situation: The standard return (as we have
been using it) of all carriers for the years 1916 and 1917 amounted to
just about $100,000,000 each year more than the proposed standard
return. It follows that if they should do as well in 1918 and 1919-
and for whatever period the Federal control may be-they are taking
$100,000,000 less than they would have taken if they had continued
in the separate, uncontrolled, operation of their own roads. In other
words, the Government proposes that if they should all trade on the
general terms outlined in section 1, to cut their net earnings $100,-
000,000. Now, manifestly that cut must fall mainly upon the large
carriers that have made during these last two years large profits.
For instance, the table to which I referred a few minutes ago shows
that in 1916 the 38 systems in this eastern district paid dividends of
under $118,000,000 and put $172,750,000 into surplus. Now, no
such surplus as that would under Federal control accrue to those
carrier systems; for out of those 38 carrier systems would come a
good share of this diminution of $100,000,000-the difference be-
tween standard return and the average earnings for the past two
years. On the other hand, there are certain roads struggling into
being, short lines, that gave a good deal of evidence before you, as I
understand it, that probably may be entitled to more than the
average of their net earnings during the past three years. They are
entitled to have their just compensation determined by due process
of law. So that they may get more than their average net earnings
for the last three years. I can not say how those cases may come
out. But these facts seem to me to be indubitable: The big carriers
that have been making the big money for the past two years can not
make as big money under Federal control as they have made in the
last two years. The small carriers that have not been making any
money during the past few years may, if they can show that they
are entitled to it, under due process of law, get "as just compensa-
tion" more money than they have been making in the past few years.
There is no escape, and there is not to be any escape, from that
conclusion.
Mr. PARKER. I notice that you twice spoke of the power of the
President to agree upon the standard return, the compensation, of
not exceeding the average annual income. I find the words of the
bill say "at a rate equivalent to." That is on page 2, line 2, and I
do not find those words, "not exceeding" in the bill. He doesn't
seem to have the power otherwise than that.
Mr. SANDERS. I see that the word "shall" is used-"shall receive
as just compensation" the standard return. That is on page 1.
Commissioner ANDERSON. If you will read section 1, line 6, you
will find it says, the President "is hereby authorized to agree.'
That means he may agree.
888
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. SANDERS. Not if followed by the word "shall," in giving
compensation.
Commissioner ANDERSON. It says, "the President is hereby au-
thorized to agree" that carriers "shall receive." There is no man-
date about that. When you give an official power to do a thing,
you do not instruct him to do it.
Mr. SANDERS. But it says the President "shall" agree.
Commissioner ANDERSON. No, sir; it does not say that he shall
agree.
Mr. SANDERS. The President may agree, and if he agrees they
shall receive as just compensation an annual sum, etc.
Mr. BARKLEY. Of course, if he agrees, they ought to recieve it.
Mr. DECKER. The point is this, that he makes the point that it
might be worded like this: "The President may agree that the rail-
roads may receive not more than" a certain amount.
Commissioner ANDERSON. I can not see that there is the slightest
possible doubt about the meaning. The President "is hereby au-
thorized to agree" that any carrier shall receive as just compensa-
tion an annual sum payable in reasonable installments for each
year, pro rata for any fractional year of such Federal control, "at
a rate equivalent as nearly as may be to its average annual railway
operating income."
Now if you authorize your agent to buy a horse "at the price of
$100," you authorize him to buy it for $90.
Mr. DECKER. Is that true? The President is as much the President
of the men who own the railroads as of all the other people; and of
course if you, acting as my agent, buy a horse, and I should specifi-
cally authorize you to pay $100, I could not come in and say you
wronged me by only paying $90. But if you represented the owner
of the horse as much as you represented me, and I said "I hereby
authorize you to pay $100"-well, that is hardly a fair illustration,
but I think you get my idea-can he make any other agreement than
we specifically authorize him to make?
Commissioner ANDERSON. Yes; within the limits of the law.
Mr. SANDERS. I am frank to say, Mr. Anderson, I can not read it
that way. It looks to me that under section 1 the President if he
agrees with the roads must agree upon the standard return. That
is the way it looks to me.
Commissioner ANDERSON. I do not so construe it, and I do not
think the courts would so construe it.
Mr. SANDERS. Then why not use a word—it may be my fault. I
may not be able to understand it, but I can not read it except as
mandatory that if he agrees, he shall agree on the standard return.
I can not read it any other way, so therefore it looks to me as abso-
lutely fixing not a maximum but fixing the terms of the agreement.
Mr. DECKER. Here is the proposition, if I may be allowed to make
a suggestion: Not only the President but Congress also is interested
in the railroads, and we are not willing, or ought not to be willing,
for the railroads to be unjust to themselves, because of these widows
and orphans, as well as those 10 wealthy men that our friend, Mr.
Plumb, spoke about, and we are willing for him to agree, accord-
ing to this bill, that the President may agree to a specific thing, which
we think will be just to both sides, and we are as much interested
in one side as in the other, because we represent them all. Now,
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
889
wouldn't it be better to say in there that the President is authorized
to agree that the railroads shall be paid not to exceed so and so?
Mr. SANDERS. Why not strike out the word "shall" and put in the
word "may"? That would cover it-"that during the period of
such Federal control it may receive as just compensation"? That
would cover the whole thing.
Commissioner ANDERSON. If you agree that something shall hap-
pen, you agree that it shall happen. You do not agree that it may
happen.
Mr. DECKER. It has got to be "shall" instead of "may."
Mr. DILLON. Mr. Anderson, if it does not follow the standard, then
there would be a discrimination, wouldn't there, of one contract
being one thing and another contract another thing? There would
be absolutely discrimination, wouldn't there?
Commissioner ANDERSON. I think this is the situation, gentlemen-
I am spending more time on rather minor matters than is consistent
with other matters that I want to bring to your attention if I quarrel
very long with you over "may" and "shall"-but you want to bear
in mind that section 1 is the alternate power to due process of law in
section 3; that it is authority to the President to trade; that it is
expected and intended-if you adopt the views of the draftsmen of
this bill that this trade will be open to all carriers that are sub-
stantially standardizable in accordance with this standard, on undis-
criminating terms. But I still assert that if when we come to deal
with the reports and the facts of the various carriers, it be found that
there is an exceptional case-there is no mandate by Congress to the
President to trade with any carrier. Of course as a practical matter
if the carriers desire to accept the terms offered by Congress, there
must be some special reason why the President should not permit
them to have those terms. But there is no mandate compelling him.
Mr. MONTAGUE. This authorizes the President to make an offer.
Then it leaves it to the railroads whether or not they will accept the
offer?
Commissioner ANDERSON. Yes, sir.
Mr. DILLON. And if the offer is made, he must follow the standard.
Mr. DECKER. That is the point.
Commissioner ANDERSON. Well, he need not follow the standard.
He can not exceed the standard.
Mr. DILLON. It is discretionary with him whether he will carry it
on or not; but if he follows it, he must follow the standard?
Commissioner ANDERSON. I do not so construe the bill. But I
regard it as probably a very academic question, because I think the
chances are 99 out of a 100 that he will with every carrier on the
terms set in section 1, or that they will resort to section 3 and have
their rights determined under the due process of law clause.
Mr. RAYBURN. Mr. Anderson, I am interested in the question
raised by Mr. Sanders. It doesn't seem to me that the President is
given any latitude whatever when you say a rate "as nearly as may
be." Therefore, if that rate be determined, it seems to me that
under that statute he has got to fix that rate, if it can be determined.
Commissioner ANDERSON. I don't think that is the construction.
But that question, I also say, is probably academic.
Mr. RAYBURN. I agree with you that it is academic.
890
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Commissioner ANDERSON. I can tell you why I put the words
"as nearly as may be" in; because my experience with railroad sta-
tistics is such that I never believed you could reduce to a mathe-
matical certainty the question of what their net earnings were.
I
put in the words "as nearly as may be," indicating that Congress
knew, when it gave this authority that you could not set an absolute
mathematical standard. I did not want any point raised as to the
President's having exceeded his power, if it appeared that there was
some error or possible variation that might have been taken into
account and was not taken into account. If the power had been
substantially followed in good faith, I wanted a valid trade, and
put in those words to safeguard that power.
Mr. SNOOK. If you leave out those words and put in the words
"not to exceed," don't that give him all the power necessary?
Commissioner ANDERSON. It might give him the power; but I
think it would have a certain dampening effect upon the security
market, and the security market is already pretty wet. I don't
think it is desirable that Congress should at this time throw a scare
into the security market by indicating that this is merely the outside
limit and that it is expected that it will be varied at what you might
say was "the whim of the administration."
Mr. RAYBURN. But Congress ought to say what it means, Mr.
Anderson.
Commissioner ANDERSON. I think it has, if you say this. I should
unhesitatingly advise the Director General also, if he asked my ad-
vice, that if some particular carrier turned up with three years' earn-
ings obviously disproportionate to its ordinary earning power he
would not be bound to offer the standard return.
Mr. DECKER. I would say that too, but I would also say that there
was one other remedy, and that was in the poorhouse. [Laughter.]
Commissioner ANDERSON. Well, I would not.
Now, if you will let me pass on, gentlemen, there are other points
that I can be of more help to you than I can on "shall" and "may."
There are two other things in section 1 that I ought to bring to your
attention. The provision as to maintenance and depreciation is
stated in more flexible language. You will find it in line 22, et
sequitur, page 3. It authorizes the President in the agreement with
each carirer to make such reasonable provisions as may be necessary
to provide for maintenance, repairs, and renewals. I will read the
language:
The President is further authorized in such agreement to make all reasonable pro-
visions for the maintenance, repairs, and renewals of the property, and for the cre-
ation of reserve funds therefor, and for the depreciation thereof, to the end that at the
termination of such Federal control either the property shall be returned to the car-
rier in substantially as good repair and in substantially as complete equipment as at
the beginning of Federal control, or that just payment shall be made therefor.
In that connection, let me say a few words about this cost of main-
tenance to which Mr. Plumb referred.
Mr. MONTAGUE. Before you get to that, Mr. Anderson-the cre-
ation of a reserve fund, would that be applicable to depreciation?
Commissioner ANDERSON. Yes.
Mr. MONTAGUE. Does the language say so? The "reasonable"
reserve fund would apply, as I understand it, to maintenance, re-
pair, renewals, and depreciation, as I understand from you. Had
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
891
you not better transpose that sentence a little, to make your reserve
fund applicable to depreciation?
Commissioner ANDERSON. I do not say that would not be an im-
provement, Governor.
Mr. MONTAGUE. It might not be. That is simply a suggestion.
Commissioner ANDERSON. I may say this: After I had struggled
with that depreciation and maintenance provision a long while, Judge
Mack finally put the first part of it in that shape. He had some
addenda that I could not accept. I thought he had it right, but I am
inclined to think your suggestion has some value.
Mr. MONTAGUE. That is a mere matter of language. I just wanted
to know whether the reserve fund was applicable to depreciation.
Commissioner ANDERSON. It might be applicable to depreciation.
You can not tell what will happen. The contracts will have to be
drawn with very great care. You may find certain properties that
may have depreciated that you will have to put in much better condi-
tion in order to make them available for war purposes; you may find
other properties that have been "overmaintained," as the phrase is.
Whatever the facts are when you come to deal with the individual
carriers, the contract with that individual carrier ought to take care
of the just deserts of that individual carrier; I think we have it now
so drawn that it can be done. It is perfectly clear that there ought
not to be any expenditure at present high prices for equipment and
rails and other materials, that are not really needed. There are
various reasons for that conclusion. First, that they cost an ex-
orbitant amount of money. Secondly, that they are probably needed
for our allies. It is also clear that if you do not keep up a property
to the proper standard, at the end of Federal control there should be
an adequate provision in the way of a reserve fund to make good the
detriment to the carrier. It does not follow that that reserve funds
should be figured at prices which are 180 per cent of normal prices.
It is necessary that there should be some method worked out in your
contract that will take care that the Government pays enough, but
not too much. It is obviously just as important that that contract
should guard the public interest as that it should guard the interest
of the carrier. I have gone over that provision with very great care
and tested it by discussion with, among others, Judge Prouty;
without undertaking to quote anybody or to hold anybody else
responsible for it, I venture to say that we think that we now have
provision in safe and adequate form. I do not mean to say that
we might not make unwise or improper contracts under it, but
I do mean to say there is power given by Congress to the President
so that a contract may be worked out which will be essentially just as
between the Government and each carrier.
You find next that lines 6 to 12, page 4-
Mr. DECKER (interposing). Just a point on that. What will hap-
pen in the case of a railroad that has not been spending the proper
amount for maintenance? Will the Government under its control
spend what it considers the proper amount and then deduct from
the standard the difference between what the railroads spent and what
the Government spent during the 3-year period?
Commissioner ANDERSON. Probably that will be the result. If we
find that there is such a substantial variation from the proper stand-
ard of maintenance in the case of an individual carrier that the
892
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
standard return amounts to really a padded earning account, we can
make, under the power given here for "all reasonable provisions," a
provision that will cover that situation.
Mr. DECKER. You say that should be covered under what?
Commissioner ANDERSON. Line 23, "to make all reasonable pro-
visions for the maintenance," etc., to the end that the properties
"shall be returned in substantially as good repair," etc., "or that
just payment shall be made therefor." Now, that cuts both ways.
Mr. DECKER. I don't see how it does, to be frank with you. It
just seems to me that that says that the Government is authorized
to make reasonable provisions for maintenance, to the end that the
road shall be turned back in as good shape as it was when they got
it; but it does not make any reasonable provision as to the account-
ing between the Government and the railroad, so as to make up the
difference between adequate maintenance under Government con-
trol and inadequate maintenance under railroad control.
Commissioner ANDERSON. Well, I don't see how you can be said
to have a "reasonable provision" unless you have provided for the
actual situation that accrues between the Government and each
individual carrier.
Mr. BARKLEY. Wouldn't that provision, giving the President that
wide discretion, enable him to make a provision in determining the
contract providing that if the Government spent more money in
maintenance and turned it back in better condition than it was when
the Government got it, the Government would be reimbursed for
that?
Commissioner ANDERSON. Yes; I think it is broad enough for that.
It was intended to be broad enough for that.
Mr. DECKER. I don't see where it says it.
Commissioner ANDERSON. It does not say it in exactly that lan-
guage; but it says that the President is authorized in such agree-
ment to make “all reasonable provisions for the maintenance, repair,
and renewals," for reserve fund, for depreciation, "to the end
that at the termination of Federal control the property shall be
returned" as good as when the Government took it, and as completely
equipped, or that just payment shall be made therefor.
Mr. DECKER. Well, that is it.
Commissioner ANDERSON. Just payments might go either way.
Mr. DECKER. No; it looks to me like it could only go one way.
Now, you say that you can either agree with these railroads to keep
up the maintenance yourself for the Government, or pay them for
keeping it up. The point I am getting at is something that will
authorize the President-or, in fact, direct the President-to take this
section into consideration in figuring the standard return, because
the only thing that has shaken my faith in the exact justice of this
bill is right on that question of maintenance, to wit, I feel at the
present moment-and I think perhaps most of the committee that
we are willing to give the railroads as much as they have been getting
for this reasonable period, but we do not want to maintain these roads
during this time and then in addition to that give them what they have
been getting for the last three years to maintain it, when we are going
to maintain it for them. So it seems to me if you have a provision
in there in black and white that would say that the President is
directed to make an estimate of the difference between adequate main-
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
893
tenance that the Government will give and inadequate maintenance
that the private owners have given if it proves inadequate that
that shall be deducted from the standard return, then we can go out
and say to the people, "these other questions of reform can take care
of themselves in time of peace."
Commissioner ANDERSON. Well, I think you have given all the
power necessary to make your standard return and your maintenance
charges conform to the demands of real justice in the individual case in
the language here used. "Reasonable provisions" construed in the
light of "the end" sought, adding thereto a provision that if you do
not achieve "the end" "just payment shall be made therefor," is
broad enough, in my mind, to cover what you have in mind.
Mr. SNOOK. Doesn't the language which follows the language you
speak of, which gives the broad powers to the President to make an
agreement between parties with respect to mutual rates and obliga-
tions of the parties, cover the situation?
Commissioner ANDERSON. That is a very pertinent suggestion.
When this last question arose, Mr. Decker, I was about to pass to
line 6, on page 4, and to say that as I reflected on the power given
in section I to make a trade, it seemed to me clear that when we came
to draw the contract we would find there things that ought to be
put in that had not been mentioned in the statute, that therefore
there ought to be a broad, inclusive power like the "provision for
further assurance," authorizing the President to put anything into
the contract which is not inconsistent with this act or the act of August
29, 1916, and necessary and proper for the Federal control or for the
determination of the mutual rights and obligations of the parties
to the agreement arising from or out of such Federal control. So
that if these were otherwise any doubt about the interpretation to be
put upon the depreciation and maintenance clause, that doubt is
fully removed when you come to the "further assurance" clause.
Mr. DECKER. I am afraid not, for this reason: That says that he
can make any other further agreement that is not inconsistent with
the provisions of this act. But this act specifically and definitely
states what the standard return shall be.
Commissioner ANDERSON. May be.
Mr. DECKER. Well, what it shall be if they make an agreement:
Then it further says they can also make an agreement for the main-
tenance, and it does use broad language there and says, “to make
all reasonable provisions for the maintenance." But that broad
language is limited by what you say afterwards, to wit, "to the end
that the Government shall either make the maintenance or pay the
railroads for not making it at the end of the control."
Commissioner ANDERSON. No; "as good as" is "equivalent to,"
and if you return the property in better repair and more complete
equipment "just payment" must be made for the betterment and
the addition by the carrier to the Government in some form, either
of rebate from the standard return or against the capital account,
as the rules of the Interstate Commerce Commission may determine.
You can not construe that so narrowly as to say that the carrier
can get and never give. If it gets more property, it gets less money.
Mr. DECKER. Now, it seems to me that you have touched a spring
there that might unlock the situation if you would say in that, "to
the end that the Government may make adequate maintenance,"
894 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
or maintenance equal to what has been given by the private owners
before, and that if it fails to do so it pays the carriers, and then go
on and say if it gives better maintenance and spends more money
and turns the road back in better condition, then that that shall be
charged against the railroads when it is given back to them, it seems
to me that would be fair. But I do not believe it is broad enough to
protect the Government there.
Commissioner ANDERSON. I think it is. I think perhaps I may
make another attempt at it, along this line, to the end that at the
termination of such Federal control either the property shall be
returned to the carrier in repair and equipment substantially equiva-
lent to that in which the property and equipment were at the begin-
ning of Federal control, or failing such substantial equivalency that
the account shall be adjusted accordingly and just payments be
made. That is a crude attempt off hand. That is what you mean?
Mr. DECKER. I just mean to have it cut both ways.
Commissioner ANDERSON. I think it does cut both ways, but if it
does not cut both ways, I will make another attempt to make it cut
both ways. But if the lawyers on this committee (assuming for the
moment, what is generally contrary to the fact, that lawyers know
more than laymen) are of the opinion that there is any reasonable
doubt about it when you read that and the "further assurance"
clause together, I will make another attempt. I may say that I have
had more quarrels with myself and with other people over the draft-
ing of that depreciation clause, than over all the rest of this bill and
over any other piece of legislation that I ever undertook to frame,
with the possible exception of one section in the Boston & Maine
reorganization bill. It seems like a simple problem to state; but sit
down and deal with it in the light of the facts, and you will be wor-
ried before you finish. But I must pass on.
Mr. DECKER. Well, there is another question I would like to ask
you about that. It was brought by Mr. Plumb, and you could
probably answer it and save me lots of worry. That is, is there any
way to get around the fact while the Government has the roads the
maintenance is liable to cost double what it did at the time the car-
riers had to maintain them?
Commissioner ANDERSON. There is no way of getting around that
liability, that possibility. I think the contract should be so framed
as not to require the Government to put into the properties anything
which could be called luxuries; perhaps not to keep up full main-
tenance beyond the point of safety during the times of high prices
and scarcity of material; probably also containing a provision that
the reserve funds (which must, of course, be provided to take care of
deferred maintenance) shall be figured on some reasonable agreed
scale of prices. By that I mean that if prices should go back within
a reasonable period-say, the period within which this reserve fund
will probably be actually spent for the materials and supplies which
would constitute the physical facts of maintenance, that the funds
should be proportioned accordingly. I have not thought my way
through to a draft of a contract. All I undertook to do was to keep
in mind the possibility-perhaps the probability-that when we come
to draw a standard contract with a standard carrier we must take
into account, not only rising prices and risen prices, but perhaps fall-
ing prices before you are through with the Federal control, or through
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
895
with the spending of the reserve funds which are created during Fed-
eral control. And it was for those, among other reasons, that I drew
this elastic provision for depreciation and maintenance, and then pro-
vided this additional language for "further assurance. Anything
which is reasonable, not inconsistent with the power granted, and
which ought to go into those contracts when you come to study them
in detail, may be put in.
I should not be willing, if I were drawing a standard contract this
afternoon, and it now costs 180 per cent for cars, rails, engines, and
things, to agree that the Government should necessarily pay for every
engine that it wears out or destroys, 180 per cent of the present price,
or should put the money up for that price. I should agree that it
ought to provide for the restoration of the equivalent of that engine
in some reasonable time, and hold itself responsible for such money
as will put it back within a reasonable time.
Mr. DECKER. And so far as maintenance that has absolutely to be
made during our control, we rather have to take chances on that?
Commissioner ANDERSON. It must come out of the operating
expenses, just as it does now-things that you actually pay for.
Mr. DECKER. Had you ever thought of devising some method of
construing that in relation to the question of standard return?
Commissioner ANDERSON. I have thought of it many, many hours..
Mr. DECKER. For instance this: Last year, we will say I don't
know what the cost was-suppose last year they bought their engines
for $25,000, or their rails at a much lower figure than they would cost
this year. They may have put as many rails on the track last year
as the Government will have to put on this year, but when we got
to figure how much their standard return is, we only deduct the cost
of the rails last year, which are the same in quantity as we are going
to pay double for this year, until we would pay them that much more
than for using the roads, haven't we?
Commissioner ANDERSON. No; you could not figure it that way.
You pay them what the average of their 3-year net earnings would
be. If you do not restore as many rails as you ought to, you must
provide for a reserve fund for deferred maintenance along the line I
described a moment ago. If you buy rails to put down, you must pay
whatever you must pay, no matter whether it is 100 per cent or 200
per cent.
Now, gentlemen, lock at page 4, if you will, line 13 et sequitur,
and you will find a provision which we have added in deference to the
apparent views of members of both committees, and that is the power
to trade with carriers of nonstandardizable roads, the President fixing
just compensation in his discretion. There was apparently in both
committees a strong current of opinion as to the effect that in the
absence of such a provision, injustice would be done to scme re-
organized or otherwise abnormal companies. Under the original
bill all these companies which could not be standardized were left to be
dealt with by section 3, the terms of which I still think to be fully
adequate for that purpose. But if the committee desires that the
initial burden of trying to reach just agreements with these non
standardizable companies should be assumed by the President, we
do not object. My fear is that you will transmute the Director
General from the Director General of Railroads, coping with trans-
portation troubles, such as were never existent in this country before,
896
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
into the head of an enormous claim agency. I think it would have
been wiser to have left all nonstandardizable companies to be dealt
with under section 3, with its provision for a report by referees,
which is as simple machinery as can be devised for the ascertainment
of the amount of public money that is to go to any property owner
whose property has been taken for public purposes. Even if you
put the power where it is now put under section 1, the Director
General will of course not take upon himself to agree upon just com-
pensation with any of these nonstandardizable carriers until he has
a report by competent, intelligent, and disinterested men stating
what the property is and what it is worth. So I think you might
as well relieve him from pressure by putting them all under section 3.
But if you choose to grant that power and put that burden upon the
President (which means the Director General), he will do the best
he can with it. I have no doubt essentially just results will be
reached.
Mr. Escн. It is practically a paraphrase, is it not, Mr. Anderson,
of the amendment suggested by Mr. Thom to the House committee?
Commissioner ANDERSON. I do not think Mr. Thom suggested
anything like that. Several of us made an attempt at it.
Mr. Escн. Let me read the amendment he suggested to our com-
mittee and see whether it is not a very close paraphrase:
Provided, however, That in case of any carrier which was not in operation or was in
the hands of a receiver during any portion of the period of standard return, or with
respect to which the President shall find its conditions are so exceptional that the
basis above mentioned will not constitute just compensation, he is authorized to
make with such carrier an arrangement and guarantee for such an amount of compen-
sation as under the circumstances he shall find just in its particular case.
Commissioner ANDERSON. You are right, Mr. Esch. I remember
that now. I took that language of Mr. Thom's and changed it until
I finally reached the language here. I made it a little flatter than he
has it, by providing that if the carrier "because of nonoperation,
receivership, or other undeveloped or abnormal conditions was in
such an exceptional condition as to make the basis of earnings herein-
above provided for plainly inequitable as a fair measure of just
compensation," that discretion might be exercised. Mr. Thom's
proposed amendment I thought, opened the door too wide. I did
not want any carrier substantially standardizable to come and say,
Now, my case is not just like that other case. You ought to give
me a little more," and thus try to get away from the standard by
some special appeal. It ought to be plainly inequitable," otherwise
they ought to be traded with on terms not exceeding the standard
returns, or else be remitted to their rights under section 3.
(.
•
Mr. ESCн. That would cover the cases of short-line carriers that
were taken over?
Commissioner ANDERSON. Yes; new roads and undeveloped roads,
and roads just in process of construction-all kinds of them.
Mr. Escн. And there is no other feature in the proposed substitute
looking to any special treatment of the short-line roads not taken
over?
Commissioner ANDERSON. No; I think not.
Section 2 has been somewhat changed in substance. The original
bill authorized the payment pending settlement of not exceeding 90
per cent of the "standard return." It was pointed out that these new
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 897
carriers, the short lines, had in many instances no standard return;
that they were the ones that would be the most in need of payments
pending settlement. It was suggested at one time by some of them
that the Government should be required to pay their bond interest
and not less than 90 per cent. That might involve the Federal
Government in financing railroads which are of little or no use. The
best method seems to be to provide, as we have here, that the Presi-·
dent may make an estimate of the just compensation and pay not
exceeding 90 per cent of such estimated just compensation, leaving
any balance to be determined by litigation, or by report under sec-
tion 3, whether there be overpayment or underpayment. Section 3
is in legal effect-
Mr. MONTAGUE (interposing). It ought to be section 3, but it is
section 5; a typographical error, I am certain.
Commissioner ANDERSON. Well, I am not the printer. It should
be section 3. Section 3 is, in legal effect, I think, exactly like the
original draft. We have changed the language somewhat in deference
to various questions asked. "Auditors" have become "referees.”
We have put in language explicitly arming these referees with
judicial power to obtain evidence, administer oaths, consolidate cases,
proceed expeditiously; to report just compensation calculated on an
annual basis, and otherwise available for the sort of agreement con-
templated in section 1. It is hardly conceivable that on the basis of
such a report the President and such carrier will not settle Failing
settlement on the report, the due process of law is provided by remit-
ting either party to the Court of Claims, where the report made will
be prima facie evidence; obviously it will be pretty difficult to
upset it in the ordinary case.
Mr. Escн. Just a moment, before you leave section 3-page 5,
line 17, would it not be well to insert the word "books" there? Í
think we used that language in the interstate commerce act.
,
Commissioner ANDERSON. There is no objection whatever, if there
is any doubt about the word "papers" covering all sorts of cases,
that could be inserted.
Mr. Escн. There was litigation in the Louisville & Nashville case
with reference to the power of the commission to investigate corre-
spondence and correspondence files. The Supreme Court, as I under-
stand, finally sustained the right of the commission to investigate
correspondence.
Commissioner ANDERSON. Make it read, "books, papers, and per-
tinent documents." You want to put that in?
In
Mr. Escн. I think that would be better.
Mr. MONTAGUE. Memoranda was also in that act.
Commissioner ANDERSON. Well, "other pertinent documents"
would not that be broad enough to cover memoranda"? I have
not the slightest objection to putting in the words "memoranda."
my opinion, gentlemen, the section as originally drawn contained
by necessary implication all those powers, but so many questions
were asked about it that I thought it desirable to put it beyond
question.
Section 4 provides for an increase in the standard or ascertained
return by the amount of a reasonable return to be fixed by the
President upon the cost of additions and improvements made to the
40958-18-57
+
898 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
property of the carrier while under Federal control, either by the
President or by the carrier with the approval of the President.
In the original bill section 4 provided in explicit language that
there shall be a return allowed on such additions and improvements
paid for by the carrier from its own capital or surplus. In the Senate
hearings it was pointed out by Senator Cummins, that the use of
the word "surplus" there contained a more explicit recognition of
capitalization of surplus than had ever been made before. I indi-
cated then that my views had not changed as to the proper function
of surplus, and that I thought that the language of the bill could be
made noncommittal without either getting into the controverted
field as to whether any surplus should accrue, or leaving any accruing
surplus, constituting a part of the standard returns, tied up as dead
capital. It is perfectly clear that a prosperous carrier like some of
these eastern carriers, that will get in its standard return a sub-
stantial amount of money in excess of its fixed charges and regular
dividends, ought to put that substantial amount of money, in many
instances, back into carrier property. It is equally clear that it
won't do it unless allowed some reasonable return.
The object, therefore, to be sought during the period of Federal
control is to make to offer a reasonable incentive to make such in-
vestments. I see no way to accomplish that except in the way I
have now dealt with it, leaving out any expressed reference to “ sur-
plus" and read what we have now in section 1 and section 4, as to
the use of surplus, in connection with the caveat in section 14, to the
effect that nothing in this legislation is to be construed as "expressing
or prejudicing the future policy of the Federal Government concern-
ing the ownership, control, or regulation of carriers, or the method
or basis of the capitalization thereof." It seems now to be clear that
the Congress is not by this legislation recognizing the theory of the
surplus for which Mr. Thom argues, any more than it is recognizing
the theory for which some of the rest of us argue.
Mr. DEWALT. When you discussed section 4 when you were before
us first, I had in mind the insertion of the words "prior approval”—
referring now to line 20-made by such carriers with the "prior
approval" or by the order of the President.
Commissioner ANDERSON. I remember that, Mr. Dewalt; I thought
it ought not to be put in, because if a carrier went on in the usual
course and made additions and improvements which were obviously
in the public interest, a ratification ought to be sufficient; a prior
approval seemed to be unnecessary, and to impose an unnecessary
load of detail upon the Director General.
Mr. DEWALT. I agree with you entirely that that would be so.
What was in my mind was this: that the carrier might deem it neces-
sary to construct a tunnel, we will say, or a subway—I have in mind
now the city of Reading, where there is quite a controversy as to the
crossing of the tracks on the streets, and there was great agitation
there of the citizens to make the railroad company take their tracks
underground. Now the railroad company might say, "we will do
that.”
That would involve the expenditure of a million dollars in
all probability. Now, in such an event I think there ought to be
prior approval, because with that thought in mind, in section 5 we
use the word "prior." The section reads: "That no carrier while
1
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
899
under Federal control shall, without the prior approval of the Presi-
dent, declare or pay any dividends."
Commissioner ANDERSON. Yes, but it is very easy to get the Presi-
dent's approval to any proposed payment in excess of regular divi-
dends; but it would be a pretty onerous burden to get prior approval
of every minor addition or betterment.
Mr. DEWALT. I agree with you entirely. Well, I will drop it at
that.
Commissioner ANDERSON. Section 5 remains unchanged. I said
all I cared to say about that when I was before you before.
Section 6 has some slight changes.
Mr. Escн. Why did you substitute "operating income" for
excess earnings" in your first draft, line 8?
"in
((
Commissioner ANDERSON. Because excess earnings had no gen-
erally accepted meaning in the accounting system of the Interstate
Commerce Commission, and it was suggested to me that what I
really meant was operating income, which has an accepted meaning.
It does not make any change in the real meaning. "Available from
net operating income" means precisely what I meant by excess
earnings." Judge Mack made that suggestion. I do not think
that is very material. I do not think, as a practical matter, there
can be but one interpretation put upon the section, whatever lan-
guage is used.
The same thing is true of the words "so far as neces-
sary the amount of just compensation," which has been substituted
for the words "any deficit of any carrier below such standard or
ascertained return."
I think I shall probably submit in writing-I shall not trouble you
with it now, Mr. Chairman-a change in various places in the bill,
substituting the word "betterments" for "improvements," and
"road extensions," where I have used the words "additions and
improvements." I find that the words "additions, betterments, and
road extensions" are the more commonly used words, in our nomen-
clature; if I submit it in writing I take it that the committee would
be willing to make verbal changes of that kind in order to make the
bill conform to the accepted nomenclature of the carriers.
Mr. Escн. Does that comply with the nomenclature used in the
accounting systems?
Commissioner ANDERSON. Yes; that has been brought to my at-
tention since this reprint. I do not think it is important enough to
stop now, but I will submit the change in writing.
There has been no change in principle in section 6.
Sections 7 and 8 remain unchanged.
Section 9 requires a few words of explanation. Last spring, as I
think I pointed out when I was before you two or three weeks ago,
the Supreme Court held that the carrier employees employed in inter-
state commerce had no remedies except under the Federal employer's
liability act; that that act was exclusive of all remedies formerly sup-
posed to accrue under the various State laws. That left the condition
of the employees of the various carriers, as to numerous industrial
accidents, very precarious. We put into section 9, in the original
draft, a provision relative to extending the Federal workmen's com-
pensation act. As you remember, the Federal Compensation Com-
mission came before you and two of the three of them had voted that
carrier employees were already Federal employees and entitled to
900 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
compensation under that act. I thought that raised a pretty serious
problem. I was not able to give it the requisite time and attention
to go to the bottom of it. I may digress to say that seven years ago
I thought I knew as much about the then status of the law as to
compensation as any man in the country. But I have not kept up
since; a great many men know now a great deal more about it than
I do. It resulted that we asked Judge Mack, who did some very
valuable work on the soldiers' insurance bill, to come over here and
make a study of the problem. He spent a week or more on it. He
has a very acute, well-trained legal mind. He evolved this new sec-
tion 9, which provides, you see, authority for the President to create
a workmen's compensation plan and make it applicable to the carrier
employees. It is drawn in accordance with the same theory of con-
stitutional power that was the basis of a like provision in the Panama
Canal act. Judge Mack is of the opinion that it is constitutional;
and that under this grant of power, if it should be enacted into law,
it would be practicable to work out a compensation scheme adequate
and of great advantage to the carrier employees.
I have been informed that some of the representatives of the
brotherhoods oppose it and think that it is taking something away
from them. It is not intended to take anything away from them.
It is intended to grant a power to the President which may be used
(if it be found on thorough study of the subject desirable to use it)
in the interest of justice to the employees, as well as for the bene-
fit of the general public, the railroads themselves being a part
of the general public My own view is that section 9 is an important
grant to the employees of the carriers, and that it ought to be enacted.
It is not an essential or necessary part of the plan of war emergency
finance. We propose to have no controversy with the brotherhoods
or the representatives of the employees on section 9, old or new. If
their mature and intelligent judgment is that they do not want it,
we who are called the proponents of the bill, are not going to under-
take to force it upon them. I think they fall into very grave error
if they do not take that grant of power, leaving the use of it to be
determined more deliberately and after more careful study than can
now possibly be made But they must take their own responsibillity.
They are advised by intelligent people; they know what the present
state of the law is; they know to what extent they are satisfied with
the present state of the law. If they would rather have their present
status as to industrial accidents (and deaths, which amount to be-
tween 2,500 and 3,000 a year, on the average), than to have a plan
possibly worked out under the power granted in section 9, if that is
their matured and intelligent judgment—I have nothing further to
say.
Mr. DEWALT. Mr. Anderson, I would not have the temerity to
debate my opinion with that of Judge Mack, or with yours, but does
not section 9 give the President legislative authority?
Commissioner ANDERSON. That is exactly the question that I ex-
pected you to ask, Mr. Dewalt, and I discussed it with Judge Mack.
He says that the same power was granted by you in the Panama
Canal act, that without the use of the word "reasonable," which you
will find at the end of line 16, it might be unconstitutional; that if
there is any doubt about the constitutionality, that the insertion of
the word "reasonable" settles the difficulty. That looks like pretty
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
901
thin ground on which to make constitutional an act which is other-
wise unconstitutional. But it goes upon the same general theory that
you make rates; we do the figuring. You make "reasonable rates"
by saying that they are to be reasonable, and we figure out the facts
so as to see that your mandates are obeyed. That is the theory.
Mr. DEWALT. The trouble, I think, is this: That this power given
to the President is that he may prescribe a system and schedules of
compensation; and further, in lines 6 and 7, on page 10, the power is
still further extended and says the President may, from time to time,
revise and modify such system, schedules, means, and methods. Now,
I can not get away from the conclusion that that is legislation. It
is not the enforcement of a prescribed method by somebody else, nor
is it within the tenor of the decisions which say that the Executive
may suspend for the time being certain regulations which are made
by Congress. But this provision, if I understand it, gives to the
President the power to create a system, not as in the railroad rate
cases, not as in the power given to the Interstate Commerce Commis-
sion, because there the standard was fixed by Congress, but here the
President himself is to create a system, to prescribe the methods, and
to create the schedules; and then he may, from time to time, revise
and modify the entire system, the schedule, the means, and the
methods.
Now, this section also takes away all other rights that these men
have, 1,700,000 of them, and if this is not constitutional for the
reasons that I have suggested, then this matter is analogous. I do
not want to enforce my opinion upon anybody, but the matter is
of such gravity that I think that if Judge Mack has decided opinions
upon this, I should like to know it.
Commissioner ANDERSON. Judge Mack put in a week or ten days
on the problem, the larger part of it on compensation. I have
great respect for his judgment. I think he is one of the most thorough
lawyers and has one of the most acute legal minds that I have ever
come in intimate contact with. His mind runs into all kinds of
considerations that most of us do not think of at all.
The CHAIRMAN. Mr. Anderson, inasmuch as you do not think this
is any substantial part of this program, and express a willingness
to have it left to those who are interested, it seems to me we might
be able to deal with it as a committee in executive session.
Mr. DEWALT. I presume we may deal with it as a committee, but-
personally I would like to have the views of the framers of the bill
upon the matters contained in the bill.
Commissioner ANDERSON. I said it was not essential to the war
emergency financial legislation. I believe it will be a very grave
error for the employees of the carriers, or Federal employees, which-
ever they are—and I have not any doubt that they are, in a technical
way, Federal employees-not to allow this section to go in.
Now let me say a word in response to Mr. Dewalt's question, for
there was a time when I thought I knew something about the con-
stitutionality of compensation laws. I may say that I went to
Europe and wrote one of the earlier, careful studies of compensation
laws in 1910.
Mr. DEWALT. Permit me to paraphrase-I am really seeking infor-
mation.
902
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Commissioner ANDERSON. I have no doubt of it. I also wrote
various articles on the theory of compensation and its constitu-
tionality. So that while I am stale on the subject, it is not a subject
to which I have not given careful consideration. I believe that is
constitutional. Compensation in its fundamental theory cuts across
all of our old notions of rights based on tort-wrongs. It is nothing
but an addendum to the wage schedule. You say in effect to your
employees, "As long as you are alive and working we will pay you
so much. When you get hurt, through your fault, my fault, or
fellow servants' fault, we will pay you so much; if partly disabled,
we will pay you so much, and so much more if put out of the game
entirely; your family so much if you are dead." It is essentially a
wage scale.
It treats, as I once said in writing an article on the
theory of individualism and compensation, the human employee
almost as a part of your producing machinery. It cuts athwart
many of our old notions of individualism.
Now you would not have the remotest doubt, Congressman, that
if there were not already abundant implied power for the President
to make a reasonable wage scale, that it would be perfectly con-
stitutional to say that he could make a wage scale and modify it
from time to time. I think it is equally constitutional to say that
he may make a compensation schedule, to pay the injured employee,
in lieu of his resorting to the courts in cases where there is ground
to believe that there was negligence, some agreed sum.
Mr. DEWALT. Just permit me there the Supreme Court seems
to concur with your view in the Adamson case when they said that
the President would have control or Congress would have control
over the wages of employees, and he was a soldier.
Commissioner ANDERSON. I had no doubt personally before the
Adamson case was decided where the majority of that court would
go. The drift of modern thought is in favor of the decision reached
by a majority of that court in the Adamson case. It grows out
of the demonstrated moral and economic necessities of our modern
society, so interlaced, interlocked in our moral, economic, industrial,
and political relations, that powers have to be asserted, that 30
years ago we would have regarded as almost cutting the founda-
tions from under our individual liberties.
The CHAIRMAN. Mr. Anderson, may be I got a wrong impression
as to what you said before. While I understood you to say that this
was proper legislation and material, you practically left it to the men
who would be the beneficiaries, as to whether they would have this
section in the bill or not?
Commissioner ANDERSON. I did say that. I say that if the re-
sponsible, intelligent men who undertake to advise the great body
of those carrier employees tell them not to have that in, we are not
going into a fight before you gentlemen or in Congress to undertake
to force a compensation act into this war emergency legislation.
The CHAIRMAN. It appeared to me there was no use in discussing
constitutional questions before we know whether we are going to
give consideration to it.
Commissioner ANDERSON. If not useful, it is interesting.
Mr. BARKLEY. I think Mr. Anderson was assuming that we are
still to legislate.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
903
Mr. DEWALT. That was my assumption. I thought possibly I
might have to stand out and vote upon this measure, but if the labor
unions are to vote upon this act and determine the points themselves,
we don't need to do anything more with it.
The CHAIRMAN. I said that I understood Mr. Anderson to say that
while he regarded it as important and all that sort of thing, that
those who were to receive the benefit of it, for whose intended benefit
it was if they did not want it, he did not insist on it; that it was
no part of the scheme.
Mr. DECKER. Mr. Anderson, I want some information on this ques-
tion. Suppose we leave out section 9 as it is written, what is the
status, in your judgment, of railroad employees who are injured
under Federal post control?
Commissioner ANDERSON. Just the same as it is now, or was on the
26th of December.
Mr. DECKER. Let me suppose a case. Suppose that a man was an
engineer, and the director general would request the railroad com-
pany and its officers to move come munitions from Pittsburgh to New
York. Suppose that there wasn't adequate equipment that was
reasonably safe, but owing to the great emergency the employee or
the engineer was instructed to take the train and haul munitions to
New York, and suppose he was injured by the defective equipment.
Then suppose when he went into court to sue for the negligence of
the company the railroad company should plead that it was under
orders of a Government official that the man was sent to New York
on that equipment. What effect would that have on his damages?
Commissioner ANDERSON. Well, I do not think that any court
would listen to such plea; but if any carrier while under Federal
control employed an attorney that made that plea I think he would
be discharged by the director general as soon as it was brought to his
attention. Section 11 provides, and the proclamation now provides,
that except so far as the President shall otherwise by general or
special orders provide, parties shall continue as hitherto in the exer-
cise of all their rights. There is not a lawyer in the employ of a
common carrier, a railroad taken over, that can not be discharged
to-morrow by the director general. I do not believe that they will
be heard to make in court pleas to the effect that the employees of
the carriers shall not have the rights that the proclamation of the
President, and prospectively the enactments of Congress, say they
shall have. That is easy to cover I think.
I said all I care to about section 9. I quite agree that it is a matter
entitled to very careful consideration. I hope the representatives
of the employees will give it such consideration, and that the com-
mittee will. But I only repeat what I have said before, that we do
not regard it as an essential part of the war emergency financial
legislation-which we do urge with all the emphasis we may-as
being a necessity and a pressing necessity.
Mr. SNOOK. There is one question I would like to ask you. Sup-
pose the bill was passed with this section in it as it is now, and the
President devised a scheme under it. What would become of the
scheme at the end of the time?
Commissioner ANDERSON. You would have to take care of it in
your post war legislation, just as you will have to take care of the
equipment which is going to belong to the United States, and pro-
904
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
vided for in section 6, "to be used and accounted for as the President
may direct, and to be disposed of as Congress may hereafter by law
provide." It will be one of the things you can not now deal with, any
more than you can deal with what is going to happen with the finan-
cial arrangements which will accrue during Federal control. There
will probably be an advance of half a billion, perhaps two billion,
before Federal control ends; you will have, Heaven only knows,
how many cars and engines on hand.
Mr. SNOOK. Will all these obligations that accrue under our acts
be obligations of the Government?
Commissioner ANDERSON. I don't think it is necessary they should.
My opinion is at the present time that there is power to create a
compensation act and make the liabilities accruing thereunder lia-
bilities of the carrier corporations. But when you come to settle
with those carrier corporations at the end of the war some just and
proper amount might have to be allowed one way or the other. In
other words, it would be a matter of accounting with the separate
carriers. But you can not deal with it now.
•
Mr. SNOOK. Well, is this provision here that provides that the
President may further prescribe a reserve fund or funds to be charged
to operating expenses for the computed value of any other claims to
compensation to be allowed or accrued under the Federal act-is
that intended to take care of it?
Commissioner ANDERSON. That is intended to provide machinery
so that if it be thought desirable to put these back into the control
of the separate carriers you will have a basis for proper accounting.
Mr. SNOOK. At the end of the period.
Commissioner ANDERSON. Yes.
Section 10 contains no change, as I recall it.
Mr. SWEET. Mr. Anderson, I call your attention to the wording of
line 24, section 10. It says, "And the President, in addition to the
powers conferred by this act." I suppose "this act" refers to the
act passed by Congress on August 29, 1916?
Commissioner ANDERSON. No; it was to this act.
Mr. SWEET. Then you have got this act conferring additional
powers upon the act itself?
Commissioner ANDERSON. Yes.
Mr. MONTAGUE. It means this bill now. It would be an act if it
was passed.
Commissioner ANDERSON. Yes. I said erroneously there was no
change in section 10. The last sentence is added: "The provisions
of this act shall also apply to any carriers to which Federal control
may be hereafter extended." That was put in because it was thought
that the President might find it necessary to take over some inter-
urban lines or canals, like the Erie Canal, water lines, etc. Section 11
is changed very little in substance. I added after the words "car-
riers," in line 9, by way of emphasis and to cover a question raised
as to whether the interstate-commerce act continued to apply to
these carriers, the words "whether arising under statutes or at com-
mon law." In my opinion they are unnecessary; but as others did
not agree with me, I put them in-"and suits may be brought by and
against such carriers and judgments rendered as now provided by
law."
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
905
That covers all cases, tort or contract. It amounts to saying
that except as otherwise provided by general or special order, the
Government adopts the carrier corporations as agents for carrying
on the operation under Federal control, and leaves rights and reme-
dies to arise as they now arise. This you will easily see on a moment's
reflection possibly you have already seen, makes no difference in the
ultimate rights of any carrier corporation, for those that trade under
section 1 will not have the amount of their standard return varied by
the amount of any judgments which go against their corporations, for
those judgments would be paid, if arising out of carrier operations,
out of operating revenue, as now. Nor would it make any change in
the rights of those which will resort to section 3 for just compensa-
tion, for the results in that case would be the same.
Mr. STEPHENS. This section provides for the regulation of rates.
by the interstate-commerce act by inference?
Commissioner ANDERSON. Yes, it provides-
That carriers while under Federal control shall, in so far as is not inconsistent there-
with, or with the provisions of this act, or any other act applicable to such Federal
control, or with any order of the President, be subject to all laws and liabilities as com-
mon carriers, whether arising under statutes or at common law, and suits may be
brought by and against such carriers and judgments rendered as now provided by
law.
Now the rate-making power, gentlemen, as I think-and as I
stated during, I think, Judge Cowan's argument-accrued under
the act of August, 1916, to the President, so far as it is necessary to
exercise it, as a war power. Under his proclamation he stated that
until and except in so far as otherwise ordered, outstanding orders.
of the interstate as well as of the State commissions, shall continue.
He did not say "outstanding orders;" he said, in effect, "orders of the
interstate and State commissions shall be operative as hitherto."
This provides that all these carriers shall be subject to all laws now
applicable to them, whether arising at common law or under the
statutes, except so far as is inconsistent with the Federal control and
the orders of the President made thereunder.
Mr. STEPHENS. I would like to ask one other question. I espe-
cially would like to get your views in regard to Judge Cowan's posi-
tion this morning, when I asked him in regard to his statement
wherein he desired specific power in this section here to regulate com-
merce-that is, the commission-and he made the argument, as I
recall it, that the President already had ample power to do every-
thing that was necessary to carry on this war, without the power to
make rates; and that if you gave him the power to make rates, it
might result, as the Director General has stated, in levying a tariff
sufficient on the shipper to pay the cost of operating the roads, which
might directly be traced to the necessities of the Government making
war, and is in no way a just charge against the shipper. Now that
strikes me as rather a logical argument, and I would like to know
what answer you have to make to it.
Commissioner ANDERSON. I think you have already given to the
President the power to make rates. I think when in August, 1916,
you enacted the law giving the President the power in time of war to
take possession, control, and utilize the carrier systems of the
country, you necessarily gave the power to make rates. But it does
not follow at all that the power given to a public official to make
906
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
rates is an arbitrary and an uncontrolled power. It is a power con-
trolled by considerations of public policy. The rates must be
reasonable. They must be nondiscriminatory. The standard of
reasonableness may be different from that which now arises under
the interstate-commerce act. For instance, certain rates between
points A and C are held reasonable under our present act, even
although lower than to points intermediate between A and C, if they
are made to meet water competition between A and C. It is incon-
ceivable that the President, if this bill should be enacted into law-
the bill itself containing a provision for using Federal money for the
purpose of creating waterways and facilities in connection with
waterways should make lower rates to meet competition created
by the Federal Treasury itself. The standard of reasonableness, in
other words, is different. Discriminations between the point B,
intermediate to A and C, and C or A, have been held legal and
reasonable under the interstate-commerce act, because of the
existence of water competition.
Now that illustration may be taken as typical of certain things
which were reasonable under the old competitive code, which would
be entirely unreasonable under the coordinated, unified war control
of the President. But it does not at all follow that the President
could levy unlimited_taxation through rates. I guess perhaps it is
only a guess-that the power vested to possess, control, and utilize
the carrier systems involve, by reasonable implication, not only the
power but the duty so to regulate the rates as to make that system
essentially self-supporting. I doubt very much if the President
could justify himself in such exercise of the power given him as they
now stand, unmodified by this or any other act, as to allow a large
deficit to accrue against the general taxpayer, for which the Treasury
is liable. In other words, when you give power to a public official,
you give power which is only to be used in the light of consideration
of public policy. I illustrated facetiously over in the Senate, and I
don't mind its going into the record here, the absurdity of the reverse
rule of the notion that there could be any arbitrary discrimination
because the rates are made by the President rather than by the Inter-
state Commerce Commission-by saying that the first rule that we
put out was that hereafter Republicans should have only upper
berths in the Pullmans, the lower berths and drawing rooms to be
reserved exclusively for Democrats. [Laughter.]
Now, see, gentlemen, how absurd it would be to assume that the
lawmaking power has vested a lawless power-for a power used
unreasonably or discriminatingly is a lawless power-in any official.
See also how impossible it is in times of enormous fluctuations of
prices, in times of radical changes of relations of your carrier routes
to each other, of your rail route to your water route, to have
applicable a code which has grown up in 30 years out of or almost
through, so to speak, the competitive system. Now I very reluctantly
reached the conclusion that the President has necessarily implied
power to change rates under the act of August, 1916. But I was
forced to that conclusion; I adhere to it.
Mr. STEPHENS. Now I can conceive of this situation: Suppose that
the Government in its operation of the railroads for the purpose of
successfully conducting this war creates a deficit, a large one, an
excessive one, an unreasonably large one. Now, according to the
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
907
statement of the Director General, and your statement, it would then
be the purpose of the Government to settle that deficit upon the
backs of the shipper. It does not seem to me that it would be a
just proposition to undertake to collect from the shipper what should
properly be collected from all of the people of the country. Now
what answer would you make to that?
Commissioner ANDERSON. I can not conceive that it is just that
the general taxpayer should contribute a large amount of money for
the purpose of carrying at less than cost the products of the country
for the shipper, assuming, for the moment, that the shipper is the
man who really pays.
Mr. STEPHENS. That is not it. You missed my point entirely.
Commissioner ANDERSON. Let me finish. Now, these roads must
either be self-supporting or somebody must pay the deficit.
Mr. STEPHENS. Certainly; but the Government itself, using and
handling these roads in such a fashion for its own purposes and its
own interests creates this deficit. Now if that be true, then the
charge should not come back upon the shipper.
Commissioner ANDERSON. On the contrary, the Government will
operate these roads in many respects far more economically than they
were operated under the competitive system.
Mr. STEPHENS. I assume it will, and hope it will, but in case it
does not my position is that its neglect to do so, and its mismanage-
ment of the roads, should not be charged back upon the grain shippers
and the cattle shippers and the manufacturers of this country, who
are carrying on their business at the same time the Government is
carrying on its war business.
Commissioner ANDERSON. You can no more assume incompetence
or neglect or wrongdoing in connection with the management of the
railroads under Federal control than you can assume incompetence
or neglect in any other department of the Government.
Mr. STEPHENS. That is true.
Commissioner ANDERSON. We all have to pay if we get an incom-
petent government, whether it is in the form of a misappropriation
by Congress or through an inefficient executive. The people pay the
bill. They are paying many bills now for our past inefficiencies and
past nonpreparedness in a great many things besides war. Now, my
proposition is that when you vested this appalling power-for such it
is-in the Executive to take over your carrier systems-possessing,
controlling, and utilizing them you of necessity vested him with
rate-making power. That rate-making power must be exercised rea-
sonably, nondiscriminatingly; as I think with the purpose of making
the roads essentially self-supporting, but not to a large degree a source
of profit--nobody can calculate this to a fine point. I do not believe
that the President would have any power to undertake to collect
from shippers, as you call them, assuming that the rates are not
diffused, a half billion dollars a year in profit from the operation of
these railroads. If he collected one hundred millions a year, which
is about the margin between the last two years and the standard
return, I do not think he would be subject to criticism; if there be a
$50,000,000 deficit because of increased wages or increased cost of
things it would not be a matter of criticism. Essentially self-
supporting is the standard which I think is the reasonable implica-
tion of the power that you have vested in the President.
·
908
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. DEWALT. Mr. Anderson, in reference to section 11, I suppose
that the party construing section 11, having especial reference to the
words "or with the provisions of this act," line 7, and also the words
in line 8, "or with any order of the President" would be obliged to
say that the words that I have just mentioned would refer to any
provisions in the act. That is so, is it not?
Commissioner ANDERSON. I think so.
•
Mr. DEWALT. The construer also would be obliged to say that we
must take into consideration any order of the President. Now,
in section 9 there are provisions which fix tables and schedules of
compensation, and section 9 also provides that the President may
order a change in those matters at any time that he sees fit. Now,
section 11 also says, "that the carriers shall be liable to suits brought
by and against them, as provided by law and subject to all laws and
liabilities as common carriers." Query: Does not section 11 exclude
these employees from bringing suits against the common carriers?
Commissioner ANDERSON. As it now is without section 9 having
been put in operation?
Mr. DEWALT. No; with section 9 in the bill and section 11 in the
bill, both.
Commissioner ANDERSON. Section 9 has no operation whatever,
although enacted into law, until the President acts under it.
Mr. DEWALT. Well, supposing he does act under it.
Commissioner ANDERSON. If he acts under it, then it cuts down the
right of action, because it is expressly provided on page 10, line 9 et
secquitur: "The rights and remedies so provided shall exclude all
other rights and remedies of the person injured." There isn't the
remotest doubt, if you adopt section 9, and if a compensation act is
adopted under section 9, then it does cut down the rights of the
employees which now accrue under section 11.
That is its purpose.
Mr. DEWALT. That answers my question exactly.
Mr. PARKER. May I ask a question on a matter simply of wording,
Mr. Anderson? In the last two lines of section 11 as amended I see
that judgment will be paid only out of any acts or omissions in the
course of such Federal operation and control. When you were here
before I questioned you with reference to overlapping accounts, and
sometimes a judgment is rendered for an accident occurring in the
ordinary operation of the road, which is paid when the judgment is
rendered, and I would like to ask you whether the words "or arising
out of the ordinary operation of the railroads and ordinarily payable
out of the operating accounts"-whether those words ought not to
be added? Otherwise we will be limited and could not pay judg-
ments on an old account out of ordinary operating expenses. Or
strike out the words that are there altogether?
Commissioner ANDERSON. Well, I should be rather disposed to
think that we had better strike out those words. I think your point
is well taken, that there is a conflict.
Mr. PARKER. I want to strike it out, because the ordinary operating
account sometimes lies over for adjustment, and sometimes it comes
in on judgment after suit and is ordinarily paid out then.
Commissioner ANDERSON. I stopped in my draft of section 11,
where I had "judgments rendered as now provided by law." Then
I said, "provided, however, that except with the written assent of
the President no attachment shall be levied by mesne process or
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
909
""
execution on or against any other properties used by any such carrier
in the performance of the duties as a common carrier." Judge Mack
redrafted that into the sentence: "But no process, mesne or final,
shall be levied against any property under such Federal control.'
This is plainly an improvement on my language. Then he put in
this addition, which was apparently intended to provide a proper
means of facilitating settlements; and it looks to me, Judge, that
in the latter part of that we have overlooked the fact that you
might run against the chronology, so to speak, of the pending cases.
I am disposed to think we should make it read like this: "The Presi-
dent shall prescribe the means and methods for the payment":
strike out "out of the operating revenue derived from such Federal
control."
Mr. MONTAGUE. You would not strike out "judgments, and the
enforcement of any decrees," but leave them both in, one applicable
to law courts and the other to equity courts?
Commissioner ANDERSON. Make it read "out of the operating
revenue derived from such Federal control, for the payment of any
judgments and the enforcement of any decrees or orders, and of any
other valid obligations of such carrier."
Mr. PARKER. Properly charged against ordinary revenues?
Commissioner ANDERSON. I don't believe you had better limit it
like that, because thus you get into the same trouble. There are
some of these carriers that have got a large amount of noncarrier
property, noncarrier business, and a lot of debts. The New Haven
Railroad, for instance, has about $200,000,000 of debts accrued from
transactions outside of its railroad business. Its carrier properties,
railroad properties, are earning from 5 to 7 per cent. They quarreled
about the exact figure in a recent hearing. The Bureau of Railway
Economics reports it as 6 per cent. Its noncarrier properties,
according to the same bureau, earn about 1 per cent.
Mr. PARKER. Some of those would go to operating revenue and
some would go otherwise.
Commissioner ANDERSON. You have a nice question as to how far
this Federal control can limit itself to carrier property and carrier
operation when you have liabilities accruing from both sources.
Mr. PARKER. Ought there not to be some arrangement by which
they could be distributed as between capital?
Commissioner ANDERSON. It must be dealt with as an adminis-
tration matter. We can not deal with it in the statute.
Mr. PARKER. I think so, but we had better leave it to the admin-
istration to make that examination.
Commissioner ANDERSON. Yes; and that is the reason why I do
not want to put anything in here which would so narrow the power
of the President that proper orders could not be made. The Federal
control must seek to reach this result; it must be effective for war
and Federal purposes; it must leave the corporation such control
of noncarrier property and noncarrier business as it is not necessary
to take in order to effect the purposes of the act.
Mr. PARKER, of New Jersey. Will you put in a revision of that
part of the bill in the revision of your remarks?
Commissioner ANDERSON. I will. I think your point is well taken.
Now, in section 12 we made no change.
910
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Mr. COWAN. Might I ask Mr. Anderson one question about section
11?
Commissioner ANDERSON. I will be glad if you will.
Mr. COWAN. Whether, in order to give application of these laws
to the liabilities and the rights as between the shippers and the car-
riers, it would not be necessary to insert the proviso that these rail-
roads under Federal control should still retain their liability as
common carriers to shippers?
Commissioner ANDERSON. You can not go further or state it more
plainly or briefly than I have stated when I put in the first five lines
of section 11 that except as otherwise provided by Congress or by
the President for that is what it means-these carriers remain
individual carriers, subject to all existing liabilities, whether they
arise under statutes or under common law. Now, I have asked you
and I have asked various other people interested in this thing to
draw something that you would take the responsibility of saying
that it left the war power what it ought to be, and still furnished a
more certain basis for the kind of procedure that we all want.
Nobody has accepted that invitation.
Mr. COWAN. I have accepted it, and will try to furnish you a copy
to-morrow morning.
Commissioenr ANDERSON. It is a little bit late to bring in a new
amendment, but I am willing to take it whenever and however late.
I have had it in mind from the time the question first arose, and I
think I have achieved a safe result. If anybody can improve on it,
far be it from me to object to improvements.
Mr. BARKLEY. This language, being broad enough already to
cover shippers, why should we specify them particularly without
specifying everybody else that may have a claim?
Commissioner ANDERSON. Yes; you may get into trouble the same
as you did in section 11. I accepted what I thought was an improve-
ment, providing the machinery for payment of judgments and decrees,
and it appears now that we got into trouble from the change.
Section 13, gentlemen, was prepared in the Department of Justice,
in order to save any destruction of pending cases which ought to be
kept alive; we have accepted it unchanged.
Section 14 I shall say a few things about. I stated with some
care my views relative to the necessity of having the Federal control
herein provided for continue until Congress shall otherwise provide.
We reached that conclusion in the manner that I described. All I
care to say in addition to what I said before, is: That all that I have
heard pro and con relative to conditions which are almost certain to
arise during the period of Federal control, requiring careful, deliberate
consideration, and probably controversial post-war legislation; that
the judgment expressed upon section 14 by impartial, sound-thinking
people engaged in banking or dealing with investments; and all the
criticisms that have been made against it, have but intrenched me
more firmly in my opinion. There are certain provisions in this bill
that I can see two sides to, and can understand perfectly well how
perfectly candid, fair, intelligent minds would reach different con-
clusions from those I have reached. But how anyone can see this
situation of the Government's taking control of property estimated
to be worth from fifteen to twenty billions, which has grown up under
competitive conditions, belonging to separate groups called corpora-
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
911
tions, changing their relations with each other; financing them, per-
haps, to the extent of a billion or two; equipping them with a large
amount of rolling stock, as we very likely may equip them; putting
them into new relations with water carriers; indeed, creating out of
the Federal Treasury water carriers to take part of the burden off
rail carriers that they are not now able to carry; buying their secur-
ities of all kinds; guaranteeing them a stated rental during the
period of Federal control-how anyone can contemplate that situa-
tion without seeing that the stability sought to be given, and which
will be given by the guaranty of this great Nation, ought not to
continue until the Nation determines its new policy, whatever it
may be, toward owners of those hundred of millions thousands of
millions of securities-and toward its carrier systems, I am not able
to understand. Indeed, there is but one alternative which is really
urged, and that is this: That you ought to swing such a club over the
heads of your successor Congresses that they will act speedily on that
problem. I do not think that there is any intelligent person now
that does not recognize that there are going to be the most difficult
kind of problems to be worked out when the war is over.
Now let me say a word about the constitutional situation. Some-
thing has been said about that. The constitutional situation, as I
understand it, is this: The act of August, 1916, authorizes the Presi-
dent in time of war to take over these carrier systems. He has done
it. It is the exercise of a war power. Your grant of power was
under the war power. It would follow that in the absence of further
legislation that war power would expire with the war and a reasonable
time thereafter. In the absence of further legislation it would be,
I apprehend, the duty of the President within a reasonable time
after the treaty of peace to end the Federal control and let these
carrier properties go back to their owners, whatever their condition
might be. You have given no power, as I see it, which would war-
rant the President in holding beyond the period of the war, and a
reasonable time, whatever that might be held to be, thereafter. But
I am entirely in accord with Mr. Thom's view, expressed in response
to questions asked either by members of the committee or myself-I
have forgotten which-that under the commerce clause in time of
profound peace you could have done exactly what you have now
done. Congress had undoubted power to authorize the President to
take any or all of the carrier systems of the country for a week or
forever; for a year or for five years. The only right that the owners
had was the right not to have their property confiscated. They had
a right to "due process of law" to determine just compensation for
what the Nation should take, whether that be the use for a week,
for a year, or forever.
That just compensation to be determined by due process of law
for this taking is provided in section 3 of this bill. If now you should
enact section 14 in its present form, you would have added onto the
taking of the carrier systems under the war power a holding under the
commerce clause for such further time as should intervene before
further action is taken by Congress. This section 14 is grounded,
therefore, not upon the war power, but upon the commerce clause of
the Constitution. And there is not the remotest doubt of its consti-
tutionality. It is therefore simply a question of sound policy. This
bill proposes to provide just compensation, to stabilize the security
912
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
market, to make effective the present Federal control. with as little
change as may be in existing corporate carrier machinery. It will
stabilize the market. You must face-you or your successors-the
question of Government ownership or private ownership. If not
Government ownership, of various suggested kinds of Government
control. Those issues, whatever they may be, can no more be dodged
than the present war with Germany could be dodged, or than the
liabilities growing out of that war can be avoided. There is no use
blinking facts. These facts must be faced. Our proposition is that
we are now providing by this act a safe stabilizing measure for the
owners of the securities; for the control for national purposes after
war purposes have ceased; that the sound judgment is to allow that
status to continue until your successor Congress has determined our
national transportation policy.
I only want to add two or three sentences in regard to the caveat
at the end of section 14, to which I have already referred. If Mr.
Plumb can suggest anything which will make that more explicit
and more absolutely certain to prevent this act or anything in it
being taken to prejudice the future policy of the Federal Government
on any of the matters he is interested in, I should be glad to assent
to his change. I think that the caveat at the end of section 14 has
made it clear to fair-minded people that this bill is not intended to be
a Government ownership act. The bill is neither for Government
ownership nor is it against Government ownership .It is neither
for any kind of regulation nor is it against any kind of regulation. It
is war emergency legislation. It is intended to be just that—no
more, no less.
There is one other thing that I ought to add. A power to relin-
quish perhaps ought to be added in section 14. That I will deal
with, if we decide that it is requisite, in a letter which I will address
to the chairman containing certain verbal amendments, but will not
ask you to listen to me now.
Mr. PARKER of New Jersey. I was going to ask whether you ap-
proved of the words of the President's proclamation to be inserted in
the bill, that by subsequent order of proclamation, subsequent con-
trol may be relinquished to the owners of railroad systems or rail and
water systems, possession and control of which are hereby assumed?
Mr. ANDERSON. I think the power should be retained, but I am
more and more in doubt as to whether it should be exercised except
under extraordinary circumstances, I expect to take that up in
conference with the Director General and Judge Payne to-night,
unless otherwise prevented, and see what the policy should be.
There may be some cases where it ought to be exercised. My own
notion is that it should be exercised within very narrow limits.
Mr. BERKLEY. That amendment would empower the President
if he saw fit to turn them all back one at a time, notwithstanding
the provision in the beginning of the section holding them until
Congress would otherwise act?
Commissioner ANDERSON. Yes, it would; but it is power that I
do not think ought to be exercised except within very narrow limits,
as I have already stated.
I am very much obliged to this committee for their patience in
listening to me.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
913
Mr. THOм. Mr. Chairman, I wish to apologize to the committee for
not being here this morning. I was imperatively detained elsewhere,
and now I merely desire to read into the record a few sentences of
authorities which have come to my attention since yesterday.
I wish to refer to the case of Heubner v. Huebner, a Wisconsin case,
reported in 157 Northwestern, 765. You will find at page 767 the
following brief paragraph:
The rule is well established in this court that past profits of an established business
constitute a legitimate basis upon which to estimate the future profits of the same
business conducted in the same manner.
I refer also to the case of Landis v. Wolf, 206 Illinois, 392, where
it is said at page 399:
It may not be possible to show by demonstration the present size and extent of
such damages, but profits for a reasonable period next preceding the time when the
injury was inflicted may be taken as a measure of such damages.
And to the case of the Conqueror, 166 U. S., 110, where at page
127 this statement is made:
In the absence of such market value, the value of her use to her owner in the busi-
ness in which he was engaged at the time of the collision is a proper basis for esti-
mating damages for detention; and the books of the company showing her earnings
about the time of her collision are competent evidence of her probable earnings
during the time of her detention.
And to the following cases from which I will read no extracts, as
I have not seen the cases, but members of the committee may find
them useful in the preparation of their own views: National, etc., Co.
v. Lewitson, Fortieth Atlantic, 1095, 95 Me., 316; Lambert v. Haskell,
22 Pacific, 327; also reported in Eightieth California, 611; Central
Coal & Coke Co. v. Hartmann, 111 Federal, page 99; Yates v. Wehel
Coke Co.,_221 Federal, 607; Chapman v. Kirby, 49 Illinois, 219;
State v. Friedman, a West Virginia case, 81 Southeastern, 832;
Bokosheko v. Bray, an Oklahoma case, 155 Pacific, 226.
Mr. ESCH. May I, Mr. Chairman, suggest to the witnesses that have
appeared in the course of the argument, that they file as part of the
hearings the amendments that they have suggested, so that they
may be available to the committee as early as possible?
Mr. BARKLEY (presiding). I hope witnesses will take the oppor-
tunity to do that, because then we can get a concrete view of what
your amendments are. I hope you will do it to-morrow, gentlemen,
so that we may have the benefit of them.
(Whereupon, at 5.10 o'clock p. m., the committee adjourned.)
JANUARY 21,
1918.
OPINION OF CHIEF COUNSEL IN RE POWER OF STATES TO TAX RAILROADS UNDER
PRESENT FEDERAL CONTROL AND UNDER BILL H. R. 8172.
The question presented is, to what extent, if any, does the Federal control of systems
of transportation now being exercised or contemplated under the bill H. R. 8172 affect
the power of the States to tax railroads.
The States have the power of taxation as a necessary attribute of sovereignty. In
Union Pacific Railroad Co. v. Peniston (18 Wall., 5) the court, referring to the taxing
power of a State, said, at page 29:
(* * * and that it may be exercised to an unlimited extent upon all property,
trades, business and avocations existing or carried on within the territorial boundaries
of the State, except so far as it has been surrendered to the Federal Government,
either expressly or by necessary implication,
40958-18-58
* "
914
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
In McCulloch v. Maryland (4 Wheat., 316), the court said, at page 429:
66* * * All subjects over which the sovereign power of a State extends are objects
of taxation; but those over which it does not extend are, upon the soundest principles,
exempt from taxation.”
In Coe v. Errol (116 U. S., 517), the court said, at page 524:
* * We take it to be a point settled beyond all contradiction or question,
that a State had jurisdiction (for taxation) of all persons and things within its territory
which do not belong to some other jurisdiction, such as the representatives of foreign
governments, with their houses and effects, and property belonging to or in the use
of the Government of the United States."
A State may not tax property of the United States, Van Brocklin v. Tennessee (117
U. S., 151), nor may it tax the United States in the exercise of its governmental func-
tions. (McCulloch v. Maryland, 4 Wheat., 316; Providence Bank v. Billings, 4 Pet,
514; Provident Institution for Savings v. Massachusetts, 6 Wall., 611; Farmers Bank v.
Minnesota, 232 U. S., 516; and Choctaw, O. & G. R. Co. v. Harrison, 235 U. S., 292.)
A State may not levy a direct tax upon interstate commerce. In Kansas City Ry.
v. Kansas, 340 U. S., 227, the Court said, at page 231:
"It must be assumed, in accordance with repeated decisions, that the State can not
lay a tax on interstate commerce 'in any form,' by imposing it either upon the busi-
ness which constitutes such commerce or the privilege of engaging in it, or upon the
.receipts as such derived from it. (State Freight Tax Cases, 15 Wall., 232; Phila-
delphia & Southern S. Co. v. Pennsylvania, 132 U. S., 326, 336, 344; Leloup v. Mobile,
127 U. S., 640; Lyng v. Michigan, 136 U. S., 161, 166; McCall v. California, 136 U. S.,
104; Galveston, Harrisburg, &c. Ry. v. Texas, 210 U. S., 217, 228; Western Union
Telegraph Co. v. Kansas, 216 U. S., 1, 36, 37; Pullman Co. v. Kansas, 216 U. S., 56,
65; Meyer v. Wells, Fargo & Co., 223 U. S., 298; Baltic Mining Co. v. Massachusetts,
231 U. S., 68, 83.)"
No State may levy a tax on the gross income of any interstate carrier. (Galveston,
Harrisburg, &c. Ry. Co. v. Texas, 210 U. S., 217.) Nor may a State levy a tax upon
the receipts from interstate transportation. (Philadelphia Steamship Co. v. Pennsyl-
vania, 132 U. S., 326.)
On the other hand, a State may tax the physical property of an interstate carrier.
(Postal Telegraph Co. v. Adams, 155 U. S., 688; Western Union Telegraph Co. v.
Taggart, 163 U. S., 1; Union Pacific Railroad Co. v. Peniston, 18 Wall., 5; Thomson v.
Pacific Railroad, 9 Wall., 579; Massachusetts v. Western Union Telegraph Co., 141
U. S., 40; Central Pacific Railroad v. California, 162 U. S., 91, 125; Western Union
Telegraph Co. v. Attorney General, 125 U. S., 530.) So also a State may levy a cor-
poration tax even though such corporation may engage in interstate commerce.
(Kansas City Ry. Co. v. Kansas, 240 U. S., 227; St. Louis, Southwestern Ry. v.
Arkansas, 235 U. S., 350.)
Applying the general principles above announced to the railroads under the Fed-
eral control now being exercised or contemplated under the bill (H. R. 8172), it is
clear that under the present control by the Director General and under the proposed
bill the railroads remain the property of the owners. The operation of the railroads
by the United States upon an agreed basis of compensation need not interfere with
State taxation on the physical property of such railroads any more than the leasing
of a building in a State by the United States would necessarily operate to suspend
State taxation against the owner of the building. This conclusion of course would
not apply to any taxation which would amount to an interference with interstate
commerce or to an attempt to tax the Federal Government in carrying on any function
within its constitutional powers.
No State may levy any tax on the United States, but a State, within reasonable
limitations, could continue to tax the property owned by a railroad even though that
property be leased to or operated by the United States. Such a tax should be upon
the property of the owners of the railroads and should not be such as to interfere with
the United States in performing its transportation functions.
In Commonwealth v. Kinniconick & F. S. R. Co. (104 Southwestern, 290; 31 Ken-
tucky Law Report, 859) it was held that a railroad company, although its road is
operated by another company, still owns its line of railroad and has not parted with
any franchise granted to it and is liable to a franchise tax.
In Union Pacific Railroad v. Peniston (18 Wall., 5), referred to above, the court
said, at pages 31 and 32:
* *
،، * * * the Union Pacific Railroad Co. was created to subserve, in part at
least, the lawful purposes of the National Government;
*. They (charter
provisions) all look to a purpose of Congress to secure an agency competent and under
obligation to perform certain offices for the General Government. Notwithstanding
this, the railroad and telegraph line are neither in whole or in part the property of
the Government. * * *
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
915
"Admitting, then, fully, as we do, that the company is an agent of the General Gov-
ernment designed to be employed, and actually employed, in the legitimate service
of the Government, both military and postal, does it necessarily follow that its prop-
erty is exempt from State taxation?"
Answering this question, the court said, at page 36:
"It is, therefore, manifest that exemption of Federal agencies from State taxation
is dependent, not upon the nature of the agents, or upon the mode of their constitution,
or upon the fact that they are agents, but upon the effect of the tax; that is, upon the
question whether the tax does in truth deprive them of power to serve the Government
as they were intended to serve it, or does it hinder the efficient exercise of their power.
A tax upon their property has no such necessary effect. It leaves them free to dis-
charge the duties they have undertaken to perform. A tax upon their operations is
a direct obstruction to the exercise of Federal powers.”
In Thomson v. Pacific Railroad (9 Wall., 579) the United States was to receive 5
per cent of the net earnings of the railroad. It was claimed in opposition of the power
of the State to tax the property of the railroad that such tax by the State would hinder
and embarrass the railroad in the performance of its obligations and duties to the
United States. In upholding this tax, the court said, at page 591:
"No one questions that the power to tax all property, business, and persons, within
their respective limits, is original in the States and has never been surrendered. It
can not be so used, indeed, as to defeat or hinder the operations of the National Gov-
ernment; but it will be safe to conclude, in general, in reference to persons and State
corporations employed in Government service, that when Congress has not interposed
to protect their property from State taxation, such taxation is not obnoxious to that
objection.
""
The United States possibly might prohibit the States from levying taxes upon
railroads while under Federal control. (Home Savings Bank v. Des Moines, 205
U. S., 503, 513; Union Pacific Railroad Co. v. Peniston, 18 Wall., 5, 37.)
The United States has prohibited State taxation of a national bank except upon
real estate and upon the shares of capital stock owned by stockholders. (Sec. 5219.
Rev. Stat.) This statute has been repeatedly upheld. (People v. Weaver, 100
U. S., 539; Rosenblatt v. Johnston, 104 U. S., 462; Boyer v. Boyer, 113 U. S., 689;
Owensboro National Bank v. Owensboro, 173 U. S., 664; Bank of Louisville v. Stone,
174 U. S., 432; Louisville v. Third National Bank, 174 U. S., 435; First National
Bank v. Albright, 208 U. S., 548; City of San Francisco v. Crocker, etc., Bank, 92
Fed., 273.)
It is to be noted that H. R. 8172, instead of prohibiting the imposition of taxes
by the States upon railroads while under Federal control, distinctly recognizes the
power of the States to impose such taxes. Under the bill taxes other than those
assessed by the United States for the three years ending June 30, 1917, can be charged
to operating expenses and included in the computation of the standard return due
the carriers.
In my opinion, especially in the absence of prohibition of Congress, the States have
power to tax the property of railroads while such railroads are under Federal control.
This power is subject to the same limitations as before, that is to say, it must be reason-
ably exercised and must not be exercised in such a manner as to interfere with inter-
state commerce or as to be a direct tax upon the United States in exercising its func-
tions of government. Bill H. R. 8172 as it now reads does not prohibit State taxation
of railroads while under Federal control, but, on the contrary, accepts and consents
to the exercise of that power by the States during the period of such control.
Jos. W. FOLK, Chief Counsel.
STATEMENT OF HON. ALBERT M. TODD, PRESIDENT OF THE
PUBLIC OWNERSHIP LEAGUE OF AMERICA.
Gentlemen, in appearing before you to represent, so far as I may,
the interests not only of the Public Ownership League of America
but the citizenship at large of our country from whose industry the
means have been provided for building and maintaining all of our
transportation and other public utilities, I desire first to thank you
for the privilege you have so kindly accorded.
At no time in the history of our Nation or the world has legislation
been enacted of such colossal economic interest as that now before
916
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
•
Congress, which will so vitally affect the political institutions of our
country and the happiness and welfare of its people.
In placing my views before you I shall, on account of the limitations
of time, not enter in an academic argument, but confine my remarks
largely to the financial aspects of the question. I will only briefly
state that public ownership as well as operation of all those utilities
and natural resources which by their nature are essentially monop-
olies, is one of the most natural functions of Government, and is
fundamental to justice, equality of opportunity, and democracy.
This has been my belief for more than 30 years, and has been con-
stantly confirmed by study and observation in many foreign coun-
tries as well as in our own. In reference to this, I will briefly state
my experience in the genuinely democratic Republic of Switzerland.
Traveling through Switzerland, one is immediately impressed with
the industry, dignity, and liberty-loving spirit of the people, evi-
denced by their every act and word. The locomotive engineer, the
conductor, the fireman, the brakeman, and the men who construct
and maintain the tracks know they are not mercenary employees,
but are part owners of the railways and all the public works, and as
such take a just pride and interest in their duties and labors. Under
this system, strikes or lockouts are unknown and impossible, for each
employee realizes that in rendering his best service he is rendering a
service to the State and, as a citizen of the State, to himself. It will
thus be readily seen how with every employee giving his best possible
endeavor and each setting an example to those operating the other
utilities (in all of which each "citizen-employee" has a personal
interest), the State secures much higher efficiency and service, with
proportionate decrease in cost to the public. As the fictitious.
salaries paid in this country to presidents of the public-service com-
panies, whose chief interest is to absorb the earnings of the road are
unknown, and all officers and employees are coworkers under civil-
service rules-"soldiers for the common good"-private graft and
plunder is impossible and unknown.
Illustrating the results under this system, I purchased this ticket
which I show you, good for 42 days continuous or intermittent rides
at the pleasure of the holder, over any and all of the railways and
steamboats, for the equivalent of $27, or about 67 cents a day.
Tickets are also issued for 1, 3, 6, and 12 months at much lower rates;
and yet, though these roads, in many places tunneled through the
mountains or skirting precipitous cliffs, cost a million dollars per mile
to construct, the results are so highly satisfactory that the Republic
is constantly building extensions as rapidly as possible.
Results in efficiency and economy equally marvelous as compared
with our corporate-owned systems prevail in the telegraph, telephone,
express, and street railways; and one wonders how the American
people, can be inducated in the face of the reckless speculating and
plundering of our public utilities by so-called "high financiers,
will permit the functions of their life to be thus controlled and abused.
It seems incredible that intelligent men engaged in manufacturing
and other legitimate business should not join the farmers and wage
earners in the demand for public ownership. Under the present
corporate system the rule of the railways is to charge "all the com-
modity will bear," thus limiting both the profits of the producers
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 917
and the power of the consumers to buy; the transportation com-
panies thus levying the largest tax possible without entirely killing the
industry.
I will now turn to the practical questions involved in the bill under
consideration.
The President of the United States, by proclamation issued pur-
suant to the authority vested in him by Congress, has recently taken
over the railroads of the country for operation by the Federal Gov-
ernment during the continuance of the war, in which wise and
patriotic act he has had the support and approval of the entire
Nation; and as Congress is now legislating respecting the compen-
sation to be paid the railroads, and the various conditions under
which these systems are to be operated, it is highly important that
in the solution of this question the wisest possible action by Congress
be secured.
We who believe that the public ownership and operation of all
public utilities which by their nature are necessary to the welfare
and happiness of the people are natural governmental functions,
also believe that the rightful solution of the question is not based
merely upon the operation of these utilities during the period of the
war. We look forward to the time-which we hope is in the very
near future when through the patriotism of our citizens and the
heroism of our soldiers, victory shall come to our arms, bringing a
peace that shall be wise and just to all mankind as the fruit of the
great sacrifices America and her allies are making in this world
struggle. Among the fruits of such peace those of us who believe
in equality of opportunity, civil liberty, and democracy, hope that
public ownership and operation of public utilities and natural
resources will be among our greatest achievements.
These several circumstances unite to make the present year
momentous with respect to the development and solution of trans-
portation problems. Nothing like the present situation has been
seen before in the history of the world. No governmental under-
taking outside of the great war itself approaches in magnitude either
the valuation or the operation of the approximately 250,000 miles
of railroads in the United States. The welfare of the country is so
obviously bound up with the efficiency of its transportation system
and the prosperity of the country is so largely dependent upon the
reasonableness of transportation charges that it is needless to dwell
upon these general aspects of the problem. But very few people
outside of the railroad men themselves appear to. realize the tre-
mendous importance of the issues now being determined by the
President, Congress, and the Interstate Commerce Commission with
respect to the valuation of railroads; the fixing of the compensation
to be paid them during the period of governmental operation and
private ownership; and with respect to the determination of the
just and fair price to be paid by the Government when it shall pro-
ceed to Government ownership as well as operation.
The Public Ownership League of America has been organized for
the purpose of furthering the policy of Government ownership and
operation of public utilities, including transportation systems. It
is not blind, however, to the dangers arising out of the stress and
strain of these terrible times. It realizes that the mere form of
918
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Government ownership or operation will not in itself guarantee to
the people of this country the benefits which they are entitled to
receive from the full recognition and performance of the transporta-
tion service as a public function. The success of governmental
operation of the railroads after the war is over will depend in large
measure upon the financial obligations which the Government
assumes in connection with their acquisition. Many of the great
railroad systems of the country have been exploited and robbed by
their managers over long periods of years in ways that have created
national scandals unparalleled in the world's history. In this man-
ner many of the roads have at different times been brought to bank-
ruptcy or to a financial condition verging upon it by the studied
acts of their officials, who, having been intrusted with the manage-
ment, have betrayed that trust for their private profit. The Public
Ownership League and the thoughtful public at large believe that
it would work a gross injustice to the Nation to take the railroads
as they are looted and over capitalized, and make good to the owners
all of the wicked and foolish speculations of the past, without respect
to the actual value of the properties now devoted to railroad pur-
poses. It is not our desire to be destructive in our suggestions as
to governmental policies, but rather to be constructive in the best
sense, with the future success of Government ownership and opera-
tion constantly in view.
Few people outside of Washington realize the enormous one-
sidedness of the proceedings before the Interstate Commerce Com-
mission and the committees of Congress. The railroads represent
an investment of many billions of dollars and are naturally in a
position to employ and do employ great numbers of the most skillful
attorneys to take possession of the capital and try to enforce their
views and their will upon the governmental authorities having to
do with the determination of the great problems at issue. The
league believes that the future welfare of the people of the United
States will be very greatly affected by the decisions now about to
be made with respect to two chief problems, as follows:
1. The extent of the compensation to be paid by the Government for
the use of the railroads during the period of private ownership and
Government operation. The primary importance of this problem
is not in the amount of compensation or rental that may be paid
during the continuance of the war or for the brief period of years
during which the scheme of private ownership and governmental
operation continues, but in the effect that the payment of such
compensation and the agreements made with respect to it have
upon the ultimate purchase price of the roads when their ownership
passes from private hands to the Government. The establishment
of a fixed compensation or rental to continue so long as governmental
operation of privately owned roads continues will naturally have
the effect of determining the earning power of the property from the
present time on to the time when the purchase price therefor is to
be fixed, and if the compensation or rental is excessive, the result
may be the addition of several billion dollars to the permanent
burdens of the transportation systems of the country. With the
railroads as with public utilities, it is of the utmost importance to the
consuming public that the recognized capital value shall be kept
as low as practicable and shall not be swelled by the capitalization
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
919
against the public of gratuities and special privileges conferred upon
the transportation companies in times of great public need and
danger.
2. The principles of valuation to be applied in determining the value
of the physical assets of the railroads. Valuation is a technical and
difficult problem, largely hypothetical, with which the average
city is not familiar. Even many well-informed persons suppose
that the value placed upon a public utility property by a skillful
engineer is an ultimate fact which must be accepted by all parties
without question. In truth, however, the final valuation even of the
physical property of a railroad or any other public utility is built
upon a series of assumptions and by the application of a series of
rules with respect to each one of which the particular interests and
judgment of the engineers doing the work have great influence.
Concealed in a final valuation are many technical questions which
are matters of grave doubt and with respect to which the interests
of the public and of the public-service corporations are diametrically
opposed. As applied to the railroads of the United States, the
difference in the principles, advocated at many points in the valua-
tion work, affect the final results to the extent of hundreds of millions
or even billions of dollars.
The principles to be applied respecting the capitalization of the
railroads in fixing their compensation.-As it will require about three
more years for the Interstate Commerce Commission to complete
its report on the physical valuations of the railroads, and as the true
amounts of money actually and legitimately invested have been so
completely hidden by irregular accounting and the burning of books
and records to conceal the facts, the true capitalization is at present
unknown. On this account I shall introduce herewith evidence and
the official findings of the Interstate Commerce Commission to show
that the present capitalization as claimed in every case examined is
without any vestige of reliability, and is swelled to many times the
true amount by extravagance and speculations outside of railroad
purposes. In consequence to these facts, I recommend that further
investigations be instituted with all speed, with the view of ascer-
taining the true and legitimate capital investments on which only,
and not on water, the Government compensation to the railroads
should be based, until the physical valuations be also completed.
In the above connection I respectfully suggest that the willful
falsifying of records and the destruction of accounts be included in
the section of the bill respecting criminal acts and punished accord-
ingly.
I also respectfully suggest that the bill provide for a continuing
lien upon the railroads in favor of the Government for any over-
payments which may be made; that the extravagant salaries paid
in some instances be revised, and all salaries be based upon the
value of the services rendered; that "income on surplus," which is
income on income, be eliminated; and that if for temporary purposes
it be based on the average income of preceding years, the period
should be extended to include the past ten years, rather than for
the period proposed of three war years with their excessive profits.
Most important of all the recommendations which I have the
honor to submit to you is that Congress shall at the earliest possible
920
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
date pass an act providing for the public ownership of transporta-
tion systems for the carrying of passengers and freight as well as the
telegraph and telephone systems, to accomplish which I am engaged
in consultation with practical students of the problem in the drafting
of a bill providing for this great step, necessary to the emancipation
of the people of this country from the rule of special privilege.
When traveling in France for the first time many years ago, I
observed over the entrance of all of their churches as well as public
buildings the following motto, which is also the motto of the French
Revolution: "Liberty, equality, fraternity." Equality here means
equality of opportunity, and when a few are given the right to
control the great functions of Government which are thus denied
to the general citizenship, equality of opportunity can not exist.
There can be no more natural and necessary function of government
for promoting general prosperity and happiness than the public
ownership as well as governmental operation of all these agencies
which contribute to the public good and which by their nature are
monopolies. This includes not only the means of transporting pas-
sengers, freight, and intelligence, but also means those vast resources
of nature as well, which the Almighty placed under the ground for
the service of all of his creatures.
Public ownership is also fundamental to democracy, without which
civil liberty can not exist.
Herewith I respectfully submit the evidence on which my con-
clusions are based regarding the finances and practices of the Amer-
ican railroads; and in closing I desire again to express my high
respect for the patriotism and forward vision of the President in
this crisis.
The illegal and fraudulent practices of the American railway com-
panies in the falsifying of their accounts to cover up the expenditures of
the stockholders' money for influencing and controlling legislation,
politics, and the press; the frauds practiced by directors in taking for
their private use the funds of the company; the deceptive accounting
regarding capitalization, investment, etc., and the burning of the
books and records to secure secrecy of their acts, as shown in the
official reports of the Interstate Commerce Commission. During the
years from 1912 to 1915 various complaints were made by shippers
and the public to Congress and the Interstate Commerce Commission
respecting certain illegal practices of four important systems of rail-
ways and their resulting inefficiency of service and unjust rates. On
account of these complaints, which seemed well substantiated, the
Interstate Commerce Commission, partly on its own initiative and
partly in compliance with resolutions of Congress, made investiga-
tions, and issued their official reports of findings, in the years 1913 to
1917, respecting the unlawful practices and financial transactions of
the following four railway systems:
-
The New York, New Haven & Hartford Railroad Co., Report No.
6569; date, July 11, 1914.
The Louisville & Nashville Railroad Co., Report No. 4788; date,
February 9, 1915.
The Chicago, Rock Island & Pacific Railway Co., Report No. 6834;
date, July 31, 1915.
The Cincinnati, Hamilton & Dayton Railroad Co. and the Pere
Marquette Railroad Co., Report No. 6833; date, March 13, 1917.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 921
These investigations were made with the most painstaking care
possible, covering long periods of time, in which special agents of the
commission were employed to secure information and to investigate
the books and accounts, and officers of the companies were summoned
before the commission, several thousand pages of testimony being
taken. The findings of the commission were published in their
official reports mentioned and disclose, among others, the following
facts:
The evidence secured by the commission shows that every railroad
company investigated knowingly falsified their accounts, partly in
order to hide expenditures of large sums for controlling politics and
elections and influencing legislation and the administration of laws;
falsified the accounts respecting capital, expenses, and profits, so that
the commission, in many instances, was unable to find for what
purpose vast sums were expended; and in many cases the books and
accounts were burned by the directors in order to hide, in so far as
possible, various illegal transactions. Many of these acts were done,.
as the records conclusively show, by directors who are well known
as among the world's greatest financiers; yet even though many
records were willfully destroyed, the commission was able to secure
sufficient evidence in many cases to disclose the names, dates, and
facts.
In order to place the various illegal practices in systematic order and
to refer to official evidence and the findings of the commission, they
may be briefly classified as follows:
1. Extravagant speculations and purchases of worthless securities
in the interests of the directors; peculations from the stockholders'
money by illegal devices, accompanied by the falsifying of books and
accounts and their later burning by the directors.
2. Illegally spending the stockholders' money and property to
corruptly influence politics, the press, and public opinion and to
secure secrecy respecting their acts.
3. Acts to secure a monopoly against the public interest, by the
violation of the laws of many States as well as of the Nation.
4. The organization by the railway directors of "fake" corpora-
tions, with?
dummy" officers to hide the identity of the real pro-
moters and shield them from prosecution.
5. The voting to themselves by the directors of extravagant sal-
aries, in addition to which large sums were taken by some of these
officials without warrant of law.
The various acts recited are necessarily interwoven and will be
grouped by subjects as systematically as convenient.
The wasting of the companies' resources in extravagant specula-
tion, and the burning of the records: The following extracts are from
the official report, No. 6569, of the Interstate Commerce Commission
respecting the New York, New Haven & Hartford Railroad Co.,
July 11, 1914. All the extracts from the commission's reports
respecting the various railway systems are taken verbatim from
the records.
Public hearings were held extending over a period of 60 days of almost continuous
session. Witnesses in a position to have knowledge of the transactions under scrutiny
were examined. In the search for truth the commission had to overcome many
obstacles, such as the burning of books, letters, and documents and the obstinacy of
witnesses who declined to testify until criminal proceedings were begun for their
922
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
refusal to answer questions. The New Haven system has more than 300 subsidiary
corporations, in a web of entangling alliances with each other, many of which were
seemingly planned, created, and manipulated by lawyers expressly retained for the
purpose of concealment or deception. Ordinarily in investigations of this character
evidence is easily adduced by placing the witnesses upon the stand, but in this in-
vestigation the witnesses other than the accountants for the commission were in the
main hostile, and with few exceptions their testimony was unwillingly given.
The result of our research into the financial workings of the former management of
the New Haven system has been to disclose one of the most glaring instances of malad-
ministration revealed in all the history of American railroading. In the course of the
investigation many instances were uncovered of violation of the laws of different
States. As these were not understood to be pertinent to our inquiry under the Senate
resolution we did not follow them into their details. As pointing to violations of State
laws, we have turned over the evidence concerning local occurrences in New York
City to the district attorney for the proper district, and the testimony relating to
irregularities in Massachusetts and Rhode Island have been laid before the proper
authorities of those States. The commission has also furnished the Department of
Justice with a complete record of the testimony.
The difficulties under which this railroad system has labored in the past are internal
and wholly due to its own mismanagement. Its troubles have not arisen because of
regulation by governmental authority. Its greatest losses and most costly blunders
were made in attempting to circumvent governmental regulation and to extend its
domination beyond the limits fixed by law.
The subject matter of this inquiry relates to the financial operation of a railroad
system which, on June 30, 1903, had a total capitalization of approximately $93,000,000,
of which $79,000,000 was stock and $14,000,000 bonds. In the 10 years from June 30,
1903, this capitalization was increased from $93,000,000 to $417,000,000, exclusive
of stock premiums, or an increase of $324,000,000. Of this increase approximately
$120,000,000 was devoted to its railroad property and was espended for betterments
and equipment. This leaves the sum of $204,000,000, which was expended for opera-
tions outside of its railroad sphere. Through the expenditure of this sum this railroad ·
system has practically monopolized the freight and passenger business in five of the
States of the Union. It has acquired a monopoly of competing steamship lines and
trolley systems in the section which it serves. The financial operations necessary for
these acquisitions, and the losses which they have entailed, have been skillfully con-
cealed by the juggling of money and securities from one subsidiary corporation to
another.
SIGNIFICANT INCIDENTS.
Marked features and significant incidents in the loose, extravagant, and improvident
administration of the finances of the New Haven as shown in this investigation are the
Boston & Maine despoilment; the iniquity of the Westchester acquisition; the double
price paid for the Rhode Island trolleys; the recklessness in the purchase of Connecti-
cut and Massachusetts trolleys at prices exorbitantly in excess of their market value;
the unwarranted expenditure of large amounts in "educating public opinion"; the dis-
position, without knowledge of the directors, of hundreds of thousands of dollars for
influencing public sentiment; the habitual payment of unitemized vouchers without
any clear specification of details; the confusing interrelation of the principal company
and its subsidiaries and consequent complication of accounts; the practice of financial
legerdemain in issuing large blocks of New Haven stock for notes of the New England
Navigation Co., and manipulating these securieties back and forth; fictitious sales of
New Haven stock to friendly parties with the design of boosting the stock and unload-
on the public at the higher "market price"; the unlawful diversion of corporate
funds to political organizations; the scattering of retainers to attorneys of five States,
who rendered no itemized bills for services and who conducted no litigation to which
the railroad was a party; extensive use of a paid lobby in matters as to which the di-
rectors claim to have no information; the attempt to control utterances of the press
by subsidizing reporters; payment of money and the profligate issue of free passes to
legislators and their friends; the investment of $400,000 in securities of a New England
newspaper; the regular employment of political bosses in Rhode Island and other
States, not for the purpose of having them perform any service, but to prevent them,
as Mr. Mellen expressed it, from "becoming active on the other side'; the retention by
John L. Billard of more than $2,700,000 in a transaction in which he represented the
New Haven and into which he invested not a dollar; the inability of Oakleigh Thorne
to account for $1,032,000 of the funds of the New Haven intrusted to him in carrying
out the Westchester proposition; the story of Mr. Mellen as to the distribution of
$1,200,000 for corrupt purposes in bringing about amendments of the Westchester and
•
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
923
·
Port Chester franchises; the domination of all the affairs of this railroad by Mr.
Morgan and Mr. Mellen and the absolute subordination of other members of the board
of directors to the will of these two; the unwarranted increase of the New Haven
liabilities from $93,000,000 in 1903 to $417,000,000 in 1913; the increase in floating
notes from nothing in 1903 to approximately $40,000,000 in 1913; the indefensible
standard of business ethics and the absence of financial acumen displayed by eminent
financiers in directing the destinies of this railroad in its attempt to establish a monop-
oly of the transportation of New England. A combination of all these has resulted in
the present deplorable situation in which the affairs of this railroad are involved.
Pages 35 to 41 of the report give a history of the celebrated trans-
action in which 18 miles of railroad, in which Directors J. P. Mor-
gan, sr., William Rockefeller, and Mr. Miller were interested was
unloaded by them on the railroad company at a meeting kept secret
from the rest of the board of directors, at which meeting President
Mellen presided. This property proved to be more than worthless
to the stockholders, having been operated at an annual loss of over
$1,000,000, and for which their directors forced them to pay the
vast sum of $36,434,173.25.
The principal accounts respecting this transaction were kept in
the office of J. P. Morgan & Co. in such a manner as to hide the pur-
poses for which moneys were received or expended, under the title
of "Special Account No. 2." Part of the accounts were kept by
another banker interested in the transaction named Oakleight Thorne,
respecting which the commission report says:
It appeared during the progress of this investigation that the personal records of
Thorne which might have shown the details of these disbursements had been burned
by him in January, 1912.
This transaction is all the more sensational since the president of
the road was not permitted by the directors, who robbed it to the
extent of millions of dollars, to know who got the money.
Another startling fact, the exact counterfeit of which may perhaps
often have occurred in the history of American railroading, but never
before known and published, is revealed in this investigation respect-
ing this road. The record shows conclusively that President Mellen
of the road was practically appointed, or selected, at the instigation
of J. P. Morgan, sr., and when this "president" desired to ascertain
the facts respecting the transaction in which the road was robbed
by a conspiracy of Mr. Morgan with three other directors without
the knowledge of the rest of the board, "President" Mellen was not
permitted by Mr. Morgan to know (as he expressed it over his official
signature as disclosed in the record) "Who got the money for the
truck turned over.'
The following is from the report:
THE NEW YORK, WESTCHESTER & BOSTON RAILWAY CO.
The Westchester is a story of the profligate waste of corporate funds. The road was
not necessary as a part of the New Haven system. It parallels other lines already
owned by the New Haven and traverses territory which the New Haven already
served. That it was recognized as unnecessary by the New Haven itself at its incep-
tion is evidenced by the fact that the New Haven sought an injunction to restrain the
construction of this road on the specific ground that it was not in answer to any public
necessity and paralleled its already existing line.
The enormous sum of $36,434,173.25 was expended for a road only 18.03 miles in
extent, which is being operated at an annual loss of approximately $1,250,000, and
which will have to increase its earnings four and one-half fold before it can pay its
operating expenses and fixed charges. It is inconceivable that this enterprise could
have been entered into by the New Haven as a result of the mandates of good judgment
and proper railroading.
924
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
The Westchester acquisition was planned and executed by a special committee of
the board, consisting of directors Morgan, Rockefeller, and Miller, with President
Mellen as chairman. The vote appointing this committee "on proposed competition
between the Connecticut State line and Harlem River, with power," does not disclose
an intention to authorize the buying of charters and promotion securities and the
building of a new railroad, much less one at a cost of $36,000,000. It is ambiguous
and was evidently intended to conceal a secret purpose. The full board was not
taken into the confidence of those directors who wanted these securities purchased,
and no report was ever made by this committee placing the situation as they found it
before the board.
The first information the board had concerning the extravagant acquisition of
Westchester and Port Chester securities was on November 8, 1907, when this com-
mittee made its only report. It was then learned that $11,155,000 had been ex-
pended in obtaining control of these two insolvent promotion schemes, and that this
expenditure carried with it an obligation to construct two railroads, under franchises
of doubtful validity, paralleling the existing line of the New Haven.
There is no record that this committee ever required from these parties an itemized
statement of the disbursements they made of the funds advanced from "special
account No. 2"; nor was any such statement ever rendered. No vouchers were taken.
Special account No. 2 on the books of J. P. Morgan & Co. shows nothing more than the
lump sums received from the New Haven and the disbursement of the same to Thorne
and later to the Millbrook Co., on notes of the respective payees. It appeared during
the progress of this investigation that the personal records of Thorne which might have
shown the detail of these disbursements had been burned by him in January, 1912.
In a letter of October 30, 1906, to C. S. Mellen from the attorney, Francis Lynde
Stetson, who was representing all the parties in the deal, namely, J. P. Morgan & Co.,
the Millbrook Co., Perry & Thorne, and the New York, New Haven & Hartford Rail-
road Co., there is the following language which is significant as to the course the
committee was pursuing:
"Referring to the conversation this morning between yourself, Mr. Thorne, and
myself, it has occurred to me that it is possible that Mr. Thorne's purchases and even
his payments may have to begin before he shall have ascertained the validity of the
two principal charters which he is to acquire, and that in the event of the develop-
ment subsequently of their invalidity it might be that the money spent would be
money lost."
The report of this committee, however, was unanimously "approved, ratified, and
confirmed'' at the meeting of the board of November 8, 1907, at which the following
directors were present: Mellen, Rockefeller, Morgan, Milner, Thayer, Brooker, Brush,
Warner, Cheney, Miller, Skinner, Barney, Taft, Wittemore, Elton, Hemingway,
Robertson, Robbins, and Parker.
After this meeting of the board at which this undetailed report was ratified, Mr.
Mellen went to see Mr. Morgan and requested more information as to the expenditure
of the amounts. According to Mr. Mellen's evidence, Mr. Morgan asked him if he
knew who wrote the report, and upon Mr. Mellen's reply, "Yes; Mr. Stetson wrote
it," Mr. Morgan asked him, "Do you think you know more than Stetson ''? Mr.
Mellen admitted he did not, and apparently acquiesced, but took the precaution to
write upon the back of his report, while still smarting under the humiliation of the
interview with Mr. Morgan, the following words:
"The trouble with this is there is nothing to show who got the money for the truck
turned over. I don't like the looks of it, and I don't see why the matter should not
be made plain. If I had the stock and sold it, I should expect others would state
they bought it of me; but that don't seem to have been the disposition here.
I never
have known the first thing about who originally held the securities, what they were
sold for, and no one has thought I was entitled to know. Perhaps I am not. I would
feel better if there were at least a disposition to let me know something more than
appears in the record.
"C. S. M."
*
*
*
*
*
*
There were just thirteen things that had to be done, according to Mr. Mellen, to get
the Westchester out of its franchise difficulties, and it is significant that all amendments
to the franchises were obtained, and the sequence was that the New Haven, in addi-
tion to these things, received 30,431 of the 34,053 outstanding shares of the New
York, Westchester & Boston Railroad Co. stock, which Mr. Mellen testified was not
worth 10 cents a pound. The testimony is somewhat occult, but the character of the
transaction is no less certain. This money was used for corrupt purposes and the
improper expenditures covered up by the transfer to the New Haven of these worthless
securities.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
925.
·
The committee had kept minutes of its meetings, which were filed with its report,
but these show little beyond the authorizations to the president of the New Haven
to deposit large amounts from time to time with J. P. Morgan & Co. in an account
which appeared on the books of that banking firm as "special account No. 2." The
committee made a contract with Oakleigh Thorne and Marsden J. Perry, both presi-
dents of banks which were large creditors of the companies whose securities were to
be acquired. The contract authorized and required Thorne and Perry to purchase
for the New Haven 66 per cent of the stock of the several companies, and when this
was done they were to construct the railroad. The contract is remarkable in that no
limit is placed on the amount that might be paid for the securities or expended in
building the road, but these parties were to receive, as commission for their services,
7 per cent of the amount expended.
*
*
*
To this figure, however, must be added the $14,090,008.18 expended before the
construction began, making a total of $36,434,173.25, which yields the remarkable
per-mile cost of $2,020,752.81.
In providing the money for this construction bonds to the extent of $17,000,000,
sold at a discount of $1,200,000, were issued on the property, bearing the guaranty of
the New Haven. This guaranty has meant a drain on the New Haven resources of
$1,250,000 per annum, since the earnings of the Westchester fall this far short of paying
the fixed charges on the property. The president of the Westchester testified that the
earnings of his road would have to increase 4½ times before the Westchester will become
self-sustaining.
What could have been the motive for unloading the Westchester upon the New
Haven at the expense of the stockholders of the latter must be left largely to con-
jecture. The one accomplished result, however, of the Westchester transaction was
the stifling of possible competition into New York City from New England.
The blame for the Westchester rests squarely upon the directors of the New Haven
road. Some are guilty for acts committed; others, the greater number, for their
failure to act. They are alike culpable and responsible to the stockholders.
Maladministration costs the stockholders over $20,000,000.-On pages
55 and 56 is the following:
THE NEW ENGLAND INVESTMENT & SECURITY CO.
This company and its affairs constitute a striking illustration of the deliberate
attempt to entangle the New Haven with street railways which has recently been
publicly avowed by former president Mellen.
* * *
The Supreme Judicial Court of Massachusetts (198 Mass.. 413) decided in substance
that this company was not separate and independent of the New Haven, but was a
mere device of that company to continue to hold stock in Massachusetts trolleys in
violation of the laws of that State.
The testimony shows that Charles S. Mellen held control of the common stock of
this company through James B. Brady, as a dummy, until quite a recent period.
These shares have been transferred to Sanderson & Porter, a firm of railroad con-
tractors and builders, who since 1902 have from time to time been engaged in opera-
tions for the New Haven.
It seems quite clear, in view of the relations of this firm with the New Haven in
the past, that this stock is now held by Sanderson & Porter for the New Haven.
All profits which this company has made in the past have been the result of trans-
actions in the purchase and sale of securities in which the New Haven had title or
large interests, not in the open market, but under circumstances which would have
been collusive and fraudulent if this security company was in fact an independent
organization entirely separate from the New Haven.
On its note there were turned over to it at one time $9,918,145.65 of securities bought
and paid for with New Haven funds.
The inside facts as to its dealings show a continued operation in violation of Massa-
chusetts laws and in flagrant violation of the injunction issued by the highest court
of that State.
A summary of the operations of the New England Investment & Security Co., as
recorded on its books appears in the appendix, identified as Exhibit D.
Juggling the accounts to increase capitalization and hide irregulari-
ties. It has always been a favorite device of the American railroads
to print additional certificates of capital stock which represent no real
value, and sell them to the public; and in other cases by the juggling
926
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
back and forth of the assets and accounts to suit the private purposes
of directors and financiers, to form an excuse for increased rates.
The Interstate Commerce Commission refers to these methods in the
following extracts from pages 57-58 of the report.
QUESTIONABLE METHODS EMPLOYED TO INCREASE THE AMOUNT OF CAPITAL STOCK.
Increases in capital stock of the New York, New Haven & Hartford Railroad Co.
have been made upon the basis of transfers of assets from one subordinate company
to another.
The steamship properties of this system at one time were held by the New England
Navigation Co., approximating a cost of $11,500,000. This latter company in 1907
transferred the title to these steamship properties to the Consolidated Railway Co. at
a value of $20,000,000. The Consolidated Railway Co. thereupon increased its capital
stock $20,000,000. The Consolidated Railway Co. was then merged with the New
Haven, and the stock of the latter company increased $30,000,000, $20,000,000 of
which went to the New England Navigation Co., and placing in its treasury by this
transaction $20,000,000 Consolidated Railway stock, which by the merger became
New Haven stock, with a market value of over $30,000,000. It was this stock with
which control of the Boston & Maine Railroad Co. was secured.
MANIPULATION OF ACCOUNTS.
Proper accounting demands that the records of a company should reflect accurately
the transactions relating to the matter recorded, and where accounts fail to reveal a
true history of the transactions it can be due to but one of two causes-carelessness or
design.
Several transactions appear of record which show that by no stretch of imagination
can the irregularity of recording be classified as due to carelessness; the following are
illustrations:
In February, 1911, the New York, New Haven & Hartford Railroad purchased
23,520 shares of the Rutland Railroad Co.'s stock from the New York Central &
Hudson River Railroad Co., giving in exchange therefor its check upon the Farmers'
Loan & Trust Co. in the sum of $2,364,977.15. No entries can be found in the record
of the New Haven Co. which reveal this transaction. The stock thus acquired was
on the same day, with a check for $135,022.85, delivered to the New England Navi-
gation Co. in exchange for its note of $2,500,000. The effect of the recording of this
transaction is that the sum paid the New York Central for the stock shows as a cash
advance to the New England Navigation Co.
February 14, 1910, the New England Navigation Co. sold, through the firm of J. P.
Morgan & Co., 50,000 shares of New York, New Haven & Hartford Railroad Co. stock
at a price of 157 net, the cash proceeds amounting to $7,849,000. A check was
remitted by J. P. Morgan & Co. for $5,162,203.02 to the New England Navigation Co.,
and 16,744 shares of Worcester, Nashua & Rochester stock were acquired for the
account of the New England Navigation Co. at a total cost of $2,686,796.98.
Dummy companies formed to hide the identity of railroad officials as
to their complicity in illegal acts and frauds on the stockholders.-The
following is from pages 45, 60, and 61 of the official report:
Witnesses who were officers of some of these companies appeared before the com-
mission and testified that they acted as "dummies" under the directions of Robbins
and of attorneys selected by him. Some of them handled, without any knowledge
of the nature or purpose of the transactions, checks approximating $3,000,000.
*
*
*
*
*
DUMMY COMPANIES.
*
The frequency with which dummy corporations and dummy directors appear
in this record leads to the conclusion that some one high in the councils of the New
Haven had an obsession upon the subject of the utility of such sham methods. The
directors of the Billard Co. confessed that they were dummies and knew nothing of
its operations. Why men of respectability and standing as these appear to be should
lend their names as dummies passes comprehension.
In the organization of one of the steamship companies the young lady stenographer
was made president; and a youth of 21 years of age by the name of Grover Cleveland
Richards was selected as treasurer of another company.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
927
Clerks and irresponsible persons were drawn upon to supply the demand for dum-
mies in the financial joy riding by the management of the New Haven. Mellen's
stock in the New England Investment & Secruities Co. was held by James B. Brady,
who testified that he was merely a dummy for Mr. Mellen. Director Skinner's stock
in this same company was held by a relative and a bookkeeper in his office. Thus,
throughout the entire story of deception, the New Haven management vainly en-
deavored to hide the true facts behind these dummy individuals and dummy cor-
porations.
As a matter of law, such devices are feeble and puerile, but if the master financiers
behind these New Haven transactions could use these sham methods and thus give
their indorsement to the availability of such crooked schemes to cover the true sub-
stance and fact of financial transactions it indicates a low state of financial morality.
No condemnation can be too severe to apply to the frequent use of these companies
by the New Haven.
While in many States there are safeguards established by law, in other States there
is such a prodigality in the creation of corporations as to greatly prejudice the interests
of investors, creditors, and the public welfare generally.
While stock in the New Haven road was listed on the New York Stock Exchange a
large portion of its funds were invested in "blue sky" corporations, the officers of
which knew nothing of the purposes or assets of the companies of which they were
managers or officers.
How the officials profited at the expense of their roads by contracts
with companies in which they or their friends were financially interested.
The records of the New Haven, as well as the other railway systems.
investigated, invariably show that the officials did not purchase their
supplies in a businesslike manner and at reasonable prices, but at
extravagant prices in their own interest without regard to that of
the stockholders. As this was the general custom, and the history
abounds with many transactions, a single reference must suffice from
page 61 of the report.
LARGE PURCHASES WITHOUT BIDS.
Purchases of cars and coal are two large expenditures that railroads make. The
New Haven purchased cars almost exclusively from James B. Brady without com-
petition and to the extent of some $37,000,000. Mr. Brady, as a witness, made no
secret of his generosity to the officials with whom he had business. His methods
were justified by him on the ground that the officers of the New Haven were old
friends.
Locomotives were purchased from a company in which a director of the New Haven
was also a director. Many supplies obtained by the New Haven were from companies
having directors who were also directors of the New Haven.
Corporate economy is not practicable where gifts and obligations arising from
friendship tend to obscure official duty.
The following extract respecting the railroads' expenditures for
controlling politics is found on pages 61–62 of the report:
POLITICAL CONTRIBUTIONS.
The New Haven Railroad had no politics. It was Democratic in Democratic States
and Republican in Republican States. As Mr. Mellen testified, its effort was always
to "get under the best umbrella.'
""
Payments made for political purposes totaled a large sum.
For instance, in 1900, $50,000 was contributed by the New Haven for campaign
purposes through J. P. Morgan & Co. No proper and complete voucher for this pay-
ment appears on the books of the New Haven Co.
In 1904 a payment of $50,000 was made through Mr. Mellen for political purposes.
This was secretly done and not reported to the directors or stockholders or in any
manner made public.
No public-service corporation may rightfully use corporate funds to promote a
political cause or to support a political candidate or a political party.
A corporation as such has no political principles to maintain and no political candi-
dates to support.
928
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
+
1
The revenues of a public-service corporation are for the most part derived from the
exercise of the right delegated to it by the sovereign power to tax the public by fixed
rates established in accordance with law. Shippers and the traveling public may be
presumed to be divided in political opinion. Corporate revenue derived by public
tax from men of one political conviction can not be used to support the fortunes of a
candidate or party of contrary political principles.
Regardless of the injustice to stockholders and travelers belonging to another party
which results from such use of funds, the withdrawal from corporate use and the
diversion to political use is illegal and indefensible.
THE STEAMSHIPS.
The New Haven, from time to time, had felt the harassing effect of competition
from the steamship lines that plied between the several larger cities that it served.
Restless of any limitation of his power, President Mellen proceeded to acquire the
steamship lines and thereby stifle this interference with the New Haven properties.
The Hartford & New York Transportation Co. cost the New Haven $2,538,916.78;
the Eastern Steamship Corporation cost $4,200,000; the Merchants & Miners' Trans-
portation Co. cost $5,774,500; the New Bedford, Marthas Vineyard & Pawtucket
Steamboat Co. cost $141,700; the New England Steamship Co. cost $12,100,000; the
Maine Steamship Co. $17,300, or a total of $24,772,416.78.
The testimony shows that the physical valuation of the properties acquired as a
result of these outlays approximates something like $10,000,000. The New Haven
advises that it has recently disposed of its holdings in the Merchants & Miners' Trans-
portation Co. at a loss of $3,594,500.
These steamship lines were not acquired by the New Haven openly, but covertly
and by devious methods. Dummy companies, and dummy officers and directors
were used in financial maneuvering that resulted in the New Haven controlling
these steamships.
In connection with these steamship purchases it was necessary to have piers. The
record shows money payments in connection with pier leases which were unmis-
takably improper, and these payments were covered up by being charged on the
books of other companies to the New Haven under such headings as "repairs on
steamers.
There were payments to one John Hall McKay of many thousands of dollars for
which no itemized vouchers were given. Mr. McKay left for Europe after this inves-
tigation was commenced, and his evidence could not be secured. These pier leases
in the city of New York are controlled by public officials, as the municipality owns
the piers and arrangements for the leases had to be made through these officials. But
because of the methods employed to conceal these expenditures by increases of capital
stock and otherwise, it has been impossible to give any total amount of these payments.
After Mr. Mellen had obtained control of every boat line of any importance in New
England he suddenly changed his attitude when the public discovered the real
ownership. It was then that he proposed and urged that they be disposed of, but
in this he was overridden by his board.
Millions wasted in the purchase at extravagant prices of trolley lines
and steamship companies in which transactions a United States Senator
and railroad directors profited at the expense of their stockholders.—
The following is from pages 41-44 of the report:
RHODE ISLAND TROLLEYS.
The purchase of the Rhode Island trolleys was another instance of millions wasted
in acquiring properties that bring an annual deficit instead of a surplus, and con-
stitute a liability instead of an asset in the New Haven system.
*
*
*
*
*
*
*
The evidence shows that the Rhode Island trolley transactions were deliberately
entered into with a full knowledge of the large deficit that they would bring, and
with the determination to acquire trolley control in Providence regardless of expense.
A committee of the board of directors of the New Haven had been appointed for
the purpose of looking into the Providence trolley situation, with a view of pur-
chasing that property, and this committee, after considering the proposition, reported
adversely. Not content to abide by this action of his board, Mr. Mellen, after some
six months, revived the matter. This was done after a conference between Mr.
Mellen and former Senator Nelson W. Aldrich, who was largely interested in the
United Traction & Electric Co., the largest lessor company.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
929
The United Gas Improvement Co., of Philadelphia, that controlled this property
under lease, had capitalized the future hopes of the proposition into a holding com-
pany known as the Rhode Island Securities Co. and had issued $19,899,000 of deben-
tures, which represented an investment of approximately only $6,000,000. The
difference in these amounts was, as Mr. Mellen testified, merely capitalized water.
Not to be deterred by extravagant expenditure, Mr. Mellen undertook to exchange
the debentures of the Providence Securities Co., which he had created for the purpose,
for these debentures of the Rhode Island Securities Co., and to add thereon the guar-
anty of the New York, New Haven & Hartford Railroad Co., both as to principal and
interest. The result of the transaction was to enable the United Gas Improvement
Co. to realize par value on these securities based merely upon lively expectation of
future possibilities, and thereby immediately placed the burden of the watered stock
upon the backs of the New Haven stockholders.
·
The millions that were made from this transaction did not come through magic, but
were brought into existence at the expense of the stockholders of the New Haven,
upon whom and the public the yoke of giving value to these securities ultimately
rested, and the New Haven stock was diluted to the extent of the water thus added.
This gas company also owned some Connecticut trolley lines, and it was made a further
condition of the Rhode Island trolley acquisition that the New Haven take over these
properties.
When the details had been worked out by Mr. Mellen for the assuming of this addi-
tional burden the board of directors without question acquiesced. Mr. Mellen testified
that these Connecticut trolleys represented a payment of about $10,000,000 more than
their value.
This transaction seems such an extravagant purchase as makes it a matter of interest
just who owned the securities of the Rhode Island Securities Co. This information
could be furnished from the stock books of that company, but during the progress of
this investigation it was learned that these books had also been burned. A detailed
report on the Rhode Island trolleys is to be found in the appendix made a part hereof,
Exhibit B.
The Rhode Island and Connecticut trolley ventures are further evidences of the
prodigality in the expenditure of the money of the New Haven stockholders in carrying
out an unlawful policy of transportation monopoly.
Losses of $60,000,000 to $90,000,000 due to waste, mismanagement,
and peculations by railroad officials, and attempts to control politics, the
press, and public opinion.—The following is from pages 63–70 of the
official report:
There is the additional loss growing out of the unfortunate Billard transaction of
$2,748,700 unless John L. Billard is compelled, as he should be, to make restitution.
In addition there have been large expenses incurred in litigation, in procuring
legislation, and in a vain attempt to stem the tide of adverse popular opinion.
*
*
*
*
*
*
*
The annual deficit to the New Haven from bond interest, interest on other obliga-
tions, and taxes resulting from the Westchester venture amounts to $1,179,243.92.
When the operating deficit is added, the total annual loss to the New Haven is
$1,657,241.99.
*
*
*
*
*
*
These annual losses will, to a large extent, recur from year to year for an indefinite
period, and therefore represent large future losses.
From all of the foregoing and from a careful consideration of the method in which
expenditures, not specified herein, have been made, it is submitted that a reasonable
estimate of the loss to the New York, New Haven & Hartford Railroad Co. by reason
of waste and mismanagement will amount to between $60,000,000 and $90,000,000.
The splendid property of the New Haven Railroad itself will be called upon for
many a year to make up the drain upon its resources resulting from the unpardonable
folly of the transactions outside the proper field in which stockholders supposed their
moneys were invested.
But honesty and efficiency of management of this property as a railroad only will
undoubtedly, in time, restore its former standing.
EVIL OF INTERLOCKING DIRECTORATES.
A system of interlocking directorates has grown up and flourished in the past few
years which has brought about combinations and intercorporate relationships not
conducive to the public welfare. On the New Haven board of directors there was a
40958-18-59
930
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
representative of the Pennsylvania Railroad, which railroad owned 35,000 shares of
New Haven stock; there was a representative of the New York Central, which owned
35,000 shares; there was a representative of insurance interests that owned 35,000
shares and a representative of an express company that had a contract with the rail-
road; there were directors who were also directors of the Standard Oil Co., the United
Steel Corporation, the Pullman Co.; in fact, every other interest seemed better rep-
resented on the New Haven board than the average stockholder's interest.
After an exhaustive investigation of this great railway property
the commission summed up its findings as follows:
NEW HAVEN MONOPOLY CORRUPT.
:
This investigation has demonstrated that the monopoly theory of those controlling
the New Haven was unsound and mischievous in its effects. To achieve such monop-
oly meant the reckless and scandalous expenditure of money; it meant the attempt
to control public opinion; corruption of government; the attempt to pervert the
political and economic instincts of the people in insolent defiance of law. Through
exposure of the methods of this monopoly the invisible government which has gone
far in its efforts to dominate New England has been made visible. It has been clearly
proven how public opinion was distorted; how officials who were needed and who
could be bought were bought; how newspapers that could be subsidized were sub-
sidized; how a college professor and publicists secretly accepted money from the New
Haven while masking as a representative of a great American university and as the
guardians of the interests of the people; how agencies of information to the public
were prostituted wherever they could be prostituted in order to carry out a scheme
of private transportation monopoly imperial in its scope.
DIRECTORS CRIMINALLY NEGLIGENT.
It is inconceivable that these wrongs could have gone on without interference if the
members of the board of directors had been true to the faith they owed the stockholders.
A number of directors appear in many instances to have voted without knowledge and
to have approved the expenditure of many millions without information. According
to the testimony of some of the directors they merely approved what had been done by
some committee or by some officer of the company. The directors' minutes reveal
that it was largely a body for ratification and not authorization, as the law intended a
board of directors should be. None of the directors would have been so careless in
the handling of his own money as the evidence demonstrates they were in dealing
the money of other people. The directors actively or passively acquiesced in the
efforts of the Mellen-Morgan-Rockefeller régime to extend the domination of this
corporation over the whole transportation field in New England.
If these directors who were faithless to their stewardship were held responsible in
the courts and at the bar of public opinion for the failure to do those things they should
have done, the lesson to directors who do not direct would be very salutary.
Most of the directors of the New Haven accepted their responsibilities lightly.
They failed to realize that their names gave confidence to the public and that their
connection with the corporation led the public to invest. When these directors were
negligent and serious losses resulted therefrom they were guilty of a grave dereliction
of duty and a breach of trust that was morally wrong and criminal in its fruits.
-
Directors should be made individually liable to civil and criminal laws for the
manner in which they discharge their trust. A corporation can be no better or worse
than those who operate it. It should be just as grave a crime to plunder stockholders
or the public through a railroad corporation as it is to personally rob an individual.
SUBSIDIARY CORPORATIONS CONDEMNED.
It was found in the investigation of the New Haven system that there were 336
subsidiary corporations, and the books of the New Haven road proper reflect only a
small part of the actual financial transactions of the railroad. Many of these sub-
sidiary corporations served no purpose save an evil one. They were used to cover up
transactions that would not bear scrutiny and to keep from the eyes of public officials
matters that were sought to be kept secret. The commission should have the power
to examine not only the books, records, papers, and correspondence of interstate
carriers but of subsidiary companies as well.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 931
REMEDY IN PUBLIC CONSCIENCE AND LAWS.
The insuring of honesty throughout the management of the great railroads of the
country is a most important question before the people to-day; and only when, through
exposure of wrongdoing and an awakened public conscience, coupled with effective
laws, this result is produced may railroading be placed upon the high level that it
should occupy. The revelations in this record make it essential for the welfare of the
Nation that the reckless and profligate financiering which has blighted this railroad
system be ended, and until this is fully done there will be no assurance that the story
of the New Haven will not be told again with the stockholders of some other railroad
system as the victims.
THE CHICAGO, ROCK ISLAND & PACIFIC RAILWAY CO.
Having reviewed some of the principal transactions of the New
York, New Haven & Hartford Railroad Co. in defrauding its stock-
holders and the public, extracts will now be submitted from the
official report of the Interstate Commerce Commission, No. 6834,
dated July 31, 1915, entitled "In re Financial Transactions, History,
and Operation of the Chicago, Rock Island & Pacific Railway
Company."
Owing to the limits of space available in this statement to Congress,
and having gone into the transactions previously investigated in
considerable detail, we will content ourselves with brief extracts
from the official report just mentioned, which, when read in full,
discloses a duplication of the illegal acts of the other systems investi-
gated, together with some new details respecting the salaries of its
officers and the manner in which they abstracted, for their private
uses, from the company treasury large sums without accounting
therefor. The same system of false accounting, extravagance, waste,
and the use of the stockholders' money for controlling politics and
the press and for other illegal acts is found in the official report of the
commission.
The result of these illegal practices was to reduce the value of the
stock, which in 1902 was $200 a share, to $20 in 1914, and to put the
road in the hands of a receiver-all in the private interest of a
minority of its directors, without the knowledge of the rest of the
board, for the purpose of further exploiting the stockholders.
Among the acts so startling and sensational as to vie in interest
with the wildest fiction may be mentioned the following:
The chairman of the executive committee, L. F. Loree, in addition
to a salary of $75,000 per annum, demanded and received a contract
giving him a present or "bonus" in an additional sum of $500,000
after the expiration of his five-year contract. Owing to trouble which
arose between him and the rest of the board after only 10 months'
service, he was given a "bonus" of $450,000 to quit the job, so that
his compensation for 10 months exceeded $500,000.
A majority of the officers took money from the company's treasury
whenever they desired without warrant of law or without specifying
the purpose the money was to be used for. A stockholder who
brought suit to secure an investigation and an accounting of the acts
of the directors was paid $217,000 to relinquish his suit in order to
keep these facts from public knowledge.
The following extracts from the official report of the commission
giving a sketch of the system, the methods by which the directors
squandered the funds of the stockholders in extravagance, specula-
932
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
•
tion, and dishonesty; and the conclusions of the Interstate Commerce
Commission are found on pages 43 to 61 of the report.
In 1902 the main line of the Chicago, Rock Island & Pacific Railway Co. extended
from Chicago to Denver, with branch lines to St. Paul, Minneapolis, and Kansas City.
The territory served is one of the richest and most prosperous in the country and the
system's ramification of branch lines insures to it a large volume of tonnage. It was
then thriving and its prospects were promising, its stock selling in the markets of the
world at more than $200 a share. In 1914 the shares had fallen to $20 and the road is
now in receivers' hands. The evidence shows that the earnings of the railway com-
pany have steadily increased, and that in 1914 they were the largest in its history.
On June 4, 1902, the capital stock of the railway company was increased to $75,000,000
and the board authorized President Leeds to sell to certain individuals portions of this
increased stock at par, although at the time the stock was quoted on the market above
175.
The original articles of consolidation provide that the maximum of indebtedness
to which the company might subject itself should not exceed two-thirds of its out-
standing capital stock. This maximum has been increased from time to time until
the funded debt of the railway on June 30, 1914, was $238,746,000, an increase of
nearly $175,208,000 over the amount outstanding on June 30, 1901. On June 30, 1914,
the total capitalization of the railway company was $313,741,000. Of this amount only
$75,000,000, or 28.73 per cent, was capital stock on which dividends might or might
not be paid, according as the net earnings of the company might or might not warrant.
The remaining 71.27 per cent of the total capitalization consisted of interest-bearing
debt, including $3,500,000 of short-term loans, on which interest was required to be
paid regardless of earnings.
In 1902 plans were laid by five directors to form a syndicate and
holding company and secure control of the road to plunder and to
wreck it.
The following is from the official record:
SYNDICATE CONTROL.
In 1901 Daniel G. Reid, W. H. Moore, J. H. Moore, and W. B. Leeds purchased
about $20,000,000 of stock of the company, and by the use of proxies they soon became
members of the board of directors, W. B. Leeds being made president and D. G.
Reid chairman of the executive committee. This syndicate procured the selection
of other members of the board of directors, notably F. L. Hine, George McMurtry, and
George T. Boggs, each of whom appears to have acted and voted in accordance with
the wishes of the members of the syndicate. One other director stated that he knew
but little of what was being transacted in the affairs of the railway company, and that
he was a member of so many other boards of directors that he had no opportunity to
examine into things for himself, but had to take the word of those in authority. Thus
the syndicate controlled the board through the directorships held by themselves and
by those subject to their wishes.
ORGANIZATION AND USE OF HOLDING COMPANIES.
In July, 1902, the syndicate organized two holding companies, the Chicago, Rock
Island & Pacific Railroad Co. of Iowa, and the Rock Island Co. of New Jersey. The
railway or operating company will be referred to hereinafter as the railway company,
and the holding companies as the Iowa company and the New Jersey company,
respectively. The St. Louis & San Francisco Railroad Co. will be referred to as the
Frisco.
The directors paid a large sum to have a suit suppressed which
would have exposed their illegal transactions. Upon page 46 occurs
the following:
A significant transaction at this time is that growing out of the action of C. H. Venner,
a stockholder of the railway company. He made demands upon the officers of the
railway company in December, 1902, and in January, 1903, for a list of its share-
holders. Being ignored, he instituted on January 31, 1903, a proceeding in a State
court of Illinois to enjoin the organization of the holding companies and the exchange
of railway company stock for their securities. In February and March, 1904, the
railway company paid Venner $291,000, ostensibly in consideration of his delivery
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
933
to it of securities of the New Jersey company and of the railway company valued
at $91,000 and stock of the Nebreaska Central Railway and of the Nebraska Con-
struction Co. of a nominal value of $200,000. Thereupon the suit to restrain the
holding companies' plan was dismissed. Neither the Nebraska Central Railway Co.
nor the Nebraska Construction Co. had any road or other tangible assets, and their
stock is therefore considered to be without value. The conclusion is obvious that the
payments to Venner were in consideration of his refraining from further prosecuting
in the courts his opposition to the syndicate plans. The railway company incurred
in this litigation expenses amounting to about $17,000.
Compensation and peculations of officers who defend salaries of
$50,000 to $75,000 for themselves, but assign the wages of clerks,
telegraph operators, conductors, and brakemen as the reason for the
financial troubles of the road.-On pages 47-50 is the following:
SALARIES OF AND CONTRIBUTIONS TO OFFICERS AND DIRECTORS.
The salaries paid to some of the principal officers at various periods were as follows:
H. U. Mudge, president..
Per annum.
$60,000
L. F. Loree, chairman executive committee (one-half to be paid by the Frisco) 75,000
R. A. Jackson, vice president and general solicitor..
R. R. Cable, member of board of directors..
W. B. Leeds, president....
B. L. Winchell, president..
B. F. Yoakum, chairman executive committee.
Daniel G. Reid, chairman board of directors.
C. H. Warren, first vice president......
50,000
32,000
32, 000
40, 000
30,000
32,000
35,000
W. G. Purdy, upon his retirement from the presidency, was given two years' salary
at $22,500 per annum.
Mr. Mudge, president of the railway company and now one of the receivers, asserted
that the troubles of the railway were in a measure due to increase of wages and gov-
ernmental regulations. When asked what wages he referred to as being increased
he pointed out the wages of clerks, telegraph operators, conductors, and brakemen.
While he regarded the wages of these minor employees as having partially sapped
the financial strength of the railway, he declared that the salaries paid to the higher
officers of the company had no appreciable effect on its expenses.
D. G. Reid, upon the witness stand, was interrogated and answered as follows:
"Question. Mr. Reid, do you think these men earned these high salaries?
"Answer. I do not think there is a man who did not earn more than he was getting.
"Question. In other words, you defend paying these high salaries?
"Answer. I defend nothing. Here is 8,000 miles of railway; a man who can run
8,000 miles of railroad is worth all he can get.
Many large contributions were made to officers and directors of the railway company.
George T. Boggs, a director and secretary to the board of directors of the railway
company, and also a director in the two holding companies, admitted that he served
in these capacities merely as a dummy for the syndicate. On the question of the
right of the public to have corporate funds of common carriers properly applied, he
testified as follows:
"Question. Do you consider that the directors of a railway company, a public
service corporation, have the right to do whatever they please with the money of the
railway company?
"Answer. As in their judgment seemed right; yes.
"Question. Did it ever occur to you that the money in the treasury of the railway
company was the result of taxation of the public in passenger and freight tariffs, and
that the public had an interest in the funds in the treasury?
"Answer. I don't know that I ever thought of it particularly.
"Question. And that the public had a concern in the funds of the railway company
not being dissipated in order that they might be applied to improvements and bet-
terments and to proper purposes?
"Answer. I never considered that they were dissipated.
""
Question. And did it ever occur to you that in taking money from the treasury
of the railway company, a public-service corporation, an additional burden was
placed upon the passenger and freight traffic in order to make good the loss?
“Answer. No; I never thought of it in that light.
934
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
"Question. You don't believe it now, do you?
"Answer. No."
This opinion was also expressed in effect by other officers and directors. It appeared
to be the idea of those in control of the railway that it was no concern of the public
what became of the corporate funds so long as rates were reasonable. Those stating
this opinion apparently did not take into consideration the fact that if the funds
derived from transportation services are expended wastefully or corruptly the inevi-
table result must be either increased charges in order to enable the railway company
to obtain money to pay operating expenses, or bankruptcy.
Following are specific instances shown of record of the contributions referred to:
J. E. Gorman, first vice president in charge of freight and passenger traffic, was
secretly paid $18,750 per annum, making his total compensation $43,750, whereas
the pay roll showed $25,000.
C. A. Morse, chief engineer, received a salary of $15,000 per annum and a secret
bonus of $3,000 on the first of each year.
Upon the retirement of R. A. Jackson as general solicitor he was given $100,000 in
cash.
As an inducement to L. F. Loree, chairman of the executive committee, to relin-
quish, after 10 months' service, a joint contract with the railway company and the
Frisco under which he was to receive a salary of $75,000 per annum for a period of five
years and in addition was to be paid a bonus of $500,000 at the expiration of the con-
tract, he was given bonds of the railway company of a par value of $450,000. This
was borne equally by the two companies, and the proportion of the railway company
was charged to profit and loss. The total amount borne by the railway company in
this transaction exceeded $250,000.
C. H. Warren, vice president, was given by the railway company $150,000 in par
value of the common and $105,000 in par value of the preferred stock of the New
Jersey company and $50,000 in cash. There was no board authorization for the latter
expenditure, the item being represented in the records of the railway company
merely by a voucher signed by D. G. Reid.
R. R. Cable, a member of the executive committee, received from the railway
company $30,000 in bonds of the Iowa company, then worth $24,500, for his services
in the acquisition of the Burlington, Cedar Rapids & Northern Railway Co., and he
was paid by the latter company $85,000 in the same transaction. Mr. Cable also
received another contribution, which will be referred to later.
Robert Mather, vice president, was given $25,000 in cash.
George T. Boggs, director and secretary of the board of directors of the railway com-
pany, was given $15,000 in cash when he retired from the secretaryship of the railway
company.
As hereinbefore indicated, when the capital stock of the railway company was
increased to $75,000,000, shares of the par value of $880,500 were placed in the name
of the president, to be thereafter distributed in accordance with the following reso-
lution of the executive committee passed at a meeting held in New York July 1, 1902:
"Resolved, That such portion as the president may determine of the shares of the
increased capital stock of the company not required for the purpose of the foregoing
resolutions shall be disposed of at par by the president for the benefit of such officers
of the company as the president shall elect and determine.
""
This stock was later exchanged for securities of the Iowa and New Jersey companies
in the same manner as was stock of the stockholders of the railway company.
Following this exchange R. R. Cable received securities of a market value of
$368,300 for which he paid $200,000.
H. A. Parker, first vice president, received securities then worth $27,900 for which
he paid but $15,000.
Robert Mather received securities of a market value of $145,912 above his payments
therefor.
The contributions to officials of the railway company in excess of their salaries
aggregated about a million dollars.
IRREGULAR VOUCHER PAYMENTS.
Unexplained vouchers for amounts aggregating $72,523.45 were disbursed to the
officers of the railway company for purposes not clearly defined. One such voucher
for $6.823.12 was drawn apparently to reimburse W. H. Moore for losses sustained by
him in "supporting the market while bonds of the railway company were being
sold." The voucher was certified by D. G. Reid, "for the benefit of the railway
company. No papers were attached to the voucher and no other information was
available with respect to the disbursement.
1
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
935
Another voucher in favor of the Liberty National Bank of New York City, in ex-
hange for a cashier's check issued to Robert Mather for $25,000, is charged to "general
expenses'' under "operating expenses.
operating expenses." This voucher refers to a miscellaneous file
shown by the index thereto to have comprehended "contributions to campaign
committee." The file, however, was not produced, and a diligent effort on the part
of the accountants to secure it was unavailing. Without this file it is impossible to
state the purpose for which the money was expended, but the generalization"
tributions to campaign committee," in the light of the practices indulged in by the
syndicate in question, is clearly suggestive.
con-
The books of the railway company reveal payments aggregating $44.066.05 to the
Denver Post. The vouchers attached read, "for advertising in editorial and news
columns." Other entries show that three of these vouchers, aggregating $20,000,
cover a refund that this newspaper received at the rate of 25 cents per hundred on
its freight carried over the lines of the railway company from points in Wisconsin.
Another voucher is for $50,000 to S. M. Felton for the railway's proportion of amount
"paid by E. H. Harriman and his associates for money expended by them to secure
the discontinuance of a line of road being constructed in 1900 between Peoria, Ill.,
and Clinton, Iowa, as per agreement between R. R. Cable, chairman of the board,
and E. H. Harriman."
AGGREGATE OF LOSSES.
The aggregate losses sustained by the railway company in connection with the
foregoing transactions may be summarized as follows:
Expenses of maintaining and housing holding companies, more than... $290,000.00
Frisco deal, approximately.
Alton deal, approximately.
Trinity & Brazos Valley Ry. deal, more than.
Consolidated Indiana and Dering Coal Cos., at least..
Contributions or gratuities to officers and directors, about.
Venner transaction..
Miscellaneous and unexplained expenditures.
6, 500, 000. 00
6,370, 000. 00
4, 500, 000.00
1,300,000.00
1, 000, 000. 00
217, 000. 00
72, 523. 45
These items show an aggregate loss to the railway company of more than $20,000,000.
In addition thereto it is to be noted that prior to June 30, 1914, the railway company
paid to financial institutions, in connection with the issuance of bonds, commissions
aggregating more than $1,600,000 and suffered discounts of more than $17,700,000.
INDIVIDUAL PROFITS OF PROMOTERS, OFFICERS, AND DIRECTORS OF THE HOLDING
COMPANIES.
The amount of gains accruing to W. B. Leeds, D. G. Reid, W. H. Moore, and J. H.
Moore through their control and manipulation of the railway company are probably
not ascertainable. Reid, when interrogated with a view to ascertaining his profits
from the various transactions, explained that he always burned his books at the end
of each month.
The quotations placed in the record from the stock market of the New Jersey com-
pany stock and the railway company stock showed wide fluctuations. Whatever have
been the gains realized by these persons, it is certain that the present holders of the
stocks and bonds of the holding companies have that which is of little or no value.
REPORTS TO STOCKHOLDERS.
Misrepresentation of assets in reports to stockholders appears to have been a prac-
tice of the directors of the railway company. On June 30, 1904, a book surplus was
claimed for the railway company of $22,343,955.26. By June 30, 1914, the company
conceded a reduction of this surplus to $6,199,841.08, and even this amount was
fictitious.
*
*
*
*
The directors also reported as assets the 5 per cent debenture bonds of the Iowa
company, which were in fact worthless, but which were reported as worth nearly
$6,000,000.
In view of the fact that the reported value of the "securities" listed for the year
1914 was nearly $18,000,000 in excess of their actual value, instead of a surplus of
more than $6,000,000, claimed by the railway company, there should have been shown
a deficit of over $11,600,000.
Another misleading and objectionable practice of the railway company officials was
the failure to state on the pay roll the true amounts paid to its officers.
936
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
The publication of misleading reports to stockholders can not be too severely con-
demned, and the individuals guilty of such acts should be subject to adequate
penalties.
The bankrupting of railways in the United States has invariably
occurred from maladministration and speculation on the part of the
officers in charge, and never because of insufficient revenues when
wisely and honestly administered. Receiverships have always re-
sulted from the above cause or else have been planned by directors
for their own private gain. In some cases the condition of the
companies did not warrant receiverships, even though the directors
had placed their companies in an embarrassing condition. The
receivership of the Rock Island system is an example of the cause
last mentioned, and was planned without the knowledge of the
majority of the board by a conspiracy of a few directors in which
they were joined by the chief counsel of the company, who afterwards
acted as receiver in their interest. "Fake" legal proceedings were
had through attorneys employed fraudulently to prevent the stock-
holders defending their rights.
The following is taken from the official report:
RECEIVERSHIP.
The syndicate decided to put the railway into a receivership. The general counsel
of the railway company at the suggestion of W. H. Moore, a member of the syndicate,
drew the bill asking for a receivership and engaged an attorney ostensibly to represent
the other side. The bill was placed in the hands of this attorney with the name of the
complainant omitted and he was instructed by the general counsel to locate some
creditor of the railway company willing to act as complainant. There was an agree
ment between the general counsel and this attorney as to the parties the latter would
recommend to the court as receivers, the general counsel agreeing to instruct the
attorney appearing for the railway company to acquiesce in the recommendations so
made.
The board of directors of the railway company was not informed of the intention to
file a bill for receivership and at no meeting of the board was any authority ever
given for such action. Members of the board of directors not in the confidence of the
syndicate were kept in ignorance of the fact that such a bill had been prepared. The
stockholders had no information of the purpose to put the railway company into a
receivership, although a stockholders' meeting was held after the date upon which
the receivership bill was completed by the general counsel, and this general counsel
attended the meeting. According to the testimony, the bill was completed by the
general counsel March 29, 1915, and the fact that it was to be filed whenever desired
by those in authority was known only to certain insiders. The testimony clearly
establishes the fact that the railway company could easily have paid the debt of
$16,000 upon which the receivership application was based, and that arrangements
probably could have been made to meet all pressing obligations of the railway
company.
The creditor at whose instance the receivership application was filed appeared as
complainant by request. R. P. Lamont, the president of the American Steel Foun-
dries, the complainant, testified that he would not have thought of bringing such a
proceeding against the railway company unless he had understood that it would be
regarded as not unfriendly but as a friendly act to oblige the railway company. He
only consented that his company should appear as complainant when he was assured
that this course was in accordance with the wishes of the railway company and that
his company was not to have any care or expense in the preparation of papers or pay-
ment of counsel fees. The suit was not a bona fide proceeding to collect a debt, but
was instituted to carry out the purposes and schemes of the syndicate controlling the
railway.
N. L. Amster, who was elected to the board of directors of the railway company by
the minority stockholders at the stockholders' meeting held in Chicago, April 12,
1915, believing, according to his testimony, that no sincere effort was being made by
other members of the board to finance the obligations of the railway, undertook to
assist in raising about $6,000,000 needed by the railway to meet obligations soon
thereafter to mature. On April 16, 1915, he met and conferred with Messrs. James,
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
937
McLean, and Schumacher, all directors of the railway and members of the executive
committee, and discussed the company's finances. These three expressed approval
of his purpose to negotiate for the money. Amster testified that he had secured as-
surances for the furnishing of the money from responsible Boston bankers on securities
which the railway company had. When he arrived in New York on the morning of
April 20 to report this fact he went to the office of the railway company, and, quoting
his testimony, "could not find anybody there that would say anything, except a lot of
people moving back and forth. I left the office and found on the ticker that the
Rock Island had been put in the hands of a receiver." This, Amster testified, was
the first information he had of the receivership or that such a step was in prepara-
tion, yet he was a director of the road and after the stockholders' meeting in Chicago,
April 12, traveled from Chicago to New York with Roberts Walker, the general coun-
sel of the railway company.
It will be remembered that the bill was completed by the general
counsel on March 29, this fact being known only to a special few.
The bill was filed April 20. The records of the New York stock market reveal that
the railway stock was inactive until the day this bill was completed, March 29. Then
the stock began to be largely dealt in, and the price increased from $20 to $39 a share.
When the bill was filed and receivers were appointed the stock dropped from $39 to
$20 a share.
It is a forceful commentary on the methods by which a great railway may be ma-
nipulated into a receivership, when it is noted that the general counsel, after drawing
the bill for a receivership, sold his stock, and the local counsel, who represented the
railway company in the receivership proceedings owned no stock in the railway com-
pany, and that none of those directly participating in the receivership proceedings
had any financial interest in the railway company. The real owners of the railway,
the stockholders, the security holders, and the directors, except those composing the
syndicate and in its confidence, were in ignorance of the receivership application.
Mr. Mudge, former president of the railway company, is one of the receivers.
The general counsel for the railway company, who planned the receivership in
obedience to the will of the syndicate, is now counsel for the receivers.
SUMMARY AND CONCLUSION.
This review, giving a brief glance at the wild speculations, frauds,
and conspiracies of the officials to plunder and wreck the properties
intrusted to their care and place heavy burdens upon both the
stockholders and public, needs no further commentary than the
closing words of the Interstate Commerce Commission in its report:
The property of the railway company will be called upon for many years to make
up the drain upon its resources resulting from transactions outside the proper sphere
in which stockholders had a right to suppose their moneys were invested. This
record emphasizes the need of railway directors who actually direct. There are too
many passive directors who acquiesce in what is being done without knowledge and
without investigation. A director of a railroad is a quasi public official who occupies
a position of trust. A director who submits blindly to the exploitation of his com-
pany is a party to its undoing and he should be held responsible to the same extent
as if he had been a principal instead of an accessory before the fact. The greater his
prominence the greater his responsibility and the greater his dereliction. Obviously
a man of large affairs could not attend to all the details in intricate transactions, but
it is inconceivable that a director of ordinary business prudence and sagacity would
sanction large expenditures without an inquiry as to the purposes of such disburse-
ments. So long as this situation exists, however, it suggests the need of a law to
charge such directors with individual responsibility for the dissipation of corporate
funds.
The Clayton Antitrust Act, which becomes effective October 15, 1916, will make it
unlawful for any person at the same time to be a director in two or more competing
corporations, any one of which has a capital, surplus, or undivided profits aggregating
more than $1,000,000, but common carriers are expressly exempted from its applica-
tion. It should be just as grave an offense for an official of a railway to be faithless to
his trust for financial gain as it is for an elected official of the Government to betray his
trust for money reward.
938
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
THE LOUISVILLE & NASHVILLE RAILWAY SYSTEM.
This railway system was investigated by the Interstate Commerce
Commission. The results of its investigation are to be found in the
official report of the commission No. 6319, dated February 16, 1915,
entitled: "In re Financial Relations, Rates, and Practices of the
Louisville & Nashville Railroad Co., the Nashville, Chattanooga &
St. Louis Railway, and other Carriers."
This investigation was the result of a resolution of the United States
Senate, prompted by complaints of the public respecting illegal acts
of the above company and its subsidiaries, in which it requested the
Interstate Commerce Commission to inquire into the financial affairs
and capitalization of the company, its practices, and its efforts to
illegally influence or control politics, legislation, and public opinion.
Because of the fact that some of the records and accounts of the
company had been burned by them and the further fact that the
commission was permitted by the company to inspect but part of
those which remained, and the further fact that the officials of the
road and other witnesses summoned to appear before the commission
refused to testify, the commission was unable to ascertain but part
of the facts. The testimony obtained was, however, sufficient to
incriminate the company in many unlawful acts, among the most
important of which were the violation of laws, both Federal and
State, in respect to monopolies; the use of the stockholders' money
to control legislation, politics, and the press; and the deceptive man-
ner in which the accounts were kept respecting the capital investment
and the operating expenses.
An added romantic interest attaches to this report since it includes
correspondence between two railroad presidents, who proudly styled
themselves "Pizarro" and "Cortez," joyfully imagining they have
"subjected the natives" and can now divide the Western Hemisphere
between them.
On account of the refusal of certain officials to testify before the
commission regarding their acts, an appeal was made to the Supreme
Court of the United States, which court, in December, 1917, issued
a mandamus directing these witnesses to appear before the commission
and testify. When this additional evidence is taken, the result will
be to make the investigation of added interest.
As the stories of all the railway systems investigated by the com-
mission are nearly identical and include practically all of the same
illegal acts, we will, for lack of space, record only some of the prin-
cipal features brought out in this case.
The following brief extracts from the commission's report, out-
lining the history of the road, its accounting as to capitalization,
operating expenses, etc., appear in pages 168–173:
METHOD OF THE INVESTIGATION.
On November 10, 1913, immediately following the adoption of the Senate resolution
above referred to, the commission ordered an investigation into the questions pre-
sented and served formal notice of this investigation upon the carriers concerned.
Thereafter examiners of the commission were directed to examine the accounts,
records, and memoranda of the Louisville & Nashville Railroad Co. and the Nashville,
Chattanooga & St. Louis Railway with a view to securing all information in the files
of these carriers that would throw light upon the questions contained in the Senate
resolution. Certain obstructions have been placed in the way of the commission's
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
939
examiners by the carriers, and these will be referred to later. The facts stated herein
were secured from the annual and statistical reports and the contracts and tariffs on
file with the commission, from such of the carriers' records and accounts as were volun-
tarily submitted by them; from testimony given at formal hearings in other cases
before the commission; and in a few cases, that will be indicated, from interviews by
the commission's examiners with railroad officials and other persons. The questions
presented by the resolution will be stated and answered in numerical order, accom-
panied by such comment as seems necessary. Following the report will be found an
appendix illustrating and supplementing certain of the answers.
INTEREST OF THE LOUISVILLE & NASHVILLE RAILROAD CO. IN OTHER RAILROADS.
The Louisville & Nashville Railroad Co. was incorporated in Kentucky in 1850.
The line from Louisville to Nashville, 185.81 miles in length, was completed and
placed in operation in 1859, forming the nucleus of the present system. Various ex-
tensions have since been constructed aggregating 399.56 miles, and making a total of
585.37 miles constructed by the company under its own charter. The annual report
of this carrier to its stockholders of the year ended June 30, 1913, shows that it owned
or controlled on that date 7,889.77 miles of road. A comparison of the miles of road
constructed by this company under its own charter with the total miles of road owned
or controlled by it well illustrates its activity in securing control of other railroads.
The several lines acquired by the Louisville & Nashville through purchase, lease,
control, or otherwise, together with the dates of acquisition and the length of each, are
listed under appropriate captions in Appendix A to this report.
COST OF ROAD.
Before the Louisville & Nashville advised the commission that such of its records
as were made prior to August 28, 1906, would not be submitted for inspection,
schedules of most of the cost of road accounts had been drawn from the ledgers prepara-
tory to completing the analysis of the accounts from information to be secured from
the journals and other records of original entry. While a complete analysis of these
accounts was prevented by the Louisville & Nashville the preliminary analysis was
sufficient to indicate that the cost of road account is heavily burdened with charges.
which do not represent actual construction cost. From such incomplete information
it is concluded that at least $16,000,000 shown in the cost of road accounts covers
items which should not be charged as a part of the cost of this carrier's road, as follows:
Charges included in cost of road accounts but not expended for actual construction.
Discount on stock...
Other expenses in connection with the sale of stock.
Discount on bonds..
Other expenses in connection with the sale of bonds.
Interest and dividends...
Amounts credited to profit and loss:
For reasons not stated...
To provide a surplus in order that a stock dividend
of 100 per cent might be paid..
$2, 640, 000. 00
$1,440, 018. 00
32, 671. 48
2, 192, 142. 57
8,537.95
1, 917, 535. 13
To raise book value of stock above the actual cost
of acquirement..
To adjust difference between advances made for
construction and par value of bonds received in
settlement therefor..
6, 300, 000.00
1, 422, 784. 00
78, 447.72
10, 441, 231. 72
16,032, 136. 85
The above statement is illustrative of the character of charges which the carrier
has included in its cost of road account. A full examination of the carrier's accounts
might disclose conditions under which some of the above amounts could properly be
charged to cost of road account, but it is also possible that other improper items
would be found which would greatly augment the amount shown.
Stock and dividends of 100 to 200 per cent declared and excessive
charges made to property account. The extracts referring to the
above subjects are taken from pages 171-173 of the commission's
report.
940 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
STOCK DIVIDENDS DECLARED.
As shown in the above table, a stock dividend of 100 per cent was declared by the
Louisville & Nashville on October 6, 1880. According to a corporate history of this
railroad, which was found in its office, 10 stock dividends were declared by this
company between 1860 and 1891.
*
*
*
*
*
To make possible the stock dividend of 100 per cent declared on October 6, 1880,
the amount of surplus was arbitrarily increased by raising the book value of certain
assets. From the corporate history above referred to it appears that when this divi-
dend was declared the book value of the carrier's property exceeded its capital stock
liability.
*
*
*
*
*
*
To meet this situation the assets of the company were revalued, and the board of
directors voted that the book value of certain assets should be increased. Accord-
ingly entries were made on the books of the company crediting the profit and loss
account and correspondingly increasing the book value of the following assets in the
amounts shown below to $7,212,226.
The above-mentioned entries brought the profit and loss account to $10,883,609, to
which was charged the 100 per cent dividend of $9,065,000.
The above facts illustrate the manner in which permanent improvements on the
Louisville & Nashville have in the past to a large extent been made out of earnings
and subsequently charged to the capital account. As the commission in its annual
reports has previously pointed out, only by the fullest publicity and public super-
vision of stock and bond issues may such increasing of the capital accounts of carriers
at the expense of the public be prevented.
EXCESSIVE CHARGES TO PROPERTY ACCOUNT.
The issued capital stock of this carrier amounts to $16,000,000, par value, of which
$15,984,787.50, par value, is outstanding. It appears that cash aggregating only
about $9,831,840.77 was received for this stock, while an amount exceeding
$8,107,398.50 was given to stockholders in the form of stock dividends and by the
sale of stock at prices below par and also 'below market value. Included in this
amount is a stock dividend of 200 per cent on the outstanding capital, which was
authorized by the board of directors on August 10, 1873. The dividend as originally
declared amounted to $4,324,032.96, which was charged to the carrier's property
investment account on July 31, 1873, as an offset to the carrier's liability for stock
issued from which no funds were derived. Later the dividend was increased
$251,671.79, which amount, however, was not charged to property investment but
to profit and loss. Of this amount $181,567.66 was recorded in the books by an entry
dated June 30, 1875, and represented the dividends of 200 per cent on $91,201.44 of
capital stock held in the treasury.
How the directors spent large sums of the stockholders' money to
control the press, politics, and legislation and to influence public senti-
ment, for which purpose they formed the "Tennessee Railroad Associa-
tion"; other "fake" organizations for the same purpose were formed.-
The following extracts are from pages 229 to 233 of the report:
EXPENSES FOR THE PURPOSE OF MAINTAINING POLITICAL AND LEGISLATIVE AGENTS.
Expenditures by the Louisville & Nashville during this period which appear to
have been for the purpose of maintaining political and legislative agents amounted
to $23,274.41. This amount was distributed as follows:
Expenditures for securing copies of and information concerning legislative
bills of particular interest to the Louisville & Nashville.
Contributions to various committees or associations for the purpose of
influencing legislation...
Expenditures directly assignable to specific legislation..
Expenditures on account of legislative agents in general.
$1, 413. 58
5,596. 60
6, 611. 29
9, 652. 94
FOR THE PURPOSE OF INFLUENCING PUBLIC SENTIMENT.
The accounts of the Louisville & Nashville disclose that between September 1,
1906, and July 1, 1914, this carrier expended at least $59,322.48 for the purpose of
creating public sentiment in favor of its plans.
Of this amount, over $53,000 was spent in a publicity campaign in Alabama in the
endeavor to mold public opinion through the medium of the press. Part of the
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
941
balance was contributed by the Louisville & Nashville to a fund made up by numerous
carriers to finance a campaign in Louisiana to prevent the change of tax laws. In
order that the railroads concerned might preserve an outward appearance of indif-
ference in regard to the legislation in question, the contributions for this purpose
were placed in the hands of a bank to be disbursed by it as if in furtherance of bank-
ing interests. If the commission's examiners had been accorded access to the corre-
spondence files of this carrier and to its accounts prior to 1906, there seems no doubt
that information as to other substantial expenditures for the purposes referred to in
the question would have been secured.
TENNESSEE RAILROAD ASSOCIATION.
The Louisville & Nashville was one of the railroads which about 1884, for the pur-
pose of combating adverse legislation in Tennessee, formed the Tennessee Railroad
Association.
A large number of vouchers, aggregating, between September 1, 1906, and July 1,
1914, approximately $295,000, were issued by this carrier to various persons, as to
which the accounts contained no information other than that the expenditures were
for "special" services and expenses. Although a number of these vouchers bore
the notation "as per statement on file in the general manager's office," a request that
such files be submitted for inspection was denied.
Numerous other vouchers issued between September, 1906, and July, 1911, and
aggregating $67 722.30, are recorded as having been issued under the direction of the
legal or executive departments without the purpose being stated. These were for
amounts in excess of $1,000-one such voucher, made in February, 1910, is for
$20,715.06. Whether such sums were spent for the purposes referred to in the question
can not be determined.
The character of some of the special ledger accounts recording large expenditures,
the purpose of which could not be learned from the accounts, is outlined below:
An account was opened in the name of the Immigration & Industrial Association
of Alabama in January, 1907. This records cash advanced to George W. Jones,
assistant district attorney at Montgomery, Ala., made under the authority of the first
vice president; $13.068.80 was charged to this account; $7,868.86 was re-collected
from other carriers who were parties to the association and credited to this account.
The balance of $5.199.94 remaining was charged to operating expenses by authority
of the first vice president. The nature of this account is indicated by notations on
the treasurer's statements of cash receipts entered therein, such as "proportion of
expenses, account adjourned session of Alabama Legislature.'
The above are illustrative of numerous suspense accounts opened prior to 1913, in
which the entries were of such a vague character as not to disclose the purposes for which
they were kept. Under the accounting rules prescribed by the commission the keeping
of such vague accounts at the present time would subject the carriers to prosecution.
In the testimony taken during these investigations by the com-
mission, which is printed in a volume of 519 closely printed pages
(S. Doc. No. 461, 64th Cong., 1st sess., 1916), over 150 pages of testimony
appear in reference to the bribing of legislators, chiefly through
passes, which aggregated over 7,000,000 miles of free transportation.
These passes were accepted by governors and in many cases by
judges, as well as by more than 90 per cent of the members of the
legislatures of the various States through which the lines passed.
That these passes were understood by the legislators as bribes is
clearly shown in letters where they promise the railway officials to
give them whatever they wanted" in return for the passes. An
interesting letter is one introduced in the evidence, in which the
writer addresses the railway official as "Dear Bribe Giver:"
((
[J. A. Clement, lawyer, suite 11-12 Baker Building.]
Mr. D. G. HUDSON,
Nashville, Tenn.
DICKSON, Tenn., October 7, 1915.
DEAR BRIBE GIVER: You promised me Saturday you would send pass for Mr. C.
from Dickson to Nashville and return, Monday, but you overlooked your hand again.
Luke must have you thinking. Please send it by the 2.15 train to-morrow, if possible.
*
*
*
Yours truly,
J. A. CLEMENT.
942
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
Division of two continents. Having subjugated the American citi-
zens, as they thought, as did Cortes and Pizarro of old, two railroad
presidents proposed to divide the Western Hemisphere between them.
Some of the most interesting testimony, bordering upon the romantic
days when Pizarro and Cortes subjugated the natives of the Western
Hemisphere about four centuries ago, is to be found in the testimony
of two railroad presidents who having, as they thought, secured the
subjection of the present American people as did those plunderers of
old, felt the time had arrived when they could enjoy the realization
of their further dreams of conquest and accordingly, under the names
of "Pizarro" and "Cortez," Milton H. Smith, president of the Louis-
ville & Nashville Railway System, and Samuel Spencer, president of
the Southern Railway, gave vent to their feelings of pride and joy
in some very interesting correspondence, to be found in the testimony
taken by the commission and published as Senate Document 461,
Sixty-fourth Congress, first session, entitled "Louisville & Nashville
Railway Company Hearings Before the Interstate Commerce Com-
mission," 1916. This correspondence, exemplifying the illimitable
ambitions of railway financiers, is of great interest. The following
extracts from the testimony of President Smith and the letters
referred to appear on pages 369 to 372 of the document.
A letter from President Smith, of the Louisville & Nashville Railroad, to President
Spencer, of the Southern Railway:
[Personal and confidential.]
SAMUEL SPENCER, Esq.,
ON PENNSYLVANIA RAILROAD TRAIN No. 21,
President Southern Railway, 60 Broadway, New York City.
DEAR SIR:
PIZARRO. How shall we divide the new world?
February 22, 1896.
CORTEZ. I will take North America and you can have all of South America, except
and neither of us will do anything to the Isthmus without notice to and cooper-
ation of the other.
PIZARRO. While Patagonia is not a very large or important part of the world, yet,
perhaps, it is as much as I can tote.
Refer to typewritten report of our interview at Kenesaw, Ga., on October 28, 1894,
and to the interviews and correspondence that have taken place since that date, and
to that portion of our interview of this morning relating to the future of certain railroads
that are or may be tributary or competitive with roads controlled by the L. & N. R. R.
and the Southern Ry.
May it not be well to review the subject and perhaps make our understandings more
specific?
Your affairs, since our interview in October, 1894, progressed with rapidity, and
without, so far as I know, encountering serious difficulties. You have acquired the
G. S. & F., the Atlanta & Florida, and the Central Railroad has been reorganized in
accordance with your plans. I do not recall now what has been done with the Macon
& Northern, nor what has been done with the G. M. & G., Macon & B'ham, and one
or two other roads, although I believe you told me that your intention was to allow the
Macon & B'ham to be abandoned. The Paducah, Tenn. & Alabama and Tenn.
Midland Rds. have been disposed of as anticipated. The L. & N. will not compete
for the control of the M. & C. Rd. The L. & N. will not compete for the control of the
B'ham, Sheffield & Tenn. River Rd., provided you will acquire it, should it become
necessary to do so to prevent its extension into Birmingham, or will not permit it to
get into a position where it may become a disturber. The L. & N. Rd. will not com-
pete for the control of the Mobile & Birmingham with the expectation that you will
acquire it. It is not clear what disposition ought to be made of the Georgia & Alabama
Railroad.
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
943
*
*
I have advised Mr. Belmont of our agreement that neither party will acquire the
property of the Marietta & North Georgia Railroad Co. without the consent of the
other. You may, therefore, freely communicate with him upon the subject, and
I assume he will do likewise.
Yours, truly,
President.
Letter from Samuel Spencer, president of the Southern Railway, to M. H. Smith,
president of the Louisivlle & Nashville Railroad Co.:
Mr. M. H. SMITH,
President L. & N. R. R., Louisville, Ky.
DEAR SIR: Your letter of the 22d instant.
NEW YORK, February 29, 1896.
Pizarro: Since our last conversation, the division of the New World between us
has made some progress.
Cortez: Yes; you seem to have acquired Patagonia, and I have secured a con-
siderable part of North America which touched my former territory, but it seems
to me you have acquired a considerable neck of the Isthmus which is the connecting
link between us. Was it understood that connecting links which touched both of
of us should be a matter of consultation before acting or not?
Pizarro:. * * * I agreed that it is desirable to renew the subject and, if prac-
ticable, to make our understanding more specific. The principles on which I think
this understanding should be based are:
(1) That neither the L. & N. nor the Southern, shall acquire lines in the territory
of the other, and that lines connecting with or touching one and not the other shall
be regarded as in the territory of the one which they connect or touch.
(2) That neither will acquire lines allied by former ownership, lease, or otherwise,
to the other, and which at the moment are not controlled by reason of pending re-
organizations or other cause.
(3) That neither will acquire lines which connect with or touch both, either directly
or through subordinate or controlled lines without previous consultation and, if
possible, agreement.
(4) That neither will foster the construction of new lines or the completion of
unfinished ones into the territory of the other, but when questions with reference
to such lines arise, we shall proceed by agreement with each other, if possible.
Will you please consider this and say if such a declaration of principles is satisfac-
tory?
*
*
*
*
*
*
Confirming our verbal understanding of the 22d instant, I beg to say that we will
give no encouragement to the construction of such a line without previous consulta-
tion and understanding with you, but if the present projectors, or others, develop
sufficient strength to carry the enterprise through from Nashville to Harriman we
will cooperate with you on a fair basis as to the handling of any business in con-
nection with it which is competitive with you. I note your advices to Mr. Belmont
concerning our agreement that neither party will acquire the property of the Marietta
& North Georgia without the consent of the other, and I confirm that agreement.
Yours, very truly,
S. SPENCER, President.
The Pere Marquette and Cincinnati, Hamilton & Dayton.-The
history of this railroad system in its gross mismanagement, mal-
administration, and the peculations of the great financiers who
wrecked it, is largely a counterpart of the history of the three systems
whose rise and fall from power have already been sketched. Time
will not permit going into the details of this interesting history,
which is replete with startling instances of financial legerdemain. It
is interesting to the people of Ohio and Michigan, through which
States these lines are chiefly laid, to learn of the pressure which was
brought to bear upon the legislatures of these States to increase the
rates of charge, on the excuse that they were insufficient to pay legiti-
mate revenue; whereas the investigations of the Interstate Com-
merce Commission clearly show that the troubles of this railway
944 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
1
:
system were due entirely to the wild speculation and disregard of
the principles of business ethics which are practiced by reputable
business concerns.
The following brief extracts are taken from the official report of
the Interstate Commerce Commission, No. 6833, dated March 13,
1917, entitled "In re Pere Marquette Railroad Company and Cin-
cinnati, Hamilton & Dayton Railway Company."
INTRODUCTION.
It may be well at the outset to marshal the outstanding facts, among the many dis-
closed of record, which have affected the ability of these two carriers to do their duty
as common carriers and also the value of their securities in the hands of the investing
public.
The Pere Marquette came into being as a consolidation of three relatively unsuc-
cessful Michigan roads and began operation on January 1, 1900. The consolidation
was brought about by New England interests headed by W. W. Crapo and Nathaniel
Thayer, and in the process outstanding capital stock in the hands of the public was
inflated by $1,461,250 and book value of property by $4,290,230.41. The Crapo-
Thayer control continued for three years. Its operating policies were sound in the
main; rolling stock and miles operated were increased; a small surplus was accumu-
lated and used for improvements; no common-stock dividends were paid, and physical
condition was bettered. Outstanding long-term debt was increased by almost
$6,000,000 and at the end of the three years was about $31,000,000. In the next 12
years it was increased by more than $50,000,000 under the succeeding managements.
The first of these was the Prince management, which secured control on December
29, 1902, through purchase of Pere Marquette common at a maximum of $85 per share.
Its policy of expansion included acquisition of new equipment costing over $6,000,000,
end of about 383 miles of main and branch lines, most of which had a history of failure.
In acquiring this mileage underlying bonds of over $4,000,000 were assumed and
[emost $3,500,000 bonds issued. The Prince interests reversed the policy of their
predecessors, undermaintained road and equipment, paid unearned dividends on
common stock, and, in the 18 months of their management, added $2,500,000 net to
current liabilities, also added over $14,500,000 to outstanding long-term debt, pro-
moted a C., H. & D. syndicate, and through it sold 110,000 shares of Pere Marquette
common to the C., H. & D. at $125 per share.
The next management was that of the C., H. & D. syndicate, which took control
of both carriers on July 7, 1904, and parted with it in the following month to the
Zimmerman-Hollins interests. During these few weeks new and heavy burdens were
bound upon the Pere Marquette.
The Zimmerman-Hollins management succeeded to the control in August, 1904,
and continued the work begun by the Prince interests, with the result that when the
control of both roads was sold to J. P. Morgan & Co. on October 20, 1905, both were
promptly put under the first receiverships which began in December, 1905.
Meantime another $10,000,000 of long term Pere Marquette securities had been
marketed through interested parties at a cost to the road of over $1,100,000 in discounts,
$1,645,000 was paid to certain members of Hollins's pool for their worthless stock in
the Toledo Railway & Terminal Co., $400,000 was advanced under syndicate schemes
to affiliated companies and lost, and over $1,100,000 was used to pay off floating debts
contracted by the Prince régime. The mileage and equipment were somewhat
increased. Operation was unsuccessful and resulted in deficits.
"
Two years of receivership were succeeded in December, 1907, by a Morgan reorgani-
zation based on the consolidation of the Pere Marquette with its already controlled
Pere Marquette of Indiana, 20 miles long. This furnished the pretext for further
stock inflation, for an issue of $5,000,000 of 6 per cent debentures, and for the writing
up as
cost of road and equipment" of the direct losses, aggregating almost $5,000,000,
of the former administrations. Morgan control has continued since, except for the
second receivership, which began on April 5, 1912. In the intervening years the Pere
Marquette was in constant difficulty, revenues failed to provide for expenses and
charges, and bond interest was paid only at the cost of adequate maintenance of the
property. Road and equipment deteriorated markedly, financing became more and
more difficult, and needed funds were secured only at the expense of heavy discounts.
The second receivership was necessary to accomplish what the first had failed to
accomplish the physical and financial rehabilitation of the Pere Marquette.
The road is now emerging from the second receivership. During five years of court
control it has greatly improved in physical condition, and its service has improved
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
945
accordingly. Under the reorganization plan a large part of the fixed interest-bearing
obligations outstanding on June 30, 1916, are to be exchanged for capital stock, of
which there is to be $11,200,000 of 5 per cent prior preference, cumulative, $12,429,000
of 5 per cent preferred, cumulative, and $45,046,000 of common shares. The p'an
contemplates a decrease of over $8,000,000 in capitalization, exclusive of overdue
interest on funded debt amounting to approximately $10,000,000, and a considerable
decrease in fixed interest charges. The new capitalization will also represent $16,-
000,000 of new money provided for reorganization expenses, additions and better-
ments, working capital, and other purposes.
In contrast to the Pere Marquette the C., H. & D., prior to July 7, 1904, when the
C., H. & D. syndicate took control, was a highly prosperous road, despite losses of
several millions through Henry S. Ives and his associates in the late eighties, the
drain of supporting less prosperous lines west of Hamilton, Ohio, a funding of deficits
and interest on the western lines into some $1,800,000 of bonds, and the injection in
1895 of $10,200,000 of water into the capital stock through the consolidation effected
by the Shoemaker-Woodford interests, then in control. These interests sold out to
the C., H. & D. syndicate in 1904, receiving $125 per share for their common stock,
which was water, and $110 per share for 10,000 shares of preferred stock. The surplus
of that date was replaced in the following year by a deficit of at least $1,086,127.49,
allowance being made for some $843,000 concealed by falsification of accounts.
*
*
*
*
*
Morgan control, from 1905.-The next important changes came when the control
of the C., H. & D., and incidentally of the Pere Marquette, passed to the Erie Railroad!
Co. Representatives of the Erie took charge of the Pere Marquette management on
October 20, 1905. Shortly thereafter upon the rescission of the Erie's purchase ofi
the C., H. & D. from J. P. Morgan & Co., George W. Perkins, of the latter firm, on:
December 4, 1905, went on the Pere Marquette board and the Erie representatives
remained. It appears that Perkins more than anyone else guided the Pere Mar-
quette through the reorganization following the receivership of December 4, 1905.
In discussing the matter of stock control after the first receivership consideration
must be given to the reorganization which followed. This "reorganization" of
December 11, 1907, was on paper only. The thing accomplished was release of the
Pere Marquette from receivership without either foreclosure or a downward adjust-
ment of capital liabilities. The means used as a pretext was merely the consolidation
of the Pere Marquette of Michigan with its subsidiary, the Pere Marquette Railroad
Co. of Indiana. This subsidiary will be further considered, but note may be taken
here that it was only 20 miles long; that its capital stock of $500,000 was owned by the
parent company; that its bonds bore the guaranty of that company; and that it had
been constructed, in effect, by the parent company to piece out the latter's line toward
Chicago. In this consolidation the name "Pere Marquette Railroad Company
was retained; capital stock, including first and second preferred as well as common,
was provided for to the amount of $28,500,000, equaling the authorized issues of the
two constituents; their funded debt and other obligations were assumed; and last,
but of great importance, $5,000,000 of 6 per cent five-year debenture bonds were
authorized to take up current indebtedness, including receiver's certificates, and were
offered to the stockholders.
*
*
*
*
The first board of the reorganized company, elected August 12, 1907, was a Morgan
board. No changes of consequence occurred in its make-up until November 5, 1909,
when certain representatives of the Baltimore & Ohio Railroad Company were elected,
following the latter road's entrance into C., H. & D. affairs. But even then the
Morgan interest was the dominant one in the Pere Marquette board. Early in 1911,
when the C., H. & D.'s 110,000 shares were finally sold to J. P. Morgan & Co., the
Baltimore & Ohio directors resigned.
A little more than a year later, on April 5, 1912, the road again went into the hands
of receivers. On March 9, 1914, there was another extensive change, with more
residents of Michigan on the board.
*
*
*
*
*
*
Passing now to a consideration of the roads "affiliated," it appears that for the
Huron & Western, which ran west from Bay City principally to serve a coal mine,
the Pere Marquette paid $106,559.29 to the Grand Trunk Railway system, which
seemingly had built it at that cost. At the same time the stock came into the posess-
sion of the Pere Marquette, and since 1903 the road has been operated as a part thereof.
At the price paid this property cost about $9,340 per mile.
No accounts of the Grand Rapids, Kalkaska & Southeastern can be found. This
line ran from Rapid City, Mich., in a generally southeastern direction, to Stratford,
Mich. It was built to connect a timber tract of the Thayer Lumber (o, located in
Missaukee County, with the Chicago & West Michigan. This latter road, by contract,
40358-18-60
946
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS
agreed to oversee the construction, furnish the necessary rolling stock, and lease and
operate the road for 10 years following its completion, paying as rental $20,000 per
annum plus 15 per cent of gross receipts except upon pine.
Its minute books show that the Kalkaska road was to be constructed by William
Alden Smith, under a contract dated October 21, 1897, by which the constructor was
to receive as payment $200,000 in bonds and $264,000 in stock, less such as had been
subscribed by him. According to the State railroad commissioner's reports the
entire sum of $434,000 was treated by that carrier as cost of road and equipment.
In 1903, a few years prior to the expiration date of the lease, the Pere Marquette,
through a contract with George A. Fernald and others, purchased the entire capital
stock of the Kalkaska road for $107,000, payable in Pere Marquette consolidated 4
per cent bonds, and assumed its $142,000 of first mortgage 5 per cent bonds then re-
maining outstanding. The result was a standing minimum fixed charge against the
Pere Marquette of $11,380 annually for what was originally a tap line and undoubtedly
diminishing in value as the timber was being cut out. Speaking of this branch in
May, 1915, the chief operating officer of the Pere Marquette said:
"It is bad. There are 14 miles of the track from Eastman Junction to the end at
Stratford that is so bad that we operate it under caution, and I am about to ask the
railroad commission for the authority to take it up. There is no business on the branch.
to warrant our continuing in operation, and we are now going up there twice a week
to bring out what little business there is."
*
*
*
*
*
Morgan's purchase was on behalf of the Erie Railroad Co. The incidents of that
purchase, its speedy rescission by the Erie, and the assumption by Morgan of the
obligation, are later set forth. Immediately after the control had been returned to
Morgan a receivership was asked, and it began December 4, 1905.
*
*
*
*
*
VIII. MORGAN MANAGEMENT, FROM 1905.
*
It seems proper to treat these years as one period in the history of the Pere Marquette.
During this period there were extensive changes in the stock ownership, pârticu-
larly in the transfer of the C., H. & D. holdings of 110,000 shares of Pere Marquette
common to J. P. Morgan & Co., and there were changes in the Pere Marquette direc-
torate as a result of the purchase of control of the C., H. & D. first by the Erie and
then by the Baltimore & Ohio, while the C., H. & D. still held that common. But
from December 4, 1905, when George W. Perkins went on the Pere Marquette board,
representing Morgan & Co., that firm seems at all times to have been the guiding
hand in Pere Marquette affairs.
The first event of importance, following the acquisition of C., H. & D. control by
the Erie on October 20, 1905, and the reorganization in its interest of the Pere Mar-
quette board, was the receivership under Judson Harmon, commencing December 4,
1905. This was coincident with the receivership of the C., H. & D., and on behalf
of Morgan & Co: it is insisted that the step was necessary in order to separate the two
corporations. However that may be, it is apparent that the Pere Marquette of itself
was then well on the way toward a receivership. It continued under a receiver
until December 14, 1907.
The losses to the stockholders under Morgan control exceed $22,000,000.—
The following is from page 59 of the commission's report:
Through this Morgan reorganization the Pere Marquette emerged from receivership
in 1907 carrying a load of outstanding capital stock and funded debt heavier by
$7,000,000 than that under which it was staggering when the receivership began two
years before. It never succeeded in carrying itself thereafter. A proper reorganiza-
tion would have included reduction and not increase of fixed charges. The plan of
reorganization dated October 30, 1916, carries marked decrease in fixed charges.
Other losses carried through the profit and loss account in addition to the results of oper-
ation must be considered. In the aggregate the showing to June 30, 1914, was as follows:
Debits:
Net loss from income.
Debt discount extinguished.
Net loss on retired road and equipment..
Miscellaneous debits...
Total debits.
Credits: Miscellaneous credits.
Profit and loss balance (deficit)…….
$12, 962, 905. 48
10, 500, 486. 02
3,054, 800.59
724, 047. 40
27, 242, 239. 49
5, 187, 199.76
22, 055, 039. 73
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
947
Falsification of accounts.-Under the above heading the commission
reports in detail certain accounts which proved to be false, respecting
which they make the following remarks:
12. Falsification of accounts during Zimmerman-Hollins control. The following
statement presents a condensed income account covering the year ended June 30,
1905, for the C., H. & D., including its proprietary line, the Cincinnati, Indianapolis
& Western, 1,038.24 miles operated, as recorded in the carrier's books of account:
Gross earnings from operation..
Operating expenses.
Income from operation.
Taxes...
Net income from operation.
Income from other sources..
Gross income.
Deductions from gross income:
Rents paid for lease of road……..
Miscellaneous rents.
Interest accrued on funded debt.
Other deductions.....
Total deduction from income..
Net deficit.
$6, 008, 917.65
8,095, 885. 11
$1, 913, 032.54
316, 061. 12
1,596, 971.42
59, 688.65
1,656, 660. 07
$517, 288. 35
372, 273. 11
1,009, 515.63
348.52
1,899, 425. 61
242,765.54
The 4 per cent preferred stock bore guaranteed dividends, which makes the accrual
of the dividend more in the nature of a fixed charge than a division of profits. If
these dividends are so considered. the net deficit for the year was $251,969.20.
The foregoing income account bore little resemblance to the truth. The fact is
that large sums properly chargeable to the income for 1905 were ordered to be charged
to various other accounts and were so charged in a way to conceal the true state of
the company's affairs. These entries violated commonly accepted accounting prin-
ciples in such a flagrant manner as to make it evident that the purpose was to delib-
erately falsify the accounts in an effort to avoid showing the utter failure of the com-
pany to earn anywhere near its fixed charges.
The charges against the income of that year thus willfully omitted included inter-
est on loans made to retire preferred stocks; interest
*
*
*
*
*
*
*
But what the Zimmerman-Hollins management accomplished along that line was
little compared with what it attempted.
On pages 161-162 are the following, showing how false and "fake"
telegrams were used:
Further, in connection with this financial statement, on which such great reliance
was placed, we must refer to an exchange of correspondence which occurred between
August 15 and 24, 1905, concerning a certain statement then being prepared at the
direction of the Hollins firm by President Zimmerman, and one copy of which eventu-
ally went to that firm and another to George W. Young. This statement is described
in the correspondence as one showing "capitalization, fixed charges, estimated earn-
ings, etc., of the C., H. & D. and P. M.," the figures for the Chicago, Cincinnati &
Louisville to be omitted, and this description fits well the document placed in this
record on behalf of J. P. Morgan & Co. It was prepared in and forwarded from Cin-
cinnati by N. B. Hersloff, an employee of Hollins & Co., but evidently did not show
as favorable results as were desired, for on August 24 the firm wired Zimmerman as
follows:
"Better not have Young show statement you sent him; estimate earnings too poor;
telegraph him in two separate telegrams, one not use statement sent him, as you have
another corrected one, and another telegram saying have not mailed statement because
will bring on figures with me early next week.”
One of the startling disclosures in this investigation is the ease
and informality with which one man, in a leisure hour at his home,
can, on a sheet of note paper, either buy or sell a great railroad, as
happened in the case of the Pere Marquette. After referring to
948
FEDERAL OPERATION OF TRAN'ORTATION SYSTEMS.
instances of the maladministration of this system, showing losses
of the stockholders of about $16,000,000, the following story of the
sale of this system is found in the report of the Interstate Commerce
Commission, on page 166:
What had happened in the 24 hours meanwhile was that J. P. Morgan and H. B.
Hollins had met at the former's New York residence on September 9, 1905, and
closed an agreement for the purchase by Morgan of Hollins's C., H. & D. stock hold-
ings, involving an expenditure of some $12,000,000. Francis Lynde Stetson was
present as Morgan's counsel and wrote the agreement on a sheet of note paper. Its
text follows and its significance will be further considered:
9 Sept. 1905.
219 MADISON AVENUE.
H. B. Hollins & Co. will sell and J. P. Morgan & Co. will purchase 56,000 shares
of C. H. & D. R. R. Co. Common Stock at the price of 160% with interest at the rate
of 41% per annum from December 7th, 1905, until date of delivery, all dividends
to be credited against the interest and to J. P. Morgan & Co.
This delivery may be made by H. B. Hollins & Co. at any time, and must be made
by them upon October 1st, 1906, or at such time thereafter as shall be specified by
J. P. Morgan & Co. by three months' notice in writing.
If so requested by H. B. Hollins & Co., J. P. Morgan & Co. will lend to them upon
their obligations secured by C. H. & D. stock or syndicate subscriptions at 135%
such sums as they may find necessary to carry such stock or subscriptions, to an
aggregate amount not exceeding 56,000 shares, the rate of interest to be 41%.
This contract and all obligations of J. P. Morgan & Co. may be terminated by them
at any time after October 1, 1906x, by three months' notice in writing by J. P.
Morgan & Co.
x1906
H.B.H.
J.P.M.
J. P. MORGAN & CO.
H. B. HOLLINS & Co.
*In addition we gave H. B. H. & Co. order to buy about 16,000 sh. participation
ctfs. at about 135.
*
*
*
*
*
*
In working up this new syndicate it seems that all concerned were informed as to
the true financial condition of the properties, so that it would appear to have been a
difficult matter to induce subscribers to embark in the new venture. Even though
certain of the obligations were recapitalized so as to reduce the fixed charges to the
level of the earnings, as seems to have been proposed, the proposition would still seem
to have been too uncertain to attract such substantial subscriptions as were needed.
It may well be that the following sentence from Erb's letter of September 20, 1905,
addressed to one of the original subscribing interests of May 19, 1904, suggests one, if
not the underlying, purpose of this syndicate:
"Messrs. Edwin Hawley and John W. Gates were unimportant participants in
this syndicate and their names were made use of, with J. Pierpont Morgan & Co.,
to create the impression that the property would go into speculative hands, and they
have since stepped forward to take the property from Messrs. H. B. Hollins & Co.,
thus relieving the entire situation and to the satisfaction of everybody in interest."
Whatever motive lay beneath the new syndicate scheme, there is no doubt as to
the effect it had on the Erie management.
*
*
Mr. Harriman is introduced in the transaction and the president of the
Erie Railroad is snubbed by Mr. Morgan.-The following is from pages
172-173 of the report:
President Underwood's reference to Harriman's whereabouts prior to their interview
arose from a question as to the accuracy of a report that the Erie's purchase of the
C., H. & D. had transpired during Harriman's absence from the country. This record
does not settle this point definitely, but it does show that Harriman did not attend
any meeting of the board or executive committee during the period July 26 to Novem-
ber 1, 1905. The record also clearly indicates Harriman's emphatic disapproval of
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS.
949
the purchase upon his return in November, with the result that President Underwocd
obtained another interview with Morgan, as to which he testified as follows:
"Then I went down and had an audience with Mr. Morgan, and I told him that
practically the C., H. & D. had a floating debt that was not visible and in the statement
he showed me. He said: 'Well, we will look at the statement,' and there was some
attempt made to find that statement, but it was unsuccessful; it was not produced.
I had not kept it because-well, I did not keep it. I said: 'Mr. Morgan, the state-
ment that I made to you of the effect that the acquisition of the C., H. & D. on the
Erie's finances is null and void, because the statement was inaccurate.' He looked
at me and said: 'Well, sir, if the statement that we made to you was inaccurate, and
for any reason you think that the Erie Railroad has made a bad trade, your duty is
very simple you have only to convene your board of directors and rescind it, and I
advise you to do it at once.'
"I bade him good afternoon and walked out of his office, and as I came out of his
office I met Mr. Stetson, and I told him, being counsel, 'Mr. Morgan has just authorized
the rescinding of that trade, and I think it was a very unusual and extraordinary
thing for him to do. I am surprised that he would do it. And I wonder if it would be
bad taste for me to tell him that.' He said: 'He might like to hear it.' So I went back,
and Mr. Morgan was standing with a paper in his hand, and I said, 'I would like to
speak to you for a minute.' He made no answer. I said again, ‘I would like to speak
to you for a minute.' I said, 'I want to tell you I think you have done a very big
thing, the biggest thing I ever came in contact with.' He said nothing. I said,
'Did you hear me?' He said 'I did, sir.' And I walked out.”
In closing the report the Interstate Commerce Commission says as
follows:
Nothing disclosed in the record before us is to be more regretted than the readiness
of great banking institutions in our financial centers to loan enormous sums of money
upon exceedingly precarious security in aid of such schemes as have been devised în
the wrecking of these railroads. Not only this, but the high officers of such institu-
tions, while acting ostensibly as directors of the railroads, have in fact been little
more than tools and dummies for the promoters. The trustees of other people's
money seem to have had little compunction about violations of their trusts for the
benefit of the promoters, and at their demand.
Can the like of what has befallen these two roads be made impossible hereafter?
Perhaps not entirely, so long as financial circles continue complaisant toward financial
exploitations which prove successful. But it will help if minority stockholders are
more watchful of their interests and if bondholders assert their rights before their
security fades away for lack of upkeep, purposely neglected in order to pay interest
and dividends unearned. It would, in our opinion, render such exploitation more
difficult if the issuance and marketing of all securities of common carriers were sub-
ject to Federal regulation. As to that we renew the recommendations repeatedly
made to the Congress in our annual reports. We also point to the lesson, here again
taught, that access to correspondence files is indispensable for a thorough and accu-
rate understanding of the motives and purposes which underlie the formal entries
made in accounts and records.
Unwise management contributed to the downfall of these roads, but breach of trust
by corporate officials, often for personal gain, was the main cause here, as in the records
developed in other investigations. Consolidations and Combinations of Carriers, 12
I. C. C., 277; The New England Investigation, 27 I. C. C., 560; St. Louis & San
Francisco Railroad Investigation, 29 I. C. C., 139; Financial Investigation of N. Y.,
N. H. & H. R. R. Co., 31 I. C. C., 32; Financial Transactions C., R. I. & P. Ry. Co.,
36 I. C. C., 43. That downfall, with its deplorable consequences, can be traced only
to betrayal within, and not to compulsion from without. Neither rivalry, nor rate
level, nor regulation, nor all combined, can be found on this record to have contrib-
uted in any appreciable degree to the disaster.
In discussion of transportation conditions during the last two years or more much
has been made of the fact that over 40,000 miles of our railroads were under receiver-
ship. A recent publication lists 69 railroads, among them the Pere Marquette and
C.,˜H. & D., as in the hands of receivers on December 31, 1916. Their combined
operations cover 34,559 miles. Over 40 per cent of that mileage is in systems which,
as shown by our investigations, have suffered principally from financial mismanage-
ment and exploitation. Over 40 per cent more, of which a large part is located in
Texas, is comprised in two southwestern systems. The remaining, 5,800 miles are
distributed among fifty-odd carriers in different parts of the country.
950 FEDERAL OPERATION OF "
TRANSPORTATION SYSTEMS.
The statements of fact herewith presented having all been verified
from the official records and sworn testimony taken before the Inter-
state Commerce Commission, disclose a condition of profligacy, waste,
falsifying and destruction of records, and the ignoring and violation
of law, both State and National, so vast in its conception and so
successfully carried out in defrauding the American people as to be
beyond belief.
Can it be possible that the American people, after learning how our
great governmental functions have been usurped by the few, who have
been given such vast and dangerous powers by special privilege, will
permit this "invisible government" to destroy democracy and the
public welfare in our Republic as here disclosed? The record is before
you and the only remedy lies in the ownership by the people and the
operation through the agencies of their Governemnt of all those
utilities and natural resources which by right belong to the people,
and upon the just and democratic administration of which the public
welfare and happiness depend.
X
MAR 1 8 1918
BOUND
UNIVERSITY OF MICHIGAN
DEC 141918
UNIV. OF MICH
LIBRARY
SH.
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