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There are no known copyright restrictions in the United States on the use of the text. http://archive.org7details/cu31924030145639 INTERSTATE AND FOREIGN TRANSPORTATION HEARINGS BEFORE THE JOINT SUBCOMMITTEE ON INTERSTATE AND FOREIGN COMMERCE, CONGRESS OF THE UNITED STATES SIXTY-FOURTH CONGRESS FIRST SESSION PUBSUANT TO PUBLIC RES. 25 A JOINT RESOLUTION CREATING A JOINT SUBCOMMITTEE FROM THE MEMBERSHIP OF THE SENATE COMMITTEE ON INTERSTATE COM- MERCE AND THE HOUSE COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE TO INVESTIGATE THE CONDITIONS RELATING TO INTERSTATE AND FOREIGN COMMERCE AND THE NECESSITY OF FURTHER LEGISLATION RE- LATING THERETO, AND DEFINING THE POWERS AND DUTIES OF SUCH SUBCOMMITTEE Index to Parts 1-10 Printed for the use of the Joint Subcommittee on Interstate Commerce WASHINGTON GOVERNMENT PRINTING OFFICE 3' kfF /OS" A/fZf fi>h..i- /a JOINT SUBCOMMITTEE ON INTERSTATE AND FOREIGN COMMERCE. FRANCIS G. NEWLANDS, Nevada, Chairman. WILLIAM C. ADAMSON, Georgia, Vice Chairman. JOSEPH T. ROBINSON, Arkansas. THETUS W. SIMS, Tennessee. OSCAR W. UNDERWOOD, Alabama. WILLIAM A. CULLOP, Inaana. ALBERT B. CUMMINS, Iowa. JOHN J. ESCH, Wisconsin. FRANK B. BRANDEGEE, Connecticut. EDWARD L. HAMILTON, Michigan. Fbane Healt, Clerk. Willis J. Davis, Aaaiatant Clerk. It l>, ! .■Ii''i lU) ;> INDEX A. Accident and insurance fund : National Incorporation act to provide, F. G. Newlands 269 See also Railroad employees. Adams Express Co. See Harrison, Thomas B. Adamson, Hon. William 0. (vice chairman, Joint Committee on Inter- state and Foreign Commerce) : Arbitration, views on 190 Commerce clause of the Constitution 188-189 Elklns law. 487 Government ownership 346 Interrogation of— S. W. Brookhart 608, 611 W. J. Bryan 46-5, 469, 470, 473, 483, 484, 486, 487, 488 Max Thelen 445, 446, 456 A. P. Thom 29-33, 40, 54, 69, 91, 92, 103, 179, 183-212, 346, 347, 406, 415, 419, 420 Interstate commerce, relation of United States Constitution to 184, 185 Member of committee 4 Rayburn bill, reference to 190 Remarks — ■ Appearance of witnesses, etc 14, 15, 17, 21, 22, 23, 36, 37, 38, 39, 247, 350, 526 Statement of Mr. Bristow 14, 15 Southern Railroad . 192, 193, 194 State corporations, power of Congress over 207 State's rights, relation to the Constitution 188, 189, 190 Adamson eight-hour law : Extract from newspaper 349 References to, S. W. Brookhart : 610, 611 Advanced-rate cases : S. W. Brookhart 586, 587, 589, 607, 609, 612 A. B. Cummins 372,380,387 Reason for, S. W. Brookhart ^_ 584-585, 586-587 Advisory committee of railway executives : Witness for, A. P. Thom 235 American Express Co. See Harrison, Thomas B. American National Llve-Stock Association: Resolutions adopted 618-619, 620 American waterways : Use and development, F. G. Newlands 517-526 See also Inland waterways. Arbitration : Provisions for — • W. C. Adamson 190 A. P. Thom 190 Arkwright Club : « Membership of ^ 17 Atchison, Topeka & Santa F6 Railroad: Financial condition, Max Thelen 423, 542-543 Atlantic & Pacific Railroad Co. : Incorporation of. Max Thelen 441 70342—17 1 655 656 INDEX. Atlantic Coast Line Railroad: ^age. Annual report in Financial Age, Max Thelen 436 Incorporated In Virginia, A. P. Thorn 172 B. Baltimore & Ohio Railroad: Service of, A. P. Thorn 327, 328 Bartol, George E. (Philadelphia Bourse) : Brief on regulation of railroads 16 Benedict, Albert T. (Western Union Telegraph Co.) : Testimony 35-36 Bethlehem Steel Works : Addition to, W. A. CuUop 364 Bondholders : Rights of, A. P. Thom 173,174 Bonds. See Stoclis and bonds. Boston & Maine Railroad : Investigation of, Max Thelen 557, 559-560 Boston Chamber of Commerce : Favors Federal regulation of railroads, A. L. Hathaway 15 Bradley, Justice: California v. Pacific Railroad, opinion 136, 140, 262-263, 266-267 Railroad Company v. Peniston, opinion - 138, 265-266 Taxation of railroads, opinion 303, 451, 452 Brandegee, Hon. Frank B. (Senator from Connecticut) : Interrogation of — J. L. Bristow 27 Max Thelen 423, 437, 446 A. P. Thom 36, 40, 182, 411-415, 420 Member of committee 4 Remarks relative to testimony 28, 36, 40, 446 Brewer, Justice : Opinion on Texas & Pacific Railway Co., Max Thelen 445 Rates — Fixing of, powers of congress 448, 449 Reasonable 321 Brimstone Railroad & Canal Co. : Earnings of, S. W. Brookhart 608 Bristow, Hon. Joseph L. : Chairman National Association Railway Commissioners 25, 421 Remarks relative to hearings 13, 14, 15, 26-27, 92 Brookhart, Smith W. (State Railway Commission of Iowa) : Testimony 582-612 Adamson eight-hour law 610, 611 Advance rate cases 586, 587, 589, 593, 603, 607, 609, 612 Advanced rates 584^85, 586-587 Average haul of railways 602, 604 Brimstone Railroad & Canal Co., earnings of 608 Burlington Railroad, land values 594 Capitalizing unearned increment 593, 594 Charts showing prices and yields on stocks and bonds 590-591 Credit, impairment of 592 Earnings of railroads on common stock 606-610 Freight density, comparison of American and German 603-604 Freight rates, comparison of American and German 601, 604 German railroads 599-605 Government credit 583-584, 585, 588, 589 Government ownership — Claims of opponents 585, 597 , Economy under 583, 597 Favorable to 583 Versus private ownership 593, 595, 605, 606, 610 Iron and steel, fluctuation in prices, chart from Iron Age 598 Land values 594 Local waste in New York City 595 Minnesota rate case . 593, 603 INDEX. 657 Brookhai-t, Smith W. — Continued. Railroad credit — Page. Comparison with Government credit 588-589 Defense of 586 Reference to Mr. Bryan's statement 611 References to Mr. Thom's argument 586-587, 588, 592-593 References to Railway Age Gazette 585-586, 597, 600, 601, 602 Salaries of railroad officials and employees 597-598 Steel rails, estimate on 596 . Stockholders, returns on investments 593 Stocks and bonds of railroads compared with Government securities- 592 Terminal expense, comparison of American and German 603, 611 Wages, comparison of American and German 601-602, 603 Waste of competition 595 Brownsville Railroad. See St. Louis, Brownsville & Mexico Railroad. Bryan, William Jennings : Testimony 457-488 Capitalization of railroads 475, 478 Congress, influence of railroads on 467, 486 Dividends, earning of 488 Elkins law, reference to 487 Government regulations and control of railroads, objections to 457, 465-466, 468, 474 National remedies added to State remedies 472, 475, 479, 482, 484, 485 Railroad regulation — National 457,486 State 470, 471 Rebates, disadvantages of 481 Stocks and bonds, issuance of 474, 476 Valuation of railroads necessary 477,478 Eryson, Joseph F. (general counsel, Missouri, Kansas & Texas Rail- road) : Member of law committee 412 Buekland, E. G. (vice president and general counsel, New York, New Haven & Hartford Railroad) : Member of law committee 412 Bunn, C. W^. (general counsel, Northern Pacific Railroad) : Member of lav7 committee 412 Burke, W. B. (Charleston, Miss.) : Representing Southern Hardware Traffic Association 24 Burlington Railroad : Land values, S. W. Brookhart 594 Busby, Hon. W. G. (chairman, Public Utilities Commission of Missouri) : Member National Association of Railway Commissioners 421 Bush, B. F. (Missouri Pacific Railroad) : Member of railroad executives' committee 28 Butler. Rush C. (Chicago Association of Commerce) : Remarks relative to witnesses 25 C. California : Investments under public regulation. Max Thelen 539, 556 Public-utilities act, Max Thelen 541-542 Public utilities and the railroads. Max Thelen 556-557 Railroad commission of. Max Thelen 536, 538, 539, 540, 545 Railroad systems, Max Thelen 533, 540, 541-546 California v. Pacific Railroad: „„„„„„ „„_ Opinion, Justice Bradley 136, 140, 262-263, 266-267 Canada: , Railroads, E. L. Hamilton 410 Candler, Hon. C. M. (chairman. Railway Commission of Georgia) : Member National Association Railway Commissioners 421 Mentioned as witness 25 658 INDEX, Capitalization of railroads: Views of— ^^ee. S. W. Brookhart 593, 594 W. J. Bryan 4T4, 4T5, 478 S. H. Cowan 632 F. G. Newlands 124, 132, 149-152,154, 155, 159, 161, 270 Max Thelen 553-554 A. P. Thom__ 63-69, 72-74, 191, 244, 245, 308-310, 355, 356, 378-382, 385 See also Credit ; Dividends ; Securities ; Stocks and bonds. Carriers : Commission to consider incorporation of, F. G. Newlands 133 Inquiry relative to 10 See also National incorporation of railroads ; Railroads ; Transpor- tation facilities. Cars: Average movement, Daniel Willard 308 Fines for shortage, A. P. Thorn 78 Shortage in, S. H. Cowan 625,626 Supply of, railroads derelict in. Max Thelen 422 Cary, Graddy (Southern Cattlemen's Organization) : Mentioned as witness 20 Central Pacific Railway Co. : Incorporation of, Max Thelen 441 Central Pacific Railway Co. v. California : Opinion . 141 Certificate of incorporation 159-160 Charters : Federal — Discussion by Max Tlielen 530 Necessity for, A. P. Bamstedt 616 Not to affect bonded indebtedness, A. P. Thom 398, 399 System for, A. P. Thom 194, 195, 196 State- Amendment by Congress, A. P. Thom 99-102 Grants from adjoining States, A. P. Thom 166 Limitations, A. P. Thom 172 Chesapeake & Ohio Railroad : Incorporation in Virginia, A. P. Thom 172 Chicago & Alton Railway Co. : Financial transactions 571 Investigation of. Max Thelen 549-552 Chicago, Milwaukee & St. Paul Railroad: Income available for dividends. Max Thelen 423 Investigation of accounts. Max Thelen 560-561 Chicago, Rock Island & Pacific Railway Co. : Financial transactions 562, 563-579 Choctaw, Oklahoma & Gulf Railroad Co. : Financial transactions 573 Clayton bill : Reference to, A. P. Thom 217, 218, 219 Cleveland and Powell, Railroad Finance (extract) 52-53 Commerce : National regulation, A. P. Thom X76 Regulation by State and Nation, F. G. Newlands ' 143, 516 See also Interstate commerce. Commerce clause of the Constitution : Effects of, W. O. Adamson 188-189 Committee on real preparedness : Favors Government ownership and operation of railroads 18 Commons, Prof. John R. : Appearance as witness 28 Competition, railroad : Necessity for, A. P. Thom 109-110 Rate regulation, A. P. Thom 393 Waste of, S. W. Brookhart 595 INDEX. 659 Congi-ess : Pago. Attitude toward State's rights, A. P. Thorn 187 Constitutional powers — F. G. Newlands 250 Max Thelen 444 A. P. Thorn 173-174 Influence of railroads on, W. J. Bryan 467, 486 Interstate commerce, regulation — W. 0. Adamson 184, 185 A. P. Thorn , 184, 185 Kate regulation — Powers over, Max Thelen 443,449 Possible through power over post roads, Max Thelen 449 Possible under military power, Max Thelen 449 Under commerce clause, no power for. Max Thelen 449 Rates — ■ Powers to fix. Justice Brewer 448,449 Reasonable, powers to fix. Justice Brewer 448,449 Regulation of property subject to, A. P. Thom 174^175 Relation to Interstate Commerce Commission, S. H. Cowan 622 State laws, power to repeal, A. P. Thom 414 State's rights, attitude toward, A. P. Thom 187 Waterways, powers over, F. G. Newlands 507, 508, 509, 510 /See also Federal Government. Consolidated Indiana Coal Co. : Operation of 572 Constitution of the United States : Authority to regulate commerce, A. P. Thom 96-97 Commerce clause and its effects, W. C. Adamson 188-189 Congress, powers under — F. G. Newlands 250 Max Thelen 444 A. P. Thom 173-174 Control of interstate commerce, W. O. Adamson 184, 185 Powers to Incorporate railroads, F. G. Newlands 127 Corporations : Creation of — • Chief Justice Marshall 441 Max Thelen 444 A. P. Thom 172 Federal — A. B. Cummins 396 F. G. Newlands 27^277 A. P. Thom 98-103, 172 Merging of State and National, F. G. Newlands 514-515 Pennsylvania Railroad, A. P. i'hom 166 State- Merging of, F. G. Newlands 291, 292, 293 Power of Congress over, W. C. Adamson 207 State and National corporations, Richard Olney 112-114 Subsidiary, buying and selling through 219, 220 Texas, State of, A. P. Thom 166-167 Texas & Pacific Railway Co., Max Thelen 443, 444 Virginia, State of, A. P. Thom 168 Costs: State regulation of, A. P. Thom 176 Cotton mills. See Arkwright Club. Court of Commerce : Views of F. G. Newlands 156, 159 Covington & Lexington Turnpike Co. v. Sanford : Reference to, J. J. Esch 400, 401 Cowan, S. H. (Industrial Traffic League, Texas) : Brief submitted 617-654 • Capitalization of railroads 632 Congress in relation to Interstate Commerce Commission 622 660 o INDEX. Cowan, S. H.— Continued. ^'^• Freight rates, fixing of 637 Government ownership, opposed to 19> 618, 620 Hepburn bill 630 Inefliciency in operating railroads 625, 628 Interstate Commerce Commission- Powers and work of 22-23, 622 Regulation of local rates 648 Shows car shortage 625, 626 Versus State commissions 647 James J. Hill, enterprise in development 633 National incorporation of railroads, opposes 618, 620 Railroads, construction facilities . 635, 636 Rate making- Classification of 637, 638-639, 640, 641, 642 Inefliciency in regulation 628, 629, 631, 653 Rates — Effect of raising 627-628 Idaho 626 Increase in 623-628, 634, 635 Intrastate, regulation of 621 Reasonable 621, 623, 629, 630, 631, 654 Regulation by National Government 627, 631 State control 20-21, 629, 630, 631, 649, 650 Uniformity impossible 654 Reference to Mr. Thom's statement 648 Regional commissioners proposed 647 ■Remarks relative to hearings 24, 27 St. Louis & San Francisco Railroad Co., reorganization of 632 St. Louis, Brownsville & Mexico Railroad, references to 632, 634 Securities and bonds 631 Southwestern TarifE Committee, reference to 634 State commissions, benefit of 644, 645-646, 647 State regulation of railroads 618, 620 Transportation facilities 621, 633, 634, 639 Wyoming, rates excessive 626 Credit, Government : Views of S. W. Brookhart 583-584, 585, 588, 589 Credit, railroad : Comparison with Government credit, S. W. Brookhart 588-589 Control of, A. P. Ramstedt 614 Decline in, A. P. Thom 218, 214, 218 Defense of, S. W. Brookhart 586 Federal incorporation to strengthen, A. P. Thom 231 Impairment of — S. W. Brookhart 592 Max Thelen 437, 532, 533, 548-549, 553, 560, 562. 580 A. P. Thom__. 218, 219 Method of raising new capital, A. P. Thom 308-310 Present conditions, A. P. Thom 63-69 Creditors : Rights of, A. P. Thom 172-173 174 CuUop, Hon. William A. (Representative from Indiana) : ' Interrogation of— y-J-^?'"'^^'' 467,473 A. P. Thom__ 352-366, 369 Member of committee 4 Cummins, Hon. Albert B. (Senator from Iowa) : Interrogation of — D. L. Bristow 14-15 W. J. Bryan ~ "" ^§3 Max Thelen II"IZ~I~~__ 424 563 i>x u- ^■J^^°'^-rz 30^34, 46r54r92, 36&-400 Member of committee 4 Remarks relative to witnesses =■ 39 4^0 453 INDEX. 661 D. Dawes, Chester M. (general counsel, Chicago, Burlington & Quincy Page. Railroad) : Member of law committee 412 DeBerard, Frederick B. (Merchants' Association of New Yorli) : Favors Government control of railroads 16 Opposes Government ownership and operation of public utilities— 16 Bering Coal Co. : Operation of 572-573 Dividends : Amendment relative to, F. G. Newlands 164, 290 Earning of, W. J. Bryan 488 Incomes available for, Mas Thelen 423 Limitation of, A. P. Thom 180-181 Relation to equipment, A. P. Thom 343, 344, 346, 393 Dunn, Samuel O. See Railioay Age Gazette. E. Earling, A. J. (Chicago, Milwaukee & St. Paul Railroad) : Member of railroad executives' committee 28 Electric railways : Development of, A. P. Thom 417, 418 PJliott, Howard (New York, New Haven & Hartford Railroad) : Member of railroad executives' committee 28 Elkins law : References to — W. C. Adamson 487 W. J. Bryan 487 Elmquist, Charles B. (Railroad and Warehouse Commission of Minnesota) : Member of National Association of Railway Commissioners 25, 27 Equipment : Quality and adequacy of service necessary for, Max Thelen 454 State control over, A. P. Thom 176 Use for, A. P. Thom 343, 344, 346, 393 Each, Hon. John J. (Representative from Wisconsin) : Interrogation of — S. W. Brookhart 582, 589 W. J. Bryan 465,467,469 Max Thelen 422-423, 442 A. P. Thom 351, 386, 400-411 Member of committee 4 European war : American securities, effect on, A. P. Thom 182 Interest rates, effect on, Benjamin Strong 312-313, 314 Prosperity result of, R. R. Prentis 422 Stimulant to commerce, A. P. Thom 364 F. Federal courts : Right t§ carry cases to, F. G. Newlands 143-144 Federal Government : Functions of, Clifford Thorne 461 Power to create necessary agencies and instrumentalities, Max Thelen 440 Power to man trains, A. P. Thom 414 Railroads incorporated by. Max Thelen 441, 442 Right to create a corporation. Chief Justice Marshall 441 See also Congress ; National Incorporation of railroads. Federal incorporation. See National incorporation. Federal railroad commission : Necessity for and duties of, A. P. Thom 104-105 Fee, Frank F. (Southern Hardware Traffic Association) : Mentioned as witness 24 662 INDEX. Field, Justice: ^^s*- Railroad Company v. Penlston, opinion 138, 265-266 Taxation of railroads, opinion 303, 451, 452 Financial Age (extracts). Max Tlielen 423,436,437 Financial condition of railroads : Not generally impaired. Max Thelen 422 Finn, Hon. Lawrence B. (chairman, Railroad Commission of Kentucky) : Member National Association Railway Commissioners 421 Mentioned as witness 25 Five Per Cent Rate case : Reference to, A. B. Cummins 372 Floods : Prevention of, F. G. Newlands 49& Forests : Conservation of, F. G. Newlands 499-500 Franchises : Right of earning, A. P. Thom 401,402 Source of, A. P. Thom 174 Southern Railway Co., A. P. Thom 402 Subject to amendment, etc., by act of Congress, A. P. Thom_ 165, 166, 174, 175 Subject to taxation, A. P. Thom 402 Freight cars : Average movement, Daniel Willard i 308 See also Cars. Freight density: Comparison of American and German, S. W. Brookhart 603-604 Freight rates : Comparison of American and German, S. W .Brookhart 601, 604 Fixing of, S. H. Cowan 637 See also Rates. " Full-crew law " : Objections to, A. P. Thom 203 G. Garcelon, William F. Hill, James J. : Enterprise in development, S. fl. Cowan 633 Hoke and Bconomides v. United States : Opinion, Mr. Justice McKenna 455, 45(> 664 INDEX. Holden, Hale (president, Chicago, Burlington & Quincy Railroad) : ^^^^o Meniber of raiU-oad executives' committee ^ Holding companies : _ Requirements under national law, A. P. Thom 1'^ House, Francis E. (Commercial Club, Kansas City, Mo.) : Remarks relative to appearance •'•' Hughes, Justice : ^«4 aiq Minnesota rate cases, opinion ^to*, dj..> Hunt, Justice: Taxation of railroads, opinion 451, 452 I. Income of railroads : Increase in, F. G. Nevrlands 271 Net incomes reported from railway operations, A. P. ThomL 372, 379, 385, 386 See also Dividends. Idaho : Rates, excessive, S. H. Cowan 626, 628 Incorporation of railroads. See National incorporation of railroads. Industrial Traffic League. See Texas. Inland Waterway Commission: Appointment and purpose, F. G. Newlands 517-518 Inland Waterway Commission bill : Bill introduced by F. G. Newlands 490^91, 510-511 Inland waterway fund : Provisions for, F. G. Newlands 494^95,522 Inland waterways : Constitutional powers relative to, F. G. Newlands 496-498 Legislative requirements, F. G. Newlands 521-522 Power of President, F. G. Newlands 508, 510, 522 Speech of F. G. Newlands 489-490 Testimony of F. G. Newlands relative to 491-516 Use and development, F. G. Newlands 517-526 See also American waterways. Insurance. See Accident and insurance fund ; Railroad employees. Intercorporate ownership, W. Z. Ripley 12.5-126 Interstate and Foreign Commerce, Joint Committee on. Purposes of 225, 226, 227, 228, 220 Interstate commerce : Creation of a machine, F. G. Newlands 250, 251, 252 Intrastate traffic affected by, A. P. Thom 350-351 Regulation of — Powers of Congress — W. C. Adamson 184, 185 A. P. Thom 184, 185 Taxation by the States, A. P. Thom 93-94, 96 Views of F. G. Newlands 156 Interstate Commerce Commission : Car shortage shown by, S. H. Cowan 625, 626 Charter from, necessary for Federal incorporation, A. P. Thom 326, 327 Extension of powers advisable, A. P. Ramstedt 613, 614 Louisville & Nashville Railroad, investigated by 221 Net incomes reported to, from railway operations, A. P. Thom 372, 379, 385, 386 Powers and duties of — S. H. Cowan 22-23, 622 A. P. Thom 104-111, 207, 855 Rate regulation — S. H. Cowan 648 F. G. Newlands 180, 131, 170, 252, 253, 269, 283 294 A. P. Thom 106-110, 188, 232-234, 373-877, 387 Tlates — Fixing of, F. G. Newlands 131,170 Suspension of, A. P. Thom 108-109 Regional commissioners aid to, A. P. Thom 210, 211, 407, 408 Reorganization, A. P. Thom 104-105, 208, 209^ 353' 354 Subject to Congress, A. P. Thom 339' 390 INDEX. 665 Interstate Commerce Oommlssiou — Continued. PaE& Valuation of railroad properties by, F. G. Newlands 253,254 Versus State commissions, S. H. Cowan 647 Iron and steel: Fluctuation in prices, cliart from Iron Age, S. W. Brookliart 59S J. Jackson, Carl (member, Railroad Commission of Wisconsin) : Member of National Association Railway Commissioners 421 Mentioned as witness , 25 Jefferson, Thomas: Essential principles of government 461 Johns, C. B. (Ebensburg, Pa.) : Remarks relative to appearance 37 K. Kansas, discrimination iu passenger fare. A, P. Thorn 85-86 Keefer, Edward P. (National Live Stock Shippers' Protective League) : Mentioned as witness 20 Kellogg, R. S. (National Lumber Manufacturers' Association) : Remarks relative to testimony 18 Kenna, Edward Dudley : Railway Misrule (extract) 595 Knoxville v. Water Co. : Reference to, A. P. Thom 401 Lamb, William E. (California Fruit Growers' Exchange, Los Angeles, Cal.) ; Remarks relative to testimony 25 Land values : Increase in, S. W. Brookhart 594 Iiathrop, Gardner (general solicitor, Atchison, Topeka & Santa F6) : Member of law committee 412 Lee, O. B. (Missouri Railroad Commission) : Mentioned as witness 20 Lehmann, P. W. (American Telephone & Telegraph Co.) : Remarks relative to testimony 34 Litigation : Danger of, Max Thelen 453-454, 531 Federal and State courts, A. P. Thom 352 Loomis, N. H. (general solicitor. Union Pacific Railway) : Member of committee 412 Loree, L. F. (Delaware & Hudson Railroad) : Member of railroad executives' committee 28 Louisville & Nashville Railroad: Claim against, A. P. Thom 173 Interstate Commerce Commission investigates, J. T. Robinson 221 Love, J. E. (Oklahoma Corporation Commission) : Remarks relative to testimony 26 Lovett, R. S. (Union Pacific Railway) : Member of railroad executives' committee 28 Luxton V. North River Bridge Co. : Opinion, Justice Gray 136, 262 M. McClellan, George McK. (Seattle Chamber of Commerce) : Remarks relative to appearance 17 McClure, Dr. S. W. (National Wool Growers' Association) : Mentioned as vntness 20 McCuUough V. Maryland: Opinion, Chief Justice Marshall 136, 137, 140, 263, 441 ^Reference to, F. G. Newlands 278-279 666 INDEX. McKenna, Justice: A-r^4^ Police regulations, opinion '*'^'^' *"" MacKinnon, F. B. (United States Independent Telephone Association, Washington, D. 0.) : Statement relative to testimony °^ Mail, United States: Rates for, A. P. Thorn ^^ Markham, 0. H. (Illinois Central Railroad) : Member of railroad executives' committee 28 Marsh, Benjamin C. (Committee on real preparedness) : Favors Government ownership and operation of railroads 18 Marshall, Chief Justice: Federal Government, right to create a corporation 441 McCullough V. Maryland, opinion 136, 137, 140, 263, 441 National Government cemented by, Clifford Thorne 4-59, 463 Massachusetts Public Utilities Commission : Denies right of New Haven road to issue securities, J. J. Esch 403 Mercer, J. H. (secretary, Kansas Live Stock Association) : Mentioned as witness 20 Merchants' Association of New York. See New York. Mergers : Necessity for, F. G. Newlands 524^525 State corporations, F. G. Newlands 279, 291-293 Mileage, railroad : Construction in California, Max Thelen , 539-540, 555 New York Central, A. P. Thorn 93-94 Milton, Smith (Louisville, Ky.) : Mentioned as witness 24 Minnesota Railroad and Warehouse Commission: Opinion, .ludge Sanborn 458,464 Minnesota rate case: Opinion, Justice Hughes . 464, 613 References to — S. W. Brookhart 593, 603 A. P. Thorn 323 Clifford Tliorne 458, 459 Missouri, Kansas & Texas Railroad : Financing of, Max Thelen 579-580 Miiir, John (chairman. Railways Investors' League) : Safeguarding railway securities 224, 229, 230 Mimn V. State of Illinois : References to — J. J. Esch 401 A. P. Thom 400,401 Myrick, N. Sumner (" Amster Committee") : Remarks relative to appearance 25 N. National Association of Railway Commissioners: Purposes of, Max Thelen 421 Report on national incorporation of railroads 102 National City Bank and Guaranty Trust Co. of New York : Mentioned, Max Thelen 436 National corporations. See Corporations. National incorporation of railroads : , Arguments in favor of, A. P. Thom 98-103 As affecting State regulation. Max Thelen 439-440, 441, 442 Boston Chamber of Coramerce favorable to, A. L. Hathaway 15 Danger of litigation. Max Thelen 453-454 Extracts of speech, etc., F. G. Newlands 117-165, 523 Favorable to, A. P. Ramstedt ' 615 Importance to public interests, F. G. Newlands 31 Legal power, Max Thelen : 529 Legitimate exercise by Congress of power to regulate commerce, A. P. Thom -_ 173 Necessity for. Max Thelen 532 Opposed to, S. H. Cowan 618,620 INDEX. 667 National incorporation of railroads — Oontinued. Plan for — Page. Max Thelen 442, 529-532 A. P. Thorn 206,207 Proper system of regulating commerce, A. P. Thorn 206 Provisions of act for ^ 144-146 Kelation to Government ovenership, A. P. Thom 180 Eeport on necessity for, A. P. Thom 102 Requires charter from Interstate Commerce Commission, A. P. Thom 326,327 Suggestions for, F. G. Newlands 288-290 Views of Max Thelen 440-449 Views of railroad men, A. P. Thom 169-171 National Live Stock Shippers' Protective League : Resolutions adopted 618-619, 620 National ownership. See Government ownership. National power over corporations : Relative to power of States, F. G. Newlands 514-515 National remedies added to State remedies, W. J. Bryan 472, 475, 479, 482, 484, 485 Navigation lines : Views of F. G. Newlands 157 Nebraska case of 1897. See Smythe v. Ames case. " The New England investigation " : References to. Max Thelen 557 New Haven Railroad. See New York, New Haven & Hartford Railroad. New Orleans, Texas & Mexican Railway: Reference to, W. C. Adamson 205 New York, Merchants' Association of: Favors Government control of operation of railroads, F. B. De Berard 16 Opposes Government ownership and operation of public utilities, F. B. De Berard 16 New York Central, mileage, A. P. Thom 93-94 Ne^ York, New Haven & Hartford Railroad : Credit, causes of Impairment, A. P. Thom 218, 219 Investigation of. Max Thelen 557-560 Securities — J. J. Esch 402-403 A. P. Thom 80 New York Times: Quotation relative to dividends 423 Newlands, Hon. Francis G. (chairman. Joint Committee on Interstate and Foreign Commerce) : Accident and insurance fund 269 American waterways, use and development 517-526 Automatic adjustment versus commission adjustment 255,256 Bill to create commission to consider incorporation of common car- riGrs ctC— — — — ______—_———_———————— — — loo Capitalization of fallroadsl." 124, 132, 149-152, 154, 155, 159, 161, 270 Comity of the States to the Nation 282, 283 Commerce, regulation by State and Nation 516 Commerce Court J^°' J^^ Complexity of existing conditions 272,273 - Congress— Constitutional powers SnVSnB kaq K?n Powers relative to waterways 507, DOS, 009, oiu Corporations, national — „^^ .„_ „„ ___ Absorption of State roads by 274, 275, 276, 277 Suggestions for 288, 290 Corporations, power of Nation and State over „ttiK Corporations, State, merging of 291, 292, 293, 514^-515 Dividends, payment of l°4 Federal courts, right to carry cases to iSq Flood prevention--- ""i::::::::::::::::: 499-500 Government ownership, arguments for 131-133, 147, 153, 270, 807-308 668 INDEX. Newlands, Hon. Ifrancis G. — Continued. Page, Government regulation and riglits relative to water power 503-51(> Increase in income of railroads 271 Inland Waterway Commission, appointment and purpose of 517-518 Inland Waterway Commission bill 490-491, 510-511 Inland waterway fund 494-495, 522. Inland waterways — Constitutional powers relative to 496-498 Speech on 489-49*. Testimony on 491-516 Use and development of 517-526 Intercorporate holdings 273, 274 Interrogation of — S. W. Brookhart 593, 607, 608 W. J. Bryan 457, 473, 476, 477, 479^88 Mas Thelen__ 423, 424, 436, 446, 456, 526, 527, 539, 540, 543, 549, 554, 555 A. P. Thom___ 31, 54, 91, 92, 103, 165-171, 174r-175, 177-184, 314, 419, 420 Interstate Commerce Commissiou, rate regulation by 130, 131 Interstate Commerce Commission, rate regultion by 130, 131, 170, 252, 253, 269, 283, 294 Member of committee 4 Mergers, necessity for 524^525 Merging of State corporations 279, 291-293, 515 National construction of railroads 271, 272 National incorporation of railroads 31, 117-165, 523 National transportation line 271 Politics, influence on railroads 127, 258, 259, 260 President's power over waterways, etc 508, 510, 522 Railroad employees. Insurance and pensions for 131, 155, 163-164 Railway system, breaking down of 512-513 Rate regulation, provisions for 147 Kates — Fixing of 269 Rise in 126 " Regulate," meaning of 134 Remarks relative to witnesses 14, 15, 16, 17, 21, 25, 26, 27, 34, 35, 37-38, 39, 91, 92, 117, 225, 350, 419, 420, 489, 526, 554, 555, 56? Scope of investigation 10-13 Southern systems, incorporation of 280, 281, 284, 288 Speculative element in railroad building 256, 257 Speech in United States Senate, April, 1906 249-307, 308 State commerce, regulation 143 State lines to be disregarded 120 State police 283, 284, 299 State's rights relative to water power 503, 504, 505 Stocks and bonds — Approval of Issues 128-129 Taxation 177 Swamp lands, reclamation of 500-502 Taxation — By States 130, 135, 155, 293, 294 National instrumentalities 134r-141 State relief for 277, 278, 279 System of 257, 258, 260-269 Uniform, advantages of 281, 282 Valuation — By Interstate Commerce Commission 253, 254 Interest on ■ 254, 255 Water transportation, coordination with rail transportation 513-514, 525 Nlles, Edward C. (chairman. Public Service Commission of New Hamp- shire) : Vice president of National Association of Railway Commissioners 14, 421 Norfolk & Western Railroad : Incorporated in Virginia, A. P. Thom 172 Statement concerning, In Financial Age, Max Thelen 436 North Carolina: Electric railways, development of, A. P. Thom 417 JUDEX. 669 North Dakotn Coal case: Page. Reference to, A. P. Thorn 328 Northern Pacific Railroad Co. : Income available for dividends, Max Tlielen 423 Incorporation of, Max Thelen 44] Noyes, Judge Walter C.(general counsel, Delaware & Hudson Railroad) : Member of law coi;nmittee 412 O. Olney, Hon. Richard : Memorandum on State and National railroad corporations 112-114 Reference to memorandum, A. P. Thorn 245 Operating revenues : Fluctuations, R. R. Prentis 422. 42:! P. Pennsylvania Railroad : Corporations of — T. W. Sims 2:-!t; A. P. Tliom 16G Service of, A. P. Thorn 327, 328 Philadelphia Bourse : Brief relative to railroad regulation, G. E. Bartol 16 Police powers : Control of Congress over, A. P. Thom, 184, IS."; State— F. G. Newlands , 283, 284, 2<)9 A. P. Thom ]7."i, IVG Police regulations : Opinion, Justice McKenna , 4.")5, 4.'5il Politics : Influence on railroads — F. G. Newlands 127,258,259,260 A. P. Thom 220, 221, 222 Post, George A. (president. Railway Business Association) : Remarks relative to testimony 19 Post Office Department: f.'j Transportation service, A. P. Thom 3.30 Prentis, Judge Robert R. (president. National Association of Railway Commissioners) : Annual address, Washington, D. C, November 14, 1916 424-430 European war, prosperity from , , ,__ 422 Operating revenues, fluctuations in 422, 423 President of the United States: Po%ver relative to waterways, etc., F. G. Newlands 508. 510. 522 See also Wilson, Woodrow. Pryor, Ike T. (president. National Live Stock Shippers' Protective League) : Mentioned as witness 20 Public utilities: Financing of, A. P. Thom .— 377,378 Merchants' Association of New York opposes Government owner- ship of, F. B. De Berard , 16 Puget Sound Railroad: Inve.stigation of accounts, Max Thelen , sbO R. Railroad Company v. Peniston: ^^''chilrjustice Strong 137, 138, 264-265 Justice Bradley 138, 26.0-266 Justice Field __ ^^^'^ttl^t Justice Swayne l^°. ^"o Railroad employees : . „ t, ^ /■* aia Adiustment of disputes, A. P. RamstPdt,__ ,,— , 616 Insurance and pensions, F. G. Newlands , 131, 155, 168-164 Salaries, S. W. Brookhart-,^, — 597-598 BaUroad Finance (extract), by Cleveland and Powell 62-53 70342—17 2 670 INDEX. Railroad oflicials : Salaries— ^ae«- S. W. Brookhart 597-598 A. P. Thorn 361, 362 Railroad rates. See Rates. Railroad regulation : Brief formulated by Philadelphia Bourse, G. E. Bartol 16 President Wilson's message 3 Views of A. P. Thorn 54-57, 76-91, 166, 168, 214-216, 333-336 See also Government regulation and control of railroads ; National Incorporation of railroads ; State regulation. Railroad systems : Breaking down of, F. G. Newlands 512-513 Union of, A. P. Thorn 169-170 Railroads : Building conditions, A. P. Thorn 369,370 Canada, E. L. Hamilton 410 Competition — S. W. Brookhart 595 A. B. Cummins 393 A. P. Thorn 109-110, 393 Consolidation of — ■ C. W. Adamson 19-3, 194 A. P. Thorn 193, 194 Construction facilities, S. H. Cowan 635,636 Control of, A. P. Thom 167 Derelict in supplying equipment, etc.. Max Thelen 422 Financial condition not impaired, Max Thelen 422 Germany, S. W. Brookhart 599-605 Improved facilities of, A. P. Thom 371 Inefficiency in operating, S. H. Cowan 625, 628 Influence of politics — F. G. Newlands 127, 2.58, 259, 260 A. P. Thom 220, 221, 222 Influence on Congress, W. J. Bryan 467, 486 National construction of, F. G. Newlands 271, 272 National federation of, A. P. Thom 365 Organization, A. P. Thom 165-169 Private ownership of, A. P. Thom 310-311, 312. 319 Prosperity, Max Thelen ' 527-528 Public distrustful of management, A. P. Thom 215, 216, 218 Safety in Investments, A P. Thom ' 313 State legislation, effect on, A. P. Thom 202 203 Texas, A. P. Thom 339, 340,' 341 See also Capitalization; Corporations; Credit; Dividends; Gov- ernment ownership; Government regulation and control; Hauls; Income of railroads; National incorporation of rail- roads ; Securities ; State railroads ; State regulation ; Stocks and bonds. Railroads, Finance and Organization (extract), by William Z. Ripley_ 51-52 Railway Age Gazette: References to, S. W. Brookhart 585-586,597,600,601,602 Railway executives. See Advisory committee. Railway Misrule (extract), by E. D. Kenna 595 Ramstedt, A. P. (Idaho Public Utilities Commission) ; Testimony 612-617 Charters, Federal, necessity for __ " ~ eio Credit, control of II__IZ_II"IIIII~ 614 Interstate Commerce Commission, extension of powers _ ~ I 613 614 National incorporation of railroads, favorable to __ _ _ " '615 Railroad employees, adjustment of disputes cir Rates— "^° Fixing of _ gj„ Intrastate, influence on Interstate ~ ~ Riti rir Reasonable " 'W\% State regulation " "~~ I"" riq Securities, Issuance of _ "~_ _ _~ ~~ Sj^ State regulation of railroads III ZZ_ZZII__I_II ~ ~ eil INDEX. 671 Rate making: Pago. Classification of, S. H. Cowan 637, 638-639, 640, 641, 642 Inefficiency in regulation, S. H. Cowan 628, 629, 631, 653 Kates, railroad : Adjustment, A. P. Thorn 107 Excessive, development retarded by, S. If. Cowan 626 Fixing of — Justice Brewer 448, 449 F. G. Newlands 269 A. P. Bamstedt 613 Max Thelen 443 A. P. Thorn 399 For United States mail, A. P. Thom 109 Increase in — S. H. Cowan 623, 624, 625, 628, 634, 635 F. G. Newlands 126 Interstate and local, control of, Justice Harlan 447, 448 Intrastate — Difference in, A. P. Thom 405, 406 Influence on interstate, A. P. Ramstedt 615, 616 Regulation of, S. H. Cowan , 621 States to regulate. Max Thelen 442 Joint, agreement upon, A. P. Thom . 110-111 Lowering of — Max Thelen 534-535 A. P. Thom - 359-360 Minimum, protection to water transportation, A. P. Thom 410 Power of Congress relative to— Max Thelen 443, 444, 449 A. P. Thom 230,231 Raising of, effect, S. H. Cowan 627-628 Reasonable — S. H. Cowan 621, 623, 629-631, 6.54 A. P. Ramstedt 615 A. P. Thom 321-325,375-377,389-392,400 Regulation of — By the States — S. H. Cowan 629, 630, 631 A. P. Ramstedt 613 A P. Thom 1- 176, 177, 188, 199, 200, 201 ciifEord Thorne 459, 462, 463 Provisions for, F. G. Newlands 147 See also Interstate Commerce Commission. State and interstate. Government regulation. Max Thelen 443 State control, importance of, S. H. Cowan 649, 650 Suspension of, A. P. Thom " om Texas, A. P. Thom ^"1 Uniformity Impossible, S. H. Cowan "54 See alKo Advanced rates ; Freight rates. Rayburn bill : ..^^ Interrogation relative to, C. W. Adamson iw Rea, Samuel (Pennsylvania Railroad) : Member of railroad executives' committee ^» Reagan v. Mercantile Trust Co.: Opinion i1^' f?; Reference to case of. Max Thelen *iz, 4*( Rebates : 407 Disadvantages of, W. J. Bryan ^°' Recon.titruction period : .,o„ Relation of State and Nation, A. P. Thom -l»» Regional commissions : „ ._ Adoption of, S. H. Cowan Y^' Distribution of, A. P. Thom inrTo^"TnR'9qi"2q9 ^k^ H54 Functions of, A. P. Thom 104, 105-106, 231, 232, d53, d54 Number of— fv46-547 Max Thelen h^tV) A. P. Thom - 231, ^rf^ 672 INDEX. Keglonal commissions — Continued. p^g^^ Plans for— 546-548 Max Thelen --„ .f,- ^^q A. P. Thorn 406,407,408 " Regulate," meaning of, F. G. Newlands — _ ^°^ Resolutions relative to interstate-commerce investigations 3-4, ^2t.-z/» Ripley, William Z. (professor. Harvard University) : lot^iop Intercorporate ownership =7 k. Railroads, Finance and Onianiaation (extract) OJ- ^^ Rix, George E. (Chamber of commerce, Lawrence, Mass.) : Remarks relative to testimony lb-l< Robinson, Hon. Joseph T. (Senator from Arkansas) : Interrogation of A. P. Thorn ^16-Z60, aox, aoz Member of committee. oft'oq'qrqR f?7 184 Remarks relative to witnesses zb, zy, 6^,^0,61, xa* Rock Island Improvement Co. : Financial transactions ^'* S. " Safety " : ._ . .__ Provisions for. Max Thelen 454,455 St. Louis & San Francisco Railroad Co.: Financial transactions ^12 Reorganization, S. H. Covi^an 632 St. Louis, Brownsville & Mexico Railroad : References to, S. H. Cowan 632,634 St. Paul Railroad. See Chicago, Milwaukee & St. Paul Railroad. Salaries : Railroad officials and employees — S. W. Brookhart 597-.598 A. P. Thom 361,862 See also Wages. Sanborn, Judge: Minnesota Railroad and Warehouse Commission, opinion 4.58, 464 San Pedro, Los Angeles & Salt Lake Railway : Condition of, Max Thelen 543 Santa F6 Railroad. See Atcliison, Topeka & Santa F6 Railroad. Seaboard Air Line Railway Co. : Bonds sold, reference in Financial Age, Max Thelen 436 Incorporated in Virginia, A. P. Thom 172 Securities : American, effect of European war on, A. P. Thom 182 Control over, by Congress, A. P. Thom 190, 191, 192 Fluctuations, A. P. Thom 357 Investments in, not poptilar, A. P. Thom 368, 369 Issuance of — A. P. Ramstedt 614 Max Thelen 452, 453, 454, 535 New York, New Haven & Hartford Railroad — J. J. Esch 402-403 A. P. Thom 80 Regulation of — By Congress, Max Thelen 452 By Government, A. P. Thom 98-99 Safe guarding of, John Muir 224, 229, 230 See also Capitalization ; Credit ; Dividends ; Stocks and bonds. Seddon, Hon. James A. (special master in chancery) : Decision in rate case 652 " Seven Cases of Eckman's Alternative " : Reference to, Max Thelen 529 Sherman Antitrust Act: Not beneficial, A. P. Thom 217 Shreveiport case : References to — S. H. Cowan 21 24 A. P. Thom 83-84, 199, 200 INDEX. 673 Sims, Hon. Thetus W. (Representative from Tennessee) : Interrogation of — Page. Max Thelen 527, 582 A. P. Thorn 32, 235-247, 308-347, 414 Member of committee 4 Sisson, Francis H. (member of railroad executives' committee) : Reference to, A. P. Thom 28 Smith, A. H. (New Yorl£ Central Railroad): Member of railroad executives' committee 28 Smyth V. Ames case : References to— J. J. Esch 400,401 F. G. Newlands 252,253 Max Thelen 446 A. P. Thom 401 South Carolina : Electric railways, development, A. P. Thom 417 Southern Pacific Railroad Co.: Financial Age, quotes gross earnings, Max Thelen 437 Income available for dividends. Max Thelen 423 Incorporation of, Max Thelen 441 Prosperity of, Max Thelen 542,545 Saving of, by California Railroad Commission, Max Thelen ^ 540-541 Southern Railway Co. : Corporations, A. P. Thom 172 Franchise, A. P. Thom ^___ 402 Incorporation of systems, P. G. Newlands 284-288 Interrogation relative to, W. C. Adamson 192-193 Operation of system, A. P. Thom 168, 169 Preferred stock, A. P. Thom 223 Southern States : System of railroads in, F. G. Newlands 2S0, 281 Southwestern tariff committee : Reference to, S. H. Cowan 634 Speculation : Elimination of, in building railroads, P. G. Newlands 256,257 Starke, James E. (Memphis, Tenn.) : Mentioned as witness — 24 State commerce: Regulation of, F. G. Newlands 143 State corporations. See Corporations. State government: Functions of, Clifford Thome 461,462,468 State legislation : Effect on railroads, A. P. Thom — 202,203 Subject to repeal, A. P. Thom 414 State railroad commissions : Attitude of railroads tovreird, Max Thelen 546 Benefit of, S. H. Cowan ., 644, 64&-646, 647 Criticism and work of. Max Thelen 536-^39 State railroads : Acquisition of, F. G. Newlands 163 State regulation : Of commerce, P. G. Newlands 516 Of corporations, P. G. Newlands 279, 291,. 292, 283, 514-515 Of costs, A. P. Thom ^-_— 176 Of railroads — W. J. Bryan ^?'^^^ S. H. Cowan «18,620,627 A. P. Ramstedt 614 (3f rfttcs S. H. Cowan 627,629,630,631 A. 1>. Ramstedt-,- „ 5if Max Thelen -— -- ^42-445- A. P. Thom 176,177,188,199,200,201 Clifford Thorne 459.4ffi2, 463 674 INDEX. state taxation: „ Views of — „ ,.„„ ,,?,1 P. G. Newlands 130, 135, 155, 2Y7, 278, 279, 293, 294 Max Thelen 449-4o2 A. P. Thorn 93-94, 96, 175-176, 177, 404, 405 State's rights: Argument of A. P. Thorn, reference to. Max Thelen Ddd-Dd4 Attitude of Congress toward, A. P. Thom 187 Interstate and intrastate commerce, A. P. Thom 394r-395 Meaning of, A. P. Thom 185. 186 Merging of National and State corporations, F. G. Newlands 514-515 Regulation of rates — S. H. Cowan 20-21 A. P. Thom 199-200 Relation to Government ownership, A. P. Thom 175 Relation to the Constitution — W. C. Adamson 188, 189, 190 A. P. Thom 188, 189, 190 Relative to water power, F. G. Newlands 503, 504, 505 Taxation of railroads, A. P. Thom 175-176 Taxation on interstate commerce, A. P. Thom 93-94, 96 Steel rails : Estimate on, S. W. Brookhart 597 Stockholders : Returns on investments, S. W. Brookhart 593 Rights of, A. P. Tliom 172-173, 174 Stocks and bonds : Approval of issues, F. G. Newlands 128-129 Charts showing prices and yields on, S. W. Brookhart 590-591 Comparison with Government securities, S. W. Brookhart 592 Conditions of ownership, A. P. Thom 204, 205, 206 Control of, A. P. Thom 165 Earnings of railroads on common stock, S. W. Brookhart 606-610 Government supervision, A. P. Thom 109 Issuance of — W. J. Bryan 476, 477 F. G. Newlands 161 F. Strauss 49 Max Thelen 553-554 A. P. Thom 63-69, 355, 356, 358, 398, 399 Rights of holders, A. P. Thom 173, 174 Seaboard Air Line Railway Co., Max Thelen 436 Taxation — F. G. Newlands 177 A. P. Thom 175-181 Under Federal corporation. Max Thelen 530-531 See also Credit ; Dividends ; Securities. Strong, Benjamin, (governor, Reserve Bank of New York) ; Effect of European War on interest rates 312-313, 314 Strong, Chief Justice: Railroad Company v. Peniston, opinion 137, 138, 264-265 Taxation of railroads, opinion 304, 451, 452 Swamp lands: Reclamation of, F. G. Newlands 500-502 Swayne, Justice: Railroad Company v. Peniston, opinion 137, 138, 264-265 'Taxation of railroads, opinion 304, 451, 452 Sykes, A. (Corn Belt Meat Producers' Association) : Mentioned as witness 20 T. Tables : Dally sales and selling prices of Chicago, Rock Island & Pacific Railway Co 578 Operating revenues, etc 527 Percentage of changes 528 INDEX. 675 Taxation : By States— Page. F. G. Newlands 130, 135, 155, 277, 278, 279, 293, 294 Max Thelen 449-452 A. P. Thorn 93-94, 96. 175-176, 177, 404, 405 Franchise and physical property of railroads, Max Thelen 402,451 National instrumentalities, F. G. Newlands 134^141 Opinions, United States Supreme Court — Justice Bradley 451^ 452 Justice Field ~I 45li 452 Justice Hunt 451^' 452 Justice Strong 451' 452 Justice Swayne 451^ 452 Present system, A. P. Thorn 352,353 Stocks and bonds — F. G. Newlands 177 A. P. Thom 177-181 System of, F. G. Newlands 257, 258, 260-269 Uniform, advantages of, F. G. Newlands 281,282 Terminal expense : Comparison of American and German, S. W. Brookhart 603,611 Texas : Franchise relative to tolls, Max Thelen 444 Railroad hauls, A. P. Thom 340 Railroads and corporations — T. W. Sims 339-341 A. P. Thom 166-167, 339-341 Rates — Max Thelen 443, 444 A. P. Thom 201,340 Texas & Pacific Railway Co. : Incorporation, Max Thelen 441^44 Powers of. Justice Brewer's opinion, Max Thelen 445 Texas, Industrial Traffic League : Opposes Government ownership of railroads, S. H. Cowan 19 Texas markets : As distributing points, A. P. Thom - , 201 Thelen, Max (president, California Railroad Commission) : Testimony 420-456,527-528 Argument of, A. P. Thom 422, 437, 438, 439 Atlantic Coast Line, annual report In Financial Age 436 Bonds sold by Seaboard Air Line Railway Co., in Financial Age 436 Boston & Maine Railroad, Investigation of 557. 559-560 California — ■ Investments under public regulations 539, 556 Mileage construction ^ .' ^_ 539-540, 555 Public-utilities act 541-542 Public utilities and the railroads 556-557 Railroad commission 536, 538, .539, 540, .545 Railroad systems 533, 540, 541, .546 Chicago & Alton Railway Co., investigation 549-552 Congi-ess, constitutional power of, to create railway corporations.- 444 Credit, Impairment of, causes 437, 532, 533, 548, 549, 553, 560, 562, 580 Federal Government — Power to create necessary agencies and instrumentalities 440 Railroads incorporated by , 440-449 Federal incorporation — ■ Affecting State regulation 439-442 Legal power 529 Necessity for 532 Plan for . 529-532 Federal railroads, provisions for creation of 442 Financial Age, quotes gross earnings of Southern Pacific 437 Financial condition of railroads, impairment of 422 Government regulation, provision for 581 Incomes of railroads available for dividends 423 Litigation, danger of 453-454,531 676 INDEX. Thelen, Mux — Continued. '^^ Mentioned as witness _ ^^f Missouri, Kansas & Texas Railroad, financing of '^'J ^o^r National Association of Hallway Commissioners, purposes of 4^1 " Tiie New Knglaiid Investigation " &^^ New York, New Haven & Hartford Railroad, investigation of °°'~''^X^ Norfolk & Western Railroad, reference in Financial Age 436 Police power of the States 529 President National Association of Railway Commissioners 420 Puget Sound Railroad investigation 560 Quality and adequacy of service necessary for equipment 454 Railroad prosperity ~hw Railroads derelict in supplying sutficient cars 422 Rate cuts by the States o34r-565 Rate regulation — By Congress through military power, and post roads 449 Congress, no power for, under commerce clause 449 Intrastate, States to regulate 442 Rates— , Fixing of 44d State and interstate, Government regulation.- — ^ 443 Texas, 'National Government control of 443,444 Regional commissions and commissioners 546-548 Remarks relative to testimony 25-26 " Safety," provisions for eliminating danger ^ 454, 455 St. Paul Railroad, investigation of accounts 560-561 San Pedro, Los Angeles & Salt Lake Railway, condition of — — - 543 Santa P6 Railroad, financial condition -— 542-543 Securities — Issuance of — Right of National Government . 452,453,4.54 State regulations, Max Thelen 535 " Seven Cases of Eckman's Alternative," reference to 529 Smyth V. Ames case, United States Supreme Court decision 446 Southern Pacific Railroad Co ^ ~ 540-541,642,545 State commissions, criticism and work of -. 536-539 State railroad commissions, attitude of railroads toward 546 State's rights, argument of A. P. Thorn .__ 533-534 Stocks and bonds, under Federal corporation ,_^- 530-531 Table showing reserves, incomes, and divIden is an exceedingly serious and pressing one in this country. There has from time to time of late been reason to fear that our railroads would not much longer be able to cope with it successfully, as at present equipped and coordi- nated. I suggest that it would be wise to provide for a commission of inquiry to ascertain by a thorough canvass of the whole question whether our laws as at present framed and administered are as serviceable as they might ,be in the solution of the problem. " It is obviously a problem that lies at the very founda- tion of our efficiency as a people. Such an inquiry ought to draw out every circumstance and opinion worth considering, and we need to know all sides of the matter if we mean to do anything in the field of Federal legislation. " No one, I am sure, would wish to take any backward step. The regulation of the railways of the country by Federal commission has had admirable results and has fully justified the hopes and expectations of those by whom the policy of regulation was originally proposed. The question is not what should we undo. It is whether there is anything else we can do that would supply us with effective means, in the very process of regulation, for bettering the condi- tions under which the railroads are operated and for making them more useful servants of the country, as a whole. It seems to me that it might be the part of wisdom, therefore, before further legislation in this field is attempted, to look at the whole problem of coordination and efficiency in the full light of a fresh assessment of circumstances and opinion as a guide to dealing with the several parts of it." 3. The Resolution. Senate joint resolution No. 60 was introduced in the Senate and, after amend- ment by including the investigation of Government ownership, was adopted by both Houses of Congress. It was approved by the President July 20, 1916, and reads as follows : " [Public Resolution — No. 25 — 64th Congress.] "[S. J. Res. 60.] " JOINT RESOLUTION Creating a Joint subcommittee from the membership of the Senate Committee on Interstate Commerce and the House Committee on Interstate ana Foreign Commerce to Investigate tbe conditions relating to interstate and foreign commerce, and the necessity , of further legislation relating thereto, and denn- ing the powers and duties of such subcommittee. "Resolved by the Senate and House of Representatives , of the United States of America in Congress assembled, That the Interstate Commerce Committee of the Senate and the Committee of the House of Representatives on Interstate 4 PRELIMINARY STATEMENT. and Foreign Commerce, through a joint subcommittee to consist of five Senators and five Representatives, who shall be selected by said committees, respec- tively, be, and they hereby are, appointed to investigate the subject of the Government control and regulation of interstate and foreign transportation, the efficiency of the existing system in protecting the rights of shippers and carriers and in promoting the public interest, the incorporation or control of the incor- poration of carriers, and all proposed changes in the organization of the Inter- state Commerce Commission and the act to regulate commerce, also the subject of Government ownership of all public utilities, such as telegraph, wireless, cable, telephone, express companies, and railroads engaged In interstate and foreign commerce and report as to the wisdom or feasibility of Government ownership of such utilities and as to the comparative worth and efficiency of Government regulation and control as conipared with Government ownership and operation, with authority to sit during the recess of Congress and with power to summon witnesses, to administer oaths, and to require the various depart- ments, commissions, and other Government agencies of the United States to furnish such information and render such assistance as may, in the judgment of the joint subcommittee, be deemed desirable, to appoint necessary experts, clerks, and stenographers, and to do whatever is necessary for a full and com- prehensive examination and study of the subject and report to Congress on or before the second Monday in January, nineteen hundred and seventeen ; that the sum of $24,000, or so much thereof as is necessary to carry out the pur- poses of this resolution and to pay the necessary expenses of the subcommittee and its members, is hereby appropriated out of any money in the Treasury not otherwise appropriated. Said appropriation shall be immediately available and shall be paid out on the audit and order of the chairman or acting chairman of said subcommittee, which audit and order shall be conclusive and binding upon all departments as to the (correctness of the accounts of such subcommittee. "Approved, July 20, 1916." 4. Mesibeeship. Following the adoption of the resolution the following Members of the Senate, and House were appointed members of the joint subcommittee: Senate. — Francis G. Newlands, Nevada ; Joseph T. Robinson, Arkansas ; Oscar W. Underwood, Alabama ; Albert B. Cuminins, Iowa; Frank B. Brandegee, Connecticut. House of Representatives. — William C. Adanttson, Georgia ; Thetus W. Sims. Tennessee; William A. CuUop, Indiana; John J. Bsch, Wisconsin; Edward L. Hamilton, Michigan. 5. Organization. The members of the joint subcommittee met and organized, selecting as chair- men Francis G. Newlands and vice chairman William C. Adamson. They also appointed Frank Healy as clerk of the committee and Willis J. Davis as assistant clerk, and designated Messrs. Gait & Hull, Southern Building, Washington, D. C, as official reporters. 6. Date of Hearings. The date of. the first hearing was set for November 20, 1916, at 10 o'clock a. m., at room 326, Senate Office Building, Washington, D. C. 7. Arrangement of Hearings. It is the desire of the committee to give ample opportunity to all interested in or having any relation to the subject matter of the proposed inquiry to ex- press their views. But the comrnittee would like early notice of the subjepte \o be discussed by the various persons appearing before it, so that the hearing can be, as far as practicable, in orderly sequence as to subjects. The purpose of the committee is to hear regarding Government regulation and Government ownership the opinions of economists and publicists of emineiice, representatives of the Interstate Commerce Commission, the National Association of State Railroad Commissioners, State railroad and public utility commissions, repre- sentatives of the railroad executives and labor organizations, representatives of farming organizations and farmers, shippers and bankers, representatives of PRELIMINARY STATEMENT. 5 chamber of commerce, and other important business and industrial organiza- tions. 8. Subjects to be Considered. The subjects to be considered are stated in general terms in the joint reso- lution and cover — FIBST. " * * * the subject of the Government control and regulation of interstate und foreign transportation," including therein specifically : (re) " * * * the efficiency of the existing system in protecting the rights of sliippers and carriers and in promoting the public interest." (6) " * * * the incorporation or control of the incorporation of carriers." (c) " * * * and all proposed changes in the organization of the Interstate Commerce Commission and the act to regulate commerce." "* * * tijg subject of Government ownership of all public utilities, such as telegraph, wirelessj cable, telephone, express companies, and railroads engaged in interstate and foreign commerce," including specifically : (a) " * * * the wisdom or feasibility of Government ownership of such utilities." (6) "* * * the comparative worth and efficiency of Government regu- lation and control as compared with Government ownership and operation." 9. Government Regulation and Control. Under this head, without excluding other questions, attention is particularly called to the following subjects : (o) Whether the Interstate Commerce Commission is overloaded and whether its jurisdiction should be confined to questions of discriminations, rebates, and rates, its jurisdiction over other subjects, such as valuation, safety inspection, etc., to be turned over to some other body or bureau to be created by law. (6) Whether it is necessary to make any change in the organization of the Interstate Commerce Commission with a view to prompt and efficient action; whether it is feasible to increase the number of commissioners and to permit them to divide into several departments for the consideration of cases, and if so whether there shall also be consideration in bank and also whether there shall be appeal from decisions in the department to the commission in bank. (c) Whether such departments of the Interstate Commerce Commission shall sit in Washington or be assigned to definite traffic areas somewhat after the manner of the judicial circuits, and whether in the latter case there should be provision for their sitting in bank at Washington or for some central body in Washington with the duty of hearing appeals and directing the procedure of the departments. {d) Whether under the present system the credit of the common carriers is assured with a view to their securing the moneys needed for necessary im- provements and extensions in the interest of the public and at reasonable rates of interest. Whether Government regulation of the issue of securities is ad- visable, and if so whether it is to the interest of the public as well as the carriers that this regulation should be exercised by the National Government and whether it should involve merely publicity or absolute control of the issue of securities. Whether concurrent jurisdiction of the Nation and the States to control such issues is in the interest of the carriers and the public. What will be the field of operations for the State railroad commissions in the interest of the public if the control of securities and the control of rates is vested in the Interstate Commerce Commission. Whether and to what extent within a period of five years it will be necessary to enlarge the facilities of the common carriers in the interests of the public and whether the present system of Government regulation is such as to insure the credit of the carriers with a view to their making ad- ditional necessary expenditures. (e) What is the effect of dual regulation on the parts of the States and the Nation of the rates of carriers. What, if any, contradictions does it involve, and what, if any, discriminations does it involve as between States and localities. (/) Whether or not any regulation is feasible of the wages and hours of em- ployees of common carriers, and whether or not it is advisable, in the interest D PRELIMINABY STATEMENT. of the public and with a view to maintaining uninterrupted commerce between the States, to take any further legislative action regarding the adjustment of disputes between the carriers and their employees and regarding strikes and lockouts. (g) Whether any national legislation is required as to the organization of carriers in interstate commerce in the nature of national incorporation, per- missive or compulsory, or in the nature of national holding companies under which State corporations may be controlled and unified in their operations In the interest of interstate commerce, and what form of national legislation for the incorporation of carriers or for holding companies owning the stock of State companies, is desirable. How will national incorporation affect the police powers of the States ovei: railroads operating within their boundaries. Will it be advisable, as in the case of the national banks, for the National Government to prescribe a uniform rule for the taxation by the States of railroad properties and securities. 10. GOVEENMENT OWNEESHIP. " * * * the wisdom or feasibility of Government ownership of such utili- ties " and " * * * the comparative worth and efficiency of Government regu- lation and control as compared with Government ownership and operation," Including under this head: (a) The practical results of Government ownership both as to efficiency and economy where actually practiced. (6) Whether Government ownership is compatible with our system of govern- ment and what its effect will be on our governmental institutions. (c) Whether a system of Government ownership will suit local needs. (dq A practical method of securing Government ownership, whether by pur- chase or condemnation of properties, or by purchase or condemnation of bond and stock Issues, or otherwise. * * * * * 4: * The views of all who are interested in or have information regarding the fore- going questions are Invited by the committee, either by written communica- tion or at the oral hearings. It is suggested that, with a view to maintaining a logical sequence in the hear- ings, those participating therein classify their remarks according to the fore- going subheads as far as practicable. Feancis G. Newlands, Chairman. LIST OF WITNESSES. INTERSTATE AND FOREIGN TRANSPORTATION. MONDAY, NOVEMBEB 20, 1916. Congress of the United States, Joint Comjniittee on Interstate and Foreign Commerce, Washington, D. C. The Joint Committee on Interstate Commerce met pursuant to call of the chairman in room 326, Senate Office Building, at 10 o'clock a. m. Senator Francis G. Newlands, presiding. Present: Senator Francis G. Newlands (chairman),. Eepresenta- tive William C. Adamson, vice chairman ; Senators Eobinson, Under- wood, Cummins, and Brandegee ; Eepresentatives T. W. Sims, John J. Esch, and Edward L. Hamilton. The joint committee proceeded in pursuance of Senate joint resolu- tion 60, approved by the President on July 20, 1916 (Public J. Kes. 25), a joint resolution creating a joint subcommittee from the mem- bership of the Senate Committee on Interstate Commerce and the House Committee on Interstate and Foreign Commerce to investigate the conditions relating to interstate and foreign commerce, and the necessity of further legislation relating thereto, and defining the powers and duties of such subcommittee, which is as follows : Resolved by the Senate and House of Representatives of the United States of America in Congress assembled, That the Interstate Commerce Committee of the Senate and the Committee of tlie House of Representatives on Interstate and Foreign Commerce, through a joint subcommittee to consist of five Sena- tors and five Representatives, who shall be selected by said committees, respec- tively, be, and they hereby are, appointed to investigate the subject of the Government control and regulation of interstate and foreign transportation, the efficiency of the existing system in protecting the rights of shippers arid car- riers and in promoting the public interest, the incorporation or control of the incorporation of carriers, and all proposed changes in the oganization of the Interstate Commerce Commission and the act to regulate commerce ; also the subject of Government ovi^nership of all public utilities, such as telegraph, vi^ireless, cable, telephone, express companies, and railroads engaged in inter- state and foreign commerce and report as to the vcisdom or feasibility of Gov- ernment ownership of such utilities and as to the comparative worth and efiiciency of Government regulation and control as compared with Government ownership and operation, with authority to sit during the recess of Congress and with power to summon witnesses, to administer oaths, and to require the various departments, commissions, and other Government agencies of the United States to furnish such information and render such assistance as may, in the judgment of the joint subcommittee, be deemed desirable, to appoint necessary experts, clerks, and stenographers, and to do whatever is necessary for a full and comprehensive examination and study of the subject and report to Congress on or before the -second Monday in January, nineteen hundred and seventeen ; that the sum of $24,000, or so much thereof as is necessary to carry out the purposes' of this resolution and to pay the necessary expenses of the subcom- mittee and its members, is hereby appropriated out of any money in the Treasury not otherwise appropriated. Said appropriation shall be immediately available and shall be paid out on the audit and order of the chairman or acting chairman of said subcommittee, which audit and order shall be con- clusive and binding upon all departments as to the correctness of the accounts of such subcommittee. 10 INTERSTATE AND FOEEIGN TRANSPORTATION. The Chairman. The committee will come to order. This is a meet- ing of the Joint Congressional Committee appointed under Eesolu- tion No. 60. I will make a brief statement and then inquire as to the organizations and bodies and individuals that desire to be heard be- fore this committee, and after that the committee will go into execu- tive session to determine the method of procedure. Upon the initiative of President Wilson in a message delivered in December last, a congressional joint committee, consisting of five Senators and five Eepresentatives,- was authorized by Congress to investigate all the problems relating to transportation, and to make a new survey not only of the defects of the existing system, but of the improvements that may be made in that system. The committee organized and determined to commence its meetings in Washington on tne 20th of November, 1916, and the committee is now assembled for this purpose. The hearings will be continuous. It is the desire of the committee that there should be represented at the hearing economists and publicists of note, representatives of the Interstate Commerce Commission, the State railroad commis- sions, chambers of commerce, and boards of trade, the railroad execu- tives and the railroad employees, farmers, and shippers generally throughout the country so that the expression will be representative of every organization, class, and interest connected in any way with the subject of transportation. The inquiry will be a very wide one. It will relate to every phase of the transportation question, the rail carriers, the river carriers, and the ocean carriers, and the perfection of a harmonious system of transportation embracing rail, riVer, and ocean carriers that will meet the demands of interstate as well as foreign commerce, and it will also relate to telegraph and telephone lines, express companies, and other public utilities. It will embrace not only the subject of Government control and regulation of these utilities, but also the wisdom and the feasibility of Government ownership and the comparative worth and efficiency of Government regulation and control as compared with Government ownership and operation. In this connection the question will be considered as to whether the Interstate Commerce Commission is now overloaded, and if so whether this difficulty should be met by relieving it of many of the supervising and administrative duties which it now exercises or by enlarging and subdividing it so as to enable it to meet the strain of its existing duties, and such others as may be added by legislation. It is contended by some that the commission should not only be en- larged, but should be divided into departments, each to have the same jurisdiction as the entire commission has now, and that thus the busi- ness of the commission will be more quickly dispatched. It is also suggested by some that the commission ought to be brought nearer to the various localities than it is now ;, that instead of sitting centrally in Washington it should be divided into depart- ments corresponding to our different traffic areas, so that each depart- ment can sit within a given traffic area in contact with its activities and its thought and more quickly solve the problems relating to it. Then the question comes up, if that method is pursued, as to whether there shall be a central body of appeal at Washington to which appeals may be taken from these various departmental organizations. INTERSTATE AND FOEEIGN TEANSPOETATION. 11 Another question of importance that will come up will be the ques- tion of the control of railway and other public-utility securities. As it is, most of the State public-utility commissions are regulating the issue of securities upon the railroads within the boundaries of the State over which each has jurisdiction. Thus we may have 48 different sov- ereignties acting upon the securities of great railway systems not con- fined in their oper^ition to any particular State, but whose operations are as broad as interstate commerce itself. It is complained that this complexity of control which aff.ects not only the securities, but the rates, restrains the activities of the cor- porations themselves, makes their methods of obtaining mbney for needed improvements and developments very complicated, and fre- quently defeats their purpose of securing favorable markets, the ap- proval of the securities sometimes being given when the favorable opportunity has passed by. It is suggested that the United States Government, by reason of its power over interstate commerce, should create a tribunal for that purpose or give such control to the Interstate Commerce Commission. The question then arises whether the regulating commission shall be simply a coordinating body acting in addition to the 48 public-utility commissions created by the various States or whether its action shall be that of an overlord, dominating and controlling, where contradic- tory, the action of lesser sovereignties. So the question of States rights will be involved in this most interesting subject. There will also come up the question as to whether the Nation or the States should create the great organizations that serve the purpose of interstate commerce. Thus far we have been content to allow the States to create these corporations, these railroad companies. That served the purpose as long as the railroad system was a feeble system confined to the building of an individual railroad of a limited mileage in this or that State. But as interstate commerce in- creased and these systems were brought together in a coordinated serv- ice over the entire country in interstate commerce it has been claimed that we have not met the economic requirements of the time by creating national organizations under which great railway systems could be incorporated as broad in their operation as the national power of interstate commerce. There again the question of State rights will come up. It will be contended on the part of many of the States that the .creation of these gigantic national corporations under national control will tend to di- minish the powers of the States, with reference to local requirements as to rates, and may diminish the power of the States as to taxation, and may also diminish to some degree the police powers of the States. Among others will be the question of taxation. As to whether the States will insist each upon its sovereign right to tax the corporation and its property doing business within the boundaries of that State or whether the National Government, as in the case of national-bank corporations, shall by virtue of its sovereignty over interstate com- merce, declare a uniform rule as in the case of the banks, under which taxes shall be levied. As it is, we find the greatest diversity in the tax laws of various States, some States imposing heavy burdens upon these corporations and others imposing very light burdens ; some taxing only the visible property, others taxing the intangible thing termed a franchise ; some 12 INTERSTATE AND FOREIGN TBANSPOETATION. of them adopting the market price of the stocks and bonds as the standard and measure of valuation, others contenting themselves sim- ply with the physical valuation of the actual property within the boundaries of the State. Then in connection with that will come the question of hours and wages of employees. The burdens which constitute the operating expenses of these corporations are in time transferred to the ship- pers. They can not long rest upon the investors, for if they rest upon them too heavily there will be a decline in the securities, and a conse- quent difficulty in securing the money for improvements and exten- sions, and thus the public demands themselves will not be met. Eailway corporations have to raise their entire revenue from the public in the shape of rates for freight and passengers. That revenue goes to the operating expenses, wages of some 1,800,000 employees, the supplies to the railways, the taxes, and the interest upon the stocks and bonds issued. So that the public itself, the ultimate bearer of this entire burden, is most profoundly interested in perfecting a sys- tem which will establish the credit of the carriers themselves in such a way as to enable them to obtain money at the lowest rates and yet maintain the value of their securities. A difference of 1 per cent paid to the investors on the $16,000,000,000 of bonds and stock issued by the railway corporations of this covmtry makes an additional charge of $160,000,000 annually upon the shippers of the country. Here the question of receiverships and railway reorganizations will also come up for consideration. As to wages and the hours of labor, it is very evident that under present conditions the only ultimate method of settling a difficulty between a railroad and its emplo3fees is a re- sort to force. And the question is whether a nation pretending to some degree of civilization, which has eliminated the doctrine of forcie from application to controversies between man and man, and which furnishes judicial tribunals for the settlement of those controversies, and which is now and has been for years endeavoring internationally to secure a system under which the nations of the earth will create similar tribunals for the adjustment of international disputes with- out resort to force — ^whether such a civilized nation can be content to perpetuate the existing condition of things. This is a subject of profound thought. It will require the best and the most humane consideration of communities and State and of the Nation itself. It would seem to be our highest duty to meet this condition, and by eliciting the best thought not only of the corporations affected, not only of the thinkers and economists of the country, but of the men themselves employed by those corporations to create some system under which a resort to force, the most barbaric and brutal of proc- esses, can be avoided for the settlement of disputes between great employers . and vast bodies of employees. In addition to this question of regulation and control of these great public utilities, there is intrusted to this committee the study of the question of Government ownership. It is a question that must be faced. Other nations far advanced in civilization have adopted the system. Recently, under the stress of war, almost all European Governments have taken over the railways. Whether that will be a permanent taking over or only a temporary one it demonstrates that in conditions of great crises when autocratic powers must be given to INTERSTATE AND FOREIGN TEANSPOETATION. 13 the Government all intelligent Governments drift toward absolute and complete operation of the roads as the only solution of the question. If we pursue the exercise and the study of Government regulation wisely, persistently, and energetically we may create such a system of regulation as will meet every requirement, both in time of peace and of war, and in exigency of crises. But it seems to be a wise thing for the Government of the United States to ascertain now the history of the countries that have adopted Government ownership and opera- tion of railways, and to watch the experiences ^ of the European countries in this great war in this regard. In this connection will come the question of the method of taking over the railroads. Shall it be accomplished by an actual valuation of the railways and a condemnation of 4hem, or shall they be taken over by the easier method of taking over the stock and the bonds at their market value, thus at one step having the National Government take the position of stockholder and security holder in these great corporations? These are a few of the questions which we have before us. It will not be possible for us to come to a speedy conclusion regarding all, but that conclusion will be more quickly arrived at if we have the sympathetic aid of practical men who for years have been conversant with the practical side of the transportation question, of the econo- mists and publicists and national and State regulating commissions , of railway executives and workers, commercial bodies, farmers and manufacturers, and shippers generally. We want the best thought of the country in the consideration of these important questions. I wish to state that some of the members of the committee may desire to emphasize some of the questions which will be considered by this committee, and I will be very glad if hereafter they wil| present such questions in such form as they desire; Mr. Sims. Mr. Chairman, is that intended to be the statement of the chairman of the committee or the statement of the committee ? The Chairman. It is the statement of the chairman of the com- mittee simply. Now, I will inquire what organizations and bodies and individuals desire a hearing before this committee, and also upon what subjects, and I will ask the cletk to state what organiza- tions have presented themselves. First I will inquire as to whether any of the State railway or public utilities commissions are repre- sented here. Mr. Joseph L. Bristow. Mr. Chairman, the National Association of Railwaj^ Commissioners will be represented before this hearing by a committee appointed for that purpose. The Chairman. When would that body like to be heard? Mr. Bristow. Since the railways, as we infer from the statement made to the House committee last winter and statements made in the press during the summer and fall, have a definite plan by which they state they desife to curtail the authority which is now exer- cised by the State commissions, we would very much prefer that they present that plan in order that we may know what it is before the commissions appear to discuss them. Senator Underwood. Mr. Chairman, I notice in the statement of our former colleague that it appears as if there was an effort here to bring a fight between two contending bodies. I hope we can pro- 14 INTEBSTATE AND FOREIGN TEANSPORTATION. test against any such effort. Unquestionably the desire of this com- mittee is information, and we are not to be governed by the desire of the railroads or shippers or the State commissions. It is only information that we want in order to work out this problem for the public good, and I hope that we can avoid any combat between special interests in this connection. Mr. Adamson. It would be intolerable if either this committee or the public would tolerate a fight between anybody on this subject. We should recognize, however, the fundamental principle laid down by Blackstone centuries ago, but when you go to legislate you should consider, first, the present law; second, the mischief; and then the remedy; and that being true, it is not necessary to infer that the railroads are the only ones that have any objection to the present system. I think Senator Brietow is partially right. I do not think it is proper to say that the railroads shall take the initiative, but to say that all those who have any suggestions to make about exist- ing defects in the business ought to appear and give us the benefit of their statements. Mr. Bristow. Mr. Chairman, I will state in reply to the sugges- tions of Senator. Underwood and Mr. Adamson that the State com- missions are here to serve the pleasure of this committee. We will appear whenever you desire. I simply state what we feel would be the more orderly way for us to proceed. If the committee desires us to proceed in any other way, we will comply, of course, with its desire very cheerfully. The Chairman. May I ask, for the record, who the officials of the National Association of Eailway Commissioners are? Mr. Bristow. The president of the association is Mr. Max Thelen, of California, who is present, and is a member of the committee selected by the national organization to present certain phases of this question to this committee. There is a first and second vice presi- dent. The first vice president is Mr. E. C. Niles, of New Hampshire, who is also a member of that committee, and then there are five other gentlemen who have been selected as members of the committee to represent the association. The Chairman. Will you be kind enough to hand in their names? Mr. Bristow. I will be glsud to give the names of each, member. The Chairman. Please give the name and address of the secretary. Mr. Bristow. I will be very glad to do so. The Chairman. May I ask, Mr. Bristow, whether the State Rail- way Association is prepared to go on with its statement at this time ? Mr. Bristow. It is not. We could not proceed torday because we are not prepared to do so. The Chairman. How soon would your commission be so prepared ? Mr. Bristow. We will endeavor to prepare ourselves when the com- mittee indicates when they desire to hear us, but we would prefer, as I said in my first statement, very much, that the railways, who have been very active in promoting the idea that there shall be some radical changes in the methods as relate to the States and the Nation in regu- lating the affairs of carriers should present the plan which they have. Senator Cttmmins. Has your association proposed any change in the present law? Mr. Bristow. We have not. INTERSTATE AND FOREIGN TRANSPORTATION. 15 Senator Cummins. You are not prepared to put forward any revi- sion or readjustment of the present system? Mr. Bristow. We are not. Senator Cummins. That is as I understood it. Mr. Adamson. You are here to consider such propositions as may be offered of changes in the system ? Mr. Beistow. That is exactly the case. Mr. Adamson. Because you can not reply to them until you hear them? Mr. Beistow. That is exactly our position, Mr. Adamson. The Chaieman. Are any of ithe board of trade or chambers of com- merce of the country represented here ? Mr. Amos L. Hathaway. Mr. Chairman, I represent the Boston Chamber of Commerce. I gave my card to the clerk and asked that we be put in line for hearing at such time as will meet the conven- ience of the committee. Does tl^e committee desire any statement of the attitude of the chamber at this ime ? The Chairman. Not at this time. Senator Brandegee. Would it not be well if each gentleman should state what subject he wants to appear on, if there is any particular subject? Mr. Hatha WAT. I will be glad to state to the committee, as far as at present advised, the attitude of the Boston Chamber of Com- merce is to favor the incorporation of railroads under the Federal law, in the first place, and in the second place, that the present system of dual regulation and semicontrol shall be supplanted by a system of Federal regulation and partial control, and that this regu- lation shall extend to the subject of railway securities, and that the matters of detail, which should be left to the State commissions should be adjusted by Congress and by the Interstate Commerce Commission itself. The Chairman. Can you give the names of those who desire to appear on behalf of the Boston Chamber of Commerce? Mr. Hathaway. I can not at the present time. I think the attitude of the chamber is that of listening at the present and being prepared to meet the situation as it develops a little later, but I will keep the committee advised of its definite action. The Chairman. Do you hold any official position in connection with the Boston Chamber of Commerce? Mr. Hathaway. I am simply a member of the transportation committee of the chamber and its attorney here for the purpose of iiip^p hpR-niiffs The Chairman. With whom shall communication be had by the clerk of the committee? Mr. Hathaway. I will leave the address with the clerk. The Chairman. Are there any others who would like to be heard ? Mr. Frederick B. De Berard. I appear for the Merchants' As- sociation of New York. We desire to The Chairman. Will you give your name and address? Mr. De Berard. Frederick B. De Berard. The Chairman. And what is your address? Mr. De Berard. Woolworth Building, New York City. The Chairman. What position do you occupy with reference to that chamber? 16 XNTEHSTATE AND fOHEIGN TRANSPOETATION. Mr. De Beeakd. We desire to oppose governmental ownership and the operation of public utilities. We desire to favor the exclusive control by the Federal Government of the operation of all railroads. The Cha-jrman. Are you an officer of that organization? Mr. Db Beraed. I am the director of research. My duties are to study economic questions and advise the committee upon them, and 1 have been instructed to appear before this committee as the repre- sentative of the association and to present arguments, if opportunity is offered, in support of the two propositions I have stated. The Chairman. Can you state now who will be likely to appear before this- committee on this subject ? Mr. De Beeard. I have been delegated to appear for the association in that particular and on matters specifically touching traffic and traffic movements. Probably our traffic manager, Mr. J. C. Lincoln, will likewise appear later. The Chairman. Are you prepared to go on now and present your views at the hearing, or will you be shortly ? > Mr. De Beeakd. I am prepared now, at the convenience of the committee. Mr. Baetol. Mr. Chairman The Chairsian. Give your name and address and the organization in whose behalf you appear I Mr. Bartol. My name is George E. Bartol, Philadelphia. I rep- resent the oragnization that is known as the Philadelphia Bourse, which is practically a chamber of commerce. We ha,ve some 3,400 or 3,500 members and devote ourselves very largely to the considera- tion of commercial matters that are of nation-wide character, and not of a purely local character. We have been studying the question of reasonable regulation of railroads, as we call it, for about two years and a half. We have formulated a brjef , on what we think is quite a comprehensive plan, which seems to cover virtually the phases that are essential, in our judgment, to a reasonable regulation of the rail- roads, in the interest of the three parties — ^the public, the workers, and the owners. The Chairman. Who will desire to be heard before the committee as representing your association? Mr. Baetol. I have been delegated by the board of directors of the association to present the views of the body whenever the committee is ready to listen to me. The Chairman. You will be ready to proceed Mr. Baetol. At any moment. The Chairman. At any moment? Mr. Baetol. Yes, sir; Mr. Healy has my name and address and knows just how to reach me at any time. Mr. Kix. Mr. Chairman The Chairman. Please give your name and address. Mr. Eix. George E. Eix, of Lawrence, Mass. I represent the Law- rence Chamber of Commerce, and associated boards of trade of Essex County, and the American Woolen Co. The Chairman. Upon what subjects will your organization desire to be heard? Mr. Eix. I shall confine myself strictly to traffic. The Chairman. And by whom will these organizations be repre- sented ? INTEESTATE AND FOREIGN TRANSPOETATION. 17 Mr. Eix. They will be represented by me. I have been authorized to appear for them. My appearance would be in the form of a statement, which I would like to read into the record. It will be comparatively brief. The Chairman. Are you prepared to proceed now ? Mr. Eix. Practically so ; yes, sir — at any time the committee may desire. Mr. Gaecelon. Mr. Chairman The Chairman. Please give your name and address. Mr. Garcelon. William F. Garcelon, 608 Sears Building, Boston, Mass., representing the Arkwright Club, which has a membership of about 100 cotton mills of New England. I desire simply now to enter an appearance. I am not certain that we desire to give, testimony. If we do, I shall probably present it, but I simply desire, now, to be on the record now and to be ill a position to give testimony if we, should desire. The Chairman. You are not j)repared to proceed now? Mr. Garcelon. No, sir ; I am simply entering my appearance now.. Mr. Adamson. Mr. Chairman, T understand it is your purpose,, when you receive notice from all who desire to appear, that the com- mittee will go into executive session and make something like a calendar, in order to give these gentlemen some idea as to when they may appear, and so as to meet our convenience The Chairman. That is it exactly. Mr. McClellan. George McK. McClellan, representing the Seat- tle Chamber of Commerce. We desire to be heard later on the ques- tion of the railroad wage controversy. The Chairman. The railroad wage controversy? Mr. McClellan. Yes, sir. The Chairman. Are you ready to proceed now ? Mr. McClellan. I shall be ready later in the week. The Chairman. Will there be any others who desire to be heard in behalf of that organization ? Mr. McClellan.. So far as I am advised, Mr. Chairman, there will be nobody else, unless the chamber shall desire later to appear on other questions. Mr. House. Mr. Chairman The Chairman. Please give your name and address. Mr. House. Francis Everett House. I am associated with Mr. L. C. Boyle, of Kansas City, Mo., in representing the Commercial Club of Kansas City, Mo. I have been just recently asked to ap- pear in their behalf, and I do not know exactly what their position is. I am quite sure Mr. Boyle will want to appear at some time in behalf of the Commercial Club, and very likely Mr. Wilson, the traffic manager of that club. Mr. Boyle also represents The Chairman. Will you give the full names of the gentlemen? Mr. House. . Yes, sir. Mr. Boyle also represents some more definite interests which he will want to represent. Mr. GoDLET. Mr. Chairman The Chairman. Will you give your full name? Mr. GoDLET. Mr. Philip Godley. . I am chairman of the com- mittee on inland transportation of the Philadelphia Board of Trade, of Philadelphia, Pa. I am authorized by them to present to you 70342— PT 1—16 2 18 INTEESTATE AND FOEEIGN TEANSPOBTATION. the question of Gov.ernment ownership of public utilities, and am ready for your hearing, sir, whenever you are ready to hear me. The Chairman. Will there be any others who will appear on behalf of the organization ? Mr. GoDLEY. I think not — not at the present time. The Phila- delphia Board of Trade is a part of a joint committee who will, a little later on, present the question of railroad regulation, as a joint committee, the Philadelphia Board of Trade being a part of the joint committee. Mr. Kellogg. Mr. Chairman The Chairman. Please giye your full name and address Mr. Kellogg. R. S, Kellogg, Chicago, 111. I desire to enter an appearance at this time', simply for the purpose of protecting us in case we wish, later to present testimony. , The Chairman. You are not prepared to proceed now? Mr. Kellogg. We are not now. There is, a chance we will be later. The Chairman. Is there anyone else who will appear on behalf of your organization ? ' Mr. Sims. What phase will you discuss ? Mr. Kellogg. I am not sure we will discuss any. We did not get, until quite recently, the detailed, statement of the features of the investigation from the. clerk of the committee.; The National Lum- ber Manufacturers' Association represents 12 orgajiizations of lumber manufacturers throughout the United .States, and we have not had time, since we got the statement from the committee, to get their views on -the question. I can not promise, at this time, that we shall wish to discuss any particular subject, but I wish to protect our opportunity for presenting testimony, in case we should so desire. Senator Brandegee. You appear in the interest of the association? Mr. Kellogg. I beg your pardon. Senator Brandegee. You appear in the interest of the association ? Mr. Kellogg. Yes, sir; of the National Lumber Manufacturers' Association. Any notice or request for information may be served upon me as secretary of the organization, and I will see that it is taken care of. , : Mr. Marsh. Mr. Chairman— — The Chairman. Please give your full name and address. Mr. Marsh. Mr. Benjamin Clark Marsh. I wish to appear in be- half of the Committee on Eeal Preparedness. Mr. Amos Pinchot, the chairman, will appear. I want to urge Government ownership and operation of railroads, and, first, we should get an honest valua- tion and reasonable capitalization, and we wish also to point out to the committee the failure of the public regulation of railroads. Mr. Amos Pinchot, the chairman, as I said, will appear here later. Senator Eobinson. Will your discussion extend to telegraph and telephone companies? Mr. Marsh. No, sir. Senator Eobinson. It is confined exclusively to railroads? Mr. Marsh. Yes, sir. Senator Brandegee. What association did you say it was? Mr. Marsh. The Committee on Eeal Preparedness, of which Mr. Amos Pinchot is chairman. The committee represents some thirty- two States. liN TiiitbTATi; AiNU i'OKKlGN TBANSPOKTATION. 19 Senator Eobinson. You represent an organization in the various States? Mr. Marsh. Yes, sir. Senator Eobinson. What is the name of the organization? Mr. Marsh. The Committee on Eeal Preparedness. The Chairman. As I understand it, you will be ready to pro- ceed Mr. Marsh (interposing). To-morrow or Wednesday, if con- venient for the committee. The Chairman. Are there any other organizations represented here? Mr. Post. Mr. George A. Post, president of the Railway Business Association. We would desire to register our application to be accorded a hearing, our theme being the general regulatory scheme, to be laid before you, with the results of cpllaboration by our organi- zation with other trade bodies throughout the country. I can not, at this moment, tell who the gentlemen will be who will accompany me, but would ask that it be not earlier than the 15th of December, if that will suit the convenience of the committee. The Chairman. Are there any other, organizations represented here — ^boards of trade or chambers of commerce? . , ' . Mr. S. H. CowAN. I am Mr. Cowan, of Texas. In behalf of the character of organizations which you, are calling at this time, I wish to enter my appearance and the appearance of Mr. G. S. Maxwell, of Dallas, Tex., and a committee, the names of which I am not at this moment able to give you, representing the Industrial Traffic League of the State of Texas, who will desire to appear before this com- mittee to meet any contention with respect to tlie matter of abolish- ing, the railroad commissions of that State or any other, or the taking over to Federal control of the making of rates and all such qpgnate questions as might arise in that connection. They have put themselves upon record with respect to the matters which I have mentioned. I may safely say, likewise, that they are opposed to Government ownership, of railroads at the present time and under present conditions and unless some further absolute neces- sity shall arise and until somebody knows more . fibout it than we think anybody knows now. While I am on my feet I will say that I represent, as attorney, the National Live-Stocjc . Shippers' Protective: League,, an organi- zation which we think is in agreement with us on the subject of, pre- paredness, but we can tell about what we want to be prepared for. That brings together all of the live-stock organizations of the various States, known as the State Live-Stock Associations, by various names. All of the live-stock commission men of different markets comprising the live-stock exchanges at each market, which in turn is composed nf the membership of those engaged in business at our live-stock mar- kets. Also the American Live-Stock Association, with its head- quarters at Denver, Colo., and the National Wool Growers' Asso- «iation, with its headquarters at Salt Lake City. T likewise represent the Texas Live-Stock Shippers' Protective League, and, indirectly, through the American National Live-Stock Association, the National Live-Stock Shippers' Protective League, the Cattle Raisers' Association r>f T*>v other words, we will try to give you the best testimony which the nature of the case demands, of men closest to the facts. The Chairman. When will it be convenient for you to be heard? Mr. Lehmann. We had supposed that the question, in its general phases, would be taken up in the first instance by the railroad com- panies and we would be prepared to follow after them. We are at work now gathering this material and putting it into the most com- pact shape that it is within our power to do in order to take no more of your time than is necessary. It would be convenient to us if we could have some days' notice because we would like to bring men from Europe who can speak from personal observation of the operation of the systems there. IKTEBSTATE AND FOKEIGN TRANSPORTATION. 35 The Chairman. Will you kindly advise us, Mr. Lehmaim, when it will be convenient for you to have the hearing that you indicate? Mr. Lehmann. I will do the best I can in that way. The Chairman. The committee will now hear Mr. MacKinnon. STATEMENT OF MR. F. B. MacKINNON, UNITED STATES INDEPEND- ENT TELEPHONE ASSOCIATION, WASHINGTON, D. C. Mr. MacEjnnon. Mr. Chairman and' gentlemen, in behalf of the United States Independent Telephone Association, we desire to ap- pear to discuss the phases of the topics before you of control of telephone companies by the Interstate Commerce Commission, and the other matter, that which Mr. Lehmann has discussed, of the rela- tive merits of Government ownership as compared with commission control. As your committee understands, the Interstate Commerce Coimnission, under the act to regulate commerce, controls the tele- phone companies, all of them. We have some 8,000 companies who are interested, and in their behalf we desire to have some time set aside in which to discuss that part of the committee's work. We desire to make some suggestions as to changes in the act and to dis- cuss the present methods of control. The Chairman. Who will desire to appear on behalf of your or- ganization? Mr. MacKinnon. I shall appear in behalf of the organization in the discussion of the commission control. As to the Government ownership discussion, we shall submit names later of those of our organization fitted to discuss the various phases of that. I desire to have notice sent to me at my office in Washington. The Chairman. When would it be convenient for you to take the matter up? Mr. MacKinnon. We would prefer not to take this up until after the lOth of December. The Chairman. Please advise the committee when it will be con- venient to you. Mr. MacKinnon. Very well, Mr. Chairman. The Chairman. Proceed, Mr. Benedict. , STATEMENT OF MR. ALBERT T. BENEDICT, 191 BROADWAY, NEW YORK. Mr. Benedict. Mr. Chairman, on behalf of the Western Union Telegraph Co., I ask to be heard before your committee when the proper time comes, and I suggest that when you notify Mr. Lehmann, and Mr. Lehmann advises you what date will be convenient, that will suit us entirely. I think we can present our views at that time. The Chairman. Who will appear on behalf of the company ? Mr. Benedict. I will appear, Mr. Chairman. Mr. Thom. Mr. Chairman and gentlemen, of course, I can not know now what the committee will decide upon in executive session as to its methods of procedure. I will simply say that we have been exceedingly diligent in trying to get ready for this hearing, but there is a certain organization of witnesses and presentation that we will have to make after we know when we will be called. I would be very 36 INTERSTATE AND EOEEIGN TEANSPOKTATION. glad, while holding ourselves in readiness to obey the summons of the committee, to know some time in advance as to when you expect us to begin the presentation of our case. I would suggest ten days after you have determined when we shfill be called. We would want probably to present the question of the present situation in regard to railroad credit, for example, and we would have to know the methods of presenting that as well as presenting these other matters which we have already in mind as proper matters for this committee to consider. Senator Brandegee. Let me ask you this question, Mr. Thom: In case the committee would want to proceed to-morrow, and would want to summon any of the railroad representatives •Mr. Thom. We would not be ready to-morrow. Senator Brandegee. Is there any representative of any railroad who could proceed upon any subject to-morrow ? Mr. Thom. Not with benefit to your consideration. We want to present the matter in a compact way and not in a disorganized way. We have not reached the point of organization. Senator Brandegee. I simply want to suggest, if the chairman will permit me, before we go into executive session, that I had assumed that we were going to meet here to-day and proceed at once and con- tinuously, until Congress met at least, and then probably further, and I would like to ask, Mr. Chairman, if there is anybody who could go on to-morrow who is present in the room now ? Senator Robinson. A number of gentlemen have stated that they could — representatives of certain chambers of commerce. Senator Brandegee. Very well. The Chairman. We will have a list of them made out. Senator Underwood. Before we proceed to executive session, I move that the chairman request those gentlemen who are ready to proceed to-morrow to appear here at 10 o'clock. Mr. Adamson. Mr. Chairman, we gave notice some three months ago that we would meet to-day and proceed with the investigation. Mr. Thom has been informed and the country understands who the witnesses are who know most about this and who suggested this inves- tigation. I shall insist in executive session and here that this investi- gation commence with the testimony of those people who understand more about the trouble and difficulties of the situation, in order that the others may hear them and examine them and reply to them and testify in rebuttal. If it means a delaj^ of 10 days, I will consent to that. The Chairman. You may proceed next, Mr. Harrison. STATEMENT OF MR. THOMAS B. HARRISON, REPRESENTING THE ADAMS AND AMERICAN EXPRESS COS. Mr. Harrison. Mr. Chairman and gentlemen, I desire to enter my appearance on behalf of the Adams and American Express Cos. We have a committee representing the principal express companies for which we can enter our appearance, if the committee would like us to. The Chairman. Will you please furnish the names of that com- mittee ? ' INTERSTATE AND FOREIGN TRANSPORTATION. 37 Mr. Harbison. Yes, sir. We have nothing to propose and nothing to object to, our ppsition being that we have been investigated lately by the Interstate Commerce Commission, and our whole business changed and revamped on a nation-wide basis. We have asked the various State commissions to adopt the rates, rules and regulations, and practices prescribed by the Interstate Commerce Commission, and practically all the States have done so, and we are in hopes that the balance of the States will follow suit, our position being that if the committee desires any information of any character whatever, we will be glad to endeavor to furnish it, if given time to prepare it. This committee is composed of Mr. C. W. Stockton, general counsel of the Wells-Fargo ; Mr. R. C. Alston, general counsel of the Southern Express Co. ; and myself. The Chaieman. What are the addresses of those gentlemen ? Mr. Harrison. My address is 61 Broadway; Mr. Stockton's is 51 Broadway ; and Mr. Alston's, Atlanta, Ga. Senator Kobinson. Mr. Chairman, I suggest that anyone who de- sires to be heard simply hand in his name and address to the clerk. Mr. Hamilton. Mr. Chairman, I desire to make a statement. Under date of November 12, the members of this committee were notified that a certain number of publicists and economists had already been invited to appear before this committee on November 20, and I assume that some of those gentlemen must be prepared. Mr. EscH. What response have we received ? The Chairman. I have inquired as to whether any of those gentle- men are present, antj Prof. Commons alone responded. I will now inquire whether there are any other economists or publicists who have received the invitation of the committee to appear before it, and who have by letter indicated their willingness to appear, are present? [After a pause.] Mr. Hamilton. Have any acceptances been received? The Chairman. Oh, yes; a number of acceptances have been re- ceived. I will have a list of those gentlemen presented at the execu- tive session. Mr. Adamson. I suppose they think we are only making up a calendar to-day. Senator Eobinson. I move that we proceed to executive business. The Chairman. If the Senator will allow me, I would like to inquire as to whether there are any representatives of railway em- ployees or railway brotherhoods present? [After a pause.] Are there any financiers or investment bankers present ? [After a pause.] Mr. C. B. Johns, of Ebensburg, Pa. Mr. Chairman, I would like to speak for a short time for the Brotherhood of Engineers, but I have not conferred with the higher officers. I thought they would be here. I represent a particular lodge in appearing for the engi- neers. I shall not take very long, and would be ready to proceed to-morrow, or any other day. The Chairman. You represent an individual lodge there' Mr. Johns. That is all; yes, sir. The Chairman. Are there any others who represent the employees of railway brotherhoods or organizations? [After a pause.] Are there any financiers or investment bankers here who desire to be heard? [After a pause.] Is there any attorney general of any 38 INTERSTATE AND FOEEIGN TBANSPOETATION. State present who would like to be heard on behalf of his State? [After a pause.] Are there any others, outside the classes I have referred to, who would like to be heard? [After a, pause.] Mr. Marsh. Mr. Chairman, I have already given my name to the clerk. I would like to be heard to-morrow. I represent the Com- mittee on Real Preparedness. ' The Chaieman. I would state that if we go into executive session we will resume the hearing to-morrow morning at 10 o'clock. Senator Robinson. And all of those gentlemen who have an- nounced themselves as ready will please be present. Mr. Adamson. Would it not be proper not only to give it out to the press but have the clerk of the committee notify those whose hearings are set on a particular day, so that they will know when to come? The Chairman. I think those who are now ready to be heard should be here to-morrow at 10 o'clock, and then we will arrange regarding ^ their hearing, and we will comply with the suggestion of Mr. Adamson in regard to giving notice. It is moved that the committee now go into executive session. The motion was agreed to, and at 12 o'clock and 2 minutes p. m. the committee proceeded to the consideration of executive business, and after which the doors were reopened and the committee adjourned until Thursday, November 23, 1916, at 10.30 o'clock a. m. INTERSTATE AND FOREIGN TRANSPORTATION. thursday, hovembeb 23, 1916. Congress of the United States, Joint Committee on Interstate and Foreign Commerce, Washington, D. C. The committee met, pursuant to adjournment, in room 326, Senate Office Building, at 10 o'clock a. m.. Senator Francis G. Newlands presiding; Hon. William C Adamson, vice chairman. The joint committee resumed its session pursuant to public reso- lution No. 25, joint resolution creating a joint subcommittee from -the membership of the Senate Committee on Interstate Commerce and the House Committee on Interstate and Foreign Commerce to investigate the conditions relating to interstate and foreign com- merce, and the necessity of further legislation relating thereto, and defining the powers and duties of such subcommittee. The Chairman. The committee will come to order. Mr. Lloyd. Mr. Chairman, before you proceed, I would like to have the privilege from the committee of sitting here during the various hearings that you( may have, as a visitor, not as one who expects to be heard. The Chairman. We will be very glad to accord you that privilege. Mr. Thorn, are you ready to proceed on behalf of the railroad executives ? Mr. Thom. Yes, sir. Mr. Haines, of Galveston, Tex. Mr. Chairman, may I ask a ques- tion for information. I have been informed that Judge Cowan a few days ago made some suggestion as to setting( aside or fixing some date at which the Texas shipping interests might be heard. May I inquire whether that has been done ? The Chairman. No; no time has been fixed. I presume within a few days some kind of program wUl be arranged, but none has been determined upon as yet. Mr. Adamson. Mr. Chairman, I suggest that you announce that m due time, and with sufficient notice, these apearances will be set and everybody informed. The Chairman. I will make that announcement now. Senator Cummins. I do not know that we can assign particular dates for particular witnesses. We will have to go on as rapidly as we can, I take it. We will do the best we can to convenience them, but I do not believe we can set aside a particular day. Mr. Adamson. We will try to fix the date as nearly as possible, as the railroads do in fixing a 'schedule— come as near to it as we can. Mr. Thom. I hope you will be more successful. The Chairman. Mr. Thom, you may proceed. 40 INTEESTATE AND FOREIGN TBANSPOETATION. STATEMENT OF MR. ALFRED P. THOM, COUNSEL RAILROAD EXECUTIVES' COMMITTEE, WASHINGTON, D. C— Resumed. Mr. Thom. Before proceeding to discuss the questions which you have under consideration, I would like to state that I have tendered to the clerk copies of two printed pamphlets which we have pre- pared, and which contain certain questions that we would like to have the various witnesses consider as they appear. One of them is intended for the consideration especially of bankers, and the other is intended especially for the consideration of economists and pub- licists. When we learned that certain economists and publicists had been invited by the committee, I wrote to each on© of tlhem a letter which I shall now read to this committee, sending each one a copy of these pamphlets, intended for the consideration of the pub- licists : OCTOBBE 26, 1916. My Dear Sie : I understand that you have been, or will be, invited to appear before the joint committee of Congress, appointed by the President under the joint resolution approved July 20, 1916, to study the entire subject of trans- portation. In my capacity as counsel for the railroad at this hearing I shall ask that your attention be directed to certain aspects of the inquiry and that you be invited to give your views in respect to them. It has occurred to us that, in an Inquiry of such importance, you may desire an opportunity in advance for mature reflection in respect to the subjects about which you will be expected to testify, and I am accordingly taking the liberty of handing you herewith a list of the subjects which I will ask the committee to specifically bring to your attention. It is not our purpose to overburden you in the matter of your preparation, and there may be some subjects in the inclosed list which you would prefer not to take the time to consider. If you will call any such matters to my attention I will, so far as you are concerned, vdthdraw my application to the committee In respect to them. May I suggest that, in so far as you feel disposed to give your views on these subjects in your main statement to the committee, the time involved in putting them before you by specific questions will be saved. Trusting that the inclosed list of subjects may facilitate you in the con- sideration of some of the vital aspects of this inquiry, I remain, Sincerely, yours. Senator Brandegee. Is the list of inquiries that you sent them to be made part of the record at this immediate point ? Mr. Thom. No; I just submit it for the use of your committee. I would like to have the members of the committee read over these questions. ' Mr. Adamson. Why not let them be printed in the record as part of your statement here. Mr. Thom. I have no objection. Senator Cummins. Where is the list of questions? Mr. Thom. They are right there [indicating]. Mr. Adamson. 1 think that ought to go in the record as part of your statement. Mr. Thom. They are there for the consideration of each one of you gentlemen. Senator Brandegee. Inasmuch as the letter transmitting those questions has been made part of the record, I rather think the ques- tions themselves should be. Mr. Thom. I did not care to have any of those made part of the record. I have no objection to its being done, however. INTEESTATE AND FOREIGN TRANSPORTATION. 41 Mr. Adamson. That ought to go in. The Chairman. If there is no objection, that will be made part of the record. (The pamphlets referred to are here printed in full as follows:) ■SUBJECTS WHICH ECONOMISTS AND PUBLICISTS WILL BE ASKED TO CONSIDER. 1. What is the present condition of the credit of American railways? 2. Is it as good as the public interest requires? 3. While there have been some instances condemned by public opinion as financial mistakes and dishonesty on the part of railway managers or finan- ■ciers, are such instances the exception in railroad management, or do they ■constitute a condition prevalent enough to account for the decline which has taken place in railroad credit? 4. Are there any governmental causes for the decline of railroad credit? 5. Under existing systems of governmental regulation, is not the amount of railroad revenues-largely determined by governmental regulating bodies? 6. Is the power of the railroads to control their expenses substantially affected by forces beyond their control, such as labor unions, the acts of legis- latures, the demands of regulating authorities for facilities and service, etc.? income and their expenses, are or are not forces In operation which, unless controlled and safeguarded, menace the stability of the existing system of maintaining transportation facilities? 8. Is there any way of meeting this situation and of creating conditions which will attract investors except to Introduce into the systems of regulation prin- ciples which will reasonably assure proper income and reasonably protect the railroads against the unjust exactions of labor and excessive demands in regard to conveniences and facilities? 9. Do the present systems of regulation contain adequate safeguards in re- spect to these matters? 10. Is the present market for railroad securities narrowed by any of the fol- lowing causes, and if so, which, and to what extent? (a) By the war in Europe and its consequences, such as that Europe is now and after the war will probably be a borrower rather than a lender of capital, and the effect of the large balance of trade in our favor ; (6) By the exhaustion of underlying liens and the consequent necessity to obtain new money through inferior liens or without security, or by stock issues ; (c) By the danger which has become apparent to the investing public of financing too largely through bond and note issues involving fixed charges ; (d) By the superior attraction of other classes of investment, such as mu- nicipal securities, public utilities, industrials, and the tax-free securities which will be issued under the Federal farm loan act ; (e) By the success of labor in enforcing its demands without submitting to arbitration, and without investigation ; (/) By the inability of the railroads to promptly increase their revenues to jYjppi- tJiPir nsfids ' (g) By the fact that, although transportation is a business, the business questions affecting it are largely determined by the exigencies of politics and by political and not business considerations ; (h) What effect has the increase in prices from whatever cause, had upon the railroad situation? The high cost of living has affected everybody, but the man dependent upon his labor has received an increase 'in wages ; the man dependent upon income from railroad securities finds not only his income, sis measured In money stationary, and sometimes lessened, but his income as measured by purchasing power greatly diminished. Has this had an important effect upon the attractiveness of railroad securities? These are mere suggestions. It is felt that the economists can develop this price movement effectively, and thus show whether the investor is entitled to increased returns. , . , , . „ 11 Are the railroads of the country, generally speaking, able to finance themselves through the sale of stock, or must they do so by means of securities involving fixed charges? If, generally speaking, reduced to the latter method, would not that substantially affect their credit? 12 Is there any rule of financial safety and conservation which establishes a relationship between net Income and fixed charges? Is there any such rule 42 INTERSTATE AND FOEEIGN TEANSPOETATION. which establishes a relationship between the amount of capital, which imposes Jixed charges, and the amount of capital which should be contributed by the owner and represented by stock? If so, state what the rule is. 13. Has this proportion been exceeded in American railroad practice, and under present conditions of limited net Income, is there any adequate oppor- tunity of accomplishing the necessary financing by stocli issues? ' 14. What margin, speaking generally, is left for additional fixed charges? 15. Under present average standards of earnings for a representative series of years, are not the margins left for any kind of financing, through securities involving fixed charges or otherwise, entirely too small? 16. Should a system of regulation be based upon conditions as they are made by an increase of revenue growing out of the European war business, or should it he based on normal conditions of traffic? 17. Is the public interested that the carriers shall have adequate earnings in order to insure adequacy of transportatiofa facilities? If so, has the public !i vital interest that the revenues of the carriers shall not be unduly reduced and consequently that public authority should safeguard the minimum as well as the maximum rate? Is the public also interested in the regulation of the minimum rate so as to insure the proper relation of the terms on which business may be done by communities served by different lines of railroad? 18. As railroads are fundamentally essential to the public comfort, prosperity, and welfare, should they, in the public interest, be put upon a firmer and more Stable basis than that which they now occupy? 19. Has there in recent years been a decline — in fact, a practical suspension — of construction of new railroads into new territory ? 20. Is it a fact that in the year ending June 30, 1916, there were constructed In the United States less than one thousand miles of track, and is this less than in any year since the Civil War, and with the exception of the period covered by the war less than In any year since 1848? 21. If so, has this been because there is no need for such construction, or because railroad building has become unattractive to investors ? 22. Have the railroads of the country been kept up to the proper standard of efficiency, and if not, has it been because of a lack of money? 23. Is it true that, up to the present time, governmental regulation has had for its main purpose the correction of what the public have considered abuses and the elimination of what the public have considered evils in railroad man- agement? 24. Is it possible, without destructive consequences, for a system of govern- mental regulation to be based permanently on the principle alone of correction and elimination of abuses, or must it also adequately provide for conservation, encouragement and protection? 25. Whether or not there is a serious menace to effective regulatory control in the tendency on the part of commissions to exercise the functions of man- agement — in other words, to substitute their judgment on purely business propositions for the judgment of the railroad managers ? Can there be salutary regulation unless this tendency is checked? The courts have been keen in their criticism of this tendency. Attention is called to the following cases : People V. Stevens, 197 N. Y., 1. Bacon v. B. & M. R. R., 83 Vt., 421, 442. City of Knoxville v. Knoxville Water Co., 212 U. S., 1, IS C, M. & St. P. Ry. V. Wisconsin, 238 U. S., 491, 500. 26. Realizing that transportation facilities are the foundation of community life, and are thus a_ prime physical essential to the public welfare, can there be any wise system of governmental regulation which, while correcting abuses, fails to insure the stability, adequacy, and growth of the Instrumentalities of commerce? 27. Have not the processes of regulation already secured the public, generally speaking,, against extortionate charges and against favoritism and undue dis^ crimination? 28. Have the existing systems of regulation been more largelv concerned with the purpose to give to the shipper the lowest possible rate rather than with the purpose to prevent extortionate charges? Does the former view lose sight of the public interest in the character and standard of transportation facilities? 29. In view of the practical suspension of railroad construction, the decline of railroad credit, and the marked swing of public favor to other kinds of In- vestment, has the time come when it is proper to make a careful review of the governmental forces which are operating on the instrumentalities of transpor- INTEESTATE AND FOREIGN TIIANSPORTATION. 4S tatlon in order to ascertain whether they take proper account of the public Interests in the establishment and maintenance of adequate transportation fa- cilities? 30. It being impossible, under a system of private ownership, to coerce un- willing investors to make investments, and it being necessary to invite volun- tary investments by offering reasonable assurance of safety and of adequate returns on the investment, does the present system of governmental regulation contain the elements essential for these purposes? 31. Has the time come when in the public interest the elements of construc- tiveness, encouragement, and protection should be introduced into the govern- mental system? 32. If so, should the system of governmental regulation possess, to the great- est extent possible, without injury to the public interests, the elements of sim- plicity and homogeneity? 38. In this connection, please consider whether the tendency to long and continuous lines of railroad is sound from an economic standpoint and is thus in the public interest? 34. Is this tendency due to the natural operation of economic laws which de- mand that transportation facilities shall accommodate themselves to the require- ments of commerce, or is it an undesirable condition forced upon commerce by private interests? 35. If the existence of these long and continuous lines of railroad under a single management is in the public interest and is justified by sound economic considerations, should there exist, in the public interest, conflicting powers of governmental regulations over different parts of the same line of railroad or over different functions of the same line of railroad? 36. Is it a fact that, since the present dual system of governmental regulation of railways was adopted, American railways have, practically speaking, ceased to be local or State facilities in the sense they formerly were and have in sub- stance become highways for interstate and international business? If so, should the system of governmental regulation recognize this fact, or is the fact so unim- portant that it may be justly ignored and so unimportant as to justify the con- tinuance of the policy of treating these facilities, which have now become national in importance, as still local or State facilities in many of their substan- tial and controlling aspects? 37. Under a system of private ownership, are the. standards of efficiency and the maintenance of efficiency an instrumentality of commerce dependent on its ea,rnings; in other words, can high efficiency be continued without adequate earnings? « 38. If adequate earnings are essential to a proper and sustained standard of efficiency, should there be more than one public authority to determine what in the public interest the proper standard Is? 39. If the States have the power to fix rates and to determine the standard of service as to State business of a railroad company also engaged in interstate and foreign commerce, may the State, in cases where no question of discrimina- tion against interstate or foreign commerce is involved, fix the Sta-te rates high enough to escape the line of confiscation but so low that no substantial contri- bution will be made by State business to the maintenance of the standard of efficiency deemed essential in the public interest by the Federal authorities? 40 Does such a power on the part of the State involve the power either to fix the standard of efficiency of these instruments of commerce contrary to the views of the National Government and to the views of other States, or to throw the burden of establishing and maintaining a high standard of efficiency on interstate and foreign commerce and on the commerce of other States? 41. If so, is this in the public interest? 42 Can a power to thus prejudice the interests and to obstruct the policy of other States be justly left to one of the States? Should it be the right of each State to demand that no other State shall possess the power to determine a question in which both States have this important interest? 43 Should these important questions be determined, not by one of the States which may have a different interest or a different policy from the others but by the National Government acting for and on behalf of all the States and thus alone able to act impartially between them? .;,■„„<.„ :^„o^„ +>,^ 44 Have vour investigations disclosed any influences tending to impede the development of the railroads or to interfere with the free flow of commerce in connection with regulation by State tribunals? Have the following or other instances been brought to your attention? 44 INTEESTATE AND FOREIGN TRANSPORTATION. (a) In connection with State regulation of rates — (1) Action of Alabama in fixing rates — Saunders & Co. ■;;. Southern Ex- press Co., 18 I. O. O., 415. (2) Action of Arliansas — In re Freight Rates between Memphis and Arlcansas points, 11 I. C. C, 180. Memphis v. C, R. I. & Pa. Ry., 39 I. C. C, 256. (3) Action of Texas — Shreveport cases, 23 I. O. C, 31. Houston & Texas Ry. v. United States, 234 U. S., 342. R. R. Com. of La. v. Arkansas, etc. Ry., 41 I. 0. C, 83. (4) Action of Nebraska — ^The Missouri River-Nebraska cases, 40 I. C. C, 201. (5) Illinois passenger rate case — Business Men's League of St. Louis v. A., T. & S. Fe Ry., 41 I. C. C, 13. ( 6 ) In connection with regulation of securities — (1) The failure of Massachusetts to approve an issue by the N. Y., N. H. & H. Railroad Company of $67,000,000 convertible bonds after approval by Rhode Island and Connecticut. (2) The imposition of a fee of $600,000 by the State of Illinois upon the New York Cetitral as a condition of approval of a recent issue of securities. (3) The condition imposed by the Arizona Commission in granting right to the Southern Pacific to issue securities that a large amount should be expended in that State. 45. Is railroad transportation a prime essential of national defense? 46. Is it a fact that transportation facilities in America have already been proven to be inadequate to handle the increased business due to the war in Europe? If so, would this condition of inadequacy be much greater in the event of war In the United States? 47. Is it important to the national defense that, in times of peace, the standard of railroad efficiency should be established, so that, in times of war, the rail- roads could be readily made available for the purposes of national defense? 48. As the duty of national defense rests upon the National Government, Is transportation so essential to the national defense that the National Govern- ment should likewise have the power to fix the standard of railroad efficiency, or should the power to lower the standards of efficiency be in the States which are not burdened with the responsibility of the national defense? 49. Can the standard of railroad efficiency be established and maintained by the National Government unless that Government has the power to deal with all questions of railroad credit and railroad policies ^s far as they are within Governmental control? 50. In view of the constitutional power and obligation of the Federal Govern- ment as to the regulation of interstate and foreign commerce, of the Federal Government's responsibility for the national defense, and in view of the neces- sity for prompt and harmonious governmental action in respect to security Issues, should there be a single governmental . system of regulating security issues of carriers engaged in interstate and foreign commerce, and should this power of regulating be only in the National Government? 51. Please state what your conclusions are as to the necessity of pernlitting such a standard of earnings that, in prosperous years an adequate surplus may be laid up to carry the railroads over the lean years without the necessity for any diminution of the work of maintenance and Improvement and without the necessity for a suspension of reasonable returns to those whose means have created the Instrumentalities of commerce? 52. In view of the power of regulation which is, or should be, exerted by the Interstate Commerce Commission over carriers engaged In Interstate and foreign commerce, which, of course, involves, or should Involve, a power to prevent abuses. Is there any reason for the application to railroad companies of the anti- trust laws? Consider this especially in view of the necessity for commerce from all sections to move on relatively equal terms and of the fact that commerce being continu- ous over, several lines of railroad there must be an understanding as to through rates. Do not these considerations Involve the necessity for traffic officers to meet and to agree upon rates and terms of service, subject, of course, to the approval of the Interstate Commerce Commission? 53. As the continued operation of railroads Is essential to the public welfare, should the laws permit such operation to be interfered with, either by combi- nations of capital or by combinations of labor? INTERSTATE AND FOREIGN TRANSPORTATION. 45 54. If investments of capital are by law required to be subject to the public obligation to keep the railroads In bperation, should the law attach to labor when It enters Into this public service and enjoys employment in it an obligation not to combine to prevent the operation of these facilities which are essential to the public welfare, it being, of course, understood that no law should undertake to limit the freedom of individuals in respect to service or terms of employment, but only to prevent combinations and conspiracies to do the unlawful thing of obstructing or interrupting public service? 55. If in the public interest labor should be thus deprived of the power of combination for the purpose of preventing the operation of a public facility, how should the law deal with the question of wages, so that the system may be bal- anced by preventing the oppression of labor by capital and the oppression of capital and the public by combinations of labor? " Washington, October 6, 1916. MEMOEANDUM RELATIVE TO QUESTIONS TO BE CONSIDERED BY BANKERS AND INVESTMENT BROKERS. I. Labge Sums of Monet Needed fob Refunding Pubposes and fob Impeovements. The amount of money required for these purposes will be presented by the railroads. Are any of the bankers sufficiently acquainted with the future needs of the railroad to give any estimates of these requirements? II. Inceeasing Difficulties in the Way of Raising These Sums foe Refundi- iNG Purposes and fok Impeovements. 1. THE EUEOPEAN MAEKET FOB EAILBOAD SECUEITIES HAS LABGELT DISAPPEAEED; Europe will need her Investment funds to repair the ravages of war and to maintain and develop her Industries, which Is the only way to enable her to carry the burden of debt which will be left by the war. She may for a while spend large sums in this country for munitions during the war and for machinery after the war, but there will be little, if any, capital available for investments in our railroads and other industries. The railroads will suffer, In common with other industries seeking capital, but they will be peculiarly affected because Europe has heretofore invested immense sums In railroads. It has been stated that before the war $6,000,- 000,000 in American securities were held in Europe, of which about 154,000,- 000,000 were In railroad securities. Is this a fair estimate? If not, what is a fair estimate? Not only will there be little market for railroad securities in Europe, but the securities held there will be sent to this country for sale, to a greater or less extent, depending upon many circumstances. To what an extent has there been a sale of these securities in this country up to the present time? To what extent is the situation relieved by use of these mobolized securities as collateral for loans? Will such securities eventually find a market in this country ? These general facts should be developed by international bankers and by In- ternational monetary experts. It is important to develop clearly and by simple processes of reasoning the theory of the balance of trade. It would seem as if we could not permivnently continue to export more than we import unless one of three things takes place : (1) Imports of gold, which can not continue long In large amounts. (2) Loans to European countries, which result in a less amount of capital available for American purposes. (3) Sale of American securities owned In Europe In America, which tend to depress the price of American securities and makes it all the more difBcult to raise money for American purposes. Questions of International finance are simple propositions to bankers, but the average man has little conception of their significance. These questions should be made plain, especially as bearing upon the available supply of loanable money. 46 INTERSTATE AND FOREIGN TEANSPOKTATION. 2. ABILITY OF THE BAILEOADS TO BAISE MONET. Mucli confusion arises from the use of the expression " railroad credit." When railroad managers say their credit is bad they are confronted with the fact that their bonds and notes are in demand and sell on a higher basis than any other bonds, except State and municipal bonds. The real question is not so much whether the credit of the railroads, in its narrow, technical sense, namely, ability to borrow money, is impaired, as whether the railroads are able to raise money through issues of stock, which is the safest and wisest method of financing. Of course, it is important to show that the ability to borrow has been im- paired, and this should be fully developed, as indicated later, but we believe that the real vital Issue is the decline in the ability to raise money through the issuance of stock. 3. DANGER RESULTING FKOM THE INCREASING RATIO OF BONDS TO STOCK. It is conceded that the safest financial structure is one in which stock pre- dominates over bonds. The stock is the equity in the property. It represents the margin of safety. Just what this margin of safety should be is difiBcult to determine. Some say stock should be 60 per cent of the capitalization (Prof. Ripley) ; others say 40 per cent is enough. The tendency of recent years is toward decreasing this margin, and thus enormously Increasing the danger of bankruptcy in times of stress. Until railroads can finance largely from stock there is a growing menace in times of business depression. It shoulfl be borne in mind that the fixed charges are represented not only by Interest on bonds ; there are the rentals of leased lines. Whether or not many of the railroads have wisely burdened themselves with fixed charges in the form of rentals is immaterial. We are confronted by a condition of financial Instability, which ought not to be made worse by decreasing the margin of safety. The Boston & Maine Railroad, for example, has about 50 per cent bonds and 50 per cent stock, but because of its lease obligations and its in- ability to issue stock, its equity as represented by the stock is but 20 per cent of its total capital liabilities as represented by stocks, bonds, and notes of itself and of its leased lines. Its common stock, although earning at the rate of nearly 10 per cent a year, is quoted in the market at about 45, due principally to this menace of an unstable financial structure. This same railroad showed a deficit of $2,000,000 in 1914 — the -capitalization and lease obligations being the same as at present. Bankers can cite analogous Instances. Bankers can show that it is for their selfish Interest as bankers that the railroads should finance through bonds and notes, but that it is the unsafe and unsound method. They should develop the, proper and safe relationship between bond issues and stock issues, and the danger now confronting the railroads from an exces- sive issue of bonds Involving fixed charges as compared with stock. They should develop the dangers in this decrease in the margin of safety. We attach herewith statements of the following bankers, railroad executives, and economists : Frederick Strauss, John B. Oldham, Daniel W^lllard, W. H. Williams, Prof. W. Z. Ripley, Cleveland and Powell. Also an extract from the Report of the Interstate Commerce Commission in the Five Per Cent Case ; also Report of the Railroad Securities Commission. 4. UNDERLYING LIENS ARE RAPIDLY BEING TAKEN UP. There has, moreover, been a decline in credit of the railroads in the sense of ability to borrow new money through the exhaustion of underlying liens, as contradistinguished from the market price of desirable railroad securities already upon the market. A careful analysis of the extent to which these liens are being exhausted should be made. Bankers can testify to such instances as come within their knowledge and such testimony, coming from such a source, is extremely valuable. 5, INCREASING ATTRACTIVENESS OF COMPETING SECURITIES. (a) State and municipal bonds yield a greater return, i. e., sell at a lower price, because of the enormous issues of late years. The security is as good as ever, but the market for low-interest-yielding bonds is limited. Hence mu- INTERSTATE AND FOREIGN TRANSPORTATION. 47 nicipalities have been obliged to put out bonds at higher rates of return — thus seriously competing with high-grade railroad bonds. Furthermore, such bonds are exempt from Federal income tax and usually from State taxes. (/)) Industrials are becoming seasoned and consequently more attractive to conservative investors. It would be interesting to know to what extent investors are seeking higher returns because of the Increased cost of living. A person having a fixed income from railroad bonds of $4,000 from $100,000 bonds, finds that it now requires, say, $5,000 to buy what could be bought 10 years ago for $4,000. Instead of reducing his standard of living has he not turned to investments which yield higher returns? (o) Public utilities are becoming more firmly established, and furthermore under the laws of many States are protected from competition. (d) Bonds based upon real estate mortgages are much advertised. Is this an important field for investment? What will be the efCect of this rural credits act in providing an attractive investment? 6. MARKETS FOE KAIEBOAD SECXJItlTIES ABB BEING GBABUALLY EESTEICTED BY LAW. New York insurance companies, under the law of 1909, were prohibited from liolding any stocks. Formerly they held largely of railroad stocks. Furthermore, in many States railroad bonds ceased to be legal investments for savings banks unless dividends in stock are maintained. Can the bankers give other analogous instances? 7. INVESTOES ARE TJNFKIENDLY TOWARD RAILROAD SECURITIES. Whatever may be the causes, the experience of investment bankers coming into personal contact with customers is that investors do not want railroad se- curities to the extent they did formerly. Bankers can testify as to the reasons given, but probably back of the prejudice is the feeling that the public authori- ties will not permit a sufficient increase in rates to take care of the continual increase in cost of operation. The employee comes at the railroad with a club and compels an increase in wages ; the railroad humbly asks the public authori- ties for a sufficient increase to take care of these enormous increases and is told by these authorities, " You do not need higher rates ; practice virtue, practice economy, forego your dividends, and you will have enough money to pay higher w&ges." The testimony of brokers as to the fact of growing disposition among in- vestors as regards railroad securities and as to the reasons given by them will be extremely helpful. 8. ARE SAVINGS BANKS AND TRUSTEES INVESTING, IN RAILROAD SECURITIES? Formerly railroad bonds and many railroad stocks were regarded as the safest and most conservative investments. To what extent has this demand from con- servative investors fallen ofC? Testimony of investment bankers will be invaluable on this point. There is no doubt that there has been a great change in this respect. 0. WHAT ARE THE CAUSES OF THIS DECLINE IN ABILITY TO FINANCE BY STOCK ISSUES? The short answer is the permanent decline in net revenue, but the fact that prices of stock have not responded to the remarkable recovery in net earnings the past year shows that the causes are deeper. The testimony of bankers is valuable for the purpose of showing the fact that there is a 'decline in the popularity of railroad securities, especially stock. The bankers can also give the reasons why they have been cautious in recommending railroad securities, especially stock, and why investors who act without advice do not want railroad securities. These reasons are the real reasons why railroad ■credit in its broad sense of ability to raise money from any source— has de- clined These objections may be based upon sound economic principles, statis- tical evidence, careful analysis, or they may be based merely upon prejudice, but thev are the real and effective reasons for the inability of the railroads to raise funds. 48 INTERSTATE AND POEEIGN TBANSPOETATION. The following have been suggested as some of the causes of decline in publie favor for railroad securities : (0) Increasing tendency of commissions, especially the State commissions, not only to regulate, which Is proper, but to manage the railroads. In other words, to substitute their judgment for the judgment and discretion which should be lodged In the directors and officers of the railroad. For example, one commission ordered a railroad not to make an exclusive contract for sale of scrap iron though it was demonstrated to the satisfaction of the railroad officials that the best results were thus obtained. (6) Inability of the carriers to control their expense accounts because of Increasing demands of labor with ability through organization to enforce those demands, coupled with the corresponding inability of the carrier's to control their income account. This latter is due to— (1) The extraordinary power of suspending rate schedules resting with the Interstate Commerce Commission and the delay necessary incident to a general investigation. (2) The legal obligation of the carrier to sustain affirmatively to the satisfac- tion of the commission the reasonableness of the suspended rate. (3) The tendency of the commission to permit rates to be adjusted on the basis of years of prosperity, allowing only a moderate return in such years, without chance of accumulating a reasonable surplus for lean years. Bankers can emphasize the necessity for ample surplus, if securities, especially stock, are to be made attractive. The report of the Railroad Securities Commission on the necessity for a large surplus is particularly Impressive. (c) Tendency of State legislatures and commissions to Increase the burdens, while at the same time decreasing the revenues. The tendency of each State is to get all that It can In taxes and in service and improvements at the least possible cost. It is the jealousy of each State of Its neighboring State, rather than of Federal Government, which produces this result. (d) Restrictions placed upon the Issuance of securities by State commis- sions. The tendency to regulate price at which stock may be Issued to stock- holders takes away a valuable and attractive right. (e) Alleged misconduct of railroads. The tendency on the part of publie authorities is to charge the decline in credit to the financial mismanagement of railroads. Bankers will doubtless be asked their opinion on this important point. Jn the Five Per Cent Case, Mr. Frederick Strauss, In referring to a conversation with Sir George Paish, said : " I asked about the feeling of the British Investor toward American rail- roads by reason of Irregularities in railroad management. Sir George Paish told me that, unquestionably, these exposures had had considerable Influence- on the mind of the Investor, but that primarily It was the feeling that costs were going up, that taxes, were going up, that the margin of surplus earnings- available for dividends was declining, and that there was a growing feeling that the American railroad investments were things to be avoided." 10. WHAT IS THE EEMEDY? The railroads believe that the first step Is for the Federal Government to take- exclusive control of these Instrumentalities of interstate commerce. No business enterprise can continue to thrive If it is treated entirely from the standpoint of restriction. In any system of helpful governmental regulation there must be introduced the principle of protection. One of the great diffi- culties with the present system of regulation is that it is entirely based upont the idea of restriction and contains no element of proper helpfulness and pro- tection. As the Federal Government, having entered upon the field of regula- tion. Is responsible to the country for an adequate system of Interstate and for- eign commerce, that Government must be in a position to protect the instru- mentalities of such commerce from injury from any other source, and, as a con- sequence, the Federal Government must have full control of the instrumentali- ties of interstate and foreign commerce and must treat these Instrumentalities- not only from the standpoint of proper correction, but also from the standpoint of proper support and helpfulness. INTERSTATE AND FOEEIGN TEANSPOBTATION. 49 lOilliE.^Ta ON THE DAKGER OF IIKANCING THUOUGH EXCESSIVE BOND ISSITES. Testimony of Frederick Strauss, of tlie firm of J. & W. Seligman & Co., banlcers, New York, at the reliearin'g of tlie Five Per Cent case, at Wasliing- ton, D. C, October 20. 1914. P:!,Te .5767, printed record : " In tlie first place, I want to empliasize as a principle of .sound finance tlie necessity of railroads and of corporationis — I am speaking only of railroad* here — raising a very large part of their capital by the sale of stock as distin- guished from the sale of bonds, bonds involving as they do, a fixed interest and dividends on the stocks being contingent. " I think that statistics will .show — those that I have been able to ohtain from the records of the Interstate Commerce Commission — that whereas in 1890 the amount of bonds and stocks outstanding of the railroads were al)out equal, that the ratio has since declined, .so that the latest figures I have been able to get show approximately about 62 per cent of all the railroads in the ITnited States as being capitalized to that extent in bonds and about 38 per cent in stock. " The ability of a railroad to raise money from the sale of stock by reason of the restriction of all the States that stocks shall be sold at par and not less is limited, of course, by the price at which those stocks sell. Even taking it before the closing prices of July 30, there were only a very small — comparativel.v small — number of railroads outside of the anthracite coal group that were able to raise money by the sale of stock at all. And, taking the prices 6f July 30, one might almost be tempted to say there was practically no company thai; could sell any volume of stock for its capital needs at par or higher." * * ^ *** * * Page 5773: "Mr. Beandets. Jlr. Strauss, you iiDinted out to tlie commission, as I under- stood you, at the opening, the desiraliility of having an important part of the capital of a railroad in stock in order that a part of the capital charges might be contingent. Is not that true? " Mr. Steauss. That is true. "Mr. Beandeis. Well, if you are to insist in bad times as well as in good, as for instance, the Baltimore & Ohio has done, in continuing as a fixed burden upon the income of the railroad the dividends, are you not defeating the very purpose which you have set out as the reason, and I think very appropriately as the reason, why an important part of the capitalization should be in stock? " Mr. Steauss. One of the important things in having a large stock equity or ownership back of the bonds is to enable the railroad to borrow at a low rate of interest ; and furthermore, that in the event of a crisis such as the present, when the roads find it necessary to resort to borrowing — there is no question about being able to sell stock at the present time at par — their credit shall be of the best. That was the principal point I meant to raise ; but, answering the question you put to me, it is true that one of the very objects in having a large contingent charge and only a moderate fixed charge is that in the event of dis- aster the road shall not be bankrupted ; that it shall not have to go through the agonies and throes of a receivership, and thus bring about more important consequences to the whole country ; whereas a suspension or reduction of divi- dends, while felt acutely by the stockholders themselves, is not of such national importance. So far- as an individual road is concerned, that is true; but when such suspension of dividends, however, becomes general, so as to amount to a general convicti-on on the part of the people who have invested their money in railroad stocks that such suspension and reduction is going to become vast, I think it has an extremely harmful effect upon the general prosperity of the country. The very validity of the principle of finance arises out of the fact that it shall be contingent, so that In case of absolute necessity, the dividends can be reduced." Testimony of John R. Oldhani, banker, of Boston, at the rehearing of the Five Per Cent case at Washington, D. 0., October 20, 1914. Page 5864 : " It must be borne in mind that high credit is essential to economical financ- ing, and experience has shown that a railroad can not enjoy high credit unless the amount of its stock capitalization bears a proper relation to its total capi- talization. In the standard roads we selected approximaely three-fifths of the 70342— PT 1—16 4 50 INTERSTATE AND FOREIGN TRANSPORTATION. total capitalization was represented by obligations carrying a fixed charge and two-fifths of the capitalization consisted of stock. If g POEEIGlSr TE.ANSPORTATION. ^' Those who prefer the national incorporation can have it while those who have special refuge under the powers of any of the States can retain that." We believe that if Congress adopts a system of incor- poration at all it will make it uniform and will not permit this power of election between the various railroads of the country. Now, gentlemen, this idea of incorporation has grown in this ■country. I have in my hand a report of the Committee of the National Association of Railroad Commissioners, composed, I be- lieve, of all the commissioners of all the States as well as of the ■commissioners of the United States. They referred this matter to one of their committees. I assume it was done a year ago; I do not know. But within the last week a report has been made by that com- mittee. It is true that the association has not passed upon the report. It has put it over for another year, but the report has been made. It has been made by the State commissioners. It is unequivocal in its terms and is an expression by them of the necessity for a system of national incorporation. I will read a summary of their conclusions: In conclusion we herewith summarize our views and present the following Tecommendations : First. That the Interstate Commerce Commission be given the power to regulate the stoclts and bonds of the interstate carriers. Second. That the Interstate Commerce Commission, or some other Federal agency, be empowered to regulate the rates, practices, stocks, and bonds of the Interstate public utilities. , Third. That Congress enact the necessary legislation to provide for a national incorporation act for interstate railroads and interstate public utilities. Fourth. That the Interstate Commerce Commission be empowered to exercise jurisdiction over mergers, consolidations, and encumbrances of interstate rail- roads. Fifth. That the Interstate Commerce Commission be given authority to exer- cise jurisdiction in receivership proceedings preferably to the fullest extent, but at least over all matters rel.iting to capitalization. Sixth. That Federal and State statutes be amended, where necessary, to per- mit of issues by railroads and public utilities of a common stock without par value. Seventh. That the Interstate Commerce Commission and the Public Utility Commission be permitted to invoke the aid of the Federal Trade Commission and determine the reasonableness of cost of essential materials of railroad and public utility construction. Eighth. That adequate legislation be enacted, both national and State, to pro- vide for voluntary wage agreements, methods of arbitration, and for Federal and State intervention iii emergencies, to adjust wage conditions in the railroad and public utility service ; nothing contained in such legislation to require men to work against their will. Ninth. That such legislation as is consistent with public interests be enacted for the enhancement of railroad credits and for the protection of American railroads against competition in the American market for funds for private exploitation in foreign countries. Tenth. That a new committee be appointed by this association to study the question of the relationship between the Government and the railroads, to con- sider the possibilities of cooperation between the Government and the railroads, •and report to this association at its next annual meeting. Edwin O. Edgseton {Chairman, California,). John F. Siiaughenesst, of Rhode Island. . William C. Bliss. I have the States from which these gentlemen come, but I have not got it here, so I can not attempt to state with accuracy : Paul B. Framell— I know he is from Georgia. INTERSTATE AND FOREIGN TRANSPORTATION. IQS Clyde B. Atchison;— Mr. Atchison concurred in part. .Toins for the purpose of bringing the report before the convention. I concur m the recommendation for Federal control of the issuance of railway securities. JtTDSON O. Clements. Now, gentlemen, we can not ignore such testimony as that. What- ever may be done by that commission at a future meeting— I mean, by those commissioners at a future meeting— here is a report of their committee, made after a year's study, as I suppose, in which they ■ indorse as a national necessity the idea of national incorporation. The Chairman. Was there any dissent to that report ? Mr. Thom. Only such as I have read. One of the commissioners said that he concurred in part, but he did not say in which part. Mr. Adamson. Is there any explanation as to why it was not adopted by the convention ? Mr. Thom. I have not any, sir. Mr. Adamson. I thought perhaps the context would afford some. Mr. Thom. No ; I think not. We think that a mighty truth was dawning on those gentlemen. Mr._ Adamson. But it seems it did not spread over the convention. That is what I am inquiring about. ,Mr. Thom. No. Truth does not always spread at once, but it started out and is on the way. Mr. Adamson. Some of them may have attained your constitutional view about the Federal incorporation. Mr. Thom. I hope they did, because there could not be a sounder one, in my judgment. Mr. Adamson. I have more confidence in that thing than in any- thing you have read. Mr. Thom. I will have something else to read to you on that sub- ject before I have concluded my argument. Now, that, in brief, is the suggestion we shall make to this commit- tee on the subject of incorporation. Our third suggestion would be — ^but before arriving at that third suggestion I wish to state that I do not for a moment contend that this railroad problem will have its panacea by the mere concentra- tion of authority in the hands of the National Government. It will be helped ; it will be simplified ; it will be robbed of a great jnany cf its dangers ; but there still remains an unsolved problem. It will be necessary, in addition to that, to perfect, to strengthen, and to reorganize the principles of Federal regulation. The object of getr ling it into the hands of one body is to have it where its processes can be readily controlled and readily perfected, so as to work up to a real solution of this problem; and I want, just here, to digress, to say that if all we propose is done, there will not be, by virtue of that act ill one, a single cent of additional revenue brought to us. We are not asking this committee or asking Congress to pass upon the sufficiency of our revenues ; we are not asking them by act or by any act that you shall recommend or that Congress shall pass, to in- crease our revenues. We are simply asking that you shall perfect machinery that can readily and adequately respond to a condition which, in the public interest, will require an addition to our revenues. 104 INTERSTATE AND FOKEIGN TRANSPORTATION. We are asking for the perfection of a system that *ill take into con- sideration what at any time we need in the public interest, and which will be wise enough and independent enough to pass on that question in the way the public interest requires. So that any effort to make this a rate hearing ought not to be entertained, because we are asking nothing here in respect to rates; we are asking only a perfection of the system which shall pass upon that and every other matter which concerns the efficiency of these instrumentalities up to the standard of the public requirement. Now, passing to the Interstate Commerce Commission, we shall ask you to favorably consider this as the third proposal : The Interstate Commerce Commission has, under existing law, too much to do, and is, consequently, forced to confide to subordinates important functions which the regulating body ought to be in a posi- tion to perform itself. The Interstate Commerce Commission is like- wise clothed with different functions which are inconsistent and which violate the principle that the legislative, executive, and judicial departments shall be kept separate and distinct. To reduce the pres- sure upon the Interstate Commerce Commission and to separate these inconsistent functions, there should be withdrawn from the Interstate Commerce Commission all duties except those which are judicial and constructive, such as the power over rates and routes, the powers affecting the revenues of carriers, and the remaining duties, being mainly those of supervision, detection, prosecution, and correction, should be conferred upon a new commission, which may be named, for convenience, " The Federal Eailroad Commission." In order to co- ordinate and harmonize the system of regulation, the Interstate Commerce Commission should be made the supreme regulating body and should have the right of review of any order made by the Federal Eailroad Commission. The salaries of the members of the Interstate Commerce Commission should be increased, and their terms of office extended. The salaries of the members of the Federal Railroad Com- mission, who should be appointed by the President and confirmed by the Senate, should also be made adequate, and they should be given a long term. Regional commissions should be established, which should assist the Interstate Commerce Commission in exercising its jurisdic- tion, and, to that end, should make all such investigations and hear and determine all such complaints and perform such other duties as the Interstate Commerce Commission may, from time to time, by general or special order direct. The members of these regional com- missions should be presidential appointees at adequate salaries and for long terms. The orders of the regional commissions should not become effective until approved by the Interstate Commerce Com- mission, but should stand approved, as of course, unless excepted to within a time to be limited. The regions should be created with refer- ence to lines and systems of transportation, and need not be defined geographically. Each regional commission should be located at such place in its district as the Interstate Commerce Commission directs ; but it should be authorized to hold its sessions and perform its duties in any other district, when so directed by the Interstate Commerce Commission. This proposal has to do with the reorganization of the Federal systein of commission. The foundation of our national liberties is the separation of what are termed in consistent functions of govern- INTERSTATE AND FOREIGN TRANSPORTATION. 105 ment. You have one judicial department; you have one executive •department, which is not judicial and not legislative; you have one legislative department, which is not judicial and which is not execu- tive. The ideal of free government is that those functions shall be kept distinct from one another. It was though that if a legislator should be a judge, there would be no use for a judge, because he would sustain his acts as a legislator, and so with these other func- tions ; in order to be useful, each department must be protected from the invasion of the other. And yet we find that whole and whole- some governmental principle is violated in the present organization of the Interstate Commerce Commission. They are judges; they are, in a measure, legislators, and they are administrators of the .system of regulation. , We feel, as long as men are human, that they will go to the exercise of one of these functions influenced by the functions that they are performing in another one of their duties. We think that if there is a question, constructive in its character, relating to all the railroads, it is unfortunate for that question to be determined in an atmosphere which has been created by having that ■commission walk out of the next room, where it has been investigat- ing what is said about the Alton and the Eock Island and the Frisco railroads; we feel that human nature can not leave in the adjoining room the impressions which they have got in the exercise of their detective, corrective, and punitive functions, and come helpfully to the consideration of matters which go to the very vitals of the whole system of transportation. We feel that men ought to exercise one •of those functions, who do not exercise the other, and, as the matter of building up the system of transportation in this country is of the first and most fundamental importance to the country and to the public, the men having it in charge ought not to be embarrassed, ought not to be limitedj ought not to be influenced by any abuse which they have found m some single road; aiid yet, in the nature of things, all these things that are wrong are spread over all of the railroads of the country — guilty or innocent. Now, bear in mind that I am not asking you in any way to sur- render any part of your corrective jurisdiction; I am not advocat- ing your taking away from the regulating bodies any part of the power they have to correct abuses; but I am advocating- a system which will prevent the great good that will come to the people from a successful system of transportation, being in any way affected or ■obscured by the inconsistent functions, of the body that does the regulating. Now, as to regional commissions: We think that there is a sound underlying support for the popular desire that government shall be brought close to their homes. We believe that if you take the power to make State rates, and put it in the hands of your national author- ity, there will be increased reason for bringing your system of regu- lation to the doors of the people, so that their needs, their aspirations, and their commercial conditions shall be considered and shall be passed on by men resident among them. We think, however, that that deference to local wants, that con- sideration for local conditions, ought not to destroy a coordinated regulation, but while there is just interest of localities to have their needs appreciated, there is also a just demand on the piart of localities 106 INTERSTATE AND POBEIGN , TEANSPOKTATION. that they shall do their commerce on terms equal to the terms which are granted to any other people anywhere in this country, and that in consequence these regional commissions ought to be established in these transportation regions, ought to live there, ought to hold their sessions there, ought to take their evidence there, ought to reflect everything that is sound on local atmosphere, and yet that a local view, a local treatment of one part of commerce should be prevented by requiring their rejDorts to the Interstate Commerce Commission, which could coordinate the regulation of commerce in all parts of this country and see that it is impartial. The functions under our suggestion of these regional commissions would be like the functions of masters in chancery, who take the evi- dence and make the report, and the report lies subject to exception. The exceptions only are argued before the court. The exceptions under our suggestions would be the only thing argued before the Interstate Commerce Commission, unless in a special case they should direct otherwise. This would take from the Interstate Commerce Commission an immense burden of work and would concentrate the controverted matters between them to those that the two parties agreed were to be controverted by having an exception filed. In that way the commerce of this country could depend for its original con- sideration on men of the dignity and ability that would be appointed by the President and confirmed by the Senate. And the commercial interests of this country would then not be dejDendent upon exami- ners, who are low-salaried officers, but in all matters of controversies they could, by operation of law and by right of the statutes, go on these exceptions and argiie the matter before the commission itself. Our next proposal will be that the power of the Interstate Com- merce Commission over rates should be extended, so as to authorize it to prescribe minimum rates, in addition to its present power to prescribe maximum rates. And it should also be given the extra power to determine the relations of rates or differentials whenever necessary or apporpriate to establish or maintain a rate structure or a relation or a differential found to be just and proper by the Interstate Commerce Commission. I hope it is apparent from the argument I have so far presented that the public have as deep. an interest in having the revenues of these carriers adequate to the furnishing of an efficient and sufficient public service as the carriers have. The public depending on any special railroad can not with equanimity view a situation where the revenues of that road are so inadequate as to affect the standards of the public service that the people are getting there. There is as dis- tinct a public interest, I repeat, in the community to have the reve- nues of the carriers sufficient to guarantee a proper service as any interest the "carriers may have, and greater, because public interests are always greater than private interests. Moreover, here is a community served by a railroad, which does its business with a great market ; here is another community served by a different railroad doing its business in the same market. It is of vital importance to justice in commerce that' the terms on which those two communities can reach that market should be equal. If it is in the power of one of the roads to give to its communities terms which will be temporarily advantageous, lower than the other road INTEKSTATE AND FOBEIGN TEANSPOBTATION. 107 will give to the commmiities it serves, then th6re is an inequality of commercial opportunity which is indefensible. As long as the minimum rate is not regulated by Government the two conditions will follow ; one is that the struggling railroad, which is anxious to keep its head above water, will be at times willing to depress its rates so as to attract a temporary business, and thereby deplete its opportunity for a continuous and permanent and a reli- able service to the communities which it serves. That is one of the consequences. The other consequence is that unless the minimum rate is regulated it is in the power of these two railroads to give different commercial opportunities to the communities they serve. Now we believe that any righteous situation ought to take hold of that minimum rate and control it in the publjc interest just as much as the maximum rate ; that it ought to be able to say whether or not one community on one railroad is to receive commercial opportu- nities which are denied to a community on another railroad; and that it ought to be able to say, " If you are going to take charge of the instrumentality of interstate commerce and make it efficient for the needs of all the people, you ought to be able to say that its reve- nues shall not be depleted unjustifiably and unreasonably by mak- ing the rates too low, so that the result is simply a depletion of reve- nues at the same time that it produces inequality of commercial opportunity. In our fifth proposition we attempt to have introduced the prin- ciples of protection to these carriers, the principle pf the protection and maintenance of their credit by prescribing' some of the things that the Interstate Commerce Comimission must take into considera- tion when it fixes the rates of the carriers. No. 5 is as follows : It should be made the duty of the Interstate Commerce Commis- sion in the exercise of its powers to fix reasonable rates_, to so adjust these rates that they shall be just at once to the public and to the carriers. To that end, and as a means of properly safeguarding the credit of the carriers, of protecting the "just rights of the owners, and of providing a basis for additional facilities from time to time as the needs of commerce may require, the Interstate Commerce Commission should be required, in ascertaining and determining what is a reasonable rate for any service, to take into account and duly consider the value of the service, the rights of the passenger, shippers and owners of the property transported, the expenses inci- dental to the maintenance and operation of the carrier's property^ the rights and the interests of the stockholders and creditors of the corporation, the necessity for the maintenance in the public service of efficient means of transportation, and for the establishment from time to time of additional facilities and increased service, and in addition thereto any other considerations pertinent to be considered in arriA'ing at a just conclusion. That is part of No. 5. I will read the balance in a moment. The purpose that we have in view in presenting that as a recom- mendation is to secure a legislative mandate to the regulating body that there are certain things essential in the public interest, among them a principle, among them is the establishment of adequate rail- road facilities and the assurance that those facilities will grow as commerce 'grows and the public needs increase. That they shall 70342— PT 2—16 2 108 INTEESTATE AND FOREIGN TEANSPOETAIION. take that as one of their guiding principles in exercising their function of rate making. That the^ shall realize that they ar^ deputized by Congress as an instrumentality of government, charged with the responsibility of seeing that the instrumentalities of Con- gress are made and kept as efficient as the public interest requires. We say that can not fae done without having reference to the credit of the carriers, and therefore in fixing their principles of rate mak- ing they must have due reference to the kind of credit that the public interests require ; that the carrier should have a properly fixed revenue with reference to that as one of the standards. We say further that, as the public is interested in the matter of the net return, in the encouragement to capital, in the provision of a surplus in prosperous years to meet the efflux in lean years, that there should be a legislative mandate that the expenses to which the carrier must submit in the way of providing this public service must be taken into consideration when you fix the amount of their revenues and thus protect the net in which the public is interested as much or to a greater extent even than the carriers themselves. I say as much or more, because the carriers at last, when they are unable to do these things that the public interests require, have at least the refuge of havmg the Government buy the properties and take over the burden itself, whereas the public must meet the problem of suffi- cient transportation facilities, either under a system of private owner- ship or under a system of Government ownership. The remaining part of No. 5 is this : The power of the commission to suspend rates should be confined to 60 days from the date the tariff is filed. If the commission Is not able within this time limit to reach a conclusion, the rate should at the expiration of that time be allowed to go into effect with appropriate provision for reparation for the period not exceeding one year in case the rate should subsequently be declared to be unreasonably high. I have no doubt that that clause will give rise to considerable dif- ference of opinion, but we believe that that can be sustained by the measure of the public interest, like the other matters that we have suggested. The other proposals that we are making can be sustained, Always remember that the greatest public interest is in facilities; always remember that the greatest public interest is in the assurance of the continuance of the carrying on of commerce. Xow, suppose that the present provision in regard to suspension of these rates for 10 months should continue, and let us take the case, first, where at the expiration of 10 months it is found that the proposed rate is a just one and should have been put in effect from the beginning. The first consequence of that is that for the period of 10 months the carrier has been deprived of a legitimate earning of a legitimate income. There is no power on earth to give that to it again. It is ^one. It is irretrievably gone. Now, under the supposition that it \was entitled to it from the start, the loss to it must be felt in some direction. It must be felt either in some other part of the traffic bearing the burden which ought to be shifted to this, which violated the principle of equality among the patrons of the railroad ; or if it 'can not be shifted to some other class of that traffic, it means an impaired capacity on the part of the carriers to meet the public needs in regard to facilities. It puts the public short somewhere, •either by transfer onto some other part of the public of a burden INTERSTATE AND POEEIGN TRANSPORTATION. 109 which oughtto be borne by this traffic or by depriving the public of a proper basis for additional facilities or for adequate service, which is their prime need and to which they are, as a fundamental matter, entitled. Now, this is the case of where the suspended rate is found to have been a reasonable rate from the beginning. Now, let us take the other case, the case where, it is found that the rate proposed is an unreasonable rate and ought not to be allowed. In that event our proposal is that we shall keep our books in such a way that where we have charged during that period from the very beginning more than we are entitled to charge, that we should be in a position to make the refund to the shipper that has been overcharged. It is impossible, if you suspend for 10 months and the rate is a reasonable rate, to repay us. It is not impossible, if you suspend for 60 days and the rate is declared to be unreasonable, for us to repay the shippers. We take the view that that is the most equitable method of dealing with that question of suspension, and we take the view that that is the method of dealing with it which is best in the public interest. The sixth proposal that we shall make is: That the Interstate Commerce Commission should be vested with the po^\-er and it should be made its duty to provide, upon the application of the Post- master General or any interstate carrier, reasonable rates for all services and facilities connected with the qarrying of the United States mail. That proposal is so clear and the whole subject is so much in the minds of Congress at this time that it is unnecessary for me to en- large upon it now. Our seventh proposal is: There should be in the Federal Government the exclusive governmental power to supervise the issue of stocks and bonds by railroad carriers engaged in interstate and foreign commerce. I have argued that proposal at length during the remarks which I have had the honor to submit, and, therefore, it is unnecessary now for me to detain you at this period of the discussion with any elaboration of it. Eighth: The law should recognize the essential difference between the things which restrain trade. In the case of ordinary mercantile concerns, and those which restrain trade in the case of common carriers. While the question of com- petition may be a fair criterion in the case of ordinary mercantile concerns, it is not a fair criterion in the case of common carriers. In the case of carriers the test should be whether common ownership or control promotes trade and commerce, by afEording facilities for the interchange of traffic, or by supple- menting facilities for transportation, to a substantial or greater extent than such common ownership or control restrains trade by suppression of com- petition. You gentlemen will appreciate that no railroads can cross each other, can closely approximate each other without crossing, or can form one continuous straight line without there being competition between themi "When they cross there is an area around the point of intersection which can get to the markets of the world over either, one of them. When they closely approximate each other, coming close enough for traffic to be delivered to one or the other, then,, within that region where a common service or common public service exists, there is competition, because the commerce in that zone can reach the markets of the world over either. Where rail- roads meet in a city and one goes out due north and the other goes 110 INTEESTATE AND POREIGIT TRANSPOBTATION. out due south, their connections are such that a market anywhere can be reached by coinmerce taking either one of those railroads. So that there is a necessity of competition in respect to the railroad business at these points to which I allude, which does not exist in mercantile concerns. Moreover, those two railroads that meet end on, or that arfe so situated toward each other as to furnish an avail- able means of carrying forward on the one railroad the traffic origi- nating on the other, they so supplement eadh other in the facilities of transportation that the service they render as connections is vastly greater than the competition which exists at the point at which they meet. The facility of having commerce pass uninter- rupted from one of these connecting railroads to the other is a valu- able facility where it is a natural condition, and when we come to ask what the public interest is we must necessarily balance what these two railroads do in the way of suppressing competition against the advantage they offer in the way of supplementing transportation. N"ow, we say, therefore, that that is a matter plainly demonstrable in the public interest, and that that is a test plainly applicable to the laws which should be made to apply to them. What is the greater public interest? Is the greater public inter- est to keep its rates separate because there is some competition sup- pressed, or is it in the public interest to have those railroads unite because they are naturally supplementary to each other and they furnish additional and needed public facilities ? Now, we believe that the determination of that question ought to be put into the hands of the Interstate Commerce Commission and that they ought to be required to determine it on the principles which I have stated, of public interest as shown by supplemented and im- proved facilities on the one side, or by the suppressing of competi- tion on the other. We say more than that, that this matter of sup- Ejressing competition, of restraining trade, of enforcing hard and )urdensome terms of transportation, is taken out of the hands of these carriers because you regulate them by your public bodies. The reason for your antitrust laws in respect to other mercantile matters is because of the hardship that great combinations may put upon the people. At least, as to the terms of transportation, it is impossible to put hardships upon the public, because those terms are prescribed by public authority. Of course there is still the question of semce. That matter would have to be determined by the Interstate Com- merce Commission as one of the elements of determining what the public interest is. But when you have applied to the affairs of the, railroads the strong regulating power of one of the departments of government, the same conditions do not apply to that ; the public is not menaced by the same dangers in respect to that as it is by an entirely unregulated private business, and these essential differences, we think, ought to be recognized in the system of regulation which you will adopt. 9. The law sliould expressly provide for the meeting and agreement of traffic, or other officers of railroads in respect to rate practices. This should, however, be safeguarded by requiring the agreement to be filed with the Interstate Com- merce Commission and to be subject to be disapproved by it. Now, gentlemen, no man acquainted with railroads, with the neces- sity for them to make joint rates and through routes, can for a moment doubt the absolute necessity for the authorities of the two INTERSTATE AND FOEEIGN THANSPORTATION. Ill roads to meet and agree upon the joint rate and the through route. There can be no such thing as a joint rate and a through route without agreement unless made by law by the authority of the Interstate Commerce Commission. The law requires that to be done by the voluntary action of the carriers. It is impossible to have that Volun- tary action unless they can meet and agree. But the interest of the public does not end there. The interest of the public is equality of terms of doing business. When two railroads serve the same market ; when two railroads tap the same producing territory, there is a valuable interest on the part of the public that those whom the rail- roads serve shall have ecfuality of terms. The philosophy of that principle of transpcirtation is universally recognized even by the regulating authorities, and in order to have the equality of terms the traffic officers are obliged to meet and to make known to each other what the terms are. Of course you appreciate that an unrestricted power of agreement may open the doors to abuses, but our proposition is that all these abuses and opportunities for abuses can be obviated by requiring these agreements to be filed with the Interstate Com- merce Commission before they shall become valid, and be subject to be disapproved by that body. I make a diflference between subjects to be disapproved and subjects to be approved because the time for approval means delay ; whereas the power of disapproval is a power sufficient to meet the chance of abuse. I believe you will find, if you ask the interstate-commerce commissioners, that such an arrangement with regard to the meeting of the traffic officers is in their opinion essential to the carrying on of business in a fair and equitable. way between various communities. Now, gentlemen, I have not included in the proposals which we shall malce to you any suggestions on the labor question. All these things that I have read were agreed upon by us before this labor situation became such a menace to the commerce of the country. When we prepared for these hearings we did not expect to introduce that subject, notwithstanding its importance, because of its hotly con- tested character. It may be that recent events have put the labor con- troversy in such a situation that Congress will have to confront it and to deal with it. Whether that will be done by this committee or by some other committee of Congress, we are not advised There- fore, for the present, I shall make no suggestions in respect to the labor situation because it seems to me that that situation ought to be met when it arises, and after proper opportunity for exchange of views in regard to various proposals. I have now, then, gentlemen, laid before you with the frankness which this great situation demands, and with the frankness with Which I attempt to treat every public subject with which I come in contact, so that you may know entirely the views that we entertain and the proposals that we shall make, and so that witnesses who shall appear here will have the full benefit of the things which we think are wise to be done by this Congress. It may be that in the light of what shall be developed before you we shall take a different view on some of these questions. I do not anticipate that, but we can at least assure this committee that we will approach any suggestion which is made from any source with an open mind and always with a purpose to have it determined by the standards of the public in- 112 INTERSTATE AND POEEIGN TRANSPORTATION. terest which we have asked to be applied to all the proposals that we ourselves have made. I now come to a part of my presentation which is a matter of pro- f oundest interest to me. I come to present to you the views of a man occupying a position of supreme authority with the American people. He has lived a long life. He has ornamented and led, and still orna- ments and leads, the American bar. He has held high office from which he retired with an untarnished name and with a reputation established and safe in American history. He entertains the demo- cratic view of the rights of the State. He occupied no position of a professional or other character to this investigation except the posi- tion and the character of an eminent American citizen. It has b^en impossible to induce him to leave the honorable retirement into which he went by even the offer of the ambassadorship to the Court of St. James, which I understand was recently made to him. He stands out before the American people as a great lawyer, a great Democrat, and a man who occupied with distinguished credit to himself and benefit to the people, the offices of Attorney General and Secretary of State in Mr. Cleveland's Cabinet. I refer to Mr. Richard Olney. Unfor- tunately, his condition of health does not permit him to appear be- fore this committee, but I have from him this letter : Boston, November S3, 1916. Alfked p. Thom, Esq., Counsel Railway Executives' Advisory Committee, 1360 Pennsylvania Avenue, NW., Washington, D. C. My De.4e Me. Thom : For reasons you are familiar with, it is quite imprac- ticable for me to appear before the congressional committee at Washington for the purpose of expressing my opinion as to the desirability, perhaps I should say necessity, of the National Government proceeding without delay to insist upon national railroads being owned and operated by national corporations. But, if my opinion is of any value, I believe it will not lose but gain if stated in writing rather than by word of mouth. The inclosed "Memorandum" is an attempt to put the matter in a little more orderly shape than I have put it heretofore. You are, of course, at liberty to make whatever uSe of it will serve the object you have in view, in which, personally, I thoroughly believe. Very truly, yours, < (Signed.) Richabd Olnet. The memorandum reads as follows : A MBMOKANDTJM BY MK. BICHAED OLNEY. 1. For all the purposes and functions of commerce between the States of the United States, between such States and the Territories of the United States, and between such States and Territories -on the one hand and foreign nations on the other, the United States is one country with complete and exclusive jurisdic- tion over the whole subject — and State lines and jurisdictions are without significance. 2. Commerce, In the constitutional sense, covers transportation and inter- course in all forms and whether existing when the Constitution was adopted or since Introduced and practiced. 3. The national dommerce power, being of such extent and exciusiveness, necessarily subjects to national regulation and control all the agencies and instrumentalities by which national commerce is carried on. 4. It can not be doubted that a railroad corporation created by a national charter is an apt instrument for the carrying on of national transportation and that the organization of such corporation, with all appropriate powers and duties, is a fit subject for treatment under the commerce power. 5. Nor is it to be doubted — because ample experience has shown — ^that, in this matter of national transportation by railroads, public policy and the public welfare are at one with the law of the country. They Imperatively require that INTERSTATE AND FOREIGN TRANSPORTATION. 113 the subject should be dealt with in all its phases by a single authority which can be no other than the Nation itself. The mixed jurisdiction over the sub- ject now prevailing — the States exercising a part mostly through State charters and the United States a part mostly through the commerce power — is thoroughly archaic, originated before the true scope of the commerce power was generally understood, and has resulted in a serious waste and inefficiency In railroad operation which is at once matter of public notoriety and public scandal. 6. In view of the settled law of the land as respects the national commerce power — as by virtue of it the United States practically undertalies to exercise the power for the benefit of the several States and of all the people — and as transportation by railroad is within that power and is to-day In a condition most unsatisfactory to the private owners of railroads as well as seriously prejudicial to the national interests, the question is of the remedy for that condition. It may be claimed that Government ownership of all national railroads is the only true and adequate solution, a claim which time and sufficient experiment may show to be well founded. Yet Government ownership would have political bearings of such liith and moment as ought to prevent its consideration until and unless it is established that there is no other way out. It is best to assume in the first instance, therefore, that there ■ is some, other way out ; that the question Is essentially administrative rather than political ; that it concerns our national housekeeping rather than the structure and stability of the house itself. 7. If the correctness of the foregoing premises be assured, and if it be also conceded, as apparently it must be, that national control of national transporta- tion by railroad can be secured in the most simple, direct, and effective manner by requiring all parties who undertalie it to take out national corporate charters, the real and practical question Is one of procedure. How shall the United States rid itself of the present order of things and sub- stitute the desired new one — how eliminate any present State control of national transportation by railroad and substitute for it exclusive national control, through national incorporation of the parties undertaking to carry on such transportation? Congress, of course, must enact necessary and appropriate legislation. What must be its essential features? 8. The practical situation is complicated and difficult, because, as a whole, the Interstate-commerce railroads of the country are to-day owned and operated by State corporations under State charters. Thus (apart from the general public) the parties interested in the displacement of State railroad corporations now doing a national commerce business by national corporations are first, the States granting the existing charters, and second, the stockholders and creditors of such State corporations. If the assent of these several parties could be counted upon, the change from the present status to absoluts national control of national transportation by railroads through the medium of railroad corpo- rations with national charters would be easy. But such assent, for obvious reasons, is not to be taken for granted, arid the question is how shall the United States proceed to accomplish the desired result without such assent. ' (a) To consider first the right of the States and the State corporations — each has granted franchises enabling a railroad corporation of the State by the use of them Independently or in connection with franchises granted by another State or States to operate a national railroad. The franchises have been accepted so that there is an apparent duty on the part of the grantee to execute them and an apparent right of the grantor to insist upon their execu- tion. If the right and duty were real, only the power of eminent domain could take away the grantor's right to claim full performance or impair the grantee's duty to make such performance. But on the legal grounds already developed a State grant to a State corporation of the franchise to operate a national railroad must be regarded either as void ab initio or as provisional merely and as becoming void whenever the National Government acts upon the subject. Consequently, neither that State nor the State corporation would be legally aggrieved if a grant to a State corporation of the franchise to operate a national railroad were annulled by a grant by the National Government of an identical franchise to a national corportion. (6) Such being the settled law of the land as respects the national commerce power and its application to national transportation by railroad, it Is not only the right but the duty of the United States to exercise the power if the national welfare demands it. In various instances the National Government has by inaction acquiesced in the exercise of State authority over matters exclusively within the national jurisdiction. In such cases the theory of the courts has 114 INTERSTATE AND FOREIGN TRANSPORTATION. been that State action should not be invalidated so long as the National Gov- ernment continued to impliedly approve of it, while the policy of the National Government has been thought to be justified by the view that State action on the subjects concerned would be likely to be more intelligent and efCective than action by the Nation. So far as national transportation by railroad is con- cerned, however, no ciuestions of that sort need be discussed. Its unsatisfac- tory condition is admitted on all hands — ^is bitterly complained of by the private owners of railroads and is notoriously prejudicial to the national interests — so that the clearest possible case exists for the affirmative use by the National Government of its acknowledged power over the whole national railroad situa- tion. (c) Feasible and adequate legislation for putting a national railroad now operated by a State corporation into the possession and control of a national corporation must not only authorize the latter to operate such road, but should also provide the ways and means by which the new corporation shall succeed to and acquire the tangible railroad property essential to and actually in use in the operation of such road. Such property — the entire railroad plant, including roadbed, rails, stations, shops, telegraph and telephone equipment, and all other railroad property and appliances employed in the operation of the national railroad concerned — should pass from the old State corporation to the new national corporation as a unit, as a going concern. It can not be thus conveyed to the new corporation by the United State.s because the United States does not own it. It belongs to the old corporation and its stockholders, whose ownership is absolute except so far as their creditors may have claims on it, and neither owners nor creditors can be deprived of their interests in it except by their assent or through an appropriate exercise of the power of eminent domain. id) Congressional legislation aiming to substitute national corporations lor State corporations in the control and operation of national railroads would obviously be ineffective if conditioned upon the consent of- all parties in interest. It follows, unless the suggestions above made are unsound, that a national statute for the displacement of a State corporation by a national corporation as the owner of a national railroad should cover the following points First. Incorporation of certain designated persons with powers to acquire, hold, and manage all the franchises and property of the old corporation and with power to dispose of the capital stock of the new corporation as hereinkfter indicated. Second. Amount of capital stock to be same as that of old corporation except that the organizers in their discretion may make the amount larger or smaller. Third. Debts and obligations of old corporation to be assumed by the new with recognition of any liens and priorities of creditors already acquired as against assets of the old. Fourth. Stockholders of the old corporation, common or preferred, to be offered common or preferred shares or' such other interests in the new corpora- tion as, in the judgment of the organizers, will make their interests in the new equivalent to their interests in the old. Fifth. Shares in the old corporation to be purchasable for the new corporation by the organizers on terms which they may deem fair and not injurious to other parties to the proposed organization ; in the event of any such purchase shares of the new corporation to be sold by the organizes to an amount sufficient to enable them to pay the agreed price. Sixth. Shares of the old corporation not obtainable by exchange or pur- chase as above provided to be taken by the new corporation at its option under the power of eminent domain at a price fixed by a court of competent jurisdiction or by such court and a jury at the election of the stockholder. Seventh. The organizers to operate the national railroad concerned with all the powers of receivers of an insolvent railroad until a majority of the capital stock of the new corporation shall have been issued as hereinbefore authorized. Upon that taking place the organizers shall call a meeting of stockholders for the election of directors who, in addition to the powers of railroad directors generally, shall have the special powers of the organizers so far as the exercise of the same is necessary to fully accomplish the purposes of the charter. The foregoing list is not claimed to be exclusive. But it is confidently believed that each one of them is a necessary part of any effective plan by which a national railroad corporation is to be substituted for a State corporation in the ownership and operation of a national railroad. , - INTERSTATE AND FOREIGN TRANSPORTATION. 115 With a deference" almost too great for expression, I must say that I am in complete agreement with all of that memorandum except as to the method necessary for the transfer of the State corporation to the national one. I am convinced, as to the latter, that a method much simpler is entirely available to accottiplish this transfer, and at the proper time I shall ask an opportunity to develop that view before this committee. I feel that Mr. Olney has performed a great public service in contributing that thought to the solution of the im- mense problem which is before you. I have tried, Mr. Chairman and gentlemen, to state with complete frankness the views which actuate us when we come to a considera- tion of this immen^ problem of transportation. I am profoundly grateful to you for the courtesy you have extended me and for the consideration you have shown during the tedious hours during which I have been obliged to ask your attention, and I now respectfully announce that the opening statement which I was delegated to make has been concluded. Senator Umdeewood. Mr. Chairman, I suppose the committee de- sires to cross-examine Mr. Thom, but it is 1 o'clock and Saturday, and I move we adjourn now. Mr. Adamson. Let us have an executive session. Senator Undeewood. Do you want an executive session? Mr. Adamson. I think we do. Senator Underwood. Then I move an executive session. Mr. Ctjllop. Before we go into executive session is it understood Mr. Thom is to appear Monday for cross-examination at the opening of the sessioh ? The Chairman. It is so understood. (The motion was agreed to, and at 1 o'clock p. m. the committee went into the consideration of executive business, at the conclusion of which an adjournment was taken until Monday, November 27, 1916, at 10.30 o'clock a. m.) INTERSTATE AND FOREIGN TRANSPORTA.TION HEARINGS BEFORE THE JOINT COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE, CONGRESS OF THE UNITED STATES SIXTY-FOURTH CONGEESS FIRST SESSION PUBSaANT TO PUBLIC J. RES. 25 A JOINT RESOLUTION CREATING A JOINT SUBCOMMITTEE FROM THE MEMBERSHIP OF THE SENATE COMMITTEE ON INTERSTATE COM- MERCE AND THE HOUSE COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE TO INVESTIGATE THE CONDITIONS RELATING TO INTERSTATE AND FOREIGN COMMERCE, AND THE NECESSITY OF FURTHER LEGISLATION RE- LATING THERETO, AND DEFINING THE POWERS AND DUTIES OF SUCH SUBCOMMITTEE. Part 3 NOVEMBER 27 Printed for the use of the Joint Committee on Interstate Commerce WASHINGTON GOVERNMENT PRINTING OFFICE 1916 JOINT COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE. FRANCIS G. NBWLANDS, Nevada, Vhairman. WILLIAM C. ADAMSON, Georgia, Vice Chairman. JOSEPH T. ROBINSON, Arkansas. THETUS W. SIMS, Tennessee. OSCAR W. UNDERWOOD, Alabama. WILLIAM A. CULLOP, Indiana. ALBERT B. CTJMMINS, Iowa. JOHN J. ESCH, Wisconsin. ERANK B. BRANDBQEB, Connecticut. EDWARD L. HAMILTON, Michigan. Ebane Hoaly, Clerk. Willis J. Datis, Aasiatant Clerk. INTERSTATE AND FOREIGN TRANSPORTATION-GOVERNMENT CONTROL AND REGULATION. monday, november 27, 1916. Congress of the United States, Joint Committee on Intebstate Commerce, Waskmgton, D. C. The joint committee met at 10.30 o'clock a. m., pursuant to ad- journment, at room S26 Senate Office Building, Senator Francis G. Newlands, presiding; also Vice Chairman William C. Adamson. STATEMENT OF ME. ALFEED P. THOM, COUNSEL EAILWAY EXECUTIVES' COMMITTEE— Eesumed. The Chairman. The committee will now enter upon the examina- tion of Mr. Thom on the matters concerning which he has addressed us, and the members of the committee, commenciiig with the chair- man and vice chairman, will examine Mr. Thom in turn, according to their order, alternating between the Senate and the House, and later on, with the approval of the committee, I shall take occasion to reverse this order so as to give all the members of the committee a fair chance. It is my purpose to question Mr. Thom regarding the national incorporation of railroads, and with reference to certain bills which I introduced upon that subject from 1905 down to the present time, the bills being substantially the same, but varying in certain features according to the progress of the discussion. ■ With the consent of the committee, I will put in the record extracts from these bills, the views expressed by me in Certain reports of the Interstate Commerce Committee, notably on the Hepburn bill and the Commerce Court bill, in which I took up the discussion of the question of the national incorporation of railroads, and also certain extracts from the hearings upon this subject, and later on I will invite the attention of Mr. Thom to, and will interrogate him regard- ing, this matter inserted in the hearings. I also wish to insert in the hearing a magazine article of the North American Keview, of April, 1905, entitled " Common sense of the railroad question," which dwells upon the subject of the national incorporation, and I invite Mr. Thorn's attention to that. Mr. Adamson. Mr. Chairman, is that article by the chairman? The Chairman. Yes. (The papers referred to are here printed in full.) NATIONAL INCORPORATION OF RAILROADS. [Extracts from speech of Hon. Francis G. Newlands, of Nevada, in the Senate of the United States, Wednesday, January 11, 1905.] Mr. Newlands. Mr. President, in accordance with the notice I gave yesterday, I ask unanimous consent that the joint resolution creating a commission to frame a national incorporation act for railroads engaged in interstate commerce my be taken up for discussion. 117 118 INTERSTATE AND FOREIGN TRANSPORTATION. The Peesiding Officer. The Chair lays before the Senate the joint resolution referred to by the Senator from Nevada, which will be read. The Secretary read the joint resolution, as follows : " Resolved, etc., That a commission consisting of fourteen members, one of whom shall be experienced in railroad traffic management, to be appointed by the President of the United States, one of whom shall be an attorney at law, to be appointed by the Attorney General, one of whom shall be an expert in transportation, to be appointed by the Secretary of Commerce and Labor, one of whom shall be an expert in transportation law, to be appointed by the Interstate Commerce Commission, five of whom shall be Senators, to be ap- pointed by the President pro tempore of the Senate, and five of whom sliall be Members of the House of Eepresontatives reelected to the Fifty-ninth Congress, to be selected by the Speaker of the House, shall frame and report to the Con- gress of the United States a national incorporation act for railroads engaged in interstate commerce, providing, among other things, as follows : " First. For the construction of interstate railroads throughout the United States, the amount of the bonds and stock to be issued by such corporations to be determined by the Interstate Commerce Commission, and not to exceed in any event the actual cost of such railroads ; " Second. For the consolidation of railroads now engaged in interstate com- merce, the amount of stock and bonds issued for such consolidation to be ap- proved by the Interstate Commerce Commission, and not to exceed in any event the actual value of the railroads consolidated, sudi value to be determined by the Interstate Commerce Commission ; , " Third. For the increase of the issues of bonds or stock by such corporations for the purchase of connecting or intersecting lines, for new construction, or for betterment of the roads, the amount of such issue of stock and bonds to be determined by the Interstate Commerce Commission, and not to exceed in any event the cost of such new construction, the betterments, or the value of the intersecting or connecting lines acquired ; " Fourth. For the classification by such railroad corporations of all articles of freight into such general and special classes as may be necessary and expedient, and also the fixing of transportation rates for freight and passengers by such rail- roads, such classification and rates to be subject to revision and amendment by the Interstate Commerce Commission upon complaint of shippers and localities ; " Fifth. For the reasonable and just exercise of such power in classifying and regulating such rates of freight and fare by providing that such power shall be exercised by the Interstate Commerce Commission in such a way as to yield each railroad corporation a fair return of not less than 4 per cent per annum upon the value of its road and property, such value to be ascertained by the In- terstate Commerce Commission ; " Sixth. For the hearing by such commission of complaints made either by such railroad corporations or other party at interest regarding the decision of any rate, classification, order, or regulation adopted by such commission, and for decision thereon; " Seventh. For summary proceedings in the courts on the complaint of any railroad company or other party at interest concerning the decision of any rate, classification, order, or regulation adopted by such commission ; " Eighth. For the imposition of a percentage tax upon the gross receipts of all such corporations in lieu of all taxes upon the property of such railroad corpo- rations and its stock and bonds, and in lieu of all taxes upon the bonds and stock of such railroad companies in the hands of stockholders, the property of such railroads and their bonds and stock to be entirely exempt from State, county, or municipal taxation, and for a just plan of distributing such taxes by the Federal Government among the States in which such railroads operate accord- ing to trackage or volume of business, or such other fair method as may be deemed advisable, such percentage to be so adjusted as to yield in the aggregate an amount equal to the taxes now paid by such railroads, and to be increased gradually through a period of ten years, until it reaches an aggregate of 5 per cent upon the gross receipts of such corporations ; " Ninth. For the correction of existing abuses, arid for the prevention of rebates, preferences, and discrimination, whether relating to communities or individuals. " Tenth. For the creation of a pension fund for railroad employees disquali- fied either by injury or by age for active service, by setting aside a percentage of the gross receipts of the railroads in a fund in the Treasury, to be invested according to rules and regulations made by the Interstate Commerce Corarais- IKTEESTATE AND FOREIGN TRANSPORTATION. 119 siou, such pension system to be devised, dianged, and modified from time to time by the Interstate Commerce Commission. " Eleventh. For the arbitration of all disputes between such railroad corpora- tions and their employees as to compensation, hours of labor, and protection to life and limb. " Sec. 2. That the sum of $5,000 is hereby appropriated for the expenses of such commission." Mr. Newlands. Mr. President, this joint resolution was introduced by me on the 4th of January of this year. It is the result of a hearing before the Inter- state Commerce Committee of the Senate on the 16th day of December, just prior to the holidays, at which Mr. Bacon, chairman of the Interstate Commerce Law Convention, appeared and urged the passage of the Quarles-Cooper bill for the enlargement of the powers of the Interstate Commerce Commission. Dur- ing that inquiry I questioned Mr. Bacon regarding a plan, which I have had under consideration for some time, as to the simplification and unification, under one national taxing power and one national rate-regulating power, of the railroad systems of this country. After these inquiries were made, and the questions answered, there was some discussion among the Senators present as to the principles of this proposed national incorporation act, and it was suggested that I should bring the matter up for discussion in the Senate. I therefore endeavored to frame a national incorporation act, but I found that In doing so I would be obliged to enter into a great many matters of detail nor essential to the elucidation of the principles for which I contended, and I feared that if I should frame an elaborate bill more attention would be given to the details than to the principles. Therefore I concluded, to draw up a joint resolution providing for the appointment of a commission, consisting of four experts in transportation and transportation law, five Sehators, and five Eep- resentatlves, and Instructing them to frame and report to Congress a national Incorporation act, prepared upon certain principles declared in the joint resolu- tion. It Is In reference to those principles that I wish to address the Senate to-day, in the hope that the subject may become a matter of discussion, and that discussion here may instruct the minds of the members of the Interstate Commerce Committee regarding this important question. BAILWAY EVOLUTION. Mr. President, we find that to-day in this country there are about 200,000 miles of railroad in the ownership and control of over 2,000 railroad corpora- tions Incorporated under the laws of the various States. We find that of those 2,000 corporations only about 600 are operating companies, the others by some method having come under control of these operating companies. As to these operating companies, we find that they have fallen under the control of certain systems. So that to-day it is a well-recognized fact in this country that almost all the railroad trackage of the country is under the control of 8 or 10 systems, each of which is under the absolute direction and control of either a smgle man or a group composed of a small number of men. So, as a matter of fact, although our railroads are Incorporated under State laws, the boundary lines of the States have been practically ignored m the evolution of railroads, and to-day we speak familiarly of the Harriman system, of the Hill system, of the Morgan system, and of the Pennsylvania system, each system covering not simply a single corporation, but many corporations joined together, often without express sanction of the law, by some method of lease or trackage or traffic arrangement or through holding companies, and each system under the absolute control either of one man or of a set ot men. I regard this as a natural and practical evolution of the railroad business, resulting, so far as the economic operation of the roads Is concerned, m ad- vantage and not disadvantage, and operating, so far as the convenience of the public is concerned, to their advantage and not to their disadvantage, and only likely to be operated against the Interest of the country when we consider the questions of rates, or rebates, and of discriminations. „K^„i-q h^ It is with reference to these matters, then, that the railroads should be brought under some form of unified control, and that unified control should be exercised In such a way as jiot to Impair the initiative, the energy, and the enterprise of the operators of these great railroads. NATIONAL POWEK. Now, I assume that If to-day there were no railroads in this country and the United States should conclude to enter upon the construction of interstate rail- 120 INTEBSTATE AND FOEEIGN TBANSPORTATION. roads, under the interstate-commerce power of the Constitution, the power of the Goveinment to do so would not be questioned. It has not only the power to regulate commerce, it has the power to create the instrumentalities ■ for the exercise of that power ; and if in its judgment it concludes to enter upon the building as a Government enterprise of interstate railways, for the purpose not only of exercising the interstate-commerce power of the Constitution, but the power conferred by the Constitution upon the General Government with reference to the mails and with reference to the military defense,' I imagine the power would not be questioned. I also assume that if the Federal Government constructed and owned these railroads as Federal instrumentalities for the exercise of national powers, the National Government would not permit them to be embarrassed or impeded in their operations by State legislation — by State legislation under the exercise of the taxing power, for the power to tax would involve the power to destroy; and the Government of the United States, as a sovereign, exercising its power on the soil of each one of the States, has the right to exercise it unimpeded and unembarrassed by the taxing power in the State. So, also, I take it for granted that it would be unembarrassed by the rate- regulating power of the various States ; that power which now exists over do- mestic rates, interstate rates, for that power, if exercised, would have a tend- ency to Impede and perhaps destroy the Federal instrumentality just as much as would ■the power of taxation. It would probably impede and embarrass it even to a greater extent than the exercise of the power of taxation. So, starting off with that assumption, comes the further assumption that if the Federal Government chooses to incorporate private corporations to perform the public service of the country, for the purpose of carrying out this constitu- tional power, it can also exempt such railroads in private ownership, but. sub- ject to public control, from any power of the States that embarrasses or tends to destroy the Federal instrumentality, just as much so as 1( it itself owned the railroads. Now, then, assuming that the Federal Government has tbe power to incor- porate railroad companies for the purpose of carrying out the interstate com- merce power, and that these railroads can be exempted from local taxation and from local regulation, then we have the question unembarrassed. We have railroads organized under a national law, their stocks and bonds flxed as to amount by law or by the Interstate Commerce Comniission, so as to prevent inflation or the watering of stocks and bonds ; and we have one taxing power^^ the Federal, Government ; and we have one rate-regulating power— -the Federal Government. I insist upon it that in order to secure the proper control and regulation of the railroads of the country it is essential that we should not have a confusion of taxation and a confusion of rate regulation. Mr. Bacon. Will it interrupt the Senator if I ask him a question right here? If it will, I will defer it. Mr. Newanps. I would prefer It if the Senator would let me proceed consecu- tively, and then I will answer any question later. STATE LINES SHOULD BE DISKEGARDED, It seems to me it must be manifest that if we are to have a system of railway extending from New York to San Francisco, running through 10 States, and if we are to apply the principles laid down by the Supreme Court of the United States as to the control over rates, and if we are so to adjust those rates in the exercise of the interstate commerce power as that there shall be a fair return to the corporations upon the value of their property, it is essential that there should be but one bofly to value and but one body to fix the return. And yet under existing conditions we would have 10 States exercising the taxing power regarding that system of railway, 10 States through their legislatures or their local commissions valuing the railroads, and 10 States fixing the return in the shape of interest upon the valuation. It is impossible to assume that they will all come to the same conclusion, and if they do not come to the same conclusion we will have each one of those States fixing a different valuation upon the part of the road that goes through that State ; each one of the States taxing the road upop varying systems ; each one ■fixing a difCerent return in interest upon the valuation of the road, and above and beyond all that, we will have the United States Government making its own INTERSTATE AND FOREIGN TRANSPORTATION. 121 valuation through the Interstate Commerce Commission, and the United States through that commission fixing the rate of return In the shape of Interest, and we will have varying rates of interest, interest varying all the way from 4 to 10 per cent. ******* Mr. Newlands. I also ask permission to Insert in the Record three pages of the hearing before the Senate Interstate Commerce Committee on December 16, 1904, pages 11 to 13, inclusive, containing the examination of Mr. Bacon. The Pbesiding Oiticek. In the absence of objection, the request of the Senator from Nevada will be granted. The matter referred to Is as follows : " Senator Newlands. Are you a lawyer yourself? " Mr. Bacon. I am not a lawyer ; I am a business man. " Senator Newlands. Are you familiar with the rules the courts have laid down as to the determination of what shall be a just and reasonable rate? " Mr. Bacon. I have followed the cases to some extent as they have arisen under the workings of the interstate commerce act. " Senator Newlands. I am not very familiar with them, but I understand that they have determined that a rate must be reasonable and not oppressive, and that you must have in view a return upon the capital that has been invested. "Mr. Bacon. The Supreme Court has specifically decided that the revenues of a railroad company must be suflicient to afford a fair return upon the actual capital Invested. " Senator NewlaSds. Have these decisions ever determined what a fair re- turn, in the shape of interest, shall be? " Mr. Bacon. Each particular case has been taken up Individually and con- sidered on Its own merits, and no definite percentage of interest or return upon the money Invested has been indicated by the court as proper and right, so far as I have observed, but the court has decided that point in a general way — that it must be a fair return on the Investment. That Is something that may vary in different years. " Senator Newlands. Has any court, to your knowledge, ever laid down a rule for determining the capital or value upon which the fair return, in the shape of interest, is to be computed? " Mr. Bacon. No rule has been laid down, but different processes have been pursued in determining the cases before the courts — sometimes one method, sometimes two or three combined ; but no rule has been laid down. " Senator Newlands. Take, for Instance, a continuous system of railways ex- tending from the Atlantic coast to the Pacific coast, embracing perhaps as many distinct railroads as there are States through which It passes, each one of these railroads being subject to control by a local commission as to domestic rates, and also being under control by the Interstate Commerce Commission as to inter- state rates : I ask how would it be possible, in each individual case before the Interstate Commerce Commission under this act, to determine the effect of a given rate upon the capital or value invested In each of these roads? " Mr. Bacon. A case might be very coinplicated, as you suggest ; still, It is not beyond human wisdom to arrive at a satisfactory conclusion. It may involve considerable time and the consideration of many figures, but It is not beyond human capacity, certainly. " Senator Newlands. Do you not think that with the number of cases before the Interstate Commerce Commission, Involving both classifications and specific rates, and also with the number of cases that may be under consideration before each one of the local commissions as to domestic rates, there would be consider- able confusion as to whether or not a proper return upon capital or value could be had as a result of these changes? " Mr. Bacon. I do not think there would be any difficulty of that kind. The cases are easily susceptible of solution with proper time and consideration to be given them. But it is my judgment that with this authority conferred upon the Interstate Commerce Commission It would operate very fairly toward the pre- vention of the exaction of discriminative or Unreasonable rates. " Senator Newlands. We all agree that that Is what we want to have accom- plished. The only question Is as to method. " Senator Quables. It would have to be worked out by the courts. " Senator Newlands. Yes ; but in these cases we would have perhaps 10 different circuit courts operating at the same time In suits Instituted by each one of these railroads, Incorporated under the laws of different States, and each 122 INTERSTATE AND FOREIGN TRANSPORTATION. one of them complaining of a particular interstate rate fixed by the Interstate Commerce Commission. It strikes me that this would be likely to produce a great deal of confusion. If we could simplify this whole system, It would cer- tainly be of great advantage. " Let me just suggest a line of thought I have been pursuing for some little time on this subject. It involves a radical change in existing conditions, but it seems to me that if it can accomplish good we ought gradually to reach out for it. It is this : We have here, say, 2,000 diiferent railroads in this country " Mr. Bacon. Only about 600 operating railroads, however. " Senator Newlands. Only about 600 operating railroads. A great many of these operating roads are classified and combined into systems, so that practi- cally it may be said that 8 or 10 systems of railroads -control all the mileage of the country. That is accomplished either through leases or holding com- panies or through trafllc arrangements. As a matter of fact, however, we have this large number of corporations — although only 600 operating railroads, as you say — and these railroads are so unified that no more than 8 or 10 systems control them all. " Mr. Bacon. Substantially, yes. " Senator Newlands. That being the case, that being the evolution of railroad- ing, why is it not well to recognize that fact and bring them under control? " Mr. Bacon. That is just what we are seeking, Senator. " Senator Newlands. Let me suggest right there, would it not be well for us, then, to frame a national incorporation act for interstate commerce, under which these various railroads now consolidate under one management — ^by devious de- vices that no one under.=tands — can be Incorporated, so that we shall have one capitalization fixed by the Interstate Commerce Commission or by the courts, and one system of rates to act upon, as well as one system of taxation to act upon? It seems to me that the evil of the present system is that, while the Supreme Court has determined that there must be a fair return upon value or capital invested, yet you can have as many valuations fixed as there are States, and you can have as many rates of Interest fixed as there are States, according to conditions. " Then, upon the question of return ; this return must be found after operat- ing expenses and taxes are paid. And yet, under existing conditions, we can have 45 different systems of taxation, each of them variable according to the judgment of a legislature or according to the caprice of assessing bodies. " It strikes me if we could have a national incorporation act for purely inter- state commerce and permit consolidation of these great corporations with a capitalization fixed by law or judicially, and then provide for a percentage tax upon gross receipts absolutely in lieu of all other taxes — national. State, county, or municipal (regarding these corporations as national machines for interstate commerce, the National Government would have the constitutional power to exempt them from State or local taxation) — and then provide that that tax shall be distributed by the United States among the various States according to some fair rule of distribution — according to trackage or volume of business — ^we would then fix absolutely the rate of taxation by one law, and that at the same time no State would be deprived of its revenue. " Thus upon this question of operating expenses and taxes we would secure certainty as to taxation, at all events. " The next step would be the fixing of the proper return upon capital invested. This law could fix the percentage of dividends to be allowed — whether 4 per cent, 5, 6, or 7 per cent, whatever It may be — and it could vary that return according to the degree of risk Involved in the enterprise, etc., or it could leave the question of interest as a return on capital to the decision of the Interstate Commerce Commission or to the courts. " Those things being fixed with absolute certainty (the taxes to be paid to the Government and the dividends paid to the operators), then you have remaining only the question of operating expenses, and It seems to me you would then have one body that would fix these rates and you would not be subject to the varying judgments of 45 different commissions and 45 different courts. What do yon think of that, Mr. Bacon? " Mr. Bacon. That is a very comprehensive plan, Senator, and there is much merit in it, but it will take many years to work that out In legislation. " Senator Tillman. I want to suggest to my friend from Nevada that he put this statement in the Record, for it is the most magnificent generalization that has ever copie before me. So I hojJe he will repeat this statement In the Senate Chamber, because it will be lost to the public unless put In the form of a speech In the Senate on this general subject. INTEBSTATE AND FOREIGN TBANSPOKTATION. 123 " Senator Newlands. It will be in the record of the proceedings of this com- mittee to-day, but I should like Mr. Bacon and. his associates to look Into that question ; for while we may pass something of this kind as a temporary measure, I do not believe it will work satisfactorily as such. It strikes me that the minds of the shippers, as well as of the legislators of the country, ought to be directed to some plan of unifying and simplifying the entire railroad system of the country. " Mr. Bacon. That is entirely worthy of consideration with reference to the future, but it will take a long time to work it out. But here we have before us a very simple plan which has been evolved during the discussions of five years in regard to this class of legislation, and it seems to me that it would not be best now to take up any sUch comprehensive and general plan. Senators may work it out for themselves. " Senator Fokakee. You would not indorse the plan suggested by the Senator from Nevada? " Mr. Bacon. Not on the moment's consideration. I am very glad, however, to have that suggestion. " Senator Fokakek. So am I, but I should want to give It further consideration? " Exhibit 'A.' " United States Senate Committee on Interstate Commerce, " January 16. 1905. " additional statement of MB. EDWARD P. BACON. " Senator Newlands. Mr. Bacon, I understand your position to be that you would like this bill (the Quarles-Cooper bill) passed, but you propose to follow it up by measures to be urged hereafter, with the expectation in the end to reach a scientific and comprehensive plan covering whatever is best in the way of railway legislation. " Mr. Bacon. That Is my idea exactly. "Senator Newlands. I desire to question you a little about such a general and comprehensive plan, not with a view to delay the consideration of this par- ticular bill, but with a view to seeing whether this bill, if it should pass, will fit into the general plan. " Mr. Bacon. It is the groundwork of the plan. " Senator Newlands. I questioned you the other day when you were before the committee regarding a plan that I had in mind for unifying and simplifying the railway systems of the country through a national incorporation law. " Mr. Bacon. I was very much Interested In it. " Senator Newlands. That plan Involved the valuation of the railroads by the Interstate Commerce Commission ; a fixed percentage upon gross receipts, so that taxes would be certain, such taxes to be distributed among the States, and a return to the stockholders of not less than 4 per cent on the valuation fixed by the commission, so as to make dividends certain, thus leaving the profits from any increase in business to go largely to the betterment of the roads, the Increase of wages, or the reduction of rates. Now, I desire to ask you whether you have thought over that plan at all since you were here last. " Mr Bacon I have read your remarks on that subject in the Senate with a great deal of interest, and I can say that they meet my heartly concurrence, and that great good will come from it if it can be worked out. But, as I said before, when you were interrogating me before the committee, it will take time to ac- complish it. However, it Is a good thing to have It under consideration, and I think the more it is studied and considered the more It will commend itself to the minds of those who study It. But It will take a long time to bring It about." [S. Kept. No. 1242, 59th Cong., 1st sess.] Views of Mr. Newlands. [To accompany H. K. 12987, 59th Cong., 1st sess.] While I have joined in the report on House bill No. 12987, amendatory of the interstate-commerce act, and am in sympathy with Its general purposes, and believe that it Is well framed to cover its main purpose as to. the regulation of 124 INTERSTATE AND FOKEIGN TRANSPOKTATION. rates, I think it should be classed with the Incomplete and fragmentary legis- lation regarding interstate commerce in which Congress has thus far indulged. I believe that this is the time for full and comprehensive legislation. I dQ not believe that our legislation will be as effective as it should be unless it adds to the pending measure provisions for the national incorporation of railways engaged in interstate commerce, guarding against overcapitalization, fixing with certainty the rule for the taxation of such railway property by the States, and prescribing a fixed limit for dividends. Such legislation should not simply cover the interests of the shippers and the common carriers ; it should embrace the interests of labor by providing for an insurance fund against accidents and old age and for conciliation of dis- putes between carriers and their employees. Such legislation should be simple, definite, certain; should cover every question relating to the regulation of interstate commerce, including the creation of the artificial beings called cor- porations that are to conduct it. It should frankly recognize the economic necessity of consolidation and combination and the essentially monopoly char- acter of the business, and regulate consolidation, combination, and monopoly with a proper regard for the interests of the public served by it, the property rights of the capital employed in it, and the human rights of the labor employed by it. RAILBOAD GROWTH AND CONSOLIDATION. The railroad mileage has Increased from 23 miles in 1830 to 213,000 miles in 1905. This mileage is owned by over 2,000 railroad corporations created by State laws. As the result of cnosolidation, combination, and recombination, the operation of these 2,000 railroads has been mainly unified under the control of less than ten systems, each organized under the laws of a single State, generally bearing the name of a single man, who is regarded as the dominant factor In its control. The controllers of these systems resort for the machinery of combination to the States whose laws are most lax in proper restrictions regarding combina- tion and overcapitalization. CONTROL OF PRODUCTION. In many cases the controlling corporation of a system, in addition to securing the control of a vast mileage through purchase or lease, also buys the stock of troublesome rivals, and thus gradually brings about a community of interests which results In the suppression of competition and the stability of rates. It also in some cases purchase the control of producing companies in coal and iron, and thus, in connection with other corporations bound to it by a com- munity of interest, controls the production of coal and iron in such States as J'ennsylvania and West Virginia. In addition to this, the men who control the great Industrial combinations have become the controlling spirits of the great railroad combinations, and thus monopoly in transportation and monopoly in production have become united in the realization of profit. The pending bill provides no remedy for this abuse. CONTROL OF CAPITALIZATION. As a rule, in the formation of these great railroad combinations there is no public supervision or control over the amount of their capitalization, this being left entirely to the judgment of those interested. States which require the approval by a public tribunal of stock and bond issues made for consolidation and combination, such as Massachusetts and Texas, are avoided in the creation of such combinations. The States whose legislation is most lax in such matters are resorted to for corporate powers. The capitalization of all the railroads engaged in interstate commerce is about thirteen billions of dollars, about half in bonds and half in stock. The bonds for the most part represent genuine investment; the stocks, it is claimed, have been largely watered. The President in his message lias called attention to the evils of overcapi- talization in the following words : " Of these abuses perhaps the chief, although by no means the only one. Is overcapitalization — generally itself the result of dishonest promotion — ^because of the myriad evils it brings in its train ; for such capitalization often means an INTEKSTATE AND FOREIGN TEANSPOETATION. 125 inflation that invites business panic ; it always conceals the true relation of the profit earned to the capital actually invested, and it creates a burden of interest payments which is a fertile cause of improper reduction in or limitation of wages ; it damages the small investor, discourages thrift, and encourages gam- bling and speculation; while, perhaps, worst of all is the trickiness and dis- honesty which it implies, for harm to morals is worse than any possible harm to material interests, and the debauchery of politics and business by great dishonest corporations is far worse than any actual material evil they do the public." This measure does not reach this abuse : CHANGES IN EAILROAD CONDITIONS SINCE 1887. In the World's Work for October, 1905, appears an article by Prof. Ripley, of Harvard University, entitled as above. In this article Prof. Ripley states that from 1889 to 1903 " while population and mileage increased one-third, the railroads in 1903 hauled the equivalent of two and a half times the total volume of freight traffic handled in 1889, the year of the earliest official statistics." He adds : " If the freight busines.s of the United States increased five times as fast as population or mileage in 14 years, the imagination runs riot concerning its probable magnitude 50 or 100 years hence." In this article also appears the following statistical statement : " Gross revenues of American railroads in 1889 were about $1,000,000,000, and in 1903 they were about one billion nine hundred millions. The preliminary figures for 1904 show that they have practically doubled in the brief period of 15 years. "The net income ayailable for dividends has grown even faster. The increase to 1903 was, roughly speaking, about 250 per cent, namely, from one hundred millions in 1889 to three hundred and fifty-seven millions in 1903. There is every probability that by 1905 the net revenue will be more than fourfold the figures in 1889." GBOWTH OF CONSOLIDATION. Prof. Ripley speaks of the enormous growth of consolidation since 1887 and calls attention to the fact that before 1890 a five thousand mile railroad was about the maximum, and that the next decade, 1900, witnessed the growth of systems of about twice that size. He then adds : " Since then not simply consolidations but recombinations of systems, each in itself the result of antecedent consolidations, have made their appearance. The Morgan, Vanderbllt, Pennsylvania, Harriman, and Gould properties during the last five years attained lengths of 15,000 to 20,000 miles, and shall anyone be rash enough to predict that the end is yet in sight? " In addition to this form of consolidation. Prof. Ripley says : " Great systems are quietly assuming control of their lesser and parallel rivals through investment of surplus funds , in their securities. In this way trunk-line territory has been practically closed to competition. The New York Central has secured the Lake Shore and through it purchased a large interest in the Philadelphia & Reading Railway. At the same time the Pennsylvania Co., through the Baltimore & Ohio, purchased control of its former troublesome rivals in the South, the Chesapeake & Ohio and the Norfolk & Western. The Baltimore & Ohio is also used by the Pennsylvania as a catspaw to assist in pulling the Philadelphia & Reading out of the fire of competition. The last company, thus jointly controlled at arm's-length by the two great trunk lines, becomes the principal factor in the great anthracite coal combination, which includes four or five other companies. With the Vanderbllt and Morgan control of the Delaware, Lackawanna & Western and the Lehigh Valley it will be apparent how little room there is for competition in this territory. The only free lance In any sense is the Erie, and rumor has it that the New York Central, through the Lake Shore and the Pennsylvania, is buying into its control at the present time." INTEECOBPOBATE OWNEESHIP. Under this heading Prof. Ripley speaks of another form of consolidation which is going on. In 14 years, he says, outstanding stocks and bonds of rail- roads owned by the public increased only 25 per cent, while railroad ownership of such securities increased four times as fast, or 100 per cent. 126 INTEHSTATE AND FOREIGN TEANSPORTATION. " In other words," says Prof. Ripley, " railroad investments in other rail- roads have been, growing about four times as fast as ownership by the general public, until in 1903 about one-fourth of the outstanding issues of railway stoclrs and bonds were owned by these corporations themselves." This tendency has been accelerating during the past few years. Prof. Ripley cites as an illustration the case of the Union Pacific Railroad, whose holdings five years ago of miscellaneous securities were about eleven millions of dollars. " In its annual report for 1904 this item is represented by $211,800,000, mainly stocks of other roads with a few bonds. Including its holdings through auxil- iary companies its investments have grown in five years from $90,686,000 to $342,587,000." Prof. Ripley shows how suitable counterpoises of nonvoting stocks and bonds enable control of these parent campanies to be held with comparative ease by a few men, and adds : " This is our dilemma, then. Such an inverted financial pyramid, if it prove its worth, must unconscionably enrich the few who control it — the public danger of the overwealthy. If it threaten to prove top-heavy, it can be upheld only through larger exactions from the shipping and consuming public — extortionate rates ; while, if it topple over, vast losses must come to the Innocent public which provided nine-tenths of the real capital Investment — witness widespread bankruptcy." THE BISE IN BATES IN EECENT YEABS. Prof. Ripley, after showing that during the period from 1887 to 1900 a great reduction was accomplished in the ton-mileage of the country and that it was the well-nigh universal opinion among traffic experts that these low freights had come to stay, states that the experience of the last five years has rudely shaken this belief, and that since 1900 freight rates have been sharply advanced, and that whilst opinions differ as to the exact degree and the relative justifica- tion of these increases no denial of the fact is made. Pe goes on to show that most of the import traffic for the current season is being carried on less than tariff rates, and that a vast amount of freight is also moved on special or com- modity rates for the purpose of enabling some shipper, who otherwise might not be able profitably to reach a certain market, to engage in competition for the trade, and that it is the common opinion of railroad men that approximately three-fourths of all the tonnage of the railroads goes on such schedules. Assuming, therefore, that the rates on this proportion of the tonnage is fixed by competitive conditions that can not be raised at will, Prof. Ripley argues that the burthen of making provision for additional revenue must fall upon the standard or high-grade freight, most of which is domestic and local. Ac- cepting, therefore, the figures given by the carriers for the increase In ton-mile revenue of 5 per cent on all traffic and concentrating this entirely on one- fourth or one-fifth of the tonnage, Prof. Ripley argues we should have an in- crease to 20 or 25 per cent between 1900 and 1903. This, he shows, has been accomplished, not so much by raising rates as by a change in classification, and in yet other ways by the abolition of demurrage, by increase in charges for switching and terminal delivery, by increased fees for icing, refrigerator cars, or feeding or bedding stock, etc. He claims that great restlessness among the shipping public has been engendered by this increase of charges mainly because " they indicate indubitably " the utter Impotence of the public when the carriers all agree to act in unison. THE VAST POWEE OF THE UNITED BAILWATS. Under this heading Prof. Ripley says : " To-day the public, every merchant, and every community is confronted with the colossal power constituted of all the railroads acting in unison ; this, too, in spite of antlpooling and antitrust laws of the most stringent sort. It is the irre- slstable character and universal scope of these freight-rate changes which menance the future." Prof. Ripley quotes from a decision of the United States circuit court for southern Georgia concerning the increase of freight rates on lumber as fully Illustrating this point, in which the court says : "After a careful consideration of the extensive record there seems to have been an utter absence of excuse or justification for the concerted action of the railroads which advanced the rates on lumber throughout the South. * * * A highly significant feature of this case is the fact that the rates complained of INTERSTATE AND EOBEIGN TRANSPORTATION. 127 are the result of concert of action on the part of the members of the Southeastern Freight Association. * * * in that territory, as regards every interest de- pendent upon the transportation of commodities, the action of the association is more authoritative than the firman of the Sultan or the ukase of the Ozar. * * * The marked increase of charges did not originate from a nor- mal or reasonable exigency of the respondent's business. On the contrary, it was an arbitrary exaction Imposed by a combination of railroad agents made in restraint of the natural movement of the produce in the lumber trade." IS CONSOLIDATION DESIRABLE AND LEGAL? It may be safely stated that consolidation has for the most part resulted In greater economy and efficiency of operation, in better and quicker service, in a more equal service, and in stability of rates. As to whether it has worked a reduction of rates is disputed. The verdict of the people would probably be In favor of controlled consolidation and against uncontrolled consolidation. None of these consolidations have been tested in the curts except that accomplished through the agency of the Northern Securities Co. It was condemned and dis- solved. It is probable that others are equally Illegal, but there seems to be little disposition to attempt to break them up. Cnsolidatlon and merger of railroads engaged in interstate commerce constitute a part of the economic development of such commerce. This measure provides no supervision or control over consolidation or merger. CORPORATE A.CTIVITY IN POLITICS. The activity of these great railroad combinations in politics has been increas- ing ever since 1896. They are in politics because they feel that their property may be at any time the subject of attack either by legislatures or by administra- tive officers. Their vast property Is between the upper and the nether mill- stone — the upper millstone of the rate-regulating power, the nether millstone of the taxing power. Between the two, save for the protection of the courts, they could be ground to destruction. Participation in politics is stimulated by the uncertainty and insecurity of their situation. In the States, as a rule, they take part in the selection and election of officials whose duty Is likely to trench in any degree upon the taxing and rate-regulating power. In addition to being subject to the control of Con- gress as to Interstate rates, they are subject to the control of 45 different State legislatures or commissions as to the rates of State commerce. They are also taxed under 45 different systems embraced In the laws of as many States. There is no certalnty^, no uniformity, no permanency. Thousands of local officials are engaged in making the valuations and fixing the tax rates. The railroads are therefore in politics, and as they do everything systematically their participation In politics means either organization of or identification with a machine in most of the States of the Union, and since, as a matter of business, they pursue the lines of least resistance, this often means alliance with cor- rupt elements of the communities in which they operate. Having been drawn Into politics by the necessity for protection, they are likely to Ijecome aggres- sive and dominant In political control. It is expensive business for the railroads and it is a grave menace to the institutions of the Republic. This measure fixes no certain rules or principles for the ascertainment of either rates or taxes. It increases the uncertainty of the railroads ; it will enlarge the area of their political activity. UNDOUBTED POWERS OF THE NATIONAL GOVERNMENT. No one can question the power of the National Government to create corpora- tions for the purpose of carrying out the powers entrusted to It by the Constitu- tion. Under the granted powers of the Constitution we have created national banks, we have acquired and are now completing the Panama Canal, and have acquired the stock of and are operating the Panama Bailroad. Under .these powers we have also incorporated several railroads, among others the Union Pacific, the Atlantic Pacific, and the Texas Pacific railroads, the two former constructed through Territories, the latter constructed from a point In Texas to a point in California, all done under the powers granted in the Constitution to provide for the national defense, to establish post offices and post-roads, and to regulate commerce with foreign nations and among the States. 128 INTERSTATE AND EOEEIGN TRANSPORTATION. Economic efficiency requires that the same railroad should accommodate both State and interstate commerce. State commerce is subject to the regulation of the State, Interstate commerce is subject to the regulation of the United States. There should be no difficulty concerning the harmonious cooperation of the greater and the lesser sovereignties under a national incorporation act. When I first Introduced a joint resolution for the creation of a commission to frame a national incorporation act for railroads, I presented the view that it was unnecessary to seek either the cooperation or the consent of the States; that the United States had the power to create corporations for the transporta- tion of Interstate traffic ; that it had the power to exempt the instrumentalities It chose for this purpose from all State burthens, either as to taxation or as to regulation of rates, upon the theory that the States could not put burthens upon national Instrumentalities which might destroy their efficiency. But upon reflection I am convinced that It is wiser to secure the cooperation of the two sovereignties. I would suggest, therefore, the following legislation : WHAT NATIONAL INCOKPOEATION SHOULD INCLUDE. It is clear to my mind that we should have a national law for the incorpora- tion of railways engaged In Interstate commerce ; that no corporation formed under It should be permitted to enter upon its work until its certificate of incorporation defining its purpose and powers should be submitted to and approved by the Interstate Commerce Commission ; that such corporation should not be permitted to commence construction or to purchase or acquire existing railroads until its plans and estimates are approved by the Interstate Com- merce Commission ; that such corporation should not be permitted to issue Its bonds or stock until the amount thereof and the consideration therefor are submitted to and approved by the ' Interstate Commerce Commission, after a public hearing ; that all subsequent Issues of stock and bonds should require a similar hearing and approval ; that no existing railroad now owned by a cor- poration created by the laws of any State should be acquired or purchased without the consent of such State; that railroads so constructed and acquired by such national corporation should be subject to the reasonable police laws of the States In which they are operated ; that the stock and bonds of such national corporations should be exempt from all taxation, but that the actual property and equipment of such corporations should be assessed by the States in whiich they are located at such percentage of its value as is customary and general, and should be taxed at the same rate as other property, or, better, that the State should levy a tax not exceeding 4 per cent upon such proportion of the gross receipts of the railroad as the mileage of such railroad within the State bears to the entire mileage operated ; that nothing in the act should interfere with the power of the State to regulate the rates for the State traffic upon such railroad ; that the Interstate Commerce Commission should make a valuation both of the road constructed and the road and equipment purchased or acquired and should make a record of the same, and that the issue of bonds and stock should equal such value and no ipore, and that all subsequent issues of stock and bonds should represent the actual value of property constructed or ac- quired ; that such corporation should be authorized to collect rates which would yield gross receipts, which, after paying the expenses of operation, the cost of maintenance, the taxes, the interest on debt and other fixed charges should be sufficient to pay a dividend of 5 per cent per annum. APPROVAL OF STOCK AND BOND ISSUES. A national incorporation act should limit stock and bond issues to the cash paid In, or to the value of the property acquired, and so strict should this pro- vision be that no issue of stock or bonds should be permitted save with the approval of the Interstate Commerce Commission. There are two States in the Union to-day whose corporate legislation is of the highest character-^the State of Massachusetts and the State of Texas. In both of these States the railroad commission must approve the issues of stocks and bonds, and In Texas no stock or bond issue is legal unless the approval is indorsed upon the stocks or bonds. What we wish to do is to nationalize either the system of Texas or the system of Massachusetts, and to denationalize the system of New Jersey. It is possible that we may have to use powers both of persuasion and of coercion in bringing ,in existing corporations under a national charter. It may be that we INTERSTATE AND FOREIGN TRANSPORTATION. 129 will have to validate a large portion 6f the capitalization already created, but if we can save the country from the overcapitalization of the future, even though we validate a large part of the overcapitalization of the past, we will confer a lasting benefit upon the American people. A FAIB EETUBN. The return which national corporations are to have upon their capital should be a fair rate of interest on a fair valuation, and in giving the franchises to collect tolls we should provide that it should be exercised in such a way as to guard the public interest and save the public from extortion. The Supreme Court has declared that the railroads are public highways ; that the right to collect tolls can not be exercised without a grant from the sovereign ; that the tolls must be reasonable, and that in a judicial inquiry the reasonableness of the toll must be determined by a consideration of the value of the property em- ■ ployed in the public use, the gross receipts, the operating expenses, the cost of maintenance, the taxes, the interest on debts, etc., and that rates should be so adjusted as to yield, after all reasonable allowances, a fair return upon such valuation. The best way of maintaining for all time the valuation of these roads is to have the ocpital stock express the ren) ciipital employed, and not a fictitious capital, and then we will know upon what amount a fair return should be paid. My own belief is that the return should be 5 per cent per annum with an allowance to the company for dividends of one-third of all profits that may be realized above 5 per cent, the remaining surplus profits to go toward a guar- antee fund for dividends and an insurance or pension fund for employees. This would mean automatic regulation in time so that the Interstate Commerce Com- mission would have almost nothing to do, for automatically as the busienss of the country increases the limita^tion on dividends would force the betterment of the railroads and the reduction of rates. In Smyth v. Ames (169 U. S., 546) , the Supreme Court says : " We hold, however, that the basis of all calculations as to the reasonableness of rates to be charged by a corporation maintaining a highway under legislative .sanction must be liie fair value of tlie property being uped by it for the con- venience of the public. And in order to ascertain that value the original cost of construction, the amount expended in permanent Improvements, the amount and market value of its bonds and stock, the present as compared with the original cost of construction, the probable earning capacity of the property under the particular rates prescribed by statute, and the sum required to meet operating expenses are all matters for consideration, and are to be given such weight as may be just and ri^'ht in each case. We do not say that there may not be other matters to be regarded in estimating the value of the property. What the com- pany is entitled to ask 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 services rendered by it are reasonably worth." And yet, althouch the Supreme Coui-t has laid down the rule for the regulation of rates as involving a fair retiTrn upon the value of the property affected, in Uie consideration of which certain factors are to be considered, such as the stock and bond issues, the actual cost, the actual cost of reproduction, etc., we in our legislation do not provide the factors by which the Interstate Com.merce Commission can be guided. We should furnish them with the means of con- trolling the capitalization of these corporations, and if we ao not enter upon a national Incorporation of railways we should at all events provide that the Interstate Commerce Commission should enter upon a valuation of the railroads, and to that valuation should be added from time to time the increases of bond and stock issues made by the corporation with the approval of the Commission. THE GOVERNMENT SHOULD DETERMINE WHAT SHALL BE A FAIR RETURN ON CAPITAL. But there is another thing we can determine. We can determine the return upon capital. This is no innovation. It has existed throughout the history of this country. When we organized the Union Pacific Railroad we provided that the rates should be diminished after the income reached 10 per cent. In Massa- chusetts to-day the limitation upon the return on capital in electric railroads, which are being built all over the State, is 6 per cent, with an allowance of 130 INTERSTATE AND FOREIGN TRANSPORTATION. one half of the additional profits to the corporation and the other half to be paid to the State. The result is that nothing has ever been paid to the State. The corporation itself has never received the other half of the profits in the shape of dividends, but all excesses over 6 per cent have gone to the betterment and extension of roads and toward reasonable reductions of rates. The advantage of a limitation upon the dividend return on capital is that it vi^orks automatically either toward the betterment of the road, the reduction in rate, or to an increase of wages, all of which are to the interest of the country. Otherwise an increase of business tends simply to the increase of profit to the stockholder. This system, while securing to him a fair return upon his investment, gives the balance of the profit, caused by an increase of population and an increase of business, to the public in the shape of the betterment of the road, in the shape of increased wages to employees, in the shape of reduced rates. If we enter upon a system of proper capitalization of these roads, involving a fair and fixed return in the shape of dividends, the Interstate Commerce Commission will hardly ever have cause to act, and automatically the entire administration of these roads will tend toward impartiality in place of partiality, to reasonable rates instead of unreasonable' rates, to the betterment of roads instead of exhausting the roads with a view to paying dividends on watered capital. AUTOMATIC ADJUSTMENT. Thus we would have an automatic kind of ndjustment under national control, which would do away not only with excessive rates but all the abuses arising from preferences and discriminations as to individuals or localities. The tend- ency would be to equality and reasonableness of service. TAXATION. Then there is the question of a uniform system of taxation to be devised. Whenever the National Government creates a corporation for the carrying out of a great public purpose, and when the National Government uses the property of that corporation as an instrumentality for carrying out the powers conferred . by the Constitution, it can, if it chooses, absolutely exempt such property from State burdens, for the power to tax involves the power to destroy. If it can do this, it can certainly do what I contend for, namely, lay down the rule by which States shall tax the property of such corporations within their boundaries. We all know the looseness of the State laws regarding the taxation of rail- roads. We know that the range of assessment is a wide one ; that the lesser degree of assessment is simply a valuation of the tracks and of the right of way, and that the higher degree of assessment Involves the combined value of the stock and bonds. In addition to this, the stock and bonds themselves In the hands of the stockholders can be assessed in most of the States, and thus we have a double system of taxation. As long as the taxation of railroads is subject to the conflicting laws of 45 different States is it to be wondered that railroads keep in politics? Can we throw ten billion dollars worth of property Into the political arena, subject to public control, both as to 'rates and to taxes, and then ask the ten billion dollars to keep out of politics? The United States Government should fix a rational and fair rule for the taxation of railroad properties which would leave nothing to discretion and which could be ascertained with mathematical certainty. Such a tax Is a per- centage tax upon gross receipts levied by the various States in proportion to mileage. It has the advantage of mathematical certainty and would reUeve railroads of all necessity, so far as taxation is concerned, of interfering In politics. Besides this, if the Interstate Commerce Commission Is to fix the rates it is absolutely essential it should have all the factors for determining what is a fair return upon the capital invested, and one of those features Is the allowance of the taxes; and if these taxes can be rudely disturbed from time to time by political action, involving violent readjustments, there can be no certainty either in the action which they take or in the rates for transportation which are the result of their action. Such legislation would be part of a rational adjust- ment of regulation, for it would Involve not an absolute surrender to an Inter- state Commerce Commission of the legislative powers belonging to Congress, but would involve the fixing of a rule working mathematically toward certain re- INTERSTATE AND FOREIGN TRANSPORTATION. 131 suits and leaving the Interstate Commerce Commission, the discretion and the judgment to work out the results according to the rule. The difficulty with most of the propositions suggested for the fixing of rates by the Interstate Commerce Commission is that they confer upon an adminis- trative tribunal all the legislative powers conferred by the Constitution upon Congress in this matter, and it may be a serious question in the future as to whether the Congress can turn over all this power. It is claimed, of course, that Congress fixes the standard in declaring that all rates must be just and reasonable, and intrusts to the commission the duty only of adjusting the rates to the standard, but it must be remembered that the only power which Congress has over rates is to fix just and reasonable rates, and that in turning this power over to an administrative commission it delegates all the power it has. It may be a serious question as to whether Congress can go so far. A provision that the commission should value the property and should allow such rates as, after the allowance of operating expenses, interest on debt, fixed charges, etc., should yield a certain percentage on such value, would be sure to stand the test of the courts. BAILKOAn EMPLOYEES. There are other provisions which a national incorporation act should contain. One is an insurance and pension fund for employees. One per cent of the gross receipts of all the railroads of the country, amounting at present to over $2,000,000,000 annually, would be $20,000,000 annually. This sum put into am insurance and pension fund and invested under the direction of the Secretary of the Treasury would yield ample returns for the relief of employees suffering- from injury or old age. The charge should be frankly imposed on the public as. one of the fixed charges of operation, and allowance should be made therefor in fixing rates. The Interstate Commerce Commission should be made a bojird of conciliatiom as to all disputes between employees and the railroads. As it is, whenever there is a dispute between a railroad company and its employees, if they fail to- agree, there is war — war which does not involve them only but which involves^ the entire country, threatening an impairment and even destruction of the com- merce between the States and between communities. Can it be said that it is; wise to adhere to a system which threatens at any time to paralyze trade and tO' lock up the activities of the entire country? I would not provide compulsory arbitration, but I believe that the conciliation of the Interstate Commerce Com- mission would be as effective in such matters as has been the conciliation of the railroad commision of Massachusetts in disputes between railroads and shippers. THE NATION SHOULD ACT. These are the questions which come before us in the consideration of national incorporation. We are considering questions of the general welfare, of the national defense, of the National Postal Service, of the national commerce, and of foreign commerce — all of them intrusted by the Constitution to the repre- sentatives of the people of the United States in Congress assembled. We have- not exerted these powers to the full. Is it time that in the interests of the entire country we should assume the functions plainly given to us by the Con- stitution and provide with deliberation and judgment for their full exercise? GOVERNMENT OWNERSHIP. It is plain that the people are restive under existing conditions. They realize that consolidation, capitalization, and return on capital are practically uncontrolled ; that a few men in the great financial centers have almost absolute power in these matters; that our dual system of government tends to a con- fusion in control which practically exempts them from all control ; that the com- plexity of the situation makes the railroad men the dominant power in politics ; that the confusion of bond and stock issues, of stock watering, of leases, mer- gers, and combinations absolutely paralyzes the judgment of the average right- thinking man and is a fruitful source of corruption and fraud, political and financial. They realize that the men who are prominent in the great industrial corpo- rations are getting control over the transportation of the country, and that the 70342— PT 3—16 % 132 INTERSTATE AND FOREIGN TRANSPORTATION. union of control of the finances, the production, and the transportation of the country in the hands of a few has already created a plutocracy unsurpassed in wealth and power in the world's history, and that If this continues we are upon the threshold of still greater concentration of wealth and power. They will look fpr simplicity in whatever plan of relief is proposed, and unless we unify and simplify the control of transportation in a few thoroughly controlled great national corporations whose finances a:nd operations can be easily understood and whose functions will be entirely taken out of politics, they will drift to national ownership as the easiest solution. The iirgument is a simple and taking one. If outside of the United States three-fifths of the trackage of the world is In national ownership, why should not Ameica own her railroads? If the universal tendency is to the ownership by nations, why should uot we follow their example? If the Nation c:in build the most gigantic public work of modern times, the Panama Canal, and if it can own and operate a from ocean-to-ocean railroad at Panama, why can it not build and own and operate lines through the United States from ocean to ocean and from the Lakes to the Gulf? If Chicago can contemplate the ownership of interurban railroads, costing hundreds of 'millions, can not the Nation take in hand the ownership of interstate railroads costing billions? Such in brief is the argument in favor of national ownership. The method is not difficult. It would be easy to authorize the Interstate Commerce Commission to insti- tute suit to condemn the shares of stock in all the railroads in the country en- gaged in interstate commerce, leaving the bonds outstanding as a lien upon the property. Thus the interests of the stockholders would be purchased by the Nation, and the Interstate Commerce Commission could step into the position of directors of the various companies with their present organizations of officials and employees and could gradually work out a method of national administra- tion. The present bond issues amount to about $6,000,000,000, bearing interest at about 4J per cent, for which Government bonds at 24' or 3 per cent could be gradually substituted as the rnilroad bonds matured, thus accomplishing a saving of $90,000,000 to $120,000,000 annually. The capital stock, whose par value aggregates about $6,000,000,000, and whose market value aggregates a little less, could be condemned at approximately the market rates and paid for by the sale of 2J or 3 per cent United States bonds. As the present annual revenue of all the railroads is over $2,000,000,000 it would furnish a sufficient sum to pay all the fixed charges of the companies and the low rate of interest upon the Government bonds issued for the purchase of stock and produce a surplus which would make ample provision for betterments and extensions, and also provide a sinking fund which would extinguish the entire debt in fifty years. There can be no doubt about the legality of such a procedure, A similar bill was passed unanimously in the Senate at the last session, authoriz- ing the condemnation of the stock of the Panama Railroad. By this method the Government would acquire without any revolutionary methods the control of all the railroads engaged in interstate commerce in the country, and assuming that the administration was honest and efficient the saving effected by the sub- stitution of low-rate bonds for high-rate stock and the gradual retirement of ex- isting bonds at much lower rates of interest would eventually pay for the roads. Should the country determine to simply take hold of the railroad construction of the future, leaving the existing railroads in the hands of their present owners, the Government could easily build a railroad of 3,000 miles across the continent from Norfolk or Charleston to Los Angeles or San Diego, which would become the spinal colurim of a great governmental system. Government ownership presents no difficulties, either constitutional or practical, except possibly the difficulty of honest and efficient administration, and the country will certainly drift to it unless the existing abuses of uncontrolled monopoly, of overcapitaliza- tion, of accomplished union between the producing and transportation interests, of politiqal control, and of unjust preferences and discriminations are done away with. Even assuming that the Government management may not be as eco- nomical, the time may yet come when the people will regard equality of service as of more importance than economy of service. Such briefly is the argument for national ownership. But I believe the policy I am advocating would give the country all the benefits ■of Government ownership with none of its dangers. It would abolish the evils which have arisen from unrestricted monopoly, automatically bring about a re- duction in rates, put the railroads out of politics, close the door against the entrance of over a million men into the political patronage, and retain the INTERSTATE AND FOREIGN TRANSPORTATION. 133 inanagemcnt of the able men whose genius created our present efficient system of transportation out of the crude conditions which prevailed a generation ago. Feancis G. Newlands. I append hereto a bill which I have introduced creating a commission to con- sider and recommend legislation relating to the national incorporation of common carriers engaged in commerce between the States. I trust that the provisions of this bill may be added to the pending bill in order that a full report upon this important question may be presented at the next session. I also present for consideration certain sections of a proposed national incorporation act upon which I have been engaged. It is unnecessary to include the purely formal parts of such an act relating to organization, by-laws, etc. These provisions are merely suggestive and are Intended as a practical examplification of my argu- ment. They are presented simply in a tentative way, and I do not pretend to have come to any final conclusion regarding them. As I have not attempted in this report to review the authorities upon the legal questions here presented, I append a statement on this subject made by me before the Senate Committee on Interstate Commerce at its recent hearings. Appendix A. [S. 4471, Fifty-ninth Congress, first session.] Mr. Newlands introduced the following bill : ' A BILL Creating a commissioln to consider and recommend legislation relating to the Incorporation of common carriers engaged In commerce between the States and foreign countries, preventing the overcapitalization of such corporations, and promoting a uniform method of taxing the property and securities of such corporations, and for other purposes. Be it enacted ty the Senate and House of Representatives of the United States of America in Congress assembled, That a commission Is hereby- created to be composed as follows : Five members of the Senate of the United States and five members of the House of Representatives of the United States, to be ap- pointed by the presiding officer of each House of Congress, respectively : Pro- vided, That not more than three of said members of the Senate and not more than three of said members of the House of Representatives shall be members of the same party. Sec. 2. That it shall be the duty of this commission to investigate and report to the Congress on or before the first day of its next session what legislation, if any, is desirable for the incorporation or consolidation of common carriers engaged in commerce between the States or with foreign nations, and also what legisla- tion, if any, is desirable for the prevention of overcapitalization by such carriers, and what legislation, if any, is desirable for the purpose of securing a just and uniform method of taxing the property and securities of such common carriers by the various States, and what legislation, if any, is desirable for" the purpose of insuring the employees of such carriers against the risks incident to their employment, and what legislation, if any, is desirable for the purpose of secur- ing the conciliation of disputes between such common carriers and their em- ployees. Sec. 3. That the commission shall give reasonable times for hearings, if deemed necessary, and if necessary it may appoint a subcommission or subcom- missions of its own members to make any investigation in any part of the United States, and it shall be allowed actual necessary expenses for the same. It shall have the authority to send for the persons and papers and to administer oaths and affirmations. All necessary expenses, including clerks, stenographers, mes- sengers, rent for place of meeting, and printing and stationery, shall be paid from any money in the Treasury not otherwise appropriated ; however, not to exceed five thousand dollars for expenditure under this section, to be paid upon vouch- ers to be approved by the chairman of the commission. Sec. 4. That any vacancies occurring in the commission, by reason of death, rlisability, or from anv other cause, shall be filled by appointment by the officer and in the same manner as was the member whose retirement from the commis- sion creates the vacancy. 134 INTEESTATE AND FOREIGN TRANSPORTATION. Appendix B. [Hearings of Senate Committee on Interstate Commerce.] Tuesday, May 2S, 1905. The commjttop met pursuant to adjournment. Present : Senators Elkins (chairman), Oullom, Kean, Dolliver, Clapp, and Newlands. May 23, 1905. NATIONAL INCOEPOEATION OF INTERSTATE RAILROADS. Additional Statement of Senator Newlands. [The first part of this statement will be found on page 776, Vol. II.] Mr. Chairman : On April IT, 1905, after making my statement regarding my resolution for the national incorporation of the interstate railroads of the United States, Senator Foraker asked me certain questions relative to my pro- posed plan, which are to be found on pages 12 and 13 of these hearings, and suggested that I write out my answers and put them in the record. I avail myself of this privilege, and have the honor to submit the following : ******* MEANING or "BEGULATE." In answer to the first question, I would say that the right to pass a national act for the incorporation of railroads engaged in interstate commerce does not depend entirely upon the interstate-commerce clause of the Constitution. It depends upon tfie power given to Congress under section 8, Article I, " to pro- vide for the common defense and general welfare of the United States ; " " to regulnte commerce with foreign nations and among the several States," and "to establish post offices and post roads." The word " regulate " in the Constitution has been given no narrow construc- tion. The term " to regulate " does not mean simply to prescribe the rule. It has been held to sanction legislation absolutely prohibiting interstate commerce, as In the case of the lotteries. It has been held to apply to legislation facilitat- ing or promoting interstate and foreign commerce. Under this power, among others, the Northern Pacific and other railroads were incorporated ; under this power, among others, the Panama Canal is being built to-day, involving not only the construction of the canal, but the ownership and operation of a rail- road and the conduct of the business of a common carrier. So also the term " establish " In connection with post offices and post roads has been used in no narrow sense. It includes the leasing or construction and ownership of post offices. It includes not simply the establishig of post roads, but the construction, as in the case of the Cumberland Road. It includes the operation of post offices and post roads. It includes the actual carrying of the mails by Government employees. Instead of intrusting this work to agents, incorporated or otherwise, or instead of simply determining the rule by which post offices and post roads are to be conducted, Congress has not only estab- lished post offices, but given their establishment an entire monopoly of certain kinds of business, even punishing as a crime any participation in them by virtue of State authority or otherwise. Under these powers the National Gov- ernment could undoubtedly construct a railroad. If it could construct a rail- road it could operate It, and If it should not choose to do either it could select an agent for the purpose of constructing and operating it. It can select any instrumentality for the exercise of the broad powers employed in the control of the postal service, interstate commerce, and the military defense. Being sover- eign in the exercise of these powers, it acts upon every foot of American soil, regardless of State lines and unimpeded and unobstructed by State legislation. It can select any agents it chooses for carrying out such powers. It can select as such agfents individuals, or can itself create corporations for the purpose of carrying out those great governmental powers. TAXATION OF NATIONAL INSTRUMENTALITIES. When the Government condemns for public use and constructs a post road, that moment the post road is free from State taxation. If the Government INTERSTATE AND FOREIGN TRANSPORTATION. 135 buys real estate and builds a post office, that moment the real estate and bulld- mg are exempt from State taxation. If the National Government should con- struct railroads for the purpose of carrying out these powers, such railroads would be exempt from State taxation, just as post offices and customhouses are, and ]_ust as post roads would be if built. If it intrusts such work to a corpora- tion created by itself, the corporation is the agent for the purpose of carrying out governmental powers, and none of its powers or operations can be taxed by a State. If it selects certain property as the instrumentality or means through which its powers are to be exercised, so also would such property be exempt from State taxation, for just as the powers and the operations of the Govern- ment agent would be exempt from all local taxation, so also would be the prop- ertyselected as the chosen instrument for the exercise of those powers. The powers and operations would be exempt without any express declaration to that efCect by Congress. A difleerent rule would probably apply to the property selected as the chosen instrument for the exercise of a national power. In that case it would be necessary to show unmistakably that the property was selected as the instrumentality, and that it was the purpose of Congress that it should be taken out of the domain of State taxation. The proper organization of a system of transportation is just as essential to the welfare of the people as is the creation of a proper financial system. In the early history of the country it was determined to establish a United States bank to promote the fiscal operations of the Government. The State of Mary- land sought to impose a tax upon the notes of a United States bank in Mary- land. The notes were property just as a railroad is property, and yet the court held that the State of Maryland could not in the exercise of its taxing power tax those notes. It is true that in that case Chief Justice Marshall held that so far as the bank building was concerned the exemption would not apply, but he so held upon the ground that the ownership of the bank building was not essential to the operation of the bank; the bank could be conducted upon leased property, and therefore the bank building could not be regarded as a national instrumentality for the purpose of carrying out the powers conferred by the National Government upon the bank, but all property absolutely essential to the powers conferred upon the bank, such as promissory notes, bills of ex- change, etc., were exempt from State taxation. It should be noted that a railroad is a very different property from a bank building. The ownership of a bank building is not essential to the operation of a banking corporation. The ownership of a railroad is absolutely essential to the operation of a railroad corporation. If Congress therefore, under the interstate-commerce power, authorizes the construction of a railroad, it makes that railroad the instrumentality for the purpose of carrying out its powers — the means of the exercise of the power itself. The operation of the railroad can not be segregated from the right of way, the track, the station bulldngs, and the general equipment of the road. If they belonged to the Government they would be exempt from State taxation, and if the Government selects as its agent a corporation of its own creation and makes its property the instru- mentality for the exercise of governmental powers, and unmistakably shows its intention that this instrumentality shall not be embarrassed by State taxa- tion, clearly the property selected as the insrumenality must be as free from taxation as the powers themselves. In this connection it is proper to say that my contention as to the right of the United States to exempt a railroad incorporated under a national law for inter- state commerce from State taxation is not urged for the purpose of freeing such roads from sharing the burden of government, but simply for the purpose of securing uniformity and certainty, with a view to facilitating the public regu- lation of railroad corporations in which the fixed charge of taxes is an impor- tant consideration. Under the rule laid do.wn in Van Allen v. The Assessors (3 Wall., 573), it would be competent for the Congress of the United States to submit the prop- erty of national railroads engaged in interstate commerce to State taxation, first prescribing the rule by which such property should be taxed. In this way Congress could secure uniformity and certainty in the taxes, by laying down the rule which should be followed by the States, and could thus relieve the National Government of the duty of collecting and distributing the tax. This might be a better method than the one suggested by my resolution. It entirely relieves the United States from the position of a collector and distributer of taxes, and yet would accomplish the same purpose. 136 INTERSTATE AND POBEIGN TRANSPORTATION. THE AUTHOEITIES. In Luxton v.. North River Bridge Company (153 XJ. S., 525) it was held that, under the power to regulate commerce among the States, Congress may create a corporation to build a bridge across navigable water between two States, and to take private land for that purpose, making just compensation. And Mr. Justice Gray, delivering the opinion of the court, said :. " The Congress of the United States, being empowered by the Constitution to regulate commerce among the several States, and pass all laws necessary and proper for carrying into execution any of the powers specifically conferred, may make use of any appropriate means for this end. As said by Chief Justice Mar- shall, ' The power of creating a corporation, though appertaining to sovereignty, is not, like the power of making war, or levying taxes, or of regulating com- merce, a great substantive and independent power which can not be implied as incidental to other powers or used as a means of executing them. It is" never the end for which other powers are exercised, but a means by which other objects are accomplished.' Congress, therefore, may create corporations as appropriate means of executing the powers of government, as, for instance, • a bank for the purpose of carrying on the fiscal operation of the United States, or a railroad corporation for the purpose of promoting commerce among the States. (McCulloch v. Maryland, 4 Wheat., 316, 411, 422; Osborn v. Bank of U. S., 9 Wheat., 738, 861-873; Pacific R. R. Removal Cases, 115 U. S., 1, 18; California v. Pacific R. R., 127 U. S., 1, 39.) Congress has likevifise the power, exercised early in this country by successive acts in the case of the Cumberland or National Road from the Potomac across the AUegbenies to the Ohio, to au- thorize the construction of a public highway connecting several States. See Indiana v. United States, 148 U. S., 148. (153 U. S., 529.)" In California v. Pacific Railroad (127 U. S., 1) it was directly adjudged that Congress has authority, in the exercise of its power to regulate commerce among the several States, to authorize corporations to construct railroads across the States, as well as the Territories of the United States ; and Mr. Justice Bradley, speaking for the court, and referring to the acts of Congress establishing cor- porations to build railroads across the continent, said : " It can not at the present day be doubted that Congress, under the power to regulate commerce among the several States, as well as to provide for postal accommodations and military exigencies, had authority to pass these laws. The power to construct, or to authorize individuals or corporations to construct, , national highways and bridges from State to State is essential to the complete control and regulation of interstate commerce. Without authority in Congress to establish and maintain such highways and bridges, it would be without authority to regulate one of the most important adjuncts of Congress. This power in former times was exerted to a very limited extent, the Cumberland, or National, Road being the most notable Instance. Its exertion was but little called for, as commerce was mostly then conducted by water, and many of our statesmen entertained doubts as to the existence of the power to establish ways of communication by land. But since, in consequence of the expansion of the country, the multiplication of its products, and the inventions of railroads and locomotion by steam, land transportation has so valstly. increased, a sounder con- sideration of the subject has prevailed and led to the conclusion that Congress has plenary power over the whole subject. Of course the authority of Congress over the Territories of the United States and Its power to grant franchises ex- ercisible therein are, and ever have been, undoubted. But the wider power was very freely exercised, and much to the general satisfaction, in the creation of the vast system of railroads connecting the East with the Pacific, traversing States as well as Territories, and employing the agency of the State as well as Federal corporations. (127 U. S., 39-40.)" McCulloch V. Maryland (4 Wheat., 485). — This case decided that a stamp tax on the notes issued by a Federal bank was a tax on the operation of a Federal agency and therefore void. The essence of the decision is the impotency of the States to burden the operation of the Federal Government. As to a tax on property as distinguished from operations, the court said, in conclusion : " The States have no power, by taxation or otherwise, to retard, impede, burden, or in any manner control the operations of the constitutional laws enacted by Congress to carry into execution the powers vested in the General Government. * * * INTEESTATE AND FOREIGN TEANSPOKTATION. '137 " This opinion * * * (jges not extend to a tax paid by the real property of the bank in common with the other real property within the State, nor to a tax Imposed on the interest which the citizens of Maryland may hold In this institution, in common with other property of the same description throughout the State." Osborn v. United States Baflk (9 Wheat., 737).— Practically a restatement of the preceding case on the points in issue. The court said, page 867, that a con- tractor could not be taxed for supplying a military post with provisions or for transporting provisions to troops in behalf of the Federal Government ; but " it is true that the property of the contractor may be taxed as the property of other citizens, and so may the local property of the bank. But we do not admit that the act of purchasing or of conveying the articles purchased can be under State control." This case continues the principle of the McCulloch case by laying emphasis on the operations of the Government and the impotency of the States to inter- fere therewith. Thompson v. Pacific Railroad (9 Wall., 579). — ^This was a case of taxation by a State of a railroad acting under a Federal charter as well as a State charter. The court said (p. 590) : " We do not think ourselves warranted, therefore, in extending the exemption established by the case of McCulloch v. Maryland beyond its terms. We can not apply it to the case of a corporation deriving its existence from State law, exer- cising its franchise under State law, and holding its property within State jurisdiction and under State protection." In this case the court considered the possibility of what would happen if Con- gress should do what it had not done, to wit, explicitly exempt its agent from taxation. The court said (p. 5SS) " We do not doubt, however, that * * * Congress may * * * ex- empt, in its discretion, the agencies employed in such service from any State taxation which will really prevent or impede the performance of them. "But can the right of this road to exemption from such taxation be main- tained in the absence of any legislation by Congress to that effect? " Throughout this case it will be noted that the court is careful to say that the case did not present the feature of any positive attempt on the part of Congress to exempt the property from State taxation, and the inference is clear that in such a case the exemption would have been operative and the State tax invalid. This case emphasizes the difference between property and the operations of an agent of the Government, as follows (p. 591) : " We fully recognize the soundness of the doctrine that no State has a ' right to tax the means employed by the Government of the Union for the execution of its powers.' But we think there is a clear distinction between the means employed by the Government and the property of agents employed by the Gov- ernment. Taxation of the agency is taxation of the means; taxation of the property of the agent is not always, or generally, taxation of the means. " 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 sur- rendered. It can not be so used, Indeed, as to defeat or hinder the operations of the National Government; 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." Again obviously intimating a different opinion had Congress expressly estab- lished such exemption. Railway Company v. Peniston (18 Wallace, 5). — This case arose out of the claim on the part of the State of Nebraska of the power to tax roadbed, depots, wood stations, water stations, and other realty, telegraph poles, telegraph wires, bridges, boats, papers, office furniture and fixtures, money and credits, mov- able property, engines, etc., of the Union Pacific Railroad Company. The company was created by the act of Congress of July 1, 1862, entitled " An act to aid in the construction of a railroad and telegraph line from the Mis- sissippi River to the Pacific Ocean, and to secure to the Government the use of the same for postal, military, and other purposes." Various amendments were made to the original act at later sessions of Congress, but neither, in the original act nor in any amendment was any proylsloh made by Congress respect- ing the taxation of it or its property by the States through which the road might run. 138 INTEESTATE AND FOBEIGN TRANSPORTATION. The tax was resisted by the company on the ground that, having been incor- porated by Congress — " The State of Nebraska has no power to subject to taxation for State pur- poses the roadbed, rolling stock, and other property necessary for the use and ■operation of the road, such power resting exclusively In the Government of the "United States." It was distinctly stated by Mr. Chief Justice Strong, who delivered the opinion, that — " The States may not levy taxes the direct effect of which shall be to hinder the exercise of any powers which belong to the National Government. The Constitution contemplates that none of those powers may be restrained by State legislation" (p. 30). After referring to the legislation creating the Union Pacific road and ad- verting to the objects and purposes of that legislation, the justice further «aid (p. 32) : " Admitting, then, fifllj', as we do, that the company is an agent of the General Government, designed to be eniplciyed, and actually employed, in the legitimate service of the Government, both military and postal, does It necessarily follow that its property is exempt from State taxation?" Emphasizing the difference between the operations of an agent and the prop- erty thereof, justice Strong said (p. 33) : " It may therefore be considered as settled that no constitutional Implications prohibit a State tax upon the property of an agent of the Government merely hecau.se it is the property of such an agent." Then, after consideration of the various cases bearing upon the general ques- tion, Justice Strong summed up as follows (pp. 36-37) : " It is, therefore, manifest that exemption of Federal agencies from State taxation is dependent, not upon the nature of the i>gents, 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 hinder the efficient exercise of their power. A tax upon their property has no such necessary effect. It leaves them free, to discharge the duties they have undertaken to perform. A tax upon their operations is a direct obstruction to the exercise of Federal powers." Eight justices heard this case, and the opinion of the court upholding the validity of the tax was concurred In by four of them. A fifth. Judge Swayne, concurred in the judgment, but said : " I see no reason to doubt that it was the intention of Congress not to give the exemption claimed. The exercise of the power may be waived, but I hold that the road Is a national instrumentality of such a character that Congress may Interpose and protect it from State taxation whenever that body shall deem It proper to do so." So that Judge Swayne would have decided against the majority of the court had there been exempting legislation. Two other justices flat dissented, giving an opinion to the effcet that such State taxation was Invalid, even In the silence of Congress. And the eighth justice merely remarked : " I dissent from the opinion of the court." So that all that can be claimed from this decision as to the power of Congress to exempt a corporation from taxation by aflSrmative legislation is that the court was evenly divided, and even this can not be fairly claimed, for the case of exempting legislation was not before the court, and the opinions of the four justices who upheld the tax do not contain a word which denies the power of Congress to exempt the property which it expressly declares to be its chosen In- strumentality. Mr. Justice Bradley, for himself and Mr. Justice Field, delivered a vigorous dissenting opinion, in the course of which he said (p. 47) : " The Union Pacific Railroad Company, therefore, being a United States cor- poration, created for national objects and purposes, and deriving Its existence, Its powers. Its duties. Its liabilities, from the United States alone; being re- sponsible to the United States, now as formerly, for a whole congeries of duties and observances ; being subjected to the forfeiture of Its corporate franchises, powers, and property to the United States, and npt to any Individual State; being charged with important duties connected with the very functions of the Government, every consideration adduced In the cases of McCuUoch v. Maryland and Osborn v. The Bank would seem to require that It should be exempt not INTERSTATE AND FOREIGN TRANSPORTATION. 139 only from State taxation, but from State control and interference, except so far as relates to the preservation of the peace and the performance of its obligations and contracts. In reference to these and to the ordinary police regulations imposed for sanitary purposes and the preservation of good order, of course it is- amenable to State and local lavs's. " As an instrument of national commerce as well as Government operations, it has been regulated by Congress. Can it be further regulated by State legis- lation? Can the State alter its route, its gauge, its connections, its fares, its franchises, or any part of its charter? Can the State step in between it and the superior power or sovereignty to which it is responsible? Such an hy- pothesis, it seems to me, is inadmissible and repugnant to the necessary rela- tions arising and existing in the case. Such an hypothesis would greatly •derogate from and render almost useless and ineffective that hitherto unexe- ■cuted power of Congress to regulate commerce by land among the several States. If it be declared in advance that no agency of such commerce, which Congress may hereafter establish, can be freed from local impositions, taxation, local rates. It is confusing to have the national commission and 45 different State commissions at the same time act in judgment upon the same subject. And just as there should be but one taxing power, so also should there be but one rate-regulating power — this in the interest of simplicity, convenience, and certainty. If might be possible for a national incorporation act to exempt national railroads from State regulation of local rates, upon the assumption that the power to fix rates, like the power to tax, involves the power to destroy. But if It should not be thought advisable to attempt this, doubtless some method of amicable cooperation between the Interstate Commerce Com- mission and the State commissions could be effected which would materially increase the certainty of the calculations. There is another advantage which would surely arise from the adoption of this policy, and which is of consequence equal to, if not greater than, the ad- vantages which would follow fixed taxes and dividends and permanent peace for the railroad industry. This is the fact that the railroad would go out of politics. The railroad is in politics to-day because its vast property, amounting to more than ten billions, is between the upper and the nether millstone— the upper millstone of the rate-regulating power, and the nether millstone of the taxing power. Between the two, save for the protectioh of the courts, these properties can be ground to destruction. The uncertainty ahd insecurity of their situation compels the railroads to go into politics. Hence they take part in the election of every official whose duty is likely to trench in any degree upon the taxing and rate-regulating power. Doing everything systematically, their participation in politics means the organization of a machine in every INTERSTATE AND FOREIGN TRANSPORTATION. 151 State of the Union ; and since they pursue the lines of least resistance, this often means alliance with the corrupt element of every community. It Is expensive for the railroads and, vi'orse than that, it is a grave menace to the institutions of the Republic. I submit that these plans may reasonably be characterized as the common sense of the railroad tiuestion.' Railroad monopoly has come in the course of natural evolution^ We have learned that monopoly is inherent in our modern method of transportation. Let it be no longer outlavired, but frankly recognized, vceleomed, and made legal. The way to do this is by means of national incor- poration. Vast capital is required to create and maintain transportation facilities ade- quate to the needs of our growing country. This capital is justly entitled to its fair reward, yet can not be permitted to fix its own profits ; for it is not in human nature, and certainly not in the nature of corporations, to consider profits from an unselfish standpoint. Not only is this true, but the railroad is so intimately related to every other industry, and to the daily life of all our people, as to make it desirable that the' best service should be rendered at the lowest cost. Indeed, every saving that can be effected in this regard tends to raise the standard of living of the rhasses. How shall we realize the best service at the lowest cost? Clearly, by giving the railroad investment the lar.gest measure of security and the greatest certainty of earning power. Consolidation under national incorporation is tlie sure road to this result. It means increased efficiency, greater economy, cessation of wasteful competition and of demoralizing strife between the railroads and the people. It means, too, fixed dividends upon an agreed valuation. There is a feature of all railroad regulation which seems to have escaped the attention of those who have framed bills~on the subject. Rate regulation means, unquestionably, the limitation of dividends upon the investment. This is, in a sense, an invasion of property rights, and demands the concession of compensating advantages. When the public limits the dividends upon a given investment, the public ought to secure them. This is what will happen under the proposed plan. Virtually, the nation -^yould guarantee a certain low rate of interest upon the investment. . Under this plan, the vast increase of transportation business in the future will tend to the reduction of rates and the advantage of the people. The appre- ciation of values which has occurred up to the time this act goes into effect rightfully belongs to the owners of railroad property. They invested in a specu- lative undertaking, took their chances, and' created a property valuable to themselves and indispensable to the public. But now we propose to eliminate the speculative element, and to create conditions which will make railroad securities almost as good as Government bonds. In return for this great advan- tage, we ask that capital shall be content with a reasonable dividend upon present valuation. The increase in business which will inevitably arise in the future with the growth of the country will then inure to the benefit of the people in three forms. First, they will get it in the form of betterments, exten- sions, and constantly improving service. They will get it in the form of better conditions of employment — higher wages and shorter hours for the 1,300,000 men actually engaged in the railroad industry, and a pension fund to secure them in sickness or old age. Finally, this increase will be transmuted into public benefits, in the form of constantly lowering rates of freight and passenger traffic. The evils of overcapitalization, of stock speculation, and of corporate control of political affairs are not touched by the measure passed by the House of Representatives. Under my plan, the first would be completely done away with, the second would be greatly modified, and the third would be eliminated in so far as it arises from the regulation of taxes and rates. While this joint resolution does not intend to be a perfected piece of legisla- tion I believe it contains the germ of a railroad policy which will do equal and exact justice to all parties concerned. To capital, it will give security and assured dividends ; to labor, it will give an impartial tribunal for the arbitration of disputes as to wages, hours, and safety appliances ; to the public, the lowest rates consistent with the investment and that high degree of eflSciency which is born of modern methods. And to the capital invested, labor employed, and the public served it will, through the action of an impartial tribunal of high character and dignitv, charged with the duty of settling all disputes, bring peace and immunity from constant agitation, and put an end to the continuous 152 INTERSTATE AND FOREIGN TRANSPORTATION. warfare which has heretofore existed between the railroad and its employees and the railroad and the public. ' It is plain enough that the people are restive under existing conditions. Thev are alarmed b.v the evidence that railroad rates are likely to fall under the aboslute control of a few men, and that individuals will be subject to the absolute sway of these few men in matters vitally affecting their interests. The railroads are public highways. The service is a public service, and the conviction is gradually growing in favor of Government ownership. Unless the railroad system is unified and simplified, the complexity of the situation will drive the country to Government ownership as a solution of the difiiculty. The argument in favor of it is simple. It is urged that the Post Office Department is already engaged in transportation which is conducted to the entire satisfaction of the people ; that its work now involves expenditures equal to about one-seventh of the operating expenses of all the railroads ; that an enlargement of its operations could be secured by organizing a division of transportation in this department ; putting at its head a capable man, trained and experienced' in railroading; authorizing suit for condemnation against all railroads, the Government entering into immediate possession and retaining the present force of employees and officials, eliminating such of the latter as may be unnecessary under unified conditions ; the condemnation to cover simply the interest of the stockholders, the market value of which is now about $4,000,000,000, leaving existing bonds aggregating about $6,000,000,000 as a lien upon the property, to be retired as they mature with Government bonds at 2J per cent, the stock to be paid for by a present issue of Government bonds at the same rate. The railroads are now capitalized at about $12,000,000,000, one-half in bonds and one-half in stocks. The market value of the total issue is now about $10,000,000,000. The gross revenue of all the railroads for the past year was about $1,950,000,000, an increase over the preceding year of about $175,000,000. The operating expenses now aggregate about $1,260,000,000, leaving about $690,000,000 as the net income. It is urged that, under Government ownership, the Government wquld have to pay out of this net income the present interest on existing bonds, amounting to about $270,000,000, and 2i per cent on the $4,000,000,000 of the Government bonds, issued in lieu of existing stock, about $100,000,000, or $370,000,000 in all, leaving $320,000,000 for betterments, exten- sions, and a sinking fund for the redemption of the bonds. This latter sum can be increased by the gradual reduction of the interest on the railroad, bonds from an average of 4J per cent to 2J per cent, a saving of $120,000,000 an- nually. It is contended that a sinking fund could thus be provided which would extinguish the entire debt in less than 50 years and leave the operating expense alone as a charge upon the commerce of the country. Such Is the attractive side of Government ownership ; but it ignores, of course, the possible evils of bureaucracy, unbusinesslike methods, political patronage, etc. The plan of Government ownership has the attractiveness of simplicity anU directness. National ownership can, in my judgment, be met successfully only by a policy of national incorporation and control, which has the advantage of almost equal simplicity and directness. I believe the policy I am advocating would give the country nearly all the benefits of Government ownership, with none of its dangers. It would abolish the evils arising from unrestricted monopoly, prevent the entrance of over a million men into the political patron- age, eliminate the present corporate interference with and control of ow politics and retain in the transportation service the initiative, the enterprise, and the administrative capacity of the brilliant men whose genius created our present magnificent system of transportation out of the crude conditions which prevailed a generation ago. SOLVING THE RAILROAD QUESTION. [By Francis G. Newlands, United States Senator from Nevada. — From The Independent, Mar. 14, 1907.] The question of governmental control of railroads was not fully and finally settled in last year's legislation on the subject. Very few expected that it would prove to be satisfactorily adjusted in all respects. It was an effort to cope with many disturbing features and some conditions were improved ; but there is ■ INTEKSTATE AND EOEEIGN TRANSPORTATION. 153 abunclaut evidence that until the system is simplified and unified there will continue to be the cry that the complexity of the situation demands Government ownership as the solution of the problen;i. The arguments in favor of Government ownership are attractive and ap- parently convincing. They tell us that outside the United States three-fifths of the trackage is in national ownership, and ask " Why should not America also own her own railways?" They say : " If the universal tendency is to ownership by nations, why should not we follow their example? If the Nation can build the most gigantic work of modern times — the Panama Canal^and if it can own and operate a railroad from ocean to ocean in Panama, why can it not build and own and operate railroads in the United States? If Chicago can contemplate the ownership of interurban railroads, costing hundreds of millions, can not the Nation take a hand in the ownership of interstate railroads costing billions?" Such, in brief, is the argument for the Government ownership of the railroads. The method of accomplishment is not difficult. It would be easy to authorize the Interstate Commerce Commission to institute suit to condemn the shares of stock in all railroads in the country engaged in interstate commerce, leaving the bonds outstanding as a lien upon the property. The interests of the stock- holders would thus be purchased by the Nation. The Interstate Commerce Com- mission would step into the position of directors of the various companies, working out a method of national administration. The present bond issue amounts to about $6,000,000,000, for which Government bonds could gradually be substituted at a saving of interest of about $100,000,000 annually. The capital stock, which also aggregates about $6,000,000,000, with a market value a little less, could be condemned at its market value and paid for in United States bonds. The present annual revenue of the railroads is over $2,000,000,000, which would amply insure payment of all the fixed charges and interest on the bonds, produce a surplus which would make provision for betterments and extensions, and also provide a sinking fund, which would extinguish the entire debt in 50 years. There can be no doubt about the legality of the procedure. A similar bill unanimously passed the Senate authorizing the condemnation of the stock of the Panama Railroad. So far as the method is concerned. Government owner- ship presents no difficulties, either constitutional or practical — except possibly the difficulty of securing honest and efficient adniinistration-^and the country will certainly drift toward it unless existing evils are effectually abolished. Even assuming that Government management may not be as economical, the time may yet come when the people will regard equality of service as of greater importance than economy of service. But while the sentiment in favor of Gov- ernment ownership is increasing, it is perfectly plain, for other reasons, that the country is not, as yet, prepared for such ownership. Among these reasons a most serious objection is that It would interject 1,300,000 employees into Government patronage and render It difficult to drive from power the party controlling this vast influence, however, desirable a change of administration might be. I believe there is a better policy — a rational middle ground, solving the rail- road question, giving the country all of the benefits of Government ownership with none of its dangers ; abolishing the evils which have arisen from unre- stricted monopoly ; automatically bringing about a reduction in rates ; putting the railroads out of politics, preventing political patronage for employees, and retaining the management of the able men whose genius created our present efficient system of transportation out of the crude conditions which prevailed half a century ago . The history of the roads, which they have been working out for themselves, suggests it. In 1830 there were 23 miles of railroad in America. In 1905, 213,000 miles. This mileage is owned by over 2,000 railroad corporations created by State laws. As the result of consolidation, combination, and recombination the operation of these 2,000 railroads has been mainly unified under the control of less than 10 systems, each organized under the laws of a single State, generally bearing the name of a single man, who is regarded as the dominant factor in Its administration. For the machinery of combination the controllers naturally resort to the , States whose laws are most lax in proper restrictions as to overcapitalization and other evils. . A railroad, whether in the hands of the Government or of a private corpora- tion, is naturally a monopoly. The steady trend to consolidation is the outcome of economic forces which can not be controlled or appreciably impeded by legislation. The present system is complicated and expensive, involving the maintenance Of many unnecessary corporations, the bond and stock issues of 154 INTERSTATE AND FOREIGN TRANSPORTATION. ■whicli constitute a mass of perplexing detail, confusion alike to the investor, the tax assessor, and the rate regulating commission. It is clear that there should be unity of ownership, recognized by law, of such railroads as are now, with advantage to the public, linked together in interstate commerce regardless of State lines. As State legislation can not accomplish this the railroad corpora- tions should be national corporations — the creation of the Government whose jurisdiction is as broad as interstate commerce itself, and whose sovereignty rests on every foot of American soil. It must be admitted that for the most part cou.solidation has thus far resulted in greater economy and efficiency ; in better, quicker, and more equal service, and In stability of rates. As to whether it has worked any reduction of rates is dis- puted, and whether such combinations are legal is very doubtful since the Northern Securities decision ; but consolidation and merger of railroads engaged In interstate commerce constitute a part of the economic development of .sueli commerce. The activity of these great railroad combinations in politics has been rapidly increasing. They are in politics because they realize that their property may be at any time assailed either by legislatures or by administrative officers. Their vast concerns are between the upper and the nether millstones — the rate- regulating power and the taxing power. Participation in politics is stimulated by the uncertainty and insecurity of their situations. In the States, as a rule, the railroads enter into the elections of officials, whose duties are likely to trench in any way upon the taxing or rate-regulating power. They are subject to control of Congress in interstate matters and subject to the dictates of 45 State legislatures or coirimissions as to State commerce. They are also taxed under 45 different systems. There is no certainty, no uniformity, no permanency. Therefore the railroads are In politics, and as they do everything systematically, their participation in politics means either their organization of or identification with a machine in most of the States. As a matter of business, they naturaUy pursue the lines of lejist resistance, which frequently means alliance with cor- rupt elements of the communities in which they operate. Once drawn into politics by the necessities of protection they naturally become aggressive and dominant in political control. It is expensive business for the railroads and it is a grave menace to the institutions of the Republic. For this reason I believe that the railroads themselves, as well as the public, would welcome some efficient simplification whicli should guarantee their integ- rity and legitimate business freedom, under established national administration and recognized authority, removing the necessity and temptation for sharp political practices. It is clear to my mind that this can easily be accomplished by a national law for the incorporation of railways engaged in interstate commerce, subjecting their capitalization, their stoclt and bond issues and their relations with their employees and the public to the approval and control of the Interstate Commerce Commission. The ronds should still be subject to the reasonable police laws of each State in which they are located, but the stocks and bonds of such national corporations should be free from taxation, as representing simply parts of ov interests in railroads, which should be assessed and taxed in their entirety. If the whole is taxed the parts shoulxl not be also taxed. The actual property and equipment of such corporations should either be assessed in the State in which they are located at such a percentage of their value as is customary and taxed at the same rate as other property ; or better, a regulated tax should be laid upon the gross receipts of the road, and such proportion collected by each State as the gross mileage in the State bears to the entire mileage of the road. A rule of taxation of national instrumentalities by the States could be establislied by Congress in the case of interstate railroads, as is now done jn the case of national banks. A national incorporation law should limit stock and bond issues to cash paid in, or to the value of property acquired, and no issue of stock or bonds should be legal without the approval of the commission. There are two States in the Union to-day whose corporate legislation is of the highest character-rthe State of Massachusetts and the State of Texas. What we ought to do is to nationalize either the system of Massachusetts or of Texas and denationalize the system of New Jersey. It is possible that we might in some cases have to use the powers both of persuasion' and coercion to bring a few of the firmly intrenched corpo- rations out of their shelter and under national charter. It might be, too, that we should have to validate to a large extent overcapitalization already created, INTEESTATR AND FOEEIGjST TKANSPORXATION. 155 but if by this means we can save repetition of the errors in the future we shall be conferring a lasting benefit upon the American people. The best way to maintain for all time the value of these roads is to have the capital stock express the real capital employed. It Arill be easy then for the commission to determine a just return. In fact, this plan carried out in detail would mean automatic regulation, so that in a short time the commission would have hardly anything to do. A limitation on the dividends would enforce not only betterment of the road but reduction in rates. This is no innovation. "When we organized the Union Pacific Railroad we provided that the rates should be diminished after the income reached 10 per cent. lu Massachusetts to- day the limitation upon tlie return on capital in electric roads, which are being built all over the State, is 6 per cent, with an allowance of one-half of the addi- tional profits to the corporation, the other half to be paid to the State. Noth- ing has ever been paid to the State; neither, of course, has the corporation received the other half. Beyond tlie 6 per cent limit everything has naturally gone to the betterment and extension of the roads and the reduction of rates. The advantage of a limitation of the dividend return on capital is that it works automatically toward betterment of roads, reduction of rates, and increjise of wages, all of which are public benefits. Otherwise, advantages secured and increase of business tend only to increase the profit of the stockholder. The system which I propose, while securing to the stockholder a fair return for his investment, gives the balance of increasing profit to the public. The system will do away with occasion for irregularities. It will prevent any instigation to illegal practices and will tend directly to improving instead of impoverishing both the service and the counttry. No one can doubt the power of the National Government to create corporations for the purpose of carrying out the authority intrusted to it by the Constitution. We have created national banks and have acquired and are now operating the Panama Railroad. We incorporated the Union Pacific, the Atlantic Pacific, the Texas Pacific railroads under the powers granted to Congress by the Con- stitution to establish post ofiices and post roads and regulate commerce between the States. Economic efllciency demands that the same road should accommodate both State and interstate commerce. State commerce is subject to tlie regulation of the State. Interstate commerce is subject to the regulation of the United States, but when it is all so distinctly for the common good there should be no diffi- culty concerning the cooperation of the greater and the lesser sovereignties under a national incorporation act. Whenever the National Government creates a corporation for the carrying out of a great public purpose, and when the National Government uses the prop- erty of that corporation as an instrumentality for the carrying out of the powers conferred by the Constitution, it can, if it chooses, absolutely exempt such property from State burdens, for the power to tax involves the power to destroy. If It can do this it can certainly lay down the rule by which States -shall tax the property of such corporations within their boundaries. We all know the looseness of State laws regarding the taxation of railroads. The range of assessment is wide, from the valuation of the tracks and right of way to the combined valuation of all the stocks and bonds, which in most States are also assessed again in the hands of the liolders. Being thus subject to the conflicting legislation of 45 different States, is it to be wondered at that the railroads are well up in political manipulation? Can we throw $10,000,000,000 worth of property into the political arena, subject to public control both as to rates and taxes, and ask that $10,000,000,000 to keep out of politics? The United States Government should fix a rational and fair rule for the tax- ation of railroad properties which would leave nothing to discretion, which could be ascertained to mathematical certainty, such as would be the percentage tax on gross receipts, levied by the various States in proportion to their mileage. There are other provisions 'which a national incorporation act should contain. One is an insurance and pension fund for employees. One per cent of the gross receipts of all the railroads of the country would be about $20,000,000 annually. This sum put into a pension fund invested under the direction of the Secretary of the Treasury would yield a wide and Important benefit. The Interstate Com- merce Commission should also be made an effective board of conciliation be- tween employees and railroads to prevent the war which now follows their failure to agree — war which does not involve them only, and to the detriment of both, but which involves the entire counttry, sometimes threatening the destruc- tion of commerce between States and communities. 156 INTERSTATE AND FOREIGN TRANSPORTATION. Under this plan the vast increase of transportation business through the future of necessity will tend to the reduction of rates and the advantage of the people. They vcill feel it in the form of betterments, extensions, and improve- ment in service. They vi^ill feel it in improved conditions of employment — higher wages and shorter hours for the million and a half engaged in the rail- road industry and a pension fund for sickness and old age. They will feel if in constantly lowering freight rates and passenger rates. To capital it will give security and assured dividends. To labor it will give an impartial tribunal. To the public it will give the lowest rates that are consistent with the highest degree of efficiency born of modern methods. It will bring peace and immunity from agitation and put an end to the continuous warfare which has hitherto existed, and still exists in spite of all past legislation, between the I'ailroad and its employees and the railroad and the public. The plan of Government ownership has its attractiveness of simplicity and directness, but it also {las the grave dangers of bureaucracy, unbusinesslike methods, political patronage, and many minor objections. The benefits of national ownership can be more successfully secured by the policy of national incorporation and control which possesses the advantages without the dangers. The people demand simplicity in whatever plan is proposed, and unless we unify and simplify the control of transportation in great national corporations whose finances and operations can be easily understood, and whose functions will be entirely taken out of politics, the public will continue to drift with popular agitation toward national ownership as the most easily comprehended solution. [Senate Report 355, part 3, Sixty-first Congress, second session.] COURT OF COMMERCE— INTERSTATE COMMERCE— NATIONAL INCOK- PORATION OF RAILROAD AND NAVIGATION LINES. [Makch 7, 1910. — Ordered to be printed.] Views of Mb. Newlands. [Of the Committee on Interstate Commerce.] [To accompany S. 6737.] This bill, creating an interstate-commerce court and to amend the interstate- commerce act, was prepared by the Attorney General under the instructions of the President, and has been submitted by the President to Congress under that clause of the Constitution which gives the President the power to recom- mend to the consideration of Congress such measures as he may deem necessary and expedient. It has many admirable features and is in some respects a step_ far in advance of past legislation upon the subject ; but as its full consideration in the Committee on Interstate Commerce was iriterrupted by a premature motion to report it to the Senate I have not yet come to a conclusion regarding all of its provisions and shall therefore refrain from comment or criticism regarding them until the debate in the Senate. I avail myself, however, of the opportunity of a minority report to emphasize the views expressed by me in the report of the so-called " Hepburn bill " four years ago that the legislation regarding interstate commerce in which Congress has thus far indulged has been incomplete and fragmentary. The pending bill, whilst more comprehensive than previous legislation, lacks completeness in that it fails to provide for the valuations of railways and for the creation of national corporate agencies for the conduct of interstate transportation. The Constitution has vested in Congress the power to regulate commerce between the States and with foreign countries. Interstate transportation has grown so prodigiously that, according to the opinion of experts, it now constitutes three-fourths of the traffic of the country. The States having divested them- selves of the power to regulate interstate commerce, and having vested it in the Nation, have a right to demand that the Nation should exercise this power in the fullest and most comprehensive way for the general welfare. Thus far the Nation has exercised its power in a lame and halting fashion, and so abuses have sprung up which the States are powerless to control and which the Nation, whose jurisdiction is as broad as interstate conuueree itself, can alone correct. INTEESTATE AND FOREIGN TRANSPORTATION. 157 THE EVOLUTION OP RAILROADS. Originally, railroads were organized, constructed, and operated entirely within tlie boundaries of the respective States. Interstate connection was later made at State boundaries, but each line was operated separately. Then came through service of cars and trains by traffic arrangement. Then came consolidation of control through leases or sale with the legislative sanction of the States affected, the purchasing or leasing road being incorporated under the laws of one State and its acquisitions in other States being accomplished with the consent of their legislatures. Then came the great holding company, generally organized in the State most lax in corporate control, securing control of railroads in many States by acquiring the majority of their stock, such transaction being accom- plished by exchanging the exaggerted issues of stocks and bonds of the holding company for shares of the constituent companies. ' In this way hundreds of railroad companies organized and operating under the laws of different States would be brought under the control of a foreign corporation organized under the laws of a State in which not a mile of the railroad operated existed. Some States derive large revenues from granting roving charters of this nature. In most cases the consolidation of the roads, save where it involved competing lines, resulted favorably to the public through the perfection of administration and service ; but it also resulted in large over- capitalization and in a complexity of financing, puzzling both to the investor and to the regulating tribunals. Had Congress anticipated this consolidation by providing the machinery for It through a' national incorporation act, consolida- tion would have been accomplished without these attendant evils. NATIONAL INCORPORATION. It Is my purpose to offer as an amendment to the bill under consideration an additional section, which is appended (Appendix A). This amendment is similar in terms, though somewhat altered in details, to a bill whch I have offered at every session for the past five years. It provides for the formation of national corporations for ra:ilroad and navigation lines engaged In Interstate and foreign commerce; for the acquisition of State railroads by such corporations by pur- chase, consolidation, or merger, with the consent of the States affected, and for the control of their stock and bond issues. It subjects the physical property and equipment of such corporations to the taxation of the States, but protects them, as national instrumentalities, against the taxation of their franchises, stocks, and bonds. It provides for the exercise of the power of eminent domain under the judicial procedure of the States. It disclaims interference with the police laws of the States, and by declaring that any corporation organized under the act shall be deemed a citizen of every State In which its lines are located preserves the jurisdiction of the State courts, except where a Federal question is involved. It provides for an accident and insurance' fund for the relief of employees disqualified by injury or age. It authorizes the Interstate Commerce Commission to act as a board of conclllntion in all disputes between corporations and their employees. It limits dividends to 7 per cent, but provides that the Interstate Commerce Commission may direct the application of surplus profits, in whole or in part, to betterment of the roads or of equipment or to extra divi- dends, or to a guaranty fund against future inadequacy of earnings. The argument in behalf of national incorporation of transportation companies was presented by me in a report upon the so-called Hepburn bill, filed March 15, 1916, and is as follows : [The report here referred to is printed above.] There Is little to be added to the foregoing, except to say that whilst the Hep- burn bill has been eflScacious in correcting many abuses, the evils of over- capitalization, of consolidation of competing lines, and of lack of control over great holding companies have not been diminished. The valuation of railroads has not been made and the abuses of great consolidating and holding com- panies, created by an irresponsible sovereign, have not been abated. NAVIGATION LINES. It will be observed that the proposed amendment also covers the national incorporation of navigation lines. The agitation which has been inaugurated for the improvement of our inland waterways is constantly increasing in momentum, 158 INTERSTATE AND FOREIGN TRANSPORTATION. and public opinion now demands the expenditure of at least $50,000,000 annually under comprehensive plans which will tie the bays and sounds and Inland water- ways of the Atlantic and Gulf coasts together by coastal canals, which will secure the full development of our Pacific coast waters, which will connect the Great Lakes with the Mississippi and Ohio Rivers, which will secure the full development of the Mississipjii Kiver and its tributaries, not only for navigation under the national power, but by the cooperation of the States, for irrigation, swamp-land reclamation, the utilization of water power, and every other useful purpose. These plans also involve the coordination of rail and water trans- portation by the improvement of transfer facilities and sites, and the coopera- tion of each with the other in diminishing the general cost of transportation. Such a system of waterways would vastly relieve the existing congestion of transportation. The perfection of the transportation system of the country will , involve the creation by the Nation of common carriers which will not only own great trunk lines of railway, but also lines of steamers on the lakes, the rivers, and the ocean, thus bringing our foreign transportation in cooperation with domestic transportation, and perfecting a system similar to that of Germany,' where rail, river, and ocean lines all work in harmony for the purpose of de- veloping the trade, of the country. Combination is an essential part of the development of transportation. A perfect system would involve, as far as possible, one control from shippers to consignee ; and this can only be ac- complished by transportation lines operating regardless of State or national boundaries, which will utilize the railways, the rivers, and the ocean by methods of carriage adapted to each. If a proper system were created, most of the evils now complained of would disappear. A system of transportation could be easily devised which would enlist the best powers of the National Government without infringing at all upon the powers of the States, one which would protect alike the railway investor, the railway employee, the shipper, and the public in their respective rights, and at the same time protect the States in all their legitimate powers and change the hostility of the railways toward the waterways into friendly cooperation in the interest of the entire people. THE PROCESS OF UNIONIZING. The purpose of the Constitution was not to centralize, but to unionize, govern- ment where the general welfare was affected. We unionized the quarantine because we realized that disease had no respect for State lines ; we unionized navigation because nature failed to place the rivers entirely within State boundaries ; we unionized banking because the interest of the entire people required one money, a common denominator acceptable anywhere, and a system of exchange inviting universal confidence ; and all the reasons which led to the unionizing of these functions of government in the past exist in far greater and stronger degree at this time with reference to the unionizing of transportation. We have just reached the threshhold of this great question, and it is important that we shall start right by insisting that the Nation should create its own agents and not permit a lesser sovereignty to do so. All thoughtful men will agree that the mergers of the railways are necessary to the proper development of the transportation system of the country, and that the fullest powers of com- bination should be exercised, under proper restraints as to capitalization, rates, and profits. To break up these mergers and resolve them into their integral parts, bounded and circumscribed in their operations by State lines, would be a national calamity, as grievous to the public as to the railroads. Leaving out of consideration for the present the combination of competing lines, these mergers have been of immense service to the country, although the machinery for per- fecting them has been most complicated. The thing complained of is not the fact of combination, but the methods of combination, ofttimes accomplished by evasion of the laws, unrestrained by adequate law, and fruitful of overcapitaliza- tion, frauds on stockholders, and frauds on shippers. Appended hereto as an exhibit is the amendment which I shall offer as an additional section to the bill. Fbancis G. Newlands. INTEKSTATE AND FOREIGN TKANSPOETATION. 159 Appendix A. AMENDMENT Intended to be proposed by Mr. Newlands to the bill (S. 6737) to create a court of commerce and to amend the act entitled "An to regulate commerce," ap- proved February fourth, eighteen hundred and eighty-seven, as heretofore amended, and for other purposes, viz : Add an additional section, as follows : Sec. 18, (A) That any number of persons not less than fifteen may, under and subject to the requirements and conditions in this act provided, form a corporation for the purpose of constructing, equipping, maintaining, improving, and extending, and, as a common carrier, operating, a line or lines of railroad or navigation between points in different States of the United States, or between a State and a Territory, or in a Territory, or between a State and the District of Columbia, or between the United States and foreign countries, or for the purpose of acquiring by purchase or lease and operating any such line or lines of railroad or navigation already constructed or established, or for all of such purposes. POWEKS. (B) That every corporation organized under this act shall have powers and oe subject to restrictions as follows : To assume a corporate name, and under such name to have corporate sucv.-es- sion for a period stated in Its certificate of incorporation, and if no other period be therein named, such succession shall be perpetual. To sue and be sued in Its cflrporate name. To issue bonds and capital stock as hereinafter provided. To adopt, use, and alter a corporate seal. To elect all necessary officers and appoint managers and agents as hereinafter provided. To hold, purchase, convey, mortgage, or lease such real or personal property as the lawful purposes of the corporation may require, including the right to acquire and hold the capital stock or bonds, or both, of other railroad corpora- tions and corporations properly subsidiary or incidental to the management and operation of the railroad business, including navigation lines, and to lease the property of such other corporations : Provided, That such right to acquire and hold capital stock of other railroad corporations and corporations so subsidiary thereto shall be exercised only by a national railway corporation which itself operates the railroad or navigation lines of which the stock is so acquired and held. To manage its business, make contracts, incur liabilities, and borrow money, subject to the requirements or provisions or other conditions in this act con- tained. To make by-laws not inconsistent with the laws applicable to such corpora^ tion or the rules of the Interstate Commerce Commission. CAPITALIZATION. (C) That such corporation shall provide for and issue only such amount of bonds and stocks as may be necessary for such construction or purchase or for the improvement or equipment of the railroad and navigation lines constructed, established, or acquired, together with the proper cost of organizing and promot- ing the company and the amount of capital reasonably required in addition for working capital. JS'o bonds or stock shall be issued except for money paid or for property acquired at its actual cash value. The issuance of stock or bonds and the amount thereof shall in every case be subject to the approval of the Inter- state Commerce Commission, which shall grant full public hearings in rela- tion thereto, and of such hearings public notice shall be given by or under the direction of the commission. The United States shall be represented at such hearing by the Attorney General or one of his assistants. The commission shall certify in writing to the incorporators or to the corporation its determina- tion, and shall record the same in its records, and all bonds and stock not issued in compliance with such determination shall be void as against such corporation. CERTIFICATE OF INCORPOBATION. (D) That the original incorporators shall sign and acknowledge a certificate •setting forth the following facts : The name of the company, which shall contain the v^'ords " National Railway Company," and which shall not be the same as that of any other corporation 160 INTERSTATE AND FOEEIGN TEANSPOETATION. organized under tins act or sufficiently similar thereto to cause confusion therewith. Nature of the business proposed to be engaged in. , Duration of corporate existence. Principal place of business. Route of railway already built. Route of railwky proposed to be built. The proposed amount of bonds and stoclf, which shall be determined as pro- vided in .section three, and the respective amounts, conditions, and privileges of the separate classes of stock if it is desired to have more than one class. The par value of the shares. The number of shares subscribed by each incorporator. The said certificate, together with the engineer's report provided for unfler section six in cases where such report is required, shall be submitted to the Interstate Commerce Commission, which shall direct such amendments therein or additions thereto as may be deemed necessary, and shall, when such certifi- cate is in conformity to law and in other respects is approved by the commis- sion, indorse the approval of the commission thereon, and record the said certifi- cate, with such indorsement, and the day and hour of the submission of the approved certificate, in proper books Icept by the commission for such purpose. The corporate existence shall commence with sucli day and hour, and such record and a duly certified copy thereof shall be prima facie evidence of such corporate existence. . FINDING OF PUBLIC NECESSITY. (B) That in case such certificate shall provide for the construction or estab- lishment of new lines of railroad or navigation, the commission, as a condition Ijrecedeut to such corporate existence, aud before approving such certificate, shall determine, after public hearing, whether public convenience and necessity require the building of such new lines, said determination and the method of arriving thereat to be in accordance with rules established by said conunission. If such determination shall be to approve the construction aforesaid, it shall be recorded with said certificate of incorporation. If such certificate shall pro- vide for the acquisition by purchase, lease, or otherwise, of any line already constructed or in course of construction, it shall be lavs-ful for tlie commission, after hearing, to deny the filing of such certificate if, in its judgment, after public hearing, such acquisition would be detrimental to the public interest. But if the commission shall approve such acquisition, as in the public interest, its determination shall in like manner be recorded with said certficate of incor poration. The construction, extension, or acquisition of additions to any line or lines of railroad or navigation, or the acquisition of any other lines or parts of Hues or shares of stock in other companies as aforesaid, by any company incorporated under this act, is hereby prohibited unless and until such construction, exten- sion, or acquisition shall receive the approval of the commission, as of public necessity or in the public interest, upon application therefor duly filed and public hearing held ; and £^ny such approval shall be stated by the commission in writing, with its reasons therefor, and recorded in its records. engineer's report. (F) That no certificate of incorporation provided for in this act shall be filed or recorded unless tlie same is accompanied by the sworn report of one or more skillful engineers, showing, as far as practicable, the character, structure, grades, cost of duplication, cost of construction, and the manner of construc- tion of the road or roads, line or lines, proposed to be built, established, or required, and containing statements in relation to such other matters as rules adopted by the commission may require. MEETING OF STOCKHOLDERS. (G) That the connnission shall eKta:blish rules governing the first and other meetings of stockholders, notices thereof and quorums required thereat, the election of the board of directors, executive committee, president and other officers of the company, and for the adoption of by-laws. Such rules shall pro- vide for not less than five nor more than fifteen directors, an executive .com- mittee of the board of directors, with managing powers, the election of a presi- ik INTERSTATE AND FOREIGN TRANSPORTATION. 161 dent, vice president, treasurer, secretary, and such other officers as the by-laws shall require. The by-laws of the company shall not be effective until approved by the commission, as in accordance with its rules. The commission shall have authority to amend such rules from time to time as may, in its judgment, be required. The by-laws of the company shall provide for the removal of direc- tors by vote representing t\yo-thirds of the stock issued and outstanding at any annual or special meeting. Stock held in the company's treasury shall not be voted at any' meeting. STOCKS AND BONDS. (H) That in case the entire stock shall not have been subscribed for prior to the filing of the certificate of incorporation, the directors shall open books of subscription to such stock in such manner as may be provided for by the rules of the Interstate Commerce Commission. Before issuing the bonds of such cor- poration the amount and time and term thereof and the rate of interest must be approved by said commission. Before offering such bonds upon the general market they must be offered to the stockholders at not less than par, and there- after such portion thereof as shall not be taken by the stockholders may be sold in the general market upon such notice as the Interstate Commerce Commission shall by' rule prescribe. CERTIFICATE OF OEOANIZATION. (I) That when at least one-half of the capital stock shall have been sub- scribed for a majority of the directors shall make and swear to a certificate setting forth the following facts : Names and addresses of directors. Names and addresses of ofl5cei:s. Amount of capital stock subscribed for. Amount of capital stock -paid for in other than cash, specifying separately and in detail the nature of such consideration and the total amount of stock separately allowed for other than cash. All delegated powers conferred by the by-laws on others than the board of directors. A complete and true copy of the by laws of the corporation. And it shall be the duty of the board of directors, within thirty days after the passage of any vote, amendment, altering, repealing, or adding to the by-laws of the corpora- tion, to file with the Interstate Commerce Commission a complete and true copy of such vote, amendment, alteration, repeal, or addition. Such certificate shall be submitted to the commission, and after having been amended under the direction of the commission to conform to the requirements of this section, if such amendment be necessary, the approval of ther commission shall be indorsed thereon, and the certificate, with its indorsement, shall be recorded in full in a proper book kept by said commission for such purposes, together with the day and hour of the submission of the approved certificate, and said corporation may begin business on and after such time. CAPITAL STOCK. (J) That the par value of each share of stock shall be one hundred dollars. No stockholder shall be liable for the debts of the corporation beyond the amount of his subscription to the capital stock, except as expressly provided in this act. Each stockholder shall be entitled to a certificate of stock, which shall evidence the amount of stock held by him. The stock shall be personal t)roperty ; shall be transferable only on the books of the company, in such form as the by-laws may prescribe; and shall be subject to a lien in favor of the corporation for all debts due to said corporation from the owner of said stock. The stock may be sold for unpaid subscriptions in such manner as may be prescribed by the rules of the commission. Each share of stock shall entitle the holder of record to one vote, and in voting for directors any stockholder may cast his vote or any part thereof for one candidate, so as to exercise the privilege of a cumulative vote. Votes may be cast by proxies, and the form of such proxies and the list of stockholders entitled to vote shall be prepared as provided by the by-laws in accordance with the rules of the Interstate Commerce Commission. Stockholders, by two-thirds vote of each class of stock, may create difCerent cla3ses of stock, either in the original or in subsequent issues, if the Interstate 162 INTEESTATE AND FOREIGN TBANSPORTATION. (■"ommerce Coimnissiou shall flnd that the creation of such classes of stock proper and necessary for the purposes of the corporation, and such stoc holders may, by such vote, determine the preference, conditions, and privileg attaching to such classes, respectively : Provided, That preferred stock so Issu and any stock so issued other than common stock shall have no voting powei (K) That the corporation may, by a majority vote of its stockholders, issi bonds, notes, or other evidence of Indebtedness, but the total of all such oblig tions of the corporation shall be determined by the Interstate Commer Commission. IIEETINGS INCKEASE OR DECKEASE OF STOCK. (L) That annual and special meetings of stockholders shall be held, notic thereof issued, and quorums required thereat, in such manner and form i provided by the by-laws, in accordance with the rules of the Interstate Coi merce Commission. The stockholders shall have power to elect directors ai by two-thirds vote to remove them ; by majority vote to increase the issue ' any class of stock, subject to the provisions of this act, and by such vote decrease any class of stock. Stockholders may also by such vote of each class of stock make any alteratl( or amendment in the certillcate of incorporation of the company not inconsiste) with law which it would have been lawful to insert or omit or make in i original certiticate of incorporation, such alteration or amendment to be su ject to the approval of the Interstate Commerce Commission. REGULATION BY INTEESTATE COMMEBCE COMMISSION. (M) That all corporations organized under this* act shall be subject to tl provisions of the act entitled "An act to regulate commerce," approved Februai fourth, eighteen hundred and eighty-seven, and all acts amendatory thereof. BOOKS AND RECOEDS. (N) That the treasurer shall keep proper books of account of all transa tions of the corporation, and the secretary shall keep proper and full records i the transactions of all meetings of the stockholders, the board of directors, ai the executive committee, and all of said books shall be open to the lnspecti( of the commission at any time, and also to the inspection of any stockholder i any reasonable time and place. It shall be the duty of the respective office: having charge of such books and records to permit upon demand, after t( days' previous notice, such inspection by a stockholder, unless such right i inspection shall be enjoined as above provided. (O) That all corporations formed under this act shall make to the Intersta Commerce Commission such reports as are now by law required to be made : said commission, and such further reports as the rules of said commission sha from time to time require. DISSOLUTION. (P) That any such corporation may, after lawful private or public sale of tl railway property and equipment, upon the vote of three-fourths of its capit stock, wind up and close its business and dissolve under such forms of pr cedure as to claims, distribution of assets, notice to creditors, publication i votes and certificates of dissolution as may be prescribed by the rules of tl Interstate Commerce Commission. EMINENT DOMAIN. (Q) That any corporation organized under this act may acquire rights ( property necessary for the proper executioii of its corporate purposes, includii right of way, sidings, terminals, depots, water rights, gravel, and stone. ] case the corpartion and the owner of such rights or property are unable INTEESTATE AND FOREIGN TRANSPORTATION. 163 agree upon a price therefor nnd the same can not be acquired by agreement, the corporation may proceed in any competent court in the State or Territory where such property is located for the condemnation of sucli rights or property. Such proceedings shall be conducted pursuant to the existing statutes of such State or Territory regarding the condemnation of property for public use. taxation;^ (R) Tliat railroads and navigation lines owned by corporations duly organ- ized under this act are hereby declared to be instrumentalities for the regula- tion of interstate and foreign commerce. The franchises, stocks, bonds, fixed evidences of indebtedness, operations and traffic, and the corporation itself sliall not be subject to taxation by any State or Territory, but the property of such corporation situate in a State or Territory, including its right of way, its real estate, stations, office buildings and equipment, shall be subject to assess- ment at such average percentage of their actual value as shall be customary with reference to other property in such State or Territory, and to the custom- ary taxes on such assessment. StATE POLICE AND STATE RATES. (S) That nothing herein contained shall be construed as interfering with the police laws of any State regarding railroads incorporated under this act and operating in such States, nor shall anything herein contained be construed as affecting the right and power of each State to regulate purely State commerce on railroads organized under this act. But the Interstate Commerce Commission shall hold conferences from time to time with the regulating power of any State With a view to such harmonious adjustment and regulation of State commerce and interstate commerce as will protect the public against abuses or extortion, and the railroads against inadequate returns upon their investment, and as will promote the efficiency of such corporations as common carriers. With such end in view the said commission shall call and hold at least once each year a conference with the railroad commissioners of the several States, and with other State officers having any duty of supervision, taxation, or regulation of rail- roads within their respective States. Such conference shall be held in the District of Columbia, and the presiding officer at such conference shall be the chairman of the Interstate Commerce Commission, or some other member of said commission designated by its chairman. The proceedings of such confer- ence shall be printed or distributed by or under the direction of the Interstate Commerce Commission. ACQUISITION OF STATE KAILEOAPS. (T) That such corporation may, with the consent of any State, upon the approval of the Interstate Commerce Commission, acquire the railroad of any corporation now organized under the laws of such State, and may issue for the purchase thereof such amount of bonds and stock as may be authorized by said commission, but such authorization shall only be made after a full public hear- ing, at which the Attorney General shall appear, either personally or by one of his assistants, and no issue of bonds or stocks therefor shall exceed the value of such road as ascertained by said commission. With the consent of the State under which any railroad corporation is or may be organized, merger between the corporation owning such road and a corpora- tion organized under this act may be accomplished under this act; and bonds and stock may be ifesued by any corporation organized under this act for such purpose: Provided, That such proposed merger is approved by the Interstate Commerce Commission, and the amount of the bonds Issued, togethei* with the rate of interest thereon, and of the stock issued in the accomplishment of such merger, are also approved by said commission. Such issues of bonds and stock may include a reasonable allowance for the expenses of merger and promotion. Such merger shall not include transportation lines which are directly or sub- stantially competitive. ACCIDENT AND INSURANCE FUND. (U) That it shall be a condition of the grant and continuance of any fran- chise to do business under this act that the corporation holding such franchise 70342— PT 3—16 4 164 INTERSTATE AND FOREIGN TRANSPO'RTATION. shall set aside annually a percentage of the gross receipts of said corporation, not exceeding one per centum, to be held as a fund in the Treasury of the United States for the payment of pensions to the employees of such corpora- tion who shall have been disqualified for active service, either by injury in the service or by age. The conditions entitling employees to pensions, the amount and time of payment, the investment of the fund, the disbursing of the same, and the entire management thereof shall be under rules and regulations to be made, and from time to time amended, by the Interstate Commerce Commission, BOABD OF CONCILIATION. (V) That the Interstate Commerce Commission is hereby empowered and directed to act as a board of conciliation between corporations organized under this act and their employees as to any dispute arising between such corporation and their employees in the matter of compensation, hours, and conditions of labor, the protection of life and limb of said employees, and such power shall be exercised by said commission in accordance with the rules and regulations to be made and from time to time altered by said commission* All powers and duties now exercised by the chairman of said commission and the Com- missioner of Labor under the act entitled "An act concerning carriers engaged in interstate commerce and their employees," approved June first, eighteen hun- dred and ninety-eight, are hereby transferred to, vested in, and required of the Interstate Commerce Commission. PENALTIES. (W) That no corporation organized under this act shall make any expend- iture whatever for the purpose of aiding or defeating any political party or candidate for oflBce, and for every such offense such corporation shall be subject to a fine of dollars. Any officer, director, or agent of such corpora'tion who shall willfully make, assist in making, cause, or direct to be made, any false statement, material mis- representation, or false entry in any book, report, return, account, or certificate required by or under this act to be kept shall be, upon conviction, subject to a fine of not more than dollars, or to imprisonment for not more than one year, or both, and shall furthermore be liable in a civil action for damages caused to any creditor or stockholder thereby. Any officer, director, or agent of such corporation who shall willfully refuse or neglect to perforni any duty imposed upon him b'y this act, for which refusal or neglect a penalty is not herein otherwise expressly provided, shall be sub- ject, upon conviction, to a fine of not more than thousand dollars or to imprisonment for not more than one year, or both. Any corporation organized under this act which shall fail to conform to ano comply with any of the requirement's, or observe any of the prohibitions, in this act contained shall be subject, upon conviction, to a fine of not less than dollars nor more than dollars, and each day of the continuance of such failure shall be deemed a separate oifense. All fines collected under this act shall be paid into the accident and insurance fund herein provided. DIVIDENDS. (X) That no corporation organized under this act shall pay or distribute to its stockholders in any form, during any one year, a dividend or dividends exceeding in total amount seven per centum upon its capital stock without the consent of the Interstate Commerce Commission. , If, after the payment by such corporation of its operating expenses, maintenance, improvements and better- ments, its taxes, its interest on bond or on other indebtedness, and its contri- bution to the accident and insurance fund, there shall be a surplus over and above the amount necessary to pay such dividend of seven per centum per annum, such surplus shall be reported to the Interstate Commerce Commissioii, which may direct the same to be applied, in whole or in part, to betterment of the road or equipment, or to extra dividends, or to a guaranty fund in the Treasury of the United States against future inadequacy of earnings or reduc- tion in dividends, such fund to be controlled and invested under the direction of the Interstate Commerce Commission. INTERSTATE AND FOEEIGN TKANSPORTATION. 165 JUKISDICTION OF SUITS BY AND AGAINST RAILWAY COMPANIES. (T) That any corporation organized under this act shall, for the purpose of all actions by or against it, real, personal, or mixed, and all suits in equity, be deemed a citizen of every State in which its lines are located, and in such cases circuit and district courts of the United States shall not have jurisdic- tion other than such as they would have in cases between individual citizens of the same State. The provisions of this section shall ndt be held to aftect the jurisdiction of the courts of the United States in cases by the United States, or by direction of an officer therein, or cases for winding up the afEairs of any such corporation. Any case involving the recovery of fines or penalties under this act may be brought in the circuit court of the United States for any judicial district wherein the corporation has its principal office or through which the line or any part thereof may run. In every such case, for the purposes thereof, the juris- diction of the court shall be coextensive with tlie territory of the United States, and in writs of subpcena, removal of persons, execution, and all other process shall run throughout the United States. All existing laws pertaining to the taking and compelling of testimony in cases arising under the act to regulate commerce, or its amendments, shall apply in cases arising under this act. (Z) That the Interstate Commerce Commission shall make and from time to time alter, • amend, or repeal rules necessary for the complete enforcement of the provisions of this act. AMENDMENT OE KEPEAL. (ZZ) That this section and all franchises acquired under it shall be at all times subject to amendment, alteration, or repeal by act of Congress. The Chairman. Mr. Thorn, we all understand that the numerous railways of the country, aggregating at one time many thousands, have been organized in great systems, each one of these systems em- bracing numerous States. Will you please state under what method of organization these consolidations of State railways have been or- ganized, and the advantages or defects which those methods of orgtoization have? Mr. Thom. The methods have very greatly differed. At times there have been conditions of universal bankruptcy in certain sec- tions which resulted in sales under foreclosure of a great many roads. In cases of that kind it not infrequently happens that the physical properties have been bought by the same interest and are in the hands of one company. It also happens that in obtaining ownership of the properties there has been a purchase of the capital stock by what became then the parent company, with control and operation of the stock ownership. It also happens that a great many of the physical properties have been leased to one company and the operation has been continued under long-term leases— the operation of the physical property. So that the three methods have been the actual acquisition and ownership of physical properties, the acquisi- tion of stock, and thereby control of the acquired property, and a lease of the physical property and the operation under the lease. _ The Chairman. The main corporation in these systems is organized under the laws of a single State, is it not ? Mr. Thom. Yes ; it may be at times that they also have corporations or franchises from other States, but the parent State, and sometimes there is statutory power conferred upon the company of another State by express terms, as, for example, the Baltimore & Ohio Rail- 166 INTERSTATE AND FOREIGN TBANSPOKTATION. road operating in the State of Virginia, conferred upon the Maryland corporation certain powers. There are also, at times, corporations of various States, the company being built under the corporate charter granted by several adjoining States, and then the lines united. Illus- trations of that may be given. There have been a great variety of methods in the creation of. these continuous lines. The Chairman. Now, where a corporation organized under the law of one State, for the purpose of constructing or operating a road in that State, seeks to acquire the property of railroads engaged in operating in other States, has it been customary to obtain the con- sent of the States? Mr. Thom. Very frequently there has been sufficient power under the charter of the acquired road to dispose of its property, or the stock, to the corporation of another State. Wherever that is not done, of course, you have to have special authority from the State. The Chairman. From the State in which the property lies ? Mr. Thom. From the State in which the property lies. The Chairman. As a rule, are there general statutes covering those subjects so as to make acquisition easy, or do the corporations have to get special legislation upon the subject? Mr. Thom. It has been mostly done under the original characters, my impression is. Of course, I am speaking now from general im- pression. I have not gone into this thing in any great deal of detail, but my general impression is that there has been a tendency on the part of the States, in giving the charters, to grant powers adequate to this transfer from one to another. There have been a great many makeshifts necessary. I suppose the ideal way of creating a property is that there shall be one title to the whole property; the company shall own all the physical property that it operates. That is the ideal way. Instead of that there are a very great many makeshifts that have to be adopted, and that is so of perhaps nearly all the railroads of the country. The Pennsylvania Railroad at this time, I think, has over 100 different corporations within its system — how many I do not know. The figure that is in my mind is 149, but I can not be accurate about that. I have never looked into it, but it is a great many, and they are feeling the difficulty of this tremendous number of corporate entities in a single system. The Chairman. Where a railroad system, organized in one State, has sought to acquire property in other States with a view to meet- ing the national requirements for interstate commerce, has there been thus far very much complexity in the arrangements ? Mr. Thom. There has been very considerable complexity. In some places it is absolutely impossible — you take, for example, in the State of Texas — the State of Texas does not permit a foreign cor- poration to own a railroad in that State. The only way, therefore, you can have a through line — continuous line — made up of any part of a railroad in Texas is that a Texas corporation shall own that property, and the outside corporation has to own the stock. A very serious situation arises about that in Texas for this reason : The laws of that State, as I understand it, have required valuation of prop- erties in Texas — railroad properties— and they will not issue any— will not permit the issue of any securities in excess of that valua- tion. The valuation is away down below the capitalization at the time the valuation was made. As a result there have not been any INTERSTATE AND FOBBIGlir TRANSPORTATION. 167 Texas roads that have been able to get any money at all on their property, and the only way they could be feept up to anything like the requirements of the public was that the parent company outside of Texas should lend its credit to raise the. required funds, and in that way, to furnish the tracks and the yards and the equipment necessary for the Texas roads. The Chairman. That parent company is popularly known as the holding company, is it not ? Mr. Thom. No ; it is not the holding company. That is not what my understanding is of a holding company. I do not understand that a company that is itself an operating company, engaged in that business, and simply increases its system by operating and holding the stock of another company is what is ordinarily known as a hold- ing company. A holding company, as I understand it, is a company that does not operate at all, but holds the stock of a good many roads merely as a corporate entity, created for the purpose of holding them. Now, it is all a matter of definition. Of course, you can call it either way you please. The operating company does hold the stock, but it is not what I have understood to be popularly laiown as a holding company. The Chairman. There are companies that are exclusively holding companies that do not operate the roads? Mr. Thom. Yes. The Chairman. There are other companies that own roads, and also are holding companies, in the sense that instead of owning the physical properties they own the stock of operating companies? Mr. Thom. That is true. The Chairman. You referred to three classes of railway com- panies, one holding roads under ownership, another controlling roads through the ownership of their stock, without operation, and others controlling roads by lease. I imagine you would add to that a fourth class, the corporations to which you have referred, that hold the physical property and also hold the control through the ownership of stock? Mr. Thom. I understand the latter one that you mention to be covered by my first division into three, and this other one that has been added about holding companies has come up since, but you can divide them into those four classes — four methods. The Chairman. Now, about how many large systems are there in the United States, and what proportion of the mileage of the country do they own? Mr. Thom. Now, I can not answer that. Senator. I do not know how inany there are, and I have not made any estimate of the amount of mileage that they hold. I think I have seen it stated in some of your writings that there are about 10. The Chairman. Yes. Mr. Thom. But I have not gone over that myself and do not know. The Chairman. Would the system which you propose of national incorporation of railways have the advantage of simplicity in organi- zation ? Mr. Thom. Undoubtedly. The Chairman. And operation, as compared with the present system ? 168 INTERSTATE AND FOREIGN TRANSPORTATION. Mr. Thom. Both. It would also have advantages in methods of financing — simplicity of financing. The Chairman. Take the system with which you are familiar, the Southern Railway System, which, I presume, is a fair illustra- tion of the method of organization of the great systems of railways in the country. Will you state what is the State of the parent organization ? Mr. Thom. The State of the parent organization is Virginia, and it has large and liberal powers, both in respect to acquiring prop- erties of other roads and being acquired by other companies. It also has large powers in respect to the question of stock in other roads, and there could probably be no better illustration of the dif- ferent methods of ownership than are presented by that problem. For example, you take what is known as the general mortgage. You will find there a great many pages— perhaps 50— describing the various properties that are mortgaged; describing every con- ceivable method of ownership; the stock of such and such a road is mortgaged ; the trackage right on another road is mortgaged ; the leasehold right on another road is mortgaged ; the physical propert^r actually owned is mortgaged ; and so it goes on for pages, describing the methods of owenrship, or the interest the Southern Railway has in these various properties. The Chairman. In how many States does that system operate? Mr. Thom. Eleven. The Chairman. All of them Southern States? Mr. Thom. No; in addition to the tier of States between the Potomac and the Mississippi Elvers and south of the Ohio, they operate also in the States of Indiana and Illinois. The Chairman. How many different railways have been gradually incorporated in the Southern Railway System ? Mr. Thom. I could not tell you that, but a great many. The Chairman. A hundred? Mr. Thom. I would have to verify that. I have never enumerated them. The Chairman. How do the various States within whose bounda- ries the Southern system operates, outside of Virginia, regard the con- trol of the operations of the roads within their boundaries, by a for- eign corporation, organized under the laws of Virginia ? Mr. Thom. I must say that I have never seen any very marked degree of jealousy about that. The Chairman. You have not seen any marked opposition to the inclusion of these various State railways, in the system organized under the laws of Virginia ? Mr. Thom. No ; it is true that I came into the life of that road after that had all been accomplished. The Chairman. When did you become associated with the Southern Railway Co.? Mr. Thom. I came in — I was leased into the Southern with the Atlantic & Danville Road. The Chairman. And when was that? Mr. Thom. They acquired me by lease in 1899. The Chairman. There were a large number of roads absorbed in that system, were there not ? INTEESTATE AND FOREIGN TEANSPORTAT-ION. -169 Mr. Thom. a very large number ; yes, sir. The Chairman. Has that union of roads under a Virginia corpo- ration resulted to the advantage of the efficiency of transportation? Mr. Thom. Oh, inmiensely. That has been done as a distinct answer of the transportation people to the economic necessities of the communities they) serve. The Southern Eailroad is in a small market ; that is, practically small markets. Of course there are large and valuable markets in that section, but the great demand of the people there is for access to the larger markets, both of this country and of the world, and in order to accommodate that movement of com- merce, these roads were thrown together. I do not mean by that to say that there were not reasons of financial nature which appealed to - the people having that in charge, too, but that union would have been impossible if only the financial views of the managers had been in- volved. The financial views of the managers were sustained by the universal recognition that the movement of commerce required these long, continuous lines. The Chairman. You speak of the universal recognition. Do you understand by that that the public opinion of the region in which your roads are operated sustained this union of railways? Mr. Thom. Undoubtedly. The Chairman. Have you observed any signs of dissatisfaction with it and a disposition to return to the old system of separated railways ? Mr. Thom. None whatever. It is an answer to the absolute neces- sity of commerce. The Chairman. Then your contention is that this method has been the result of economic necessities? Mr. Thom. Yes, and commercial evolution. The Chairman. Now, would it have been much easier and simpler to have accomplished that union of railroads necessary to the eco- nomic development of the South under a national incorporation act than under the present system ? Mr. Thom. Undoubtedly. The Chairman. "Would it have been attended with less expense, in your judgment ? Mr. Thom. Yes, undoubtedly. The Chairman. And less friction? Mr. Thom. Undoubtedly; and would have made a more absolutely workable instrument. You would have had a unit then. The sys- tems are now held together in an artificial way. They are contriv- ances to meet legal difficulties. They are not made one complete and homogeneous unit. , ... The CHAiitMAN. Are we to understand that the railway executives and managers throughout the country are now agreed upon the im- portance of national incorporation of railways? Mr. Thom. Of course in a large body of men, in railroad life as well as in any other, you will find men of different views. You find also, of course, every now and then a company peculiarly situ- ated, having advantages under the present conditions which they do not feel that they could surrender for an untried condition. But I think I can say— I refer to that class of people merely to emphasize the unity of view which the railway managers of the country have 170. INTERSTATE AND FOREIGN TRANSPORTATION. come to in respect to this matter. We have debated this question a good deal among ourselves, and on the committee of council, of which I am chairman, which has associated with it the committee of executives, known as the Railway Executives' Advisory Committee, when we first commenced to debate it there were two who were very much opposed to it. I imagined, of course, that they were repre- senting the policies of their management, and we had an opportunity subsequent to that time to debate the question before the presidents, I found that I had been correct in supposing these gentlemen were representing the policies of their companies, and they were two of the very important companies of the country. After debating it the executives came in to the plan of a compulsory incorporation bill, not an elective one, because they believed it would be begt for the country, while they might ][iave to give up some of the special features of their charters, their privileges, which they valued, they believed they would get more io ^he way of helpfulness by coming to a system of this sort than otherwise, and sO those who do not agree are in nupiber very small, I do not know but one. There may be two or three. The Chaibman. I will state, Mr. Thom, that in 1904 and 1905 an investigation was made by the Interstate Commerce Committee of the Senate, of which I was a member, regarding the requirements of interstate commerce, and particularly the advisability of giving the Interstate Commerce Commission the power to fix rates, and during that investigation I presented a scheme for national incor- poration and questioned a great many of the railroad executives and managers regarding it, and I found that apparently none of them viewed it hospitably, so I was compelled to present my views in a separate document in connection with the report of the committee upon this subject. I also took up the question again in the Com- merce Court investigation, and there fo^nd that the views were not hospitably entertained by the railways, and by few of the memDers of the committee itself, as was the case with the previous committee considering the Hepburn bill. I believe the only witness during all that time who encouraged me at all in the views which I enter- tained was Senator Cummins, who was then governor of the State of Iowa, and who appeared before the committee. That was on the Hepburn bill. Now, has this change of view upon the part of the railway executives been a recent change and what has occasioned it? Mr. Thom. It has been a gradual change to a realization of what is now believed to be a necessity. The difiiculties of railroad man- agement have been becoming more and more apparent ; the view that no industry could flourish where both its income and its expenses were beyond the control of the owner, and especially that that could not be done if the income was subject not only to one com- prehensive governmental control, but could be cut down by in- numerable governmental bodies with different policies, different out- looks, who were, in the nature of things, unable to take more than a partial view of the property ; this has led those responsible for the success, primarily responsible for the success of these instrumentali- ties of commerce, to look to a method of strengthening them in the public confidence, and they have come to believe that that is im- practicable unless the United States Government will take charge of the instrument of interstate commerce and will regulate it in ac- INTERSTATE AND FOREIGN TRANSPORTATION. 171 cordance with what probably actually is. It is a national problem, and the standard of the sufficiency ought to be fixed by one authority, which can take a comprehensive enough view to determine how good it ought to be and what is necessary to its successful service. Now, that led to the ' conclusion that when you once concede that there must be governmental regulation — it led to the conclusion that there should be a system of single governmental regulation. The differing views of the States in regard to what a railroad ought to be allowed to do in the way of improvement, what it ought to be allowed to do in the way of equality of terms, as between the dif- ferent States, and similar problems, have borne in upon the rail- road management until they are convinced that they can no longer cope with their problems unless they have a single regulating power. From that it was easy enough to see that they had been mistaken heretofore in their view that there should not be a system of national incorporation, because national incorporation is an essential facility in the way of having complete national regulation. Now, of course, we are all obliged to admit that on the part of the owners of railroads and on the part of the managers ot railroads there has been an unwillingness to accept any governmental regula- tion to a greater extent than was necessary. That has been a slow process. It started in the beginning by a denial of the propriety arid justice of any regulation, but step by step the soundness of the public view that there should be governmental regulation has been more and more accepted. Railroad managers have changed ; a generation has come and gone since this thing was started 29 years ago. Men have come into railroad management who were separated from the first and early conceptions of these matters, and they appre- ciate that there must be, and I think I may say for them generally, that there ought to be a system of governmental regulation ; but they believe that it ought to be a philosophical system ; that it ought not to present complexities which will repel investors; that it ought to be helpful ; that it ought to provide the necessary protection to the instrumentality of commerce which will make it always efficient for the service which is required of it ; and they can not see now, after debating the logic of those concessions, and after the adoption of those views, they can not see where the stopping point is, or if all those views are sound where they can stop; and insist on the wisdom and advantage of national regulation alone, 'and still leave the actual corporate control of these instrumentalities in the hands of an au- thority other than the Nation. It seems that the power to control the national entity itself must necessarily follow the power of regulation by the Nation itself. The logic of that view has been now accepted by the railroad managers of the country, with the rare exceptions to which I have alluded. . The Chairman. Mr. Thom, there are two forms ot meeting this requirement for national organization to which you refer. One is the creation, under national law, of national corporations that will own the physical property of the railroads m the various States, and the other is the creation of holding companies under national law which will own the stocks of corporations organized under the laws of and operating in the various States. The latter, you will observe, has what might be regarded as an advantage— that the entity ot the State corporations is maintained, whilst the union of these corpora- 172 INTERSTATE AND FOREIGN TRANSPORTATION. tions is effected under the national law through a holding company. Will you please state your views as to the comparative advantages of these two systems? Mr. Thom. We thinlc that there should be a nationally created cor- poration which shall own the physical property. We do not see any disadvantage in that whatever. Of course the parties in interest in respect to it are three : One is the State in its corporate capacity, the second is the security holders of the State corporations, and the third is the general public. The State in reality, in its corporate capacity, has no interest ; its interest as a State is fully protected by having the Nation, which represents that State as well as all the others, create a system which shall be fair as between the two. The logic and soimdness of the view that no State can with propriety adhere to the view that it must hold on to some advantage for itself over its sister State in these matters of commerce which affect bqth is making tremendous progress in this country. For example, every railroad that runs into the South — every large sj'stem that rims into the South and goes from this section of the country is an incorpora- tion of the State of Virginia. The Atlantic Coast Line, the Sea- board Air Line, the Southern, the Norfolk & Western, and the CheSa-' peake & Ohio are all Virginia corporations. The only three roads in the South that I Imow of, of any importance, which are not Vir- ginia corporations are the Louisville & Nashville, the Central of Georgia, and the Illinois Central. There- are five of the great rail- road systems of the South that are incorporated by the State of Virginia. Now, everybody sees that no individual views of the State of Virginia ought to be imposed on North Carolina or Tennessee, or on any of the other Southern States. The State policy which might put a limitation on one of those five systems in Virginia of course would naturally be resented by the other States if they did not agree with that policy ; and the question ought not to be left^— the public is be- ginning to see that the power ought not to be left in the State of Virginia to put a limitation on the charter of those five companies, which will be felt throughout the system, but that there ought to be a power that represents every one of those States — Georgia and Ala- bama and Tennessee, as^_ well as Virginia — ^that would pass on those questions of charter limitation ; so that the view of the power of the State to put limitations or to give privileges is being rejected by the public thought of this country, for the reason that there you come across what Chief Justice Marshall so many years ago said, that while Virginia might be willing to do that, the other States are not willing for it to do it. They want those questions of vital commer- cial interest to themselves passed on by a body that is not simply one of the States, but that represents all of the States; so that we can eliminate the interest of the State, as a State, in that matter. Now, as to the interest of the stockholders and the creditors, it is our belief that there is a simple constitutional proposition underlying their rights. When they made their contract rights with a corpora- tion chartered to do interstate and foreign business, they acquired their contract rights subject to the full exercise in the future by the Federal Government of the power to regulate commerce. In the nature of things, there could not be a contract right acquired by one of the investors in these railroads chartered to do an interstate busi- IJSTTEKSTATE AND FOREIGN TBANSPOBTATION. 173: ness which would limit the power of the Federal Government to- fuUy regulate that instrumentality. The State itself had created it to do this interstate business ; the people that had gone in as stock- holders or creditors had gone in to a concern organized, in the first; instance, to do an interstate business. They found in the Constitu- tion of the United States a provision giving to the Federal Govern- ment the full power to regulate interstate business— interstate com- merce. They then took their rights subject to the future exercise by^ Congress of that power to regulate commerce to the fullest extent that Congress might feel that the public interest might demand. You gentlemen will remember that that question has been passed on. already by the Supreme Court of the United States. Years ago there was a man who was injured in a railroad wreck on the Louis- ville & Nashville road, giving him a legitimate claim against that comi)any for damages. He settled that claim by assuming a contract relationship with the Louisville & Nashville. He got a pass for life- from the Louisville & Nashville, in consideration of this claim that he had against the road. That was legitimate; that was lawful at the time it was done. There was nothing in the laws of Congress to ■ prevent it when that contract was made; but as years came along- Congress undertook to regulate how people could pass on a rail- road — the terms on which they must deal with the railroad; that there must be absolute equality, and that nothing should be taken except money for passage on a railroad, and that case was carried up to the Supreme Court, and the Supreme Court there said that this- ■man took his contract right with the road subject to the future exer- cise by Congress, to the fullest extent, of the right to regulate com- merce and that his rights under that contract must fall, because- Congress had seen fit to regulate commerce to an extent greater than- it had undertaken to do at the time that contract right was created. Now, we believe that these stockholders' rights and these bond-^ holders' rights do not stand on any higher basis. We believe that when the bondholder lent his money to a railroad engaged in inter- state commerce, and when the stockholder made his contribution to the 'capital of railroads engaged in interstate commerce, that ex necessitati they both did that subject to any legitimate regulation of commerce in the future which Congress might undertake. There- fore, we ask ourselves the question whether a system of national incorporation is the legitimate exercise by Congress of the power to regulate commerce. We think it is. We think that everywhere it appears in the authorities that it is. If we are right in thinking that Congress, under the power to regulate commerce, may adopt a national incorporation law, then these stockholders and bondholders tqok their rights in the corporation subject to that possible exercise in the future, and they have no complaint; they have no case for compensation in the event that Congress does exercise that power of regulating commerce to the extent of adopting a national system of incorporation. So that our view is that Congress can pass a law forbidding any railroad company, after a date to be fixed by Congress, to engage in interstate and foreign commerce unless they have taken out a- license under the National Government, or unless they have taken out a charter under the National Government, and when that is done the stockholders of that corporation may meet and by a majority — 174 INTERSTATE AND FOREIGN TRANSPORTATION. not by a unanimous, but by a majority vote — ^bind everybody in it, bind the minority to a system of national incorporation, because that is one of the purposies which they went into business for, to do as interstate-commerce business. That is the other method of doing it, and we think, therefore, that there will be no difficulty about the matter, and that there will be no right on the part of anybody to object. But we do. think this: We think that every right that has attached in that property, whether it be the right of creditor or right of a stockholder, must be pre^ served against the assets that pass into the national incorporation; that they must stand when they get there just as they stood in the corporation of the State. It is not a legitimate method of regula- tion to try their rights interstice, or their rights as to the corpus of the property, but as to the management of the property, as to the form in which it stands ; that that is a matter which is fully within the regulating power of Congress, and that when Congress preserves their contract rights in regard to the assets of the company they have guarded; that is. Congress has guarded — every constitutional right •of the creditor or the security holder, and still retains unimpaired its power to regulate and direct the instrument of interstate com- merce in its business in commercial operation. Now, the other class of people to whom I referred as having an interest is the public, and the problem is merely before you gentle- men to determine whether the public interest requires this action. You may say it does, or you may say that it does not. That is for you to say. But if you say it does, we are absolutely convinced that that is no constitutional obstacle in your way ; that neither the State nor any of the security holders occupy any position that can in any way impede you in the full exercise of your power of regulating commerce. The Chairman. Do you think that the consent of the State is re- quired as to the_ acquisition and absorption of the property and powers and functions of a State corporation by a national incorpora- tion organized under the national law ? Mr. Thom. No, sir. You do not transfer to th^ national incor- poration any franchise granted by the State. You might confer upon the State corporation — I mean upon the national corpora- tion — every franchise that the State has conferred upon it, but it will be your gift then and not the State's. The source of its fran- chise then is Congress, not the State. You would only acquire the physical property. You acquire none of the rights granted by the States, but acquire the. physical property. ' It is inconceivable that Congress can be charged with the duty of regulating and assuring that there shall be such a thing as inter- state commerce unless it can enter upon the territory of the State and acquire the means of doing it, and it has been held that Congress can do that through the exercise of the right of eminent domain. The Supreme Court has decided that, even if the property did not belong to the railroads, even if it belonged to a citizen of the State, Congress can go into one of the courts of that State and can have the property of an individual citizen condemned in order to create a system of interstate commerce. Now, when the whole property has gone into an individual— I jnean gone into an individual company — and becomes the property INTERSTATE AND FOEEIGN TRANSPOETATION. ITS of a State corporation no longer, the property of an individual in the State, and was acquired for the purpose of devoting it to inter- state commerce and subject to regulation of Congress, then, of course,, there can be no doubt of the power to transfer it to a better sj^stem. of regulation and to a more extensive system of regulation than that which existed at the time that property was acquired. The Chairman. I take it, then, that you think a system of holding- companies, organized under national law, would not meet the re- quirements of the situation? Mr^ Thom. I do not think it would at all. I feel that that would, lead to some diversified situation of conflicting, or accumulated neces- sity for corporate action which will retain all the complexities of the; present situation, and that the whole thing can be simplified and unified by making one national corporation of the railroad system, and letting that corporation own the physical property and be charged with the direct obligation to the country for their proper operation. The Chairman. Assuming that the national system of incorpora- tion of railroads is adopted, what, in your judgment, woiald be the- application of the police laws of the various States to railroads, owned by such national corporations? For instance, with reference to the gradings and crossings of railroads, with reference to the use of separate cars in the Southern. States by the blacks — would the local police laws apply to such national instrumentalities? Mr. Thom. My view — or perhaps our view, I may say — is that the police powers of the State ought to be affected to the least pos- sible extent consistent with an efficient regulation of commerce. The people of this country value local government. It is a natural and it is a proper view. Men have always wanted their government near enough to their homes to let the government understand the- spirit of their civilization. Those police powers ought not to be affected in any way except under the compulsion of finding that any one police power is inconsistent with the national object which Congress has in view. Now, take this matter of taxation. Of course, if there were Gov- ernment ownership there should be nothing but National Government, ownership. There has been no suggestion anywhere that the States, should begin and own these roads, but if the Government ownership siiould be a general concurrence in the view that the only govern- mental agency at all is the United States, of course that is a recogni- tion of the fundamental of interstate commerce ; that it has national aspects and necessities which can not be dealt with locally. No State's rights man, no matter how deeply imbued he may be with that governmental philosophy, would for an instant think that any State should own these agencies of national commerce. All must concede that the United States Government must own them, if any Government owns them, and that that conclusion comes out of the very nature of the business itself. It is national in its aspects. I say that all the contention for Governnient ownership, therefore, recog- nizes the fundamentals of the plea that we are making for national regulation. Now, if there was that system of national ownership of course that would take away from the States the right of taxation. It seem& 176 INTERSTATE AND FOREIGN TRANSPORTATION. to US that in any system of national incorporation there should be Si provision leaving to the States the right to tax all railroad property within their respective borders to the full extent that it would tax ianj other property there. I suppose the right of taxation is in the mature of a police power. Then we go to the other police powers. "We think that Congress ought to start a system of regulation by putting on the State side of the line of -the division between the national authority and State authority all those matters where there is a possibility, or I should say a probability, of the power being exer- cised in a way not to interfere with the national purpose of regSating commerce. The philosophy of this all would be, of course, to take this matter of grade crossings, and matters of that kind, as possibly affecting in a large way the instrumentality of commerce, and therefore neces- sary to be controlled by the National Government. But we do not think that that ought to be taken for granted. We think that ought to be left to the State until such time as it is demonstrated it interferes with the general policies Congress has in view. We think that ought to be left to the State. We think also, in the matter to which you specially alluded, the matter of separate costs and separate rates, where any one section of the country there are susceptibilities on that subject which do not exist in others, we think those matters ought to be respected, and where there is any valid law of the State controlling that matter we think that law ought to be left undisturbed by an act of -Congress. There ought to be, in our judgment, the powers taken over by Con- gress which Congress can now see are essential to the successful operation of interstate commerce, and of a complete guarantee to the public of the efficiency of their commercial facilities. But nothing else, no other matter — I will not say right — ^but no other matter ought to be disturbed until it shall come to appear that the power which is left where it is now is being exercised in a way to affect adversely the public interests. The matter of State rates I have attempted to show you is a matter which now is undoubtedly burdening the various States. The action of one State is undoubtedly burdening the commerce of another State and is undoubtedly burdening interstate commerce. We think that undoubtedly ought to be taken hold of, because you «an not divide these instrumentalities and let some essential function of them be regulated by one system of government, and other essen- tial functions of them be regulated by other systems of government, and at the same time preserve the equality that ought to exist be- tween them and ought to exist between the commercial, affairs of the country. We think also there ought to be taken such matters as the equip- ment of trains which run unbroken across the continent, or half across the continent. We think there ought to be no necessity for stopping at State lines and changing the equipment; but, broadly speaking, our contention is that wherever there is a matter, whether even admittedly within the power of Congress, which can be, and probably will be, exercised by the States, without a disadvantage to the instrument of interstate commerce and its efficiency in the public service, it ought to be left to the States. INTERSTATE AND FOREIGN TRANSPORTATION. 177 The Chairman. Upon the subject of taxation you referred to the fact that if the roads were owned by the Government there would be no taxation, of course, and that if they are to be nationally incor- porated we will all agree they must, of course, contribute to the expenses of the State and municipal governments and to the National Government. Do you find that there is much variance in the laws of the various States with reference to the taxation of railroads? Mr. Thojm. Yes ; we find a great difference, and a great difference in the tax burden of the States. The Chairman. Do you find that variance as to law and variance as to the amount of burden imposes any difficulty as to the negotia- tion of securities at low rates of interest? Mr. Thom. I am not able to say that I do. I think there are great inequalities between the various States with respect to the imposition of the tax burdens; that thereby the State that imposes the greatest burden is taking an undue part of the revenues of the company for its own purposes and is putting- — theoretically at least, and it would all depend on the amount of the tax — a burden on the other States. That money has got to be made up somewhere. That is one of the things that must be taken into consideration when rates are fixed, and the State that imposes the largest tax, in proportion to some other State, to that extent increases that burden and adds to the aggregate expense- Notwithstanding that, in striking a balance between the public interest, on the one hand, and having a consistent and efficient sys- tem of transportation, necessary at all times for its purposeSj and the interest of the public not to see sources of State revenue impaired unnecessarily, I believe that for the present at least — and I think it will prove to be so for all the future — that this power of taxation should be left with the States to be imposed on this class of prop- e;"ty in the same way it imposes and to the same extent it imposes taxation on other property belonging to the people in that State. Great debts have grown up in municipalities an"d in States, based upon all the assets in the State and among them railroad assets. I do not believe that it would be accepted as a fair consideration for those conditions if Congress were just to take away from the States this power of taxation on any very considerable part of the assets. No matter if it had the power, I do not believe that it would be accepted as a fair consideration for those local conditions for Con- gress to do that. The Chairman. You are aware, as to national-bank corporations, the national law fixed a rule for their taxation, are you not ? Mr. Thom. Yes, sir. The Chairman. In the incorporation bill which I framed I in- serted a provision regarding taxation providing that the stocks and bonds of corporations should be exempt from taxation as being merely interests in the property of the corporation, but that the physical property of the corporation itself within the boundaries of a State should be assessed and taxed under the laws of that State. What do you think of such a rule of taxation ? Mr. Thom. My own belief in the system of taxation is that you ought to tax the property. Now, the stock in a corporation is nothing more than the certflicate of the ownership of the holder in the corpora- tion. Here is a corporation with 100 shares of stock. A person owns 178 INTERSTATE AND FOREIGN TRANSPORTATION. 1 share of that stock. That jneans that he owns a one-hundredth in- terest in that corporation. Now, I do not see how that differs from the naan who holds a deed to his farm. The title of the owner of the farm is his deed. To tax both the farm and the deed would be double taxation. To tax both the property of the railroad and the stock is double taxation for the reason that I have just narrated. The certificate of stock stands in the place of the deed of the owner of the farm as a muniment of his title. When we get to taxation of bonds, we get into a very difficult situation ; not difficult in itself, having no inherent qualities of difficulty, but difficulty because there has grown up in this country suOh an immense accumulation of public debt that you have got to look everywhere for sources of taxation, and to withdraw all of a sudden the entire bonded indebtedness of thg country as a source of taxation would greatly disturb an intensely practical situation. I think thftt ought to be done myself on any legitimate basis, but 1 do not think that is a practical thing to do. I do not think it is possible to do it. The Chairman. Does not the bond also represent an interest in the property just as the stock does? Mr. Thom. In reality it is a debt that the property owes. It is not £> part of the title of the property (secured by a mortgage, it is true)j but it is a lien and is not an interest in it. It is secured by the prop- erty, but not an interest in it. The Chairman. If you tax the full value of the property, or assess, rather, the full value of the property, and then assess the full valu^ of the bonds and the stocks, is not that double taxation? Mr. Thom. Yes, sir ; but that, of course, assumes, as it is generally true, that the proceeds of the bond had gone into the property and the stock. The CHAiRaiAN. You dealt upon the importance, in the public interest, of so regulating our railway systems as to enable them always to obtain sufficient capital for development and extensions at reasonable rates of interest. Now, from that point of view, does not the taxing system of a particular State affect the negotiability of bonds and stocks Mr. Thom. Undoubtedly. The Chairman. At reasonable rates of interei5t? Mr. Thom. Undoubtedly. Before I came to Washington, in the community where I lived in Virginia the rate of taxation on what is known as intangible property was so high that there was not any- body in the city that could afford to own a bond. You could get a bond then, when I came here, at a low rate — it was a period of low interest — and it was generally the case that bonds could be issued at 4 per cent, but the rate of taxation on that bond was over 2. So,, of course, there could not be anything like the ownership of a bond there, and you have got there a real difficulty. The Chairman. The investing public was limited? Mr. Ti-ioM. The whole credit of that community was excluded from the purchase of bonds. There is not any way of getting any credit in that community for the support of the bond issue of a rail- road, but that same State di'd this in its recent constitution — there is a provision in the constitution of Virginia that where the property of a company is in that State and chartered by that State ; that is^ INTEBSTATE AND FOKEIGN TBANSPOETATION. 17& taxed, that the stock shall not be taxed, and that resulted in a great deal of the funds of the dependent people, children, cestui que trusts of various sorts, being put in the stocks of the Virginia railroads, and the event showed that a good many of them stopped paying dividends pretty soon, and all that class were stranded, so far as any income of that investment went. The Chairman. What was the case with reference to bonds in Virginia ? Mr. Thom. There is no such provision in the constitution of Virginia in respect to bonds. The Chairman. Then, take a 4 per cent bond, subject to a tax, you say, in Virginia of 2 per cent ? Mr. Thom. They have changed that now somewhat. That was the fact, then? The Chairman. Would suqh bonds, subject to such a tax, find a market in the State of Virginia ? Mr. Thom. No ; not unless they were good dodgers. The Chairman. How would you view them with a view to secur- ing in the public interest money for the stocks and bonds of cor- porations at the lowest rate of interest or dividends, an exemption of stock and bond issues of railways from taxation ? Mr. Thom., I believe it would be greatly to the public interest, but whether the public is ready for that or not I do not know; but I would think it was immensely in the public interest. The Chairman. Would, you question the power of the National Government to do that ? Mr. Thom. Not at all. The Chairman. Assuming that in the gradual development of the railway systems of the country we will arrive ultimately at Govern- ment ownership, would you regard the national incorporation of railways under great systems as a step facilitating that result? Mr. Thom. Eecent events have very largely increased among rail- road managers the advocacy of Government ownership. I suppose I am an altruist in a great many ways, and my view as to the effect upon our national institutions is so pronounced that I would deplore the idea of Government ownership if we are to have free institutions in this country. ^r. Adamson. I do not believe Mr. Thom exactly understood the question of the chairman. I understood the question to be whether JFederal incorporation would lead to Government ownership. Mr. Thom. I am coming to that. Mr. Adamson. Whether it would facilitate it. Mr. Thom. I heard the question. Federal incorporation would not in any sense be an impediment in carrying out any plan of national ownership. The method of acquiring these properties, how- ever, by the Government is so easy in case it has got the money to pay for them, that I do not think it is necessary to facilitate it by a system of Federal incorporation. My views in regard to FederaJ] incorporation are in no way influenced by the idea that it would facilitate public ownership, or that it is desirable to facilitate public ownership, and on that I am speaking my view, not the views of the railroads, because some of the railroads are getting very anxious for Government ownership. 70342— PT 3—16 5 180 INTEESTATE AND FOEEIGN TRANSPORTATION. The Chairman. Regarding the dividends of corporations, I under- stood you to say that the general consensus of railway men was that shares could be negotiated at par and held at par if provision were made for 6 per cent dividend and 3 per cent for a surplus, applicable to lean years, to extensions, and development of the roads, etc. Would you deem it wise to put in the incorporation act a limitation of dividends, « or a provision for dividends of not exceeding 6 per cent, with a provision for this surplus ? Mr. Thom. Before answering that question, may I add something to my previous answer in order to avoid misunderstanding? The Chairman. Certainly. Mr. Thom. I do not want to be understood in anything I have said as indicating that the railroad view is in favor of Government owner- ship. It is not. I merely meant to say that there were some people who had come to that view, therefore- 1 preferred merely to express my own views instead of undertaking to express a great many people's views. I think the view of the railroads is adverse to that. Now, as to the question which you present, Mr. Chairman, in regard to the limit on dividends. I do not think you can limit the maximum of dividends imless you limit the minimum of dividends. If the Government is prepared to guarantee dividends on stocks of a certain amount, then I think you can limit the maximum, but if you are go- ing to leave open the possibility of losses of all dividends, I think you are going to withdraw a very great attraction from this class of investment, if you limit the dividends that may be legitimately earned. I can not conceive of an inducement to anybody to put in money in an enterprise which leaves him free to lose everything and says that he can not gain any more than a certain percentage in that, when that percentage is the thing that he can get much more readily from some other source of investment, and where he may get a great deal more. ■ . I would rather loan money on a farm mortgage at 6 per cent than to put money in a railroad where I might lose everything and could never get more than 6 per cent. . I referred a day or two ago to one class of investors which modem conditions have repelled from railroad investment, and that is the class that is willing to risk its investment for the sake of a chance of handsome returns. You must realize that that is the class of people ^ that built the railroads of this country. Whatever may be the criti- cism on what is called watered' stock and high finance, and all that sort of thing, the methods of the man that was willing to adventure his means has given to the American people 250,000 miles of railroad. The way the railroads of this country were built was this : A cer- tain number of bonds were issued to the people who built a railroad, and with them was given a bonus of stock. Now, it was supposed that those bonds, which represented the input of money, would represent the ordinary commercial return. The bonus of stock represented the hope of the projectors; it represented what they might anticipate that if their enterprise was successful would come to them in unusual returns. That is what is known as watered stock. That was the bait, that was the attraction which aroused the individuals in this country and abroad to build American railways, and notwithstanding all of the criticism that we hear made of that we must realize that put of it has come our commercial opportunities. You can never take away your railroads. They are here ; they are the servants of the people, INTERSTATE AND FOREIGN TRANSPORTATION. 181 and you got them in that way and got them under laws permitting that. Now, if you are not only going into that question of feeling bitterly denunciatory of that system, but are also going to say that no man who puts his money in a railroad hereafter can expect to earn more than 6 per cent, and he may lose it all, you are going to separate from the production the facilities of commerce aU the class of men who want to make an investment in the spirit of adventure and take the chance of getting their handsome return. You will cut down very largely your investing public. And if I am right in thinking that the chief interest of the Ameri- can public is in facilities, I think a limitation of dividends would have a very disastrous effect upon the assurance of such facilities. Now, we all know that there are very few railroiids that pay more than the figure you have mentioned, Mr. Chairman, 6 per cent, but there is no legal inhibition to its being more, and the adoption of a governmental policy of limiting the amount of dividend to what can be gotten, almost on any investment, without guaranteeing a return of at least a certain amount would, in my judgment, make the railroad invest- ment field a very unattractive one. The Chairman. Mr. Thom, in your opening statement you referred to the growing indisposition of the public to invest in railway se- curities, either bonds or shares. Was that manifested before the com- mencement of the European war? Mr. Thom. I believe, Mr. Chairman — I am not able to verify this statement I am about to make — I believe when you look at the course of investments of savings banks that you will find a decline in their investments in railroad bonds to begin with the realization that the people were made to have — I mean the investment public was made to have by the first decision against an advance -in rates, that there was no longer any control on the part of the investors of the revenues of the company. I think that the realization, which has now become general on the part of the public, that there is no control, in the in- vestor of how much his revenues are going to be, or how much the expenses are going to be, has been the thing that has a,lienated the public from railroad investment. I would say that decision I refer to was before the European war. Certainly, we find it the case that ' there is a pronounced indisposition to invest in railroad securities, and when we study the situation, we find the conditions a,ll the time approaching the exhaustion of the margin between the existing liens and the sum of the assets of the company ; so that the American people are confronted with the consideration of that margin. You are not interested in whether anybody wants to buy a bond on the market, the bond of a railroad, or whether they want to buy a bond of a steel company, unless it means something else, but you are interested, and profoundly interested, in watching that margin between the amount of the liens on a property, evidenced by fixed charges, and the value of the assets, and that is seen gradually but surely decreasing, and what is left all the time measures the' ability of the carriers to keep on producing facilities that are required by Congress. You must be profoundly interested in knowing that progress. That is what is going on to-day. ... The Chairman. But do you not think that the throwing of for- eign-held shares and bonds of American railway companies upon 182 INTERSTATE AND FOREIGN TRANSPORTATION. our markets, caused by the European war, has absorbed the surplus money of the country available for. investment to the exclusion of the capacity to absorb new securities? In other words, have not the old securities of these companies held abroad taken the place in the markets of the United States for investment that might have been taken by new securities if it had not been for that war? Mr. Thom. Undoubtedly that has had a very marked tendency and a very large influence in producing the conditions, because just in so far as prior liens and the most desirable classes of stock are offered the American public the}'^, of course, are disinclined to take inferior liens, which would mean the new offerings, and they have preferred the best classes of securities, but that has not absorbed the funds in America that are available for investment. We do not see any con- finement of present investments to railroad securities. On the con- trary, there is abundant capital in this country — overflowing capital in this country to seek another avenue to invest. Take the steel com- panies, the copper companies, municipalities of various classes — se- curities that might be mentioned, and there are untold millions pour- ing into them t^-day. Cotton, 25 cents a pound; copper, 35 cents a pound; steel, many dollars a ton advance — and that is where the American investment is going. You see it every day. The Chairman. You are aware that this country has been com- pelled to absorb nearly $3,000,000,000 worth of American railroad securities since the European war? Mr. Thom. And to that extent the forces that you have alluded to have been operating ; but I mean to say that there are tremendous classes of investment outside of railroads that are now being pre- ferred by the American public. Take these copper stocks; they pay you about 12 per cent ; and steel stock way up— the returns way up above anything you can get from any railroads, and they can advance the prices when they see fit. The railroads can not advance their prices. The Chairman. Mr. Thom, I want to question you regarding the traffic divisions of the United States. How many are there ? Mr. Thom. There is the southern classification The Chairman. What are they? Mr. Thom. Southern classification territory, trunk-line classifica- tion territory, Central Freight Association territory, and western classification territory. There are four. The Chairman. Now, what areas do those embrace? Mr. Thom. Well, the southern classification territory — ^I will have to be, maybe, a little inaccurate in this, but I can tell it generally. The southern classification territory covers the. southeast — the region between the Potomac and the Mississippi Rivers and south of the Ohio. The trunk-line classification territory covers the section of the country north of the f'otomac Eiver and east of a line drawn through Chicago. The central freight Senator Brandegee. Is not that called official classification some- time^ ? Mr. Thom. Sometimes called official classification. Central freight association territory covers the section between this line that I have alluded to, passing through Chicago, and the Missis- INTERSTATE AND EOKEIGN TRANSPORTATION. 183 aippi River. The western classification territory is west of the Missis- sippi Eiver. That is my general impression. I would like to get Mr. Rich to correct me, if I am wrong about that. I would add to what I have said that what is known as official classification territory takes in trunk-line association territory and the central freight asso- ciation territory. By that I know you gentlemen understand that freights, subject to freight commodities and the classes, are differently classified in different sections of the country, one in the southern classification territory, another in the official classification territory, and the third in the western classification territory. The Chairman. Would it be your idea to have a regional commis- sion in each one of these traffic areas? Mr. Thom. More than that. I think Congress should study the transportation systems of the country and should make more than one for! each of these sections, but that the division should be on lines of transportation rather than geographically. For example, I should suppose — just for example I suppose that a region could probably be made out of the northern transcontinental linfes running from the Mississippi River to the Pacific coast, such as the Northern Pacific, and the Great Northern, the Burlington, and some of those roads, and that it would be appropriate to have another classification territory between that— I mean another region between the southern boundaries of that and the Gulf of Mexico, and perhaps more still. I thinjj whatever is necessary in order to bring the administration of ' this system into local territory ought to be afforded in the division of the country into regions. ' The Chairman. Have the railroad executives or managers any definite suggestion to make regarding the boundaries of these traffic areas or regions involved ? . Mr. Thom. They have not any definite suggestion to make at this time. Of course, their opinion on the subject would be open to use by your committee at any time you may desire it. They have not formulated any plan. The Chairman. Mr. Adamson, do you desire to ask any questions? Mr. Adamson. I would like to have the hour after 1 o'clock. You are doing so well that I think you could occupy the balance of that time. The Chairman. I am through, so far as I am concerned. I would like, when questions are handed around the committee .again, to ques- tion Mr. Thom after he has examined the material that I submitted this morning. Mr. Adamson. Is it your purpose to adjourn at 1 o'clock or half pastl"? The Chairman. That is for the pleasure of the committee. M ould you prefer to wait ? Mr. Adamson. If I can think of anything appropriate to ask Mr. Thom, I would like perhaps to crmnlete mv_ interrogatories at one sitting. However, I will go on now, if it is desired. The Chairman. Shall we pass you for the present? Mr. Adamson. If you choose. The Chairman. You may proceed now, if you wish, or if you pre- fer I will pass to the liext member of the committee. The next would be Senator Robinson. 184 INTEESTATB AND FOBRIGN TBANSPOBTATION. Senator Eobinson. I do not care to ask any questions now. Mr. Adamson. I will not let you waste time. I will go on if no other gentleman wants to proceed, or if you are not ready to adjourn. The Chairman. You may consult your own pleasure, Mr. Adamson. Mr. Adamson. I never have any pleasure. I am for the people. If I get no pleasure out of that, I waive it. Mr. Thom, you have sev- eral times alluded to the Constitution in your discourse, which is a kind of novelty of late days for that to be alluded to. Mr. Thom. Oh, yes. Mr. Adamson. I presume the paragraph to which you allude is in the enumeration of the powers of Congress, in which I find, "To regulate commerce with foreign nations and among the several States and the Indian tribes." Mr. Thom. Yes, sir. Mr. Adamson. Can you tell me what pai'ticular business and things and movements that refers to? Mr. Thom. I did not hear you, Judge. Mr. Adamson. What particular persons and things and instru- mentalities does that refer to ? Mr. Thom. I think it refers to all instrumentalities of interstate commerce. Mr. Adamson. Does it not refer to anybody who trades across a line, or converses across a line or transfers people and property across a line, or does any business or has any conversation across a! State • line? Mr. Thom. In so far as relates to these cross-State line transac- tions ; yes, sir. Mr. Adamson. That is what we are talking about ? Mr. Thom. Yes, sir. Mr. Adamson. There are two kinds of people who do business, natural and artificial. Mr. Thom. Yes, sir. Mr. Adamson. You understand that this section of the Constitution is limited in its operation by any particular incident to the birth of a man or the organization of a local corporation ? Mr. Thom. Not at all. Mr. Adamson. Do you not understand that regardless of whom a man's father and mother were, or what State charters the* corpora- tion, or what its terms and conditions are, that under this authority of the Constitution, when Congress acts it superadds or displaces anything in conflict with it and absolutely controls the persons, natural or artificial ,? Mr. Thom. It displaces whatever is in conflict with it and abso- lutely controls the subject with which it deals. Mr. Adamson. Then that section of the Constitution, if Congress should do its duty, seems plainly to control every person, natural or artificial, engaged in interstate commerce ? Mr. Thom. In so far as they are engaged in interstate commerce. Mr. Adamson. Well, that is what we are talking about? Mr. Thom. Yes, sir. Mr. Adamson. Well, you have alluded to the police powers of the States. The police powers are those which it would be unconstitu- tiohal for Congress to interfere with, are they not? INTERSTATE AND FOREIGN TRANSPORTATION. 185 Mr. Thom. No, sir; the police powers can be police powers, and Congress might interfere with them if it chose to exercise full power under that clause that you have just read. Mr. Adamson. If Congress does not see proper to do so, it may leave to the States any operation which the States desire to take, but when Congress does act as to the matters affecting interstate com- merce, the action of Congress supplants the other regulations en- tirely. Mr. Thom. _ Well, there are some aspects of interstate commerce that the State can not do anything about at all even if Congress is silent. There are others where until Congress speaks the State may occupy the field, but when Congress speaks as to that class, any pro- vision of the State law with respect to it disappea,rs. Mr. Adamson'. Are there any things done by a State within its own borders not affecting outsiders, or outside transactions, that it would be unconstitutional for Congress to prohibit or interfere with ? Mr. Thom. Is there anything which a State has power to do ? Mr. Adamson. Can do within its own borders, not affecting out- siders or outside territory, that Congress could not constitutionally prohibit or forbid? Mr. Thom. If I understand your question, I think there are a great many subjects, or things that a State may do which Congress can not at all interfere with. Mr. Adamson. Well, if that be true, is a charter for a Federal cor- poration any higher, or more binding than an act of Congress. direct? Mr. Thom. Not at all. Mr. Adamson. If a thing be unconstitutional, if enacted by an act of Congress, would it not be alike unconstitutional if attempted through the indirect method of a Federal corporation which is the creature of that act of Congress ? Mr. Thom. Undoubtedly. Mr. Adamson. Well, I will pass to another proposition. I am satisfied with that. Now, you have described eloquently' and ably and justly the rights which the States acquire which they do not already have, in return for those which were surrendered in the formation of the Constitu- tion. Those rights, as I understand you — and I agreee with you as I understand it myself — are the rights of any person in a State to trade, travel, and traffic in any other State in the United States. Mr. Thom. You mean that is one of them ? Mr. Adamson. I say that is one of them. You beautifully and elo- quently describe that. Mr. Thom. That is one of them. Mr. Adamson. My point is, as I understood you, it is a State right acquired at that time — they may have had some of them before — but it is a State right to trade, converse, or travel anywhere in the area of the United States? Mr. Thom. Absolutely, freely. Mr. Adamson. Well, that being true, the right of the local com- munities, which are commonly called States, to charter corporations which may do business anywhere in the States, is a State matter and not a national right, is it not? Mr. Thom. No, sir ; I do not think so. Mr. Adamson. You do not think it is a State right ? 186 INTERSTATE AND FOREIGN TRANSPORTATION. Mr. Thom. It is a right to do that until Congress shall act on the subject, if that is what you mean. Mr. Adamson. But you say that one of the, rights which they acquired was the right to converse and travel anywhere in the United States? Mr. Thom. Yes, sir. Mr. Adamson. Now, you say that right which they acquire is limited by the pleasure of Congress in the future ? Mr. Thom. No, sir; I think you misunderstood me. I said that they have a right to travel and to trade under such regulations as Congress may prescribe under the clause I have mentioned. Mr. Adamson. Then your beautiful argument about the State' rights acquired under the Constitution loses some of its value and force, does it not ? Mr. Thom. Not to my mind. My argument was that each State acquired the right by entering the Union to have its trade free from any embarrassment and from any regulation except as prescribed by the impartial authority of Congress, which represents all the States. Mr. Adamson. I understand that, but it is free so far as the action of any other State is concerned ? Mr. Thom. It ought to be, but is not now. Mr. Adamson. It has the right to trade and traffic in any State, but it is subject to regulation by Congress ? Mr. Thom. Undoubtedly. Mr. Adamson. That is, reasonable regulation ? Mr. Thom. Undoubtedly. Mr. Adamson. What is that right? Is that a State right or a national right ? Mr. Thom. I think it is the right of a State to invoke at any time it pleases- Mr. Adamson. Then it is not a right- Mr. Thom. Will you please let me finish my answer to your ques- tion — at any time it pleases the benefit of its constitutional protec- tion. Now, suppose that the State of Georgia were invaded. I think it is the right of the State of Georgia to ask the United States to send its armies there and repel that invasion. I think if the National Government should undertake to say that every other State in the Union should have a post-office system but that it should not extend to Georgia that Georgia would have the right to have the post-office system extended. I think if the State of Alabama were to attempt to do something prejudicial to Georgia's commerce — ^the right to trade in Alabama — that Georgia Avould have a right to invoke the clause of the Constitution which gives the entire power of regulat- ing commerce to Congress and not to the State of Alabama. Mr. Adamson. Well, whether any State ever enjoys the right to efficiently acquire it or not, it did acquire State rights. Mr. Thom. I think it acquired an immense State right. I do not think they would have gone into the Union unless they thought they would acquire State rights. _ Mr. Adamson. If that be true, and I think it is, then the conversa- tion that you and Secretary Olney indulged in the other day, when you read his letter, is a little inaccurate to denominate these present lines of traffic national railroads, is it not? INTEESTATE AND FOREIGN TEANSPOETATION. 187 Mr. Thom. That was his nomenclature, which he explained was a short way of expressing an interstate and foreign railroad, but he did not want to repeat that every time. He said he would call them national. Mr. Adamson. Transition seems to be easy sometimes, the use of one term or the other, according to your doctrine and mine ; it always leads the other way. Mr. Thom. Judge, I do not feel any hostility to the National Government. I. believe a nation occupies a ground of usefulness to the State which could not be occupied in any other way. I believe there should be no jealousy toward those powers. I believe they are just as important to Virginia, my State, and Georgia, your State, in the field which the Nation occupies, as the. rights reserved by those States are. Mr. Adamson. It has become fashionable, Mr. Thom, when the Constitution is talked about, for that term to be given to it. If a man talks about local authority and local rights, some men sneer and the States talk about State rights. If he gets to talking about the Constitution as being dual, and wants the Government, in all its grandness and greatness and national power, to do what the Consti- tution says for it to do, and the States in their inherent' right acquire rights to do the part the Constitution says for them to do, people come and talk about hostility, the one to the other. All lawyers know that this Government is dual, that part of its func- tions are to be discharged by Congress — the general public — and the other is by the States, and there is no use of anybody — and we had just as well let that go out of fashion — to talk about one being hostile to the other. What we want to do either here or elsewhere is to do something that is constitutional. Mr. Thom. Undoubtedly, and I do not think there ought to be any jealousy on the part of the National Congress toward what are commonly known as the rights of States. They are just as sacred, they are just as important, and they are absolutely essential to the due balance of powers in our system of democratic government. But I do not think there is any danger of the National Government try- ing to invade any rights of States wherever there has been an exten- sion of national power within the last 30 years. My belief is that the demand for it has come up from the States, from localities. Mr. Adamson. Mr. Thom, the question is now mooted. For a long time it was regarded as certain that within the confines of a State the State authority could absolutely fix rates and practices between points within that State, having no relation, or not traveling or being shipped into any other State. I understand it is now contended that if the rates and practices are favorable, or less favorable than similar rates and practices in a neighboring State, that they may be held to be a violation of interstate commerce and may be regulated. Mr. Thom. I think the line of demarcation is this Mr. Adamson. I am not going to require you to state what your or my opinion is about it. What I was getting at is this, regardless of what the truth of it is, regardless of which is right, it is mooted, and I want to see if I can develop in your legal opinion, for which I have great admiration, the principal change by national incorpora- tion if two lines of road within your State parallel each, other, as between Eichmond and Danville or between Norfolk and Dan- 188 INTEESTATE ANIJ FOEEIGN TRANSPORTATION. ville, and one is charged by Federal authority and one by State au- thority as to the things which they should do between those points, both in the same State, as to the rates and practices and the treat- ment of the public — I want to loiow if they both would not be re- quired to act just alike, regardless of where the charter came from ? Mr. Thom. Undoubtedly. Now, I want, if you will permit me, to say that the line of demarcation between what the Nation — or the United States, if the word " Nation " is not liked — what the United States ought to do in the matter of regulating commerce, and what it ought not to do, is determined by whether or not what the State undertakes to do has an extra-territorial effect. If what the State attempts to do is to influence a situation in another State or influence interstate comm,erce, then the State ought not to want to do it, be- • cause the sister State may come along and do the same thing. Mr. Adamson. Well, my question to you is. Would not an order from the Interstate Commerce Commission or from the courts of the country have exactly the same force and effect upon the corporation doing that, regardless of where its charter was ? Mr. Thom. Undoubtedly that is so, but the order the Interstate Commerce Commission may issue is limited by the statutes of the United States. They can not go beyond the statutes. Mr. Adamson. But we can change that statute without changing the incorporation laws? Mr. Thom. Undoubtedly, and I have never contended you could not. I have never contended that it was necessary, as a measure of putting into effect the law, that you had to change the incorporation law. You can extend the power of interstate-commerce control over the local rates in the States without incorporation Mr. Adamson. Well, then, is not this a possibility — I do not mean to say that exactly, either — but is it not a possibility that while it is admittedly possible that the Interstate Commerce Commission, under authority of Congress or the powef of Congress to regulate all State corporations, that it might be possible, under a Federal corporation, to prevent the State from doing some of those things which they have a right to do now ? Mr. Thom. I do not think it is possible to do that under a well- balanced law of Congress, because I think the law will expressly reserve to the State all those things that Congress feels it ought to have, and Congress represents the States, you know. Mr. Adamson. It has been generally accepted that the power of Congress to regulate these matters rests upon the clause of the Consti- tution giving the Federal Government power to regulate commerce, and it has been said that the power of the Federal Government in that respect has gradually grown, but I have never understood exactly what was meant until I came to Congress and went to consider the commerce clause of the Constitution, and my own judgment is if this Republic is ever sent to the bad, it is more likely to occur through the commerce clause of the Constitution than any other. , If Congress may control everything in coimection with the police powers of the States, and then itself prescribe practically what those police limita- tions are, Congress being always in session with power to change the law, it may grow and grow and grow until the idea will become prevalent — and it seems to have become quite prevalent among the INTERSTATE AND FOREIGN TRANSPORTATION. 189 railroad executives now — ^that consolidation of power is what we should have. Mr. Thom. Judge, I do not think there is a student of public affairs who can fail to know that the very difficulty now that is becoming a large difficulty is coming just in the opposite direction. We had, at one time, certain influences that were operating to nationalize this country. In the first place, we had slavery. There was one section of the country that approved of it ; there was another section of the country that disapproved of it. Mr. Adamson. There was a good time to mention Georgia again. She was opposed to slavery and liquor at the time the Constitution was adopted. Mr. Thom. There was another section of the country opposed to it, and that issue was so great as to maJke one party opposed to the ex- tension of the national rights and the other party in favor of it. In other words, there was then the State rights party and the national party. Then we came along, at that same time, to the tariff question. There were certain agriculturel States that believed in free trade. There were certain manufacturing States that wanted a tariff. The one party wanted to preserve free trade through the power of the States, and the other party wanted to extend a protective system to the power of the Nation, and there was an influence in favor of nationalization. Then we came along to the period of reconstruction. There were, at that time, certain States that wanted to limit the power of the Nation in respect to reconstruction. There was another party that wanted to insist on a large delegation and application of the national power, and that made a national issue. Now, all those things have disappeared. The South, which generally was on the other side, has gotten manufacturing interests, and its real view is divided on the question of the tariff, like any other section of the country, and with the disappearance of those issues, which have divided the country on the lines I have mentioned, it is now a fact that local conditions elect a man in Massachusetts just like local conditions elect a man in Georgia, and every man in public life has reference now to his local conditions rather than to national conditions in consider- ing the forces which must keep him in public life or put him out of public life, and therefore to-day the influences in Massachusetts for, local power are just as operative as they are in Virginia or in Georgia and the result has been instead of having a division between the people that nationalists and people that 'are not in this country we have now the common judgment of the country, divided on whether or not they can best u^ the national power to do what they want to do, or the State power to do what they want to do. If they think they can use the national power to get a child-labor law they will use that instead of the State law. If they think they can use the na- tional power to get universal prohibition they will use that. In other words, there is no philosophical division of the States in this country any longer between those who believe in national power a,nd those who do not believe in national power. It is a mere question now which they can use to better advantage, and our country down yonder will as soon lay hold of the national power to carry out an object which they think they can acquire better in that way, and extend the national construction of the Constitution in order to do 190 INTERSTATE AND FOREIGN TRANSPORTATION. that as any other section of the 'country, and so the danger now is not from a division of the parties in respect to national issues, but there is an entire disregard of that school of ,interpretation of the Constitution which divides parties on the one hand into Federalists and the other side into State rights people, and the question comes back in every locality, " Which can we use best, the National Gov- ernment or the State Government, in order to attain our purpose? " and no interpretation of an academic nature of the Constitution is allowed to stand in its way, and I believe tljiat the tendencies of this day, instead of toward federalization and the vesting of power in the Federal Government, are just the other way. Mr. Adamson. It seems to have had a different effect, judging from the experience of the railroad executives. You remember, along when you say the Southern Railway leased you, we wej-e tryii^g to amend the old act to regulate comiperce, and the representatives of the railway companies who appeared before us claimed that we were violating the States rights doctrine in reference to local control and States rights. We went ahead and legislated, but before it was over litigation had started in the various States, and the last conten- tion made was that it was a Federal matter and not a State matter. Now, you have said that they have all come to the belief that this is a matter of getting all the control of the transportaion companies— the entire control of them — ^into the hands of the Federal Govern- ment. Mr. Thom. I did not quite say that. I said that in all features that would substantially affect their service to the public— — Mr. Adamson. My recollection is also that at that time they were opposed to arbitration. More recently they have come to the idea that the Federal provision for arbitration should be extended Mr. Thom. You can not at all criticize anybody Mr. Adamson. I am not criticizing, you. I am, just ^getting the trend of historical and chronological events. Mr. Thom. I understand some Members of Congress were in favor of arbitration a few years ago that do not believe in it now. [Laughter.] Mr. Adamson. I remember very well that in full accord with the railroad view at that time I helped defeat the; Townsend, bill for compulsory arbitration. Mr. Thom. Did you vote for the Newlands bill two years ago? Mr. Adamson. I do not remember. I was not a ferocious advocate of it. Mr. Thom, you are familiar with the efforts we have made to regulate ^tocks and bonds? Mr. Thom. Yes, sir. Mr. Adamson. The House passed the Rayburn bill once and sent it to the Senate, and we have reported it from our committee again and have it on the calendar. Don't you think, with some amend- ments which you have thought about, if that bill became a law, that we could have an intelligent control of the financing of corporations? Mr. Thom. Judge, I attempted to develop in the remarks which I made the difficulties which seem to me to be inh^rent in tha|; situation- I believe, in a very ample way, in the constitutional power of pon- gress to control that subject. I argued that befpre your committee. INTERSTATE AND FOEEIGN TEANSPOKTATION. 191 Mr. Adamson. Yes ; I know you did. Mr. Thom. And I argued it before every committee of Congress, and I have attempted to facilitate, in every way that my powers would permit, the adoption of a single system of Federal regulation of the issue of securities. I believe that that law would have been absolutely constitutional. I can not close my eyes, however, to the importance of having a law on that subject, not in the interests of the railroads alone, but in the far greater interest of the public, which will be universally accepted as constitutional, and in spite of men of the highest legal eminence, who believe that such a system would not be accepted by the investing public until it is finally in- dorsed by the Supreme .Court of the United States. Now, are we going to ignore that legal view? Can we safely do that? I know your constitutional views and mine agree on that subject. We both believe that the Federal power is ample to do this thing we are talk- ing about, but we are both under responsibilities which rest upon us, respectively ; you to represent the great public interest in your official position, and I as responsible for the successful provision of means for the performance of the public duties which rest on the instru- mentality with which I am connected and a part. We are both supremely interested in having a system of financing the railroads that will be universally accepted. I know this will not be universally accepted, and therefore, as a means of getting the thing which will be universally accepted, I believe that incorporation is a wise step on the part of the Federal Governiment. Mr. Adamson. But not necessarily one ? Mr. Thom. I do not think it is necessary. I have your constitu- tional view on that question, Judge Adamson. Mr. Adamson. Mr. Thom, your idea is that investors, looking at a bond signed by a Federal corporation, would at first blush naturally regard it as more important, or more reliable, than a bond issued by a corporation under local authorities? Mr. Thom. That view has not specially impressed me. Mr. Adamson. He could understand it better ? Mr. Thom. I have never seen any hesitation on the part of investors to unduly honor anything a State did about that. That is not my difficulty. My difficulty is, first, that we can not possibly be sub- jected to the necessity of going to four or five authorities without losing time that is most valuable and which is absolutely essential to our sbcurities first. Mr. Adamson. Is that the only difficulty? Mr. Thom. No, sir ; I say, first. Now, second, I think, moreover, that if it comes to pass that the authority of the National Govern- ment, which is so created as to be exclusive of the necessity for any other approval, if that assumes to contravene some charter power of a State court; if it exceeds the authority granted by the statute of the State in creating the corporation, that is a question raised as to the validity of the order of the Federal corporation, or of the Federal body, and therefore a question raised as to the validity of the security issued, which will not be determined by the interested parties. Mr. Adamson. Is that true, although an act of Congress has said that that corporation shiall be required to do it? Mr. Thom. It is true that there will be that difference of opinion about it? In my judgment, which is in accord with yours, I have 192 INTERSTATE AND FOREIGN TRANSPORTATION. no hesitation whatever in forming my opinion as to the way the Supreme Court will decide. Mr. Adamson. I know, hut the investors you say Mr. Thom. The investors will wait until they have that question decided. Mr. Adamson. Although an act of Congress has authorized it? Mr. Thom. I think so. You will have a period of uncertainty, a confusion of this most important matter where traffic is waiting for a supply of cars, and you can not get the money to furnish them until you go to the Supreme Court of the United States, and I do not think it is wise, when we have got a way of avoiding that, for us to incur that difficulty. Mr. Adamson. The same argument of Federal control in order to prevent diversity and make uniformity, it would seem to me, would apply to all other transactions with equal force, would it not ? i or instance, I own a little land in some towns in my State and some in Senator Robinson's State — a very little — some in Senator. Under- wood's State, and the city, town, and county in each State imposes a different rate of taxation, and all the three States differ in all these respects, and yet I have got to keep up with them. Mr. Thom. Yes ; and that is your entirely private matter ; the pub- lic is not interested in it. Mr. Adamson. I know, in different States entirely; and the argu- ment is that it ought to be made easier to attend to my business, and it looks to me like it- ought to have some consideration. Mr. Thoji. I do not think so. I am too much of a States' right, man to think that. I feel we have no standing here if we come to present our own private interests in this matter of financing. But if it is true, as I believe it to be true, that there is a tremendous pub- lic interest in our capacity to adequately finance and to promptly finance in order that we may get the means of furnishing the cars and tracks and the yards and other facilities which you want for your three farms Mr. Adamson. Yes ; and ought to have them. Mr. Thom. Then it becomes a public interest and must be con- sidered from the standpoint of that pu.blic interest, and the thing that the public interest requires is a guarded system of supervising the issue of these securities so that there may not be any improper exploiting of the credit of the companies, and that the method shall be a prompt and workable one so that the public needs will not have to wait because of unnecessary red tape. Mr. Adamson. I enjoyed your description of the gi'owth of the Southern Railroad, with which I was familiar before you were; I was with it when it started — not associated with it, but I am ac- quainted with it, and I have admired it all along, and I admire its liberality and its public spirit and all that, perhaps above all other railroads. There are great systems in this country. And you de- scribed it so beautifully as growing up in harmony and happiness and prosperity under the laws of 11 different States, the present system. Mr. Thom. I do not recognize my picture, Judge Adamson. Mr. Adamson. I want to ask you the advantages of the consoli- dation of that large number of roads, I want to ask you if the con- INTERSTATE AND FOREIGN TKANSPOETATION. 193 solidation of all of them into one management reduces greatly the expenses of administration? Mr. Thom. Immensely. Mr. Adamson. Does it do that by dispensing with the services of men, officials, presidents, and general managers and lawyers and train operators? Mr. Thom. Well, that is a very small part of it, Judge. Mr. Adamson. Does it dispense with them? Mr. Thom. It extends executive authority over tremendous areas of lines, and in addition to that, however, it enables you to divide the operation of those properties . into appropriate divisions where rolling stock will be safe, where locomotive power will be safe, where matters may be coordinated, where connections may be made, where yards can be simplified, and in the thousand and one other different ways making the thing operate as one coordinated system. Mr. Adamson. Is it not true that sometimes in making a division that a fat town or section may be coupled with a lean town or sec- tion and make the whole division more profitable? Mr. Thom. Well, I have no such illustration in my mind. I do not know exactly to what you allude. Mr. Adamson. Is not that true that sometimes a division is so constructed that one part of it, one part of the railroad would not pay and one part of the railroad did pay, and that together they can be made to operate profitably? Mr. Thom. The history of almost every railroad in this country is that when started it did not pay, and that then when you got feeders they did not pay. Now if you take one of those feeders and consider merely its revenues, what it earns on its own line, it is a failure. But when you take that traffic and send it under one ownership 5,000 miles over some other parts of the line owned bj'^ those people, the earning on all of them will justify the parent com- pany in keeping up that feeder because of the revenues it gets on the balance of its line for the great haul it makes of that small con- tributor. Mr. Adamson. Then a hodge-podge of different lines and parts of fines will enable the contribution of those that do pay to help you run successfully those which would not by themselves pay? Mr. Thom. Yes ; it does, for the feeder's contribution is not merely what it earns itself, but the contribution that its traffic makes -over the whole long haul that is carried over the entire haul. Mr. Adamson. Of course it delivers business to you and you make a profit on the long haul ? Mr. Thom. Yes, sir. Mr. Adamson. You have that advantage, and the advantage that you economize by dispensing with men and officials, and what other advantages? Mr. Thom. And also you economize by consolidatmg the termi- nals, points of connection, and the more economical use of your rolling stock, they all go to make it a much cheaper method of operation. Mr. Adamson. You consolidate the railroads m 11 States, the process which you have described by which that was done was sometimes an insolvent railroad would go through the mill and would be acquired, either through the mill or voluntarily. I sup- 194 INTEESTATE AND FOREIGN TRANSPORTATION. pose if lean times should come you would be able to acquire other roads in the same way? Mr. Thom. The policy of a great many roads in this country now has turned away from the policy of extension into the policy of in- tensive improvement of their facilities within the territory they already occupy. Some railroads have come to the conclusion that the extension of lines has gone as far in respect to that particular system as it ought to go, unless they have the means to fully develop the properties that they have already acquired and make them thoroughly serviceable within the territorial limits that they already occupy. Now, I know when Mr. Finley came into the presidency of the Southern Eailroad that he deliberately adopted the policy of acquiring no new lines, but of improving the lines that he had already acquired, all the money he could raise he put into improving the hnes within what was then Isnown as the system. Mr. Adamson. If it is advantageous and profitable for everybody to consolidate railroads in 11 States, why would it not be advantageous and profitable to make still larger consolidations ? Mr. Thom. Because it is always a question of wisdom and human endeavor involved, and a man has got to look at all the conditions that surround him and determine whether or not wisdom leads him in this direction or that. Frequently there is a mistake in the judg- ment, but at last it must be decided as a question of choice between two courses. One man will think that it is to the interest of the system to get into a certain market ; another man will think that it is to the interest of the system to improve its mehods and get to the market which it already reaches. That is a matter of judgment: Mr. Adamson. If you were to consolidate with the Coast Line, the Air Line, the Chesapeake & Ohio, and the Norfolk & Western you still would not be much larger than the Pennsylvania system, would you? Mr. Thom. I have never compared these lines. Mr. Adamson. There are systems in the country a great deal larger than yours, are there not ? Mr. Thom. Yes, sir. Mr. Adamson. If you are going to take out a Federal charter under an act of Congress, would you take out one for each one of the cor- porations you acquired, or would you take it out for your entire system ? Mr. Thom. The system which I would adopt would require each corporation that now exists to take out a Federal charter, but I would also provide the machinery by which under the direction and with the permission of the Interstate Commerce Commission they could con- solidate. Mr. Adamson. Ultimately go into one ? Mr. Thom. Ultimately go into one, just so far as the Interstate Commerce Commission approved. Mr. Adamson. If Qonsolidation is desirable and capital is more easily enticed by a great Mr. Thom. Do not talk about enticing. Judge; we do not want to Mr. Adamson. Well, less repelled. Mr. Thom. Let us say attracted. INTERSTATE AND FOREIGN TRANSPORTATION. 195 Mr. Adamson. By one strong Federal corporation, why have so many, why not have just one great big one ? Mr. Thom. Because that is the only method you can pursue with convenience. What Congress would be obliged to say would be — you have got to take the situation as it to-day and to say that no rail- road corporation shall, after n day which Congress fixed to engage in interstate commerce unless it takes out a charter under this act. Now, you could not say, as a preliminaiy to taking- out a charter imder this act, you must find some way of consolidating before you take it out. You must say you must come in here and then when you come in here I will ^^ive you the facilities of consolidation. Mr. Adamson. Do yoTi propose to go to the policy by which the Federal Government would indulge in prohibition, by which car- riers would engage in interstate commerce Mr. Thom. To that extent; yes. Mr. Adamson. Has not our policy heretofore been to force them, primarily, all to make through routes, to have joint rates, before they go into business at all? Mr. Thom. This would be a very cogent invitation for them to continue. They are not going out of business. Some people have suggested as a method of doing this the taxing power, taxing the corporation that stays outside, like they do the bank. We believe that the best method is to say you shall not engage in interstate and for- eign commerce — that is, 85 per cent of your business — ^you shall not engage in that business unless you come in under Federal charter, and we have no fear whatever there would be any of them left out. Mr. Adamson. Then, if you did not do it, what would you do with that gap? Mr. Thom. With that gap? Mr. Adamson. Yes. Mr. Thom. There will be no such gap. Judge, but if there is there will be found some other way of filling it out. In other words, let us find out how the gap would be made. Mr. Adamson. Would it not be a good, old, honest, plain way to start this thing, if you want Federal incorporation, just for somebody "who wants to build a new railroad to apply and get a Federal corpo- ration, and go ahead and build one, and show how it works ? Mr. Thom. They did that many years ago. Mr. Adamson. I know ; but you want to do it again. Mr. Thom. Why, that did not solve the problem. Mr. Adamson. It obviates all of these troublesome questions that you are talking about, how to take somebody else's property and turn, it over to a new corporation. Mr. Thom. It does not touch the problem. Here are 250,000 miles of railroad in this country, in round numbers. That is tlie problem you are dealing with primarily. Now, you can not deal with that problem: — you can not touch that problem by saying hereafter, when there is a railroad, you must take a Federal charter. Mr. Adamson. Oh, yes ; you can. You can forbid any present one to go in that wants to; but I-wiU give you a good suggestion. Mr. Thom. I will be glad to have it. Mr. Adamson. Suppose you started in north Georgia and ran down through western Georgia and eastern Alabama to the Gulf, 70342— PT 3—16 6 196 INTERSTATE AND FOREIGN TRANSPORTATION. down about St.: Andrews Bay, where they need a railroad — every- body along through the country— and take a Federal charter and build that railroad. You can get money so much easier on a Federal charter, and people have been trying for generations to get that country opened up, and surrounding railroads tell them there are railroads enough, and they can not get capital in it at all, and it is the best place I laiow of in the world to try the attracting eiiect of a Federal charter. Mr. Thom. Judge, my proposition Mr. Adamson. You will not have any of these questions of taking over the property of adjacent corporations. Mr. Thom. No ; and you will not deal with your problem, either. Mr. Adamson. Oh, yes. Mr. Thom. Now, my proposition is to deal with your problemby requiring that that company that you allude to shall be a Federal incorporation, because under our recommendation there will be a necessity for its being a Federal corporation, and the machinery would be there for the purpose of enabling it to be a newly incor- porated agency of commerce. Mr. Adamson. Is there anything in the way of your building it now, under Federal charter? Mr. Thom. Yes, sir. Mr. Adamson. What is it? Mr. Thom. We have not got a statute. We can, of course, get one from Congress, maybe, but that is not the point with us. We have a problem already existing. Here are 250,000 miles of railroad with which you are primarily interested. That is your problem. You have got to strengthen and perfect that for continued useful- ness. You can not say, , " We will put that aside and wait until we see how the railroad from north George to Alabama turns out." If it is a problem, why, you have got to deal with that. If it is not a problem, there is no justification for your doing it. If I am mis- taken in thinking that the country has a problem on its hands now, all of the contentions that I have made are ill founded. I think you have got a problem. I have attempted to show you you have got a problem as to the present 250,000 miles of road. Now, to sug- gest to me that that problem should be entirely ignored," and we should attempt to deal with the situation by operating under a Federal charter from north Georgia to Alabama, does not at all reach the question. We have already tried that in a charter to the Union Pacific. We have tried Mr. Adamson. That was Government aid, was it not ? Mr. Thom. Government charter. Mr. Adamson. The Government got behind it? Mr. Thom. No, sir ; they chartered it. Mr. Adamson. I know they did it. Mr. Thom. And they chartered the Texas & Pacific. We know what the history of this country has been in respect to individual roads under Federal charters, but that is not our problem. That is not the problem that we think exists, and, therefore, we do not have to go back to a charter on new roads to' know how Federal charters act. We have already done that. Mr. Adamson. In_ talking to Senator Newlands — Mr. ChairmaJi ■ Newlands — a few minutes ago you agreed with him on the proposi- INTERSTATE AND FOREIGN TBANSPOETATION. 197 tion about the relation respectively between bonds and stocks and physical property. I wanted to ask you if I understood you right, that bonds and stock stood for the same thing, and, therefore, if one was taxed the other ought not to be ? Mr. Thom. I was very careful to draw a distinction in wha;t I said to the chairman on that subject. Mr. Adamson. I misunderstood you, then. Now, if bonds and stock amount to the same thing, the stock is of no account if the bonds are good. As I understand this, a railroad, like a man, makes a debt, but he expects to earn profits enough on the property to pay off the debt and still have the property. So, is it not true that the man who holds the debt has good property if the debt is good, and the man who owns the stock has good property if the property is solvent and it earns enough to payl Mr. Thom. Undoubtedly ; and nothing I have said to the chairman was contrary to that. Mr. Adamson. I must have misunderstood you. I thought you agreed with him that they both ought not to be taxed because they represent the same thing. Mr. Thom. No; I made a distinction between the two classes of property in what I said to the chairman. Mr. Adamson. Now, in relation to your method of acquiring these railroads from the present owners — it is about time to adjourn, though, and I will not go into that. Senator Eobinson. Mr. Chairman, I move that the committee ad- journ. The motion was agreed to ; and at 1.30 o'clock p. m. the committee adjourned until tomorrow, Tuesday November 28, 1916, at 10.30 o'clock a. m. INTERSTATE AND FOREIGN TOM^PORmTION HEARINGS BEFORE THE JOINT COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE, CONGRESS OF THE UNITED STATES SIXTY-FOURTH CONGRESS FIRST SESSION PURSUANT TO PUBLIC J. RES. 25 A JOINT RESOLUTION CREATING A JOINT SUBCOMMITTEE PROM THE MEMBERSHIP OF THE SENATE COMMITTEE ON INTERSTATE COM- MERCE AND THE HOUSE COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE TO INVESTIGATE THE CONDITIONS RELATING TO INTERSTATE AND FOREIGN COMMERCE, AND THE NECESSITY OF FURTHER LEGISLATION RE- LATING THERETO, AND DEFINING THE POWERS AND DUTIES OP SUCH SUBCOMMITTEE. Part 4 NOVEMBER 28 Printed for the use of the Joint Committee on Interstate Commerce WASHINGTON GOVERNMENT PRINTING OFFICE leis JOINT COMMITTEE ON INTERSTATE AND POKEIGN COMMERCE. FKANCIS G. NEWLANDS, Nevada, Chairman. WILLIAM C. ADAMSON, Georgia, Tice Chairman. JOSEPH T. ROBINSON, Arkansas. THETtJS W. SIMS, Tennessee. OSCAE W. UNDERWOOD, Alabama. WILLIAM A. CULLOP, Indiana. ALBERT B. CUMMINS, Iowa. JOHN J. ESCH, Wisconsin. PRANK B. BRANDEGEB, Connecticut. EDWARD L. HAMILTON, Michigan. Fbane HealYj Clerk. Willis J. Datis^ AaHatant Clerk. II INTERSTATE AND FOREIGN TRANSPORTATION-GOTERNMENT CONTROL AND REGULATION. TUESDAY, NOVEMBEE, 28, 1916. Congress or the United States, Joint Committee on Interstate Commekce, Washington, D. G. The joint committee met at 10.30 o'clock a. m., pursuant to adjourn- ment, Senator Francis G. Newlands presiding, also Vice Chairman William C. Adamson. MR. ALFRED P. THOM— Resumed. The Chairman. The committee will come to order. Mr. Adamson, you may proceed with your interrogations. Mr. Adamson. Mr. Thom, before proceeding to the other subjects as to which I was about to interrogate you when we adjourned yester- day, I would like to ask you a little about one phase of your testimony that I suppose was covered by the Shreveport case. I read a good many pages, and in fact several volumes about that. The courts and commission seem to be playing hide and seek and bull frog and tumble about it. I want to ask you if there is any authority in the Constitu- tion, apart from your conception of the commerce clause, that would authorize the Federal Government to go inside a State and raise a rate between two intrastate points ? Mr. Thom. There is the clause of the Constitution forbidding any discrimination between ports, which might do it in some cases — it might have that effect in some cases. Mr. Adamson. Of course, there are some ports in Texas and some in Louisiana. As I understand it, the point touched by the Shreveport case did not affect ports ; they were internal points. Mr. Thom. I did not understand you to confine your question en- tirely to the Shreveport case but generally. Mr. Adamson. Of course, your answer about ports would be an answer in some cases, but where points inside the State are not ports, what authority would you find? Mr. Thom. Then the commerce clause is the only one that I know of. Mr. Adamson. Then the contention of those who insist on that con- struction would be, in effect, that if the internal business of a State is, prosperous and local business could be carried at a profit at a lowjer rate than it could between similar points in sister States, that that business and that State ought to be required to contribute the equality under the commerce clause of the Constitution ? Mr. Thom. I do not understand that to be the contention. Judge. 199 200 INTERSTATE AND POE.EIGN TBANSPOBTATION. Mr. Adamson. Well, on what theory can they insist that the inter- nal business of the State of Texas itself is so properous without affect- ing or touching anybody else that it would be a reasonable and just rate and profitable between those two points — on what theory cau you say that you are compelled to go outside and compare that with somebody else's condition and raise the rate that is profitable there? Mr. Thom. I understand the situation to be this : Let us take the condition that you refer to, within the State of Texas, of a prosperous business, and let us compare that with the prosperous condition of business between the cities of New York and Philadelphia, where there is great density of traffic. Now, one of those businesses you refer to is intrastate; the business between New York and Philadel- phia is interstate. I understand that the view of the Constitution is that there shall be no reference to the line of the State in determining the conditions on which commerce should move, and if the conditions within a State relating to a larger traffic are- such as to justify a lower rate, that rate will be made lower, although it is within the State, just as the rate between New York and Philadelphia perhaps ought to be made lower than the rate between Petersburg and Norfolk. One is in a State and the other is outside of it. The point of the Shreve- port case is that there was a deliberate policy on the part of the State of Texas to exclude Louisiana points of production or distribution from the markets of the State of Texas and that the power over rates was used for the purpose of controlling Texas markets for Texas points of distribution. Mr. Adamson. Well, what was the motive for them to do it if there was something in the letter of the law and Constitution as to the rates established? Mr. Thom. There was nothing in the letter of the law to justify it. Mr. Adamson. The Constitution says that Congress shall regula,te traffic between the States or among the States and not within the State of Texas. Mr. Thom. Uiidoubtedly it says that, but it can not be permitted— no State can be permitted to so regulate commerce within its borders as to go outside and have an effect on commerce beyond its borders, because if it does Congress can not regulate the commerce between the States. That is most forcibly presented by the Supreme Court of the United States in the Shreveport case, and if you will let me I will give you further record with respect to that argument. Now, here they are : Here is the commerce withiii the State of Texas that moves at such a low rate that either Congress must bow to that rate in fixing its own interstate rates or cease to regulate the com- merce over which it has jurisdiction. Now, if it bows to the will of the State in respect to the rate, then it has accepted the standard of the State as to interstate commerce and has given up its obligation to the people to regulate interstate commerce. If it does not bow to that will of the State in respect to that matter, then it must create the standards on which both shall move. Mr. Adamson. Now, I fully understand Mr. Thom. Because the two classes of business are inseparable, one from the other. Mr. Adamson. I fully understand your line of reasoning appli- cable to a continuous line over the same tracks. If there were a through line through the State of Texas, or one State on this side INTERSTATE AND FOREIGN TRANSPORTATION. 201 and one State on the other side, and the State of Texas had a lower rate inside of the State locally then a Federal commission would not regard that lower rate in making up the through rate, but would allow the Federal regulations to govern the shipments entirely through the State. For instance, I at one time started to New Oreleans in a hurry and got down to the depot to .go to West Point. I wanted to get an excursion ticket. It had been selling at $15. The rate in Georgia to West Point was 2 cents, and at that rate they make a good living out of it. From West Point through Alabama to the Mississippi line it was two and half, and to Mississippi it was either 2.25 or two and a half. They charged me three cents a mile sohd from Newnan to New Orleans in interstate business. We can understand that the Federal commission upholds that, because they say in making through transportation over that through line they do not have to regard those local State rates. B.ut they do not order those States to raise their local rate as to intrastate traffic. They just state in making the through rate it would be disregarded. Mr. Thom. I suppose it could be realized that the whole purpose of the Constitution would be disappointed if any one State had a right to exclude people across the borders from dealing with its people. Mr. Adamson. Was there any evidence, internal or external, con- nected with the statute regulating that rate in Texas to show that their purpose was an embargo on export business? Mr. Thom. I understand that to be a conceded part of the argu- ment; that they claim that right to absolutely hold Texas markets for Texas distributing points. At any rate that was the basis on which the matter was treated in the Supreme Court of the United States and by the Interstate Commerce Commission. Mr.. Adamson. When I was examining you yesterday, I had mis- placed my book in which I had scribbled some allusions to your testimony, but I can hardly read them, and I do not know exactly what reference they had. to your testimony, when I can read them; but I notice that you talked about the diversity of State statutes. I will ask you if the railroad companies have not been as active as any other citizens always in looking after the legislation in the various States? Mr. Thom. Judge, the railroad companies of course must try to put their cases before the legislators Mr. Adamson (interposing). They have a right to do that. I just usked you if that is not the fact? Mr. Thom. I assume that the legislators want every point of view before they come to pass upon any matter of public importance ; but I can not too strongly emphasize here, if you will .permit me, the utter lack of justification, in the interest of the people who need a perfected system of transportation, to try and make every question turn upon whether or not heretofore the people have been mis- taken or the railroads have been mistaken. Mr. Adamson. I do not think that is involved in the question I asked you. I have quite a different purpose in asking you that question. Mr. Thom. If there has been a system most objectionable in the management of these railroads, that in no way answers the need of the public for facilities in the future. 202 INTERSTATE AND FOREIGN TRANSPORTATION. Mr. Adamson. I have not come to that either. I just asked you the fact, if you have not exercised your constitutional rights, as other citizens, to look after legislation in the various State legislatures— any legislation that affected the railroad companies? You have a right to do that. Mr. Thom. I have no doubt that whenever a case has come up the matter has been presented to the legislators by the railroads as best they could. I have no more knowledge of that than you have. Mr. Adamson. Do you not think that the light that these very able railroad men were able to shed on the deliberations of the State legislators had some influence on legislation? Mr. ThoM:. I have no doubt on earth that it has had a beneficial influence to bring out a more comprehensive view of the situation, Mr. Adamson. For instance, you alluded to the full-crew law. How many States have that ? Mr. Thom. I do not know, but a good many have it and a good many have not. Mr. Adamson. Do you not suppose that the enlightened efforts of the railroad advocates before the legislatures prevented its enactment in many States? Mr. Thom. They may have in one State and not in another. En- lightenment does not seem to be the test, because the enlightenment was the same in all the States but the results were different. Mr. Adamson. They used their light everywhere alike; but all substances and surfaces do not receive light as susceptibly. Mr. Thom. Therefore, in dealing with a problem that is universal we ought to get to a place where light has the same effect everywhere. Mr. Adamson. I will get to that argument later, but I will stick now to this one question, if you will answer me. There is no doubt, then, that the efforts of the railroad companies themselves in the various States, using their influence in some places where it would take and some where it would not, has had some effect in producing this diversity of legislation ? Mr. Thom. Yes ; but the difference between Mr. Adamson (interposing). Is that true? Mr. Thom. The difference in effect would be either to accept uni- versal disaster or try to obviate it in some places. Mr. Adamson. I am not talking about the result; I am talking about the fact. Mr. Thom. You know as much about that as I do. Mr. Adamson. I know, but I am not the witness. Mr. Thom. But you must not interpret Mr. Adamson (interposing) . I know all the subjects that you are posted on, and when I have a good witness I want to prove some- thing. Mr. Thom. Undoubtedly, if you want to know that, when there is a case involving a railroad, and it is presented to two different legis- latures, the result in one case will be different from the result in the other case, and diversity will be created which is hurtful to the whole public. Mr. Adamson. A?id yet if your influence had not been exerted in all those places there might have been different action in some places? Mr. Thom. And there might have been universal disaster, instead of our having diverted it in some cases. INTERSTATE AND FOREIGN TRANSPORTATION. 203 Mr. Adamson. On the other hand, there might have been universal blessing? Mr. Thom. That depends on whether it is a universal blessing to put a charge upon the commerce of this country everywhere equal to the charge that is put upon it by Pennsylvania and New Jersey for this extra-crew law. Mr. Adamson. As you have mentioned the extra-crew law, is your chief objection to that — I mean, the objection of the companies, be- cause you claim you do not object personally to anything — ^but is the main objection to that the expense that it puts on the roads? Mr. Thom. Oh, yes; certainly. Mr. Adamson. Are you familiar with the operation of these long trains on these roads? Mr. Thom. I have never operated any, but I have looked at them as they went by. Mr. Adamson. Did you ever see one with 75 or 100 cars in it? Mr. Thom. I have, indeed. Mr. Adamson. And two engines at the head of it ? Mr. Thom. Yes. Mr. Adamsox. How many crews run on one of those double-headers of 100 cars? Mr. Thom. I do not know, but they are all automatically controlled by a system of brakes. Mr. Adamson. That is not "the question ; I will come to that later. The question is, How many crews are on them ? Mr. Thom. I do not know. Mr. Adamson. There are not as many as there would be if each engine just had as many cars as it could carry and run along, are there? Mr. Thom. There are not as many as there would be ? Mr. Adamson. Yes. Mr. Thom. There are just as many as there would be. Mr. Adamson. Then you do not save any crews? Mr. Thom. What? Mr. Adamson. I say, then you do not save anything in the number of crews? Mr. Thom. By what? Mr. Adamson. By the double-headers and a hundred cars in a train ? Mr. Thom. No ; we do not make the crews less than we would on a train with a single engine. Mr. Adamson. Where is the expense, then, of what you call the " full-crew law " ? Mr. Thom. Because it requires more people than are necessary. They say they want — that it is a good thing to have an extra man to make up a hand at bridge in the caboose ; that he can stay there and play cards during the trip. Mr. Adamson. You are not prepared to say ]ust how many men constitute 9, crew i Mr. Thom. No. I am not an operating man. You will -have peo- ple here on that subject. Mr. Adamson. I know that. I do not want you to answer any- thing that you do not know, of course. I just asked you if you are prepared to say. 204 INTERSTATE AND FOREIGN TRANSPORTATION. Mr. Thom. No; I do not know how many men. I might guess pretty accurately, but I am not an operating man, and I am not discussing operating questions. Mr. Adamson. Then, I will go back into the field where you are skilled. Yesterday you made a distinction in your i^rocess of trans- mogrification Mr. Thom. Between the what? Mr. Adamson (continuing). Your transmogrification from State corporations to Federal corporations; you made a distinction be- tween condemning the property and the stock, on the one hand, and local taxation on the other. You argued that because these people invested with knowledge that Congress had the constitutional power to regulate them ad libitum Mr. Thom (interposing). No; not ad libitum; within constitu- tional limitations. Mr. Adamson. Well, does not Congress sort of take its own view about the Constitution when it is making law ? Mr. Thom. Sometimes it is checked up a bit in the Supreme Court. Mr. Adamson. I know, but not until after Congress acts. Mr. Thom. No ; they coujd not do it before they act. Mr. Adamson. You say they made their investments with the knowledge that Congress had the constitutional right . to regulate commerce, and that therefore it is all right to condemn them, dis- lodge them, and put their effects into a Federal corporation; then you say that you do not advocate taking the taxing power away from the States at all. I just want to ask you if the States did not go into the Union and make their delegation of authority and reservation of authority with the same notice, that Congress had the power to regu- late commerce in every respect? Mr. Thom. Yes ; and the Congress would have the power to control the question of taxation too. My remarks on that went to the wisdom of the exercise of that power. Mr. Adamson. As a matter of policy? Mr. Thom. To the wisdom of the exercise of the power. Mr. Adamson. You are like St. Paul: All things are right unto you, but all things are not expedient ? Mr. Thom. I would like to be like St. Paul, but I have not fully found the parallel. Mr. Adamson. Now, the obstacle to taxation of the physical prop- erty or the stock would be the inhibition against direct taxation, would it not ? Mr. Thom. What is that? I did not catch that. Mr. Adamson. The obstacle to the Federal Government taking over the taxing power would be the inhibition against direct taxa- tion? Mr. Thom. No. That could be very easily accomplished without running counter to that. Mr. Adamson. By an income tax? Mr. Thom. By a tax on the gross earnings as an excise tax. Mr. Adamson. I am glad you do not advocate that. Mr. Thom. I try to keep within the Constitution, Judge. Mr. Adamson. You say that would be constitutional? Mr. Thom. What? Mr. Adabison. To interfere with the taxing power. INTERSTATE AND FOREIGN TRANSPORTATION. 205 Mr. TiiGJi. That is a different thing from interfering witli any- body else taxing and imposing upon yourselves. Mr. Adam SON. I want to ask you now about the disposition of the property of those State corporations. You condemn a road like the one the newspapers are talking about now, down in the Southwest — the New Orleans, Texas & Mexican Railroad — that is, when it is found to be a little over $7,000,000 in debt, with capital stock of $12,000,000 and bonded indebtedness of $40,000,000. I would like to know what disposition would be made of a case like that in your condemnation proceedings? Mr. Thom. I do not think any condemnation proceeding is neces- sary. Judge. Mr. Adamson. What would you do there? Bankrupt it? Mr. Thom. No. I believe that you are obliged to recognize the things that have happened in this country. You are obliged to pro- ceed henceforth with respect to the rights — whatever those rights are — that have already been created imder the laws of the various States. Mr. Adamson. Leave them undisturbed, as they are ? Mr. Thom. Yes. You would not get rid, by the idea that I am suggesting, of any of your difficulties in respect to the present statutes relating to capitalization, unless you did this — unless you in your Federal system of capitalization issued stock without par value, and gave share for share to the owners of the stock in the State corpora- tions. Of course, the par value of stock means nothing. Mr. Adamson. You would not do that by compulsion? You would have to base that on agreement? Mr. Thom. I do not laiow how that would be. I think the stock- holder gets the exact equivalent of what he has now. That merely gets rid of the nominal capitalization. Mr. Adamson. You though yesterday or day before, in your direct testimony, that the holders of the stocks and bonds would not gen- erally object Mr. Thom. That is what I thought. Mr. Adamson (continuing). To reorganization under Federal charters. Mr. Thom. Yes; that is my belief, and whether they object or not they have nothing to do with it ; they can not help it. Mr. Adamson. You would have a right to do it anyhow ? Mr. Thom. Undoubtedly. Mr. Adamson. Suppose one of those corporations that you were about to condemn were under the weather financially ; not prosperous— would not bring much under the hammer, either the physical prop- erty or the securities, and yet the holders are hopeful— hope springs eternal in the human breast, you know ; and when you drafted a lease into the Southern Eailway it was not a great big rollicking thing like it is now. They grow; they have a right to grow. Have not those stockholders and security holders a right to say " We are look- ing for better times; let us alone, we will prosper if you will let us alone instead of selling us under the hammer " ? Mr. Thom. I have made no suggestion about selling anybody under the hammer. Mr. Adamson. Condemnation means that, does it not? 206 INTERSTATE AND FOREIGN TKANSPOETATION. Mr. Thom. I did not say anything about condemnation. That is an idea that your question produced. I did not say that condemna- tion is necessary. I do not think it is. Mr. Adamson. I may have confused you, in my mind, with Secre- tary Olney. Great men all look alike to me. Mr. Thom. If you will get me confused with him, I will be per- fectly delighted : I will get so much more than I give, that I will be the gainer. Mr. Adamson. What was your proposition, then? One of agree- ment ? Mr. Thom. My proposition is this: That when the people who obtained a financial interest in one of these railroads authorized to engage in interstate commerce, did so either by the purchase of bonds or stock, they accepted their contract relations limited by the possi- bility that Congress might at any time exercise its full power Under the commerce clause of the Constitution to regulate it. Mr. Adamson. I understand that. Mr. Thom. That a system of Federal incorporation is a proper system of regulating commerce, and therefore they hold their securi- ties subject to the adoption by Congress, under its power of regula- tion, of a compulsory incorporation system. Mr. Adamson. I understand that. Mr. Thom. And when Congress does that they must permit their property to come in under that Federal incorporation without the claim of damages against us. Mr. Adamson. I understand all that; but how do you get to the critical point where the transition is to be made? We have sug- gested an agreement, but if you do not agree, then what do you suggest ? Mr. Thom. Here is where we make the transition, and it seems simple to me. First, Congress passes a law, and then fixes a date when no corporation shall engage in interstate commerce unle^ss it takes out a charter under the national law. Mr. Adamson. That involves a reversal of our policy that we are going to compel them Mr. Thom. You were asking me how it was to be done. You interrupted me in the middle of my answer. Mr. Adajison. You may go ahead. Mr. Thom. Congress having done that, having provided a system of national incorporation, that system should provide for a meeting of the stockholders of the company upon due notice and a vote to be taken as to whether or not they would confine their corporation in the future to business in intrastate commerce or would continue to do interstate commerce and would come in under the Federal regulation. If the majority of the stockholders voted for that, then the machinery for the application of that company for Federal charter ought to be provided by the Federal act and the minority stockholders would be bound by that action of the majority, because they took their stock subject to the exercise in the future by Con- gress of its constitutional function of regulating commerce, which regulation is embraced in this compulsory system of incorporation. There is no condemnation in that ; nothing in that whatever except the order passing of the corporation before its charter, as it is in the charter as they want it to be. INTERSTATE AND FOREIGN TRANSPORTATION. 207 Mr. Adamson. But I think there is one fundamental trouble in it. Your plan is all pretty enough if it did no involve prohibiting them from going into interstate commerce. Our policy is to compel them to go in and stay in while your proposition would require a change of that policy and a change of the commerce law. At this time we can make joint routes and rates and force them to do it, and it is our policy to compel every one of them to do it. Mr. Thom. Yes; and that would be the means and would make your power in that respect much more effective than it is now. You would bring the whole business into interstate commerce under Fed- eral charters a once, subject to the unquestioned regulation of com- merce in all the respects you have mentioned. It would enlarge the opportunity for Congress to manage the thing in a homogeneous and comprehensive way, and not in any sense diminish it. Mr. Adamson. Well, I reckon we can not agree on excluding them from interstate commerce as a condition for them to change the form Mr. Thom. I think we can agree on the power, and it will be a great source of distress to me, because you are the man to decide it, and I am not. Mr. Adamson. Of course I do not decide it. There are 20 good lawyers on my committee that manage me entirely. Mr. Thom. I am putting you in asr a representative, not speaking of you as an individual. Mr. Adamson. I am the humblest servant on the list. Now, Mr. Thom, we exactly agree on the power of Congress, and the power of Congress can make these State corporations to do anything it pleases now withouAi all this trouble and expense of transforming into Federal charters, but I will not continue that discussion with you. I want to ask you now about yojir plan of administering and regulating, how you will get your corporations changed. I believe you stated that the commerce law and the commission operating under it could not control the Federal corporation any more than it can the State corporation at present? Mr. Thom. I think the commerce power of the Constitution is sufficient to enable the Interstate Commerce Commission, or any other commission Congress may appoint, to regulate the whole instrument of interstate commerce, even if not incorporated under national law. Mr. Adamson. Then the only other subject I wish to ask you about is your plan of organizing and operating the commission itself. I fully understand, as you do, that the people over the country do not welcome the visits of young lawyers and agents and examiners to hear and pass upon grave questions which they have a right to have a commissioner hear, and I fully agree with you that there ought to be enough commissioners of ability and experience to attend to all this business. To that end you know our committee reported and passed through the House 10 years ago a bill increasing the commission to nine members, with the idea they would divide them- selves into sections; that the commissioners would go over different parts of the country and hold hearings, and sections of three could each dispose of cases, unless there was dissatisfaction, when a demand might be made for a consideration in bank of the entire commission. That was never passed in the Senate, and we kept hammering at i' 208 INTERSTATE AND FOREIGN TRANSPORTATION. until last spring our committee reported it to the House and passed it again and sent it to the Senate. It is still hanging there, although I believe all the railroad companies, and the President, also., said it should not be stayed by this resolution. It has not been passed. What I want to ask you is, would it not be easy to conform prac- tically to your idea, substantially to your idea, by so enlarging and subdividing this commission and doing the work? Mr. Thom. Do you mean that alone without supplementing by what I have suggested ? Mr. Adamson. Can you not make it practically answer your sug- gestions ? Mr. Thom. No, sir; the Interstate Commerce Commission assures me that even if the views which I am advocating should be carried out they would still need those two extra members. Mr. Adamson. I say, enlarge the commission. Mr. Thom. Wait a second, please, Judge. Nine members of the commission, nine men can not do the work. Mr. Adamson. Then why do you not make it 12 or 15 ? Mr. Thom. Because I think the people of this country greatly prefer to have some commissioners resident in their own localities. Mr. AoAarsoN. Can you not select them from diflferent parts of the country ? Mr. Thom. Then, they would all be residents in Washington. So far as I am concerned — I am speaking now of the selfish interests of the railroad, not my view or what is good for the country — so far as the selfish interests of the railroads go, of course, those selfish in- terests would just as well be protected by a commission resident in Washington ; but that does not meet the public demand. The public demand is for the Government to understand local conditions. And this commission here, if it consisted of 30 members, sending out agencies from time to time to different parts of the country, would all the time be felt by the people at large as having men visit them that are not acquainted with their local conditions. Now, my idea is that you gentlemen have got to take — it does not make any difference what view I take — ^but you gentlemen have got to take a comprehensive view of the needs, the sensibilities, and the views of the people of this country. I believe one of the dearest things which they have is that their Government shall not be a stranger to them ; then, it must be brought into an intimate and ade- quate knowledge of their real conditions. This idea of regional commissions, of high men appointed by the President and confirmed by the Senate, of men paid in a way to at- tract the best service to the Government, is to bring to the doors of the people of this country in the various sections the Government that shall pass upon their needs. Mr. Adamson. I should like to be permitted to uncouple the last strong and beautiful sentence of yours and attach the part so beauti- fully descriptive of home government as against your proposition to transfer the corporations from the States to the Federal Govern- ment and the regulation of rates from the States to the Federal Government. Mr. Thom. Well, Judge, 1 am very confident that if you attach them they will look like brothers. They are part of a whole and INTERSTATE AND FOREIGN TRANSPORTATION. 209 comprehensive and consistent scheme, as it appears to me. Here we have got this thing of commission that is not a State affair. In the interests of the whole people it is necessary to be without territorial limitations ; it is a way they have learned to do and that they want to do business. The people in my State want to get to the markets of another State ; they do not want to get to the markets of my own State, it may be. It may be that we have not got any markets that are sufficiently attractive, so that commerce has found it necessary to pass over State lines without any reference to their being there. The commerce is a thing of nation-wide or world-wide' extent and importance. Now, that is one of the things. The Avay to regulate that, recog- nizing that it does not halt at State lines, but goes over great trans- portation movements that are not confined by State lines, and yet understanding at the same time the needs of the people, are the two things to be recognized. One we do by recognizing the fact that the movement of commerce is not confined by State lines, and the other is to put the regulating body close to the people. Mr. Adamson. I think your optimism and admiration for your proposed system is largely justified in your own case, so far as I know, by the practice of your own road. I must say that above any other railroad that I know, so far as I have observed the Southern Road has accommodated the local necessities, stopped their good trains, let the people ride, and treated them fairly, but your road does not run all over the United States, and I just want to ask you if, under your changed system, excluding Federal regulations and Federal incorporations, what do those local people feel that they can do if you whiz your transcontinental trains through the towns without stopping and give them a local passenger train that leaves before day in the morning and after dark at night — that does not look much better. They believe they will get a complete redress as Opposed to local authority. Mr. Thom. i thought you werp against local authority ? Mr. Adamson. No, sir; not for local affairs. I want Congress to do what the Constitution says Congress is to do, and the States to do what the Constitution says the States shall do, not because I am crazy about State rights or daft on State rights, but because the Constitution fixes it that way. Mr. Thom. Why not have some of the representatives of the regulating power resident in each community? Mr. Adamson. The State commission lives there. Mr. Thom. I understand that, but that is based upon the theory that the commissioners ought to be regulated by State lines. Mr. Adamson. Not at all, not local commissioners. Mr. Thom. If we differ on that, we differ on the fundamentals. Mr. Adamson. Not local commissioners. It is more important for the people in remote counties to get to their nearest town than it is for them to see a load of drummers go through from Boston to San Francisco, and they are the fellows you have to deal with; they are the fellows you get your verdicts from, if you get any at all; they are the people who first consented for you to build your rail- roads- they are the people who thought there was some obligation to accom'modate and respect them; and they are the people that will 210 INTERSTATE AND FOREIGN TRANSPORTATION. be dissatisfied unless j^ou inspire them with confidence about how their grievances are going to be redressed. If one of them is put off a train, or has a pet cow or pig killed, where is he going to be redressed ? Now he gets it at home. Mr. Thom. He will get it at home under any suggestions I have made to you. Mr. Adamson. You are going to propose, then, that you can sue all these Federal corporations through the State courts at home? Mr. Thom. Yes, sir. Mr. Adamson. And not be removed to distant Federal courts ? Mr. Thom. Undoubtedly; just have those jurisdictions where they are now. I think instead of there being a fundamental difference between what you are saying and I am saying, it relates only to the line of how much police authority is under the wisdom of Congress preserved. Mr. Adamson. No ; there is a fundamental difference. Mr. Thom. My proposition is where a State exercises a power which has no substantial effect beyond its own limits it ought to con- tinue it, but where it exercises a power, the substantial effect of which is to put its own laws on its neighboring States, it ought not to. Mr. Adamson. There is a fundamental difference in this: Repre- sentative government means that the local officers are chosen by local people. My proposition is that the local people choose the local administrators, and the local authorities govern the local communi- ties. You are proposing that a central authority through a central body, shall govern local as well as general affairs, and from a central authority those local people shall be selected. Mr. Thom. Only those matters in which the authorities in one State extend themselves across their border and undertake to regu- late the affairs of another State Mr. Adamson. Now, how many traffic divisions did you say there are — four or five? Mr. Thom. There are three classification territories. Mr. Adamson. Only three? Mr. Thom. Three classification territories. Mr. Adamson. You say there ought to be more commissioners than territories ? Mr. Thom. More regions. Mr. Adamson. How many in all? Mr. Thom. I have not gone into that, but I think Congress should have quite a number. Mr. Adamson. Just give me an arbitrary figure, for speculative purposes. Mr. Thom. An arbitrary figure would have no value, Judge. My own idea is Mr. Adamson. I am talking about a supposition case — say how many — 6 or 7 or 10 ? Mr. Thom. Suppose we say 15. Mr. Adamson. Say 15, then. If there are 15 places where local men ought to work, or a foreign man ought to be sent to the local place to work, or a local man sent to a central outhority to work, and you then add enough to staj'^ in town and hold the fort and attend to general business, it does seem to me you ought to select INTERSTATE AND FOREIGN TRANSPORTATION. 211 all 15 from all over the country and let them tend to the business in that central section. Mr. Thom. I do not believe that would be satisfactory to the people. My own judgrnent is that the fundamental reason for having these regional commissioners reside in their communities Mr. Adamson. But the big trouble you have there- Mr. Thom. A great many railroad people take your view. They take your view and say " Divide up this commission here and do not have the local men," because some of them think in that way you will get a much more independent judgment. My own judgment is we will have to take the risk of that; that we have got to recognize the demand not only because it exists, but because it has a funda- mental justification, for having men that are brought in contact with vital affairs and know them by residing among them. Mr. Adamson. The greatest difficulty you will have, Mr. Thom, in getting your program through is the idea that has been disseminated among the people by those who have been making your arguments, in the papers and elsewhere, about your escaping the appeal — the juris- diction of 48 different authorities. The idea is prevalent among the people that you are trying to get away from them and run your operations independent of them and in spite of them, and with no responsibility to them, and they do not like that. Mr. Thom. I hope after my explanation you will help me get that erroneous doctrine out of their minds. Mr. Adamson. I am glad to get that to your mind, because you wiU confront it everywhere. Mr. Thom. I am protesting against the suggestion that this is an attempt to concentrate everything in Washington, and I am telling you the counter view I take on that subject, that it is desirable from every standpoint; from the standpoint of meeting the views of the American public and from the standpoint of meeting a condition which probably demands knowledge on the part of those who govern, of the conditions of those who are governed, to put these regional commissions close to the people by making them reside in the various regions where they have jurisdiction. Mr. Adamson. I believe the people are not only willing but desire and demand that the railroads have revenue enough to put themselves iQ a condition of equipment and safety to do the business of the people promptly and safely, but they are suspicious and they are afraid that they will not be locally respected and protected in their local rights. That is what you have to combat. Mr. Thom. The President in making his nominations, and the Senate in confirming them ought to safeguard that point. Mr. Adamson. Well, all the President is talking about is about helping you get money, and you are not in such straits now as theni Is not your business more prosperous now ? Mr. Thom. Undoubtedly it is more prosperous now, but the mis- take of fixing your standard of regulation by prosperous years, in- stead of taking into consideration the average conditions that affect these railroads, will be mistakes which will lead to ruin. Mr. Adamson. Would it not be advisable to continue your case, and not argue it during days of prosperity, and wait for lean years, to press it on the people? 212 INTERSTATE AND FOREIGN TEANSPOETATION. Mr. Thom. Not at all. Bear in mind not one cent is coming to us from this investigation, if we get all we think we ought to have. This is not a rate case. This is not a case where you are passing on whether we need more or less money. It is a question whether or not you will protect your systems of regulation so that they will reflect the needs at all times, prosperous as well as unprosperous. If there are fundamental conditions that obtain in this matter that are objectionable in this matter, there is no more reason for removing them in prosperous years than there is for removing them in lean years. The question for you gentlemen to consider is whether there is anything in the tendencies of these conditions as they are now to really affect the future of transportation in America, Are the margins being absorbed unduly ? Are there too much fixed charges going on the property ? Is the margin that is left sufficient to guar- antee the American public adequate facilities ? You must judge that in prosperous times as well as in lean times, and if that is a fact the man who really foresees and provides for the needs of the future is the statesman. The man who does that must take note of that now as well as in future times. Mr. Adamson. In prosperous times the atmosphere is not as favor- able for considering appropriations for financial relief as in times of pressure. Mr. Thom. No financial relief is asked for. We are asking simply for perfected conditions of governmental regulation, which will deal with times when financial needs must be provided for and will not deal with them when financial needs are not .to be provided f Or. Mr. Adamson. But a very able part of your speech was addressed to the difficulty of securing ample capital. I understand you want to be placed by law where you can secure capital. Mr. Thom. Undoubtedly ; but ought we to wait until we are in a position of disaster to provide against this possibility, or should we provide in time to avert disaster? Mr. Adamson. I suppose you do not care to be cross-examined about Government ownership ? Mr. Thom. No, sir; I do not, personally — well, I should just as soon be examined on that as anything else, but I do not think my views are of any special value to the committee. Mr. Adamson. I thought I might disprove a thing by examining you on that. Mr. Thom. I do not believe in Government ownership. Mr. Adamson. That was the idea I had in considering examining you. I wanted to get your testimony on that and your objections to it. Mr. Thom. My objection is pretty much from the public stand- point. Mr. Adamson. I thank you for your courteous responses to my numerous questions, and I will relieve you from further questions. Mr. Thom. That is what I am here for. I will give you all the information I have got. The Chairman. Mr. Robinson, will you proceed? Senator Eobinson. I think it will require me only a few minutes to submit to Judge Thom such questions as I think are necessary to clarify my mind concerning the very forceful and able statement which he has made to the joint subcommittee. IKTEKSTATE AND FOREIGN TRANSPORTATION. 213 Judge Thorn, in your address you discussed the decline of rail- way credits. About when did that condition first manifest itself ? Mr. Thom. I do not know that I can speak with any accuracy about that, or in any way that will not need some verification, but my understanding is that railway credit commenced distinctly to decline in 1910. Senator Kobinson. Did I understand you correctly to charge this decline of credit principally against governmental action in over- regulating through State or national authorities or both ? Mr. Thom. I am told that the activities of all these commissions did not appear much prior to that time. Now, we, in the South, have been so long familiar with State regulating bodies that my inclina- tion would have been to put the time much behind the point I men- tioned, but there seems to have been, in other sections of the country, a delayed application of these varying systems of regulation, and they perhaps seem to have come to a climax somewhere about the year 1910. In that year, too, there was an increase of $50,000,000 in wages. There was a determination that railway revenues could not be increased in the way then proposed and in a way that a great many investors in railway securities thought they ought to be increased, and the lesson was taught somehow, in some way; that both revenues and expenses of the carriers were beyond the control of the owners. Senator Eobinson. Was there also a falling off in the railway earnings in 1910? Mr. Thom. I can not recall. Senator Kobinson. Do you think, in accounting for this decline in railway credit, in your statements, you have given due prominence to the mistakes and mismanagements on the part of the railway managers and financiers? Mr. Thom. I do not know how much attention should be given to that. I have no doubt it had a marked cumulative effect. Senator Egbinson. I believe you stated, if I understood you cor- rectly, that these mistakes Mr. Thom. Orie minute, if you will permit me to say this in respect to that, at the same time even the charges about that did not affect 10 per cent of the mileage of this country. It was a very small pro- portion, but it was made a great deal of in the public press. Senator Eobinson. It would not be necessary that charges should affect the entire mileage or even a large part of the mileage in order to impair the credit if the system was believed to be more Or less general, would it ? Mr. Thom. Not if it was believed, no ; but I do not understand even that it was charged that it was more or less general. I do not under- stand it extended to more than 10 per cent, and one of the great diffi- culties in railroad management is that the restrictive provisions of regulation intended to deal with this evil to which you allude but was expressly in the hands of people who never were supposed in the most remote degree to be subject to the charge. Senator Egbinson. These alleged mistakes and mismanagement, or the public conception of them, was largely responsible for bringing about the era of governmental regulation, was it not ? Mr. Thom. I think it very likely— very likely. 70342— PT 4—16 2 214 INTERSTATE AND POEEIGN THAN SPOETATION, Senator Eobinson. Prior to the basic act of Congress to regu- late commerce, laiown as the act of 1887, Congress had never at- tempted in any comprehensive way to exercise its power to regulate commerce, had it ? Mr. Thom. It had not. Senator Eo'binson. Are you familiar, or have you made any. study of railroad credit generally, and the conditions concerning railroad credit generally, during the period of nonregulation — ^that is, prior to the act of 1887? Mr. Thom. Well, when you ask me if I have made any study, I assume you mean some special study outside of my general knowledge of conditions ? Senator Kobinson. That is what I mean. Mr. Thom. No, sir ; I have made none outside of my general knowl- edge of conditions. I knew at that time, and for some years after- wards, it was easy enough to get money to go into new railroad enter- prises. Senator Eobinson. Increased Federal regulation is now regarded by you as necessary in some respects for the restoration or the estab- lishment on a securer basis of railroad credit, if I understand you ? Mr. Thom. That is correct. Senator Kobinson. In your opinion if there had never been any attempt at Government regulation, either upon the part of the Fed- eral Government or the States — ^that is, if all conditions with regard to regulation which prevailed prior to 1887 had continued to the present — would railroad credit now be on a better and securer basis than it is? Mr. Thom. Well, of course, that is a mere matter of opinion. Senator Robinson. I understand that. Mr. Thom. But at the same time I am a great believer in regula- tion. I think that great benefits have come from regulation, and that a great many more benefits can come from perfected regulation. I believe that the railroads, within the limits that they have been constructed, and the public are better oflf for having adopted a sys- tem of regulation. Now, the reason I say within limits is this: We must realize that the railroads of this country were built by people who expected in some way to get very handsome returns -from their investments.. Their hope in that respect was natural — ^benefited by bonuses of stock — and they expected to be able to work their enter- prises up until the stock became worth something. They would not have built them if they had not had that hope. We would not have had railroads if it had not been for that hope. Now, if here comes along Government regulation and puts an end to that hope and has to deal with the situation that is created by that change of condition, and having done that it makes a tremendous problem as to how venturous capital is still to be brought into this field of development. Senator Robinson. Now, let me ask you a question in that con- nection. You made that quite clear in your statement, to my mind, that the initiative of railroad construction in the United States was upon the part of more or less speculative investors. Do you think it was desirable that that condition should have continued in- definitely ? Mr. Thom. I do not think it was possible' to continue it indefinitely, Senator. INTEKSTATE AND FOBEIGN TEANSPORTATION. 215 Senator Eobinson. And that the era of regulation was inevitable? Mr. Thom. I think so. Senator Eobinson. Now, you have said that the existing system of regulation has had for its main purpose the correction of abuses and the elimination of evils of railroad management. Mr. Thom. Yes, sir. Senator Eobinson. That is the inevitable result of the condi- tions — '■ — Mr. Thom. Of all these abuses which have arisen ; yes, sir. Senator Robinson. The system of regulation that now prevails is the product of a slow growth which has occurred in spite of the opposition of railroads, I believe you stated ? Mr. Thom. That is my judgment. Senator Eobinson. I think that is correct. Do you regard the act to regulate commerce — that is, the act of 1887 that we have already mentioned — as largely a punitive corrective measure, and not as a constructive measure? Mr. Thom. Yes, sir. I think. Senator, that is not only so, but in obedience to the spirit of resentment throughout of the abuses which did exist, that has been demonstrated with the idea of giving the very lowest possible rate and of surrounding the management of the railroads with the greatest possible restrictions. Senator Eobinson. In maldng that statement Mr. Thom. Just one second, I had not quite finished my sentence. Senator Eobinson. 1 beg your pardon. Mr. Thom. And that there has been a tremendous distrust on the part of a large portion of the public in the management of rail- roads. It has been considered necessary to surround them with bayonets, and in order to make them keep step just prick them in the back and around. Of course, there can be no enduring system of that kind. The time must come when the character of the men in charge of these properties must be recognized as high as any other business or the system of private ownership and private manage- ment must go. We say that time has come. We ask you gentlemen to examine whether or not the time has not now come when you can deal with this business as you do with any other business, on the assumption — on the recognition, I should say, rather than assump- tion — of the fact that railroad management in this country is, as a rule, honest and upright and patriotic. Now, when that time does come — and I say it has come how — you "gentlemen are considering whether it has come or not — when that time does come then we think that the time has come for you while retaining all of your corrective powers and processes, to add the constructive and helpful features to this system of regulation which will insure for the future the suffi- ciency of these facilities, and I want to say right there, if you will permit me one more remark — that granting all that can have been said about abuses existing in the past, the mere existence of these abuses, of looking at them and feeling resentment against them, de- tecting them and'punishing them, will not provide for what the pub- ' lie needs in the future as to its facilities. If they were great enough upon their mere removal to put the railroads in a condition of fur- nishing all these facilities that are needed in the future, that would be one thing, but if you remove them all and still have an incapaci- tated system, why you have not done what the public needs require. 216 INTERSTATE AND FOREIGN TRANSPORTATION. Now our proposition is, first, that the great mass of these abuses have been removed; that if they exist at all it is only in sporadic cases, but certainly as to those that are not removed the retention of your corrective powers will be sufficient to deal with them, and when they are all removed there still are conditions of incapacity created which will prevent the railroads from being able to dp their real function for the public. Now we are asking you to see to it that when you, by the retention of your corrective machinery and processes, get rid of them all you do not leave an anaemic and incapacitated system of transportation, but that you will deal in a comprehensive and helpful way with the needs of the future. Senator Eobinson. You have referred frequently during your statement to the distrust in the public mind occasioned by the alleged mismanagement on the part of railway managers' and finan- ciers. Does that condition, in your opinion, still exist? Mr. Thom. I do not think so. Do you mean the public mind ? Senator Robinson. In the public mind. Mr. Thom. To nothing like the same extent that it did. I think the public mind has been greatly modified; that is, the public judg- ment of this matter has been greatly modified, and they are looking to-day on the situation with different eyes. Senator Eobinson. You regard it as true, do you not, that that condition has been perpetuated by the policy of railroads themselves, first, in opposjing all regulation, and, second, in failing to acquiesce in the attempts of Congress to regulate property. For instance, after the passage of the act of 1887, the general policy of the railroads was to test every inch of ground of regulation contained in that act, was it not? Mr. Thom. Yes, sir. Senator Eobinson. And that course has been pursued largely with regard to other subsequent acts of Congress enacted in the exercise of its power to regulate commerce? Mr. Thom. That tended to keep the country divided into two views ; one was the public insisting that these regulations should be made effective, and the other side fighting it, and the result of that was necessarily to put the passionate views of the victorious party on the other side. Senator Eobinson. That condition, I believe you have correctly stated, has been modified, to' say the least of it? Mr. Thom. Yes, sir. Senator Eobinson. The railroads have changed their attitude en- tirely on the subject of regulation? Mr. Thom. They have. Senator Eobinson. And in part, as a result of that as well as the other conditions, the public attitude toward the railroads has changed ? Mr. Thom. Yes, sir. We are getting into a better condition of affairs. Senator Eobinson. And if that diagnosis of the situation is an accurate one, and I think it is approximately so, it means a very grati- fying condition. Now, the second general exercise by Congress of its power to regulate commerce was, I believe, embraced in the so- called Sherman Antitrust Act, was it not, of 1890 ? INTERSTATE ANT* FOREIGN TEANSPORTATION. 217 Mr. Thom. Well, at the time that was passed, Senator, it was not supposed to apply to railroads. Senator Robinson. I was going to ask you about that. As a matter of fact that was the second comprehensive attempt on the part of Congress to exercise its regulatory power over commerce. Was that act generally regarded as applicable to railroads when it was passed? Mr. Thom. No, sir; it was not. Senator Robison. What, in your opinion, are the public benefits resulting from the application of the Sherman antitrust law to the railroads under the system of governmental regulation such as exists now? Mr. Thom. I do not think that it has any benefit. Senator, for the reason that there are two points at which competition may benefit the public. One is in respect of charges, the other is in respect of facili- ties. Now, of course, it can not have any effect in respect of charges, because those charges are Government made for both lines. Now, as to competition of facilities, I believe that the natural conditions of every management insure that just as much as if there was absolute competition all around. You can not imagine the efforts that the management of a single system has to make to keep down the rivalry hetween the managers of various divisions of that property, in order to make a good showing for themselves. That has been at times a serious difficulty of railroad management. Here is a man who wants to make a splendid record for his own division, and to get his trains over quickly and get them over cheaply, and rise up above the gen- eral mass as a successful railroad operator. Now, at times he has done that to such an extent that he has not regarded the next division at all. He has sacrificed the through movement to the success of the management of his own division, and that comes from a very human impulse, for him to demonstrate his own efficiency and get the advan- tage of it. Now, therefore, I think that that applies also to the management of two railroads commonly owned but doing a competitive business as to facilities and all that. Each one wants to make a record for himself, and therefore I do not believe that the public has been in much danger in respect to facilities ; secondly, I feel that I can answer your question quite comprehensively, that when you regulate rail- roads you put them in a class where the antitrust acts become of little value to the public, and that is certainly true when you recog- nize that your power of regulation would extend to the only possibly uncovered feature, and that is facilities. Senator Robinson. Then, if I understand you correctly, in your opinion the public interest would not suffer if the antitrust acts were made inapplicable to railroads? Mr. Thom. I don't think it would. Senator Robinson. And railroad operations might be facilitated — is that your idea ? Mr. Thom. I think so. There are certainly some features of it where this happens, as I understand it. I myself went before the Judiciary Committee, or the subcommittee of the Judiciary Com- mittee of the House of Representatives, when they had the Clayton bill under consideration and presented the question of the desirability of the law permitting the traffic managers of these various railroads to get together and to discuss the terms on which commerce should 218 rWTERSTATE AND FOEEIGN TKANSPOETATIOlir. move. That committee referred that question to the Interstate Com- merce Commission in writing, and the Interstate Commerce Com- mission wrote a letter indorsing that view and drew a provision, which was put in the Clayton bill as it left the House of Eepre- sentatives. When it got to the Senate the Senate Committee on the Judiciary, of which I believe there is at least one gentleinan here present, did not hold any hearings and we could not make our presentment, and that went out so quick there that it made us dizzy, but we feel it went out without having the merits of it presented. The committee had a short time — they had to act very quickly— and they did not have any public hearings on that bill at all; but, at any rate, the point I am making is that the practical necessity of having the^e traffic managers meet and agree upon their joint rates and their through routes and agree upon the terms upon which they will carry traffic on their roads so as to make it harmonious with and not discriminatory against the rates on some other roads is an essential of the railroad business if equality is to be created, and the public interest can be safeguarded if you permit the Inter- state Commerce Commission — ^make a report to the Interstate Com- merce Commission of whatever is done and enable them to set it aside. Senator Robinson. I presume it is your thought that if the sug- gestions which you have made with regard to increasing the au- thority of the Interstate Commerce Commission over the control of rates is enacted into law that there would still be less necessity for the application of the antitrust law as to railroad operations? Mr. Thom. Yes, sir. Now, Senator, just let me get this idea in there. When we recognize that rates, wherever they exist, may dis- criminate against other rates, no matter whether they are interstate or outside of the State, and that rates interstate may discriminate against the rates outside of the State, we have gotten to a point where there must be an independent authority to determine that (}uestion of discrimination. We can not let one of the parties who is adversely affecting the interest of another party across the border determine the question of discrimination, because that is the power of discrimination instead of the judicial determination of the ques- tion. We can not have a question of discrimination determined except by some impartial authority. Senator Robinson. I want to ask you some questions a little later about the question of increasing — the proposition of increasing the authority of the Interstate Commerce Commission touching the mat- ter of rate making; but now I want to go back just a moment to the subject of the impairment of credit and the restoration of it. You have said that the objectionable conditions which have existed in the management of some railroads in the past have, in your opinion, practically been eliminated, I believe. Mr. Thom. I think they have been almost entirely eliminated. The condition of public sentiment in the railroad world has been in the direction of such elimination. Senator Robinson. In your judgment, did such disclosures as were connected with the New Haven Railroad, along about the time you say this impairment of credit began, have any emphatic influence in the impairment of credit ? INTERSTATE AND POEEIGN TEANSPOETATION. 219 Mr. Thom. I think it did have a most adverse effect, Senator, and I will tell you another thing it had. It had the effect of helping to create the public sentiment among the railroads themselves that such things as that must cease. Senator Eobinson. I agree with you. Now, I want to ask you further along that line, whether or not the practice has existed among many, or at least some railroads, of the officers of the rail- roads organizing corporations, independent of the railroads them- selves, of which they, the officers of the railroad corporation, became the principal stockholders, and of buying and selling through those subsidiary corporations the supplies which were purchased by the railroads. Has that condition existed? Mr. Thom. Has it existed ? Senator Robinson. Yes. Mr. Thom. I have heard of it, and I believe it has. Senator Robinson. Do you not think that tended to increase the distrust occasioned in the minds of railway investors, by other mis- managements in railroad affairs? Mr. Thom. I do ; but I think this. Senator ■ Senator Robinson. Do you think it would be possible to put rail- road credits upon a secure basis without in some way eliminating this practice, whereby, or through which, railroad officers who, under every principle of law are trustees, are in the habit of buying and selling to themselves through corporations that they have organized and thus making enormous profits out of their trusts ? Mr. Thom. Senator, the difficulty about our situation there is this : That did exist, but that has likewise been practically eliminated, and we are attempting — it takes a long time, you know, for law to catch up with an abuse. Senator Robinson. That is true. Mr. Thom. I think that the law is about 10 years behind that abuse. Senator Robinson. You think that condition has been abolished for 10 years? Mr. Thom. I think it has been abolished for a long time. I said ■ 10 years at random. I did not mean anything especially, except that it has been for some time abolished. Senator Robinson. Take the case we had a while ago of the New Haven Railroad. Mr. Thom. Those things— I do not know when they existed, and, as I say, I put the period at 10 years simply as an illustration, but my belief is it is abolished. I talked with the President in regard to sec- tion 10 of the Clayton Act. That was drawn in such a way as practi- cally to break up the railroad systems of the country, and I told him, in asking his assistance in having that act suspended until Congress could think of it again— I told him that I was thoroughly m harmony with the soundness of the principle for which he stood ; that a railroad officer in and dealing for the railroad, whether he be a director or other officer, should not be allowed to sit on both sides of the table, and some way should be found, if the public thought at all that that situation now continues, of preventing it, and that I, as far as my powers lie, would assist in suggesting a means of preventing it, and I hold myself open to that to-day. I believe that that is a thoroughly unjustifiable position for the trustee of a railroad— and an officer is a 220 INTERSTATE AND FOREIGN TRANSPORTATION. a trustee, and a director is a trustee — ^to be dealing for his own bene- fit with the contracts of the railroads. And we, speaking of it now as a railroad fraternity question, we are all agreed on that subject. Senator Robinson. And such practice could unquestionably startle cautious railway investors? Mr. Ti-iOM. Undoubtedly. Senator Robinson. For all investors are cautions ? Mr. Thom. Undoubtedly. Senator Robinson. I agree with you. ' Now, you have, in the course of your statement, referred to the Pennsylvania Railroad as a model system ? Mr. Tpiom. I did not know I had, but I will. I think it is. Senator Robinson. You did, as I understood you, and I do not wish to be understood as implying any attack upon the Pennsylvania Railroad system, but, as touching your statement made just a moment ago, that these objectionable practices on the part of railroad officers of profiting through the organization of associate corporations to sell supplies to the railroads of which they are officers has been abolished, I want to ask you if you know anything about the alleged printing company which does the printing for the Pennsylvania Railroad ? Mr. Thom. Not a thing. I never heard of it. Senator Robinson. You do not know about that company, or whether it is still in existence, and the salaries of Mr. Thom. No; I have not. I know this: Of course, I am con- versant with the investigation that was made some years ago of profits that various officers of the Pennsylvania Railroad were alleg;ed to have made out of contracts with the company, or out of com- modities along its way, that were hauled by the company, but that is the full extent. I have never heard of the printing part of it to which you refer. Senator Robinson. It is still in existence and I will not ask you any further questions concerning that, as you say you know nothing about it. Now, you also referred, and I think very aptly, to the per- nicious influence of politics in the matter of the regulation of rail- roads, and you made the statement that the railroads themselves were • not in politics and no railroad you know of had been in politics. Mr. Thom. No ; I did not say that. Senator Robinson. Did you not? Mr. Thom. No ; I said no railroad with which I am acquainted is in politics. I did not say I did not know of any one having been in politics. Senator Robinson. "Well, I misunderstood you, then. Mr. Thom. Oh, no. Senator Robinson. I accept, as an abbreviation of this examina- tion in that particular, your statement now. Mr. Thom. Senator, let me tell you one thing before you get me away from that. I know railroads which are in politics, some more than others, but I have, since I had any responsibility of the general officers — have stood for, with the entire sympathy of the managers^ the chief managers of the companies with which I am particularly connected — ^have stood for the elimination of that, and their face has been set against it. You can not imagine, when a railroad company has been in politics, the difficulty of getting out. Men in the highest position will come and insist on cooperation in political matters, and IKTEESTATE AND FOREIGN TRANSPORTATION. 221 you have the greatest difficulty. Sometimes you have to accept a great disaster as the penalty for getting out, but railroads have accepted that, speaking generally, in this country. Now, I do not know — there may be still some in politics to a limited degree. Senator Robinson. I referred in my examination of you to this subject solely because of your mentioning it in your argument. I agree with you that in so far as it is possible to eliminate politics from any human affairs, that politics ought to be eliminated from the regulation of railroads, and I think you agree with me that the rail- roads, if that is done, ought to go out of politics, or perhaps they may have been partially responsible for some of the political influences that have been exerted concerning them by reason of their activities in politics. Take, for instance, the case of the Louisville & Nash- ville. I suppose you are familiar with the investigation that has recently proceeded before the Interstate Commerce Commission? Mr. Thom. In a general way ; yes. Senator Robinson. I do not care to go into the subject in detail further than to say it illustrates the embarrassments that accrue to a railroad managment after it once enters politics, by reason of the importunities of politicians, and that investigation indicated that the Louisville & Nashville and other railroads operating in that section of the Union were, up until quite recently, as late as 1913, and per- haps 1914, very actively engaged in politics. I suppose you are , familiar with the case of two southern railway presidents — I do not ' mean presidents of the Southern Railway, but two presidents of rail- roads in the South — who held a conference and who in numerous , correspondence subsequently styled each other as Pizarro and Cortez and discussed how they should divide the new world ? Mr. Thom. That was very humerous. I have seen it, but that Was many years ago, almost as long ago as the time when Cortez and Pizarro did exist. Senator Robinson. It is long since you were connected with the Southern Railroad. It was in the year 1906. Mr. Thom. That was some years ago; well, that is a long time ago. Senator Robinson. Yes; but I do not think you can refer to that as ancient history in view of the fact that the railroad which was represented by one of those presidents is shown in the investigation of the L. & N. by the Interstate Commerce Commission to have con- tributed enormous sums to political campaigns in 1913. I do not think you can say this is purely a matter of ancient history. I make no point of that except to emphasize the fact that the fault is, so far as political activity is concerned, is not all upon the part of the politicians; that the railroads may have invited or promoted the ■condition by their activities in politics. Mr. Thom. You must have misunderstood me if you thought I contended to the contrary. It is a system which is indefensible. It acted in this way. Here is a railroad in politics that all the time was behind one set of men and all the time opposed to another set of men, and after a while the other set of men won and then they came in there with their tomahawks out, you know, and with all their paint and feathers, and determined to destroy the thing that had been after them all those years, and there is the illustration of the spirit with which the railroads have been dealt with, because many 222 INTEBSTATE AND FOREIGN TKANSPOKTATION. of the men who have dealt with them have dealt with them with their wounds fresh from the attacks the railroads made on them. Now, I do not mean to say — let me make this clear — I do not mean to say that the railroad movement out of politics will appeal- to every company at the present day and to the same extent. You know very well that you might find some radicals even in the Senate. We meet some radicals even in the railroad life. We meet people in the railroad world that we can not approve, because they take an entirely different view of the policies which ought to be adopted from those that we take, and therefore you find that when a tend- ency starts it will appeal to men of different temperaments and dif- ferent views of public policy at different times, but what has hap- pened is that the men who were most persistent in holding on to that have become early exceptions or belated adherents of this view ' of getting out of politics. But some of them are belated at the same time the public sentiment of the railroad world is against being in politics, and the practice of the railroad world, dealing compre- hensively, possibly with some exceptions of belated gentlemen, is to be out of politics. Senator Robinson. I think we agree that in any event politics ought to be taken out of the railroads and the railroads out of politics as far as can be done? Mr. Thom. We agree on that, but we will say this, that for the railroads to be incapacitated to take any position in politics — ^it is a most lamentable thing for the public if they are to be hacked to pieces by the other side being all the time in politics and trying to get into public office by abusing them. Senator Robinson. You have contrasted the regulation of national hanks with the regulation of railroads and pointed out very accu- rately that railroads did not begin with regulation, whereas the national banks did. Here is another contrast that I think we may agree upon between the regulation of national banks and railroads, the Government control of national banks is very much more rigid than it is of railroads, is it not ? Mr. Thom. I really have not those features in mind. Senator Robinson. If you have not I do not care to heckle you about it. Mr. Thom. I say my impression was there was a liability on the national banks that, as I understood it, railroads do not possess. What I mean is of their having the perfect power of initiative, or a much larger power of initiative. Senator Robinson. In so far as regulation is concerned, though now the Government power as exercised is much more rigid as to the banks than it is as touching the railroads, is it not ? Mr. Thom. I do not so understand it. You may be right. Senator Robinson. Is there not another distinction in the organiza- tion and operation of these classes of corporations in the national banks? The officers and managing agents usually are the principal stockholders of the banks themselves, are they not ; whereas is that true under the present system of railroad management? Mr. Thom. I do not think it is true of either. Senator Robinson. Do you not? Mr. Thom. No ; the rates of the national banks are not subject to such regulation as the rates of railroads. INTERSTATE AND FOREIGN TRANSPORTATION. 223 Senator Robinson. I do not think you understood my last ques- tion. Mr. Thom. I was. answering your former one. Senator Robinson. But there is an absolute maximum limit fixed by law nearly everywhere touching the interest that shall be charged, but I was not speaking of that now. In the national banks the officers of the banks and the managing agents, the men who control the policy of the bank are the men who own the bank largely, are they not? Mr. Thom. I think that very frequently is the case. Senator Robinson. That is not true as to railroads, is it ? Mr. Thom. No, sir. Senator Robinson. By way of illustration, how much stock do you know — ^I do not mean to pry into private business, and if you have any objection to answering my question you need not do so — but just by way of illustration, how much stock has Mr. Fairfax in the Southern Railroad? Mr. Thom. I have no idea. The necessity, however, for selecting railroad managers without reference to their stock ownership comes from the necessity of putting the very best man in charge of these properties, and I do not believe, since the difficulties which you alluded to a moment ago of these private arrangements of profit have disappeared — I do not believe the railroads suffer from that. Ordinarily now it is one of the most magnificent instances of our American system to observe the way men in railroad life have come up from the lowest beginnings. I have in my mind one man who is now controller of one of the large railroad systems and is con- sidered, perhaps, the most eminent accountant in this country, who never went to school until he was 12 years of age, and commenced as a messenger boy in a Virginia station. I know of a vice president and general manager who has come up all the way from the lovrest grades of railroad service, and these men have come into these high positions because of special personal ability they exhibited through long years of service. Senator Robinson. While all that is true — and I agree with you and rejoice in it as a fact — it is also true that this management loses something that is usually associated with ownership and actual monetary interest in the control of large business concerns, does it not? Mr. Thom. The public does not lose. Let me give you an illus- tration of what I mean. Senator Robinson. I just asked you this question. Do you think Mr. Thom. I know; but this is a valuable illustration I wish to present. I was present at a stockholders' meeting a short time ago of a southern railroad company, as to whose president you asked me how much stock he had. It has been since the fall of 1914 since there has been any dividend on preferred stock of the Southern road. The Southern road has adopted the policy of having mass meetings of stockholders, so as to have criticisms of the manage- ment, and when we went into this meeting last October there got to be a very considerable pressure for dividends, and a gentleman, who was a preacher, got up and demanded dividends, and he said, " This management does not consider the stockholders enough. The first duty of a management is to its stockholders." The president of the 224 INTERSTATE AND FOREIGN TRANSPORTATION. ' company said, " It must be recognized that the first duty of the man- agement is to the public, and that the duty to the stockholders comes after that." Now, in that matter of consideration for the public as the first duty the management of the railroad loses nothing by not being very heavily interested in the stock. Senator Eobinson. Do you know anything about the Eailway In- vestors' League, Mr. Thom? Mr. Thom. No, sir; I do not. Senator Eobinson. I observed an advertisement in the New York American — the date does not appear in the advertisement — of some gentlemen who style themselves the " Eailway Investors' League." It is signed by Mr. John Muir, of New York City, as chairman, and a number of other gentlemen, complaining, it seems, that the interests of investors in railway securities is not being safeguarded in this hearing. Mr. Thom. In this hearing? Senator Eobinson. Yes, sir. Some reference is made to a letter sent out by the chairman, indicating some of the matters which the commission would consider and some of the classes of persons from whom the commission would like to hear, and complaint is made that railway investors were not specifically mentioned in that letter. I will hand this to you, and then I think it would be fair to let it go into the record, and I will ask you to just glance over it. Before you examine that, your discussion here has largely been based upon the safeguarding, the fair safeguarding, of the interests of investors in railway securities as a means of strengthening railway credit and thus obtaining adequate and necessary railway facilities. Mr. Thom. Yes, sir. Senator Eobinson. Do you know of any conflict between the rights and interests which you have presented here, and the rights and interests of railway investors? Mr. Thom. None at all. I have attempted to show, just as you have stated, that the public needs, in its own interest, an adequate railroad credit, and that the only way to protect the public is to do the things that legitimately attract investors. Now, as to this news- paper advertisement, to which you have called my attention, I know nothing of it or any of the people. I have heard Mr. Muir's name mentioned ; I do not know him. I never heard of this advertisement, and I never heard of this move. Senator Eobinson. I know Mr. Muir. He is a very prominent citizen. Mr. Thom. Any man has a right to complain of anything in this country, and I suppose Mr. Muir is simply exercising that preroga- tive. Senator Eobinson. I will state that I have read the advertisement, and my construction of it is that it is simply an invitation or a request to railway investors to effect an organization for the purpose of presenting their views and interests to this joint subcommittee, and of escaping what they may regard as unwise and unfair legisla- tion affecting their interests resulting from the investigation. Mr. Thom. If that is the purpose of it, I suppose that is legitimate, for anybody to come here and present his views. Senator Eobinson. I do not mean to question the legitimacy of it- Mr. Thom. What is that? J J INTERSTATE AND FOREIGN TRANSPORTATION. 225 Senator Kobinson. I do not think you can infer from anything I said that I was questioning the legitimacy of it. Mr. Thom. No. I have not read the advertisement and I do not know what it is. Senator Robinson. My interest in the matter is to see that all parties in interest are fairly treated, and I called it to your attention,, thinking perhaps that you would be able to throw some light upon it.. Mr. Thom. No; I am not. Senator Robinson. You know nothing about it? Mr. Thom. No; I know nothing about it. The Chairman. Mr. Robinson, would you permit me, in connec- tion with that advertisement, to insert right here in the record the invitation which was sent out? Senator Robinson. Yes. The Chairman. I will just read one sentence from that invitation. Senator Robinson. I will state that I think the invitation embraces the class whose interests are alleged to be involved in that advertise- ment, and I will be glad to have you do so, Mr. Chairman. The Chairman. I will state, in the first place, that the committee will, of course, welcome the representatives of any organization of investors who wish to appear before it, and the purpose of the invita- tion was to cover such organizations, if they existed. I did not know that any existed. Now, the purpose of the committee is stated in this, sentence : The purpose of the committee is to hear regarding Government regulation and Government ownership the opinions of economists and publicists of eminence, representatives of the Interstate Commerce Commission, the National Associa-. tlon of State Eailroad Commissioners, State railroad and public utility com- missions, representatives of the railroad executives s^nd labor organizations, representatives of farming organizations, and farmers, shippers, and bankers, representatives of chambers of commerce, and other important business and industrial organizations. I put in ^he term " bankers " there, supposing that, as a rule, the investment bankers might be regarded as representatives of the investors. We all know that there are numerous investment bankers, in the country, upon whose advice customers make investments. I ' saw that advertisement, and if I had seen it before the invitation was sent out I should have included that organization in the invitation. Mr. Adamson. And they are now invited. The Chairman. Yes ; they are now invited. Insert this invitation in the record, with the advertisement referred to. (The " invitation " above referred to is printed in full, as fol- lows:) [Tentative Print — Subject to Revision.] Congress of the United States, Joint Committee on Interstate Commerce, room 326, Senate Office Building, Washington, D. C. [Senate: Francis G. Newlands, Nevada, chairman; Joseph T. Robinson, Arkansas; Oscar W Underwood, Alabama ; Albert B. Cummins, Iowa ; Frank B. Brandegee, Connecticut ; Frank Healy, clerk. House of Representatives : William C. Adamson,. vice chairman ; Thetus W. Sims, Tennessee ; William A. CuUop, Indiana ; John J. Bsch, Wisconsin; Edward L. Hamiltop, Michigan; Willis J. Davis, assistant clerk.] Investigation of the Conditions Relating to Interstate and Fokbign Com-- mebce and the necessity fok fukther legislation relating thereto. PRELIMINARY STATEMENT. 1. Initiation of proceedings. — The initiative of the proceedings provided for by Senate joint resolution 60 was taken by President Woodrow Wilson in a 226 INTERSTATE AND POEEIGN TEANSPOBTATION, message to the Congress of the United States, presented December 7, 1915, in the following words : 2. President's message. — In the meantime may I make this suggestion? The transportation problem is an exceedingly serious and pressing one in this coun- try. There has from time to time of late been reason to fear that our railroads , would not much longer be able to cope with it successfully, as at present equipped and coordinated. I suggest that it would be wise to provide for a commission of inquiry to ascertain by a thorough canvass of the whole question whether our laws as at present framed and administered are as serviceable as they might be in the solution of the problem. It is obviously a problem that lies at the very foundation of our eflaciency as a people. Such an inquiry ought to draw out every circumstance and opinion worth considering, and we need to know all sides of the matter if we mean to do anything in the field of Federal legislation. No one, I am sure, would wish to take any backwack step. The regulation of the railways of the country by Federal commission has had admirable results and has fully justified the hopes and expectations of those by whom the policy of regulation was originally proposed. The question is not what should we undo? It is whether there is anything else we can do that would supply us with effective means, in the very process of regulation, for bettering the con- ditions under which the railroads are operated and for making them more useful servants of the country as a whole. It seems to me that it might be the part of wisdom, therefore, before further legislation in this field is attempted, to look at the whole problem of coordination and efficiency in the full light of a fresh assessment of circumstances and opinion as a guide to dealing with the several parts of it. 3. The resolution,. — Senate joint resolution No. 60 was introduced in the Sen- ate and, after amendment by including the investigation of Government owner- ship, was adopted by both Houses of Congress. It was approved by the Presi- dent July 20, 1916, and reads as follows : " [Public resolution — No. 25 — 64th Congress.] " [S. J. Res. 60.] I *' Joint resolution creating a joint subcommittee from the memt)ership of tlie Senate Com- mittee on Interstate Commerce and the House Committee on Interstate and Foreign Commerce to investigate the conditions relating to Interstate and foreign com- merce, and the necessity of further legislation relating thereto, and defining the powers and duties of such subcommittee. "Resolved by the Senate and House of Representatives of the United States of America in Conyress assembled, That the Interstate Commerce Committee of the Senate and the Committee of the House of Representatives on Interstate and Foreign Commerce, through a joint subcommittee-to consist of five Senators and five Representatives, who shall be selected by said committees, respectively, be, and they hereby are, appointed to investigate the subject of Government control and regulation of interstate and foreign transportation, the efficiency of the existing system in protecting the rights of shippers and carriers and in promoting the public interest, the incorporation or control of the incorporation of carriers, and all proposed changes in the organization of the Interstate Com- merce Commission and the act to regulate commerce, also the subject of Govern- ment ownership of all public utilities, such as telegraph, wireless, cable, tele- phone, express companies, and railroads engaged in interstate and foreign com- merce and report as to the wisdom or feasibility of Government ownership of such utilities and as to the comparative worth and efl5ciency of Government regulation and control as compared with Government ownership and operation, with authority to sit during the recess of Congress and with power to summon witnesses, to administer oaths, and to require the various departments, com- missions, and other Government agencies of the United States to furnish such information and render such assistance as may, in the judgment of the joint sub- committee, be deemed desirable, to appoint necessary experts, clerks, and stenog- , raphers, and to do whatever is necessary for a full and comprehensive exami- nation and study of the subject and report to Congress on or before the second Monday in January, nineteen hundred and seventeen ; that the sum of $24,000, or so much thereof as is necessary to carry out the purposes of this resolution and to pay the necessary expenses of the subcommittee and its members, is hereby appropriated out of any money in the Treasury not otherwise appro- INTERSTATE AND FOKEIGN TRANSPORTATION. 227 priated. Said appropriation shall be immediately available and shall be paid out on the audit and order of the chairman or acting chairman of said subcom- mittee, which audit and order shall be conclusive and binding upon all depart- ments as to the correctness of the accounts of such subcommittee. "Approved, July 20, 1916." 4. Membership. — Following the adoption of the resolution the following Mem- bers of the Senate and House were appointed members of the joint subcommittee : Senate : Francis 6. Newlands, Nevada ; Joseph T. Robinson, Arkansas ; Oscar W. Underwood, Alabama; Albert B. Cummins, Iowa; Frank B. Brandegee, Connecticut. House of Representatives : William C. Adamson, Georgia ; Thetus W. Sims, Tennessee ; William A. CuUop, Indiana ; John J. Esch, Wisconsin ; Edward L. Hamilton, Michigan. 5. Organization. — ^The members of the joint subcommittee met and organized, selecting as chairman Francis G. Newlands and vice chairman William C. Adamson. They also appointed Frank Healy as clerk of the committee and Willis J. Davis as assistant clerk, and designated Messrs. Gait & Hull, Southern Building, Washington, D. C, as official reporters. 6. Date of hearings. — The date of the first hearing was set for November 20, 1916, at 10 o'clock a. m., at room 326, Senate OfBce Building, Washington, D. C. 7. Arrangement of hearings.— It is the desire of the committee to give ample opportunity to all interested In or having any relation to the subject matter of the proposed inquiry to express their views. But the committee would like early ' notice of the subjects to be discussed by the various persons appearing before it, so that the hearing can be, as far as practicable, in orderly sequence as to sub- jects. The purpose of the committee is to hear regarding Government regula- tion and Government ownership the opinions of economists and publicists of eminence, representatives of the Interstate Commerce Commission, the National Association of State Railroad Commissioners, State railroad and public utility commissions, representatives of the railroad executives and labor organizations, representatives of farming organizations, and farmers, shippers, and bankers, representatives of chambers of commerce, and other Important business and Industrial organizations. 8. Subjects to be considered. — The subjects to be considered are stated in general terms In the joint resolution and cover — FIEST. " * * * the subject of the Government control and regulation of interstate and foreign transportation," including therein specifically : (a) " * * ■ * the efficiency of the existing system In protecting the rights of shippers and carriers and In promoting the public Interest." (5) " * * * the incorporation or control of the Incorporation of carriers." ^gj tt * i, * g^jj^ ^ji proposed changes in the organization of the Interstate Commerce Commission and the act to regulate commerce." " * * * the subject of Government ownership of all public utilities, such as telegraph, wireless, cable, telephone, express companies, and railroads engaged in interstate and foreign commerce," Including specifically : (a) " * * * the wisdom or feasibility of Government ownership of such utilities." (6) "* * * the fcomparative worth and efficiency of Government regula- tion and control as compared with Government ownership and operation." 9. Government regulation and control. — ^Under this head, without excluding other questions, attention is particularly called to the following subjects : (a) Whether the Interstate Commerce Commission is overloaded and whether its jurisdiction should be confined to questions of discriminations, rebates, and rates, its jurisdiction over other subjects, such as valuation, safety inspection, etc., to be turned over to some other body or bureau to be created by law. (6) Whether it is necessary to make any change in the organization of the Interstate Commerce Commission with a view to prompt and efficient action; whether it is feasible to Increase the number of commissioners and to permit them to divide into several departments for the consideration of cases, and if so, whether there shall also be consideration in bank and also whether there shall be appeal from decisions in the department to the commission in bank. 228 INTERSTATE AND FOREIGN TRANSPORTATION. (c) Whether such departments of the Interstate Commerce Commission shall sit in Washington or be assigned to definite traffic areas somewhat after the manner of the judicial circuits, and whether in the latter case there should be provision for their sitting in bank at Washington or for some central body in Washington with the duty of hearing appeals and directing the procedure of the departments. ( d ) Whether under the present system the credit of the common carriers is issured with a view to their securing the moneys needed for necessary improve- ments and extensions in the interest of the public and at reasonable rates of Interest. Whether Government regulation of the issue of securities is advisible, and if so whether it is to the interest of the public as well as the carriers that this regulation should be exercised by the National Government and whether it should involve merely publicity or absolute control of the issue of securities. Whether concurrent jurisdiction of the Nation and the States to control such issues is in the interest of the carriers and the public. What will be the field of operations for the State railroad commissions in the interest of the public if the control of securities and the control of rates is vested in the Interstate Com- merce Commission. Whether and to what extent within a period of five years- it will be necessary to enlarge the facilities of the common carriers in the inter- ests of the public and whether the present system of Government regulation is such as to insure the credit of the carriers with a view to their making addi- tional necessary expenditures. (e) What is the effect of dual regulation on the parts of the States and the Nation of the rates of carriers. What, if any, contradictions does it involve, and what, if any, discriminations does it involve as between States and localities. (/) Whether or not any regulation is feasible of the wages and hours of employees of common carriers, and whether or not it is advisable, in the interest of the public and with a view to maintaining uninterrupted commerce between the States, to take any further legislative action regarding the adjustment of disputes between the carriers and their employees and regarding strikes and lockouts. ig) Whether any national legislation is required as to the organization of carriers in interstate commerce in the nature of national incorporation, permis- sive or compulsory, or in the nature of national holding companies under which State corporations may be controlled and unified in their operations in the in- terest of interstate commerce, and what form of national legislalon for the in- corporation of carriers or for holding companies owning the stock of State com- panies, is desirable. How will national incorporation affect the police powers of the States over railroads operating within their boundaries. Will it be ad- visable, as in the case of the national banks, for the National Government to pre- scribe a uniform rule for the taxation by the States of railroad properties and securities. 10. Government ownership. — " * * * the wisdom or feasibility of Govern- ment ownership of such utilities " and " * * * the comparative worth and efficiency of Government regulation and control as compared with Government ownership and operation," including under this head : (a) The practical results of Government ownership both as to efficiency and econorhy where actually practiced. (6) Whether Government ownership is compatible with our system of gov- ernment and what Its effect will be on our governmental institutions. (c) Whether a system of Government ownership will suit local needs. id) A practical method of securing Government ownership, whether by pur- chase or condemnation of properties, or by purchase or condemnation of bond and stock issues, or otherwise.- * * * * it! * * The views of all who are interested in or have information regarding the foregoing questions are invited by the committee, either by written communi- cation or at the oral hearings. It is suggested that with a view to maintaining a logical sequence in the hear- ings those participating therein classify their remarks accordng to the fore- going subheads as far as practicable. Feancis G. Nkwlands, CMirman. INTEESTATE AND EOEEIGN TRANSPORTATION. 229 (The newspaper advertisement is printed in full, as follows:) Nbwlands Joint Conqeessionai, Committee — An Open Letter to all Investobs IN American Railway Securities. Do you, the real owners of America's railroads, wish to be ignored by the Newlands joint congressional committee's investigation, which began yesterday and will continue probably for many months? Or do you want to have your interests properly presented and represented by Spokesmen chosen by you and authorized to speak for you, with a view to secur- ing fair play for your invested savings? Every conceivable interest will be represented at the committee's hearing, except the real owners of our railroads, you and us and the rest of the 600,000 investors who, by means of our savings, have provided the capital for the creation and development of our ,$20,000,000,000 transportation system. There is no one authorized to go before the congressional committee and pre- sent your united views. The truth is that the small and moderate investors who have supplied the bulk of our railroad capital are the only body or class identified with the rail- roads who will not be very much to the fore throughout this investigation so vital to the future of every railroad stockholder and bondholder in the land. Bead carefully the following list of interests Senator Newlands, the chairman, declares the committee desires to hear from : " The purpose of the committee is to hear, regarding Government regulation and Government ownership, the opinions of economists and publicists of emi- nence, representatives of the Interstate Commerce Commission, the National Association of State Railroad Commissioners, State railroad and public utility commissions, representatives of the railroad executives and labor organizations,, representatives of farming organizations and farmers, shippers, and bankers, representatives of chambers of commerce and other important business and ■ industrial organizations." Not one word, you will note, about the great army of frugal citizens whose hard-won savings have brought the railroads into being and keep them run- ning. Railroad regulators galore are cordially invited. So, too, are the labor unions, the shippers, farmers. " Important business and industrial organiza- tions " are likewise bidden to the deliberations. But railway investors are wholly without any " important organization " to champion their rights. This ought not to be. Are you content to stand idle and impotently by and let everybody and any- body else say what should be done with your properties? Don't you feel that your wishes, your views, your interests should cut some figure in the momentous proceedings — ^proceedings which are to determine whether the time has come to have the Government become owners of our 250,000 miles of railway or whether some other method be adopted hereafter in handling the whole railroad situation? Surely to ask the question is to answer it. If you agree with this, if you wish to have a voice in shaping the future and the fate of your properties, you can insure the proper presentation of your wishes by joining the movement to organize a Railway Investors' League and, later on, by nominating and authorizing the strongest delegates possible to go before the committee to defend your legitimate rights. RAILWAY investors' LEAGUE. The Railway Investors' League has already tentatively enrolled several thou-' sand members from all the States of the Union, and a start has been made in inducing the leading railroad companies to bring the movemrinet directly before each one of their recorded stockholders. If the response to this announcement and to the other measures being taken by those who are striving to bring together railway investors in a united, influ- ential, nation-wide body shows unmistakably that you wish to have some voice in the fate of your properties, steps will be promptly taken to proceed with the formal and permanent organization of the Railway Investors' League. Such an association must, of course, be self-supporting, and it is proposed to fix the annual dues at $i. 70342— PT 4^16 3 230 INTERSTATE AND FOREIGN TRANSPORTATION. Do not forward any money at this stage, but simply fill in the appended blank form and mail it at once, without committing yourself to any obligation or to any responsibility whatsoever. If you do not consider your own rights worth prote'cting, it is scarcely to be expected that anyone else will. John Muie, New York City, Chairman, Lionel Sutko, New York City, Vice Chairman, B. C. Forbes, New York City, Vice Chairman, Paiti, Mack Whhi-an, New York City, Secretary. Organization Committee. J. A. Fagan, Minneapolis, Minn. Cabl W. Peieck, Massillon, Ohio. F. Edwakd Sommeks, St. Louis, Mo. William K. Ewing, San Antonio, Tex. H. T. Winston, Washington, D. C. C. McCoNNELL, M. D., Hogansburg, N. Y. Date, , 1916. Railway Investors' League, John Munt, Chairman, 61 Broadway, New Yorh City: I have read the platform of the Railway Investors' League. I am in hearty sympathy and accord with Its object and purpose, and I hereby pledge my co- operation and assistance in carrying out the program. With the understanding that signing this form does not place me under financial obligation, please enroll me as a member of the organization. Signed Address ' Owner of (Name securities owned) Senator Robinson. It may be that some of the questions I am asking you are more or less academic, but they are not asked for the purpose of haggling in any wise, but solely for the purpose of clarify- ing my own mind with respect to the matters which you have sug- gested. You suggested certain reforms as fairly calculated to ac- complish the ends which you think are desirable in railway regu- lation. Mr. Thom. And which are making much progress in that direction. Senator Robinson. The first relates to the national regulation of all rates for roads engaged in inter^ate commerce. I understand that you expect hereafter to discuss the law applicable to these sug- gestions, and I will not go into that now, or anticipate your discus- sion by questions in detail concerning the power of Congress to oc- ■ cupy the entire field of rate making as toj-ail roads engaged in inter- state commerce ; but in order that I may understand now your view- point as to this proposal, I ask do you contend that if a railroad en- gages in interstate commerce the rates which it charges on purely mtrastate traffic are within the regulative power of Congress? Mr. Ti-ioM. Yes, sir. Senator Robinson. Is it not true that Federal control over inter- state rates is limited to two conditions, so far as our courts have yet decided — first, the nullification of rates which are confiscatory, and, second, the nullification of rates which constitute a discrimination against or a burden upon interstate commerce? INTEESTATE AND FOREIGN TRANSPOETATION. 231 Mr. Thom. I think the courts have gone further, and have said that it is the constitutional power of Congress to regulate the entire instrument of interstate commerce. Senator Eobinson. Has the Federal Government power, in your opinion, to fix or regulate rates on purely intrastate traffic, merely because the commodities are transported over a railroad which, while doing intrastate business, is also engaged in interstate business? Mr. Thom. I think that the foundation of the power of Congress to act in the matter is to regulate the instrumentality of interstate commerce in all its bearings. Senator Robinson. Do you not think that is limited to its con- nection with interstate commerce; that it regulates it as an agent of interstate commerce and not as an agent of intrastate commerce? Mr. Thom. You can not regulate it; you can not protect it; you can not sustain it unless you regulate it in all its activities. , Senator Eobinson. Then, I understand you correctly in your origi- nal statement. I wanted to make sure of it. Mr. Thom. Yes. I will present an argument on that subject at a later stage of these proceedings. Senator Robinson. With reference to the suggestion which you make as to compulsory Federal incorporation of railways before permitting them to engage in interstate commerce, this, in your opinion, would relieve the imequal conditions under which the rail- roads are organized and operated, by reason of the limitations and provisions of their State charters, but it would not add anything, of course, to the regulative power of Congress ? Mr. Thom. No. Senator Robinson. Congress can do everything without Federal incorporation that it could do with it ? Mr. Thom. I think it can ; but, as I told you, there is some differ- ence of opinion about that, in respect to any provision of a congres- sional act which might be construed as an amendment to a State charter. Senator Robinson. It would, in your opinion, constitute a tend- ency toward uniformity, which would strengthen railroad credit ? Mr. Thom. Undoubtedly; and it would have a most important bearing upon universally accepted control as valid by Congress of the issue of securities. Senator Robinson. Your third suggestion relates to reorganiza- tion of the Interstate Commerce Commission and changes in its jurisdiction and powers, so that it shall become a judicial tribunal? f Mr. Thom. Yes, sir ; largely. Senator Robinson. And that regional subordinate commissions be established, with right of appeal to the central commisison pro- vided in certain cases? Mr. Thom. Yes; on exceptions. Senator Robinson. How many of those regional commissions do you think would be required, Mr. Thom? Mr. Thom. I have not gone over the country about that. I do not know. Senator Robinson. Very well; if you have not determined upon the number Mr. Thom. No. I thought that was a matter that the Interstate Commerce Commission would study and recommend to Congress. 232 INTERSTATE AND FOREIGN TRANSPORTATION. Senator Robinson. Now, if these regional commissions are created, as you suggest, would it still be necessary for them to have examiners in order to make a proper investigation of cases coming before them? Mr. Thom. I should hope not, but I can not tell. Senator Robinson. The primary purpose of creating regional com- missions, as I understand you, is to bring the work — the investigation itself — closer to the commission so that the litigants may have the advantage of the actual service of the commissioners themselves rather than of subordinates in the person of examiners and clerks? Mr. Thom, Yes. The double object of bringing the Government close to the communities whose interests are affected, and the other object is that of assuring the character of the men — ^the type of the men, I would say, rather than the character — ^the type of the men who are to have charge of these important matters. Senator Eobinson. You would not advocate the creation of these regional commissions unless they were so constituted and equipped as to accomplish these two things ? Mr. Thom. That is right ; yes. Senator Robinson. To bring the public closer to the commission and the commission closer to their work ? Mr. Thom. Yes; and that the type of men be assured. There is great complaint — somebody made it here this morning, I think Judge Adamson — a great complaint, not only on the part of the shipping public, but on the part of the railroads, that in many important mat' ters they do not get beyond the examiner ; and while these examiners are fine young men and capable people in a great many ways they are bound to have their grade somewhat fixed by the compensation they get. Senator Robinson. With the constantly increasing work that is being imposed by Congress on the commission and the natural growth of their duties, with the expansion of the commerce of the country, this condition will grow worse ? Mr. Thom. Yes; undoubtedly so. Senator Robinson. Now, just an inquiry or two about the increase of the power of the Interstate Commerce Commission over rates which constitutes another one of your suggestions. Do you suggest that this power be extended in any particular so as to give the com- mission the power to fix minimum rates? Mr. Thom. That, in my representative capacity, is the full extent to which I would make the recommendation. I mean that I am ex- pressing the views of the railroad executives in making that recom- mendation. Senator Robinson. Yes; you do not wish to express any personal views concerning it? Mr. Thom. I do not think it would be very becoming for me to express a personal view. Senator Robinson. I will not ask you to do it. Mr. Thom. I want to say that my personal view goes to the full extent that I have recommended there, however. Senator Robinson. Would the power to fix both minimum and maximum rates, if vested in the commission, prevent discrimina- tions ? Mr. Thom. I think it would. INTERSTATE AND FOREIGN TEANSPORTATION. 233 Senator Robinson. That is the principal object of giving that power to the commission ? Mr. Thom. That is one object, but the other object — and a very important one — is to prevent the improper depletion of the revenues of the companies through some local conception of what is best to be done for the company. Senator Robinson. And to prevent the railroads themselves, under stress of competition, from making unfairly low rates? Mr. Thom. Yes. Senator Robinson. Would not the diiEculty of determining the relative reasonableness of rates still exist after the power to fix a minimum rate is given to the commission and the rate actually fixed? Would not there still exist a latitude between the minimum and the maximum that would enable the railroads to practice dis- crimination ? Mr. Thom. I think you will find in the suggestion that they be given entire power over the question of discrimination. Senator Robinson. Very well. Mr. Thom. And the protection of the rate structure. Senator Robinson. Referring to your fifth suggestion, which would prescribe some of the things that the Interstate Commerce Commission must take into consideration in fixing rates, you say that they should be required to consider the value of the service. Do they not do that now ? Mr. Thom. I do not Iniow, Senator, whether they do it or not. I have a good deal to say when the proper time arrives on that ques- tion of value of service, and if you have time now for about half an hour I would like to do it at this time. Senator Robinson. You need not do it now. I prefer that you should do it in your own time, although I should be very glad to hear your discussion of that subject. What do you mean by the suggestion that the commission should be required to consider the rights of the passengers, shippers, and owners of the property trans- ported as an element in rate making? Mr. Thom. "What do I niean by that? Senator Robinson. Yes. Mr. Thom. I mean you would have to have reference to the pub- lic's, side of the question as well as to the side of the corporation that furnishes the service. Senator Robinson. The commission now has regard to the ex- penses of the railroad in maintaining and operating its property, does it not ? Mr. Thom. Not always. Senator Robinson. Well, should it always do it? Mr. Thom. I think it ought always to do it. Senator Robinson. Do you think the law should require them to do that without regard to' the economic extravagant maintenance of its 'J)roperties ? Mr. Thom. No, sir; I do not. But now I will take the illustra- tion that is in my mind that caused that provision. Everybody knows that the railroads, when they have paid wages and increased rates, have not done it as a means of extravagance ; they have done it under the compulsion or forcing that they felt they must recognize. The Interstate Commerce Commission has said in a case that they can 234 INTERSTATE AND FOREIGN TRANSPORTATION. not consider an increase in wages if not justified as an element in the expense. Now, what does it mean by that ? You gentlemen know something of the way wages are demanded. We think the Interstate Commerce Commission ought to know that, and when we find that situation we feel that it ought to be taken into consideration in determining rates. Senator Eobinson. That seems fair, but I did not infer from your statement of that matter that it would embrace this item. I thought if you had anything embraced there other than road improvements and things of that sort, you would have specifically mentioned it. There ought to be some limitation on that provision, however. The commission ought not to be required to make rates always remunera- tive to railroads without regard to. the manner in which the railroads had expended their funds. Mr. Thom. Oh, no ; certainly not. In other words, there must be some supervision over the matter of expenses. Senator Eobinson. Yes. Mr. Thom. I assume that when Congress says expenses, it means legitimate expenses. It does not mean wastefulness or throwing away. Senator Robinson. Yes: reasonable and necessary expenses. Mr. Thom. Certainly. There must be that margin to the managers as to what they consider necessary, and the Government must not prescribe an arbitrary rule, for it can not be done. But there might come up a case theoretically. However, I do not think you will find it. Senator Robinson. From your statement I infer that you are merely expressing the suggestion in general terms, that you were not trying to write it as it should be written into law. Mr. Thom. Yes, sir. Senator Robinson. I did not understand exactly what you meant by it. Your suggestions with reference to giving the Interstate Com- merce Commission power to revise railway mail pay would undoubt- edly relieve Congress. Mr. Underwood suggests that that is already the law. Mr. Thom. Well, it is measurably the law. Maybe it will be able to do it a little more effectively. Senator Robinson. You would like a modification of the law in that particular, would you ? Mr. Thom. Yes, sir. The truth of the matter is that I am not acquainted with what the law has done. Somebody appointed me on a committee the other day of counsel to appear before the Inter- state Commerce Commission on the subject, and I noticed my name at the head of a brief which I never saw, and I found that I was in rather deep water. . Senator Underwood. As I understand it, the last Post Office appro- priation bill took the control of the fixing of the railway pay out of the hands of Congress and authorized the Interstate Commerce Commission to determine what it should be. Senator Robinson. I think that is what you want in that sug- gestion, and I think it is a fair suggestion. I was just going to re- mark that. Your suggestion as to Government control of the issuance of stocks and bonds of the railroads engaged in interstate commerce is undoubtedly in conformity with the opinion of growing public INTERSTATE AND FOREIGN TRANSPORTATION. 235 thought on the subject, and more than any other one thing would tend to strengthen railroad credit and protect it for the future. Mr. Thom. I want to call your attention right there, Senator, to the fact that that proposition on our part indicates that we desire to get proof of a provision of the law which would prevent the recurrence of the things that the public complain of. In other words, to talk about the doing of these other things does not involve the suggestion on our part that the Government should not keep its eye on the possibility of abuses for the future. We want the machinery to provide for that as well as for the other things. We are trying to take a broad and comprehensive and patriotic view of what the Government ought to do in this matter of regulation. Senator Eobinson. That concludes my examination of Mr. Thom. In your statement you submit concrete propositions for reforms which you think are necessary in the public interest and to protect the rights of the railroads and railroad investors, and you have per- formed the service, which I appreciate. Mr. Thom. I thank you, Senator. The Chairman. Mr. Sims, will you proceed ? Mr. Sims. Mr. Thom, I do not want you to assume or conclude that I am unduly inquisitive, or in an unfriendly attitude, because of the questions I am going to ask. When we get through with this hear- ing I want to, as far as I can, know who is bound by it or who is estopped by it, and that sort of thing. Now, you appear as attorney here for a committee, as I understand it. Mr. Ti-ioM. Yes, sir. Mr. Sims. The Advisory Committee of Eailway Executives? Mr. Thom. Yes, sir. Mr. Sims. Now, you may have stated it, and if you have, I do not remember, what railroad executives is this committee advising, what systems do they represent, what per cent of the railroad property of the country do they represent? Mr. Thom. I should suppose it is between 85 and 90 per cent now. Mr. Sims. In other words, you have the companies by name, so that they can be put in the hearings, that you in this way represent? Mr. Thom. Oh, yes. Mr. Sims. And this 85 per cent of the railway interests Mr. Thom. I think it is over 85 per cent now. Mr. Sims. Well, whatever it may be, that you are representing them, and what you represent as their wishes will be acquiesced in by them? ' Mr. Thom. That is my understanding. Mr. Sims. Now, then, there- is about 15 per cent, then, of the railway interests of the country that, have not indicated their willing- ness to be bound by your recommendation ? Mr. Thom. There are some small ones, mostly, of cours'e not alto- gether. There are some, mostly small lines. Mr. Faulkner. Short lines. Mr. Thom. And I have no doubt in the world that a great many of them do not dissent, in any way. We happen to have the specific authority of a great many. Mr. Sims. Well, are they in general lines that are in the nature of subsidiary lines, owned by other roads? Mr. Thom. No, sir ; I do not know what they are. As a rule, of course, some of them are, but not all. 236 INTERSTATE AND FOEEIGN TEANSPORTATION. Mr. Sims. You are representing the public here, as I myself am, and you are asking us to take that view ; that is, the view that this whole proceeding shall be in the public interest Mr. Thom. Yes, sir. Mr. Sims. Pressing nothing that the public interest does not de- mand or require or will not be benefited by receiving. Of course, this 15 per cent is part of the public — ^the small roads — and I sup- pose there are a greater number of small corporations than large ones. In your testimony here A'ou referred to the fact that your recollection was that in what we call the Pennsylvania Kailroad System it embraces 149 separate corporations. Mr. Thom. That is my recollection. I do not remember exactly. Mr. Sims. Well, that is about accurate. And that 149 corporations that constitute the present Pennsylvania Railroad system, as a matter of course, are parties to this investigation. Mr. Thom. I should say so. Mr. Sims. And you are representing their views, the same as you do the Southern and all others — I mean they are represented by yourself, and you being counsel Mr. Thom. Well, I do not want to be in the position of saying that I recommend anything specific. If it is necessary at any time, I will put in the record the names of the roads I represent. Mr. Sims. I think that would be a good idea from the fact that some roads may afterwards say they did not know they were being represented or something of that kind; that is, the stockholders in some roads. Mr. Thom. I can put a list of those into the record. Mr. Sims. You are acting in the capacity of attorney to an ad- visory committee? Mr. Thom. Yes, sir. Mr. Sims. I suppose that means only in reference to this examina- tion. Mr. Thom. Well, it does not mean only in reference to that, so far as my present appearance is concerned. It is confined to what might pass here. But my authority is a larger one than this mere hearing. Mr. Sims. Well, this committee of executives — are they chiefly railroad presidents? Mr. Thom. They are either railroad presidents or they are chair- men of the boards of railroads. Judge Lovett is chairman of the board of the Union Pacific and Mr. Walters is chairman of the board of the Atlantic Coast Line and the Louisville & Nashville. They .are both members of this committee of executives. Mr. Sims. Now, this committee that you do represent — are they the owners of the railroad properties with which they are officially connected ? Mr. Thom. I assume that the stockholders own the roads and, of course, they do not oWn individually a majority of the stock, I imagine, although I am not acquainted with their ownership. Mr. Sims. Do you know whether they are representing the owners of railroads; that is, the stockholders and bondholders? Mr. Thom. They represent the railroads. They are acting in their official capacity as the heads of those systems. INTERSTATE AND FOREIGN TRANSPORTATION. 237 Mr. Siais. I do not understand that an operative officer of a rail- road has a right to bind stockholders as to financial matters or poli- cies or anything of that kind ? Mr. Thom. I think it would be safe to assume foi- these railroad presidents and others that they feel they have the authority or the capacity to represent all the interests. At least, whether they have or not, that is the extent of my authorization that comes from them. Mr. Sims. It is a fact or has been, I have supposed, to some extent that the office of president of a railroad company was more in the nature of being a general manager than otherwise ? Mr. Thom. I do not so understand it. Mr. Sims. When one railroad company is financially owned by another railroad company the president of the first railroad com- pany may not be the representative of the financial interest in the second company. Mr. Thom. Oh, that is quite true, but when you look over the names of these gentlemen I think you will find that they are respon- sible representatives of the railroads. Mr. Sims. Not having the means of knowing, or not knowing, that is what I am trying to do. Mr. Thom. I will give them for the record. Mr. Sims. I mean the advisory committee, that is what you have reference to? Mr. Thom. Yes, sir. Mr. Sims. I am speaking of the others. Now, take the Louisville & Nashville Eailroad Co. It owns a large controlling interest in the Nashville & Chattanooga Eailroad Co. Therefore, the president of the Nashville & Chattanooga Eailroad Co. is representative, to a great extent, of the Louisville & Nashville Eailroad Co.'s interest in that company rather than the general stockholders. Mr. Thom. Yes; but the man who is on this committee is Mr. Walters, who is the chairman of the board of the Louisville & Nash- ville. Mr. Sims. And does he not get that position by reason of the Louis- ville & Nashville, the majority of its stock being owned by the Atlantic Coast Line ? Mr. Thom. Yes, sir. Mr. Sims. The Atlantic Coast Line is the holder directly of the stock of the Louisville & Nashville Eailroad Co. ? Mr. Thom. It holds a majority of the stock, as I understand it; I do not know how much, but I understand a majority of the stock of the Louisville & Nashville. Then the Louisville & Nashville has stock control of the Louisville, Nashville & St. Louis, and in that way Mr. Walters has become very sufficiently representative of both interests. Mr. Sims. In other words, the railway company that he repre- sents, being the controlling company, he therefore represents the company which can, and does in fact, control the policy of these other railroads ? Mr. Thom. That is my understanding. Mr. Sims. I wanted to get that, because I think it is something that it is well to have Imown. Mr. Thom, the propositions you present are from 85 per cent of the railroad interests of the country? 238 INTERSTATE AND FOREIGN TRANSPORTATION. Mr. TiiOM. I think, when you get to talking about 86 or 90 per cent, it is nearer 90. Mr. Sims. Let it be 100, then. Mr. Thom. I merely want to state what that means. That means a railroad, or railroads, in the class into wliich the railroads are divided by the Interstate Commerce Commission, having as much as a million dollars gross income a year. Of course, there are a great many shorter roads outside of that. Mr. Sims. Who do not earn that much? Mr. Thom. Yes, sir ; and one gentleman representing a large num- ber of short roads on the Pacific coast came into my office yesterday and stated he wanted to appear, and I have no doubt you will have representatives of these short roads. I am representing the roads in the class I have mentioned. Mr. Sims. Which is practically the railroad interests of the entire Nation? Mr. Thom. I think so. Mr. Sims. That is the way I understood you. Mr. Thom. There are some interests — there is a very large per- centage — ^that ha^'c conferred about this matter, and have argued with each other about it, and have come to the conclusions which have been placed before you. Mr. Sims. By yourself? Mr. Thom. Yes, sir. Mr. Sims. And those conclusions are propositions for legislation and changes in the existing conditions, which are so general and so radical, as compared with the existing conditions, as to practically be an entire new situation or new legislative consideration of the entire subject matter of the railroad interests of the country, its credit, its capacity to seive the public and all those things considered; in other words, the legislation you have asked for is so different from existing conditions as to amount to what you might say is a ne^^' codification and revision of all existing railroad laws and of the powers of the States, as they are now exercised, together with existing national legislation? So, if I see it correctly, it becomes practically fundamental regarding all transportation questions. Is that not substantially so? Mr. Thom. It does not involve — it is easily engrafted as an amend- ment upon the present interstate commerce act, but the changes that are made in it have many fundamental qualities.. There is much in it that is a real change from present conditions. Mr. Sims. That, if carried out, would be practically a new inter- state-commerce law? Mr. Thom. Well Mr. Sims (continuing). Eather than an amendment of the existing law? Mr. Thom. Well, the difference between us on that would be simply a difference of terms. We both know it can be carried out by an amendment to the present law, and we both know that the changes that would be made in it are far-reaching, and anything further than that would be just a difference in terms. Mr. Sims. Now, Mr. Thom, in hearing your entire discussion, which I did except one day — and I have read that since — ^it is your belief, or the belief of those you represent, that unless there are INTERSTATE AND FOREIGN TRANSPORTATION. 239 changes in. the existing law along the subject dealing with the sub- jects which you have outlined, that the present conditions do not meet the demands of the commerce of the coimtry, and without these changes, relatively speaking, our transportation system is a failure? Mr. Thom. Yes, sir; and Government ownership inevitable. Mr. Sims. If we do not pass legislation substantially along the lines you have marked out there is only one logical conclusion to reach, and that is Government ownership must come in order to have transportation at all? Mr. Thom. You say substantially along the lines I have marked out. Mr. Sims. I mean so as to accomplish the purposes you have marked out. Mr. Thom. Do not lose sight of the fact that I have been put, by the action of this committee, in front of these proposals, and my de- sire was to hear some of the independent thinkers of the country to see what effect that might have on the Suggestions I might make. I am still in that open-minded condition, and there may be members of this committee and other people who may appear who may sug- gest a wiser program than I have done, but unless things are accom- plished, as you have put it^unless these things are accomplished to strengthen the railroad credit and enable the situation to be so brought about as to cause people to regard railroads as a stable thing in which to invest safely, in my opinion, the time is short between now and Government ownership. Mr. Sims. And governmental ownership is made inevitable on the failure to legislate so as to accomplish the purposes you mention ? Mr. Thom. Yes, sir; then I say also that all the talk we are hav- ing about the States has no real place in this investigation, because if something is not done to stabilize the present system and to bring the necessary amount of money into it, then Government ownership will come and then State control, of all sorts will go. So I am trying to retain as much as I can, with safety to the general system, all State participation, because that is the only way, in my judgment, that will obviate ownership ; and when Government ownership comes, then there will be but, a single interest and single power, and every divided power must disappear. Mr. Sims. I think you state the matter so any of us can under- stand it. Then the basic grounds of the investigation here, if I understand them, should be conducted along the lines of ascertaining whether or not it is best to avoid Government ownership by legis- lation that will result in enabling the railroads to perform the services as they should be performed, either through the suggestions you have made or some other legislation that will accomplish the same result? Mr. Thom. That is my judgment. I think you have stated it accurately. Mr. Sims. Then the issue between private ownership and public ownership, by making private ownership possible in this present condition, is not possible or feasible or practicable without some remedial legislation ? Mr. Thom. The present conditions can not continue. Mr. Sims. And so, then, without any question of the remoteness of the matter or the immediateness of it, if the conditions must be 240 INTERSTATE AND FOEEIGN TBANSPORTATION. changed in order for private ownership to be successful, we can not too soon change the necessary conditions to that end ? Mr. Thom. That is my judgment. Mr. Sims. Now, what is possible in physics or mathematics is one thing; what is possible in legislation is another thing; what is im- practicable in legislation is therefore impossible; that is, it may as well be physically impossible. We are confronted with the old, settled idea that each State has rights which it ought to exercise and which should never be exercised by a central power and can never be exercised by any central power with the same benefit locally. We have people all over the country with different views and we are just representatives of those people in those different States with those different views, and therefore I think this investigation ought to be as broad and as unlimited as is necessary to meet all these suggestions and views of the public generally and of those who do the voting, as well as gentlemen upon whose responsibility the future operation of the railroads depends. Now, there is no proposition before this committee — nobody advo- cating it — for a legislative proposition about Government ownership at this time. Consequently it seems to me an examination of these propositions^ as fairly as we can, the possibility of getting them en- acted into law, is the practical work for this committee. That is my own view of it. If I am in error about it, I want to be corrected. I want to say, as far as I am personally concerned, Mr. Chairman, I have absolutely no prejudice. I never was employed by any railroad company in my life to render any form of service for them; I was never employed by anybody to represent them against the railroads. I live in a county that is uncontaminated by a single mile of raihoad, and consequently can not have any personal feeling for or against the railroads. Mr. Thom. I have often said that those who know most about the railroads are those who never saw a railroad. Mr. Sims. But I have seen them. Mr. Thom. We have one district where a railroad runs right along the edge on one side and right along the edge on the other side, and the most radical things, so far as the railroads are concerned in that State, come right from that district. Mr. Sims. But I am not proposing anything radical. What I am referring to are practical things. Mr. Thom. But I mean the people who see the country going to ruin from the railroads are there. Mr. Sims. I will tell you why we have no railroads in my county. It is a good county. It has phosphate, iron ore, timber, building stone, farm land — good agricultural land — and the county has on sev- eral different times voted a bond issue of $50,000 to any railroad that would cross that county — that is, either north, east, south, or west— and a railroad was being built from Memphis to Nashville, called the Tennessee & Midland, and after it got built to the Tennessee Eiver, which was practically a half-way point, why, the man who was in charge of it then died. He was a Mr. Morse, from St. Louis. The Louisville & Nashville Eailroad Co., in the administration of his estate, bought up the stock of that railroad, and then, owning the Nashville & Chattanooga Railroad by a majority of stock, leased it to the Nashville & Chattanooga and prevented its being built INTBESTATE AND FOREIGN TKANSPOETATION. 241 Now, that is the helpfulness that we have had toward getting a railroad built through our good county. They are not to blame for it, because the railroads will not even build one when the money is offered to them. There stands an authorized bond issue to build one now through my county, but for some helpful purpose or another they are never able to get there. So, there is a portion of the country un- served by railway facilities that they have done everything they know how to do in an effort to get a railroad there, even to the extent of voting a bond issue. So, if I have any prejudice in this matter at all, it exists on account of that local condition there. I think the rail- way systems of this country should be built up so as to develop each undeveloped , section of the country, and that if the rate — ^if the amount of business through that county will not pay for building a railroad across the county, that is no reason why it should not have a railroad. Mr. Thom. One of the great difficulties which men charged with comprehensive duties have to meet is some local condition, such as you have described, where somebody has not got just what they think they ought to have. Now, it is manifestly injurious to the public interest that the great question of transportation should be affected at aU by some local condition. Mr. Sims. I think you are right about that. Mr. Thom. I sympathize with your criticism. I never heard the facts in that case before, but that condition of affairs you say, if you have any prejudice, creates it. Now, you come on this commission. You have great national responsibilities on your shoulders. You have got the fate of this Nation in your hands. You have got to help deter- mine the standard of commercial possibilities for the future, and you come to it, as you say, from that situation. Now, can not we get away from those conditions when we are dealing with so great a subject as this? That would illustrate my plea for trying to have a national regulation of a matter so national in its character. Mr. Sims. Well, I stated this fact, or story, I have told you for two reasons. I think the committee and yourself ought to know whether or not there is any local condition that affects my judgment — if it does affect it-r-but the point I was trying to reach was another mat- ter entiij-ely, and that is this : The strife between railroad companies under the existing conditions— the struggle to shut out railroad com- petition in their regional field — ^has forced communities like my own to suffer. Tl^at action in preventing the building of this railroad was not to keep a railroad from being built in my county and the con- tiguous counties, but it was done to prevent competition at Nashville, Tenn. Mr. Thom. Yes, sir. Mr. Sims. Between some other railroads. Mr. Thom. Yes, sir. Mr. Sims. Now, the destructive work of competition between rail- roads has actually overdeveloped some sections and actually pre- vented the development of others. Mr. Thom. Undoubtedly, and now right there I want to say I think that is a very mistaken railroad policy. I believe that rail- roads are bound to succeed by virtue of the prosperity of the com- munities they serve, and that if Nashville could be built up by a number of railroads going there, it is vastly to the advantage of 242 INTERSTATE AND FOREIGN TRANSPORTATION. every railroad in it to have Nashville so built up instead of keep- ing some railroad out. We have got a point on our road, I have not talked with this president of the railroad, but I have talked with his predecessor, and I know it was his policy to do nothing to prevent the construction of a railroad other than his own into that point, because he felt by doing so, if that point was built up, he would get more trade from the prosperous community than he would get from the community that has limitations, perhaps, put upon it by being served by a single line. I entirely agree with the phi- losophy which suggests your remarks there. I do not believe in that policy, and I believe, that as the wisdom of governmental regu- lation grows so we may hope for the policies and views of railroad managers to become expanded and to grow likewise and to take a more comprehensive view of this problem than some of them have thought wise heretofore. Mr. Sims. In the interest of the whole public I believe that, com- paratively speaking, relatively speaking, the present system is an absolute failure. Now, I read from a speech delivered by yourself at Atlantic City, October, 1916, in which you say : " The average move- ment of freight in the United States in 24 miles a day." Mr. Thom. I have received a letter from one of the principal rail- road presidents of the country about that statement in that speech, and he has called my attention to the fact that that 24 miles a day includes the movement of all cars while they are waiting for loads at points of loading, and on sidings, and in yards, in transit, and all that, and since his letter I have tried to get the exact figures, which I have not yet done, and I have not again used that illustration be- cause I do not know whether it is so. Mr. Sims. It is substantially correct, I take it, is it not? Mr. Thom. I do not know. Mr. Sims. Twenty-six or twenty-three miles, or something of that sort? Mr. Thom. I do not know the figures. Mr. Sims. What is the relative gross receipts of railroad companies from freight and passenger traffic? Mr. Thom. The freight traffic is very much greater. Mr. Sims. Is it not about three to one? Mr. Thom. I do not know. I suppose it is different with different companies. The New England Eailroad has about one-half. Mr. Sims. I am talking about all railroads. Mr. Thom. I do not know ; but it is very much greater for freight. Mr. Sims. You say further: "There is an average movement of the freight car of 1 mile an hour throughout the country." Mr. Thom. Well, that is the very point I say Mr. Willard, in writing to me, says I am mistaken about those figures; that the movement of cars while in motion was, of course, vastly greater than that, and he gave the figures — ^told me in that letter Mr. Sims. I mean that each car during the year upon the average moves only 1 mile in one hour of time, including all the movements it makes, including the time it is lying at a siding or at a terminal, that the car itself operated in the - freight service only moves 1 mile in one hour, or 24 miles a day ? Mr. Adamson. They are not counted until they are loaded, are they? INTERSTATE AND EOEEIGN TEANSPOETATION. 243 Mr. Thom. That is what I say ; I have not been able to get at the bottom of it. I am trying to verify that statement, because it was called to my attention by a letter from Mr. Daniel Willard, of the Baltimore & Ohio. Senator Underwood. If you will allow me to interrupt, I think you will find the question embraced in the report of the Interstate Commerce Commission a year or two ago in reference to loaded cars, and rny recollection is the report shows they moved 24 miles a day— that is, the time on the average — that included the time on side- tracks and on spurs. Mr. Sims. That does not include the time actually in transit, I should say ? Senator Underwood. No. Mr. Sims. Then it does include substantially the movement. Now, I want to say there is three- fourths, if I am correct about it being three-fourths, of the gross receipts of the railroad companies of this country earned upon cars moving at a snail's crawl, and they are carrying the freight traffic of the country upon which the people must live and upon which business must prosper or fail. I do not see how it is possible, at this day and time for such movement of freight, upon the average, to serve the public interests of the country. Mr. Thom. There ought to be double tracks. Mr. Sims. There ought to be what ? Mr. Thom. There ought to be double tracks so that we would not have to wait for the car moving in one direction to let another one going in the other direction have the right of way for hours. There ought to be more extensive yards ; there ought to be perhaps greater traction power; there ought to be greater transportation capacity; and, as I say, that is a question which is confronting the American people to-day. You may rest assured that whatever movement there is of those freight cars is spurred on by the very influence that you are now referring to. Those railroads want to make that money. They are deliberately leaving that car at that rate of speed when they could make more money if they .could move it faster. There are physical limitations upon it. You have got men who have grown up with the business, the wisest and best and the most skillful that the country can afford to try to get that car along, yet their physical obstacles are so great that even the immensely increased revenues they would get from a quicker movement are not open to them, and we are coming here to plead for the credit to enable us to double- track our road, to enable us to increase our sidings and yards, that will enable us to increase our capacity in every respect. Mr. Sims. But the fact remains and seems to be proven, and what you have just said, that under present circumstances, with the rail- road operatives doing all they can to serve the people by way of moving the products of the' country, that its movement is relatively a failure ? Mr. Thom. It is too slow. Mr. Sims. It is too slow and does not meet the requirements of business, the requirements of commerce, and that that itself accounts for what is now called the shortage of cars. If these cars were moving on an average of 50 or 52 miles a day, twice as fast as they are, they would naturally carry twice the products they are now 244 INTERSTATE AND FOREIGN TRANSPORTATION. carrying, consequently you would have, with the more rapid move- ment, a surplus of cars, with the present supply? Mr. Thom. Possibly, with a greater track capacity and other con- ditions making such a faster movement possible. Mr. Sims. In order that this faster movement may come about the double-tracking, the increasing of facilities for the loading and unloading, and all that kind of thing must necessarily come before this freight can be moved as it should be moved; is that not correct? We must have the instruments you have just detailed in order to enable the country to receive the service it is entitled to receive, and which is necessary ? Mr. Thom. I do not think we can get the best service until its facilities are improved. Mr. Sims. Without the best service they can not afford the best national development ? It would be utterly impossible ? Mr. Thom. Yes, sir. Mr. Sims. Now then, the improvements that would necessarily be required in order to give the best service, not a service that is just simply tolerated, but the best service to the whole, entire country, would call for an expenditure of money, under present conditions, perhaps approaching the present investment, would it not? Mr. Thom. I think, from investigations I have made — I have not conducted them myself, but I stated here the other day figures about what would be needed. We must remember that the American peo- ple up to this point are pretty prosperous; that while their methods of doing business are not in the most perfect condition, yet they prosper; the Nation has grown; the Nation has been developed; their transportation business up to now has been carried on fairly well; there is a great deal which has been done, notwithstanding the situ- ation which you refer to, and we are not preaching, but unless growth is stopped we have got to perfect our facilities for the future. Mr. Sims. When growth stops death sets in, does it not ? Mr. Thom. It does, indeed, and that is what I am trying to avoid. Mr. Sims. What I am trying to find out is whether you have any estimate at all of the amount of capital that the railroads will re- quire, what you gentlemen call new money, additional capital to include the railway facilities of the country that now exist and add to them such as may be necessary to properly develop undeveloped regions of the country — about what per cent, if you know or have an idea, relative to the present investment will be required in the way of new investment? Mr. Thom. About 8 per cent annually for the next 10 or 15 years, which would mean about $1,250,000,000 a year. Mr. Sims. In other words, in 12 years it would be double what the ptesent investments are? Mr. Thom. Yes, sir. Mr. Sims. Now I want to bring to your mind a question in regard to that. I am not, of course, a railroad man, but I take it you are correct, or substantially correct, in saying that much money will be required provided that is done which ought to be done for the public interest for the development of the United States, and not any particular portion of it. I think I heard Mr. J. J. Hill a few years ago make a statement substantially along the lines you have made be- fore a congressional committee of the Senate. Now, then, in order tO' INTERSTATE AND FOREIGN TRANSPORTATION. 245 secure that much money as a certainty is certainly a very serious . consideration as to. how to get it, and without acquiring the money the improvements can not be made, and without the improvements the country can not progress ? Mr. Thom. Yes, sir. , Mr. Sims. And would have to continue in its present unsatisfactory condition ? Mr. Thom. And therefore the time has come for you gentlemen, for you responsible statesmen, to consider whether something must not be done of the far-reaching nature that you have ref er!red to here to provide for those public needs which all of us see are coming. Mr. Sims. Should any country as great as the United States is and with the necessity for provision for future development have to de- pend upon that development alone, upon market conditions for private securities during the long series of years which may be affected by wars and famines and such things as m&,y interrupt the steady flow of private income? Mr. Thom. I think it can be safely done for a number of years to come. As Mr. Olney stated it in that wonderful memorandum I read . here the other day, it may be found on sufficient experience and ex- periment that Government ownership is the only solution, but in his judgment, and he is a very wise man, the time has not yet come for -despair and to conclude there is no other way out of it, and that we .ought at the present time assume there is some other way out and try to find and perfect that way. Mr. Sims. It is possible for the railroad companies to judge for a period of 12 years in advance what their operating expenses are going to be and what they are going to have to pay in the way of interest in order to secure capital for a new development ? Mr. Thom. Not with certainty. Mr. Sims. Not with certainty. ^ Mr. Thom. There can be a comparatively safe forecast of what is going to happen. We can not tell. Mr. SiJis. Juding of the future by the past? Mr. Thom. Judging of the future by the past. That is the only thing we have got to go by. .1 Mr. Sims. Now, should the development of a great country like this be a mere speculative matter, that we have got to guess at what things will be in the future ? ■ Mr. Thom. We have done so up to now ; and we have gotten along pretty well. • ■. Mr." Sims. We have struck a snag, so to speak. Mr. Thom. We have gotten to a time when it is now proper for u« to take our bearings and see where we are, and see if something can not be done to improve our situation. Mr. Sims. You made a statement yesterday, in substance, that ■the spirit of adventure had built our railroads; that what was called -stock watering had been one of the leading inducements to cause pne to make an investment that they would not otherwise have made,, but it is perfectly evident that that period has passed, and that the investment in a railway security, especially in stock, must be so attractive to a new purchaser as to enable him to discount the possii- uJbilities of what has happened to former investors in railroad stock. 70342— PT •^1^16 4 246 INTIilBSTATE AND FOREIGN TRANSPORTATION. Mr. Thom. You have got to substitute safety. Mr. Sims. For uncertainty. Mr. Thom. For possibilities. Mr. Sims. Speculative possibilities? Mr. Thom. Speculative possibilities. Your system of law has got to find some way of attracting by safety, instead of depending on speculative possibilities. Mr. Sims. Then, we have reached that period in our country's system in which we can not possibly rely on further railroad develop- ment, on the method that has heretofore been used, for the present development? Mr. Thom. Yes ; we have reached that point. Mr. Sims. So there is no use in considering the old methods of offering stock bonuses and speculative methods, or such a high rate of interest as of itself to suggest the insecurity of '. Mr. Thom. Not except as methods of enlightening your future actions. Mr. Sims. Yes. But, I do not think, speaking as an individual member of this committee, when it is made so plain by expert evi- dence — I am regarding you in this matter as a superexpert, as you represent all of the experts combined, and have had the opportunity to confer with them all — that the future development of this country ought to be conditioned upon the sweet will of men who hare got money, as private individuals, as to whether or not they will invest it in an industry like the Steel Corporation or in a farm or in rail- road stock. If it does, why, then, we may make changes. that are temporary. We may benefit present conditions, but why not make things as near a certainty while we are at it as possible? Mr. Thom. You mean by Government ownership ? Mr. Sims. There are more ways, but I do not see how you are going to convince the people of Europe, or the people of this country, for that matter, that future railroad stocks and bonds are going to be a better investment than they have been in the past, to such an ex- tent as that they will yield par for a 4 per cent dividend, or 5 per cent, or 6 per cent, unless there is something in the nature of a Gov- ernment guaranty, something along the line that they can rely on regardless of mismanagement, regardless of the accidents, stock failures, possible wars, the revolutions, and things of that kind affecting our commerce, both domestic and foreign. So, now, it seems that just simply wiping out some of the abuses, and to that extent new methods of regula;tion that will avoid some of the diffi- culties that now exist, will be a guaranty that the public will take more than a million dollars of new railroad money for the next 10 years — -more than a billion dollars, I mean — ^now, then, it comes down to the point where the Government must guarantee a dividend sufficient to pay this 4 per cent, or 5 per cent, or whatever it is, or it must go security to the railroads by guaranteeing their bond issues or in some way getting behind the railway — ^the future railway de- velopment of this country, so as to remove that uncertainty which now deters private individuals putting their money into the railroads. Now, it seems to me we have got to consider something on a very broad scale. Mr. Thom. Judge, my own view was that the country was not ready to guarantee these railroad funds. I may be mistaken about INTEESTATE AND FOREIGN TEANSPOKTATION. 247 that. You may be right in thinking that it is, and that is the solu- tion. Being of the judgment that the country was not ready, and it would not do that, that it is not a practical matter. Mr. Adamson. Mr. Chairman, I do not think it is probable that Mr. Thom. Let me finish this sentence, please. Judge. Being of that conclusion, our minds naturally went toward the point of try-r ing to improve the conditions under which we might deal success- fully with that problem for a while. Now, of course, evolution of railroad questions as of any other great governmental question are not made in a moment. If Government is ready to guarantee the return on these securities that is one thing. Assuming that the Government is not ready for that we have plead for a situation in which we feel that we will be able to perform our public duties by an improved condition of regulation. Mr. Adamson. Mr. Chairman, I suggest that Judge Sims suspend here and conclude his examination to-morrow. The motion was agreed to and at 1.22 o'clock p. m. the joint com- mittee adjourned until Wednesday, November 29, 1916, at 10.30 o'clock a. m. X INTERSTATE AND FOREIGN TRANSPOR HEARINGS BEFORE THE JOINT SUBCOMMITTEE ON INTERSTATE AND FOREIGN COMMERCE CONGRESS OF THE UNITED STATES SIXTY-FOUETH CONGEESS FIRST SESSION PURSUANT TO PUBLIC J. RES. 25 A JOINT RESOLUTION CREATING A JOINT SUBCOMMITTEE FROM THE MEMBERSHIP OP THE SENATE COMMITTEE ON INTERSTATE COM- MERCE AND THE HOUSE COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE TO INVESTIGATE THE CONDITIONS RELATING TO INTERSTATE AND FOREIGN COMMERCE, AND THE NECESSITY OF FURTHER LEGISLATION RE- LATING THERETO, AND DEFINING THE POWERS AND DUTIES OF SUCH SUBCOMMITTEE. Part 5 NOVEMBER 29 Printed for the use of the Joint Subcommittee on Interstate Commerce WASHINGTON GOVERNMENT PRINTING OFFICE 1916 JOINT COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE. FEANCIS G. NEWLANDS, Nevada, Chairman. WILLIAM C. ADAMSON, Georgia, Vice OhaarmoM. JOSEPH T. BOBINSON, Arkansas. THBTUS W. SIMS, Tennessee. OSCAE W. UNDEEWOOD, Alabama. WILLIAM A. CDLLOP, Indiana. ALBEET B. CUMMINS, Iowa. JOHN J. ESCH, Wisconsin. FEANK B. BEANDEGEE, Connecticut. BDWAED L. HAMILTON, Mlclilgan. Fbank Healt, Cleric. Willis J. Davis, Assistant Cleric. INTERSTATE AND FOREIGN TRANSPORTATION-GOVERNMENT CONTROL AND REGULATION. wednesday, november 29, 1916. Congress of the United States, Joint Subcommittee on Interstate Commerce, Washington, D. C. The joint subcommittee met at 10.30 o'clock a. m., pursuant to adjournment. Senator Francis G. Newlands presiding, also Vice Chairman William C. Adamson. [Fifty-ninth Congress, first session.] EBGULATION OF RAILROAD RATES — NATIONAL INCORPORATION OF RAILROADS — NATIONAL OWNERSHIP OP RAILROADS. Speech of Hon. Francis G. Newlands, of Nevada, in the Senate OF the United States, Wednesday and Thursday, April 4 and 5, 1906. The Senate having under consideration the bill (H. R. 12987) to amend an act entitled "An act to regulate commerce," approved February 4, 1887, and all acts amendatory thereof, and to enlarge the pov^ers of the Interstate Commerce Commission — Mr. Newlands. Mr. President, although I joined in reporting the pending bill from the Committee on Interstate Commerce, I do not regard it as a comprehensive measure. I think that now is the time to secure full and comprehensive action upon the subject of interstate commerce, and that we should not content ourselves with such frag- mentary legislation as we have hitherto enacted. I believe that in legislating upon the subject we should, in the first place, create the great carrying corporations that operate between States. We should then provide against overcapitalization. We should provide for a simple system of taxation by the States that would be mathematically certain in its computation, and we should fix a definite return to the stockholders upon the capital invested. We should also take into consideration the relations of the employees of the railroads to these corporations. We should provide for an insurance fund against accidents and old age, and we should also provide for a conciliation of disputes between carriers and their em- ployees. We should frankly recognize the economic necessity of con- solidation arid combination and the monopolistic character of the business, and regulate all with a proper regard for the interests of the public served by it, the property rights of the capital employed in it, and the human rights of the labor employed by it. 249 250 INTERSTATE AND FOBEIGN TBANSPORTATION. CONSTITUTIONAL POWERS. There can be no question as to the power of Congress. The power is granted in those sections of the Constitution which provide for the national defense, for the regulation of commerce with foreign nations and between the States, and for the establishment of post offices and post roads. In the exercise of these powers it is absolutely essential that there should be highways. Canals and railroads are highways. The United States, therefore, has the power either to construct such highways or to authorize their construction by agents; and in doing the latter it can create national corporations for that purpose. It is not necessary to cite the authorities, for the power is without ques- tion and has been exercised frequently. Under these powers we are to-day constructing the great Panama Canal and will operate it. Under these powers we have acquired the Panama Railroad and are operating it. Under these powers we incorporated the Pacific railways — ^the Union Pacific, the At- lantic and Pacific, and the Texas Pacific Railway, the two former running in Territories of the United States, the latter from a point in the State of Texas to a point in the State of California. Under these powers we incorporated the National Maritime Canal Co. of Nicaragua. Under these powers we are to-day in the process of incorporating the proposed canal between Lake Erie and the Ohio River, called, I believe, the Erie and Ohio Canal, which is intended to join the Great Lakes with the Ohio River and the Gulf. The bill for that purpose has passed the House almost without opposition and will probably pass here without serious opposition. The Nation^ therefore, under the granted powers, has the right and the power either to construct these great highways, or to authorize their con- struction by corporations created by itself. SHALL THE MACHINE BE STATE OR NATIONAL? Now, it is true that the same machine is used for both State com- merce and interstate commerce. The same railroad accommodates both. State commerce is under the control of the State. Interstate commerce is under the control of the Nation. And obviously it would involve economic error to provide for the State commerce a separate machine from that employed in interstate commerce. The same railroads must be employed for both. But the corporation must be created either by the State or by the National Government. If it is created by the State, then the National Government uses a State agency in the exercise of its power* over national commerce. If it is created by the National Government, then the State uses a national agency in the exercise of its control over State commerce. The reason why these corporations have been created by the States is that in the first place the commerce contemplated was entirely within the boundaries of a State, from a point in one State to another point in the same State. But these purely State rail- roads have now grown into great national systems under conditioi^ of great embarrassment and difficulty; and one can but admire ihe genius of the' men, who struggling against inadequate laws, have been able to build up these great systems of national highways, INTEESTATE AND FOREIGN TRANSPORTATION. 251 intended for national commerce, and embracing the commerce of numerous States and some of them the commerce of the entire Union. Thus far the Nation has not exercised its full powers as to rail- roads. For many years it exercised no powers whatever, and it is only within the last 20 years that the constant growth of interstate commerce, as compared with purely local or State commerce, has forced the question upon public consideration. Kailroads at first were purely State institutions intended only for transportation within State boundaries, but they have now, through consolidation, merger, lease, or community of interest, grown into great institu- tions of national scope and character, whose traffic is conducted without regard to State boundaries — whose capital embraces over one-tenth of the wealth of the country, and whose employees number about one-twelfth of its effective labor. Had such growth been contemplated doubtless a national incor- poration act would have been provided, but as it is the growth has been accomplished under inadequate and lax State legislation, under which simplicity of organization and operation is impossible. The weakness of all national legislation thus far has been that it has not at the very start created national machinery for incorporating the' artificial beings called upon to exercise the great national func- tion of interstate transportation. It has been content, while per- mitting State corporations to exercise this function, to regulate its operation. The result has been that State machines are performing national functions, and are inadequate to do so without complexity of organization, baffling to the mind of a regulating Interstate Com- merce Commission. As the result of tMs experience legislation has been a growth. Had we contemplated in -the first instance that national commerce would absolutely dwarf State commerce, and that both State and national commerce would be conducted upon these great machines of trans- portation, we would doubtless have seen the wisdom of having the greater sovereignty create the machine that is to do the business of both and not have the lesser sovereignty, whose jurisdiction is con- fined to a contracted area, create that machine. The interstate com- merce is three-fourths of the commerce of the entire country. The State commerce is only one-fourth. We were told in the Nebraska case that of all of the conamerce of the railroads of that State one- twentieth only was State commerce, and all the balance was inter- state. It is clear, therefore, that we ought to have national machinery for the transaction of this commerce, that this is the time for it, and that we will never have a better opportunity for creating it. The passage of a national incorporation act would require the ad- dition of only 15 or 20 sections to this bill. The pending bill simply provides for the regulation rates. We could, right in this bill, fur- nish the machinery for the incorporation .of national corporations, and we could make this legislation either coercive or persuasive. Tn my judgment, at first it should be made merely persuasive. Later on it might be deemed wise to apply coercive legislation, as we did when the national banks were created, by taxing thie State note issues 10 per cent. In using the term " coercive," I do not wish to imply that Congress could force State railroads to come under national 252 INTERSTATE AND FOREIGN TRANSPORTATION. charters. What I mean is that we could so cripple them in their oper- ations in interstate commerce as to make them eager to avail them- selves of national charters, and even then, of course, the consent of the States to the change would be required — a consent which I be- lieve could be obtained with as little difficulty as that now obtained in the various States by corporations organized under the laws of sister States. This coercion could be applied in different ways. It could be applied by absolutely preventing State corporations from engaging in interstate commerce, or it could be applied by imposing such a tax upon the commerce carried by such corporations as to be prac- tically prohibitory of their engaging in it. But, in my judgment, the legislation now should be merely persuasive and should offer such obvious advantages to these great systems, whilst at the same time properly protecting the public, as to induce them to incorporate under its provisions. MUST CONGHBSS FIX THE STANDARD FOE RATES? Mr. President, as to the pending bill, it seems to me it is weak in that it does not provide a rule which is to control the Interstate Commerce Commission in regulating rates, and I have some doubt as to whether we can, under the Constitution^ grant this power to a mere administrative commission unless we prescribe the rule, so that their action will be largely one of computation and mere ad- ministration, not involving legislative discretion. It is contended that the legislature can delegate this power to a commission by providing a rule or standard for its action, and this contention seems to be upheld by a great many decisions relating to the States. Now, what rule or standard does this bill . provide ? It simply declares that the rates shall be just and reasonable, and it is said that is the rule which the commission is to follow. But Congress could not fix, or confer upon a commission the power to fix, unjust and unreasonable rates. Under the limitations of the Constitution the only power Congress itself has is to fix just and reasonable rates, and when it transfers that power to a commission, does it not trans- fer to the commission all the power it has ? It may be that the courts will finally hold that it is so difficult for a legislative body to exercise this power directly that it is warranted in creating an administrative board for the purpose. If that is so, legislation of this kind will be sustained, in my judgment, not upon the ground that it fixes the rule for the commission's action, but upon the ground that Congress can grant to a commission all the power that it has in fixing the rates for interstate commerce. VALUATION OF RAILROADS AND RETURN. It seems to me that in this very bill, outside of the question of national incorporation, we could provide the standard and we could follow the rule laid down in Smyth v. Ames, the Nebraska Case (169 TJ. S., 546), in which the Supreme Court says: We hold, however, that the basis of all calculations , as to the' reasonable- ness of rates to be charged by a corporation maintaining k highway under legis- lative sanction must be the fair value of the property being used by it for tne INTERSTATE AND FOREIGN TRANSPORTATION. 253 convenience of the public. And In order to ascertain that value, the original cost of construction, the amount expended in permanent improvements, the amount and market value of Its bonds and stock, the present as compared with the original cost of construction, the probable earning capacity of the property under the particular rates prescribed by statute, and the sum re- quired to meet operating expenses, are all matters for consideration, and are to be given such vceight as may be just and right in each case. We do not say that there may not be other matters to be regarded in estimating the value of the property. What the company is entitled to ask is a fair return upon the value of that which it employs for the public convenience. On the other hand, virhat the public is entitled to demand is that no more be exacted from it for the use of a public highway than the services rendered by it are rea- sonably worth. We could provide that the Interstate Commerce Commission should value the property of all these railroads, should make a present valuation, and to that should be added such additional investments as may be made in the future. We would then have the basis of value. We could also provide in this bill that the Interstate Com- merce Commission, in exercising the power of fixing rates, should so adjust rates as to yield a return upon such value of not less than a certain percentage — not less than 5 or 6 per cent or not less than i per cent or more than 6 per cent. If the bill provides the machinery by which the value of the rail- way property can be ascertained and also fixes the return upon that value, we then have a rule established by Congress which involves simply mathematical computation upon the part of the Interstate Commerce Commission. Of course, if we fix the rule for the exer- cise of the judgment of the commission the bill would not be so open to constitutional objections as it is now. Mr., President, I prefer that valuation of the property of these railroad corporations which woidd be exhibited in a fair capitaliza- tion. I should prefer legislation which would provide for the national incorporation of these great railways and the issue of bonds and stock representing their actual value and cash outlay, so that wherever the question of the regulation of rates comes up, either by State commissions or national commission, the factor of value would be omnipresent in the capitalization of the roads in stock and bonds. But if we are not to have comprehensive legislation of that kind, then the next best thing is to provide in this bill for a valuation of the roads by the Interstate Commerce Commission. A valuation has already been made by the Census Bureau, based simply upon the existing income of the roads, and they have made a valuation of about eleven billion dollars, I believe, approaching within a billion or so of the existing capitalization of the roads, which it is claimed is exaggerated. Mr. FoEAKEK. Within 10 per cent. Mr. Newlands. Within 10 per cent, the Senator from Ohio says. Now that is based upon income, but there can be another kind of valuation, following the principles laid down in Smyth v. Ames, by considering first the actual cost of reproduction; second, the cost of the road to the corporation ; third, the market value of the stock and bonds, and fourth, the value as determined by existing income, for the .Supreme Court says that all these factors can be taken into consideration. If the Interstate Commerce Commission, then, should be aur thorized in this bill to provide for the employment of experts to 254 INTERSTATE AND EOEEIGN TRANSPORTATION. make a valuation of the roads, we would have the basis for sound action in the regulation of rates ; and if we should add to that the legislative will as to the return upon the capital invested, we would have two factors in the problem determined by Congress. We would have the rule established and the rest would be a mere matter of mathematical calculation. VALTJATION THROUGH NATIONAL INCORPORATION. So far as this bill is concerned, I would suggest that a provision be inserted in it for ascertaining the value of the railroads engaged in interstate commerce and that a provision also be made fixing the return in the shape of interest upon such value. But I believe that we should also add to this bill provisions for' the national incorporation of railways. In such additional provisions we could declare that no stocks or bonds should be issued, either for construction, extension, or im- provement of such railways, or for the purchase of connecting or intersecting lines except for full value in money or property, or without the approval of the Interstate Commerce Commission. In this way we could guard against overcapitalization. The President in his message has called attention to the evils of overcapitalization in the following words : Of these abuses perhaps the chief, although by no means the only one, is overcapitalization — generally itself the result of dishonest promotion — ^becatisf of the myriad evils it brings in its train ; for such capitalization often ^eans an inflation that invites business panic ; it always conceals the true relation of the profit earned to the capital actually invested, and it creates a burden of interest payments which is a fertile cause of improper reduction in or limita- tion of, wages; It damages the small investor, discourages thrift, and eccovir- ages gambling and, speculation ; while, perhaps, worst of all is the trickin&ss and dishonesty which it implies- — for harm to morals is worse than sny pos- sible harm to material interests, and the debauchery of politics and business by great dishonest corporations is far worse than any actual material evil they do the public. This measure does not reach this abuse, and it should be amended so as to prevent it. DUTY OF CONGRESS TO FIX THE RETURN. We could also limit in this bill the rate of interest to be receiverl oy the investors upon such valuation, and thus in the future the great increase of business which is induced by the extension of the railroads and the expansion of commerce will tend automatically either to the betterment of the roads or to a reduction in rateb. It has been said that it is unfair to limit in any way the returns of these corporations ; that we do not limit the returns of people gener- ally in business or of corporations engaged in business. But 'vee must recollect that ordinary occupations and businesses are not of public nature, and the public has no right to regulate or control them. This regulation and control arises from the fact that the high\yays, are public highways, the function a public function, and the Gov- ernment simply entrusts the conduct of this function to certain agencies, and all the agent is entitled to under the decisions is a fair return upon the amount he has invested. If that is a fact, it is INTERSTATE AND FOKEIGN TBANSPORTATION. 255 competent for Congress to fix that return and not leave it to chance or accident. Beyond this, if we are careless regarding the return, and allow a corporation to receive 10, 15, or 20 per cent instead of 5 or 6 per cent interest, the result will be that the stocks will rise in the market, their value being based upon income, and if you should permit the $10,000,000,000 now claimed to be invested in these great highways in this country to receive an interest of 10 per cent instead of an interest of 5 per. cent, you would find immediately in the market thai, these securities would be quoted at $20,000,000,000, and if you allow interest at 15 per cent you would find the market valuation would be $30,000,000,000, and if you allow 20 per cent you would find the mar- ket value would be $40,000,000,000. Now, then, are we to assume that at different stages in the regula- tion of rates the value of these properties is to vary with the income ? If we do there will be no limit to their value, for if there is no re- striction on the return there will be no limit to the value. If to-day these railroads are valued at $10,000,000,000, based upon existing in- come, they must be valued at $20,000,000,000 if the return is doubled. Thus will the value increase proportionally to the income, and if we do not apply a fair restrictive regulation of the rate of interest we will bring about a - serious readjustment of values all over the country. The cry will be raised by investors that the Government has per- mitted the securities to reach this high value, just as it is claimed tp-day that the value of these properties is not necessarily the value actually put into them by experts but the value based upon income. The return must be fixed therefore either by the commission or by Congress, and Congress is just as competent to fix it as is the commis- sion. State legislatures already exercise the power of regulation over the rate of interest. Throughout the United States the legal rate of interest does not exceed 6 per cent. Those laws are intended to guard against usury. A law of this kind is intended to guard against extortion. Unless the return is fixed by somebody, either by the Commission or by the Congress, we will have varying valuations running through the years. AUTOMATIC ADJUSTMENT VEESTTS COMMISSION ADJUSTMENT. Mr. President, it seems to me exceedingly important that we should fix this rule of valuation and return, simply because it will work automatically toward a gradual reduction in rates. I believe myself that under the pending bill the Commission will be overwhelmed with work. I have been impressed with the evidence of the traffic man- agers before our committee, the ceaseless vigilance which they em- ploy in moving the traffic, in providing a market place for the sur- plus of the country, which they serve, and in bringing from the out- side the things needed by the communities which they serve. They have many thousands of men in that service — the great traffic managers at the head of each system, the assistant traffic managers, the district traffic managers, and then every agent and every station is a part of this great machinery for the adjustment of- rates, not simply as a matter of profit to the corporation, but as a matter of 256 INTERSTATE AND FOEEIGN TEANSPOBTATION. serving the requirements of the communities through which the rail- roads run. In this adjustment much elasticity of action is required. I do not believe that any board of seven men can exercise mtelli- gently all the powers that are exercised by these thousands of com- petent, skilled, trained traffic managers and their assistants, and I believe if the Commission attempts it, it will be overwhelmed, and in the end it will either be inert and inactive, or it will bring the adjust- ment of rates practically to a mileage basis. It is true that these rates are to be adjusted only upon complaint; but all the rates can be complained of. An entire schedule. can be complained of. We are told that within a single year 160,000 differ- ent schedules have been filed in the office of the Interstate Commerce Commission, each one of these schedules involving varying classifi- cations and varying rates. Any one or all of these schedules Can be challenged, and if challenged the challenge must receive the consid- eration of the Interstate Commerce Commission. Will it be possible for it then to consider all the cases? It will be obliged to adopt some rule, and the easiest rule in the end will be the mileage rule, with modifications according to distance. The advantage of fixing a return of a certain percentage upon a valuation of the property is that it protects the investors in these great public securities, and it forces a limitation of profits, so that automatically, as the receipts of the company increase, the rates will be reduced. All that the average investor, outside of the speculator, asks is a fair return upon his money. The great banking institutions in New York that negotiate the securities of these great corporations rely upon other people's money for the exercise of their power. We have had illustrations of that in recent investigations. ' Himdreds of mil- lions of dollars collected from all over the country by the insurance companies, or the savings of the people in savings banks and trust companies, supply the funds which are invested in a large proportion of these securities. The average investor to whom these securities are presented looks simply to the rate of interest, and if he gets 4 or 5 per cent he is willing to pay par for the securities. All the real investors require is a fair return of from 4 or 5 per cent, and the proposed limitation of profits is absolutely fair to them. ELIMINATES THE SPECULATIVE ELEMFNT. It is said that if this return is limited there will be no inducement to these great railway promoters to extend the roads ; that it is the speculative idea that attracts them into these operations. That may possibly be true as to the great promoters who have made millions and hundreds of millions out of these operations, but it is not true as to the people themselves. All they expect is 4 or 5 per cent, and they are willing to put their money into any investment that will secure that return. I do not believe, Mr. President, that in order to stimulate enterprise in this country in railroad building it is necessary to hold up before some man or some set of men a prize of from ten million to one hun- dred million dollars for the operation. I think that if we protect the bondholders and stockholders by fixing a return of this kind, it INTERSTATE AND FOREIGN TRANSPORTATION. 257 will lead to the elimination of the speculative element in railroad operations, but I do not regard that as of consequence, for the specu- lative element has little to do with material railroad building. Y ou will find that the men who really conduct this business, the men who really build the railroads, the men who really manage them, are men of moderate means, who are content with moderate salaries, and yet do their work faithfully and well. We find in the Government service to-day — in the scientific branches of the Government, such as the Geological Survey — ^the high- est standard of efficiency and energy, accompanied by a public spirit which seems to elevate their action above that of men not employed in the public service. I have not the slightest doubt but that railroad enterprises will be just as well conducted without retaining the aid of the speculative element. TAXES SHOULD BE CERTAIN. In such an incorporation act we could also provide with certainty as to taxes. One of the great difficulties of the existing condition is that although these great systems are really national, embracing in their operations a number of States, they are subject to the varying rules of 45 different States as to taxation. In some States the assess- ment is made at the assessed value simply of the tracks and the right of way. In other State the assessment takes into consideration the value of the franchise. In some States it is contended that the a;ssessment should be the combined market value of the stocks and bonds. In addition to all this the stocks and bonds themselves in the hands of their holders can be separately assessed and taxed, a form of double taxation. We have in this country about $12,000,000,000 of railroad stocks and bonds. The market value is, say, about $10,000,000,000. If the highest rule obtains, these railroads could be assessed for $10,- 000,000,000, and they would have to pay an average tax of 1^ per cent upon that value, or $150,000,000. The railroads to-day are paying $56,000,000 per annum. If this rule, which has been upheld by the Supreme Court of the United States, were to prevail throughout the country the taxes of the rail- roads would be immediately raised from $56,000,000 to $150,000,000 per annum, an increase of about $100,000,000. One hundred million dollars is 1 per cent upon the market value of the entire bonds and stocks of the country. That would be im- mediately taken out of the returns to the stockholders unless the rates were so increased as to make up the extra tax charge. So if you raise the taxes from $56,000,000 to $150,000,000, the taxes which the public receive, then you must increase the rates to the extent of $100,000,000 so that the corporations can pay these taxes or else you must take the $100,000,000 out of the profits of the stockholders and diminish their return to that extent below the normal rate of interest. But under the existing system the States could not only tax the railroads themselves $150,000,000 annually, thus trebling their taxes, but they could assess every bond and stock in the hands of the holders, for they are, under the laws, regarded as personal property and sub- ject to taxation. It is true that they generally escape assessment, but if they were assessed at their market value, $10,000,000,000, it would mean that $150,000,000 more in taxes could be secured from them. 258 INTERSTATE AKD FOREIGN TRANSPORTATION. If this system were carried out to its logical conclusion, where would there be any security for the stockholders ? With $150,000,000 taken from the corporations of which they are stockholders and bond- holders and $150,000,000 taken annually from the bondholders and stockholders individually as owners of these securities, it would be utterly impossible for us to get people to invest in railway securities; and yet this wide range of taxation is possible under existing condi- tions ; and it is a fruitful source of evasion, fraud, and political corruption. WHY EAIUROADS ARE IN POLITICS. The railroads find it utterly impossible to keep out of politics simply because their property is between the upper and nether mill- stone and can be ground to destruction between the rate-regulatiijg' power and the taxing power of the public. In the famous case of ■Munn V. Illinois the doctrine was first asserted in this country by the United States Supreme Court that where a person devotes his prop- erty to a public use he grants to the public an interest in that use and must submit to regulation by the public; that if he is dissatisfied with the regulation he can discontinue the use, but so long as he con- tinues the use he must submit to the regulation. In answer to the objection that such legislative power could be abused the court stated that the only remedy for legislative abuses was at the polls. The railroads have been at the polls ever since. Their taxes are a matter of political control. Their rates are a matter of political control. How can we expect $10,000,000,000 to keep out of politics when that $10,000,000,000 is completely subject to political control in every State of the Union ? It is absolutely essential, therefore, for the railroads to be in poh- tics, and they go into politics as they go into everything else, in a systematic and businesslike way. There is no sentiment about it. They go into politics to protect their property, and they seize as swiftly as they can the entire political machinery of a State. It is easier to do that than it is to try to influence the people at the polls. What chance has a great corporation at the polls in a contest with the people ? They are compelled to be in politics, but they can only be influential in politics by indirection. They deem it, there- fore, absolutely essential to seize wherever they can the political machinery of both parties. With their ramifications, with their army of lawyers, traific man- agers, and agents in every community, and with their 1,200,000 employees — about one-tenth of the effective labor of this country-^- they have all the factors of a strong political machine, for it is eyi' dent to one who has had experience in these matters that although the men employed by the railroads often have disputes with the rail- roads regarding their hours and compensation, yet that whatever their disputes may be they always stand in with the railroads when the common fund from which wages and dividends are paid is, in danger. We have had an illustration of that in this legislation. The em^ ployees of the railroads throughout the country have petitioned Con- gress against the regulation of rates upon the ground that it may endanger their compensation, and whenever it is known that the man INTERSTATE AND FOBEIGN TBANSPORTATION. 259 offering himself for a public office is opposed to a railroad, either upon the matter of taxation or upon the matter of rates, it is not a difficult thing for the railroad to array all of its employees against such a man. So the railroads have been invited to go to the polls, and they are going to the polls in the only effective way, by control- ling the political machinery of local conventions and of State con- ventions, and even the national conventions themselves. There is not a man who is familiar with national conventions who does not know how large a factor the railroads have been in selecting delegates to them. We will find that to be the case hereafter, when we give this extraordinary and unrestrained power to a commission, giving it the full discretion that Congress itself has, without impos- mg any rule whatever of protection to the railroads. We will find them showing great activity in national politics and in the election of Presidents, as they have done in the election of mayors, of boards of supervisors, of county commissioners, of governors, of boards of equalization, and of State commissions. It seems to me that that is an additional reason why we should put in this bill the rule that is to guide the commission in its work, for it may be that one of these days this commission will be a con- trolled commission, just as the State commissions have been in many instances. We can easily imagine a contest in either party where two or three men of equal ability, equal capacity, and of equal popu- larity are before a national convention as candidates for the Presi- dency. We can imagine how the railroads, massing their power for one candidate, may secure him the nomination, and we can imagine how the understanding might be that the railroads would be con- sulted as to the selection of this Interstate Commerce Commission. Of course it would be done in the most delicate way; such things are always done in a delicate way ; but when a man receives the sup- port of a great interest in a convention for so high a nomination and accepts it, the chances are that his judgment will be in some degree swayed by that fact. Then we will assume that the national conventions of both parties have met and selected their candidates, the contest is a close one and the candidates are equally popular before the country. We ean imagine how effective the railroad strength would be if turned over to one of those candidates, and we can understand how under such conditions the railroads might not find it difficult to secure assurances, directly or indirectly, as to the composition of the Interstate Com- merce Commission. The character of the men appointed might be above reproach, but it is easy to understand how in the end the appointment of men of a certain inertia, inactivity, indisposition to move or to act, might condemn the commission to uselessness. On the other hand, it is possible that in periods of excitement the commission might be com- posed of prejudiced and violent men, who would imperil the interests of investors. So it seems to me incumbent upon us, in the common interest, to put in this bill fixed rules governing taxation and return on capital, so that the law itself will adjust with certainty the relations of the car- riers to the public, protecting the carriers from spoliation and the public from extortion. 260 INTERSTATE AND FOREIGN TRANSPORTATION. Now, Mr. President, in this matter of taxation, to which I wa& referring, I think that taxation should be absolutely certain, so that the railroads will know what they have to pay, so that the States -will know what they are to receive, and in order that the railroads may be protected from the blackmailers and the cranks and the honest reformers throughout the entire country, each of whom is seeking to change the existing system of taxation in every locality and in every State, some men honest and probably right in their views, some of them cranks, some of them joining with the reformers and with the cranks simply for the purpose of blackmailing. We have recently had evidence of the kaleidoscopic character of railroad taxation by ' the States. A few. days ago the Post stated that Gov. Dawson, of West Virginia, was in Washington making inquiries as to the recent census valuation of railroads in West Virginia with a view to tax reform in that State. Similar movements are on foot in many of the States, and the Supreme Court has recently handed down a deci- sion affirming a recent statute of Michigan which trebles the existing railroad taxes of that State. It is too much to demand of human nature to expect the railroads under those conditions to keep out of politics. All of us who have been familiar with politics know of conventions where it was whis- pered around at the very beginning of the session that the railroads demanded the tax commission, or the railroad commission, or both, and where the party managers knew they had a fight on their hands if they did not accede. We will find these same conditions extend- ing to national politics if we do not take care. A FAIR AND UNIFORM RULE OF TAXATION. Now, what is a fair rule of taxation? I think it is generally agreed that the fairest rule is a percentage tax upon gross receipts. A tax of 4 per cent upon all the gross receipts of all the railroads of the country, which now aggregate about $2,000,000,000, would be $80,000,000. A tax of 5 per cent would yield $100,000,000. The present taxes paid by all the railroads amount to about $56,000,000, or about 3 per cent upon their gross receipts. Here let me say that these railroads, forced into politics to protect themselves against excessive taxation, finally end in evading taxation themselves. Hav- ing got the power, having secured the party machinery, having secured control of the officials who control taxes, they naturally seek to diminish their own taxes, and so, though originally going into politics for protection, they remain in politics for profit and seek to escape their fair proportion of the burdens of government. As to a gross-receipt tax, a tax of 3, 4, or 5 per cent upon the gross receipts is mathematically ascertainable. The gross receipts are published every year by the Interstate Commerce Commission. There -is no way of concealing them. The tax would be a matter of mere computation, and would not involve the exercise of discretion by the taxing officials of the various States, as the present system does. The National Government can, in incorporating interstate rail- roads, either exempt them as national instrumentalities from State taxation or it can fix the rule for their taxation by the States. INTERSTATE AND FOEEIGN TRANSPORTATION. 261 TAXATION OF NATIONAL INSTEXJMENTALITIBS ^POWER OF CONGRESS TO FIX EITLE OF TAXATION BY STATES. When the Government condemns for public use or constructs a ?ost road, that moment the post road is free from State taxation, f the Government buys real estate and builds a post office, that moment the real estate and building are exempt from State taxation. If the National Government should construct railroads for the purpose of carrying out its granted povrers, such railroads would be exempt from State taxation, just as post offices and customhouses are, and just as post roads would be if built. If it intrusts such work to a corporation created by itself, the corporation is the agent for the purpose of carrying out governmental powers, and none of its powers or operations can be taxed by a State. If it selects cer- tain property as the instrumentality or means through which its powers are to be exercised, such property would also be exempt from State taxation, for just as the powers and the operations of the Government agent would be exempt from all local taxation, so also would be the property selected as the chosen instrument for the exercise of those powers. The powers and operations would be exempt .without any express declaration to that effect by Congress. A different rule would probably apply to the property selected as the chosen instrument for the exercise of a national power. In that case it would be necessary to show unmistakably that the property was selected as the instrumentality, and that it was the purpose of Congress that it should be taken out of the domain of State taxa- tion. The proper organization of a system of transportation is just as essential to the welfare of the people as is the creation of a proper financial system. In the early history of the country it was deter- mined to establish a United States bank to promote the fiscal oper- ations of the Government. The State of Maryland sought to impose a tax upon the notes of a United States bank in Maryland. The notes were property just as a railroad is property, and yet the court held that the State of Maryland could not in the exercise of its tax- • iag power tax those notes. It is true that in that case Chief Justice Marshall held that so far as the bank building was concerned the exemption would not apply, but he so held upon the ground that the ownership of the bank building was not essential to the opera- tion of the bank; the bank could be conducted upon leased prop- erty, and therefore the bank building could not be regarded as a national instrumentality for the purpose of carrying out the powers conferred by the National Government upon the bank, but all prop- erty absolutely essential to the powers conferred upon the bank, such as promissory notes, bills of exchange, etc., were exempt from State taxation. It should be noted that a railroad is a very different property from a. bank building. The ownership of a bank building is not essential to the operation of a banking corporation. The ownership of a rail- road is absolutely essential to the operation of a railroad corporation. If Congress, therefore, under the interstate-commerce power, author- izes the construction of a railroad, it makes that railroad the instru- mentality for the purpose of carrying out its power— the means of 262 hjtteestate and foreign teansportation. the exercise of the power itself. The operation of the railroad can not be segregated from the right of way, the track, the station build- ings, and the general equipment of the road. If they belonged to the Government they would be exempt from State taxation, and if the Government selects as its agent a corporation of its own creation and makes its property the instrumentality for the exercise of gov- ernmental powers, and unmistakably shows its intention that this instrumientality shall not be embarrassed by Sate taxation,, clearly the property selected as the instrumentality must be as free from taxation as the powers themselves. In this connection it is proper to say that my contention as to the right of the United States to exempt a railroad incorporated under a national law for interstate commerce, from State taxation is not urged for the purpose of freeing such roads from sharing the burden of government, but simply for the purpose of securing a uniform rule of taxation by the States, with a view to facilitating the public regulation of railroad corporations in which the fixed charge of taxes is an important consideration. Under the rule laid down in Van Allen v. The Assessors (3 Wall., 573), it would be competent for the Congress of the United States to submit the property of national railroads engaged in interstate , commerce to State taxation, first prescribing the rule by which such property should be taxed. In this way Congress could secure uni- formity and certainty in the taxes. THE AUTHORITIES. In Luxton v. North River Bridge Co. (153 U. S., 525), it was held that, under the power to regulate commerce among the States, Congress may create a corporation to build a bridge across navigable water between two States, and to take private land for that purpose, making just compensation. And Mr. Justice Gray, delivering the opinion of the court, said: The Congress of the United States, being empowered by the Oonstitution to regulate commerce among the several States and pass all laws necessary and proper for carrying into execution any of the powers specifically conferred^ may make use of any appropriate means for this end. As said by Chief Justice Marshall, " The power of creating a corporation, though appertaining to sovereignty, is not, like the power of making war, or levying taxes, or of regulating commerce, a great substantive and independent power which can not be implied as incidental to other powers or used as a means of executing them. It is never the end for which other powers are exercised, but a means by which other objects are accomplished." Congress therefore may create corporations as appropriate means of executing the powers of government, as, for instance, a bank for the purpose of carrying on the fiscal operations of the United States, or a railroad corporation for the purpose of promoting com- merce among the States. (McCuUoch v. Maryland, 4 Wheat., 316, 411, 422; Osborn v. Bank of U. S.., 9 Wheat., 738, 861-873 ; Pacific R. R. Removal Cases, 115 U. S., 1, 18; California v. Pacific R. R., 127 U. S., 1, 39.) Congress has likewise the power, exercised early in this country by successive acts in the case of the Cumberland or National road from the Potomac across the Alleghenies, to the Ohio, to authorize the construction of a public highway connecting several States. See Indiana v. United States, 148 U. S., 148. (153 U. S., 529), In California v. Pacific Eailroad (127 U. S., 1)' it was directly adjudged that Congress has authority, in the exercise of its power to regulate commerce among the several States, to authorize corpora- tions to construct railroads across the States, as well as the Terri- INTERSTATE AND FOREIGN TRANSPORTATION. 263 tories of the United States; and Mr. Justice Bradley, speaking for the court, and referring to the acts of Congress establishing cor- porations to build railroads across the continent, said : It can not at the present clay be doubted that Congress, under the power to regulate commerce among the several States, as well as to provide for postal accommodations and military exigencies, had authority to pass these laws. The power to construct, or to authorize individuals or corporations to construct, national highways and bridges from State to State ^is essential to the complete control and regulation of interstate commerce. Without authority in Congress to establish and ihaintain such highways and bridges it would be without au- thority to regulate one of the most important adjuncts of Congress. This power in former times was exerted to a very limited extent, the Cumberland, or National, road being the most notable instance., Its exertion was but little called for, as commerce was mostly then conducted by water, and many of our statesmen entertained doubts as to the existence of the power to establish ways of communication by land. But since, in consequence of the expansion of the country, the multiplication of its products, and the inventions of rail- roads and locomotion by steam, land transportation has so vastly increased, a sounder consideration of the subject has prevailed and led to the conclusion that Congress has plenary power over the whole subject. Of course the au- thority of Congress over the Territories of the United States and its power to grant franchises exercisable therein are, and ever have been, undoubted. But the wider power was very freely exercised, and much to the general satis- faction, in the creation of the vast system of railroads connecting the Bast with the Pacific, traversing States as well as Territories, and employing the agency of the State as well as Federal corporations. (127 U. S., 39-10.) McCvMocJi V. Maryland {4- Wheat., 48S). — This case decided that a stamp tax on the notes issued by a Federal bank was a tax on the operation of a Federal agency and therefore void. The essence of- the decision is the impotency of the States to burden the operations of the Federal Government. As to a tax on property as distinguished from operations, the court said, in conclusion : The States have no power, by taxation or otherwise, to retard, impede, bur- den, or in any manner control the operations of the constitutional laws enacted by Congress to carry into execution the powers vested in the General Gov- ernment. * * * This opinion * * '* does not extend to a tax paid by the real property of the bank, in common with the other real property -within the State, nor to a tax Imposed on the Interest which the citizens of Maryland may hold in this institution, in common with other property of the same description throughout the State. Thompson v. Paci-fic Railroad (9 WaTL, 579). — This was a case of taxation by a State of a railroad acting under a Federal charter, as well as a State charter. The court said (p. 590) : We do not think ourselves warranted, therefore, in extending the exemption established by the case of McCuUoch v. Maryland beyond its terms. We can not apply it to the case of a corporation deriving its existence from State law, exercising Its franchise under State law, and holding its property within State jurisdiction and under State protection. I? In this case the court considered the possibility of what would happen if Congress should do what it had not done, to wit, explicitly exempt its agent from taxation. The court said (p. 588)': We do not doubt, however, that * * * Congress may * * * exempt, in Its discretion, the agencies employed in such service from any State taxation which will really prevent or impede the performance of them. But can the right of this road to exemption from such taxation be main- tained in the absence of any legislation by Congress to that effect? 70342— -PT 5—16 2 264 INTERSTATE AND FOREIGN TEANSPOETATION. Throughout this case it will be noted that the court is careful to say that the case did not present the feature of any posiive attempt on the part of Congress to exempt the property from State taxation, and the inference is clear that in such a case the exemption ^yould have been operative and the State tax invalid. The case emphasizes the difference between property and the opera- tions of an agent of the Government, as follows (p. 591) : We fully recognize the soundness of the doctrine that no State has a "right to tax the means employed by the Government of the Union 'for the execution of its powers." But we think there is a clear distinction between the means em- ployed by the Government and the property of agents employed by the Govern- ment. Taxation of the agency is taxation of the means ; taxation of the property of the agent is not always, or generally, taxation of the means. 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 Government ; but it will be safe to conclude, in general, in refer- ence 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. Again obviously intimating a different opinion had Congress ex- pressly established such exemption. Railroad Company v. Peniston {18 Wallace, 5). — The case arose out of the claim on the part of the State of Nebraska of the power to tax roadbed, depots, wood stations, water stations, and other realty, telegraph poles, telegraph wires, bridges, boats, papers, oiSce furni- ture and fixtures, money and credits, movable property, engines, etc., of the Union Pacific Railroad Co. The company was created by the act of Congress of July 1, 1862, entitled "An act to aid in the construction of a railroad and tele- graph line from the Mississippi River to the Pacific Ocean, and to secure to the Government' the use of the same for postal, military, and other purposes." Various amendments were made to the original act at later sessions of Congress, but neither in the original act nor in any amendment was any provision made by Congress respecting the taxa- tion of it or its property by the States through which the road might run. The tax was resisted by the company on the ground that, having been incorporated by Congress — ■ The State of Nebrasl^a has no power to subject to taxation for State purj; the roadbed, rolling stock, and other property necessary for the use and op- eration of the road, such power resting exclusively In the Government of the United States. It was distinctly stated by Mr. Chief Justice Strong, who delivered the opinion, that — The States may not levy taxes the direct efEeet of which shall be to hinclev the exercise of any powers which belong to the National Government. The Cou- stitution contemplates that none of those powers may be restrained by- State legislation (p. 30). After referring to the legislation creating the Union Pacific road and adverting to the objects and purposes of that legislation, the justice further said (p. 32) : Admitting, then, fully, as we do, that the company is an agent of the General Government, designed to be employed, and actually employed, in the legitimate service of the Government, both military and postal, does It necessarily follow that its property is exempt from State taxation? INTERSTATE AND FOREIGN TRANSPORTATION. 265 Emphasizing the difference between the operations of an agent and the property thereof, Justice Strong said (p. 33) : It may therefore be considered as settled that no constitutional implications prohibit a State tax upon the property of an agent of the Government merely hecause it is the property of such an agent. Then, after consideration of the various cases bearing upon the general question. Justice Strong summed up as follows (p. 36-37) :_ It is therefore manifest that exemption of Federal agencies from State taxa- tion 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 eifect 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 hinder the efficient exercise of their power. A tax upon their property has no such necessary effect. It leaves them free to discharge the duties they have undertaken to perform. A tax upon their operations is a direct obstruction to the exercise of Federal powers. Eight justices heard this case, and the opinion of the court uphold- ing the validity of the tax was concurred in by four of them. A fifth. Justice Swayne, concurred in the judgment, but said: I see no reason to doubt that it was the Intention of Congress not to give the exemption. claimed. The exercise of the power may be waived, but I hold that the road is a national instrunientality of such a character that Congress may interpose and protect it from State taxation whenever that body shall deem it proper to do so. So that Justice Swayne would have decided against the majority of the court had there been exempting legislation. 'Two other jus- tices flatly dissented, giving an opinion to the effect that such State taxation was invalid, even in the silence of Congress. And the eighth justice merely remarked : " I dissent from the opinion of the court." Thus all that can be claimed from this decision as to the power of j Congress to exempt a corporation from taxation by affirmative legis- lation is that the court was evenly divided, knd even this can not be fairly claimed, for the case of exempting legislation was not before the court, and the opinions of the four justices who uj)held the tax do not contain a work which denies the power of Congress to exempt the property which it expressly declares to be its chosen instru- mentality. Mr. Justice Bradley, for himself and Mr. Justice Field, delivered a vigorous dissenting opinion, in the course of which he said (p. 47) : The Union Pacific Railroad Co., Uierefore, being a United States corpora- tion created for national objects and purposes, and deriving its existence, its powers, its duties, it:i liabilities from the United States alone; being , respon- sible to the United States, now as formerly, for a whole congeries of duties and observances; being subjected to the forfeiture of its corporate franchises, powers, and property to the United States and not to any Individual State; being charged with important duties connected with the very functions of the Government, everv consideration adduced in the cases of McCulloch v. Mary- land and Oshorn v. The Banli, would seem to require that it should be- exempt not only from State taxation, but from State control and interference, except so far as relates to the preservation of the peace and the performance of its obligations and contracts. In reference to these and to the .ordinary police regulations imposed for sanitary purposes and the preservation of good order, of course, it is amenable to State and local laws. As an instrument of national commerce as well as Government operations, it has been regulated by Congress. Can it be further regulated by State legis- lation' Can the State alter its route, its gauge, its connections, its fares, its franchises or any part of its charter? Can the State step in between it and the superior pewer or sovereigntv to which it is responsible? Such an hypothesis, 266 INTEESTATE AND FOREIGN TEANSPORTATION. It seems to me, is inadmissible and repugnant to the necessary relations arising and existing In the case. Such an hypothesis would greatly der.ogate from aW render almost useless and ineffective that hitherto unexecuted power of Con- gress to regulate commerce by land among the several States. If it be declared in advance that no agency of such commerce, which Congress may hereafter establish, can be freed from local impositions, taxation, and tolls, the hopes of ' future free and unrestricted intercourse between all parts of this great country will be greatly discouraged and repressed. Again : But it is contended that the laying of a tax on the roadbed of the company is nothing more than laying a tax on ordinary real estate, which was con- ceded might be done in the case of the United States Bank in reference to its banking house or other lands taken for claims due in the course of its businesis. This is .a plausible suggestion, but. In my apprehension, not a sound one. In ascertaining what is essential in every case, respect must always be had to the subject matter. The State of Maryland undertook to tax the circulation of the United States branch bank established in that State by requiring stamps to be affixed thereto ; the State of Ohio imposed a general tax of $50,000 upon the branch established therein. These taxes were declared unconstitutional and void. They impeded the operations of the bank as a financial agent. Real estate was not a necessary appurtenant to the exercise of the functions of the bank. -It might hire rooms for its office, or it might purchase or erect a building. But the primary object of a railroad company is commerce and transporta- tion. In its case a railroad track is just as essential to its operation as the use of a currency or the issue or purchase of bills of exchange is to the opera- tions of a bank. To tax the road is to tax the very instrumentality which Con- gj-ess desired to establish, and to operate which it created the corporation. Besides, all that a railroad company possesses in reference to its roadbed is the right of way and the right to use that land for the purpose of way. This is a franchise conferred by the Government and inseparately connected with the other franchises, which enables it to perform the duties for the performance of which it was created. Any estate in the land — the soil, the underlying earth — beyond this belongs to the original proprietor, and that proprietor in the pres- ent case is the (rovernment itself. So that, look at it what way we will, there is no room for the taxing power of the State. The estate in the soil can not be taxed, for that remains in the United States; the franchise of right of way and materials of track can not be taxed, because they are essentially connected witii and form a part of the powers, faculties, and capital by which the national purposes of the organization are accomplished. If the j-oadbed may be taxed, it may be seized and sold for nonpayment of taxes — seized and sold in parts and parcels, separated by county or State lines — and thus the whole purpose of Congress in creating the corporation and establishing the line may be subverted and destroyed. In my judgment, the tax laid in this case was an unconstitutional interfer- ence with the instrumentalities created by tlie National Government In carrying out the objects and powers conferred upon It by the Constitution (pp. 49-50). In Van Brocklin v. State of Tennessee (117 U. S., 151) Mr. Justice Gray, spealdng for the court, said : The liability of the property of the Pacific railroad companies to State taxa- tion has been upheld on the distinction * * * that, although the railroad corporations were agents of the United States, the property taxed was not the property of the United States, and a State might tax the- property of the agents, provided it did not tax the means employed by the National Government. And he there quoted with approval the following from the dis- senting opinion of Mr. Justice Bradley in the Peniston case : The States can not tax the powers, the operations, or the property of the United States, nor the means which it employs to carry Its powers into execution. In California v. Central Pacific Railroad Co. (127 U. S., 1) the question of taxation by the State of California of the franchise of the Central Pacific Eailroad Co. came before the Supreme Court in this case, and the court, speaking by Mr. Justice Bradley, unani- IITTERSTATE AND FOREIGN TRANSPORTATION. 267 mously held that such franchise was not subject to taxation by the State. In the opinion the following language is used : It seems very clear that the State of California can neither take them (the franchises held by the company ) away, nor destroy nor abridge them, nor cripple them by onerous burdens. Can it tax them? It may undoubtedly tax outside visible property of the company situated within the State. That is a different thing. But may it tax the franchises which are the grant of the United States? In our judgment it can not. What is a franchise? * * * Generalized, and divested of the special form which it assumes under a monarchial government Jiased on feudiil traditions, a franchi.se is a right, privilege, or power of public concern, which ought not to be exercised by pri- vate individuals at their mere will and pleasure, but should be reserved for public control and administration, either by the Government directly or by pub- lie agents, acting under such conditions and regulations as the Government may impose In the public interest and for the public security. Such rights and powers must exist under every form of society. They are always educed by the laws and customs of the community. Under our system their existence and disposal are under the control of the legislative department of the Government, and they can not be assumed or exercised without legislative authority. No private person can, establish a public highway, or a public ferry, or a railroad, or charge tolls for the use of the same, without authority from the legislature, direct or derived. These are franchises, * * * >jq persons can make them- selves a body corporate and politic without legislative authority. Corporate capacity is a franchise. * * * In view of this description of the nature of a franchise, how can it be possible that a franchise granted by Congress can be subject to taxation by a State without the consent of Congress? Taxation is a burden, and may be laid so heavily as to destroy the thing taxed, or reader it valueless. As Chief Justice Marshall said in McCuUoch v. Maryland, " the pover to tax involves the power to destroy." Eecollecting the fundamental principle that the Constitution, laws, and treaties of the United States are the supreme law of the land, it seems to us almost absurd to contend that a power given to a person or corporation by the United States may be subjected to taxation by a State. The power con- ferred emanates from and is a portion of the power of the Government that confers it. To tax it is not only derogatory to the dignity, but subversive of the powers of the Government and repugnant to its paramount sovereignty. * * * It may be added that these views are not in conflict with the decisions of this court in Thomson r. Pacific Kaih-oad (9 Wall., 579), and Railroad Company v. Peniston (18 Wall., 5). As explained in the opinion of the court in the latter case, the tax there- was upon the property' of the company and not upon its franchises or operations. (127 U. S., 40-41.) fteagan v. Mercantile Trust Co. {154- U. S., 4/5).— While the lan- guage in this case is not wholly clear, it seems to indicate a belief that Congress might exempt such a railroad from State taxation. Page 416: Similarly we think it may be said that, conceding to Congress the power to remove the corporation in ail its operations froiu the control of the State, there is in the act creating this company nothing which indicates an intent on the part of Congress to so remove it. * * * It (Congress) must have known that, in the nature of things, the control of that business would be exercised by the State and if it deemed that the interests of the nation and the discharge of the duties required on behalf of the nation froJB this corporatiOA demanded ex- emption in all things from State control it would unquestionably have expressed such intention in language whose meaning would be clear. Its silence in this respect is satisfactory assurance that, in so far as this corporation should en- gage in business wholly within the State, it intended that it should be subjected .to the ordinary control exercised by the State over such business. In Central Pacific Eailroad Co. v. California (162 U. S., 125) the court said: It may be regarded as firmly settled that although corporations may be agents of the United States their property is not the property of the United States, but the property of the agents, and that a State may tax the property of the agents, subiect to the limitations pointed out in Railroad Company v. Peniston, etc. 268 INTERSTATE AND EOBEIGN TRANSPOETATION. Of course, if Congress should think it necessary for the protection of tlie United States to declare such property exempted, that would present a different question. Van Allen v. The Assessors {3 Wall., 70 V . S., p. 573) .—The court in this case considered the act of June 3, 1864, " to provide a national currency," etc., which subjected the shares of bank associations in the hands of shareholders to taxation by the States under certain limita- tions. It also considered the act of March 9, 1865, of the legislature of New York, which taxed such shares but did not tax them by the same rule as the shares of State banks, and held this statute unwar- ranted by the act of Congress and void. The court said (p. 591) : That Congress may constitutionally organize or constitute agencies for carry- ing into effect the national powers granted by the Constitution; that those agencies may be organized by the voluntary association of individuals, sanc- tioned by Congress ; that Congress may give to such agencies so organized Cor- porate unity, permanence, and efficiency; and that such agencies in their, being, capital, franchises, and operations are not subject to the taxing power of the States, have ever been regarded since those decisions as settled doctrines of this court. It will be perceived in this case that Congress laid down the rule under which a State tax could be levied upon the capital invested in a national incorporation, and, as the rule laid down by Congress was violated by the State, the tax of the State was held to be invalid. From the foregoing authorities it seems clear — First. That Congress, under the power to regulate interstate com- merce, can create corporations for the purpose of engaging in such commerce. Second. That a State can not tax the franchises of such corpora- tions, nor can it interfere with the operations of a corporation chartered by the United States for such purposes, or hinder, impede, or burden such corporations in carrying out such purposes. Third. That, while the State may tax the tangible property of the corporation within its territorial limits, in the absence of any re- striction upon the taxing power of the State contained in the charter of the corporation, nevertheless Congress may, in terms, expressly provide against such State taxation by a declaration that all the property of the corporation necessary for the carrying out of the purposes for which it was incorporated shall not be subject to State taxation, or it can prescribe the rule for State taxation. In other words. Congress itself can declare what shall be regarded as the in- strumentalities of government, can define such instrumentalities m the charter itself, and upon such instrumentalities the States can not levy any tax if Congress forbids. TAXATION ACCORDING TO DENSITY OF TRAFFIC. In laying down such a rule it may be said that sufficient regard would not be. had to the density of traffic; that in some States tramc would be very much more dense than in others ; that it would be very unfair to allow to States in which the traffic is less dense the same tax per mile as to States in which the traffic is greater. This objee- tion can be met by providing that each mile of second track should be estimated as one-half mile of main track, and that each mile oi third, fourth, or fifth track should be estimated as a quarter mile INTERSTATE AND TOKEIGN TBANSPOE.TATION . 269 of main track, and thus the States whose density of traffic is demon- strated by the existence of second, third, and fourth tracks would receive a larger amount proportionately per mile of main track than the States in which the traffic is not so dense and in which such extra trackage does not exist. A CERTAIN FACTOR IN RATE l^IXING. The advantage of this method of taxation would be also that the Interstate Commerce Commission would have another factor in their determination of rates which would be entirely certain. As it is, assuming that these railroads are entitled to a fair return upon a fair valuation, that return can only be ascertained after computing the gross receipts, then deducting from such receipts the expenses of operation and maintenance, and finally deducting the taxes and fixed charges. The balance would be the income which would be applied as a return upon the value of the property. It is, therefore, of the highest importance that the taxes themselves should be fixed and certain. If they vary, the whole calculation of the Interstate Commerce Commission must vary, for the rates must be adjustecl in such a way as to yield to the corporation operating expenses, maintenance, and taxes, and a fair return upon the valua- tion. ACCIDENT AND INSURANCE EUND. A national incorporation act should also provide for an insurance fund. We all know that in every State in the Union the employees of railroads are pushing legislation fixing the liability of corpora- tions for injuries to employees, even though caused by the negligence of fellow employees. There is constant warfare between the rail- roads and their employees upon this question, and it is another fruit- ful source of the activity of railroads in politics. In order to pro- test, themselves, they are omnipresent in all the legislatures of the country upon this subject. It seems to me that we should frankly recognize such liability as a charge upon the' transportation of the country. There should be a fund created to aid those employees who are disqualified for active service through accident or old age, by providing that the national corporations should pay into the National Treasury 1 per cent of their gross receipts, which, under the present system, would amount to about $20,000,000 annually. . This fund should be invested by the Interstate Commerce Com- mission in interest-bearing securities, and the Interstate Commerce Commission should frame rules and regulations with regard to its payment to the disqualified employees. This $20,000,000 would not be taken from the profits of the stockholders, but would be imposed upon the commerce of the country as part of the operating expenses of the companies. In this way we would do much to relieve the present hostility between the corporations and their employees rega,rding this matter, and we would do much to protect the men who are engaged in this public service of an extra hazardous character. 270 INTERSTATE AND FOEEIGISr TKANSPORTATIOIS'. NATIONAL OWNERSHIP OF RAILROADS. Mr. President, I have already referred to the fact that this biH is likely to burden the Interstate Commerce Commission to such an extent that it will prove inert and inactive and incapable of accom- plishing its purpose. If we establish a rule that will work auto- matically, tending toward a gradual reduction of rates, there will be no difficulty ; but if we do not, I believe, there will be a steady and increasing tendency toward nationalization of all the railroads of the country. The proposition is a very simple one. The existing railroads are now, for the most part, embraced in about 10 systems, each of them controlled by a corporation organized under the laws of a single State. These corporations have outstanding about $6,000,000,000 of bonds and $6,000,000,000 of stock. It is unnecessary to consider the bonds, for they can remain as a charge upon the property when the United States Government seeks to acquire the railroads, and it can gradually substitute for the existing bonds, bearing interest at the rate of 4, 4^, or 5 per cent, bonds bearing interest at the rate of 3 per cent, thus making a gradual reduction of about $100^000,000 annually in interest charges. It is not necessary for the Governriierit to con- demn the physical property of the corporations. All that it needs is the interest of the shareholders. This was done recently in the case of the Panama Eailroad, when a bill passed the Senate, with the approval, I believe, of all the lawyers, giving the United States power to condemn shares of stock in the Panama Railroad that were outstanding. We could exercise that same power aow with our railroads, and all that we would have to provide for would be the market value of all the railroad stocks, whose par value is about $6,000,000,000. Such market value is, I believe, about $5,000,000^000. NATIONAL OWNERSHIP EASILY FINANCED,. The statement for 1904 shows that the net income of all the rail- roads of the country, -after paying operating expenses, taxes; main- tenance, and interest upon debt, amounted to $278,000,000. Assuming that we had to pay $5^00,000,000 for all the stocks outstanding, we could issue national bonds at 3 per cent therefor, and the annual interest charge would not be more than $150,000,000. We would have, according to this statement, an excess of $128^000,000 annually, which could be applied to a sinking fund or to extensions. The Nation could also gradually, retire the existing mortgage bonds bearing interest at about 4^ per cent with 3 per cent bonds, .and thus make a saving in in- terest of $100,000,000 more, and thus we would in time accomplisli an annual saving of $228,000,000, which would construct at least seven or eight thousand miles of railroad annually to keep pace with all the re- quirements for new construction in the future. Or if new capital should be .applied to that, the $228,000,000 pirt into a sinking fund would soon retire every dollar of indebtedness created by the purchase of these railroads. Or we could enter upon national ownership in a very limited way. INTERSTATE AND FOREIGN TRANSPORTATION. 271 A NATIONAL TRANSCONTINENTAL LINE. We could acquire simply one trunk line from the Atlantic to the Pacific by acquiring the Baltimore & Ohio, running from New York, I'hiladelphia, and Baltimore to Chicago, and the Atchison system, run- ning from Chicago to San Diego, Los Angeles, and San Francisco. We could condemn their stock for about $450,000,000, leaving the roads subject to a bond issue of about $500,000,000. The income of those properties would take care of the interest chai'ges and leave a surplus that could be applied to a sinking fund or to new construction. Branch lines of railway could be built from this great central line or the numerous railroads in the country that are not embraced in the great systems could connect and cooperate with it. I suggest this line because less money would be required in financing it than in any other line. INCREASE IN INCOME. That the income of these railroads is bound to increase largely imder existing conditions is demonstrated by a comparison of their earnings for 1904 and the earnings for 1897. The gross earnings for 1904 were $1,975,000,000 ; for 1897 (seven years previous) they were $1,122,000,000, an increase in seven years of about 70 per cent. It is altogether probable that within the next 10 years the present gross earnings of the railroads now aggregating about $2,000,000,000 will be increased to $4,000,000,000. A more favorable showing is made regarding the net income. In 1904, after deducting all interest charges, operating expenses, main- tenance, and taxes, the net income was $278,000,000, while in 1897 it was only $81,000,000. So their net income has been increased within a period of seven years over 300 per cent. The Nation having acquired the stock of these railroads, their operation could be continued under their present managers with their present employees. The roads could continue to pay their present taxes to the States, so that no readjustment of revenues would be necessary, and the members of the Interstate Commerce Commis- sion could "constitute the directors of these corporations and gradu- ally work out a system of national administration, just as the Panama Commissioners are now acting as the directors of the Panama Railroad Co. If the United States is ever to enter upon the purchase and na- tionalization of these roads, it could never act at a more favorable time than now, nor with more justice to the stockholders and bond- holders of these corporations, for their stocks have within seven years increased from 25 to 100 per cent in value. NATIONAL CONSTRTJCTION OF RAILROADS. But if the United States should be unwilling to condemn existing properties, which, on the average, are capitalized at about $65,000 per mile, it could easily enter upon the work of national construction without interfering seriously with the operations of any of the exist- ing systems. I imagine it would not be our wish to imperil the investments of the stock or bondholders of existing corporations, 272 INTEESTATE AND POKEIGN TBANSPOBTATION. and that many -would not look with favor upon a policy which would put the Government in the attitude of a competitor with private railroads. But we must remember that new construction is going on at the rate of about 5,000 miles per annum. There is no reason why the United States should not take up new construction — the constructioE of the future. The railroads are now engaging in it. The Gould system is now being extended into a transcontinental line. It will be absolutely necessary in the near future to duplicate and perhaps triplicate the tracks of some of the existing roads in order to meet the demands of business. Why, then, should not the United States construct one road from ocean to ocean and operate it as an experi- ment in national ownership? Three thousand miles of railroad would not cost more than $36,000 per mile. One hundred million dollars would construct such a rail- road. The Geological Survey, with its great force of topographers and civil, railroad, hydraulic, and construction engineers, now em- ployed in the Reclamation Service, could easily undertake the work, and thus the Nation would have an opportunity of contrasting Gov- ernment construction and operation with that of private corporations. The Nation could in this way, while leaving the existing railroads in the enjoyment of their present business, simply take up the rail- road construction of the future. The capitalization of such roads would be at the rate of $35,000 a mile instead of the existing capi- talization of about $65,000 a mile. The financial difficulty therefore is not a great one. If we take hold of all the roads or a chain of roads, like the Baltimore & Ohio and the Atchison system, the net income would pay all the interest charges and leave a surplus for a sinking fund or extensions. COMPLEXITY OF EXISTING CONDITIONS. I imagine that the country will respond to such an appeal unless we relieve the complexity or the existing conditions. What is that complexity ? , We have 2,000 railroad corporations in this country, combined, for the most part, into eight or ten great systems. The complexity of the situation is beyond parallel. It is almost impos- sible to get at the facts regarding these great systems. Look over the interstate commerce reports and you will find the Pennsylvania Railroad operating a system. Under its name, as sub- sidiary lines, will be 80 or 90 different roads, and you will find at the side after the name of each road a note to the effect that this line is a subsidiary line and that line is an operating line ; in this line the Pennsylvania Railroad owns all the stock, in that line the Pennsyl- vania Railroad owns a part of the stock; this road is leased; with another road it has traffic arrangements, etc. Thus you find the ut- most complexity as to title and ownership and the holding of these various systems, all arising out of the fact that, while combination is desirable, the laws, whether National or State, have not provided suitable machinery for its accomplishment. This complexity is, and will continue to be, a fruitful source; of corruption and fraud. Then we find that there is some understanding between the New York Central, the Pennsylvajnia Railroad,., the Baltimore & Ohio, the Norfolk & Western, and the Chesapeake & INTEESIATE AND FOREIGN TEANSPOKTATION. 273 Ohio, all of them trunk lines, all of them occupying the territory of densest traffic, all of them national in their operations, for they em- brace not only the traffic of the States through which they operate but the traffic of the entire Union. The traffic of the Pacific coast, the traffic of the Southern States, the traffic of the Middle States, all go over these trunk lines, and yet it is impossible for a national com- mission to understand what is the relation of these various roads toward each other. It finds each of them operating numerous subsidiary companies, all bound to the parent company by the most complicated arrange- ments. Some of these arrangements take the shape of rentals. How can they tell whether a fair rental is made in these cases ? Suppose the directors of the New York Central are interested in a railroad which is intended to be taken into the New York Central system, and they do it through the medium of a 999 year lease. I ask whether they are likely to be very rigid with themselves in fixing the terms of that lease ? Whether, if it is a question between a rental that will yield 4 per cent and one that will yield 8 per cent, they will not be likely to determine in favor of the latter, and whether in that case the larger rental will not, by the contract of parties interested upon both sides, dealing with each other, be fastened upon the entire commerce of the country? INTEECORPOEATE HOLDINGS. Then these railroads have their intercorporate holdings. The Baltimore & Ohio owns $30,000,000 of the stock of the Eeading Co., a company which owns the stock of the Philadelphia & Eeading Co. and also owns extensive coal mines. We have also the Lake Shore & Michigan Southern, which is one of the subsidiary roads of the New York Central, owning an equal amount, I believe, about $30,000,000, in the stock of the Eeading Co. Then we have the Pennsylvania owning a large amout of Baltimore & Ohio stock, and we find some of the subsidiary roads of the New York Central owning stock in the Chesapeake & Ohio and the Norfolk & Western, so they are aU interlinked with each other. These four railroad systems consti- tute the trunk lines of the country over which almost all the com- merce of the country goes, and yet they are organized under the laws of particular States in whose government the people of the Nation generally have no share. I ask whether it is an essential doctrine of State rights that the State of New York is to create the machine that is to do the business for the Nation, or that the State of Pennsylvania or the State of New Jersey should create the machine that is to do the Nation's business? Would it not be very much wiser to provide for a national incorporation act, under which these great consolidations can be accomplished and under which they can be supervised and controlled. The intercorporate holdings of these railroads to which I have alluded aggregate nearly $3,000,000,000— nearly two billion in stock and nearly one billion in bonds— and of these intercorporate holdings three hundred millions are holdings in corporations that are not trans- porting corporations, not railroad companies, but coal companies, steel companies, companies engaged in production. 274 INTERSTATE AND FOREIGN" TRANSPORTATION. The States furnish the machinery by which production and trans- portation can be linked together. I imagine nothing can be more apparent than the fact that if you give certain men control of the transportation of the country and also give them control of the pro- duction, through these great trusts and combinations, they will in time absorb all the wealth in the country, and yet this is permitted under State laws, while the Nation, whose commerce is three-fourths of all the commerce in the country, sits idly by and allows the States to frame, the charters under which these great masters of transporta- tion and of production can absorb the productive wealth of the country. ABSORPTION or STATE BAILROADS Br NATIONAL CORPORATIONS. Mr. Bacon. Will the Senator permit me to make an inquiry of him"? Mr. Newlands. Certainly. Mr. Bacon. The Senator is speaking of a condition now existing. We have in this country some 230,000 miles of railway, I believe, almost all of which is the property of companies which have already been chartered by the States^ Mr. Newlands. Yes. Mr. Bacon. And which to-day exist as corporations by State au- thority. I should like to loiow of the Senator, if he could secure the necessary consent of Congress to carry out his scheme, in what way could the charters of these hundreds, and almost thousands, of cor- porations granted by the States be taken away from them — ^nullified, in other words — and national charters substituted therefor, except by the consent of the States themselves, unless you are going to work a much more far-reaching revolution in the centralization of power than we have ever had suggested by the most extreme advocate of central power? In what way would the Senator proceed practically to consummate the purpose which he now suggests, and that is to bring under Federal control all of these hundreds, if not thousands, of corporations now existing under State law, with corporate rights secured under State laws, and all these vested interests built up under State law? What would be the practical proceeding which the Senator would recommend to enable him to carry out his purpose, even if he had the consent of Congress to do it? Mr. Newlands. I will say to the Senator that in the first place I would not attempt to do it without the consent of the States. But I assume that the States would yield their assent just as readily to the operation of railroads incorporated by the Nation as to the operation of railroads incorporated by sister States. Mr. Bacon. I should like to suggest to the Senator Mr. Newlands. Take the Southern States, for instance — "- Mr. Bacon. I should like to suggest to the Senator the very re- markable difference there is between the two. When a corporation is organized by a sister State it does business in another State simply by the comity of that other State and by the consent of that other State. Mr. Newlands, Yes. Mr. Bacon. Whereas if the scheme the Senator from Nevada sug- gests could be inaugurated it would not be a matter of consent on the INTERSTATE AND FOREIGN TRANSPORTATION. 275 part of the State. If we have the power to do what he contends for it would be a matter of obligation and compulsion on the part of the State, whether it desired it or not. That is a very different thing from the State being willing to consent to a railroad operating under a charter granted by some other State, the exercise of whose corporate powers in that State ptill continue to be within the control of that State. Mr. Newlands. I will say to the Senator I have very much modified my proposition since I first asserted it, in order to meet the objections of those who fear that it might involve usurpation of State sov- ereignty. I have now framed some provisions, which the Senator will find in the appendix to my views upon this bill when reported from the committee, in which I take up the question to which he has referred. I will state that so far as new construction is concerned, there is no doubt about the power of the National Government to organize na- tional corporations for the purpose of conducting an interstate road. If such a road were constructed the National Government could lay down the scheme of taxation for that road. Mr. Kean. Without the consent of the State ? Mr. Newlands. Without the consent of the State ; absolutely. Mr. Kean. Take land and do everything necessary ? Mr. Newlands. Certainly ; under the power of eminent domain. Mr. Bacon. The Senator will pardon the inquiry, as I ask for in- formation simply. The Senator is contending for a system of na- tional taxation to the exclusion of State taxation. Does the Senator mean now to assert the doctrine that under the power of interstate commerce the Federal Government can charter a railroad through a State and deny to the State the ri^ht to tax that railroad, and take to itself the exclusive power to tax that railroad ? - Mr. Newlands. I do. I would not deem it wise, however, to exer-i cise that power. Mr. Bacon. I understand the Senator did advocate the exercise of that power, because the great evil that I understand him to be com- bating is the evil which grows out of State taxation. The Senator wishes to have uniform taxation, which, he says, can be accomplished only by the National Government. Mr. Newlands. But I would not exercise that power by exempting the property from State taxation. I would exercise it by providing the rule and the method of taxation. Mr. Bacon. By which the State would levy the tax ? Mr. Newlands. By which the State would levy the tax. Mr. Bacon. But that -would imply, of course, the power to deny to the State the power to tax it. Mr. Newlands. Yes ; I contend for that. Mr. Bacon. The Senator has given very much more thought to this subject than I have, and I should like to inquire of him whether his statement that in his opinion it is within the power of the National Government to authorize the construction of railroad through a State and to deny to the State the right to tax any of that property is based simply upon his own reflection or upon the statement or ruling of any court? ■. Mr. Newlands. Upon both, I will say to the Senator. I claim, in the first place, that the National Government can itself construct a 276 IHTTEKSTATE AND FOREIGN TRANSPORTATION, railroad — an interstate railroad. It can, if it chooses, construct a railroad from the Atlantic to the Pacific Ocean, just as to-day it is constructing the Panama Canal. I claim, further, that that road^^a Government road — after it is constructed, would be exempt from tax- ation by the State. Mr. Bacon. The Senator is now speaking of the construction of a railroad by the Government and not of the granting of a franchise to a company. Mr. Newlands. Yes ; but I am going to follow it up. Mr. Bacon. The Senator is now speaking of the appropriation by the Government to its own use of property in the way of right of way, etc., and upon that constructing a railway, the title of which shall be in the Government and the ownership of which shall be in the Government. Mr. Newlands. Yes. Mr. Bacon. That would be very limited in its operation, neces- sarily, if the Senator is speaking of those things which are practical. As I understand the contention of the Senator, it is that there is such a great evil growing out of the multiplicity of railroads, with differ- ent charters, different powers, different burdens resting upon them, of their own indebtedness, and of differing systems of taxation and rates of taxation, that it is of the highest importance that all this vast system shall be unified in such a way that there shall be uni- formity of burden upon the railroad companies, in the way of tax- ation particularly. When the Senator suggests the construction of a road by the Government, of course, he has to engraft that upon n .system, which already has 230,000 miles of railway. So in dealing with the question practically, for the purpose of meeting the evil which the Senator contends exists, it seems to me the matter to which our attention should be directed is the question how shall this vast system be unified, and not how it would be prac- ticable to build one railroad. While I do not agree with the Senator on his contention in regard to that proposition, 1 do not think he meets the question, even if the correctness of his proposition were conceded. Mr. Newlands. I will say to the Senator that I was simply giving him the process of reasoning by which I arrived at the conclusion that a railroad incorporated by the National Government as an instru- inentality for interstate commerce could be exempted by the National Government from taxation, and so I started by assuming that if the National Government, in the exercise of its power over interstate ■commerce, should conclude to build a road from the Atlantic to the Pacific Ocean, with all its branches, etc., it could exempt that railroad from State taxation. Then, I assume next that if the National Government, instead of building the railroad itself, concludes to put the construction in charge of an agent, a corporation which it has itself created, it can also stamp that road as a national instrumentality and exempt it by express enactment from State taxation; and that if it can do that it can prescribe the rule by which the State can tax that particular property. My reasoning thus far extends only to the case of a Gov- ernment-owned railroad or a Government-incorporated railroad. Noy\', let us take up Mr. Hetburx. Mr. President INTERSTATE AND FOREIGN TRANSPORTATION. 277 The Vice President; Does the Senator from Nevada yield to the Senator from Idaho? Mr. Newlands. I should like to get through with my reply to the Senator from Georgia. CAN CONGRESS RELIEVE THE RAILROADS EROM STATE TAXATION? Mr. Hetburn. Before the Senator leaves that question I should like to ask whether, in his judgment, it is competent for Congress to relieve this property from taxation in the States? Mr. ^b^EWLANDs. I think so. Mr. Hetburn. Then I should like to make this suggestion to the Senator : In some counties in my State the railroads pay from 60 to 70 per cent of the taxes that go to the maintenance of the local gov- ernment. I suppose there are such instances in Nevada. Would the Senator regard as reasonable any low which would exempt those railroads from contributing to the expenses of the government that affords them protection? Mr. Newlands. I would not, and I do not propose to exempt them. Mr. Hetburn. I think there are counties in the Senator's State where the railroads pay as much as 80 per cent of the expense of maintaining local government. If you are going to exempt the rail- roads from taxation within the States, where is the substitute to be found for maintaining the local government — schools, roads, etc. ? Mr. Newlands. I will say to the Senator that I do not propose to exempt the railroads from State taxation. On the contrary, I pro- pose to subject them to State taxation. Mr. Hetburn. I misunderstood the Senator. Mr. Newlands. I propose that the National Government shall fix the rule by which the roads shall be taxed, providing they are rail- roads under national incorporation, created as national instrumen- talities for the purpose of carrying out a national power. Mr. Hetburn. I should like to ask the Senator whether he thinks Congress can do that? Mr. Newlands. I think so. Mr. Hetburn. Can project a railroad into a State, which rail- road enjoys the protection of State laws, and the State be able to tax the railroad only under -the rule established by the Government, without any State control over it at all? Mr. Newlands. I do not propose that the National Governnient shall tax the railroads at all, but that the National Government shall fix the rule by which the States shall tax them. Mr. Hetburn. What is the difference between fixing the rule under which the railroads shall be taxed and taxing them, because if the Government could fix the rule it could limit it without regard to the necessities of the State? It seems to me a difficulty would arise there. Mr. Newlands. So far as the power is concerned — we have that already illustrated in the action of the National Government with reference to national banks. The National Government fixes the rule by which national banlcs shall be taxed. Mr. Hetburn. I suggest that is in the nature of tangible prop- erty Mr. Newiands. No. 278 INTEESTATE AND FOREIGN TEANSPOBTATION. Mr. Heybukn. And the other is a class 6i property that taxes possession of the soil, occupies a part of the territory. Mr. Newlands. The National Government fixes the rule by which the capital stock of national banks may be taxed in the States. Mr. Heyburn. That is tangible property. Mr. Newlands. It is true it does not relieve the real estate of the banks from taxation, but it does fix the rule that shall apply to the capital stock of the bank. Mr. Heybtjen. But not to the building. Mr. Newlands. It does so upon the ground that the national bank is a national instrumentality, and that the State will not be permitted to put a burden upon that national instrumentality which may destroy it. Mr. Heyburn. I would ask the Senator Mr. Newlands. If the Senator will permit me, in this case the national instrumentality is the road itself — ^the rails and the equip- ment and the appurtenances — that is, the property, the instrumen- tality by which transportation is conducted and through which inter- state commerce is conducted, and the reasoning, therefore, applies to that instrumentality. m'cULLOCH v. MARYLAND. In the case of McCulloch v. Maryland, with which the Senator is familiar, the Supreme Court held that the State of Maryland could not tax the notes of a national bank, and it held it could not upon the ground that the bank was a national instrumentality, and the sev- ereignty of the Nation could not permit the sovereignty of the State to put a burden upon a national instrumentality which might destroy it. It is true that in that case the court said that the exemption would not apply to the real property upon which the bank was located. Mr. HErBURN. I was going to ask that question. Mr. Newlands. But recollect in that case the property of the bank was not exempted by statute at all — none of it — and the Supreme Court held in that case that by implication the property to which I have referred was exempt from taxation because it was necessary in the exercise of the powers of the National Government. The owner- ship of the bank building is not. They could conduct their bank in a leased building. But, so far as all of the instrumentalities necessary to exercise the power, they are exempt. In this particular case the railroad is the thing. It is the instru- mentality itself-— the railroad, its appurtenances, and its equipment — and I urge that if that railroad is in the ownership of the Government the Government can exempt it from taxation, and if it is in the owner- ship of a corporation created by the Government, it can exempt it. I admit, as to the law of the case, that that matter has not been finally determined by the Supreme Court, but I have already shown that in the Peniston case the court stood four to four upon it, and the only reason why the judgment was rendered against the exemption in that case was that one of the four judges, who held that the power to ■ exempt could apply to the railroad, claimed that the exemption had not been declared in the statute, and that unless it was declared in the statute it was clearly not the intention of Congress that the property should be exempt. So the case stands four to four in that decision. But upon the reasoning of the case, the logic of the case, if a na- tional railroad, incorporated by the United States Government, was INTERSTATE AND FOREIGN TRANSPORTATION. 279 constructed by an agent of the United States Government, and if it is declared to be a national instrumentality, and declared by the Na- tional Government to be exempt from taxation, then under the case of McCulloch V. Maryland, and by reasoning and analogy, it is clear the exemption will be sustained. As to the policy of exempting it, that is another thing. All I insist upon is a fair rule of taxation. I do not propose to diminish the existing taxes an iota, but I want to propose a rule which will make these taxes mathematically precise, in order in the future to keep the railroads out of politics upon this question, and to aid in the determination of rates by securing a definite factor in the calcu- lation of fixed charges. Mr. Heybuen. I should like to ask the Senator from Nevada a question. The Vice President. Does the Senator from Nevada yield to the Senator from Idaho ? Mr. Newlands. Certainly. Mr. Heybuen. I should like to ask the Senator whether, in his judgment, if the railroad was the property of the United States, it could be taxed at all by a State ? And I will say, in connection with that question, that the strongest argument against Government own- ership of railroads is that the States could not tax the property of the Government of the United States, and would therefore be deprived of the support that they naturally should have in the way of taxation. MERGER. Mr. Newlands. I know that is urged as a reason. In reply to the Senator from Georgia, who asked mei how we would, under a national incorporation act, secure the merger of these State corporations into a national corporation, I will say, in the first place, that I do not propose in my bill that that shall be done without the consent of the States. But if the Senator will look at the legislation of some of the States, particularly the Southern States, he will find that the States have not been loath to allow a foreign corporation to enter their borders and to construct and operate railways. Take the ten Southern States south of Pennsylvania and of Ohio. Almost the whole of the transportation facilities of those States to-day are under the control of two great systems. One- is the Southern Eailway system and the other the Atlantic Coast system. Each of these systems operates about 10,000 miles. The Southern Eailway Company is incorporated under the laws of Virginia. The Atlantic Coast Railroad Company was originally incorporated under the laws of Virginia, I believe, but its stock has now passed into the hands of the Atlantic Coast Company, which is incorporated under the laws of Connecticut. So we find that one of the systems of rail- Avay traversing the entire South is incorporated under the laws of Virginia, and the other practically incorporated under the laws of Connecticut. • i c. How is it that those railroad companies operate m those States? With the consent of the States, expressed in legislation. And the Senator will find that in one or more of the States in the South they have laws now upon the statute books which permit merger with any 70342— PT 5—16 3 280 INTEBSTATE AND FOEEIGN TEA2SrSP0ETATI0N. connecting railroad, whether incorporated under the laws of another State or under the laws of the United States. I imagine they will have no more objection to merger with a corporation organized under the laws of the United States than they will have to a merger with a corporation organized under the' laws of a State. Mr. Bacon. Mr. President Mr. Newlands. Particularly if, as in this case, the law incorporat- ing the national corporation absolutely disclaims any intention of interfering with the police power of the State and provides that it shall only acquire an existing railroad in any State with the consent of that State. The Vice President. Does the Senator from Nevada yield to the Senator from Georgia? DUAL SOVEREIGNTY. Mr. Neavlands. If the Senator will just let me close this thought. Here are two sovereigns, one the great national sovereign, exercising sovereignty under the granted powers over the territory occupied by all the States of the Union, the other sovereign eacli of the 45 differ- ent States. The State has control over State commerce. The Nation has control over interstate commerce. The same machine must do the business of both. Now, if the State can create the machine that is to do interstate commerce, the Nation can create the machine that is to do State commerce. Mr. Bacon. Mr. President . Mr. NewlAnds. If the Senator will permit me, the States can not authorize corporations to do interstate commerce without the ap- proval of the Nation, and the Nation can not authorize corporations to do State commerce without the approval of the States; but I imagine that consent would be forthcoming in both instances. Now I yield to the Senator from Georgia. Mr. Bacon. The reason why I sought to interrupt the Senator was because he was passing away from the point on which I wished to reply to him. I want to say, however, that I have no disposition to unduly interrupt the Senator, and my only purpose in the first inter- ruption was to get his views as to how he proposes practically to accomplish that which he argues so effectively theoretically. Mr. Newlands. I am very glad to yield to the Senator. RAILROAD SYSTEMS IN THE SOUTHERN STATES. Mr. Bacon. The Senator, though, in speaking of the question of probably securing the consent of the States mentions the fact that in the Southern States, using them as an illustration, most of the rail- roads are owned by two or three systems, and that being operated suc- cessfully in States making no special objection to that fact they would equally consent that there should be systems operated under Federal charter, the systems now being operated there having, as they do, charters of other States. I wish to make a statement to the Senator, and I do not propose to pursue the discussion further or to interrupt him in the regular course of his remarks. There is a vast difference between the two. INTERSTATE AND FOKEIGN TKANSPOETATION. 281 The purpose of the Senator, if accomplished by Federal incorpora- tion, would be entirely different in its operation from that which is now accomplished by railroads operated as they are under charters from other States. The purpose of the Senator is to take away from the States the right to assess and collect taxes, and if his scheme could be carried out under national incorporation the large systems of railroads oper- ated under Federal charters would have as their chief characteristic or feature the fact that their taxes were assessed and perhaps levied by the Federal Government; if not levied, certainly assessed. In other words, the State would entirely lose the right of assessing taxes and be remitted imder the Senator's scheme purely to the work of collection, whereas as it now exists, while it is true that the railroads are chartered in a large measure (it is not altogether so in my State, by any means) by States other than those through which thej^ run, nevertheless in all those cases and in all those States the power of assessing and levying taxes is as perfectly preserved by the State as if the road was chartered within that State and operated solely by an authority or franchise received from it. As I said, I do not desire to break up the Senator's speech with a colloquy, but I really interrupted him for the purpose of getting his view, if the Senator's theory is a correct theory, and if Congress could be gotten to consent to it and to attempt to put it in execution, in what way would the Senator seek to bring under his general control the 230,000 miles of railroad now being held under charters granted by States and not by the Federal Government. The Senator has already expressed his view as to how that was to be done, and I simply repeat it for the purpose of disclaiming any purpose to enter into any general discussion with him on the subject. Mr. Newlands. Mr. President, I am glad to have the Senator put me any inquiry that he sees fit, and I am only too glad to answer. I wUl state to the Senator that it is not absolutely essential that a national incorporation act should provide for a scheme of taxation. I assume that Congress could not, in framing a national incorpora- tion act, provide a scheme of taxation unless it presented obvious advantages — advantages which the representatives of every State in the Union would see. ADVANTAGES OF UNIFORM TAXATION. Now, those advantages are that if we have a fixed tax, mathe- matically ascertained, it will yield as much and more than the States now get. It also takes the railroads out of politics as to taxation, and I regard that as very desirable. Second, it results in a certain faqtor for the regulating of commerce, both National and State, be- cause then taxes can be definitely and mathematically ascertained as one of the fixed charges of the company, whereas if they are left in the elastic form to which I have already alluded, ranging possibly all the way from the present tax of $56,000,000 in the aggregate to $150,000,000, and involving possibly in addition a tax of equal amount upon the stockholders and bondholders, all certainty regard- ing taxes as a factor in the regulation of railroad rates will be lost. 282 INTERSTATE AND FOREIGN TRANSPORTATION. I would expect, of course, in the consideration of such legislation that the members from the different States represented in Congress would not permit any provision to go in regarding taxation unless they felt it was a beneficial provision — ^beneficial to the States them- selves and beneficial to the entire Nation. It is not essential, how- ever, to national incorporation ; in fact, it is rather extraneous to it. The main purpose to be accomplished by national incorporation is the control over capital, and also the control over the return upon capital. COMITY OF THE STATES TO THE NATION. The Senator seems to doubt that the States would pursue the same rule of comity toward a national corporation that they follow with reference to a corporation organized under the laws of a sister State. I admit that at the start there may be a filing that here is the great national sovereign proposing to dominate the transportation in a particular State. But then I would expect the people of the State and their representatives to reflect upon the utter inadequacy of exist- ing State law to shape a machine that can do this work properly. Mr. Bacon. If the Senator will pardon me there, I will try not to interrupt him again. Mr. Newlands. Certainly. Mr. Bacon. I understand that while it would be the Senator's plan to secure the voluntary action and consent of the State, nevertheless he does contend that in the absence of such consent it would be within the power of the Federal Government without that consent to convert all these charters into Federal charters. Mr. Newlands. No; I do not contend that. Mr. Bacon. Does not the Senator recognize that of all the schemes— and I use the word " scheme " not in any disparaging sense — of all the plans that have been suggested, short possibly of the Government ownership of the 230,000 miles of railroad in this country, there has never been a scheme which would so certainly result in the far-reach- ing and fast-binding of the centralizing power and authority of the General Government as would this scheme. Mr. Newlands. I think not. I do not think it would centraUze power in the National Governnient any more than the present system centralizes power in the hands of outside States. We must locate power somewhere, and under the existing system of combination and consolidation the great corporation which controls the transportation of 10 or 15 States, and through them the commerce of all the Union passing over those roads, is centralized in a particular State, like the State of Virginia, or the State of New Jersey, or the State of New York. I imagine that if this transportation system is to be under the control of a foreign corporation the States affected would rather have the control in the Federal Government, in whose legislation every State has a share, than in a State in which the people of no other State have any share. In examining the statutes of some of the States I find they ex- pressly provide for the merger of railroads organized under the laws of that State with railroads organized under the laws of other States or of the United States. So there is the evidence right upon the statute books that there is no objection to accepting the National Government as the creator of the corporation that is to merge these INTERSTATE AND FOREIGN TRANSPORTATION. 283 great systems. Let me call the Senator's attention to the loose legis- lation that has prevailed in States upon this matter. Mr. Bacon. If the Senator will pardon me, before he goes on to that, just as a mere suggestion, I will revert to the fact that not only the State's control over the railroads thus merged, of which he speaks, is in the right of assessing and collecting taxes, but the right to con- trol in every particular — every matter of police, every matter of taxation, every matter of the regulation of rates is still within the power of the State. Under the. Senator's system the matter of police and the matter of regulation and the matter of the regulation of rates would be surrendered to the General Government, as well as the matter of assessing taxes. Mr. Newlands. Let me read to the Senator the section which I have prepared upon that subject. It is headed : STATE POLICE AND STATE RATES. Sec. 18. Nothing herein contained shall be construed as Interfering with the police laws of any State regarding railroads incorporated under this act and operating in such States, nor shall anything herein contained be construed as affecting the right and power of each State to regulate purely State com- merce on railroads organized under this act. But the Interstate Commerce Commission may hold conferences from time to time with the regulating power of any State with a view to such harmonious adjustment and regulation of State commerce and interstate commerce as will protect the public against abuses or extortion, and the railroads against inadequate returns upon their investment, and promote the efficiency of such corporations as common carriers. Mr. Bacon. The Senator must necessarily recognize the fact that the success of his scheme would involve the permanent surrender by the States thereafter to control any of those matters, and while we might pass that statute now, another statute might be passed to- morrow and the right to regulate the rates in a State, even as to the matter of rate or any question of liability for damages of any kind or under a contract of any kind or any other matter of police, taxation, or the regulation of rates, would be forever gone from the State and thereafter permanently vested solely in the United States, If the Senator thinks that the States would voluntarily for all time surrender such rights as those, the Senator is very much more sanguine than most of us would possibly be under such circumstances. I think that so far from being ready to surrender for all time such rights as those it would create somewhat of a spirit of resistance if there was an attempt to force it upon them. The Senator, I under- stand, of course, does not contemplate that, but I simply speak of it as a matter of contrast. , Mr. Newlands. I will state that no surrender whatever of the rights of any State is involved, in my judgment, in this proposed act. The States have absolute control over purely State commerce. The Federal Government has absolute control over interstate com- merce. The same instrumentality is used for both State commerce and interstate commerce. Now, the only question is, which sovereignty shall create that in- strument? After the instrument is created nothing will interfere with the powers of the State over State commerce or with the power of the National Government over interstate commerce. The Senator might as well insist that if we permit the instrument that is to do 284 INTERSTATE AND FOREIGN TRANSPORTATION. the interstate commerce we thereby absolutely surrender to the State all power over interstate commerce. The Senator will not contend that. On the contrary, although Congress has permitted the State to create the instrument of interstate commerce, we are regulating that instrument by all the statutes which we have upon that subject. We have regulated the State instrument as to safety , appliances, as to rebates and preferences, and we purpose now to regulate it as to. rates, but only in relation to interstate commerce. So also, if a national corporation were created, that corporation, so far as inter- state commerce is concerned, would be subject to the laws of each particular State ; and in the absence of any provision exempting the corporation from taxation, or prescribing the rule for taxation, it would be subject to the laws of that State with reference to taxation. Now, the Senator seems to view with apprehension the possibility that hereafter we might seek to change this law, but recollect this law can only be changed by the Representatives in this body and in the House of Representatives of the various States affected. Every one of them has a voice here and a voice in the House of Repre- sentatives, and I suggest to the Senator whether it is not better, if the instrument is to be created that is to conduct both State and inter- state commerce to have that instrument created by a sovereign in whose action the people of every State can participate rather than in the sovereignty represented by a single State like the State of Vir- ginia, or New York, in which the people of outside States have no representation or voice whatever. THE INCORPOHATION Or THE SOUTHERN SYSTEMS. Let US see what this present system fastens upon the entire Nation as a whole and upon States whose transportation is conducted by cor- porations organized outside of that State. The two lines to which I have referred — ^the Atlantic Coast line and the Southfem Railway line — each control about 10,000 miles of railways in the South. Each of those lines is composed of many different roads, organized under State laws, and each one of those was probably the result of antece- dent consolidations, so that probably each of the present systems represents an aggregate of two or three hundred corporations. Now, let us look at the law which provided for this. The Southern Railway Co. is the successor of the Richmond & Danville. The Richmond & Danville road was a small railroad company operating about 300 miles of railroad in Virginia. It got into difficulty and went into the hands of a receiver. It was purchased by certain parties, and they evidently determined to make it the nucleus of a great national system, for that is what the Southern Railway system is to-day. They applied to the Virginia Legislature, and a law was passed which provided that the purchasers of that road could organ- ize a corporation by whatever name they chose, and that the pur- chasers could make the capital stock of that corporation $350,000,000. There was no limit whatever as to bonds. The stock, however, was limited to $350,000,000. The Senator can look over that law and he will find that there were no guards whatever attached against exces- sive capitalization, it being quite possible for that corporation to issue shares for a dollar a share, though the par value is $100; and INTERSTATE AND EOEEIGN TRANSPORTATION. 285 the act provides that, whatever may be paid for the stock, the stock shall be thereafter regarded as full-paid stock. Tha,t act gave the most ample powers, without any restriction or restraint or control of any supervising body. I can understand how it was done. The people were anxious to have the railroad system of the South built upj and they were glad to have the cooperation of any body of capitalists who would do it. So this extraordinary charter was given. As I stated, it allows this little 300-mile railroad to issue $350,000,000 of stock. It does not provide that that stock shall be issued only for money paid or for property at its value, but under those provisions watered stock to almost any extent can be given out. As I have stated, stock could be given for a dollar a share, and yet afterwards it would be regarded as full-paid stock at a hundred dol- lars a share. Unlimited power is given with reference to bonds, and then it gives the power to " lease, use, operate, cbnsolidate with " * * * " any railroad or transportation company now or hereafter incorporated by the laws of the United States." The State of Virginia had no objection to consolidating with any corporation organized under the laws of the United States. There is the sanction now, so far as Virginia is concerned, to this very proposition — " or of any of the States thereof, or any one or more of such railroad or transportation companies." There are liberal provisions of this kind which I shall insert in the Record. The power is given to purchase, hold, and own bonds or stocks of other corporations, and also the power to purchase and guarantee " the stocks and bonds, or either, of hotel, lighterage, wharf, elevating, and other such enterprises convenient in connection therewith or as a part thereof." The company may classify its stock as it chooses and give preferences as it chooses, and then comes the following clause : Such new corporation may borrow money and Issue bonds or other evidence of indebtedness' therefor, and may secure the same from time to time by mort- gage or deed of trust upon any or all of its property and franchises ; and such new corporation, from time to time, may issue and sell its bonds and its capital stock at such prices and on such terms as shall be specified in said plan of organization, or as a majority in amount of the stockholders shall approve at any meeting, and may receive in payment therefor property, securities, or shares in any corporation mentioned in this act ; and any stock so Issued shall be deemed fully paid and free from any liability. Now, the Atlantic Coast Line was incorporated under a similar law. Contrast that law with the State of Texas, where they will not permit consolidation with any corporation outside of the State, and where in the State itself consolidation is absolutely controlled by the regulating commission. Contrast it also with the laws of Texas, which provide that there shall be no issue of bonds or stocks except for money paid or property delivered at its actual value, and that there shall be no issue of either bonds or stocks without the approval of the railroad commission of that State. Contrast it with the laws of Massachusetts, which equally guard against overcapitalization and provide that bonds shall only be issued for money actually re- ceived or for the property delivered at its value and also provide that there shall be no issue of bonds or stocks without the approval of the railroad commission. 286 INTERSTATE AND FOREIGN TRANSPORTATION. In both of those States you have absolute guards against overcapi- talization; but these great combinations in seeking the power for combination, seek the States, the laxity of whose laws puts a pre- mium upon consolidation and combination. They turn to States such as New, Jersey and New York and Pennsylvania, whose legis- lation is almost altogether controlled by the railroads. Mr. Bacon. But no single one of the corporate powers given by either of those States can be exercised beyond the limits of the par- ticular State thus granting the franchises, without the consent of the State in which it is to be exercised. Mr. Newlands. That is true. Mr; 'Bacon. But by the legislation which the Senator contemplates a railroad would have the right to exercise such franchise regardless of the consent of the States. Mr. Newlands. So far as interstate commerce is concerned. Mr. Bacon. Well, if they are interstate railroads, if the suggestion of the Senator is a tenable one, they would necessarily be roads which run from one State into another, and through States into other States, and throughout their whole length they would be interstate commerce roads. Mr. Newlands. So far as interstate commerce is concerned, they ought to be free from the control of the States. They are how free from control of the States. Mr. Bacon. The Senator misunderstands me. I mean so far as the exercise of corporate franchises is concerned. As it now is, no railroad company chartered in one State can exercise corporate franchise in another State without the consent of that State; and under the Senator's scheme, if it is to be operative, of course it would not be a matter of consent on the part of the State. Mr. Newlands. So far as the acquisition of existing lines is con- cerned my proposition does not involve acquisition without the con- sent of the States, and the States may impose any condition they choose upon that consent, just as they would in the case of a corpo- ration organized under the law of a sister State. There is another section which I have drawn here regarding the acquisition of interstate railroads. It is as follows: Sec. 19. Such corporation may. with the consent of any State, upon the approval of the Interstate Commerce Commission, acquire the railroad of any corporation now organized under the laws of such State and may Issue for the purchase thereof such amount of ibonds and stock as may be authorized by the Interstate Commerce Commission ; but such authorization shall only be made after a public hearing, at which the Attorney General shall appear, either per- sonally or by one of his assistants, and no issue of bonds or stock therefor shall exceed the value of such road as ascertained by said commission. With the consent of the Senate under which any railroad corporation is or may be organized, merger between such corporation and a corporation organized under this act may be accomplished under this act, and bonds and stock may be issued by any corporation organized under this act for such purpose, pro- vided such proposed merger is approved by the Interstate Commerce Commis- sion, and the bonds and stock issued in the accomplishment of such merger are also approved by such commission. So the rights of the States are protected just as much as where a corporation, organized under the laws of a foreign State,, is conducting the transportation of a particular State. The difficulty , about the present system is, as I have already stated, that these cor- porations uniformly resort for their charters to the States whose INTEBSTATE AND FOREIGN TBANSPORTATION. 287 laws are most lax, and the result is overcapitalization, which is in- jurious to the entire country. It may be said that this overcapitalization is not to be considered in the matter of the regulation of rates ; and yet, as a matter of fact, it should be. These bonds and stocks are put out upon the country. The railroads make strenuous efforts to secure an income that will pay an interest upon them. They finally get a place and a value in the markets of the country ; they fall into the hands of the pur- chasing public; and there is not a regulating board in the country that will not consider the value that has been built up in this way, and justly so, because society has stood by and allowed these values to accumulate without taking action to prevent it. Upon this question of capitalization, I should say that even if we do not frame a national incorporation act, we should put a provi- sion in this bill declaring that no corporation engaged in interstate commerce shall hereafter issue bonds and stocks without the ap- proval of the Interstate Commerce Commission. Mr. Kean. Does the Senator offer that as an amendment to this bill? Mr. Newlands. I shall offer it. Mr. President, I ask permission to incorporate in my remarks some quotations from the laws of various States regarding the control of capitalization and also some authorities. The Vice President. Without objection, permission is granted. Mr. Newlands. I now wish to call' attention to the great advance that is being made in the value of these securities, and unless we arrest it by providing for the control of capitalization by the Interstate Commerce Commission and the control of the return on their capital, we will find that this advance will increase in the near future. Thus, for instance, in 1896 the lowest quotation for New York Central was 88 ; in 1900 it was 125| ; in 1905 it was 136i. The highest quotation for these years was in 1896, 99^; in 1900, M5f ; in 1905, 167f. Mr. Gallinger. Mr, President The Vice President. Does the Senator from Nevada yield to the Senator from New Hampshire? Mr. Newlands. I do. Mr. Gallinger. Has the Senator the quotations for the years 1893 to 1897? Mr. Newlands. I have not. Mr. Gallinger. I think they would be illuminating. Mr. Newlands. I imagine the quotations were then lower. Mr. Gallinger. Yes ; very much lower. Mr. Newlands. For Pennsylvania, the lowest quotation in these three years was in 1896, when it was 99^; in 1900, 124f ; in 1905, 131|. The highest quotation in these years was in 1896, 109^; in 1900, 1494; in 1905, 143|. In the case of the Northern Pacific, the lowest quotations in these three years were as follows: In 1896, 12i; in 1900, 45|; in 1905, 165; and for the same years the highest quotations were : In 1896, 14| ; in 1900, 864; in 1905, 216^. In the case of the Great Northern, the lowest quotations were : In 1896, lOSi ; in 1900, 144f ; in 1905, 236. The highest quotations were : In 1896, 122; in 1900, 1914; in 1905, 335. 288 INTEKSTATB AND FOREIGN TBANSPOBTATION. Let me say here that the consolidation of' the Great Northern and the Northern Pacific was broken up by the Northern Securities decision. There can be no doubt that most of these mergers which have been accomplished are subject to the same legal objections to which that merger was subject; but they have not been tested in the courts. It would be a great misfortune to the country if these consolidations were broken up; I believe that consolidation is beneficial to the country. The burden imposed by consolidations arises from the fact that they are uncontrolled — uncontrolled as to capitalization and uncontrolled as to return on capital. From present indications, from the returns of these various companies, I have not the slightest doubt that after this rate legislation is over, unless national ma- chinery for consolidation with proper guards is provided, these railroads will combine with a capitalization greater than ever has been known in the history of the country. I shall print in my remarks the pertinent sections of a bill for national incorporation, which I am preparing, and shall close my re- marks to-morrow. The sections referred to are as follows : SUGGESTIONS AS TO LEADING PROVISIONS OF A NATIONAL INCORPORATION ACT FOR RAILEOADS. FOEMATION. Section 1. Any number of persons not less than 15 may, under this act, form a corporation for the purpose of constructing, maintaining, and operating an Interstate railroad, or for the purpose of acquiring and operating a railroad or railroads, already constructed and engaged in interstate commerce. * ****** CAPITALIZATION . Sec. 3. , Such corporation shall issue only such amount of bonds and stock as may be necessary for the construction, purchase, and equipment of the railroads constructed or acquired. No bonds or stocks shall be issued except for money paid or for property acquired at its actual value. The amount of such issue of stock or bonds shall in every case require the approval of the Interstate Com- merce Commission, which shall grant public hearing regarding the same, to which all parties interested shall by public notice given by the commission be invited. The United States shall be represented at such hearings by the Attorney General or one of his associates. The commission shall certify in writing to the incorporators or to the corporation its determination, and shall record the same in its records, and all bonds and stock not issued in compliance with such determination shall be void as against such corporation. Sec. 14. All corporations formed under this act shall make to the Interstate Commerce Commission such reports as are now by law required to be made to said commission, and such further reports as the rules of said commission shall from time to time require. * * ***** TAXATION. Sec. 17. National corporations duly organized under this act are hereby de- clared to be military and post roads and instrumentalities for the regulation of interstate commerce. The franchises, stocks, bonds, jBixed evidences of m' debtedness, operations, and traffic, and the corporation itself, shall be exempt from all taxation by any State or Territory other than as provided in this act, but the property of such corporation, including its right of way, track, real INTERSTATE AND FOREIGN TRANSPOETATION. 289 estate, stations, office buildings, and equipment, shall be subject to assessment and at such average percentage of their actual value as shall be customary with reference to other property in such State or Territory. In lieu of such tax any State or Territory may impose a tax not exceeding 4 per cent on such proportion of the gross receipts of such corporation as the number of miles of track in such State or Territory bear to the total miles of track operated by such corporation. In estimating the miles of track, each mile of second track shall be regarded as equal to one-half mile of track, and each mile of third or fourth track or siding shall be estimated as equal to one-third of each mile of main track. For the purpose of computation by each State the Interstate Commerce Commission shall certify to the taxing authorities of each State or Territory the gross receipts for the preceding year of the total mileage, as aforesaid, and the proportion of such total mileage operated in such State or Territory. STATE POLICE AND STATE BATES. Sec. 18. Nothing herein contained shall be construed as interfering with the police laws of any State regarding railroads incorporated under this act and operating in such States, nor shall anything herein contained be construed as affecting the right and power of each State to regulate purely State commerce on railroads organized under this act. But the Interstate Commerce Commission may hold conferences from time to time with the regulating power of any State with a view to such harmonious adjustment and regulation of State commerce and interstate commerce as will protect the public against abuses or extor- tion, and the railroads against inadequate returns upon their investment, and promote the efficiency of such corporations as common carriers. ACQUISITION or STATE EAILEOADS. Sec. 19. Such corporation may, with the consent of any State, upon the ap- proval of the Interstate Commerce Commission, acquire the railroad of any corporation now organized under the laws of such State, and may issue for the purchase thereof such amount of bonds and stock as may be authorized by the Interstate Commerce Commission ; but such authorization shall only be made after a public hearing, at which the Attorney General shall appear, either per- sonally or by one of his assistants, and no issue of bonds or stock therefor shall exceed the value of such road as ascertained by said commission. With the consent of the State under which any railroad corporation is or may be organized, merger between such corporation and a corporation organized under this act may be accomplished under this act, and bonds and stock may be Issued by any corporation organized under this act for such purpose, provided such proposed merger is approved by the Interstate Commerce Commission and the bonds and stocks issued in the accomplishment of such merger are also approved by such commission. ACCIDENT AND INSTIRANCE FUND. Sec. 20. It shall be a condition of the grant and continuance of any franchise to do business under this act that the corporation holding such franchise shall set aside annually 1 per cent of the gross receipts of said corporation, to be held as a fund in the Treasury of the United States for the payment of pensions to the employees of such corporation who shall have been disqualified for active service either by injury in the service or by age. The amount and time of pay- ments, the investment of the fund, the disbursing of the same, and the entire management thereof, shall be under rules and regulations to be made and from time to time altered by the Interstate Commerce Commission. BOABD OF CONCILIATION. Sec. 21. The Interstate Commerce Commission is hereby empowered and directed to act as a board of conciliation between corporations organized under this act and their employees as to any dispute arising between" said corpora- tion and its employees in the matter of compensation, hours and conditions of labor, the protection of life and limb of said employees, and such power shall be exercised by such commission in accordance with rules and regulations to- be made, and from time to time altered, by said commission. 290 INTERSTATE AND FOEEIGN TBANSPOBTATIOlir, PENALTIES. Sec. 22. Any oflBcer, director, or agent of such corporation who shall be en- gaged in promoting or opposing any legislation or governmental action, either National or State, shall from time to time make oath to the Interstate Com- merce Commission to a statement of his expenditures made in that behalf. No corporation organized under this act shall make any expenditure whatever for the purpose of aiding or defeating any political party or candidate for office, and for every such ofCense such corporation shall, on conviction, be subject to a fine of dollars. Any officer, director, or agent of such corporation who shall willfully and knowingly make, assist In making, cause, or direct to be made any false state- ment, material misrepresentation, or false entry in any book, report, return, account, or certificate required by the act to be kept, made, or filed, shall be, upon conviction, subject to a fine of not more than — ■■ dollars, or to im- prisonment for not more than one year, or both, and shall furthermore be liable in a clvl action for damages caused to any creditor or stockholder thereby. Any officer, director, or agent of such corporation who shall willfully refuse or neglect to perform any duty Imposed upon him by this act for which refusal or neglect a penalty is not therein otherwise expressly provided, shall be sub- ject, upon conviction, to a fine of not more than dollars, or to imprison- ment for not more than one year, or both. All fines under this act shall be paid into the accident and insurance fund aforesaid. DIVIDENDS. Sec. 23. No such corporation shall pay or distribute to its stockholders in any form during any one year a dividend or dividends exceeding In total amount 5 per cent upon the entire capital stock. If after the payment by such corpo- ration of its operating expenses, maintenance. Improvements, and betterments, its taxes, its interest on bonded or other Indebtedness, and its contribution to the accident and insurance fund, there shall be a surplus over and above the amount necessary to pay such dividend of 5 per cent per annum, the surplus shall be apportioned as follows: One-half thereof shall be paid into a guar- anty fund in the Treasury of the United States for future dividends In case of a slackening of business, such fund to be controlled and invested by the Inter- state Oonamerce Commission, and one-half thereof shall be paid Into the accident and insurance fi^nd provided for by this act. No reduction of rates as to any given railroad shall be made or ordered by the Interstate Commerce Commission, or by any other governmental agency, which shall make it reasonably probable that such 5 per cent dividends can not be earned upon the total capital stock of the corporation. JUBISDICTION OF SUITS BY AND AGAINST RAILWAY COMPANIES. Sec. 24. All national railway companies incorporated under the laws of the United States shall, for the purpose of all actions by or against them, whether at law or in equity, be deemed citizens of the States in which they are respec- tively operating, and in such cases United States circuit and district courts shall not have jurisdiction other than such as they would have in case such corpora- tions were individual citizens of such States, respectively. The provisions of this section shall not be held to affect the jurisdiction of the courts of the United States in cases in which the United States is a party or cases for windin? up the affairs of any such corporation. Sec. 25. The Interstate Commerce Commission may make rules necessary for the complete enforcement of the provisions of this act, and from time to time alter, amend, or repeal the same. AMENDMENT OK EEPBAI.. Sec. 26. This act shall be at all times subject to amendment, alteration, or repeal by act of Congress. interstate and foreign transportation. 291 Thuesdat, April 5, 1906. Mr. Newlands. Mr. President, in my remarks of yesterday I briefly answered the inquiries made by the Senator from Idaho [Mr. Hey- burn] and the Senator from Georgia [Mr. Bacon], both of whom had some misapprehension regarding the purpose of my proposed amend- ment providing for the national incorporation of railways. The Senator from Idaho seemed to be under the impression that it was proposed to exempt these national corporations altogether from State taxation. I wish to say that that was not my purpose. My purpose was simply to provide a method of taxation which would be uniform throughout all the States in the Union and would result in a tax which would be mathematically exact, thus relieving the rail- roads of the necessity of interfering in politics, as they do in every State in, the Union, upon the subject of taxation, and also making the tax a fixed and certain factor in the calculation of rates. merger — HOW ACCOMPLISHED. Then, as to the inquiry of the Senator from Georgia, who asked how I proposed to have the merging of State corporations with national corporations accomplished, I hq,ve to say that I propose that merger shall be accomplished in the same way that the merger of the corporations organized in different States is now accomplished. As it is, Mr. President, we find that the 2,000 or more railroads of this country are already practically merged into 10 or 12 sys- tems, and that each one of these systems is incorporated under the laws of a particular State. Now, how is it that this merger has already been accomplished? It has been accomplished under laws passed in the different States permitting such merger. These laws vary in their character and in their expression, but they all have a common purpose, which is to permit the consolidation of existing lines, the consolidation of State roads with roads organized under the laws of other States. Some of these laws simply permit con- solidation with corporations created under State laws. Others also permit consolidation with corporations created under United States laws. As to the bonds, the process is easy. Each railway system would organize a national corporation under the national law and would transfer all its property to such corporation subject to the existing bonded indebtedness. As the existing bonds matured they would be retired by an issue of the bonds of the new company, and thus in the end the bonds of the new national corporation would be substi- tuted for the bonds of the constituent State corporations. As to the stock, the process would be no more difficult than that frequently gone through with in 'existing consolidations of State corporations. The stock of the old companies would be surrendered and the stock of the new company substituted. Of course, the stock issue of the new company must be subject to the approval of some tribunal, such as the Interstate Commerce Commission, in order to avoid over- capitalization. But I take it that a fair method of valuation of the stock of the existing road could be secured. Individually I should favor a very liberal adjustment. I should recognize the market value 292 INTERSTATE AND FOREIGN TEANSPOBTATION. of existing stocks, whether watered or not. The watering of stock in the past has had many causes, among them the difficulty of pro- moting such enterprises without giving investors some speculative chance. The railroads have been obliged to work out their own sal- vation, unaided by wise laws, and while possibly some of these exaggerated stock issues have been the creation simply of stock specu- lators many of them have been necessitated by financial exigencies. At all events, the stocks are now in the hands of the investing pubhe and have largely gone out of the hands of those who originally issued them. If we can only guard the stock and bond issues of the future and prevent overcapitalization — all of which is provided for by my proposition — we can easily afford to validate much of the overcapi- talization of the past. The amount of stock which should be issued in new national cor- porations to the stockholders of the old constituent companies could be determined by the Interstate Commerce Commission. The merger is accomplished by various methods. The stock is often interchanged. The company which desires to accomplish the merger of a railway in another State provides for the issue of stock, which is issued to the stockholders of the merged railroad in ex- change for their existing stock. Merger can be accomplished through a national corporation, as well as through a foreign State corporation. The method is perfectly simple. It is a method which has been worked out in years of finan- ciering. If the railroads wish to come under this national system, there will be no difficulty about their securing the consent of the States in which they at present operate, and there will he no diffi- culty about their financing the operation. The advantage of a national incorporation act is that instead of allowing the capitalization to be, as at present, unrestricted, subject only to the judgment or caprice of those financially interested, the. Government of the United States, through its Interstate Commerce Commission, will sit in judgment upon the capitalization and de- termine it justly and fairly. The Senator from Georgia seems to assume that the States will be unwilling to give their consent. Do they not at present give their consent to unrestrained and unrestricted consolidation? Have not the States in the South, 10 or 12 in number, permitted the merger of their two or three or four or five hundred railroads, as they ex- isted originally, into two great corporations, each of them foreign, one organized under the laws of Virginia and the other organized under the laws of Connecticut ? Has there been any difficulty there in obtaining consent ? If you go to the statutes of these States, you will find consent expressly given ; and in all of the laws of Virginia you will find consent given not only to merger with corporations organized under the laws of the State, but consent given to merger with corporations organized under the laws of the United States. Now, are the people of the United States in earnest in demanding that capitalization shall be restricted? Does the Senator from Georgia doubt that ? Does he doubt that the people of the United States insist that there should be some restriction of the capitaliza- tion of these great systems, or does he think that the people are content to allow these great promoters to juggle with the matter, unrestrained and uncontrolled? INTERSTATE AND FORErON TRANSPORTATION. 293 I take it the people of the United States are in earnest upon this question; I take it that the people of the Southern States are in earnest upon this question; and if a method is pointed out through national incorporation by which capitalization can be restrained (and under the existing system of State corporations overcapitaliza- tion is not restrained) I submit that as a choice between two foreign corporations, one the corporation organized under the laws of a sister State in whose legislation they have no share, and the other organized under the laws of the United States in whose legislation they all share, they will seek the shelter of the latter. TAXATION BT STATES. The Senator also objects upon the ground that this system involves the surrender of the power of taxation by the States. Mr. President, it is not essential to this plan of national incorporation that we should include in it a scheme of taxation of railroads. It is not at all essential. It is desirable, but it may be left out if it is the judg- ment of the Senate and the House that it should be. I point out its desirability simply because of the great powers of discretion now given to local assessing and taxing bodies, powers of discretion which involve the assessment of these properties at from $10,000 a mile — the mere cost of their rails and the right of way — up to $76,000 and $100,000 a mile, including their franchises ana valuations based u_pon the market value of their stock and bonds. The scheme of taxation also involves the possibility of double taxa- tion, for the bonds and stocks in the hands of individual holders may also under existing conditions be assessed and taxed. It, is this very uncertainty that keeps these railroads in politics. They are obliged to be in politics, because they have a property value of $10,000,000,000 subject to the discretion of these various taxing bodies, subject to the passion and the caprice of different localities, and subject to the legislation of reformers and cranks and black- mailers. Can we expect them under such conditions to keep out of politics? I want to keep them out of politics by providing a fair and uniform system of taxation that will be absolutely certain in its mathematical calculation, that will leave nothing to the discretion of the taxing officers. When we do that ^ve accomplish two purposes. We keep the rail- roads out of politics on the subject of taxation, and we also secure an additional factor of cert.ainty in the determination of rates, which involves the ascertainment of the gross- receipts, the operating expenses, and the taxes, and a fair return upon capital. The taxes, therefore, are a factor in the determination. We now have varying taxes, which may be this year one-third of what they Avill be next year, as in the case of Michigan, for recently by a new system of taxation the taxes of the railroads in that State have been trebled in amount. So all over the United States we may have this varying taxation, which tends to uncertainty in the determination of rates. Mr. President, I have already stated that it is not necessary to put in this bill a scheme of taxation, for the main purpose of national incorporation would be to control capitalization and interest return as factors in rate fixing, but it is desirable ; and I believe on an ap- 294 INTEKSTATE AND FOftEIGN" TEANSPOETATION. peal to the common sense of the American people upon this proposi- tion Congress ,can declare that these railroads, incorporated under a national incorporation act are national instrumentalilties in the exer- cise of the great national powers of the common defense, of the establishment of post offices and post roads, and of the regulation of interstate commerce, and when it declares them to be instrumentalities of the National Government it can, if it chooses, absolutely exempt them from taxation. I do not propose it shall do that, but if it can do the greater thing it can do the less. It can then prescribe the method of taxation and the rule ol taxation by the various States. Under the method which I suggest, a tax of a certain percentage upon the gross receipts of national railroads, to be levied by the States according to mileage, we have. a tax that may be mathemati- cally fixed, that will be just to the railroads, that will be just to the States, and will retain for them the revenues which they now have and possibly secure them greater revenues than they now have, and at the same time secure a certain factor in the regulation of rates which will be of incalculable benefit both to the State boards and to the national board. KATE MAKING A GTJESS. At present rate making is a guess. Ask any member of the Inter- state Connnerce Commission that question and he will say it is a guess. It is true that the Supreme Court has endeavored to reduce it to something of a science by saying that the commission must have regard to value, to cost of construction, to the original cost, to the market value of the stocks and bonds, and to a fair return upon the valuation after considering all these factors. But these factors should be as certain as possible. We must have a valuation. First, I prefer to see a valuation rep- resented in the stocks and bonds fairly and not in an exaggerated form, and so I urge national incorporation as a means to that end. But at all events it seems to nie that the Congress of the United States in parting with its' legislative discretion on this subject and turning over the regulation of rates to the Interstate Conunerce Com- mission is bound to fix a rule by which that commission shall pro- ceed; it is bound to provide for valuation, and it is bound to provide for a fixed return in the shape of interest upon that valuation. Then it will leave to the commission, only the mathematical process of work- ing out the calculation and distributing the burdens of transportation within the rule established by Congress upon all the various industries and commerce of the country. Mr. Heybuun. I should like to ask the Senator a question. The Vice President. Does the Senator from Nevada yield to the Senator from Idaho? Mr. Newlands. Certainly. Mr. Heybuun. Do I understand the Senator to say that we are bound to fix a rate of return upon the valuation in fixing rates ? Mr. Newlands. Yes; we ought as a matter of duty to do so. What I meant to say was that we are now turning over to the Interstate Commerce Commission the power to fix just and reasonable rates; that that is all the power that Congress has. It could not give to INTERSTATE AND FOREIGN TRANSPORTATION. 295 the commission the power to fix unjust and unreasonable rates. Under the limitations of the Constitution all that Congress can do is to fix just and reasonable rates, and when we turn over that power to the commission we turn over all the power we have. Mr. Heybuhn. Eight there I should like to ask the Senator a question. Mr. Newlands. If the Senator will permit me further, I think in order to fix the constitutionality of this legislation beyond a doubt we ought in this very act to fix the rule, the standard, by which this commission should act. Mr. Heybuen. The measure? Mr. Newlands. The measure. Mr. Heybuen. The measure of what constitutes a just alid fair return ? Mr. Newlands. Yes. Mr. Heybtjen. Would the Senator think we could go so far as to say it should not be more than a certain per cent upon the value ? Mr. Newlands. I do. Not more and not less than a certain per cent. Mr. Heybuen. Then I will renew the question I submitted the other day. Would that not be for the Government to guarantee a given income upon the investment of any transportation company ? Mr. Newlands. Not at all. Mr. Heybuen. If we say that they shall be entitled to earn 6 per cent, does that not give them the right to charge such tolls as will result in producing 6 per cent on their investment ? Mr. Newlands. Of course it does and it ought, if that is the return fixed by Congress as a reasonable return. Mr. Heybuen. Would it not result, then, in this, that the Govern- ment, by legislation as directly as the Government can act, guarantees a given fixed rate of income upon the investment represented by the stock and bonds of every transportation company in the land ? Does- it not amount to that? Mr. Newlands. Not a legal guaranty, Mr. President. It simply in- volves nonreduction by the conmiission of the rates of a corporation, as long as they produce only the return fixed by law. Mr. Heybuen. If we say that a reasonable rate shall be fixed and that 6 per cent shall constitute a reasonable rate of return to the com- pany, why is not that true ? And if it is true, do we want to do that? Mr. Newlands. I will say, in reply to that, that the fixing of a limit or percentage which these railroads shall receive upon a valuation fairly ascertained is not a guaranty of that percentage and it never has been so regarded in the legislation of this country. Mr. Heybuen. Is that an authorization ? I should like to substitute the word " authorization " to the company to fix its tolls so that they would insure a return of that percentage. Mr. Fulton. Mr. President The Vice President. Does the Senator from Nevada yield to the Senator from Oregon? Mr. Newlands. Certainly. Mr. Fulton. I should like to ask the Senator from Idaho [Mr. Heyburn] a question, with the permission of the Senator from Nevada [Mr. Newlands]. T0342— PT 5—16 i 296 INTEBSTATE AND FOBEIGN TBANSBOETATION. Mr. Newlands. Certainly. Mr. Fulton. Suppose Congress should enact a law providing that no corporation created pursuant to an act of Congress, incorporated by virtue of a national incorporation act or law of Congress, should be permitted to realize over 4 or 5 or 6 per cent, would that be a guaranty that they should realize that amount? Mr. Heybuen. Not unless it was coupled with the other suggestion that I understood the Senator from Nevada [Mr. Newlands] to make, that we were authorized to say what should constitute a fair and reasonable return, and that having determined that the corporation was entitled to earn it, of course, it naturally follows that it would be entitled to adjust its tariff rates in such a way as to produce a result of that kind, taking the two propositions together. Mr. Newlands. In reference to that I would say, of course, a cor- poration has a right to adjust its rates so as to produce the return hxed by Congress, and the Interstate Commerce Commission, in exer- cising its supervisory power over rates, would be compelled to have in view the return fixed by Congress ; and it is only fair that the corpora- tion should have that return, if it is possible for the corporation to get it out of its business. Mr. Hetbuen. If I do not annoy the Senator by an interruption, I should like to inquire if there is any other department of the busi- ness world where the Government undertakes to insure to the investor any return whatever? Why not as well the manufacturer demand the same rights as the transportation company? What difference is there in the relation which they bear to the economic system of our Government ? Mr. Newlands. The shortest answer to that is that the Govern- ment does not insure. The Senator might as well insist when we pass usury laws in the States of the Union providing that the lawful rate of interest shall not exceed, say, 6 per cent, that we guarantee every investor that he will receive 6 per cent upon his money. This limita- tion of return is no new thing in legislation. The United States Gov- ernment has done it in previous legislation. When Congress incorpo- rated the Union Pacific Eailroad or the Texas Pacific — ^I forget which — it provided that the rates should not yield a return of more than 10 per cent upon the investment. Ten per cent was then the going rate of interest, just as 4 or 5 per cent is the going rate of interest now. The Government gave that corporation the power to fix rates that would yield it 10 per cent, and provided that the regulating power of Congress should be only ap- plied in case the return exceeded 10 per cent. That is a case in the history of our legislation where the return was absolutely fixed by the act of Congress. In the State of Massachusetts I understand the returns to all the electric railroad companies are fixed by law. No corporation of that character there can declare any dividend of over 6 per cent. All profits over that amount are divided, one half going to the State and the other half going to the corporation. The result is that none of these companies ever return more than 6 per cent. They keep down their rates. They expend their income in new investments, in extensions of their lines, and in the betterment of their roads. INTEBSTATE AND POBEIGN TBANSPOBTATION. 297 I repeat, this is not at all a new thing in legislation. I call the attention of Senators to one thing, which is that the Supreme Court has said that fixing rates is not to be a matter of guesswork ; that the railroads are entitled to a fair return upon a fair valuation. If that is so, it seems to me that it is the duty of Congress to provide for the valuation. It is an essential. The railway commissioners of all the States have been in session recently in Washington, and you will find in the morning's paper that they have adopted a resolution call- ing upon Congress to provide for the valuation of railroads, their appurtenances, and their equipment in every State of the Union. That is to be done not by the local commissions, but by the national commission. These men, experienced in the business of regulating railroads, know how adrift they are under present conditions; they know that they can not regard simply the capitalization of these roads. In some cases such roads are undercapitalized, and in many other cases they are overcapitalized. Nor can they always take into considera- tion the market value of the securities in determining the value of their property, because these securities are up and down. I read some quotations yesterday to show that the stock of certain roads had increased in value from 300 to 600 per cent in 10 years. So this association of State railway commissioners has asked Congress to provide for the valuation of these properties, and it seems to me their recommendation is entitled to some consideration here. What valuation would a national corporation act provide for? It would provide for an initial valuation at the very time when the company was organized. When the company was organized and pre- sented its scheme of consolidation to the Interstate Commerce Com- mission it then would have to state to that commission the amount of bonds and stocks that were to be issued. The commission then would make an inquiry as to the value of the property, in order to determine upon the amount of its capitalization, either approving the amount submitted or reducing it if the circumstances warranted it, and that corporation would then be allowed to issue only the amount of stocks and bonds so approved. From that time on we should have a permanent valuation of the property of that corpora- tion. To that may be added from year to year the amount expended in improvements and betterments, less the depreciation that takes place. Thus throughout the years we should have a constant valua- tion of these properties accomplished by the aid of the legislation which I suggest, and the value would be represented in the capital, in the stocks and bonds. This system would make these, railroad securities the best securi- ties in the country, and railway bonds could be negotiated at 3 per cent under such a system. As to the stocks, instead of being variable, as they are now, they would be fixed and certain in value and go into the hands of the investing public instead of being controlled and manipulated, as thej are now, by the stock speculators. Mr. Heybtjen. Mr. President The Vice President. Does the Senator from Nevada yield to the Senator from Idaho ? Mr. Newlands. Certainly. Mr. Heybuek. If the Senator will permit me, before leaving that subject I will ask may not this investigation and sifting down of the 298 IKTEESTATE AND FOEEIGN TBANSPOETATION. values of corporate property for the purpose of arriving at- a basis upon which to estimate what would constitute a fair return be as well accomplished without the national incorporation feature suggested by the Senator? Mr. Newlands. As I suggested in my remarks yesterday^ if we do not conclude to provide for national incorporation in this bill we should at least provide for a valuation of these railroads engaged in interstate commerce. Mr. Heybuen. I will say to the Senator that I am in hearty accord with him in regard to that matter. I have endeavored to cover it by a bill already introduced and before the committee, providiag for just as stringent an investigation as is suggested by the Senator, to be had not through the means of national incorporation, but allowing the corporations to exist under the statutes as we find them, and doing it through a board of interstate commerce commisisoners, and arriv- ing at this information annually, for the purpose of having a correct basis of value upon which to estimate what would constitute a fair return. I do not believe that the Senator will meet with any opposition in this body or elsewhere if he confine his amendment to that proposition by providing a method of determining real values, because it is es- sential that we should have a method of determining them. It is obvious, I think, to every. Senator that before you can determine what would constitute a fair and just return you must know upon what that return is to be based. OPPOETtTNITY FOR AMENDMENT. Mr. Newlands. I am very glad to know that the Senator from Idaho has introduced such a bill ; but let me make a suggestion to tKe Senator from Idaho, and that is that he put his bill in the shape of an amendment to this bill, for experience shows that legislation upon the subject of interstate commerce is very rare and infrequent. We have now reached a crucial point in that legislation ; we have a bill before us to which any amendment in the line of reforin can be attached, and I suggest to the Senator that he frame an amendment to this bill, for otherwise I should very much fear that the valuation which he calls for will be indefinitely postponed. Mr. Hexbuen. Mr. President, I would say,' in reply to that sugges- tion of the Senator, that it has not occurred to me that we have reached a point in the consideration of this bill where it is necessary to formulate every suggestion that may occur to the minds of Sena- tors in the shape of amendments. .1 think we are from day to day gathering new light upon the scope and effect of this legislation. I have in my desk, with a view to considering the propriety of intro- ducing it as an amendment, a provision along the line suggested in the remarks that I have made ; but I do not feel that the time is ripe yet or that the necessity has arisen for introducing it. I am not at all apprehensive that a vote will be reached upon this bill with such unexpected haste as to make it dangerous to defer the consideration of these measures until we are quite sure that our minds are clear as to exactly what we want to do. Mr. Newlands. If the Senator will review the history of legisla- tion upon the subject of interstate commerce, he will find that Con- INTERSTATE AND POKEIGN TRANSPORTATION. 299 gress has not very often awakened from a condition of apathy and inertia and indifference upon the subject. Interstate commerce was given over without let or hindrance to the railroads of the country until 1887. Then it was only after a very severe struggle, in which the Senator from Illinois [Mr. CuUom] took so prominent a part, that the people were successful in securing the passage of legislation that brought them only some degree of regulation and control. Mr. Hetbuen. Yes; but I will suggest, if I may, that it took eight years to reach any conclusion on the question of interstate commercie. I remember — that is, if my memory serves me correctly, and I think it does— hearing a Member of the House of Eepresentatives from Texas at that time, Mr. Eeagan, introduce the original interstate commerce bill in that body. I listened to its discussion through several winters from the gallery, looking down upon it, and I fol- lowed it through the public press through all the years while it dragged along; and it took, I believe, about eight or nine years to arrive at any conclusion whatever on the subject. Then, after an interval of about that many more years. Congress attempted to re- sume the consideration of it. So, I repeat that I have no fear of such a hasty determination of the conclusion of this question in this body as to make it dangerous to postpone the introduction of amend- ments. Mr. Newlands. Of course, if the Senator thinks that 10 or 12 years is a mere trifle in the consideration of the question of this reform, my appeal to him will have no weight; but, I repeat, if the Senator will review the history of legislation upon this subject, he will find that it has been very difficult to wake Congress from in- difference and apathy. It was not until 1887, after eight years of agitation, that the meager bill which -was passed upon this subject found a place in the statute book. Years and years were involved in the discussion of rebates and preferences, but it was not until the great trunk lines of the country, headed by the Pennsylvania Rail- road Co. three years ago, came to the conclusion that it would be an advisable thing to have legislation upon the subject that legislation was enacted. Since then Congress has rested upon its oars, and Congress will probably rest for 5 or 10 years more upon its oars after this bill is enacted. I w^rn every friend of reform upon this question, every man who views with apprehension the growing power of these rail- roads, who views with apprehension their increasing capitalization, who views with apprehension their activity in politics — I warn them that if they wish legislation looking to reform upon this subject put upon the statute book now is the time and this bill is the place. POLICE POWERS OE THE STATES. Mr. President, I wish to state that my suggestion involves no in- terference with the police powers of the various States. This idea of national incorporation fully comprehends the fact that there are two sovereigns that are dealing with the question of commerce — the great National sovereign and the lesser State sovereign, each supreme within the limits of its jurisdiction; the National Government, ab- solutely supreme upon every inch of American soil, regardless of 300 INTERSTATE AND FOREIGN TRANSPORTATION. State lines, within the powers granted to it by the Constitution, and the States, absolutely supreme in all the powers relating to sover- eignty outside of the powers granted to the Nation. Here we have machines called " railroad corporations " running railroads on Amer- ican soil through American States, used for State commerce and for National commerce — State commerce under the control of the States, and National commerce under the control of the United States. It is simply a question of judgment between us as to whether we shall leave such machines to be created by the State sovereignty under its powers as to State commerce or whether we shall permit them to be created by the national sovereignty under its powers as to interstate commerce. These railroads, have grown from mere local systems into great national systems. I believe it will be a proper thing for the great national .sovereignty to create the charters for these railroads. I do not propose to force them into a national in- corporation. I hope it will be so just and so fair, and relieve them of so many complications, political and otherwise, that they will gladly seek the shelter of national inco;rporation. At the same time, I do not propose to interfere with the police or taxing powers of the States, except so far as is necessary to establish a uniform rule of taxation, which will operate to the advantage of every State in the Union. Mr. Spoonee. Mr. President The Vice President. Does the Senator from Nevada yield to the Senator from Wisconsin ? Mr. Newlands. Certainly. Mr. Spoonee. If the Senator's theory of Federal incorporation were adopted, and every railroad corporation in the United States en- gaged in interstate commerce and also in State commerce were a Fed- eral corporation, does the Senator contend that that would oust the regulatory power of the State ? Mr. Newlands. Not at all. Mr. Spoonee. Then what would be gained? Although railroads are State corporations, so far as interstate commerce is concerned Congress now has the power to control them. The States can not control them. The States control intrastate commerce. How would that change the situation essentially ? Mr. NEwiiANDs. I will say that when I said " not at all " I meant that the bill which I have submitted does not affect the regulatory power of the States over intrastate commerce. As to whether a law could be so framed as to affect that, I will not discuss at present. I have been inclined to think that if the National Government should create a national corporation for interstate commerce it might possi- bly be regarded that any attempt by the State to regulate the State conamerce carried upon that road would be regarded as burthening a national instrumentality and as such involving possibly the power to destroy it. The courts might possibly uphold a provision in a national law which forbade the State to regulate State commerce on a national railroad. Mr. Spoonee. The question, Mr. President, which the Senator makes as to the power to destroy would obviously arise only as to the exercise by the State of its power of taxation, but Mr. Newlands. The decisions thus far relate entirely to taxation. INTEESTATE AND FOREIGN TRANSPORTATION. 301 Mr. SpoOner. Yes; to taxation; but it is undeniable that to-day Congress has the power to create Federal corporations for conducting interstate commerce. In the Senator's idea, which is a very large and far-reaching one, there is much of merit ; but my question really goes to this, whether, without an amendment of the Constitution, what the Senator has in mind could be effectively, in any large de- gree, carried into operation. It is utterly impossible, I take it, under the existing Constitution, for Congress to create a railroad corpora- tion to engage in interstate commerce, which it may do, which could oust the States of their regulatory power of purely intrastate com- merce. So that we would still have what the Senator deplores, Fed- eral regulation of interstate commerce and the State regulation of purely domestic or State commerce. That would be far away from what the Senator wants to accomplish. Then, as to the power of taxation, is the Senator certain at all that the States in taxing private property — for a railroad chartered by the Federal Government would be private property within the boundaries of a State — can be made to enforce a rule of taxation which is created by Congress? The States exercise their taxing power under their own constitutions. Is it competent for Congress, under the existing Constitution, to take away from a State in any degree the power to tax property within its own limits, its own boundaries? The Senator's plan is one entitled to great respect and considera- tion. There are large views in support of it, but what has troubled me about it is the constitutional power to really efficiently carry it into effect by any bill which we can enact. Mr. Newlands. Mr. President, I will endeavor to answer both propositions to which the Senator has referred, namely Mr. Spooner. They are questions, not propositions. Mr. Newlands. As to whether we can legislate in such a way as to deprive the State of its regulatory power over intrastate commerce, and, second, as to whether we can legislate in any way as to affect the State's power of taxation over railroad property within the State. As to the first proposition, I will say that there is no effort made in the measure which I propose to affect the power of the State over purely State commerce. That would remain ; but I call the Senator's attention to the fact that whilst it is, of course, inconvenient to have forty-five State commissions acting at the same time with one na- tional commission upon the subject of these rates, and whilst it would be very much better, in my judgment', to have one national commis- sion that would regulate the rates of both State and interstate com- merce, when that commerce is conducted by the same road, yet as to rates the ultimate control is in the United States Supreme Court. If the rates are fixed by a State commission unfairly and unjustly and in such a way as to deprive the corporation ' of a fair revenue, the corporation can take that case into the United States courts and to the Supreme Court and they will be adjudged invalid. So that in the end the power of the United States is exerted in one form or the other, either through the legislature or the courts, upon commerce, both State and national. As to the power of taxation, I admit that it is an open question, not yet fully determined by the courts; but I submit that all the decisions indicate clearly that if the United States incorporates a 302 INTERSTATE AND FOREIGN TRANSPORTATION. railroad as a national instrumentality and declares it exempt from State taxation, the court will enforce the exemption. There is a case in which the question of the exemption from State taxation of a railroad organized under a national charter has been considered, and that is the case of Railroad Company v. Peniston (18 Wall., 5), where the Union Pacific Co., a national corporation, operating under a national charter, but without any exemption asserted in the statute from its liability to State taxation, claimed that because it was a national corporation and a national instrumentality its property was by implication exempt. There were eight judges who sat in that case. Threie of the judges declared that without any express exemption in the statute the entire property of the railroad company as a national instrumentality was exempt from State taxa- tion. As to the other five judges, four declared that the exemption would apply only to the powers and operations of the national instrumentality and not to the property used by the agent in charge of it. But the three judges who held the other way declared that the railroad itself was the instrumentality for carrying out the power, and that therefore it was exempt. The fifth judge was be- tween the two. He held that such property could be exempted by Congress from taxation, but that it was clearly the intention of the statute not to exempt it. So he held in that case that the property was subject to taxation. If the statute in that case had expressly declared that the railroad property should be exempt from State taxation, the court would have stood four to four upon that propo- sition. In the decisions since that time the Supreme Court has expressly reserved that question as an open question for the future. Mr. Teller. Mr. President The Vice Peesident. Does the Senator from Nevada yield to the Senator from Colorado? Mr. Newlands. Certainly. Mr. Teller. I would ask the Senator if he thinks there is no dis- tinction between that case and a case where the Government char- tered a road running through & State or attempted to do so ? The line to which the Senator has referred, as he must know, was char- tered to run through the Territories of the United States and not through the States. It commenced in a Territory, ended in a Ter- ritory, and ran only through Territories. Mr. Newlands. That is triie, Mr. President. There was only one of the Pacific railroads, I believe, which ran from a point in one State to a point in another, and that'was the Texas Pacific Railroad. But the court does not take that into consideration at all, as the Senator will see. Mr. Spooner. The Senator is mistaken about that. The Northern Pacific is another. Mr. Newlands. I was not aware of that. I thought it was entirely constructed through Territories. Mr. Spooner. No ; not at all. Mr. Teller. I want to call the attention of the Senator Mr. Newlands. I will read the language Mr. Teller. I want to call the attention of the Senator to the fact that in the litigation of which he speaks — ^the Union Pacific litiga- tion — the parties claimed that in the act the toad was exempted from INTERSTATE AND FOREIGN TRANSPORTATION. 303 taxation. It was in the power of Congress to have exempted that property from taxation, if it saw fit. Why? Because it was to run through a Territory absolutely under the control of the General Government. While the power to exempt it in a Territory exists, it might not exist, and I do not think it does exist, in a State. , Mr. Newlands. The Senator is mistaken in his assumption that the counsel claimed in that case that the statute itself exempted the property from taxation. It was admitted on both sides that it did not. Mr. Teijjee. Ko; I did not mean to say it exempted it in words, hut in principle, because it was performing -a duty for the General Government and had a charter from the General Government. Mr. Newiands. But the question as to its being a Territory was not considered, for it must be recollected that the Territories had ^iven way to States, and they were complaining then of State taxa- tion. I will read from the opinion of Judge Bradley, who wrote the dissenting opinion, and who states the case also for Mr. Justice Field: The Union Pacific Railroad Co., therefore, being a United States corporation, created for national objects and purposes, and' deriving its existence, its powers, its duties, its liabilities, from the United States alone ; being responsible to the United States, now as formerly, for a whole congeries of duties and observ- ances ; being subjected to the forfeiture of its corporate franchises, powers, and property to the United States and not to any individual State; being ■chelrged with important duties connected with the very functions of tile Gov- ernment, every consideration adduced in the cases of McCulloch v. Maryland and Osborn v. The Bank would seem to require that it should be exempt not only from State taxation, but from State control and interference, except so far as relates to the preservation of the peace and the performance of its obligations and contracts. In reference to these and to the ordinary police regulations im- posed for sanitary purposes and the preservation of good order, of course, It is amenable to State and local laws. As an Instrument of national commerce as' well as Government operations, it has been regulated by Congress. Can it be further regulated by State legis- lation? Can the State alter its route, its gauge, its connections, its fares, its franchises, or any part of its charter? Can the State step in between it and the superior power or sovereignty to which it is responsible? Such an hypothesis, it seems to me, is inadmissible and repugnant to the necessary relations arising and existing in the case. Such an hypothesis would greatly derogate from and render almost useless and Ineffective that hitherto unexecuted power of Congress to regulate commerce by land among the several States. If it be de- dared in advance that no agency of such commerce, which Congress may here- after establish, can be freed from local impositions, taxation, and tolls, the hopes of future free and unrestricted intercourse between all parts of this great country will be greatly discouraged and repressed. Again : But it is contended that the laying of a tax on the roadbed of the company is nothing more than laying a tax on ordinary real estate, which was conceded might be done in the case of the United States Bank, in reference to its bank- ing house or other lands taken for^ claims due in the course of its business. This is a plausible suggestion, but, in my apprehension, not a sound one. In ascertaining what is essential in every case, respect must always be had to the subject matter. The State of Maryland undertook to tax the circulation of the United States bank established in that State, etc. Mr. Justice Bradley goes on to state the case with reference to the United States Bank, and then continues : But the primary object of a railroad company is commerce and transporta- tion. In its case a railroad track is just as essential to its operations as the 304 INTERSTATE AND FOREIGN TRANSPORTATION. use of a currency or the issue or purchase of bills of exchange is to the oper- ations of a bank. To tax the road is to tax the very instrumentality which Congress desired to establish, and to operate which it created the corporation. Such is the opinion of three of the eight justices who sat in that case. The opinion of four of the justices was delivered by Mr. Justice Strong, who, after referring to the object and purpose of the legis- lation creating the Union Pacific Railroad, said (p. 32) : Admitting, then, fully, as we do, that the company is an agent of the General Government, designed to be employed and actually employed in the legitimate service of the Government, both military and postal, Aoes it neces- sarily follow that its property is exempt from State taxation? Emphasizing the difference between the operations of an agent and the property thereof, Justice Strong said (p. 33) : It may therefore be considered as settled that no constitutional implications prohibit a State tax upon the property of an agent of the Government merely because it is the property of such an agent. Then, after consideration of the various cases bearing upon the general question. Justice Strong summed up as follows (pp. 36-37) : 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 hinder the efficient exercise of their power. A tax upon their property has no such necessary effect. It leaves them free to discharge the duties they have undertaken to perform. A tax upon their operations is a direct obstruction to the exercise of Federal powers. Eight justices heard this case, and the opinion of the court uphold- ing the validity of the tax was concurred in by four of them. A fifth, Judge Swayne, concurred in the judgment, but said : I see no reason to doubt that it was the intention of Congress not to give the exemption claimed. The exercise of the power may be waived, but I hold that the road is a national instrumentality of such a character that Congress may interpose and protect it from State taxation whenever that body shall deem it proper to do so. So that Judge Swayne would have decided against the majority of the court had there been exempting legislation. Two other justices flatly dissented, giving an opinion to the effect that such State taxa- tion was invalid, even in the silence of Congress. And the eighth justice merely remarked : " T dissent from the opinion of the court." All that can be claimed from this decision as to the power of Congress to exempt a corporation from taxation by aflS.rmative legis- lation is that the court was evenly divided, and even this can not be fairly claimed, for the case of exempting legislation was not before the court, and the opinion of the four justices who upheld the tax does not contain a word which denies the power of Congress to exempt the property which it expressly declares to be its chosen, instrumentality. So, out of eight justices four expressly declared that Congress could exempt the property of a national instrumentality in the hands of a national agent from State taxation, and the question therefore is an open one to be determined in the future. Mr. Teller. In that case the court did not hold what the Senator says it did. It simply held that in that particular case, where the INTERSTATE AND FOEEIGN TRANSPORTATION. 305 company had been,chartered by the general authority of the Govern- ment in a Territory, it was within the power of Congress. That is all it did hold. I am very familiar with that case. Mr. Newlands. Of course the decision was with reference to that particular case. Mr. Teller. I do not want to discuss it with the Senator, but I will say to him that the court was dealing with the particular case of the railroad which was brought before them, and they took that charter and were simply saying what Congress might have done, but what Congress did not do. That case is pretty well understood, and the Senator can find in it no support for his contention. Of course, if the Senator depends upon the law of the minority, he can find a good deal of law that is not recognized as the law. A man may sometimes think it is pretty good sense, but the law is what the majority holds. Mr. Newlands. Undoubtedly the law is what the majority holds, namely, that where a statute does not exempt property employed by a national corporation in the exercises of its powers, that property is not impliedly exempt from State taxation. But four of the judges expressly held that where the statute does exempt, the property would be exempt from State taxation. Mr. Teller. In that particular case. Mr. Newlands. And hence I submit I am justified in the state- ment that the suestion is an open one. I think the logic and the reasoniag are entirely with the four judges who declared that the National Government, creating a corporate agent for the purpose of carrying out a national power, stamping the property of that agent as an instrumentality for the exercise of that power, can pro- tect it from destruction by another sovereignty upon whose soil it has a right to operate. There can be no question of the power of a national corporation to enter any State without the consent of that State and to build a railroad and to exercise the power of eminent domain and to take part in interstate commerce. The National Gov- ernment itself can do it, and if the National Government can con- struct a railroad, would it be held for a moment that that railroad would be subject to State taxation ? The National Government, under the power to establish post offices and post roads, builds post offices in the States. Do we have to ask the State to exempt them from taxation? No. Years ago it was thought necessary to obtain a special State statute exempting such buildings from State taxation. Now it is the universally recognized doctrine that the public buildings put up by the National Govern- ment in a State in the exercise of its governmental functions can not be taxed. Mr. Spooner. Will the Senator allow me to ask him a question ? Mr. Newlands. Certainly. Mr. Spooner. Aside from the question of law, aside from the ques- tion whether Congress has power to exempt such property in the States, does the Senator think the States would ever foi^ a moment submit that railroad property within their borders should not be subject in any degree to local taxation? Mr. Newlands. No; I do not think they would. It is impossible to get through such a bUl, and I would not ask to have it passed. All that I wish to accomplish is to have a uniform rule of taxation that 306 INTERSTATE AND FOREIGN TEANSPORTATION. will make the taxes of railroads a certainty, so that they will keep out of politics upon this subject, and so that we will have a definite factor in the determination of rates. Mr. Spooner. Do not the railroads get into politics more on the question of regulating rates than on the question of taxation ? Mr. Newlands. No; I think they are in politics upon both; and they have to be. Mr. Spoonee. The Senator would leave them in politics as to the ■one? . _ ■ Mr. Newlands. Because I can not help it. But still as to that the Senator must recollect that they have the protection of the national courts, which are bound to see to it that no State regulation deprives the company of a fair return upon its property. The courts have modified very much the doctrine asserted in the case of Munn v. Illinois, where it was declared that the power to regulate was a legis- lative power ; that it was no objection to the power to say that it would lead to legislative abuse; that the only remedy for legislative abuse was a resort to the polls. That was a poor remedy given to the corporations by that decision, for we know how ill any corpora- tion would fare at the polls in seeking a redress of injuries. But we do know that since that time that doctrine has been seriously modified, and the courts have now taken the property of these cor- porations within their protection and have given them ample pro- tection. They do not simply protect them against confiscation, but they protect them in a fair and reasonable return upon their prop- erty and in a fair and just compensation for the services which they perform. Mr. President, I have, at the risk of being tedious, gone. quite fully into the principles which should, in my judgment, govern the regula- tion of rates. I believe that it is our duty to provide for a valuation of railroads engaged in interstate commerce and to fix the returns which the corporations are to receive on such valuation. If these two factors are established, the whole system will tend automatically toward a reduction in rates as the business of the railroads increases. automatic adjustment. A system of national railway corporations strictly controlled as to capitalization, limited as to their returns to a certain percentage, with taxes mathematically certain, with a proper allowance for an insurance and pension fund, with -proper provisions for conciliation of disputes between employees and the railroads, would result in an automatic adjustment that would do away gradually with excessive rates and all the abuses arising from preferences and discriminations as to individuals or localities. The tendency woul be to equality and reasonableness of service. If we enter upon a system of proper capi- talization of these roads, involving a fair and fixed return in the shape of dividends, the Interstate Commerce Commission will hardly ever have cause to act, and, automatically, the entire administration of these roads will tend toward impartiality in place of partiality, and reasonable rates instead of unreasonable rates, to the betterment of the roads instead of exhausting the roads with a view to paying dividends on watered capital. INTEESTATE AND FOKEIGN TEANSPOBTATION. 307 NATIONAL OWNERSHIP. The people will look for simplicity in whatever plan of relief is proposed, and unless we unify and simplify the control of transporta- tion in a few thoroughly regulated great national corporations, whose finances and operations can be easily understood, and whose functions will be entirely taken out.of politics, they will drift into national ownership as the easiest solution. The argument in favor of national ownership is an attractive one. Outside of the United States three-fifths of the world's trackage is; in national ownership, and not a single nation that has entered upon national ownership is inclined to withdraw from it. Japan, only recently coming out of the stress and strain of a. great war, has passed an act for the purchase of all private railroads in Japan, at a cost of $250,000,000. The plan of acquiring national ownership would not be difficult. It would not involve the entire readjustment of the present system. It would be easy to authorize the Interstate Commerce Commission to institute suit and condemn the shares of stock of all the railroads in the country engaged in interstate commerce, leaving the bonds, outstanding as a lien upon the property. Thus the interests of the stockholders would be purchased by the Nation and the Interstate Commerce Commission could step into the position of director of the- various corporations, with their present organization of officials and employees, and could gradually work out a method of national ad- ministration. The present gross revenue of all the railroads would be amply sufficient to pay all the fixed charges of the companies and the low rate of interest upon the Government bonds issued for the purchase of stock and produce a surplus which would make ample provision for betterments and extensions, and also provide a sinking fund which would extingush the debt before many years. Or, should the country determine to take hold simply of the new construction of the future, leaving the existing railroads in the hands of their present owners, the Government could easily build a railroad of 3,000 miles across the continent from the Atlantic to the Pacific,, which would become the spinal column of a great governmental system. Government ownership presents no difficulties, either constitu- tional or practical, and the country will certainly drift to it unless, the existing abuses of uncontrolled monopoly, of overcapitalization, of accomplished union between the producing and transportation interests of the country, of political control, and of unjust prefer- ences and discriminations are done away with. Even assuraing that the Government management may not be economical, the time m&j come when the people will regard equality of service as of more im- portance than economy of service. But the plan of national incor- poration would give the country the benefits of Government owner- ship with none of its dangers. It would abolish the evils which have arisen from unrestricted monopoly, automatically bring about a re- duction in rates, put the railroads out of politics, and retain the management of the able men whose genius created our present effi- cient system of transportation. No complaint can be made as to this efficiency ; no complaint can be made as to consolidation properly 308 INTERSTATE AND FOREIGN TRANSPORTATION. controlled in its capitalization. No attempt should be made to raid the property of railroad investors. No attempt should be made to destroy or impair the existing values of their securities. Unity of control, simplicity of organization, certainty in valuation of railroad property and in return upon such valuation to the stockholders, cer- tainty in taxes, fair recognition of the dangerous character of the service of the employees, proper provision for insurance against accidents and old age, conciliation of disputes between the carriers and their employees, are parts of the full and comprehensive legisla- tion which this subject requires and which would differentiate our legislation from the incomplete and fragmentary legislation in which Congress has thus far indulged regarding interstate transportation. MR. ALFRED P. THOM— Resumed. The Chairman. The committee will come to order. Mr. Sims, will you proceed with the witness ? Mr. Sims. Yes, sir. Mr. Thom. Before Mr. Sims begins, I made a reference yesterday to a letter I received from Mr. Daniel Willard on the subject referred to in Judge Sims's examination, and with his permission and with the permission of the committee I should like to read into the record an extract from that letter. It relates to the average movement of freight cars, referring to the statement which I made at Atlantic City and which was quoted by Judge Sims yesterday. Mr. Willard proceeds as follows : Tou say, " One of the States has k law requiring its freight to be moved for- ward at a rate of not less than 50 miles a day. The average movement of freight in the United States is 24 miles a day." What you meant to say, I take it, was that the average miles made per day by all freight cars in the United States is 24, which, I am sure you will agree, is quite dlfEerent from saying that the average movement of freight in the United States is 24 miles per day. As a matter of fact, when freight is actually moving, I doubt very much if the average speed is less than 10 miles per hour, and usually when moving, freight cars will go over at least one division of 100 miles per day. In the case of the freight car, however, it must be kept in mind that the total time of the car must be accounted for — that is to say, not only the time while it is actually moving but also during the 48 hours which the shipper is given to load the car and the 48 hours allowed for unloading, and any other delays which may happen to the car during the entire year, due to accident, slack business, etc. I have taken the liberty of writing you about this matter because I have no doubt you will have occasion frequently to refer to the same subject in your public addresses, and otherwise, and on that account I thought best to point out the distinction which I think should be drawn between the average move- ment of freight and the average movement of the freight car. Mr. Sims. He is correct ; your statement is the average movement of freight in the United States, 24 miles per hour. He is correct in that. Mr. Thom. Yes, sir. Mr. Sims. Which you accept? Mr. Thom. I accept what? Mr. Sims. The statement of Mr. Willard. Mr. Thom. I am trying to have that whole subject developed by having the statistics checked, and I have not got them in such shape yet as to present it. Mr. Sims. When we took a recess yesterday we were on the sub- ject, at least indirectly, of railroad credit, or what would be neces- INTEESTATE AND FOKEIGN TUANSPORTATION. 309 sary to be done in order that the railways of the country might receive the necessary new capital at such rates of interest as would enable them to make the required new developments that ought to be made in order to meet what seems to be admitted, both by your- self and everyone else, as absolutely necessary. Or else, failing to do so, the commercial growth of the country will be arrested. Your conclusions are, as have been announced in your former state- ments, as I understood them, that something must be done to attract private investors sufficient in itself to enable railroad companies to market their securities in competition with all other kinds and char- acters of investments that will be open to the private investor. Your conclusion, as I understood it, was that if legislation along the lines you have suggested was carried out, that then the stocks and bonds of railroads — in other words, railroad securities — would prove suffi- ciently attractive to cause private investors, in competition with all other forms of investment offered, to take these securities in such volume as will enable the railroads to do that which they admit is necessary to be done, so that we shall not have a continuous state of arrested commercial development. Now, we were on that point, and I made the suggestion with reference to the Government guar- anteeing minimum returns upon these new issues of stock or bonds, or both, for a sufficient length of time, so as to remove the element of imcertainty that now exists, and in that way, while reducing the rate of interest charged to the public carriers, really making a form of credit investment that will be desirable over all other securities offered not guaranteed by the Government of the United States or some other guaranty of equal solvency and ability. I, of course, am not a railroad man, and can not go into these things except in a very crude way, but I wanted to ask your opinion as to what you think would be practical, provided that legislation might be passed giving the Interstate Commerce Commission or some other Government authority the power and placing upon it the duty to approve all future issues of either stocks or bonds of railroad companies. Would it be practical, and would it serve the purpose if, after the Government had approved these issues, that it should guarantee that the interest return or dividend return upon this specially authorized stock issue or bond issue should not be less than a fixed amount— say, 4 per cent — giving to the investor the , opportunity to receive, if he is a purchaser of stock, any additional dividend that might be earned in the nature of a speculative induce- ment or in the nature of a bonus, so to speak? That is, if the com- pany makes under Government regulation 6 per cent, which it can devote to dividend on the stock, that it should not be prevented from doing so, provided this Government authority regulating these things did not intercede and prevent it upon the idea that it was not authorized by the conditions of the carrier. The Government not guaranteeing the ultimate value of the stock, but simply the regular payment of a dividend for a certain period of years— 20, 30, 40, or 50, or whatever might seem to be practical. I want to ask you whether or not you think such a system as that might relieve the situation and, at the same time, not involve the Government in any probable or possible ultimate loss, and not remove the properties of railroads from State control — I mean to the extent ,310 INTERSTATE AND FOREIGN TRANSPORTATION. of taxation, police regulation, and so on — giving the Government the right to be represented in any meeting of the stockholders of §uch a company and making it necessary that the Government director, if we should call him such, the Secretary of the Treasury, the Secretary of Commerce, or whoever might be authorized by leg- islation to act, should approve all arrangements and regulations of that railway company iust as though it was a private owner of the stock, to the end that the Government might be protected against a possible loss of this guaranteed dividend. These are only STiggestions, crude thoughts, and I have thrown them out for just what they are worth, to the end that what seems to be undesirable by some people, and at the same time to have behind a railroads security both a moral and a financial guaranty that would appeal to the investors both at home and abroad over an investment, of like character, but without governmental, moral, and financial responsibility. I will ask you, have you given this propo- sition any thought or have you thought along that line ? Have you given it consideration? Mr. Thom. You present an exceedingly interesting point of view, Judge. In the first place, I would like to call attention to perhaps a little modification that should be made in your statement of my view, so that the record shall not be Mr. Sims. I do not want to misstate it, of course. Mr. Thom. Of course I appreciate thg,t. I do not think you wUl find that I have ever said that even if everything that we have sug- gested is done, that there will be no need for something further to be done in respect to a constructive system of relationship between the Government and the railroads. I regard what we have proposed as an immense step in the direction of stability. Wonderful progress will be made if we can get those elements of sympathetic cooperation between the Government and the railroads which we have suggested. Now, I have never assumed that we could get everything that was necessary at one effort. I have no doubt it will be a developing situation, in which Congress will have to study it from time to time, as the conditions are presented, and will have to deal with it ia a progressive way, but that what has been now proposed will be a tremendous step in that direction. Undoubtedly a Government guaranty of income will be a most tremendous element in the value of these securities and would very greatly attract investors, but you ask me whether I have given any consideration to that. I have not given consideration to it as a prac- tical matter, for the reason that I never supposed that the Govern- ment would make such a guaranty. Now, if that is in the range of possibility that is a very important thing to be considered. A. Gov- ernment guaranty of income would be a tremendous attraction. For example, take the securities that are going to be issued under this new rural-credits system, which come with the apparent backing of the Government, even free from taxation. Now,, it is the general opinion among financial men that when those things are issued they are going to be very attractive, because the Government is behind them in a way. Now, if the Government chooses to get behind the securities of the railroads, of course that is going to be a tremen- dous factor; but I call attention to the fact, if you will permit me INTERSTATE AND rOREIGN TRANSPORTATION. 311 one moment, that the tendency of the questions which you are asking is to base them upon a recognition of a condition in respect to rail- roads which is in accord with what I think it is, that there is a pres- ent condition calling for decided helpfulness on the part of the Government so as to continue these facilities up to the point that the commerce of the country requires. Your questions are based upon that as a fundamental. I do not mean that you necessarily think that, but you are asking these questions based on that assump- tion. That is my belief. The only difference between the tendency of your questions and my own judgment is that you are suggesting remedies far beyond anything that I believe to be practicable from a public standpoint. I do not believe the Government is going to do that. I would think that if the Government is ready to do that, the whole subject ought to be reviewed in the light of that willing- ness on the part of the Government; but I have assumed that we have a condition here which your questions indicate must be met by some real, earnest, serious governmental effort in order to meet the public needs of the future, and even the present, in respect to the facilities which commerce needs. We feel that as long as these properties are privately owned that the Government will expect us to see that they are kept up to the needs of commerce, provided the Government affords us such en- couragement in its regulations, such helpfulness and constructiveness in its system of regulations as will enable us to do it, leaving the responsibility on us to do that, and testing finally the system of pri- vate ownership by our success. You can not test the success of the system of private ownership under a systeia of regulation where only the correction and repression are the main features. You can test a system of private ownership when you have given to the in- vestors in these facilities all the^ reasonable aid which Government can give, and when you have done that, when you have perfected your system of regulation by introducing in addition to your present powers of correction and punishment the power that the Government may give in the way of helpfulness and encouragement — I mean reasonable and proper helpfulness and encouragement — when that is done and tested, of course, we appreciate that there will be the supreme test of private ownership. We can not have it now, because the system of Government ownership denies it to us anyhow. We will have it then, because the system of private ownership will have been helped by the Government in every reasonable way. Then the question will come up, and on that question will depend the future of this Government. If we break down after having been helped to the extent that Government can reasonably help us in the system of regulation — if we break down — then the commerce of this country is not going to contend with inadequate facilities. When private ownership fails, there will be a demand from everybody that the Government shall take its place, and thereupon we will have what- ever that means to our system of government. One man may think that means one thing, and another another, but we all know that it is an unknown world which we will be enter- ing, to engraft upon a democracy the immense strain of Government ownership of transportation facilities, with its army of employees. We know that that will be a great strain. I do not believe that ,that 70342— PT 5—16 5 312 INTERSTATE AND FOEEIGN TKANSPORTATION. ought to be accepted as a solution, until we find there is no other way out, and therefore I have addressed myself in your presence, earnestly to establish the purpose of creating the conditions that will, I hope and I think, save the system of private ownership of these railroads. I believe that to be in the interest of the public, and of our system of democratic government, infinitely more than it is in the interest of the security holders; and if I may be permitted a personal word, if anything that I can do will tend or help to bring about that result, I will feel that I have not labored in vain. Now, in connection with another aspect of your question, I wish to introduce at this point an idea that has been suggested to me since these hearings began. As bearing upon the conditions which we will have to confront in respect to getting new money for these railroads, the various matters which I have mentioned in that connection are in the record, and probably are remembered by you gentlemen ; but here is a letter from a most distinguished man, a financier, who is at the head of the new governmental banking system of New York. I think he is the governor of the Reserve Bank of New York. I do not know exactly what his title is, but it is Mr. Benjamin Strong, who was formerly president of the Bankers' Trust Co., and is now the head of this new banking system in New York, and he calls attention to an additional matter which the statesmanship of this country has got to confront in dealing with the matter of railroad credit, and that is this: The effect of the European war on interest rates. Now, his view is this : He says in England they are now paying 6 per cent for money that they used to get for less than 2 per cent. France is pay- ing 6 per cent for money it used to get for less than 1 per cent. That, of course, has a tremendous effect upon the level of interest during the war. The problem that men of affairs have got to deal with, and that the statesmanship of the country has to deal with is : What is going to be the effect on interest rates after the war? Is this 4 per cent you are talking about going to be a legitimate return on money after the war, or will the effect of the immense demand for capital abroad, in reconstructing Europe when peace comes be to make such a de- mand for money as to greatly increase the rates of interest, and if it will there will be a tremendous competition established with rail- road securities, and the amount of interest they will have to pay for new money will be affected greatly by it. May I read a portion of this letter ? Mr. Sims. I have no objection, of course, The Chairman. Certainly. Mr. Thom. It is a question we would like to Mr. Sims. I would like the information. Mr. Thom. It seems to me it would be of some importance. I will read the whole letter. It is written by Mr. Benjamin Strong, from Denver. He is out in Denver and has evidently been out there for some time — to Mr. Trumbull, who is the chairman of this railroad executives advisory committee, written on November 8 [reading] : Deak Mb. Teumbtjll: Since replying to yours of the 31st, I have been over the various documents you were good enough to send me bearing on the subject of railroad regulation. Every time I read literature on this subject the difficulties stand out stronger and my own unfamiliarity becomes more apparent. The three sug- INTEBSTATE AND POEEIGN TBANSPORTATION. 313 gestions outlining the scope of information desired struck me as being very ably and thoroughly prepared but I am constrained to make one modest sug- gestion where I believe the subject has not been as extensively developed as it should be. We all recognize that the war is bound to have an unsettling influence upon rates of mterest all over the world for many years to come. The British Gov- ernment is paying 6 per cent interest for short loans, which a few years ago it had no difficulty in placing at less than 2 per cent. The French Govern- ment is paying between 5 per cent and 6 per cent for short loans, which in times of peace it had no difficulty in placing with bankers at times at less than 1 per cent. These developments have had as yet but slight effect upon the level of interest rates in this country because the influences of war conditions here have been quite the reverse of those which are found abroad. When peace lets down the bars and the financial currents begin again to flow nor- mally, what will be the general effect upon interest rates and how will it be felt in this country? I am inclined to agree with Prof. Fisher who believes apparently that the whole world is more likely to face considerably higher rates, rather than with those who believe that relaxation of business activity will bring about lower rates. As applying to the railroad situation, which is peculiar to itself in that rail- roads can not readjust their rates to meet economic changes, I would suggest a line of inquiry somewhat as follows : First. What will be the general eifeet of the war on interest rates? Second. Will considerable differences in rate levels abroad and in this country influence further sales of American securities now held in Europe ? Third. Will such difference of rates likewise preclude the possibility of sales of railroad securities in foreign markets in future years? Fourth. Will the course of interest rates following the war have any effect upon certain special domestic markets for railroad securities such as trust funds, savings banks, insurance companies, etc.? Fifth. Is the margin of railroad earnings now sufficient to enable railroads to finance by issues of stock when upon the conclusion of the war business slackens, earnings decline, and interest rates advance? Sixth. The same inquiry should be made as to financing by bond issues. Seventh. If rates do advance sharply, what will be the situation of those roads which in past years provided for their requirements by large issues of short-term obligations? Some of these points are already covered in the questions addressed to bankers, etc., and I realize that the above suggestions are no more than the surface of a subject of tremendous importance and uncertainty. I think the safest guess as to economic conditions after the war ends can be described by stating that the United States will be in competition with all belligerent nations in all markets of the world and in all departments of finan- cial and commercial activity. The conditions of production here will be based at first upon the highest wages ever paid in this country, nominal taxes as com- pared with Europe, and much lower interest rates at first than will prevail abroad, whereas the belligerent nations will have very cheap labor, a tremen- dous burden of taxation, and at first considerably higher rates of interest than ours. If there is one thing which experience demonstrates in this country it is that wages readjust more slowly than any other item in the cost of production. Taxes are fixed and can not be readjusted. The first readjustment and always the promptest to take effect is the value of credit— that is, interest rates. In presenting the case of the railroads, It will be Impossible to avoid dealing with a good many controversial features of the railroad situation. Here is one subject of vital importance to the railroads which can be developed to great advantage without inviting the antagonism of stockholders, wage earners, or shippers. It has nothing to do with the character of the regulation which should be applied to railroads, but It has a great deal to do with the reasonableness of methods applied In regulating their affairs. You asked me for suggestions, and these are the only things which occur to me that do not seem to be very fully developed by the documents sent me. I hope your hearings at Washington meet with the great success which they deserve. With warmest regards, Very sincerely, yours. 314 INTERSTATE AND FOREIGN TRANSPORTATION. The Chairman. Have you given the signature ? Mr. Thom. Benjamin Strong. Mr. Sims I failed to state, but, necessarily, it should be a part of my statement, that in case the Government, should guarantee a minimum dividend on stocks and a minimum interest on bond issues, any railroad company making application for such a guaranty would have to provide that in case there was a loss to the Government, the loss should be a first lien on the properties of the company, so that the Government would not ultimately lose anything. I intended to state that as one of the conditions upon which Government guaranty should be obtained. Mr. Thom. You can readily see that if every amount — every cent that is paid to a stockholder in current revenue becomes a fixed charge ahead of his rights thereafter, it will be a very serious ques- tion with him as to how far he is undermining his ultimate security. Mr. Sims. I am not presupposing at all that the application should be compulsory, but that when such railroad companies as might think it would be of economic advantage to them should make this appli- cation for a guaranty. Mr. Thom. Yes. Mr. Sims. They could also make application to' a Government agency authorized to approve the issues of stocks, without any guar- anty condition going with it. You will remember, perhaps, that when we had, this question up before the Committee on Interstate and Foreign Commerce of the House — I mean the question of regu- lating railroad securities by approval of the Interstate Commerce Commission — making it conditional upon their approval — that some very learned gentlemen among others one of the members of the Interstate Commerce Commission, Mr. Myer, who was a member of the Hadley commission, presented the view that public sentiment would regard the indorsement or approval of a bond issue or an issue of stock by a common carrier as a pledge upon the part of the Government of the United States that it would not deny such a rate to that railroad in the future as would enable it to provide for, the payment of reasonable dividends on these securities which it author- ized to be issued ; and also to be based upon the condition that it would not deprive the railroad of opportunity to carry out any existing obligation by way of paying interest on outstanding securi- ties — reasonable dividends upoii its outstanding issues; in other Avords, it Would be in the nature of a moral obligation that the Gov- ernment would not afterwards reduce the rates so that the railroad company getting the approval of the Government for its issue, which it would have to have under the proposed law, would not be able to pay this authorized rate of interest or dividend on stock issue; which would make the Government'practically a guarantor. I have stated it just from memory, and I am not trying to state accurately the views of Mr. Meyer and others who expressed the same views, but that is a thought M'hich they suggested with regard to what would take place in public sentimnet. Now, if the Government of the United States is going to be hampered in the reg-ulation of freight rates by the approval of out: standing securities it would hamper itself in the future, so far as that is concerned, to give anything like substantial rate regulation, at least on the railroads the securities of which it had approved, and INTERSTATE AND FOREIGN TEANSPOETATION. 315 not only to the extent of those approved, but as to all outstanding prior securities, which, of course, is a condition that ought not to be invited and ought not to be encouraged, at least it did not strike me that way. I did not believe it was a legal obligation myself, but these gentlemen regarded it in the nature of a moral guaranty of profitable returns, and that is one of the reasons that led me to think about a specific absolute guaranty of a sufficient income on the railroads' properties, by making it a preferred liability over other outstainding obligations of the railroad company. You have men- tioned a difficulty that we have got to meet; that is, that present conditions are impossible of continuance in the successful develop- ment of the country. It seems to me, Mr. Thorn, that the question is not whether we want or do not want Government ownership ; the question is what shall we do, consistent with the demands of the country, that will prevent the necessity of Government ownership? Now, between absolute Government ownership and present condi- tions, the thought occurred to me of a cooperative affair, by reason of having the Government to approve additional security issues and to guarantee a minimum income upon those issues, leaving the prop- erty or the owners of the property the right to pay more than that guaranteed dividend, if the Government, through its proper au- thorities, approved, and giving the Government the power by way of Government directors to decide whether or not this railroad prop- erty, after getting this guaranty, should do this, that, or the other thing. In other words, as a cooperation of a valid and material kind. Now, I do not laiow myself whether the public would take hold of this at all or not ; I do not know what the public is going to approve, but I think we are all agreed that present conditions will not develop the country. Mr. Thom. Yes; I think we are. Mr. Sims. And none of us knows whether the plans that the rail- road men have proposed will do it or not, and we do not know whether Government ownership would fully meet all the require- ments of the situation or not ; but we are up against a situation where we must do something. Mr. Thom. Undoubtedly. Mr. Sims. Now, you made a very interesting argument along the, theory that the proper development of our railways was a necessary step in the national defense. Is this country to depend for the proper development of its national defense upon the money markets for private securities, competing with the demands of all the world for a number of years to come? The letter which you have just read points out what will probably be the case ; that attractive invest- ments that have not heretofore flooded our markets will flood them. Now, is the national defense of this country to depend upon the ability of privately owned properties to float their securities in com- petition with the fierce demands made by these abnormal conditions throughout the country and throughout the world, perhaps for an unknown number of years? Mr. Thom. Now, Judge, we will both admit, I imagine, that it is better, from the standpoint of national defense, to have the National Government establish the standard of efficiency of the railroads, rather than that they should be in a position to be pulled down by 48 316 INTERSTATTE AND FOREIGN TRANSPORTATION. States not charged with the duty, of national defense — at least that one thing we must agree on — that if there is this duty of national defense (and we all agree that that does exist, and that it does exist in the interest of the States) , then that the standard of efficiency and capacity of these carriers must be fixed by the National Government. The difference between your question and any answer I might make is not that, because that is conceded by your question, but it relates to whether or not, after putting upon the Government the duty of estab- lishing this efficient standard that can be done through private owner- ship at all, or must be done through Government ownership. Now, my belief is that with the proper system of encouragement to the private owners and assurance to the public of a sympathetic attitude on the part of the Government that this burden can still be borne by the private owner. I may be mistaken about that; I may be taking counsel entirely of my hopes, but at least the sugges- tion you make is most important. It is entitled to the greatest con- sideration; but reverting back to what you have just said in respect to the history of the hearings before the Committee on Interstate and Foreign Commerce of the House on the subject, I was not encouraged to hope by what transpired there, or what transpired in the Senate committee, for a Government guaranty. I was aware of the general views which are described as having been presented to your committee, but when I commenced to read the bill which you reported out, and which the Senate had under consideration and reported out, it had in it a provision saying that nothing therein contained should be construed as any guaranty on the part of the , Government in any of these matters. Now, that was your answer, and that did not encourage me to expect a Government guaranty. Mr. Sims. Well, that was an amendment to a bill I introduced,, which had nothing on that subject in it Mr. Thom. I know you did, and I was very much interested in it. Mr. Sims. That very proposition was put up to these distinguished gentlemen before our committee, that if the authorized stock issue on its face should say that the Government should not be responsible, they then said that public sentiment and the moral aspect of the case with the public would be such as to practically force the commission to allow rates sufficient for the company that had issued these Government-approved stocks, to pay a reasonable dividend or inter- est on the stock, regardless of whether that was a. part of the law or not; in other words, that the public would afterwards consider it as no part of the law and not be bound by it. Mr. Thom. Now, as to my own conception of that, I never enter- tained the idea that a mere governmental approval of a particular issue of stock involves any guaranty on the part of the Government at all. Mr. Sims. I . am like you. I did not take that view of it, but the Hadley commission did take the view that we should not go further in that direction in connection with stock issues. Getting down to the point mentioned, the national defense,, national defense is not a matter of choice ; it is a matter of absolute necessity. Who would think of having our fortifications along the seacoast owned and operated by private interests that depended INTERSTATE AND FOREIGN TRANSPORTATION. 317 upon their ability to get enough money to make sufficient fortifica- tions, in the competitive money markets of the world? Mr. Thom. Who would think of having their fortifications not con- trolled by the United States, but controlled by. the States in which, they were located ? Mr. Sims. Well, I am not suggesting anything of that sort. I am not responsible for that. Mr. Tho]^. But I want to get the two ideas together. Mr. Sims. I understand that and am not antagonizing it, but that which ought to be done should not be left to speculative uncertainties. When it comes to whether a man can make money- out of private in- vestments, the Government can afford to let him take his risk, but if this Nation is to be defended, and a proper railroad system is a part of it — a part of the national defense — I can not see how the Government can any more afford to neglect its duty in that respect than in the building of forts, arsenals, etc. Mr. Thom. That is one of the most important suggestions, and the oilly question is, if the Government can fix such an efficient standard of railroading in times of peace that it can readily be converted into a useful instrument in time of war, that is the problem for you gentlemen to determine. Mr. Sims. The ability of the railroad companies to make such fur- ther additions to their equipment and such further additional new construction as may be required depends entirely upon the income they get out of investments, and the income depends entirely upon' what they may charge the public for the services they may render. The theory of private property, as I get it, is this, that it is not a public utility ; that every man has a right, lawfully, to make as much out of his private investment as he can. If a merchant has a capital of $10,000 and can make $10,000 profit on his capital in competition with other merchants, he is rather commended for it, provided it is in an open, high-minded way in competition with other merchants without any advantage. Therefore, the theory of private enterprise is that the private owner should not be unduly hampered; that he should be encouraged by having an open field. On the other hand, public utilities, such as the life of a nation or city or county depends on, brings us to a situation where it is not a question of how much money the owners of these utilities can make out of them, but how much service the public can get out of the utility with the least expenditure. Is not that practically the dividing line between them ? Mr. Thom. I am afraid you have invited a deluge. I am afraid you will have to wait a little while. Mr. Sims. I will finish my question. The question which I wanted to follow is this; If the development of the railroads in the future depends upon maldng the investments in railroads as desirable to the private investor as any other private enterprise, how can we know what the future earnings of the railroads will be, what future ex- penses will be, and how is it possible for them to get money in such volume as would enable them to make the necessary improvements, and at the same time give the service to the public at the least possible charge for rendering the service, in competition with the entire field of private enterprise^— the entire field of private, unrestricted, un- regulated investment? 318 INTERSTATE AND FOREIGN TEANSPORTATION. Mr. Thom. I beg your pardon, Judge, I did not quite catch your question. Mr. Sims. I will- repeat it. Mr. Thom. No ; let the stenographer read it. (The stenographer thereupon repeated the question asked by Mr. Sims.) Mr. Thom. I believe you have, got to place safety in investment, instead of hope in investment, when you come to railroads. Of course, there are two great classes of investing public. One is the class that asks for safe investments, and that class accepts a lower return in order to obtain safety. The other class of the investing public is the class that is willing to accept risk in order to obtain higher returns. Now, the railroads of this country were built by the second of those classes, by the class that was willing to accept the risks in the hope of large returns. The time has come when the large returns can not be hoped for and your whole system of regulation has got to be to give to the conservative class of investors, the one who wants safety, such at- tractions of safety as will bring their money into this industry. I believe it is possible for you to do that. I believe that with a gov- ernmental attitude of support for all the legitimate interests of these carriers that you will so far make an appeal to the investing public, allowing them safety, that you will get such money as you need. At least, I think it worthy of the trial before you go into this tremen- dous revolution of taking over these properties by the Government and supporting them, perhaps, from general taxation, because Gov- ernment ownership will not be as efficient in making net returns as private ownership, and putting a strain upon your system of Gov- ernment which may make it an absolutism instead of a democracy. Now, I can not give you any assurance — nor can any person — look- ing into the future, as to what will happen in an issue as great as this. Men may speculate about it and have differing views, but we know something now is happening to the public. We know some- thing is happening now in the way of absolutely menacing the com- mercial opportunities of the public. They are not properly safe- guarded in the matter of transportation. Now, we come together — I am not speaking now of you and me, but the common judgment of the American public — we have come together to deliberate on ways and means of meeting that situation. One way is certain to meet that situation, and that is the Government can come and say that it will take these properties over and that it will guarantee to the public their commercial opportunities. Mr. Sims. That is an absolute certainty. Mr. Thom. That is certain. Now, the consequence of that, how- ever, is that many men of ordinary type quail at the thought of what may happen. Some men may be brave enough to jump into an un- known future, without qualm, but I misread the American public if they are ready to do that with the railroads just yet. They may be driven to it, but the propelling forces have not been evolved to bring them to that point. That is what I think. Now, what other thing can we consider? The next thing for us to consider is whether or not there is anything which can be done to make more successful the present system of private ownership, ac- cepting fully the principle of governmental regulation, accepting the INTEESTATE AND FOREIGN TEANSPOBTATION. 319 policy that the Government has a right to protect the public in this essential— now, what can be done to strengthen that? We think that is a fair subject for consideration, a fair subject for effort and a fair subject, if you will say so, for experiment. I do not know what you would call it. It certainly is a fair thing to be tried, because of the tremendous consequences of any other step. We must remem- ber that your action here is not final ; you will stand again vigilant on the lookout for what the public interests will require from time to time. If what you do now is a mere advance, a mere evolution of what you did in 1887, it will be no more final than what you did in 1887, but, in evolving a final poli^r of wisdom for this country!, you will have the benefit of all these efforts to meet the situation, and you will have that before you come to the ultimate decision of ;the enor- mous question of a thing that may and, in the opinion of many of us, will seriously alter our system of government. I think that we are here to discuss merely the question of what is wise to do in the step that all of us admit must be taken. Mr. Sims. Is it wise to undertake to do that which you have not a reasonable probability of being able to do? Mr. Thom. Undoubtedly not. Mr. Sims. Then, the approach of the railroads to do and what the public require they should do depends on their future credit as out- lined by yourself and as admitted by all ? ' Mr. TiioM. Yes, sir. Mr. Sims. Your present position makes this credit depend on things that are hereafter to happen — ^the railroads must have in- creased net earnings, either by reducing expenses or by increasing freight rates, incrieasing the pay they receive, or reducing their operating expenses. Now, Mr. Thorn, is it possible for you or me or anybody to know anything certain as to what the operating expenses of a railroad will be in the next 20 or 30 years? Mr. Thom. It is not possible. We can only guide ourselves in that as we guide ourselves in everything we do, by the best light we hstve and try to draw some lessons from the past. I think that we can form a reasonably good idea, enough to justify an effort to strengthen the present system before abandoning it. Mr. Sims. And your whole object and purpose, then, is to make at least one more experiment to avoid public ownership of the railroads of the country ? Mr. Thom. Well, I do not know whether you would say that is my whole object. Mv view is that would be the wise thing to do. Mr. Sims. That it would be better to do it than not ? Mr. Thom. Yes, sir. Mr. Sims. Mr. Thom, is it possible for you or this Congress, or anybody else, to know what the labor costs of this service is gomg to be 5 years from now or 10 years from now ? Mr. Thom. I have just said it is not possible. We can only form some judgment of it just as we could of any other affair of the future. Mr. Sims. There is only one power in this Government by which all these conditions may be reasonably controlled and that is the sovereignty of the Government itself ? Mr. Thom. By the Congress of the United States. Mr. Sims. Yes ; and depending not upon private agency, but upon public agency. As a matter of principle, Mr. Thom, is there any 320 INTERSTATE AND FOREIGN TRANSPORTATION, difference in the Government requiring a railroad now existing, a private instrumentality, to carry 50 pounds of ordinary freight 150 miles at a certain price, than to require the railroad to carry 50 tons of the same class of freight the same distance ? Mr. Thom. The principle is the same. Mr. Sims. It is said by the Supreme Court, I believe, or at least upon about as good authority as the Supreme Court, that "The power to tax is the power to destroy " ? Mr. Thom. But right here I want to register my 'dissent from the parallel of a charge for a freight service or a passenger service through the power to tax. Mr. Sims. I am not assuming that myself. Mr. Thom. The power to tax is a power of a superior authority to take a toll from those subject to its jurisdiction to carry on a public work. It has no element of being payment for a specific service, whereas the charge of a railroad for carrying a passenger 100 miles, or carrying a ton of freight 100 miles, is simply the power to be rea- sonably paid for the services performed. Mr. Sims. The right to be reasonably paid ? Mr. Thom. Yes; the right to be reasonably paid for the services performed. It is no more a tax on the man who travels 100 miles, or whose ton of freight is carried 100 miles, than my bread man im- poses on me Avhen he comes and leaves his loaf of bread at my house and gets his 10 cents for it. Mr. Sims. I am not controverting one word you say, and I did not contemplate doing so. Mr. Thom. I was not answering you ; I was answering this talk I hear everywhere, that the power to charge a freight or passenger rate is the power to tax. It is a power simply to be paid ; it is a right simply to be paid for a service which is never overpaid. Mr. Sims. What I was leading up to, and the only reason I used that expression, " the power to tax is the power to destroy," is not the power, the unlimited power, of the Government to regulate pri- vate control and ownership of property the power to destroy it com- mercially ? Mr. Thom. If there was not any Constitution. Mr. Sims. Oh, we can not be confiscatory, but when you destroy the earning power of property ha'^'e you not virtually and commer- cially destroyed the property itself ? Mr. Thom. Undoubtedly. Mr. Sims. If the Government has the right to say to a railroad you shall carry freight put up in a certain way of a certain class a certain number of miles for a certain compensation, is not that absolutely uncontrolled exercise of an arbitrary power ? Mr. Thom. No, sir. The Government has no right to say they can do that on any terms that are not reasonable. Any terms imposed that are not reasonable are confiscatory. Mr. Sims. I do not assume that the Government shall say it shall carry this at a loss to itself. Now, then, as to what reasonable profit is, as to what the reasonable per cent which should go to the carriers, that is a question, of course, that is the hardest matter in the world on which to find two experts in agreement. Mr. Thom. Eight there I have a thought in my own mind which I want to get in this record. I think a great many of our difli- INTERSTATE AND FOREIGN TRANSPORTATION. 321 culties have come from the adoption by the- Supreme Court of the United States of an erroneous idea in respect to the fixing of rates. I do not mean that it has adopted that view to which I allude finally or exclusively, because sometimes a case comes which is de- cided one way and sometimes a case comes that is decided another way, and there are two views that they have accepted — two views which are, to my mind, absolutely destructive of each other. One of those views is that the question of confilscation must -be determined by whether or not there is a reasonable return on the value of prop- erty. The other of those views is that the reasonableness of- a rate must be determined by the relation that the rate bears to the service. Now, I believe the latter one is the correct view, and I believe if we had had it started at that point that we never would have had any of this trouble. I believe, in other words, it is tlie rate paid on a specific service which the railroad gets for that service, and that the public is not interested at all in the question of return, except as it is interested in the question of facilities. Now, this view was first r presented — I can not say first presented, but was very strikingly pre- sented — by Justice Brewer, of the Supreme Court in the case of Cotting V. Kansas City Stock Yards (183 U. S., p. 95). There the question came up of what was a reasonable rate in the quasi public business of the stockyards, and with your permission I will read to you from that case, which will indicate the line of view which I wish to present : Pursuing this ttiought, we add that the States' regulation of his charges — He is now referring to the stockyards' charges — is not to be measured by the aggregate of his profits, determined by the- volume of business, but by the question whether or not any particular charge to an individual dealing with him is, considering the service rendered, an unreasonable exaction. In other words, if he has 1,000 transactions a day and his charges in each are but a reasonable compensation for the benefit received by the parties dealing with him, such charges do not become unrea- sonable because by reason of the multitude the aggregate of his profits is large. The question is not how much he makes out of his volume of business, but whether in each particular transaction the charge is an unreasonable ex- action for the service rendered. He has a right to do business ; he has a right to charge for each separate service that which is reasonable compensation therefor, and the legislature may not deny him such reasonable compensation and may not interfere simply because out of the multitude of his transactions the amount of his profits is large. Such was the rule of the common law even in respect to those engaged in the quasi public service independent of legislative action. In that action to recover for an excessive charge prior to all legislative action, whoever knew of an inquiry as to the amount of the total profits of the party making the charge? Was not the inquiry always limited to the particular charge, and whether that claarge was an unreasonable exaction for the services rendered? Mr. Sims. That is the view you indorse, as I understand you? Mr. Thom. That view I indorse. Now, I want to say here we are met with the necessity, under some decision, of trying to find out whether the rates are reasonable by reference to the value of the property, whether or not the return-r-in other words, the effort is made to first determine the value of the property, and from that to determine the earning capacity of the property. Is there any other property on earth where that is done? You have a ware- house on the corner of Twelfth and F Streets in the city of Wash- ington, and you have another one over liere in Anacostia, and they 322 INTERSTATE AND FOREIGN TRANSPORTATION. cost exactly the same. Now, the one on F Streets rents for five times what the one over in Anacostia does. Do you find the value of that F Street house by the cost of it? Do you find the value of the unrentable one in Aiiacostia by the cost of it? What you do universally in trying to find the value of a property used for com- mercial purposes is to first find the income from it and then to ascertain the value from that. If you want to buy it you can. go to your real estate man, and you would ask him, first, "What income can I expect from this prop^ erty," and you would give him not the amount that the property cost, but you would give him what you considered to be the fair valuation of the income you are going to get out of it. Now, if that is so, how counter to everything that is recognized as a commercial and economic law are such transactions as we are undergoing, when we are trying to find the value of the railroad and then f roni that to deduce its earning capacity. Mr. Sims. I did not know my question had involved any such consideration. Mr. Thom. I ask you to give me an opportunity at this point to get this idea into the record, Judge. I have got a broader view than the mere question, and if it is not unpleasant to you, I would like to indulge in it. Mr. Sims. Not at all to me ; glad to hear it. Mr. Thom. Now, we have two railroads, one that runs from the city of New York, through Philadelphia to Pittsburgh ; another one built along the crest of the Eocky Mountains, or is built out from the keys of Florida, toward Cuba, over the water. The cost of those two roads may be exactly the same, or it may be more in the Rocky Mountains or over the water toward Cuba — may be vastly more — but the value of them is entirely different. The value depends upon the neighborhood business; the location of the public for handling business; and when we put ourselves upon the plane of reversiug that economic law, we introduce the very situation which has given us all of this trouble to-day. We are first trying to find values and then to restrict earnings to them. Instead of that, the duty of government is completely done when you safeguard every transaction that one of the public has with the carrier, and see that that is done at a reasonable rate; and if he has got a million of them instead of a hundred of them every day that is the advantage that he has, and you have exhausted the whole power of government when you safeguard each individual transaction. Now, that has been held — there is one line of decisions of the Supreme Court of the United States which goes on that view. Take the case in One hundred and forty-eighth United States, where the Government wanted to acquire a dam in the Monongahela Eiver, and the Congress of the United States said that given the power of condemnation, you must not take into consideration the franchise clause; take the physical property. You must not take any franchise. That case went to the Supreme Court of the United States, and there the Supreme Court of the United States said, " This is not brick — the brick and mortar of this dam is not the value these people have." They have go.t a right to use that — got a right to make money out of it — and we have got to find the value of the dam — lock, INTEBSTATE AND FOREIGN TBANSPORTATION. 323 I should say. I said dam ; I meant the lock. We have got to find the value of that lock, not by reference to what it cost but by reference to what it can legitimaely earn. So there is one line of decisions -going that way. Now, here comes another one which says that the proper standard of judging whether or not a particular rate is or is not confiscatory, is return on the whole property. Now, when we do that, when we accept that second one, we get to the condition where we limit the reasonable and legitimate earning capacity of a road, on transactions each one of which are reasonable. I consider that when I own a railroad — which I wish I did, sometimes; then, again,nvhen I think of the future I wish I did not. If I owned a railroad my property right justifies me in making out of that railroad every bit of profit I can make if every one of my transactions is at a reasonable rate. If that were adopted as a prin- ciple, then we would not have this trouble here, because all we would have to do would be to let the railroads fix a reasonable rate, and let them earn what they could without oppression to the public in any special transaction, and there would not be this limitation you speak of upon them. Now, the difficulty in that is to fix what is each in- dividual's rate. But the United States Supreme Court, in the North Dakota Coal case and in the Western Passenger case, have undertaken to say that that is the proper standard. Now, the difficulty of estab- lishment is the difficulty of regulation. It does not affect the sub- stantial constitutional rights, and at the proper time I have got a little article on that subject that I may ask to be put in the record, hut I want to say now that I believe that that is the fundamental difficulty in our railroad situation, that we have adopted a false prin- ciple of determining what these railroads may legitimately do. Mr. Sims. Does any of the legislation you propose cover that par- ticular phase of it ? Mr. Thom. It does not, because I consider myself " a voice crying in the wilderne^ " on that subject. Mr. Sims. Are the decisions you refer to by the Supreme Court of the United States the latest decisions on the subject? They are the latest decisions of the court on this question? Mr. Thom. There are more, of course, I have not referred to. Mr. Sims. The one that you did refer to. Mr. Thom. They are very late. Then, there is also a very late one, and that is the Minnesota Rate Case, which takes the other view. .Mr. Sims. It is the law, as interpreted by the Supreme Court at this time, that a rate is not confiscatory if, from all the earnings of the railroad, a reasonable profit is made upon the fair value of the property ? Mr. Thom. That is a view which unfortunately they have taken. They are very wise men. You see that that just simply means this^ that if five rates were too high and five rates were too low, and the average is right, that that means simply that when the rates that are too low are attacked, the man can reply, " You have got another one here that is too high, and your average is right, and you can put the burden which you have on me on some other man." Mr. Sims. Now, upon your theory, of what ought to be the law, or what ought to be the decision of the Supreme Court, but what is not, is that a public-service corporation, like a railroad company, should 324 INTERSTATE AND POBEIGN TRANSPOETATION. have the same right an individual does to have a profit on each separate unit of service performed? Mr. Thom. I do not think it is a question of profit on each one. I think it is a question of a reasonable rate on each one. It may be- a profit or may not. I may so extravagantly operate the railroad that I get no profit on anything. I may so extravagantly build it that I get no profit on anything. I must be content, however, when I go into that business to get a reasonable return for each charge by com- parison with other charges. Mr. Sims. For each service? Mr. Thom. For each service, by comparison with other services, .and if I make no money out of it that is my fault and my misfor- tune. If I do make money out of a reasonable charge, it is to the .advantage of my business to which I am entitled. Mr. Sims. But your conclusion necessarily involves in the defini- tion of a reasonable charge something more than money out of pocket, does it not, in the performance of service ? Mr. Thom. I do not think it does. I do not think you have got a right to simply say that I can put up my cost by bad management •and have a profit on that transaction. I think you have got a right to do this : I come to you, Judge, and I employ you as a lawyer and you go into court for me and attend to my case, and we do not say a word about what I shall pay you. Then when you get through you present me a bill. Now, your bill has got to be what you and I call— what lawyers call a quantum meruit. It has got to be a reasonable ■charge for that service. Now, nobody on earth can say that there is any absolute test of what that is, but the common judgment does fix something that is reasonable for an unagreed service. And this court goes on to state how those things are to be determined ; Justice Brewer talks about how that is to be determined. Mr. Sims. I do not mean that you will claim you are entitled to a profit on a service that you have wastefuUy and extravagantly per- formed. I mean, of course, that the service has been done as economi- ■cally as a good service could be rendered under the circumstances, but your theory is and your holding is that when that is complied with, in substance, that then a public-service corporation is entitled to have a return — in order to be a reasonable return, something in addition to the cost of performing the service? Mr. Thom. Judge, it is impossible to determine what the cost is of any particular service. You can not determine that. You have got to approach the question of a reasonable charge from a different angle. You have got to judge a great many economic and commer- cial conditions, and determine what is reasonable under the circum- stances. Mr. Sims. In other words, it is a complex problem. Mr. Thom. It is very. There is my difficulty. If I could point a way that was certain and simple to determine what was a reasonable charge for each service, I would have no difficulty in getting it ac- cepted, but the very difficulty of doing that, which I claim does not change the constitutional principle — the very difficulty of doing that has driven the mind of the public into the other conclusion of put- ting upon railroad property a limitation in respect to its value, that absolutely does not apply to any other class of property in the ■country. You first in railroad property determine your value, and INTERSTATE AKD FOREIGN TRANSPORTATION. 325 from that you determine the reasonablene^ of your revenue ; where- as, in every other class of business you first say how much this prop- erty can legitimately earn and from that determine what the value of it is. Mr. Sims. We are getting very far afield on this rate-making prob- lem, and I think we will never get to any end. Mr. TnoM. We are, indeed. The Chairman. I would suggest, Mr.' Thom, that while your dis- cussion of this subject is very interesting, it is likely to take us far afield. Mr. Thom. It is. Mr. Sims. But what is germane, as I understand, is what can the railroads do in the future that the public can endure and prosper; that commerce may expand and that the railroads may make such additional improvements as is necessary, in order for them to meet the expanding requirements of commerce, when your whole depend- ence, for credit to enable you to perform this service depends upon a competitive field for credit securities, worldwide, and depending upon the conditions that this Congress can not prescribe. Mr. Thom. 'Now, you have got in your system of regulation to introduce the attraction that will enable the railroads to go into that competitive field and succeed. Mr. Sims. Then, that involves increased earnings to the railroads over present conditions? Mr. Thom. It involves an assurance of increased earnings. Mr. Sims. An assurance of increased earnings. Mr. Thom. Now, of course, the reason I am guarded in that Avay is because at the present time we are in what we think an abnormal condition. We have got a standard of earnings created by a war condition, but in a little while that will be all gone. Now, what are we to do to meet that changed situation? My judgment is we have got to have a system of regulation that will be sensitive to those changed conditions and will respond as to those changed conditions. Mr. Sims. You admit that rate making is at present under the law, as decided by the Supreme Court, a very complex and unsatisfactory condition ? Mr. Thom. I do. Mr. Sims. And it being that way, how is it possible for you or this committee to know what the rates made in the future will bring, in the way of net returns to the railroads? Mr. Thom. I do not think it necessary; the committee can not know it, and I do not think this committee is called to pass on it. The committee's entire duty is performed when it perfects a system of administration which it creates that will deal in the most sensible and fair way with that problem. Now, my whole plea is for perfec- tion of a method. I do not ask you to determine the question here of how much revenue these roads are entitled to, or increase, or to do anything of that sort. My plea to you is for perfecting a method of dealiiig with that situation as it arises. Mr, Sims. You say there, Mr. Thom— it may be that I have over- looked it or I am not capable of discerning it— the propositions you have made do not seem to me to eliminate the wastefulness of com- petition at competitive points of the present systems of the rail- roads. Now, you speak in high terms, no doubt correctly, about 326 INTERSTATE AND FOREIGN TEANSPOBTATION. the condition of the country served by the consolidation of the 149 railroads now composing the Pennsylvania system; also the con- solidation of numerous roads now composing the Sou'them system, and that these systems are built up in that way all over the country but as systems they have competitive points and a competitive service to render in which it seems to me that the competitive methods adopted are absolutely wasteful. Now, your propositions which you put forth, if I have understood you correctly, do not provide for the elimination of wasteful com- petition practiced between the several systems, and when you get your regions established, which extra members of the commission are to look over, if 149 railroads combined in 1 better serve the country they cover than a lesser combination, and if your national incorpora- tion is intended to force all of these railroads to take out national charters and then . make your working arrangements or combina- tions afterwards, for the life of me I can not see, if a railroad com- pany owning and operating 149 railroads with great benefit to the country and to the stockholders — I can not see why that same iden- tical railroad should not own every railroad in the United States and should not operate them all with reference to the public interest, and not simply to a section served by it. Mr. Thom. Now, Judge, the difficulty about that is that you are up against the fact that you do not. How are they to acquire all these other railroads ? You have to deal with the situation as it is. You are trying to improve that situation as it is by making improve- ments. Now, you complain of certain private practices that are wasteful. Don't you imagine that these responsible railroad men, who find their limitations of initiative narrowed by having no con- trol to speak of over their revenues and expenses, are giving this matter great thought ? These men are studying every day how they can eliminate competition and other wastes. If you do not believe that they are doing so, I should like for you to come and sit in one of their offices and see how earnestly they are giving attention to that very matter. Mr. Sims. I have no doubt of it, but that does not remove the fact that now stares us in the face, that here we have two railroads in sight of each other all the way, paralleling each other, from here to the city of Philadelphia, and from there to the city of New York, doing an immense business with double terminals, double bridges, double rights of way, and double expenses all along. Is not that an economic folly, to continue that kind of thing through all time to come? ■Mr. Thom. Let us see. In the first place, let me call attention to the fact that that is a situation that now exists, and we have to deal with it, whether it is good or bad. Now, as to the future, our pro- posal is that there shall not be any more railroad construction of a mere competitive nature, unless approved by the Interstate Com- merce Commission. There has to be a certificate of public neces- sity for the construction of railroads under the view we hope to present ; that before a railroad can be built, that must be done. Now, in Germany, they have adopted an entirely different theory from America. Here, in America, we have had the idea, up to now, that the wise policy is to get just as many competitive railroads as we can, and there are prohibitions in some constitutions to, prevent INTEESTATE AND P.OEEIGN TBANSPOETATION". 327 the refusal of charters to competitive railroads, or something of that sort.. Now, in Germany, they have a governmental principle that will not let a railroad be paralleled within a certain distance, because they think it better to have one good railroad than two poor ones, dividing the business. A Voice, But they own the railroads. Mr. Thom. Yes; they own the railroads. That may be a wise policy, but we have grown up in a haphazard manner in this country with respect to our railroads. "We can not undo what has been done. You and I may think we have an unnecessary railroad, but it is there. What are we to do with that? We have to deal with that as an existing fact. We can safeguard the future, but we can not change the past without most hurtful consequences. Now, you speak of these two railroads. I am not acquainted with those situations any more than you are, but I will say this — ^this oc- curs to me — ^that there is the Baltimore & Ohio that serves a vastly different public from the Pennsylvania Eailroad. Mr. Sims. Between here and Philadelphia and New York ? Mr. Thom. No ; at other points. Mr. Sims. That is ,what I am talking about. Mr. Thom. Is it to the interest of the vast public that the Baltimore & Ohio serves and the Pennsylvania does not serve to get directly into the markets of Philadelphia and New York ; are we justified in considering merely the distance between Washington and New York in considering this problem or must we go out to the whole section of Peimsylvania that the Baltimore & Ohio serves to determine whether that vast public has an interest in getting directly over the same railroad into those markets? Now, there may be a difference of opinion about that, but those are the things that the men who built the road determined in favor of when they built the roads, and my proposition is that you and I can not go and tear up those roads. They have got to continue. We have got to deal with a situation, good or bad, such as has been created. Mr. Sims. Is it not economically sound to double-track a road rather than build two separate railroads, having separate terminals and separate bridges, etc. ? Mr. Thom. If a double track will serve the same community. Mr. Sims. I mean the same community. Mr. Thom. Undoubtedly. Mr. Sims. We want to guard against such things in the future. Mr. Thom. Yes, sir ; and the proposition we have presented to you is one we would present as a means of carrying out that very idea. In other words, when there is a possibility, under the Federal law of incorporation, to incorporate a new railroad there must be, in our judgment, an application made to the Interstate Commerce Com- mission for a certificate of necessity — ^public necessity — and the In- terstate Commerce Commission must pass upon that question favor- ably, before a charter can be issued. Mr. Sims. Now, then, Mr. Thom, seriously, do you think the Amer- ican public will ever agree to vest in the hands of a single board the question of whether they shall have or shall not have one railroad ■ or two railroads ? Mr. Thom. But that must be determined by somebody. 70342— PT 5—16 6 528 INTERSTATE AND FOBEIGN TEANSPOKTAIIOM". Mr. Sims. Yes, sir ; that is a practical question. Mr. Thom. Who will determine it ? We supposed the creature of Congress would determine it. Mr. Sims. Would the great, imperial State of Texas ever agree to a situation where her domain, which is larger than Germany, should depend on a board sitting in Washington as to whether, a railroad should or should not be built there ? Mr. Thom. Why should it not? Does not that board represent Texas? Is there any doubt that if there is any semblance of neces- sity that the commission will be more responsive to the sentiment in Texas than to the railroads ? Mr. Sims. I am supposing this to be a competitive railroad, to be privately owned. Mr. Thom. I am, too. But ought not anybody, no matter where he is, feel perfectly safe in filing with the Interstate Commerce Com- mission, the independent body that represents every interest in this Union, that it will not prevent the building of a railroad except it is a mere frivolous pretext to break down some other? Mr. Sims. I assume that it would be very safe to rely on. Mr. Thom. And that the Empire State of Texas would have just as many railroads as they could get anybody to build, where there was a reasonable excuse for the building of them. Mr. Sims. The State of Texas has the right, as a State, to build railroads there itself, in Texas. Mr. Thom. Undoubtedly. They could build their own railroads if they wanted to. Mr. Sims. But you do admit, under private ownership, there has been an unnecessary and wasteful expenditure of capital, by building excessive railroad facilities unnecessarily, and more than was needed in some sections of the country, to the deprivation of other sections of the country, not having what they actually do need, because the investors have to make an earning on the investments as they are? Mr. Thom. You say I admit that. I do not know that I have ad^ mitted that. I do not think my study of the situation — this particu- lar situation — would justify me in admitting that. I have admitted the possibility of that. I do not know myself where there is an ex- cessive railroad built in this country. Mr. Sims. You do not think we need two from here to Baltimore? Mr. -Thom. I think so. Mr. Sims. What is the reason the same railroad could not have six or eight tracks or a dozen and still be cheaper than two separately- operated entities? Mr. Thom. We have considered that question. Here is a situation of this sort. There is the Baltimore & Ohio Eailroad, running from the city of Baltimore to the West. It ran long before the Pennsyl- vania Eailroad came through Baltimore. Now, was it not to the pub- lic interest that the Pennsylvania system should also come to Wash- ington ? Mr. Sims. Oh, as a matter of course, I am not questioning the ad- visabilitv of doing what was then done. Mr. Ti-ioat. It looks like the public was benefited. Mr. SiJis. But the public is compelled to stand a rate for all time, . to cover services which would not cost so high if this railroad build- ing had been done economically. INTEESTATE AND FOKEIGN TRANSPORTATION. 329 Mr. Thom. Do you know, Judge, that it costs less to come from Baltimore to here than it does to take a taxicab from here uptown? I do not think Mr. Sims. That is so, but I do not think that makes any difference. Mr. Thom. I do not think the cost is excessive. Mr. Sims. The public has a right to have that service performed at the lowest cost of performing the service. Now, the only reason why private companies are tolerated at all, as I understand it, to perform a governmental function, is that they will perform it and make a profit, and upon the whole give the service cheaper than the Government would give it if it was performing the service itself — as cheap and as efficient — some contend much more efficients But is not that an implied necessary condition or assumption that when a private individual or a corporation does for the public that which it can do for itself, that it' must be done beneficially to the public, and at the same time, if they can make an earning or profit, well and good ? Mr. Thom. They must do it on terms beneficial to the public, un- doubtedly, but you must take the whole field, as to what is beneficial to the public, and that is not determined by simply the scale of rates. Mr. Sims. Now, Mr. Thom, is it not sound to say that unless pri- vate ownership, as a principle and as a policy, can serve the whole country as efficiently and as cheaply as the country can serve itself through its own facilities, that it is not entitled to perform that service ? Mr. Thom. No, sir ; I think there may be other considerations that may control the matter of whether it should be private or govern- mental ownership. Mr. Sims. Then you do not think that the Government has the right to supply its own facilities for its own purposes ; for the public interest, to serve the public interest in any such way as will give the pubhc the greatest amount of service at the lowest amount of ex- penditure ? Mr. Thom. I do believe in its right, but the question is as to the ■wisdom of exercising it. I admit it has a perfect right to do it. Mr. Sims. Are. we going to assume that the Government of the United States is not as able and as willing to do for its people what the Government of any other country has done or is doing for its people? Mr. Thom. I do not know, Judge, what you are going to assume on that subject. I think there is a vast difference, speakmg per- sonally, as to what we ought to assume in regard to one form of gov- ernment and what we ought to assume in regard to another form of government. I think that there are certain forms of government where the principle of liberty is made dominant over the theory of efficiency. I think there are other forms of government where the principle of efficiencv is made dominant over the principle of indi- vidual liberty. What one of those governments may do m a great matter affecting an efficient form of government, and what the other form of government may do may rest upon very different principles, and the success of it must be measured by the different governmental systems which authorize it. ... Mr. Sims. Do you think that the individual liberty of any citizen has ever been affected by the Government function of performing 330 INTERSTATE AND FOREIGN TRANSPORTATION. the entire transportation service carried on by the Post Office Depart ment? Mr. Thom. I think, Judge, that, of course, there has not been, bi; when you extend that principle to the ownership of every railroa in the country, and increase your army of governmental employee to the extent you will, and put upon the officers of the Governmer the responsibility for this transportation system, that you will b dealing with a very different problem than any which any democrac ever dealt with before. Now, as I have said to you, time and suffi cient expei^iments may prove that that is the only way we have goi speaking for myself alone — ^I do not think the time has come for u to accept that as a final proposition. I believe that some other wa" of dealing with this immense problem exists than the way suggestei by your question. Mr. Sims. But the some other way would naturally include tha which is to the best interests of the country, taken as a whole? Mr. Thom. Undoubtedly. Mr. Sims. And should develop every part of the country instead o sections only ? Mr. Thom. Undoubtedly. Mr. Sims. Now, if private enterprise, through the earnings of tb railroads and under the complex control that now exists, can no secure the necessary funds with which to perform this service am to give to the people of this country that which their own Govern ment, you admit, can give, are we going to be hampered foreve: and never have a complete and perfect transportation system in thii country, in order to leave the whole matter subject to the control o: private interests, private employees or private employers Mr. Thom. You ought not. The minute that private ownershij breaks down the Government ought to step in. Mr. Sims. Has it not broken down ? Mr. Thom. I do not think it has finally broken down. Mr. Sims. You think it is breaking ? Mr. Thom. I think, unless you improve conditions, it will breal down. Mr. Sims. Now, then, you can not promise us anything more thai the mere further experimenting with private ownership! Mr. Thom. I think, so far as I am concerned, my judgment woulc be we could succeed with proper help from the Government. Mr. Sims. As I understand you, as representing practically all th( railroad properties in the country, they are not ready to sell theii holdings for a fair valuation ? Mr. Thom. We have never discussed that. I did not come to speal for them on that subject. Mr. Sims. I understood you to say that some of the railroad people were in favor of Government ownership. Mr. Thom. Some railroad people take this view Mr. Sims. And that a majority was opposed. Mr. Thom. Some take this view, that with an inability to control their revenues and with the demonstrated inability of controling their expenses, there is nothing left but for them to take some money and have the governmental agencies manage them. Some of them are pessimistic and some are hopeful. The majority are hopeful and expect proper results from improved regulations. INTEESTATE AND FOREIGN TRANSPORTATION. 331 Mr. Sims. And so they are not willing to sell their property for a fair valuation? Mr. Thom. I do not know that I can say that. If you come around and offer a fair value I expect you will find more willing to give.it to you than you think. But I do not know ; you are asking me to dis- cuss a question now which I have not discussed with them. You, of course, realize that if I have not discussed the particular phase of the matter that you are now alluding to that I can not speak as to their views, but I say generally that I have discussed it enough to know that some of them feel differently about public ownership than others. Some feel very pessimistic ; others feel less so. Mr. Sims. But in view of the fact that your argument, and I am not contending that your argument is not a correct one, that the po- sition taken by these railroad companies whom you represent is that without the legislation proposed, or something that will do equally as well, that Government ownership is inevitable. Now, then, it is strange to me that these companies do not contemplate- that which they think may arise at a reasonably early day, because they do not kaow, I do not know, and you do not know what will be the result of passing every law that you are asking for. If every one was passed just as you have suggested them, you do not know, and I do not know, and nobody else knows what the effect on the railroads will be for the future, as to whether or not investments in those roads will bfe' so attrac- tive as to compete with all other markets for capital. Therefore, not knowing, and you can not possibly know that it will be a success, your next step must come — Government ownership. Why should not these lines, these owners of these properties, contemplate that contingency ? Mr. Thom. I have not said they did not contemplate it. I say on that subject that I am not entitled to express a view. Mr. Sims. You mean you are not authorized to express a view? ■ Mr. Thom. Not only am I not authorized to express a view, but I am not acquainted with the views of these managers ; but they are in this attitude of mind : Here they have become committed to vast expenditures in the way of furnishing facilities to the public. They have assumed vast responsibilities in respect to the public service. They believe that the time has come for their hands to be upheld by sympathetic and helpful public regulations in order that they may adequately perform their duties; and they expect, under perfect regulations, to be able to do that. Now, when the time comes that all these apprehensions that you are talking about are realized, then your power remains as it is now in respect to any further change. Mr. Sims. But if the Government is going to undertake the ex- periment of Government ownership, why defer the evil day, if it should be so denominated ? , ' • i Mr. Thom. If you so determine. We do not think the time has come. That is one thing you are to determine. Mr. Sims. Speaking for myself individually and not pretending to bind anybody but myself, t think that with the potential control to the extent that it is lawful and has been and can be exercised hy the several States, with the potential control that has been exercised by the Congress of the United States, that the successful operation of the transportation business of this country is as impossible as 332 INTERSTATE AND POBBIGN TBANSPOETATIOlir. would be the conducting of the post-office business of this country under similar conditions. ^ Mr. Thom You do not think it is possible ? Mr. Sims. Not possible m the sense of being the best that can be done. Mr. Thom. I will agree with you that it is not. Fow we bring before you our best thought as to how to meet that situation. Of course we will be immensely benefited and the public will be im- mensely benefited by any suggestion of a better course. Mr. Sims. You speak of practical things in a practical way and with a" practical view, and I think you are right about it. Now stat- ing it in a practical way, I will give you my own personal judgment. The people settle these things through their power to vote, through the exercise of the elective franchise, and at this time I think it would be as utterly impossible to take from the State railway com- missions the powers that they now exercise, waiving all question as to whether they are beneficially exercised or not, and lodge them in a single Federal body of control — I think it is practically, politi- cally impossible. And with 48 potential regulators of commerce, rate-fixers, and then with the forty-ninth asserting its power over all, and all the issues of credit instruments in the future to depend upon them, I can not see how you expect much better results in. the future than we have had in the past. Believing that it is practically impossible to centralize Federal control, I think that thei second proposition, National incorporation, will be fought to the bitter end by those who do the voting. You perhaps have never been a candidate before the people for office and do not know just how a man feels. It is always very easy to talk about a man having moral courage, but until a man has been tested he does not know what he will do, is my observation. We passed a rural-credit law here in which we adopted 50 per cent of the land value of a piece of land; in other words, if a man wanted' to borrow he must not borrow a sum exceeding 50 per cent of the land value, and not to exceed 20 per cent of the insured improve- ments. . I went out in my district thinking I had a splendid thing to present to the people, and my opponent, who ran against me, said that anything less than 80 per cent of the entire value was an abso- lue failure and a denial of justice to the poor tenant farmers of the country, and enough of them took his view of it to come very nearly defeating your humble servant. Mr. Thom. But they did not? Mr. Sims. They did not do it, but I do not know what the other experiment will do. Mr. Thom. What did you think of that argument, Judge? Mr. Sims. I thought it was not economically sound and would lead to a speculative increase in the values of land and all that sort of thing. I made that argument ; but the man who had $200 in money and wanted to borrow $800 to buy a piece of land costing $1,000 paid no attention to my argument. He was after practical results. Mr. Thom. Is it desirable that the matter of these great facilities, on which the public is dependent, should be made the football of arguments like that ? Mr. Sims. It is not desirable ; but the question, like the one you spoke of is. Is it practical to do it ? INTERSTATE AND POEEIGN TKANSPORTATION. 333 Mr. Thom. Let me see if I understand you. You say it is not possible for the United States Government to act on behalf of all the States? _ Mr. Sims. No ; I do not say that. I say it is practically impos- sible to get the States to consent to this kind of a law. Mr. Thom. To consent that the United States shall act on behalf of all of them, but to say, moreover, unless they do that, we have come to an impossible situation in respect to transportation, and your proposal is Mr. Sims. The inevitable Mr. Thom. Your proposal is for Government ownership ? Mr. Sims. I do not propose it. Mr. Thom. But in your question that is your other suggestion. Now, what will become of these State governments that you allude to when you get Government ownership ? Mr. Sims. They will not exist. Mr. Thom. Therefore there is no difference between your sugges* tion and mine, so far as they are concerned. Mr. Sims. There is a very great deal of difference. Mr. Thom. No, sir; in either event the authority of the State over these transportation facilities will disappear and be merged in the National Government that acts on behalf of all the States. . Mr. Sims. They will be publicly owned and publicly operated, and then they will believe that this operation is performed with refer- ence to equality among the people who receive the service, with pri- vately owned agencies that do not believe it. ' Mr. Thom. Why should there be any greater confidence in that when the Government owns it or when the Government regulates it ? Mr. Sims. Simply because the Government has greater power of control and regulation than such agencies. Mr. Thom. There is only this difference between you and me, the tendency of your questions and the purport of my answers, and that is I am asking that there should be a regulation on the part of the National Government in behalf of all the States, and you are ask- ing that there shall be an ownership of all these properties by the United States in behalf of all the States, and in both events the authority of the local body to deal with these questions will be taken away, only it will be taken away much more under what you advo- cate than under what I advocate. Is not that a fair statement of it ? Mr. Sims. Answering you offhand, it seems to me to be a fact that absolute ownership is more inclusive than regulation by that authority. Mr. Thom. So the difference between you and me is not one of whether or not the States have continued to determine the standards of these agencies of commerce, but you think it ought to be to a greater extent in the hands of the National Government than I think? Mr. Sims. You are admitting, if I understand it, and I do not mean in terms— but that is the tendency of your entire argument — that present conditions can not continue in justice to the public? Mr. Thom. You and I both agree on that. Mr. Sims. We agree on that. Now, then, you present a suggestion which I think is practically impossible. 334 INTERSTATE AND FOREIGN TRANSPORTATION. Mr. Thom. Exactly. You present another one which is a greater denial to the States than I do. Mr. Sims. No ; I do not present a suggestion at all. You, yourself, have suggested that in the absence of th6 success of the solution you propose Government ownership is inevitable. Mr. Thom. And you say not only that, but you judge that what I propose is not worth anything to start with and that we should go to Government ownership now. Mr. Sims. No; I do not say it is not worth anything; I just say I am afraid, and very much afraid. In fact, I do not believe for a moment we can pass the laws you say are necessary to prevent Government ownership. Mr. Thom. You interpret, then, what I say into a failure; you do not go back to a condition which you say is impossible, but you go forward to Government' ownership, where every right of the State disappears. Mr. Sims. Eemember, I am not making this argument-in favor of State commissions; I am simply presenting to you a situation. It is not what we want to do, but what we can do. If it is practically impossible, it may just as well be physically impossible. Mr. Thom. Judge Sims, I have profound faith that when the people of the United States understand that this thing is done in the interest of assuring them the commercial facilities which are essential that they are going to approve it; and if I were a candi- date for office, I would not object at all to going before the people on that issue. I have been a candidate for office. You are mistaken in assuming that I have not. Mr. Sims. I did not know it. You know, then, how to sympathize with us. Mr. Thom. I was not only a candidate for office, but I was elected. I was made a member of the constitutional convention of Virginia, and the man who attacked me was an eminent lawyer of my city; and he attacked me just along the lines you are talking about; and I did not run. I came out and I met the issue, and I beat him in every precinct in my city. Mr. Sims. Why did you not keep on running? Mr. Thom. I did not have to. I got there. Mr. Sims. But for other offices. Why are you not in office now? You would be a valuable man in Congress. Mr. Thom. I never was in Congress. Mr. Sims. We agree, Mr. Thom, that a situation exists that calls for relief, and that without relief progress is paralyzed. Mr. Thom. You and I agree on that ; the only thing is you want to take away more from the States than I do. Mr. Sims. I am not talking about taking away from the States, I am talking about whether the States will let us or not. They control, not we. When you admit that not over 1,000 miles of rail- roads were built in this Nation last year, you admit one of the sad- dest facts that it appears to me can possibly confront us. If that is not absolute arrest of development I do not know what it takes to constitute it, because nobody can claim for one moment that there was not a real, pressing necessity for a larger construction than 1,000 miles, and last year was a profitable year to the industries of this country. INTERSTATE AND FOREIGN TKANSPOETATION. 335 Mr. Thom. The saddest fact, and|One that is so large, which should not be brushed aside and that we should do that which will not further continue this state of national industrial commercial paraly- sis; but whether you are going to get it done by increasing the cost of the service to those already receiving it, and make it less beneficial to those who may hereafter receive it, I can not see that that can be done. I can not see that it is going to be possible to pass a na- tional corporation act — that it is possible to pass an act that is going to deprive the State commissions subst"antially of the authority they are now exercising, and I can not see how we are going to get con- crete results in sufficient ^mount and sufficiently comprehensive that the propositions of the railway executives present, to enact the legis- lation that they propose, or anything that would be substantially the same, and therefore not believing that that is possible — and I may be mistaken — then next year, we are to have less than 1,000 miles of railroad built in the country, a country of this vast domain whicK needs so much, and which needs perhaps every trunk line' in the United States doubled — I mean its trackage doubled, its facili- ties doubled. If you can present a gloomier picture that that, I do not know what it is going to be. Mr. Sims. The whole theory as to what effect it will have politi- cally, as to whether a Member of Congress will appoint an engineer — and I am surprised that the great president of a great railroad system of this country thinks that we are so limited in our discharge of ex- ecutive duties that the appointment of an engineer or a conductor on a railroad, if Government owned, would be left to the political in- terests of a Senator or Eepresentative in Congress — if that is a fact and it should come down to that, then we need a new form of gov- ernment worse than we need a new system of railroad regulation. Now, believing as I do that we have reached this state of arrested development, and believing as I do that we can not live under it and continue to prosper, it is not a question about what we want or I want. What can we get that relieves the situation — either the legis- lation which you are proposing, .substantially complete, or such Gov- ernment guaranty as to the niture issues of securities so that you will find they can withstand competition of other Governments, which, according to the letter you have just read, may become very acute after this war is over, which will enable, along the lines of private ownership with Federal control, to furnish the country what it must have, or whether or not we shall have to go to Government ownership, either directly or indirectly, through stock ownership of present corporations sufficient to control them, or through an abso- lute ownership of the properties ? Now, we are up against a great question, as I see it, and one that I can not treat frivolously, and I am afraid that I am absolutely incompetent to treat it from the best interests of the country. I mean in speaking, individually, for my- self, and therefore I want information of every kind, and I hope that the railway executives and the owners of stocks and bonds will be heard before this committee with reference to the inevitable, pro- vided the present scheme of legislation should fail. Mr. Thom. That is very earnestly to be hoped, and it will be grati- fied by their coming. Now, what you said interests me greatly. As I understand, your proposition is this, that the idea of increased regu- 336 INTEESTATE AND FOREIGN TEANSPORTATION. lation by the National Government, up to the point we suggest, is im- practicable, because people won't have it; but you propose to go before the people and to say to them that the present condition is an impossible one. Here in a country not yet developed, not yet ap- proaching the point of entire, complete, satisfactory development, the present system has brought about what is practically an arrested railroad extension. Not more than a thousand miles of railroad has been built in this whole country during the last year. Now, that is the situation that shows that the present conditions are unbearable, that the present condition must necessarily fail. Now, I know that you people are not ready to let the Federal Government regulate to a greater extent than they do now, because it will interfere with some of your own powers of regulation. I know that, but my remedy is for the Federal Government to own these properties entirely and to deprive you of any voice in your local capacity in respect to it, and I ask you to adopt that. Now, where would you get with such an argument? Don't it destroy itself? Mr. Sims. Well, I would have to cite a rural route in a community where the Government is performing transportation service, most satisfactory to the people who receive it, without any local control whatever. Mr. Thom. When you do that, are you not arguing in favor of increased Government regulation, as much as in favor of Government ownership ? Mr. Sims. I say that there is a concrete fact. The Government is to-day delivering package freight, all over the country, through Gov- ernment agencies, to the absolute satisfaction of people who are receiving the service. Mr. Thom. I do not believe that the people of this country will ever accept an argument which is based upon the fear of disturbing their control of these agencies of commerce, and present as a substi- tute for that, excluding them from the entire field of any possibility of exercising any local control, and I think you have got to go with your proposition, and that is where J think you will succeed. What this country needs is improved and increased commercial facilities and the assurance of every adequacy in all the future. That is what the country needs. Now, it is time for us to take counsel together as to how that is to be obtained. You realize that you would not yourself go into these matters, if you were subjected to the varying policies of 48 dif- ferent governmental bodies. Now, that can not stand. Which shall we have as a substitute for it, Government regulation or Government ownership ? In either of them, this divided responsibility and this divided power ceases. Now, which shall we take? Do we want to go to Government ownership, or do we want to go to improved and increased Government regulation? Now, it is a fair argument. I do not think there is a doubt as to what the people would say now. It may be that something will happen in the future to show that the experiment of improved regulation will break down and that the other is inevitable, but I do not believe the American people are going to be content to take the step of Government ownership now. Mr. Sims. We all assume to be afraid to allude to a certain mat- ter — ^not afraid, but rather not discreet to do so, and I won't ask IKTEBSTATE AKD FOKEIGN TEANSPOBTATIOlir. 337 you to do it at all — ^but the exercise of franchise controls this country. No question about that. Mr. Thom. Undoubtedly. Mr. Sims. Now, as between private, individual ownership and public Government facility and direct Government ownership, which is most liable to be involved in these interminable labor troubles and disputes? So far as I know, wherever the Government has done anything — I mean wherever the Government has pursued any line of industry — ^the Government has had absolutely no trouble with this interminable contest between labor and capital, and how can you operate the railroads of this country and not know what the demands of labor are going to be? Mr. Thom. I think that that is a matter that the Government can control, Judge. Mr. Sims. It controls through Congress? Mr. Thom. Yes. Mr. Sims. And Congress is controlled by the exercise of the elec- tive franchise; do you know what sort of a Congress you will have four years from now? Mr. Thom. We can only hope. Mr. Sims. But the Government it'self, wherever it does own any- thing, operates it just the same way, regardless of a change in Gov- ernment control. Now, I know this bugaboo about making politi- cians of all the employees of a railroad company is just about as substantial as making politicians of employees who carry the mails on your streets — just about as substantial and about as reasonable. Mr. Thom. Judge, we can not accept the proposition that, not- withstanding the fact that the franchise controls the views of our public men, that it is going — either the views of the public or the views of our public men are going to be inadequate to deal with any situation that arise. If so, our system of government breaks down. Now, I am basing everything that I say upon the supposition that our system of government is possible ; that while Congress may go wrong for a time, or while any public body may go wrong for a time, that ultimately it is coming to a sound and an honest view of every question. I think that that must be the reliance on the part of the American public, if it is going to believe in and be content with its own Government, and that their leaders must in the end arrive at a sound conception of what the public needs are and make the proper legislation to get them. Mr. Sims. We have been generalizing. I want to ask you a few questions along your propositions which you have already fully ex- plained, but under your system of compulsory incorporation — I be- lieve perhaps some one did ask that question — I am not sure now— could you compel a railroad, owned by a corporation within the State in which the railroad is being operated, say, Texas, for in- stance— say you have a Texas corporation that owns a thousand miles of railroad, aril within the State of Texas. Could you force that railroad company to take out a national charter simply because it, in connection with other roads, delivers to patrons on its route freight coming from some other State or going to some other State? Mr. Thom. Yes, sir. Mr. Sims. In other words, you think that if they do that business, ' they must do it in the way the Government says it must be done ? 338 INTOEESTATE AND FOKEIGN TKANSPOETATIOlir. Mr. TuoM. The test is not the location of a physical property, The test is the character of business in which the road engages. Now. if the road that you speak of, being entirely within one State, wants to do business within that State and not carry any traffic in interstate commerce, it would have a perfect right to do so, and the United States Government would have no right to disturb it, but if it wants to engage in interstate business — wants to carry traffic which is inter- . state traffic, then this Government can say that unless you take out a Federal license or a Federal charter' of incorporation you can not continue to do it. Mr. Sims. Now, then, take a great State like the State of Texas, being 67,000 square miles; larger than the German Empire Mr. Thom. AVhy use Texas all the time ? Take some little State. Mr. Sims-. It illustrates what I am speaking about. Could not a Texas railroad corpora:tion build a system of roads, one terminus at El Paso, one at some eastern town in the State of Texas, one at a northern town, another one at the Gulf somewhere — could they not do all of the business they wanted to, to the end of their terminals, and not take a bill of lading or anything else to go beyond the State, and yet some other road, an interstate road, pick it up at the end of that line and carry it on wherever it wants to ? Mr. Thom. Not without its being still interstate commerce. The Supreme Court of the United States has held — which I am sure your judgment as a lawyer will indorse — that through no form of han- dling business can the intrinsic character of the traffic be changed, and if the traffic was really an interstate shipment it is not prevented in being an interstate shipment by where ybur billing starts and your billing ends, but it is the real nature of the transaction itself. Mr. Sims. Well, now, I admit that. I understand it; I mean I understand the decision. Mr. Thom. And, therefore, to answer categorically your question about the device of billing to the end of a road interstate traffic, the road could not violate the laws of the country. Mr. Sims. Well, now, let us see whether it could not. Here is a firm doing business in El Paso. Here is a firm doing business, not in Shreveport, but in the nearest Texas town — Texarkana. Th?,t illustrates very well. Now, this firm here is doing business. It is buying and selling, and the El Paso firm is buying large amounts of Texas property, for which California has a demand and furnishes the market. Now, that firm can buy all of the Texas property it wants to, have it shipped to El Paso and stopped ; then it can resell to a California purchaser, can it not ? A man comes there and buys it and wants to ship it to California. Mr. Thom. The question is, what was the transaction from the beginning? If it is a device to change interstate traffic into intra- state traffic, it can not succeed. If it is a fact that it was honestly, intrastate traffic, up to the time of being delivered at the ultimate destination in the State, then that could be done; that.could be done because then that would be simply intrastate traffic, honestly intra- state traffic, but if that is a course of business, intended as a device, it can never succeed at law, nor can it succeed as a practical matter, because there will be some other road that will come along and take that property, without breaking hulk, and carry it very much quicker to destination in another State, and there will be no chance of this INTEESTATE AND FOREIGN TRANSPORTATION. 339 broken shipment and reshipment transaction succeeding in competi- tion with the other. Mr. Sims. Now, then, another question. I am leading up to one, the reason I am asldng these preliminary questions. Now, then, you have a great cotton purchaser and dealer in cotton at Texarkana. in Texas. He buys thousands and hundreds of thousands of bales of cotton in the State of Texas, shipped on a Texas railway, intra- state railway, which terminates at Texarkana. He has got that cotton to sell, say Philadelphia purchasers, Boston purchasers, and other purchasers buy that cotton of him, and ship it straight on. That is all in perfect good faith. Why can he not do that ? Mr. Thom. Because there is a vast bulk of that railroad traffic that could not be handled in that way, and for that purpose of evading the effect of the laws of the land, and that railroad would not for a minute stay out of the national system of incorporation, because it would be sacrificing its facilities and its opportunities of doing busi- ness. Mr. Sims. Now, we are coming to the question Senator Underwood. Mr. Chairman, will Mr. Sims allow me to ask a question a moment — not ask it of him. I want to ask the com- mittee — 1 have got an appointment and must leave in a few minutes — I want to ask if it is the purpose of the committee to meet to-morrow. The Chaieman. I have canvassed the committee and find that the impression is against meeting to-morrow. There will be a recess until Friday at half past 10. Mr. Sims. Now, the State of Texas makes 4,000,000 bales of cot- ton, upon the average, every -year. Perhaps it will make 10,000,000 some day. Now, the average cost of railway construction, mainte- nance, and operation in the State of Texas' is so much less than the average cost of railway construction, maintenance, and operation from Boston and New York and Texas as to enable a Texas railroad to perform the largest part of that haul economically and profitably at much less than the through rate would have to be, if the through rate was based upon the reasonableness of a rate that these other States would have to charge. Therefore, there would be a burden placed upon the State of Texas, or its industry, by national incorpo- ration, provided a rate could then be put upon the producer of the cotton in Texas for the proportion of the haul in Texas that exceeded what the pro rata part of such a service would be, if confined to Texas. So that a system of rate making that would put a rate from Boston to Galveston or to El Paso or to San Antonio, that would be a reasonable and fair rate for the entire service, but for the Texas part of it would exceed what it would be if done by a Texas corporation- why is it not to the interest of the State of Texas to encourage a system of State railways, built wholly within the State, to carry away those products to a border market so as to escape the additional cost of transportation over several hundred miles, that would be added provided they had to pay the average through rate? Mr. Thom. Judge, how many railroads in Texas are in bank- ruptcy to-day? Mr. Sims. I do not know. Mr. Thom. Are they all, pretty nearly Mr. Sims. I do not know. I do not see that that has anything to do with the question I have asked. 340 INTERSTATE AND FOREIGN TRANSPORTATION. Mr. Thom. I think so. Mr. Sims. I assume that the railroads in Texas can do it cheaper than the average haul to the average destination of the cotton. Mr. Thom. Yes, sir. Mr. Sims. I assume they can do a profitable business for a less rate than the average through rate. Mr. Thom. You have assumed that in reference to interstate ship- ments, have you not? Mr. Sims. I have assumed that with reference to a product which will ultimately be used or consumed in another State. Mr. Thom. The real purpose is to accommodate an interstate move- ment, or what is practically an interstate movement ? Mr. Sims. Oh, no; it is the purpose to enable people to grow cotton in Texas, to have a freight rate through Texas that is reason- able, just and fair and profitable, for the Texas haul. Mr. Thom. No ; now the real destination of that commodity is in another State or in a foreign country. Mr. Sims. Well, that is, a greater portion of it would be, naturally. Mr. Thom. That is what I say. Now, if Texas, and if each State can, on such a haul as that, divide ujj, according to its local condi- tion, you have State regulation instead of United States Government regulation of a commerce that is distinctly interstate. Is that right? What is the meaning of a State line for interstate commerce? Didn't every State, when it came into the Union, agree that there should not be any such thing as State lines so far as commerce pass- ing beyond is concerned) and what possible justification is there for dividing those territories now by State lines and trying to fix rates by State lines? You destroy the very constitutional system on which equality among all the people is dependent. Then, on your suggestion, _ this Texas commodity would have to pay, perhaps, a lesser rate in Texas, on your assumption, but then they would make that up in a subsequent part of this movement where it had to pay a greater rate than it does now. Mr. Sims. You mean for incoming commerce? Mr. Thom. No. sir; for that matter, when you take your Texas shipment and later go out of Texas up to Chicago, then you say in Texas it has a very cheaply built road and ought to have a low rate, but that commodity when it gets out of Texas goes on a road more expensively built, and according to your theory it ought to have a higher rate. Now, taking the shipment through to the final desti- nation it would be part of the way on a very cheap rate and the balance of the way on a much higher rate, but the result to the commodity would be the same. Now, why divide that by State lines and not in accordance with the way the shipment actually moves from a State point to a point in another State ? _ Mr. Sims. Judge, the policy as given forth by the Texas commis- sion, I believe, is that they were trying to develop Texas business. Mr. Thom. It that a constitutional purpose? Mr. Sims. Now, let me ask this question : Suppose instead of ship- ping this cotton and selling it to a purchaser in Texarkana he sells it and ships it to a manufacturer in Texarkana in order to get a lower rate on the raw material, lower than he will have to pay if he ships it to any New England' points, he buys it up and manufactures it in Texarkana or points where he gets the benefit of this low Texas INTERSTATE AND FOREIGN TRANSPORTATION. 341 rate, and then ships out the manufactured products to these States, would it not result exactly Mr. Thom. I do not think so. Mr. Sims. He is getting the advantage of lower priced cotton and Manufacturing it in the State where the transportation cost is naturally lower than the average transportation elsewhere. Mr. Thom. Here, you say Texas has got a policy of building up Texas. That means Texas people dealing with Texas distributing poiats. Suppose you take New York, with its immense markets and its immense ports, and let it have a similar policy of excluding other States. Now, New York has a great deal to give to other States. AVould you have a well-balanced system of commerce among the American States when you would give to New York and Pennsyl- vania and Massachusetts, with the three great markets of those States, the right to exclude the other States? Mr. Sims. I am not talking about the merits of your proposition. I am talking about the possibility of enacting the legislation. What willthe State of Texas do, with her 18 or 20 Members of Congress, counting those in the Senate — what will they do about enacting a national charter provision of this kind that will increase freight rates on the large cotton crop of that State ? Will they vote for any such thing? I am talking about the practicability of getting this legislation. Mr. Thom. I do not know what the Texas delegation will do. My hope is that they will take a comprehensive and national view of the whole situation. Mr. Sims. But your observation has been, I judge — and I am afraid it is the observation of everybody — that there is always a circumscribed local conception Mr. Thom. But if a man Mr. Sims. It does not matter about a man, because if they do not have men that represent them they turn him down and get others who will. This is a practical matter. Mr. Thom. If we are going to have men in Congress who can never get outside of their local situation, we are in a bad way. Mr. Sims. Do you know of any way of getting them here in oppo- sition to a local situation ? Mr. Thom. I hope they are here, now, Judge. Mr. Sims. Do you know of any way of getting them to act m spite of a local or district interest? Mr. Thom. The only way, as I seet it, is to get the district to reaUze and appreciate what its real interests are. Mr. Sims. They always Mr. Thom (continuing) . And not be governed by a narrow view. Mr. Sims. They always think the particular thing which they are doing in that locality is the dominant patriotic consideration. Let me tell you of something of your own State. I had to go up against it myself. A portion of the State of Virginia raises peanuts, and the delegation of Members of Congress elected from Virginia m that sec- tion came before the Ways and Means Committee and demanded a high protective duty on peanuts when the Payne law was passed. Were they patriots or not ? It was contrary to the Democratic policy and Democratic doctrine, and yet those Members from Virginia, as 342 INTBESTATE AND FOREIGN TEANSPORTATION, good Members as we had, pleaded before that committee to comply with requests of the peanut growers, who sent them to Congress, to give them a high protective duty, right in the face of the Democratic position on that subject. Mr. Thom. The only answer I can make to you is that this propo- sition is a great deal bigger than a peanut. [Laughter.] Mr. Sims. In the district from which these gentlemen came it was the largest issue which they had. I am talking now about practical things. Mr. Thom. I do not know, but I hope that those gentlemen from the peanut district of Virginia will rise to the national and universal aspects of this great problem. I do not know whether they will or not. Mr. Sims. What is a Eepresentative of Congress? Is he not an agent of those who send him here? Mr. Thom. Yes; he is; but he is an agent to do this: He is elected to represent the highest and most enduring interests. He is not an agent to simply reflect the whims and lack of judgment in his district. Mr. Sims. How many Representatives could be elected from the district in Virginia in which the Newport News Ship Building & Dry Dock Co. is located who are opposed to the building of ships there? Mr. Thom. I do not know. Mr. Sims. You must deal with these matters in a practical way. Your Virginia man could not come to Congress if he would not repre- sent the peanut growers in Congress, because if they did not do so, some others would. The peanut would still have been in Congress. That is a fact. You can not get away from it. Mr. Thom. You are drawing a mighty gloomy picture of this country if no man can see beyond his own district. Mr. Sims. I am talldng about the past and present. Mr. Thom. Let us talk about the future. Mr. Sims. Well, didn't I see, on the formation of the tariff bill, a southern Senator, a good man and able man and a patriotic man, as patriotic as any, ask for a protective duty on sea island cotton that grew in his State. Mr. Thom. I can only defend my proposition, and not Congress. Mr. Sims. But Congress has to take care of these conditions, and Congress is the country ; and when you are talking about theoretical things we ought to see what can be done. Mr. Thom. Judge, I think I think better of Congress than you do. May be I do not know what you think about it. Mr. Sims. I have been here 20 years, and it is still a problem to me — or I will have been here 20 years soon. Here is a proposition that is an actual fact. It is a condition that confronts us, and not a theory, and you have got to do something. I believe that you will have to go in and reform local views ; and if you think you can do so I siispect that you will have a pretty difficult long-distance matter to undertake. Mr. Thom. The problem is for the country to assure itself that the very fundamentals of its commercial prosperity are provided for. Mr. Sims. To help the country through the railroads, you mean? Mr. Thom. If I should come to you with a private interest in re- spect to this matter, I should not complain that you should discard my whole argument. INTERSTATE AND FOREIGN TKANSPOETATION. 343 Mr. Sims. The great cotton crop of Texas to them is not a private interest. Mr. Thom. It is not ? Mr. Sims. Not in the attitude they take of it. Mr. Thom. If you go to take any of it, you will find it is. Mr. Sims. It is not, though. It is just as dominant an interest with them as the peanut industry is to the people in your State. They think the people who eat them should aid them by paying a protective duty, a higher protective duty. I have found in my ex- perience whenever a protective tariff will relieve or assist an indus- try in a Democratic district it is difficult to find a man who will not urge a protective tariff for that industry. Mr. Adamson. A parliamentary inquiry, Mr. Chairman. Was not a law passed to put a protective tariff on peanuts ? Mr. Sims. It is on there now and has been on there. They wanted it increased. It was not sufficiently large. Now, I want to help the situation, if I can. Mr. Thom. I am encouraged by that, Judge, anyhow. Mr. Sims. The situation now is one that confronts the whole coun- try, and as to the future, inasmuch as unbridled private ownership for many years had its reign, and wrought wreck and ruin upon the rail- road industry, and inasmuch as we can no longer finance the rail- roads as they were once financed, as you, yourself, admit — inasmuch as the complex regulation of 48 States and the General Govern- ment which does affect, perhaps injuriously, railroad facilities — inas- much as we feel morally certain that your propositions as a whole are not going to be adopted, right or wrong, whether they approve or do not approve of them, it does seem to me that you and those who represent the owners of these properties, which they now do not want to sell, should begin to consider the inevitable and be ready to make some sacrifices themselves and to quit drawing dividends, when, in order' to do so, they deprive their own railroads of sufficient facilities to do the business of the public. Mr. Thom. I know of no case where that is done. Mr. Sims. How many millions of dividends were paid last year? Mr. Thom. I do not know. There is a vast percentage of the stock of the railroads of the country that did not pay 1 cent. Mr. Sims. There was still about a billion dollars of net earnings paid, as I recall. Mr. Thom. I do not think any judicial mind will complain of the railroads' dividends in the last series of years. Mr. Sims. Has any railroad a right— charged with the interests of the public— to pay dividends at the cost of necessary equipment on that line ? Mr. Thom. It has no such right, nor can you get new money into a railroad unless there is a return on the money already there. Your problem, however, as a statement, is not to deal with anything ex- cept 'suggestions to provide for the future. That is what statesmen are for. Mr. Sims. I have not heard yet of any propositions brought up with reference to dealing with railroads that did not put in, as a i;ondition precedent, that the stockholders should not have a fair return on their money in the way of dividends paid out. A dividend 70342— PT 5—16 7 344 INTERSTATE AND FOREIGN TRANSPORTATION, if; earned and properly paid if it is put in the equipment of the railroad. Mr. Thom. How can you deal practically with the question of railroad credit unless there is some return actually paid out '< Mr. Sims. I do not regard a stock sale as a credit instrument. Mr. Thom. I think, if you will Mr. Sims. If I owned a hundred acres of land, and I sell a one- fourth undivided interest in that to somebody else, I do not regard that as a credit instrument at all. I just part with a part, and somebody bought it for what they thought it worth. Every time a railroad, without extending its lines, increases its stock sales, the individual interest of the remaining stockholders is lessened, unless they buy additional stock in proportion to that which they owned. I do not regard it as a credit facility at all. Mr. Thom. When that amount of money that the stock brings in is expended in increasing the plant, is it not ? Mr. Sims. If the plant is in being, no. Mr. Thom. When you sold your farm, you put your money in your pocket. Mr. Sims. Yes, sir. Mr. Thom. If the stock of the railroad is sold, the money which it brings in is put into the plant and not into the railroad's pockets. There is an increased asset. Mr. Sims. He has his value, which is represented by the increased value of the property into which it went, just the same as in receiv- ing dividends on the stock, but instead of declaring a dividend of .5 per cent or 4 per cent or 6 per cent, that money is expended in the plant, that is an investment. He has his dividends, but in the form of more valuable property. Mr. Thom. At the same time. Judge — I do not know whether we are getting anywhere, but it seems to me where you and I stand is this : You say that the present condition is an unbearable one from the standpoint of the public and there must be a greater assurance of the facilities than there is now, under existing conditions, and this must be provided for the future. That is what I say. Then your conclusion from that is that there ought to be Govern- ment ownership, and my conclusion is there ought to be improved regulations. You are the men to determine that. Mr. Sims. No; I do not state my conclusions just as you have stated them. In the first place, my conclusions are that something ^ has to be done. My next conclusion is that that which you propose ' can not be done. Something has to be done, and that which you propose can not be done, and you say, in the absence of that being done which you say ought to be done, that Government ownership, is inevitable. I am only asking you to consider the inevita.ble, not as desirable, not as a first thought, jDut as a reasonable probability. Mr. Thom. But that is your conclusion, that it is inevitable. I say you are the man to determine that, among others. Mr. Sims. You have just announced that doctrine yourself, that you agree it is inevitable. Mr. Thom. Undoubtedly. Mr. Sims. Then we both agree? Mr. Thom. No; we do not agree, because you say that what 1 suggest can not be done. INTERSTATE AND FOREIGN TRANSPORTATION. 345 Mr. Sims. I say I am afraid it can not be done. Mr. Thom. I think it can be done. Mr. Sims. I think so. Mr. Thom. But I know so. And I think it can be done. Now you say that in view of your idea it can not be done, that something else more drastic must be done, and that is Government ownership. I say that I have presented my views on that subject. You are the men to determine that ; I am not. Mr. Sims. I asked you if you discussed this matter with your ex- ecutive committee and the owners of the railroads ? Mr. Thom. It is not a matter to be discussed with them. The Government can resort to Government ownership without their con- sent. It is not a matter for them to consent to. You can adopt the policy of Government ownership without our consent. Mr. Sims. But you are not willing to sell ? Mr. Thom. We do not have to be willing to sell for Government ownership. Mr. Sims. I think you will have to come to that conclusion before there will be any Government ownership. Mr. Thom. I do not know about that. Of course, I can not tell. Mr. Sims. As long as your property is so valuable, so desirable to the present owners, the present owners are going in some way or other to continue in the railroad business. Mr. Thom. Let me make one prophecy. If the present system is persisted in, it may not be long before the principal advocates of Government ownership are the railroad owners themselves. Mr. Sims. I think it is inevitable; it is bound to be that way. I think you are exactly right about it. Mr. Thom. You can not complain if they are trying to do the thing which they believe will meet the public conditions under that Government ownership, and we have brought that question directly to you ; you are one of the 10 men who are primarily to pass on it. We brought it frankly to you and stated our views. Is there any- thing else we can do than that ? Mr. Sims. So you have not studied the matter so that you can give your views as to whether or not it is practicable or possible to intro- duce some guaranty of Governmfent earnings, secured by a lien on the properties ? Mr. Thom. I told you about that, that I believed that Congress would never consent to a governmental guaranty. As I stated before, you know Congress better than I do. Mr. Sims. I did not suggest it as a proposition coming from you, but as a possible suggestion. Mr. Thom. I know ; but whatever authority it comes from it never occurred to me that the Government should guarantee the securities of these railroads. It may be that you are right about it. If the Government is ready to guarantee the returns on these securities, it is a new situation to be taken up and dealt with. Nobody on the part of the railroads ever believed that possible. Mr. Sims. The railroads first had to consider it as a fact that the Government would have to be secured by first liens on all existing properties as to any defaults in earnings the Government might have to make good, and that is a matter of contract. 346 INTERSTATE AND FOREIGN TRANSPORTATION. Mr. Thom. You appreciate that is simply rapid progress to abso- lute destruction ? Mr. Sims. I do not think I would advise the Government to guar- antee an uncertain business. Mr. Thom. Suppose a railroad company were to make an arrange- ment to pay out a certain amount to its security holders, and ii it did not earn those dividends to put them as a lien upon their prop- erty. How long would it be before that property would become absolutely worthless to the owners, eaten up ? Mr. Sims. If it is good property it would not be, because the Gov- ernment is only guaranteeing the payment of a minimum dividend and giving them the benefit of all over and above that, and if the Government loses on the minimum dividend, if the Government has to pay something the railroad did not make, the sooner it goes into liquidation the better. With a minimum dividend, one by which they can earn and one which will make a market for their securities, without depending on the uncertainty of labor and the imcertainty of the cost of material and the uncertainty of conditions over which the railroads themselves have no power of control — if. the prior owners are not willing to risk this, then the Government certainly should not risk it. Mr. Thom. Do I understand that you are agreeing with the con- clusion that the Government will not be willing to guarantee the return on these securities? Mr. Sims. I doubt it exceedingly, because, as you say, it is a new question and has not been discussed. I am only speaking of it as a possible solution, Ijang between the field of absolute private owner- ship and absolute Government ownership — a Government corpora- tion. Mr. Thom. If the Government is not ready to do it it is not a pos- sible solution, is it? Mr. Sims. I mean as a possibility. The Government, of course, as 1 say, having a control in the railroads over the stock, I mean to the extent of the stock upon which the Government has guaranteed a dividend so as to see what the Government official approves is done by the railroad. In other words, they would have to submit to that which is partially Government ownership — that is, if the result is equal to it — that anybody that can absolutely regulate your earnings on any piece of property potentially owns the property to all intents and purposes. Mr. Thom. You think you have got us now ? Mr. Sims. I think we have. The Chairman. Are you through, Mr. Sims? Mr. Sims. I am going to suspend for the present. Mr. Adamson. I know it is not according to our ruling to ask a question out of turn of the witness, but it is not a violation of that rule to ask Judge Sims a question, is it ? Mr. Sims. I will not object. Mr. Adamson. If we are actually in a condition of wreck and ruin and destruction and the only avenue of escape is the alternative proposition of Government ownership or regulation of the carriers, which they themselves prepare and dictate, would it not be safer for us to reject both alternatives and repeal the commerce clause of the Constitution ? INTERSTATE AND FOREIGN TRANSPORTATION. 347 Mr. Sims. The judge has started a new proposition which I have not qonsidered as possible or probable. Mr. Thom. I want to enter my protest here, Mr. Adamson, against the suggestion that the carriers are dictating any terms. I was asked by none more earnestly than Judge Adamson to come here and make our suggestions, and I do not think it is fair now to put us in the position of trying to dictate terms. Mr. Adamson. I wUl change the word from " dictate " to " suggest." Mr. Thom. I am very glad to have the change, Judge. Mr. Adamson. Yes ; I will say " suggest." The Chairman. Have you concluded your examination, Mr. Sims ? Mr. Sims. There, are some matters I may wish to bring before Mr. Thom, on which I am not prepared, later in the hearing. They may be brought out by some other gentleman, or some other witness, and I may not inquire further in the subject. Mr. Adamson. I move that the committee do now adjourn. Mr. CuLLOP. Until Friday morning, at 10.30 o'clock. The motion was agreed to, and, at 1.20 o'clock p. m., the committee adjourned until Friday, December 1, 1916, at 10.30 o'clock a. m. INTERSTATE AND FOREIGN TRAl*^SPORf iTION HEARINGS BEFORE THE JOINT COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE, CONGRESS OF THE UNITED STATES SIXTY-FOURTH CONGRESS , FIRST SESSION PURSUANT TO PUBLIC J. RES. 25, A JOINT RESOLUTION CREATING A JOINT SUBCOMMITTEE FROM THE MEMBERSHIP OF THE SENATE COMMITTEE ON INTERSTATE COM-- '' MERCE and THE HOUSE COMMITTEE ON INTERSTATE AND =' FOREIGN COMMERCE TO INVESTIGATE THE CONDITIONS RELATING TO INTERSTATE AND FOREIGN COMMERCE, AND THE NECESSITY OF FURTHER LEGISLATION RR- ' i LATING THERETO, AND DEFINING THE POWERS AND DUTIES OF SUCH SUBCOMMITTEE. Part 6 DECEMBER 1 Printed for the use of the Joint Committee on Interstate Commerre' WASHINGTON GOVERNMENT PRINTING OFFiCE JOINT COMMITTEE ON INTERSTATE AND FOREIGN COMMBROE. FRANCIS G. NEWLANDS, Nevada, Chairman. WILLIAM C. ADAMSON, Georgia, Vice Chairman. JOSEPH T. ROBINSON, Arkansas. THETUS W. SIMS, Tennessee. OSCAR W. UNDERWOOD, Alabama. WILLIAM A. QULLOP, Indiana. ALBERT B. CUMMINS, Iowa. JOHN J. BSCH, Wisconsin. FRANK B. BRANDEGEE, Connecticut. EDWARD L. HAMILTON, Michigan. Fbane Hdalz, aierh. Willis J. Datis, ±%aistant Clerk. NTERSTATE AND FOREIGN TRANSPORTATION— GOVERNMENT CONTROL AND REGULATION. PHIDAY, DECEMBER 1, 1916. United States Senate, Joint Committee on Interstate Commerce, Washington, D. G. The joint committee met at 10.30 o'clock a. m. pursuant to adjourn- nent, Senator Francis G. Newlands presiding; also Vice Chairman C^Tilliam C. Adamson. The Chairman. The committee will come to order. We will now 10 into executive session for a short time in the adjoining room. (The committee proceeded to the consideration of executive busi- aess, and after such consideration the doors were reopened.) Mr. Adamson. Mr. Chairman, in the nature of a matter of per- sonal privilege as well as pro bono publico I want to read an extract Erom a newspaper and make a remark upon it for the record. Mr. Davis, will you please read it? (The assistant clerk read as follows:) BIGHT-HOXTE LAW IS NOW BEFOEE COUNCIL COMMERCE CHAMBER — SUGGESTIONS THE BAILEOADS WHL MAKE TO JOINT OONGKESSIONAI, INVESTIGATING COMMITTEE AEE OUTLINED. Washington, November 17. Some of the suggestions the railroads will make to the joint congressional investigating committee, which begins hearings on transportation questions here Monday, were outlined to-day at a special meeting of the national council of the United States Chamber of Commerce by A. P. Thorn, counsel of the railway executive advisory committee. Thom's presentation of the railroads' sugges- tions was preceded by speeches which brought the eight-hour law squarely be- fore the council. Representative Adamson, author of the law, declared he be- lieved it unconstitutional and thought Congress would enact supplementary legislation before the congressional investigating committee reports to make impossible another situation such as confronted the Nation when the brother- hoods threatened to strike. Mr. Adamson. Mr. Chairman, I wish to say — — Senator Eobinson. What paper is that taken from ? Mr. Adamson. It is from a paper in Paducah, Ky. I do not know the name of it. Senator Eobinson. Was the report sent out from here ? Mr. Adamson. Yes. That paper has either been badly imposed upon or it is grossly imposing upon somebody else, and it affords me pleasure to say that I conferred with the members of the Associated rress about it and am able to acquit them of any guilt in the matter. It is a monstrous medley of misrepresentation, and I wanted it put in the record in that way. I wish to add that not only did I not say that I believed the law unconstitutional, but I believe that any man who would believe that would believe anything. 349 350 INTERSTATE AND FOEEIGN TEANSPOETATION. Senator Eobinson. Have you ascertained who sent out the report, who instigated that ? Mr. Adamson. I have not. Senator Underwood. Mr. Chairman, will yow please announce the conclusion of the committee before we proceed ? ■ The Chairman. The committee has come to the conclusion thati it will hold meetings to-morrow, Saturday ; next Wednesday, Thurs- day, and Saturday at 10 o'clock, to adjourn not later than 12 o'clock noon. , Senator Eobinson. From 10 o'clock until 12? The Chairman. From 10 o'clock until 12 next week. Mr. Ti-ioM. i)o those hours relate to to-morrow also? The Chairman. No; to-morrow the session will be from half past 10 until, half past 1. ' ' - Mr. Thom. Has the committee, may I ask, gone ' further in its plans than next week? The Chairman. No. Mr. Underwood, will you proceed with the witness? . Mr. Adamson. Mr. Chairman, with regard to that lagt inquiry of Mr. Thom's, the committee thinks that after he has completed hi,s, examination we will be better able to determine upon any further program. Senator Underwood. Mr. Chairman, the questions that have already been asked Mr. Thom by other^ members of the committee cover the field of interrogation that I had in mind, and I do not care to occupy any time in making inquiries. Mr. Thom. Before proceeding, Mr. Chairman The Chairman. Mr. CuUop, will you proceed with the witness? Mr. CuLLOP. I understand that Mr. Thom desires to make a state- ment, Mr. Chairman. Mr. Thom. Before proceeding I would like to do what I can to clear up a misapprehension which I understand exists in some minds with respect to one of the proposals which we have submitted to the committee. The idea seems to have obtained somewhere that under these proposals our intention is to do away with the State authority and State commissions. I wish it to be distinctly under- stood that we are making no such proposal. We have not under- taken to outline the exact place where the separation between State authority and Federal authority should be, but we have announced the principle which we advocate and which I now wish to emphasize, and that is that in the matters where the exercise of authority by a State exists beyqnd the State border and affects the affairs of another State, or affects in a substantial way interstate commerce, that then the authority should be entirely national. In those mat- ters, however, which do not exist, where the authority of the State^ did not exist beyond its own borders, but deals with affairs within its borders entirely, we do not advocate the substitution of the National for State authority. Of course, when we come to con- sider where a line ought to be exactly drawn, we find some matters falling on one side of the line and some matters on the other side of the line. I am not now attempting to discuss the specific matters, but to announce the principle which we advocate, and that is— andll repeat it — that no State ^ould want to exercise an authority in a matter which extends beyond its own borders and atfects the affairs INTERSTATE AND FOREIGN TRANSPORTATION. 351 of another State and the people of another State, or which affects interstate commerce, but in those matters entirely within its own borders of course it ought to continue to exercise the proper au- thority in respect to them. Senator Eobi>^ son. May I ask you a question ? Mr. Thom. Yes, sir. Senator Eobinsox. Does your statement now apply to the making of rates for purely intrastate traffic ? Mr. Thom. It does. We think that the making of rates of an interstate carrier on intrastate traffic does affect the people of other States and does affect interstate commerce. Senator Robinson. I do not think I ma;de my question quite clear to you: at least your answer does not seem to me to be quite re- sponsive to my question. On purely intrastate traffic, carried upon ii railroad which is also engaged in interstate commerce, do you think that the Federal Government should fix the intrastate rates? Mr. Thom. Yes. I have said that fixing of an intrastate rate constitutes what would be the measure of contribution by the traffic of that State to the upkeep of the interstate carrier, and would also have the effect of controlling the carriers of commerce. Senator Robinson. I merely wanted to know whether your state- ment this morning was a modification of your former statement. I understood your former statement very clearly. Mr. Thom. Not at all ; I am trying to make clear my former state- ment with the statement now, as I said then, that I think that the fixing of intrastate rates on interstate carriers is a national matter. Senator Robinson. Now, you say as to purely intrastate matters the States ought to control. What would that embrace? Mr. TiiOM. I think the grade crossings. — I am illustrating — ^the grade crossings, the establishment of stations Mr. EscH. The speed of trains ? ^..Senator Robinson. Why the speed of trains, if it is a through train? Mr. Es,CH. It is police authority. Mr. Thom. I am not certain about that, Mr. Esch, with respect to the speed of trains. I think that is a debatable matter and I form no special judgment upon it. For example, we find this situation, that the carrier wilt not stop a through train at a certain locality because the judgment of the carrier is that it would best accommo- date the travel by not doing that. Very frequently there have been local ordinances requiring the train speed to be reduced to two or three miles an hour through that locality. Now, that affects the whole through movement. ■ But those are matters for this committee to take up and pass upon. The principle, Senator, which I have announced, and which appeals to me, is the one which I have tried to express. ■ .Senator Robinson. The statement you have made this morning does not differ, as I understand you, from the statement you made before? Mr. Thom. Not at all. I was trying to correct a misunderstand- ing I believed to exist of the statement I had made. I was not attempting to modify it. I was attempting to impress it and em- phasize it. 352 INTERSTATE AND FOREIGN TBANSPOETATION. Senator Eobinson. I think I understood you correctly in the be- ginning. Mr. Thom. I think you did, but I heard that some gentlemen who are not attending these meetings had a different view, and I merely wished to emphasize that. The Chairman. Mr. CuUop, will you take the witness? Mr. CuLLOP. Mr. Thom, I want to ask you a few questions that I do not think have been brought out, at least to my mind, clearly. Other members have covered the ground pretty fully and I only have a few matters that I want to interrogate you about. Mr. Thom. Yes, sir. Mr. Ctjllop. Would not national incorporation remove the trial of causes between the citizen and the railroad company from the State courts to the Federal courts? Mr. Thom. No ; the act of Congress would take care of that. Mr. CuLiiOP. In the event of national incorporation, do you think it would be advisable to have a provision maintaining litigation in the State courts? Mr. Thom. I do. Mr. Cuiiop. As between the citizen and the railroad ? Mr. Thom. I do. You will find a parallel to that, Mr. CuUop, in the litigation under this liability law. There, by express terms of the act of Congress, the litigation must take place in the State court unless there is some ground for removing it elsewhere. Mr. CuLLOP. Other than the fact that it is a Federal law? Mr. Thom. Yes, sir; or a Federal question. In order to be en- tirely accurate I will say preventing the removal to the Federal courts of a litigation instituted in a State court simply on the ground that there is a Federal question involved arising under a Federal statute. Mr. CuLLOP. I have long since had the idea that such a pro- vision ought to be generally adopted, as it would relieve the citizen of many burdens which are now imposed on them in the way of litigation by removal of cases. Mr. Thom. I am entirely in sympathy with preserving the terms of the act of Congress as to the jurisdiction of the States — ^in the State courts, I mean. Mr. Ctillop. In many instances it is practically a denial of jus- tice because of the added litigation. Now, you spoke of double taxation. Do you not think that the matter could be remedied by a provision of law providing exemption on the part of the mortgagor to the amount of the indebtedness of the mortgagee by some pro- vision of law ? Mr. Thom. That may be entirely controlled. At one time I heard you call attention to the law of Indiana. Mr. CuxLOP. On real-estate mortgages? Mr. Thom. On real-estate mortgages, and that is a perfectly prac- ticable and feasible method. It is a question merely of the policy that Congress desires to adopt in respect to it. . ■ u Mr. CrxLOP. What would be the result of such legislation m the event that the mortgagee and mortgagor lived in different taxmg jurisdictions? INTERSTATE AND FOEEIGN TRANSPORTATION. 353 Mr. Thom. Then it would be to transfer the benefit of the taxing power from one jurisdiction to the other, as to some value of the Mr. CuLLOP. Could that be done under the power of the State? Mr. Thom. That part bould be done. The whole thing could be obviated, though, by a different method of applying the taxing power. Mr. CuLLOP. It is certainly unfair to have the double taxation as it is,, or at least ought to be, enforced now so that either the mortgagor or mortgagee should have some relief, so as to avoid double tax- ation. Mr. Thom. The justice of that proposition is undenible, it seems to me. How far it is practicable .as a system of taxation, is another question. Mr. CuLLOP, In the State of Indiana we have a law relating to mortgages on real estate that upon application to the proper au- thority the mortgagor can be relieved in the taxation of his property in an amount equal to the mortgagee's interest, whatever the loan may be. Do you think that such legislation as that would obviate the matter of which we spoke then in reference to double taxation ? Mr. Thom. Of course, that 'removes the objection of double tax- ation. Mr. CuLLOP. Now, as to the reorganization of the Interstate Com- merce Commission, what would you think of a plan to reorganize it on the plan of the Federal judiciary? Take, for instance, the Inter- state Commerce Commission, composed of seven or nine members as the supreme authority, and then divide the United States into differ- ent districts with commissioners to hear the complaints in their re- spective districts, with the right of appeal or removal to anyone who might complain of a ruling, to the Interstate^ Commerce Commission, where it could be reviewed just as you do now in cases in the Federal eourts ? Mr. Thom. If I understand your question, it is practically the suggestion which I have been advocating here. Mr. CuLLOP. I am glad to know that you have. Mr. Thom. That seems to me to be in principle the same. Now, I suggested here, in the course of my remarks, a system by which the Interstate Commerce Commission should consist of seven to nine members, as they or Congress may feel is the necessary num- ber, to sit in Washington, and with what we call " regional commis- sions," to correspond, as I understand it, with your suggestion of a distribution of subordinate bodies into districts to be determined by Congress. Mr. CuLLOP. Inferior tribunals? Mr. Thom. Yes; and they would be close to the place where the complainants were and would live there and be acquainted with the local atmosphere and local conditions, local views; and they could take all the testimony, hear all the case right there ; formulate their conclusions on it, and send them up to the Interstate Commerce Com- mission, where it would be subject to exception, as you have sug- gested, and those exceptions to be argued before the Interstate Com- merce Commission either by the complainant or by the carrier, or by anybody who might be in interest — any community; and with 354 INTERSTATE AND FOEEIGN TBANSPOETATION. power, likewise, to the Interstate Commerce Commission of so con- trolling the matter that, even without exception, they may say, " We will not let that decision pass through here notwithstanding no one objects to it, because it puts the administration of the law in that section entirely different from what "we have determined on for fee balance of the country." So, as I understand it, Mr. Cullop, the suggestion you have made, and the view I have, are entirely in harmony. Mr. Cullop. I am glad to know that. Supposing you were to divide the United States into 12 or 16 different jurisdictions or cir- cuits, with a commission of three, who would occupy the relations with the Interstate Commerce Commission that a district court- Federal court — now occupies to the Supreme Court, giving such a court or commission the right to hold hearings over their respective districts, so that the litigation would be brought close to the people, and with the right of appeal to the Interstate Commerce Commis- sion by filing exceptions, or otherwise as might be provided by law, and with the right in the Interstate Commerce Commission to review the question, if either party sought to have it reviewed; could you not, in that way, bring the settlement of all these, disputes near the people and give them better opportunity — in fact, both sides — ^to be heard where their witnesses reside, and where the questions in dispute .] arise? Mr. Thom. I think so. May I illustrate that just a little? Mr. CuLLOP. Now, in the event of doing away with the State com- missions, about which you have spoken, would not this take the place and afford each State or community the right of regulation and be ■ no conflict between the two authorities? Mr. Thom. Yes ; except that I have not advocated, as I have just ' explained, doing away with the State commissions, but in the respects | that the jurisdiction of the State commission was transferred to the • National Government, it would be just as you say. Now, may I : illustrate what I know to be the difficulty — one of the difficulties? ; Mr. CuLLOP. I will be very glad to have you do so. , Mr. Thom. This is what I know to be one of the difficulties, which | a very intelligent State commissioner finds in respect to that matter, j He says he is constantly against the determination of questions which '| are arbitrarily limited by the State line, whereas the transportation problem does not limit itself by those lines. At the same time, he says it is very important to have a local conception of all these . matters; but if you colild have some such body as you and I are re- j ferring to — some regional or district subcommission — whose juris- ^ diction would run according to the lines of transportation instead , of according to the arbitrary lines of the State, he believes that his ,j usefulness would be very greatly increased ; and that is the view [ which has appealed to me. \ Mr. CuLLOP. If I have understood you correctlj' — and I thifik I i, have — it is your contention that the Federal Government has. a right to regulate the intrastate as well as the interstate transportation, ; under the power of the conimerce clause of the Constitution ? ' Mr. Thom. If it is done by an instrumentality engaged in inter- i state commerce. . ;| Mr. CuLLOP. Certainly. Noa^'. if that power exists — and I think j^ it is clear from the decision in Two hundred and thirty-fourth ^ INTERSTATE AND EOKEIGN TEANSPOETATTON. 355 'United States that the court has settled that proposition — what is the office now of the State commissions, in the event the interstate commission or the Federal- Government should 1;ake jurisdiction over »that matter? Mr. Thom. If the Federal Government takes the jurisdiction over the matter, of course the State authority would cease. Mr. CuLLOP. It would no longer have any functions to perform ? Mr. Thom. In respect to the particular matter over which the Federal jurisdiction was constitutionally extended. Mr. CuLLOP. Now, do you construe that to go far enough to regu- late the police powers which the States have reserved in regard to the ■operation of roads, such as the building of depots, relating also to crossings and grades, and other things that are connected with the •operation of railroads? Mr. Thom. My conception of the constitutional limitation is one thing; my belief as to the proper policy is another thing, in respect to the question you have just asked. My belief is that, constiution- ally, the Federal Government would have authority to take entire charge of the instrumentality of interstate commerce in all its rela- tionships. I think that is constitutionally possible. I do not think it is wise that that full authority should be exercised at the present time. Mr. CuLLOP. Now, in regard to the bonding of roads or raising finances for them, have the States, through their commissions, at- "tempted to exercise authority over interstate roads in relation to the bonding of them, so that the jurisdictions have been conflicting? Mr. Thom. Yes. Mr. Ctjllop. There are already instances of that kind? Mr. Thom. Yes; a good many. Mr. CuLLOP. You spoke the other day Mr. Thom. You will find, if you are interested in the subject particularly, a very interesting case of the general power, in the Supreme Court of Maryland, where Maryland undertook to exercise that power in regard to the Baltimore & Ohio road. Mr. Ctjllop. You spoke the other day of a certain amount of mile- age that was able to refund or bond itself, and a certain number of mileage that was unable to bond or refund. I would like to hear you go over that a little more fully, and develop the idea more fully than you did the other day. I think you mentioned 185,000 that were unable to refund or bond themselves, and 49,000 that were. In other words, what is the cause of the inability of this great number of mileage? I might ask, further : Is it because it is bonded to its full yalue now, or is it the reckless financing or management of the road that prevents them from raising the necessary capital? Mr. Thom. "What I said in the respect that you are now alludmg to was this : I was referring to the power of the road to obtain new money ; not for the purpose of refunding, especially, but new money for the purpose of creating additional facilities. Mr. CtJLLOP. An additional amount to that which they already have; is that it? Mr. Thom. Yes. Mr. CuLLOP. That is what I wanted to bring out. Mr. Thom. Yes; and I was trying to explain the view that I en- tertain of the great desirability, if these railroads are to remain 356 INTERSTATE AND FOEBIGN TBANSPOBTATION. stable, of being able to finance themselves by the issue of stocks, in- stead of bonds ; and I stated that in order to finance by the issue of stock, the general view, as I understand it^ is that the revenues of the roads must be large enough to pay at least a 6 per cent dividend on the stock, with a surplus of at least 3 per cent in addition, and thtit applying that test there were 39 railroads which have a mileage of 47,363 miles, which could probably be financed hy the issue of stock at par; whereas under the same test there are 137 railroads, having a mileage of 185,219 miles, that could not be financed by the issue of stock at par. Mr. Ctjllop. Now, is that because of the overbonding or the terri- tory that is penetrated by these roads, or because of the manner of financing them heretofore? Mr. Thom. I think you will find the causes which have led up to that to be mixed causes. I do not undertake to deny — I d6 not in any way take the position that some of the objectionable things which have been done in respect to financing railroads have not had an effect on the public estimate of railroad management. Whereas these objectionable things, as I am informed, relate to only about 10 per cent of the mileage, I think that they have had an effect upon the public mind, but I do not think that that alone explains it. I think that after allowing for all of that there are Other causes and other difficulties which have created insuperable difficulties. One of those is — and these things that I am now referring to have a vastly greater influence on the general view of the investor than the other matters to which I have just referred — rthat there is no power on the part of the investor, when he gets his money in, to control the amount of the earnings that will come from that property; that there is, likewise, no power, speaking in general terms, for him to. control his expense. When those two things are brought together the very fundamentals of the desirability of an investment are involved. If you can not control either your income or your expenses, you find that your chance of success is very much limited, and when you find also that those matters are controlled — ^both of them — ^by considerations which spring from a willingness to publicly agitate the question, to de- termine it by political exigencies in any particular case, you find such a very serious situation created that the investor shrinlis from entering that field of investment when he considers the attractions that may be open to him in other fields. Mr. CuiiLOP. Has not a great deal of this distrust been created in the public mind through the manipulation of the stocks and securities of the railroads on the boards of trade and stock exchanges, of the country? The bulling and bearing of the market? Mr. Thom. I have no doubt that those things apply, to railroad securities as they do to every other security. But let me say that I am entirely convinced that if there had never been any of them, if there had never been anything in railroad financial management that was criticized, if the record were absolutely clear and free from criticism, but there were left the conditions where the system of governmental regulation was repressive and corrective only,; where there was no control over revenues and no control over expenses, you would find the same condition you find now in respect to the difficulty of financing. INTEESTATE AND FOREIGN TRANSPORTATION. 357 Mr. CuLLOP. Is there any good reason in your mind why the railroad stock or bond should not be as stable in the markets as that of any other staple product? Mr. Thom. Yes ; there is a very good reason. Mr. CuLLOP. I would be glad to hear yoif state what it is. Mr. Thom. I have just stated that where the amount of your reve- nues is beyond your control no amount of industry, no amount of genius can affect the level fixed by governmental authority on your revenues, and no amount of good management can control the amount of your expenses; and therefore where the net earnings is so abso- lutely beyond the control of the man who puts his money into it there arises at once a reason of overwhelming consequence why the bonds and stocks of railroads should not be as desirable as the other character of investments to which you allude. If, however. Govern- ment concludes that the necessity for measures of correction and repression simply without anything else have passed and that there be the same cooperative spirit in the regulation of these enterprises of railroads as is in the banking- system of the country, I believe that an immensely greater credit will be attracted to them. Mr. Ctillop. Do you think these are the reasons which have occa- sioned the wide fluctuations in the values or sales of the stock of the same road which frequently occur in a very short period of time and without any reference to the earning capacity of the roads? Mr. Thom. I think if you will watch the stock markets you will see that the fluctuations in railroad securities is nothing like as great as in other securities, and I think if you watch the stock markets in respect to the stock you will see that the sales are very much better. In other words, the spirit of the speculative public is one which makes wild speculation, and the spirit of the public in these matters is very much different. Mr. CujiLOP. Such wide changes and fluctuations do not occur in the stock of banks, trust companies, real-estate mortgages, and kin- dred securities ; then, why is it that they do occur so rapidly in rail- road securities? Mr. Thom. I say I think your facts are wrong there. I do not think that the fluctuations in railroad securities are anything like as great as in many other classes of investment. You probably refer to some historic incidents when there were these great fluctuations ; they occiirred for special reasons. They have occurred not only with respect to railroad securities, but in respect to others. For every railroad stock that has had a history of great advance or great decline I think I can name some security of another class of industry that has had the same, and that now the wide fluctuations are in other classes of securities instead of in railroad securities, because they are practically neglected. Mr. CuLLOP. Have they not been neglected because of the distrust or the fear that the public has of them from former manipulations of them on the stock markets ? Mr. Thom. I do not think so. I have explained my view about that. I think if all that was withdrawn that the great fact which I have attempted to express here would control the matter anyhow, and in skying that I am not at all losing sight of the fact that in railroad finances, as well as in any other kind of finance, as well as in any other kind of business, there have been objectionable practices. 358 INTERSTATE AND FOEEIGN TRANSPORTATION. Mr. CuLLOP. There have been very great abuses, have there not? i Mr. Thom. There have been abiises. They have been confined to a small area, however. Mr. Ctjllop. Do you not believe that confidence could be restored in the public mind so as lo invite capital into this line of investment if there were provided a method for the issuing of stocks and bonds for railroads; for instance, that they could only be issued upon the filing of a petition with the Interstate Commerce Commission pro- viding for what purpose, what amount, and regulating, fixing the minimum price at which they should be sold, so that the purchaser would know the purpose for which the additional finance was to be raised and that his investment would be applied to that particular purpose? Mr. Thom. I think, Mr. CuUop, that is but one of the things to do. Of course you know that that is a thing that I think ought to be done. You have heard me say so before your committee often; you have heard me say so here. But that is only one of the things to be done. We have got to convince that investor not only that the Gov- ernment approves of the issue of the special security and approves of all the other matters to which you have alluded, but you have got to convince him further that there is going to be a proper return on them, and unless you convince him of the latter he does not care how much you supervise the issue of securities ; he will not take them, be- cause what he is after is his return, and unless he is assured of that he will not invest. Mr. Ctrixop. The increase of rates reduces the amount of business or patronage of the railroad, does it not? Mr. Thom. No, sir; the increase of rates up to a reasonable point would not reduce the volume of traffic. , The traffic is not created' simply by low rates. If there is a profit in the transaction of the shipment in question after paying the rate the traffic will move, and you have got to get a prohibitory rate before you reduce business. You do not get to the prohibitory rate by making a reasonable rate. Mr. CuLLOP. Take certain lines of products that bring a low price on the market, farm products, if the rates are low will it not invite traffic in that line of products? Mr. Thom. It will not invite trafiic in that line of product unless— I will say it will not retard the movement of that class of traffic until you make the shipment an unprofitable one. As long as it is within the range of a profitable and attractive business to the farmer his product will move. Mr. CuLLOP. But, if the rates were lower, would it not inspire him to activities along lines of production that he would not now engage in at all? Many products on the farm can be raised without prac- tically any additional labor. In the cities there is a demand for them, but the rates are such that he can not afford to ship them for the price they will bring, although they are desired in many con- gested centers of population. Now, if that rate was down to a lower figure where he could afford to produce and put on the market his product, would it not multiply business as well as revenues for the railroad companies? Mr. Thom. I think the difference between the idea that is in your mind and mine is that you are using the words " low rates," just INTERSTATE AND FOREIGN , TRANSPORTATION. 359 simply low rates without the relativity in it at all. You, say, would not a low rate bring about traffic. I say Mr. CTJUiOP. I should like to modify that a little. Mr. Thom. Will you let me finish what I was trying to say ? Mr. GuLLOP. Yes, sir. Mr. Thom. I say that if the rate is low enough in relation to what the product will bring. on the market it will do all that is necessary to stimulate traffic. The mere making a rate low enough to move the traffice anyhow and then lowering that rate which already moves the traffic, would not move more traffic. It is a question at last of the commercial merits of the proposition. Here is a farm product, which on existing rates, is profitable for the farmer to send to market. Now, he will send that if it is profitable to him, and by cutting that rate in half he will not send any more of it, because he is already induced by the profitableness of the transaction to engage in the husness. And I will say further that the farmer's interest is not in the low rate alone, or principally. What is his interest is to be able to get to the market on reasonable terms, and he wants facilities, and he is interested in that rate being high enough to guarantee the facilities, and he is interested in that vastly more than he is in just having rates indiscriminately slaughtered. Mr. CuLLOP. Now, there are certain products which can be raised on farms without additional labor, practically. They are a cheap line of products, much desired in congested centers of population, for food, but because of the rate charged for transporting them to markets, say a hundred miles, they are unable to produce and put them on the market. It seems to me that if a rate was fixed, without additional cost in transportation to the railroad company which is operating its trains, not to the capacity in many instances, of the motive power, it would add revenues to the roads, as well as relieve ■aniembarrassing situation existing throughout the country, especially at this time, in the shortness of food products, and add very, ma- terially to the revenues of the railroads. I never could understand why railroads do not meet that situation. Mr. Thom. I think you will find, Mr. CuUop, that they do meet it, and not only that, that if they do not meet it that Government has assumed the power of making them meet it. These rates are Government fixed. Now, I will give you an illustration of what you are talldng about, I think. Suppose there is a manufacturer of tobacco that has 10 boxes that he wants sent down to the station and shipped, and he gets a wagon to take them, and that wagon comes atag, but has space for 12 boxes instead 'of 10, and that the man who has the 10 boxes is willing. to pay 20 cents a box to get them down there— $2. Now, his next-door neighbor is a manufacturer of tobacco too, and there is space in that wagon for 2 additional boxes, and he comes out and say's, " You have got vacant space there, and I will give you 10 cents a box to take 2 boxes down." Now, you think that he ought to have the authority to carry those extra. 2 boxes at 10 cents, because he has got the transportation capacity there. He is going to the station anyhow, but the result of that is generally this: That load now, under the supposition that I have made, will pay $2.20. The result of that is this, that when this wagoner agrees to takes those 2 boxes for 10 cents, the man who is willing to pay 20 cents a box says, " You must take all of my 10 boxes 360 INTERSTATE AND FOBEIGN TRANSPOBTATION. for 10 cents. So that when he does that, instead of that load paying $2.20, the load pays $1.20. There are thousands of those situations that have to be taken into consideration by rate-making bodies; but we are discussing here the perfection of those rate-making Ibodies so that they will adequately respond to whatever the commerce conditions require. Mr. CuLLOP. Is it not the experience that the enactment of 2-cent fare bills in a number of the States has a tendency to very materially increase the revenues of the railroads because of the reduction of passenger fares? Mr. Thom. That is a very much disputed question. Mr. CuLLOP. It did increase the travel, did it not? Mr. Thojvi. Some people think it did and some people think it did not. The general consensus of opinion is that whi],e it induced some additional travel it reduced passenger rates so low that the pas- senger business was not contributing its part' to the upkeep of the facility, and that the burden of keeping that up was on the shippers of freight ; and the burden to an unjust extent was on the shippers of freight, so much so that the Interstate Commerce Commission has examined that question and has so declared and has directed the passenger farts to be increased. Mr. CuLLOP. But was it not a fact, at least in some jurisdictions, that instead of decreasing the revenues of the railroads or making it an additional burden upon the shipper, on the contrary, it did in- crease the revenues of the railroads? Mr. Thom. Of course, I can not say what has happened in all of the jurisdictions. I do not know; but where it has been examined the contrary effect has been declared, and the representatives of the public have directed that the passenger rates be increased. Mr. Cotlop. Now, the operation of trains — the expense has been very materially reduced by more powerful facilities, has it not? For instance, formerly one engine would pull a train of 25 freight cars; no car in that train would have a capacity of more than 28,000 pounds. Now one engine, with the same number of men in the crew, will draw a hundred cars, with a capacity running from 50,000 to 1 50,000 pounds in each car. The same number of men man a train of the increased capacity that were required to man the train of smaller capacity. Has not a great saving been brought about to the railroads in the working of this reform or increased efficiency? Mr. Thom. I think it is one of the greatest tributes to railroad management that in the :face of their increasing costs, their larger expenditures for labor, of their larger expenditures for materials, of their greater facilities which the public was demanding, the better roadbeds, heavier rails, larger yards and terminals, that they have done everything that human inventive genius would per- mit to decrease the cost by adding to the tractive* power of the engines, by adding to the character of their facilities, and the result has been in the direction that you state, to enable them to carry a unit of freight at a lower cost for the charges that I am alluding to; but the general opinion seems to be that about the limit of tractive power of engines has been reached. Of course, you realize that when you' get to the larger tractive power of engines you add to their weight. Wheii you move 100 cars in a train you add to its weight, and that involves also very much heavier and stronger rails and INTERSTATE AND FOREIGN TRANSPORTATION. 361 roadbed, and that also requires greatly strengthened bridges to carry those care. Now, everything that railroad people have been able to think of has been done in that direction, and their achievements have been very great. The result is that their expenses do not stand where they were before these improvements were introduced. Here comes along a demand for $50,000,000, perhaps, for increased ■wages and the other classes of things that I have alluded to have added to their expenses. They are not making anything like the same progress in enlarging their net earnings that these things would have effected if other things had stood still, and the result I am telling you about is not the result back yonder before these things were done, but the result after they were done. It is a condition that confronts the country to-day notwithstanding the introduction of all of these great advances to which you have alluded, and something seems necessary to be done in order to insure the public the facilities if they are to be furnished in the way they have heretofore been furnished. Mr. CtTLLOP. Now, were not all of these increased facilities econo- mies to the railroads, instead of adding to the expense? For in- stance, they now have steel cars. The steel car lasts much longer and endures much greater service than the old wooden cars did. The heavy rail is more durable and more lasting than the light rail was, which was used in the earlier period of railroad building, and in the end does it not make the operation of the roads cheaper than formerly, because of these economies in the use of more durable ma- terial for the operation of the trains? Mr. Thom. Not when you consider all of the increases that have come in other matters. Now, it may be Mr. Ctillop. Now, we are getting to where I wanted to get. Have not the increases come in high-salaried officers — presidents, vice presi- dents, general managers, and lines of that kind ? Do you think any railroad president in this country is worth $100,000 a year to that road, or to that investment, and do you not think that that is an imposition upon the man who invests his money in that property? Could he get that at anything else that he would be employed in, and does not he get his position through favoritism, by the manipu- lation of the management of the road in his selection ? Mr. Thom. Now, Mr. CuUop, I do not suppose you have at all investigated that matter, if you ask such a question. Mr. CuLLOP. I may not have, but I am trying to get information on it. Mr. Thom. Do you know what a very small percentage of all the expenses of a railroad is involved in the matters that you have alluded to, and that you might wipe them all out ? Mr. CtTLLOP. I concede it is small, but it is that much of the revenue that is being consumed. Mr. Thom. Now, just let me answer your question. You asked me a question ; let me ainswer it. I will say to you that if everyone of those officers worked for nothing, and gave their time and their skill, with the same enthusiasm and earnestness that they give it now, it would not affect this problem at all because the amount actually involved is so very little. Now, as to whether there is any railroad president in the United States getting $100,000 a year I do not know ; perhaps you do. I have never heard of any. 362 INTERSTATE AND FOREIGN TRANSPORTATION. Mr. Ctjllop. I do not know. Mr. Thom. l''hen, why do you say so? Mr. Ctillop. I have understood so. Mr. Thom. Exactly. Now, I do not know, and you say you do not know it ; but I venture to say this, that the railroad presidents of this country have been selected, not out of favoritism, not out of manipu- lation, but because of the belief on the part of the people that selected them that they were the best men for the job, and that they could give much more than the, salary that is paid in the management of those tremendous affairs. You can not get a man that is too big for the responsibilities of trying to make a success of the facilities which he is using in the public service in this country on these railroads. It is a tremendous, job, and the reason that they get such salaries as they do is because of that belief and not because of favoritism and manipulation. Of course, I am speaking generally. I have no particular cases in my mind, but that has been my observation of these matters. Mr. CuLLOP. Now, is not some of the mistrust — - Mr. Ti-iOM (continuing). And the men who have done so hava- usually come up from the ranks, where they had no favoritism and where they have hewn their own way by the things they have shown they could do. Mr. CuLLOP. Do .you think any of the mistrust that now exists, of which you speak, in the minds of the financiers, was created be- cause of the manner in which supplies for railroads and the opera- tion of the properties owned by the same stockholders a few years- ago — for instance, take coal mines? It was a common habit of a number of men who had the management of a railroad in hand to buy up a large acreage of coal land and open coal mines. Their connection with the railroads, of course, gave them, favorites — favor- itism that the independent operator could not get, until in some localities they worked very greatly to the detriment of the inde- pendent operator, and in some instances put them out of commission. Now, do you think that those things had anything to do with creating the distrust in the minds of the financiers that made them hesitate about investing in railroad securities ? Mr. Thom. I think wherever anything of that sort has been dis- closed it has been condemned. But I think you might wipe them all out and you would still be confronted with the problem you are to-day, and they have not had sufficient influence upon the investors to prevent them from going into these investments, if they were otherwise assured by a proper and cordial Government control. Mr. CuLLOP. Would they — ■. — Mr. Thom. Now, right there, in that connection, let us get the- value of that idea in its relation to the duties imposed upon you gentlemen on this committee. Let us get that. If it is to have any decisive bearing upon the problem which j^ou are to decide, we would have to determine that those things now exist to an extent that if they were all wiped out your problem would be solved. Now, I do not believe that to be the case. I believe, however, that the existence of those things in the past does justify a retention in your system of regulation of poM^ers adequate to deal with them, if any of them con- tinue to exist or any of them appear in the future. We think that: INTERSTATE ANB FOREIGN TRANSPORTATION. 363 fully. But I believe your problem goes far beyond that. You are confronted not now with the necessity of removing abuses — because I believe everybody admits that the laws are adequate to that pur- pose now — ^but you are confronted with the problem of assuring to the commerce of the future, as well as to the present, adequate facilities, and your task will not be done by simply talking about abuses, because you get nowhere, for the people you represent, as to the future, when you talk merely about abuses. You have got to go beyond that, and say, " "We will remove all the abuses, but we will not be content with that ; we will assure to the American public sufficient transportation facilities for their present commerce, and their commerce as it grows in the future." Therefore I have attempted to try to give the proper value to what you have stated, and what I have heard otherwise in respect to abuses, but to not let that in any way obscure the real thing that is before the statesmanship of this country, and that is to provide an adequate transportation facility system, with adequate facilities for the needs, not of the railroads, but of the public that you gentlemen represent. Mr. CuLLOP. But in order to get the public to understand what the future work is to be, in preparing the way for giving assistance to this great question, the public must understand what the abuses have been, so that adequate means can be provided to prevent their recur- rence. Now, along that line, was it not a fact, with reference to some of the coal properties that I have spoken of, owned by many roads, that when there was great demand for coal, in large cities,, the cars of the companies hauling coal from these mines Avere used as storehouses ? In other words, they kept their coal in the cars and kept the cars out of transportation for periods of time — sometimes- two or three weeks. Were you acquainted with that condition that ■occurred with some roads? Mr. Thom. I am not more acquainted with that than any other man who reads the newspapers. There are vast numbers of railroads in this country which are not coal roads. There are a vast number of roads in this country which are coal roads of which that can not be said. It may be said of some, but I wish to present to your minds the thought that the thing which is now in the way of the investors is not those matters, which the general belief in the qountry is to the effect have already been adequately attended to by the lawmaking power, but it is the attitude of the lawmaking power that will not recognize the necessity for adequate net returns in order to be a basis for proper credit for these carriers. Mr. CuLLOP. But was not management of this kind one of the material things that prevented roads from making earnings so ag to make their stocks attractive to the public ? Mr. Thom. Not as I know of, but I do not see how it affects earn- ings ; but if it did, then, since the investigations which are in your mind took place, these matter were years ago discarded as methods, and yet we still find this difficulty about earnings. We still find in the public mind the idea that every time you speak of a railroad somebody gets up and talks about abuses and punishment, and the investors are not going into an industry where the men who control its destinies are all the time talking about punishment and all the 70342— PT 6—16 2 364 INTEKSTATE AND FOREIGN TEANSPOKTATION. time talking about correction, and never a word of help. It is not going to Mr. CuLLOP. But if you will remove the abuses help will then vol- untarily come. That is one angle of looking at the matter. Now, let me ask you, are not the railroads now carrying more commerce at a better price than ever before in the Jiistory of the railroad busi- ness in this country? Mr. Thohi. The war in Europe has stimulated an extensive addi- tion in the commerce of this country, and I do hope that the mistake will not be made of basing the system of regulation which is to apply in all times on the exceptional conditions created by this great world catastrophe. Mr. Cttljjof. Are not the men who operate those industries making preparation for greater business after the war than they are now doing ? Are not all of the large industries of the country increasing their capacity, extending their plants; have they not taken survey of what the future will be in Europe and in this country, and ex- pecting to do a much larger business in the future than they are doing now? Mr. Thom. I thought it was a matter of profound uncertainty in the public mind as to whether or not there will be an increased business after the war. I thought the general conception was that it would likely not be, and every time you talk about peace you will find a cold shiver go down the backs of these men who have enlarged their plants. Mr. CuLLOP. They are enlarging them, are they not ? Mr. Thom. Some of them — I do not know whether they are now — but some of them did for war purposes. Mr. CuLiiOP. The Bethlehem Steel Works made a very large ad- dition, costing something like $90,000,000? Mr. Thom. I know nothing more about that than you do, from reading in the newspapers. Mr. CuLLOP. I saw the interview of the head of the institution. Now, certainly he is not unwise enough, in view of his conduct, to expect the bottom to fall out of the business after the war ? Mr. Thom. And neither do I expect the bottom of the business to fall out after the war, but I expect very great changes in the eco- nomic conditions relating to business after the war, and I can not tell what it will be. We can not tell what will be the opportunities for our products to get in the markets of the world after the war. We do not know what their buying capacity will be, and we know nothing and will know nothing until at the end of the war. One man will come along and say, " I think there will be great need for steel after the war, because of the great destruction, and I will take that side of the proposition " ; another man of equal judgment may say, " I do not know that we will control that business after the war. It may go to another country." There you are. Everything is an uncer- tainty. Mr. CuLLOP. Taking the situation as it appears now, with the num- ber of men that have been put out of commission there because of the war, the destruction of manufacturing plants, the exhaustion of their finances in the war — waste — would it not appear most reason- able that the business of this country, the commerce of it, would necessarily increase very largely after the war is over, because the fellows in the trenches over there will not arise to produce any more? INTERSTATE AND EOBEIGN TRANSPORTATION. 365 Mr. Thom. No; but, Mr. CuUop, you have got to consider the vastly increased efficiency of the men and the nations who have gone through this great discipline. You do not know what it will be. You know you have got men who have been taken away from luxury, who have known all the discipline of need and all the discipline of self-control, and you are going to put them back, as a force, to re- build the civilization of those devastated countries. Now, what they are going' to accomplish we can not tell, but we do know that those men will accomplish more than they would if they had not gone through that ordeal. Mr. CuLLOP. But it will take Mr. Thom. But I want to say this: I want to say that for us to establish our system of government — I mean, rather than our system of government, our policies of government — upon a war basis of business, would in my opinion be the most short-sighted policy you could get up. ' Mr. CuLLOP. I agree with you on that. I am speaking Mr. Thom. Now, when we are talking about more business and more earnings, we get back at last to what we are piking about in the main in this investigation, and that is a perfected system of transportation, and are we to base that, as sensible men, on the ex- ceptional conditions brought about by the great commercial changes incident to this war, or base it upon the average conditions .which will apply in the future, in time of peace? Mr. CuLLOP. Now, one of your plans for assisting business is the national incorporation of railroads, as I understand you. Mr. Thom. I think that would be the most beneficial. Mr. Ctjllop. In view of the fact that the Federal Government noAV has the power to regulate both interstate and intrastate charges on emamerce, what additional assistance would the Federal incor- poration be over the present plan other than the one of making it easier to handle in the financing of railroads? Mr. Thom. I think it would simplify the whole subject of regu- lation and would assure a national policy on all the matters that would affect the destinies of railroad investment. Mr. CuLLOP. That would be the real benefit in it, in your opinion ? Mr. Thom. I believe that you can handle this great question, di- vided up in authority, with different sources of power in different roads, and with a different measure of what they may do in a, cor- porate way. But where you have to organize this country now you have got to make it efficient. You have not got one railroad handling a part of your interstate and foreign commerce with very limited corporate powers, and another with ample, because you do not want a limitation upon your agents. You want the power to determine the entire corporate capacity of your instrumentality of interstate commerce, and you can not do that except through national charter. Mr. CiTLLOP. Now. the national-charter plan will be very strongly resisted or opposed' by the States, because it would deprive them of a source of great revenue, would it not ? Mr. Thom. I do not think so. What do you mean by the revenue? I have not got that in my mind. 366 INTERSTATE AND FOREIGN TRANSPORTATION. Mr. CuLLOP. Well, nearly every State in the Union charges a per- centage for the granting of a charter, a certain per cent of the capi- talization, which makes quite a great revenue to the States. Other- wise by national incorporation the States would lose that source of revenue, and hence would be, for that reason, if for none other, opposing the change of plan. Mr. Thom. I did not know that that was a very great revenue; but if it is, somebody has got to pay it. Now, who is going to pay it? Is it a proper charge to put upon the general public or other States, where one State, can create that burden as a condition of incorpora- tion, or is it better, when we are trimming down now everything and putting every little stone in its proper place in the mosaic we are trying to create, not to have unnecessary tribute paid anywhere, not to have unnecessary burden put anywhere, because you are ac- counting for every cent of your revenues, and where your expenses are made greater. In order that some State may have the oppor- tunity of charging for its franchise you have got to put that expense on some part of the public, either in increased rate or in impaired facilities. ' Mr. CuLLOP. I believe that is all I care to ask. The Chaikman. Senator Cummins, will you take the witness? Senator Cummins. In order to avoid any misinterpretation of the questions I intend to propose, I desire to say that I have for a long time favored, and I now favor, the very substantial enlargement of the scope of Federal control. But there are certain phases of the matter concerning which I want to secure Mr. Thom's opinion, and in order that I may conduct the examination intelligently I will state what I understand to be the argument made by Mr. Thom. First, that the capital required for the proper enlargement and coordina- tion of transportation facilities can not be secured unless there are (a) better assurances of the safety of the investment, (&) greater certainty of adequate profit. Have I stated, so far, the argument correctly ? Mr. Thom. I think I made that argument just as you have stated it. Senator. Senator Cujimins. Second, that such assurance and such certainty can be established only by creating an exclusive Federal system of regulation for interstate carriers in all matters which affect the in- terstate service rendered by the carrier. Am I still correct ? Mr. Thom. Will you read that over, Senator ? There is one part of it that I did not get. Senator Cummins. That such assurance — that is, the assurance of safety Mr. Thom. Yes. Senator Cummins. That such certainty— that is, the certainty of adequate return- Mr. Thom. Yes. Senator Cummins. Can be established only by creating an exclusive Federal system of regulation for interstate carriers in all matters which affect the interstate service rendered by the carrier? Mr. Thom. Yes, sir ; that is correct. Senator Cummins. Third, that the most effectual way to accom- plish the desired object is to enact a general law for the incorporation INTERSTATE AND FOREIGN TRANSPORTATION. 367 of interstate carriers and require all such carriers to incorporate under it? Mr. Thom. Yes, sir"; that is part of the argument I made, but that is not the. whole of it. Senator Cummins. Certainly; I am speaking of that part of it about which I intend to interrogate you. Mr. Thom. Yes, sir. Senator Cumjiins. It has been assumed by yourself and by some members of the committee that the present system has practically broken down, and that facilities for the future can only be secured in the way I have indicated. Mr. Thom, what is your definition of a confiscatory rate? Mr. Thom. My definition of a confiscatory rate? Do .you mean my own or the one under the law, as I see it ? Senator Cummins. I would prefer your own. Mr. Thom. Well, the one which is my definition of confiscatory rate is any rate less than a reasonable rate for the service rendered. Senator Cumjiins. Without regard to its effect upon the revenue of the company charging it? Mr. Thom. I say that would be my own definition. Senator Cummins. Yes. Mr. Thom. I do not mean to say that is the one universally ac- cepted. Senator Cummins. That it, there may be rates, then, which will make no returns upon the value of the property rendering the service that will, or may be, reasonable rates. Mr. Thom. That is my individual view. I think the road may be situated in such an unfortunate location and so expensively admin^ istered that the charge of reasonable rates on it would not make any return on the investment. Senator Cummins. Is it your view that the investor looks at the subject from that standpoint? Mr. Thom. No, sir ; because the investor has been taught differently from the way in which the rule has been applied. Senator Cummins. It is true, is it not, that when a man is thinking of investing money in railway securities he thinks first of the safety of the , investment — that is, the probability of securing a return of his principal — and, secondly, of the interest upon the investment that he is likely to receive f roni year to year ? Mr. Thom. Yes ; those are the things that control him — ^the safety of both his principal and return, and the amount of his return. Senator Cummins. He wants to know that there is a reasonable probability, anyhow, that when he desires to do so he can recoup his capital— that is, can sell his securities and retake his principal^ and so long as he remains the owner of the security that he will re- ceive adequate or reasonable interest upon his money ? Mr. Thom. Yes. Senator Cummins. And those two things being fairly well as- sured to him, he will invest in any security that has those charac- teristics ? Mr. Thom. The class of the public that is looking for a safe and reliable investment will invest in that. The speculative man will not. 368 INTEESTATE AND FOREIGN TEANSPOBTATION. Senator Cummins. Certainly. Now, the only evidence or facts— I will put it in that way — that you have submitted to the committee bearing upon the disinclination of men of money to invest their means in railway securiies is that during the last year only about a thousand miles of railway have been constructed ? Mr. Thom. Oh, no, sir ; that is not all. Senator Cummins. Wliat other facts have you submitted? Mr. Thom. The other facts which I have submitted are that the public does not favor investing in railroad securities any longer, and I propose that there shall be a great many witnesses here who will show that fact. Senator Cummins. That is your opinion, is it not, rather than a fact? Mr. Thom. No, sir; it is a fact whether or not the public' now seek or avoid railroad investment. Senator Cummins. How do you know that the public is uot will- ing to invest money in railway securities? Mr. Thom. Because I get it from the people who are in the invest- ment business, and we expect to have them here to testify. Senator Cummins. What company has endeavored to sell railway securities and failed? Mr. Thom. Oh, that is another question entirely. They have, however, not sold the character of railway securities that will not consume the margin of safety ; and there is another fact that I pre- sented here, namely, that the recent financing of railroads, in the last 16 years, has involved an increase of about 1 per cent a year, or about 16 per cent in the additional fixed charges, instead of the proportion between stock issues and bond issues being maintained. Senator Cummins. But you assert that we are not going forward to care in a proper way for the commerce of the country. As I im- derstood it, you said that during the last year we had built but a thousand miles of railroad. Mr. Thom. That is one of the facts. Senator Cummins. Do you know of any company desiring to build additional railways that has failed to secure the money necessary to doit? Mr. Thom. I think the companies have come to the conclusion that it is an unattractive deal. Senator Cummins. I asked you, Do you know of any company that has endeavored to secure capital that has failed in the attempts Mr. Thom. I do not know it. But I add that that question of the result can be affected in two ways, one by the company not attempt- ing to do it and the other by the company coming to the conclusion that the field is not attractive enough to attempt to do it, and that it would better put all its financial energies in increasing and improving the property it already owns. Senator Cummins. I want to be perfectly sure about one fact, namely, do you know of any company that believed a railway ought to be built and has endeavored to build it and failed to secure the capital, Mr. Thom. I personally do not know, but I do not know that there are none. I do not know one way or the other about that. I only know the fact that whereas heretofore there has been a large increase in the mileage each year of new roadst INTERSTATE AND FOEEIGN TRANSPORTATION. 369 Senator Cummins. But there may be other reasons for the failure to enlarge railway facilities than the inability to secure the capital to construct? Mr. Thom. I have been thinking of that, Senator, and when I con- sider the vast regions of this country that are in need of new rail- roads just as much as they have been in the past, and there has been no extension in them, I can not believe that the result has been brought about by anything but the feeling on the part of investors that the field is no longer attractive. Senator Cummins. But that is merely argumentative.' I wondered whether the cessation of railroad building in a measure was due to the fact that people were unwilling to invest their money in such enterprises or whether it was due to some other cause. Mr. Thom. I think it is due to the fact that railroad investments are no longer attractive. Now, that is an opinion. Senator Cummins. But do you not know of any company that has sought to secure the capital and failed ? Mr. Thom. No, but I think I can see a sufficient reason from what I know of railroad conditions to show why there would be nothing of that sort advocated by railroad managers. Senator Cummins. What is your test of the necessity of additional railroad facilities? Mr. Thom. I would say that where the territory is promising enough in respect to its products, agricultural, mineral, or forest, or any products, to make transportation necessary, that then it would be an attractive field, but of course there is a relation between the cost of the enterprise and the amount of traffic that will be produced, and when you get to the point of where there is a reasonably assured traffic that will pay the return on the investment, I think there you have your attractive field. Senator Cummins. You recognize, do you not, that with the rail- roads as they are now located and^the markets as they are now estab- lished, that the railroad building of the future must be practically carried on by established railroad companies^? Mr. Thom. I believe that to be the fact. Senator. I think we have got to rely in the future on the extension of present systems rather than the building of new systems. Senator Cummins. Inasmuch as substantially every extension into ?. new territory must rely upon transportation of an established line there is really no inducement for an independent company to en- deavor to exploit or to develop a new territory, is there ? Mr. Thom. Well, there are some, but I believe that is a disappear- ing force. Now, heretofore we all know that a railroad could build into a new territory and make itself so disagreeable that it would have to be bought out. I believe now that situations have been ma- terially altered by the public conception of such matters, and that ■ Hereafter, as you have stated it, the great thing we have to rely upon to develop new territory is for existing systems to extend into them. Senator Cummins. That is so long as private ownership continues the extensions into new territory must, practically speaking, take place through the established lines? Mr. Thom. Must for the most part. 370 INTERSTATE AND FOREIGN TRANSPORTATION. Senator CtiauiiNS. Do you know of any instance in which any established line of railway desired to build new tracks into a new territory and could not do it because it could not get the money? Mr. Thom. No, but I feel entirely justified in saying that their judgment of whether or not it was desirable to build into new terri- tory has been affected by railroad conditions as established through regulation, and that that feeling of extension would reappear if they could be assured of helpful Government action. Senator Ctjmmins. This feeling, however, has been in the minds of railway managers. They have not sought the minds of the rail- way investors, have they? Mr. Thom. Oh, 1 suppose they have discussed those questions with the) representatives of railroad investors, undoubtedly. I have no idea in the world that they have shut themselves up like clams and have not considered the usual avenues of securing money. Senator Cummins. I suppose I have already asked you the question, but I repeat it, do you know of any instance in which an established line of railway desired to extend its tracks through new territory during the last year ? Mr. Thom. You have asked that and I answer again that I, per- sonally, have no knowledge of such an enterprise as that having been offered to the public and having failed. Senator Cummins. What do you regard as the test for the neces- sity of an enlargement of the facilities of a transportation company in territory already occupied ? Mr. Thom. The test is whether the transportation company is able to carry forward promptly all the traf&c that that territory can properly produce. Senator Cummins. Is it your view that without regard to the ebb and flow of traffic — ^I say the ebb and flow of the volume of traffic- that the railway company should be prepared at all times to take care of any traffic that may be offered to it? Mr. Thom. Oh, no; that they should be reasonably prepared for any traffic that they can f orsee, and one of the greatest functions of a railroad management is to form a just and reasonable conception of the needs of the public as they develop and to have its facilities ready when the time of necessity arises. Senator Cummins. It is true, is it not, that within two years that the facilities we now have were more than sufficient to take care of the traffic? Mr. Thom. If you mean the rolling stock we have now. Senator Cummins. I mean all the facilities of the railway com- panies. Mr. Thom. They were in the low condition of business adequate, but we do not have a mere ebb and flow in business. There is, not- withstanding the ebb and flow to which you allude, there is always progress to an enlarged commerce, to a necessity for greater facih- ties, and that is the thing that has to be provided for. . Senator Cummins. You are familiar with the traffic movement of the last five years, fairly so, I assume. Mr. Thom. I do not know; I suppose I am just like any other roan. Senator Cummins. In what years of the last five has it been found that the railway facilities were insufficient? INTERSTATE AND FOREIGN TRANSPORTATION. 371 Mr. Thom. I have those years in mind. I know the fact that, taking a large view of the question, that we can trace through a series of years a percentage of increase all the time. Sometimes that increase is accentuated by special conditions; sometimes it is de- pressed below the average by special conditions, but there is the consequent growth, if you take a large view of it, and do not take it from year to year. Senator Cummins. Do not understand me to controvert the state- ment that under the present system, since we began to regulate the railways in 1887, the volume of the traffic has quadrupled or more, has it not? Mr. TiiOM. I should say so; yes, sir. Senator Cttmmins. And it is to be hoped, of course, that over long periods we shall see a like increase in the future. But there always will be, in the natural course of affairs, some years in which a part of the facilities will not be demanded and other years in which the facilities will be inadequate? Mr. Thom. That is inevitable. Senator Cummins. And it would not be either economical or wise to enlarge our railway facilities so that they could always promptly care for the peak of the load in a particular month ? Mr. Thom. No ; that is not necessary nor do I feel that under any ^stem of regulation it will be attempted. Senator Cummins. You have already stated that the present year is abnormal, have you not? Mr. Thom. Yes, sir. Senator Cummins. And you adhere to that? Jtfr. Thom. Oh, yes. Senator Cummins. So that, unfortunate as the fact may be that we are not able to expeditiously carry all the commerce that is now offered, that is no proof that there is any serious inadequacy in rail- way facilities, is it? Mr. Thom. . That is no proof that there is any inadequacy in the railroad facilities which ought to be provided against, standing alone, but I do think that you will find it will develop that the rail- road facilities would have been very much better to meet the situation if there had been a normal opportunity for the railroads to look forward. Senator Cummins. Mr. Thom, how much independent capital — by independent I mean aside from the earnings of the railways — has been invested in railway property in the last five years? Mr. Thom. I think between six and seven hundred millions a year. Senator Cummins. What amount of earnings have been invesled in betterments and enlargements, not included within the ordinary phrase of maintenance and operaticjn ? Mr. Thom. I can not tell you that. I have not the figures. Senator Cummins. You can not remember, or possibly you have never inquired? Mr. Thom. No, sir ; I do not know the fact. I should like here to put into the record some figures for the year 1915. The reason I have them is because of a question asked by Judge Sims the other day in which he spoke of the billion of dollars of earnings and why they could not be put in the properties. 372 INTERSTATE AND FOREIGN TRANSPORTATION. Mr.- Sims. Net earnings. Mr. Thom. Yes ; for the year 1915 those figures are these- Senator Cummins. You are speaking now of earnings invested in enlargements and betterments of property, are you ? Mr. Thom. I am coming down to that figure of a balance, but I just want, if you will let me, without interrupting your examination, to put these figures in. They are as follows : Net income from operations for the year ending June 30, 1915, from the railroads reporting to the Interstate Commerce Commis- sion was $688,953,248. Income from securities owned by those rail- roads, $129,374,047, making an aggregate of $818,327,295. Out of that there was paid-in interest $463,540,666, leaving a balance of $354,786,629. Dividends paid $209,520,420, or 2.4 per cent on the outstanding stock, leaving a balance of $145,266,209. It may be that balance went into improvements. Senator Cummins. You understand, I assume, that those figures are not accepted generally, are they? Mr. Thom. I do not know what you mean. Senator Cummins. I mean this : That it is charged and, I think, is rather satisfactorily proven, that during certain years of the last five the railway companies have taken from their earnings and in- vested in permanent improvement of their property, aside from ordi- nary maintenance, a very much larger proportion of their earnings than they ordinarily do. Mr. Thom. I had not been advised of that controversy ; I had not heard of that. Senator Cummins. You know, do you not, that it was very ear- nestly contended in the Advanced Rate Cases that the railways had unduly and unreasonably expanded their so-called "maintenance accounts " ? Mr. Thom. No. Senator Cummins. And in that way had disposed of a large sum of earnings that ought -to have been reported as applicable to the payment of capital — I mean, a return on capital? Mr. Thom. I was not acquainted with that controversy. Perhaps it is as you state. I assume that the Interstate Commerce Commis- sion's system of accounts was intended to reveal everything that was done. Senator Cummins. The figures you have just stated are taken from the reports of the railway companies, are they not? Mr. Thoji. On the system of accounts that the Interstate Com- merce Commission requires. Senator Cummins. I know, but that system permits of great lati- tude in discretion with respect to the application of earnings, does it not? Mr. Thom. That system reveals every cent that is spent and the purpose for which it is spent. One thing of which we can rest assured is that there are no longer any secrets in the railway world. Senator Cummins. I am not accusing the railways of anything criminal or of violating the law, but I assumed that you were fa- iniliar with the controversy with respect to the application of earn- ings that arose in the Five Per Cent Eate Case, and in other cases, too. Mr. Thom, if investors are frightened now about railway invest- INTERSTATE AND FOREIGN TRANSPORTATION. 373 ments, does their fear arise from past regulations or from appre- hension with respect to future regulation ? Mr. Thom. I think it arises from both. SenatorCuMMiNS. If it arises from past regulation, is it founded upon the idea that the railway companies have not been permitted to earn a fair, reasonable revenue ? Mr. Thom. I think that the public believe that regulation has been heretofore applied so as to give the cheapest possible rate, without any reference to the larger view of the public interest in a surplus fund suiScient to secure the credit of the carriers and the future supply of facilities. Senator Cummins. Your answer, in a paraphrase, is simply an affirmative one to my question, is it not ? Mr. Thom. I do not know. Senator CuMmins. That is to say, that you have said, substan- tially, tliat the fear so far as the past regulation is concerned arose out of unfair regulation in reducing rates or in not permitting the railway companies to charge adequate rates ? Mr. Thom. I do not use the word " unfair." I think it has been a misconception on the part of the public of the two functions of regulation. I think that heretofore the public eye has been alone upon the question of railroad abuses, the necessity for their correc- tion, and the desirability to get the least possible rate, whereas there has been much more involved, and that is a provision for the facili- ties for the future; and you can not get them without furnishing a proper basis for railroad credit. Senator Cummins. However carefully you may reflect the public opinion in the answer you have just made, it is, at the same time, a very serious impeachment upon, the intelligence and justice of the ■ Interstate Commerce Commission, is it not? Mr. Thom. I do not intend to make it so. I think it is a perfectly legitimate comment, that that has been the conception Senator Cummins. Do you mean to say that the Interstate Com- merce Commission _ Mr. Thom (continuing). In the minds of the regulating authori- ties on the subject, and I am not going to be put into the position of making a criticism on the Interstate Commerce Commission un- justly. Senator Cummins. I do not want you to do so, unless you mean it. Mr. Thom. Well, I do not mean it in any sense to reflect upon them. I think it has been the spirit of regulation. Senator Cummins. We selected an Interstate Commerce Commis- sion supposedly of intelligent and patriotic men. Now, do you mean to affirm" that there has been absent from their minds the necessity of the development of our railway facilities, so that the commerce of the country could be served? Mr. Thom. I think they have not taken due care of that, nor do I think Congress has taken due care of it; nor do I think the public mind has taken due cognizance of that, and we are all justified in bringing forward any phase of an idea that we think -has been neglected. "Senator Cummins; Perfectly justified. 374 INTERSTATE AND POEEIGN TEANSPORTATION. Mr. Thom. And that is all I am doing. I am not doing it in any spirit of criticism or antagonism. I am doing it merely for the value of what this angle of view may be to our common destinies. Senator Cummins. But, after all, your position is that the commis- sion to which we have delegated the power to revise rates, has failed to think of the future, and has imposed rates upon the railway companies which have driven investors out of the market; that is the substance of your position, is it not ? Mr. Thom. Well, Senator, no matter what invidious form your question may attempt to put upon my answer — and I do not think it is fair to try to put any, because I am simply here bringing for- ward in as considerate and as fair a way as I can, the idea, with- out particularizing any part of the governmental machinery of regulation, that regulation itself has not heretofore duly considered the needs of the future. Senator Cummins. Yes. Mr. Thom. Now, I do not mean that in any sense that would be unpleasant to anybody, but I do mean it as putting before you gentlemen, charged with your responsibilities, that thought for you to see whether or not there is anj^hing in it. Senator Cummins. I can well understand how people who think on the subject superficially may not consider that phase of it, but it is utterly impossible for me to understand how a commission com- posed of intelligent, thoughtful men could fail to give that subject all the consideration that it deserved. Mr. Thom. They may arrive at a conclusion, under one presenta- tion of the subject, different from what they would under another, and their conclusion may not have dealt successfully and adequately with the public needs for the futur^. Senator Cummins. That may be. Mr. Thom. That would be then merely this : I am not. going to be put in the position of attempting a criticism of the motives of that body. I have got a right to bring forward the thought that the policies of regulation in this country have not taken sufficient note of this important matter, and that is all I do. Senator Cummins. But it seems to me that in order to be Mr. Ti-ioM. Now, you may think that you had better just take as a whole what the Interstate Commerce Commission has done, and never question that, and never look beyond that, and you may say " Mr. Thom is wrong about it." I may be wrong about it, but I am bringing it forward with the proof which we will have to support it, to see whether or not I am right about it. I believe I am right about it. ■ Senator Cummins. What I am suggesting is that there is a differ- ence between a failure to consider that phase of the subject, and a failure to deal with it adequately. Now, if you had said that the Interstate Commerce Commission had compelled the railways to render their service at a rate that will not provide for the future, that would be a mistake on their part, if true, in my judgment, as to the rates, that were necessary for that purpose ; but whbn you assert that Congress and the Interstate Commerce Commission have not thought of the future, it seems to me that is rather a serious situation. Mr. Thom. I have not said that. I have not said that. All that I have said is that, in my judgment, whether thinking of the future INTERSTATE AND FOREIGN TRANSPORTATION. 375 or not — and, of course, they have thought of the future — ^that they have not given sufficient weight to the considerations which I am now bringing to your attention. Now, is not that a legitimate thing to say to anybody of a public commission? Senator Cummins. Yes; I think that is legitimate, in a way; and all that means is simply that the Interstate Commerce Commission has not permitted the carriers to charge a sufficient rate to take care of the future, and that, as it seems to me, is a peril of the days to come just as menacing as the peril of the days that are past. Mr. Thom. Undoubtedly. Senator Ctjmmins. For we can not do anything that will change that situation, unless we change the Interstate Commerce Commis- sion and get other men there. Mr. Thom. Oh, I do not think that is necessary. I think you want your law changed. I think you want the spirit of the Gov- ernment defined in such a way as to bring about a confidence that the public now, as represented in its chief law-making body, appre- ciate conditions in a way that will insure a cordial and friendly attitude toward anything that can be justified in the future. Now, I tried to show you that the spirit of the present law was the terms that were imposed upon the vanquished, created by the victor. I think that is true. Senator Cummins. You have developed the genesis or origin of regulation. ; Mr. Thom. Now, I want to plead with you to get into this law an assurance of governmental attitude which will give to the investing public confidence. ^ Senator Cummins. What I can not understand is this: How we can, by legislation, change the spirit of the people or the spirit, if you please, of the commission. We have delegated to the commission the authority to establish reasonable rates for the service. Now, they have gone forward, and, in so far as they have acted, they have established reasonable rates. Now, what can we do to correct the spirit of tile commission in the work that they are about to do? Mr. Thom. I do not like you to put it in the way of correcting the spirit of the commission. I am not making any attack on the Interstate Commerce Commission. Senator Cummins. Whose spirit is it, then, you want corrected? ** Mr. Thom. I am talking about your system of regulation, gen- erally, and I believe that on the lines which I have advocated here, you can put into that system of regulation certain ideas of encour- agement and assurance to the investing public that will be of great benefit. Now, what good does it do to get me down to a possible criticising of the Interstate Commerce Commission? I am not assuming that position. Senator Cummins. Every man has that right. I Mr. Thom. Why try to put me in that position? _ _ F Senator Cummins. I think what you have said is a criticism of the Interstate Commerce Commission. .. Mr. Thom. So far as I. have said, it has to go. Why do you want ' to emphasize that and bring out as if I were in antagonism to them, when I tell you I am not ? 376 INTERSTATE AND FOREIGN TRANSPORTATION. Senator CtrMMiNs. Personally, I am sure you are not; but we can not do any more than to say to the Interstate Commerce Commis- sion, " Fix reasonable rates for the service rendered by the railway companies." Mr. Thom. Yes; you can. Senator Cummins. Can we say, " You can fix unreasonable rates "? Mr. Thom. No ; but you can say that certain things must be con- sidered in fixing them. For example, here is a section of the Inter- state Commerce Commission that ha.s held distinctly that they can not consider general conditions in this country in fixing a rate ; that they must have regard only to the particular little transactions that are before them. Now, you can say to them in your law that in fix- ing the level of rates in this' country they must take into considera- tion the whole outlook ; that they must regard the credit of the car- riers to the extent that such a credit is necessary for them to be able to furnish the facilities as commerce grows. You can say that. Now, that is one of the principal things we want you to say. Senator Cummins. I was coming to just that point. I think the statement you just rnade is inconsistent with others that you have made, in this : What is a reasonable rate for the service rendered by a carrier is a judicial question finally — ^the elements that enter into it. Mr. Thom. You mean judicial — are you using that term as one to be determined bj' the courts as contradistinguished from the commis- sion ? Senator Cummins. We will say it is in its sense judicial. If we were to say to the Interstate Commerce Commission, " Fix a reason- able rate for every service rendered by the carriers " we could not go on and say that in fixing it the Interstate Commerce Commission should fix it thus and thus. Mr. Thom. Why? You have got a right to fix it yourself. You don't have to go through the commission. Senator Cummins. Because we can not do anything more than to declare that there shall be a reasonable rate. Mr. Thom. Yes, you can. Senator Cummins. But we can not declare the elements that shall make up the reasonable rate. Mr. Thom. Not only that ; but you can declare the rate. Senator Cummins. We can declare the rate? Mr. Thom. Yes; and you can tell the Interstate Commerce Com- mission everything that they must take into consideration. Senator Cummins. Can we say to the Interstate Commerce Com- mission that " You shall establish rates that will pay 6 per cent on all of the capital stock of the railway company?" Mr. Thom. Can you say that? Senator Cummins. Would that be a lawful direction? Mr. Thom. Oh, I think it would be entirely lawful. There is so much opportunity, you know, for making a man appear to advocate something when he says it is merely lawful that I want it understood I am not saying that is a desirable thing to do, but I say it is a lawful thing to do. Senator Cummins. Then, that would take the discretion entirely away from the commission? Mr. Thom. You haA'e a right to do that. Senator Cummins. We have a right to establish rates? INTERSTATE AND FOREIGN TRANSPOETATION. 377 Mr. Thom. You have a right to limit it ; you have got a right to take it away, Senator Cummins. So that what you really are asking here is that Congress shall so direct the commission that the outcome of the work of the commission will accomplish the purposes that you have in view and take away from the commission its present dis- cretion in determining what reasonable rates are ? Mr. Thom. It will not take away the discretion of the commission by any means, entirely, but it will introduce into their consideration certain standards which, if Congress approves, should be made Blatters of consideration by them. Senator Cummins. Mr. Thom, have you had any observation with regard to the disposition of investors toward the securities of other public utilities controlled by municipalities ? Mr. Thom. Only what I have heard generally. I have not per- sonally. Senator Cummins. Has the investing mind changed with regard to them, and is it as much disinclined to invest in municipal utilities as in railway utilities ? Mr. Thom. I could not tell you that. We will have here before you witnesses to show the attitude of the investing mind. Senator Cummins. What is your understanding of that attitude during the last four or five years ? Mr. Thom. My understanding of the attitude is rather indefinite on that point, and I would not care to state it, because I do not kaow enough about it to state, with accuracy. Senator Cummins. You do not know whether the utilities throughout the country, under the control of municipalities Mr. Thom. No ; I do not know how that is. Senator Cummins. Have any difficulty in financing their various enterprises or not? Mr. Thom. I do not know. That has not come under my obser- vation. Senator Cummins. Excluding duplication, the present capitaliza- tion of the railways of the country is about fifteen and one-half bil- lions, is it not ? Mr. Thom. I have not got the figures ; I do not know. Senator Cummins. Well, you know it is about $15,000,000,000, do you not ? Mr. Thom. I thought it was somewhat in excess of that, but I do not know. Senator Cummins. I am excluding the duplication of securities. Mr. Thom. We will accept your figure for the purposes of your qnestion. I do not know what it is. Senator Cummins. And of this capitalization, in round numbers, nine billions are represented by bonds and six billions by stock. Mr. Thom. Well, I haven't got those proportions; but I am willing to accept your view, because you are generally very accurate. Senator Cummins. I do not pretend to be exactly accurate, because I am using simply the round numbers, but that is my recollection and it corresponds with your idea that about 60 per cent or a little more pf the capitalization will be found in bonds, and about 40 per cent in stocks. 378 INTERSTATE AND FOBEIGN TEANSPOETATION. Mr. Thom. I have never found any difficulty in accepting your views as to the facts. Senator. Senator Cummins. You said, and it is universally known to be true, that these stocks were originally issued without payment, or substantial payment, to the corporations which issued them, and that they were given to those who took the bonds as bonuses. Mr. Thom. Not all of them by any means. A great deal of stock has been issued at par, but there has been a system of issuing stock as a bonus with bonds. Now, what proportion is involved in that I do not know. Senator CuMMiisrs. How much of the six billions of stock, or a little more than six billions, were issued without any substantial payment ? Mr. Thom. I do not know. Senator Cttmmins. I am not now speaking, of course, of what the present investor paid for the stock. Mr. Thom. I quite understand you. Senator Cummins. I am speaking of the original issue. Mr. Thom. Original issue, but I do not loiow the facts. Senator Ctimmins. You do know that it is a very large proportion of the $6,000,000,000, do you not? Mr. Thom. I should be prepared to accept that if it should turn out to be the fact. I do not know. Senator Cummins. Now, is it not true that these bonuses of stocks, through which a large part of the watered capitalization was issued, were absorbed by promoters and were not acquired by those who actually furnished the money on the bonds? Mr. Thom. Well, it may be that that was so. I know that there was a large system of promotion and they got, doubtless, what they asked in stock. Senator Cummins. The original way in which it was done, as I understand it, was that the railway company, either through a con- struction company or otherwise, issued its bonds and stocks, and that the investment brokers or bankers got the stock together with the promoters, and that when finally they sold the bonds to the real investor he got nothing more than the bonds. That is true, is it not, in a large way? Mr. Thom. I believe that to be true in a great many cases. Senator Cummins. Now, therefore, the man who really invested his money in these enterprises was not an adventurer, was he ? Mr. Thom. Well, you take, for example, such a situation as this: Here is a railroad to be built and the contractor to build it; he undertakes to do it and to furnish the money for the bonds and the stock. Now, that money that built that railroad came in that way. Ultimately those bonds are passed on to the public, just like the stock was passed on to the public, and the man that bought that bond is not the man that built the road. Senator Cummins. Precisely; and therefore so far those roads have been built by the proceeds of bonds that have been bought by investors who got nothing more than the bonds themselves and could make no profit in excess of the interest upon the bonds, is not that true? Mr. Thom. I expect a great many of those men that took the bonds got stock with them. INTERSTATE AND FOREIGN TRANSPORTATION. 379 Senator Cummins. Have you ever gone through the history of the capitalization of any considerable railway, aside from the one which you are interested in? Mr. Thom. Well, I have been brought in contact with it, and that is the was it is frequently done, for the man who furnished the money to get both stock and bonds with it — so many bonds and so much stock, as a bonus. Senator Cummins. Well, that may be true. Mr. Thom. And finally that is passed along, until the man who buys the Stock pays for it, and the man who buys the bonds pays for them. Senator Cummins. It is not my observation or knowledge that I have acquired, in what little study I have given to it. Notwith- standing the character of the stock — and we have just been discuss- ing that — and the further fact that the bonds or many of them were originally issued in a dishonest way — and by dishonest I mean that the company did not get the proceeds of the bonds and put it into the property that was being built — what per cent upon the capitali- zation was earned by the railway companies of the United States during the last 12 months, after deducting operation, maintenance, and taxes? Mr. Thom. I will get the figure and put it in the record, if you want it. I do not know. I will get it and put it in the record. Senator Cummins. Is it not true that during the last 12 months the railway companies have earned net, after making the deductions I have already mentioned, more than 7 per cent upon the entire capitalization ? Mr. Thom. Well, without knowing the fact, and granting it for the purposes of the discussion, I do not think that that has any real bearing on what you gentlemen are called upon to decide, for the reason that I do not suppose anybody will contend that you must consider this abnormal year as a permanent situation. Certainly, investors do not. If you could guarantee always the earnings up to the present level you would have the future very much simplified in respect to railroad matters, but nobody charged with this respon- sibihty believes that this is a fair test. Senator Cummins. I do not myself think it is a fair test, the one year alone; but if we need additional railway facilities — a,nd I am assi^ing that we will need more — it must be because there will be more traffic to handle in the coming years than is handled now ; that is true, is it not ? Mr. Thom. Yes, sir; but Senator Cummins. And the natural growth of commerce. Mr. Thom. It does not mean that there will be the same relation- ship between the amount of traffic and the cost of the facilities. You have got always to determine that as a permanent quantity before you can Senator Cummins. But in order to be furnished a little more in- formation on the subject, is it not true that the net earnings of all the railway companies of the country, arrived at in the way I have suggested, deducting maintenance and operation and taxes for the last five years, has averaged 6 per cent upon the entire capitali- zation ? 70342— PT 6—16 3 380 INTERSTATE AND FOREIGN TKANSPOKTATION. Mr. Ti-ioM. I should doubt that very much. I have not the figures, but I should doubt that very much. Senator Cummins. You will bear in mind, of course, that the great proportion of the bonds of the railway companies bear inter- est at 4 or 4| per cent, and if the earnings during the last five years, as an average, have paid 6 per cent upon the entire capitalization, the result would be that they have earned enough to pay about 8 per cent upon the entire stock capitalization? Mr. Thom. I do not believe that to be the fact; and I do not be- lieve that the earnings have been in sufficient amount to attract the investment of the public in them. I think the fact is just the con- trary. Senator. Senator Ctjmmixs. Do you remember what the net earnings of all the railways were, computed in the way I have suggested, in the year 1910? Mr. Tpiom. No, sir ; I do not. I can get any of those figures and put them in the record, if you want them. Senator Cummins. Do you know what they were for the year 1913? Mr. Thom. I do not carry those in my head by years. I know that the percentage has been way below the necessary surplus which must be provided if you are going to attract investors. Senator Cummins. Well, that is just what I am trying to find out Mr. Thom. We will have witnesses on the stand to give all those figures. Senator Cummins. And whether the revenues have not been a little more satisfactory to the investors than you have been inclined to believe. I have asked about 1910 and 1913, because the revenues of both those years were very carefully examined into in the two advance rate cases, and I suppose you are familiar with the showing there. Mr. Thom. You know I was not in those advance i?ate cases. We will have testimony on all those points before this committee. I have not charged my mind with that at all. Senator Cummins. If it should turn out that the figures I have given are substantially correct, you would want to revise your view of the attitude of the investor, would you not, a little ? Mr. Thom. No, sir; I would not. I think I have very certain evidence of what the attitude of the investor is. Senator Cummins. One more question along that line. You know something of the history of the capitalization of the Chicago & Alton and St. Louis & San Francisco and the Rock Island and the Erie, do you not? Mr. Thom. I just know that there has been a general feeling on the part of the public that there have been very unjustifiable methods adopted about them, but I do not know the particulars. Senator Cummins. You know that those companies are conspicu- ous among all the others for the extravagance and wildness of their capitalization, do you not? Mr. Thom. I know they have been very much criticized, but I have never gone into those controversies at all, and I do not know about them. INTEBSTATE AND FOREIGN TRANSPORTATION. 381 Senator Cummins. Excluding those companies, and the standing of their capitalization in the market, I think can be very easily ex- plained for other reasons — ^is it not true that the roads which in 1913 — and I take that because it is the last year for which we have "any report — carried 80 per cent of the traffic earned 7 per cent and a little more on their common stock ? Mr. Thom. Well, Senator, you will have to realize, of course, that it would be necessary for me to have all of those figures and to go into them to see what the fact is, and I have not the aspect of the matter that you are now presenting and the figures before me. At the same time I shall be very glad to take it up and to go into that if you desire. Senator Cummins. I did not know but that in looking into the disinclination of investors to loan money upon railway securities or buy stocks, that you had examined some of those things that I am touching upon. Mr. Thom. All those that I have examined I will tell you about, and those that I have not I will have to answer that I am doing it. Senator Cummins. Do you not believe, Mr. Thom, that a very, large factor in the hesitation, if there be such, of an investor to take stock in a railway company is due to the fact that he must put up his good money against the water that is represented in the capitali- zation of those companies? Mr. Thom. I believe the impression among investors is that there is, practically speaking, no, or very little, water in any of those com- panies now. I think that they feel that just as other companies have grown up to their capitalization, that the railways have. Senator Cummins. How did they grow up without the investment of money ? Mr. Thom. How did they? Senator Cummins. How did this property become more valuable without the investment of money? - Mr. Thom. It grows up as every other business does, by the de- velopment of its business. The thing that makes property valuable is its capacity for earning. Senator Cummins. Yes ; but its earning capacity Mr. Thom. And here is a company that goes into an undeveloped territory, and it has a very few developed enterprises. Now, as the years go by a great many enterprises grow up along that property and they add very great traffic to it and thereby increase the value of that railroad. Senator Cummins. That is, increase the earnings? Mr. Thom. Increase the earnings — increase the value of that rail- road, and that is believed by the investing public to have gone on imtil the railroads have grown up to their capitalization. Senator Cummins. Are you familiar with the three railroads upon which the committee on "valuation or division, of valuation, ap- pointed by the commission, has found values? Mr. Thom. I am familiar with the results which are not accepted. Senator Cummins. You do not think the Kansas City Southern has grown up to its capitalization, do you? Mr. Thom. Those are not accepted by the railroads. 382 INTERSTATE AND FOREIGN TRANSPORTATION. Senator Cummins. I know they are not, but you do not believe that a railroad like the Kansas City Southern has grown up to its capitalization ? Mr. Thom. I do not know the exact facts about the Kansas City Southern because I do not know about the road, but I do know that there is going to be a serious contention that great elements of value have been omitted by the valuation authorities. Senator Cummins. I know of that contention. Mr. Thom. And I believe that contention is a sound one. Senator. Senator Cummins. But, after all, there are degrees in this matter, and when we reach a certain point we ought not to find ourselves out of harmony with each other. Take the Missouri Pacific. Do you believe the property of the Missouri Pacific is worth its capitalization ? Mr. Thom. It would be the wildest guess on earth. I never was on the Union Pacific, and I do not know anything about it. Senator Cummins. I said the Missouri Pacific. Mr. Thom. I meant to say the Missouri Pacific. Senator Cummins. Do you believe the Rock Island is worth its capitalization ? Mr. Thom. Senator, what basis have either you or I for that belief? I have never been Senator Cummins. Simply because its stock is selling in the market at 6 cents on the dollar or 10 cents on the dollar or 13 cents on the dollar. Now, you do not believe, do you, that that property is worth its capitalization? Mr. Thom. Both of those roads are in the hands of receivers. Senator Cummins. And earning more than they ever earned before. Mr. Thom. What I mean by that is that while you may take a railroad here and there that is not earning enough to sustain its capitalization, that the railroads of the country, as a rule, I believe, are fully worth their entire capitalization, and I believe that if a proper element of value be allowed for reasonably in this valuation, that you are going to see that the railroads of the country are not overcapitalized, as a rule. Senator Cummins. Precisely. Mr. Thom. Now, that is a controverted question. Senator Cummins. 1 have no doubt that some railroads have in- creased in value either through investment or development of the country, so that they are worth their capitalization, but I am sure you would not be willing to affirm that that is true of even the major part of the railway companies of the land. Mr. Thom. I believe it to be true. Without, of course, adequate investigation of each property, my conviction is that when you allow the proper element of value you will find the railroads of the coun- try are not overcapitalized. Senator Cummins. You mean as a whole? Mr. Thom. Yes ; I mean as a whole. Senator Cummins. I venture to say that in acquiring the com- panies that you have combined into the Southern Railway Co., you did not pay anything like the capitalization of those companies. Mr. Thom. That may be. Senator Cummins. Why did you not? 1M"TEBSTATB AND FOEEIGN TEANSPOETATION. 383 Mr. Thom. But the association of those railroads into a useful system in the growth of business may make those properties, and I think does msike those properties, vastly more valuable now than the capitalization of the Southern. Senator Cummins. But if the railroads, taken as a whole, have during the last five years earned substantially 6 per cent upon their entire capitalization — and certainly 6 per cent upon their stock — the situation is not so desperate as we have been led to believe, is it ? Mr. Thom. I think it is. I do not think 6 per cent is enough to enable them to properly operate. You must remember the difference between these properties and other property. Mr. Adamson. Mr. Chairman, if Senator Cummins will kindly yield to me for a second, I suggest that the hour for adjournment has arrived. Senator Cummins. I had lost all track of time. Mr. Adamson. I move that the committee now take a recess until to-morrow morning. (The motion was agreed to, and accordingly, at 1 o'clock and 30 minutes p. m., the committee took a recess until to-morrow, Saturday, December 2, 1916, at 10.30 o'clock a. m.) INTERSTATE AND FOREIGN TRANSPORTATION HEARINGS BEFORE THE JOINT SUBCOMMITTEE ON INTERSTATE AND FOREIGN COMMERCE, CONGRESS OF THE UNITED STATES SIXTY-FOURTH CONGRESS FIRST SESSION PURSUANT TO PUBLIC J. RES. 25 A JOINT RESOLUTION CREATING A JOINT SUBCOMMITTEE FROM THE MEMBERSHIP OF THE SENATE COMMITTEE ON INTERSTATE COM- MERCE AND THE HOUSE COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE TO INVESTIGATE THE CONDITIONS RELATING TO INTERSTATE AND FOREIGN COMMERCE, AND THE NECESSITY OF FURTHER LEGISLATION RE- LATING THERETO, AND DEFINING THE POWERS AND DUTIES OF SUCH SUBCOMMITTEE. Part 7 DECEMBER 2, 1916 PriHted for the use of the Joint Subcommittee on Interstate Commerce WASHINGTON GOVERNMENT PRINTING OFFICE 1916 JOINT SUBCOMMITTEE ON INTERSTATE AND FOREIGN COMMERCE FRANCIS G. NBWLANDS, Nevada, Chairman. WILLIAM C. ADAMSON, Georgia, Viae Chairman. JOSEPH T. ROBINSON, Arkansas. THETUS W. SIMS, Tennessee. OSCAR W. UNDERWOOD, Alabama. WILLIAM A. CULLOP, Indiana. ALBERT B. CUMMINS, Iowa. JOHN J. ESCH, Wisconsin. FRANK B. BRANDEGEE, Connecticut. EDWARD L. HAMILTON, Michigan. Frank Hbali, Clerk. Willis J. Davis, Assistant Clerk. II INTERSTATE AND FOREIGN TRANSPORTATION-GOVERNMENT CONTROL AND REGULATION. SATURDAY, DECEMBER 2, 1916. United States Senate, Joint Subcommittjee on Interstate Commerce, ' Washington, D. C, The joint subcommittee met at 10.30 o'clock a. m., pursuant to ad- journment. Senator Francis G. Newlands presiding; also Vice Chair- man William C. Adamson. The Chairman. The committee will come to order. Senator Cum- mins, you' may proceed. ME. ALFRED P. THOM— Resumed. Mr. Thom. Are you ready to begin? Senator Cummins. I am ready. Mr. Thom. Before you begin I have some information you asked for yesterday, which I wovild like to put into the record at this point. Taking the five years from 1911 to 1915, the per cent of net income on total net capitalization was, according to the figures of our statis- tician, 4.56 per cent. The Chairman. Was what? Mr. Thom. 4.56 per cent. The per cent of total income of total gross capitalization was 4.38 per cent. As compared with the five- year period immediately before that, embracing the years from 1905 to 1910, the per cent of net income of total net capitalization was 5.25, and the per cent of total income on total gross capitalization was 5.01, showing a decline on net capitalization in the latter five- year period over the former of from 5.25 in the former to 4.56 in the latter five-year period. The per cent of total income on total gross capitalization shows a decline from 5.01 in the first five-year period to 4.38 in the last five-year period — the returns on stock, not divi- dends—but the total earnings on stock for the years from 1910 to 1915 were as follows : For all roads reporting to the Interstate Commerce Commission the amount here stated as the per cent of stock is arrived at by taking the net operating income and adding to that income the principal securities owned, and deducting from that interest on bonds reckoned at 4 per cent. In that way the result would be as follows : Per cent on all stock for the year 1910 would be 7.09, for 1911 it would be 6.17, for 1912 it would be 4.97, for 1913 it would be 5.94, for 1914 it would be 4.06, for 1915 it would be 3.44. Senator Cummins. Wliere did you get the statistics that you have just laid before the committee ? 385 386 INTERSTATE AND FOREIGN TEANSPOKTATION. Mr. Thom. Mr. Errickson, who was formerly chairman of the Wisconsin Commission until a few months ago ; he was chairman of the Wisconsin Commission — and has compiled these statistics which I haA'B now given you, and he will be on the witness stand to explain them. Senator Cummins. Are they compiled from the reports made by the railway companies to the Interstate Commerce Commission? Mr. Thom. Yes, sir. Senator Cummins. Or are they from independent sources? Mr. Thom. They are compiled from reports made to the Interstate Commerce Commission, and Mr. Errickson ■will be on the stand dur- ing these hearings to fully explain them. Senator. ^Ir. EscH. They embrace only such roads as have capitalization of a million or more ? Mr. Thom. Yes, sir. Senator Cujimins. Your suggestion made many times — and 1 regard it as a very wise one — is that there ought to be, both in the adoption of the regulatory measures and in the administration of the law, a spirit of encouragement and helpfulness rather than a spirit of hostility and repression. • You have construed what has been clone in the past as having been done largely in a spirit of hos- tility and repression, I assume. Mr. Thom. Not only I do that, Senator, but I am convinced that the investing public do that, and we think it is an entirely philo- sophic growth that you can trace to reasons in the inception of the system in what has occurred to justify public indignation, and we feel at the same time we are confronted with that fact. Senator Cummins. So far as Congress is concerned, it has simply committed 1o the Interstate Commerce Commission the authority to determine what is or is not a reasonable rate to be charged by the carriers for their services.. There is nothing hostile in that regula- tion, is there? Mr. Thom. No ; there is nothing hostile in that regulation at all ; it is a very proper regulation, but the feeling in authoritative cir- cles — and by that I mean the men who .are in position to speak for public sentiment — has been one that has caused a feeling of parsi- mony in the administration of those powers in respect to the matter. I would like to illustrate that Senator Cummins. That is, there has been some difference of opin- ion with regard to what ig" a reasonable return to the railroad com- panies for their services? Mr. Thom. Not only that, but that question. What is a reasonable return? has been influenced, in my judgment, by conditions outside of the question itself, in such matters as this that I am about to illustrate. Senator Cummins Do you— ^ — Mr. Ti-ioM. One minute, please. Let me answer this question. I am told that there is one of the States — which I will not name, but it will be named during the hearing — I am told in one of the States the State commission whenever it increased a rate would be met with a bill in the legislature to abolish the commission. Now, that com- mission Avas also kept on the defensive, and would do whatever was done in the way of advancing rates in the most parsimonious way, and would look to the political expediency, to a certain extent, rather INTERSTATE AND FOREIGN TRANSPORTATION. 387 than to the constructive purpose of guarding the future of the facilities of that country. Now, I feel that we have gone so far in the expression of public view of these matters that we have put the hand of repression upon the discretion which has been lodged in that commission, and it has reflected very largely a repressive spirit on the part of the people. Now, that is what. I am here trying to appeal against and trying to get into a clearer atmosphere. Senator Cujimixs. I am confining myself to legislation and the administration of that legislation. I am confining mself at this time to the Interstate Commerce Commission and have not in my mind the attitude or the action of the State commissions. Mr. Thom. I quite understand ; but I wanted to illustrate my view of what has happened in the regulation by the Interstate Commerce Commission of this power that you have put into their hands, and which has had the effect of not sufficiently safeguarding the future of the railroads in accordance with public requirements. Senator Cummins. The State commission regulates, at most, not more than 10 or 15 per cent of the business done by the carriers, and I leave that aside for the time being. Mr. Thom. So do I, Senator; and what I said about that was merely trying to illustrate to you my conception of what is going on also in national regulation. Senator Cummins. You know, do you not, that when the Advance Eate cases were presented, both in 1910 and 1913, and again in 1915, that a large part of the argument and a great deal of the evidence submitted, related to just the thing that you are attempting to im- press upon us, namely, that the credit of the railway companies must be sufficient to enable them to go forward and develop transportation facilities ? ' Mr. Thom. That was undoubtedly so. Senator Cummins. You know, do you not, that the final decision in the Advance Eate case rested on that ground and on that ground alone ? Mr. Thom. I do, and I know that that very thing had been at- tacked on the floor of Congress. Senator Cujimins. Undoubtedly; but you do not expect, do you, that there will be universal concurrence everywhere and with every- body, concerning governmental action. You do not expect that we will get to any such Utopia as that ? Mr. Thom. Undoubtedly not ; but unless we get to the point of surrounding these properties by business, rather than political con- sideration — unless we rise to that po^t — we are going to repel in- vestors in them. Senator Cummins. But we — according to your own admission^ have risen to that point already, because the most important decision of recent times rendered by the Interstate Commerce Commission was based upon the very proposal that you now make. _ Mr. Thom. I do not think so. Senator. I think that we have not risen to it, when, on the floor of Congress, that commission is all the time threatened with public indignation because they have done that thing, and by inaportant men. Senator Cummins. I do not know whether ^that be true or not. There are differences of opinion among the people with regard to th« 388 INTERSTATE AND FOREIGN TRANSPORTATION. justice of that decision, and I assume that every man is at liberty to speak his mind with regard to it ; but do you Ifnow of any man who has asserted anywhere that railway companies should receive less than a reasonable return or reward for their service? Mr. Thom. No; I do not know of any man, but I know this: I know there are important ^men who take such a course in public life that they menace the investor with a view entirely different from that which the investor takes, and who, when anything like this happens, make it an issue before the American people, and by their standing, by their ability, they are able to make an impression on the public mind which has the effect of discouraging confidence in the stability of railroad securities. Senator Cummins. But the railway companies make the same issue, do they not? They make a campaign before the American people; they put their views before the public with a great deal of persuasive- ness, do they not? Mr. Thom. Undoubtedly. I am not saying anything against the presentation of the other side. I am asking — not in a controversial spirit — I am asking whether or not an industry can stand a strain of that sort, constant agitation, most intelligently and capably carried forward. Now, can they do that and live is the question. Senator Cummins. You do not hope for a time, do you, when the action of our public officials, either in legislation or in administration, will be immune from criticism or comment? Mr. Thom. I do not look forward to that, but I am bringing to your attention, as a responsible American statesman, the fact that you are dealing with an industry that lies at the base of American prosperity; that that can not stand the sharp .controversial differ- ences ; that some way must be found to assure the public, if they are going to continue this investment, that there is a stability of public opinion behind them, and not all the time a controversial opinion — public opinion behind them. Senator Cummins. You said yesterday that one of the ways in which Congress could encourage the railways and be helpful would be to prescribe certain elements which the commission should take into consideration, in determining the reasonableness of railway rates. Mr. Thom. Yes. Senator Cummins. And I think you expressed the opinion that there was no doubt of our authority to do so. Mr. Thom. That is my opinion. Senator Cummins. It goes without saying, then, I assume, that if we can tell the commission thsrt it must consider certain elements in determining what is a reasonable rate, that we can also tell it that it must not consider certain elements, in determining what is a reason- able rate? Mr. Thom. Unless that would prevent the legitimate operation — unless your prohibition would prevent the legitimate operation of economic forces to which, as owners of the property, these people are entitled. Senator Cummins. Yes; but I am speaking now of legislative power. We create a commission to determine what rates shall be; they must be reasonable. Now, it must be true INTERSTATE AND FOREIGiN TRANSPORTATION. 389 Mr. Thom. Now, I say- Senator Cummins. Just a moment. Mr. Thom. Yes. Senator Cummins. It must be true that if we can state to the com- mission that in determining reasonable rates it shall consider certain factors, we can also say to it that it shall not consider certain factors ; j that must be true. I Mr. Thom. No; it must bei true — ^it is true with this limitation, that you can tell them that they must not consider any factor that it is improper for them to consider. I mean by that, this — I will illustrate it in this way : Here was the Monongahela lock case. Congress un- dertook to have that lock condemned, and it undertook to say that there were certain things that must not be considered in that con- demnation, to wit, the value of the franchise. Now, the Supreme Court said that could not be considered, because not to consider it would be to take what was property, contrary to the Constitution. Senator Cummins. Precisely. Mr. Thom. Now, with that limitation you, in my judgment, have a perfect right to prescribe what shall not be considered. I say this, J Senator, I say Congress has a right to prescribe a rate itself, if it is !; a reasonable rate ; that that involves the lesser power to refer it to I an administrative body to determine that question and have Congress f set the standard by which it shall be determined. ^ Senator Cummins. You are undoubtedly right. Congress could I prescribe a rate, subject, of course, to judicial examination, and the I judiciary would not examine into the elements which were in the minds of the members of Congress when they passed a law of that character; but that is a very different thing from prescribing to a ( commission the elements which it shall take into mind. For instance, * do you believe that we could say to the Interstate Commerce Com- j mission that in fixing a rate for the railways it must not take into consideration the advance in the value of its right of way ? I Mr. Thom. No; because that is property and it would be forbidden by the Constitution. Senator Cummins. And we can not do it, because the Constitution protects it ? Mr. Thom. Yes. Senator Cummins. That is to say that it is a judicial question and not a legislative one ? Mr. Thom. No ; it is a legislative question, within the bounds of the Constitution. j Senator Cummins. That is to say '''■'' Mr. Thom. I will express it this way. Senator: The Interstate , Commerce Commission, or any other conimission appointed by Con- gress, is a hand of Congress. It is a deputized authority to do the things which Congress might itself do. You can prescribe any limit on the power of that commission and place upon it any instructions within your constitutional powers. You are limited simply by the Constitution — by nothing else. You have got a right to deputize anything, except legislative power. You have got a right to deputize administrative power, and the limitation of your instruction is simply the Constitution. 390 /'fTEBSTATE AND FOREIGN TEANSPOBTATION. Senator (Cummins. That is, we have the right then to prescribe any element that will tend to increase the rates, but we can not with- draw any element that will tend to decrease the rates? Mr. Thom. Yes, you can. The very elements that I refer to might tend to decrease the rate. Those elements, are not necessarily the ones that increase the rate. They are merely the declaration by Congress of the things that ought to be taken into consideration. For example, one of the things that I suggest is the rights and interests of the shippers. Now, is that to increase or decrease? Senator Cummins. We are talking now about reasonable rates, and if we leave out the word "reasonable" your conclusion might be true. If we should tell the commission to ascertain what the rate should be, considering certain factors, that might or might not be valid legislation, but' when we tell the commission " You ascertain what is a reasonable rate," in my judgment,, we can not prescribe any clement that judicially, or from the judicial standpoint, is hot a proper element to be considered in determining what is a reasonable rate. Mr. Thom. Senator, I am very disappointed to hear you say so. I have profound confidence in your constitutional views, but not- withstanding my admiration for them, I feel that you are without any support whatever in that proposition. Senator Cummins. You have stated that in your opinion the rail- way companies should be permitted to earn 9 per cent, aiid I presume that is upon their capital stock and not upon the entire capitalization ? • Mr. Thom. "What I said was that it was — as I understood it--it was the general investors' view, that in order to make stock salable at par there must' be an earning power behind it at least equal to the payment of 6 per cent dividends, and at least equal to the piling up of a surplus to protect it of 3 per cent, which is the equivalent of what you said. Senator Cummins. That is simply a paraphrase of what I have just. said. Mr. Thom. The reason I did it that way was because I wanted to paraphrase it. I wanted to put it in shape where it expressed my own idea. Senator Cummins. Which is that the rates ought to be so adjusted that railway stocks can earn 9 per cent, 6 per cent of which may be used as an annual dividend and 3 per cent of which is to be accumu- lated in a surplus fund ? Mr. Thom. Yes, sir. Senator Cummins. Now, you also said that in your opinion the rates should be so adjusted that they will represent the value of the service. Mr. Thom. Yes ; I said that that was not the view, however, that I was discussing this case on, because that does not seem to have been given due weight in the decisions of the court, according to my very diffident and very humble opinion. ' Senator Cummins. We must, in forming legislation, proceed upon one theory or the other. ■ .,- Mr. Thom. Undoubtedly ; and I have assumed in everything that I have said that you are going to put yourselves where the courts seem to have put themselves. I wish very much that Congress could see its way to cut loose from that and to adopt this other principle, INTEHSTATE AND FOEEIGN TBANSPOETATION. 391 but I said that merely because it was my cherished view of the con- stitutional question involved. Senator Cttmmins. You recognize that these two proposals are entirely inconsistent with each other ? Mr. Thom. Which two ? Senator Cummins. Namely, the 9 per cent upon the stock and the ■ 'Mr. Thom. Undoubtedly they are. Senator Cummins. value of the service ? Mr. Thom. I wish you would discard my own ^iews of rate making because they are not adopted by the courts, and the 9 per cent was on the theory that it had been adopted by the courts. «, Senator Cummins. I think the court has not quite said 9 per cent. Mr. Thom. Not said the 9 per cent. What I mean is they have adopted the idea that the constitutional right is measured by a fair return. Senator Cummins. Certainly ; and you rather expect us to go along on that theory ? Mr. Thom.. I am afraid you have got to, Senator. I am afraid you ■will, at last. Senator Cummins. If you adopt the other theorj^ there is no limit upon the earnings at all. Mr. Thom. No limit either way on the earnings up or earnings down. Senator Cummins. There is a limit if we assume that there should be simply a fair return upon the value of the property rendering the service — that prescribes a rule that people can understand. Mr. Thom. I quite understand that, and I understand that this other view that I entertain is one that is not likely to be accepted by the general public, and therefore my testimony in respect to this per- centage has reference to the theory of a fair return. Senator Cummins. Then, confining ourselves for a- moment to the theory which has been adopted by the courts and which seems to prevail in the country, is it your idea that the 3 per cent surplus should be allowed to accumulate indefinitely, or should there be a limitation upon it ? Mr. Thom. My idea is it ought to be the general rule of earnings, but in lean years you will have to go into that to pay your dividends. Senator Cummins. Suppose your rates are adjusted in the lean year so you will have 9 per cent in the lean years, what would you do then with the surplus ? Mr. Thom. Senator, you are suggesting the impossible. There has never been a rate made yet that was not made in prosperous years and on prosperous standards. I mean legislatively made. Senator Cummins. But you can not assert that with regard to the aption'of the Interstate Commerce Commission, can you? Mr. Thom. Oh, no ; because they have got to make them all right Senator Cummins. Legislatively, Congress has never attempted to make a rate ? . Mr. Thom. But if you will examine rate making in this country you will see the political agitation about rates has arisen in pros- perous years, and thereupon they take the prosperous standards to 392 INTERSTATE AND EOEEIGN TEANSPOETATION. make the rates accordingly and let the lean years take care of them- selves. Senator Cummins. However that may be, the suggestion does not appeal to the Interstate Commerce Commission, does it? Mr. Thom. It does not, and they ought to be established on an average condition. Senator Cummins. You do not mean to assert there should be no- limitation upon the accumulation of a surplus, do you ? Mr. Thom. Oh, no. Senator Cummins. What would be a fair, reasonable limitation from your point of vjew ? Mr. Thom. My point of view is that the Interstate Commerce Commission will look over the whole situation and ought to estab- lish a basis of earnings, about what I have said, where the lean years would decrease it, the prosperous years somewhat increase it,, and where we will realize that that surplus will necessarily go to. build up and strengthen the transportation systems of the country which the little amount of money involved in the earnings will not begin to compare with. Senator Cummins. Do you mean to use the surplus that you ac- cunjulate in that way in the development of the property, or hold it for the purpose of paying dividends in the lean years ? Mr. Thom. I think that two things ought to be considered; a proper provision to make up deficiencies in dividend ought to be provided for and the balance put into the property. Senator Cummins. Why should any of it be put into the property? Mr. Thom. Simply because the people that own the property are perfectly willing and content that a proper proportion be applied to the upbuilding of the property. Senator Cummins. They contribute, we will say, 3 per cent this year, and then next year you will not earn another dividend of ft per cent upon the surplus that you have invested in the property. That is not fair regulation, is it ? Mr. Thom; I think when the money is earned it becomes the property of the stockholders. Senator Cumjiins. But in fixing the rates, you are, as I understand you, suggesting that if the stockholder has 6 per cent every year he will be satisfied? Mr. Thom. If he is certain of it. Senator Cum'mins. And that the 3 per cent surplus, or whatever surplus is fair, is intended to guard against a year in which the earnings will not pay the dividend of 6 per cent ? Mr. Thom. Through a series of years. Senator Cummins. If you invest' the surplus in the property then it is not available for the purpose of paying dividends, is it? Mr. Thom. No ; not if you invest it all, therefore I suggest the right way, for wise business management, is to accumulate a certain amount in cash necessary for that and to put it back in the property. Senator Cummins. You do not expect the rate payers in this country to build up the property, accumulated in the way you have suggested, and then pay interest upon the value 3f the property that is built up in that way — you- do not expect that, do you ? Mr. Thom. No; what I expect is this: I expect that the public, when they commence to consider the question, will say that the INTEESTATE AND FOREIGN TRANSPORTATION. 393 greatest public interest is in adequate transportation facilities and adequate all the time; that therefore they have got to permit such a basis of earnings as will attract the new capital necessary for that purpose, and I do not expect the rates that will be permitted to be charged will allow an undue accumulation. We need not discuss the question on anything else except principle, because you are not going to state in your law how much shall be allowed. You are merely going to try to safeguard certain public purposes, and that standard will be accepted by your deputy, the commission, and will be applied in their discretion to carry out that purpose in differ- ent ways at different times. Senator Cummins. You agree, then, that the surplus is really to protect dividends and ought not to be used to build up the property upon which another return is to be expected ? Mr. Thom. Well, I did not say that, Senator. Senator Cummins. We will pass that if you do not agree to it. Mr. Thom. I think it would be wise business management of those matters. Senator Cummins. You recognize that a very large part of the business of the country is competitive among the railroads, do you not? Mr. Thom. A very large part is. Senator Cummins. And you recognize that rates, which do carry competitive business, must be the same rates? Mr. Thom.~ Undoubtedly they ought to be. Senator Cummins. You recognize, also, that there are companies which can do business, serving competitive territory, accumulate 9 per cent upon their stock every year, that will put the competitive company into bankruptcy? Mr. Thom. And therefore I have — — - Senator Cummins. No ; not " therefore," but I ask you if you do not recognize that to be true? Mr. Thom. Yes; but I suppose I am entitled to make not only a categorical answer but an explanation. Senator? Senator Cummins. Yes; but I should like to know whether you recognize that to be the situation ? Mr. Thom. That is a possibility, and therefore I say it is exceed- ingly wise on the part of the Interstate Commerce Commission, when it applies the principle of a return on the property as a standard of what the Constitution requires, to take an average condition and deal with it, as it did in the Eastern rate cases. Senator Cummins. Yes; but -what I have just suggested is really one of the insoluble problems in railway regulation, is it not ? Mr. Thom. I thought the commission had probably dealt with it pretty well in that case, in the way of a solution. Senator Cummins. I know of a railroad, and you do, too — ^you faiow a good many of them — where two railroads given the same rates, one of them will earn 25 per cent on its capital stock and the other one will not earn anything, and they do competitive business and they serve a competitive territory. I Mr. Thom. That is a very possible situation. ^ Senator Cummins. What" are you going to do with a situation of that kind? 394 INTERSTATE AND FOREIGN TRANSPORTATION. Mr. Thom. You are going to' deal with it in a broad, comprehen- siA-e spirit of recognizing the real situation and try to apply business principles to it instead of political principles. Senator Cummins. That does not mean anything to me, . those generalizations. We have either got to allow one railroad to earn a very large return or we have got to destroy the other railroad. Mr. Thom. Then the question would come up, as I suggested, using business discretion about it, the question would come up whether or not there is any wrong done the public in the rate which makes this large earning for the big company. If so, if no wrong is done it, then the fact that its earnings are very great ought not to be objected to if this class of property is to retain public favor or have public favor. Senator Cummins. I want, Mr. Thom, to discuss with you a mo- ment or ask of you a few questions with regard to Federal incorpora- tion. You answered Mr. Adamson, and I think correctly, that a State corporation had a right to enter a State foreign to its domicile without the consent of the latter in order to engage in interstate business? Mr. Thom. Yes ; pirovided it can find a method of doing it. Senator Cujijiins. The general rule is that a corporation organ- ized in one State can not enter another without the consent of that other ; that is the general rule, is it not ? Mr. Thom. Yes ; it is. Senator Cummins. There are two exceptions to that,' as I remem- ber the law although I am a little bit rusty in the law now, and the two exceptions are these: If the corporation is. about to perform a Federal function, a general function, it can go in without the con- sent of the State, or if it is to engage in interstate commerce, it can go in to do that commerce. Mr. Thom. Now, Senator, on that general principle I am in entire accord. Here has always been my difficulty on that point. Sup- pose we have a railroad chartered by the State of Georgia, authorized to do an interstate business, and that railroad wants to acquire a right of way in the State of Alabama and the State of Alabama will not give its consent. Now I have never been able to exactly reconcile it to my mind how, in the absence of congressional legislation on the subject, that corporation, chartered by the State of Georgia, can go in and obtain a right of way in Alabama against its consent. On the other hand, suppose there is a mercantile concern in the State of Georgia that wants to do an- interstate business. It does not require the obtaining of any right of way to do that business and they can send their agencies there and do it without the consent of Alabama. But have you ever considered it from the standpoint of acquisition of right of way ? Senator Cummins. Yes; but my question did not involve that feature of it. I do not believe a foreign corporation can exercise the right of eminent domain within a State without the consent of the State within which the power is to be exercised, but of course Congress could give a State corporation the right to exercise the power of eminent domain in that State. Mr. Thom. I think so. You mean engaging in interstate com- merce ? INTEESTATE AND FOREIGN TBANSPOBTATION. 395 Senator Cummins. And that Congress could give to a corpora- tion, organized under its own laAv, the authority to take property for a pubUc purpose in any State ? Mr. Thoji. Yes, sir. Senator Cummins. In order to carry on interstate commerce? Mr. Thom. Undoubtedly. . Senator Cummins. Do you believe that Congress could give a Fed- eral corporation the right to enter a State and do intrastate business without the consent of the State ? Mr. Thom. Undoubtedly ; I do. Senator Cujimins. It has never been so decided, has it ? Mr. Thom. Oh, no. Here is what I mean, I mean that a Federal incorporated company to do an interstate business can be permitted by Congress to go into a State and do a local business just as much as the United States can permit its banks to go into a State and do an interstate business. Senator Cummins, i do not want to bring the banks in because that rests upon an entirely different proposition, in my judgment; but I do not believe that a corporation, organized under the State of Illi- nois can come into the State of Iowa and do what is known as intra- state business without the consent of the State of Iowa. I do not believe that a Federal corporation can enter the State of Iowa and do an intrastate business, whatever that may be. If there is no such thing then the difficulty disappears without the consent of the State, and it is upon that point that I should like your opinion. Mr. Thom. Senator, I take occasion' again to say, as I have said often in your presence and outside of it, I understand and appre- ciate your constitutional conception and therefore I am diffident in expressing a view at this time that has not been confirmed by Con- gress. But I feel, undoubtedly, that Congress possesses that power. I have instanced the state of the banks, which you think rests on a different principle, but it seems to me the principle underlying both of those cases is the same. Now here is a Federal purpose, the estab- lishment in the one case of a bank, in the other case of interstate carriers.. It is to carry out one of the constitutional functions of the Federal Government in both cases. In order to do that those two companies, the banks on the one hand and the railroads on the other, must be permitted to enter into the entire field of commerce. To say that the Government of the United States is confined by its agencies to do an interstate business by the corporations which it finds necessary in the public interest to create, is to hamper the United States Government by taking away from it 15 per cent of a real field of commerce. Now, in my judgment, they can not exclude the States from doing that. The States can build as many railroads and allow as many governmental agencies as they please to do in- terstate commerce, but the States have no right to assent or dissent from the power of the Federal Government to engage in the full field of commerce any more than they have the right to say that this national bank shall come here and that it can do business that is interstate in character, but that it can not do business that is State in character. I believe both of those things are an essential element of sover- eignty which the States have agreed should, in their interests and 396 INTERSTATE AND FOREIGN TRANSPORTATION, in their behalf, be vested in the impartial hands of the Federal Government, and that that can not be subject, to be crippled by with- drawing from them any proper element of commerce when they undertake to do any other portion of commerce. Senator Cummins. I do not intend to conduct an argument on that point with you, but I feel great doubt about it. I think the right to incorporate a bnnk, in order to carry on a governmental function, is one thing. Our right to regulate commerce among the States is quite another, and I am not now trying to settle what is so connected with interstate commerce as to bring it within the Federal jurisdiction, but I am assuming there is something outside. Now, I am not able to see how we can authorize a Federal corporation to do that thing outside, under our power to regulate commerce be- tween the States. Mr. Thom. Senator, what do you regard as the constitutional basis for the power of the Government to establish national banks — what provision of the Constitutirn? Senator Cummins. I would simply have to quote from McCul- lough against Maryland. Mr. Thom. What did that case say? Senator Cummins. There is no use of my quoting^ Mr. Thom. What did that case say was the function of the Gov- ernment to establish Government banks? Senator Cummins. To carry on business, create business — Gov- ernment business. Mr. Thom. In other words, we all have to admit Senator Cummins. And some people have thought ' Mr. Thom. We all have to admit that there is no clause in the Constitution to which you can assign the governmental power to establish banks, as distinct as the commerce clause. You have to hunt all over and find Fome possible basis for it. Senator Cummins. That is true, but the commerce clause is limited. The other is not. Mr. Thom. Yes Senator Cummins. The commerce clause is limited to a certain kind of commerce, and we can not authorize a Federal corporation to do anything that is not in and of itself a regulation of commerce among the States. Mr. Thom. Yes ; but the other is not limited, because you can not find it in the Constitution. You can find this in the Constitution. Now, if anything on earth— here is an exercise of a governmental duty, found on the face of the Constitution, with respect to inter- state commerce. We all admit — at least I am sure you and I do — that Congress had the constitutional power to incorporate an agency to carry that on. Having that done, the law will never permit that agency to be crippled and destroy that power — the exercise of that power to be made unavailing by withdrawing from it the support of any portion of commerce that is usually carried on by some carrier. Senator Cummins. All of that is based on your general propo- sition, which may or may not be well founded, that because the revenue derived by a carrier from intrastate business may be less than a proper revenue for the service, and thus a burden imposed INTERSTATE AND FOBEIGN TKANSPOETATION. 397 upon interstate commerce, that must be borne by the interstate rates, brings the whole subject under Federal jurisdiction. Mr. Thom. I think so, and I suppose what we are now discussing is academic rather than practical, for the, reason that, doubtless all of us will agree, no State would prevent an interstate railroad, simply because it was chartered by the Federal Government, from doing intrastate business there. It would be glad to have it do so. Senator Cummins. It arises in this way: I assume that if we in- corporate railroads we will at the same time group them through the Interstate Commerce Commission, and the corporation which we authorize will acquire the property of this group of railways. Thnt seems to be reasonable. Mr. Thom. I do not think that is the wisest way to do it. It may turn out that that is, but that has not so appeared to me. Senaor Cummins. Don't you think it is about a fair thing for the Federal Government, if the Federal Government were to acquire the railroads, to pay their value Mr. Thom. I did not quite catch that question. Senator Cummins. Undoubtedly we can give the Federal corpora- tion the right to condemn. Mr. Thom. Undoubtedly. Senator Cummins. Now, suppose it should go on and condemn properties of which it is to become the owner. What would be the measure of the condemnation? Mr. Thom. What would be the measure of value? Senator Cummins. The measure of value. Mr. Thom. What the property was worth to the person whose property was condemned. Senator Cummins. Not what the property is worth — not what it is worth to the owners of the condemned property, but what the property is worth. That means. the acquisition by the new com- pany of property at its fair nad reasonable value. Mr. Thom. The Supreme Court has determined that that value must be considered in respect to the person whose property is con- demned. Senator Cummins. The kind of property taken and the service Mr. Thom. No; the value to the owner of it, for any legitimate purpose. Senator Cummins. That has always been the rule in respect to any property. Mr. Thom. That is what I say. It must be taken with reference to the value of it to the person who owns it. _ Senator Cummins In that way we could establish a capitalization that represented the real value of all the properties, could we not ? Mr. Thom. Oh, we could — ^you would not have to pay for any- thing except value. Senator Cummins. Would you be willing to cooperate in that plan? Mr. Thom. My judgment is that the only wise course for the American Government to pursue is to regard — ^unless they want to upset the very fundamentals of healthy conditions in this country- is for the American Government to realize that certain things have happened in this country, and you must deal with that status as it is. 398 INTERSTATE AND FOREIGN THANSPORTATION. Some men say there is watered stock. Other men say there is no- longer any ^vatere(l stock; that values have grown up to them, I do not believe that you can, without creating an upheaval that is not in the public interest, try to disturb that situation. You must safeguard the future, but deal with the past as it is. Senator Cujimins. Your plan absolutely involves the recognition of all stock now outstanding in the railroads ? Mr. Thoji. There is one way you could provide for that — ^that is open for you to provide for that. Senator Cm m ins. -There is your difficulty. You will never be able to establish, in my judgment, the securities, and especially the stock securities, of railway companies until the people understand that those securities are practically the measure of the value of the property which they represent. Mr. Tiioji. No^^', the only way I think you are going to get at that, if there is any reason for dealing with it from that angle, would be to issue stock without par value to the present holders, share for share, so that their relative interest in whatever the assets are shall be maintained, but without expressing it in dollars." Senator Cummins. That would be done, anyhow. Suppose the Government organized a corporation and that corporation proceeded to take over the property of the Southern Railway Co. It would ascertain its value according to the principles which the courts all recognize, and ha^'ing ascertain its valucj it would pay the Southern Railway Co. the sum of money so established, and that money would be distributed among the present owners of the Southern Railway according to their holdings. Mr. Thoji. You mean that in the case of Government ownership it would do that ? Senator Cummins. No ; I am speakng of the Federah corporation. Mr. Thom. I do not think that is the way. Senator Cummins. But it is a way, is it not? Mr. Thom. Oh, that is a way; but I do not think that is the way.. Senator Cumjiins. Then, .we would have the Southern Railway Cp. under Federal law, with its value ascertained, and with stock and bonds outstanding representing that value. Then you have a basis, in-the markets of the world, for the establishment of credit. Mr. Thom. I think that you do not properly estimate the peculiar value of what you are there suggesting, Senator. I believe that this thing is a tremendous step ; that it has to be taken with wisdom; that it has got to be taken with the purpose of disturbing the least pos- sible the present financial conditions of the. country and of the world, and that the way to do it is to provide that after a certain date no corporation shall engage — no railroad corporation — shall engage in interstate commerce unless it takes out a Federal charter ; thereby you open the way by which a Federal charter may be secured, and provide' that that shall not affect the bonded indebtedness, other in- debtedness, or stock ownership of the existing corporation, but that the present securities outstanding shall represent corresponding' interests in your corporation. Now, there you have done this : You would say from the point of view which your questions now indicate, this. We have thereby not dealt with the purpose to squeeze- water out of existing securities. Now, I say that the only way in which you will ever succeed in doing that at the time, if you find with your conception of public ■ INTERSTATE AND FOREIGN TRANSPORTATION. 399 •duty it is necessary to be done, will be instead of issuing $100 shares in.tlie new. comJ)any for $100 shares in gold, you issue a share in the, new for a sharfe in old and do not express in the new company value at all. It is just like if you and I and other members of the committee, 10 of you and myself, owned a farm; we would each have one-eleventh interest. We might divide that, put it into a corpora- tion, find each one of us would have 11 shares of stock and each one take 1. Now there would be no value attached to that except what could be gotten out of the farm, but we would all have an eleventh interest. Now, that is a method that you might consider. Senator Cummins. I recognize that it 'is a method. That simply deludes the country, that is all. It avoids realization of the fact that the value of the property is less than the capitalization. Mr. Thom. No; it does not say anything about values. It just puts a share, of ownership Senator Cummins. Precisely; but when the commission in its authority comes to fix the rate or rates for that property the value of the property will be taken as a basis for those rates. They are engaged now in valuing the railroads for that very purpose, and why, inasmuch as we are not going to fix rates upon any other basis than the value of the property, why not come down to the piroposi- tion and allow or capitalization to represent the real value of the property ? Mr. Thom. "Why. Senator, I believe that under the present deci- sion that the ultimate criterion of rate fixing is value, not stocks and bonds. In other words, I am agreeing with the proposition that you have just announced to that extent. Now, I say the reason why ypu can not adapt the capitalization to value imless it is done already by the correspondence between the two is because you would be undertaldng a task which would result in the financial ruin of the world. You would be trying to take hold of values which had been bought and hadbeen distributed among the innocent investing pub- lic and trying to affect those values, and you can not do it by the power of government without an upheaval that it is not in the power of government to stem. Senator Cummins. I think possibly you do not take into considera- tion all the factors, This stock is now discredited. This stock is now hocked upon the market for a fraction of its par value. Now, if it is made to represent the real value of the property out of M'hich it is issued, it will assume, then, a par value, or ought to. The only difference is this — and I may be permitted to suggest it — ^you are hoping all the time, ,or at least some people are hoping all the time, that these stocks that are now comparatively worthless in the market will, by some necromancy, be allo'sVed to grow into a par value, and in that way apparently nothing is taken from the stockholder. Mr. Thom. Do not talk about necromancy, please, Senator. Use some other term than necromancy. By some economic growth. Mr. Adamson. Legerdemain. Senator Cummins. If it is by legitimate economic growth, then the new stock that would be i^ued, that would represent the real value of the property, would correspondingly raise the value. 70342— PT 7—16 2 400 INTERSTATE AND FOBEIGN TEANSPOKTATION. Mr. Thom. Undoubtedly ; but you never would be able to impress the men whose stock is taken in that way with the fact that you are not making war on them, and you are going to disturb the financial confidence of the world by doing it. Senator Cttmmins. Well, I do not think it would myself. I believe that it would be a very healthful but somewhat painful surgical op- eration, and the sooner it is performed the sooner the patient will recover. I have a great deal of sympathy with your general plan. Mr. Thom. I know you have, Senator. Senator Cummins. ■ But I think, when you base it upon the legali- zation and the perpetuation of all the securities that are now out- standing, you have raised up an obstacle which you will never be able to overcome. Mr. Thom. Well, I do not laiow. I want you to understand that in every view I have presented I have presented it to be tested by the public interest and by the wisest sort of statesmanship of this country. I have not presented in any way a view which I am not willing to submit to that kind of a test, and where I am wrong I would be greatly delighted to have wiser people set me right. Senator Cttmmins I am afraid that your mind is like many an- other— possibly like all others — somewhat difficult to convince. Mr. Thom. That is mostly the case, we find, when we get with men with strong convictions. Senator Ctjmmins. That is all I care to ask, Mr. Chairman. The Chairman. Mr. Esch, will you proceed with the witness? Mr. EscH. Mr. Chairman, I hope that both my cross-examination and the answers thereto will have good terminal facilities. Mr. Thom, has the Supreme Court always followed the same policy with reference to determining the reasonableness of the rate and the fair return to the carrier, or has there been an evolution in the court in recent years on that subject matter ? Mr. Thom. I think there has been a partial evolution. I do not think they are yet committed finally to any opinion on that subject, although I think it is fair to state that in dealing with an entire . situation they have indorsed the idea of a fair return. Mr. Esch. You are familiar with the Granger case, known as Munn V. The State of Illinois. If I recollect rightly, that decision was to the effect that the courts would not go back of a rate fixed by the legislature, even though such rate brought no profit whatever. Mr. Thom. They have abandoned that whole ground. They did announce that proposition in the Munn case. That was in 94 TJ. S., land then, I think in 118 U. S., they abandoned'that whole principle. , Mr. EscH. But in the next step in this evolution, in the case, I think, of The Covington & Lexington Turnpike Co. v. Sanfoi:d, they held that the governing body would not be responsible for the amount of profits, and if any profits could be shown by the public utility, that would satisfy the legislative judgment. Mr. Thom. Yes; they went through that stage that you have just alluded to. Mr. Esch. Then came the famous Nebraska case of 1897, Smythe 'V. Ames, which determined, what you have announced several times, the fair return upon the actual property devoted to public use. INTEESTATE AND FOKEIGN TBANSPOBTATION. 401 Mr. Thom. Yes, sir. Of course there was also the Wabash case, you remember. Mr. EscH. Yes; but Smythe v. Ames is the outstanding case, is it not? Mr. Thom. Undoubtedly. Mr. EscH. And in that they went further and said that in con- sideration of the reasonableness of a rate the value of the stocks and bonds might also be taken into consideration together with 'eight or ten other different elements of value. , ; Mr. Thom. That was one of the factors that they mentioned that would probably be considered in Smythe v. Ames. Mr. EscH. So that showed an abandonment of the doctrine in the case of Munn v. Illinois and also the Turnpike case. Mr. Thom. In other words, the abandonment of the idea that the legislative discretion was without limit? Mr. EscH. Yes. Mr. Thom. Yes; but that had been abandoned, Mr, Esch, before that. Mr. Esch. It is a leading case? Mr. Thom. Yes; it is a leading case. The Chairman. What case is that? Mr. TnbM. Smythe v. Ames in 169 U. S. The Chaieman. You say it was abandoned in 118 U. S.? Mr. Thom. Yes ; in the case of Munn v. Illinois. Mr. Esch. But in the case of Wilcox -v. Consolidated Gas Co., which is a more recent case, they there held they were entitled to a fair return and said, I think, that 7 per cent was a fair return. Mr. Thom. My recollection is they said about 6. I would not bei certain. Mr. Esch. Which has been followed by one or two subsequent cases along the same line. Mr. Thom. Yes, sir; the Knoxville v. Water Co. case was one. Mr. Esch. In that Wilcox case did they not also state that the value of the franchise must be considered as part of the assets in determining the reasonableness of the rate? Mr. Thom. That is my understanding. Mr. Esch. Is it your opinion that in fixing rates through govern- mental agency for public utility bodies, that the franchise should be considered as an element of value ? Mr. Thom. I think we would have to find out what you mean by franchise. I think you have got to take the whole property as a going concern and with the right to go and to earn in that field, and if the right to go and earn in that field is a franchise, then I think you must do that — take that into consideration. Mr. Esch. Here is a grant by a legislature, for instance, for a railroad to construct a line. That grant, of course, implies the right of, eminent domain, which is part of the sovereignty, and the grant is free. That grant is valuable. Shall the corporation be per- mitted to have valued a franchise which it has got free in fixing the reasonableness of the rate charged to the people of the sovereignty which granted it? Mr. Thom. Unless the right to do that is qualified m the grant. 402 INTERSTATE AND FOREIGBT TRANSPORTATION. Mr. Adamson. Mr. Esch, do not the various States regard that as taxable property, the franchise itself, and dp they not tax it? Mr. Esch. It depetids upon the different States. Mr. Adamson. Some of them do? Mr. Thom. Yes; it is universally done. The tax is considered a value. Mr. Esch, suppose we have^ this situation, which is not un- common in the western roads, of having large land grants made to railroads in order that they sliall be built. The Government was confronted with the question whether or not it was more valliablfe to the Goverriment to own these lands in the condition they then were or to give them! to the railroad cbiftpany, which would under- take to build its railroad, and in the case of a land gratnt the Govern- ment determined that it was a wise thing to do, to give the land and to get the railroad. Now, I have never seen any principle which would deny to t^iat railroad company the full enjoyment of these lands as much as if it had bought them. It did not pay in money. It did pay in carrying out its contract to build the road, but if it paid nothing— ai gift to me— if you gave me a farm out in Wisconsin — ^the State of Wisconsin — ^neither the State of Wisconsin nor this Government can take away from me that farm any more than if I had bought it from you. It is, my property by a lawful system of acquisition, and, consequently, it seems to me that the true principle is to determine what the property is, not its method of acquisition, and that is as Judge Adamson has just suggested, that principle is almost universally recognized in a legitimate application of the governmental power of taxation. That is true in every State that I am acquainted with. They do tax this franchise of the railroad company which is given by the State, and the State — one State taxes the franchise which was derived from another State. Mr. Esch. Do you know what State that was ? Mr. Thom. Well, if you take the Southern Kailway Co., that entire franchise was given by Virginia. There is not a State in which the company runs that does not tax a part of that franchise. Mr. EsoH. Do you know in the Spokane rate ca^es, when the ques- tions of the rates over the Greal; Northern and Northern Pacific were involved, whether or not any allowance was made for the fact that the Northern Pacific had a' tremeiidous land grant and the Great Northern had none ? Mr. Thom. I do hot know how that is. I don't remember. I wish you woiild tell me about that. Mr. Esch. No; I asked for information. You stated that econ- omists and experts in railroad matters recommended that there should be the ratio of 60 per cent outside to 40 per cent inside capital. Mr. Thom. I said that is what I believe to be the rule. We are going to develop that by having people here to testify about it. Now, I understand that there is some difference of opinion. Some people think it ought to be made as high a-s 35 or as high as 45 or 50 per Cent of inside caipital. I believe you are going to find it to, be 60 and 40, as you have mentioned. Mr. Esch. You have said that the New Haven Eoad sought to issue something like $67,000,000 of securities; that Rhode Island and Connecticut assented; that the Public Utilities Commission of jifassachusetts, while approving, denied its rigjit under the statute of Massaphusetts. Mr. Thom. That was its poTjyer under the statute of Massachusetts. Mr. EscH. Do you know whethey that was because there was afl.y provision in the law with reference to this ratio of outside and inside capital? Mr. Thom. No ; on the question of whether or not they could issue convertible securities under the laws of Jdassachuset.ts. Mr. EscH. That question, then, of security was not involved in denying the issue ? Mr. Thom. Of the proportion ? Mr. EscH. Of the proportion. Mr. Thom. No ; that was not involved. Mr. JEscH. Had it been involved do you think it would have been a righteous denial ? ^r. Thqm. Yqu mean if it had been involved ? Mr. EsoH. The proportion had been destroyed. Mr. TnpM. The proportion had 1be,en destroyed? I think, then, the question, Mr. Esch, would have been this : Do the public interests require our approval of a plan which will violate that rule of safety, in order to obtain an immediate supply of facilities, or piusj; we adhere to this rule of safety, even though it is a denial of facilities yhich the pu,blic at once requires; and I can very readily see that if j had peen on the commission I would J;iave viplatjed the rule of safety in order to supply Senator Eeandegee. No ; nothing like that. I shall not take more than five minutes. Mr. Adamson. I want to be as good to you as I can. Senator Beandegee. I thank you. On that theory the committee has asked you to proceed as the first person before us, because it was understood you had some changes to propose, both in the constitution of the commission a'nd the act to regulate commerce. You have proceeded here for 10 days before us and have been the only witness so far and have outi lined in a general, tentative way the changes that you had to sug- gest to the committee. You have stated, however, earlier in the hearing that your views and recommendations were not final and were subject to modification by anything that might appear in the hearings hereafter that caused you to change your opinion. I do not care to enter upon any cross-examination in detail of the great num- ber of subjects which you have presented — at least I do not at this time. I prefer to hear from some of the publicists and economists and others who are coming afterwards and from some of the wit- nesses which you have stated you are going to produce in considerable number to expatiate and elaborate upon the different branches of the suggestions you have made. You say they are better informed upon those subjects than you are. I simply want, for my own satisfac- tion and for the purposes of the record, inasmuch as you put in the record, on page 28, the names of the railway executives who repre- sent, I think you said, about 90 per cent of all the railways in the country, and stated that you appear as the chairman of the advisory committee to those executives Mr. Thom. Of the law committee. Senator Beandegee. Of the law committee — I wanted to ask you who the law committee consisted of? Mr. Thom. I will try to give their names. Senator Beandegee. It will be just as well if you will put it into the record later. Mr. Thom. I will do it now. Senator Beandegee. About how many are there? Mr. Thom. There are 11 of them. They are as follows : Mr. E. G. Buekland, vice president and general counsel of the New York,, New Haven & Hartford Eailroad; Mr. Albert H. Harris, general counsel of the New York Central lines; Judge Walter C. Noyes, general counsel of the Delaware & Hudson; Mr. Francis I. Gowan, general counsel of the Pennsylvania Railroad; Mr. Gardner Lath- rop, generEtl solicitor oj^ the Atchison, Topeka & Santa Fe; Mr. Burton Hanson, general counsel of the Chicago, Milwaukee & St. Paul ; Mr. N. H. Loomis, general solicitor of the Union Pacific ; Mr. Joseph F. Bryson, general counsel of the Missouri, Kansas & Texas; Mr. C. "W. Bunn, general counsel of the Northern Pacific; Mr. Chester M. Dawes, general counsel, Chicago, Burlington & Quincy; and myself, Alfred P. Thom, general counsel of the Southern, chair- man. The Chaieman. Are they all general counsel of different rail- way systems? INTERSTATE AND FOREIGN TRANSPORTATION. 413 Mr. Thom. They are either general counsel or general solicitors. Mr. Lathrop is general solicitor of the Atchison, and Mr. Loomis is general solicitor of the Union Pacific. Senator Bkandegee. By the way, is this 90 per cent of railways that they represent, is that mileage, or in business ? Mr. Thom. It means 90 per cent — I have not calculated the exact percentage — 90 per cent, or whatever the proper percentage is, of the gross earnings of railroads in the classes made by the Interstate Commerce Commission that earn as much as $1,000,000 a year. Senator Beandegee. You spoke about these suggestions that you present here in their behalf as having been the conclusions reached after much consideration and argument among them. How ex- tensive has that consideration been ? Mr. Thom. It has been very extensive. Senator Beandegee. Well, over what period of time has it ex- tended? Mr. Thom. It has extended over 18 months, and has been brought about in this way, that as many of the executives as possible would be gotten together at a time. It was not possible to get all of them together at one time, and the matter would be discussed among those who could be gotten together, and then another opportunity was seized to bring in others until every railroad executive has had the. opportunity to come in and to participate in the discussions, and almost all of them have done so. Senator Beandegee. With the law committee, do you mean? Mr. Thom. No ; I do not. I mean the law committee, while meet- ing sometimes with the executives, has not met always, but I have met as representative of the law committee; I have been at the meetings of all the executives — that is, all the meetings of the ex- ecutives. Senator Beandegee. And you are quite sure that. the views you present represent generally the views of all the gentlemen whose names you have given ? Mr. Thom. Yes, sir; you mean of the executives? Senator Beandegee. Yes; and of the law committee, too? Mr. Thom. And the law committee, with slight exceptions. For instance, I have told you of the difference in opinion on the question . of Federal powers entertained by some lawyers. Well, some of those lawyers differ with my committee and to a slight extent with me, in respect to some of the constitutional powers of the Federal Govern- ment, but they have acquiesced in the views that are presented, caus- ing me, however, to acquiesce in the practical desirability of having a certain method of dealing with the issue of stock securities through incorporation rather than through an intent to control the matter ■under State charters— not that I have not felt, and not that I do not feel a very earnest conviction of the desirability of Federal in- corporation from every standpoint, but they have convinced me that we wiU certainly avoid litigation if we apply a system of govern- mentar regulation of stocks and bonds to the incorporation- of the Federal Grovemment, whereas we are likely to.invite litigation if we try it otherwise. So that I have agreed with their views that that is a certain way to prevent litigation, while I have not modified in any sense my view of the constitutional powers of the Federal Gov- 4l4 INTERSTATE AND FOBEIGN TRANSPORTATION. ernment. But as all lawyers differ and as all men differ, you will find slight differences of opinion, but this is a consensus of oUr whole consideration of the subject. Senator Beandegee. I understand you. Now, as I sta.ted,, I con- sider your statement to be the broad outline of the suggestions that you have to make, subject to modification as the hearings progress? Mr. Thom. Yes. Senator Beandegee. And that you will have men appear before the committee who are more expert in the various details of what j'ou have suggested than you are yourself? Mr. Thom. Yes, sir. Senator Beandegee. And you have detailed information to lay before us in relation to these matters? Mr. Thom. Yes, sir. Senator Beandegee. If that is so, I shall not attempt any sort Qf cross-examination of you at this time. I have finished, Mr. Chair- man. Mr. Sims. I want to ask one question, and it will not take but a minute or two, with regard to something I overlooked the other day, and that is this, Mr. Thom: Will national incorporation of the ex- isting railroads have the effect to nullify such State laws as the Pennsylvania and New Jersey full-crew law that you described the other day? Mr. Thom. That would depend entirely upon your act of incorpo- ration. You could provide either way in respect to matters of that sort. I think you ought to provide for having charge of each situa- tion. Mr. Sims. I understood you to make the contention that wherever State laws were of such a character as to harmfully affect or encum- ber the carrier in its service to another State, by imposing burdens that would affe"ct the service in other States, that that ought to be a subject of national control? Mr. Thom. I say so now. I understood your question to relate to whether the necessary effect of incorporation would be that. I think that ought to be accomplished by your system of incorpora- tion. I think you can qualify your occupation of the field as you see proper. Mr. Sims. Then, you do think that Congress does have the power to virtually repeal such laws as would be proper ? Mr. Thom. Undoubtedly ; that has been decided, I think,, if you will recall, many times in such decisions as this, that where, Con- gress has not occupied the field of regulations the States may in a certain class of cases act until Congress does, but immediately upon Congress occupying that field the State statutes gives way to it, and undoubtedly the Federal Government has the right to occupy the field in respect to the manning of trains, just as it has occupied the field of determining the rules of liability from a carrier to employees in interstate commerce, and that the State statutes on that subject and State laws on that subject haVe already given way. Mr. Sims. I did not ask you about that. That is all I have to ask. Mr. Adamson. Mr. Chairman, it is very likely that we can not finish with Mr. Thom to-day, and it is Saturday afternoon and we have worked arduously for two weeks, and it is an invariable custom in the INTERSTATE AND FOREIGN TRANSPORTATION. 415 South for white folks and negroes to take Saturday afternoon. I think we had better rest. The Chairman. Mr. Hamilton, could you finish your interroga- tions before we went into executive session ? Mr. Hamilton. I have only a few questions to ask, but I will defer to the committee. Mr. Thorn's argument has been very fully annotated, and, as far as I am concerned, I have but a few questions to ask. The Chairman. If that is the case, had you not better conclude now? Mr. Hamilton. I am perfectly willing to adjourn. Mr. Adamson. Mr. Thom's answers though have developed a great deal of originality and force, and he sometimes makes a questioner come on with a coming appetite. Senator Beandegee. Let me suggest, Mr. Chairman, before Judge Adamson makes the motion that he intends — we are not going to sit on Monday and Tuesday, as I understand. The Chairman. No. Senator Beandegee. As Mr. Hamilton would have about three- quarters of an hour before half-past one, if he could proceed and finish up with Mr. Thom, so that we could get through with him, then when the committee convenes again it would be possible to have another witness on the stand, it might be better to postpone the ad- journment for a little while. Mr. Adamson. Senator Brandegee, I understand that the chair- man wishes to ask Mr. Thom some more questions, and I want the privilege of asking him several. Senator Beandegee. Oh, I did not know that there were to be further examinations. Mr. Adamson. If he could finish to-day I would be willing to go on, but I am satisfied he can not. Senator Brandegee. Of course I ^o not know how long the chair- man's questions are going to take. Mr. Adamson. I want to read Mr. Thom some of these good speeches in this book and ask him some^more questions. Senator Brandegee. Of course you gentlemen can regulate it ac- cording to your desires. The Chairman. 1 desire, if possible, to bring the examination of the committee to a close to-day, with the privilege to the committee, of course, of going around again and aslnng such questions as they deem desirable. Mr. Adamson. I move that the committee adjourn. The question being put, on a rising vote resulted — yeas 3, nays 4. So the motion was lost. Mr. Adamson. I misunderstood the chairman. I want to move to reconsider my motion and withdraw it. He said his purpose was to • get around one time and then adjourn. I am willing to do that, if Mr. Hamilton will not stay too long. Mr. Hamilton. Mr. Thom, I have one question as bearing upon the hne of the investigation by Mr. CuUop. Inasmuch as our ex- ports, during the last fiscal year, amounted to about four and one- half billion dollars, and inasmuch as about two billion dollars of those exports were munitions and potential munitions, it is reason- 70342— PT 7—16 3 416 INTERSTATE AND FOREIGN TRANSPORTATION. able to suppose, is it not, that when they stack arms in Europe, theiw will be a very decided falling off in export business and in the carry- ing business of the raili'oads of this country. Mr. Thom. That is nay expectation. Mr. Hamilton. What is the railroad mileage of Canada, Mr. Thom? Mr. Thom. I can not tell you. Mr. Hamilton. Could you tell me approximately ? Mr. Thom. No, I can not. I will get it for you. Mr. Hamilton. Do you know anything about the earnings of the railroads of Canada? Mr. Thom. I do not ; I can get that and put it in the record for you. Mr. Hamilton. Well, another question. How do the Canadian railroad stocks and bonds — that is, so far as those railroads are constructed by private corporations — compare as investments with the stoclffi and bonds of the railroads of the United States? Mr. Thom. Well, I am not well enough versed in that to give you that information, but I will tell you what I know about the Cana- dian Pacific. That is very high, up in the neighborhood of 175 or 180. Mr. Hamilton. And they are doing well over there? Mr. Thom. Yes. Mr. Hamilton. How many transcontinental railroads are there — Canadian transcontinental railroads? Mr. Thom. There are three, the Grand Trunk, Canadian Pacific, and the Canadian Northern, but you have got me in a field now, I am afraid, where I can not help you, because I have not studied the situation in Qanada. Mr. Hamilton. The point that I had in mind was, inasmuch as this field has been very fully covered by the inquiries heretofore, to try to institute a comparison as to prosperity between the rail- roads of Canada and the United States, not laiowing much about it myself, but assuming I might get information from you. Mr. Thom. I will have the information obtained for you and put it in the record. Mr. Hamilton. Very well. Now, this Canadian transcontinental railroad, the Grand Trunk Pacific, do you know if that has been, finished ? Mr. Thom. I do not. Mr. Hamilton. You are not prepared at this time Mr. Thom. They tell me it is not quite finished. Mr. Hamilton. I understand it is not quite finished. You are not prepared at this time to state, I suppose, the method of the construc- tion of that railroad? Mr. Thom. No ; I would not like to go into the Canadian business, because my information about it would not be of value to you. Mr. Hamilton. All right. Can you state — and I assume you can — what the mileage of the strictly intrastate railroads of the United States is? Mr. Thom. I think — ^confining it to steam roads ? Mr. Hamilton. Yfes. Mr. Thom. I think there is none at all. Mr. Hamili-on. Can you give the mileage of the electric railroads of the United States? INTERSTATE AND FOEEIGN TRANSPORTATION. 417 Mr. Thom. No, sir; I can not. Mr. Hamilton. Can you state about when these electric lines began to be competitors of the steam lines ? Mr. Thom. I think it has been in the comparatively recent past. Mr. Hamilton. It has been, I should imagine, within the last five years — perhaps a little more. I do not know, though. Mr. Thom. I should say in the last 10 years anyhow. Mr. Hamlton. Has there been a considerable extension of electric roads within recent times? Mr. Thom. I see that there has been in the West. Take the coun- try which I am interested in — ^there has been very little, except at oiie point. There has been a very considerable development of elec- tric railways in competition with the steam railways in the southern part of North Carolina and in the northern part of South Carolina by the Dukes. Mr. Hamilton. I notice in my own State (Michigan), Mr. Thom — I have in mind just at this moment a case of a recently constructed electric line. I think they call it a third-rail line. That is a method, is it not ? Mr. Thom. Yes. Mr. Hamilton. Which was built between two large towns in the State in competition with two steam railroads which have been doilig business for many yeafs, and the electric line is a very prosperous line, apparently taking a good deal of business away from the steam roads. Does it cost more or less to construct one of these electric roads than it does a steam road at the outset ? Mr. Thom. Well, that would be a mere impression. My impres- sion is it costs less, but that is a mere impression. I have never had information on the comparative cost. Mr. Hamilton. I should imagine that it costs as much, but that the maintenance might be less, but I have no figures in relation to that. The mileage of electric roads is being considerably increased, and as a rule they are in direct competition with the steam roads, and they are being constructed and doing business successfully, ap- parently, during a period when, as you say, the steam roads have been having difficulties. How do you account for that ? Mr. Thom. It seems to me that there are several ways of account- ing for it. In the first place, you do not. find the electric roads handling the same character of business or the same volume of busi- ness. They do not need the same facilities. You go into one of those States you allude to, and I expect you will fiiid tremendous railroad yards of the steam roads. You will find very small railroad yards of the electric roads. Mr. Hamilton. Yes; the steam roads have a larger yard. Mr. Thom. Yes; that is a very large element in the expense of rail- roads, the establishment of proper yards and terminals, and in ad- dition to that the steam railroads handle the lowest class of com- modities, such as coal, ores of various sorts— raw materials--•^yhlle the electric roads probably do the city business between the cities, of a higher grade, easier to be handled, and at better rates. _ Mr. Hamilton-. My observation is these electric roads do a con- siderable freight business. Mr. Thom. Do they not do it in a higher class of freight? Mr. Hamilton. I should imagine so; yes, sir. 418 INTERSTATE AND FOREIGN TRANSPORTATION. Mr. Thom. That creates a very much larger percentage. Mr. Hamilton. But their stations throughout their lines are good. All of their facilities are excellent, and they are doing an increasing business, I should say, .without knowing the actual statistics, and these roads have been constructed directly in competition with the steam roads. Mr. Thom. My idea is that they are engaging in the cream of the business, on which the country can not sustain itself. The country must sustain itself by the supplies it gets from steam railroads — ^raw materials, etc. — and you can very well imagine that in a country of cotton, practically, such as the one I have just alluded to down below here, that an electric railway might go to these cotton factories and take away the manufactured goods and carry them to some port or other, and thereby get the very highest-priced traffic. Mr. Hamilton. Exactly. Mr. Thom. Whereas they are not doing anything in the way of sustaining the general growth and supplying the general needs of the country, and those things must be done — in raw materials — must be done at a very much lower rate than the manufactured goods. Mr. Hamilton. But, Mr. Thom, is there any reason, so far as power is concerned, or for any other reason, why these electric lines might not increase their freight-carrying power so as to meet the re- quirements of the various territories which they enter? Mr. Thom. They can, but when they do it and tap the point of supply which the steam railroads have to tap, in order to supply the human needs, they would then get in a region of the same class of expenses that the steam railroads are under. Mr. Hamilton. Steam roads in some instances supplement their own steam power by the use of electricity. Mr. Thom. At some points ; for instance, Manhattan Junction and New York, they have a few. Mr. Hamilton. I think that is all for the present, Mr. Thom. Out of deference to the chairman I have hastened my inquiries. The Chairman. I did not wish to limit your inquiries at all. The committ«e will now take a recess until Wednesday at 10 o'clock. Mr. Thom. I am still on the stand ? The Chairman. You are still on the stand. Mr. Thom, let me ask you to look over the material which I have put in the record, speeches, and magazine articles, and reports, and particularly resolutions, bills and amendments upon national incorporation. Mr. Thom. I have pretty well done that already, biit I will do it again between now and next Wednesday. The Chairman. Because I would like to question you regarding the national incorporation act. (The joint committee thereupon, at 1 o'clock p. m., adjourned until Wednesday, D'ecember 6, 1916, at 10 o'clock a. m.) X INTERSTATE AND FOREIGN TRANSPORTATION HEARINGS BEFOEE THE JOINT SUBCOMMITTEE ON INTERSTATE AND FOREIGN COMMERCE, CONGRESS OF THE UNITED STATES SIXTY-FOURTH CONGRESS FIRST SESSION PURSUANT TO rUBLIC J. RES. 25 A JOINT RESOLUTION CREATING A JOINT SUBCOMMITTEE FROM THE MEMBERSHIP OF THE SENATE COMMITTEE ON INTERSTATE COM- MERCE AND THE HOUSE COMMITTEE ON INTERSTATE AND FOREIGN COMlilERCE TO INVESTIGATE THE CONDITIONS RELATING TO INTERSTATE AND FOREIGN COMMERCE,. AND THE NECESSITY OF FURTHER LEGISLATION RE- LATING THERETO, AND DEFINING THE POWERS AND DUTIES OP SUCH SUBCOMMITTEE. Part 8 DECEMBER 6 Printed for the use of the Joint Subcommittee on Interstate Commerce- WASHINGTOiN GOVEENMENT PRINTING OFFiCE 191« JOINT SUBCOMMITTEE ON INTERSTATE AND FOREIGN COMMERCE. FRANCIS G. NEWLANDS, Nevada, Chairman. WILLIAM C. ADAMSON, Georgia, Vice Chairman. JOSEPH T. ROBINSON, Arkansas. THBTUS W. SIMS, Tennessee. OSCAR W. UNDERWOOD, Alabama. WILLIAM A. CULLOP, Indiana. ALBERT B. CUMMINS, Iowa. JOHN J. ESCH, Wisconsin. FRANK B. BRANDEGEE, Connecticut. EDWARD L. HAMILTON, Michigan. FuANK Hbaly, Clerk. Willis J. Davis, Aasietant Clerk, u INTERSTATE AND FOREIGN TRANSPORTATION. wednesday, december 6, 1916. Congress of the United States, Joint Subcommittee on Interstate Commerce, Room 326 Senate Office Building, Washington, D. C. The joint subcommittee met at 1.0 o'clock a. m., pursuant to ad- joumment, Senator Francis G. Newlands presiding; also Vice Chair- man William C. Adamson. The Chairman. The committee will come to order. It has been suggested that Mr. Thelen,' who has been here for sometime be heard to-day on behalf of the State railway commissions, and that Mr. W. J. Bryan, who is here for a couple of days only, and who leaves to-morrow evening, should be heard to-morrow, and then we should continue the examination of Mr. Thom and complete it. Mr. Hamilton. Mr. Chairman, what branch of the subject does Mr. Bryan desire to be heard upon ? The Chairman. He desires to be heard against the centralization of power in the National Government over transportation. Mr. Adamson. I suggest that under that arrangement Mr. Thom might as well be relieved for the balance of the week if he wants to do anything else. The Chairman. It is possible we might go on with him on Satur- day, might we not ? Mr. Adamson. I imagine all these gentlemen will get through by Saturday. The Chairman. If that arrangement is satisfactory to the com- mittee, and there is no objection, we will hear Mr. Thelen this morning. Senator Underwood. Mr. Chairman, have you consulted Mr. Thom about it? The, Chairman. That will suit his convenience. Mr. Adamson. We had just finished one round, and before we start another round of cross-examination, Mr. Thom, we are in a position to let you off. The Chairman. If there is no objection, the committee will now hear Mr. Thelen. Mr. Thom. Mr. Chairman, does the committee Imow anything about what it will do in the way of holding sessions next week, or has it arrived at any conclusion in that respect? The reason I am asking the question is that I have made an engagement for Monday and Tuesday of next week, assuming from what happened this week it will not hold sessions during those two days. Of course, my 419 420 INTERSTATE AND POEEIGN TRANSPORTATION. engagement is subject to cancellation, but I would like to know what the plans of the committee are with regard to next week. The Chairman. The only determination the committee has thus far reached has been to hold meetings to-day, Thursday, and Satur- day of this week. The committee has come to no conclusion with reference to further meetings. Mr. Adamson. Will it suit Mr. Thom's convenience if we hold an executive session on Saturday and notify him afterwards? We can determine what the course will be and then notify him. Mr. Thom. That will be satisfactory. Senator Underwood. It seems to me that Mr. Thom has been here nearly two weeks, and if he has business engagements and does not wish to be heard on Monday and Tuesday, there is no reason why we could not hear him later in the week. Senator Ctjmmins. Mr. Brookhart is here and has been here for two weeks, and I would like very much if he could follow Mr. Thelen or Mr. Bryan, for I realize that Mr. Bryan, being here only for a day or two, should be here to-morrow morning, but after Mr. Thelen finishes I would like Mr. Brookhart to be heard. Mr. Adamson. Then I suggest that we notify Mr. Thom later as to the decision of the committee. The Chairman. It may be possible to go on with Mr. Thom on Saturday. You will be free on Saturday, will you, Mr. Thom? Mr. Thom. Yes, sir The Chairman. Very well ; we will notify Mr. Thom, and he will understand that he may not be called upon on Monday or Tuesday. Mr. Thom, you will be ready on Wednesday, as. I understand it, if the committee concludes to go on with you ? Mr. Thom. Yes, sir. Mr. Adamson. Mr. Brooldiart is sitting back here, and there is no use calling Mr. Thom back here on Saturday. We have now four witnesses scheduled, and before we take up Mr. Thom again you know they will take four or five days. The Chairman. What is the sense of the committee? Senator Cummins. I think we ought to do that ; I think we ought to hear Mr. Thelen, Mr. Bryan, and Mr. Brookhart, and their exami- nations will require four or five days probably altogether. Senator Brandegee. I think we can excuse Mr. Thom until he re- ceives further notice. The Chairman. If there is no objection, that order will be made, and the understanding is that we will proceed with Mr. Thelen, Mr. Bryan, and Mr. Brookhart. STATEMENT OF MR. MAX THELEN, PRESIDENT CALIFORNIA RAILROAD COMMISSION. Mr. Thelen. Mr; Chairman and members of the committee, speak- ing for the National Association of Railway Commissioners, of which I have the honor to be the president, and also for the Railroad Commission of California, in which I have the honor to occupy' a similar position, I desire to express our appreciation for this oppor- tunity to appear before you gentlemen and to offer such suggestions as occur to us in conection with the solution of the tremendously INTERSTATE AND FOREIGN TRANSPORTATION. 421 important problems which are now under consideration by this committee. We regard it, gentlemen, not merely as a privilege but also as a duty arising from our responsibile positions in, the various States of the Union, to come before you and to give to you such assistance, if any, as we can from the experience which we have had in the regulation of railroads and other classes of public utilities in the various States of the Union. The National Association of Kailway Commissioners is an asso- ciation composed of the State railroad and public-service commis- sions of the various States of the Union. At present all except two States of the Union have either a State railroad commission or a State public-service commission, and all of those commissions are members of the National Association of Eailroad Commissioners. The association has been in existence for over 20 years. The pur- pose of the association is the discussion of the problems affecting the regulation of railroads and other classes of public utilities in the hope that as a result of those discussions certain constructive policies might be adopted by the various States of the Union. At its convention held in Washiiigton a few weeks ago the Na- tional Assocition of Railway Commissioners authorized the com- mittee on State and Federal legislation to appear before you gentle- men and to offer all possible assistance to you. The members of this committee are the Hon. Joseph L. Bristow, chairman of the Public Utilities Conamission of Kansas, who is chairman of the committee ; Hon. W. G. Busby, who is chairman of the Public Utili- ties Commission of Missouri ; Hon. C. M. Candler, who is chairman of the railway commission of Georgia ; Hon. L. B. Finn, who is chairman of the railroad commission of Kentucky ; Mr. Carl Jack- son, member of the railroad commission of Wisconsin ; Hon. Edward C, Niles, chairman of the Public Service Commission of the State of New Hampshire ; and Judge Owen Thompson, member of the Public Utilities Commission of Illinois; and the president of the association as ex officio member. We are here, gentlemen, not in hostility but in a spirit of helpful- ness. We want to do. whatever we can to be of assistance to you, and right at this point, speaking for my own commission, the Rail- road Commission of California, I want to say that if there is any special problem which develops during the course of theSe hearings, which problem you think should receive special investigation, not merely the commissioners but the heads of our various departments, men who are trained in the regulation of public utilities, and to a very considerable extent in their construction, will be only too glad to.be of service to you as a matter of courtesy and for the good of the cause. Now, with these few opening remarks, I wish to address myself directly to the argument which Mr. Thorn has presented. You will find, gentlemen, that my style of presentation can not compare in any way with the beautiful oratory of which Mr. Thom has shown himself a master. The men of the West can not hope to in any way compete, when it comes to eloquence, with the gentlemen of the South, so, without any question at all, the prize for eloquence belongs to them; and I shair address myself in the simple, dire(!t way— the 422 INTERSTATE AND FOREIGN TBANSPOETATION. wa.y we have in the West — to the consideration of these various problems. Mr. Thom, as you will remember, divided his argument into three portions, one presented on each day. On the first day he discussed the financial situation, as far as the railroads are concerned; he referred to their credit ; he referred to their necessity for additional funds, and expressed some doubt as to whether they would be able to secure these additional funds for capital, extensions, and other- wise under existing conditions. On the second day he addressed himself to the cause of the existing conditions, to the cause of im- paired railroad financial credit, and he presented to you at that time an analysis in which he charged that the cause of impaired railroad credit is principally regulation — regulation by the Nation and, even more particularly, regulation by the States. On the third day he presented to you his nine remedies, which, as I understood it, are a first installment ; it is the first part of a program which the railroads ultimately desire to present to this committee and to Congress. Referring now for a moment to the first day's presentation, I am glad to say, in the interest of harmony, that we agree with the rail- roads in part. We agree with them that the railroads have been derelict in their duty of supplying sufficient cars, equipment and other facilities to the shipping public ; we agree with them that if it is true that the panic of plenty- of 1907 and the present high cost of living are due to a failure to supply the necessary transportation facilities, then the credit for that condition rests with the railroads. We agree, furthermore, that it will be necessary for the railroads, in the immediate future and thereafter, to secure large amounts of additional capital, not merely for extensions into new territory, but also for additions and betterments to the existing railroads. To that extent, we agree with them. ■ But when it comes to the claim that the financial credit of all the railroads is greatly impaired and that the whole railroad situation has gone to the damnation bow wows, we distinctly disagree with them. I do not wish to tire you gentlemen with long reports of statistics with reference to the financial condition of the railroads ; I know that statistics are usually very dry. I think, however, that I might serve my general purpose in this respect by reading a paragraph from an address which was delivered by Judge Robert R. Prentis, a member of the highest court of the State of Virginia, before the National Association of Railway Commissioners at .its last convention. In this address Judge Prentis says, in part— Mr. EscH. Was he not the president of your association at the time he delivered that address? Mr. Thelen. He was the president of the association and served with distinguished credit (reading) : While it may not be entirely fair to compare tlie present large earnings with the earnings for the preceding 12 years, without some reference to the sudden prosperity, attributed by many altogether to the European war, it is interesting to note that the total operating revenues have, with some fluctuations, increased from $1,975,174,091 in 1904 to the sum of $3,396,808,234 in 1916, and the average per mile of line from $9,306 In 1904 to $14,818 in 1916. During that period the operating expenses per mile of line have increased from $6,308 in 1904 to $9,684 in 1916, and the net operating revenue during the same period has in- creased from $2,998 in 1904 to $5,134 in 1916— that is, the operating expenses have increased 5i'> per cent, while the operating revenue has increased 71 per cent. INTEESTATE AND FOREIGN TBANSPOETATION. 423 Judge Prentis then refers to the operating ratio for 1916, which ■was 65.4 per cent. He states that the lowest operating ratio of any year within the period indicated was in 1916, and that the highest was in 1914, when it was Y2.2 per cent, and the next lowest was 1906, when it was 66 per cent. Judge Prentis also refers to an editorial in the financial column of the New York Times, in the issue of October 9, 1916. In this edition of the paper the financial editor says : It is a habit to put all the railroads in a group and of late it has been a habit to talk of all railroads as though they were subject to the great difficulties under which some roads, even many, are laboring. That is a false market point of view. There are railroads in a very strong positions — railroads which year after year have paid good dividends and which to-day are earning those dividends twice over and in some cases more — showing the fallacy of considering the railroad problem as a whole, when some railroads are entirely prosperous while others are having difficulty. Why should there not be confidence in the ability of such properties to with- stand the effects of regulation, and to continue to give good returns to their stockholders? Moreover, why is it not reasonable to recognize the fact that a road once poor is not necessarily poor forever? Big earnings month after month with no sign of diminution are surely a cure for months of the other sort. They are, moreover, the best sort of offset for such added burdens as that im- posed by the eight-hour law. I desire to make just one further brief reference to this speech of Judge Prentis. I refer to that part of the speech in which there is pre- sented a table compiled from an editorial in the Financial Age, a New York financial paper, of October 21, 1916, entitled " Evidences of Railroad Prosperity." In this table there is a comparison of the income available for dividends earned by the railroads named, in two fiscal years ; that is, the year ending June 30, 1915, and the year ending June 30, 1916. I desire to draw your attention in this con- nection not merely to the splendid showing in 1916, but also to the favorable showing in 1915. Take, for instance, the Union Pacific. They had available in 1915, and when I refer to these years I mean in each instance the' fiscal year, 11 per cent for dividends on common stock, and in 1916 they had 15.65 per cent. The Southern Pacific had in 1915 7.2 per cent, and in 1916 11 per cent. The Southern Pacific is one of the California railroads, and before I finish I shall go, in some detail, into their financial affairs during the last few years, so that you may judge, if you will, whether or not regulation has been unfair to them, or whether it has impaired their credit. The Santa Fe had available in 1915 9.2 per cent for dividends on their common stock, and in 1916 12.3 per cent. The St. Paul had in 1915 3.28 per cent, and in 1916 7.33 per cent. Take the Northern Pacific; in 1915 they had 7.58 per cent, and in 1916 they had 10.47 per cent. I do not want to tire you gentlemen by reading all these figures. These are illustrative, and if I may have permission I will just insert the table in the record so that I may pass on to other matters. Senator Beandegee. On what page does that table appear? Mr. Thelen. This is on page 12 of this speech. The Chairman. That may be done, Mr. Thelen, if that be the pleasure of the committee. Mr. Adamson. Why not just put that speech into the record? 424 INTERSTATE AND FOREIGN TRANSPORTATION. Mr. Thelen. I am entirely willing to do so, if that suits the pleas- ure of the committee. Mr. Adamson. I suggest that you put it in. The Chairman. He can put in the whole speech, or just such parts •of it as he may deem pertinent. Mr. Hamilton. I see no advantage in putting the whole speech in. 'The gentleman is selecting the parts which he wishes to bring to our zattention- Mr. Adamson. Several members of the committee think that we •would find some value in other parts of it. Mr. Hamilton. V^ry well. Senator Cttmmings. How long is it — ^the~ speech ? Mr. Thelen. The speech is 19 pages, and it deals almost exclusively with the present railroad problems, the solutions offered by the rail- roads, and Judge Prentis's comments. The Chairman. Do you wish it all to go in as pertaining to this inquiry, or only parts of it ? Mr. Thelen. I might follow Judge Adamson's suggestion, if it meets with your pleasure, and have it all go in. The Chairman. Very well. (The paper above referred to appears in full below, as follows:) Annual Address of Robert R. Peentis, President National Association of Railway Commissioners, Washington, D. C, November 14, 1916. Gentlemen of the Convention : When I first began to attend the meetings of this association about eight years ago, I regarded them as valuable chiefly because informing and educa- tional. I thought it well for the members of the Interstate Commerce Com- mission and the State commissioners to assemble once a year for the purpose of discussing their difficulties and comparing experiences, with the view of Im,- proving their own work in their several jurisdictions. I still think so. As the years have passed, however, and while, as it seems to me, the unwise tendency is to change our Government from the representative to the popular form, I have learned to regard the National Association of Railway Commis- sioners and other similar associations as performing a very much more signltl'- •cant and valuable function in our scheme of government. I first received this suggestion from an article in The New Republic, refer- ring to the National Education Association. That article said that organiza- tions such as the National Education Association are coming to occupy an unexpectedly Important place in American national life. That — ; " They are becoming the vehicle whereby Americans meet for joint delibera- tion. They constitute the gatherings at which public opinion Is fdrmed, public questions ventilated, and an essential specific interest or profession adjusted to Its task in the national economy. The historian of the future, as he surveys the modifications In American political institutions during the past and the coming half century, will remai-k the slow but inexorable decline of our group of representative institutions and the corresponding building up of another. The legislatures are ceasing to have any representative value and are ceasing to exercise any formative effect on public opinion. They are being poisoned toy a kind of political corruption which' they have neither the will nor the ability to correct. The work which they once performed is being passed on to great national organizations of teachers, social workers, business and professional men, farmers and trade unionists. These organizations are the germinating centers of American opinion ; they initiate the new programs and put a quietus ■on the old ones. For the present they do this work unofficially, but eventually they will be recognized in the official organization as the really representative members of our political body." While I do not think it now necessary to consider whether or not these toodles shall ever be recognized in the official organization of the Government, I do believe that the observations quoted clearly state a great truth, not as yet generally perceived or recognized. I further feel that no national organization INTERSTATE AND FOREIGN TRANSPORTATION. 425 has exercised a greater or more beneficial influence upon Federal and State legislation than the National Association of Railway Commissioners. In view of proposed legislation, some of which is actually pending before Congress, designed to destroy State regulation of railways. It is of the highest importance that we should approach the consideration of the great questions involved therein without selfishness and actuated only by a desire to serve the country. There is a fully organized movement having for its ultimate object nothing less than the absolute elimination of the States and the State commissions from all jurisdiction over intrastate rates of the railrdads. At the time the act to regulate commerce was enacted such a proposition would have been promptly rejected as plainly violative of the United States Constitution. Recent decisions of the Supreme Court of the United States, however, have encouraged the view that under the commerce clause of the Con- stitution the Congress may have the power to take actual control of all rates upon the new theory that railway rates are so Intimately related to, and so directly affect, each other as to make it impossible properly to regulate Inter- state rates without at the same time taking control of intrastate rates. The determination of this great question should not be based upon any mere local or selfish considerations, or any mere insistence upon State's rights. It should be determined upon great broad general principles, looking only to the geenral welfare ; not that even such considerations will justify a plain viola- tion ,of the Constitution, for if the change is to be made it should be done in due and orderly manner, by amending the Constitution If necessary, and not by violating the Constitution as a matter of expediency. The officials of the great transportation lines of the country, always restive under any and every sort of control, are behind the movement. They have enlisted the support of a large number of newspapers and magazines, employed able counsel, and have prepared for the great controversy which such a propo- sition precipitates. The danger is that they may win at the first onslaught, but if so it will be only because those who believe such a change unwise are in a state of absolute unpreparedness. If the question is to be fairly and fully discussed and presented to the Congress, poorly as they are prepared therefor it must be done by the State commissions. Therefore this is the work to which the present hour summons us. If the efEort shall succeed then questions regarded as settled from the founda- tion of the Government will be unsettled, and the great accomplishments of the States of this Union for the last 30 years in their endeavor to exercise efficient control over the public-service corporations which they have created and fostered, will have become unvailing and obsolete. In this connection it becomes my duty to call your special attention to Public Resolution No. 25, Sixty-fourth Congress, and I think it proper to emphasize some views which I have with reference thereto. This resolution was intro- duced by Senator Newlands as Joint Senate Resolution No. 60, and reads as follows : " Joint resolution creating a joint subcommittee from the membership of the Senate Committee on Interstate Commerce and the House Committee on Inter- state and Foreign Commerce to investigate the conditions relating to interstate and foreign commerce and the necessity of further legislation relating thereto, and defining the powers and duties of such subcommittee. "Resolved by the Sena-te and House of Representatives of the United States of American in Congress assembled, That the Interstate Commerce Committee of the Senate and the Committee of the House of Representatives on Interstate and Foreign Commerce, through a joint subcommittee to consist of five Senators and five Representatives, who shall be selected by said committees, respectively, be, and they hereby are, appointed to investigate the subject of the Government control and regulation of interstate and foreign transportation, the efliciency of the existing system in protecting the rights of shippers and carriers and In promoting the public interest, the incorporation or control of the incorporation of carriers, and all proposed changes in the organization of the Interstate Com- merce Commission and the act to regulate commerce ; also the subject of Gov- ernment ownership of all public utilities, such as telegraph, wireless, cable, telephone, express companies, and railroads engaged in interstate and foreign commerce and report as to the wisdom or feasibility of Government ownership of such utilities and as to the comparative worth and efficiency of Government ffegulation and -control as compared with Government ownership and operation, with authority to sit during the recess of Congress and with power to summon 426 INTEESTATE AND FOEEIGN TBANSPOETATION. witnesses, to administer oaths, and to require the various departments, com- missions, and other Government agencies of the United States to furnish such information and render such assistance as may, in the judgment of the joint subcommittee, be deemed desirable ; to appoint necessary experts, clerks, and stenographers, and to do whatever is necessary for a full and comprehensive examination and study of the subject and report to Congress on or before the second Monday in January, 1917 ; that the sum of $24,000, or so much thereof as is necessary to carry out the purposes of this resolution and to pay the nec- essary expenses of the subcommittee and its members, is hereby appropriated out of any money in the Treasury not otherwise appropriated. Said appropria- tion shall be immediately available and shall be paid out on the audit and order of the chairman or acting chairman of said subcommittee, which audit and order shall be conclusive and binding upon all departments as to the cor- rectness of the accounts of such subcommittee." Under that resolution a joint subcommittee, consisting of five Senators and five Representatives, has been appointed, and they have publicly announced that they will, begin their investigations on November 20, 1916. The adoption of this resolution by the Congress indicates the very great progress which has ben made in the country in the deliberate and concerted effort to destroy the State commissions as regulating bodies, including the taking over by the Federal Government of exclusive jurisdiction to regulate intrastate rates. The movement has been under way for several years, and is inspired by the great railway organizations of the country. Through the press and through many other great organizations they have endeavored to create a sentiment so overwhelming as to convince the Congress that the time has come, if the railways are to continue efficient public service, to make this tremendous change. As far back as the 25th day of February, 1916, in the hearing before the Committee on Interstate and Foreign Commerce of the House of Representa- tives, while the resolution was under consideration by that committee, these facts were made a matter of record. There is a railway executive advisory committee, of which Mr. Frank Trum- bull, chairman of the board of the Chesapeake & Ohio Railway Co., is chairman, and 13 railway presidents of the large lines are members, and for which the Hon. Alfred P. Thom, general counsel of the Southern Railway Co. is counsel. They represent between S3 and 84 per cent of the railroad mileage of the United States and systems extending from the Atlantic to the Pacific and from British Columbia to the Gulf of Mexico ; that is, lines which, combined, cover the entire country. At that time a definite plan for the accomplishment of their purpose was outlined to the committee. Since then it has been publicly reiterated by Mr. Trumbull^ This plan embodies two main features : First. That there be a Federal incorporation law, under which every railway company in this country which is engaged in interstate commerce — and all of them will be construed to be so engaged — shall be required to incorporate. Such companies are to be given no option as to this, but incorporation under the proposed act of Congress is to be made compulsory, and thus the entire control of such companies, including their rates, intra and interstate, and their stoclt and bond issues, is to be vested in the agencies of the Federal Government. Second. Then it is proposed that in place of the Interstate Commerce Com- mission there shall be two. commissions, one to be called the Interstate Com- merce Commission, which is to be the supreme body, in charge of all the powers of regulation, on appeal as to some of such powers and dii^ectly as to others. Another commission is to be organized, which it is suggested shall be known ns the Federal Railroad Commission, whose members shall be presi- dential appointees. This new commission is to be vested with the power and charged with the duty of detection, correction, and prosecution, and those feeling aggrieved by their conclusions are to have the right to have tliem reviewed by the Interstate Commerce Commission. In addition to these two great organizations, they propose, as a method of getting closer to the people in the various sections of the country and as a substitute for the present State commissions, that there shall be regional boards in every transportation region that the Congress may divide the country Into ; that their offices shall be In such localities, these bodies to be authorized INTERSTATE AND FOREIGN TRANSPORTATION. 427 to take evidence as to all the graver and more important questions which remain vpithin the jurisdiction of the Interstate Commerce Commission, in- cluding the mailing of rates and the establishment of proper relations of rates between localities; they are also to take evidence in any case that shall he- pending before the Interstate Commerce Commission as commissioners in chancery would do, reporting their conclusions to the Interstate Commerce Com- mission, subject to exception; the orders and conclusions of these regional boards, if not excepted to, are to be effective without further action by the- Interstate Commerce Commission, unless that commission should itself see some reason for ordering rehearings. If they are excepted to by shippers, representatives of localities or by the carriers, then such differences are to- be argued before and settled by the Interstate Commerce Commission. This plan, as will be observed. Is most ambitious, and the manifest purpose of this vast machinery to be organized under Federal legislation is to relieve- the railway companies from any effective supervision by the States. The rail- way companies, as above stated, have organized their executive advisory com- mittee, employed eminent counsel, and have fully prepared themselves tO' present their views to the subcommittee. I wish to emphasize my view that the issue thus presented should be ap- proached in no narrow, selfi.sh spirit by the National Association of Railway Commissioners, and should be considered upon its merits. We may expect its; advocates to present it with the greatest possible force and ability. Wliile intensely interested in promoting every possible improvement in the- present situation, in favor of strengthening the Interstate Commerce Com- liiissiou to the fullest extent necessia-y, and anxious that all of the necessary Federal powers shall be exercised, it seems to me that this proposition, con- sidered in its entirety', is in the highest degree unwise, and that its effect will of necessity be retrogressive instead of progressive. Most of the true progress of this world is made,- not by tearing down, hut- by building up, by construction, not by destruction. For 30 years the Federal and State Governments have been enacting laws- iind administering them with the view of exercising efficient control over tlie rates and jiractices of the railroads. A long catalog of the benefits- wliich liave arisen from !?uch regulation can easily be made. Forty-six States of the Union at greit expen.se have organized commissions for the purpose of controlling intrastate rates, and exercising their constitutional powers hitherto conceded to them. The proposition is to take over all the important jurisdic- tion of these local commissions and concentrate the power in two Federal commissions in the city of Washington. Then, knowing that the Interstate- Commerce Commission is already overwhelmed with its work, and apparently realizing the utter futility of expecting central commissioners in Washington to deal effectively with all of the many and varied questions that arise locally all over the country, it is proposed to establish regional boards in various- sections of the country which shall be subordinate to the central authority at Washington. In other words they see that just as soon as they tear down- the existing system they mus.t immeidlately commence to rebuild a vast hydra- headed administrative bureau, with two big heads and many small ones, whichi will correspond in many particulars with the very organization we already have. It is impossible for us to escape the conclusion that if these suggestions, shall be adopted the cause of public regulation will be practicaly just where it was 30 years ago. It seems to me that experience has demonstrated that all the powers of all the States combined with all the powers of the Federal Government must be exercised If public regulation is to be effective. Since the decision of the Shreveport case (Houston East «& West Texas Railway Co., etc., v. United States, 234 U. S., 342), which apparently authorizes: the Interstate Commerce Commission to remove discriminations between locali- ties and shippers by requiring railway companies to make intra and interstate- rates conform, it is difficult to understand the immediate need for adding to- the powers of the Federal commission as to removing such discriminations. Already the Interstate Commerce Commission has in several cases administered the very relief which the carriers claim should be afforded by new legislation, and it is claimed already has jurisdiction to correct the very evil which it is-- alleged to exist. It is, of course, exceedingly important that there shall be no conflict of jurisdiction between the Federal and the State authorities, and I am sure that I give expression to the sentiment of a very large majority of" the State commissioners when I say that they and this association is now •428 INTERSTATE AND FOREIGN TRANSPORTATION. and has always been prepared to cooperate with the Federal authorities in the fullest possible degree for the purpose of avoiding such conflict. The Hon. Alfred P. Thom, as the counsel for the railway executive com- mittee, representing between 83 and 84 per cent of the railway mileage of the United States, said this to the committee above referred to : " AVe realize that we have no right to approach this problem from the stand- point of the private interests of the railroads. We realize that unless we can present a plan that commends itself because it is best for the public interest that we will have no standing. We have tried to separate ourselves from the standpoint of a mere private interest in this matter, and to appreciate the spirit of the American people, which is devoted to the principle of regulation. "We accept in its entirety the wisdom of that policy, and our effort will not be to present a plan which we think is a plan in the selfish interests of the railroads, but to present a plan which we believe is best for the whole American people, for the' preservation of its commercial supremacy, and for the accommo- dation of Its traffic." These are no " weasel " words : Mr. Thom and I have been warm personal friends since our college days, and I know him to be a man of commanding ability, with practical but high ideals upon all great public questions. I must, of course, examine his views, however, knowing that he would not be human if they were not affected by his employ- ment and his environment. Giving full faith to his statement that they accept in its entirety the wisdom of the American policy and that they appreciate the spirit of the American people, which is devoted to the principle of regulation, how is it that he can expect the American people, as represented by the com- missions of 46 of the States, to accept without the most vigorous protest and contest a governmental plan which will practically nullify all of their efforts for the past 30 years? I venture the suggestion that the opportunity has come for them by some affirmative action to make good their averment of their acceptance of the principle of regulation to which the American people is devoted. That principle, firmly fixed in the thought and legislation of this people, is that the Federal Government shall do all of these things which it can best do. and that the local authorities under the jurisdiction of the State gov- ernments shall do those things which they can best do and that local rates and local matters can be best regulated by those most familiar with local conditions. I believe that they have greatly exaggerated the difficulties of the present situa- tion. Are the discriminations between interstate and intrastate rates as great to-day as they were before the intervention of the Federal and State authori- ties? Have they forgotten the free-pass abuses, the rebates, the special rates, the discriminations, the competition, the rate wars, from the burden of which public regulation has relieved them? It is erroneously assumed by many that most of the cases of discrimination are discriminations brought about by the action of the State commissions in favor of intrastate rates and against interstate rates. It will, however, not be difficult to find numerous interstate rates far lower, proportionately, than the intrastate rates, and hence discriminative against intrastate business in the same sense as is complained of. Indeed, it may be stated as a general proposition that the general scale of interstate rates, or long-distance rates, is much lower than the general scale of intrastate rates. (I will say, by way of parenthesis, that I do not wish to be understood as saying that I think, as a whole, that the relatively Iom- long-distance interstate rates are Injurious to the trade and prosperity of the country. It is these rates that have brought about competition between the large distributing centers of our vast country, and this competition has been beneficial to consumers all over the country.) Returning to the question of discrimination, it must be noted that the mere fact that one rate is lower than another is of itself no proof of the reasonable- ness of either the higher or the lower rate. If justice Is to be done by remov- ing discrimination, then there should first be a careful inquiry to determine which of the.se rates. If either, is the just and reasonable one, and I venture nothing in .saying that upon fair investigation the lower rate, or a different rate, will be found "to be just and reasonable just as often, if not more fre- quently, than the higher rate. So let it not be assumed that the alleged fla- grant cases of discrimination so often referred to are by any means the only cases of discrimination, and let it be understood that th6re are many cases of discrimination brought about, not by the State commissions, but by the carriers, either Inadvertently or in their effort to attract business. INTERSTATE AND FOEEIGN TRANSPORTATION. 429 So far as I am informed, and I have read all that has come to me on the subject, I know of only three instances, alleged to be flagrant, in which it is alleged that the State commissions have undertaken consciously to discrimi- nate in favor of State rates as against interstate shipments, and it is by the carriers claimed that the remedy for these flagrant cases of discrimination, without additional legislation, is already vested in the Interstate Commerce Commission. If there shall be proper cooperation between State and Federal commissions and the railway companies, is there any practical obstacle under the law as it exists to-day which prevents the removal, after proper investi- gation, of the difficulties and discriminations of whicJi the carriers complain? I repeat, is it not far better and more likely to accord with the views of the American people and more likely to afford prompt and efficient relief to build up from what we have rather than to tear down for the purpose of immedi- ately rebuilding something very similar to the existing system ? Is there any pressing need at this time for any radical' change? In Bulletin No. 18 of the Railway Business Association, which was issued during the past year, entitled "Defects in Railway Regulation," a pamphlet which has been widely circulated in the country by a national organization composed of dealers in railway supplies, the following statement, emphasized in bold type, appears : "Expenses have arisen faster than earnings, and no branch of the Govern- ment performs the function of providing enlarged revenues to meet the higher cost. It is vital to national prosperity that this defect in regulation be cor- rected." I desire to place in contrast with this statement (which I think would not have been made If those who are responsible for it had known of the enor- mous recent increase in the revenues of the carriers) certain figures from bulletins issued by the JBureau of Railway Economics, established as you know- by the railways of the United States for the scientific study of transportation problems. These bulletins show that the Increased operating revenues of the railways have already performed the function of providing the larger revenues, which the authors of the statement inferentially criticized the Government for failing to provide. While it may not be entirely fair to compare the present large earnings with the earnings for the preceding 12 years, without some reference to the sudden prosperity, attributed by many altogether to the European war, it is. interesting to note that the total operating revenues have with some fluctua- tions increased from $1,975,174,091 in 1904 to the sum of $3,396,808,234 in 1916, and the average per mile of line from $9,306 in 1904 to $14,818 In 1916. Durinr that period the operating expenses per mile of line have increased from $6,308 in 1904 to $9,684 in 1916, and the net operating revenue during the same period has increased from $2,998 in 1904 to $5,134 in 1916 ; that is, the operating ex- penses have increased 53 per cent while the operating revenue has increased 71 per cent. ' This increase is comparatively recent, for while in 1914 the net operating reve- nue per mile of line was $3,443, in 1915 $3,747, In 1916, as above stated, it was $5,134. But there has been no diminution in the volume of these earnings since the statement for the last fiscal year was made up, and the reports for July, August, September, and October continue to show greatly increased railway earnings. There is every reason for feeling assured that the current fiscal year will show still greater net earnings. We can all sympathize with Mr. Justice Hughes in liis appealing cry of pro- test against the " delusive exactness " of the mass of figures which the railway accountants and statisticians toss at us whenever we come to consider large problems in, connection with our work. I think that we can say as to these figures, however, that they have an illuminating exactness which demonstrates that the statement of the Railway Business Association, which I have above quoted, while true as applied to some previous years, is now untrue, for it plainly appears that recentlv earnings have risen very much faster than ex- penses and that they have also risen much faster than investments in railway properties. I know that it is said that the figures of 1916 represent an abnor- mal condition and that possibly the present prosperity of the railways will not continue. Whether this be true or not. the future can only determine. The fact is, however, that the figures for 1915, the previous year, showed the largest total operating revenue per mile of line of any year between 1904 and 1916, save for the year 1913, and the net operating revenue per mile of line showed a larger amount than for any year within the period indicated, except for the years 1910 and 1913. The operating ratio for 1916 was 65.4 per cent, the lowest 430 IISTTEBSTATE AND POBEIGN TRANSPORTATION. operating ratio of any j-ear within the period indicated, the highest having been for 1914, when it was 72.2 per cent, and the next lowest within the period indi- cated having been in 1906, when it was 66 per cent. It seems to me that it is perfectly apparent, however great the perplexities and difficulties which have beset the railway managers within the past 12 years, that they have but suffered as other men have suffered, and that their business has only been affected in the same way that other business enterprises have been affected from year to year and from period to period. The merchant, the manufacturer, the man living upon a 'fixed salary have all suffered from the in- crease in the cost of living and doing business. So have the railroads, but the latter have suffered no worse, and in view of the figures I have referred to and the proper Inferences to be drawn therefrom, the suggestion that they are "being banljrupted by oppressive State legislation or because of the conflicts of jurisdiction between the Federal commission and the State commissions has no sufficient justification. There are prosperous railroads whose prosperity is l)rought about because they are well located, well managed, not overcapitalized, and because they have succeeded in securing a large and profitable business; and there are railroads which by reason of poor location, poor management, and overcapitalization have failed to secure a profitable business and hence are not prosperous, but tlie average prosperity of the railways compares favorably "With the average prosperity of the other business enterprises of the country. In 1915, largely as the consequence of concentration of traffic, the New York Central carried 2,500,000,000 more tons of freight 1 mile than it did in the pre- ceding year at an actual outlay for conducting transportation of $3,000,000 less. We see in the financial columns of the newspapers such statements as these: That the Union Pacific is now earning at a rate which, if carried out for the full year, will give it about 20 per cent for the common stock, and that the New York Central promises to yield about 22 per cent for dividends on its stock, and that the Erie will earn for the current year about 20 per cent avail- able for dividends on the first preferred — that is, five times what it is entitled to receive in any one year. These results are typical, not exceptional, and ■many of the other large railway systems of the country are likewise pros- pering. While considering the encouraging features of the general railway situation let us not forget the enormous economies, for which tlie managers of the rail- ways are entitled to unstinted praise, which have recently been brought about by better loading of cars and the increasing of train loads. For instance, the figures for traffic on the Chicago & Northwestern Hallway show that the train load has been raised from an average of 210 tons not longer ago than 1910 to :an average of 491 tons for the year ending June 30, 1916, and this enormous increase in the average train load has brought an increase in the revenue per train mile run from $2.32 to $3.28, and this in spite of the fact that the average ■freight rate per ton mile was lower in the latter year than the former. This is only one example out of many like it which the statistics disclose. I am aware that there are many other facts to be considered besides these facts shown by the figures which I have quoted. I have observed that one of the Imperfections of the human mind is its ten- •dency to emphasize certain facts which can not be contradicted, and from those facts to draw false conclusions. It seems to me that this is manifestly true of many of the facts which are relied upon by those who take the opposite view. For instance, the statement that while rates have remained stationary, taxes, materials, and all other expenses have increased is sub^Stantially true, and con- sidered alone would indicate that rates must be increased if these increased ex- ■pendltures are to be properly met and capital to receive Its just return, but when considered in connection with other facts, easily susceptible of proof, ■such as that along with the increase in expenses have come proper and needful ■economies, such as the better loading of cars, and that the volume of business "has Increased, and that the character of equipment has so changed as to enable the railroads to handle a larger volume of business, and it is shown that the in- ■crease In expenses has been met by the increase in business and revenue, then the fact that expenses have increased loses much of its significance. Ar we not then justified in claiming that the lack of prosperity in past years ■should not be attributed to excessive regulation nor to the inadequacy of rates, considered as a whole, but chiefly to lack of business, because the recent results •prove that with the same facilities reasonable profits have been made during the past fiscal year, and this, it will be noted, only because of increase in the traffic and in spite of the alleged excessive regulation and adverse legislation ■which is complained of. INTERSTATE AND POKEIGN TEANSPOBTATION. 431 The editor of the financial column of the New York Times, who, I take it Is not unfriendly to railway interests, evidently thinks so, for in the issue' of October 9, among other optimistic views as to the present business prosperity and Its continuance to be reasonably expected at the end of the war he savs this : ' V ^l^'^°„^"*'*n'' P-V^ ^y ^^'^ raHroads in a group, and of late it has been a habit to talk of all railroads as though they were subject to the great difficulties under which some roads even many, are laboring. That is a false market point of view. There are railroads in a very strong position— railroads which year after year have paid good dividends, and which to-day are earning those divi- dends twice over and in some cases more. Why should there not be confidence in the ability of such properties to withstand the effects of regulation and to continue to give good returns to their stockholders? Moreover why is it not reasonable to recognize the fact that a road once poor is not necessarily poor forever? Big earnings month after month, with no sign of diminution are surely a cure for months of the other sort. They are, moreover the best' sort of offset for such added burdens as that imposed by the eight-hour law " The relatively large net earnings for the fiscal year ending June 30 1916 have continued with Increasing volume during the succeeding months, and this inspires the Financial Age in its issue of October 7, which Is also most friendly to railroad interests, to say this : "That the railroad list should have occupied so much of Wall Street's attention during the past week is not surprising in view of the remarkable statements of railroad earnings that are daily coming to hand. Recently pub- lished returns of several of the companies' largest systems are not only impres- sive in their aggregate but all the more so on account of the substantial in- creases over corresponding periods of last year when traffic on all the leading systems was beginning to show material improvement over previous years. A notable instance of this was furnished by the publication during the week of the Union Pacific's report for the fiscal year ending June 30 last, which shows the largest gross earnings in the company's history, with surplus income after deducting all charges, including the preferred-stock dividend, equivalent to 15.65 per cent on the common stock, which compares with slightly less than 11 per cent in the preceding year. Another remnrk-able showing was that of the Louisville & Nashville, whose income balance for thg last fiscal year was equivalent to about 19.4 per cent of the company's capital stock, as against 6.75 per cent in 1915. Such instances might be multiplied Indefinitely, but all of them are eloquent of the fact that the wonderful activity and pl-osperity in mercantile and industrial lines that have developed since war began have spread freely to the railroad world." The following table is compiled from an editorial in' the Financial Age of October 21, 1916, entitled " Evidences of Railroad Prosperity " : Comparison of income available for dividends earned by the railroads named in the fiscal years of 1015 and 1916. 1915 1916 Union Pacific Per cent. 11 7.2 9.2 3.28 7.58 7.71 7.50 7.87 Deficit. 5.4 6.27 6.8 .03 10.4 19.36 8.5 5.5 10.6 4.25 8.8 8 Per cent. 1 15 65 floutliem Pacific. . . Atchison. . . St. Paul.. 1 7 33 Northern Pacific... . 10 47 ChloaEO, St. PailV Minnoapnlis Ji, Omaha Northwestern ." v" ' <"^ ' 11 4 "SooLine" 1 X6 32 Wisconsin Central.. 9 18 Alabama Great Southern 1 13.6 lUmois Central .. . . 10.8 Louisville & Nashville . 19.4 Southern.... 25 lehighValley 15.3 12.65 Jersey Central... 21.8 Pennsylvania »11 Baltunore&oiiio. 7.3 Keading ] 11.5 Chesapeake & Ohio... . «11 Nortolk& Western... 1 16.7 new York Central (fiscal year ending iJec. 31) «18 ^ Common. ^Preferred. a About. 'Nearly (10.! 'Probably. 432 INTEBSTATE AND FOREIGN TEANSPOBTATION. While technically available for dividends, many of the railways are wisely expending their increased earnings for deferred maintenance and needed betterments. Has not the time come, then, for those speaking for the railroad interests of the country to cease singing their jeremaids? Has not the time come for optimism ijistead of pessimism? I do not underrate the fact that there have been many lean years for many railroads in the past 10 years, but perhaps the chief reason for the leanness was lack of business and not excessive regulation nor unremunerative rates. Certainly it could not be insisted that the rates of the more prosperous railroads of the country should be increased, in view of the earnings during the past fiscal year and at this time, and it is obvious that it \\ould be no boon to the unprosperous roads merely to Increase then* rates. This for the reason, well known to all railroad men, namely, that the unprosperous roads are competing for business with the prosperous roads, and to increase their rates will simply be to prevent that competition and destroy the unprosperous roads. If, then, there ever can be a time when optimism should prevail in railway circles and when their managers should cheerfully and not so sorrowfully cooperate with the Interstate Commerce Commission and with the State commissions, that time is at hand. According to an Associated Press dispatch, Mr. Frank A. Vanderlip, presi- dent of the National City Bank, in an address to the Society of Railway Finan- cial Officers In Washington on October 20, expressed the opinion that exclusive Federal control will not solve railway difficulties, and he adds : " The selfish- ness of the public — stockholders, wage earners, and politicians — is the chief trouble with the railroads." May we not add to this list those who, without ceasing day or night, like the sad prophet of Israel, continue to cry, "Behold and see if there be any sorrow like unto my sorrow," while we know that they have no monopoly of this, the common heritage of the race, which, as we have learned both from the highest authority and from experience, " is bom unto trouble as the sparks fly upward." It is undoubtedly true that the greatest immediate need of the railroads, and therefore a need of the country, is that they may secure new capital for the purpose of adding to their facilities by increasing the number of their tracks, improving their condition, and adding to their rolling stock, which are not suffi- cient for the business now being offered. To secure these betterments it is necessary that they secure new capital. Are they to secure it by continuing to advertise their own poverty through public speeches made by their officials and attorneys and through the newspapers, which give publicity to their sentiments, exaggerated in every possible way? The wonder is, considering all their own efforts to show their desperate condition, that any of them have escaped bank- ruptcy. Would, it not be wise for some of them to assimilate some of the homely but cheerful philosophy of " Mrs. Wiggs," she of the " Cabbage Patch," and not be quite so sorry for themselves? I do not believe that any other business in the country could have continued to exist for so many years under such a campaign of depreciation. I do not mean to say thi't the recent increase in earnings (which the Railway Age Ga- zette states, whether " taken by themselves or in comparison with the figures for the preceding year, alone seem to indicate an amazing degree of prosperity ") alone constitute the panacea for all of the ills of the present railway situation. I do say, however, that amazing pj-osperity will tend to reestablish their credit, that their present earnings enable them to keep up their property to a higher degree of efficiency, that reasonable dividends to their stockholders are thereby assured, and that all of these things combined, if continued, will build up their credit and enable them to secure the new capital which they need. That is, amazing prosperity will ultimately reestablish their credit unless they continue to destroy it themselves. I do not wish anything which I have said to be construed as indicating that I am unmindful of the fact that the managers of the railway companies of this country have carried and still carry great burdens. A very large number of great and strong men are in the railway service, and are devoting their lives to tlie solution of the many and grave problems which are unsolved. They have performed a great public service, which the country should recognize, but, like the other sons of Adam, they are liable to err In judgment and in action, and some of them have so erred. On the other hand, I will not deny, but will freely agree, that some railroad commissioners have, as it seems to me, sometimes misconceived their duty to the public. Some oppressive rules and regulations have been insisted upon; INTERSTATE AND FOREIGN TRANSPORTATION. 433 DUie unnecessary burdens have been imposed; some simple requests of the ailway managers for aid and cooperation have been refused, and railway omraissioners of this class have retarded the progress of the country, and, a my opinion, have failed to perform a part of the great public service for fhich they were chosen. As, however, there are many great and wise men in ailway business, so also there are many patriotic and sensible men upon the ublic-servlce commissions of the country. I believe that without flattery very large majority may be thus characterized. The best results can only e obtained by the fullest and frankest cooperation between the public-service pmmissioners and the railway managers. While they approach the questions ttvolved from different angles many of the objects sought by each are the ame, and notwithstanding all of the inherent defects of human nature, we lelleve there is no reason for depression or despair, and while the country is njoying an unexampled period of prosperity why may not the railroad com- lanies cease their songs of woe and join in the chorus? The slogan or shibboleth of those antagonistic to State regulation is, that hey have forty-nine masters ; that Is, that forty-eight States and- the Federal Jovernment are all regulating them at the same time. Let us examine these atch words for a moment. Possibly In the heat of argument exaggeration may- le excused, but what railroad in this country runs through forty-eight States?" day we not at once say then without hesitation that no railroad In this eoun- ry has forty-nine masters. Their masters In this, sense of the word are the- Meral Government as to matters referring directly to Interstate commerce,, ind as tis local matters and Intrastate commerce those States only In whichi hey are located and doing business. Then again, have they any more masters han every otJier citizen of this country? When I travel from Virginia to Cali- 'ornla I am subject to the laws of the Federal Government all the time, and mm time to time subject to the laws of the State in which I happen to be raveling. Some of the large private corporations do business in as many States, or more, as any large railroad system. Have the railroads any more Qasters than such corporations, wliich are subject to the Federal law, and at he same time are subject to the laws of the various States In which they do lusiness and by which they are protected? They have one master — the law — md the sovereignty of the law Is, and should be, master of us all. Tested in this way it may be said to be simply an attack upon and criticism if our form of government. That is to say that the framers of the Federal Constitution were not wise vhen they adopted the form of government which provides for the dual State md Federal sovereignty ; that the encomiums bestowed upon this Federal sys- :em of ours by students of political history are all based upon erroneous con- eptlons of its value ; that the imitations of It by other nations In their struggles tor political freedom have been undertaken without due consideration and are inwlse; that the magnificent progress which we have made dviring the ,129 :ears of its existence owes nothing to our governmental system — indeed, that ill the lessons of the remote and recent past are to be 'forgotten in our thought- ess and headlong rush in the name of progress toward centralized power and lureaucratic government. Possibly this process of centralization of authority in the Federal Govern- Qent at Washington is to go on, with accelerated pace in the future, but If so- 8t us fully realize what we are doing. Let us not close our eyes to the fact hat if those who believe in thus changing the form of our Government succeed n their efforts, then that change will be radical and far reaching, and let us ult boasting of the wisdom of our fathers In providing that form of govern- aent which they evidently Intended when they adopted the United States !onstitutlon. If the mature judgment of the Nation Is that we have made a serious mistake- II the form of our Government, let us meet the situation frankly and without ubterfuge, let us amend the Constitution and abolish State control over local ffau-s, and cease our labored and dubious reasoning In our efforts by construc- ion to enlarge the plain provisions of the Federal Constitution. I commend to the Congress and to the railway executive committee these 'eighty and carefully considered words of that master of logic and diction, tie Hon. Ellhu Root, taken from his recent annual address as president of the Jnerican Bar Association. After referring to the necessity of developing our vast new body of administra- ve law and calling attention to the fact that It Is still In Its infancy and still fude and imperfect, he says : 70342— PT 8—16 2 434 INTERSTATE AND FOREIGN TRANSPORTATION. " The development of our law under the conditions which I have pointed out will be accompanied by many possibilities of injurious nature. There will be danger that progress will be diverted in one direction and another from lines really responsive to the needs of the people, really growing out of their insti- tutions, and will be attempted along the lines of theory devised by fertile and ingenious minds for speedy reforms. Ardent spirits, awakened by circum- stances to the recognition of abuses, under the influence of praiseworthy feel- ing, often desire to impose upon the community their own more advanced and perfect views for the conduct of life. The rapidity of changes which character- izes our time is provocative of such proposals. The tremendous power of legis- lation, which is exercised so freely and with little consideration in our legisla- tive bodies, lends itself readily to the accomplishment of such purposes. Some- times such plans are of the highest value. More frequently they are worthless and lead to wasted effort and abandonment. The test of their value is not to be found in the perfection of reason. Man is not a logica;i animal, and that is especially true of the people of the United States and the people of Great Britain, from whom our methods of. thought and procedure were derived. The natural course for the development of our law and institutions does not follow the line of pure reason or the demands of scientific method. It is determined by the impulse, the immediate needs, the sympathies and passions, the idealism and selfishness, of all the vast multitudes who are really from day to day build- ing up their own law." Pursuing the same line of thought, he says : " There will always be danger of developing our law along lines which will break down the carefully adjusted distribution of powers between the National and State Governments. Upon the preservation of that balance, not necessarily in detail but in substance, depends, upon one hand, upon the maintenance of our national power, and, on the other hand, the preservation of that local self- government which in so vast a country is essential to real liberty." Then, growing impassioned, he concludes his thought upon this general sub- ject with this dire prophecy : "And if the process goes on our local governments will grow weaker and the central governments stronger in control of local affairs until local government is dominated from Washington by the votes of distant majorities indifferent to local customs and needs. When that time comes the freedom of adjustment which preserves both national and local liberty in our system wiU be de- stroyed and the breaking up of the Union will inevitably follow." When this association was organized under the guiding hand and inspiration of Judge Cooley, the first chairman of the Interstate Commerce Commission, as its president, and at its first meeting in this city on the 5th day of March, 3889, he emphasized the need for cooperation and concert of action between the Interstate Commerce Commission and the State railroad commissions, and this doctrine has been continuously emphasized by all of our leaders from that day to this. The most serious complaint now made of the present system is the lack of uniformity, growing out of the differing legislation of the Congress and the States, as well as the differing legislation of various States, and yet the proposition is that in order. to secure uniformity the very agency through which such uniformity as does exist has, in great measure, been secured must be destroyed. Every important question involving the regulation of the railways, almost without exception, has been first proposed, argued, and debated upon the floor of this association. Following these debates has come practically every amend- ment of the act to regulate commerce, and in almost every instance a number of the States of the Union adopted similar legislation before it had been adopted by the Congress. This association has not simply advocated and favored uniformity as a senti- ment. It has done much of Importance to promote uniformity. To enumerate : The accounting methods of the railways and' of making the annual operating reports has been greatly improved, and is practically uniform throughout the country, so that they now know more about their own business than they ever knew before ; the safety-appliance laws have been enacted. Such slow progress as has been made in classification owes much to the insistence and persistence of this association; the demurrage rules, which are now practically uniform throughout the country, were framed by a committee of this association under the chairmanship of the Hon. Franklin K. Lane, then a member of the Interstate Commerce Commission ; this is true also of the express rates, not long since in INTEBSTATE AND FOBEIGN TEANSPOETATIOK. 435 state of confusion, which are also now practically uniform throughout the ountry. At this very session of this association much progress will be reported 1 bringing about uniformity in the elimination of dangerous crossings and the irecautions to be taken at crossings. The list might be prolonged to cover Imost every phase of public regulation, and I can not conceive of any better nethod under our dual form of government for the creation of nation-wide entiment for the promotion of uniformity of legislation and practice than the Liaintenance of the State commissions, with unimpaired powers, and of this issociation with all of its activities. The charge of lack of uniform laws in this great country may doubtless be lustained by reference to a number of laws passed by the various States, but lotwithstanding these laws we may safely venture to say that uniformity has )efin greatly promoted since the Federal and State Governments began to ssercise their powers as well as by such exercise, and that it exists to-day in a lar greater degree than formerly, when each railway company was free to com- )ete with -every otlier and to make its own rules and regulations. While there nay be some glaring exceptions, it is unquestionably true that the great work )f this association from its beginning to this day has been in the promotion and ieeuring of uniform laws, Federal and State, and uniform regulation, and there las never been a year since its organization that substantial progress has not )een made. If the State commissions are shorn of thieir powers the cause of ^egiUatlon will be hindered and not promoted. I know that the sentiment of iis association, is unequivocally and unalterably opposed to all unjust and anlawful discriminations in favor of either State or interstate traffic. I suggest that the time has come for us to affirm that sentiment in some concrete form. [ therefore recommend that this association pass a resolution to the foUovring effect : "Resolved, That we favor the establishment and maintenance of reasonable md remunerative rates for railway companies by State and Federal authority, and that we oppose the making of either State of interstate rates with a view of creating discrimination in favor of or against any class of traffic or any community, and that we pledge ourselves to cooperate with each other for the purpose of preventing the establishment of any such discriminative rates, and of removing such unlawful discriminations, if any there be, as may now exist." What then do we propose? We propose that we shall continue the policy of the past which has produced results, which, while not perfectly satisfactory, has certainly accomplished many reforms, and justifies the continuance of the combined efforts of the Federal and State Governments to correct the errors of the past and remove the abuses of the present. We propose by amendments of the act to regulate commerce, as its defects are disclosed, to remedy those defects, and to reach out after improvements lor the future. Public regulation has not broken down, and the State com- missioners will in the future, as in the past, unite their efforts with those of the members of the Interstate Commerce Commission through this organiza- tion, and otherwise, so to amend the act to regulate commerce as to enable the latter commission the better to perform the service which the country desires it to perform. This association will doubtless approve the effort to increase the number of Interstate Commerce Commissioners( ds well as any other legis- lation which the commission desires for the strengthening of its control over interstate commerce. All growth which is enduring is slow. Nature never hastens, Michael Angelo visualized his magnificent conception of the creation on the walls of the Sistine Chapel in the Vatican at Rome by picturing the powerful hand of God rolling the sun and the moon from off the tips of His fingers, and the soul is stirred by that vision of power, but instructed by the geologists we have learned that the Creator did not build the universe in that way. We are told- that he took His time through the eons and immeasurable periods of the past to build the physical world out of crude material which in the ages before that He had already created, and so He continues from age to age to educate and improve humanity for that " far off divine event to which the whole creation moves." ^ , ^, , ^ ,^. Let us then take a lesson and proceed to better things confidently but with- out Impatience. Progress in public regulation has been slow, painfully slow, but it has progressed, and it has not failed. _ , Let us by all means correct our mistakes and continue to improve our legis- lation. National and State. 436 INTERSTATE AND FOREIGN TRANSPORTATION. • For, as old Dr. Jowett would say : " None of us is infallible, not even the youngest of us." In all and above all let each one of us, and this is meant to include com- missioners, legislators, State and Federal, as well as railway managers, coop- erate for the better things which must of necessity come as tlie result of such cooperation. It is the right spirit, the spirit of fairness which we should above all desire, the respecting of the opposite and antagonistic point of view, the proving of all things and the holding fast to that which is good ; the discarding of the worthless and the adopting of the best as we are given wisdom to per- ceive what is best which I am urging. To those who think that this is too sublimated, ideal, general, and vague to be helpful, I would say, that we stand ready to welcome the practical man who can devise the efficient remedy, and we stand ready to adopt it when he satisfies our reason and judgment of its wisdom. For our guidance and support let us always bear in mind those inspiring words of Daniel Webster: " Justice is the greatest interest of man on earth. It is the ligature which holds civilized beings and civilized nations together. Wherever its temple stands, and so long as it is honored, there is a foundation for social security, general happiness, and the improvement and progress of our race. And who- ever labors upon this edifice with usefulness and distinction, whoever clears its foundations, strengthens Its pillars, adorns Its entablatures, or contributes to raise its august dome still higher to the skies, links himself In name, fame and character with that which is, and must be, as durable as the frame of human society." Mr. Thelen. Just a reference or two more to present financial conditions. I happened to secure the other day a copy of the Finan- cial Age of December 2, 1916 — coming right down to date — and I find there, on page 953, a reference to the most recent reports of a number or the leading railroads of the country. Without going into that in detail, I will just take one or two instances which seem to be typical. Take, for instance, the Atlantic Coast Line Railroad. The Financial Age says with reference to this railroad : Annual report shows that in the last fiscal year Atlantic Coast Line earned an equivalent of 11.31 per cent for Its $68,558,000 of common stock, compared with 6.23 per cent In 1915. The Chairman. For what year was the 11 per cent ? Mr. Thelen. The 11 per cent was for the last fiscal year; that is, the year ending June 30, 1916. The reference to the Atlantic Coast Line Railroad ends with this sentence : Dividends on the preferred and common stocks required $3,437,735, leaving a surplus for the year of $4,317i801, or $3,454,600 more than 1915. There is a statement with reference to the Norfolk & Western Railway Co., headed " September earnings." It says : The company reports for September gross earnings $5,122,182, an increase of $332,554; maintenance of way and structure, $686,403, Increase $10,425; maintenance of equipment, $838,005, Increase $53,271 ; transportation, $1,207,- 790, increase $60,2b4; net after taxes, $1,986,359, increase $89,930. For the three months ended September gross earnings were $15,310,316, increase $1,323,852; maintenance of way, and structure, $2,100,461, increase $140,390; maintenance of equipment, $2,556,564, increase $168,799 ; transportation, $3,626,- 257, increase $229,309 ; net after taxes, $5,948,031. There is a reference here to bonds which have just been sold by the Seaboard Air Line Railway Co., and, by the way, the New York papers all contain advertisements of this particular bond issue: The company has sold to the National City Bank and Guaranty Trust Co. of New York $12,800,000 first and consolidated mortgage 6 per cent bonds. These bonds, part of an authorization of $300,000,000, are a direct obligation INTERSTATE AND POBEIGN TEANSPOBTATION. 437 of the company and are secured by a first mortgage upon 416 miles of road and collaterally on 3,046 miles of road. Proceeds of the sale will be applied chiefly against expenditures for improvements to properties. I find hy reference to an advertisement which appears in the New York Herald of December 4, 1916, that those bonds are being offered at 991 and interest — a very good price — so that it would appear that this particular railroad is able to find additional money which it needs for extensions and betterments. Senator Brandegee. Six per cent, you say? Mr. Thelen. Yes; 6 per cent bonds. With reference to the South- ern Pacific Co., the Financial Age says : Gross earnings In October amounted to $15,692,153, a gain of $1,558,790. The report goes on and presents an interesting comparison of the increased freight earnings as against decreased passenger earnings of the Southern Pacific Co. The financial statement shows that these increased earnings were due to $1,845,927 increase in freight revenues, which was offset by a decrease in passenger business of $286,466. Of course the reason for that was we had the fair last year, with immense passenger business, and the business for this year has not been so good. The statement says that the operating income of the Southern Pacific was $22,375,310, or a gain of $3,- 165,290. There are references here to other railroads all telling the same story, but I think these which I have read are typical and sufficient to make my point. I now present these few words with reference to this financial situation. We shall have considerable more to say on this subject when the claims of the railroads are fully presented. At the present time the point that we desire to make is that, although it is true that certain railroads are in financial difficulties, although it is true also that certain railroads have been very much impaired as to their credit, this is not a generalization which can be made of all railroads of the country, and that many of them are still in a strong position, abundantly able to secure the additional funds they need on rea- sonable terms. May I now invite you, gentlemen, to return with me to the second main branch of Judge Thom's argument? That argument, as you will remember, was that the cause of such impaired financial credit as exists is largely due to regulation, and principally to the regula- tion of the States. With that claim we take absolute issue, and before we are through we think we shall be able to convince you that Judge Thom has entirely misconceived the causes of impaired railroad credit. What the carriers have failed to do in that respect — • that is, to draw your attention to the real causes of impairment of financial credit — we shall do, and before we are through we shall show you in detail, by reference to page and volume of official rec- ords, the real causes of the impairment of financial credit of the railroads, and then, having before you the causes of the disease, you will be better able to apply the remedy. On the third day of Judge Thom's argument, as we have already observed, he presented his nine remedies. During the course of these proceedings we hope to present to you our suggestions with reference to each of these remedies. Some of them, frankly, we think are good; others, frankly, we think are bad; and hereafter. 438 IHTTERSTATE AND FOREIGN TEANSPOBTATION. after we have been able to mature our views, we shall present just what our matured views are with reference to a number of these remedies. The first and most important remedy is to take away from the States practically all their power to regulate and supervise railroads. I say practically all their power. Judge Thom himself stated that he would leave to the States two powers with reference to the regu- lation of railroads — first, the power to tax, and, secondly, power with reference to such police regulations as, in his words, are not " vital " ; in other words, which are not of very great importance either to the States or to the Nation. That being his main proposition, he next urged as the means and instrumentality for accomplishing that pur- pose — ^that is, for taking all these powers away from the State — the Federal incorporation of the railroads. There are, gentlemen, almost as many brands of Federal incor- poration as there are men who have given thought to the question. I realize that there are some men of splendid ability and whose patriotism I certainly very highly respect, who are very strongly in favor of certain kinds of Federal incorporation. But those kinds of Federal incorporation, gentlemen, are not the kinds that these gentlemen present; and when I here refer to Federal incor- poration I have in mind, unless I otherwise indicate, the plan of Federal incorporation which has here been presented by the rail- roads. The committee of the National Association of Railway Commis- sioners has thought that it might be of service to you by taking this subject of Federal incorporation and going down to the bottom of it, particularly from a legal point of view, and, having done that, then to make our comments on the precise plan which has here been pre- sented by the carriers. It will be my function, as the first main part of my presentation, to take the subject of Federal incorporation of the railroads, to put it out on the table before you where you can all see it, take it from the comers in which it has been lurking, and let the light of day shine upon it so you can see exactly what is involved in the plan presented by the railroads. Then you can judge what ought to be done with that plan. Before doing that, however, gentlemen, in order that there may be no misapprehension with reference to the position of the National Association of Railway Commissioners on that subject, I desire to refer for just a moment to a certain committee report, on which Judge Thom has placed great reliance. This was a report of the committee on capitalization and incorporate relations of the National Association of Railway Commissioners. The national association has a certain number of committees. The chief function of these committees is to take some particular subject, which is assigned to the committee, and to render a report on that subject, which is presented to the next convention of the national association. The report is read. If there are any recommendations for action contained in that report, then the convention does one of two things; it either adopts the recommendations or, if it does not like them it does the courteous thing, in killing the report, by simply ordering that it be filed and printed. In this particular case this report was read to the convention. It contained a recommendation INTERSTATE AND TOREIGN TEANSPOETATION. 439 for Federal incorporation of the railroads. Now, what did the con- vention do to the report? The chairman of the committee moved that the recommendations be adopted. Another commissioner moved, as a substitute, that the committee be thanked for its work and that the report be printed and filed. In connection with that matter I desire to read just a paragraph or two from the proceedings of the cenvention, so you may place your- selves there in the atmosphere of the convention and see what hap- pened to this report. The Peesident. Gentlemen, at the time when these special orders came up we had before us as the unfinished business the report of the committee on capi- talization and intercorporate relations. A motion was made to adopt the rec- ommendations contained in that report. There was, however, no second to that motion. If there is anyone who will second the motion, it will give Mr. Edger- ton a chance to express his views, if any, as to what should be done with the report. There was silence for awhile. I can tell you these facts, because I was the presiding officer and I can see the picture before me. Mr. Clarke of Nebraska. As a courtesy I second the motion. Mr. Finn of Kentucky. I second the motion also. The Pkesident. With two such seconds the motion is certainly well seconded. ' There was also a motion by Commissioner Mills, of Minnesota, thanking the committee for the hard work which it has done and moving that the report be filed and printed. Is there a second to that motion? Mr. GfuiHEK of Iowa. I second the motion. The Pkesident. The motion of Commissioner Mills is before the convention for discussion, and the chair recognizes Mr. Edgerton. Mr. Edgebton of California. Mr. President, from the i=econd of Commissioner Finn may I assume that I have at least one supporter, or is it only seconded to get it before the house? Mr. Finn. As a very interested listener, that is all. Thereupon Mr. Edgerton, of California, proceeds : I am here prepared to defend the report, prepared to discuss it, or prepared to have it quietly embalmed, not to say buried in the proceedings of the con- vention. I realize that the report somewhat boldly attacks many subjects which might be considered to be loaded. My experience with dynamite is that except the fellow who produces it and encases it in a receptacle nobody wants to finger it or approach it. From the aspect of the association so far with regard to this report, I feel that there is an atmosphere of dynamite labout it. I want to assure you, however, that after it is quietly put to rest, and perhaps the fuse thus taken out of it, when you can get alone by yourselves, and nobody will see you reading it, you will find much matter of interest in it. The question was put upon the motion of Commissioner Mills of Minnesota, that this report be simply filed and printed, and it was unanimously so ordered, with the exception of one vote. Mr. Thorn stated that this report had been put over for one year. He was not quite accurate in that, gentlemen. What was done to the report was it was killed— quietly but politely killed. This was the history of this report. I have referred to the matter because Judge Thorn apparently placed considerable reliance on this report with reference to Federal incorporation. , . . The particular kind or brand of Federal incorporation which is here presented by the railroads is presented to you frankly as the agency and instrumentality for taking away from the States practi- cally air their power over railroads. The two propositions are linked together, first, the proposition to take away these powers from the States, and, secondly, the proposition to have Federal incorporation 440 INTERSTATE AND FOKEIGN TRANSPORTATION. for the purpose of doing that very thing. It may be that some of the members of this committee might favor some type of Federal incor- poration, with many qualifications and conditions attached to it. It may be that those same members of the committee are not in favor of taking away from the States practically all their powers to regu- late railroads. I think, in general, you will find, gentlemen, that those who are in favor of taking away from the States all their powers will be in favor of Federal incorporation, and that those who are opposed to such course of procedure will be opposed to Federal incorporation. Federal railroad incorporation, of course, means simply the incor- poration by the Federal Government of a railroad. We may forget the other classes of incorporations for the present, because we are confining ourselves to the railroads. . I had hoped, gentlemen, that the representatives of the carriers would present to you some details of their plan so that we could see exactly how they intend to accomplish what they have in mind. For instance, their purpose could be accomplished either by general statute, under which articles of incorporation are issued, or it could be accomplished by issuing charters directly to each railroad. The carriers have not indicated which one of those two plans they intend to pursue. There is a fundamental difference between those two plans. In the old days it was customary to incorporate corporations directly by grant from the sovereign, but there were such abuses in con- nection with that method of procedure, arising from the fact that special clauses were slipped in or left out of the charters, that the modern way of handling a situation of this kind, the way in which the national banking act handles it and the way the most of our States handle it to-day, is by passing a general statute which pre- scribes general powers for these corporations, and then provides for the filing of their acticles of incorporation with some public authority. Unfortunately we are in the dark as to which specific method the carriers intend to pursue in this regard, as in most other regards. Just a word here and there, either in the general statute or in the special charter, can absolutely change the aspect of the situation. So I think if this committee is inclined to go further into that par- ticular proposition, you may find it desirable to ask the carriers to present their statute and put it out on the table where we can all look at it and see what is really in it, and when that is done we may desire to be heard further on this particular subject. Just a word, gentlemen, on the general proposition of the power of the Federal Government to incorporate Federal corporations. I may refer to some matters which are rather elemental, some matters which are well known to every member of the committee, but if I do my only excuse is that I am trying to build this question up from the ground as- far as the legal elements of the problem are concerned. That the Federal Government has the unquestioned power to create such agencies and instrumentalities as are necessary to enable it to carry out its admitted powers is, I think, clear, and that one of those agencies and instrumentalities which the Federal Govern- ment has the power to create for these purposes is a corporation, in- corporated by the' Federal Government is equally clear. I need to INTERSTATE AND FOEEIGN TRANSPORTATION. 441 refer in that respect only to the case of McCuUough v. Maryland, the famous case, 4 Wheat., 316, in which the Supreme Court of the Dnited States, speaking through Mr. Chief Justice Marshall, held that although the Federal Constitution did not specifically give the power to create a bank, nor did it specifically give the power to create 3, corporation, nevertheless the Federal -Government, under its gen- eral powers, had a right to create a corporation which was a na- tional bank. In that case, as you will remember, the State of Mary- land tried to place a tax on the securities issued by a branch bank of the Bank of the United States, located in Baltimore, and the Supreme Court held that such tax was illegal, and that the Federal Government had the right to create this corporation, which should be free from taxation by the States. I shall not read any part of this case because it is so well known that you are all no doubt familiar with it. I cite it simply as a foundation, work for the general proposition that the Federal Government does have the legal right to create corporations for the purposes which the Federal Government has the power to execute. Now, • referring specifically to Federal railroads, it is generally known that the Federal Government has from time to time char- tered Federal railroads. I thought it might be helpful to the mem- bers of the committee, if I simply referred to the four cases which have come under my observation and give a reference to the statutes, so that if you desire to follow the matter further you will easily be able to do so. The first Federal railroad incorporated by the Fed- eral-Government was the Union Pacific Railroad Co., Avhich was incorporated by act of July 1, 1862, for the purpose of constructing a railroad from the one hundredth meridian east of Greenwich, west, to connect with the Central Pacific Railway Co., which was incorpo- rated by California. That statute you will find in Twelfth United States Statutes at Large, page 489. The second Federal railroad was the Northern Pacific Railroad Co., which was incorporated by the Federal Government by act of July 2, 1864, for the purpose of constructing a line of railroad from Lake Superior to Puget Sound, in the State of Washington, with a branch line down to Portland, Oreg. This statute you will find in Thirteenth United States Statutes at Large, at page 365. The next Federal railroad was the Atlantic & Pacific Railroad Co., which was incorporated by the Federal Government by act of July 22, 1866, for the purpose of constructing a line of railroad from Springfield, Mo., to Albuquerque, N. Mex., thence on to the Colorado River, and thence on to the Pacific Ocean. In this same act the Southern Pacific Railroad Co., although it was not a Fed- eral corporation, being a California corporation, was granted power to connect with the Atlantic & Pacific Railroad Co. at the California State line. This statute you will find in Fourteenth United States Statutes at Large, page 292. The fourth Federal railroad which has come under my observation was the Texas & Pacific Railway Co., which was incorporated by the Federal Government by act of March 3, 1871, for the purpose of constructing a line of railroad from Marshall, Tex., to San Diego, Cal. This statute you will find in Sixteenth United States Statutes at Large, page 573. 442 IITTEHSTATE AND FOREIGN TKANSPOETATION. It is possible that there may be other Federal railroads, but those are the ones to which my attention has been particularly directed. I shall not read any of those statutes. I shall not even abstract any of them. In general, they provide that certain specified individuals shall be created into a corporation, which shall have a certain name, and which shall have the right to construct a railroad between cer- tain points. They provide for the initial meetings of the boards of directors of these concerns. They provide generally for grants of land from the Federal Government. They retain certain powers to the Federal Government, and most of them retain the power to alter, change, or amend the statutes, although in the Texas Pacific case that power was not retained, which shows the need for very great care in drawing these particular statutes, in that some matter may be left out by just a slip of the pen. Now, having laid the general foundation, it is my purpose, gen- tlemen, to take up the important powers which the States have over railroads, and to show you just what effect Federal incorporation will or may have on those powers, so that you may have the entire situation before you. The first power is the power over rates. I assume that it is the conceded law that at present the States have the power to regulate what are known as intrastate rates,- subject, of course, to the decision of the Supreme Court of the United States in the Shreveport case in cases of discrimination. Assuming, then, that the States liaA'e some power to fix State rates, we are next confronted with the question as to what will be the effect of Federal incorporation on those particular powers. This question has come before the Supreme Court of the United States a number of times. The decisions," I believe, are not very well konwn; at least, I have almost never seen them referred to, and I find, even among lawyers of standing at the bar, considerable lack of knowledge with reference to those particular decisions and as to what can be accomplished under those decisions. So I hope I may be pardoned if I refer a little more in detail to certain of these decisions. The first case in which that question came before the Supreme Court of the United States was the famous case of Reagan against the Mercantile Trust Co., which will be found in One hundred and fifty- fourth United States Statutes, at page 413. In that case the question at issue was whether or not the Texas Railroad Commission could regulate the rates of the Texas & Pacific Railway Co. It was claimed by the Texas & Pacific Railway Co. that under its charter from the Federal Government the State of Texas had no power over the rates of this corporation, even as to purely intrastate traffic. That raised a very interesting question, upon which the Supreme Court passed. I have before me, gentlemen, a copy of the original briefs w^hich were filed in that case with the Supreme Court, and I want to refer to a few paragraphs in those briefs, as showing to you the exact question which was before the Supreme Court, because if we realize the exact questions which were presented to the Supreme Court by the attorneys for the railroads I think we may be in a po- sition to understand a little better the language which was used by the Supreme Court in its decision. I have before me, first, the brief which was filed by the Mercantile Trust Co., the trustee under the Texas & Pacific Railway Co.'s bond INTERSTATE AND FOREIGN TRANSPORTATION. 443 mortgage. The first point urged by the Mercantile Trust Co. was that the Texas & Pacific Eailway Co. is a Federal corporation, char- tered and existing under an act of Congress, and that Congress alone has the right to regulate the exercise of its corporate franchises or to fix its rates and charges. It was claimed that Congress alone has the right to regulate not merely the interstate rates but also the intrastate rates of this par- ticular corporation. Section 13 of the statute under which the Texas & Pacific Railway Co. was incorporated provided, in part, as follows : Provided further. That the rates charged for carrying passengers and freight per mile shall not exceed the prices which may be fixed by Congress for carrying passengers and freight on the Union Pacific and Central Pacific Railroads. Based on that paragraph the railroad attorneys made an argument that Congress had clearly indicated that as far as rates were con- cerned, both state and interstate, the matter should be left to regular tion by the Federal Government. On page 24 of this brief the Mer- cantile Trust Co. says : The effect, therefore, of the incorporation of the Texas & Pacific by Corl^ grass, under the various provisions in its charter, is necessarily to make the Texas & Pacific a corporation of the General Government, which is its sovereign, and to withdraw the control of the Texas & Pacific and its franchises from the States and Territories through which the roads may run, except in so far as police and taxation laws of such States and Territories may lawfully be made to apply to it. I may say that, later on, I shall consider both police matters and taxation matters and the eflFect Federal incorporation may have on the powers of the States as to both those matters. On page 28 the brief continues : The franchises of the Texas & Pacific, including its most vital franchise, of fixing of rates and fares subject to the reserved right of the congressional control, are Federal franchises, conferred for Federal purposes, and therefore necessarily subject only to Federal regulation and control. The necessary result is that the Texas Railroad Commission can not be invested by the State with any authority, without the consent of Congress, which has never been given to fix or establish any rates of fare or charges which shall have any operation or effect on the Texas & Pacific Co. I am reading these sections of the brief, gentlemen, so you may see clearly just what contentions were presented to the Supreme Court. I have here also a brief which was filed in the same proceeding by the Texas & Pacific Railway Co., signed by Winslow S. Pierce, R. S. Lovett, now president of the Union Pacific, and T. J. Freeman. In this brief, counsel make the same points as were made by the Mer- cantile Trust Co., but in addition thereto make a very important addi- tional point. Counsel, in this brief, draw attention to the fact that the Texas & Pacific Railway Co. could be incorporated, not merely under the power of the Federal Government over interstate com- merce, but also could, have fceen incorporated under the military power and under the power over post offices and post roads, and con- tend that although there is a qualification in the power of the Federal Government over commerce, namely, the qualification that the con- trol of the Federal Government shall be limited to commerce among the States, that there is no qualification with reference to the power of the Federal Government under the military power or with refer- ence to the power over post roads. So these attorneys contend that 444 INTERSTATE AND FOREIGN TRANSPORTATION. even though if the commerce clause alone were under consideration the State of Texas might have retained its control over Texas rates; that if you look to these other two powers, both of which are referred to in the statute, that the State of Texas has entirely lost out, and that the Federal Government alone has the power to control rates both interstate and intrastate in the State of Texas. I shall read one paragraph which, I think, clearly shows that point of view. I now read from page 56 of the record : Thus, legislating for national purposes, Congress may confer upon these cor- porations the right to transact business at any place within its territorial juris- diction and may subject these agencies to such public use as may be incident to their general nature or desirable in the interest of public good or welfare. In such legislation Congress knows no State line. Its law is supreme and enacted in the interest of the people of the Nation. May I direct attention particularly to the next sentence ? The regulation of commerce among the States is but one of the constitutional powers under which Congress derives sanction for the creation of these railway corporations. In the exercise of the other poweTs in which such sanction is equally found, State lines are without significance. Its action is supreme, and its authority is conclusive. I shall read one further paragraph, paragraph No. 5 of the sum- mary as presented by the attorneys for the railroad in this case: The military, postal, and other powers under which the Texas & Pacific Rail- way Co. was created are, with the exception of the commerce power, which Is but one of the jiowers under any one of which the sanction for the creation of the company was complete, exercised without regard to or constraint by reason of State lines, and in the Federal power to preserve, protect, and regulate these agencies is not subject to the limitation of such lines. It was here contended before the Supreme Court of the United States that although under the commerce power, it was not within the authority of the Federal Government to take from the State of Texas the power to regulate Texas rates, that nevertheless, under two other powers of the Federal Government, namely, first, the military poAver, and, second, the post-roads power, that it was pos- sible to do this sort of thing. Now, bearing that contention in mind, T would like to read you a paragraph or two from the decision of the Supreme Court. This decision is found in 154 United States at page 413, and I now read from page 414. Justice Brewer delivered the decision. The Texas i^ Pacific Railway is a corporation organized under the laws of the United States, and by reason of that fact it is earnestly insisted by counsel for it and the trust company that it is not subject to the control of the State, even as to rates for transiiorlation wholly T\ithin tho State. The argument is that it receives those franchises from Congress ; and among those franchises is the right to charge and collect tolls, and that the State has not the power, therelove, in any manner to limit or qualify such franchise. This is an im- portant question and deserves consideration, even though in respect to other matters these facts should present a case exactly parallel to tlint just recited and calling for a like decision, because if the State has no control in the matter the decree should not be affirmed in part, but in toto. Then, at page 416, we come to the meat of the decision: Similarly, we think it may be said that, conceding to Congress the power, to remove the corporation in all its operations from the control of the State, there is in the act creating this company nothing which indicates an intent on the part of Congress to so remove it, and tliere is nothing in the enforcement by the State of reasonable rates for transportation wholly within the State INTERSTATE AND' FOKEIGN TBANSPORTATION. 445 which will disable the corporation from discharging all the duties and exer- cising all the powers conferred by Congress. By the act of incorporation, Congress authorized the company to build its road through the State of Texas, It knew that, when constructed, a part of its business would be the carrying of persons and property from points within the State to other points also within the State, and that in so doing it would be engaged in a business, control of which is nowhere, by the Federal Constitution, given to Congress. And so on. ■ I think I would better read the entire paragraph. It must have been known that, in the nature of things, the control of that business would be exercised by the State, and if it deemed that the interests of the Nation and the discharge of duties required on behalf of the Nation from this corporation demanded exemption in all things from State control, it would unquestionably have expressed such intention in language whose meaning would be clear. Its silence in this respect is satisfactory assurance that, in so far as this corporation should engage in business wholly within the State it intended that it should be subjected to the ordinary control exercised by the State over such business. Without, therefore, relying at all upon any acceptance by the railroad corporation of the act of the legislature of the State, passed in 1873 is respect to It, we are of opinion that the Texas & Pacific Railway Co. is, as to business done wholly within the State, subject to the control of the State in all matters of taxation, rates, aM other police regulations. Gentlemen, I want to draw your attention to the fact that Justice Brewer conceded that if Congress had in this act incorporating the Texas & Pacific Railway Co., clearly shown the intention that the State of Texas should have been deprived of its power to fix rates, then that effect would be accomplished. Mr. Adamson. Do you understand the use of the word "conced- ing" there means he thinks it is conceded, or that he uses that word to simply pass the matter to take up other objects? Mr. Thelen. From the further language in the decision, Judge, referring to the intention of Congress — that if Congress had had &is intention Mr. Adamson. But it is all based on the connection in which he used the word. Mr. Thelen. I base my interpretation on the entire paragraph. Mr. Adamson. I am talking about what he did. He used it there one time. Does he not mean " for the sake of this argument? " Mr. Thelen. I should say there would be much force in your suggestion, if it were not for what later appears. He says that the silence of Congress must be deemed an intention not to deprive the States of that right. I think it must be clear that if Congress had expressed itself so in this paragraph, then the State of Texas would have been deprived Mr. Adamson. The trouble with your view is it is all based on the construction you put on his use of the word " conceding." Mr. Thelan. I make this argument, gentlemen, largely^ in view of the claims made in the briefs, in which it was clearly pointed out that although there is doubt about this coming within the com- merce clause of the Constitution, that notwithstanding, under the military power and the post-office power. Congress could have effected this by putting the necessary language in the statute. Personally I think there can be little doubt as to what Justice Brewer had in mind in this case, and my belief in that respect is strengthened by two other decisions of the Supreme Court of the 446 INTERSTATE AND FOEJEIGN TEANSPOBTATION. United States in which reference is made to this decision, and in which this decision is given the effect which I suggested to you gentlemen. Senator Underwood. Will you call the committee's attention to those decisions at this time? Mr. Thelen. I shall refer to each of them in just a moment, Sen- ator, if it is not boring the committee. ' Mr. Hamilton. These references are useful to the committee. Mr. Thelen. That is the exact spirit in which I make them. I hope, putting them all together, they will be of some help to yoii. I will say frankly I am going into this matter for this purpose. There may be some among you, or some Senators and Representatives in Congress, not on this committee, who may have the belief that even a Federal incorporation would not take these powers away from the States, on the ground that it is necessary first to amend the commerce clause of the Constitution. If there are any of those with that view, I think it should be drawn to their attention that it has been inti- mated three times by the Supreme Court of the United States that these things can be done without an amendment to the commerce clause of the Constitution. I was surprised to find, in the famous case of Smyth v, Ames, that this particular point was dealt with. This case, of Smyth v. Ames is found in 169 U. S., at page 466. Senator Beandegee. I should like, Mr. Chairman, before Mr. Thelen proceeds in analyzing these cases, to ask whether we are all at liberty to ask all the legal questions we want to ask now or keep still? The Chairman. I think the decision of the committee was we should wait until the conclusion of the remarks. Mr. Adamson. I think, Mr. Chairman, that is correct as to cross examining, but as to any matter reached which we do not understand, I think that rule does not obtain. Senator Eobinson. If we relax the rule at all, it will only result in confusion. ■ The Chairman. The chair will rule, unless the committee decides to the contrary, that the witness is not subject to interruption during his presentation of the case. Mr. Thelen. After I have concluded, I shall be only too glad to answer any questions. This case of Smyth against Ames was a case brought; by the stock- holders of the Union Pacific Railroad Co., a Federal corporation, and other railroads against the constituted authorities of the State of Nebraska, to enjoin them from putting into effect an act of the legis- lature of Nebraska, establishing certain freight rates. In this case it was urged by the railroads, and by the stockholders of the railroads, that the statute of the State of Nebraska could have no application to the Union Pacific Railroad Co. because it was a Federal railroad corporation, and reference was made, in that respect, to this Reagan case, to which I have referred. The court, speaking through Mr. Justice Harlan, gives very careful consideration to that point, and I quote from page 519 of the report. An important question is presented that relates only to the Union Pacific Co. That company is a corporation formed by the consolidation of several companies under the authority of acts of Congress, one of the constituent companies being INTERSTATE AND FOEEIGN TEANSPOETATION. 447 the Union Pacific Railroad Co., incorporated by the act of July 1, 1862. * * * Neither that company nor the Union Pacific Railroad Co. is named in the Nebraska statute, but the statute is interpreted by the State board of transpor- tation as embracing the present defendant corporation. It is contended that the State is without power to fix or limit the rates that the Union Pacific Co. may charge for the transportation of freight on its lines between points within Nebraslia. This contention rests: (1) Upon the provisions of the acts of Congress showing that the Union Pacific Railroad Co. was created for the ac- complishment of national objects, namely, to secure the safe and speedy transportation of the mails, troops, munitions of war, and public stores of the United States; (2) upon the eighteenth section of the above act of July 1, 1862 — being the statute under which the Union Pacific Railroad Co. was incorporated, which section provided in part : " That whenever it appears that the net earnings of the entire road and telegraph, including the amount allowed for services rendered for the United States, after deducting all expenditures, including repairs and the furnishing, running, and managing of said road, shall exceed ten per centum upon its cost, exclusive of the five per centum to be paid to the United States, Congress may reduce the rates of fare thereon, if unreasonable in amount, and may fix and establish the same by law." So, in this particular case, the railroad relied, first, on the general fact it was incorporated under an act of Congress, under all thefee tljree powers; secondly,, on specific language in the statute of incor- poration, by which language the railroad claimed that Congress had expressed its intention that the rates in the State of Nebraska should no longer be subject to control by the State. Mr. Justice Harlan continues : The argument is that Congress by this enactment has reserved to itself exclu- sive control of rates, interstate and local, to be charged on the Union Pacific Railroad. As this view, if maintained, would require an affirmance of the decree, so far as the Union Pacific Company is concerned, whether the Nebraska statute of 1893 would be constitutional or not as to the other railroad corpora- tions, it can not properly be passed without examination. Then the court referred to the" Eeagan case. I do not know whether I want to read all of that to you. They quote from the Eeagan case, and it would be a work of supererogation, inasmuch as I have read that particular passage to you from that Reagan case, to repeat it. By the way. Judge Adamson, I shall read part of this paragraph, because it bears on this question you asked me. In Reagan v. Mercantile Trust Co. (154 U. S., 413, 416) the question arose whether the Texas & Pacific Railway Co., a corporation organized under the laws of the United States, was subject to the laws of Texas with respect to rates for transportation wholly within that State. The ground upon which exemption from State control was there asserted by the company was that it received all its franchises from Congress, including the franchise to charge and collect tolls. This court, conceding, for the purposes of that case, that Congress had power to remove the corporation in all its operations from State control, held that the act creating it did not show an intention upon the part of Congress to exempt it from the duty to conform to such reasonable rates for local transportation as the State might prescribe, and that the enforcement by the State of reasonable rates for such transportation would not disable the corporation from performing the duties and exercising the powers imposed ipon it by Congress. Then there is a quotation from the Reagan case, and notwithstand- ing that fact the court, here proceeds to consider this particular pro- vision in the statute and tries to make up its mind as to whether, under this particular provision in the Union Pacific Railroad Co.'s statute, Congress expressed the intent which was referred to by Mr. 448 INTERSTATE AND FOREIGN TRANSPORTATION. Justice Brewer. That will be found on page 521 of the report, in the middle of the page : In the present case the question Is more difficult of solution by reason of the declaration in the above act of July 1, 1862 (no similar declaration being made in the act incorporating the Texas & Pacific Railway Oo.) that Congress may reduce the rates of fare on the Union Pacific Railroad if unreasonable in amount, and may fix and establish the same by law whenever the net earnings of the entire road and telegraph, ascertained upon a named basis, should exceed ten per centum upon its cost, exclusive of the five per centum to be paid to the United States. Then Mr. Justice Harlan continues: Undoubtedly Congress intended by that act to reserve such power as was necessary to prevent the corporation from exacting rates that were unreason- able. But this is not equivalent to a declaraion that the States through which the railroad might be constructed should not regulate rates lor transportation begun and completed within their respective limits. In other words, he reaches the conclusion that the language of this particular statute is not strong enough and not explicit enough to support the claim of the railroads in that respect. He then goes on and refers to the fact that the making of rates for transportation taetween points wholly within the State is primarily under the con- trol of the State, and continues: And it ought not to be supposed that Congress intended that, so long as it forebore to establish rates on the Union Pacific Railroad, the corporation itself could fix such rates for transportation as it saw proper, independently of the right of the States through which the road was constructed to prescribe regulations for transportation beginning and ending within their respective limits. On the contrary, the better interpretation of the act of July 1, 1862, is that the question of rates for wholly local business was left under the con- trol of the respective States through which the Union Pacific Railroad might pass with power reserved to Congress to intervene under certain circumstances and fix the rates that the corporation could reasonably charge and collect. Congress not having exerted this power, we do not think that the national character of the corporation constructing the Union Pacific Railroad stands in the way of a State prescribing rates for transporting property on that road wholly between points within its territory. Then please notice, gentlemen, this next sentence : Until Congress, in the exercise either of the power specifically reserved by the eighteenth section of the act of 1862 or its power under the general reser- vation made of authority to add to, alter, amend or repeal that act, prescribes rates to be charged by the railroad company, it remains with the States through which the road passes to fix rates for transportation beginning and ending within their respective limits. In other words, here is a clear intimation that under its general power reserved to alter, amend or change the statute. Congress might have the power to establish and fix even the rates which should be charged by the Union Pacific in Nebraska on purely State traffic, in that respect, following out the intimation that was made by Mr. Justice Brewer in the Reagan case. The third reference which I have found in the decisions of the Supreme Court on this general question, is found in the famous Minnesota Eate Case (230 U. S., at page 352). At page 425 I find this reference, in the decision made by Mr. Justice Hughes. This is the Northern Pacific, by the way, another Federal corporation, and here again we have the same question arising. I read now from page 425 : A further question was presented in Reagan v. Mercantile Trust Co.' (154 U. S., 413), in respect to the same statute and order as applied to the Texas INTERSTATE AND FOREIGN TEANSPOETATION. 449 & Pacific Kallway Co. which had been organized under the laws of the United States (Mar. 3, 1871, 16 Stat., 573, c. 122) and operated its road not only within the State but also for several hundred miles outside. It was insisted that this company was " not subject to the control of the State, even as to rates for transportation wholly within the State," the argument being that it was not within the State power to limit the Federal franchise to collect tolls. Mr. Justice Hughes continues : • But the court held that the act of Congress did not go to the extent asserted but left the company, as to its intrastate business, subject to State authority. Now,, here we have Mr. Justice Harlan, in Smyth v. Ames, and Mr. Justice Hughes, in the Minnesota rate case, apparently giving the same interpretation of what Mr. Justice Brewer said in the Keagan case, as I have suggested. Now I ask your attention to the fact that in none of these cases ' was a decision on this specific question necessary to the decision of the case, and I think any lawyer who looks the cases squarely in' the face must realize that fact; but, notwithstanding we have the clearest kind of intimation here three times — first, by Mr. Justice } Brewer; second, by Mr. Justice Harlan; and third, by Mr. Justice Hughes— that if in the language incorporating a Federal railroad Congress clearly expressed the intention that the State should be deprived of its authority over rates, that effect will be accomplished not under the commerce clause but under the military power or under the power over post roads. I have presented this argument to you on the question of rates so that if you should want to go further into this question of Federal incorporation you may have before you clearly the danger which I see in that situation ; that is, the danger \ of doing one thing and thinking one thing is being done when in fact another thing is being done. If I were in the service of the rail- roads — and, by the way, I used to be a railroad lawyer, and I hope from that that I can see both points of view — if I were in the service of a railroad, and if I were drawing this Federal incorporation act, I should insert a clause providing that this particular corporation shall be available to the Federal Government for the transportation of troops, munitions, supplies, and all that sort of thing, and I should insert another clause to the effect that this railroad shall be a post road, and I should insert another clause to the effect that this is done under the power to regulate commerce, and then, if the States wake up some day and see what is being done to them, I would go to the Supreme Court and argue on the basis of these cases and on the basis of the military power and the post-roads power. I do not know but what the Supreme Court would decide — and I am inclined to think it would on the basis of these three decisions — ^that the States had lost their power over rates. The next power of the States that would be affected and which I de- sire to discuss is the matter of taxes. It is true that the railroads have graciously stated that the States may for the present retain their power over taxes. I want to say that we are very thankful to them lor _ that, because taxes mean a great deal in the conduct of our various State governments, and we certainly appreciate their courtesy for the present in leaving this power to the States. You no doubt observe that with reference to the few powers which they offered to^ leave to the States — ^namely, the taxing power and such police powers 70342— PT 8—16 3 450 INTEESTATE AND FOREIGN TRANSPOETATION. as are not vital — the representative of the carriers in each case states that for the present these powers were to be left to the States. We know, of course, what their ultimate plan is. We must suppose that they will be able and energetic in carrying through their plan and that some day, if the door is opened, the States will find they have lost their taxing power as well as their power over police regulations, including those which are not vital. Now, some lawyers of eminence haA'^e taken the position that there is nothing to be feared as far as the taxing power is concerned. They have taken the position that even through the instrumentality of Federal incorporation the States can not be deprived of their taxing power. If you will pardon me just a moment, I will get a case to which I would like to refer. Mr. Adamson. At the risk of being obnoxious, and subject to the objection that I am interrupting you, I would suggest that one of these clerks will hand you any of those books that you desire. Mr. Thelen. That is very kind of you, Mr. Adamson. I have a list here of the cases. The first important case in which the question of taxation, as far as Federal railroad corporations are concerned, came before the Su- preme Court is the case of Thomson v. Pacific Railroad, which you will find in Ninth Wallace, at page 57&. In that case the question before the Supreme Court. was whether or not the State of Kansas had the power to tax the property of the Union Pacific Railroad Co., again a Federal corporation. With reference to that point the Su- preme Court said in effect that, although Congress might, if it has so expressed the intention, take the taxing power away from the States, no such intention had been clearly expressed in the act incor- porating the Union Pacific. At page 587 the court, speaking through the Chief Justice, said : The main tirgumeut for the complaiuants, however, Is that the road, being constructed under the direction and authorization of Congress for the uses and purposes of the United States, and being a part of a system of roads thus con- structed, is therefore exempt from taxation under State authority. It is to be observed that this exemption is not claimed under any act of Congress. In other words, there is no specific provision in the statute incor- porating this railroad providing that this property was to be exempt from State taxation. It Is not asserted that any act declaring such exemption has ever received the sanction of the National Legislature. But it is earnestly Insisted that the right of exemption arises from the relations of the road to the General Govern- ment. It is urged that the aids granted by Congress to the road were granted in the exercise of its constitutional powers to regulate commerce, to establish post offices and post roads, to raise and support armies, and to suppress insur- rection and invasion ; and that by the legislation which supplied aid, required security, imposed duties, and finally exacted, upon a certain contingency, a percentage of income, the road was adopted as an instrument of the Govern- ment, and as such was not subject to taxation by the State. There we have the claim made by the Union Pacific in this par- ticular case. At the bottom of page 588, passing upon that conten- tion, the court said: We do not doubt, however, that upon the principles settled by that judgment Congress may. in the exercise of powers incidental to the express powers men- tioned by counsel — INTERSTATE AND POHEIGN TBANSPORTATION. 451 Referring to the case of McCuUoch v. Maryland — make or authorize contracts with individuals or corporatious for services to the Government ; may grant aids, by money or land, in preparation for and in the performance of such services; may make any stipulation and conditions in relation to such aids not contrary to the Constitution— I would like to refer particularly to the next language : and may exempt, in its discretion, the agencies employed in such services from any State taxation which v\-ill really prevent or impede the performance of them. It was decided in this particular case that Congress had not clearly expressed an intention to remove the property of the Union Pacific Eailroad from State taxation, and on that ground the court ruled against the contention of the carriers. The other case to which I would like to refer in this connection is the case of Railroad Co. v. Peniston, which you will find in 85 United States, also 18 Wallace, at page 5. In that case the State of Nebraska was the State which was trying to tax. The local authorities of Lincoln County, Nebr., had levied a certain tax on the phj^sical property of the Union Pacific Railroad Co. in the State of Nebraska. We have here a very interesting situa- tion when it comes to the decision. We find Justice Strong writing the decision of the majority, which was not a majority, being con- curred in by only three justices. There you have four accounted for. Mr. Justice, Swayne concurred in the conclusion, but not in the reasoning. Mr. Justice Bradley and Mr. Justice Field dissented, and Mr. Justice Hunt dissented. Now, the majority, if we may refer to four as a majority, headed by Justice Strong, held that there is a clear distinction between tax- ing the physical property of a Federal railroad and taxing its fran- chise, or the right to exercise its functions. They decided the case on the ground solely that in this particular case the tax was levied on the physical property of the Union Pacific Railroad in the State of Nebraska. Those four justices held that the tax was not obnoxious to any constitutional provision. Mr. Justice Swayne said on page 37, concurring in the judgment — I concur in the affirmance of the judgment in this case. I see no reason to doubt that it was the intention of Congress not to give the exemption claimed. The exercise of the power may be waived. But I hold that the road is a national Instrumentality of such a character that Congress may interpose and protect it from State taxation whenever that body shall deem it proper to do so. , For some of the leading authorities in support of this principle Mr. justice Swayne referred to the case of the Chicago & North Western Railway v. Fuller, decided by the court a short time before. I shall not take the time of the committee by reading from the dis- senting opinion of Justice Bradley and Justice Field, but shall simply draw attention to the fact that those two justices strongly urged that although there was no reservation of the taxing power in the statute creating the Union Pacific, that nevertheless from the mere fact that the Federal Government had created this agency, and in analogy to the McCuUoch v. Maryland case, the State of Nebraska, and no other State, had the right to tax even the physical property of the Union Pacific Railroad. 452 INTERSTATE AND FOREIGN TRANSPORTATION. Mr. Justice Hunt simply said, " I dissent from the opinion of the court." There you have the situation. If there had been language in the Union Pacific statute clearly showing the intention of Congress to exempt this property from taxa- tion there is no question on that record that the majority of the court would have concurred and would have held that the Federal Government had succeeded in exempting the entire property of the Union Pacific from State taxation. I urge this matter so that you may have before you when it comes to the question of taxation what I believe is the undoubted law, that if the language put into the statute is sufficient for that purpose then under Federal incorporation the Federal Government clearly has the power to take away from the States the right to tax all rail- road property of all Federal railroad corporations. I come now, gentlemen, to the very interesting question of securi- ties. By securities T mean generally the stocks and bonds, notes, and other evidences of indebtedness of railroad companies. I predict, gentlemen, that you will find as your first large con- structive piece of work to be done under this inquiry the jjrovision for adequate regulation by the Federal Government of the issues of the securities of all the interstate railroads. There is considerable difference of opinion among the members of the National Association of Eailway Commissioners as to whether this action of the Federal Government shall be concurrent with State action or whether it should be exclusive. I have my own very strong views on that subject, but I think it is not necessary to go into them at the present time, because I am trying to address myself to the legal aspects of the question. With reference to control by the Federal Government of the is- suance of securities of all railroads engaged to any extent in inter- state commerce, I wish to present to you as my first proposition that Congress has the full power, under amendment of the interstate com- merce act, or by other legislation, without any Federal incorporation, of providing for a complete, adequate, and, if it wants to, exclusive regulation of the issuance of securities of all interstate railroads. I am happy to find that Judge Thom agrees with me on that proposi- tion. In the hearings which were held before the Committee on In- terstate and Foreign Commerce of the House of Representatives in 1914, from February 9, to March 17, 1914, Judge Adamson and the other members of the House committee who were there will remember that Judge Thom explicitly made the admission that it is possible for the Federal Government to enter upon complete and adequate regulation of the securities of all these carriers 'vifithout Federal in- corporation. As you will remember, he made the same statement the other day, so that we find Judge Thom in 1914 and Judge Thom in 1 916. agreeing with my point of view. I furthermore take the position that the Federal Government has the right to make such regulation exclusive, without Federal in- corporation. I rest with reference to that point on the general prin- ciple of constitutional law, that whenever the Federal Government enters into the field of interstate commerce, if it expresses its inten- tion that its regulation shall be exclusive, that will be the inevitable effect. It will be unnecessary, I think, for me to refer to the large number of cases which have established that proposition. I might INTERSTATE AND FOREIGN TRANSPORTATION. 453 refer in passing, without quoting, to one or two typical cases, as follows: The Northern Pacific Eailway Co. v. The State of Washington (202 U. S., 370). That was a case involving a railroad hours-of- ' service statute of the State of Washington. After the Federal Gov- ernment enacted its statute it was held that the State statute would have to yield, because the Federal regulation was exclusive, it hav- ing entered into that particular field. Southern Railroad Co. v. State Railroad Commission of Indiana (236 U. S., 439), decided on February 23, 1915., In that case the State of Indiana passed a statute providing that the railroad com- • panies should place secure grab irons and handholds on the sides and ends of every railroad car. The Federal Government passed the Federal safety-appliance act. A prosecution was instituted by the State of Indiana under the State statute. The railroad made the defense that the Federal Governnaent had entered into this field, and that it having entered into the field, its power was exclusive and the State statute was superseded. The Supreme Court upheld that contention. In the second employers' liability case the same conclusion was reached. Without referring to a large number of other cases estab- lishing the same principle, I simply want to present the elemental proposition that if the Federal Government should undertake to regulate the issue of securities by these interstate carriers, particu- larly if in its statute it shows that it intends that its regulation should be exclusive, the regulation will be exclusive without the crea- tion af a Federal corporation. The argument which was presented here the other day as to why it was necessary to have Federal incorporation, bearing in mind the regulation of securities, was in a nutshell this: That if this purpose is accomplished through the instrumentality of Federal corporations, then all the lawyers would accept it and there would be no litiga- tion ; but that if Congress should undertake directly, by amendmeiit of the interstate commerce act or otherwise, to regulate these securi- I ties, then there would be litigation. It seems to me, gentlemen, that that is an argument which works the other way. It is certainly very easy, if the interstate commerce act is amended so as to provide for regulation of these securities, to take a test case to the Supreme Court of the United States, and it should not take very long to decide that question. On the other hand if yoii, are going to undertake to create Federal corporations you I are going to have a legal fight all along the line, greater than .any legal fight in which the railroads of this country ever have been en- gaged. At the very outset we find Judge Thom differing from Richard Olney. The question at issue was what shall be done with the shares of stock of minority stockholders in the State corporations. , Mr. Olney says, "condemn them by the exercise of the right of eminent domain." Mr. Thom says it is not necessary. Now, when you have here at the very outse:t this fundamental difference between two distinguished lawyers on the railroad side of it, how are we going to escape litigation if the Federal incorporation project is carried through? Take the question of rates; take the question of service; take the question of safety; take even the question of ' securities. There is 454 INTERSTATE AND FOREIGN TRANSPORTATION. bound to be litigation all along the line. There will be litigation on the construction of the various clauses and paragraphs of this Federal incorporation act. It seems to me that when it comes to the question of litigation the arguments are all in favor of the direct amendment of the interstate commerce act to provide for the control of these securities. So, frankly, I can not see the force of that argument. The ■ Committee on Interstate and Foreign Commerce of the House could not see the force of- the argument either, as the record will show that Judge Adamson and others went carefully into that very question and wanted to find out why it was necessary to have Federal incorporation when the same thing could be done directly, simply, without this agency or instrumentality, by a simple amendment of the interstate-commerce act. On the question of securities, I simply desire to make the point that without Federal incorporation the Federal Government has the ■ power, by direct amendment of the interstate- commerce act, or by the passage of another statute, to provide not merely for adequate, but for exclusive control over the securities of these carriers, if Congress is so minded. The next general heading to which I will address myself just a moment we may call " Service, equipment, and facilities." This head includes a large number of matters which, at the present time, are regulated by the States, and efficiently regulated — the quality and adequacy of the service ; the adequacy of equipment, freight and pas- senger; the construction, heating, lighting, and sanitation of rail- road stations and other buildings; the number and the stopping of trains ; the supply of cars and the time for supplying them ; the con- struction of spur tracks ; and the construction of connections between various railroads. With reference to all these matters, and others, which we may group under the general head of " Service, equipment, and facilities," it follows if the Federal Government can take the power of controlling rates away from the States by Federal incor- poration it can do the same thing in reference to service, equipment, or facilities. I take it that no authorities are necessary on that point. It seems to be elemental. Another group of powers now exercised by the States, of consider- able importance to them, may be classed under the general head of " Safety." If I may illustrate by our own work in California along this line, we investigate all railroad accidents and take steps to pre- vent such accidents in the future. We establish for the smaller rail- roads, which do not always have trained and efficient men, operating rules, so that the operations of the railroads may be conducted with greater safety, and we have established such rules for all the smaller railroads of the State. We have made provision for eliminating danger from horizontal clearances and from vertical clearances, and we are carrying our general order in that regard into effect on various roads of the State. We have gone over block and various other sig- nals and are now taking up that matter with some of the railroads. I will say that in California we do not have any trouble with the railroads. When any question comes up we get around a table; we deal with each other in perfect frankness; they do not bear false witness against us, and we make no false charges against them, and we get along very well. So many of these matters which might lead INTERSTATE AND FOREIGN TRANSPORTATION. 45§ to litigation in case the railroads did not have a frank and public spirit are solved easily and readily in our State, as in many other States in the Union. We have control over interlocking devices, and quite a number of these have been installed under our general regulations. We also have control over the condition of equipment and the manning of equipment. Now comes the tremendously important question of grade cross- ings. It is provided in California that no railroad may run its track over a railroad or highway, and no railroad or highway may be con- structed over a railroad track until the commission's consent has first been secured. We also have control over the matter of the elimina- tion of grade crossings. At the present time we are engaged in a State-wide investigation in every county of the State, conducted by our engineers, in company with the railroad engineers, examining ail the railroad grade crossings. Where dangerous obstacles exist they will be removed. The most dangerous of the grade crossings will be eliminated and separation of grades will be instituted, the expense being borne partly by the railroads and partly by the public. I could refer to a large number of other matters under this general head of " Safety." My point with reference to Federal incorporation is that if appropriate language is inserted in the general statute pro- viding for Federal incorporation or in the special charters the States will be relieved from all this power with reference to safety. I come next to a very interesting group of powers, which we may class under the general head of " Police powers." I find that among lawyers there is quite a, prevalent view to the effect that whatever the Federal Government may do as to other matters under the commerce clause, it can not touch the local police regulations of the States. In view of that rather prevalent opinion, which I have been somewhat surprised to find among a number of well-informed lawyers, I have gone into the matter a little in detail. One always gets into difficulties w^hen he tries to define police power, and I am not going to try to do so. On the one hand is the broad police power, under which all public utilities, can be regu- lated, and, on the other hand, are what are known as police regula- tions. In referring to police regulations I have in mind matters affecting the safety, health, and morals of the public. The opinion is quite prevalent that the Federal Government can not enact regula- tions which will affect matters of safety, health, and morals of the people of the various States. That matter has come before the Supreme Court, and the Supreme Court has decided against that contention. The leading case, I think, on that point is Hoke and Economides v. United States. That is the white-slave case, and will be found in 227 United States, 308. In that case, as you Avill find on page 221, this contention was made : Plaintiffs in error admit that the States may control the immoralities of Its citizens. Indeed, this is their chief insistence, and they especially condemn the act under review as a subterfuge and an attempt to interfere with the police power of the States to regulate the morals of their citizens, and assert that it is in consequence an invasion of the reserved powers of the States. The court, speaking through Mr. Justice McKenna, says: There is unquestionably a control in the States over the morals of their citizens, and, it may be admitted, it extends to making prostitution a crime. It is a control, however, which can be exercised only within the jurisdiction 456 INTERSTATE AND FOREIGN TRANSPORTATION. of the States, but there is a domain which the States can not reach and over which Congress alone has power ; and if such power be exerted to control what the States can not it is an argument for, not against, its legality. Its exertion does not encroach upon the jurisdiction of the States. We have cited examples; others may be adduced. The pure food and drugs act (June 30, 1906, 34 Stat., 768, ch. 3915) is a conspicuous instance. In all of the instances a clash of national legislation with the power of the States was urged, and in all rejected. So the Supreme Court here clearly holds that if the Federal Gov- ernment, acting under the commerce clause, enacts legislation which touches these police regulations, then the power of the Federal Government is exclusive and the States have lost control. Mr. Adamson. Mr. Chairman, House Members of this committee will be compelled to be at the House at 12 o'clock. We have barely time now to reach the House for the opening. The Chairman. How much longer will it take you to conclude your argument, Mr. Thelen? Mr. Thelen. I am afraid it will take at least a day longer, Mr. Chairman. Mr. Adamson. I move we do now adjourn. (The motion was agreed to, and thereupon, at 11.50 o'clock a. m., the committee adjourned until to-morrow, Thursday, December 7, 1916, at 10 o'clock a. m.). INTERSTATE AND FOREIGN TRANSPORTATION HEARINGS BEFORE THE W SUBCOMMITTEE ON INTERSTATE AND FOREIGN COMMERCE, CONGRESS OF THE UNITED STATES SIXTY-FOURTH CONGRESS FIRST SESSION PURSUANT TO PUBLIC J. RES. 25 A JOINT RESOLUTION CREATING A JOINT SUBCOMMITTEE FROM THE MEMBERSHIP OF THE SENATE COMMITTEE ON INTERSTATE COM- MERCE AND THE HOUSE COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE TO INVESTIGATE THE CONDITIONS RELATING TO INTERSTATE AND FOREIGN COMMERCE, AND THE NECESSITY OF FURTHER LEGISLATION RE- LATING THERETO, AND DEFINING THE POWERS AND DUTIES OF SUCH SUBCOMMITTEE. Part 9 DECEMBER 7 Printed for the use of the Joint Subcommittee on Interstate Commerce WASHTNGTON GOVERNMENT PRINTING OFFICE JOINT SUBCOMMITTEE ON INTERSTATE AND FOREIGN COMMERCE. FRANCIS G. NEWLANDS, Nevada, Chairman. WILLIAM C. ADAMSON, Georgia, Vice Chairman. JOSEPH T. ROBINSON, Arkansas. THETDS W. SIMS, Tennessee. OSCAR W. UNDERWOOD, Alabama. WILLIAM A. CDLLOP, Indiana. ALBERT B. CUMMINS, Iowa. JOHN J. BSCH, Wisconsin. FRANK B. BRANDEGEE, Connecticut. EDWARD L. HAMILTON, Michigan. Frank Healt, Cleric. Willis J. Davis, Assistant Clerk. n INTERSTATE AND FOREIGN TRANSPORTATION-GOVERNMENT CONTROL AND REGULATION. THURSDAY, DECEMBER 7, 1916. United States Senate, Joint Subcommittee on Interstate Commerce, Room 326 Senate Oefice Building, Washington, D. C. The joint subcommittee met at 10 o'clock a. m., pursuant to ad- journment, Senator Francis G. Newlands presiding ; also Vice Chair- man William C. Adamson. The Chairman. The subcommittee will come to order. Mr. Bryan, will you proceed? STATEMENT OF HON. WILIIAM JENNINGS BRYAN. Mr. Bryan. Mr. Chairman and gentlemen of the committee, my reason for coming here is that the proposition which you have before you seems to me to be of so great importance, in fact, so revolutionary in character, that, as one interested in all things that affect the Gov- ernment and people, I feel it my duty to present very briefly what might be called the other side from the side that has been presented, as I have read it in the papers. The first question to be decided is whether we need more stringent railroad regulations, and, according to the decision of that question will be the decision of the other questions involved. If we want less restriction I know no better plan of securing it than the transfer of all regulation to Washington. The issue, as I understand it, is whether the Federal Government should take exclusive regulation of railroads, not only as to interstate commerce but as to intrastate commerce as well. The transfer of this power to Washington — that is, the giving of the Federal Government exclusive control — is, in my judgment, objectionable for several reasons, if what we desire is more stringent regulation. It seems to me inevitable that such a change would very much weaken the regulation of railroads for two reasons: In the first place, it would bring such a burden upon the people in charge of regulation at Washington that they would be overwhelmed and would find it physically impossible to go into the whole subject and understand the details. I may add that I would like to introduce and make part of my testimony, if you call it testi- mony, a speech made by Dr. Clifford Thorne, chairman of the State Board of Railroad Commissioners of Iowa, and president of the National Association of Railway Commissioners. This is an ex- tract from his address which is described as the " President's ad- dress at the twenty-seventh annual convention of the National Asso- ciation of Railway Commissioners, San Francisco, October 12, 1915." '^ 457 458 INTERSTATE AND EOKEIGN TKANSPOBTATION. ■ The Chairman. If you will hand the speech to the reporter it will be included in the record. (The paper referred to is here printed in full, as follows:) THE GBEAT AMERICAN EXPERIMENT. We are on the eve of another struggle for party supremacy. The birth and death of political parties are intensely dramatic and Interesting ; but, at the most, parties are only temporary things. Our form of government is of far greater consequence ; it has outlived and -will outlive hundreds of brilliant leaders and many great political parties. Its creation was, and its change ■will be, a news item of the centuries. For several years there has been gradually developing in this country a senti- ment in favor of vriping out State lines. An agitation, partly spontaneous and partly inspired by interested persons, has been carried on to support a change in the trend of our judicial decisions relative to the powers of a State to regu- late business. This is reflected in speeches, magazine articles, and books. It is now vigorously claimed that the time has arrived for the practical abo- lition of all State regulation. This thought has permeated the minds of some of our ablest leaders. Such a change in the American plan of government would be of stupendous importance. It is probably safe to say that not since the Civil War has this question of the relative rights and functions of State and National Governments commanded such widespread consideration as during the past few years. The issues of to-day again concern vast property interests. The rights of railroads, express companies, telegraph, telephone, and other public-service cor- porations, as well as many huge industrials, the rights of shippers, producers, and consumers, and the future policies of State and Nation on many grave questions of business are vitally concerned. Shall we proceed as rapidly as possible to eliminate State government from our commercial life? Judge Sanborn, as a circuit judge, in the spring of 1911, rendered a decision enjoining the enforcement of certain orders made by the Minnesota Railroad & Warehouse Commission. During the past 50 years there have been many orders of Federal courts sustaining and enjoining orders made by State author- ities, but none of these have commanded the Nation-wide consideration following that decision. The decision by Judge Sanborn occasioned the railroad commissions of eight sister States, having 70 similar cases pending in the Federal courts involving precisely the same issues, to file a brief with the Supreme Court as amici curiae, opposing the doctrine he announced. Thjs action was later unanimously indorsed at a representative gathering of 30 State railroad commissions in their annual convention at Washington, D. C. After the railroad commissions had determined to file a brief and argument against the doctrine announced by Sanborn, the governors at their national con- vention unanimously ijgreed upon a similar action. Finally, the Federal Govern- ment, through the Attorney General of the United States, filed a brief opposed to the positions taken by the governors and railroad commissions of the various States. Perhaps never before in the history of the United States has any case called forth such an array of briefs and arguments from the various depart- ments of the State and National Governments. The Minnesota rate case will probably take rank as one of the great legal contests of the present generation. The decision of the Supreme Court of the United States reversing Judge Sanborn, of the lower Federal court, brought into issue the whole subject of the relative functions of State and Nation in our scheme of government as applied to the commercial affairs of the country. It focused attention for the moment dh the wisdom of our American plan of dual government. The Supreme Court refused to decide the real issue that the public had under considration at the time. The court said that the question as to whether Federal regulation of commerce shall supplant State regulation is not a ques- tion for the judiciary to determine ; it is legislative and not judicial in char- acter. The contest was therisby transferred from the court room to' the Halls of Congress. It now becomes not a question of precedence or of statute but one of expediency — of wisdom. INTEBSTATE AND FOREIGN TRANSPORTATION. 459 Since that decision a movement has been gradually inaugurated throuWiout the Nation looking toward the elimination of State regulation of commeix'e Let us pause a few moments and carefully weigh the wisdom of this dual system or Federal plan. IS STATE KEGULATION WOETH PRESERVING? You may start with this premise : Within the next 25 years substantially all our commercial affairs will be carried on by companies doing both State and interstate business. What is good for railroads 'will be good for others. Shall we abandon our State governments, so far as the regulation of business is concerned? Here is an issue which strikes at fundamentals — which has to do with the method of government. In striving after the new we frequently fail to realize the Intrinsic value of the old. Let us consider a few of the reasons justifying this Federal plan or dual form of regulation, which contemplates both a centralized gov- erning power and State regulation. It is true that our Constitution in many respects was a compromise, the crea- tion of circumstances. The different Colonies were loath to yield up any of their powers. Hamilton fought vigorously for a strong National Government. In those days much fear prevailed that we might have too loose a central Gov- ernment. Statesmen of that and succeeding periods were profoundly concerned over this problem. Marshall, on the Supreme Bench, became the chief instru- ment In cementing the national character of our Government. However, it is a gross mistake to imagine that the jealousy among rival States was the sole cause for limiting the powers of the central Government. There existed among the framers of our Constitution, entirely independent of any compromise as to the rights of rival States, a deep-seated conviction that a Federal Government composed of several States retaining large juris- diction was far preferable to a strong centralized Government. This Is evi- denced by the recorded discussions of that day. Here was a question not of State rights but of expediency, of wise government. This purpose or intent in their minds was reflected in the Constitution which they drafted. One whose writings inspired much of the thought of that time was Rousseau. His " Contrat social " became a standard textbook for the niakers of govern- ment of those days. In this work Rousseau stated: "As nature has set limits to the stature of a properly formed man, outside which it pro'duces only giants and dwarfs, so likewise, with regard to the best constitution of a State, there are limits to its possible extent, so that it may be neither too great to enable it to be well governed nor too small to enable It to maintain Itself single handed. There is in every body politic a maximum of force which it can not exceed and which is often diminished as the State Is aggrandized. The more the social bond is extended the more it is weakened, and in general a small State is proportionally stronger than a large one. "A thousand reasons demonstrate the truth of this maxim. In the first place, administration becomes more diflicult at great distances, as weight becomes heavier at the end of a longer lever * * *. The same laws can not be suit- able to so manv dIfCerent Provinces, which have different customs and different climates and can not tolerate the same form of government * * • -'■f^ chiefs, overwhelmed with business, see nothing themselves ; clerks rule the btate. In a word, the measures that must be taken to maintain the general authority, which so many officers at a distance wish to evade or impose upon, absorb all the public attention ; no regard for the welfare of the people remains, and scarcely any for their defense in time of need, and thus a body too huge tor its constitution sinks and perishes, crushed by its own weight." There is much truth well stated in the foregoing sentences. Jt is quite evi- dent, however, that Rousseau had not realized the full possibilities of the ted- eral plan of government, as worked out in America, whereby the advantages oi intelligent, efficient local home rule and the large empire, compelling respect, aye combined into one whole. It is this combination, this federated cooperative plan which is the distinguishing feature of the American Constitution. From the earliest records we leai-n that men have always been seeking foi some form of government which vsould come close to the life and thought ot the average man which would keep in close touch with the progress of business and social life and at the same time be large and strong enough to keep peace at home and abroad. Powerful centralized governments or innumerable small 460 INTERSTATE AND FOREIGN TRANSPORTATION. nriueipalities have been common. There seems to be an inevitable tendency for a s<>vernment either to fall to pieces or to gravitate into a strong, centralized (lonihit'eiing power. \Vliat is the fundamental characteristic of our Government vi'hich distin- guishes it from all oth'ers preceding ours? It is not the republican idea of gov- ci'nment, for the vyorld has seen many republics. It is not the formation of a large empire, for there have been larger. It is the creation of a Nation large and strong, enough to assert its independence among the vi^orld powers and to compel respect from others and obedience and order at home, at the same time combined with a form qf government securing real, tangible home rule to the variou.s independent sovereignties making up that nation. The delicate bal- ance between the central and local authorities in America was a novelty among the nations up to the end of the eighteenth century. This was not the fruition of any one man's reasoning, but largely the result of circumstances ; however, a most happy result, which has surpassed the expectations of those who conceived the plan. The builders wrought better than they knew. For many years our Government was referred to among political circles in Euroije as "the great American experiment." They said it would be Impossible for this Nation to live without developing into a strong central form of gov- ernment, gradually wiping out of existence all separate State sovereignties, or else we would become split up into a number of distinct nations. Their words seem almost prophetic. The tendency to swing from one extreme to the other has been very pronounced In our history. The movement toward the creation of a large number of separate nations culminated in the Civil War. The result of that costly struggle put the ^tamp of success upon " the great American experiment." When the success of this novelty in statecraft became assured, the basic fea- tures of the plan were followed by other countries. England has been forced to abandon the strong centralized form of government for her large Empire and to substitute the federal principle in most of her colonies. It is now being seriously proposed to go a step farther and to break up the small island itself into a number of separate sovereignties. A metropolitan daily a few years' ago contained the following dispatch : " The first lord of the admiralty to-day advocated a change in government whereby England would have a number df parliaments, on a plan similar to the. State legislative system of the United States. " Mr. Churchiil outlined a system of federation for Great Britain. He said England alone was too large for a single parliament, which would be strong as an imperial parliament, and conflict of opinion would be disastrous. "He suggested that England should be broken up into Provinces, such as Lancashire, Yorkshire, Midlands, and London, and pointed out that the United States conducted its business through a larger number of parliaments in pro- portion to population than -if there were 10 or 12 parliaments in the United Kingdom. " ' The British Government,' said the first lord of the admiralty, ' intended Irish home rule to be the forerunner of a genuine system of self-government in all four countrigs of the Kingdom.' " Germany and other nations followed our example during the past century. In the early part of the nineteenth century Tocqueville stated, as to our Constitution : " This Constitution, which may at first be confounded with federal constitu- tions that have preceded it, rests in truth upon a wholly novel theory, which may be considered a great discovery in modern political science." In the latter part of the nineteenth century the eminent statesman, Glad- stone, described this American plan of government as " the most wonderful work ever struck oft at a given time by the brain and purpose of man." Now, in its heydey of prosperity, when its success has been proven and is acknowledged on all sides, it is proposed to gradually destroy the chief feature of the American plan. That which renders the United States unique in all history is the organization of a vast empire in territory and population, so as to preserve the largest possible home rule to the various parts of the Nation. In the name of a new nationalism it is now proposed to eliminate this basic characteristic of our Government. The fact is that men of the eighteenth century clearly anticipated just such situations as are here presented in the attempt to take away powers from the several Sates, powers which were undoubtedly intended at the beginning and INTERSTATE AND FOEEIGN TRANSPOETATION. 461 which have been thoroughly established, exercised by many States, and recog- nized by all courts for a generation. JefEerson's autobiography contains tlje following remarkable passages : " I deem it indispensable to the continuance of this Government that they (onr judges) should be submitted to some practical and impartial control; and that this, to be imparted, must be compounded of a mixture of State and Federal authorities. " It is not enough that honest men are appointed judges. All know the influ- ence of interest on the mind of man, and how unconsciously his judgment is warped by that influence. To this bias add that of the esprit de corps, of their peculiar maxim and creed, that ' it is the office of a good judge to enlarge his jurisdiction,' and the absence of responsibility ; and how much can we expect In impartial decision between the General Government, of which they are them- selves so eminent a part, and an individual State, from which they have nothing to hope or fear? We have seen, too, that, contrary to all correct. ex- ample, they are in the habit of going out of the question before them, to throw an anchor ahead, and grapple further hold for future advances of power. They are, then, in fact, the corps of sappers and miners steadily working to updermine the independent rights of the States and to consolidate all power in the hands of that Government in which they have been so important a free- hold estate. But it is not by the consolidation or concentration of powers but by their distribution that good government is effected. Were not this great country already divided into States, .that division must be made that each might do for itself what concerns itself directly, and what it can so much better do than a distant authority." (Extract from the autobiography of Thomas Jeffer- son, p. 81, Vol 1, of the writings of Thomas Jefferson, published by Taylor & Maury, Washington, D. C, 1853.) Mr. Jefferson, in his first inaugural address, summarized what he termed " the essential principles of our Government," and amongst the first of these he placed : " The support of the State governments in all their rights as the most coinpetent administrations for our domestic concerns and the surest bulwarks agaiilst antirepublican tendencies." If the National Government is permitted to graduall.^• absorb those functions formerly exercised by the States it will only be a question of time until some great evil will demand some great remedy. Agitation will follow agitation. There will be no opportunity to try out the new proposal ; the Nation as a whole must adopt it or reject it. Those will be trying times, when the fore- sight of the best of us will differ and the future of this American system will be at stalce. It would be wise for us to ^^-eigh well the advantages of that which we have before exchanging it ftu- that which we have not. We believi' the Federal plan as conceived by our fathers is better thiin the new nationalism. We believe the States are a distinct factor in our scheme of Government. There is a function for the NationLil Government to exercise jmd there is a function for the State. This Federal plan i.s a sort of safety valve against political and industrial revolution, and it is the greatest ever devised by the makers of government. Nbav ideas are tried out in a few States before tliey ai-e adopted in others or h\ the Nation. The State governmen': is far closer to the lociil needs and demands of traffic conditions than is the National Government. Practically everv important advr.nce step in the regulation of railroads, cor- porations, and the great consolid^itions of our generation has originated ^^•lth the States." The first legislative acts to- regulate the business of, our railway companies were passed by a few Middle Western States. This occurred in the early seventies, many years before the Federal Government ever took a similar step. At first these commissions were largely figureheads, but several States pro- • vided for commissions with full power to fix maximum rates during and prior to the year 1887. It was not until 19 years later that the Federal Government gave the Interstate Commerce Commission actual power to fix maximum rates. It was in the nineties that the Supreme Court stated that the fair value of the properties devoted to the public service should be the basis of all computa- tions relative to reasonable rates, and it was in the nineties that one ot the States made a valuation of her railway properties. Since then 20 different States have valued one or more railroads. It has now been more than a decade since the Interstate Commerce Cotomission first asked Congress for facilities to make a valuation of railwav properties in this country. Year after year 462 INTERSTATE AND FOREIGN TRANSPORTATION. they petitioned I'or this, and their efiEorts were entirely in vain until March 1, 1913. Each important step of progress along these lines has been initiated in the States. No one except the ignorant or he who is not in his right mind will claim that we have solved these problems concerning the regulation of rail- roads. We are only at the threshold of this subject, pioneers along the edges. Now, at this stage is it wise to cut off that which experience has demonstrated to be the principal source of progress? There is a natural reason why«the States have always acted first and will continue to do so in the future. It is easier for a small group of men of moderate means, realizing the value and force of a new line of action, to com- mand the attention and consideration of a State. In order to secure the serious consideration of the same thing by a great nation it takes many years of agita- tion and large sums of money ; indeed, it is doubtful if a nation scattered across a continent like ours would ever have taken many of these steps for generations to come had it not been because they proved practical and effective vphen tried in different States. It is only the rich, the extremely powerful, who are able to start out and persuade the nation along a given line of policy ; but ■ if one State adopts it, and it proves to be wise, then another State adopts it, and then another State, and finally it grows until the nation adopts it. That is the natural result of our method or system of government. These facts are true not only as applied- to railroads. We abolished slavery in the various States long before we did in the Nation. We have had efllcient temperance legislation in the States long before any substantial steps have been taken by the Nation. We had pure-food acts in the States long before the Nation acted. As one State after another finds the action of their neighboring Common- wealth to be wise and' good, they have followed her and adopted similar provi- sions. In this way progress or reform is gradually brought about in the Na- tion as a whole. The States form a sort of experiment station, and where they have gone wrong the courts are quick to check them, or there is developed a tremendous public sentiment in the country as a whole which quietly destroys that which is not wise. It is no reflection on State commissions that they should have been reversed occasionally ; they have been blazing the way. In the matter of the regulation of railroad rates these carriers can have little to complain .about as to the different States. The records show that the Interstate Commerce Commission has been reversed by the courts on railroad questions as often as all the State commissions put together. Where mistakes have been made the companies have had ready access to the Federal courts. So long as this continues the railroad companies have' nothing to fear. Upon the other hand, they have much to hope for if they can succeed in destroying the State regulation of rates. In view of the remarkable history of the origin of these movements, it is little wonder that the carriers are extremely solicitous in their efforts to pre- vent and to remove the possibility of further advance steps in the different States. This novelty in statecraft, this Federal Government of ours, which combines the strong central government with local self-government into one whole, has some elements of value and strength never dreamed of, perhaps, by those who worked out the details in the latter years of the eighteenth century. It is precisely this local self-government which keeps regulation close down to the needs and demands of different localities and different States. It has been said that the railroad business is so complicated, State business is so closely interlaced with interstate business, and the details of the costs, rates, earnings, values, and the physical handling of the traffic are so inter- woven and connected together that it is an impossibility to make any separation. Therefore it is claimed that this business is of such a national character that it requires a single national tribunal to regulate it. An extract from a recent report of Special Master W. S. Thorington, sitting in the Central of Georgia and Western Railway of Alabama rate hearings, is in point on this separation between local and interstate business. He stated : " The vice of such a claim consists in the assumption of the unity and in- seperableness in all cases of the two classes of traffic. " That such a separation is diflScult or not possible with the exactness of mathematical certitude Is very generally admitted, but it would be a startling canon of construction that a State Is to be deprived of a right so vital because INTERSTATE AND- FOREIGN TRANSPORTATION. 463 of difficulties in tlie way of its exercise when such a principle has never been applied to the individuals seeking to enforce ordinary rights In the courts " One sentence will contain an answer to claims of this character, that it is difficult to separate the expenses on local and through hauls : Even after you have removed the State lines the problem of reasonable local rates still remains. The longer the hauls and the higher the rates the better it is for the stocli- holders in railway companies. Ui)on the other hand, it is to the interest of the public generally to have short hauls as well as long hauls and to have rates just as low as they can reasonably be placed, providing it does not seri- ously interfere with the prosperity tmd growth of the railway business. In order to tell whether local rates are reasonable or not it will be necessary always to make some division between operating expenses, earnings, and values. This will be true whether State governments or whether the National Govern- ment has jurisdiction over these local hauls. The problem of the reasonable local haul in all its complexity would still be with us even if you were able to destroy State regulation. Occasionally one hears about various examples of freak legislation on the part of some States. These are very rare. The argument that such acts im- peach the whole body of State legislation is like saying that one sinner In a church renders the whole church a failure. This argument is actually ad- vanced from time to time ; the only thing it proves is the assinine stupidity of the man who makes the argument. There have been a hundred wise "and beneficial laws enacted to one that is foolish ; and generally the unwise law has been quickly relegated to the realm of oblivion by the courts or by the solid good sense of public opinion causing its repeal. Should it ever be proven in any given case that a State has reduced its interior rates with the deliberate purpose of favoring its own Industries to the injury of a neighboring State, then it will be ample time for the courts to inter- fere. There is not a State commissioner in America who supports such a policy. (See San Diego Land & Town Co. v. Jasper, 189 U. S., 439; Knoxville Water •Co. V. Knoxville, 189 U. S., 434, 439.) The real issue is practical rather than theoretical in character. It is not whether we shall abolish all State regulation, but, instead, whether this or that is a proper function to be performed by the State. Whenever the act of a State legislature or commission does, in fact, conflict with the findings of the Inter- State Commerce Commission as to what is just and reasonable, and directly interferes with and places a burden upon interstate commerce, practically all of us, at least the vast majority, are ready to acknowledge that such a condi- tion of affairs should not continue. Either the courts or some other tribunal not a party to the disagreement should have power to determine which rate is reasonable. If additional legislation be needed to clarify this situation, efforts along that line will ultirnately succeed. But that does not affect to the slight- est extent the other projiosition — that where a given act of a State tribunal does not interfere with interstate commerce it should stand. The development of the law has been along the line of determining what does and what does not interfere with interstate commerce. This kind of legislation and judicial in- terpretation have been in progress for many years. But it is a wholly new and unheard-of proposition to do away with State regulation. This is a doctrine that jeopardizes our institutions. In case of a discrimination between rates, that one which is unreasonable should yield. If such a conflict exists between State and interstate rates, let the Supreme Court determine which one is reasonable and must stand, and the other should be disapproved. The judiciary has no power to determine reason- able rates for the future, but it has exercised the power of determining the reasonableness of rates already established. Even if that were not so, it would be better to amend the Constitution in that respect than to devitalize our dual system of government, by a virtual amendment In another manner. Chief Justice Marshall retained to the fullest extent entire appreciation of the importance of the Federal judiciary and the National Government, thereby securing to us and to posterity one Nation instead of many ; yet Chief Justice Marshall was capable also of realizing the value of the States in our scheme of government. In the famous case of Gibbons v. Ogden (9 Wheat., 1, 203), Marshall, com- menting on these powers reserved to the States, said : " They form a portion of that immen.se mass of legislation which embraces everything within the territory of a State not surrendered to the General Gov- 464 INTEESTATE AND FOEEIGN TEANSPORTATION. ernment ; all which can be most advantageously exercised by the States them- selves, inspection laws, quarantine laws, health laws of every description, as well as laws for regulating the internal commerce of a State, and those which respect turnpike roads, ferries, etc., are component parts of this mass." Mr. Justice Hughes, in the ma.sterly opinion rendered in the Minnesota Rate case, gives recognition to the same principle. He says : " Our system of government is a practical adjustment, by which the national avithority as conferred by the Constitution is maintained In its full scope with- out unnecessary loss of local efficiency." The great benefit urged on behalf of exclusive national control is uniformity. We have made a sort of modern fetish out of this slogan, " uniformity." Any- thing done in the name of uniformity we assume to be right and proper. To be sure uniformity is very greatly to be desired. We all agree on that proposi- tion. But there is something even better and more iniportant than uniformity — that is, wise regulation. Rates may be uniformly high or uniformly low. Rules of service may be uniformly harsh and rigid or uniformly lax and weak. Proof that they are uniform does not prove that they are just. Wise regulation contemplates vastly more than mere uniformity. If uni- formity were the summum bonum, we should have a world government pre- ecribing what time of the year we must plow and reap, what kind of educa- tion we shall give to ovir children, etc. Harvest time depends somewhat upon the particular portion of the world in which you live ; education should depend somewhat upon your circumstances and probable future life. There are some things which a world government could do better than Na- tional or State governments. A world government could compel peace amongst the nations ; but it could not efficiently prescribe the character of sewers to be installed by the city of Pittsburgh, Pa., or Des Moines, Iowa. There are some things a national government can do better than a State or city govern- ment. But we do not want to leave it to the National Government to prescribe the character of telephone service our city shall have. I do not want to leave it to Congress to determine the time I shall retire at night. There are some things which might well be left to a world government, there are others which can be cared for better by our National Government, and others by the State government ; and still others by the county, and city, and family. And there are a few matters that even the individual, himself, can best perform, strange as it may seem to some. The real problem is how to secure wise regulation. Will a strong central- ized government bring the best results, or is the Federal plan — joining na- tional and State control — preferable? The issue concerns the method of gov- ernment, one of the profound problems at the basis of all organized human life. The tremendous growth of Interstate commerce seems to have raised the query amongst some of us as to whether separate State governments are longer needed. The wisdom of local self-government and the Federal system of state- craft is up for consideration. The Sanborn doctrine .strikes at the very vitals of our present system. There has been a marked tendency to swing from one extreme to the other. At one time the prevailing sentiment favored independent States. It was the genius of a Marshall that created the great public sentiment, later crystallized under the leadership of Lincoln, which saved our country from being trans- formed into several separate nations. To-day the pendulum is swinging in the other direction. We are anxiously waiting to see if there will be other champions of our Federal system, our American plan of government, men who will have the far-sighted vision and the courage to save the country this time from going to the other extreme. The life of our dual system of government is again at stake. Many of us have lost sight of its value in the glamour of a new nationalism. Too much " nationalism " is just as wrong as too much " States' rights." There is a happy medium. It is not this G-iivernment as one Nation, nor the several States, but the com- bination in one Fec'eral plan that has rendered such a distinct contribution to the vi'elfare of humanity. It is this Federal plan that must be most jealously guarded. A tendency one way or the other, toward centralization or toward decentralization, is dangerous. It must be expected that from time to time there will be strong men, men who are ambitious to leave distinguished names in history, who will champion a powerful, centralized government In the United States. There always has been, and there always will be, a dramatic attraction in the building of great INTERSTATE AND FOREIGN TRANSPORTATION. 465 empires about a central authority ; the glory of po^ver in a supreme authority interests ami awes even those wlio are governed. The strength of nations does not lie in the vastness of the territory under one highly centralized and supreme authority. This truth has been centuries in the learning. That government which hugs closest to the sober and mature .ludgment of the Jieople and Iceeps in touch with the demands of clianging conditions is the one which best fulfills its mission, and will live the longest. The makers of government must set as their goal, not the creation of an extensive centralized machinery, but a human or,t;anism, capable of reaching out, and searching after, nnO meeting the demands of life. Mr. Beyax. In this address he calls attention to the objections, which I desire to emphasize, and treats them much more elaborately than I can in what I have to say to yen. All I can do is to present substantially the same thought in my own way. When you take the railroad systems of this country, involving, as they do, I think, 160,000 miles— is it not? I Mr. Faulknee. It is over 200,000. Mr. EscH. Two hundred and fifty thousand. Mr. Bryan. Mr. Chairman, I will have from time to time to inquire .is to the details, because I am better acquainted with the principles involved than I am with the figures. When you take the railroad systems, involving the management of some 250,000 miles of railroad, and collecting earnings amounting to Mr. Adamson. It was almost three billion last year. Mr. Beyax. Yes; over three billions, I think — an amount at least twice the revenues of the Federal Government. Mr. Adamson. I beg your pardon, Mr. Chairman, for interrupting. The witness asked that question, it was not I. Mr. Bryan. I hope you will help me, because I come before you, gentlemen, without any opportunity to prepare such a statement as I would like to present, and will ask permission to make such addi- tions and amplifications as may seem best when I have more leisure. When you take the management of a system of railroads with this amount of mileage and collecting more than twice, as I say, the rev- enues of the Federal Government, and when you remember how many men it takes to conduct this Federal Government, you cm see that you are either going to build up an enormous bureau with a multitude of officials or else you are going to attempt to do this enormous work with a few men, who can not possibly attend to it. The first suggestion is, therefore, that in the very nature of things there can not be an efiicient regulation from this central source with- out the creation of machinery that is far beyond the calculation,. so far as I have seen it stated, of those who have considered it from that side. The second objection is a fundamental one, namely, that the further you remove the work of regulation from the people the more difficult it is for the people to control their representatives. If there is any virtue , in representative government, it must be admitted that the representation is best when the representatives are nearest home and most completely submissive to the will of the people. The tendency that we have observed throughout this country is already sufficient to have impressed itself upon several States to put back into the hands of the people a power with which they had parted through the process — that is, reclaiming the' Government through 466 INTERSTATE AND FOREIGN TRANSPORTATION. the process of the initiative and referendum. In that we see evi- dence of a confidence in the people and a distrust of the people's representatives. Now, this distrust rests upon several foundations; that is, there are several things that contribute to this distrust. In the first place, there is the natural bias of the man. Every man has a natural bias. If the word " natural " is considered, I possibly ought to say that it is a bias that is controlling whether it comes in youth or comes after maturity. It is a bias on one side or the other of the great line that runs through society. There is just one division, as I understand it, between men, and that is the line that separates a man Avho is at heart a democrat from the man who is at heart an aristocrat, and I need not tell you gentlemen that I am not using the word " demo- crat" in a partisan sense. The word is 2,000 years older than the Democratic party. It is a word which describes an attitude of the human heart, and that attitude which it describes is just the oppo- site of the attitude described by the word aristocrat. They do not differ in honesty, the democrats and aristocrats. They differ in bias, in point of view. The democrat believes in a society built from the bottom. The aristocrat believes in a society suspended from the top, and because of this difference of opinion the democrat believes that things ought to come up from the people. The aristocrat be- lieves they ought to come down from the few. To illustrate it, the man who is at heart a democrat believes that legislation should be for the masses. His philosophy is that if you just make the masses prosperous that prosperity will find its way up through all the classes that rest upon the masses. The aristocrat, because of his point of view, namely, that society is suspended from the top, says, and he says honestly, for he believes it, legislate for the well-to-do, and then be patient and wait until their prosperity leads to those below. Now, when you are choosing a representative everything depends upon the point of view. He may be just as honest a man as yp^ could find, but if he really believes that the well-to-do must take care of the rest of the people his decisions are going to be entirely different from the decisions of the man who takes the other point of view, and believes that society is built from the bottom and that good comes up from the masses. Now, it is not always easy to know a man's fundamental bias until you test it, and the further he is from you the more difficult it is for yoTi to follow him and to measure him and to judge whether he repre- sents you or somebody else. A democrat — ^taking the word in its fundamental sense — ^believes that the representative ought to act for the people. The aristocrat believes he ought to think for the peo- ple, and if you take all this railway business to Washington you have got to depend for all your regulation upon the men who are elected ^o Congress and to the Senate, who come a long distance from home and who are so remote from their constituency that" the constituency is not able to watch over them, or rather to watch them, and to measure their fidelity in the matter of representation, so that when you surrender this power that the States now have and put it all here in Washington you make it more difficult for the people to watch the men who are their exponents and their spokesmen. INTERSTATE AND FOREIGN 'iliANSPOKTATION. 467 The second is that the temptations are much greater if you put the power here than if you kept it at home, because if an act of Congress is to affect these railroad systems to the extent of $50,000,- 000 a year or $100,000,000 a year, the railroads find it to their interest to bring pressure to bear on the Members of Congress and the Sena- tors who are to act. I hope you will not think I am reflecting on the railroads when I say they may yield to temptation to exert an influence. I have known them to do so. You may remember that a few years ago some money was appropriated for the building of this depot. Some of you may be able to tell me how much it was. Was it not two or three millions? Mr. EscH. I think the District appropriated about three millions and the Government about an equal amount. Mr. Bryan. Congress appropriated something Mr. CuLLOP. The same as the District — one-half. Mr. Bryan. At that time two of the leading railroads that enter into this place had their lobbyists in the corridor of the Capitol issuing passes to the Members, and I know of two cases where the railroad lobbyists refused passes to men who had voted against the railroads' position in this question. One was a lobbyist of one of the roads and one was the lobbyist of the other. If they will send their lobbyists to the Capitol with their pass books — of course they can not do it now, because the pass business has been prohibited; that is, the issuing of passes has been stopped, and that was only a few years ago — if they will send their lobbyists to the corridors of the Capitol with their check books to purchase, by passes, the votes of men on so small an appropriation as $3,000,000, what will be the temptation when a brief statute may mean $50,000,000 or $100,000,000 ? I was in Congress for a couple of years, and I know what diffi- culty we had whenever any question affecting the railroads came up. You will recall that it took 10 or 15 years to secure a change in the law relating to the Interstate Commerce .Commission, enlarging its powers. It took 10 or 15 years to secure it, after the commission ha*d asked year after year that' this power be granted. What was it that prevented it ? It was the influence of the railroads in your National Capital. Your railroads were potential enough and power- ful enough to thwart the will of the people on that subject and to influence the Senators and Members of Congress; and I remember that the president of one of the railroads was elected to Congress, and he came, after he was elected, under the privileges of our rules, and, sitting on the floor of Congress, he directed the fight against the measure that the railroads were opposing. Now, I only mention these as some of the things you have got to consider, and when you take from the States the power that they have and put it all here you make every congressional contest a fight with the railroads of this whole country, for, remember, that the railroads of the whole country will be interested in the election of every Congressman in every district. They will be interested in the election of every Senator from every State, because one vote may decide a question that may mean $10,000,000 or even $100,000,000 to them. So, it seems to me the direct , result of this will be to bring into national politics a corrupting force greater than we have ever known 468 INTERSTATE AND FOREIGN TRANSPORTATION. before, and that every Congressman will be subjected to . pressure after h^ gets here, and that we will find these men picking out the men who are to run and furnishing them the means with which to secure nopiimations, and with the ^^^iis with which to secure, elec- tionsr-^iiiot- - njecessarilj! doing things which necessarily violate the stsitutegi .They m9,y not furnish money, because under our present law that would have to be accounted for and corporations can not contribute, to campaign funds; they can not furnish passes, because ■that has .b,e.en prohibited; hut remember,, that the railroads run into all the towns of any importance, and they have their agents there ; they have their attorneys; they have their station agents and their adjusters, and they have the men whom they call upon to testify; if damage is done, there are certain ones whom they call to testify as to injuries; if there is an injury, there are certain physicians who testify as to the extent of the injury. They have their entire work- ing force, and when you put the entire working force of all the rail- roads behind a candidate for nomination and, after he is nominated, behind the candidate for election, you bring into politics a tremen- dous special interest that can not but have its influence upon the politics of the country, and when you send to Washington a man who comes as the representative of any special interest, he is open to the solicitations of every other special interest, for the special interests have to stand together, and any man who comes with a commission — a secret commission — from any special interest is here to trade his vote on any subject with the representative of anj' other special interest that needs his help. Now, that, to my mind, is a consideration that can not be over- looked by those who are dealing with this subject in a large way and in an official way. The third point is that the absorption of legislative power by the Federal Government and the surrender of all legislative power by the State governments ■ will practically obliterate the lines of the States and weaken them in the discharge of their duties, while it will tremendously increase the centralizing forces that are at work in our Government. I believe that no one has better stated. the merits of the dual form of government than Webster when he spoke of an indissoluble union of indestructible States. Now, it is just as necessary that the States should be indestruct- ible as it is that the Union shall be indissoluble, for our Government rests for its success upon the plan that enables the units to take care of the things that relate to them, leaving to the Federal Gov- ernment the control of the things that relate to all the States. It is just as necessary, to my mind, that the local unit shall be preserved and shall be safeguarded as it is that we shall act as a unit on all matters that affect the Nation. And that is necessary for exactly the same reasons that I have mentioned before. ■ The people at home can better attend to the things at home, and if this Federal Government attempted to take care of all these things it would so enormously increase the work to be done that it would be absolutely impossible to do it with any scrutiny. What do you find here ? I have not seen the statement for two or three years, but I remember when we had 10,000 bills introduced, in one Congress. INTERSTATE AND FOREIGN TRANSPORTATION. 469 Mr. Adamson. It has got to 30,000 now. Mr. Bryan. Well, gentlemen, you see my service is of a very ancient kind, and there has been a great growth since, Thirty thou- sand bills. What Congressman or Senator attempts to consider, to examine, or to uiiderstand any large percentage of the 30,Q00 bills that are introduced? Of course you say that the committees sift these out. Mr. Adamson. If you will permit me to answer that question, I will tell you that some Congressmen are so wise that they pretend to study all of them and pretend on the floor of the House to know more about them than the committees that unanimously reported them. Mr. Bryan. I notice you say " pretend." Mr. Adamson. Yes, sir. Mr. Bryan. That would express an opinion. According to your judgment it is mere pretense? Mr. Adamson. I think generally so. There is not one case in ten thousand that a man knows more about them than the committee. Mr. Bryan. I think you are right. Mr. Sims. In the recent Congress there were over 40,000 bills and joint resolutions introduced in both Houses. • Mr. Bryan. So you see how conservative I am, gentlemen, in my statement. When it comes to the committees you have a number of committees, and when you diidde 40,000 bills and resolutions among the com- mittees of the Senate and House you can see what a number of them go to one committee. How many committees have you in the Senate or House? Mr. EscH. About 58 in the House. Mr. Bryan. That would mean an average of something like 650 bills to a committee. Mr. EscH. Of course over three-fourths of those bills are private bills, pension bills, etc. Mr. Bryan. Of course there would be a great many of those, but quite a number of them are on general subjects. Mr. EscH. That is true. Mr. Bryan. When you take the number of bills that go to the committee you see that with the work that a committeeman has to do it is impossible for him to know much about all these bills, so that you have your subcommittees, and these bills are divided among the subcommittees, and then the subcommittee divides the bills among a still smaller number, and finally you get down to one man who takes a bill- and reports it, and what you know is what one man reports largely, and unless it is a matter of some great public in- terest you have simply the opinion of one man who has investigated it, and that will largely guide the thought of the rest of the people. Mr. Hamilton. Mr. Bryan, in practice that seems to me scarcely to he the fact. Committees take up bills for consideration, and when they do take up bills for consideration with a view to reportmg upon tliem it is the custom of those committees, so far as I have had ex- perience, to examine them very, very carefully, because each member of the committee has certain responsibility. I think, in fairness, that ought not to be said. 470 INTERSTATE AND FOBEIGN TRANSPORTATION. Mr. Bryan. I am very glad to have any correction made. I am only stating it mathematically. Mr. Hamilton. Exactly. Mr. Bryan. If the number of bills averages 650 to a committee Mr. Hamilton. Yes, sir; but comparatively few of those bills are reported. Senator Cummins. I suggest that the rule of the committee ought to be observed. Mr. Hamilton. I was not the first to violate it. The Chairman. There have been many violations of the rule, and as a member of the committee has called attention to it I will say I will enforce it hereafter. Mr. Bryan. Let me say, Mr. Chairman, that I should not like to have the rule invoked if it is with the idea of protecting me, because I am here to contribute, if I can, to the understanding of this sub- ject, and I am very glad to have any member of the committee inter- rupt me at any time. The Chairman. Mr. Bryan, the rule is not invoked with a view to protecting you. We know that you are abundantly able to pro- tect yourself! But the rule, as originally made in the committee, was that the committee would not interrupt a witness whilst he was mak- ing his opening statement; that after he had closed they would then examine him in order, in. an orderly way. Mr. Bryan. I must hurry through, because I want to give you time to ask questions. Mr. AoAJtsoN. I understand the witness himself may refer to any member of the committee, or all of us, and ask us any questions he wishes? Mr. Bryan. Yes. I will now refer to you all. The Chairman. The committee has not yet ruled on that question. Mr. Adamson. I make the point. Mr. Bryan. But the point I am trying to emphasize is this — that the dual character of our Government is essential to its permanence. The fact that we now have 40,000 bills, when a few years ago we only had 10, gives you some idea of what it is going to be, for our country is a growing country — 50 years from now the work of the Federal Government will be very much larger than it is now, with no change whatever in this organic division. But if we are to con- solidate things here at Washington it only multiplies the demands, and I believe that it necessarily follows that in the course of time, if not now, the work that would devolve upon this Government would be so great that it would be physically impossible to give the same careful attention to these questions that could be given by these units acting alone, and my observation of Congress was that a measure that affected a locality was really left to the people of that locality. For instance, if a subject came up in regard to oysters down on the Chesapeake, the men who represented the districts immediately affected would be the ones who Avould have almost absolute, exclu- sive control of the action on that measure. In other words, if you attempt to put everything here, it will result in our really turning it over to the people who act for those particular sections, and they act under much less restraint than the people who act upon them at home and are nearer to the people. INTEESTATE AND FOREIGN XEANSPOETATION. 471 What I -wanted to say I have said; that is, the princiijles that I speak of I have presented. I believe that the transfer of this policy would bring a tremendously increased pressure to bear upon those' who deal with this question. That it would centralize this Govern- ment more than anything else that has ever been suggested since this Government was organized. When you remember that, these rail- roads are now actually collecting more than twice — we have not the exact figures — but more than twice the entire amount that the Fed- eral Government has collected, you can see that to bring that business from 48 States and deposit it here would work such a revolution as we have never known in our governmental work. And I may remind you of this, that the lessening of the restraint is not merely theoretical — that is, the statement that the restraint would be less is not a matter of theory — it is a matter that is ■demonstrated by experience; and I may add, if you will not accept it as a reflection upon anybody who appears for the railroads, that the fact that the railroads ask for it is conclusive proof that it is not intended for greater regulation. When I say that those in charge of the railroads are like other people, I say all that can be asked. If they say they are better than other people the burden is on them, and they will find it difficult to present the evidence. If I say that they are just like other people, selfish, biased, looking after themselves, I am not only stating a general fact that is universally applicable, but I am stating a fact that can be proven by abundant testimony, if the truth of it were challenged. The fact that these people are here asliing for the surrender of all the power the States have is proof coticlusiA'e that the whole pur- pose Oi this is to get away from regulation and not to get a better regulation, and that is supported by what we have seen. Where have our laws come from that have given us whatever Regulations we have had? Largely from the States. We have a 2-cent rate, fot instance, that has been given us in a number of States. To-day the railroads in some instances, I will not say in all, are charging more for the interstate than the sum of the local rates, and I know several cases where the people, in order to avoid the higher rate, divide at the State line and then cross over. I had an experience myself the other day in going from one city to another. The man who was with me said, " I am going down to get my ticket ; I will get yours at the same time." I said, " I wish you would." When we got on the train I said, " How much do I owe you?" He gave me the amount, and he said, " I only bought to a certain place, because by buying there we get the 2-cent rate, and We save 85 cents." So my friend had been good enough to save me 85 cents by buying there. A few years ago I wrote to a Member of Congress and suggested to him that we ought to have a Federal statute requiring the rail- foads to sell interstate tickets for a price not greater than the sum of the local rates, and surelj^ if there is any proposition that rests, upon sound economic grounds it is that a railroad can carry a pas- senger the whole distance for as little per mile as the two parts of it. My friend could not interest Congress in so simple a proposition,. and to-day, with our Congress in session, we have no successful effort, 70342— PT 9—16 2 472 INTEBSTATE AND FOREIGN TEANSPOBTATION. and I am not sure whether we have even any unsuccessful effort, but we certainly have no successful effort to give to the people of the Nation the protection that has already been given to the people of the States by these States. Now, if we can not get through Congress a measure that will give to the people who cross State lines as low a rate as they can get in different States through which they travel, certainly, gentlemen, he will have to find some other reason for advocating this' national transfer than the bare restraining and restriction of railroads. Mr. Adamson. Mr. Bryan, I think that is the proper place to answer your appeal for suggestions. I referred that bill to the Inter- state Commerce Commission, and the substance of their reply was that to pass that bill would be to enable the different States to make the rates for the Interstate Commerce Commission, and that they could not approve that. Mr. Bryan, I do not see that that answers the proposition. Mr. Adamson. That was their reply. Did I say " answer " or "reply"? Mr. Bryan. I will call it " reply." But that does not changp' the fact that when it comes to Washington there are so many ways of denying the relief that is desired that the relief is more difficult to secure than it is at home where the people live near to their con- stituents and go back to their constituents and their constituents are more amenable to public opinion. These are the general objections I have to this, and while I state them as my personal objections, because I do not come here in a representative capacity, there is no one that I know of for whom I can speak, yet I am satisfied that the opinion that I present is enter- tained by quite a good many people. And I believe that when the issue is presented to the people and the people understand it that there will be a very unanimous objection to the surrender of the power of the States over these corporations. So that the proposition that I beg to subniit as a substitute for the proposition which you are discussing . is that national remedies should be added to State remedies, and not substituted for them. There is no reason why Congress should not use all the power that it has for the regulation of railroads, and there is no reason why the fullest use of its power should in the slightest degree interfere with the sole and entire use of the powers of the States. And when the Federal Government has done all it will do, and when the States have done all they will do, we will not have any more regulation, in my judgment, than the people of this country need; and any attempt to destroy. the power of the State, and to con- solidate all authority at Washington would, to my mind, inevitably lessen, and not increase, the restrictions and restraints and control; and I think a removal of all legislative power would, very naturally, be followed by a removal of all judicial power ; and I need not tpU you, gentlemen, that it makes a great deal of difference whether a man who has a cause of action against a railroad is able to prosecute it in his county, or must travel around and prosecute it before some United States court. There are two ways of denying justice : One is to abso- lutely refuse it, and the other is to make the securing of it so expen- sive that a man can not afford to prosecute his claim; and if this theory, as I have seen it presented here, is to be adopted, and the INTERSTATE AND FOEEIGN TKANSPOETATION. 473 States are to surrender all their power and the Federal Government is to assume it all, I think the same arguments that would lead to that, would very soon lead to the surrender of all judicial control, and then, if a man had a cow run over, he had better give the rest of the herd than sue for the cow; and I am convinced that the general public is not entertaining the thought of giving up any power it has to regulate these corporations, that have become so great that the God-made man is at a great disadvantage when he comes to compete with the man-made corporation. If you will pardon me for speak- ing in so rambling a way— I have not had time to present this in a logical way ; I have been so occupied with matters that I could not put off, that since I learned I was to come here this morning, I have had no time to arrange my thoughts in any logical order. There are other things that I would be glad to present on other subjects, but I understand you are now discussing only this question of the rail- roads — I mean, the change in control. The Chairman. We would be glad to hear from you upon any of the subjects that are embraced in resolution No. 60, Mr. Bryan. Mr. Betan. Would the question of what a railroad should be allowed to earn some under that ? The Chairman. Yes; any legislation relating to interstate com- merce transporation. Mr. Bryan. But you adjourn at 12, and I want to give you plenty of time to ask questions, because I think I will not be able to come back after 12. I The Chairman. Yes. r Mr. Adamson. Capitalization is a very important feature, is it not — ^financing ? Mr. Betan. Yes. The Chairman. The questions of Government ownership, capitali- zaltion, control of stock and bond issues, national incorporation, and evenr'subject that,relates ' Mr. CTJiiLOP. Financing. I The Chairman. Yes. Mr. Brtan. I think it will not take me long to express an opinion, but I recognize that the expression of an opinion is not of value to the committee, and I am sorry I can not fortify my opinion with something more substantial. As to Government ownership, I have believed for a number of years that it was inevitable, and inevitable only because the railroads will not consent to effective regulation, and. I think it is now some 10 years since I had occasion to say that unless our experience with the railroads was different from our experience with municipal cor- porations, the people, for their own protection, would be compelled to take charge of the railroads. Our experience with municipal cor- porations has been this : that the men who own the franchise have so large a pecuniary interest that they are always alert and watching; while the individual citizen has so small an interest, relatively, that he is Hot so alert or so watchful, and the result has been that in cities of any size the people holding the franchise have felt that it was necessary for them to control the election of councilmen, or whoever liavethe authority, in order to protect their interest; and some of you may have heard the argument made that they do not want to enter politics, but they have to enter it in order to protect themselves from 474 INTERSTATE AND EOEEIGN TBANSPOBTATION. the demagogue ; and I may add that the first time this was presented in an official way by any high authority — ^this matter of national in- corporation — I remember that the president of a railroad, whose rail- road had, only a short time before, been found by an investigating committee to have three times as much capitalization as it had prop- erty, gave out an interview indorsing national corporation, and the reason he gave was that it was the only way the railroads could pro- tect themselves from the demagogues in the legislature ; and that is the argument given in the cities — ^that they must protect themselves from sandbaggers and demagogues ; but the result is corruption, and the cities have been forced to take over their franchises for the protec- tion of their people, not only the economic protection but the political protection. Now, I said that unless our experience with the railroads was dif- ferent, we would have to do the same thing for the same reasons, and the effort that is now being made to secure a revblutionary change and the effort made not in the interest of better regulation, but to avoid the regulation of the States, is simply an illustration of what I meant when I said the people would, for their own protection, be compelled to take these railroads over; and my opinion is that nothing would hasten the Government ownership of railroads more than the success of the plan which is under discussion. If you can ever secure national corporation — and that, of course, is of no value unless it is effective in transferring the control, for a national corpo- ration that does not effect any change is not worth having; it is only valubale in proportion as it does bring this change in the cen- tering of authority, but if this succeeds, I believe that the evils that will develop will become so intolerable that it will hasten the action ; but, my friends, I never believe it wise to advocate a bad thing in the hope that it will bring a better thing. In fact, I think it is a very unsound philosophy. I think that if you oppose a thing, and it comes, you can then take advantage of it, and you may be able to use it to bring something that is better; but whenever I am tempted to advocate a bad thing, in the hope it will bring a better thing, I am restrained by this process of reasoning — rather, this illus- tration of reasoning. I will put it this way: If I ever get it into my head that I can raise a man from the dead, I will try it on a dead man; I will not kill a man just to experiment with him; and I apply that to this case. While I believe that out of the abuses that this would lead to, Government ownership would come, I would not be willing — ^no mat- ter how much I favored Government ownership — ^to favor the bad thing and take my chances on the good thing coming, because if I helped to get the bad thing, I would be responsible for it, and then, if I were not able to get the good thing, I would have no way of defending myself from a very serious responsibility. Now, person- ally I cannot say that I desire Government ownership, because I lean to the individual idea rather than to the collective idea; that is, I believe that Government ownership is desirable only where com- petition is impossible. I am not able to tell you who first laid down the rule that I have adopted, but the first man whose name was attached to it was Prof. Ely ; I do not know whether it was original with him or whether he took some one else's statement, but my under- standing of it was this — I think he put it this way: that natural ' INTERSTATE AND FOBEIGN TRANSPOETATION. 475 monopoly must be owned by the people, on the theory that in the case of a natural monopoly competition was impossible, or, if not impossible, was so expensive as to amount to the same thing, and that there should be Government ownership. That proposition expresses my views better than any I have been able to myself frame ; that where competition is impossible. Govern- ment ownership is necessary; that a private monopoly is inde- fensible and intolerable, and I only favor government ownership on the condition that a proper regulation is impossible, and I have been frank to express the belief that it will be found impossible, simply because of the natural tendency of the men in charge of the railroad to make all they can out of it, without regard to the equities or to the rights of the people. But I am perfectly willing to give to private ownership a fair and complete trial, and I am willing to have all , proper restrictions tried, so that when the people turn to Govern- ihent ownership, they will turn with evidence either that it is im- possible to devise restrictions, or because the railroads are able to prevent efficient restriction, and I have gone so far in my willing- ness to try effective regulation? as to suggest this: that the railroad capitalization be reduced to an honest basis, and that then the rail- roads be allowed to earn a sufficient income to keep their stock at par, and, in addition to th^tj a sum to be put into a surplus, as a bank creates a surplus, from which the railroad could draw in bad years, to keep its dividend at a just and reasonable point. Now, if I know the sentiment of the people, there is no desire among the masses to do injustice to the railroads, and I have not any doubt that any fair proposition that is just to both sides would be indorsed by the public, and I have such faith in the sense of jus- tice and the fairness of the masses that I would not hesitate to mdorse and appeal to them to indorse a proposition that would give absolute stability to railroad stock by permitting this accumula- tion of a reasonable surplus, out of which the dividends could be paid in any bad year, so that any man who bought a railroad stock could know that every year he would receive a return that paid the value of the money invested. Now, just how this would be brought about is a matter of detail, and I would not be prepared to go into it, but that is the principle 1 would Uke to see — the stock of a railroad, as long as it is in private hands, made as substantial and as unvarying as the value of a Gov- ernment bond. I remember that in 1907 the stock of some of these railroads went down more than one-half in a year's time. Now, if legislation had reduced the value of that stock one-fourth of the amount that it fell without legislation, there would have been a great cry about in- justice, and yet the railroad managers are permitted to water stock and sometimes to juggle the market, and thus do injustice to stock- hoMers, without any seeming complaint, whereas if the Govern- ment did it there would be a great outcry gainst the unfairness of the Government. . So much in regard to the matter of rates; first, that the capitaliza- tion should be reduced to an honest basis, so that the railroads would represent the cost of reproducing, and I know of no other basis; werybody else is governed by that rule. A merchant's stock is only Worth the cost of reproducing. The land that a farmer buys is not 476 INTERSTATE AND FOREIGN TRANSPOETATION. determined by the amount of the mortgage on it; it is determined by the value of the crop and the value of the land around it, and it is only where the owner of the property has some special means of protecting himself from general laws and general rules that he can expect to preserve a value that is in excess of the cost of reproduc- tion, and the way that the railroads do it is to exercise the privilege— I say privilege rather than right — the privilege of collecting rates sufficient to pay interest and dividends on the capital that they have. I believe the only just basis would be the cost of reproduction, and how that is to be ascertained or how it is to be reached is a matter that would require a good deal of discussion and in- vestigation. That is all on that point. The Chairman. Are you through, Mr. Bryan? Mr. Brtan. Yes; unless there is something else suggested. The Chairman. Mr. Bryan, you say that the capital stock of corporations should be reduced to a fair valuation of the properties? Mr. Betan. Eeduced on the supposition that it is now above. The Chairman. Yes. You are aware that under existing law the National Government can not control stock issues, are you not? Mr. Betan. That we have no law for it ? The Chairman. Yes; that we have no law for it. Do you think the National Government should pass a law controlling stock and bond issues? Mr. Brtan. I do. The Chairman. Do you think that control should be exercised contemporaneously with a similar control by the respective State's* Mr. Brtan. I see no conflict. The Chairman. Suppose a State should come to one conclusioi, regarding the capitalization of a railroad incorporated in that State but operating in interstate commerce, and the National Government should come to a different conclusion, which would control? Mr. Betan. I should say that each would control within its own borders. The Chairman. You would say, then, that the State action would control as to purely State commerce? Mr. Brtan. I would say this, that the State's action would con- trol in the State which acted, but that would not prevent the Federal Government from controlling outside of that State in interstate commerce, or any other State controlling within its own borders. The Chairman. Well, then, you understand that the issue ol stocks and bonds is a mathematical expression? Mr. Brtan. Yes. The Chairman. So much stock and so much bonds. Now, if the National Government says that a stock a'nd bond issue shall be a cer- tain amount and the State says that that stock and bond issue shall be a different amount, which mandate shall the State corporation follow ? ]Mr. Brtan. Well, I should say this, that the Federal Government can take the matter up the moment the corporation attempts to do business outside of the State of its origin, and can fix the conditions upon which that State corporation will be permitted to do inter- state commerce, just as we have in the child-labor law. You know that the trust remedy that I have advocated for many years is based INTERSTATE AND FOKEIGN TEANSPOKTATION. 477 upon that very power; — ^that a State may create a corporation as it pleases, and be as lax as it will or as careful as it will, and as long as the corporation stays in the State the Federal Government has ■nothing to do with it, but the moment the corporation attempts to enter into interstate commerce, then the Federal Government is able to take charge and say on what terms it shall enter, and I not only believe in applying that doctrine to the railroads, but I believe in applying it to our large industrial corporations. The Chairman. You realize that all State corporations engaged in railroading are also engaged in interstate commerce, do you not ? Mr. Bryan. Well, nearly all. The Chairman. Practically all? Mr. Bryan. Yes. The Chairman. Now, then, with reference to the stock and bond issue of the State corporation engaged both in State and interstate commerce, where the regulating power of the State says that the stock and bond issue shall be one amount, and the National Govern- ment, acting for interstate commerce, says the stock and bond issue shall be another amount, how is that corporation to obey both mandates? Mr. Bryan. Well, if you will pardon me, your statement is not quite accurate, Senator. The State does not say it shall be a certain amount. It says it shall not be more. The State fixes the maximum and the Federal Government fixes the maximum, but if the Federal Government fixes a maximum lower than the State, it does not con- flict with the State, because the State simply says that the higher maximum shall be possible, but not necessary. The Chairman. Now, proceeding to the question of fair capitali- zation, you are aware that the National Government has passed a law for the valuation of railroads ? Mr. Bryan. Yes. The Chairman. Eailroads engaged in interstate commerce, and that the process is now going on ? Mr. Bryan. Yes, sir. The Chairman. Now, assuming that a fair valuation is arrived at by that process, what would you regard as a fair return with a view to maintaining that valuation on the market ? Mr. Bryan. I think it would be impossible to fix it in figures, but the principal is very easily ascertained. I would allow the market price of money to determine so that a margin of say from 1 to 10 per cent above the par value might be allowed ; that whenever the dividend paid raised the value of the stock above 10 per cent it ought to be reduced. If the dividend paid reduced the value of the stock below 1 per cent it ought to be raised. I think it would be possible to simply state the principle that the dividends should be sufficient to keep that stock at a fair revenue and a reasonable margin to cover the fluctuations that you could not possibly calculate. The Chairman. How about the surplus, this return for a surplus which is to guard the lean years and protect the stockholders ; have you any views as to the amount of return which should be allowed for that purpose? Mr. Bryan. Nothing except a suggestion. It would be merely a matter of opinion. I should say tentatively 25 per cent, but when 478 INTEESTATE AND FOREIGN TRANSPORTATION. I say 25 per cent I do not mean to say that I would favor that and nothing else. The Chaieman. You mean 25 per cent of the amount of the re- turn Mr. Bkyan. The capital. No; I would say list the railroads— and I am just suggesting that by way of illustration — let the railroad collect enough in rates to pay the dividends and interest and in addition a certain amount that could be fixed that would go into the surplus until the surplus reached a certain sum and thereafter would cease until the surplus fell. To illustrate what I mean, suppose we took the dividend of 5 per cent and allowed the rates to be sufficient to collect a dividend of 5 per cent, and then suppose we allowed 2 per cent to be collected in addition, that would be put into this sur- plus until the surplus reached, say, 25 per cent. The Chairman. Twenty-five per cent of the capital? Mr. Bryan. Of the capital. Then the 2 per cent would cease to be collectible until the surplus was reduced by being drawn on to pay dividends, and whenever it was reduced it would be again increased by the same process. The Chairman. Now, regarding Mr. Bryan. May I just add a suggestion before you proceed? Now, you spoke of the ascertaining of the value of the road. I think that is the first step. When we have ascertained the value we will know, then, what amount of water they have or what excess their capitalization contains. I believe that excess ought to be dealt with and removed from the basis of calculation, and when you come to that there are equities that ought to be considered. I would not be willing to say that as soon as you ascertain what the actual value of the road is that therefore you should, by law, wipe out all the rest, because there may be equities to be considered; but when you fiiid out what that actual valuation is, I think that ought th^n to be represented by stocks and bonds, and thereafter no stocks and bonds should be al- loAved to be issued except under supervision and for actual money in- vested. Then this excess, which will be greater in some roads than in others, should be treated by itself, and that the investments should be upon some equitable basis. It might be fair, all things considered, that that amount should be divided between the stockholders and the general public. It might he. wise for the general public to assume the payment of a certain amount of that excess, if it can be shown to have an equitable claim; but I think we ought to get to some basis and not have this quantity of water made as a continuing foundation upon which there should be a perpetual tax upon the public. I would rather have that set apart and settled upon an equitable basis, and after that the railroad problem, so far as the stockholders are con- cerned, would be very easy, and then I think we ought to have legis- lation that would prevent the exploitation of roads, not by their owners, because the owners of roads do not exploit them. The railroads are exploited by a group of men who use the power the stockholders give them, not for the benefit of the stockholders, but for the benefit of themselves. A railroad president drawing $100,000 a year would have tb serve 50 y^ars in order to make $5,000,000, and then on the assumption that he did not spend any- thing during that time. Now, nobody begrudges these railroad offi- cials a fair return for their services, but when a president drawing INTERSTATE AND FOREIGN TRANSPORTATION. 479 $100,000 a year is permitted to buy over a railroad and then sell it to himself for five millions more than he paid for it he makes in one transaction as much as the railroad would pay him in 50 years, and the large fortunes, as I understand it, have not been made out of salaries; they have been made out of exploitation, and one of the common ways has been when a railroad is to be built — of course, we do not have so much building now, and it is not, therefore, so much used — ^but the way used to be for the railroad company to elect its directors and then the directors would form a construction company, and the construction company would^then deal with itself and the railroads represented by those men would pay to those men all that the railroad had, and these men would get all the money that the railroad had by dealing with themselves. Now, that has been the way in which a good deal of the exploita- tion has been done. Since that time we have had this other plan of buying a new road, as we have had some illustrations of it in the railroad life. The men in charge would buy a road and sell it to the corporation they controlled, and in that way they have made that money. I think we ought to have laAvs that will compel the railroad managers to do an honest business, and we have had an investigation in the last few years that has shown that railroads that stood among the very best in the country, backed by men that we recognize as our biggest financiers, have been guilty of things that would bring discredit upon an ordinary highway robber. The Chairman. Would you have this legislation to prevent the exploitation of railroads, to which you refer, enacted by the Nation or the States ? Mr. Bkyan. I fall back upon my original proposition. I would have both. I would have the Nation do its part, but not deprive the States of their part; in other words, I believe that national remedies should be added to the State remedies and not subtracted. ' They can act concurrently within their respective jurisdictions. The Chairman. With reference to the corporate organizations which are to operate in interstate transportation, with a view of meeting the demands of the Nation as well as the respective States in which they are located, do you regard this tendency toward the consolidation of State railroads into great national systems, under which one system will operate railroads in 3, 4, 5, 8, or 10 States, a beneficial one ? Mr. Bryan. Well, I would not attempt to interfere except where competition was eliminated. That is, the mere extension of a line into new territory I would not regard as necessarily objectionable, and I would not care to say that a limit should be set to the length ofa road or to the number of its branclies, but The Chairman. Or to the number of States in which it runs? Mr. Bryan. That would follow from its length— but I do think that no permission should be given to take competing lines. To my mind competition is essential unless you would have Government ownership. The Chairman. Now. taking into consideration the present S or 10 large systems of railroads, consolidating in their operation many miles of track, that belong to individual corporations, organized under the laws of the States, do you view any of these consolidations 480 INTERSTATE AND FOEEIGN TEANSPOBTATION. which have been effected, so far as their operation is concerned, as prejudicial to the public interest? Mr. Bryan. I am not prepared, Senator, to point out a case and explain the operation of its management. The Chairman. Are you awafe of any general public complaini against any one of these consolidations, so far as the area of its operations is concerned ? Mr. Bryan. No; I can not say that I know of any complaint based on area. Take the Pennsylvania and the Baltimore & Ohio. There was complaint based on the destruction of competition, and I think the same with regard to the Southern Pacific and Union Pacific The Chairman. Well, we have now in the East several great railway systems — the New York Central, embracing six or seven States, running as far as Chicago and perhaps beyond ; the Pennsyl- vania Eailway system; the Balitmore & Ohio Railway system; the Southern Railway system — all extending from the' Atlantic coast to the Middle West. Do you loiow of any public complaint against the area in which those roads operate — as to the area, rather, in which those roads operate? Mr. Bryan. I am not prepared to say that there is any complaint, and I do not recall ever having heard an objection based upon area alone. I know in the case of the southern railroads there have been complaints based upon the combination that has eliminated competi- tion. The Chairman. And there are also complaints as to capitalization, but I am confining myself simply to area served. Mr. Bryan. I see your point. The Chairman. I want to get at the question as to whether there is any public complaint against the size of the area of operations of these 'great systems. Mr. Bryan. I know of no complaint based merely on length or area. It has been based merely on the elimination of competition. The Chairman. You are aware in each one of these districts con- solidations have been effected of from two to five or six hundred iii- dividual roads by a gradual process, are you not? Mr. Bryan. I know that that process has gone on, but I am not sure that it has gone on in recent years as it did some time ago. Then, of course, that process may not at all interfere with competition — the extension of arms and branches may not affect the matter of competition. The Chairman. Now, the statement was made some years ago, when I' examined this matter thoroughly, that there were about 6j000 operating individual rajlroads in the country ; that there were about 2,000 operating railways, and that the bulk of those operating railways had been through some process consolidated in their opera- tion through the creation of great systems, some 10 in number, and this consolidation had gone so far that the entire trackage of these 10 systems amounted to about 200,000 miles of railway out of' the 225,000 or 230,000 miles then existing. Now, just simply from the economic standpoint, the question of service to the public, and disregarding the question of exaggerated stock issues and bond issues, do you regard that tendency as simply meeting the economic requirements of the times, or was it a mistake ? INTEESTATE AND FOKEIGN TEANSPOKTATION. 481 '. Mr. Bryan. I think it would be difficult to answer that question intelligently without more information as to the details of each par- ticular case than I have from your question. The Chairman. Do you not think if it had violated the economic requirements of the time we would have heard from the public? Mr. Brfan. I think the public would not likely have complained, except as that consolidation deprives them of an effective competi- tion. The Chairman. I understand, and if it does not prevent an effec- tive competition Mr. Bryan. Competition, to my mind, is the test question. The Chairman. You are aware that each one of these systems has main trunk lines and also branch lines extending out like the bones of a fish from the spinal column, and you are aware that as to each one of these systems, these branch lines stretch out into each others' territories, and in that way create a competition between the branch lines, are you not? Does not that constitute about as effective a method of competition as can be devised ? Mr. Bryan. Well, I think that that makes competition effective, provided the railroads of which these are branches are not themselves in some combination by which they destroy it. You see, there are two ways of destroying competition; one is by the absorption of ownerships and the other is by the association of managers. The Chairman. Yes ; and your contention — — Mr. Bryan. We have had some experience Avith both. The Chairman. Your contention is that these great corporations, through intercorporate holdings, create practically a monopoly ? Mr. Bryan. My contention is, and has been for many years, that there should be no interlocking directorates; that is, no man should be a director of two competing corporations. The Chairman. You realize legislation has been enacted by the Nation Mr. Bryan. I am very much gratified to know that it has. The Chairman. Now, take the Southern Eailway system, which operates in about 10 or 11 States, and which is competitive with the Atlantic Coast Line in part and with the Louisville and Nashville Mr. Bryan. And the Seaboard ? The Chairman. And the Seaboard in part— there, as I understand i^-there were many hundreds of small State railroad corporations that were organized into this great system. Mr. Bryan. I am not acquainted with the history of those. The Chairman. I will state to you briefly their history. That consoUdation or union of railroads was accomplished through the Richmond & Danville Kailroad, organized uflder the laws of Vir- ginia, and to which a verv liberal charter was given by the State of Virginia without many restrictions as to stock and bond issues, with- out many of the restrictions which have since been regarded as neces- sary in both State and National legislation. And through the powers given to that Eichmond & Danville Eailroad of purchasing the stocks of other corporations and of leasing other corporations that railway, as I understand it, has come into the physical control ot some 10,000 or 11,000 miles of railroad which had been operated previously by individual roads— some two or three or four hundred m number. 482 INTERSTATE AND FOREIGN TRANSPORTATION. You will realize, now, that was done for the purpose of promoting interstate commerce. Mr. Bryan. I should say that was not the primary purpose. The Chairman. No ; not the primary purpose perhaps of the incor- porators. Theirs was private, but it was possibly acquiesced in. Mr. Bryan. Yes; that may have been incidental. The Chairman. Upon the assumption that it advanced the interest of interstate commerce. I now ask you whether you think it was wise, as a matter of public policy, to permit a single State to create the organization that was intended to promote the national purpose of interstate commerce and to frame the entire organization that was to operate that immense system in 11 States; whether it was wise public policy to permit a single State to legislate regarding a matter in which all these States were interested? Mr. Bryan. My answer is this, that it is not necessary to restrict the power of the State to incorporate to give the Federal Govern- ment power to regulate that corporation whenever it goes outside of the State that organizes it. No matter what the State of Vir- ginia may say that a corporation can do, the Federal Government can say what it can do outside of the State of its origin when it engages in interstate commerce, and the Federal Government can be perfectly indiiferent to the liberality, as you so call it, of State laws, because they do not bind the Federal Government, and these State laws do not command the railroads to do so-and-so, thev merely per- mit, and when the Federal Government says, "We will not permit you to act up to the full authority of your State outside of your State" there is no conflict between it and the State, for the State does not exercise or attempt to exercise any authority. When it gives this power it simply gives its permission, and I can not see that any other State should respect this power to its own injury any more than it should allow a citizen traveling from Virginia to another State to do in the other State anything that is harmful. ' The State exercises the right to say what a citizen coming from Virginia or any other State shall do or can do, and the Federal Government exercises the authority. Take the sale of liquor. If a man goes from Virginia into West Virginia or into North Carolina and attempts to sell liquor the Government does not care where he came from, it says, " You can not do that." And so when a State says that a corporation organized within its limits and under its laws can do so-and-so, it does not interfere in the least with the right of any other State to say it can not do it within its jurisdiction or the right of the Federal Government to say it shall not do it anywhere outside of its own State. I can not see that there is any conflict. The Chairman. Eegarding the question of capitalization, we will assume that the Eichmond & Danville Railroad, which changed its name to the Southern Railroad system, was organized for the pur- pose of promoting interstate commerce in 11 States, and that each one of those States has a different view as to the rule which should govern the issue of stocks and bonds, and that each should declare that no corporation organized in another State should operate in that State save upon complying with its requirements as to stock and bond issues. That would be a condition which would absolutely prevent, would it not, the meeting of the economic requirements of that section by unifying these railroads? INTERSTATE AND FOREIGN TRANSPORTATION. 483 Mr. Brtan. My answer would be this, that the people of the State are more interested in their own welfare than any people outside, and they would not do anything that would hurt themselves, and if they do a thing, you may rest assured that it is done on the theory that they are helping themselves, they are protecting themselves. And I can not see, Mr. Senator, why a corporation, organized in another State or organized even under the Federal Government, if you succeeded in securing such a change, should be permitted to do in a State what an individual is not permitted to do in a State. That is, I do not see why a man-made corporation should have rights higher than the God-made man. The Chairman. Mr. Bryan, I do not like to trespass on the time of the other members of the committee, and I think I have occupied your time long enough. Mr. Bryan.' At what time do you adjourn? The Chairman. We adjourn at 12 o'clock. Senator Cummins. Before Judge Adamson interrogates Mr. Bryan I have a suggestion to make. The Chairman. Certainly ; we shall be glad to hear it. Senator Cummins. I agree with so many of the observations made by Mr. Bryan and with so much of his reasoning, and the people of this country have so great confidence in his opinion, that I think each member of the committee ought to have an opportunity to develop this subject a little further. At least I feel that way, and I hope that the chairman can make an arrangement with Mr. Bryan at some future time to resume this inquiry so that all of us will have a chance to go further into this very important matter. The Chairman. Would the committee be disposed to go on this afternoon at half past 1 ? Mr. Adamson. No, sir; the House is in session, and I have never yet been smart enough to be in two places and do two things at the same time. Mr. Bryan. I am compelled to leave here at 4 o'clock. Mr. Adamson. I shall join with Senator Cummins in inviting Mr. Bryan to return here at a future day and allow us all to examine him. Mr. Bryan. I can now fix the 16th day of January as a day that I could use for that purpose. Mr. Adamson. We are not empowered to trade that far ahead yet, because this committee expires on the 1st of January, unless we secure an extension. The Chairman. I will endeavor to fix a time that will be con- venient. Mr. Bryan. Of course, gentlemen, anything that you require of me will take precedence over anything that I have arranged, for myself. Mr. Adamson. I move that the chairman arrange with Mr. Bryan to return at some convenient day to resume this discussion. The Chairman. Without objection that motion will be adopted. Mr. Adamson. Has the chairman completed his examination ? The Chairman. I should like to ask another question. I stopped because of delicacy. I thought I was taking too much of the time of the committee. 484 INTEESTATB AND FOREIGN TEANSPOETATION. Mr. Bryan. So far as I am concerned, I could remain here, say, until 1 o'clock, if it suited your convenience ; but I could not remain after that hour. Mr. Adamson. There are just two or three questions suggested by your questions, Mr. Chairman, Avhich I will ask, if you will allow me. The Chairman. I will ask one or two other questions, if you please. Mr. Bryan, you are aware that with reference to the national banks, which serve national purposes regarding our fiscal affairs and which also serve interstate commerce in providing for interstate and foreign exchange, that we have organized national incorpora- tions. Would that not suggest that in the exercise of the national power with reference to transportation that we should organize national incorporations? Mr. Bryan. To my mind it raises neither necessity nor suggestion. In the first place the national bank was created as a war measure. The primary purpose was to secure a market for bonds. That pur- pose no longer exists, but the bank has been found to serve a com- mercial purpose ; but the bank is amenable to the laws of the State ; and then remember that it is no such institution as the railroads. For instance, the income of all the banks is relatively small compared with the income of the railroads. The employees of all the banks is small in number compared with the number of employees of the rail- roads, so there is neither the original necessity nor a parallel use that would suggest the following of that example. My own opinion is that the necessity for the national banks, as it now exists, is pos- sibly overestimated. The Chairman. But would you favor a reorganization of the na- tional bank system and the restoration of the State bank system? Mr. Bryan. I would not say that it was necessary because the evils, such as there may be, are insignificant, in my judgment, compared with the evils that would follow from the change which is proposed in regard to railroads, and then you have an existing institution created for the purpose, but an institution to which society has ad- justed itself, so that the abolition of the bank would compel a read- justment. The surrender of State authority over railroads and the exercise of exclusive authority by the Federal Government would compel a readjustment, so that in one case the readjustment is an argument against the change back, and in the other case it is an argument against the change proposed. The Chairman. You spoke of the necessities of war warranting the organization of the national banks. Do you take into view the fact that in the future the adaptation of the railroads of the country to our national requirements for national defense — do you take that as an essential? Mr. Bryan. I see no reason why we need change our present methods to give the Federal Government any authority it needs. I think the plan proposed by the President, of authorizing the taking over of the railroads in cases- The Chairman. In cases of necessity? Mr. Bryan. Yes, sir ; would meet that emergency. The Chairman. That would mean that for that purpose the Na- tional Government would practically operate all the railroads, or could operate all the railroads? INTEESTAa?E AND FOREIGN TRANSPORTATION. 485 Mr. Bryan. Only to the extent that it was necessary, but that might be a very limited extent and for a limited time. And then that is a contingency that really I am less disturbed about than some others. The Chairman. You realize the fact, do you not, that while for many years there was great complaint about our national bank sys- tem, and particularly about the money control of the country, that complaint has been largely done away with by legislation enacted by the National Government, has it not ? Mr. Bryan. I think the creation of this reserve system, with its twelve financial centers, and its central board, has very much relieved the public from the control that was exercised through the banks, not necessarily by them. The Chairman. Does not that diminish, to some degree, your lack of faith in the ability of the national representatives to meet the requirements of the hour with reference to restrictive and controlling legislation as to these great national instrumentalities? Mr. Bryan. Not when I remember the difficulty we had in getting the law passed and the effort made to undo it. The Chairman. Do you not think that in the matter of the regula- tion of transportation the States, acting as a unit through the National Government Mr. Bryan. That the what? The Chairman. That the States, acting as a unit through the Na- tional Government, have been able to do more in the way of properly regulating the railways of the country than the respective States have been able to do ? Mr. Bryan. I can not agree with you on any evidence that I know of; but I shall be glad to consider any evidence that you have in support of that piroposition. The Chairman. I had the impression' that that was self-evident. Mr. Bryan. That is not my view. The Chairman. That while some of the States — very few — have reached a very perfect system of regulation and control, that has not been the case with most of them. Mr. Bryan. I think on that point I might suggest The Chairman. And that they have been very slow, in my judg- ment, in meeting the requirements of the situation. Mr. Bryan. Not so slow as the Federal Government. And, besides, where you have a number of States acting separately there is oppor- tunity for the trying of remedies that will enable us to experiment and profit by experiment, and a successful experiment tried in one State is apt to be adopted in another ; but where you have just the one legislative body acting there is no other body from which it can receive either the impulse that comes from rivalry or the benefits of experience. The Chairman. You are aware that in the suggestions regarding national incorporation it is not proposed to, relieve those corporations from the police laws of the State or "from the taxing powers of the State? Mr. Bryan. Yes. The Chairman. You are aware of that ? Mr. Bryan. Yes. 486 INTEESTATE AND FOREIGN TEANSPOBTATION. The Chairman. And you are aware also that they all involve the most careful control of capitalization of the stock and bond issues ? Mr. Bryan. But I think everything that is good in the proposed measure can be secured entirely independently of the proposed change. The Chairman. I see. Mr. Bryan. That is, that you can add, through the Federal Gov- ernment, any regulation that is desirable and any that would be included in the plan without the adoption of the plan at all. The Chairman. That is all, Mr. Bryan. Mr. Adamson. Mr. Bryan, while you may be aware of Chairman Newland's theory about what ought to be done, how could you pos- sibly be aware of what would be the final outcome of legislation if we should enter on this project? Mr. Bryan. No one can predict with any certainty in regard to legislation. Mr. Adamson. The influences which could secure this movement at all might frame the legislation? Mr. Bryan. My fear is that the temptations that would come with the change would be difficult to resist— that is, the temptation would come to the railroads to exercise an undue influence. Mr. Adamson. Whatever general advantages may be claimed for large consolidations of these local corporations — might those advan- tages be largely offset if local interests and convenience were ig- nored through the management by people far removed from the communities ? Mr. Br? AN. Yes. They may not only be overcome, but I think there is a principle there that we can not ignore, and that is that where you transfer from the locality to some remote place the con- trolling power, in proportion as it is removed, it is less amenable to local opinion, and that is one of the objections to the consolidation that has gone on under the trust system. Mr. Adajison. You answered Chairman Newlands's question about the ramifications of these great systems going into the vicinity one of another and competing. I will ask you, while you say you have heard no great general complaint, except as to competition, if you have not observed the practice of great and profound courtesy by one railroad combination as to another with regard to invading its territory ? Mr. Bryan. I think there has sometimes been a courtesy that could not be entirely explained by the ordinary standards of life. Mr. Adamson. On the subject of the necessity for this regulation, my railway friends do not conceal that they are embarrassed in two particulars: One is that they have too many restrictions on their operation and too many restrictions on the securing and use of capital. That is their whole complaint. Now, they say, in elabora- tion, that they have not the power to control either their expendi- tures or their earnings. I will ask you if under the condition of society where we have relinquished part of our national liberty in consideration of securing other great benefits from society — if that is not true of every person and corporation in this country ? Mr. Bryan. Yes ; but in the case of the corporation there is a rea- son for restriction that does not exist with the individual. INTEESTATE AND FOREIGN TBANSPOETATION. 487 Mr. Adamson. You mean a greater reason ? Mr. Beyan. Yes. Mr. A'damson. An additional reason? Mr. Bhtan. Yes; because the corporation has no rights except those conferred by law, while the indi'vidual has natural rights. Mr. Adamson. They further state that the Government has dealt with them solely with a policy of restriction and punishment. I want first to ask you a few questions to see if I can develop that the)' are entirely in error about that. You remember the desperate conditions .existing when we undertook to regulate the railroads — and you were correct in saying that the States first started it. The Government, prodded to it or induced to it by the representatives from tlie States, finally made an effort; then the railroads resisted it until the Su- preme Court set aside enough of it to emasculate it; and you cor- rectly say that, in spite of and notwithstanding your position, we suc- peeded, after 12 or 15 years, in putting some life back into it. I want to ask you what particular thing the Government has put upon |hem — what restrictive thing the Government has put upon the operation of railroads that is any more severe than it is on any other business in society? For instance, we established a rule that every rate and practice shall be just and reasonable. Is that any more than is required of other people by the Government — that their conduct shall be just and reasonable? Is that an unreasonable rule, for the railroads to complain of ? Mr. Bktan. I do not regard it as a reason for complaint. Mr. Adamson. Then, we adopted the Elkins law, forbidding dis- criminations and rebates ; we had something in the original law about 'discriminations. Is there anything wrong in saying to the men who are operating these great corporations that they shall not give one man in one community a preference over another ? Mr. Bryan. My recollection is that it was stated at the time the Elkins law was drawn by the representatives of the railroads that the complaint was that as long as one system granted rebates, the other had to, and that it was a disadvantage to the railroad to give rebates, and that the Elkins law really protected the railroads from /each other. Mr. Adamson. Then we have provided, in the interest of public safety, certain requirements and restrictions. Do you think there is anything wrong or harsh- in that ? Mr. Bryan. Speaking generally, I am not able to point out any restriction that I regard as unjust. Mr. Adamson. I shall not enumerate all of these to you, but all of them have been prohibitions against the conduct not of good men but of bad men — wrongs, crimes per se, or malum in se or malum pro- hibitum. These restrictions are directed to the conduct of the men, and not against the railroads ; and how can a good man who wants to do right and administer the affairs of a railroad properly, justly object to these restrictions and prohibitions any_ more than you can, as a citizen of this country object to the prohibitions against bad men committing lawless acts? Mr. Bryan. I think your reasoning is sound, Congressman, and I have long believed that our laws should put the penalty upon the individual and not upon the corporation. 70342— PT 9—16 3 488 INTEESTATE AND FOREIGN TBANSPOKTATION. Mr. i^k)AMS0N. Do you believe that the railroads are correct in their apprehension that the people have a prejudice against them? Do you not think that the people love and admire the railroads, and •desire that the. railroad officials should do right, as other people? Mr. Brtan. You state it a little stronger than I would. Mr. Adamson. What is your statement? Mr. Brtan. When you speak of the love for these men. Mr. Adamson. Railroads. Mr. Brtan. I mean loving the railroad officials. Mr. Adamson. No; the railroads, I say, and the good officials. Mr. Brtan. Yes. I think in an impersonal way they love the railroads, but that they separate some of the railroad officials from the railroad that they love when they attempt to display their affec- tions. Mr. Adamson. They love the good ones and try to correct the bad ones. Mr. Brtan. They are interested in legislation that will permit the investment of all the capital necessary, and the earning of all the dividends necessary, and the fact that they have an interest in not doing injustice to the railroads is the protection o:^ the railroad against injustice, if it will only go to the people and fairly lay its case before them ; but as long as the railroad keeps an " oil room " and spends its time trying to corrupt the men sent there by the people to regulate the railroad it is apt to raise a suspicion as to the good intent of the railroad. Mr. Ajdamson. Then the misconduct and mismanagement of the bad railroad officials has contributed to create the very demagogue of whom they complain? Mr. Brtan. Yes; but you can not always tell who are the bad officials and which is the bad railroad until after a thorough investi- gation. Mr. Adamson. Mr. Chairman, I will be compelled to go to the House. I can not go on. I move we adjourn. (The motion was agreed to.) The Chairman. The committee will take a recess until Saturday at 10 o'clock. (Whereupon, at 12 o'clock noon,- the committee took a recess until Saturday, December 9, 1916, at 10 o'clock a. m.) X INTERSTATE AND FOREIGN TRANSPORTATION HEARINGS BEFORE THE JOINT SUBCOMMITTEE ON INTERSTATE AND FOREIGN COMMERCE, CONGRESS OF THE UNITED STATES SIXTY-FOURTH CONGRESS FIEST SESSION PURSUANT TO PUBLIC J. RES. 25 A JOINT RESOLUTION CREATING A JOINT SUBCOMMITTEE FROM THE MEMBERSHIP OP THE SENATE COMMITTEE ON INTERSTATE COM- MERCE AND THE HOUSE COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE TO INVESTIGATE THE CONDITIONS RELATING TO INTERSTATE AND FOREIGN COMMERCE, AND THE NECESSITY OF FURTHER LEGISLATION RE- LATING THERETO, AND DEFINING THE POWERS AND DUTIES OF SUCH SUBCOMMITTEE Part 10 DECEMBER 9 Printed for the use of the Joint Subcommittee on Interstate Commerce WASHINGTON GOVERNMENT PRINTING OFFICE 18U JOINT SUBCOMMITTEE ON INTERSTATE AND FOREIGN COMMERCE. FRANCIS G. NHWLANDS, Nevada, Chairman. WILLIAM C. ADAMSON, Georgia, Vice Chairman. JOSEPH T. ROBINSON, Arkansas. THBTUS W. SIMS; Tennessee. OSCAR W. UNDERWOOD, Alabama. ■ WILLIAM A. CULLOP, Indiana. ALBERT B. CDMMINS, Iowa. JOHN J. ESCH, Wisconsin. FRANK B. BRANDBGEE, Connecticut. EDWARD L. HAMILTON, Michigan. Feank Healy, Olerk. Willis J. Davis, Assistant Clerle. II INTERSTATE AND FOREIGN TRANSPORTATION. satttkday, december 9, 1916. United States Senate, ''-, Joint Subcommittee on Interstate Commerce, ','/■ ' Room 326, Senate Office Building, I Washington, L>. C. The joint subcommitteie met at 10 o'clock a. m., pursuant to adjourn- ment. Senator Francis G. Newlands presiding; also Vice Chairman "\V'illiam C. Adamson. 1 ' '. ORDER OF PROCEDURE. I The Chairman. The committee will come to order. I will state .'that the committee has determined to hear Mr. Thelen to a conclusion, and Mr. Brookhart upon the subject of Government ownership, post- poning the cross-examination of both until some time in the future. Mr. Cowan, on behalf of the shippers, will present a written state- ment on their behalf within the next few days, which will be inserted in the record. As the committee will doubtless desire to fully consider a coordi- nated rail, river, and ocean transportation, I desire to insert in the record for the consideration of the committee, and for the examina- tion of those who appear before us to testify regarding interstate commerce, certain matter regarding a measure which I have been urging for the last 10 years, generally known as the Newlands river regulation bill, intended' to promote the improvement and develop- ment of the rivers of the country in the interest of interstate com- merce, and in this connection to secure the development and control of our water resources for every useful purpose, including the recla- mation of arid and swamp lands, the development of water power, and other beneficial uses^, thus making the waters of the country the creators instead of the destroyers of wealth. I shall insert in the record extracts of a speech on this subject made by me on the 17th of December, 1907, also an article appearing in the annals of the American Academy of Political and Social Science bf January, 1908. (The matter referred to is as follows :) THE INLAND WATERWAYS— A LEGISLATIVE PLAN FOR THEIR IMPROVEMENT— THE COORDINATION OF RAIL AND WATER TRANSPORTATION. V "The Inland Waterways Commission is now engaged in framing a preliminary ■.'IPort to the President, but It has not yet reached a final conclusion. I wish to say, as a member of that commission, that I simply express here my individual views. I have introduced in the Senate a bill (S. 500) providing for the Wfipintment of an inland waterway commission for the development of the ' " • 489 490 INTEESTATE AND FOREIGN TKANSPOKTATION. inland waterways of the country, purely in a tentative way. I invite suggestion, criticism, and amendment, so that the commission may have the advantage of the consideration of this question by members of b6th bodies of Congress and by the country at large before it reaches a final conclusion. * * * " I have also recently introduced a bill (S. 499) which in most particulars is identical with the bill introduced by me over two years ago for the national incorporation of rail, river, and ocean carriers. I shall insert a copy in these remarlts in the hope that it will be carefully considered in connection with the development of our waterwaiys. I Invite also as to this bill the criticism, sug- gestion, and amendment which I have invited regarding Senate bill No. 500." [Speech of Hon. Francis G. Newlands, of Nevada, in the Senate of the United States, Tuesday, Dec. 17, 1907.] Mr. Nbwlands. Mr. President, I desire to present my views re- garding a bill which I introduced a few days since and which reads as follows: THE INLAND WATBBWAY COMMISSION BILL. A hill (S. 500) providing for the appointment of an inland waterway commission and for the improvement and development of the inland waterways of the country, with a view to the promotion of transportation between the States and with foreign countries. Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled. That a special fund shall be established in the Treasury, to be known as the " inland waterway fund," to be used in the examination and survey for and the development of the inland waterways of the country ; and the sum of $50,000,000 is hereby reserved, set aside, and appro- priated as such fund. Sec. 2. That the President of the United States is hereby authorized to cause to be made examinations and surveys for the development of the inland water- ways of the country, including the Great Lakes, the Mississippi River and its tributaries, the navigable rivers of the Gulf of Mexico and their tributaries, the navigable rivers of the Atlantic coast and their tributaries, the navigable rivers of the Pacific coast and their tributaries, and for the connection of such rivers with each other, wherever practicable and desirable, by connecting canals and by coastal canals, with a view to the promotion of transportation between such rivers by vessels of a standard draft ; and to investigate all questions relating to the development and improvement of the inland waterways of the country, with a view to the promotion of transportation ; and to consider and coordinate the questions of irrigation, swamp-land reclamation, clarification of streams, utiliza- tion of water power, prevention of soil waste, protection of forests, regulation of flow, control of floods, transfer facilities and sites and the regulation and control thereof, and such other questions regarding waterways as are related to the development of rivers, lakes, and canals for the purposes of commerce. Sec. 3. That in order to enable the President to make such examinations, surveys, and investigations and to construct the works provided for by this act he is authorized to appoint an inland waterways commission, to be composed of members, and to bring in coordination therewith the Corps of Engi- neers of the Army, the Bureau of Soils, the Forest Service, the Bureau of Cor- porations, the Reclamation Service, and other branches of the public service related to waterways, and to appoint such experts and other persons and create such board or boards in connection therewith as the work may require, and to fix the salaries of all commissioners, experts, and other persons employed under this act until the same have been fixed by Congress, the official salary of any official appointed or employed under this act to be deducted from the amount of salary or compensation fixed under the terms of this act. Sec. 4. That such commission shall make to the President annually, and at such other periods as may be required either by law or by the order of the Presi- dent, full and complete reports of all their acts and doings and of all the moneys received and expended in the construction of works and in the performance of their duties in connection therewith, which reports shall be by the President transmitted to Congress ; and such commission shall furthermore give to either House of Congress such information as may ^t any time be required either by act of Congress or by order of either House of Congress. The President shall cause to be provided for the use of the commissioners and other employees under this act such ofBces as may, with the suitable equipment IKTERSTATE AND FOREIGN TBANSPOBTATION. 491 of the same, be necessary and proper in his discretion for the proper discharge of their duties. Sec. 5. That if after such examination, survey, and estimate such commission shall determine that any project for the improvement or construction of an inland waterway or coastal waterway is practicable and desirable, it may, with the approval of the President and through the appropriate service, construct or execute, or cause to be let, contracts for the construction or execution of the same, in such portions or sections as it may be practicable to construct and exe- cute as parts of the whole project : Provided, That the necessary moneys there- for are available in the inland waterway fund. Sec. 6. That such projects may include such collateral works for the irrign- • tion of arid lands, for the reclamation of swamp lands, for the conservation or replacement of forests, for the clarification of streams, and for the utilization of water power as may be deemed advisable in connection with the development of a channel for navigation or as aiding In a compensatory way in the diminu- tion of the cost of such project. Sec. 7. That such commission is authorized, with the approval of the Presi- dent, to enter into cooperation with States, municipalities, communities, cor- porations, and Individuals in such collateral works, and to make arrangements for the proportionate payment of the cost thereof out of the inland waterway fund and by the States, municipalities, communities, corporations, and indi- viduals benefited thereby, in such manner as to secure an equitable distribution of the costs and benefits : Provided, That the cost of such collateral works shall be paid, if practicable, out of funds provided therefor by Congress, but if suffi- cient provision therefor is not specially made by Congress, such commission is authorized to pay for the same out of the inland waterway fund, bvit the total payments made on account of such collateral works from such inland waterway fund shall not exceed ten per centum thereof, and provision shall be made, as far as prajCticable, for the reimbursement to such fund of such payments by the States, municipalities, communities, corporations, or individuals benefited thereby : And provided also, That the inland waterways developed shall remain free for all the uses of navigation. Sec 8. That such commission shall make, with the approval of the President, rules and regulations governing the cooperation and compensation to the fund, wherever practicable, by the conveyance of reclamation rights, the lease of water' power, and such otlier means as may be beneficial to the United States and the several States, municipalities, communities, corporations and indi- viduals entering into such cooperation. Sec 9. That in carrying out the provisions of this act regard must be had, as far as practicable, to the equitable apportionment and contemporaneous execu- tion of the projects contemplated under this act among the several waterway systems of the country. , Sec 10. That the President is authorized, whenever the inland waterway fund is reduced below $20,000,000, to make up the deficiency in such fund by the issue and sale of bonds in such amount and for such time as he shall deem advisable, bearing interest at a rate not exceeding — per cent per annum ; but the amount of bonds issued shall not at any time exceed the difference between the cash on hand in such fund and $50,000,000. Mr. Newlands. Mr. President, the agitation for a deep waterway from St. Louis to the Gulf and from the Lakes to the Gulf has reached such proportions as to create a general demand from every section of the country that a broad and comprehensive plan should be inaugurated for the improvement of all the navigable waterways of the country, and that legislation should be adopted creating a fund for continuous and uninterrupted work, securing a fair appor- tionment of the work between the different sections of the country, and providing for a businesslike administration with reference both to examination and construction. The President, realizing this demand, determined to investigate the matter, with a view to recommending to Congress such a broad and comprehensive plan ; and as a step in that direction appointed the Inland Waterway Commission to look into the various questions 492 INTERSTATE AND FOREIGN TRANSPORTATION. relating to the inland waterways .and their full economic develop-' ment, and to report to him, with the expectation that, if their recom- mendation was approved by him, it would be submitted to Congress for its action. The commission has been in frequent sessions since April last. It has visited nearly every section of the country. Sev-' eral members of the commission visited the Pacific coast and in- spected the Sacramento, the San Joaquin, and the Columbia Rivers. The entire commission took a tour of the Great Lakes, and also made a trip from St. Paul to the Gulf upon the Mississippi Eiver. Subse- quently a majority of the commission made an examination of the Missouri River. WATERWAY CONVENTIONS. In addition to this the commission has been represented at various conferences and conventions which have been held throughout the country from the Pacific to the Atlantic and from the Lakes to the Gulf upon this important question. The general interest which the country is showing in the improve- ment of waterways is manifest in the organization of various river- improvement associations in all parts of the country, and in meetings of these and other associations, the principal object of which is to consider waterway improvement. I shall enumerate some of these. At Sacramento, Cal., last September was held the National Irriga- tion Congress, which was turned almost entirely into a discussion of waterways. Delegates were present from all the States west of the Mississippi and from States east of the Mississippi River. The total attendance was about 2,000. The first week in October witnessed the most imposing pageant in the history of the Mississippi River. The trip of the President down the Mississippi from Keokuk to Memphis, together with governors from 19 States, Congressmen, and citizens representing the whole Mississippi Valley, made the Deep Waterways Convention at Mem- phis one that will be significant in the history of the Nation. Three thousand delegates were present, besides citizens representing a large number of States. At Moline, 111., in October, was held the Upper Mississippi Im- provement Convention, at which there were present delegates from five States, reaching the number between four and five hundred. At Sterling, 111., in October, was celebrated the opening of the Hennepin Canal, with the governor of Illinois and representatives of four or five States present, and a general attendance of thousands. In October the Trans-Mississippi Congress at Muscogee was chiefly devoted to the waterway improvement question, and was the largest and most enthusiastic assemblage in the history of that body. Then came the Atlantic Deeper Waterways Convention at Phila- delphia, with a representation of 15 States and a great and enthusi- astic discussion of the improvement of waterways along the Atlantic coast. At Victoria, Tex., in September, was held a waterway convention, whose special object was a discussion of the improvement of the western Gulf interpassage and the development of Texas rivers as tributaries to it. INTERSTATE AND FOREIGN TRANSPORTATION. 493 At Birmingham, Ala., in Oqiober, was held a meeting of a water- way improvement association, at which two projects were discussed — the eastern Gulf interpassage movement and the Atlantic western project. The National Drainage Congress, at Baltimore, in November, was devoted largely to a discussion of waterway improvement. The Ohio Valley Improvement Association met at Wheeling in October and discussed the improvement of the Ohio River. A waterway improvement association met at Grants Pass, Oreg., in September, with a representation of three or four States. There have also been other meetings in Oregon and Washington, and in the State of Montana a waterway improvement association has been formed. In January the Missouri Development Association, devoted to waterways improvement, will meet. These indicate, as I have said, the deep and general interest that the people in various parts of the country are taking in the improve- ment of waterways. The Inland Waterways Commission is now engaged in framing a preliminary report to the President, but it has not yet reached a final conclusion. I wish to say, as a rhember of that commission, that I simply express here my individual views and that I have intro- duced in the Senate a bill (S. 500) providing for the appointment of an inland waterway commission for the development of the inland waterways of the country, purely in a tentative way. I invite sugges- tion, criticism, and amendment, so that the commission may have the advantage of the consideration of this question by Members of both bodies of Congress and by the country at large before it reaches a final conclusion. GOVERNMENT WORKS. In the past, Mr. President, it has been the general view of the coun- try that the Government was unable to do constructive work ; that it was unable to do such work efficiently ; that it was unable to do it economically ; that it was unable to do it quickly. The experience of the country within the past few years with two great systems of constructive work has proved the contrary and has proved that the Government is able to do its own work. Mr. Beveeidge. I will ask the Senator what are the two examples to which he refers ? Mr. Newlands. Those two exceptions are the construction of the Panama Canal and the work of the Eeclamation Service. For the work of the Panama Canal service $75,000,000 has 'already been ap- propriated, of which about $39,000,000, I believe, has already been spent. The Reclamation Service has a fund of about $39,000,000, a very large proportion of which has already been spent on about tWenty-three different projects in fourteen or fifteen different States and Territories. I will not enlarge upon the work of either one of these services. It is sufficient to say that the coxmtry is satisfied with the work of both. So far as the region which I represent is con- cerned—the arid and semiarid region— there is a feeling of universal satifaction with the energetic and efficient work and the thoroughly organized work that has been done by the Eeclamation Service. 494 INTERSTATE AND FOREIGN TRANSPORTATION. Now, Mr. President, in shaping this bill I have endeavored to unite the best features of both those bills. Mr. Beveeidge. Mr. President The Vice President. Does the Senator from Nevada yield to the Senator from Indiana ? Mr. Newlands. If the Senator will permit me a moment fur- ther - Mr. Beveridge. I am profoundly interested in what the Senator is saying on this whole great plan, and I think the Senator might en- large there upon the fact that the Reclamation Service and the Panama Canal, as enterprises, are conducted also by officers of the Government, and in the case of the Panama Canal it finally came down to the most efficient work by the officers of the Regular Army. Those two instances I call to the Senator's attention, so that he might put them into his speech. They, however, are not the only ones. There is the telegraph service in Alaska, covering 8,000 miles or more, and other things of that kind. I ventured to interrupt the Senator for the purpose of directing his. attention more pa^-ticularly to those facts. Mr. Newlands. I aiu very glad to receive the suggestion of the Senator from Indiana. It is true, as he says, that both of these services are being conducted by officers of the Government. Mr. Gallingee. Mr. President The Vice President. Does the Senator from Nevada yield to the Senator from New Hampshire? Mr. Newlands. Certainly. Mr. Gallingee. The Senator suggested very properly that, so far as the Reclamation Service is concerned, the section of country from which he comes — ^the arid and semiarid region— is well satisfied with what has- been done. I come from a section of country, Mr. Presi- dent, which is neither arid nor semiarid, but I have been a very warm friend of the irrigation project, and I will ask the Senator now, for my personal information, if he can tell me what extent of territory, in acreage or otherwise, has been reclaimed up to the present time? Possibly the Senator has the information, possibly he has not. Mr. Newlands. I am unable to state just now what number of acres have been reclaimed. Many of these works are yet unfinished. Mr. Gallingee. Is any one of them completed? Mr. Neavlands. Yes; in Idaho, in my own State, and in other States. Mr. President, I have endeavored to takef the best features of both the Panama Canal act and the reclamation act in shaping this tenta- tive measure which I present for your consideration. THE INLAND WATEEWAY FUND. In the first place, the bill which I have drawn provides for an in- land waterway fund of $50,000,000 and appropriates and sets aside in the Treasury $50,000,000 for that work. It also provides that whenever, as a result of the work and expenditure, the amount in the fund falls below $20,000,000 the President of the United States, unless the fund is made full by legislative appropriation, shall issue bonds for the deficiency, thus giving him power at any time to issue bonds INTERSTATE AND FOREIGN TRANSPORTATION. 495 for the difference between $20,000,000 and $50,000,000. The purpose of this is to maintain continuous and uninterrupted work, so that this work shall not be conducted in the disjointed manner in which it has been conducted in the past. Mr. HErBixRN. Mr. President The Vice Pkesident.. Does the Senator from Nevada yield to the Senator from Idaho ? Mr. Newlands. Certainly. Mr. Heybtjrn. I desire some information, which I expect the Senator can give me. The suggestion has come to nie from many quarters that the Government should set aside — that is the term used — $50,000,000 for this work; but I have been unable to under- stand just what was meant by setting aside $50,000,000. Is it to be understood that an appropriation to that extent is favored in one lump sum and that $50,000,000 should be withdrawn from the general purposes of the Government to await its expenditure in the Treasury, idle, or that $50,000,000 should be made available from time to time as the necessities of the work may require? It is to that subject I would direct the Senator's attention and inquire as to just what the plan is with reference to the disposition to be made of this sum of $50,000,000 pending the performance of the work or the organization of it. Mr. Newlands. The bill which I have drawn, and which represents merely my individual views, provides this inland waterway fund, sets it apart in the Treasury, and forever dedicates it to this work, so that that money can not be used for any other purpose. Mr. Heybuen. Then I understand that so much of this money would remain idle as was not expended until the entire system had been worked out and the $50,000,000 expended ; that is, if we should only expend $10,000,000 of it in the next five years, the forty millions would remain idle in the Treasury of the United States. Is that the purpose of the bill ? Mr. Newlands. That is my purpose in providing for this fund so that this fund can not be disturbed in anyway and it is forever dedi- cated to this purpose. I wish to provide the Inland Waterways Commission that is to do this work with capital for the purpose, and I wish it to handle this apital just as a board of directors of a great constructive corporation would do, without being hampered by Congressional restrictions ap- propriating a certain sum to this detail and another sum to that. I would give it the right to adjust and to readjust its plans, estimates, and expenditures according to varying conditions, and to finance the work with a view to cooperation with and contributions from States, municipalities, communities, corporations, and individuals benefited by it. I hope to see a commission that will do work, not one whose chief business will be to hang about the committee rooms of Congress. I hope to see a commission of experts that will have the power to ini- tiate both investigation and construction and with ample funds to complete its projects, not a commission that will have to wait upon the tardy initiative of Congress as to projects the details of which it is incapable of dealing with. , . „ , ^ i i. I will answer the Senator by saying that if we only contemplate spending $10,000,000 within the next five years, it is best tor us not 496 INTERSTATE AND FOREIGN TEANSPORTATION. to commence the work at all. My expectation is that we will expend at least $50,000,000 a year for the next five years, perhaps even during the first year. Mr.BEVERiDGE. The Senator does not mea-n that? Mr. Newlands. I do. Mr.BEVERiDGE. Expend $50,000,000 every year? Mr. Newlands. I do. Mr.BEVERiDGE. That would be a matter for discussion; but per- haps the Senator is right. Mr. NewlajsTds. That is what I shall urge. That is my individual view. My individual view is that within the next 10 years the United States should expend at least $500,000,000 in the improvement of its inland waterways; that we ought to enter upon this work contemporaneously in every section of the country; that we should enter upon the work of the rivers of the Pacific coast, upon the rivers of the Atlantic coast, upon the Gulf coast, and upon the Mississippi Eiver and its tributaries, and upon the coastal canals or sheltered waterways which will connect the rivers of the Gulf and Atlantic coast from Texas to Maine. All these works should be commenced and prosecuted contemporaneously. I wish to say further that that is the sentiment of the people of the United States, and Congress will, I have no doubt, accommodate itself to that view of the great public. constitutional POWER. Mr. Teller. Mr. President- The Vice President. Does the Senator from Nevada yield to the Senator from Colorado? Mr. Newlands. Certainly. Mr. Teller. I want to ask the Senator a question as to the bill. Section 6 provides, among other things, for such utilization of water power as may be deemed advisable in connection with the develop- ment of a channel for navigation, etc. Does the Senator understand that the General Government has the right to control the waters of the rivers of the States beyond what is necessary for navigation? In other words, does the Senator understand that the Government of the United States can establish water powers inside of the State and use the water ? I should like to know what the Senator understands that to mean. Mr. Newlands. The Senator rather anticipates the order of my argument, but I shall be very glad to answer the question the Senator asks and propose to take up that question later on. Mr. Teller. Then I will not interfere with the Senator if he pre- fers to go on in his own way. Mr. Newlands. I will answer now if the Senator prefers. Mr. Teller. Very well. Mr. Newlands. This bill contemplates the coordination of all tiie related uses of water and the coordination of all the various services of the Government that have anything to do with water, such as the Engineer Corps of the Army, the Reclamation Service, the Forestry Service, the Bureau of Soils, the Geological Survey^ and expects irt make them all efficient in developing the highest use of the waters of the country, not only for navigation, but for all the related uses. INTEESTATE AND FOREIGN TEANSPOKTATION. 49T And in this connection it provides for the cooperation of the Nation with States, communities, corporations, or individuals, where such cooperation is necessary in securing the most beneficial use of the waters for all purposes. Now I come to the question of the Senator from Colorado. The Senator asks me whether I think the Nation has the power Mr. Tel^ek. The constitutional power. Mr.NEWLANDS. The constitutional power to utilize the waters of the rivers for the purpose of making electrical power, for that iS' the only thing that is suggested. My answer to that is that under the interstate-commerce clause of the Constitution the Nation has control over the rivers for purposes of navigation, and the States themselves can not, without the consent of the Nation, do anything to the rivers that will interfere with navigation. Now, what does the development of a river for purposes of navi- gation involve ? Does it involve simply getting a dredging machine for the purpose of removing the shoals and the sand bars that ob- struct navigation or for the purposes of digging a channel which ships of a given draft can traverse ? Can it not adopt measures that will prevent the sediment and sand from being deposited in the shoals and sand bars? Can it not take hold of the treatment of the entire river from the very springs to the mouth for the purpose of pro- moting navigation? It may be admitted that the Nation has no power to enter upon irrigation as such, except, perhaps, as the owner of the land with the same right that any other proprietor has. It may have no power to engage in the protection and replacement of forests as such. There is no power expressly granted in the Constitution for that. It may have no power to enter the electric-light business. It may have no power to enter in the business per se of clarifying the streams; but if in improving a river for purposes of navigation, for the purpose of promoting interstate and foreign commerce, any of these enterprises will either aid in the maintenance and the secur- ing of a fixed and suitable channel for navigation or diminish the cost of the works for navigation, the Government can not only under- take the great work of securing a channel for the stream, but can en- gage in the collateral works that are useful and necessary for the harmonious, economical, and comprehensive development of the en- tire stream for purposes of navigation. Mr. Teller. Mr. President The Vice President. Does the Senator from Nevada yield to the Senator from Colorado? Mr. Newlands. Certainly. Mr. Teller. Mr. President, I do not desire to interfere with the discussion of this question by the Senator in his own line and in his own method, but I would like to say to him that the Supreme Court has passed on these questions at least thirty times in the last 60 years, and I would suggest to him that if he desires to accomplish what he says he does — namely, a general utilization of the waters of the country for navigation — he had better not complicate it with something like a claim on the part of the Government of the right to establish water powers and electrical plants in this country. The Supreme Court has declared that all the Government has is a franchise in the waters — the right to run ships on the waters, but 498 INTERSTATE AND FOREIGN TRANSPORTATION. that it has no ownership whatever in the water, not even in navigable waters, much less in nonnavigable waters. I myself, Mr. President, if the Senator will allow me, am a great believer in the utilization of the waters, and as a friend of the measure I hope those who advocate it will not complicate it with that which is certain to defeat the purpose which they claim they want to ac- complish. The States are the owners of the waters, and the States will maintain that ownership, because there are 50 years of un- broken decisions of the Supreme Court in their favor. There is a recent case in which the court has declared that the Government may clean out a stream and may undoubtedly prohibit individuals, or even the States, from filling up a stream and destroying it; but that is an entirely different thing than for the Government to estab- lish a water plant or a power plant, as it is proposed now in the State of California- at least, and to demand rental for water which I assert belongs to the State of California and not to the General Government. In the interest, Mr. President, of this public work, with which I fully sympathize and have for many years, I hope the friends of the measure here will at least understand what the constitutional rights of the Government are, and not attempt to invade the rights of the States. Mr- Newlands. I do not propose to follow the Senator from Colo- rado into a discussion of the question as to who owns the waters of a navigable river. That ownership must be a very elusive one, for every drop of water is gradually making its way from the sources in the mountains to the Gulf and the ocean. I imagine, so far as ownership is concerned, that the ownership of water would be like the ownership of wild beasts — that it would depend upon the abso- lute subjection to the power and dominion of the party who secures possession. Mr. Teller. I can only recommend my colleague in the Senate to study the question of the right of the States to the water, and I think thereafter he will not say it is elusive. It is as positive as the ownership of the land, and parties owning water abutting their land, under certain conditions, are as absolutely the owners of the water, so far as concerns making it useful, if they choose, as they are of the land abutting. Mr. Newlands. As I stated, I do not propose to follow the Senator into that very interesting discussion because it is not necessary for me to take up that question in order to maintain all that I contend for. Mr. Teixee. I hope not. Mr.. Newlands. I think the Senator will be convinced of that when I get through. A BEOAD AND COMPREHENSIVE TREATMENT. Now, I ask, what is a broad and comprehensive treatment of a, river that is to be used in interstate or foreign commerce for navigation? Take the Mississippi, so far as its western tributaries are concerned; the Missouri and its tributaries; the Yellowstone; the Madison; the Gallatin ; and the Jefferson Rivers ; farther down, the Platte and the Kaw ; farther down, the Arkansas River. All these rivers have their source in the region to which the Senator and I belong — in the snows of the mountains. INTERSTATE AND FOREIGN TRANSPORTATION. 499 PREVENTION OF FLOODS. Now, what does a rational treatment of that river, so far as con- cerns its utilization for navigation, involve? It involves for one thing the prevention of floods, for these waters rush down in torren- tial streams in the spring months and destroy property, and then dur- ing the summer and fall months, the waters having rushed down to the ocean and having been wasted, the river itself is -reduced to an attenuated stream upon which boats can not float. What does a rational treatment of that river involve? Obviously storage, all along the line, wherever it can be done practicably and economically and with a view to the reasonable cost of the entire enterprise. What does storage upon those upper rivers mean ? It means the construc- tion of artificial reservoirs in which these waters are impounded during the period of flood, and from these reservoirs waters are led over the Great Plains, the arid and the semiarid plains, and used for purposes of cultivation. These plains absorb the water like a sponge and gradually give it out by the process of seepage to the tributary streams of the great river. Give it out wlien? Give it out when it is most needed for navigation, during the months of July, August, and September. So irrigation is a proper method of treat- ing the river for navigation, for it is one method of impounding the flood waters of these tributary streams, preventing those flood waters from creating destruction below in the spring and pre- serving them for a beneficent purpose jater on in the summer and fall months. In the more humid regions, in which irrigation is not required and in which evaporation is less rapid than in the arid and semiarid districts, the reservoir may be used for the storage of storm and thaw waters, which may be kept impounded, as is now done, for example, in the upper Mississippi and in some foreign coun- tries, until the time of low water, when the contents ma^^ be let out in such manner as to maintain navigation throughout the summer. Now, the Senator's view doubtless would be that the Government has no power to enter upon the reclamation per se of arid lands not in its own ownership. There is no power expressly granted in the Consti- tution for that purpose, and I believe with the Senator from Colorado that this is a Government of granted powers, and that we can only exercise the granted powers. I sliall simply contend for the full exercise of these powers. No one will deny the full power of the Government over the question of interstate and foreign commerce. No one will deny the power of the Government to make a river navigable. If you do not deny that, then the Government can adopt aiiy practicable means to make it navigable, and it need not confine itself to digging a channel when it can by this process of the storage of waters at the heads of these streams and by this process of spread- ing those waters over the vast arid and semiarid plains suspend the flow of that water until by the process of seepage it gradually goes back to the streams at the time when it is most needed for the maintenance of a full, safe, and sure channel for the purposes of natigation. rOEESTEY. So it is with forestry. The forests are the conservators of mois- ture. In a state of nature the streams gathering in forests run clear SOO INTERSTATE AND FOEEIGN TRANSPORTATION. ■and in fairly uniform volume throughout the year. The soil is ■protected from the beating of the storm by the branches and foliage, which break the drops into spray, and this trickles gently down the trunks and along the roots, so that the soil remains open and pervious. This soft, spongy soil is further protected by a mulch of partly decayed leaves, twigs, and shreds of bark and wood; and in the mulch and friable mold the waters of rains and thaws are absorbed as in a sponge, and do not flow off quickly in rills and freshets, but seep slowly through the soil into the permanent springs bj which the streams are fed. Denude large areas of their forests, and the rains falling from the heavens rush off the lands in torrential •streams and increase the volume of the floods that are so destructive below. We all know that one of the causes of these great and de.- ^tructive floods has been the destruction of our forests. If, then, the forests are conservators of moisture, if they are natural storage reser- voirs of moisture, and if the impounding of these waters in artificial reservoirs for the purpose of holding them until they can swell the volimie of the stream below for the purpose of navigation is con- stitutional, can we not make use of the reservoirs that nature has created and develop them, and, if we can do that, can we not take control over large areas of land and replace the forests that have beeii destroyed ? Of course the Constitution grants no power to the National Gov- ternment to enter into the timber business or the lumber business as such, but it has the power to make a sure, stable, equal stream for purposes of navigation ; and if it can accomplish this by developing the forests, the natural reservoirs of the country, so as to hold these waters in suspense until the time when they are most needed, it- has the power to preserve and protect the existing forests, it has the -power to replace the forests ; and certainly in that connection it has the power to plant trees; and if it has the power to plant trees it has the power to sell the timber which is planted when it becomes unnecessary to the main purpose of the enterprise — the conservation -of moisture. If the forest becomes too crowded, is there any objection to the removal of useless trees? And can you say that because the Consti- tution has not granted to the Government the power to enter into the lumber business it therefore can not sell that timber as a part of the compenastion of the enterprise itself? Would you say, with reference to these great reclamation enterprises which constitute a rational method of treating the river for the purpose of navigation, that the Government can not compensate this fund and diminish the cost of the entire enterprise by selling irrigation rights, thus getting i)ack proportionately from all the lands benefited the cost of the reclamation work and diminishing the cost of the main enterprise — .the promotion and development of a navigable stream? RECLAMATION OF SWAMP LANDS. But the comprehensive plan for the development of these water- ways not only involves reclamation by irrigation and the protection and replacement of forests, but it also involves the drainage of swamp lands below. The reclamation of swamp lands is the antith- tesis of the irrigation of arid lands. There is too little ^ater on INTERSTATE AND FOEEIGN TRANSPOETATION. 501 the land above and there is too much below. Why is there too much below? Because the river breaks through its banks, divides itself into numerous channels, creates bayous and sloughs, and thus dedi- cates vast areas of cultivable land, the richest in the world, to poverty and death. Mr. Beveeidge. Will the Senator from Nevada permit an inter- ruption? Mr. Newlands. Certainly. Mr. Beveeidge. As I said and as the Senator from New Hamp- shire said, I think this is one of the very greatest subjects before the American people, and one, perhaps, in which they are as much interested as any other just at the present time. I wish the Senator irould follow, till he establishes it more closely, the analogy between the Government's power over the conservation of waters and their control as navigable waters and the power of the Government over forests. For example, one of the most fundamental rules in statu- tory and constitutional interpretation is that if the power is con- ceded it carries with it any incidental power necessary to make it ■complete. So if it be conceded— and that has been thrashed out — that we have the right as a Government to control certain forest reserves it follows as an incident of that that it is not only our right and our power but our duty to dispose of what is called " down timber " and " excess timber " •, and therefore the Government not ■only has the right, but it becomes its duty, to become a lumber mer- chant to that extent. Again, our power to build the Panama Canal is conceded, let us say. That carries with it the power to do what the Government is now doing; that is, to operate a line of steamships and also to oper- ate a railroad across the Isthmus of Panama. So it can be carried out in numberless instances. I would be glad if the Senator would spend a little more time in establishing the analogy between the Government's power over the conservation of waters and their control as navigable waters and these other things which the Senator has referred to. If the Senator from Nevada will permit me for just a moment further: In reference to what was said by the Senator from Colo- rado, of course, it has been held since Gibbons v. Ogden until now that the power of the National Government over navigable waters, even wholly within a State, goes to the point that signals and lights may be maintained by the National Government and it may do every- thing else that is necessary. The State has no right to establish hghts or signals, even in its own waters; because they might inter- fere with the navigation of commerce that passes beyond the State lines. So again, the National Government, in improving waterways, for which we now expend scores of millions every year in the river and harbor bill, has the right to prevent the State from in any way obstructing that waterway. If that was not conceded, of course, it would be destructive of the power to improve it. Therefore, if the estabhshment by the State of an electric-light plant upon the waters running through the State, which were navigable, interfered with that purpose; 'the National Government would have the right to pre^ vent the erection of such an electric-light plant. But per contra, if the erection of such an electric-light plant became necessary as an 502 INTEESTATE AND EOREIGN TRANSPORTATION. aid to the navigability of the waters, it would necessarily follow", would it not, that we would have the right to construct it ? The Senator will pardon me, but I think it is a vital point in his argument, and if he will follow that analogy a little more closely, it will be agreeable to many of the friends of his measure. Mr. Newlands. I have already gone further into the argument of these questions than I intended when I rose. My purpose was simply to present a statement of the bill and an explanation of its provi- sions, but I have been drawn out somewhat by the challenge of the Senator from Colorado. It was not my intention to go into all these refinements. However, I will pursue the argument that I was pur- suing regarding the various uses of the waters of a stream which tend to the promotion of its navigability, and I will take up in its turn the suggestion that the Senator from Indiana makes with refer- ence to electric power. I was upon the question of the reclamation of swamp lands, which I stated was the antithesis of the reclamation of arid lands, the swamp lands being at the lower reaches of the streams, the arid lands at the sources of the streams. We all know that a great river in making its way through these lowlands during periods of flood divides itself into numerous channels, which make bayous and sloughs, and create these vast areas of swamp lands, incomparably rich, for they are composed of alluvial soil, and yet are incapable of cultivation because of an excess of moisture. Now, the reclama- tion of swamp lands as such, unless the Government is the owner of those lands, would not be one of the functions of Government under the granted powers of the Constitution. But the control of the river for purposes of navigation is; and if the control of that river in- volves the construction of levees along its banks so as to keep the river in its channel, so that the large volume of water can scour the bottom and create a channel fit for navigation, then that is clearly within the powers of the Government. In like manner, when the needs of navigation demand, it is competent for the Government to maintain the volume and regimen of rivers required for commerce by laying drains in such manner as to maintain a flow at low-water stages. The reclamation in both cases is simply incidental and collateral. compensatoky projects. "Would you say that when the Government goes to this great expenditure, which involves an incidental benefit to the lands of private owners, it can not seek in some way compensation to the fund for this beneficial work, and thus diminish the cost of the primary enterprise? Can not the Govermnent by cooperation with States, by cooperation with districts, so organize this work as to divide the cost between, the States or the localities affected' and the National Government? The project might not be feasible at all unless the Government could diminish the cost by putting a certain amount of the cost upon incidental and collateral works of this kind. And so this great plan of developing a river for navigation may involve, and in most cases does involve, the actual reclamation of large areas of swamp land. INTEESTA-TB AND FOEEIGN TEANSPOETATION. 503 WATER POWER. Now we come to the question of Avater power. The Government will be compelled not only to construct dams on the tributary streams for irrigation, but sometimes on the great river itself — for the pur- pose of constructing locks through which vessels can pass, and thus avoid dangerous rapids. If the Government does construct such a dam for the purpose primarily of promoting navigation, will the Senator from Colorado contend that the Government can not dimin- ish the cost of the enterprise by selling the water power created by that dam? Mr. Teller. Does the Senator want me- to answer his question now? Mr. Newlands. Yes. ]Vtr. Teller. That is the very point I wanted to bring to the Sen- ator's attention. That is exactly what I wish to deny. The Govern- ment has not any power under the Constitution, for any purpose whatever, to go into business of that character. It has not any right to create a water power and sell the power. If the State did not interfere, the Government would have no such authority under the Constitution. But the State, if it had a proper conception of its rights, would not allow that to be done. The State would say it would do it if it was to be done ; and if the Senator will pardon me, some day I will present him a brief on this subject which I think will convince him that my suggestions are fully supported by the decisions of the Supreme Court of the United States. I am not afraid that the Senate will go into anything of that kind. But I do not want to have this initial step, as it were, in this waterway business complicated by what will appear to those who study the law on the subject as an utter impossibility. Mr. Newlands. I take issue with the Senator upon that question. I shall be very glad to read the brief to which he has referred me, but I can not question the power of the Government to build a dam in a river for the purpose of constructing locks which will be serviceable to navigation. Mr. Teller. The Senator has no business to put me in that cate- gory. I have never suggested that the Government could not da that. Mr. Newlands. I was going one step further. Mr. Teller. I say most empatically the Government may do that,, but the Government has no ^ght, then, to establish an electric-light plant on it and sell the light'. That is what I assert. Mr. Newlands. If the Senator had heard my sentence through, I think he would not have taken exception to it. I will repeat part of what I did say and add to it what I intended to say. I do not doubt for a moment the power of the Government to con- struct a dam for the purpose of establishing a lock which will be serv- iceable to navigation. Mr. Teller. Neither do I. , Mr.' Newlands. Thus far the Senator agrees with me. Now, I was going to add, nor do I doubt the power of the Government to dimin- ish the cost of that enterprise to the Government by availing itself of the sale of the power created by that dam. 70342— PT 10—16 2 604 INTEBSTATE AND rOREIGN" TKANSPOETATION. Now, another thing. If the Senator insists that the Government can not do that without the consent of the State, then I say we should take steps in this bill for obtaining the consent of the State. Mr. Teller. I deny the right of the Government to do it even with the consent of the State. This Government can not go into any com- mercial business of that kind. Mr. Newlands. I would not expect the Government to go into the commercial business of peddling out light Mr. Teller. Or water. - Mr. Newlaxds. Of constructing poles and stringing wires and dis- tributing light throughout an entire community, or distributing power throughout an entire community, but I do contend that it would be entirely within the governmental function to diminish the cost of the great work ; and if it can accomplish that result by some method of leasing the power, at the same time so controlling the lease that it Avill not result in monopoly and oppression, I should say it had that power as a means of diminishing the cost of the. enterprise.^ But if there is anything in our dual government that prevents the nation from acting without the consent of the State, then I see no reason why the two so^'ereigns affected should not confer together about the matter — the Union of States, the one sovereign, the indi- vidual State where the dam is located, the other. Can we doubt that they would come to some rational conclusion ? Would the lesser sov- ereign deny to the greater sovereign the right to get a value out of that which it itself had created that would be in a measure compen- 1 In fact, that is just what the Government is doing now, and has done for several years, under statutory authority. The legislation has so often been repeated and has so long remained unquestioned that the governmental policy with respect to water power may be regarded as established. Under this policy the Federal Government reserves the right, when authority is given to private corporations to dam actually or possibly nayir gable streams for the development of power, to use wildiout charge so much of that power as may be reciuired for specific uses by the Government, this reservation beingrin the nature of a consideration. When the works are constructed-' cooperatively between the Federal Government and prospective power users, then the Government reserves rights' of administration and specific uses, and also limits the lease or authority to the private party to use the power to a specified period; while, if the work is constructed at tbfe' cost of the Federal Government, then the statutes authorize the leasing of the power developed thereby under customary governmental restrictions as to advertising, etc. (The first case is covered by the provision of the general "Act to regulate the con- struction of dams across navigable waters," to the effect that " The person owning such dam « * « shall grant . to the United States a free use of water power for building and operating " any constructions which may at any time be required " in the interests of navigation." (U. S. Stat. L., vol. 34, p. 386.) And this provision is re- peatedly affirmed in special laws of various dates. The second case is exemplified by ''An act to enable the Secretary of War to permit the erection of a lock and dam in aid of navigation in the Tennessee ftiver near Chattanooga, Tehn., anfl' for otlier pur- poses " (U. S. Stat. L., vol 33, p. 3091. in which it is provided in section 4 " Tha/t in consideration of the construction of said lock and diam, free of cost to the United States, * * * the United States hereby grants * * ■» such rights at it possesses to use the water power produced by said dam and to convert the same into electric power or otherwise utilize it for a period of ninety-nine years : Provided^ That it or liey [the grantees] shall furnish the necessary electric current while its or tlieir power plant is in operation to move the gates and operate the locks and' to light the United States build- ings and grounds free of cost to the United States : And provided further, * » * That the Secretary of War is hereby authorized to prescribe regulations- to govern the use of the said water power and the operations of the plant and force employed im con- nection therewith." The case of leasing is covered, for example,' in the provision of the river and harbor act approved .Tune 13, 1902 (U. S. Stat. L., vol. 32, p. BB8), under the item for " Improving Cumberland Elver, Tenn., above Nashville," as follows : "And the Secretary of War is hereby authorized, in his discretion, to grant leases or licenses to the highest responsible bidder for the use of the water power created' by said dam, at such a rate and on such conditions and for such periods of time as may seem to him expedient * » » : Provided, That any lease or license so granted shall be limited to the iisr- ot the surplus water not required for navigation • • * : Provided further, That before leasing or licensing such water privilegeSj or issuing permits for the construction and operation of such canals, or otherwise disposing of any water power or privilege, the Secretary of War shall first advertise the sarne in one or more dally papers' at ISashv-Mle for sixty days immediately preceding, stating, specifically the right'or privilege proposed to be leased or conveyed, ■with its exact limitations, inviting bids for the same, and he mav, in his discretion, then lease the' same for a specific term of years at so much per year, to be paid semiannually In cash into the Treasury, and the Secre- tary of War shall reserve the right to reject any or all bids.") INTERSTATE AND FOEEIGN TBANSPORTATION. 505 satory of its own expenditures? The two sovereigns can do business with each other just as individuals can; and there is no reason why the Union of States should not enter into an arrangement with an in- dividual State that will present a just solution of the question. If the State has the property rights, for which the Senator contends, it can share with the nation the burden of cost of a work necessary or useful for both navigation and power. If the Government spends miUions of dollars in the construction of a dam, it should certainly have compensation for. the power which it itself has created. Com- mon honesty would distate that. I did not intend at this time to discuss the question of governmental functions at all; it is a matter of business, and that is what I hope to see established as the basis of this enterprise. I hope to see this great work put upon a business basis. I believe the Government can do work in a businesslike way in carrying out the granted powers, and I believe in giving its agents a pretty free hand to enable them to do business effectively. The reason why I present this bill now is because I fear that in the future should we enter upon this work Congress may without consider- ing these related questions of use and compensation and cooperation put the administrative agents of the Government in a strait- jacket and thus prevent them from conducting the work in a businesslike way. I do not intend, Mr. President, to be drawn off into nice refine- ments as to constitutional power. I do not propose to balance the power of the National Government with the power of the State in an . individual matter. Here is an enterprise which is of the greatest importance of the entire country. We propose in aid of the develop- ment of commerce between the States and commerce with foreign nations exclusively within the jurisdiction of the National Govern- ment to enter upon this great work of utilizing our rivers in a busi- nesshke way for every beneficial purpose to which they can be put. We must realize that it is not wise to take up simply one use of the river for navigability and lose sight of all the other uses when the adoption of the other uses and the development of the other uses will diminish the cost of the enterprise and make it more efii- cient for the public good. The cost might be entirely prohibitory if it were not for the correlated uses and the contribution or compen- sation secured through them, for this is a work which can be accom- plished either by the National Government itself or by the coopera- tion of the National Government with States, with corporations, with municipalities, and with individuals. CLARIFICATION OF STREAMS. We can not only take up this question of the utilization of water power beneficial to the entire people and with a view to economy in the enterprise itself, but we can take up with it the question of the clarification of the streams. That is a matter, you say, of sanita- tion, affecting the people of the towns and cities along the borders of the streams. But you must recollect that these great rivers are full of sediment and sand, every particle of which is a destructive tool when directed against the banks of the river. Clear waters are not nearly so destructive or obstructive as muddy waters, as water 506 INTERSTATE- AND FOREIGN TEANSPORTATION. filled with sand or soil. It is well demonstrated that every particle of soil, every particle of sand in the water, is a destructive agent. When deposited in the shoals and bars it obstructs the channel. When suspended in the water and driven by the force 6f the current against the banks of the river it breaks them down, and the broken bank carried down in the current sinks within a few miles and makes the shoal or bar. What do we find in the great rivers that pass through alluvial bottoms ? The banks dissolve like sugar when the force of the water is directed against them. A capricious stream like the Missouri River makes its way through a bottom of this kind, from Kansas City to St. Louis, a distance of about 300 miles, a valley from 4 to 10 miles in width, bounded by bluffs on either side; and that river during the period of flood, its banks dissolving like sugar before the force of the water, can make its way anywhere in the alluvial bottom between the bluffs, so that the farm of to-day becomes the swamp to- morow. and .the river bed of to-day becomes the cultivated farm to-morrow. We can clarify that turgid water, swollen with sediment and sand. How ? By the prevention of soil waste and by the protection of the banks by willow and stone revetment. There washes down the Mis- sissippi River every year pretty nearly a continent of the best soil. At New Orleans to-day the alluvial soil is twelve hundred feet deep. The great problem we have had in the lower reaches of the Mis- sissippi has been the control of the Passes, the river making its way to the Gulf through three passes, building up on either side, by the deposit of sand and sediment, a continent. So it is hardly an ex- aggeration to say that in time the great Gulf itself will become a continent. Now, is the Government simply to dredge out that sand and sedi- ment when it settles down in the bed of the stream and deposit it somewhere else, whence it will make its way gradually back to the stream, or can it take measures to prevent that sediment and sand from coming into the stream? Can it not take measures to prevent this soil waste and this bank destruction ? It is fair to say that in time the prevention of soil waste can be brought about by proper methods of cultivation enjoined by the National Government, per- haps as a matter of persuasion at first, though it niight well become a matter of compulsion. The conservation and development of the natural resources of the country — the forest, the land, the water — for every purpose require the scientific treatment of a stream and the full consideration of every related use. How is 'this to be done ? In the first place, this fund is created to which I have referred, a fund for uninterrupted and continuous work, the dedication of $50,000,000 inunediately to this work. The Senator from Idaho savs it may lie idle for a time. There is $250,000,000 or $300.000,000 "in the Treasury now that is lying idle. The Treasury deposits a large portion of it in banks of the country and receives no compensation from it. It will be no more idle than it is now. It is incumbent upon us to show our fixed and determined pur{)ose that this work shall commtoce, and that it shall be prosecuted with- out interruption, and not in the elusive and disjointed way in which it has been prosecuted heretofore. INTEESTATE AND FOREIGN TRANSPOETATION. 507 ' AN ADMINISTRATION MATTER. Now, this bill gives the executive department great power, and I have no doubt that objection will be urged. I believe in giving the executive department full power in this matter, because it is an ad- ministrative matter. I believe in preserving the boundaries of the functions of the Government ; and I insist upon it that Congress has attended too much to administrative matters, and the very reason of the inefficiency of our work upon our rivers and harbors "has been that Congress has sought to do administrative work and has done it badly, as it always will do it badly. Ninety men in the Senate and four hundred or more in the House working on legislation for the country do not constitute efficient bodies for administrative work. Wherever administrative tifork is to be done I believe in intrusting it to the executive department and putting the responsibility upon the Executive. We did this with reference to the reclamation act. After having educated the entire country to the desirability of entering upon the great reclamation work, the western men found that they were unable to move because they were divided among themselves as to what should be done. Each man wanted a project first undertaken in his own State and was unwilling to concede that another State had superiority or ad- vantage as to priority. We were in confusion as to the methods of administration. Finally w^e got together, and what did we conclude to do? TVe passed a bill creating a fund derived from the sales of the public lands of the country and dedicated that fund forever to this work. Then we gave the power to the Secretary of the Inte- lior to go ahead and investigate the projects, and if lie found them feasible to do the work, and the only limitation put upon his power was that he should not let a contract unless the money for its pay- ment was in the fund. That was the only limitation. • We did not go into details regarding the organization. There can be no effective organization which is not the result of the process of evolution. Let Congress attempt to organize at the start a great working force of this Irind and it will always fail. They will have to come back to Congress for amendatory and supplementary legislation, all delaying the prosecution of the work. We did the simple thing and put the responsibility upon the Secretary of the Interior, and the Secretary of the Interior accepted the responsibility and held the responsibility. Congress, of course, reserved to itself all the powers of supervision, of criticism, of examination. Keports were required. The officers of the service were compelled to come before the committees and give full expositions of their work. Committees visited the works them-, selves and made actual inspection, and then upon their return to Congress summoned the officials before them and examined them upon matters concerning which they desired information. So the whole service, under the critical eye of Congress, but with full powers of administration, has advanced and accomplished a great work. It has in the short period of its existence removed, I believe, twice as many cubic yards of earth as have been removed in the Panama Canal. It has constructed works of great niagnitude and has considered problems, many of which were 'as difficult as those involved in the Panama construction. We have organized m the Reclamation Service a body of skilled engineers capable; of un- 508 INTEESTATE AND FOREIGN TRANSPORTATION. dertaking any work of construction from the construction of a canal to the construction of a railroad and the development of the inland waterways themselves. So it was with the Panama construction. Accidentally we blun- dered there into wise legislation. Congress was divided into con- tending forces as to whether we should have the canal at Panama or at Nicaragua. Different views prevailed as to whether it should be a lock canal or a sea-level canal. There would have been the widest divergence of views as to all the details of operation. But in the confusion a simple bill, I believe drawn by Senator Spooner of AVis- consin, appropriated $50,000,000 for the work and gave the President full power to go ahead and do it. We all know how that has worked out. Suppose we had started in the first place and insisted upon it that all the plans should be submitted to committees of Congress with their differences of opinion, and to Congress itself with their differ- ences of opinion, we would have been debating to-day over mere mat- ters of detail. But out of the very necessity of the situation, inas- much as Congress was unable to agree, a simple bill was prepared which gave the President full power. Does anyone contend that the President has abused that power? Is there any President whom we can elect who will be so dishonest or so inefficient as to abuse that power ? He has gone about in a businesslike way to create an organi- zation, each organization in itself tentative at the start. I believe the Panama Canal service has been reorganized three times. First,, we had the Walker Commission, and then we had the Shonts Com- mission, and then we had the Goethals Commission, a commission the same in number, authorized, I believe, by Congress, but main- tained in organization at the will of the Executive. We were proba- bly unwise in compelling the Executive to have a commission of nine men. He himself in a recent message or in a recent speech has indicated that perhaps a more efficient method of organization would be one commissioner, with subordinates, so that one person could be held responsible for the work. The first two commissions held their sessions here. The last com- mission is located in Panama, and consists mainly of officers of the Grovernment, an engineer officer of the Army, an engineer officer of the Navy, and a medical officer of the Army, who has done the sani- tation work for that district. After various experiments the Presi- dent has placed the control of the work in the Engineer Corps of the Army, noted for its efficiency, integrity, and high sense of honor — a corps which has been compelled thus far to adapt itself to the re- pressive policy of the Nation as to rivers and harbors, but which, under a progressive policy and aided by the other scientific services of the Government in matters relating to their jurisdiction, will ac- complish as brilliant a work in our inland waterways as it is now accomplishing at Panama. We have given the Executive a free hand, and we have been wise in giving him a free hand. Had we sought to impose upon him congressional restraints and put him in a congressional strait- jacket, the work would not have advanced as it has advanced. So I contend that in this case we should give the President the power not only to enter upon the construction of the work but to make the examinations and the surveys, and to do it without further INTEESTATE AND EOEEIGN TRANSPORTATION. 509 3,ptliority from Congress, and to. appoint such boards and commis- sions and agents and experts as in his judgnient may seejn proper, and to fix their salaries until Congress fixes them. The organization can best be worked out by an executive ofiicer and not through the wisdom of Congress. It will be observed that the Forest Service, the Eeclamation Serv- ice, and the Panama Cpjial Service are all engaged in a variety of works incidental to the main enterprises, and they are engaged"^ not o^ly in constructing them but in operating them. Such works in- clude waterworks, electric-light plants, roads, railro,ads, electric roads, cement mills, and other works of similar character, all inci- dental and collateral to the main enterprises. Can it be maintained that the Government should have less poAver when, in the interest of interstate and foreign commerce, it enters upon the artificialization of rivers and the construction of canals ? It will also be observed that the Panama Canal Service is to be made compensatory by the charging of tolls, the Forest Service by the sale of timber and by charges for grazing permits, and the Eeclamation Service by the sale of water rights. So far as the Forest Service and the Eeclamation Service are concerned, they will Idb absolutely self -compensatory. In the case of the Inland Water- ways Service it is picoj)osed that the artificialized rivers and canals shall be free to navigation and that no tolls shall be imposed. Is it not, therefore, of all the more importance that the collateral works undertaken by this service through other appropriate services of the Government for the purpose of fully developing every profitable and beneficial use of our rivers shall be made self -compensatory as far as practicable, and that wherever the cooperation of States, municipali- ties, communities, corporations, or individuals is necessary to accom- plish this purpose, such cooperation shall be secured? No one can measure the future value of the water power of the country in the development of electricity. It is probable that this new force has a future value equal to that of all the coal supplies of the country. In organizing this great work, an ample fund should be immedi- ately provided and as free a hand as possible given to the Executive. In the case of the Reclamation Service, the method of securing a re- volving fund from the proceeds of the sales of public lands and of water rights has proven an incentive and an inspiration to the best efforts of those in charge of the work. The methods are those of a business house which knows its condition at all times. Under such a method the Government organization knows just what to depend upon. It can plan for the future and look ahead without uncertainty as to the size of appropriations. Furthermore, it is inspired to work for practical results, for early and considerable returns which, by the application of business niethods, can be again applied to produce more returns. No questions of such magnitude, where a long look ahead is necessary and a comprehensive plan for the future imperative, should be hampered at its beginning by uncertainty of congressional action. Those in charge should know at all times on what they can depend and what results are expected of them. It is therefore essen- tial that an ample fund should be provided and that provision should be made for its replenishment by the sale of bonds whenever congres- sional appropriation fails. As free a hand as possible m organization 510 INTERSTATE AND EOEEIGN TEANSPOBTATION. should be_ given, and particularly during the first few years. After the organization is perfected and its work reduced to a system, then Congress can, if it chooses, substitute the old plan of congressional initiative as to investigation, as to projects, and as to construction in each particular case. PKOVISIONS OF THE BILL. The bill provides that the President in executing this work is " to consider and coordinate the questions of irrigation, swamp-land reclamation, clarification of streams, utilization of water power, pre- vention of soil waste, protection of forests, regulation of flow,, control of floods, transfer facilities and sites and the regulation and control thereof, and such other questions regarding waterways as are related to the development of rivers, lakes, and canals for the purposes of commerce." Section 3 provides that in order to enable the President to make such examinations, surveys, and investigations, and to construct the work and enter upon the construction, he is authorized to appoint an inland waterways commission and to bring in coordination therewith the Corps of Engineers of the Army, the Chief of the Eeclamation Service, the Chief of the Bureau of Soils, the Chief of the Bureau of Forestry, and, I might as well add; the chief of the Panama Canal service, for doubtless the observation and experience of all these officials will be beneficial in this great work. Section 4 provides that the commission shall make full and complete reports of all their acts and doings to the President and to Congress, or to either body of Congress. Section 5 provides — That if after such examination, survey, and estimate, such commission shall determine that any project for tlie improvement or construction of an inland waterway or coastal waterway is practicable and desirable, it may, with the approval of the President and through the appropriate service, construct or execute, or cause to be let, contracts for the construction or execution of the same, in such portions or sections as it may be practicable to construct and exe- cute as parts of the whole project : Provided, That the necessary moneys therefor are available in the inland waterway fund. This therefore gives the power to the President, without further authority from Congress, to immediately enter upon the construction of these works which are determined to be feasible and desirable. Section 6 provides — That such projects may include such collateral works for the irrigation of arid lands, for the reclamation of swamp lands, for the conservation or replace- ment of forests, for the clarification of streams, and for the utilization of water power as may be deemed advisable in connection with the development of a channel for navigation or as aiding in a compensatory way in the diminution of the cost of such project. Section 7 is also a very valuable section. It provides — Tliat such comniiMsinn is authorized, with the approval of the President, to enter into cooperation with States, municipalities, communities, corporations, and individuals in such collateral works, and to make arrangements for the pro- portionate payment of the cost thereof out of the inland waterway fund and by the States, municipalities, communities, corporations, and individuals benefited thereby, in such manner as to secure an equitable distribution of the costs and benefits : Provided, That the cost of such collateral works shall be paid, if prac- ticable, out of funds provided therefor by Congress, but if sufficient provision INTERSTATE AND POSEIGN TEANSPOETATION. 511 tJierefor Is not specially made by Congress, such Commission is authorized to pay for the same out of the inland waterway fund, but the total payments made on account of such collateral works from such inland waterway fund shall not ex- ceed 10 per cent thereof, and provision shall be made, as far as practicable for the reimbursement to such fund of such payments by the States, municipalities communities, corporations, or individuals benefited thereby : And provided also That the inland waterways developed shall remain free for all the uses of navigation. EQUITABLE APPOETIONMENT. Another section provides that regard must be had " to the equitable apportionment and contemporaneous execution of the projects con- templated under this act among the several waterway systems of the country," so that every section of the country will feel that it is directly interested in this legislation and in this fund, and every sec- tion will feel that contemporaneous work will be conducted through- out the entire country upon feasible projects. Mr. President, it is useless to propose in the Congress of the United States any individual project. The people of this country are not prepared to enter upon this work unless we prepare a comprehensive ' plan that will include the entire country. This work is not so difficult as many think. So far as the Pacific coast is concerned, it involves simply the Columbia Eiver, the Sac- ramento and the San Joaquin Rivers, and the consideration of the related questions there of the irrigation of arid lands and the rec- lamation of swamp lands; and as to those projects, they will be largely self -compensatory if we provide in this bill for proper co- operation with States, municipalities, communities, corporations, and ■ individuals. You say the Government goes into partnership. N"o partnership, of course, is involved, but cooperation is involved ; and if by uniting the powers of the States and the powers of communities and the powers of individuals with the powers of the National Government in this great work we can diminish the cost to the General Government and make the project, which would otherwise be so costly as to be impracticable, absolutely feasible, shall we hesitate to enlist that cooperation ? Good business judgment requires it. The coordination of all the Govern- ment services of the country related to the use of water, the coopera- tion of the Nation with every State, every municipality, every com- munity, every corporation, and every individual capable and willing to enter into this work and which will bear its proportion of the ex- pense, will result in the conservation of the natural resources of the country and their preservation from monopoly. COLLATERAL WORKS AND COMPENSATION NECESSARY. It would be very nice, of course, for the United States to conduct these great works without view to any compensation to itself or bene- fits conferred upon others. It would be very nice for it to construct great dams costing millions of dollars and then turn them all over, under noxious State legislation, to great monopolies that would use them for the oppression of the people. It would be very nice for Congress to build up forests, to preserve forests, to replace forests, and then let the Lumber Trust utilize the fruits of their labor. But I assume that when the American people 512 INTERSTATE AND FOREIGN TRANSPORTATION. determine to go into business in the development of these inland waterways they will conduct the business in a businesslike way, and they will not stand upon refinements as to the boundaries between the Government and the States ; and where they find that there is any difficulty as to constitutional power in order to do a desirable thing promotive of navigation, and that the cooperation of a State is neces- sary, they will insist upon the cooperation of both for the common good. All that we must -provide is a board of experts capable of making broad and comprehensive plans for the common good, and public sentiment will force cooperation. Mr. President, I alluded a few moments ago to the simplicity of the problem before us and gave as an illustration the rivers of the Pacific coast. The problems of the other waterways are not more difficult. The connection of the Great Lakes with the Ohio and the Mississippi is not difficult. The treatment of the Mississippi and its tributaries is not difficult. It will not be difficult to establish a standard chan- nel. It will not be difficult to treat the Gulf rivers. It will not be difficult to construct the coastal canals along the Gulf and the Atlantic, which, connecting bays, sounds, and rivers together, wiU open up all under the protection of sheltered waterways to boats of standard draft. Artificialization of waterways and construction of canals are as old as civilization. All that is required is good plans, made by competent experts and carried out continuously under proper administration. Now, Mr. President, I hardly dared venture to hope that in present- ing the bill at this time, with the holidays approaching, I should have the opportunity of presenting my views at all fully. I did not expect it. My purpose was simply to put upon record here an explanation of the bill, so that it would go out in the Congressional Eecord to the country, so that it could go to these great organizations whose mem- bers are interested in the development of inland waterways and aid somewhat in the development of public opinion upon this question. Congress rarely creates public opinion; it records public opiniop. The real argument of the legislator who wishes to do something in a businesslike way should go to the country and not to Congress. I will ask leave to print with my remarks Senate bill No. 500, Senjate bill No. 499, certain statistics of the Reclamation Service and of the Panama service and the forest reserves, and also an article which I prepared for the Annals of the American Academy of Political and Social Science, entitled " The use and development of the American waterways." • The Vice President. Without objection, permission is granted. Th^e matter referred to is appended. BREAKING DOWN OF THE RAILWAY SYSTEM. Mr. Newlands. I wish to add that this question of waterway trans- portation is, of course, only a part of the general subject of transporta- tion. The railway service of the country is much broken down. The railroads of the country, when there was less business than there is now, sought to increase their tonnage by carrying cheap and bulky productslong distances at low prices, and they thus entered upon a carriage which has been mainly absorbed in other countries by water- ways. This bullfy carriage lias absorbed so large a proportion of IJTTEKSTATE AND FOEEIGN TRANSPOKTATIOI^. 513 their facilities that suddenly, with the great increase in production and population, they found themselves unable to meet the demands of the country. At that time an agitation arose for the regulation of rates and for the better control of the railroads themselves. The railroads, on the one side, regarded their properties as private prop- erties and resented legislative intrusion. The people, on the other hand, regarded them as public servants charged by the law with the performance of public duties, entitled only to a just compensation, that compensation to be fixed by the public either in the shape of tolls or the Imiitation of return upon capital in the shape of dividends. That contest has not yet reached the end. The railroads have now reached the point where they admit in some degree the powers and the rights of the public. They now talk about cooperation; they will talk later on about obedience; and obedience is what the American people demand. The only limitation upon the power of the American people over the highways and over common carriers is that the legislation shall not be confiscatory in character. That contest is not yet ended. Meanwhile, the finances of the rail- roads have been embarrassed, rates of interest have gone up, and the very agitation which has gone on has affected their negotiations in foreign countries for cheap money. They have been unable, even if they willed it, to keep up with the necessary construction in order to meet the demands of increasing population and of business. One eminent railway man declares that it will be necessary for these rail- roads to expend, I believe, within the next five' years, five and one-half billio-ns of money in order to meet the requirements of the country. We all realize that it is now impossible for them to get the money. We might enable them to get the money if we stopped this agitation ; but the American people will not rest, whatever may be the conse- quences, until the true status of the common carrier is ascertained and determined as that of a public servant. So that we can not hope for such conditions as will enable them to finance the construction that is necessary. It is therefore of great importance that we should de- velop these waterways and that we should develop them quickly. ' COORDINATION OF EAIL AND AVATER TRANSPORTATION. It would startle the country, perhaps, if we were to say that $100,000,000 annually for the next five years should be expended; but I believe it ought to be expended in order to meet the require- ments of transportation, and the public mind must become accus- tomed to it. After it is all expended the business' of the railroads will not be injurecl. They will have more than they can then carry, . and their carriage will be of products more compensatory than the cheap and bulky products that will be carried by water transpor- tation. We have had a most marvelous railroad development in this coun- try, which has surpassed that of any other part of the world. But our development has not been as rational, as comprehensive, and as scientific in the matter of transportation as has that of Germany. Her railway transportation, her river and canal transportation, and her ocean transportation hare been dovetailed together in such a fashion as to make her carriers the most efficient servants of produc- tion ,ga)d of commerce in the world. 514 INTERSTATE AND FOREIGN TRANSPORTATION. This movement is not one of hostility to the railroads. It is one that supplements the railroad system of the country. If we can add to our ocean service so that that ocean service and the river and canal service and the railroad service of the country will act in cooperation as the handmaidens of production and commerce, we shall have marvelous results. After we get these waterways developed the question then will be, How shall we administer them ? Are the railroads to be allowed to put down their rates during the navigation season to the destruction of their river competitors and to put them up during the winter sea- son when that competition ceases? Shall we permit one public servant to destroy another public servant necessary to the public good ? We niight crowd these rivers with boats, but capital, regard- ful of the bitter experience of the past, will hesitate to enter upon the enterprise. As we passed down the Mississippi Kiver we hardly saw a boat. On both sides of the river we saw long trains of cars carrying the products of the country. If the railroads refuse to act in cooperation with the rivers in the future, as they have in the past, they may paralyze the very instrumentalities which we create for interstate and foreign commerce. We must ourselves — the Nation must — create the corporations that are to act as waterway carriers. We should not submit the incor- poration of these great public servants engaged in interstate carriage to the shifting legislation of 46 different States. There is no river boat that on its course will not in going from baiik to bank move from one State to another in interstate commerce. The Nation should create its own public corporate servants, and we should protect them. We may find it necessary in creating these instrumentalities of inter- state commerce to exempt them from taxation, State and National, for a limited period. The power is, in my judgment', clear. The Na- tion can certainly exempt them from its own taxation and can refuse to permit a sovereign State, without the Nation's consent, to place a burden that might be destructive upon a national instrumentality. We may have to protect them against unfair and unjust competition. We may have to compel the coordination of the railroads with them. The railroads to-day have all the terminal facilities upon the nvers. They have the depots and the stations and the tracks. They have all the spaces that will be required for river commerce. The Nation can not permit these national instrumentalities to be subject to the caprice of selfish interests. All this can be adjusted if we only go further and provide that as to the great national systems of railways, 8 or 10 in number, each one of them having from ten to twenty thousand miles of track and traversing between 15 and 20 States — these mergers shall come under a national charter. We shall then ourselves have created the public agents of the Nation the servants of the Nation for the adequate development of interstate and foreign transportation. THE NATIONAL POWERS. It may be said that we have not the power to compel the merger of such corporations under a national charter. I admit that we can not forcibly go into a State and compel a State to force a State cor- poration to come within the national merger, but the Nation can INTERSTATE AND FOEEIGN TRANSPORTATION. 515 authorize public carriers, common carriers, incorporated under its laws, to construct new interstate lines, and it can, by the process of persuasion, induce the States, driven by the demands of their own people, to permit these parts of great interstate systems to get to- gether under one national control and charter. The change will not mean an invasion of the powers and rights of the States. At present we have State corporations engaging also in interstate transportation. Is it not just as logical to have national interstate corporations engage in State transportation? The same public agent, whether State or National, can now engage in both State and interstate transportation. As to the -former, it would be subject to the State regulation ; as to the latter, it would be subject to national regulation, whether the corporate agent were incorporated under State or National character. Nor would the police powers of the States or the jurisdiction of the State courts be affected by na- tional charter. The national-bank act, under which the jurisdiction of State courts is maintained, is an illustration of that. If we can nationally incorporate these great railway carriers, and if we can nationally incorporate river carriers, and if we can nationally incor- porate ocean carriers, the entire people will then have these public servants under their control, and by the unity and simplicity of the operation the service can be made profitable to the carriers, just to the public, and efficient in the promotion of interstate and foreign commerce. , I am aware that some of my friends call this a centralization of power. Some of my friends on this side of the House are accustomed to apply that term to any power which is exercised by the National Government. The National Government has not, in my judgment, commenced to exercise its powers under the interstate-commerce clause of the Constitution. It has been prevented from exercising the powers which the people granted to the Nation for a beneficent purpose. The main purpose of the formation of the Union was to unite all the States in matters relating to the national defense and to the protection of interstate and foreign commerce. The development of interstate and foreign commerce was the primary cause of the Constitution and of the Union. The growth of transportation has been an accidental growth from a point in one State to another point in the same State. Gradually this accidental growth has advanced until, either under the laws of the States, or outside of the law, or against the law, or in evasion of the law, great systems of railways have been in fact, though not in law, nationalized, unionized, running almost from the Atlantic to the Pacific and from the Lakes to the Gulf. Will anyone deny that the combination has been beneficial, whatever we may say about the methods employed, about the capi- talization issued, about the power in politics exercised by these great political masters that ought to be public servants ? Would you to-day enter upon a process of decentralization ? Would you attempt to divide these systems up into the units of which they were once composed, each unit comprised within State lines? You would not? Then legalize them under proper restraints as to capi- talization, under proper restraints as tp profits, and legalize them by the action of the only sovereign capable of dealing with the question. 516 INTERSTATE AND FOREIGN TRANSPORTATION. NOT CEXTEALIZATION, BUT TJNIONIZATION. Centralization ! Is that the right term ? I should say " unioniza- tion." The exercise of the granted powers of the Constitution does not involve the centralization of power. It involves simply the unionizing of the forces of the entire people of the country in matters clearly intrusted to the Union of States. This Union is composed of 46 States. We are all parts of this Union. This Nation is not a separate entity afar off, exercising jurisdiction and control and do- minion without our participation in it. The States constitute this Union; and they entered into this Union for certain beneficial pur- poses, one of which was the advancement of interstate and foreign commerce. That involves the creation of the instrumentalities for interstate and foreign commerce, the creation of the public servants that are to engage in interstate and foreign commerce by the Nation and not by a single State of the least public virtue, absolutely con- trolled by the corporate carriers, who ought to be the servants of the Nation. There is no centralization about it. We unionize the forces of the Nation under the powers granted to the Nation, of which each State forms a component part. If the States were all separate, then would they not have to get together by treaty and settle many mat- ters? We have the best kind of tfeaty making under our system, the treaty making of this legislative body and the other legislative body — the Congress of the United States — a permanent treaty-mak- ing Congress, imposing its will upon each one of the 46 sovereigu States in matters intrusted to it for final determination. I have recently introduced a bill, S. 499, which in most particu- lars is identical with a bill introduced by me over two years ago, for the national incorporation of rail, river, and ocean carriers. I shall insert a copy in these remarks in the hope that it will be carefully considered in connection with the development of our waterways. I invite also as to this bill the criticism, suggestion, and amendment which I have invited regarding Senate bill 500. Note. — The provisions of Senate bill 499, for the formation of national corpo- rations for railroad and navigation lines engaged in interstate commerce, will be found on pages 159-165 of these hearings. In conclusion, Mr. President, I trust that we will all take a broad and comprehensive view, not only, of the plans' relating to the de- velopment of our inland waterways but of the plans relating to the development of our foreign transportation and of the plans re- lating to our railroad transportation. We can only make our powers efficient in the interest of the common good by the full exercise of this important power granted by the people to the Nation — the Union of States, the power to regulate commerce between the States and with foreign nations. If we will only exercise this power fully, comprehensively, and wisely, both as to the development of our national highways and waterways and as to the creation of the public servants that are to operate them, we can build up such machinery for the development of our domestic and foreign commerce as the world has never known. I ask that the bill be referred to the Committee on Commerce. The Vice President. At the request of the Senator from Nevada, the bill will be referred to the Committee on Commerce. INTERSTATE AND FOREIGN TRANSPORTATION. 517 ApPEiYUIX A. [From the Annals of the American Academy of Political and Social Science, January, THE USE AND DEVELOPMENT OF AIMIUCAN WATERWAYS. By Senator Fkancis G. Newlakds, vice chairman of the Inlnnd AVaterways Commission. The Inland Waterways Commission is the outgrowth of an agitation which has been conducted for some time, particularly in the Mississippi Valley, for the improvement of our waterways. The President was urged to exercise his constitutional power of making recommendations to Congress, and, pursuing his usual method of first exhausting investigation, appointed nn executive com- mission with a view to gathering into one body a number of men who, either in legislative or in administrative work, had acquired experience in the prob- lems relating to the waterways of the country. appointment ok THE COMJtlSSION. As chairman of this commission the President selected Hon. Theodore E. Burton, of Ohio, who, as chairman of the Rivers and Hai-bors Committee of the House of Representatives, had discharged the duties of that important position with rare intelligence, thoroughness, and public spirit. He also appointed two United States Senators, Hon. William Warner, of Missouri, and the writer; another Member of the House of Representatives, Hon. .John H. Bankhead, of Alabama (the leading minority member of the Rivers and Harbors Committee of the House), who has since become a Senator; and five members of the executive department of the Government. These scientific members are : Gen. Alexander Mackenzie, Chief of the Engineer Corps of the Army ; Dr. W. J. McGee, a scientist and soil expert, cpnnected \A-itli the Bureau of Soils in the Department of Agriculture ; Mr. Frederick H. Newell, Chief of the Reclamation Service ; Mr. Giiford Plnchot, Chief of the Bureau of Forestry, and Mr. Herbert Knox Smith, Chief of the Bureau of Corporations. The President reserved the right of adding to the commission in the future certain transportation experts, and it is possible that the commission may, before its work is completed, take up in the broadest way the whole question of transportation. I PUBPOSE or ITS appointment. , The duty imposed upon this commission was to investigate the use of water, not only for navigation but also for all other purposes, with a view to recom- mending to the President a full and comprehensive plan for the development and utilization of all the natural resources of the country relating to, water. Its primary purpose was to facilitate water transportation, upon which the prosperity of the country so largely depends. We have been for some time engaged in the consideration of questions relating to railways, and we are now about to enter upon the related question of waterways. ^ WOEK PEKFOEMED BY THE COMMISSION. Smce its appointment the commission has been hard at work upon the prob- lems assigned to it. An organization was effected in Washington on April 29, 1907. Early in May the commission took a trip down the Mississippi River from St. Louis to the Gulf and studied the problems of the lower part of that river. In September a part of the commission visited the Pacific coast and inspected the Sacramento and San Joaquin Rivers in California and the Colum- bia River in the Northwest. Beginning September 21, the entire body started on a tour of the Great Lakes, embrrking at Cleveland and ending at Duluth. Passing from Duluth to St. Paul by rail, the journey was resumed down that river on 'board a Government boat and continued to Memphis, the President joining the party at Keokuk. After the Memphis convention most of the mem- bers of the commission proceeded to Kansas City, and from that place made a tour of inspection down the Missouri River to its mouth. In these various tours, covering thousands of miles, daily meetings were held, at which Govern- ment engineers and other experts were examined and much testimony taken relative to the conditions and needs of the rivers. 518 INTERSTATE AND FOKEIGN TEANSPORTATION, Besides attending tlie convention at Memphis, the commission was also repre- sented at tlie Irrigation Congress at Sacramento, Cal. ; the Trans-Mississippi Congress at Musliogee ; the Upper Mississippi Convention at Moline, 111. ; at the Atlantic Deeper Waterway Conference in Philadelphia late in November; the recent congress of the National Drainage Association in Baltimore; and the National Rivers and Harbors Congress in Washington, which closed a few days ago. On November 2b the commission again convened in Washington and has ever since been busy considering its recommendations. The President in his message to the first session of the Sixtieth Congress stated that he would transmit his recommendations regarding the waterways to Congress after receiving the report of the commission. 'J?he work thus far performed is highly instructive and important, but until the report is formulated and made public what I shall say upon the subject must be regarded as only the expression of my individual views. IMPOBTANCE OF THE SUBJECT. The transportation question is the most important question of the day, and the reason that it has suddenly (and somewhat unexpectedly to many of uS) become of such pressing importance just at this time is because the railway service of the country has practically broken down. Whilst the railway devel- opment of the country has astonished the world, and whilst we have to-day more than half the railway mileage of the world, yet that machinery has proven inadequate to meet the demands of the production of the country. Years ago the railways, were competing with the waterways and practically drove them out of business ; but the efforts of the railways to monopolize the carriage of cheap natural products; carried in other countries by water, 'has resulted In conges- tion of traffic and a virtual breaking down of the entire transportation system, and it is essential that we shall take immediate steps to supplement our railway system by a complete system of waterway transportation. Everywhere else in the world water transportation is an important factor In both domestic and foreign commerce. Germany has, perhaps, the most perfect system of trans; portation in the world. Her rivers have been artificialized from source to mouth and they are supplemented by a system of canal, rail, and ocean trans- portation which, combined, give that country a transportation machinery un- equaled anywhere in the development of domestic and foreign commerce. However much we may rely upon the railways for quick transportation of persons and of products, it is clear that the rivers should also be used ; that they should be properly artificialized ; that their beds should be made stable and their courses sure for the transportation of bulky merchandise. This class of traffic has too long occupied too large a proportion of the available capacity of the railroads, to the detriment of other more valuable products and even to the injury of life and limb. Even the great railway managers — such men as Mr. Hill, Mr. Harrahan, Mr. Finley, and others — are urging the development of the inland waterways as supplementary to the railways. Only a few years ago Mr. Hill is said to have declared that water competition could not exist, and that if he were given the money with which to build a double-track railway ■ beside the proposed enlarged Erie Canal he would turn the canal into a lily pond. It will be remembered, also, that with regard to the Mississippi Biver he declared it could never be made an efficient instrument of conference until its bottom had been lathed and plastered. But the views of these men are changing, and changing because they realize that their railways have been over- taxed, and that they must either expend vast sums of money in their Improve- ment or call In the aid of the waterways. Mr. Hill estimates that It will cost, within the next five years, I believe, five and one-half billion dollars to put the railroads In condition to meet the requirements of the country's traffic. This does not appear to be an overestimate when we remember that the railroads of the country to-day are capitalized at about fifteen billion dollars, and that there is little double track, although every railroad in the country ought to be double tracked. A COMPREHENSIVE PLAN NEGESSABY. I assume that the country will not be disposed to enter upon the work of improving the Inland waterways unless a plan Is presented which will fairly meet the requirements of the whole country. The movement represents a pol- icy, not a project. It seems improbable than any particular river, such as the Mississippi, will be fastened upon and pushed forward without some assurance INTERSTATE AND FOREIGN TRANSPORTATION. 519 that all the other rivers which require improvement v?ill also be taken up under a comprehensive plan, one involving, ultimately, the highest possible de- velopment of all the waterways of the country. It was doubtless with this thought in mind that the President appointed the Commission, and it was doubtless with a view to the formulation of such a plan that he called in the members connected with the Reclamation Service, the Forestry Service, the expert on soils, and the Chief Engineer of the Army. There is practically no difference of opinion, I apprehend, as to the desirability of improving the in- land waterways of the country. The public attention is arrested, and I never knew the people to be more interested or united. The important thing now is to give effective direction to this aroused public sentiment by explaining the true scope of the subject and the importance of scientific legislation for carry- ing out the comprehensive plans which alone will make the undertaking suc- cessful. It is possible that the whole question will not be solved for some time, for the reason that Congress rarely takes the initiative ; it follows public opin- ion rather than leads it. It is fortunate, therefore, that these questions are now being discussed in the various conventions and conferences held through- out the ceuntry, and it is important that every man who has a thought of value upon the subject should express it. SCOPE OF THE WORK. It is impossible to enter, with hope of success, upon comprehensive plans for the improvement of our inland waterways without taking into consideration the related questions. of forest preservation and restoration, of the irrigation of arid lands, of the reclamation of swamp lands, of bank protection, of clarifica- tion of streams, and other kindred matters. It is necessary to preserve the forests of the country from the destruction which threatens them, not only beicause our timber supply is diminishing but because forests are natural conservators of moisture and aid in the gradual distribution of the waters to the streams and rivers that flow into the lakes and the ocean. When an area of land is denuded of its forests, the waters falling upon it rush off in torrential streams, causing destructive floods and soil waste ; but the forest absorbs moisture like a sponge and gives it out grad- ually to the springs and streams through the season of drought, thus aiding in the maintenance of a stable channel. So also with the question of the irrigation of the arid lands on the head- waters of our inland rivers. The cultivation of the vast areas on the upper reaches of the western tributaries of the Mississippi involves the construction of great reservoirs for the storage of water, which is caught while the snows are melting and later on let out through canals upon the plains to meet the demands of the growing crops. These fertile plains drink up the moisture and become themselves great storage basins which return the water by seepage at the time when it is most needed for the maintenance of a channel in the nav- igable rivers below. Thus, both forestry and irrigation are essential to the prevention of floods and of soil waste and to the maintenance of a stable channel for navigation, to say nothing of the vast money value or the great sum of human happiness in- volved in the possession of great forests and vast areas of productive irrigated plains. For the purposes of navigation it is of the very highest importance that there should be a stable channel, one of standard depth ; not a variable channel, 40 feet deep at one time and 1 foot at another ; not a channel deep in one place and shallow in others, owing to the interposition of shoals and quick- sands ; but one of standard depth, which will accommodate vessels of standard draft, just as there is a standard gauge for railroads. Anything which will retard the flow of the water during the period of flood and make it available in time of drought will, of course, increase the stability of the channel. And thus it is that the questions of forestry and irrigation become of first impor- tance in connection with the problem of the inland waterways. Few of us realize as we ought that the soil of our continent is being washed away and that the bottoms of the navigable rivers themselves are drifting slowly into the Gulf and the ocean. The trouble with the passes at the mouth of the Mississippi is that a great delta has been built up there, like the delta upon which the city of New Orleans stands, where there is now a depth of 1.200 feet of alluvial soil which has been deposited by that river. It is net 70342— PT 10—16- 9: 520 INTERSTATE AND FOREIGN TRANSPORTATION. impossible tliat in time tlie Gulf might be turned into a continent \)y this process. Closely related to the ijrevention of soil waste is the matter of the claritica- tion of streams, for every grain of sand in these rivers is a tool of destruction when directed against the river's banks, while clear water cuts the banks but little. The Yellowstone, as its name indicates, is pouring into the Missouri immense volumes of sand, and the Missouri is pouring into the Mississippi vast quantities of alluvial deposits, every grain of which is both a tool for the de- struction of the banks and an obstruction to navigation when deposited in shoals and sand bars. The rivers are also the sources of water supply for domestic purposes to cities and towns, and must be purified and made fit for consumption and kept clear of the filth and sewage of cities. The reclamation of sw:imp lands must also be considered. Their reclamation means not onl\- the addition of large and fertile areas to the productive re- sources of the country, but also the control of the streams themselves. These lowlands lie at the foot of the rivers, whose waters naturally spread out waste- fully in swamps and bayous. The channels fill up and become shallow because there is no current to carry away the .sediment ; but when confined in compara- tively narrow channels by means of levees the water is thereby raised to a higher level and its current is quickened and beci)mes an efficient power for carrying away the sediment and scouring the l")ott(jms of the rivers and thus creating a channel of sufficient depth for the purposes of navigation. So that we have also Inseparably connected with the question of navigation the related questions of swamp-land reclamation and bank protection. All these uses of water are important ; it is difficult to sSiy which is the most important. But, assuming that the transportation of products is as Important as their jjroductioii. it is clear tliat for the proper development of our inland waterways we must embrace in one comprehensive plan the treatment of our forests, the irrigation of arid lands, the reclamation of swamp lands, and other related matters. In doing this, vast water power can be developed, and this power must be saved from the control of trusts and monopolies and care taken to direct its use in the interest of the entire people. It is estimated that, on many of our navigable rivers, the power which can be developed in this way will be sufficient to pay the entire cost of the improvement of the streams. CAK THE WATEKWAYS BE KESTOREB? The outline M'hich Jias been given, based upon the requirements of the Mis- sissippi, River, is merely an illustration of what is required on the Pacific coast rivers and, in less degree, on the rivers of the Gulf and the Atlantic coast. The business question before us is whether we can restore these waterways as a part of the efficient machinery for the country's transportation. Many doubt it. and I must confess that when I went down the Mississippi last summer and traveled for miles without seeing a single boat, I was Inclined to doubt it also. There were a few towboats, but the river towns were neglected, the wharves rotting, and the river fronts largely occupied by the tracks of the railroads, whose trains of cars, running at frequent Intervals along the bants, showed how thoroughly they had absorbed the commerce of the region. These conditions seemed to be due to two causes — the terrific competition of the railroads, which have made a practice of underbidding the waterways during the navigation season and afterwards raising their rates, and also to the failure of the Government to provide and maintain a stable navigation channel. I am also of opinion that the railroads have been somewhat influential in ob- structing legislation for the improvement of our waterways, and I believe they now see that this was a mistaken policy. I have no doubt, myself, about the policy of restoring the commerce of our Inland waterways, but I think It is likely to be a difficult task. One difficulty ivill be in providin.g facilities for assembling and distributing the products to be carried on the rivers. The terminal facilities at the towns on the rivers are now very poor, when they are not entirely in the hands of the railroads, and terminal facilities mean little in themselves unless the connecting lines of rail- road are able and willing to take goods from the waterways and distribute them in the interior. The railroads have, as one of the chief elements of their strategic strength, the ability to assemble commerce in every part of the country and to carry it on cars of standard gauge to any other part of the country ; whereas the river carriers are, at present, circumscribed in their efforts by the limits of the rivers themselves. INTERSTATE AND FOREIGN TRAKSPORTATION. 521 It is therefore necessary that the railroads shall be brought into the most intimate relations with the river carriers, so that the one system will supple- ment and aid, not injure, the other. ^Ye must broaden the area for water trans- portaton, also, so that it can live, if necessary, upon the trade of the towns accessible by boat. The Ohio can be connected by canal with Lake Erie, the Mississippi with Lake Michigan, and so on, and we can connect the entire Mis- sissippi Valley, the Gulf coast, and the Atlantic coast with each other by a system of sheltered waterways along the Gulf and Atlantic coasts, such as was so ably discussed at the Philacielphia conference, consisting of bays, sounds, and rivers to be connected with each other by canals such as the contemplated canal across Florida connecting the Gulf with the Atlantic coast, the canal connect- ing the Carolina sounds with Chesapeake Bay, the canal connecting Chesapeake Bay with the Delaware River, the canal connecting the Delaware River with the Raritan, and the canal across Cape Cod — thus giving a sheltered waterway from the mouth of the Mississippi to Maine, upon which it is possible that boats of standard draft could pass from Boston down the Atlantic coast across Florida to the Gulf coast and up the Mississippi River to the Great Lakes. If these things were done and warfare between the railways and the waterways should continue, there would still be sufficient transportation without the dis- tributing aid of the railways to constitute a very influential part of the com- merce of the country. But it will scarcely do to predicate the improvement of our waterways upon the continuance of this antagonism. A few weeks ago I was quoted in certain Ohio newspapers as saying that the appointment of the Inland Waterways Commission was a part of the " big stick " policy of the President. Besides the fact that I never made such a statement, I believe the contrary to be the fact, and that the President, like the commission, is working for greater harmony — not to stir up antagonism between the different transportation systems of the country. My own view is that the waterway system ought to be largely supple- mental to the railway system and that it may possibly become necessary, in the event of continued hostility on the part of the railways toward the water- ways, to enforce a liberal system of interchange of traffic and use of facilities between the two. Viewing transportation ,in the large, it is of tlie highest importance that its niachinery should be so ad.iusted that the common carrier can make the best and cheapest possible use, in the interest of the public, of all the public liighways — of river, of railway, and of ocean. A perfect system of transpor- tation would involve but one control from shipper to consignee, and our aim should be a system that will create great corporate carriers, under proper regulation and control, owning railway lines from the Atlantic to the Pacific and from the Lakes to the Gulf, owning steamboat liues on the rivers and lakes wherever practicable and economical, and also owning great lines of ocean steamers, so that rates can be made and goods be carried from any poUit in this country to any other point in this country or to a foreign country under a single control and at a single rate, and that rate the lowest one con- sistent with good service and reasonable profit. LEGISLATIVE KEQUTEESfENTS. Having said this much upon the physical requirements of the problem, let us Consider what legislation is necessary in order to carry the undertaking into effect. And here the greatest difference of opinion is likely to exist, for while the country is practically united as to the necessity of undertaking the work, the machinerv for setting it in motion has not been carefully considered and already there Is divided counsel. It has been thought in the past that our Government was incapable of engaging successfully in any great con- structive work. This belief has been entirely disproved by the great works begun and continued under the direction of the Reclamation Service and the Panama Canal Service. In the legislation inaugurated for these public works Congi-ess very v.'isely gave a free hand to the Executive, \^ith the result that by a process" of evolution a great administrative organization has been built up in each service that has been conducted on thoroughly businesslike prin- ciple.'i. In a bill which I have recently introduced in the Senate (Senate bill 500) I have endeavored to follow that beneficent legislation by putting the whole responsibility for the development of the waterways of the country upon the Executive, whoever he may be, conscious that we will never have a dishonest Executive and that his highest pride will be to carry out success- 522 INTERSTATE AND FOREIGN TRANSPORTATION. fully and ecouomically the great charge intrusted to him. To put the Execu- tive in a legislative straitjacket would be sure to result in inefficiency ahd failure. INLAND WATERWAYS FUND. The most important feature of this bill is the creation of an inland water- ways fund, to be used both for investigation and construction. The sum of $50,000,000 is by the bill reserved and set aside as such fund, and the Presi- dent is authorized, whenever the fund is reduced below $20,000,000, to make up the deficiency by issuing and selling bonds up to the amount of $50,000,000. Thus the fund is always kept full, even though Congress should fail to make appropriations. The President is authorized to have examinations and sur- veys made for the development of the inland waterways of the country and for the connection of such rivers with each other, or with the Great Lakes, by connecting and by coastal canals. In order to enable the President to make such examination and to enter upon works found to be practicable, he is au- thorized to appoint an inland waterways commission, and to bring in co- ordination therewith the scientific services of the country, such as the Corps of Engineers of the Army, the Bureau of Soils, the Forest Service, the Re- clamation Service, and the Bureau of Corporations ; and to appoint such ex- perts and boards in connection therewith as he shall deem advisable ; and to fix their salaries until the same are fixed by Congress. The commission is required to make reports to the President and to Congress, or to either body of Congress, whenever information is required. CONSTRUCTION. The next question is as to construction. Under this bill, the President is authorized, whenever a project is determined by the commission to be feasible, to enter upon the immediate construction of the works and to let contracts for the execution of tlie same, in whole or in part; the only limit upon his power being that the necessary money for the payment of the contracts must be in the waterway fund when any such contracts are let. It will be observed that the initiative, both as to examination and as to actual construction, is put in the hands of the Executive Department as an administrative matter. It is clear that the judgment of a board of experts will be very much better than that of Congress upon such matters, and that much delay and confusion will be saved by authorizing the prompt initiation of the work. Otherwise, we shall have difference of view, both in committees and in Congress itself, as to the details of the work, as to the relative im- portance of the projects, and sectional differences will arise, only to be com- promised by concessions harmful to this great movement. Congress should exercise the fullest power of examination and of criticism, and, of course, it has the power at any time to change the organization or to stop the work. All these powers should be exercised whenever wise and necessary ; but the main purpose of the bill is to enter upon the work in a business-like way, just as a private corporation would do, and not to impair its proper administration by unnecessary legislative restraints, or by the breaks and interruptions in the continuity of the work which have proven so disastrous heretofore when Congress has failed to continue to make the necessary appropriations. The bill also provides for cooperation with States, municipalities, communi- ties, corporations, and individuals with reference to such collateral works as have been suggested, and for an equitable distribution of the costs and benefits. AVherever practicable, compensation to the fund is to be secured by the con- veyance of reclamation rights, the lease of water power, and such other means as may be beneficial to the States, municipalities, communities, corporations, or individuals alfected. Equitable apportionment of the work among the sev- eral waterways systems of the country is also enjoined by the bill. It is intended that work shall be commenced contemporaneously among the different systems of the country, so that no section may feel that another section is being favored at its expense. The bill is tentative In its nature and designed to provoke discussion and to aid in the framing of a more perfect measure. AFTER CONSTRUCTION, WHAT? After these waterways are developed they must, of course, be freely used by the people ; but their use will necessarily involve the creation of common carriers under laws either National or State. The business of common carriers is not. INTEESTATE AND POBEIGN TKANSPOBTATION. 523 in these days, engaged in by individuals ; the creation of artificial beings called corporations is necessary for this purpose. It Is clear that the transportation of these waterway carriers will be interstate and foreign, and therefore subject to national regulation and control. The Nation should itself create these cor- porations, and it should supervise their capitalization, control their profits, and make them the obedient servants of the people. At the same time it should protect them against the destructive competition of the railways. The Nation ought not to allow one public servant (the railway company) to destroy another public servant (the steamboat company), both engaged' in conducting trans- portation on the public highways of the country. It might, in order to encourage the operations of the waterway companies, exempt them for a period, as national instrumentalities, froia taxation either National or State. These questions should be taken hold of at the start with a strong hand, and the organization of the water carriers should not be left to the laws of the different States. We should not drift into confusion on this subject as we have regarding our railways. NATIONAL INCORPOBATION OF EAILWAYS. The demand for national action as to water transportation will lead to national action regarding rail transportation and finally necessitate the creation by the Nation of the coi-porations which are to handle both classes of traffic. We mu.st begin to realize that three-fourths of the transportation of the country is now interstate; that our railroad systems are being operated regardless of State lines; that regulation by the individual States operating here and there on the sections of these great systems lying within their boundaries is disjointed, illusive, and illogical ; that complexity, confusion, and insecurity, both to investors and shippers, are the results of the present system. The truth is we have not yet begun to think or act scientifically on this sub- ject, but have allowed ourselves to drift, and the present railway system in this country may be called an accidental growth. The first railroads were built from a point in one State to another point in the same State, and their com- merce was at first purely State commerce ; but the railroad corporations, at first organized for the transportation of State commerce, gradually developed into great interstate systems, composed of many railroads combined under the laws of a single State, and that, oftentime, a State entirely foreign to the region in which the system operates. In this way 6,000 railroad companies gradually came into existence, of which less than 2,000 are now operating roads, the others having been merged into them, and of these 2,000 almost the entire mileage — at least 170,000 out of a total of 220,000 miles — is merged in 8 or 10 great systems, each controlling from ten to fifteen thousand miles of track and operat- ing in from 10 to 15 different States. So' that the growth which began as a purely State growth became, by a process of evolution, a national growth, and it is no longer a question whether the railroads shall be nationalized, for they long ago nationalized themselves, but- merely a question whether we shall continue to permit the lesser sovereignties to assume the function which the Nation has neglected of creating its own agents for the transportation of interstate and foreign commerce. THE NATIONAL POWERS. We can not take the broad' view of the powers of the National Government as relating to waterways and carriers by water and refuse to recognize those powers as relating to waterways and carriers by rail. It is curious how united public sentiment is as to the national control of the waterways and how divided it seems to be as to a similar control of the railways. We have now 46 sovereign States, each absolutely sovereign in all matters of local legislation, and each absolutely subject to another sovereign, the Union of the States, as to all matters intrusted by the Constitution of that Union. The main purposes of creating this sovereignty called the " United States " were two — the national defense and the regulation of Interstate and foreign commerce. The regulation of interstate and foreign commerce involves neces- sarily the selection of the instrumentalities of that commerce, and necessarily also the selection of the public servants that are to engage In such transporta- tion. The Nation should itself create the great corporations which are to engage in interstate transportation by both water and rail. The reason the Nation should frame the incorporation act under which great mergers are to be made is that we must prevent overcapitalization and we must limit their profits. If the Nation is to permit a State to create the public agents which are to do the Nation's business. It should control the legislation of that State; and that, of course, is neither desirable nor possible. 524 INXEBSTATE AND FOBEIQN TRANSPOBTAHON. The purpose of the Constitution was not to eeutralize Kovei-niuent, but to to unionize government where the general welfare was affected. We unionized the quarantine, because we realized that disease had no respect for State lines ; we unionized Irrigation, because nature failed to place the rivers entirely within State boundaries ; we unionized banking, because the interest of the entire people required one money, a common denominator acceptable everywhere, and a system of exchange inviting universal confidence. And all the reasons which led to the unionizing of these functions of government in the past exist in far greater and stronger degree at this time, with reference to tlie unionizing of the subject of transportation. We liave just i-eached the threshold of this great question, and it is very important that we shall start right by the Nation's creating its own public agents, and not permitting an inferior sovereignty to do so. MERGERS KECESSAUY. We should drop excitement, reprisal, and retaliation, and get down to the question whetlier these mergers shail be broken up and resolved into their original elements of purely State railroads, or whether consolidation, properly controlled, shall be permitted. I thing all thoughtful men will agree that the mergers of the railways are necessary to the proper development of the trans- portation system of tlie country, and that tlie fullest powers of combination should be exercised, under proper restraint as to capitalization, rates, and profits. To break uji these mergers and resolve them into tlieir integi'al parts, bounded and circumscribed in their operations by State lines, would be a national calam- ity — if it could be done — as grievous to the public as to the railroads. Leaving out of consideration for the present the combination of competing lines, these mergers have been of immense service to the country, although tlie machinery for bringing them about has been most complicated. Tlie thing complained of is not the fact of combination, but tlie methods of combination, unrestrained by adequate laws and fruitful of overcapitalization, frauds on stockholders and frauds on shippers. It is a universal experience that whenever the laws of a country do not meet its economic requirements the people will violate the laws or evade them. That is what has occurred in the case of the railroads. The ingenuity of all the corporation lawyers of the country has been exercised in- order to pro- mote the combination of single roads into systems. Although these combina- tions were absolutely essential to the best development of the country, the railroads were obUged, in order to accomplish them, to evade the laws. This is as much responsible for the spirit of lawlessness In the management of the transportation interests of the country as any other one thing ; and I am sure that, if this condition exists (and I fear we must all admit that it does), we, the lawmakers, can not escape our share of responsibility. The railway is merely the agent of the Government — the agent of the State as to purely State commerce and the. agent of the Nation as to Interstate and foreign commerce, and the Government has the power to fix the compensation, in the shape of rates on freight or the rate of dividend which the agent shall receive on his investment. It can fix this compensation in the form of tolls, or it can fix it in gross, and all that it must avoid is legislation of a confiscatory nature. I think, therefore, the reasoning is conclusive that, inasmuch as the State can legislate only for State commerce, it can not legislate and ought not to attempt to legislate upon this great question of merger, which is only entered upon for the purpose of promoting interstate and foreign commerce ; but that this can only be wisely accomplished by the action of the Congress of, the United States, In which every State in the Union is represented, and in the election of which every citizen has a voice and vote. I am more and more impressed with the importance of the whole problem and with the necessity of preparing a broad and comprehensive plan for the improvement of our waterways and also for their coordination with the rail- way system of the country. Such a system of waterways, involving ultimately the highest development of forestry, of irrigation, of swamp-land reclamation, of clarification of streams, and of bank protection as efficient means of main- taining a channel for navigation, would relieve vastly the existing congestion of transportation. The perfection of the transportation system of the country will, in my judgment, involve the creation by the nation of common carriers which will own not only great trunk lines of railway, but also lines of steamers on the lakes, the rivers, and the ocean. Combination is an essential part of the economic development of transportation. A perfect system involves, as far as possible, one control from shipper to consignee, and this can only be INTERSTATE AJTD FOREIGN TRANSPORTATION. 525 accomplished by great transportation lines operating regardless of State or national boundaries, which will utilize the railways, the rivers, and the ocean by methods of carriage adapted to each. A COMPREHENSIVE MEASXIBE. It is with such considerations in view, and for the purpose of effectually coordinating the transportation interests of the country, both waterway and railway, that I have introduced in the present Congress another measure known as Senate bill No. 499. In framing this act I have not urged the na- tional incorporation of all railways, many of which lie entirely within the boundaries of a single State, but confine it simply to the construction of inter- state railroads and to the combination of interstate railroads already con- structed into great systems. As to existing roads, this can only be done with the acquiescence of the States. Some States might attempt to withhold their consent, but they would, in my opinion, soon yield when they found themselves outstripped by their more obliging neighbors. There are other ways of pro- ceeding, but I should prefer persuasion to anything savoi-intt of force ; and when I speak of force, I do not, of co\irse, mean actual coercion or the viola- tion of the sovereignty of any State, but the prevention, for instance, of any corporation not under national charter from engaging in interstate transporta- tion—a' course unquestionably within the power of the nation. The bill provides for the incorporation under national law of carriers, whether by rail or by water, engaged in interstate and foreign transportation, with a provision for the acquisition, with the consent of the State aifected, of State-incorporated roads now in existence. The Interstate Commerce Commis- sion is given full control over the capitalization, rate^, dividends, and other incidents of the operation of such corporations. When promoters desire to construct a new line of interstate railroad, or to combine old lines into one system, they will be brought before this body of the highest intelligence, char- acter, and efficiency and present their plan ; the amount of bonds they are to issue and the rate of interest, the amount of preferred stock and the rate of interest, the amount of common stock and the rate of interest, and the ex- penses of promotion ; and, upon the approval of the Commission, the consent of the Nation will have been given only after the most careful scrutiny and con- sideration and the genuineness of the whole transaction visGed by the Govern- ment itself. The bill also lays down a uniform method of taxation by the States, and 1 per cent of the gross receipts is set aside annually as a special fund in the Treasury of the United States for an insurance fund to the employees of the railroads against accident and disability. Dividends in any one year are limited to 7 per cent, except with the consent of the Interstate Commerce Com- mission, and any surplus goes to the betterment of the roads, to the insurance fund, or to a guaranty fund against future inadequacy of earnings, or to extra dividends, if the Commission consents. In fixing rates and dividends, the Interstate Commerce Commission are directed to have regard, as far as possible, to the maintenance of the. par value of the stock. There is a iwovision for the Interstate Commerce Commission to act as a board of conciliation in the settlement of disputes between the railroads and their employees on questions of hours and of conditions and compensation of labor. It is stipulated that there shall be no interference with the local police regulations of the States or with their regulation of purely State traffic or with the jurisdiction of the State courts. We welcome, therefore, the national consideration of all these questions relating to the inland waterwavs because it opens up the greater question of transportation regardless of State lines by both rail and water, and because its very consideration will bring about a fuller exercise of the granted powers of the Constitution. It seems to me peculiarly fortunate that this question of the improvement of the inland waterways has come up and arrested public attention as it has done, because once public opinion is created, legislation will speedily follow. The whole question of transportation in all its branches will be opened up and intelligently discussed, and we may be able to incorporate m our legislation regarding the waterways some much-needed legislation relating to the national incorporation of carriers, whether by water or rail er both, ami thus weaken the opposition of those who would prevent the coordination ot the whole matter comprehensively by indicating to them that the national powers regarding interstate and foreign transportation will not be exercised piecemeal or with reference to the one class of transportation and not with reference to the other. 526 INTERSTATE AND FOREIGN TRANSPORTATION. If a proper system were created, most of the evils now complained of would disappear. A system of transportation could be easily devised which would enlist the best powers of the National Government without infringing at all upon the powers of the States — one which would protect alike the railway in- vestor, the railway employee, the shipper, and the public in their respective rights and at the same time protect the States in all their legitimate powers and change the hostility of the railways toward the waterways into friendli- ness and cooperation in the interest of the entire people. Mr. Adamson. Mr. Chairman, I wish to place in the record an editorial from the Washington Post on " How railroads can raise money." The Chairman. That insertion will be made. (The editorial referred to is here printed in full, as follows:) HOW BAILBOADS CAN BAISE MONEY. The national question of placing the railway.^! of the country in the state of eiRciency which the public interest requires is now claiming attention. The sooner this question is settled the better it will be for the railroads, railroad investors, and all business interests. Fortunately the evolution which has taken place during the last 20 years in the relations between the people and the railroads and between the Govern- ment and these carriers has been in the right direction. While care has been taken of vested rights', the primary duty of carriers to serve the public effi- ciently and at reasonable charge has been impressed upon railroad managers. The days of " the public be damned " have passed from railroad managements forever. The days of watered stocks, of profitable deals between officials at the expense of investors, of manipulation of one railroad by another, and of combines to extort excessive rates from patrons are rapidly coming to an end. Much of the difficulty of obtaining capital needed by the roads comes from the unsatisfactory and unsavory dealings in the past. The railroads need billions of dollars to extend their lines, enlarge their ter- minals, increase their rolling stock, and improve their roadbeds. Bankrupt Europe can not now provide this capital, and even if it could the people of this country who pay the freight are opposed to paying exorbitant commissions to foreign syndicates for floating loans. The railroads must raise their money in this country. They must place themselves unreservedly under Government control in every particular. They will then be entitled to full consideration and public confidence. The books will be open. The public will readily invest in standard railroad stocks and bonds when complete Government regulation is assured. By eagerly seeking Government regulation, by complying with the laws seeking to insure economical and honest administration, by strictly enforcing a regime of open and square dealing with the people, the railroads can obtain ail the credit they need. The Chairman. I wish to make the further statement that the further cross-examination of Mr. Thom will also be postponed to a time to be fixed in the future. Mr. Adamson. Did you itiake any statement about meetings this afternoon and night? The Chairman. The committee will hold a session until 12 o'clock, and then take a recess until half past 3, and it is hoped we will reach a conclusion to-day. Mr. Adamson. And after the recess we will go on and finish with these two witnesses? The Chairman. Yes; we will proceed until we finish with these two witnesses. Senator'EoBiNsoN. That is, with their direct statements < The Chairman. Yes. Mr. Adamson. There will be no cross-examination at all at this t;me. INTERSTATE AND FOEEIGN TKANSPOETATION. STATEMENT OF MR. MAX THELEN— Kesumed. 527 Mr. Thelen. Eeferring just for a moment to the table which was inserted in the record of Wednesday's proceedings, showing the moneys available for dividends both in 1915 and 1916 on certain of the leading railroads, as selected by the New York Times, I have here now a copy of the Annalist, which is a magazine of finance, com- merce, and ' economics, published by the New York Times, under date of December 4, 1916. In that copy there appears under the heading "An exhibit in railroad prosperity " the details of the table which. I presented on Wednesday, showing the exact amount in dol- lars of gross operating revenues, operating income, and balance available for dividends on the common stock as to each of the rail- roads which are shown in the earlier table. The table is rather short, and if I may be permitted, I should like to submit that table as supplementing the other and giving the details. Mr. Sims. Is this statement to go in with what you are reading now? Mr. Thelen. No; I do not care for the statement; I just want the table. (The table referred to is here printed in full, as follows:) An exhibit in railroad prosperity. 1 Company. Gross operating revenues. Operating income. Balance available for common stock. Earned on common stock (per cent). 1916 Increase. 1916 Increase. 1916 Increase. 1916 1915 Union Pacific Southern Pacific Great Northern ■. Lehieh Valley Central Railroad of ^ewYork, Onto-io & ' Western 8104,717,005 152,694,228 81,262,478 47,382,669 33,462,928 8,942,251 91,313,865 105,646,483 133,762,392 69,077,342 57,304,586 19,522,562 102,358,892 7,411,626 11,868,037 5,641,401 11,971,018 111,668,680 60,317,993 69,997,675 48,239,012 12,667,618 10,683,630 63,171,652 817,758,709 22,828,553 14, 099, 620 4,866,607 4,720,673 15,306 10,634,190 14,211,109 16,096,805 6,965,790 14,317,642 1,681,214 11, 233, 832 1,230,373 886,888 864,771 2,491,083 19,862,883 8,711,978 7, 798, 166 8,774,975 459,433 547,734 12,767,578 $40,823,536 48,189,971 32,216,193 14, 289, 591 12,333,033 2,477,862 24,606,706 31,261,194 43,779,993 14,15u,087 25,123,240 5,635,335 36,186,893 1,955,696 2,925,200 1,681,301 3,072,101 28,639,063 18,266,905 21,004,005 14,842,217 3,067,288 3,659,918 21,588,493 510,643,430 12,500,367 6,511,279 1,711,017 2,542,084 336,422 4.722,802 6,544,242 7, 728, 693 3,276,614 9,968,011 821, 448 9,608,865 378,480 264,438 737,038 758,014 4,057,366 8,234,457 8,603,951 4,292,303 519,665 677,158 8,904,696 $34,807,394 30,885,254 27,600,614 7,665,810 15,972,572 983,668 16,274,341 8,109,206 26,271,049 11,807,564 19,704,386 2,214,879 29,846,269 1,081,765 847.739 1,223,733 932,820 11,261,688 14,039,130 6,333,989 6,879,216 1,021,313 891,716 18,822,820 $10,384,775 10,314,935 6,982,344 1,343,995 660,394 371,372 4,365,947 4,250,130 7,948,874 4,948,403 10,214,152 23,794 10,804,350 688,363 522,309 800,380 512,820 2,892,961 9,087,366 7,733,341 4,215,679 719,308 691,285 6,907,053 16.6 11.3 11.1 12.6 21.7 16.9 11.7 6.9 12.3 10.8 16.8 11.9 26.9 9.8 14.0 15.6 8.9 7.4 19.5 5.3 10.9 20.4 3.0 7.6 11.0 7.5 8.3 10.4 19.4 1.1 Chicago & North Western. 8.4 Chicago, Milwaukee & St. Paul 3.3 Atchison, Topeka & Santa Fe 9.1 Illinois Central i Norfolk & Western... I.Chicago, St. Paul., Minneapolis & Omaha 6.3 8.8 11.9 ., Chicago, Burlington i & Qumcy 17.2 |j, Booking Valley fj.Kobile & Ohio i/Alabama Great |!.v- Southern 4.5 6.4 5.4 'J'lBuflalo, Rochester* 4.0 Baltimore & Ohio.... Louisville & Nashville Southern Railway.... Chesapeake i Ohio... Central of Georgia.... ■ Kansas City Southern Northern Pacific 5.5 6.9 ■"4."2 6.0 1.0 4.8 Total, 24 com- panies 1,420,885,823 203, 704, 812 461,679,821 114,342,720 284,568,843 107,146,742 11.7 7.4 ' Does not include Lehigh & Wilkes-Barre Coal Co. dividends of 31,103,654, owtog to litigation. declared, but not received 528 INTEBSTATE AKD FOEEIGN TBANSPOKTATIOST. Mr. Ti-iELEjj. There is also contained in the sam-e issue of the Annalist a very short and interesting table headed " Drift of the Business and Financial Tides," showing the percentage of changes last month as compared with a year ago in matters such as the cost of living, bank clearings, bank loans, steel orders, cotton spindles, etc.; also with reference to 230,447 miles of railroads, the gross earnings per mile, and net earnings per mile. The table shows that there has been an increase in gross earnings per mile by these rail- roads of 19.1 per cent and an increase of net earnings per mile of 25.8, and that this increase is greater than the increase s'hown as to any of the other items in the table, with the exception of three — the cost of living, steel orders, and foreign exports. If I may be permitted, I would like to insert that table also. It is very short. The Chairman. How much space will be occupied by these tables ? Mr. Thelen. They are very short. They will not occupy very much space. The Chairman. Please eliminate all immaterial matter, as we wish to condense as far as possible. The table referred to will be incorporated in the record. (The table referred to is as follows:) Drift of the b'lisiness and fmancial tides. Percentage of change compared with — Cost oflivmg 1 Bank clearings 2 , New York bank loans (average) Price of 60 stocks CommerGial failures Daily average pig iron output (October) Car supply (November 1) Steel orders (October 31) Anthracite output (October) Bittmiinous output (September) Railroad earnings August (230,447 miles of line): Gross (per mile) Net (jjer mile) Cotton spmdles (October) - — Foreien trade (October): Exports Imports 1 Annalist index number, 2 5 days last week, 3 On Nov, 1, 1916, there was a net shortage of freight cars of 108,010, against a net shortage of 61,030 on Oct, 1, and a surplus of 26,239 on Nov, 1, 1915, Mr. Thelen. In my judgment, gentlemen, the railroads are now suffering from a hysteria of pessimism. Although their earnings are. greater than they have been at any other time in their history, and although those earnings ,are still going up, nevertheless the railroads seem to be engaged in the absurd task of trying to ruin their own credit. It seems to me that the time has come for them to remove themselves from the mourners' bench and to get out into the sunshine and attend to the business of running their railroads and of securing the additional cars, equipment, and facilities which INTBBSTATE AND POEEIGN TBANSPORTATION. 529 are urgently demanded by the new business which is constantly being offered to them. On Wednesday, as you will remember, at the adjournment I was addressing myself to the proposition that under Federal incorpora- tion the Federal Government would have the power to take from the States their powers even as to so-called police matters, in so far as carriers engaged to any extent in interstate commerce are con- cerned. In that connection I desire to refer, without reading, to one further authority, a very recent case decided by the Supreme Court of the United States, entitled "Seven Cases of Eckman's Alterative," to be found in 230 U. S., at page 510. In that case it was urged by the owner of the property that it was not constitutionally possible for the Federal Government, even in connection with the regulation of interstate commerce, to enact any regulation which would interfere with the so-called police power of the States. The Supreme Court held squarely the ether way, as they had held in a number of preceding cases. As an illustration of what I mean by police regulations of the States, I may refer to a single case which I think will be illustra- tive. I refer to the laAvs of many of the States of the South with reference to separate coaches for whites and blacks. Those laws unquestionably are enacted under the police power of these States. I am absolutely satisfied under these authorities that the Federal Government, if it wants to, can hereafter, under a plan of Federal incorporation, take from the States the control over these matters in so far as every railroad which is to any extent engaged in inter- state commerce is concerned. The carriers tell us that at present they do not desire to go so far in any plan of Federal incorporation, and I refer to the matter merely on the question of legal power and not on the question of policy. With reference to this general question of legal power, as far as Federal incorporation is concerned, I desire to leave with you iuy general conclusion that under Federal incorporation the Federal Government either will or may take away from the States all powers which the States have in connection with any railroad which is engaged to any extent in interstate commerce, and that, furthermore, this conclusion probably follows as to even purely State rates, State service. State facilities, and so on, if the Supreme Court of the United States follows the intimations which it has three times made in the cases to which I have referred. Of course, no one can tell absolutely until that question is squarely decided, whether the Su- preme Court will follow those intimations or whether it will say that the reasoning of those cases is wrong, and that some better rea- soning should govern. Nevertheless, those of us who are interested in the constitutional aspects of the question must squarely face those cases, because they are there— they stare us in the face. Just a word, now, gentlemen, with reference to some of the aspects of Federal incorporation, apart from the legal questions which are involved. First, under that head what is the plan? As I under- stand it, the plan here presented by the carriers, in so far as they have presented it, is, in a nutshell, that it shall be provided by the Federal Government that after a day certain no railroad shall there- 630 INTEESTATE AND FOREIGN TEANSPORTATION. after engage in interstate commerce unless it shall have secured from the Federal Government a Federal charter. This plan is to be com- pulsory, as distinguished from voluntary or elective. The consent of the States affected is not to be secured. It is not proposed initially to reduce the number of railroad corporations. If there are at pres- ent 6,000 railroad corporations in the United States, as was sug- gested the other day, then under this plan there will be 6,000 Fed- eral railroad companies to take the place of the 6,000 State railroad companies, although there was a suggestion made that thereafter some arrangements might be made by which these railroads could, if they so desired, consolidate; but I think the attention of the com- mittee should be drawn to the fact that, in the first instance, there is not to be a diminution in the number of railroad corporations. Furthermore, any advantages which the State railroad corporation at present has under its charter are to be retained to that corpora- tion; but there is absolutely nothing said with reference to the ad- vantages which the States may have under those same charters or with reference to the powers which the States may have reserved to themselves under such charters. Now, with reference to a few special features of this plan. First, the purpose of the plan. The carriers come here with the avowed purpose to use the instrumentality of Federal incorporation to take away from the States practically all the power which the States have over their railroads. We must assume that the railroads will be diligent and persevering in carrying out their plan, and that through this agency they intend ultimately to accomplish theii- avowed purpose. Secondly, stocks and bonds. Under this plan, as thus far pre- sented, it is contemplated that the new Federal corporation shall take over the existing State corporation, subject to its entire indebt- edness, so that there will be no diminution in the amount of bonds or in the fixed obligations. Furthermore, it is contemplated that the new Federal corporation shall issue to the stockholders of the existing State corporation shares of stock equivalent in amount to the entire outstanding stock issue of each of these State corporations. If there is any water in that stock the water is to be perpetuated, not by permission of the Fed- eral Government but by compulsion of the Federal Government. Let us look into this matter just a moment. The Federal Govern- ment says to each of these State railroads : " You can not go on doing interstate business unless you do what we tell you ; you must take out a Federal charter, under a certain plan which we now pre- scribe, and one of the elements of that plan is that the new Federal corporation must issue to the shareholders of the State corporation capital stock equivalent in amount to the outstanding capital stock of the State corporation." Therefore, we have a situation in which the new securities will be outstanding under force and compulsion of the Federal Government and not as a matter of choice. Gentlemen, is this the real purpose of their plan of Federal in- corporation? Are they trying to establish, through direct compul- sion by the Federal Government, an amount of securities which they will later use, not merely for the purpose of claiming higher rates but also, when the Government comes to take over their property, for the purpose of securing higher values for those properties? INTERSTATE AND FOREIGN TRANSPORTATION. 531 That is a matter of most serious and momentous consequence, and I am certain that each member of the committee will give the most careful consideration to that part of their plan. I want to add at this point that, entertaining, as I do, the most pro- found respect for the witness who testified here on Thursday, Hon. William J. Bryan, and although agreeing to some considerable ex- tent with the views that he expressed, nevertheless, it is entirely im- possible for me to agree with his contention that justice will be done to the railroads if the securities are scaled down to the point of estimated reproduction cost, new, of the railroads. All railroad commissions which have had experience in their various States know that there is many and many a railroad which, either because of lack of wisdom in its construction or because the traffic which it was built to serve has diminished, or for some other reason, is not worth anywhere near the cost to reproduce that railroad new. I have in mind a case to which I shall refer a little more in detail later— a railroad incorporated under the laws of California, which cost something over $81,000,000 to construct originally, which would cost more than that to reproduce to-day, which issued $75,000,000 of bonds, $75,000,000 of stock, and about $25,000,000 of other in- debtedness, and which, the other day, was sold at a receiver's sale for, $18,000,000; and on the basis of the earnings of that road now and prospective, that is all the road was worth. Now, if in that case you say that the fair value of the property is its cost to reproduce it new, you are saying something which, commercially and legally, 1 say is not true; so 1 suggest that very careful consideration be given to that point in working, out the problems which are now be- fore the committee for consideration. The suggestion of the carriers that this particular difficulty may be met by issuing stock without par value, although it sounds well, in my opinion does not solve the problem at all. One of the great diffi- culties financially in which many of the railroads to-daj find them- selves, is that the bonds were sold at a discount and that the moneys put into the railroad were secured solely from the bonds which were sold to the public, the railroad financiers and executives themselves putting in none of their own money, by the purchase of capital stock. In addition, large amounts of capital stock were issued without any consideration. Now, what is the situation? We have, in the first place, in such cases very little, if any, equity left, over the fixed obligations, to represent the stock. We have either no equity at all, or only a very small equity against a very large amount of stock. Merely issuing stock without par value is not going to increase by $1 the amount of the outstanding equity available for the stock ; neither will it increase by $1 the earnings of the rail- road. It will absolutely not solve that problem. It will not make it easier for the railroads to finance themselves, as they claim they should be, and as we know they should be. So that my thought with reference to that particular proposition is that it will not solve the problem at all. Third, litigation. I have already referred to the very large amount of htigation which inevitably must ensue, in case this plan of the carriers for Federal incorporation is put into effect. I shall not go into the matter further, but suggest it at this point. 532 INTERSTATE AND FOREIGN TRANSPORTATION. Fourth, the necessity. What is the necessity for this Federal incor- po'ration plan ? Counsel for the railroads has frankly admitted that it is possible for Congress to do everything under the commerce clause without Federal incorporation which they can do with Federal incorporation. Then, why the necessity of going into this matter? Wliy the necessity of doing something which apparently is not of prime importance, but which, nevertheless, will create all kinds of dangers and difftculties? Finally, under this head, the ultimate effect of the plan. The carriers in proposing this pla,n say that they will surround their Federal iftcorporation with many qualifications, limitations, and reservations of power, so that the States shall be secure in those powers which should remain to the States. But, gentlemen, this Congress can not bind the next Congress, nor the Congress after that. It might be very easy, even though a statute were now passed con- taining all these qualifications reserving power to the States to have the next Congress come along and take a pencil and strike out half a dozen words or so, and absolutely undo what this Congress might have intended. If the door is once opened, I believe, gentlemen, it will be very diiRcult to close it later. Bearing in mind the avowed purpose of the carriers to use this instrumentality for ultimately taking away from the States practi- cally all their poAt^ers over railroads, I think it is not difficult to look ahead just a little into the future, and to see how when once the backbone or framework of this law has been prepared and passed, and when the States have been relieved of their power under their own charters over these railroads, it will be very easy later, when you who understand the situation may possibly be in other fields of activity, and when others who may not be so familiar with the situation may be here to have the plan put over completely. Gentlemen, it is not for me to suggest to you what course should be pursued in this matter. It is my duty simply to present to you the facts as I see them, and it will be for this committee and this Congress to take such action with reference to Federal incorporation as you believe to be wise and patriotic. This concludes what the national association desireg to present at this time on the subject of Federal incorporation. I shall address myself now to the general claim of the carriers that their impaired financial credit has been caused by public regulation, and particularly regulation by the States. I listened attentively to Judge Thom's very able argument, hoping that he would present some detailed facts in substantiation of his general claim that the action of the States has impaired the financial credit of the carriers. Thus far I have listened in vain. We have, thus far, nothing but the general charge that the claim made is true. If I may analyze and dissect the argument just a moment, it amounts to this : First proposition, regulation of the railroads by the States is a fact. Second proposition, impaired railroad credit is a fact. Conclusion, therefore regulation by the States has caused im- paired railroad credit. Gentlemen, that is as clear a case of logical fallacy as I have ever run across. If you find two facts existing side by side contempo- INTEESTATE AND FOREIGN TRJ^NSPOKTATION. 533 raneously and you want to show that one fact is the cause of the other, it is not suiRcient to make the general assertion that that is the case, but it is necessary to go further and to present convincing evidence to show that the casual relationship actually exists and that some other fact may not be the cause of the particular fact whose cause you are trying to ascertain. In this particular instance we claim that the railroads have made an entirely wrong analysis of the situation. We claim that the facts which they say are the cause for their impaired financial credit are not the cause at all, and we claim further, and hope that we of their impaired financial credit, in so far as it exists, is something to which they have not called to attention at all. When we examine the real causes, we shall do so by reference to page and volume of the record, and hope to satisfy you on that point. The first thing which the railroads, the boards of trade, the cham- bers of commerce, the bourses, and others who are working with the railroads say in this matter in their speeches, addresses, lectures, orations, newspaper articles, magazines, and other sources of pub- hcity is always to refer to the 49 masters. Now, gentlemen, I took this matter seriously when I first heard of it. I at once examined the railroads in California to find out how many of them were subject to 49 masters. I found that of 61 steam railroads in California 56 run exclusively in the State of California, so that as to those 56 there are only two masters, one the State of California and the other the Federal Government, instead of 49 roasters. Going further, I found that of the other five railroads which run beyond the State of California, three of them run through three States, whereas two of them, the Southern Pacific and thu Santa Fe, run through 10 or 12 States, and I found, gentlemen, that the Southern Pacific and the Santa Fe, which run through the most States and which are subject to the most masters, are the most pros- perous. I then went further and assiduously examined all the railroad maps which I could find, both in California and here in Washing- ton, trying to find the railroad which has 48 masters. I must say to you frankly that, although I have tried perseveringly, I have not as yet found the railroad which runs through 48 States. In fact, the most States through which any railroad runs, as far as I have been able to find, is 15 or 16. But after I had gone thus far I was told after all not to take this matter too seriously ; that this languag'* about the 49 masters is simply language to tickle people's ears ; that everybody who uses the language uses it in that sense; and that it is not necessary to give any further consideration to that matter. So, with considerable relief, I pass it on. Judge Thorn, in his very able argument, presented to you per- suasively what I believe to be, although interesting, a very novel theory. " He termed the theory "A right of the States." Concretely that theorv amounts to this': That the State of Georgia has the inherent, constitutional right to have the Federal Government come along and take awav from the State of Alabama all the powers which the State of Alabama has over her own railroads, because the State of Alabama might use those poAvers so as to hurt the State of Georgia. And conversely, that the State of Alabama has an equal constitutional rig-ht to have the Federal Government come 534 INTERSTATE AND FOREIGN TRANSPORTATION. along and take away from the State of Georgia all the powers which the State of Georgia has over her railroads, because, forsooth, the State of Georgia might do something to injure the State of Alabama. Now we have taken care of Alabama and Georgia. We have the powers of both those States in the Federal Government, and then, by extending over the Nation, the argument proceeds that every State of the Union has the inherent, cherished, constitutional right to have the Federal Government come along and take away from that State its power over its own railroads. That, in a nut- shell, is what this argument boils down to. I am somewhat consoled by the fact that nowhere in the decisions of the Supreme Court of the United States, from the beginning of this Nation to the present time, has any member of the Supreme Court ever held that by reason of any such argument the Federal Government has the right to step in and take away from every State of this Union its power to regulate its railroads. This cherished right, this constitutional right, slept like the fairy princess of the days of old, on and on from the foundations of the Government until, on June 25, 1915, there was delivered from the State Bar Asso- ciation of Tennessee, at Chattanooga, a very able and interesting address by Alfred P. Thom, the discoverer of this theory, and the fairy princess was then for the first time revealed to an astonished world. As I say, gentlemen, my only solace is in the decisions of the Supreme Court of the United States. That court has never held, and, in my judgment, never will hold, that that theory is sound. I have feeen very much interested by the position here taken by the carriers that their every act is in the public interest. They come here as the champions of the public. I do not quite understand, if that is true, where the representatives of the people of the States, who hold official positions in the States and who assumed they had the right to speak for the people of the States, stand. I never like to see a man's hopes raised higher and higher, and then see them^ suddenly dashed to the ground. I always have a kindly feeling for a man of that kind, and I have a kindly feeling for the counsel of the railroads here, and I do not want to see his hopes dashed to the ground. I want to say at this time, publicly, so that all men may understand, and so that there may be no false hopes for the future, that the counsel for the railroads is not under pay from the public ; that there is no implied assumpsit on the quantum valebat basis, or any other basis, by which hereafter counsel for the railroads can hope to receive a retainer from the representatives of the public for what he is doing before this committee " in the public interest." Just a word, now, gentlemen, as to certain general charges which have here been made against the States. The first charge is tiiat the States cut railroad rates down to the point of confiscation, and that that is the cause of impaired railroad credit. It is somewhat difficult, when one bears in mind that only 15 per cent of all the railroad traffic in the country is State traffic, to conclude that the mere difference between the point of confiscation and a reasonable rate would be sufficient to plunge these railroads into their financial difficulties. In this. respect, gentlemen, as in all others, we call for a bill of particulars. We call upon the railroads to show by page and volume of the record where States have cut rates down to the point of confiscation. So that the matter may be perfectly clear INTERSTATE AND FOEEIGN TKANSPOETATION. 535 and that there may be no misunderstanding, and illustrating what 1 mean, we ask the railroads to take my own State— the State of California— and to go through every decision which the Eailroad Commission of California has rendered with reference to railroad rates, and to point out, not in generalities, but by specific reference to page and volume of the record, where we have ever reduced rail- road rates to the point of confiscation, and then let them do the same for the other States of the Union. So far as my own State is concerned, although we have reduced railroad rates there to the amount of about two and one-half million dollars a year, those reductions have been accepted by the carriers as jbeing just and reasonable. It is here urged that the States are everlastingly bickering among themselves ancT that they 'have a habit of reducing their own rates so as to_ discriminate against interstate rates. Gentlemen, if that is true, it is a condition that ought to be remedied. The Supreme Court of the United States, has remedied that condition in the Shreveport decision. We shall have more to say later about the Shreveport decision, but my only thought at present is to suggest to you that that particular situation has been taken care of by the Supreme Court of the land, and that it is not necessary to give fur- ther relief in that conn.ection. Referring again just for a moment to my own State— we all of us apply these generalizations to the specific facts of which we have knowledge so as to test them — in that State within the last five years, although many changes have been made by order of the commission in railroad rates, there has only been one single instance in which it was even suggested that an order of our commission discriminated against interstate commerce, and in that case those who made the suggestion did not go into court, and the rates are now in effect. With , reference to security issues, certain cases have here' been cited— three of them, I believe— in which it was alleged that the States had acted unwisely or, unfairly in connection with security issues, i am not familiar with the facts of two of those cases, but I will, say this to you, gentlemen, that if there is anything wrong in the regulation by the States of security issues, we are willing and anxious that it be made right. . In fact you will find the commis- sioners of the various States of the Union among the strongest advo- cates of action by the Federal Government in this field of security regulation. It is true that many of the States have entered this field, but we have done so because the Federal Government did nothing. In the absence of action by the Federal Government, many of the forward-looking and progressive States of the Union have done what they could in their way to prevent further excessive issues of securities and to see to it that the public interests are pro- tected in consolidations, mergers, leases, and so on. Whatever action, in the judgment of this committee and of this Congress is necessary in connection with control of security issues by the Federal Government, whether it is concurrently with the States, or whether it be exclusive, in my judgment, ought to be taken, and when that action is taken, no one will applaud the action more heartily than the commissioners of the various States of the Union, 'because we think it ought to be done. T0342— PT 10—16 4 536 INTEESTATE AND FOREIGN TRANSPORTATION. Gentlemen, in view of the charges the railroads have here made against the various State commissions, in view of the intimidations that the State commissioners are not acting wisely ; that they are not acting honestly; that in certain cases they have been narrow; that they have been selfish ; that they have been bickering ; that they have been unpatriotic, we feel that frankness with this committee requires that we present to you a few pictures of some of the typical State commissions of the country actually at work, so that you can see what work they do and how they do it, and that you then will be better able to judge whether that kind of work by that kind of com- missions ought to be left to the various States of the Union. As the first bird's-eye view which we shall submit, and I shall do it in an unskilled and sketchy way, I desire to present to you, gentle- men, the picture of the Railroad Commission of California in action. The Railroad Commission of California was created by the con- stitution of 1879. At that time it had three members who were elected from three separate subdivisions of the State. Their terms were for four years. By the constitution itself the commission had power to establish the rates of railroads and to supervise their sys- tems of accounts. Practically nothing was done between 1879 and 1911, for reasons which, I think, it is not necessary to go into at the present time. They are a matter of public history. But in 1912 adequate regulation and supervision of railroads and other public utilities of California commenced. The constitution was amended so as to provide that the commissioners shall be appointed by the governor and that their terms of office shall be six years, one going out at the end of two years, two at the end of four years, and two at the end of six years, with six-year terms thereafter, so that there shall be continuity in office. The public-titilities act was passed under these constitutional changes. That is the act under which the commission exercises its authority. The public-utilities act defines the classes of utilities which shall be subject to control by the railroad commission. These classes include railroads, both steam and electric; street railroads; ex- pre^ companies, car companies; pipe-line companies; water, gas, electric, telephone, and telegraph companies; water carriers; wharf- ingers; and warehousemen. The commission has no authority over publicly owned utilities, nor has it complete authority in some of the cities of the State with reference to privately-owned utilities. During the year ended June 30, 1916, the following utilities of various classes filed reports with the commission. I go into this matter simply so that you can see the scope of the commission's work : Steam railroads, operative-l 48 Steam railroads, lessor 13 Steam railroads, under construc- tion 4 Electric railroads, operative 35 Electric railroads, lessor 2 Express companies 3 Car companies 2 Water carriers 18 Electric companies 91 Gas companies 35 Gas and electric companies 17 Telephone companies 114 Telegraph companies 3 Telephone' and telegraph com- panies 7 Water companies 329 Warehousemen 183 Wharfingers 13 Total 91T HJTEESTATE AND FOREIGN TKANSPOETATION. 537 Over these various classes of utilities the railroad commission exerts complete and adequate authority. It has power to fix their rates, their rules, and their regulations; to regulate the quality and standards of their service; to regulate their equipment and their facilities and the safety of their construction and operation; to examine and prevent accidents ; to regulate their systems of accounts ; to regulate the issue of stocks and bonds and other securities by all these classes of utilities; to regulate their sales, leases, mortgages, consolidations, and encumbrances; and to pass on applications for certificates of public convenience and necessity. With reference par- ticularly to the railroads, the commission, in addition to these gen- eral powers, has specific power to establish joint rates and through routes; to secure reasonable facilities for the prompt and efficient discharge by the railroads of their duty with reference to the trans- fer of passengers, freight, etc. ; to require the construction of physical connections between various steam railroads and between steam and street railroads; to order the construction of interlocking plants; and to pass on all matters affecting the safety of grade crossings. With reference to the organization of the commission, the com- mission consists of five members, as I have indicated. For the efficient discharge of its duties the commission has provided various departments. There is the secretary's office, which attends to the general office work ; the legal department, which handles all the com- mission's cases in court; the rate department, consisting of a rate expert and assistant rate experts, who are trained in the construction and operation of railroads and express companies, water companies, and other common carriers ; the engineering department, a very large department, consisting of a chief engineer and a number of assistant engineers, who have control not merely over all engineering mat- ters 'referring to the railroads, but also engineering matters, rates, service, etc., of gas companies, electric companies, telephone and telegraph companies, and water companies. We have an auditing department, which supervises the annual reports of the various util- ities, audits their books, and. prescribes classifications of accounts. Our stock and bond department, one of the most important of all, has control over the issues of securities bj' all the various classes of utilities. Finally we have a reporting department, consisting of a chief reporter and four assistant reporters. Gentlemen, after these preliminary words, I come now to the actual work done by the commission and the manner in which it is done. The proceedings before the commission are roughly grouped into informal proceedings and formal proceedings. The informal proceedings are those in which some one complains of some action of a utility and makes his complaint either verbally or by letter. They are the cases in which there is no public hearing. For instance, a letter comes in complaining that there are no lights in a certain rail- road depot ; that the toilet facilities of some railroad depot are out of order and are not being attended to ; that a certain grade crossing is unsafe and that some one was killed there, or was in danger of being killed just a few days ago ; that certain trains do not make proper connections ; that this particular passenger was left out at a meeting point, simply because one train pulled' out before another came in — hundreds of matters of that kind. 538 INTERSTATE AND FOREIGN TRAliTSPOETATldN. How are these matters handled? They are handled, where pos- sible, personally by the particular department affected, either per- sonally or by phone. If that is not possible, they are handled by letter. In many cases we send our experts on the ground promptly, so as to interview the parties and get the matter disposed of. During the year ended June 30, 1916, the Railroad Commission of California disposed of 3,212 informal complaints. Of those 687 affected steam railroads, 80 electric railroads, 42 express companies, 32 water car- riers, 653 electric companies, 279 gas companies, 704 telephone and telegraph companies, 669 water companies, 33 warehouseinen, and 3 wharfingers. I shall refer simply to the steam-railroad informal complaints and indicate to you the general character of those complaints. Two hun- dred and seventy-three affected rates, 218 refunds, 130 service, 26 railroad crossings; 2 rules and regulations, 3 safety of structures, 31 loss and damage, and 4 violatioris of law. Without gomg further into these informal complaints, I pass on hurriedly to the other class of proceedings, which are bldssified as formal proceedings. Those are proceedings in which a formal com- plaint is filed against some utility or in which the utility makes formal application for authbrity to do some act, such ag to issue securities or make a railroad .grade ijrossing, or something of that kind. In these proceedings hearings are held. These hearings are held generally before a. commissioner. He goes on the ground. If the trouble is in San Diego County, in the southern part of the State, he goes to San Diegb County, aiid if the ti?ouble is in Hum- boldt County, in the northern part, he goes to Humboldt County, so in each iiistahce the people in the community affected can be present and can see what is going on and express their sentiments. Further- more, these hearings are very promptly set. It is one bf our chief aims, in conducting the work of the commission, that these mattets be promptly heard and promptly disposed of. The findings of faci; of the commission are conclusive. There is a direct review provided to the State supreme court. In a number of instances reviews ha'Ve been taken to thfe State supreme court, but as bearing oh the question of whether or not the action of this State commission has been fair or unfair, I desire to di-aw a,tteiitiori to the fact that over 99| per cent of the decisions of the Eailroad Coinmissidn of Califttrnia in formal cases have gone into effect promptly, without any court action whatsoever. We think that may be fairly taken as indicating the point of vjlew of the public utilities themselves, as to whether or not they are getting a square deal from the State. I venture the prediction that if other Stsites will analyze their decisions, as I have analyzed ours, you will find a very similar condition existing. In fact, gen- tlemen, during the last five years there have been appeals taken ])y the railroads in only three cases in California. In one of those cases the appeal was taken in the Federal court. We went there promptly and demurred and had the matter heard in four days. The court sustained the demurrer of the commission without leave to amend, and that ended the matter. There are two other railroad cases now pending in the supreme ■ court, not involving rates, however. I will say, as far as rates are HTTBBSTATE AND FOREIGN TEANSPOETATION. 539 coR('emed, that no ordei' of the Railroad Commission of California has been overturned. Have the utilities prc«pered, or have they not, under public regu- lation in my State? In connection with that matter I desire to 4raw your attention to the investments which have been made in California during the years 1913 to 1915, inclusive, under public regulation. I shall not read the odd dollars. I shall just read the milUons : Steam railroads $55_ 000, 000 ElMtric railroads 16, 000, 000 Electric companies 56, 000, 000 Gas companies—, 10, 000, 000 Telephone companies 46, 000, 000 Water companies 7, OOO, 000 190, 000, 000 Including certain classes of utilities, not here specified, the general result is that during those three years, under adequate and efficient regulation by the State, there has been 'invested by the public utilities the sum~ of $200,000,000 in public-utility properties in the State of California. The Chairman'. What amount? - Mr. Thelen. $200,000,000, Senator. Now, as to railroad mileage : I have here a table prepared by the auditor of the California com- mission, at my request, which shows that from June 30, 1911, to June 30, 1916, there were constructed in the State of California, under regulation by the State railroad commission, an additional railroad mileage amounting to 1,289.85 miles. Furthermore, that in the year ending June 30, 1916, there were constructed 200 miles of new railroad. Our railroad friends tell us that in the year ending June 30, 1916, in the entire United States, only 1,000 miles of new railroad were constructed. If that is true, California, under as ade- quate State regulation as any State in the Union, claims the honor df one-fifth of that mileage. if. Furthermore, gentlemen, while we still hear ringing in our ears the .eloquent words of counsel, saying that railroad construction has stopped in. the United States because of State regulation, railroad ■builders in California are building railroads under State regulation. I have here a telegram from the Eailroad Commission of California leferring to railroads which are now under construction in the State of California, under State regulation, and I quote from that telegram : The following roads under construction in Callfprnia: 1. California Southern, 30 miles, $600,000. The dollars in each instance represent the estimated completed cost of the railroad. Next, Patterson and Western, 36 miles, $720,000. Next, Hetch Hetchy, 67 miles, $1,800,000. Next, Fresno Interurban, 16 miles, $230,000. Next, Tidewater Southern, 12 miles, $190,000. Next, Mlnkler Southern, 15 miles, $1,800,000. Next, Visalia Electric, 20 miles, $800,000. Next, Los Angeles and Salt Lake, commonly known as the Salt Lake, 4 miles. $250,000. That includes very extensive purchases of property and overhead construction. Next, Indian Valley, 21 miles, $325,000. Making a total of 221 miles and a total of $5,715,000. 540 INTERSTATE AND FOREIGN TEANSPOBTATIOIir. Now, then, gentlemen, to my mind this is proof conclusive The Chairman. What is the total amount? Mr. Thblen. The total amount, Senator, of milage was 221 miles and the total amount of money involved $5,715,000. Now, if it is true that regulation by the States stops railroad construction, why has not railroad construction in the State of Cali- fornia stopped ? We see the construction which is actually going on there. I think the inevitable conclusion must be that there is some other cause than State regulation which is responsible for such a cessation of railroad construction as exists in various sections of the Union. Since I came here I have received newspapers from San Diego County, in the southern part of our State, referring to the fact that another railroad is about to be completed. This railroad is known as the San Diego & Arizona Eailroad. It is to be built from San Diego eastward, partly through Lower California, thence back intothe State of California to Arizona. For some time, due to the- war in Europe, which shut oflf the source of money supply, this railroad has been in a period of cessation of construction, but, according to these news- paper reports, which are substantiated by word from my own com- mission, the completion of this railroad has now been financed through the Southern Pacific Co., one of our California lines, and 40 miles, being the intervening gap, will now be completed at an ex- penditure of $5,000,000 of additional money. In the old days of the seventies railroad men dreamed a dream of the. Texas Pacific Railroad, to be constructed from Texas west- ward to tidewater at San Diego Bay, in California. During an absence of regulation that dream remained a dream. But to-day, under regulation, that dream will come true and finally the last link in that railroad from Texas to San Diego, Cal., will be completed under regulation by the Railroad Commission of the State of Cali- fornia. It is my desire now to take the four leading interstate railroads of California and to point out to you what the specific effect has been on these railroads of regulation by the Railroad Commission of California. Before passing on, however, to the consideration of each of these four railroads, I desire to draw your attention to the extent to which railroad depots have been built in California, again, under State regulation. During the last few years, subsequent to January 1, 1911 a total of $2,105,000 has been invested by the railroads in Caliromia in the construction of new depots. The Santa Fe has built a beautiful new depot in San Diego costing $300,000. The Southern Pacific has built magnificent depots in San Francisco cost- ing $1,000,000 and in Los Angeles costing $690,000. Other smaller depots have been built in various sections of the State, principally under order of the railroad commission. Referring now to these four interstate railroads and to the effect of regulation by the State on their prosperity : First, the Southern Pacific Co. That is our largest railroad. It has a mileage in California of 6,302.53, being approximately one-half of the entire railroad mileage in the State. Gentlemen, I want to present to you two pictures. I want you to contrast those pictures and then to say whether it is true that State INTERSTATE AND EOEEIGN TEANSPOETATTON. 541 regulation is carried on in a spirit of punishment or in a spirit of vindictiveness. For over 30 years the Southern Pacific Co.. corrupted the political life of the State of California. It controlled the Re- publican Party and it controlled the Democratic Party. It elected our governors, our legislators, and our judges. It held the State in abject political thraldom. No young man of ideals who desired to go into public life in the State of California could do so unless he swore allegiance to the Southern Pacific political machine. Finally, in 1911, a number of men of ideals in the State, mostly yoiing men, and largely graduates of our State university, decided that the time had come to put a stop to that sort of thing. Led by the man who since then has become governor of the State, these men waged the hottest political fight that has ever been waged in the State of California, and they kicked the Southern Pacific Co. out of politics. Since then the railroad has been out of politics and has attended to the business of running its railroad, and has done it mighty well. That is the first picture. Now I want to give you a second picture. Less than three years after that the Southern Pacific Co. was before the Railroad Commission of California in a contest which involved its very life. The Union Pacific was trying to break apart the Southern Pacific and the Central Pacific in such a way as to break loose the tracks, the rights of way, this moles, and all other property of those two companies, the Southern Pacific and the Central Pacific being owned by the Southern Pacific. If they had been successful in that plan, the Southern Pacific would have been left to its southern route and the Southern Pacific's financial prosperity would have been very seriously interfered with and' the railroad would have suffered the heaviest blow that it ever suffered in its entire history. The matter came before the State Railroad Commission of Cali- fornia. It there developed that if this segregation into two distinct and separate parts were brought about that not merely would the Southern Pacific Co. have its life destroyed, or at least seriously threatened, but that the people of California would have to pay higher rates and they would have to endure poorer service because of the breaking apart of these railroad facilities. Gentlemen, the very men who only three years before kicked the Southern Pacific out of politics in the State of California at that time saved the Southern Pacific Co. The public officials granted the application, but with such conditions that the proposed breaking apart of the Southern Pacific system was not effected. The proudest day in the life of our State officials was when a number of officials of the South- ern Pacific later came to the Railroad Commission of California and thanked the commission for having saved the railroad's life. Is that vindictiveness ? Is that done to punish ? I will leave it for you gentlemen to judge. Now, just one further illustration. When it came to drawing the public-utilities act in 1911, 1 had the very great pleasure of going over the United States and visiting the leading railroad and public-service commissions, so as to gather all the help we could from their experi- ence and from their statutes, so that in the State of California we might enter upon this work in a constructive way, not to punish any railroad, but to provide for constructive and scientific regulation of 542 INTERSTATE AND FOREIGN TRANSPORTATION. railroads and other public utilities. When that law was drafted, what did we do? We sent a copy of it, before its introduction into the legislature, to every leading ' railroad and public utility in the State, and we said to them, " Gentlemen, this is the proposed statute. Now make your suggestions." We held public hearings, and at those public hearings the representatives of these utilities appeared before us and made their suggestions for changes in the statute. Many of those changes were made. The very night before that bill was finally introduced in the legislature, I remember very well a room at the Capitol where at a long table there were seated about 60 representa- tives of railroads and pT;iblic utilities and two representatives of the public at the head of the table. Again we went over the entire statute, paragraph by paragraph, and listened to their suggestions, adopting those which seemed good. The next day the bill was introduced. Ts that vindictiveness? I dare say you could duplicate that experience in almost every State in the Union. No, gentlemen, the States have not been vindictive. They have simply insisted that there should be adequate, efficient, and honest regulation of these public agencies which are of such tremendous im- portance to the people of the States. There has been no thought of vindictiveness except in the minds of some railroad representatives who, I fear, have not had the closp and intiniate acquaintance with the various railroad and public-service commissions throughout the United States, which I think it would be well in their own interest if they could secure. I desire to insert in the record a few figures showing whether or not the Southern Pacific Co. has jprospered under regulation by these many masters. I have here a statement compiled from the annual reports of the Southern Pacific Co. showing the operating revenues of that railroad, its operating expenses, and its net operating revenue, and its surplus for the years ending June 30, 1912, to June 30, 1916, inclusive. Without reading all the figures in detail, I will read them in round millions : Operating revenues, 1912, $90,000,000; 1913, $95,000,000; 1914, $92,000,000— that was an off year for railroads; 1915, $97,000,000; 1916, $115,000,000. Operating expenses, 1912, $52,00p,000; 1913, $54,000,000; 1914, $55,000,000; 1915, $61,000,000; 1916, $71,000,000. Net operating revenues, 1912, $38,000,000; 1913, $40,000,000; 1914, $37,000,000; 1915, $35,000,000; 1916, $44,000,0.00.' The surplus on June 30, 1911, was $63,000,000. During the period ending June 30, 1916, this surplus increased to $117,000,000. During this period, under State regulation by a numl^er of those 49 masters, the Southern Pacific Co. not merely paid all its fixed charges, not merely paid full dividends on its stock, but also, in addition thereto, added to its surplus the sum of $53,507,618.13. I do not believe that anyone can fairly say that under State regulation this railroad, with these many masters, has been injured. Now, as to the Santa Fe. The Santa Fe is subject to 10 or 12 masters — I do not know the exact number. I believe it is incorpo- rated under the laws of Kansas. It does a considerable business in California. As to the Santa Fe, without going into detail, I wi^ simply to draw your attention to one instance which I think is typical of the financial condition of that railroad. In November, 1915, the Santa Fe sold in New York $10,000,000 of 5 per cent pre- IKTEBSTATE AND FOREIGN TEANSPORTATION. 543 ferred stock at 98^. There you have one of these railroads, with its many masters, selling, not bonds but preferred stock — 5 per cent preferred stock— at 98 J. That fact alone, I think, is eloquent of the financial condition of the Santa Fe. The Chairman. What year was that? Mr. Thelen. That was in 1915, in November. Third, the San Pedro, Los Angeles & Salt Lake Railway, now known as the Los Angeles & Salt Lake. That is what is known as the Clark Line. It was built by Senator Clark and runs from tide- water at Los Angeles through the States of California, Nevada, and Utah, to Salt Lake City. This railroad has had a hard time, due very largely to washouts in the State of Nevada several years ago. I never heard, Mr. Chairman, that those washouts were caused by the Nevada Railroad Commission. Notwithstanding those wash- puts, which necessitated a very extended reconstruction in the State of Nevada, the railroad is gradually pulling itself out. It is now building additional railroad mileage in the State of California and has further mileage .under consideration. In that connection, when the reporter returns the telegrams to which I referred a few minutes ago, I desire to refer to additional railroad mileage which is now under contemplation in the State of California, including certain mileage by the Los Angeles and salt Lake Railroad. Fourth, the Western Pacific Railway Co. There, gentlemen, is a very interesting case and a very instructive case on the question of the real causes of impaired railroad credit. I am going to refer quite a little to this railroad, because I know of no railroad which presents a more interesting story of just why railroads have trouble. The Western Pacific was on© of the Gould Lines. It was con- structed from Salt Lake City, in Utah, westward to San Francisco, in California. Gould wanted to have an outlet to the Pacific Ocean, so he built this line. As those of you who have traveled in the West know, throughout almost its entire extent this railway parallels the Southern Pacific Co. In fact, all through Nevada a strong man with a good right arm could take a stone and throw it from the Southern Pacific right of way to the Western Pacific right of way. There was no economic necessity for the construction of this rail- road. The Southern Pacific was handling the business. The Western Pacific tapped no new territory. It had no feeders. It went into none of the productive valleys of the State of California. It was simply a string stretched across the intervening distance be- tween Salt Lake and San Francisco, paralleling the Southern Pa- cific. What was the result? The inevitable result. Of course that railroad could not make good. The railroad cost $81,869,254. There were issued against it $75,000,000 of bonds, $75,000,000 of capi- tal stock, and $25,000,000 of other indebtedness. The railroad, of course, started in earning deficits the first year, and continued to do so regularly during the succeeding years. The net corporate loss in the year ending June 30, 1912, was $3,281,972.87, and that loss continued in each of the 'succeeding years. Finally the inevitable crash came. The Denver & Rio Grande, which had been guaran- teeing the payment of interest on the' bonds of the Western Pacific, refused longer to be burdened with that payment and refused to pay the interest obligations which were due on March 1, 1915. 544 INTERSTATE AND POBEIGN TEANSPOBTATION.. ■ Receivers were appointed and we had tlie usual receivership pro- ceedings. The road was sold on July 1, 1916, to its bondholders, for the sum of $18,000,000. At that time the rnilroad was earning about $1,000,000, applicable for interest on bonds and for dividends on stock, and $18,000,000 is practically all that road was worth as a business proposition. Here, gentlemen, you have a receivership. You also have State regulation. Does it, therefore, follow that State regulation caused the receivership? That argument is just as logical as some of the other arguments which the railroads have been presenting. The fact is, gentlemen, as far as I can remember, that the Eailroad Com- mission of California never reduced a rate of the Western Pacific. As far as I Imow, the State of Nevada did not do so. The State of Utah has no commission, therefore could not have done so. Never- theless, the railroad was a financial loss. Here you have a clear case, gentlemen, of one of the causes of impaired railroad credit. It is the case of a railroad which is constructed where it is not justified. In cases of that Idnd you have not merely that particular railroad going into the hands of a receiver, but you have that railroad sub- tracting from the revenues which are justly due the competing line, and to that extent you injure also the competing line. In this par- ticular case, the Southern Pacific was strong enough to stand the competition, but in other cases the competing railroad has not been strong enough. Now, let me finish the story of the Western Pacific. When it came to the reorganization, the railroad applied to the Railroad Com- mission of California — it is a California corporation. The stocks of the railroad are now subject to regulation by the State, and we also exercise jurisdiction over the bonds in so far as they affect California. We insisted that the railroad reorganize in' such a way that it would have a chance. We insisted that its organization should be on sound financial lines, and not on unsound financial lines, be- cause if we had let the matter go as it had gone in the past it would only be a number of years before we would have another railroad crash. There was issued in exchange for all the outstanding securi- ties of the Western Pacific, common and preferred capital stock amounting to about $75,000,000. There were no bonds authorized except for new additions, extensions, and improvements. We author- ized the issue of $20,000,000 of new bonds for extensions, additions, and improvements. So we have this railroad starting on its new career with only the fixed charges on the bonds whic^ were to be issued to pay for additions, extensions, and improvements. If dividends are earned on the stock, well and good. If they are not earned, the railroad, at least, does not again go into the hands of a receiver. There you have, gentlemen, a clear case — a case of a rail- road which went on the rocks, not because it was subject to State regulation, but for entirely different reasons. Finally, you have public regulation coming along and insisting that when that rail- road goes out of the hands of the receivers, it shall have a fair start and a chance to make good. I think that is rather an interest- ing study in contrast between what happened before regulation and what has happened after and under regulation. I just want to refer to a few matters which the Railroad Com- mission of California, as typical of other State commissions, has [NTEKSTATE AND POEEIGN TEANSPOBTATION. 545 done in order to help the railroads. The first thin§ we did was done against their will. We kicked them out of politics and we saved them hundreds of thousands of dollars every year by that act. Next be abolished the use of passes. I am credibly informed that the Southern Pacific Co. alone saves $250,000 a year by reason of the abolition of those passes. Next -as to legislation: When bills are introduced in the Legislature of California referring to public utili- ties, including railroads, those bills are generally referred to the railroad commission, and we are asked to pass judgment on them. We do so. If the bills seem to be detrimental to the carriers and to the other utilities and to the public, we recommend that they be not passed, and the legislature generally accepts our recommendations. In that respect, unquestionably, we have been of assistance to the carriers, and they deserve our assistance, because they are part of the public life of the State of California. With reference to relief from the operation of certain laws, we have granted relief to the railroads from the operation of the long and short haul clauses where water competition made such relief necessary. We have granted relief to them in connection with a statute known as the telephone train- dispatching statute, which was aimed' at telephone train dispatching, but which allowed the railroad commission to specify the cases in' which the statute should be applied. We were able to work out the matter in such a way that I believe both the railroads and the em- ployees were entirely satisfied. With reference to car shortage : Every year when car shortage comes we send a notice to shippers, advising them to cooperate with the railroads, because they are just as much involved as the railroads are, and in that way I think we have been of assistance not only to the railroads but also to the shipping public. We have allowed rate increases where they were justified. We are just as ready to do that as to insist on rate reductions. We have told the people of California this many times, and I think they approve of that policy. I think you will find, gentlemen, when the other State commissions present their story, that they will tell you that their attitude is no different in that respect from the attitude of the State Eailroad Commission of California. Whenever it is proper we allowed railroads to take off unprofit- able trains. We allow them to take off caretakers of depots when the business does not justify their retention. We have allowed them in certain cases to abandon operations entirely. We have worked with the railroads these last five years to have more consistent rate structures established in the State. I believe that any California railroad man will tell you that the public author- ities of the State have been of very substantial assistance to them in that connection. We are doing all we can to help the railroads in their campaign for larger minimum carload weights. That goes to greater efficiency of railroad operation, and in the long fun, of course, reacts to the benefit of the public as well as the carriers. Now, just one illustration. This is typical. Last spring we had very severe floods in San Diego County. The floods washed out not merely one of the existing dams but also, to a considerable ex- tent, the rail-road mileage in that county, including, among others, a considerable part of the railroad mileage of a railroad known as the San Diego & Southeastern Kailway — an electric interurban line— 546 " INTERSTATE AND EOREIGN IBANSPOETATION. having one line out into the country east of San Diego aiid another line south of San Diego. That railroad had had a hard time even before the flood. The competition of the autobuSses had severely affected the railroad revenues. They canje to us after the flood and threw up their hands and said, " We do not know what to do ; we do not believe there is any way, we can reconstruct our lines and make them pay; we have had losses before the flood; we >vill have greater losses after." They asked us for our help as to what they should do, and the public authorities of the Stat« sent down to that county two of the very best experts of the railroad commission, one of them our service expert, the other an engineer. They spent a month down there on the job, going over in every detail the con- struction and operation of that railroad, and then rendered their report to the commission as to what should be done. We were able to eliminate considerable railroad mileage whose operation was not necessary, and whose operation had proven expensive. We were able to show the railroad that by running the street cars from San Diego over this system, over the southern portion of it, they would save very considerably over what their expenses had been in connec- tion with the. operation of the heavy interurban cars. As to the other section of the road, the eastern section, we were able to show them that by putting on gasoline motor cars they would be able to operate far more economically than they had in the past operated by steam. The railroad took our advice. They did what we suggested to them, and to-day they are in a more prosperous financial condition than at any time in the last few year's. Other States, typical States, will present to you similar testimony hereafter, so that you can see what they are doing and how they are doing it, whether the work is being well dQii^j whether it is neces- sary, and whether it should continue. Our friends, the railroads, prppose now to practically kill each of these State commissions, to take away from them all of their effective powers over the railroads, and to throw all of those powers into the lap of the Federal Government. It is my judgment, gentlemen, that the people of the United States will never stand for having the local administration of their local affairs taken away from their local representatives and transferred to the General Government at Wash- ington. The carriers, I think, realize that attitude, and so they have tried to meet it in some way. How do they propose to meet it? They propose to create regional commissions. The first proposition was to create five regional commissions. The number has now gone up to 15. . When I speak of regional commissions, gentlemen, I hope that you will bear in mind the distinction which I make in my own mind between two classes of regional commissions. There is one plan to establish regional commissions, to enable the Interstate Commerce Commission to do more effectively the work with which it is now charged, and the additional work, such as stock and bond issues, which may later come to it. That is one kind of regional commis- sion. I am not now addressing myself to that kind of regional com- missions. Tlie other kind of regional commission-^and this is the kind which the carriers here advocate— is a regional commission the purpose of which shall be, after they have rooted out the State commissions, to take the place of that commission, to be superim- i INTERSTATE AND FOREIGN TRANSPORTATION. 547 pbsfed from above f br the purpose of doing the work which the local commission is now doing. It is to that kind of regional commissions to which I shall now address mj'self. How many shall there be? We have had the number go up from 5 to 15. The carriers. I believe, are not quite satisfied in their own mind as to whether 15 will be sufficient. Now, take my own State. I think, gentlemen, you will be convinced from what I have said that if the tremendous amount of work which the Railroad Commission of California to-day does in connection with railroads is to be transferred to the Federal Gov- ernmferit it will be necessaiy to hare one regional commission in the Skte of California. In other words, first tear up the existing com- mission and then superimpose on the State a new regional com- mission. As to how many regional commissiolis there will have to be throughout the country I am not informed. Personally, I doubt whether 15 would be enough. Then they provide that the regional commissioners shall reside in the States. " We are very thankful for that concession, but I think the people of California would rather run their own affairs, through their own commissioners, who do not merely reside here, but who have been raised with the people, than to have some coinmissioner superimposed upon our people from WsiShingtori, although he may reside in California. Frankly, I do not know just -what is going to happen in some of the States of the Union, where the most of the bra,ins and ability is in one of the political parties, if the other political party should be in the as- cendancy at Washington. I fear it will be very difficult in some cases to find in some States representatives of one of the political parties in whom the public will have entire confidence and who will represent the best part of that community. If it is impossible to do that, it will be necessary for the Chief Executive to go to other States and find commissioners and ship them down to those particu- lar States. I am very hopeful that if that is ever done we shall not Have a repetition of our " carpetbagger " days. ITiirthermore, gentlemen, it is not enough to have just thi-ee com- missioners on this regional commission ; it will be necessary for thein to have their rate experts, their engineers, their auditors, their other experts. I think it is very clear, fr-om the illustration which I haye given of the work in California, that the commissioilers alone do not do the work; it is necessary to have a large force of experts — men who can be sent out into the State at a moment's notice to solve these various situations. Hence, if this plan should be accom- plished, it will not only be necessary to have regional commissioners lor each commission, but, in addition thereto, a whole army of em- ployees, all centered in the Federal Government at Washington. Suppose all these objections are overcome. There are still certain objections to this plan which are inherent in it and which can not in any way be overcome. The first objection inherent in the plan is that it is a government superimposed from above instead of being a government growing up naturally from beneath. There is no way that that objection can be met. The second objection is that this plan will be very detrimental to the poor man in the prosecution of his cases. At the present time, if there is complaint in any part of the State, we send a commissioner there ; he hears the case ; the com- plainant does not have to be represented by an attorney; if he has 548 INTERSTATE AND EOREIGN TRANSPOBTATION. not any attorney, we take care of him. If the railroad is not satis- fied with the decision of the commission, it goes to the supreme court in San Francisco. It is relatively easy for people to come to San Francisco from various sections of the State. If this plan of regional commissions is carried through, then there will be an appeal, not to San Francisco but to Washington, because it is to be provided under this plan that there will be appeals taken from the decisions of the regional commissions to a central body in Washington. It is very easy for the railroads to send their men to Washington, but it is mighty hard for a poor man who is on the other side to come to Washington or to send a man here. So that here, further, is an inherent difficulty which you can not get away from if you adopt this plan of regional commissions. Grentlemen, in view of that situation, what is the use ? If you be- come convinced before these hearings are over that the States are fenerally doing their work well, that they are generally trying to e honest about it, that they are generally animated by a desire to be wise in their actions and to be patriotic, what is the use? Why take away from them the work which they are now efficiently doing and throw it into the lap of a Federal bureaucracy? I will say to you also, gentlemen, that if the railroads had the intention of mak- ing all public regulation ineffective, they could not do it in any way better than that which they now suggest — first, to take away the powers from the States which are on the job, and, secondly, to overload the Federal Government in such a way that the Federal Government's regulation will break down. I hope that this is not their plan; but if it were their plan, the method suggested by them would be very effective to accomplish the purpose. That completes what I desire to say at the present time with refer- ence to this general question — whether or not regulation by the States has impaired railroad credit. I hesitate to put my judgment against that of men of the very considerable ability, well-paid men, whom the railroads employ, but I am absolutely satisfied that the railroads have made an entirely wrong analysis of the situation. Their impaired financial credit is not due to regulation by the States; it is not due to regulation by the Federal Government; but it is due to an entirely different cause or set of causes. I propose now, as the third part of my argument or my presenta- tion, to submit to you, by reference to official publications, the real causes of impaired railroad credit. I may say, by way of prelimi- nary, so that you may see exactly what I am driving at, that it is my judgment that the real causes of impaired railroad credit, in so far as such credit has been impaired, are to be found in unwise rail- road construction, in unwise railroad administration not to say criminal railroad administration,, and, furthermore, in excessive issues of securities; and, very particularly, in unsound financial structures which, in the very nature of things, can not produce in the long run constructive results. Now, first, unwise railroad construction. I have already drawn your attention to the case of the Western Pacific Railway Co. That case is typical of other cases in which railroads are built where they should not be built. In those cases we have, ultimately, not merely a collapse of that railroad itself, but you have often very serious im- INTERSTATE AND FOREIGN TRANSPORTATION. 549 pairment of the revenues and, consequently, of the credit of the competing railroads. With reference to other situations, I said to you that I desired to quote from page and volume of official records. I believe that is a better way of presenting a matter than by mere generalizations. I shall try not to take longer than necessary, but there are certain paragraphs from reports of the Interstate Commerce Commission and other official records which I believe should be drawn to your attention. I refer, first, to what is Imown as the " Harriman Investigation," which was conducted by the Interstate Commerce Commission under Commissioner Franklin K. Lane. This report will be found in the Twelfth Interstate Commerce Commission Keports, at page 319. I refer particularly to that part of the report which deals with the Chicago & Alton, and I read now, first, from page 337 of the report. The Chairman. What volume is that ? Mr. Thelen. It is volume 12, Mr. Chairman, at page 319. I hope, gentlemen, that you will understand my purpose in doing this. My sole purpose is to let you see what the truth is. If it hurts, it is too bad; but, in any event, you are entitled to laiow the truth. It would seem rather absurd if a man who apparently had a dis- ease should come to you as surgeons and ask for relief, and if you should proceed to cut off his good right arm when, as a matter of ' fact, the trouble was with his liver or with his appendix. In this case, gentlemen, the railroads propose to cut off the good right arm of State railroad regulation on the plea that State railroad regula- tion has injured their credit, when the real trouble with them is acute gastritis resulting from an overdose of securities which they have not been able to digest. Now, as to the Chicago & Alton, I read from page 337 : It developed during the inquiry that the Union Pacific Railroad Co. in the year 1903 became the owner' of 103,431 shares of the preferred stock of the Chicago & Alton Railway Co., and the commission therefore deemed it im- portant to inquire into the reorganization and capitalization of this company. Prior to 1898 the Alton road had been for many years under the control of Mr. T. B. Blaekstone, as president, and had paid an average dividend exceed- iQg 8 per cent per annum and in addition had expended large sums out of earnings in the improvement of its property. I refer to this as showing the condition of the railroad before the financiers and executives got busy on it. Now, on page 338, re- ferring to the year 1898, it proceeds: About this time Mr. Edward H. Harriman, Mr. Mortimer L. Schiff (repre- senting Mr. Jacob H. SchifC), Mr. George J. Gould, and Mr. James Stillman formed a syndicate to buy this stock and bought it for $200 a share for the preferred and $175 a share for the common, making the total cost of the shares purchased $39,042,200. In about seven years, to June 30, 1906, the outstanding capital indebtedness of this company was expanded from $33,951,407 to $114,610,937, or an increase of about $80,660,000, and there was expended in actual improvements and addi- tions to the property out of this capitalization only about $18,000,000, leaving an increase of its stock and liabilities, without one dollar of consideration, of about $62,660,000, or $66,190 per mile on the 946.66 miles of road owned by the company on June 30, 1906. Then follows a heading, " How this was accomplished." For the purpose of taking up the first-mortgage bonds on the road, amount- ing to about $8,500,000, the making of improvements and additions, and for 550 INTERSTATE AND FOREIGN TRANSPORTATION. other corporate purposes this syndicate placed a $40,000,000 3 per cent mort- gage on the property, which by its terms could be extended and bonds Issued in addition to the forty millions. I invite your attention, please, to the price at which these bonds were sold to these same men. They sold these bonds to the stock- holders — and they were the principal owners of the stock — for 65 cents on the dollar, and as they has acquired substantially all of the stock they obtained nearly all of the bonds. Then there is a show- ing as to the amount of stock which they owned, and the commission then continues: The first $10,000,000 thereof were issued about October 10, 1899, and through the syndicate managers (Kuhn, Loeb & Co.) were sold to Goldman, Sachs & Co., who sold them to. the New York Life Insurance Co. for 96 cents on the dollar. Only $32,000,000 out of the $40,000,000 were sold Mr. BLiMiLTON. How soon after that purchase were those bonds sold? Mr. Thelen. These bonds were authorized, Mr. Hamilton, on September 7, 1899, and were sold to the stockholders on October 10, 1899 ; in other words, one month and three days later. Mr. Hamilton. At an advance of how much? Mr. Thelen. At an advance of from 65 cents to 96 cents on the dollar. Only $32,000,000 out of the $40,000,000 were sold, and the prices the syndi- cate received for the balance does not appear ; but it does appear that Kuhn, Loeb & Co. sold $1,000,000 thereof to the Equitable Life Insurance Co. in 1900 at 92 and $550,000 thereof later at 88 in 1901 ; and the market vajue of the bonds during the years 1900, 1901, and 1902 varied from 82J to 94, and has from that time to the present time varied from 78i to 861. So that the syridi- cate must have reaped a profit on these bonds of about $8,000,000, which could have been and should have been reaped by the railroad company. It is a case of where the financiers bled the railroad company. Some of those very financiers, gentlemen, are among those who are now most vociferous in their claims that the State railroad commis- sions have impaired railroad credit. On page 339 : Out of the 65 cents on the dollar thus realized by the railroad company the principal stockholders voted themselves a dividend of 30 per cent on the com- mon and preferred stocks. Voting a dividend from the sale of bonds ! Of course, every man who has had experience in railroad finance knows that that is abso- lutely against every canon of proper finance. You can not vote yourself dividends out of the sale of securities. The only source from which dividends should be paid is from income. The total dividend amounted to $6,669,180, and as it appears they owned more than 98 per cent of the stock they received nearly all of it. This dividend was not reported to the Interstate Commerce Commission. Tliere was no other money in the treasury, outside of the proceeds of these bonds, with which to pay a dividend. Then, on page-34:0, the following: Furthermore, instead of paying all of the coupons outstanding on the prior mortgage bonds and canceling them, as vi'as contemplated when the $40,000,000 mortgage was made, $973,477 of these coupons were, from 1901 to 1905, carried as an asset in the treasury of the Alton Co., under the head of " Funded inter- est account," and oh June 30, 1905, credited to assets and charged to capital account of the Chicago & Alton Railway Co. In other words, we have here coupon bonds, which represent obli- gations to pay interest on bonds, added to capitai account, thereby IBTTEKSTATE AND FOREIGN TKANSPORTATION. 551 swelling the capital account and apparently the assets of this par- ticular railroad company. The assets and the profit-and-loss account of the company were swollen by this transaction to the extent ot $973,477 ; thus, in fact, turning a debt or obliga- tion of the company, which should have been paid and canceled, into an asset, and capitalizing the same. Then just one or two more references to this railroad on page 341. Keferring to the mortgage made by the Chicago & Alton Railway Co., the commission says : This mortgage, made by the Chicago & Alton Railway Co., covering the stocks of the railroad company, also covered about 34 miles of prospective railroad which the company contemplated constructing and which it was authorized to construct under its charter and organization. But all the bonds were sold, and no bonds were left to raise money with which to construct the line thus contem- plate. Here, then, you have a case of apparently necessary railroad con- struction, which would no doubt be urged by the carriers in amplifi- cation of their claim that it is necessary to secure more funds for additional railroad construction, and through this financial hocus- pocus the bonds which were to be used for this purpose were used for other purposes, and those 34 miles were not constructed. I am not sure whether they are constructed at this day or not ; I can not say positively on that point ; but at this time the funds which should have been used to construct that 34 miles of additional railroad were diverted to entirely different purposes. So that when the new management took hold of the Alton on the 1st of October, 1906, it found that this Hue, in process of construction, had already been mortgaged, the bonds sold, and no funds reserved with which to complete the construction. On page 343, under the heading of "Indefensible financing," is the following : From this brief synopsis of the exploitation of the Chicago & Alton it is evident that its history is rich in illustrations of various methods of inde- fensible financing. First came the profit to the stockholders, arising out of the sale to themselves of $32,000,000 of bonds at 65, which sold for several suc- ceeding years for 82J to 94. Second came the 30 per cent dividend, based on amounts expended from income for improvements, much of It nearly 30 years before and recently capitalized. Third came the pseudo transfer to Stanton, and his contract under which the new company paid $10,000,000 in cash for preferred stock which had cost less than $7,000,000. Fourth came the conversion of 183,224 shares of common stock in the railroad company into 195,428 shares of common stock plus 194,890 shares of the preferred stock in the railway company, part of which was sold to the Union Pacific at 86i a share. Fifth came the sale of the St. Louis, Peoria & Northern for $3,000,000 cash. Sixth came whatever interest the syndicate may have had in the sale to Knhn, Loeb & Co. of $22,000,000 of bonds at 60 cents on the dollar. Seventh came the fee of $100,000 to Mr. Harriman for financing the enterprise. This, analysis is no doubt Incomplete, but it is suggestive. To continue, the Interstate Commerce Commission says: We are told that the methods of the financing of railroads which has pre- vailed in the year 1900 are now obsolete, owing to a higher degree of con- scientiousness among financiers, and, moreover, that the Chicago & Alton should not be regarded as an isolated instance, inasmuch as it was dealt with much as many other roads were at that period. The first of these statements is, we trust, true-; the latter statement is not calculated to uphold the value of American railroad securities. 70342— PT 10—16 5 552 INTEESTATE AND POBEIGN TRANSPORTATION. So there the Interstate Commerce Commission intimates veiy clearly that transactions of this kind, being not calculated to uphold the value of railroad securities, must be regarded as among the mov- ing causes of impaired railroad credit. I have just two further paragraphs, gentlemen, which I wish to read. I believe I should draw your attention to the recommendations which the Interstate Commerce Commission made as a consequence of the exposures in this investigation. The third recommendation reads as follows: The time has come when some reasonable regulation should be imposed upon the issuance of securities by railways engaged in interstate commerce. We are aware that in the construction of new lines of railway, developing new territory, it has been necessary in many instances to sell railway securities at large discount and to sell bonds with stock bonuses, and even in such cases it has many times been difficult to raise the necessary capital. Men will not invest their money and take the risk for small rates of interest. But this principle does not apply to old established railway systems having good credit. Such railways should he prevented from Inflating their secuHties for merely speculative purposes. Railroads should be encouraged to extend their systems and develop the country. It is of the utmost ifaportance, also, t^at rail- way securities should be safe and conservative investments for the public and should yield good and ample return for the money invested. Then comes their final suggestion : Reasonable regulation will tend to make them safer and more secure invest- ments, and thereby benefit not only the railway companies but the public. It was suggested in the opening statement of counsel here that there will be bankers here from the Middle West to testify "that the demand for railway securities in the Middle West is not as brisk as they would like to see it. Here, gentlemen, is one of the causes for that condition in the Middle West. Xext, I desire to refer to a report by the Interstate Commerce Com- mission headed : " In the matter of the receiverships of the St. Louis & San Francisco Railroad Co. and the Chicago & Eastern Illinois Eail- road Co.," decision No. 5933, rendered on January 20, 1914, and to be found in Twenty-ninth Interstate Commerce Commission Report, page 139. Some of the members of the conunittee are no doubt entirely fa- miliar with this case. Nevertheless, in view of the fact that we have presented here an alleged cause of impaired railroad credit which we say is entirely erroneous, and in view of the fact that you have not had drawn to your attention the real causes, I think the record should show a reference to a few of these cases. Senator. Robinson. What is that case? Mr. Thelen. The Frisco reorganization was decided on January 20, 1914, in response to a resolution of the Senate asking the Interstate Commerce Commission to make this investigation. On page 140, I read as follows: Notwithstanding this apparent exhausted financial condition and inability to meet obligations without recourse to further borrowing, the Frisco sold to Speyer & Co., of New York, shortly before the receivers were appointed, $3,000,000 of its general lien 5 per cent bonds, French series, at a price of 78. The dates of such sales were : Apr. 24, 1913 $1, 000, OOO May 2, 1913 1,000,000 May 10, 1913 500, 000 May 14, 1913 500, 000 3,000,000 INTEESTATE AND TOREIGN TEANSPORTATION. 553 This was just prior to the appointment of the receivers. The sale of securities to the investing public through the bankers at a time when every appearance indicated tlip insolvency of the Issuing company invites and vyarrants condemnation of all those who assisted or participated in such sale. Speyer & Oo. should have been awaie of the poverty of the Frisco and of its difficulties in obtaining funds, as they advanced that company on April 24 $725,000 on its demand note and $50,000 on its .lemand note dated April 29, and applied the proceeds of the sale of $1,000,000 of these bonds on^May 2 to the liquidation of the.'je notes. There, gentlemen, you ha^e another case of impaired railroad credit. The sale by the railroad company, through its bankers, of ■additional securities to the public at a time when everybody should ha\e known that the road was on the point of going into the hands of a receiver. We can well imagine that the people who bought these securities will be very slow to invest in other railroad securities. To that extent these railroad executives and these bankers have them- selves created the impairment of railroad credit. On page 142 the commission states its conclusions with reference to the insolvency of the Frisco in the following language : The insolvency of the Frisco may be attributed to various causes. First. Disproportionate capitalization. May I pause just a moment on that, gentlemen? That is^ to my mind, one of the most potent causes of the financial difficulties of these railroads. You have, frequently, the capital which goes into a railrbad secured exclusively from the sale of bonds at a discount. If a man has a horse that is worth $100, and if he should attempt to borrow $120 on that horse, everyone would say that he was erratic, to say the least. You can not borrow more in ordinary business on a piece of property than the property is worth. But here we have railroad after railroad securing its entire funds for the eoinstruction of its property from bonds sold at a discount, so that at the very beginning of that railroad's history you have more face bonds of outstanding than you have value of property. Instead of having these financiers and railroad executives put in part of theil- own money by buying capital stock, it hag been only too often the prac- tice to secure the entire funds by the sale of fixed obligations to the public. In addition to that, large amounts of capital stock have been issued in cases such as those to which I have referreid without any consideration whatever. How does the railroad start, then, in its financial history? It starts, first, with bonds outstanding of a face value in excess of the value of the property, and with a large amount of additional stock issued without consideration. Later on, that railroad needs addi- tional money. How is it going to get it ? It can not sell stock, be- cause the outstanding stock represents no value, and -no person who Imows the facts is going to be so foolish as to buy further stock, which will be diluted over the very little, if any, equity which exists at the time. , n , . . Secondly, they will have difficulty in selling bonds, because the bonds outstanding have a face value already in excess of the value of the property. How are they going to get the money for these additional cars, this additional equipment, and these additional extensions? They are going to have very great difficulty in getting it, and that particular railroad, unless it has very good earnings, is 554 ■ INTERSTATE AND FOREIGN TRANSPORTATION. going to have trouble. When the trouble comes, gentlemen, it will not be due to public regulation. It will be due, generally, in part to the absence of public regulation, which would have insisted on sound financing for that particular railroad at the very outset. Various State commissions, which have jumped into the breach, as it were, while the Federal Government has been inactive in these respects,- have insisted and do insist on efficient financing of all public utilities, including the railroads, and that the financial struc- ture from the beginning shall be sound, so as to avoid the otherwise inevitable crash. It is under regulation of that kind that quite a number of absolutely new railroads in the State of California have started their operations. Mr. Chairman, I have diverted a little from the text, but I thought it a proper place to draw your attention to the tremen- dously important influence which the form or character of the financial structure of these railroads bears on the financial history of these railroads, and on their credit when they need to borrow additional funds. Senator Eobinson. Mr. Chairman, is it the purpose of the Com- mittee to suspend at this point (at the hour of 12 o'clock and 5 minutes p. m.) ? The Ci-iAiRMAiv. No; Mr. Adamson stated that he could not re- main, but suggested that we go on until quarter to 1. Will you be able to conclude your remarks at quarter to 1, Mr. Thelen? Mr. Thei^n. Almost. I have some material which I did not bring and which I would like to refer to. The Chairman. We do not wish to hurry you. Senator Underwood. Mr. Chairman, I understood — ^I was not here at the beginning of to-day's session — ^that the committee had come to the conclusion that after to-day they would suspend these proceedings. The Chairman. Yes. Senator Underwood. And the present witness and other witnesses would be called back to the committee. The Chairman. Yes; for cross-examination. Senator Underwood. I would like to ask the witness some questions before he concludes; and that being the case, why should we pro- ceed now if we are coming back anyhow ? The Chairman. We will not proceed. The purpose was to close with these opening statements and that we postpone our examina- tion of the witnesses until later on. That was the sense of the com- mittee. It is proposed to hear today, if possible, Mr. Thelen and Mr. Brookhart on behalf of Government ownership. Our desire is to conclude the hearings for the present to-day, so we arranged to have a session at half past 3 o'clock this afternoon. Senator Robinson. What is the object of postponing the session this afternoon to that unusual hour? Mr. Sims. The House will adjourn at that time. The Chairman. If it is the sense of the committee that we should take a recess now until half past 3 o'clock, that order will be made. Senator Underwood. I would like to ask the witness, whose state- ment I have been very much interested in, either now or when he comes back — as representing the State commission and being thor- oughly informed on this question — ^that he make a stateinent to the INTERSTATE AND FOEEIGN TEANSPOETATTON. 555 committee as to his views as to whether the commission should have the power to initiate rates or whether they should continue to pass on rates that are initiated by the railroads? Mr. Thelen. I shall give some thought to that question and be glad to give you my views when I am recalled for cross-examination. Senator Underwood. I would like to have you do so. Mr. Hamilton. I understood Mr. Thelen to say that he would not be able to finish without getting some notes that he had not brought with him. Mr. Thelen. I have almost everything here and am ready to proceed now or at half past 3, just as it suits the pleasure of the committee. The Chairman. Can you form any idea how much longer it will take you? Mr. Thelen. Not over an hour, I think. The Chairman. Then, Mr. Brookhart will come on at about half- past 4. Mr. Brookhart, can you tell us how long you desire to oc- cupy? Mr. Brookhart. I should think, Mr. Chairman, two hours. I will read most of my statement in order to curtail it. The Chairman. Then, I think we can probably close this proceed- ing this afternoon. The committee will now take a recess until half past 3 o'clock. (Accordingly, at 12 o'clock and 10 minutes p. m., the committee took a recess until 3 o'clock and 30 minutes p. m. of the same day.) AFTER RECESS. The joint committee reassembled at the expiration of the recess, Senator Newlands presiding. The Chairman. Mr. Thelen, will you proceed ? STATEMENT OF MR. MAX THELEN-^Resumed. Mr. Thelen. Mr. Chairman and gentlemen, this morning I re- ferred to the railroads which are being constructed in the State of California at the present time under State regulation. I think it appropriate to complete that record by referring to those railroads which are now contemplated, although actual construction work has not yet commenced. Eeading from the same telegram to which I referred this morn- ing I find that the following railroads are projected and will prob- ably be built : Panoche Valley Kaiiroad, 52 miles, $1,100,000.- Martinez & Concord, 12 miles, $376,000. Tidewater Southern, 8 miles, $110,000— an extension of an existing railroad. Los Angeles & Salt Lake— another extension of an existing railroad— 20 miles, $1,500,000. . ^ ., Fresno Interurban— an extension of an electric interurban railroad— 5 miles, WOOD. A total of 97 miles, at an expenditure of $3,146,000. I refer to this railroad construction as illustrating my point, that it can not fairly be said that State regulation stops railroad con- struction, in view of the history of what is actually going on m the State of California. 556 INTERSTATE AND FOEEIGST TRANSPOBTATION. It is just possible that there may be some misapprehension with_ reference to the original issue of stocks and bonds by the Western Pacific Eailway Co. That corporation was a California corpora- tion, but the railroad was entirely constructed and all its stocks and bonds were issued before the State provided for control by the State railroad commission over railroad construction and the issue of securities. However, later, when it came to the reorganization, an application was made to the California commission, and the Cali- fornia commission insisted on the type of financial structure to which I referred this morning. It might be well at this point, before proceeding with the Frisco investigation, to say just a word with reference to the advantages of public regulation, as I see them, both to the public and to the railroads. As far as the public is concerned it is, of course, obvious that State regulation of railroads and other utilities means that they have a tribunal to which they may come for the settlement of their troubles as to rates, to sedure more adequate service and facilities, and to secure greater safety both for the traveling public and for the employees of the railroads. No one, I think, doubts the advantages of public utility regulation to the members of the public. As far as the railroads and public utilities are concerned, I am satisfied that there are advantages to them as great as the advantages which accrue to the public. In the first instance, the Government either has or can provide for sound financial structures. When sound finSincial structures are provided it means that there will be stability to the securities of that particular utility. In California, the securities which are authorized by the Railroad Commission of California find a ready market. Some of the leading public utility corporations of California, such as the San Joaquin Light & Power Corporation, the Mount Whitney Power &. Electric Co., and other companies of like character, have recently spM their bonds, under the • authority of the Railroad Commission of California, at prices higher than those at which they were ever sold before. We are told by public utility men that there is no question that the control by the public of the security issues of these utilities is very good for the utilities themselves. Furthermore, Government control, when scientifically exercised, will prevent the construction of needless duplicated property, a matter of very considerable importance. Whenever a railroad is constructed where it is not necessary or whenever a gas or electric company is constructed when not necessary, for the sole purpose of competing with an existing utility of the same character, ultimately the public must pay the bill, and in the meantime the existing utili- ties must suffer. Scientific regulation would eliminate that sort of thing. Furthermore, it has been our experience in California that as the result of regulation of the public utilities, there is an entirely dif- ferent attitude on the part of the public toward these utilities. The people noAV have a tribunal to which they can come to straighten out their dilferences with the public utilities, and the result is that although a number of years ago there was an attitude of hostility on the part of the public toward certain utilities, now the public is satisfied to let the commission settle aU differences. Instead of being hostile to the utilities, the people attend to other matters, and INTEKSTATE AND FOREIGN TEANSPOKTATION. 557 there is altogether an entirely different feeling on the part of the •public. I thought that it might be well at this point to draw attention to some obvious advantages of public regulation, both from the stand- point of the public and the utilities themselves. I think I can say fairly that there is not a single broad-gauge utility in the State of Cahfomia which would go back to the days prior to State regulation. We have been told so again and again hj the public-utilities men. I am satisfied that this is also the feelirig of broad-gauge public- utillity men in all States of the Union. At the time of adjournment I was reading from the decision of the Interstate Commerce Commission rendered on January 20, 1914, in the matter of the Frisco reorganization and was referring to the causes of the financial difficulties of the Frisco as set forth by the Interstate Commerce Commission. These causes are as follows, as appears from page 142 of the record : First. Disproportionate capitalization. Second. The acquisition of new lines. Third. The financing by the Frisco of the New Orleans, Texas & Mexico and other south Texas lines. Fourth. The desire for an entrance into Chicago, 111., resulting in the assump- tion of heavy fixed charges In the acquisition of the stock of the Chicago & Eastern Illinois Railway. Fifth. The sale of its securities at prices so low as to indicate a deplorably weakened credit or an extravagant arrangement with bankers to whom large- profits accrued in the purchase of the bonds and the subsequent sale of same to the public. Sixth. Miscellaneous causes, among which are the payment of dividends upon its preferred stock in spite of its weakened credit and need of money, poor in- vestments and expensive rentals, among which are the investment in the New Orleans Terminal Co., stock in the Klrby Lumber Co., and rentals paid the Crawford Mining Co. You will observe, gentlemen, that in this careful analysis of the causes of the financial condition of the Frisco there is not a single reference to public regulation, either State or Federal. In none of these reports does the Interstate Commerce Commission even suggest that in a single case was State regulation responsible for the financial difficulties in which these railroads found themselves. In practically every case it was their own fault, the fault of the railroad financiers and executives. I could refer further to this report, but I am anxious to keep my promise to finish in an hour. The next report which I have before me is the report of the Inter- state Commerce Commission entitled " The New England Investiga- tion." This report will be found in volume 27 of the Interstate Com- merce Commission Eeports, at page 560. The report was written by Commissioner Prouty. It was an investigation conducted, on the commission's own initiative, into the financial affairs, rates, classifica- tions, regulations, and practices of the New York, New Haven & Hartford and the Boston & Maine. I had marked certain passages, but I shall eliminate them and read only a part of the conclusion of the commission at page 616 : In conclusion this commission desires to call attention to one lesson from, this investigation of national application. I think, gentlemen, you will realize by this time that it is my sole desire in referring to these matters to help you ascertain such facts, with reference to impaired railroad credit, as the experience of the 558 INTERSTATE AND FOREIGN TRANSPORTATION. past has shown us, so that we may act intelligently in adopting measures to cure existing ills. The commission said: No student of the railroad problem can doubt that a most prolific source of financial disaster and complication to railroads in the past has been- the desire and ability of railroad managers to engage in enterpri'ses outside the legitimate operation of their railroads — There we have another cause of impaired financial credit — especially by the acquisition of other railroads and their securities. The evil which results, first, to the investing public and finally to the general public can not be corrected after the transactiom has taken place ; it can be easily and effectively prohibited. In our opinion the following propositions lie at the foundation of all adequate regulation of interstate railroads : 1. Every interstate railroad should be prohibited from expending money or incurring liability or acquiring property not in the operation of its railroad or in the legitimate improvement, extension, or development of that railroad. 2. No interstate railroad should be permitted to lease or purchase any other railroad, nor to acquire the stocks or securities of any other railroad, nor to guarantee the same, directly or indirectly, without the approval of the Federal Government. 3. No stocks or bonds should be issued by an interstate railroad except for the purposes sanctioned in the two preceding paragraphs, and none should be issued without the approval of the Federal Government. I desire to refer now to an investigation conducted by the Inter- state Commission under direction of the Senate into the financial transactions of the New York, New Haven & Hartford Railroad Co. This report is dated July 11, 1914. It will be found in volume 31 of the Interstate Commerce Commission's reports at page 32. I read from page 32 : 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. That is an indictment against the members of my own profession, but we must have the truth, whichever way it cuts. Ordinarily in investigations of this character evidence is easily adduced by placing the witnesses upon the stand, but in this investigation 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 manage- ment of the New Haven system has been to disclose one of the most glaring instances of maladministration revealed in all the history of American rail- roading. I desire to draw j'our attention particularly to what follows: The difficulties under which this radlroad system has labored in the past are internal and wholly due to its own mismanagement. We have here a letter of good conduct, in so far as the States of New York, Connecticut, Rhode Island, and Massachusetts are con- cerned. Apparently, in this case, the State commissions were not at fault. I read further, as follows: Its troubles have not arisen because of regulation by governmental authority. Its greatest losses and most costly blunders were made in attempting to cir- cymvent governmental regulation and to extend its domination beyond the limits fixed by law. Referring to an attempt on the part of the New York, New Haven & Hartford Railroad Co., contrary to the ]f\ws of the State of Massa- IKTEESTATE AND FOREIGN TRANSPORTATION. 559 chusetts, to acquire control over the Boston & Maine Railroad and other roads, it is said : 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 approx- imately $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— That was in TO years — Of this increase approximately $120,000,000 was devoted to its railroad prop- erty, and was expended for betterments and equipment. This leaves the sum of $204,000,000, which- was expended for operations outside of its railroad sphere. Through the expenditure of this sum this railroad system has prac- tically 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 tjie section which it serves. The financial operations neces- sary for these acquisitions, and the losses which they have entailed, have been skillfully concealed by the juggling of money and securities from one subsidiary corporation to another. I shall now take one case as illustrative of what was done. The commission says, on page 35 : 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 inception 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 tefore it can pay its operating expenses and fixed charges. It is inconceivable that this enterprlce could have been entered into by the New Haven as a result of the mandates of good judgment and proper railroading. The commission refers further to this particular transaction, and then refers to the Ehode Island trolleys, to the steamships, to the steamers Yale and Harvard^ and then to the Boston & Maine. The reference to that railroad begins on page 47 of the report. There the commission says: Before the New Haven secured control of the Boston & Maine the stockhold- ers of the latter had realized substantial dividends for a period of more than 50 years. Its credit was high and its stock was, in the year 1900, oflSclally valued by the Railroad Commission of Massachusetts at $190 per share. The Boston & Maine, before the New Haven secured control, was conserva- tively managed, had a low capitalization, and only a moderate debt. Its capi- talization was $28,000,000 common, $3,000,000 preferred, and its debt was $34,000,000. There is reason for the belief that this railroad in the hands of its former management would have continued to pay dividends and serve its constituency of passengers and shippers with reasonable rates and adequate facilities. That is the picture before the transactions to which I shall refer. Then the Boston & Maine ran into stormy days. Through the inter- mediation of a member of the banking firm of Lee, Higgmson & Co., of Boston, arrangements were made by which the New Haven ac- quired control of the Boston & Maine, contrary to the laws of the State of Massachusetts. This caused all kinds of difficulties. Finally, on page 49, the result of the new management of the Boston & Maine 560 INTEBSTATE AND FOREIGN TEANSPORTATIOJST. under the direction of the New Haven & .Hartford is reported as follows : The financial strength of the Boston & Maine, which had been made manifest for more than half a century, was converted into financial weakness in half a decade after passing into the control of men who had the reputation of being- eminent financiers. These great names proved to be of no reliance to investors. The management of the Boston & Maine by the New Haven was unwise. It began in illegality and in a lust for extended monopoly and has resulted in great depreciation and serious impairment of credit. We are told, gentlemen, that the carriers will hereafter present to you bankers from Boston and other places in New England who will testify that the people of New England are slow about investing^ in railroad securities at the present time. The answer is very simple. It is New York, New Haven & Hartford. I desire in this connection simply to read the last paragraph of the decision. I read now from page 70, under the heading " Remedy in public conscience and laws," as follows : 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 awaliened 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 finan- ciering 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. Until this is done, gentlemen, we can have no permanent strength- ening of railroad credit. I should like to refer for a moment to a decision of the Interstate Commerce Commission, headed " No. 933, St. Paul & Puget Sound accounts ; in the Matter of Rates, Practices, Accounts, and Revenues _ of Carriers subject to the act to regulate commerce." This decision was rendered on February 9, 1914, and you will find it in Twenty- ninth Interstate Commerce Commission Report, page 508. In that case the Interstate Commerce Commission, acting through Commis- sioner Harlan, made an investigation into the systems of accounts of the St. Paul Railroad and of the Puget Sound Railroad. I read from page 509, as follows : 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 carriers 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 disbursed In improving Its property ; on the other hand, a financially weak road, seeking to enhance its credit by a good showing of operating results, would include In Its property accounts sums expended in operation. In other words, they would take sums which ought to go into the operating account, remove them to capital account, and by that method decrease the operating expenses and increase the apparent net income. The report continues as follows : 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 execu- tive. These reports were often used for speculative purposes, and the stock- holder and the general public were left without any assurance as to whether (lie dividends declared wore paid from income or surplus or out of capital. INTERSTATE AND FOREIGN TRANSPORTATION. 561 Then comes this observation : 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 understanding that ,)vwr 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 promoters and investors in bonds or held in the treasury of the issuing com- pany, in the hope that the future growth of the company's traffic or the exi- gencies of corporate control might give them some value. Referring now specifically to the St. Paul Railroad, the Interstate Commerce Commission finds that about $5,000,000, which should have appeared under the head of operating expenses, was put into capital account, thereby increasing the apparent net income of the railroad during the first year of its operation $6,000,000 more than was the fact. In connection with that matter the commission, at page 511, says: By means of these entries the income of the Chicago, Milwaukee & St. Paul Railroad Co. for the year 1910 was overstated by more than $5,000,000. As the result of this overstatement of income for the fiscal year ending June 30, 1910, the report of the St. Paul Co. for the succeeding year showed an ap- parent falling off in revenue and income, as compared with the previous year, of over $2,000,000. This, of course, called for some sort of explanation. The com- mission continues as follows: In its report to its stockholders for the latter year the explanation offered by, the officers of the company was that — I draw your particular attention to this explanation because it has a familiar ring. It is as follows : The large decrease in the net operating revenue is accounted ior by the inability to obtain Increased rates and the great increase in the cost of labor. That is what the railroad told their stockholders was the cause of the apparent falling off in net operating income in 1911 9,3 com- pared with 1910, but here is what the Interstate Commerce Commis- sion says about it : This statement was not in accordance with the facts in the case. Had the income for the year 1910 been properly reported, the net income for the follow- ing year, instead of showing a decrease, would have shown an increase of about $2,800,000 over the net income for the fiscal year ending June 30, 1910. The reference to " the great increase in the cost of labor " was no less at variance with the real facts. The commission goes on to show that the actual amounts paid for labor were less in 1911 than in the year 1910. The commission then says: These departures from what were the actual facts are sufficiently serious to merit the strongest condemnation. What happened here, gentlemen, was that in order to sell its securi- ties the railroad misrepresented to the extent of $5,000,000, making it appear that its net operating income for the year 1910 was $5,000,000 more than it actually was. Thus they induced people to buy securi- ties on the strength of that misrepresentation. 662 INTERSTATE AND FOREIGN TRANSPORTATION. Is there any wonder that those people should hesitate to buy addi- tional railroad securities when they had been deceived in that way? Is this not another of the causes of impaired railroad credit — failure to be honest' as between the corporation and its own stockholders and its own investors ? . Furthermore, when the truth finally comes out we find the same old excuse, that it is due to the failure to secure increased rates and to the great increase in the cost of labor, while, as a matter of fact, the difficulty was caused by the juggling of its own books by the corporation itself. I say these words not in any spirit of hostility. I am a public servant. I am as much a representative of the railroads as I am of the shippers and of the people who travel on the railroads, but I feel strongly that we must find out what the truth is, and unless we do find out what the truth is we are going to flounder around hopelessly in legislation, both State and Federal. I shall refer to one additional report. This is the report of the Interstate Commerce Commission, decided on July 31, 1915, in the matter of the financial transactions, history, and operation of the Chicago, Kock Island, and Pacific Eailway Co. This will be found in Thirty-sixth Interstate Commerce Reports, at page 43. This is another of the railroads in the hands of receivers. We are gradually accounting for most of the railways which are in the hands of receiv- ers and finding out that the reason for the receivership is not State regulation, but some entirely different cause. This is the Rock Island, then. The commission says, at page 43 : In 1902 the main line of the Chicago, Rock Island & Paci0c 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 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. But, nevertheless, the road went into the hands of receivers. The commission, at pages 47 and succeeding pages, draws attention to the fact that not merely were relatively large salaries paid to large numbers of officers of this railroad, but in addition thereto large additional contributions were made, just out of good fellow- ship or something or other, with the result that the contributions to the officials of the railway in excess of their salaries aggregated about a million dollars. That was not all. They engaged in certain financial transactions with some other railroads, resulting in very heavy losses, trying to buy out other railroads which did not have the business to warrant it. On page 55 appears an itemized statement of the losses suffered by the railroad as a result of these financial transactions, amounting to a total of $20,000,000. Then, under the head of " Reports to Stockholders," I would like to read one paragraph: Misrepresentation of assets in reports of 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, 3914, the company conceded a reduction of this surplus to $6,199,841.08, and even this amount was fictitious. INTERSTATE AND FOREIGN TRANSPORTATION. 563 So the reports to the stockholders, on the strength of which it was no doubt intended to sell additional stock, were entirely mis- leading. On page 57 the commission continues its report : 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 ofHeials was the failure to state on the pay rolls the true amounts paid to its officers. Then I direct your attention to this statement of the commission : 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. Of course it is entirely obvious that if people buy stock or bonds on the faith of the financial statements of the railroads and later find that the financial statements are erroneous and misleading and that, in the language of the street, " they have been stung," they are going to be very slow about purchasing additional railroad securities. Finally this report, on page 61, says: 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 un- divided 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. This record, as you will notice, is dated 1915. We have here a series of these reports, running from the Chicago & Alton case, which, I think, was in 1907, through the intervening years up to 1915, and still they are coming. Senator Cummins. Mr. Chairman, I would like to ask just one question — not a question — concerning the report he has just read. Does that report show how the Rock Island road took its $75,000,000 of capital stock in 1902, and more than doubled it in amount, with- out adding anything to the value of the property ? Mr. Thelen. I think it does. Senator. Senator Cttmmins. I would like the entire report to go in. The Chairman. That order will be made. (The report in full is printed as follows:) [Interstate Commerce Commission. No. 6834. In re financial transactions, history, and operation of the Chicago, Rock Island & Pacific Railway Co. Submitted June 5, 1915. Decided July 31, 1915.] M. L. Bell and White & Case for Chicago, Kock Island & Pacific Railway Co. Roberts Walker for the Rock Island Co. of New Jersey, and Chicago, Rock Island & Pacific Railroad Co. of Iowa. Walker D. Hines for L. F. Loree. Samuel Untermyer for protective committee of stockholders of the Chicago, Rock-Island & Pacific Railway Co. „ „ ^.. ^ c i.t t-, ij. Silas H. Strawn for Robert B. McLain, George E. Scott, and S. M. Pelton. 564 INTEESTATE AND POEBIGN" TEANSPOETATION. REPORT OF THE COMMISSION. ny the Commission : Pursuant to an order entered on April 24, 1914, the commission has investi- gated the financial transactions, history, and operation of the Chicago, Rock Island & Pacific Railway Co., and make the following report in respect thereto : The initial hearing was held on October 16 and 17, 1914. Thereupon the hear- ing was adjourned until February 25, 1915, to enable the accountants of the com- mission to complete certain investigations suggested by the facts disclosed. 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 hearing 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, Eock Island & Pacific Rail- way 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 rami- fication 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 shates had fallen to $20 and the road is now in receivers' hands. The evidence shows that the earnings of the railway company have stead- ily increased, and that in 1914 they were the largest in its history. The results of the management, which is the subject of this investiga- tion, may be seen from the statement above, made as to the market value of the stock, and froin the table below, showing the capitaliza- tion, indebtedness, and operating accounts for the years 1901 and 1914: Capital stoc'' FundaiJ debt Loans pavable. Operating revenue Operating expenses.'. . . Interest on funded debt Rentals Net income Surplus Mileage owned Mileage operated 849,921,400.00 63,638,000.00 None. 26,075,874.00 17,096,066.00 2,931,980.00 473,962.00 5,306,519.00 10,263,184.55 $74,995,122.50 235,246,300.00 3,500,000.00 65,848,258.00 49,517,948.00 9,934,169.00 1,881,651.00 395,915.00 6,264,208.84 3,128 3,772 5,367 7,729 SYNDICATE CONTROL. In 1901 Daniel G. Eeid, 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 di- rectors, W. B. Leeds being made president and D. G. Reid chair- man of the executive committee. This syndicate procured the selec- tion 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 con- INTEBSTATE AND FOBEIGN TBANSPOETATION. 565 ■trolled 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 160,000,000 was authorized, W. H. Moore was elected a director of the company, and at a directors' meeting held on the same date Daniel G. Eeid was also elected a director. At 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, re- signed. On October 24 the articles of incorporation of the railway com- pany were amended to provide for an executive committee to con- sist 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 fol- lowing W. B. Leeds succeeded W. G. Purdy as president of the rail- way 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 com- mittee in place of H. E. Bishop, resigned. The other members of the executive committee at this time were E. E. Cable, Marshall Field, and A. E. Flower. On June 4, 1902, the capital stock of the railway company was in- creased 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. OEGANIZATION AND USE OF HOLDING COMPANIES. In July, 1902, the syndicate organized two holding companies, the Chicago, Eock Island & Pacific Eailroad Co. of Iowa, and the Eock 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 Eailroad Co. 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 company was $150,000,000 in stock, of which $54,- 000,000 was preferred and $96,000,000 common. In the latter com- pany 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, uj)on motion of D. G. Eeid, 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 com- jiany were placed with it^ under an agreement that they were to be flidianged for stock of the railway company in the proportion of 668 INTEESTAXE AND FOREIGN XEANSPOKTATION. $100 in Iowa company bonds and $70 in preferred and $100 in com- mon stock of the New Jersey company for each $100 in stock of the railway company, or $270 face value of the holding company secu- rities tor each $100 par value of the railway company stock. Under this agreement the members of the syndicate deposited railway stock as follows: D. G. Keid $5,915,437.50, W. H. Moore $6,118,975, J. H. Moore $3,059,262.50, W. B. Leeds $5,597,100, making a total of $20,690,775, for which they received $20,690,775 in the Iowa com- pany'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 amount 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 depos- ited 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 syn- dicate — 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. 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 securities. 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 Nebraska Central Railway and of the Nebraska Construction Co. of a nominal value of $200,000. There- upon the suit to restrain the holding companies' plan was dismissed. Neither the Nebraska Central Railway Co. nor the Nebraska Construc- tion 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. ,The expense of incorporating the holding companies, $218,000 for the Iowa company and $120,000 for the New Jersey company, was ])aid 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 INTEESTATE AND FOREIGN lEANSPORTATION. 567 rtiihvay company. Practically the entire expense of renting, fitting up, and furnishing the (Quarters occupied by the holding companies for the first four years of their existence 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, 37^ per cent to the New Jersey company, and 12J 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 approximately $290,000. That amount was improperly diverted from the treasury of the rail- way company. SALARIES OF AND CONTRIBUTIONS TO OFFICERS AND DIRECTORS. The salaries paid to some of the principal officers at various periods were as follows : Per annum, H. U. Mudge, president $60, 000 L. F. Loree, chairman executive committee (one-half to be paid by the Frisco) : 75, OOO R. A. Jackson, vice president and general solicitor 50, GOO R. R. Cable, member of board of directors 32, 000 W. B. Leeds, president 32, 000 B. L. Winchell, president t- 40,000^ B. F. Yoakum, chairman executive committee 30, OOO Daniel G. Reid, chairman board of directors 32, 000 C. H. Warren, first vice president 85, 000 W. G. Purdy, upon his letirement 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, conductors, aiid brakemen. While he regarded the wages of these minor em- ployees as having partially sapped the financial strength of the rail- way, he declared that the salaries paid to the higher officers of the Qompany had no appreciable effect on its expenses. D. Gr. 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 ofiicers and directors of the railway company. George T. Boggs, a director and secretary to the boai-d of directors of the railway company, and also a director ia the two holding companies, admitted that he served in these capaci- ties merely as a dummy for the syndicate. On the question of the 70342— PT 10—16 6 568 INTERSTATE AND E-OEEIGN TKANSPOETATIOHT. rights of the public to have corporate funds of common carriers properly applied, he testified as follows: Question. Do you consider that tlie directors of a railway company, a public- service corporation, liave tlie 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 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 dissipatfed. 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 though 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 reasonable. Those stating this opinion apparently did not take into consideration the fact that if the funds derived from transportation services are expended wastefuUy or corruptly the inevitable 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 contribu- tions referred to: J. E. Gorman, first vice president in charge of freight and pas- senger 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 com- mittee, 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. IKTEESTATE AND FOKEIGN TEANSPORTAaSON. 569 K. E. 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 Eapids & Northern Eailway 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 company, 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 resolution of the execu- tive 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 ofiicers 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 stockhold- ers of the railway company. Following this exchange E. E. Cable received securities of a mar- ket 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 VOUCHEE 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 appar- ently to reimburse W- H. Moore for losses sustained by him in " sup- porting 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. Ajiother voucher, in favor of the Liberty National Bank, of New York City, in exchange for a cashier's check issued to Eobert Mather for $25,000, is charged to " general expenses " under " operating ex- penses." 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 " contributions to cam- . paign 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 570 INTERSTATE AND Ti-OREIGN TKANSPORTATION. 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 Wis- consin. 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, 111., 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 com- paj', 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 com- mon 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 bond's, 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 Bank of New York. Of these bonds, $1,388,000 were sulasequently retired, lea'^ing in the possession of the railway company $6,112,000, Avhich the Iowa company 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 $6,600,000. 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 the result of transactions in the Alton stock the railway com- pany acquired 48,800 shares of preferred and 144,200 shares of com- mon at a total cost of $9,709,876.49. These shares were bought prin- cipally in 1903, but sundry purchases were madfe after that time I-' INTERSTATE AKlJ FOEEIGN TRANSPORTATION. 571 until June 30, 1907, when the above total amount had been accumu- ' lated. in October, 1907, the railway company delivered to the Toledo, St. Louis & Western Eailroad Co. 41,100 shares of the preferred and 144,200 shares of the common: stock of the Alton company, receiving, in e;schange for the former 4,110 series "A" $1,000 bonds and for the latter 5,047 series " B " $1,0.00 bonds of the Toledo, St. Louis & Western. , v On November 28, 1908, the executive committee of the railway company authorized the sale of the remaining shares of the pre- ferred stock of the Alton company held by the railway company, together with sundry bonds, series "A," of the Toledo, St. Louis & "Western Eailroad (Jo. 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 preferred, 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 addition, the money with which the Alton stock was originally purchased was secured from the sale of bonds, the interest on which to June 30, 1914, less dividends 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 railway company as a result of the disastrous Alton deal was approximately $6,370,000. TEIXITY & BRAZOS VALLEY RAILWAY CO. A contract was entered into under date of March 31, 1906, between the railway companj', 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 Eailway, 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 i, 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 contract 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 onlj of such amounts as are defaulted by the railway company. A, supplemental contract was entered into on June 1, 1914,wherem the railway company and the Colorado & Southern release each other from the obligation to make any further payments to or for account of the Trinity & Brazos Valley, and the railway company agrees to pay to the Colorado & Southern one-half of the interest at the rate of 4J per cent per annum on the total cost of the Brazos line to 572 INTERSTATE AND FOREIGN TRANSPORTATION. 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 ad- vanced 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, therefore, 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 doubtful value. CONSOLIDATED INDIANA COAL CO. The Consolidated Indiana Coal Co. was incorporated under the laws of Maine April 29, 1905, by interests affiliated with the railroad company. Although E. A. Jackson, vice president and general counsel of the railroad 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 stock, 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 com- pany was estimated 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 pay-' ments were discontinued. The loss on the part of the railway com- pany 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 com- pany being reimbursed for the advances made by it. DERING COAL CO. The incorporators of the above-entitled company, which was incor- porated in 1905 under the laws of Delaware, were parties affiliated with the Chicago & Eastern Illinois Railway Co., and theiT original plan was that it should be owned jointly by the railway company and the United States Steel Corporation for the purpose, priniarily, of furnishing fuel to those companies 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. INTERSTATE AND EOEEIGN TRANSPORTATION. 57. The railway company, upon the organization of the coal companj acquired bonds to the extent of $450,000 and stock of par value o $1,700,000 at a net cost of $981,000. It received no interest on th 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 companj Its net loss from this transaction, including interest, was $906,42C and this, added to its loss in connection with the other coal compan^ above referred to, makes a total loss of more than $1,300,000 as i result of its cbal deals. If the advances to the coal companies cai not be collected, it will result in an additional loss of nearly '$2,500 .OOC CHOCTAW, OKLAHOMA & GUUT EAH^ROAD CO. On April 11, 1902, the executive committee of the railway com pany authorized the president and the secretary of that compam to engage with Speyer & Co., New York bankers, to assume a con tract previously entered into between that firm and the Choctaw Oklahoma & Gulf Eailroad Co. covering the purchase of the stocl of the latter company. Under this contract Speyer & Co. pur chased for the railway company 192,958 shares of common anc 118,871 of preferred stock of the" Choctaw, Oklahoma & Gulf Eail road Co. Each of these shares was of $50 par value. Speyer & Co. received from the railway company $80 per share for the com mon and $60 per share for the preferred, or $22,668,900. Addi tional shares, 3,592 common and 1,129 preferred, were purchased bj 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 author ized by the railway company to the extent of $24,000,000. Thes< bonds were secured by the capital stock of the Choctaw, Oklahoms & Gulf Eailroad Co., and $23,520,000 in par value of these bonds were sold to Speyer & Co. at 96J and accrued interest. In the con summation of this transaction the railway company paid a commis sion of more than $113,000, a discount on the sale of bonds oJ $824,325, and incidental expenses, including attorneys' fees anc brokerage, of about $27,000, making a total expenditure of approxi- mately $24,000,000 for stock of the Choctaw, Oklahoma & Gulf Eail- road Co. of a par value of $15,827,000. On March 24, 1904, the lines of the Choctaw, Oklahoma & GulJ Railroad Co. were leased to the railway company for a term of 99f years. Since thatr date the railway has advanced to the Oklahoms company a net aggregate of $1,293,229.58 as of June 30, 1914. Nc interest has been paid to the railway company on account of thest advances, and the corporate records do not disclose any liability or the part of the Oklahoma company therefor. Whether or .not a loss has been sustained by the railway companj as a result of this transaction is not demonstrable for the reason tha< the accounts of the carrier are not kept in such a manner as to permit the segregation of items by corporate lines. There is abundani reason to believe, however, that the disbursements made by the rail- way company in acquiring the Oklahoma company are far in excess of the actual value of the property and disproportionate to the re- turns accruing from the investment therein. 574 INTERSTATE AND FOREIGN TRANSPORTATION. EOCK ISLAND IMPROVEMENT CO. The Eock Island Improvement Co., incorporated 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 com- pany is covered by equipment notes which were guaranteed as to principal and interest by the railway company, the equipment pur- chased with the funds so secured being thereupon leased to the rail- way company. The equipment is held in the name of the improve- ment 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, not- withstanding the general tendency of bonds to approximate par as they approach maturity. The only justification offered by its sponsors for the existence of the improvement 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 improvement company apd what such cost would have been had such equipment been purchased directly by the rail- way company, but it is plain that the procedux'e entailed 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 con- nection with the foregoing transactions may be summarized as follows : Expenses of maintaining and housing holding companies, more than ^ $290, 000. 00 Frisco deal, approximately 6, 500, 000. 00 Alton deal, approximately 6, 370, 000. 00 Trinity & Brazos Valley Kailway deal, more than 4, 500, 000. 00 Consolidated Indiana and Dering coal companies, at least 1, 300, 000. 00 Contributions or gratuities to officers and directors, about 1, 000, 000. 00 Venner transaction i 217, 000. 00 Miscellaneous and unexplained expenditures 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 insti- tutions, in connection with the issuance of bonds, commissions aggre- gating more than $1,600,000, and suffered discounts of more than $lt.000,000. INTERSTATE AND FOREIGN TRANSPORTATION. 575 IKDIVIDUAL PROFITS OF PROMOTERS, OFFICERS, AND DIRECTORS OF THE HOLDING COMPANIES. The amount of gains accruing to W. B. Leeds, D. G. Eeid, W. H. Moore, and J. H. Moore, through their control and manipulation of the railway company, are probably not ascertainable. Eeid, 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 company 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 OF 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 raihvay company of $22,343,955.26. By June 30, 1914, the company conceded a reduc- tion of this surplus to $6,199,841.08, and even this amount was fictitious. Thus the railway company included among its assets certificates of indebtedness of the Trinity & Brazos Valley Eailway Co., carried at a book value of $3,694,863.87. The Trinity & Brazos Valley Rail- way was then in the hands of a repeiver and was already facing a deficit of $8,000,000, with a practical certainty 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 Eailroad Co. at a book valuation of $6,000,000 secured only by stock of the Chicago & Alton Eailroad 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 'Eailway 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 stock- holders 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 Eailway Co. that the commission be advised that that carrier had " no existence except on paper, having no rail- road 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. 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. 576 INTERSTATE AND FOREIGN TEANSPOBTATION. 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. The publication of misleading reports to stockholders can not be too severely condemned, and the individuals guilty of such actff should be subject to adequate penalties. PRESENT STATTJS OF THE RAILWAY. The original articles of consolidation provided that the maximum of indebtedness to which the company might subject itself should not exceed two-thirds of its outstanding capital stock. This maxi- mum 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. 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 company. Pursuant to foreclosure proceed- ings instituted on behalf of the bondholders, the United States Dis- trict 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. 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. Eeid, a member of the syndicate, organized a self-appointed bondholders' protective comjnittee, the members consisting of him- self and five other men of his selection. This committee advertised 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 stockholder 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. INTERSTATE AND EOKEIGN TEANSPOETATION. 577 EECEIVEESHIP. 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 receiver- ship 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 com- plainant. 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 at- torney appearing for the railway cpmpany to acquiesce in the recom- mendations 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 stock- holders had no information of the purpose to put the railway com- pany 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. Ac- cording to the testimony, the bill was completed by the general coun- ■ sel March 29, 1915, and the fact that it was to be filed whenever de- sired 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 ap- plication 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. E. P. Lament, the presL dent of the American Steel Foundries, 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 ir accordance with the wishes of the railway company and that his company was not to have any care or expense in the preparation d 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 company by the minority stockholders at the stockholders meeting held in Chicago April 12, 1915, believing, according t( his testimony, that no sincere effort was being made by other mem bers of the board to finance the obligations of the railway, under took to assist in raising about $6,000,000 needed by the railway U meet obligations soon thereafter to mature. On April 16, 1915, h( met and conferred with Messrs. James, McLean, and Schumacher all directors of the railway and members of the executive com mittee, and discussed the company's finances. These three ex 578 INTERSTATE AND POEEIGN TEANSFOKTATION. pressed approval of his purpose to negotiate for the money. Amster testified that he had secured assurances for thg 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 anyr body 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 preparation, 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 for the railway company. It will be remembered that the bill was completed by the general counsel on March 29, this fact being known ojily 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, 1916, are shown below : Daily sales and selling prices of the Chicago, Rock Island & Pacific Railway Go. stock as reported l>y the Wall Street Journal. Date of sale. Number of shares sold. Selling price. High. Low. 1915. Mar. 22 Mar . 23 -■ Mar. 24 Mar. 25 Mar. 26 Mar. 27 Mar. 29 Mar. 30 Mar. 31 Apr. 1 ■ Apr. 2 (holiday). Apr. 3 Apr. 5 Apr. 6 Apr. 7 Apr. 8 Apr. 9 Apr. 10 Apr. 12 Apr.13 Apr. 14 Apr. 16 Apr. 16 Apr. 17 Apr. 19 Apr . 20 400 2,700 2,850 900 7,050 5,400 28,360 73,676 106,800 62,642 18,700 15,000 6,200 41,000 14,250 68,900 68,000 18,600 16,556 78,000 45,600 32,900 16,100 37,700 261,400 Zli 21i 22J 22i 21i 26 31i 36| 334 29i 30 29i 32i 32i 36J 39 36 35? 38? 381 38i 38 331 321 20J 20 21i 2l| 19i 19i 191 28 ■ 311 261 274 ,27| 28 30i 31 34J 34| 32} m 36i 36J 361 33f 21i Total capitalization, S75,000,000, represented bj; 750,000 shares. Total sates within 30 days preceding receivership, 1,019,684 shares. The sales aggregated more than one and one-third times the total capitalization of the railway. INTEBSTATE AND FOREIGN TEANSPORTATION. 579 It is a forceful commentary on the methods by which a great rail- way 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 raihvay com- pany, and that none of those directly participating in the receiver- ship 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 raihvay 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 trans- actions 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 knowl- edge and without investigation. A director of a railroad is a quasi public official who occupies a position of trust. A director who sub- mits 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 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 disbursements. So long as this situation exists, however, it suggests the need of a law to charge such directors with individual respon- sibility 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 thar $1,000,000, but common carriers are expressly exempted from its application. It should be just as grave an offense for an official of s railway to be faithless to his trust for financial gain as it is for ar elected official of the Government to betray his trust for monej 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. By the Commission. George B. McGintt, Secretary. Mr. Thelen. Referring now to the M., K. & T., familiarly knowi as the " Katy," I have here a clipping from the New York Times o: November 23, 1916, which shows such a keen understandmg of rail road financial problems, and which also shows so clearly the rea cause of the troubles of that railroad, that I shall read just a para .580 • INTERSTATE AND FOREIGN TRANSPORTATION. graph of two. The heading is " $26,636,000 needed to finance M., K. & T." Hallgarten & Co. and J. & W. Seligmans & Co., bankers of New York, who undertook a year ago the reorganization of the Missouri, Kansas & Texas Kailway, have made public their first formal report covering the activities of the engineers employed by them. The existing receivership is charged, in ■large measure, against conditions dating back 25 years, when the road was reorganized without foreclosure. The plan followed then left the property not only in poor physical condition and without provision for its rehabilitation, but also rendered it difficult to secure new funds, since the first and second liens, extending over nearly all of the road, were closed morgages at an average rate of $43,000 per mile. So it was impossible to secure from the sale of bonds, any funds for additions and improvements in excess of the total of $43,000 per -mile. The report states that, based upon good practice, the fixed charges left in 1891 were more than twice what they should have been. The closed mortgages made later adequate financing impossible, and necessitated the issuance of ■divisional, extension and terminal bonds, and the construction of new lies under independent mortgages by companies organized and controlled by the Missouri, Kansas & Texas Railway. As such resources became exhausted — .you can not continue selling bonds at a discount without your resources becom- ing soon exhausted, unless you bring in money from some other source. The report continues : As such resources become exhausted the physical property fell below the traffic requirements, and led to the accumulation of a floating debt in the form of short-term notes, the impending maturity of which is the immediate cause of the receivership. Here we have an honest and intelligent statement as to what caused the troubles of this railroad. When it was originally organ- ized, they did not build a sound financial structure. If you do not build a sound financial structure for your utility, you are going to have trouble later as sure as fate. In my judgment, one of the most important functions which either Federal or State Government can exercise, is to insist that the financial structure of the utility be isuch that the utility has a chance to succeed, and that it will not later find itself in the necessity of going through receivership or reorganization. I have gone into these matters, gentlemen, not for the purpose of adding to the troubles of the railroads. They have troubles enough. If the truth be told, I think they are largely of their own making; but nevertheless the fact is that they have their troubles. But here is the situation with which we are confronted: We have coming be- fore this committee the question of what are the causes of impaired railroad credit. We find the carriers presenting their views. They charge that the State commissions are responsible. We think that is one of the most ridiculous charges ever made. We have believed, however, that it is not sufficient for us to draw your attention to what the States have done, and that they are not responsible. We think it is necessary, in addition, in a constructive way, to draw the attention of this committee to the real causes of impaired railroad credit. These causes are found in unsound financial structures; in the construction of railroads where not needed; in attempts to pay interest and dividends on excessive issues of securities ; and in finan- cial mismanagement of these properties by the financiers and execu- tives in responsible charge thereof. There may be other causes, but those, I believe, from my experience, are the most important causes. INTERSTATE AND FOEEIGN TRANSPORTATION. 581 That being the case, the next question which presents itself is the •question of constructive policy. What can be done in a constructive way, so as to prevent this sort of thing from happening in the future .and so as to do what government can do to insure greater financial :Stability for these railroads? To my mind, the first constructive .thing is to provide for adequate supervision and regulation by the Federal Government of not merely the stocks and bonds and notes •of all these carriers, but also of their consolidations, their mergers, their sales, their mortgages, their encumbrances, and their leases. This might either be done concurrently with the States or exclusively by the Federal _ Government, just as the Congress may deem to. be wise. If that is done, the few horses which are left in the stable will be reasonably safe. Of course, we can not recover the horses which have escaped. This brings me to the next question. What are we going to do about what has been done in the past ? I believe, frankly, gentlemen, that it will be necessary for some of these rail- roads to reorganize from time to time and to put themselves on a sound financial basis. They can not expect the public to bear those burdens for them, because it has been the fault of their own execu- tives and financiers. With this action looking to the future — that is, the control by the Government of the issue of these securities — and with reorganizations on the part of the railroads- themselves, undertaken where they find it necessary, some relief will be given. I believe also that it is time for the railroads to stop complaining. They have the finest earnings that they have ever had. It would be far better for them if they stopped crying calamity, if they came •out into the sunshine, as I suggested this morning, and if they went to work and ran their railroads. They are having splendid pros- perity. Why not be optimists instead of pessimists? They will get a good deal further if they attack the problem in that way. Finally, I say frankly that it is the duty of all public officials, both State and Federal, to do what they can in a sympathetic and constructive way to help these railroads, if they show good faith on their part. The greatest service which the public authorities can render these railroads is to assist them where, necessary, to build financial struc- tures which shall be sound instead of being unsound. I stated at the beginning, gentleman, that we have come here in a spirit of helpfulness. Now that I am about to conclude, I hope you will think that we have done exactly what we said that we would do. Mr. Adamson. Mr. Thelen, I unfortunately was out during a por- tion of your discourse, and while I can not ask you any questions I can ask you if in any part of your discourse you have put in the record a review of what effect Federal legislation has had, and whether or not it has failed in its efforts to regulatethe railroads? Mr. Thelen. I will say, Judge, that before you came in I made a general statement as to the effects of State regulation upon the car- riers and also upon the public. As far as the action of the Federal Government is concerned, I take it that the officials of the Federal Government will be amply able to take care of themselves. I have not undertaken t • i. Mr. Adamson. I allude to the complaint that all regulation has proven a failure. 582 INTERSTATE AND FOBEIGN TRANSPORTATION. Mr. Thelbn. I went into that matter to some extent, Judge, before you came into the room. Mr. Adamson. I do not care to have you repeat it, if it was gone over. Mr. Thelen. In concluding, gentlemen, I simply wish to say what I said at the beginning, that if there is any special problem that occurs to you, oh which you want an investigation made, or on which you want a study made, the Railroad Commission of California is, I think, well equipped to do that work for _you. We have our experts along all the various lines of public-utility regulation. They are men of intelligence, thorough students of public-utility problems, and if there is anything that we can do for this committee along that line, we shall be only too glad to do it. We want to help you. I wish to express my appreciation to you for allowing the national association to appear here and to make this opening statement for the public. Mr. Sims. I understand that you expect to come back at some future day. Mr. Thelen. I can either come back here or invite you to come out to San Francisco. I am ready at any time and place that will suit the convenience of the committee. The Chairman. Mr. Brookhart, will you now proceed ? STATEMENT OF MR. SMITH W. BROOKHART, REPRESENTING THE STATE RAILWAY COMMISSION OF IOWA. Mr. Brookhart. Mr. Chairman and gentlemen of the committee, I am very grateful that you have consented to hear .me at this time. I have been waiting for several days and I assure you that a look at the frost on the blue grass of Iowa would seem good to me again now. I have had some doubts that you would be able to endure this kind of a session, and had it not been that I had read of something over in the Senate that they call a filibuster, I would hardly like to attempt it, but if the Members of the House can stand it I have no doubt the Senators will, after the record they have made on that line heretofore. Mr. Esoh. Whom do you represent, Mr. Brookhart? Mr. Brookhart. I will state in a moment. In 1906 I was appointed by the governor of Iowa to attend the rate convention in the city of Chicago, known as the Interstate Commerce Law Convention. The purpose of that convention was to support national regulation of railroads, and especially the law then proposed giving the commission power to fix rates. Up to that time no such power had existed, as determined by the Supreme Court. This convention was in 1906. Shortly after that I was associated with Mr. Thorne in starting the investigation against the Standard Oil Co. that disclosed the discriminations of rates in its favor, and since then I have been associated with him in the Iowa commission in most of the big rate cases in some capacity. I presume it was on this account that I was invited by the committee to appe.ar and present this question of Government ownership of the railroads. In the begin- ning I was opposed to Government ownership of railroads, even when Mr. Bryan came back from Europe and suggested that it would be the only solution because of the constant resistance of thei railroads against regulation. Even then I looked upon his suggestions as rather INTERSTATE AND FOREIGN TRANSPORTATION. 583 a socialistic vagary, but in these rate cases, digging deep into facts of the financing of railroads, their returns, of the difficulties of com- petition, and all those other questions, hard facts ha^^e changed my mind and I have reached the conclusion that Government ownership is not only the ultimate solution but that it is a desirable and present solution, and I shall present the matter to you largely from the fact of digging out the ultimate economic facts as they appear to me in considering this question. • Now, gentlemen, in order that my remarks may be more brief and more concise, I am going to read my statement to you largely as I liave prepared it. However, I will at times depart from it and discuss some of the questions that are presented here. Before private parties can own, construct, or operate railroads the Governnient must grant them the power to exercise certain sov- ereign functions. Such are the rights of eminent domain and oi taxation as exercised in the rate-making power. For this reasoii freight rates have been properly termed a tax. (I. C. R.1903, p. 14,-. Blake v. Rd. Co., 19 Minn., 368; 3 Paige Chancery, N. Y., 74; 4 N. Y.. Rep., 431; Sticloiey "The Ey. Problem" pp. 163-24^-6; Brooks Adams Sen. Com. 1905, p. 2924.) And for the same reason every court in the land holds a railroad to be a common carrier and a public highway. " The right to make roads and levy toll is a pre- rogative of sovereignty and in the hands of a subject is a franchise, a privilege or immunity of a public nature, which can not be legally exercised without legislative authority. * * * The right to make and maintain a railway and take tolls or fares is such a privilege., A railroad is but an improved modern highway." It therefore fol- lows that ownership and operation of railways are not only proper .functions of government, but are the primary standards to which all other systems should be compared. Our Government has granted to private corporations the power to levy taxes for railway purposes, far greater in amount than all of the taxes levied by the Congress of the United States. For" the most part this vast taxation has been without representation and until recent years it has been without regulation or restraint. Even now the power is lodged in the carriers in the first instance and the Interstate Commerce Commission inter- venes upon complaint. Has the surrender of this vast power into private hands been the part of wisdom? This brings us to the direct consideration of the feasibility of Government ownership. Under the head of efficiency and economy I desire to consider three items. (1) The superiority of Government credit. (2) The saving of unearned increment iii real estate values. (3) The saving of the waste competition. There are many other items of economy under Government owner- ship, but these three are greatest. We often hear it said that governments are proverbially extrava- gant. However true- or however false this alleged proverb may be,. it will be conceded that in the matter of interest rates governments, ire more economical than private persons or corporations. When it 3omes to borrowing money and paying interest rates the Government s our most efficient agency. Its credit is better and it can borrow -he money cheaper than anybody else. This means it could borrow 70342— PT 10—16 1 584 INTERSTATE AND FOREIGN TRANSPORTATION. the money to own the railroads at a lower rate of interest than the companies are now paying^ and would make a great saving upon this item. In 1913 the tentire net capitalization of all our rail- roads was little less than 15^ billion dollars. (Statistics of Railways, I. C. C, 1913, p. 36.) This includes all stocks and all bonds, watered and otherwise, with duplications eliminated. It is generally stated in the public prints that our railroads are capitalized at 20 billion dollars. I have even seen this figure used by such eminent authority as Sir George Paish and President Eipley in opposing Government ownership. But this is error. It is the gross capitalization and includes over 4 billion dollars of direct duplication. Subtract this and the correct amount is less than 15 J billion for 1913. This deducts nothing for watered stocks. For the purpose of this pre- sentation I will assume the railroads were worth the full capitaliza- tion and that it would cost the Government 15 J billion dollars to take them over in 1913. There is no way to tell the exact rate of interest the Government would have to pay. In October, 1912, Mr. B. F. Yoakum estimated it as 2J per cent. In 1914, Sir George Paish estimated it at 3^ per cent. I will split the difference and use 3 per cent. At that rate the whole interest charge which the Govern- ment would have to pay would have been 460 million dollars. All of the other net earnings would have been saved and the amount is over 450 million dollars after allowing for all taxes, upkeep, and maintenance expenses of all kinds. (I. C. C. S. of E., 1913, p. 48.) Here is the summary for that year: Interest on funded debt $404, 817, 955 Interest on unfunded debt 31, 191, 623 Amortization of discount on funded debts 2, 579, 103 Appropriations for dividends, reserves, betterments, etc '_ 471, 801, 973 Total net earnings 910, 390, 654 Interest charge under Government ownership 460, 000, 000 Saving because of superior Government credit 450, 390, 654 The above does not represent all of the saving upon this item of Government credit. The same table on the above page, 48, shows a general balance of $1,115,028,899. This is a general surplus accumu- lated over a series of years, and if the Government owned the rail- roads it would all have been saved. It is impossible to tell the exact amount of this surplus that should be assigned to 1913 or any other particular year. This table shows a decrease of surplus for 1913, but that is due to bookkeeping. A comparison with the table for 1912 (I. C. C. S. of E., p. 51) shows an increase and the cause of these discrepancies is there explained. If we assign one-fifteenth of this surplus to 1913, it would amount to about $75,000,000 and raise the annual saving because of better Government credit to over $525,000,000. There is another special reason why this should be done. In 1913 the railroads were asking increased rates. An increased expense account would help their showing of poverty and thus help get the higher rates. It is, therefore, a remarkable and accommodating coin- cidence that the expense of maintaining way and structure and of maintaining equipment increased the enormous sum of $120,779,276. (I. C. C. S. of E. 1912, p. 54, and 1913, p. 52.) This never happened before except in 1910, when they were asking advanced rates, and it INTERSTATE AND FOEEIGN TEANSPORTAHON. 585 was continued in 1914, when they were still asking advanced rates. It would therefore seem to be a regular phenomenon that precedes an advance-rate case. This means either that they neglect maintenance over a series of years and then catch up all at once in order to use the unfavorable comparison to secure higher rates, or else they use large, sums for betterments and charge them to maintenance for the double purpose of improving their properties at the expense of the public and at the same time securing higher rates. Perhaps both are ^^L^Ji a large measure. As a concrete illustration of this policy, m 1913 the Pennsylvania system increased its allowance over 1912 for renewals and depreciation of locomotives an average of 110 per cent per locomotive. This single item amounted to over $2,000,000. Even it 1913 depleted the surplus on the books, still it more than sup- plied its share m fact by taking care of so great maintenance expense. The plea is sometimes made that many of the items of this sur- plus are mere bookkeeping and can not be figured as a saving under Government ownership. This plea can not be entertained. In all of the rate cases the companies always present the properties bought from these items as a part of their property investment, and they demand a return upon them. Under the system of regulation they are charged against the people and therefore under the system of Government ownership they would be saved to the people. It must also be remembered that I have figured the Government's interest charges upon the basis that the roads would cost 15^^ billion dollars. That this is too high there is little doubt. An investigation of the market value of the stocks and bonds in October, 1913, showed that all of the stocks and all of the bonds of all of the railroads could have been bought on the market at that time for a little less than 14 billion dollars. This would reduce the Government interest charge by over $40,000,000. With all of these facts in view it is safe to conclude that Government credit would save over $500,000,000 per year even if the Government were required to pay 3^ per cent for the money to buy the railroads. With the enormous earnings of 1916, and as far as we have gone in 1917, fiscal year, this saving would be increased to over $600,000,000 per year. It would now be well to notice the claims of the opponents of Government ownership upon this proposition. They all admit the Government could borrow money at a lower rate of interest.' At present the average rate the railroads are paying is about 4J per cent, while the average rate paid by the Government is only 2^ per cent. (Dunn's book, p. 58.) While they admit these facts and also admit that net earnings are much greater than interest rates, they still figure the saving because of superior Government credit at about one- fourth of my claims. In this connection I desire to call attention to the book entitled "Government Ownership of Rail- ways," published in 1913 by Mr. Samuel O. Dunn, editor of the Rail- way Age Gazette. This book was distributed by the railroads free of charge to newspapers all over the' country. The identical copy which I present here was so received by a little paper which I publish at Washington, Iowa. The inscription on the paper cover says, " The author is one of the foremost authorities of America on rail- road questions, and his treatment of the subject may be regarded as conservative, judicial, and fair." I concede the eminence of this 686 INTERSTATE AND FOREIGN TRANSPORTATION. author, but I deny that he is judicial and fair. He is, in fact, the official mouthpiece and advocate of the railroads, both for private ownership and higher rates, and I shall use this book as an example ■ of the partisan and unfair methods of the railroads in trying to develop public sentiment against Government ownership. On page &8 he estimates the cost of the railroads to the Government in 1910 at $16,000,000,000 and the rate of interest at 3^ per cent. This would make the annual interest charge $560,000,000 per year, or $100,000,000 higher than I figure it. This difference arises be- cause Mr. Dunn takes the extreme view of private ownership ; but his unfairness appears at the next step. When he comes to compute the saving he considers only the net interest and dividends paid by the railway companies, which total only $680,000,000. Subtracting the' above interest charge would leave a saving of only $120,000,000. Mr. Dunn took his figures from page 60, Statistics of Railways, In- terstate Commerce Commission, 1910. He only found two items of interest and one of dividends to consider, but on the same page is another item of $222,000,000 which he omitted. The table plainly shows that this was a part of the net revenue available for adjust- ments and improvements. A note shows that all of this would have been saved to the Government except about $91,000,000— $86,000,000 dividends from surplus and $5,000,000 deficit weak lines — and this would add $131,000,000 to Mr. Dunn's $120,000,000 and make the total saving $251,000,000 on his own basis. If we add to this a proper assignment of general surplus and consider the increased maintenance charges of over $109,000,000 for this year — this was the J 910 year — all of the discrepancies between my own conclusions and those of Mr. Dunn's book are explained. Mr. Dunn also says, page 63, that capitalization of switching and terminal companies is excluded from his consideration, because no figures are given by the Interstate Commerce Commission. On page 52, Statistics of Railways, Interstate Commerce Commission, 1910, in the very table from which he took his figures, I find included an item of $136,634,040 for " Securities of switching and terminal com- panies not represented in figures first above stated." These great mistakes, all on the side of Jjrivate ownership, show the unfairness with which the most eminent authority may sustain his cause. In reference to this subject of credit, gentlemen, I now desire to depart from my written brief to say that I believe that before I am through you will find me the strongest defender of the credit of the railroads of any that has appeared before you. Perhaps it would be to my interest and to the furtherance of my argument to admit that they have failed, that their credit is broken down, and that it is now a corpse, dead, and that resurrection would be the only rem- edy, because the only institution that could bring about a resurrec- tion would surely be the Government; but I am standing upon the facts in this- matter, and I want to present the question of credit to you as I see it in this connection. Mr. Thom, for the railroads, has asked a return of 6 per cent and 3 per cent for surplus, saying that it would take something of this kind to restore the credit of the railroads. I first met this credit argu- ment in the 1910 advance rate case ; that was when the big calamity howl began. The western railroad attorneys and railroad presidents appeared before the commission and sang that song with great force INTEESTATE AND FOREIGN TEANSPOKTATION. 587 and vehemence at that time. Gentlemen, here is a remarkable fact, and I want to tell you why : As Mr. Thom has said, the rate cases have all been decided in the more prosperous years, and here is the reason •why: The railroads themselves have selected the years in which they would ask for an advance. They selected 1910 as the first, year, and the expense accounts seem to have been properly and scientifically and lefficiently arranged, because they increased '$109,000,000 over the preceding year. That seemed to have been taken care of first rate, but the prophets could not see six months into the future, and before the case was over the reports for 1910 came in, showing the greatest earnings the raili-oads had ever had in all their history, and they lost that case; the calamity howl did not win that year. Then they stepped back and waited a couple of years or so, and in 1913 they made a new start in the eastern advance rate case, and again they got into identically the same trouble. The prophets of calamity failed, and 1913 came up as another big year, next to 1910 the greatest, and before the case was over they had to face that fact. That Case ran along over into 1914. The expenses increased for 1913 $120,000,000 over the preceding year, and they never go back, gentlemen; when they make one of those horizontal rises, it stays there. Then for 1914 the increase was $20,000,000 more over 1913, and the case was decided just before the war began in 1914, and they lost that case, as you will remember, on the first decision. The east- ern railroad presidents were forced to admit, on cross-examination, that the 35 roads in the case had earned and were earning at that time a net of 8.07 per cent upon all their stock — water and all — and that defeated their claim for an advance. Then the war broke out and then this calamity howl reached its apex ; I think it was the loud- est and noisest and most persistent at that time. The war hit some other lines of business and other people lost because of its beginning, but the railroads seemed to think they should come in and take care of their losses as well as their own; so they began, and they did fdarm the country about the future of the railroads. They even called on the President of the United States, and succeeded in alarm- ing him and he gave out a statement practically indorsing an increase of the rates at that time, and the case was reopened and speedily tried and, upon the hearing, about one-half of the 5 per cent advance was granted in the East on perhaps about 45 per cent of the tonnage. This encouraged the western roads, and then the third advance rate case was begun immediately ; but before it could be reached for trial in March of 1915. the war tide had changed things, and instead of the apprehension because of the war, instead of all that great talk of calamity, the first witness. President Schaff, appearing on the stand said they were not asking this increase because of a war calamity. The very reason why the roads in the East had secured their advance was now abandoned', because these prophets of dire calamity for rail- road credit had again failed and the earnings of the railroads were mounting upward as they never had before, ev^ beatmg the years of 1910 and 1913. ^ -. . i, • ..i j-* In the course and during all of these calamity talks m these dif- ferent hearings before the commission, each time a new set of repre- sentatives appeared, and this is the first time I have had the honor of meeting Judge Thorn, who now comes with the same old story that I heard over and over again, telling it to this congressional com- 588 INTERSTATE AKD FOREIGN TEANSP0E.TATION. mittee. Every time they want higher returns, higher rates; that is, the thing that will restore this credit. It was asked here what they were going to do with that 3 per cent surplus, and I have to say that after listening attentively and reading the record, it leaves me in the fog. I can not tell what is going to happen to this 3 per cent surplus. I heard Mr. Bryan's statement and I understood distinctly what he meant by " surplus." He proposed that they should have a surplus of 25 per cent of their capital stock; to let them pile up a surplus that high and then stop it, and that they should use that 25 per cent for the purpose of making up the shortages on the lean years. Now, that is clear and distinct and plain and anybody can understand what is going to happen to that, and I will say to you, gentlemen, that I do not think that is an unreasonable surplus, if it means 25 per cent of the capital stock, and I want to call your attention to this f actj that in 1913 they had a billion one hundred and fifteen million dollars of surplus already piled up, which would be about twenty per cent on all the capital stock outstanding at that time, so on an average they are almost up to the limit on the surplus right now ; perhaps they are. What do the railroads propose to do with this 3 per cent ? Is that to go on perpetually and eternally, forever? If a lean year comes along and takes 1 per cent out, is the other 2 per cent to be added in ? Is that all they are to lose out of it ? If that is the meaning, gentle- men, they are asking for a straight 9 per cent return; that is all it means. If they are going to allow this to accumulate until it amounts to 25 per cent of the capital stock, and then stop it, and use the whole amount simply to make up for lean years, there would be some reason to that; but they do not propose that and have not made that clear. In fact, they have said that after the surplus is earned, it belongs to the railroads. That means that out of this surplus they want to use it in the futurre as they have done in the past — to build additions and betterments — and they want to ask the public to build up their roads and improve them, and after we have paid the money, they own the road ; and then they ask us to pay dividends — rates high enough to yield them dividends upon the very donations which we have made into surplus. That is what it means; and in the valuation which is going on by the commission now that point is of very great im- portance, and I understand that the commission is not able to or has not separated the building of additions and betterments out of sur- plus from those built out of new capital, and that is a thing that the Congress of the United States should have its attention focused upon and should consider very seriously, because it means a great burden on our people forever afterwards. Mr. Thom said that their credit was impaired because of the new arrangement of capitalization. The margin of safety, as he said, has been reduced. It is true that the proportion of bond issues to stock issues has greatly increased, but I desire to show, you a situa- tion here that in spite of that — in spite of all this calamity howl_ during all these years, in spite of all these irregularities of financ-' ing that Mr. Thelen has shown you in detail, and every statement of which is true — in spite of all those things this credit of the railroads of the United States is so great that for 14 years it was, steadier than the credit of the Government of the United States. I do not mean by that they could borrow money cheaper than the Government of the United States, not at all, but I mean that INTEESTATE AND FOREIGN TEANSPOKTATION. 589 the fluctuations over a period of 14 years of actually incorporated lines showed a little less fluctuation of the railroad credit than of the United States combined with the Governments of England, of Germany, of France, and of the 20 largest cities of the United States. In the western advance rate case we made an exhaustive investi- gation of this credit question. Mr. Norton, who is now an editor on the Wall Street Journal, was the expert whom we employed to do that. He drew a picture of the results of his investigation— a chart. The lower line on this chart represents the credit of the four great Governments I have named and of the 20 largest cities in the United States. The average credit, beginning in 1900 and going up to the end of 1914, to January 1, 1915. Here is the per cent that the average of those governments and cities had to pay during that period, and all the fluctuations are shown. This per cent will be a little higher than the Government would have to pay, because the cities — I do not mean the utilities ; I mean city bonds themselves ; that is what I am talking about now — they pay a little higher rate than the Government. The next line up here is the group of northwestern railways, and I will read the names of them. They are: The Chicago, Burlington & Quincy; the Chicago, Milwaukee & St. Paul; the Chicago & North Western; the Chicago, St. Paul, Minneapolis & Omaha; the Great Northern ; the Minneapolis & St. Louis ; the Northern Pacific ; and the Union Pacific. Those were the ones that were averaged in -this next line, and that shows what their funded debt cost them during those same years as examined and figured out by the actual market quotations during all those times. The third line at the top is the southwestern group of railroads, and I will read those. They are: The Atchison, Topeka & Santa Fe; the Chicago, Eock Island & Pacific; the Colorado & Southern; the Kansas City & Southern; the Missouri, Kansas & Texas; the Missouri Pacific; the Southern Pacific; the St. Louis & San Fran- cisco ; and the St. Louis & South Western. There are the two groups. I regret for the purpose of my pre- sentation that this does not show the Government credit alone as compared with the railroad credit. This shows it almost 1 per cent higher than the Government credit would be alone, but never- theless it helps to illustrate the general parallel I am making that Government credit is always lower than the corporation credit, and there are those three lines. I am going, Mr. Chairman, to pass this chart to the committee and you can pass it along. It is easy to see how the parallel runs, itere is where the Government's credit started and there is where it ended. Here is where the northwest- ern railroads started and there is where they ended. The rising interest rate was not quite as much for that group of railroads as for this combination of governments and cities, and individually it is true of the governments, and the same is true generally of the southwestern group of railroads which had so many of those bad financing propositions. Mr. EsCH. You might have it printed as a part of the record. Mr. Beookhaet. If it could be put in the record, I would desire to have it appear. (The paper referred to is here printed in full as follows:) 590 ISTERSTATE 'AND FOKEIGN TEANSPOETAIlOff. 1 1 *n« MiMM Q — 1 ; 1 t 1 V 1 y ., * <, If III 2 1 1 i 1 ^ J ^ r ^^ / / ' ■■•| V N, ( \ ? \ \ 1 } } . 1 < \ { 1 1 V 's T- \ T — \ \ 1 S .1 1 v'^ \ ON s \ \\ 1 \ i ^ ( i ■ si \ ) 1 / i 4 1 ?I . 1 ■ \ ■■■* 1 1 ( Q CHART Y. IKTEKSTATE AND POEEIGN TRANSPORTATION. 591 '■' \ f 1 '\ / \ V [ 1 \ \ \ \ \ 1 \ \ 5 1 V 1 \ \ } 1 I'll /■ 1 1 s 1 1 I \ ^ \ \ \ . \ 1 \ \ \ ; i \ / 1 / / / 1 1 1 I \ \ \ ^ \ _ ] § 1 _ _ ,j 1 ~~ / / _ —i ■ — ■ _»■ . ^»m J *"■" V V ^ L 1 mmm ' '~— Jl-.* c HAl IT Z. 592 INTEBSTATE AND FOKEIGN TRANSPORTATION. Now, gentlemen, I will say further that was the exhibit that was put in the rate cases, and the Interstate Commerce Commission found the facts as stated there to be true in its findings and it was not seri- ously controverted in any way. As to the stocks. That was the other feature of capitalization. We will see what happened to them at the same time. I have an- other chart, prepared on the same line by the same expert, and the 100 per cent and the 200 per cent, and so on, was given, and this was compared with industrials. What happened to the railroad stocks of these groups of railroads compared to some of the best industrials in the United States? You will see the heavy black line, the railroad stocks started lowest; they passed industrials, got away up above . there. There were more fluctuations in them, but they earned consid- erably above the industrials. So that both the bonds and stocks of railroads during that period of 14 years — the bonds stayed steadier than our Government securities and the best municipalities, and stocks steadier than our best industrials. Mr. Thom gave you some figures upon the credit of the earnings of the railroads as one reason why this credit was impaired, and he claimed — ^he took the net earnings from the year 1906 to the year 1910, inclusive, then the earnings from 1911 to 1915, inclusive, "and he found them to be 5.25 per cent for the first years and 4.56 per cent for the next five years, ending June 30, 1915. That showed a decline of about three-fourths of 1 per cent in the earnings in five years. That tends to illustrate the claim that earnings were declining, do you not see? Gentlemen, I will tell you what I did. I just moved the thing down one year. I took the years from 1905 to 1909. He had the years 1906 to 1910. I just moved it back one year and the average was 5.04 per cent. Then I took the years 1910 to 1914, the next five years, and the average was 5.64 per cent, so by just sliding it forward one year you get an advance of sixty one-hundredths of 1 per cent. The experts who select these years are very expert gentlemen, and it is one of the difficulties in the rate cases, in which we had to watch them, to watch the selections they made. If a combination was in . favor of the roads they were so expert that they never failed to find it. I tried to bring that up to 1916, to see what the result, would be. I went to the commission to get the figures, but the capitalization, etc., is not up to date, but taking the great earnings of that year you will find there was ho decline when you bring up that five years. Here is another thing. I found in the latest figures from the com- mission that the total net earnings of the railroads earning $1,000,000 or more for the two months of July and August — that is, the first two months of the fiscal year — were $204,482,000. In 1915 they were only $161,522,000. There is an increase of about $43,000,000 for two months,' and that increase is on top of another increase over the pre- ceding year of perhaps $25,000,000 more. In that two months, the increase in the revenues of these railroads was enough to pay as much as they have estimated the entire expense of the Adamson law Avould be in putting the eight-hour day into effect. Here is another proposition : These figures of earnings that were given you bj' Mr. Thom were upon the whole capitalization of the INTERSTATE AND FOREIGN TKANStuBTATION. 593 railroads. You are not particularly concerned about the return on the whole capitalization. The return upon the bonded or funded part of this capitalization is fixed by contract. The people of the country are not going to be asked to pay a commission to the rail- roads for getting that first-mortgage loan on a public utility of this kind. The cost of that was returned for that part of the capi- talization. The important part, and the place where they are to get the return, is upon the stock capitalization ; so why not, in these comparisons, use the net earnings upon the stock values? For instance, I took 1913, which was the only record I had before me, and in the figures given by Mr. Thorn the earnings on the whole capitalization were only 5.94 per cent, but the earnings on all the capital stock, water and all, after paying all the interest on all the bonds, was 8.31 per cent. Gentlemen, you can see by that why net earnings may be increasing on the capital stock and declining on the whole capitalization, so we must watch out for the comparisons of figures. They have deadfalls in them. The next subject I desire to consider is the proposition of the unearned increment of real estate. The railroads are constantly capitalizing unearned increment and claiming a return upon it. This claim has been resisted, but the Supreme Court of the United States has finavlly decided that the railroads ought to be satisfied to receive a return upon the increase in the value of the real estate. (Minnesota Rate case, Simpson v. Shepard, 230 U. S., 377.) This; theory constantly adds the unearned increment to the value of rail- road property. Under private ownership this added value belongs to the stockholders. Under Government ownership it would be a saving to the Government. It is impossible to tell the exact amount of this saving. The record of the past will not be known until the valuation of the railroads is completed. I can only give a concrete example and estimate the total. In the Minnesota Rate case, above cited, the master determined the cost and the present value of the real estate for terminals of the Northern Pacific in the cities of St. Paul, Minneapolis, and Duluth. Up to 1908 he found the original cost to be $4,527,228.76. He found the present value at that time to be $17,315,869.45. This finding was not approved by the opinion of the Supreme Court, but it did announce a theory that allows about thirteen and one-third millions, or nearly 200 per cent, advance. If the Government had owned the Northern Pacific, every dollar of this would have' been saved. Under private ownership the stockholders not only get a reasonable return upon their original investment, but in this instance they got a present of over eight and three-quarter million dollars, and are allowed to collect a return upon it from the public forever. The same thing has happened with every railroad m every city of the United States. In the Western Advance Rate case, 1910 (20 I. C. C. Rep., 243), it was found that the increase alone of the land values of the Burlington Railroad amounted to three-fifths of the total original investment of the entire Burlington system. The Chairman. State that again, please. Mr. Beookhart. I will repeat that. I am glad to have that noticed, because it means much in this proposition. 594 INTERSTATE AND FOREIGN TRANSPORTATION. It was f (Dund that the increase alone of the land values of the Burlington Eailroad amounted to three-fifths of the total original investment of the entire Burlington system. The figures will come later. On page 340 Commissioner Ijane, now a member of the Presijient's Cabinet, in writing the unanimous opinion of the commission in referring to the claims of the Burlington Railroad that it should be permitted to continuously increase its rates because of (first) betterments out of income, and (second) increase in land values, stated : If the position of the Burlington is sound and is a precise expression of what our courts will hold to be the law, then, as we are told, there is certainly the danger that we "may never expect railroad rates to be lower than they are at present. On the contrary, there is the unwelcome promise made in this case that they will continuously 8.d¥ance. In the face of such an economic phil- osophy 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. The same thing has happened as to all of the right of way of all of the railroads. The amount of unearned increment already capi- talized is a fabulous sum. It will be more in the future than in the past. The growth and development of our country is only begun. Eminent authority has estimated the future unearned increment of our railroad real estate at an average of at least $300,000,000 per year. 'The increase in land values for one railroad has been esti- mated by the Intierstate Commerce Commission. This railroad was accepted as typical of the western territory, it being the Burlington. The increase alone amounted to $150,000,000, that company having a capitalization at that time of $32OjOOO,O0O. Of course the capitali- zation was higher than the original investment, but $150,000,000 was three-fifths of the original investment. It will be impossible to find any accurate statement of the total land values in the United States, but considering the fact that the enormous terminals are in the East rather than in the West, that the proportion of terminals to the railroad right of way is very much greater in the East than in the West, and when you consider not only the increase in land values but also the original cost, it would seem safe to estimate that the total land values in the United States, including the enormous terminals, is $6,000,000,000, exclusive of im- provements. It is probably safe to estimate that land values have increase 100 per cent in the last 15 years. If they increase 100 per cent in the next 20 years, the annual increase by reason of this un- earned increment will amount to $300,000,000. I also desire to call your attention to the fact that the writers of books against Govern- ment ownership of railroads do not discuss this item. Although this item is so important that it alone might be sufficient to decide this great question, still it is not mentioned by the advocates of private o^vnership. It deserves a thorough investigation by this committee. In think, gentlemen, that the unearned-increment proposition, even if you do not go to Government ownership but decide to go ahead with Government regulation, is one that deserves serious con- sideration a{ your hands. I believe it should be ended. If we give INTERSTATE AND FOREIGN TRANSPORTATION. 595 them an. honest valuation and give them enough returns to collect 6 per cent in all years, that is sufficient, as they are not entitled to get a speculative value out of property of this kind. They are noth- mg more than public trustees — trustees for the public — for perform- ing this service. We have surrendered this into their hands, and it is no more right that they should profit out of that trust than that a guardian or administrator of an estate should profit out of the ad- vance of real estate which he controls. The third great economic loss of private ownership of our rail- roads is the waste of competition. The details of this subject are myriad. I shall not . attempt to present them. Those who favor uniting our railroads in a single giant private corporation rely upon the facts showing the great waste in the present system through duplication in everything. With these facts I agree. Nor is there a vast difference in the remedy I propose. I, too, believe in a single giant system, but I want all of the people of the United States for stockholders and the Interstate Commerce Commission for the board of directors. The Government of the United States is the only agency which our people will trust with so great power. But as to the waste of competition, I shall only give the conclusions of the most eminent authority, Mr. C. P. Huntington, president of the Southern Pacific Railway, who said that the local waste in New York City alone amounted to $100,000,000 annually. (U. S. Ind. Com. IX, 985.) In reference to the waste of competition under the Eng- lish system, Clement Edwards, page 28 Railway Nationalization, says: What do the wastes of the present system, with its manifold ownership and divided management, amount to? Only an approximate figure can, of course, be given, in the present defective state of railway statistics. The secretary of the London & Northwestern Railway Oo. — and he would not he likely to err on the side of exaggeration — estimated the loss as 20 per cent of working expense. A similar estimate has been made by Sir Edwin Chadwick, C. B., the eminent engineer. Another railway authority, Oapt. Laws, manager of the I^ancashire & Torkshire, has placed the estimate at 24 per cent. Mr. Edward Dudley Kenna, former vice president and general counsel of the Santa Fe, in his book on Railway Misrule, page 111, says: English experts estimate that the wastes from competition are equal to 20 per cent of operating expense.s. They are scarcely less in the United States. As the operating expenses of the railways for 1912 were $1,9.58,963.000, the reasonable inference is that $400,000,000 of this was waste, all of which the people were called upon to supply. This sum exceeds the total of all dividends disbursed during the vear given by railway companies and is also greater than the annual disbursements for military, naval, and post-office expenditures by the Government. Of course, Mr. Kenna's book was written a few years ago, before the great increase in military expenditures. This Is high authority, and it seems reliable. Government ownership would remove this waste and in this third great item would save to the people $400,000,000 per year. Summarized, we have : Annual saving because of superior Government credit $500. 000, 000 Annual saving of unearned increment of real estate ^00, 000, 000 Annual saving of waste of competition wu, uuu, uuu Total annual saving of Government ownership 1, 200, OOO, 000 696 INTERSTATE AND EOREIGN TEANSPOBTATION, This is more than (iiie-third of tlie gl'oss revenues of till the railroads. Until recently it is more thaij the entire appropriations of the Congress of the United States. And this does not include nil of the waste and extravagance of private ownership. There are many smaller items, like legal expenses, advertising, and soliciting, which I will not attempt to estimate ; however, there are two others so large that they ought not be omitted from consideration. The first is the waste through the alliances with subsidiary supply companies. This waste is nearly all concealed. I will only quote you what a distinguished United States Senator has said : " Enough is Ivuown to make it reasonably certain that hun- dreds of millions of railroad expenditures annually reported as necessarily paid out to maintain the railroad and meet its operating expenses are not honestly expenditures for such purposes, but represent instead wrongful payments to ' insiders ' who work a legalized form of graft, taking a rake-off on everything that enters into railroad construction, from the money to finance it to the oil that lubricates the engines. The directors of the United States Steel Co. own and control more than one-half of the railroad mileage of the United States. They sell steel rails to themselves at ' most satisfactory figures.' " I can illustrate this by a personal experience. Some years ago, in connection with the promotion of a little interurban railroad, I got the B. J. Annour Co. to estimate on the price of furnishing steel rail, and the only price they quoted was $28 per ton f . o. b. factory. The same year I had some business in Canada with the Canadian Pacific Railway Co., which was building an extension through some land, that was owned by a company which I represented, and I went up there, and during the course of our business I made inquiries of the parties in charge of this extension about their steel prices, and they said they were quoted to them at $20. That is the way the Steel Trust is doing business to-day. In this' connection, gentlemen, I have another exhibit which I desire to present to you, and I want to show you something about the power of this item in the history of the United States. In this same rate case, when we were examining their prices, etc., we made an investigation of the subject of steel rails as compared to the several items of steel. The exhibit which I have here, the top line running highest through that variation [exhibiting] is wire nails. There is a line in there — and I have marked it with pencil so you can find it easily — which indicates the steel rails. Now, there are several other items of steel on that page, and they are going up and doM'n, year after year, from 1898 to 1914, in com- pliance with the law of supply and demand, and perhaps there were manipulations, but you see the variations that happended all the way through on all the other steel products. The comparison of the per- centages will show that if steel rails brought $28 per ton, that wire nals brought about $31 per ton, which is a remarkable thing, consider- ing the difference in manufacture. Now, what happened to steel rails in 1901? In 1901 starts this black line [exhibiting] representing steel rails, and from 1901 it has proceeded as straight as the point of the compass. It never varied up or down until the end of 1914, and that is as far as this exhibit shows. Since the war began I under- stand it has varied up, but it is proceeding along in the same deadly parallel. Who was it that repealed the law of supply and demand? It has never been done before in the history of this big round world. Here is a private corporation or an association of private corpora- tions that have exerted a power greater than the Roman Emperors' power or the Czar of all the Russias could exert. The Congress of the United States can not draw another black line like that by law. You never can do it unless you take over these railroads and own both INTEESTATE AND POBEIGN TEANSPOETATION . 597 the railroads and control the manufacture of steel rails at the other end, as these men did. Owning a majority of these roads and sell- ing these rails at the prices they desired, they were able to repeal the law of supply and demand and draw the blackest line— the only black line of its kind— in all human history. By the way, I want you to see this exhibit, gentlemen. That was figured out by the same expert in the western advance rate case, and it was not controverted, and there is no doubt about its very great accuracy. (The exhibit referred to is published in full; see p. 598.) Then we have the alliances with subsidiary transportation com- panies. Our American railroads have failed to perform the very functions for which they were created. They have admitted their inefficiency and incompetence by farming out the express business, the telegraph business, the sleeping-car business, the tank-car busi- ness, and even a large part of the refrigerator and other freight business. These companies are all profiitable. The receiver's court has no terrors for them. Even a Government parcels post has but slightly affected the express business. Under Government ownership nearly all of the net profits of these parasite companies would be saved to the people. The extravagance of governments is proverbial, but the extravagance of private ownership of railroads has never yet been told. Having pointed out the economics of Government ownership, it is pertinent to inquire if there is anything on the other side of the ac- count to offset them. It will be conceded that some things do so oper- ate. According to Mr. Dunn, Government ownership of railways has been adopted in whole or in part in 53 different countries, and since his book was written the United States has started in Alaska. This gives a wide field for observation. A review of the change from private to public ownership in all of these countries will show that labor has received better treatment and better pay under Govern- ment ownership. This costs something, and would absorb a part of the savings I have indicated. Upon this subject Mr. Dunn says, on page 338 : As to the intensity of tlie labor required from and done by employees; it is likely to be greater under private that under public management. As has been sliown elsewhere, when railroads have been transferred from private to public ownership, there is almost invariably an increase in the number of employees, and under similar conditions State railways ordinarily employ more men than private railways. This must mean that on the average the individual employee oa the latter Is required to do more work than on the former. Indeed, it Is one of the common complaints against capitalistic employers that they work their employees harder than Governments. Again, on page 441 he says: However, it is significant that where there are State and private railways in the same country, it is found that the State railways pay a somewhat higher scale of wages, and seldom or never is it found that the opposite is the case. These conclusions may be treated as the admissions of the best- informed opponents of Government ownership. They are true ex- cept as to the high-salaried general officers. In Germany the mmis- ter of public works has charge of more railroads than any other one man on earth, and he manages them better, but his salary is only $9,000 per year and house rent. Suppose, therefore, we admit that $300,- 000,000 of the saving we have pointed out would go to increase the 598 INTEBSTATE AND FOREIGN TEANSPOETATION. INTERSTATE AND FOEEIGN TBANSPOBTATION. 599 number of employees and to increase their pay. This would mean better labor conditions, greater safety, and better service for the public. . Who is there would regret if the $20,000,000 now paid to general officers, largely as financial experts, legal experts, or political experts, were transferred to the section hands who do not draw a decent wage ? Three hundred million dollars would be more than railroad labor has ever asked. This would leave $900,000,000 still to be used in lowering rates, improving the service, or extending the facilities. We could have 1-eent passenger fare if we wanted it, or we could save an im- mense capital for- new development. This is the other side of the account, and the balance remains large in favor of public ownership. But now you ask for a concrete example. You say this is all theory, and you want to see the record of the country that has done these things. For this purpose I will make comparison to Germany. There are several reasons for this. The German roads are well man- aged. I do not favor Government ownership in this country unless the management is something like German efficiency. This does not mean an autocratic management. Contrary to popular belief, the German roads are under a very democratic management. The at- tached note is from Prof. Frank Parsons, and gives the workings in detail. A similar system is the most suitable for this country. , Now, gentlemen, I want to read to you a note about how the Prussian railroads are managed. . They are really State roads in Germany. Prussia is the greatest State. Over and above the Prussian management there is a sort of supervising office that brushes down any distrust among the States. It does not exercise anything like the authority of our Interstate Commerce Commission as to private ownership. The real management, after all, is in the hands of the States over there, and this note that I read you now gives the manage- ment of the Prussian railways, and I think you will find it is both cooperative and democratic, exceedingly so, and as compared with the system which these railroads are proposing here now of abolish- mg practically all the State commissions and giving all the authority of all the management into the hands of the commission appointed by the President and Senate alone, the autocracy of the plan proposed here in the United States would be beyond expression, when you com- pare it with the so-called autocratic management in Germany. Now, let us see : Railways are managed by the minister of public works at the top (with a national advisory council), 21 railway directories, 6 classes of local officers (operating, machine, trq.ffic, shop, telegraph, and building). One of the prin- cipal duties of the local traffic office is to maintain a " living union between the railway administration and the public. The chiefs of these offices are required to get into intimate relations with the people of their localities. Bach local traffic chief "by numerous personal interviews and observations must inform himself concerning the needs of the service in his district, investigate and remedy complaints and evils without delay, and take such measures as will secure the most efficient service." It is also one of his duties to inform the public concerning the organization and administration of the railways. The manage- ment has nothing to hide from the public, but, on the contrary, desires the public to know exactly what is being done and why. ^ 4.. „ ,, ko,.=. The local aclvisory councils are composed of representatives from chambers of commerce labor organizations, farmers' unions, dairy associations, merchants club°Ttckll sorts of industrial and social combinations are represented m these advisoo' councils, and the law requires the directories to consult these 70342— PT 10—16 8 600 INTEHSTATE AND FOREIGN TEANSPORTATIOST. advisory bodies. The people organized according to their interests into various forms of industrial union (chambers of commerce, la,bor unions, farmers" asso- ciations, etc. ) elect the members of the local advisorj' councils, and these councils in turn elect 30 out of the 40 members of the national advisory board, the other 10 members being appointed, 3 by the minister of a.griculture and forests, 3 by the minster of trade and industry, 2 by the minister of finance, and 2 by the minister of public works. State officials being ineligible. These advisory bodies do actually discuss with the greatest force, clearness, and effectiveness all sorts of questions about rates and classification and the conduct of the railroads ; they make their recommendations and suggestions, and they are almost always adopted — always, in fact, except in those rare cases where conditions beyond the control of the railway management prevent adoption from being reasonably possible. So that in Germany to-day the railway system is practically in the hands of the people to manage and direct. The roads are' actually operated in the interests of the people on one of the most democratic and cooperative plans it would be possible to imagine. Each railway directory must consult the circuit council on all important matters concerning the railways in its circuit. This applies especially to time- tables and rate schedules. On the other hand, the council makes recommenda- tions to the directory. In case of emergency the directory may act according to its own judgment independently of the council, but it is required to report all such cases to the standing committee of the council and to the council itself. This provision supplies the elastic element which enables the railway management to combine full efficiency and executive force with the council system. Each council "has a standing committee which receives petitions, gathers and sifts evidence, and reports to the council. If, for any reason, the circuit council and the local directory can not agree, or the question in hand is too large for local settlement, the matter goes up to the. national council and the minister. The national council meets at least twice annually and deliberates on such matters as the proposed budget, normal freight and passenger rates, classification of freight, special and differential rates, proposed changes in regulation governing the operations of railways, and allied questions. The law requires it to submit its opinion on any ques- tion brought before it by the minister of public works, and it has the right to make any recommendations it sees fit in regard to any matter relating to the railways. Its proceedings are regularly submitted to the Landtag, where they are considered in connection with the budget, thus establishing " an organic connection " between the national council and the Parliament. In this way the proceedings are made accessible to every one, and an opportunity is given to approve or disapprove what the council does through parliamentary representatives. The system is one of ' reciprocal questioning and answering on the part of the minister of public works, the national council, and the Parliament. For the purpose of this comparison, I will take my figures from Mr. Dunn's book. When they are unfair they are also unfavorable to Government ownership, so I use as my basis the concessions of the opposition. The mileage of the Prussian Hessian State Kail- ways in 1910 was 23,325 and the cost per mile was $114,000. (Dunn, p. 180.) The net earnings were $170,000,000 (Dunn, 311), but from this should be deducted $21,000,000 for taxes not collected. (Dunn, 313.) This would leave $149,000,000 of profit to the Prussian Gov- ernment in 1910, after paying all expenses and taxes as great as ours, and this vast sum was earned on 23,335 miles of line. The mileage for the United States was 238,609, or more then 10 times as great. At this ratio the American roads would have earned more than one and a half billion dollars, and deducting from this the entire interest charge would have left over 1,135 millions net. This is a wide mar- gin over a billion dollars, and it shows that Germany actually did what I claim the United States ought to do. No claim is more persistently made than that the American freight rates are the lowest in the world. You see it in newspapers, in maga- zines, in pamphlets, and in books. Mr. Dunn excepts Japan alone INTERSTATE AND FOREIGN TRANSPORTATION. 601 (p. 296). This claim has even reached Congress, and near the close of the last session Senator Works said : " The truth is that our freight rates are materially less than are the freight rates of any country in the world, and that passenger fares, with the exception of third 'and fourth class fares in European countries, are as low as are the rates in other parts of the world." Mr. Dunn has used seven pages of his book, 296-302, to demonstrate that our passenger rates are almost as low as the German and our freight rates much lower. I desire to join issue with those conclusions and assert that not only are Ameri- can passenger rates highest in the world, but American freight rates for the same service are highest also. The issue is sharp and is also important. Now for the facts. When we seek to compare freight rates in two different countries we first look for the average cost of hauling 1 ton of freight 1 mile. In the table given this average cost in Germany is 1.248 cents and in the United States 0.753. If this were all to consider, the American rate is much lower than the German. But this is only the starting point. Every rate is made up of two things — one the terminal ex- pense, the other the haulage expense. All freight must be loaded and unloaded, and facilities must be provided therefor. That is ter- minal expense. It must be moved. That is haulage. The terminal expense is about the same for a short haul as for a long one. There- ' fore the length of haul becomes the next great item in a freight rate. The above table gives the average German haul as 68 miles. That is Mr. Dunn's figures. Other eminent authority gives it as 60 miles; but again I use the conceded figures. In my table the American haul is given as 249.88 miles. In Mr. Dunn's book, on page 176, the " average haul miles," " railways of the United States," is given as only 138 miles. Now, we are coming to the issue. On page 296 he says the length of the American haul is double the German, and this statement is repeated on page 299. He makes no explanation of these figures, and states them as a positive fact and without qualification. Where did he get those figures ? Look on page 59 of the statistics of railways. What is the answer to this fatal achievement? In the main we hear two. First, it is loudly proclaimed that wages in the United States are double what they are in Germany, and, second, the Ameri- can freight rates are' the lowest in the world. The first is more than offset by the greater cost of railroads in Germany, and the second I challenge and will seek to disprove. In order to make the compari- son I submit the following table. The German figures are from Mr. Dunn's book and the American from Statistics of Railways, I. C. C, 1910, which is the same year used by Mr. Dunn : -^„B operated Capitalization or cost of construction per mile of road Passenger density, j)assengers carried 1 mile per mile of line. Average journey, miles Average rate per passenger mile, cents Frelglit density (tons hauled 1 mile per mile of line) Average haul, miles Total compensation American railway employees, 1910 Prussian Hessian State. 23,335 S114,000 693.921 14.45 88 1,150,490 United States, private. 239,609 $62,657 138,169 33 1.938 1,071.086 , 249.68 $1,143,725,308 Average wage (Dunn, 177) , Prussian about one-half of American. 602 INTERSTATE AND FOREIGN TRANSPORTATION. If the German wages are only one-half the American wages and all other conditions were equal, then it is certain American earnings would be less. A glance at the foregoing table shows other condi- tions are not equal. The first great discrepency is in the cost of the road. We find that the German roads cost over $51,000 per mile more than the capitalization of the American roads. If, therefore, the American roads cost as much there would be an additional $12,000,000,000 upon which to earn a dividend. If we took half of the American wages shown in the table for that purpose they would yield about $572,000,000, or about 4.77 per cent. But on page 311 Mr. Dunn shows the German roads earned 6.48 per cent upon their entire cost of $114,000 per mile. Therefore the one item of greater cost of road more than offsets the difference in wages. In addition to this the German employees are so well protected by State insur- ance against injury and loss of employment with pensions that the real difference in wages is much less than the nominal difference. Where did he get those figures? Look on page 59 of the Statistics of Eailways, I. C. C, 1910, and you will find them under the head- ing, " Typical haul of the average railway." Does that mean the average haul of the railways of the United States? It does not. It means the average haul of one ; that is, the average railway. In the next column on the same page we find " The typical haul of all the railways regarded as a system," and that is 249.68 miles instead of 138. And there you find the two figures side by side, in the same book, and yet Mr. Dunn uses the typical haul of the average railway and never says a word about it, as the average American haul. In order to maintain that claim that American rates are lower at all, it is necessary to split that haul and reduce it down to 138 instead of 260 miles as it is to-day. It was 250 miles, in round numbers, at the time I made the comparison. In our country there are many thousand hauls over two or three or even more roads. You can start a trainload of freight at New York over the New York Central, take it over the Lake Shore and over the Big Four, down to St. Louis without that train being broken up, every car going at the same time, under the same motive power, under the same crews. You can do all of that, and yet in Mr. Dunn's figures the typical haul of the American railway — that through haul is broken up and reported as three hauls, and there would be three terminal expenses. The unfairness of that proposition has enabled them to publish continually and put in statements and pamphlets and books and everything the fact that American freight rates are the least in the world. The cars are loaded at the beginning, switched from one road to another and not unloaded until the jour- ney end. So far as terminal expense is concerned this is one haul. Under the figures used by Mr. Dunn, if a car passed over three dif- ferent roads that trip is broken up into three hauls, and he figures it as loaded three times and unloaded three times, when, in fact, it is only loaded once and unloaded once. He is not only wrong, but is grossly unfair in using these figures without explanation or comment. If the Government owned the railroads, his figures would disap- pear from the table. There would be nothing from which to make them up. If private ownership is charging a terminal expense which includes its share for loading and unloading every time it INTEBSTATE AND FOREIGN TRANSPORTATION. 603 switches a car from one road to another, it is taking an extortionate toll that will be wiped out by Government ownership. Why is tills so important ? When we find out the amount of ter- minal expense we shall see. I have made a careful investigation of this question and have had it figured out by an expert. Under the McGraham system established many years ago the railroads actu- ally charge 6 cents per 100 pounds for terminal expense on sixth class, and they charge the same for the short haul as for the long one. Sixth class, the rate from New York to Chicago is 25 cents, and if you will read Prof. Ripley's book, which is favorable to the railroads, he describes how that rate was established 30 or more years ago and brought down to date — paying it to-day. It is divided 6 cents for terminal and 19 cents for haulage. Noav, of course, for higher classes, both the haulage and the terminal are increased. For the sums of the commodities they are the same. The sum of the division, however, is made on any commodity where the rate is 25 cents per hundred. On the commodities that are lower, surely both the haulage and the terminal is reduced in the charge. Xow, gentlemen, in order to make this terminal average for the United States safe, T have taken all of that reduction off the ter- minal and have not allowed any on the haulage at aU. For the higher class rates they charge more and for the commodities less. The average terminal charge for all freight in the United States fig- ures to be at least 4.25 cents per hundred pounds. That is what It figures out, allowing all this reduction, if there is any, on the ter- minal alone, taking nothing off of the haulage, leaving it as high as it is on the sixth class. On some local short hauls they charge less. In the Minnesota rate case the State commission fixed the charge for first class at 11.02 cents, and the average terminal charge for all freight in the United States figures out to be at least 4.25 cents per hundred pounds. This is the average terminal charge in the rates we nowpav the railroads, and it is not modified by the fact that shippers load and unload carload lots. Therefore the average ter- minal charge alone on each ton of freight in our country is 85 cents. Now, gentlemen, I would like to have you remember those figures. The average terminal charge which we are now paying the railroads in the United States is 85 cents for each hundred pounds. In Ger- many, for terminal movement and all, it costs 1.248 cents to move each ton 1 mile. Therefore, to move a ton the average haul oi 88 miles would cost only 84.9 cents. The terminal charge m the United States alone is higher than the whole German rate. . In other words the terminal expense alone m the United States is more than the whole German rate. If the length of haul is 68 miles in Germany and 250 in the United States, then the American is 3| times the German instead of double as claimed by Mr. Dunn. This means we must add 2| terminal expenses to the American rate to make the comparison. When this is done the Ainerican rate be- comes 2.886 as against 1.248 for the German. Instead of being the lowest in the world our freight rates are more than 50 per cent higher than the German and there are no other facts to change this con- clusion. We have already seen that our highest wages are more than offset by the greater cost of roads m Germany. The table sImws the freight density to be about the same in the two countries. This 604 INTEESTATE AND FOEEIGN TEANSPOETATION. is a surprise to many, but some years it is even greater in our coimtry. There are many other facts which tend to increase the American rates in the comparison. German rates include express, which is high and increases the average. Express is not included in the American rate. The American rate is cut down by large amounts of freight carried for the companies themselves, but the German rate includes only freight actually paid for. The proportion of bulky low- rate freight like coal, iron, and timber is very much greater in this country. Much of this goes by water in Germany. About one-third of our tonnage is coal and that reduces the average rate. In Germany the proportion of manufactured goods is very much greater and they always go at a higher rate and increase the average. These considerations are fatal to the claim that the American rates are lower. About 1905 the German commissioners, Hoflf and Schwabach, visited this country for the purpose, of comparing freight rates. They reported that for the same service the American rate would be 1.44 cents per ton-mile as compared to the German rate of 0.95 of 1 cent. They also found the American rate to be almost 50 per cent higher. I have searched in vain for higher freight rates than the Americans upon a fair comparison. England is the nearest ap- proach, and England enjoyed the blessings of private control until the war wiped it out. In Germany the average passenger fare is 0.88 of 1 cent per mile. About 3 per cent must be added to this for baggage charges and a little more for tickets through gates to parties seeing friends off on trains. After all is considered the German rate is less than half the Ajmerican rate of 1.938 cents per mile. The American accom- modations are better than the German lower classes and the German density is more than five times the American. However, density does not count so much on passenger as on freight rates. In our country the passenger rate in the East is higher than in the less dense Middle West. In the recent advances allowed by the commission, they allowed 2^ cents for the eastern district here, but in the western district they only allowed 2.4 cents for interstate traffic, so the greater density is' paying the higher rate here in the United States, and the railroads themselves figured it out in the same way, prior to that. The average journey in Germany is less than half the American, but neither is length of journey so important as length of haul in freight. When all is considered it is found that for the same service the American passenger rate is almost double the German and the freight rate more than 52 per cent higher, but still upon those low rates Government ownership in Germany had a net earning of $170,000,000 in 1910 and the mails and parcel post were handled free. A proper and fair analysis will reach the same conclusions in all the M'orld. The United States is the best natural railroad proposi- tion on earth. I used to feel we could not make a comparison. You might make a success in a little country like Switzerland, but you might fail in a big counti-y like the United States, but the investiga- tion of this subject proves, conclusively that the larger the country the more sure you are to make a success. The railroad consolidations prove that. The attempt they are malring now to get them united INTEESTATE AND FOREIGN TEANSPORTATION. 605 under a single management proves the same thing. It is easier to make a success of Government ownership in the ifnited States than m any coxmtry m this world. Germany is next. Superior manage- ment has put the German first. In other countries the results are not so great, because the propositions are not so good. The management in Switzerland under the most democratic form of government is in all respects as good as the German. The results are as great in pro- portion to the opportunities. In Australia the same is true, except the ownership has been by States instead of national. The same is true of Belgium, New Zealand, Japan, and South Africa. Until very recently they have had a poor State management. Some States had narrow-gauge roads that went up against broad-gauge roads in other States. They hg.ve had an economic loss on them, but recently they have had national management, which will unite them all together, with the result that they will be as good as in any other country. Even in Italy, where the proposition is so bad it is a failure under every management, still it is better under Government ownership. This is the only country that ever relapsed from Government owner- ship, but it soon came back. In all other countries the question is settled where the Government owns the railroads, and I believe there is no other settlement for it in our country. Is Government ownership compatible with our system of govern- ment? The committee has asked that question, and I would reply to this by saying that private ownership has certainly proven incom- patible to our system of government. If we go into the history of the manipulation, the looting, and the wrecking of American railroads, we find it without parallel in the history of the world. Legislatures, courts, and even Congress have been unable to stop these evils. They have continued right down to date in the New Haven and the Rock Island. Their participation in government has been evil, sinister, and universal. Count up the thousand newspapers on the pay roll of the New Haven, and who can ascribe to it any other motive than the corruption of public sentiment and the subversion of free govern- ment? Its schemes Avould have failed if government had not been chloroformed. How much better is the recent campaign for higher rates through newspaper advertising. In Iowa more than 500 papers published this advertising, which was so false and unreliable that the attorney for the railroads was forced to repudiate it in the trial of the ad- vance rate case. And all of this scheme of deceiving themselves was paid by the people in railroad fares. Why. at this moment, do the railroads have 350 political attorneys retained in the State of Iowa and other thousands throughout the United States? Why have the railroads offered my newspaper and every newspaper throughout the country free plate accounts of the hearings before this com- mittee? It is because private ownership is not compatible with free government. The railroads will never get out of politics until the Government owns them. Then nobody will conduct a political cam- paign for higher rates. Nobody will corrupt a legislature for a charter to water the stocks. The political attorneys will, all be dis- charged. The United States attorneys will protect the Government's interests. Congress can investigate, every subject of transportation and no free plate matter will be sent out to edit or distort the facts. 606 INTERSTATE AND FOREIGN TRANSPORTATION. On June 30, 1915, the United States Government was running more than 28,000 miles of railroad — more than the Prussian Empire. I think the nitober at the present time — I have seen it stated, at least, to be 1:2,000. This was repoi'ted from the Interstate Com- merce Commission at that time. These great properties in control of our courts do not threaten our Government. They would be better still in the hands of the Interstate Commerce Commission, which knows so much more about them, but the courts run them better than these private owners who have wrecked them. As to whether Government ownership will suit local needs, we only need to look at the Post Office Department. Its establishment of the rural free delivery is an answer full and complete! Every system of Government ownership does more to suit local needs than private ownership. It is one of the charges against Government ownership that it does too much and goes to extravagance. I should favor the acquiring of the properties by the Government either by purchase or condemnation. The old stock issue should be retired and speculation forever cease in our public highways. In conclusion, I will point out in my opinion why regulation is doomed to failure. A very large percentage — over two-thirds — of our railroads can live and prosper on a given set of rates. They are doing it now. It is unjust to the public to raise the whole rate structure in order to gi\e the other one-third more revenue. It might be done in one giant corporation plan, but that looks too much like a private monarchy. The American people will not tolerate it very long. The other and only alternative is Government owner- ship. I have here compiled a list of railway companies that earned more than 7 per cent on their common stock during the year 1913. This earning is net above all interest, all operating expenses and all taxes. I have accepted their capital stock as they themselves report it, water and all. These roads handled 70.09 per cent or mere than two-thirds of all the traffic handled by the railroads for which the Interstate Commerce Commission publishes ton-mile figures. The commission did not publish traffic statistics for Class III railroads. However, these roads earn less than $100,000 each annually and comprise less than 4 per cent of the mileage of the United States. Gentlemen, here are the roads and what they earn, and I believe that nothing can be better than for us to read these figures over here and see what is happening to these individual roads. It shows to you that regulation can not regulate this competitive system. It is impossible for you gentlemen to figure out a plan to give all of the railroads of the. United States 6 per cent and just enough surplus to make that absolute^ sure each year. You can not do it under this private ownership because of this great discrepancy and the great differences in the organization, the localities, and the numerous systems. The Baltimore & Ohio earned 7.33 on all its common stock. The Bessemer & Lake Erie Railroad Co. earned on all its stock, preferred and all — I did not get some of these sejaarated ; I had to take it all — it earned 18.14 per cent. The Buffalo, Eochester & Pittsburgh Rail- way Co., on all its stock, earned 12.89 per cent. The Central New Enffland Railwnv Co. f>nrnf>d 8.4.'i npr csnt-, nn Q.fi9 497_Rn8 fnn-TnilpH. IHTTEESTATE AND FOREIGN TRANSPORTATION. 607 Sm^Io Isi. ^tI n 1 \^''-J^^^^y earned 24.93 per cent on 2484,0^0,480 The Delaware & Hudson Railroad System earned 14.19 per cent on 3,060,971,982. The Delaware, Lackawanna & West- ^T a ^i^*?**^- °- S?™ed 22.93 per cent on 4,277,030,439. The Kana- wha & Michigan Railway Co. earned 11.17 per cent on 712,246.180 S'vJf 7nl tP'V^T ?\':^^;^"y.^^ ;^y Co. earned 20.01 per cent on 231,727,702 Ihe Lehigh ^ alley Railroad Co. earned 14.10 per cent on 5,812,384 91 < The New lork Central lines earned 11.08 per ?oL'''i,?'^?n'^^^''?^- ^^e Pennsylvania System earned 9.64 on 42,874,01.0 -240 whole line. The Reading System earned 13.10 per cent on 6,134,611,74 J. ^ On all the stock of the Baltimore & Ohio it woidd be more if the dividends were paid on the preferred than all applied to the common stock. The Chairmax. What year Avere those figures for? Mr. Bbookhaet. This was 1913. I took them from the Advance Rate case because we have worked them out in that case. The figures for 1916 would be considerably more. In 1914 and 1915 they would be less. This probably would be about an average of the four years. The earnings are on common stock on these. The Detroit & Mackinac earned 9.71 per cent on 96,239,146 ton- miles. The Detroit & Toledo Shore Line earned 19.20 per cent on 4,346,397. The Elgin, Joliet & Eastern Railway Co. earned 25.03 per cent on 1,755,724,208. The Lehigh & New England earned 8.64 per cent on 157,791,718. The Alabama & Vicksburs Railway Co. earned 17.50 per cent on 127,280,286. The Cincinnati, New Orleans & Texas Pacific R.ailway Co. earned 71.23 on 1,072,034,160. You will notice they had over a billion ton-miles. The Atlantic Coast Line Railroad Co. earned 11.50 per cent on 2,036,643,060 ton-miles. The Atlantic & West Point Railroad Co. earned 10.14 per cent on 44,118,659 ton-miles. The Louisville & Nash- ville Railroad Co. earned 11.99 per cent on 5,513,273,784 ton-miles. I take it that is the one which bought up the road you sought to have built through your county, Mr. Sims. It earns almost 12 per cent, and it bought up that road in some manner, dumped it in the wastebasket to control the situation better and earn more perhaps. Name of road. Per cent earned on common stock. Ton-miles. Ssslryllle, Gliattanooga & St. Louis Ry Rlchinond, Frederioksburgh & Potomac R. R Western Ry. of Alabama Charleston & Western Carolina Ey.Co Alabama Great Southern Mobile & Ohio YSrginia & Southwestern Ry Ati^oba & New Mexico - Atphi on, Topeka & Santa Fe flttgham & Garfield MjjmiBapoIis, St. Paul & Sault Ste. Marie C-hiCago & Northwestern 15.53 24.34 9.86 14.82 11.90 10.68 15.74 16.42 8.61 22.43 18.35 10.06 933,652,813 167,521,317 61,098,853 131,376,050 538,601,736 1,555,296,849 ,186,781,321 35,817,134 7,802,544,667 71,196,686 3,332,849,906 6,282,916,222 Those two last are large roads, one 3,000,000,000, and the other 6,000,000,000 ton-miles. 608 IN'rfiESTATE AND FOREIGN TEANSPOETATION. Name ol road. Ton-miles. Chicago, St. Paul, Minneapolis & Omaha Chicago, Milwaukee & St. Paul Florence & Cripple Creek K. E Duluth & Iron Range 1,262,998,028 8,670,061,411 27,268,344 867,841,405 That road has more than three-fourths billion ton-miles. Mr. Adamson. Those roads to which you have just alluded having such large earnings are the iron roads,. are they not? Mr. Brookhaet. I think some of them are. Mr. Adamson. The ore roads? Mr. Brookhaet. Yes; and coal roads, some of them. Name of road. Per cent earned on common stock. Ton-miles. Duluth, Mesaba & Northern El Paso & Southwestern Great "Northern International & Great Northern Nevada Northern Northern Pacific Chicago, Burlington & Quincy Fort Worth & Denver City San Antonio & Aransas Pass Union Pacific System Southern Pacific System Cambria & Indiana R. R. Co Cornwall R. R. Co ' Coudersport & Port Alleghany Cumberland & Pennsylvania E. E. Co. , East Broad Top Eailroad & Coal Co Tennessee & Wyoming E. E. Co Hoosac Tuxtnel & Wilmington R. R. Co, Lake Champlain & Moriah R. E. Co Lakeside &TJarbleheadR. R. Co Ligonier Valley R. R.Co 90.49 9.02 11.60 10.80 35.36 8.80 19.00 7.52 20.12 14.41 9.62 11.90 13.30 8.80 24.57 26.84 7.77 7.58 16.44 37.51 17.81 1,070,850,116 750, 740, 290 7,634,056,449 695,410,511 104,507,372 6,232,168,637 8,791,435,697 378,842,093 210,434,227 6,283,029,209 7,034,174,870 10,092,236 4, 219, 116 4,542,302 44, 811, 069 15,321,013 4,429,973 1,094,622 5,414,199 15,340,439 13,062,220 The Chairman. Have you on that list all the large railway systems? Mr. Brookhaet. Yes; they are all in here except the few I will mention later, Senator. There are some of the roads badly financed I Avill mention later by themselves. Mr. Hamilton. You have not given the average of all the roads, have you? Mr. Brookhart. No, sir; it is a big job. You can get the capitali- zation of all of them and add them up, and add these per cent, and in that way figure them out, but it is a bigger job than I had time, just as a common, ordinary citizen, to do. I will not read the balance' of them. The Chairman. They will be included in the record. Mr. Brookhaet. I have read a good deal because I wanted you to feel that most of the railroads of the United States are earning more than they ought to earn now. The rates are too high. I call your special attention to the Brimstone Railroad & Canal Co., which earns 209.80 per cent. The Brimstone route is earning the 'most of any railroad in the United States. INTERSTATE AND FOREIGN TRANSPORTATION. 609 The Hocking Valley, which omitted earlier, is one of these large roads ; it earned 17.43 per cent on its total stock. These roads were taken out of 96 per cent of the roads that are reported, and they carry over 70 per cent of all the traffic in the United States. The authority for it all is the Interstate Commerce Commission. I will read that. It is in the record here. The balance of the list is as follows : Name of road. Per cent earned on common stock. Ton-miles. Potato Creek R. R. Co Bariron River R.R.Co St. Louis & OTallon Ry. Co Pionesta Valley Ry . Co Burham & Southern Ry. Co East Tennessee & Western North Carolina. Frankfort & Cincinnati Ry. Co EZentucky & Tennessee Ry ' Eentwood & Eastern Ry. Co Abileiie & SouthemRy. Co Brimstone Railroad & CanalCo CastleValleyR. R. Co Colorado & Southeastern R. R Colorado & Wyoming Ry . Co Bialuth & Northern Minnesota Ry Mississippi River & Bonne Terre Ry Missouri & Louisiana R. R. Co Missouri & Southern R. R. Co lllimiesota & International Ry Columbia & Puget Sound R. B Bay & Gila Valley R. R. Co San Antonio, tjvaldo & Gulf R. B San Joaguin & Eastern Ry Sibley, Late Bisteneau & Southern Ry . Houston & Shreveport Sunset Ry . Co Sugar Land Ry . Co Tonopah & Goldfleld R. R. Co Wittea & Quachita Valley Ry Washington , Idaho & Montana Ry Hooking Valley 48.32 13.34 88.97 12.51 11.98 18.74 9.19 121. 02 43.46 36.52 209. 80 33.24 18.80 171. 86 17.54 7.36 23.88 17.07 24.42 204.58 27.04 23.32 34.77 . 27.68 32.00 7.78 12.87 14.14 8.01 17.41 17.43 3,777,341 4,231,869 11,677,412 3,741,787 6,886,804 6,268,074 1,544,577 3,432,727 7,524,119 2,359,811 888, 04» 6,320,094 10,300,629 19,815,728 40,983,769 26,902,257 7,823,233 3,933,422 68,877,376 24,207,928 13,819,327 6,341,030 3,433,877 2,443,809 13,516,161 50,929,121 1,478,221 9,626,423 1,463,642 22,714,229 1,463,682,875 Total ton-miles.. 211,2^1,777,994 Total ton-miles of Class I and II railroads— or those whose annual operating revenue exceeds .SlOO 000 — in the United States for year ending June 30, 1913, 301,398,75(5, lOS. Per cent of traffic handled of those roads that earned 7 per cent on their common ^' AuthMitfes : Railroad exhibits showing figures for systems in Five Per Cent Case were used in order to eliminate the intercorporate relationship of capital «t°; ^^ J«P°'t|j '•> atockhnlrtprs for Atchison Topeka & Santa FS, Union Pacific, and Southern Paciuc, givinS system figurS, were used ; and the balance of Class I and II roads as reported by th"e Ktemate Commerce Commission in their Reports of Statistics of Railways in the ^°96l3%'i-%nrof rte'' total' mfleage of railway companies reporting to the Interstate '^TS^s'^oT^^i^itaLtocr'F^^'ri^tSfJom ?ailroa^^^ in Five Per Cent Case did not show tht common and preferred stock separately, however, the return on com- mon stock would be^Zch greater in instances where there is more than one kind of stock. Take out of the remaining 30 per cent the Chicago & Alton, the Frisco and the Kock Island, about which Commissioner Daniels spoke 'as having been wrecked by financial mampulation, m his opinion, in the Western Advance Eate Case, also the Ene (whc^ financial history is notorious, and if its capital stock averaged the same per mile of line as the average of the eastern district it would have earned 7.56 on such capital, and if its funded debt had aver- aged the same as the average of the eastern district per mile, it would have earned 14.60 per cent) ; also take out the Chesapeake & 610 INTERSTATE AND POKEIGN TRANSPORTATIOBT. Ohio, the West Side Belt, the Illinois Central, and the St. Louis, Iron Mountain & Southern, which earned over 5 per cent, and the remaining roads of the United States only handled 18 per cent of the traffic. This analysis shows the railroads handling 82 per cent of our traffic are earning enough on an average. If you will take the fore- going " wildcat " roads and reform their capitalization to even, the general railroad standard and also take the 6 per cent roads which I have mentioned and put them in with those I have specifically shown to have earned over 7 per cent, you will probably find that the whole 82 per cent earned an average of over 9 per cent on all their common stock, water and all. The representative of the railroads has stated in this hearing that 6 per cent for dividends and 3 per cent for surplus is an adequate return to insure good credit and command the capital necessary for future needs and developments. Let us concede that the roads handling the other 18 per cent of traffic should have high rates, and then let u§ reduce the rates on the Central of New Jersey, the New York Central Lines, the Pennsylvania System, the Atlantic Coast Line, the Louisville & Nashville, the Great Northern, the Burling- ton, the Northwestern, the Union Pacific, the Southern Pacific and on the other roads that earn more than 9 per cent, and what will private ownership say? It will throw up its hands in horror and tell you the whole rate structure must be raised in order to relieve the situation. In other words, the already excessive and even extor- tionate rates of many strong lines must be further increased, in order that a few weak lines may live and the whole credit fabric, become dependable. A more unjust and unreasonable proposition was never presented to the American Congress. It is impossible for regulation to equalize the rates and earnings of our railroads under their un- scientific and competitive system of private ownership. Eegulation must also fail because of the constant conflict between the interests of private ownership and the regulating authority. The claim that the railroads have ceased to resist regulation in the courts or anywhere else is a myth. In 1907 they fought the enactment by Congress of the law giving the Interstate Commerce Commission power to regulate rates. They fought the 2-cent fare laws and all the other regTilating measures before most of the State legislatures. Failing, they took them into the courts and never stopped the fight until they won or lost in the courts of last resort. The ink of the President's signature had not dried on the Adamson bill when President Kipley, of the Santa Fe, announced that he would not submit to the law until commanded by the Supreme Court of the United States; and the other railroad executives have joined him since. An^ the railroads are now before this committee fight- ing every State commission in the whole Republic. They are de- manding that you abolish these commissions by taking away all their authority over the railroads. They are inviting a lawsuit upon every act of every State commission in regulation of the railroads, regard- less of the constitutional rights of the States. If the Adamson law is held void, and if the railroad men strike, they have brought us to the threshold of revolution. This conflict must cease. The answer is Government ownership. Former Gov. Larrabee, of Iowa, now de- ceased, was a pioneer in the field of raih'oad regulation. In his INTERSTATE AND FOREIGN TRANSPORTATION. 611 private library, in a book entitled " Transportation in Europe," by Logan G. McPherson, on the margin of page 207, in his own hand- writing, Gov. Larrabee wrote: Private management strives for tlie most money for tlie least service, while Government management strives for the best service for the least money possible! The Government will eventually take over the railroads. People will not tolerate private management. In conclusion, I believe that if the Supreme Court should hold, as the lower court has held, as to the constitutionality of the Adam- son bill this session of Congress will take over the railroads. Mr. Adamson. You are mistaken about the lower court holding that. He j ust said according to what he had heard them say about it. • Mr. Beookhart. I accept your correction, Mr. Adamson. Mr. Adamson. That was a consent order, by agreement, in order that they could correct it. Mr. Beookhaet. He put it in the record. Mr. Adamson. If the Supreme Court should hold the Adamson law unconstitutional it would have to repeal the commerce clause, and I am willing to do that in order to get rid of the commerce clause. Mr. Beookhaet. I agree with you on your eight-hour law. I be- lieve it is right and just; but if it should go the other way, what will you do? I believe if that should happen the question of taking over the railroads, and taking them over immediately, will be all that we can reasonably consider. That is the only way you can save us from the greatest trouble and revolution since the Civil War. But sup- posing that does not happen, and supposing things go smoothly and that you are going to give these railroads another chance. They are before you confessing and claiming that they are inefficient as to (jredit, and that they have failed. I am not agreeing with them on that; I am giving them a better credit than they give themselves. They are telling you that the system of regulation which you have provided is a failure, and they are asking you to invade the States and take away the regulative powers of the States and to give them another chance. After 80 years of experiments they want one more opportunity for experiment. If you decide to do that, let me ask you to consider the proposition of a referendum to the people of the United States on this question. Let us take the voice of the people ; let us give them the facts and see what they say. Up to date, gentlemen, we have no been able to get the people to consider these facts. Books are sent to me like this one all the time, because I happen to publish a little newspaper out in my home town. They are articles by college professors, and they all have the railroad bias, which Mr. Bryan has so aptly described ; they leave out the things that would clarify the people's under- standing of the situation ; but they persistently claim that American freight rates are so much lower and American wages are so much higher that the railroads are at a disadvantage. They never tell the people that a right of way abroad costs more than the whole road equipped in the United States, and that that difference more than offsets the difference in wages. They never figure out that the terminal expenses in the United States are more than the whole freight rate of any other country in the world, and by that sort of campaign they mislead the people, and they have 612 INTERSTATE AND FOREIGN TBANSPOKTATION. ' made those arguments in hearings before the Interstate Commerce Commission; every paper in Iowa that came to my exchange table published their paid advertisements before the trial of the rate case — this last advance rate case — and -when we went into the trial and brought out the facts, where they claimed that they did not have money sufficient for maintenance, although the maintenance had been increased once $120,000,000 a year, and again $109,000,000 in a year, and that level always maintained forever afterwards, and although the fact is that they are building up their roads both as to equipment and as to roadbed out of surplus and out of earnings all the time, and they are using it out of earnings and charging it to earnings, and the people are paying it, and they are getting it — although all of those facts and those things were happening, this campaign went on all over our State and all over the West to create a public sentiment in deciding a question of fact which was a judicial question, to surround the commission with that sort of influence, and when we brought them to book, their attorney, Mr. Wright, of , the North Western Railway, was forced to repudiate the claims of the advertisers and to concede that the maintenance of the western roads had been as good as they themselves thought it should be. Under those conditions and in the light, of those facts there is a great opportunity for economy to be effected by Government credit, because every man must admit that there will be the saving of the unearned increment on real estate, which is now enormous, and every well-informed man will admit that the saving of the waste in com- petition will be enormous, those items amounting to more than a billion dollars a year, and those are the economic savings with which you can start to better your facilities, to better labor's condition, and to reduce rates, to better serve the American people; and if the Gov- ernment of the United States is so inefficient and so incompetent that with an economic basis like that it can not start and do for the people of the United States by managing the people's public high- ways better than private ownership is doing now, this Government ought to cease to exist. I thank you, gentlemen. The Chairman. The committee will now adjourn. (Thereupon, at 6 o'clock and 5 minutes p. m., the joint committee adjourned subject to the call of the chairman.) STATEMENT OF A, P. RAMSTEDT, OF THE IDAHO PUBLIC UTILI- TIES COMMISSION. Gentlemen: I had hoped to be able to appear in person before your committee to express my views on the subject of railway regu- lation and control, but it now seems that I will be unable to go to Washington, and for that reason I take the opportunity offered by the committee to briefly express my views on the subject in this writ- ten communication. In discussing the question of regulating common carriers, I have in mind the provisions of the Federal Constitution, vesting in Con- gress the power to regulate commerce among the several States, and the spirit and intent of the Constitution that no preference shall be given one State over any other State by any regulation of commerce. I believe that it was to secure the freedom of interstate commerce INTEESTATE AKD FOREIGN TEAKSPOKTATION. 613 froih State control whenever the general welfare should demand it that the grant in the Constitution was made under which Congress may provide effective regulation and exclusive Federal control. ■ Referring to the power of Congress to regulate interstate com- merce, Mr._ Justice Hughes in the Minnesota rate cases said "the con- viction of Its necessity sprang from the disastrous experiences under the Confederation when the States vied in discriminatory measures against each other." We are to-day confronted with the possibility of one State, in the absence of any interference on the part of the Federal Government, to so regulate purely State rates as to build up shipping centers within its borders at the expense of shipping centers in other States. State regulation is always subject to the influence of State jealousy, resulting in discrimination against the people of other States. This discrimination, as I view it, is contrary to the very spirit of the Fed- eral Constitution. After making these general statements, I shall as far as prac- ticable classify my remarks according to the suggestions of your committee. Referring to the first subject to which our attention is called, would say that the jurisdiction of the Commerce Commission should, I believe, be extended rather than restricted. I believe that the commission's jurisdiction should be extended to also include re- striction of competition wherever competition is not clearly in the interest of the public. I am convinced from my experience in the regulation of other public utilities under a plan favoring regulated monopoly that such regulation would be in the interest of all the people. Under such plan the commission should have authority to prescribe fixed rates — not maximum rates, as at present. The com- mission should also have power to prescribe the joint use of facili- ties whenever economy or the public convenience and necessity so require. The commission should also exercise authority to permit the con- solidation of short-line roads into long through systems, assuring the patrons of the carriers quick and regular deliveries and opening up to producers free competition throughout the whole country in the interest of the consumers — the whole thing supporting the con- centration for cheap production and the elimination of waste in an extended competitive field. I believe that it is now generally admitted that competition, in so tar as public utilities are concerned, is undesirable when the State has, as to the rates charged and the service rendered, undertaken to control and regulate such utilities. At least the people of my State admit the soundness of that idea and are committeed to that general principle. This country, especially that part of the country wherein I live, needs more railroad facilities. These facilities can not be had with- out added investment to railroad enterprises, and as far as I can see the investment will not be made unless there is some assurance that a reasonable return will be allowed on the investment and that the money invested will be honestly expended. It follows therefore that the commission should also 'exercise jurisdiction over the issue of securities and perhaps the incorporation of railroads. I will defer 614 INTERSTATE AND FOREIGN TRANSPORTATION. discussing the questions of Federal incorporation and supervision over the issue of securities until later in order to maintain the se- quence outlined by your committee. Referring now to the next two subheads having to do with the organization of the commission, I will say that I have no detailed plan to offer. Viewing the matter in the interest of the country as a whole, the organization should be such as will tend toward uniform and general transportation regulation and development, because oftentimes the interests and ideas of the several States, as well as different sections of the country, are conflicting on account of purely local conditions. I am therefore in favor of a larger and stronger Federal commission, acting as a central body in Washington and through several subcommissions exercising administrative jurisdic- tion over areas determined by traffic conditions. The supervision should not only be centralized and of the highest class possible, but should be capable of being brought close to the public, affording a means of taking care of troubles that are more or less local in character. The next subhead refers to railroad credit, the supervision of securities issues, and the effect of concurrent jurisdiction of the Nation and the States to control such issues; also the field of opera- tions for State commissions under exclusive Federal control. In earlier years when a larger portion of the country was undevel- oped and transportation lines comparatively few, the people were liberal and granted the transportation lines a latitude under which the lines were extended into undeveloped territory, resulting in a remarkable development in railroad transportation. In later years the old-time liberality of the people disappeared to a degree which is probably justified by the development of railroad transportation, and we have now reached a stage where the absolute rights of the carriers and the public should be determined according to fixed eco- nomic principles. A number of States assert a right to control stock and bond issues of railroads within their respective territories. Such control on the part of the several States through which a transcontinental line runs would, of course, impair railroad credit. ' Some States have insisted that part of the proceeds of contem- plated new financing be expended within their respective bound- aries as a condition to obtaining their consent. I believe that the imposition of such conditions by one State creates a discrimination against the rights and commerce of other States. I believe that improvements of existing railroads and construction of new lines has under the present system been seriously retarded. In order to secure the capital necessary to bring about needed im- provements and new construction it appears that a market must be found for railroad securities, and the public must be assured that the capital invested will be used for legitimate purposes and not for speculation. In order that railroad securities may find a market in the world's exchanges and the people may know that the capitalization is honest there should be some supervision over the issue of railroad securities and possibly incorporation, in addition to such supervision over rates as will give reasonable assurance that the earnings will be sufficient INTEESTATE AND FOKEIGN TEANSPOETATION. 615 ;o meet mterest accounts as well as operating expenses. This super- dsion should, on accoutit of its very nature, be Federal and, as stated jefore, centralized and of the highest class. To allow a State to supervise or regulate the securities of an interstate carrier appears to me to be unreasonable. The Federal Government alone should axercise such authority. Under the protection of the Federal Constitution, as I understand it, railroads are allowed to charge- rates that will produce a reason- able return upon the capital invested. The determination of a rea- sonable return, as well as the capital to be invested, must, if success- fully determined, be determined by one authority. It seems to me that in justice to all concerned you can not leave the determination of these questions to several authorities, each acting separately and without coordination. If exclusive Federal control is adopted there still remains a large field of operations for the several State commissions. The regulation of public utilities other than railroads will keep them all occupied. The next subhead refers to the effect of dual rate regulations— State and Nation — ^and with reference to that matter would say that the attempt of the several States, each acting independently, to regulate our railroads has, in my judgment, resulted in waste, confusion, and discrimination, which can be eliminated only by the institution of a single rate-regulating authority. If we are ever to fully enjoy the blessings that flow from eificient railroad regulation, the very nature of the thing to be regulated requires that the regulation be vested exclusively in the Federal Government. I have referred to the possibility, under multiple control, of one State building up shipping centers at the expense of shipping centers in other States. Centers built up by regulation only can not hope to enjoy prosperity permanently. Sooner or later the fictitious values created at the expense of other centers naturally more favor- ably situated will fall, and we then realize the extent of the economic waste that has been going on in attempting to create an abnormal situation by rate regulation. An intrastate rate of an interstate carrier will have its mfluence upon interstate traffic which is by far the greater part— probably three-fourths or more of all traffic — and the efficient regulation of interstate traffic by Federal authority in the interest of the majority of the people will require the regulation of intrastate traffic by the same authority. Interstate carriers are engaged in intrastate as well as interstate commerce. The assurance that a reasonable return be allowed on the investment can not be had without proper and exclusive Federal control. The return can not be determined without regard to revenue and expenses. The revenue is made up of the earnings from all sources— intrastate as well as interstate— and the expenses are in- curred in the transactions of intrastate as well as interstate business. It is almost impossible to segregate the revenue and expenses of car- riers between intrastate and -interstate traffic. Even though such segregation could be made, control of State rates must be had under any scientific plan of regulation in order to justly distribute the expense of operation in fixing rates. Furthermore, under multiple 70342— PT 10—16 9 616 INTEBSTATE AND FOEEIGN TEANSPOETATIOlir. regulation we are confronted with the conflict between States as r€ gards demurrage penalties, Sunday and holiday restrictions, an( other matters. I believe it can be stated conclusively that rates are essentiall; interstate in their operation (Shreveport and other cases) and tha the transportation question is a national problem. It has been said that Federal regulation at present means highe rates. This statement is undobtedly based on the fact that the Com merce Commission has consistently supported the higher interstat( rate as compared with State made rates. The tendency of Stati regulation is to reduce rates on account of the opportunity affordec to take advantage as between States. As a result there is a tendency to reduce certain interstate rates on account of the influence oJ the intrastate rate on the interstate fates. The failure or rather ina bility of the Commerce Commission to prescribe minimum rates permits certain interstate rates to become unreasonably low, and as a result other interstate rates are increased in attempting to over- come loss resulting from the low rates. I believe that if the Com- merce Commission could in all cases fix the rate, i. e., increase as well as decrease the rate, a great many, interstate rates could be reduced as a result of increasing other rates which are now too low. This adjustment of rates could not be made without central control of all rates on account of the influence of the intrastate rate upon interstate rates. Eef erring now to the next subhead, I would say that some pro- vision should be had for the adjustment of disputes between carriers and their employees in order to maintain uninterrupted commerce between States. We can now all realize how a disruption of all railroad service, and the infliction of loss and suffering upon the entire country, might result from a mere disagreement between car- riers and their employees. The employee and the employer engaged in interstate commerce have certain duties of a public nature to perform and each should be held responsible in the performance of such duties. The next and last subhead refers to national incorporation and uniform rules of taxation. As stated before, I am in favor of the consolidation of railroads into through systems and the regulation of transportation systems as natural monopolies. Any scheme favoring such consolidation and regulation should include Federal incorporation. As it is now, many of the individual companies that go to njake up a great rail- way system have special charter rights or restrictions wMch do not permit of or encourage the development of the territory served by the entire system to the extent of the development that might be had under a scheme permitting consolidation under a Federal charter. With reference to the taxation of railroad properties will say that I am convinced that it would be for the good of all if a uniform sys- tem of taxing railroads could be established, and I am therefore in favor of the National Government prescribing a rule under which the total amount of taxes paid may as far as possible be fairly dis- tributed among the several States entitled to share in the distribution of such taxes. It may be that, under all circumstances, the nearest INTEESTATE AND FOEEIGN TEANSPORTATION. 617 approach to an equable distribution of such taxes among States might be had under a rule similar to that prescribed for taxing Natioftal banks. BRIEF FILED BY S. H. COWAN, OF FORT WORTH, TEX. To the Joint Committee on Interstate and Foreign Commerce. Mr. Chairman and Gentlemen: I. preliminary. At the convening of this committee in Washington on November 20, 1916, at which time those who expected to make statements or present arguments to this committee touching the matters under investigation, as shown by Senate joint resolution No. 60, approved July 20, 1916, pertaining to all matters of transportation, etc., were called upon to enter their appearance and state the subjects upon which they expected to be heard, the time at which they desired to be heard, the parties who desired to be heard, and what interests they would represent, we appeared, as shown by the printed report of the proceedings, representing the National Live Stock Shippers' Protective League, the American National Live Stock Association, and constituent members of these associations, which comprised practically all of the organizations of live-stock shippers and those engaged in the business of raising, feeding, fattening, buying, slaughtering, and selling of live stock throughout the West and Cen- tral West, ranches, farms, and in the business of the great markets of the country. It was then stated that these organizations desired to appear, prob- ably through the various parties whose names were then given, to- gether with other representation that might suit the convenience of the committee, mainly in opposition to the proposal which they un- derstood to be before the committee to adopt a system of Federal con- trol of rates and transportation, and matters pertaining thereto, with the view to taking away from State commissions the exercise of their functions in that behalf ; also that we desired to appear to pre- sent some matters regarding affirmative legislation to facilitate and hasten cases before the Interstate Commerce Commission. It was stated that some of these parties would be able to appear from about the 4th to the 8th of December should it suit the convenience of the committee, and at such later dates as might be found desirable, it be- ing desired first to hear the proposition submitted by the proponents of this revolutionary legislation to change the regulation of rates and transportation. We understand that it was arranged that the representatives of the ■railroads should present their views; also representatives of certain other organizations, certain publicists and economists and others, and that thereafter the shippers would be heard from. Since it has now been determined that the committee will adjourn until after the short session of Congress, those represented, and who present this brief, desire to submit a general outline and some specific matters to this committee for its consideration in the "meantime, and to reply to some of the propositions which have been heretofore sub- mitted to this committee for its consideration by the representatives 618 INTEESTATE AND FOKBIGN TEANSPOETATION. of the carriers. Accoi'dingly the request was made that we be per- mitted to file this brief "of iirgument, as it may be termed, to go in and be printed as a part of the proceedings of this committee, and ar- rangements to that effect were made with the chairman and vice chairman of this committee. As we understand it, leave has been granted to that effect and we therefore submit the following for your consideration : We are opposed, to Federal control of State rates, directly or in- directly, or the taking away of the control of intrastate rates and regulations by the States, and in favor of State right of control of State commerce. We are also opposed to Federal incorporation of railroads for the purpose of Federal control of State rates, regula- tions, and control of railroads as to State business ; and we are further opposed to the interference with the constitutional right of the States to regulate railroads, and to Government ownership until and unless it shall finally appear to be absolutely necessary in the public interest. The question as to whether Government ownership is absolutely in the public interest has not been considered by our organizations. Mainly, we devote ourselves to the subject of Federal control of State rates, and to some amendments of the act to enable the Inter- state Commerce Commission to efficiently perform its duty and for relief of the public. n. shippers' eesoltttions. We submit herewith a resolution adopted by the executive com- mittee of the American National Live Stock Association, at Denver^ on September 16, 1916, as follows: STATE BEGULATION OF KAILBOAD KATES AND CHABGES SHEBVEPOKT DECISION. [A resolution adopted by the executive committee of the American National Live Stock Association, at Denver, Colo., Sept. 16, 1916.] Whereas a serious conflict of jurisdiction has arisen between the Interstate Commerce Commission and the railroad commissions of the different States^ by reason of certain decisions of the Interstate Commerce Commission affectin? the rates, rules ,and regulations governing intrastate traffic ; and Whereas in a recent decision in the Shreveport case tlie Interstate Commerce Commission, on the ground of discrimination and prejudice against Shreve- port, prescribed a scale of rates on live stock between Texas points and Shreve- port on a different and higher basis than fixed by the railroad commission of Texas and by its order, effective November 1, 1916, requires the railroads to ceaije and desist from ijiargiiig and collecting a lower rate for the transpor- tation of live stock wholly within the State of Texas than the said scale to be applied to Shereveport ; and, as said decision is construed by Texas railroads, the jurisdiction of ths Railroad Conmiission of Texas over State rates is thus superseded by the Interstate Commerce Commsslon ; and Whereas this is the first instance in which the Interstate Commerce Commis- sion has proposed to regulate intrastate rates on live stock, and its -decision in this case is based upon what we believe to be a misapprehension of the extent and character of the alleged discrimination and prejudice against Shreveport ; for we contend that the small volume of traffic involved, and the consequent negligible amount of difference in the rates, makes it extremely improbable that any interests at Shieveport could be unduly and unreasonably prejudiced by the existence of -i lower scale of rates for intrastate live-stock traffic within the State of Texas ; and Whereas, the present rates on live stock prescribed by the railroad commission of Texas are, with minor exceptions, the same as the rates originally fixed by the railroads, both as to beef and stock cattle, and have been in effect for approximately 25 years and have applied regardless of whether the cattle INTERSTATE AND EOEEIGN TEANSPOETATION. 619 ■move to markets within the State or between postures or to feed lots ; and said rates have been carefully investigated at divers times by the railroad commission of Texas and declared to be reasonable and just ; and Whereas we believe the conditions of raising, shipping, and maturing cattle within the State of Texas, and the necessities of the business, are best known to the people of Texas, and the transportation requirements can be more judiciously regulated through the constituted State authority, as In the past ; and Whereas the jurisdiction of the Interstate Commerce Commission to regulate such live-stock rates within the State of Texas is dependent wholly upon an alleged unjust discrimination and undue prejudice against Shreveport, and it- is our firm conviction that, while an apparent discrimination may seem- ingly exist by reason of a difference in the present rates, it is not such a real discrimination or undue prejudice, as required by the law, as to warrant the Interstate Commerce Commission to assume jurisdiction over the intra- state rates in Texas, and thus completely change conditions that have ex- isted for 25 years, and contrary to our rights, as we believe, and to the public interest ; and Whereas our laws do not define the conditions under which such extraordinary and far-reaching changes in the regulation of carriers should be permitted. or what conditions precedent should exist to justify such a departure from previous methods of regulation of Intrastate traffic: Now, therefore, be it Resolved by the executive committee of the American National Live Stock Association, representing the live-stock industry of the United States, at its meeting held in Denver, Colo., September .16, 1916, 1. That we deprecate any conflict of jurisdiction between the State and Federal authorities engaged in the regulation of railways, and we urge that every reasonable effort be made to avert it, for we believe that the necessities of the transportation problem re- quire that strictly local State rates be regulated by the States, as at present, and that any question of discrimination or preference between State and inter- state rates should be handled by coordinate action of State and Federal au- thorities. 2. Thcvt we appeal to the Interstate Commerce Commission to suspend its order in the Shreveport case with respect to the rates on live stock until a more complete investigation may be had of all the factors surrounding the transportation of live stock between Texas and Shreveport, and in order that a careful review may be conducted by State and Federal officials as to the almost Irreparable injury that the decision will inflict upon the vast interests of Texas, far removed from any possible connection or relation to the issues in said Shreveport case; and we urge that this request be granted so that the Interstate Commerce Commission may not indirectly assume jurisdiction over State rates and thus absolve the railroads from obedience to the regulations ■of the diflEerent States, without an earnest endeavor being made to harmonize any alleged inequalities in rates. 3. We appeal to Congress to provide by law that where a conflict arises ^s to rates, rules, or regulations made by State and Federal authorities, before •the Interstate Commerce Commission shall have jurisdiction over any State- made rates, rules, or regulations, and before the railroads shall be authorized to disregard same in order to perform their duty under the act to regulate commerce said State-made rates, rules, or regulations must first have been held by a court of competent jurisdiction to be unreasonable and to constitute a direct burden upon interstate commerce. . ^ .,,, 4 That before such jurisdiction shall be exercised by any court or by the Interstate Commerce Commission the State-regulating authority should be made party to such proceedings, and all interested shippers should have the right to 5 We appeal to the State authorities having control of railroad regulation and to the executive and legislative departments of the different States to pro- vide ways and means whereby the public rights In the premises may be se- cured and defended. . . ^, , , , . 6 We express full confidence in the administration of the. act to regulate commerce by the Interstate Commerce Commission, and this appeal is made without an/feeling or spirit of criticism, but for the purpose of evokmg the most mature and deliberate consideration of so grave and important a question and to determine the extent to which the Interstate Commerce Commission may appropriately interfere with State regulation, if at all, and the limitations of that power. 620 INrEESTATE AND FOEEIGN TBANSPOETATION". Resolved further, That a copy of this resolution be forwarded to the Inter- state Commerce Commission, to each Member of Congress, and to the various State railroad officials and executives of the different States. We also submit herewith a resolution passed by the executive com- mittee of the National Live Stock Shippers' Protective League at its meeting in Chicago on November 14, 1916, as follows : Chicago, November 17, 1916. Seeking " State rights " in the matter of railroad rate regulations and other conditions dealing with intrastate railroad affairs, the National Live Stock Shippers' Protective League is calling upon Congress to desist from passing legislation which will give the Interstate Commerce Commission power to pre- scribe rates on intrastate shipmehts. The executive committee of the shippers' league, at its meeting held in Chicago, November 14, 1916, passed the following resolution : The National Live Stock Shippers' Protective League, an organization of live-stock shippers of the United States and the shippers of fresh meats and packing-house products, composed of organizations of stock raisers of various States, the national live-stock associations engaged in the live-stock business, live-stock exchanges of live-stock commission men at the various markets, and the meat packers and slaughterers of live stock, and representatives of railroad commissions of Iowa, Kansas, South Dakota, and Missouri, submit to the com- mittees of Congress having consideration of legislation pertaining to transporta- tion rates, regulations, and practices of railroads engaged in such transporta- tion the following resolution as voicing the sentiments and desire of this organi- zation and live-stock shippers and other shippers generally : "Be it resolved by the executive committee of the National Live Stock Ship- pers' Protective League at its meeting at Chicago on November IJf, 1916, First, that we oppose any law or laws which shall take away from the State railroad, commissions, corporation commissions, or other rate-making bodies of the sev- eral States the right and power to regulate the rates and transportation of intrastate traffic or otherwise to deprive the. States of control over the same; and " Second. That we urge upon Congress the passage of an act so amending the act to regulate commerce as to define and limit the powers of the Interstate Commerce Commission so as not to interfere with the rates on intrastate com- merce as prescribed by railroad commissions or other authorized authority of the several States to prescribe and regulate rates and transportation of intra- state traffic within such States ; and that the Interstate Commerce Commission shall not interfere with such rates, regulations,' and practices of such State- unless the same shall have first been found to be unjust and unreasonable and' to place an undue burden upon interstate commerce by a court of competent, jurisdiction provided for by law, and then only to the extent that may be neces- sary to remove a discrimination specifically alleged and clearly proven to be unjust and unreasonable." National Live Stock Shippers' Protective League. , Edwakd F. Keeper, Secretary. These resolutions we submit as voicing the sentiment and desires of the entire live-stock industry of the country with respect to the subject of Federal control of State rates, regulations, etc., and, as we believe, expressive of the sentiment of the people generally who take the pains to inform themselves upon the subject, where they are not under some sort of misapprehension, or who may be unduly, though in many cases unconsciously, influenced by the great and powerful influence of the railroads, permeating, as that influence does, many great industries and financial institutions with which they are closely allied or those who have been influenced by a campaign of publicity favoring the centralization of the control of all rates and regulations of railroads by the Federal Government, and eliminating thereby the State control. We may be permitted to express the view that in the complex situa- tion and the manifold difficulties arising out of the regulation, or the INTEESTATE AND FOREIGN TEANSPOETATION. 621 attempt to regulate the charges and operations of railroads in their daily transactions in millions of instances with every industry, time and opportunity do not afford the ordinary man much chance of analyzing the functions of goyernment, the necessities of trade, and of the public interest to enable him sufficiently to master the subject as the basis of correct opinion. Newspaper writers are oftentimes little less informed, and consciously or unconsciously, or by reason of their surroundings and environment, are led into the advocacy of propositions unsound and untenable in the face of the correct analy- sis of the subject of the regulation of transportation in the interests of the public, and at the same time in fairness to the carriers. This in turn as often mislead the public. It will be understood, of course, that the agitation, if it should be called such, of the proposition for Federal control of these matters of transportation and the abolishment of State control is compara- tively of recent origin, because doubtless the rights of the States seem fully preserved under the Constitution and the provisions of the act to regulate commerce, which by the first section of the act pro- vides : That the provisions of this act shall not apply to the transportation of passengers or property, or to the receiving, delivering, storage, or handling of property wholly within one State and not shipped to or from a foreign country from or to any State or Territory as aforesaid, nor shall they apply to the transmission of messages by telephone, telegraph, or cable wholly within one State and not transmitted to or from a foreign country from or to any State or - Territory as aforesaid. Not until the decision of the Supreme Court of the United States in the Shreveport case (234 U. S., 342) was it generally supposed either that Congress could confer such power upon the Interstate Commerce Commission or had done so. In its essence that decision is that while the Interstate Commerce Commission can not prescribe the rates on intrastate traffic it may find a discrimination to exist by reason of the difference betweea the rates within a State prescribed by the State authority and the rates between such State and a point outside of the State and order the carriers to remove the same, where- upon the carriers may disregard such rates within a State prescribed by State authority in order to comply with the order of the Inter- state Commerce Commission to remove the discrimination. A care^ ful consideration of that case in connection with the Minnesota rate case just preceding it will inevitably lead to the logical conclusion that as to such intrastate rates the carriers are left free from any regulation either by the State or the Federal Government. The fundamental right of the public both as to interstate and in- trastate rates is that they shall not be charged more than is reason- able and of the carriers that they are entitled to charge as much as is reasonable. The further fundamental proposition is that not every rate or every service is required by law or practice to yield an equivalent profit compared to all rates or to some other rate, but the underlying principle is that a system of rates, which system upon the whole is to be reasonable, is to be the standard rather than the attempt to make a standard of a particular rate. This is fully illus- trated by the decisions of the Supreme Court of the United States in St. Louis & San Francisco Kailway Co. v. Gill (156 U. S., 649), Minneapolis & St. Louis Railroad Co. v. Minnesota (186 U. S., 257), and the Minnesota rate case (230 U. S., 352). 622 INTERSTATE AND FOREIGN TRANSPORTATION. The question naturally arises as to whether by section 3 of the act, condemning unjust discriminations and undue preferences, it was intended by Congress that the Interstate Commerce Commission, by an order to remove a discrimination or preference, could thereby set aside an intrastate rate made by authority of the State or license the carriers to disregard the same. Is it reasonable to suppose that Congress intended such a result and thus leave the carrier free to make such rates as he pleases regardless of the rates prescribed by the States, and that such rates should thereafter be subject to the control of the Interstate Commerce Commission without specific provisions in the law to that effect? The whole course of judicial decisions shows that when a State rate is set aside as being con- fiscatory, the regulation of it is not transferred to Federal control in the way of prescribing the rate; and the further question natu- rally arises : Court Congress under the Constitution directly author- ize the Interstate Commerce Commission to prescribe the State rates on traffic originating and moving wholly within a State and not a part of interstate transportation? What we have here said upon this subject is to bring into bold relief the question as to whether there is anything for this com- mittee to investigate and recommend as a means of transferring the making of rates and the regulation of transportation on intrastate traffic, unless it recommends an amendment to the commerce clause of the Constitution. Surely the mere right to correct an ascer- tained discrimination under the method employed in the Shreveport case would be to produce the most complex situation imaginable. "We do not suppose that the carriers or others holding their views in desiring the transfer to the Federal control of the intrastate rates and regulations, desire to accomplish that end short of a compre- hensive system which, of course, could not be based upon the mere incidental power held to exist by the decision of the Supreme Court in the Shreveport case, which might or might not exist according to the will of the carriers themselves in given instances. We say, therefore, that touching this subject of the transfer of control of rates and regulations as to intrastate traffic by the Federal Government, the two questions presented are : First. Has Congress the power to do it under the existing Consti- tution ? Second. Shall the Constitution be amended so as to give to Con- gress that power and take it away from the States ? The latter is so improbable of accomplishment that it may be dismissed from consideration as a practical question before the "pub- lic. It would then resolve itself down to the first question, which ought to be determined by this committee before proceeding with extensive investigations in order to determine whether it would be desirable, even if Congress has the power to exercise it. It is our opinion that Congress has not the power, and that if it has the power it should not in the public interests be exercised. III. POSITION or THE RAILROADS AS AVE UNDERSTAND IT. Without attempting to state all of the various positions taken by the carriers, by their counsel, and otherwise as presented to this committee in its hearings, we refer to some of the statements as INTEBSTATE AND FOEEIGN TRANSPORTATION. 623 indicative of the ultimate conclusion and results which are sought, namely, to secure greater returns upon railroad investments and securities in order to give them credit and to provide the railroads and transportation facilities needed by the public, and to that end to invite the investment of new capital and make the business at- tractive to investors. In other words, the means to the end of throw- ing off such limitations upon the rates charged as is possible, and in the aggregate to have a greater measure of return from the charges made for the services rendered; in other words, to be permitted to increase rates. And while it is said to be in the public interests, it has its origin and design in the desire to secure an increase of rates which the public must pay. Mr. Thorn, at page 55 of the printed report of these proceedings of November 23, referring to liberal charters and the granting of sub- sidies, lands, etc., to encourage the- establishment of railroad facili- ties, said : There was no limitation in most cases put upon the powers of these chartered agencies in respect to what they miglit do in regard to their charges, but if a limitation was put, it was put so high that it did not amount to a limitation or a practical matter. Now, the result of that was to create the impression, I may say, to create the conviction on the part of the man who invested his means in a railroad, that he was Investing it as he would in any other private enterprise. No other <;onception was in the public mind, because the need for it had not then ap- peared ; no other conception was in the mind of the investor ; he had no I'eason to have any other conception, as he was not only welcomed but urged by the ipublic to enter upon this field of human industry. Now, what was the effect of that? Examining' human motives, watching the operation of human inter- ■ests and human forces, what was necessarily the effect of that, in the first instance, upon the conception of the investors in these properties as to their rights? Inevitably it produced the impression that they had engaged in a private business and that they owned it and could use it for their private ends. Now, time went on. These conceptions of the rights of the railroads to increase rates are exactly the same as they were. The difference lies in the method of accomplishing this end. . . Ao'ain referring to the victory of the public over the opposition to public regulation, he states at page 56 : But it was a victory won in anger ; it was a victory which was the outcome of of fierce conflict, and the terms that vi^ere imposed were the terms of the victor upon the vanquished, and reflected nurely the purpose to apply in the prmci- ples of the system of regulation the forces of correction and punishment. Thus the same spirit is now manifested before you. The question is. What terms were imposed? Broadly speaking, and as reflected by the act to regulate commerce and the various enactments of the different States, the terms imposed were that rates should be ]ust and reasonable and alike to all without unjust discrimination or imdue preference, coupled with the provisions ot the law tor its ad- ministration in justness and fairness to the pubhc and to the car- riers by the tribunals provided— not hy the shippers or the carriers, but by the public. If the original conception, as mentioned, were wrong, as seems to be admitted, the present conception is equally so. It is further stated by Mr. Thom, at page 57, that: The things that I say and the things that are proposed must be measured bv the staSdaKl of the public interests and must be determmed by the standard of the nuhlic interests, and I shall make no other argument. No7 what Ts the public interest in respect to transportation? Ift^^^^^rt for rm™t and get that in our minds. As I read the needs of the public 624 INTERSTATE AND FOREIGN TRANSPORTATION. they are to be assured of sufficiency of railroad and transportation facilities now and in all tlie future, and. of course, to be assured of them on reasonable terms ; but if it becomes a question between high charges and the existence of these facilities, I suppose there will be no dissent from the fact that the public interest is, after all, in having the facilities. Thus the reasoning leads quickly to the demand for higher charges. Naturally we should suppose that the legislation which seems to be the object of the carriers to secure must be expected to accomplish that end, otherwise it were a useless task to ask for it. Neither can we dissemble the fact that it is their main purpose, and equally that they are not satisfied to leave it to existing methods of regulation. At page 58 Mr. Thom further states:- We have no controversy any longer about a lack of power to deal with rates that are too high. Some think that tliere are none too high, others disagree with that view, but all appreciate, that the existing governmental systems are adequate to deal with the question of the level of rates, to the extent of pre- venting them from being exorbitant. So that we must come back to this question of whether or not I am right in insisting that the fundamental and essential interest of the public is now in the great question of whether or not existing systems guarantee to the public an adequate supply of transportation facilities not only for the present but for the future. If, therefore, it becomes a question, as stated on page 57, between high charges and these facilities which can only be had according to the argument through the means of higher charges, it might as well have been stated at the outset that the object of the propositions advanced was to obtain higher charges. Again it is stated by Mr. Thom, at page 58, that : Those who propose a change in existing methods must make their appea! to the judgment of the people upon the proposition that existing methods do not assure to the public the supply of transportation facilities that the public needs, and those who oppose any change must make their appeal to the public judgment on the proposition that existing conditions, if honestly administered, do assure to the public an adequate supply of transportation facilities. Now, is not that a fair statement of the issue which we should debate? Mr. Thom thus states the proposition which he proposes to adopt. He then states the crux of his argument in the expression, at pages 58-59, which follows: No theoretical view of the proper distribution of governmental powers can have any weight with you or with the judgment of the people of this country, unless under the proposed distribution of governmental powers adequacy of the transportation facilities of the country is assured. No private interests, no cherished theories of government, can be permitted to enter here unless they come with a guaranty in their hands that what they propose will protect the public in the matter of transportation facilities. Therefore, gentlemen, I shall debate this question on the theory that I must sustain the propositions which I shall advance by showing not only that the public interests are promoted by them but that they tend to give greater assur- ance to the public of the continuing efficiency of transportation facilities in this countiy. Thus the matter is made perfectly plain that all other considera- tions respecting constitutional rights and the division of the powers of the Government as we have known them since its establishment, must give way to the one controlling proposition that adequate transportation facilities must be supplied, which, as previously stated, must depend upon the adequacy of revenues to provide such transportation facilities, or the rates must be high enough to yield a return under all circumstances that will induce private capital to INTEESTATE AND FOBEIGN TEANSPOBTATION. 625 invest in supplying such facilities, which condition shall be there- after kept up by continued rates high enough to carry out the scheme. This amazing proposition is disclosed in the nature of a demand for legislation to compel the people to provide the transportation facilities for the railroads to own. If it has ever been presented heretofore before any of the committees of Congress throughout the lengthy hearings, we should like to be informed of that fact. It is the first time that this bold proposition has been seriously made, so far as we are aware. It has been sometimes asserted by the repre- sentatives of the carriers before these committees and elsewhere, that the regulation of rates should carry with it the guaranty of an ade- quate retumupon the property engaged in the public service. No such proposition has ever received serious consideration by Con- gress or the Interstate Commerce Commission or any other regulative body, or by the Supreme Court., The public does not guarantee ton- nage or insure against bad management, bad judgment, or misadven- ture. We shall therefore, so far as our argument may be considered, de- mur to the conditions thus placed upon it and decline to accept those conditions. The very fact that the carriers have failed to furnish sufficient transportation facilities or so managed their business as not to be able to utilize the same efficiently under this theory carries with it exemption from liability to furnish those facilities and places upon the public the burden of rates sufficiently high to enable the railroads to purchase them and own them. It necessarily assumes the acme of perfection in the management of these properties when, as a matter of fact; there is probably more inefficiency in railroad operations than in any other important line of business in this country. This is fully illuminated by the situation which presents itself whenever any rate or charge is called in question as being unreason- able, actually or relatively, when the question of the cost of the per- formance of the service and the resulting profit from the rates paid is uniformly announced by the railroads to be not ascertainable and not known to them. Of this subject we shall speak at more length hereafter. It has repeatedly been the case that in order to induce the return of cars by connecting lines and other foreign lines the per diem for the use of cars and the demurrage charges against shippers have been increased 100 and up to 200 per cent above the normal. That is the condition at the present time. Inquiries by the Interstate Commerce Commission and the result of its investigations concerning car supply has drawn forth the oft-repeated excuse, be it valid or otherwise, that the railroads which furnish themselves with cars, if they could keep them in their possession or an equal number in the interchange of loaded and empty cars, could fully supply the demand for cars on their lines, but because other railroads which had not a sufficient supply had taken and appropriated the use of the cars' of the line having a sufficient supply and wrongfully refused to return them, they were unable to supply the demand. This was notably the case as developed by the investigations of the Interstate Commerce Com- mission growing out of the car shortage of 1907, to which attention was called by Mr. Thom, at page 59 of his statement. The report of the commission was filed with the Committee on Interstate (commerce 626 INTERSTATE AND EOEEIGN TEANSPORTATION. of the Senate. The same condition has just been developed in the investigation now being conducted by the commission, Must it be assumed as a postulate that whatever the carriers do is right and that the public must be taxed to supply the facilities which the law re- quires them to have, and that the public must answer in money for the failure of efficient management by the railroad companies ? THE PARADOX THAT HIGH RATES WILL DEVELOP THE COTJNTRT AND REDUCE THE HIGH COST OE LIVING. The undeveloped agricultural lands, the insufficiency of or unequal distribution of railroad facilities, the reference to untouched for- ests, and particularly the conditions in Wyoming and Idaho, seem to be given prominence to prove the necessity of higher rates in order to secure more railroads. If this committee desires to know why Wyoming and Idaho have not been developed along the lines of ex- isting railroads, inquire of Senators and Representatives from those States. The answer will be that the railroads have pursued the policy of rates so high that the reclamation projects in those States remain, to a large extent, unused because their products can not pay the existing rates and meet the competition in the great centers of consumption, and generally development has been thus retarded. The intermountain rates in this undeveloped country have been the subject of controversy before the Interstate Commerce Commission long before the enactment of the Hepburn bill, and they have stoutly insisted, and it may be said with marked success, in retaining the very peak of high rates in the very territory referred to, which ac- counts for the failure in the development of the natural resources of this country and its settlement, and the utilization as well of the^ wonderful reclamation projects established by the Government. If existing railroads in that territory, which are the advocates of the marvelous propositions now urged before this committee, can not see their way clear to develop the resources contiguous to their lines, how can it be ejected that rates can be increased there to make up for the want of facilities by additional construction and still higher rates? It is truly stated by Mr. Thom, at page 61, that the people " will produce no more than they can get to market, and when you limit your transportation capacity you limit the capacity of your Seople for productiveness and for usefulness in human endeavor." Ixactly the same thing follows where the rates are so high that the prodlicts of the locality can not be sold in competition with those elsewhere produced. Much has been said, at pages 62 and several following pages, to establish the proposition that needed facilities can not be provided out of earnings; that it requires new money, and that to get that credit must be established; to have the credit that there shall be a guaranteed means by which the provision of the facilities may be insured, and that must be sufficient in the way of reliable earnings to provide a return of 6 per cent, with a surplus of 3 per cent, to the investor ; and that at last the decline in railroad credit, which it is stated will be called to the attention of this committee during the hearings, is due to the governmental policy, and that the amount of the revenues of the carriers is not within the control of the owners •of the property. It is admitted that there should not be freedom INTERSTATE AND FOREIGN TEANSPORSATION. 627 from regailation or the absence of regulation. It is contended that the character of regulation should be such as to increase the public confidence. However much it may be covered up with apt and sldllful language, the whole object of the argument is. to secure higher rates for the purposes named, which, it is asserted, are in the public interest. We may with deference, therefore, be permitted to say that the argument should have begun with the demand for higher rates. As we understand it, the idea advanced is that under the dual system, so called, of State and interstate control of rates and the regulation of railroads by the States and by the Government, the earnings are kept down to the point that not every locality or com- munity which might desire to have it can obtain a railroad, and that existing railroads can not, out of their earnings, supply the needed facilities for the transportation service. So that whatever may be said to establish the proposition that is offered in support of the proposition to put under the control of the Federal Government the matang of all rates and regulations pertaining to raili'oads, the advocates of that proposition seek that sort and character of reg- ulation which will accomplish the end of securing a great deal more money, by measuring the standard of rates and charges by what they assert to be necessary in the public interest to secure the facilities so much adverted to. The standard of reasonableness or, put in another form, the method of ascertaining what is reasonable, is made to depend upon and limited only by the amount of money which would be required to carry into effect this Utopian theory of forcing the public to supply the facilities, the charges for which they could not in practical effect regulate. Reduced to its last analysis we are here facing the demand said to be made in the public interest by the existing railroads of the .country, that rates be made high enough to insure the construction of railroads and the supplying of facilities in competition with the proponents of this idea, dividing the tonnage and business and then increasing rates to make up for it. It proceeds upon the mere fanci- ful theory that increasing revenue follows the increase of rates. It may ilot matter that it is not stated in so many words, that is neces- sarily the logical sequence flowing from what they do say and might as well have been stated in so many words. It entirely ignores the important fact, always present in all railroad operations and in the operation of all industrial institutions where the money is made by a multitude of transactions, that the volume of business is increased by the cheapness and attractiveness of it and that the profitable earnings are made from the great volume of the business rather than from the higher rates charged for it. So it is that every railroad operating economist, so far as we have ever observed, or as is disclosed in any writing or teachings, and certainly as the result of experience, seek tonnage and a volume of business and make the rates so as to induce it. , , , i That is to say, the amount of rates charged or that can be charged in the profitable business of the railroads are necessarily limited by the business necessity of the country, and if the railroads are turned loose to make the rates as they please they can not increase then- earnings just as their own will. Surely this could not be done i± the 628 INTEESTATE AND FOREIGN TRANSPORTATION. rates charged are so high, which these gentlemen seem to desire, as to insure the construction of all of the railroads that any community might need, because of the universally known fact that when a busi- ness becomes so profitable as to induce a great many others to go into it, it then becomes so divided that the profits themselves cease to operate as an inducement for the further extension of such business. Whatever may be said of it, therefore. Congress could not if it fiaw fit abandon all regulations, and if the States saw fit to abandon .all regulations, bring about such a condition as it is argued here would be desirable in the public interest. A few examples will illustrate this : Suppose that some capitalists should take it into their heads to build two other trunk lines from the Mississippi Eiver and Lake commercial centers to the large Atlantic ports, that would divide .up the traffic. Could they by increasing rates increase the traffic? Take grain, for example', rather than pay the higher rates from the grain-producing territory, it would move in some other direction, by way of the Gulf ports or by way of the Lakes through Canada and Canadian ports, and thus reduce the amount of tonnage that they already have. Suppose that were not done, but on the contrary two additional trunk lines were built from Missouri River territory to the Gulf, that would divide up* the traffic, and it could not be made up for by increasing the rates, because if that were done then all the grain would move through the Atlantic ports. A thousand similar illus- trations could be given to place it beyond peradventure, that the proposition that is laid down before this committee that the railroads should be permitted to charge rates high enough to provide all the facilities that anybody might desire, is a mere creature of the imagi- nation and impossible of accomplishment. It can not be done by the abandonment of regulation, and it can not be done by concentrating it in the Government and taking it away from the States. If it could be done, it involves within it the making of slaves for the benefit of the master, with too many masters to profit by their labor. The difficulty that may confront the country in particular in- stances, and perhaps generally, is the inefficiency of railroad opera- tion and the inefficiency of regulation. Of this we shall say more hereafter. Rate making is not a science, as to which we submit the following pungent remarks as the result of a half century or more of experi- ence in that undertaking, both by the railroads and the regulating authorities of the States and the Nation : 1. Rate making Is not a science; it is always an experiment. 2. The only rule of universal application is expediency. 3. Carriers' object is to get the most revenue. 4. "Jones, he pays the freight " ; wants it as low as ha can get it. 5. Each individual, or industry, wants to prevent the other fellow getting the best of it. 6. The rule of the law is reasonableness and relative reasonableness. 7. The right of the public is that no higher rate shall be charged ; the right of the carrier is that at least that much may be charged. The exercise of judicious power over rates by the rate-making tribunals and the controversies between contending parties and the protection of these rights involve due consideration of the foregoing in practically every case. INTERSTATE AND FOREIGN TRANSPORTATION. 629 8. The resultant rate is the firbitrary judgment of suoh rntp mni-ino- t,.,- bunal; it is essentially a practical matter measuredby no ru^e ^^ *"' after due consXat'ion''^nfl''n^'"'?.* ^° ^f 1^^ '^^"" «* '^^ ^^^^ information alter due consideration of all matters of fact affecting the interests of the carrier the shipper, the producer, the consumer, and the puWic 10. Among those considerations are the cost of service, the value of the service, the profits of the transaction, the return upon the investment tht returns and profite.'"'" '"'"'' ""'* "" approximated to find the provable lo No equivalent of profit is required by law or possible to obtain 13. A difterence m rates according to weight carried or distance of the haul IS not an unjust disci-imination or undue preference 14 Conditions of trade and competition, the location of producing and con- suming markets, the facilitating of trade and commerce are involved in the question of unjust discrimination or undue preference. _ Rate making is therefore not a science, but the exercise of well- mtormed judgment. rV. REASONABLENESS OF RATES, CHARGES, AXD REGULATIONS THE PARAMOUNT STANDARD. Under -the common law, before the days of railroads or steam- boats, the relation of the carriers to the public and the rights of each under the common law were measured by this standard. It would seem useless to go into a discussion and history of this sub- ject, about which there can be no dispute. The growth of the car- rying business and its development into necessary and indeed, if properly regulated, beneficial monopoly is well known to every student of the subject. The principle is universally conceded and arises out of the necessity of the situation. The matter which is ever present and which will always be the source of controversy will be the method of ascertaining what is reasonable. At first statutes were enacted declaring maximum rates, defining the rights and duties of carriers and limiting the amount of charges. With the growth, particularly of railroads, of the transportation business and its monopolization this was found wholly inadequate to meet the situation so as to do justice. The complexity of the commercial and carrying trade, the great multitude of circum- stances, and the innumerable services and shipments under these varying circumstances rapidly increasing with the growth and development of commerce and industries and the various character of service performed were such that it was impossible to lay down a rule of universal application or even of local application which would do justice to all. Therefore, the more flexible method of establishing by law tribunals to hear and determine complaints and to adjust and equalize all of the matters pertaining to transportation and the rates and charges, and to prescribe the rule of conduct which in its judgment was proper in a given case, or applicable to a large number of cases, came into existence in various States for the public protection. In every in- stance the standard was one of reasonableness, which had been the universal rule from the earliest times recognized by law as proper. These State commissions grew by experience, and confronted by new necessities, into more complete regulating bodies, along with the growth and development of railroads, so that one State and another 630 INTERSTATE AND FOREIGN TRANSPORTATION. following the example of its neighboi's adopted this form of regula- tion. Not until long after the beginning of State regulation was there any attempt made by Congress to provide for the regulation of interstate transportation. In that effort Congress adopted the same standard which from time immemorial had been adopted by the com- mon la;w, and reenacted in the form of statutes in the various States, and declared the standard, in the first section of the act, in the fol- lowing language, which was subsequently amended to include tele- graph, telephone, and pipe lines, etc. : AH charges made for any service rendered or to be rendered in the transpor- tation of passengers or property * * * shall be just and reasonable ; and' every unjust and unreasonable charge for such service or any part thereof is prohibited and declared to be unlawful. Up to the time of the enactment of the Hepburn bill, as is of com- mon knowledge, no adequate provisions were made to carry out this declaration, because it could not be done unless the regulating body prescribed the rates and the services where necessary. The Hepburn bill gave that power, so that the Federal Government has only really entered upon the administration of the law in declaring the funda- mental piinciples of reasonableness as a standard within the past 10 years. It is ye't in its infancy, for one main reason at least, that the commission was not given authority to make any other than a maximum rate, which the railroads might or might not observe so long as no undue discrimination or undue preference was proven to exist which would interfere with their action in the premises; and furthermore, the commission was not given any power to prescribe a schedule of rates, but it is limited to the correction of rates to make them apply to the standard of reasonableness according to the opinion of the commission in a given case. The railroads at all times have the initiative, provided they observe the orders of the c(3mmis- sion, so long as the same remain effective, which can not extend for over a period of over two years. So, as a matter of fact, we have no system whereby the Government makes rates on interstate traffic, but only the regulating power conferred upon the commission over the rates made by the railroads. That is entirely different in at least some of the States where the regulating body itself prescribes the entire system of rates, which must remain effective until the' State commission sees fit to set it aside, or until it may be set aside because on some account it may be unlawful or violate a constitutional prop- erty right. The beginning, therefore, of regulation, and the most effective regTilation to-day, comes from the States. Of course, whatever is interstate commerce is not subject to their control or regulation, and the right under the Constitution to regulate all commerce other than interstate commerce committed to the Federal Government by the commerce > clause of the Constitution, remains with the States, where it ought to and will remain. The attempt here by this new discovery is to brush it aside as of no consequence or as an evil, but it must be understood that that attempt is made primarily by those Avho have always been opposed to the establishment of these bodies and the interference by them with the rates and regulations which the railroads themselves have desired to make without let or hindrance. INTERSTATE AND FOREIGN TRANSPORTATION. 631 The arguments here presented are based wholly upon a utilitarian standpoint, as measured by the desires and wishes of those who seek and have always sought to escape all regulation that would interfere with money getting, and of such others as they may find who look with favor upon their scheme. It is idle, therefore, to talk about not being permitted to come before this committee to present any theoretical view of the proper distribution of govern- mental powers and to urge that it should have no weight with the committee, unless under such proposed distribution of governmental powers adequacy of the transportation facilities of the country is assured. A theory of government is necessary upon which to establish the fabric which protects and insures the rights of the people. Whether the theory of this Government was or was not right it has found practical application, with which we are confronted in the estab- lishment of our laws and systems in accordance with that theory. To destroy the theory is to destroy the Constitution. In the course of events it has come about that we have created artificial bodies, dependent for their powers and existence upon legis- lative enactment, and now we are confronted by them with the de- mand to abolish the constitutional provisions with respect to our governmental policies to suit their desires and convenience. So there is no use to dissemble the fact that we are confronted with the proposition that the railroads will control the Government or the Government will control the railroads. Among other things the Government and the States have estab- lished a method of determining all controversies between the car- I'iers and the shippers, and a means of carrying into effect and practical application the standard of reasonableness as affecting rates, charges, and services, which are accessible to all. This con- troversy before this committee seems to arise out of the fact that the railroads are dissatisfied with the standard and system. Being dissatisfied, they wish to bring about an entirely new system to op- erate "under entirely different standards, and when the argument is all boiled down to "its last essence and the dross is skimmed off and the adulteration is eliminated, it is simply the means to the end of getting more money than is possible for them to secure under the present system ; and that is practically admitted. That is what we oppose. In doing so we say that it were far better to perfect the present system of regulation, to bring up the standard of its effi- ciency, Utilizing what has gone before and the material we have at present, to the end of bringing into • practical application, to the best advantage of the entire public, the standard declared by the act to regulate commerce, as above quoted. , ■ , , We can but be impressed with the strange hallucination which has produced the argument, repeated at great -length, to establish a con- clusion or belief in your minds that your supreme duty to the public is so to legislate respecting rates and regulations of the railroads of this country and permit the making of charges so high and the return so certain as to give currency to railroad securities other than bonds, so that the ordinary man will invest m them, and thereby that the new money will be acquired or be obtainable for all this vast 70342 — PT 10 — 16 10 632 INTERSTATE AND EOBEIGN TKANSPORTATION. scheme of railroad facilities. We could scartiely expect, of course, that any considerable amount of new mileage would be constructed by new and independent companies, so it must be assumed that you will enter upon the experiment of legislating into the minds of the public (by taking their money beyond what could confessedly be obtained through the present instrumentalities of freight regulation and control) confidence in such schemes, for instance, as the reor- ganization of the St. Louis & San Francisco Railroad Co. Have you read the confirmation of the\sale back to the stockholders of that property and the payment -of some of its debts by the issuance of new stock ? Have you read about certain New York bankers first taking out of this property — or, to use another expression, to skim off the cream — $5,500,000 in money by the reorganization committee, and the purchasing committee, and the loan syndicate, wjiich latter alone got $750,000 for its name — just for being in a state of pre- paredness ? They counted units of money in that transaction by the million. If you want to investigate something which will throw light upon the subject of the want of confidence of the public in railroad stocks, just have a look in on that proposition. If they sold these bonds which they were permitted to issue by the Railroad Com- mission of the State of Missouri for par,' on the representation that the property was worth the amount of the bonds issued, you make some inquiry to see whether or not the bond purchasers needed pro- tection. If you will inquire as to the amount of expenditures by the old company to purchase little pieces of railroad which were con- structed in Oklahoma, Texas, and Louisiana, compared to what they cost for the real construction, you will likewise be interested. I think you will find that that part of the road built in piecemeal and by sections, which is supposed to extend from southeastern Texas to New Orleans, was capitalized far beyond its worth. All of Mr. Thorn's solicitude about the inability of railroads to construct lines into new forests will certainly disappear in the presence of this per- formance. He seems to feel, judging from his statements and arguments, great fear lest the undeveloped agricultural lands of the country will not be reached by railroad facilities, the reaching of which he feels would enable the people to secure the products of the soil to live upon. We should like to invite the attention of the committee to the example of the St. Louis, Brownsville & Mexico Railroad, which extends from Houston, Tex., to Brownsville (another Frisco enterprise). Some of you are doubtless somewhat acquainted with the conditions which existed in that country before the construction of that railroad and the conditions which exist now. Five hundred miles of that road were built through a wholly undeveloped and unsettled country. It was occupied by cattle, some Mexicans and burros, coyotes, lobos, and other predatory animals, to say nothing of jack rabbits, prairie dogs, and prairie rats. Underneath the surface of that country in many. places on these great ranches, among the largest and best cattle breeding grounds in the world, were vast sheets of artesian water, which were pierced by thousands of drills, and like magic, lands which were worthless except for grass in a country subject to the severest droughts this side of the Nile became the most productive vegetable and fruit garden of things that are good to eat ever developed in this country in so short a time. Towns and INTEBSTATE AND FOBEIGN TBANSPORTATION. 633 homes sprung up ; people went there from every part of the United States, and it caught the eye of Mr. Bryan, who became at last a farmer. Had it not been for one difficulty, which seemed to be beyond the power of the people to control, there can be no reason to suspect that it would not have become the most prosperous country in the United States, not excepting Southern California. Let your in- quiries extend to what that difficulty was, then ask yourselves the question as to whether these great pioneers of development so ably represented by Mr. Thom can be trusted with the public interests, which they are so anxious to have you turn over to them. You will find that the reason lay at the door of these carriers. At the western rate advance hearing before the Interstate Commerce Commission in Chicago a couple of years ago these western lines were demanding an increase in rates ; and among other bad conditions that required it, emphasis was placed upon the condition of the Brownsville road. There was no traffic outbound except the products of the soil, principally cabbage, onions, lettuce, melons, potatoes, and smaller amounts of other vegetables, together with live stock, some cotton, and a little corn, and on all this traffic, except cotton, the rail- roads were seeking an advance in rates. They did not get it on live stock, cotton, or corn, but they did on the vegetables, etc. There came before that committee a witness who had been one of the sub- officials in charge of operations, who held his office and worked on that line, and who at the time he testified had charge of some short lines winding around among the canals and irrigated farms in the Browns- ville district, who in a most graphic way detailed the settlement of various districts and localities throughout, and up and down that railroad, to show that the people went there with money enough to buy their little places with 40 acres or more, which yielded to their energies most bounteous crops. Thousands of carloads of cabbage and these other various vegetables mentioned were shipped to the cen- ters of population, finding their market mainly at St. Louis and beyond, but the conditions of trade were such that although the cab- bage was ready for market long before it could be shipped and sold, it had to be held until the northern supply of cabbage was nearly con- sumed before a market was developed for it in that country. It be- ing a warm country most all of the year, it was necessary to handle it with dispatch and care, in order to get it to market in a salable condition. It is true that the freight rates were comparatively low, otherwise it could not have moved at all. But it turned out that, with the cost of icing, the failure to furnish cars, the delay upon the Brownsville, road, the, poor condition of the old engines which had been sold to it, on paper at least, by the Frisco road (the Brownsville road being a Frisco property in some way or another), hundreds and hundreds of carloads of cabbage rotted in the fields, were spoiled m transit or oftentimes could not be sold when it reached the market for enough to pay for the freight and icing charges. The coYisequence was that these people who were induced by the flaming advertisements of the Frisco Eailroad, and many individuals interested m land schemes and town-site schemes, came to penury and want— they were in rage— all because of a situation which could have been remedied alone by that spirit of enterprise under which James J HiU developed the great States of Minnesota and North Dakota. Now, Mr. Thom 634 INTEESTATE AND FOREIGN TBANSPOKTATION. seems to think it the fault of the people for not furnishing proper facilities. If you would like some interesting reading of facts after you are through with the consideration of these platitudes, which so much adorn the reports of these hearings, get hold of the testimony on the fruit and vegetable part of the hearing of the western rate case and read that evidence. The witness above referred to stated that he went to the traffic men of the railroads and pointed out to them the great mistake they were making in endeavoring to advance these rates upon the impoverished people, and begged them not to do it. After you have read the evidence with respect to the Brownsville Railroad and that district, then turn into the chapter with respect to the onion- raising business soutli of San Antonio, in the vicinity of Laredo, on the I. & G. N. road and branch lines and small connecting lines that were built in that part of the country, and you will find evidence to show that on one occasion it was estimated by the general agent of the selling department of these vegetable growers that a thousand cars of onions rotted in the fields on the I. & G. N. Eailroad and vicinity because the rates were such that, and the onion market such that, they could not reach the market with profit. That is another, territory where the artesian water was discovered and had brought forth its abundance. That was followed by the construction of all the branch lines of railroads that were needed, and notwithstanding this situa- tion they raised those rates 5 cents per hundred pounds. If you should have the time and opportunity to read this testimony, you will find that people were induced to go down into that country and buy these lands and enter upon their development upon advertised cheap rates for their products and a market which would be supplied by the railroads. As soon as these people were rooted to the soil and could not get away, their means being expended, these railroads, -through the Southwestern Tariff Committee, which holds its sessions at St. Louis, in spite of and in violation of the antitrust laws — we might say in open defiance of such laws — voted to increase these rates, so that whether the Brownsville road and the I. & G. N. road believed they should be increased or not, under the practice of this committee tjiey would havfe been compelled to increase them ; otherwise connect- ing lines would not have participated in the rates. The I. & G. N. Eailroad has been in the hands of a receiver off and on for several years, and it might at least' have helped these people to live whom it had helped to go there, without any ultimate harm to the persons who were the owners of its stocks and bonds. Even if it took the money out of the pockets of the bondholders, it would have been a righteous £ict, which human sympathy would have induced had the railroad belonged to any single individual. Now, coming to the further development of an undeveloped coun- try, take a look in on the construction of railroads by the Santa Fe sy^em in Texas and that which is going on to-day, and you will find all of the panhandle country of Texas plastered over with a spider web of railroad lines, built by the Santa Fe, and a country rapidly developing. During all these periods of the last 10 or 12 years, in which Texas has been maligned from one end of the country to the other on account of its railroad regulation and policy, there has been more construction of railroads than in any other part of the country. IXTEESTATE AND FOREIGN TEANSPORTATION. 635 Then get the printed annual report of the president to the stockhold- ers of the Santa Fe company and take a look in on the returns which that system of road, a marvel of good management and efficiency, extending, as it does, from the Lakes to the Gulf and to the Pacific, and observe the favorable results of its operation. Of course, it may happen that in the operation of a great system of roads some parts of it will not be profitable, but they are part of a system, and the sys- tem must be treated as a whole: You will find preciselv the same thing with respect to the western lines other than the Santa Fe. Two of the very extensive railroad projects constructed by the Goiild systems, or so-called systems, namely, the Western Maryland and the Western Pacific, present examples of enormous expenditures, without consulting the public as to whether or not they should be made: Of course, they have some traffic, or an opportunity to get it, but when you are called upon so to legislate as to produce out of the earnings enough money to make these railroads profitable, to do which you would have to increase the rates on the parallel and com- peting lines, or somebody would have to do it, and it would be little less than robbery ; in fact, it would be worse than robbery to make the public pay for these facilities in the way of freight rates. There is another shining example of misadventure and bad judg- ment in the construction of the Trinity & Brazos Valley Railroad by the amalgamated Frisco & Rock Island interests, intended to serve these lines as an outlet to the Gulf from the termini at Dallas and Forth Worth, and also the traffic of the Fort Worth & Denver City, Railway, a part of the Colorado & Southern system, which seemed to be under control, by stock ownership or some other sort of manipulation, of the Rock Island & Frisco combination. That road (Trinity & Brazos Valley) has never paid anything, and the receiver of it testified before the Railroad Commission of Texas that if rates were advanced 300 per cent it would not make it a profitable property but that what it needed was tonnage. Of course, the Rock Island & Frisco system combination went to pieces, and ex- hibited as a moving picture to the world the helplessness of an in- vestor in the stock of such a cpncern. Yet, notwithstanding all of this, it is insisted that you shall so arrange legislation that rates can be made high enough to give the public confidence to purchase such stock and thus get new money. You may take for another example the Colorado Midland Rail- road across the Rocky Mountains to Grand Junction, a most diffi- cult and expensive road to construct, as well as to operate, practically parallel with the Denver & Rio Grande. The rates of these two lines of roads are justifiably higher than the roads east of the Rocky Mountains in Colorado, and the divisions which are allowed on traffic originating on these lines and delivered to their connections at Pueblo, Colorado Springs, and Denver are likewise high, because these properties are most difficult and expensive to operate. Should the public be put to the expense of still higher rates to construct other lines across the Rocky Mountains and thus divide the traffic? Take the Missouri Pacific and the Santa Fe eastward from Pueblo, on opposite sides of the Arkansas River. Can it be expected other lines should be constructed in that vicinity and rates advanced to 636 INTERSTATE AND FOREIGN TRANSPORTATION. give confidence in the public mind to purchase the securities? It may be depended upon that if other lines are needed in that vicinity the Santa Fe is able to build them, and will do so as it did build the branch line southwest from Dodge City. Likewise the Milwaukee & St. Paul system and the Chicago. & North Western have been able to build all of the needed lines that the country can by any possi- bility be expected to support west of the Missouri River. As to Idaho, it is quite certain that the Union Pacific does not need the establishment of public confidence in order to get the money to build such lines as may be needed, or as appears to it to be desirable,- for the development of that country. So it is of the Northern Pacific and the Great Northern. Common sense teaches us that there must necessarily be a limit to the construction of railroad facilities. Another embargo to railroad construction between great centers of commerce is the enormoils expense of obtaining usable terminals. The investment in real estate would be so great, and undoubtedly is so great to-day, as to be prohibitive in the way of such railroad construction. We therefore appeal to this committee to examine into the actual detailed facts surrounding existing lines and their traffic to show that no such theory as has been advanced and insisted upon of making rates high enough to accomplish all of these ends which you are told should be accomplished is possible.. It would bankrupt the public, it would destroy its commerce, and it would be impossible for such increased rates to obtain the tonnage in most instances which would in the end amount to increased revenue. If one-half of the energy,, intelligence, and expenditure of money which has been used during the past 10 years to circumvent and prevent adequate regu- lation and to increase rates had been used in the economies of opera- tion and efficiency, we may express the belief at least that their con- dition would have been immensely improved in every way com- pared to what it is at present. It can not be expected that we are to abandon all of the prin- ciples and standards which have been established through the long course of experience and put into the form of law by the various statutes of the States, as well as of the act to regulate commerce, and the decisions of the courts construing these statutes, the power and duty of commissions established for the purpose of administer- ing the regulatory laws. _We deem it not out of place to quote from some decisions of the Supreme Court of the United States applying these general principles and rules to the facts of given cases respect- ing some of the various tests and standards with respect to the sub- ject of reasonableness and the proper adjustment of rates. In Atlantic Coast Line Eailroad Co. v. North Carolina (206 U. S., 20) it is said : In a case involving tlie validity of an order enforcing a scheme of maximum rates, of course the finding that the enforcement of such scheme will not pro- duce an adequate return for the operation of the railroad in and of itself demonstrates the unreasonableness of the order. Such, however, is not the case when the question is as to the validity of an order to do a particular act the doing of \yhich does not Involve the question of the profitableness of, the operation of the railroad as an entirety. The difference between "the two cases Is Illustrated in St. Louis & San Francisco Railroad Co. v. Gill (156 U. S., 649; 39 L. ed., 567; 15 Sup. Ct. Rep., 484) and Minneapolis & St. Louis Rail- road Co. V. Minnesota (186 U. S., 25T ; 46 L. ed., 1151 ; 22 Sup. Ot. Rep., ' INTEKSTATE AND FOREIGN TBANSPOETATION. 637 In the case of Minneapolis & St. Louis Eailroad Co. v. Minnesota (186 U. S.) it is said: True, It may be hard to segregate hard coal in carload lots from all other species of freight and determine the exact cost to the company ; upon the other hand, the commission, in considering a proper reduction upon a certain class of freight, ought not to be embarrassed by any difficulties the companies may experience in proving that the rates are unreasonably low. The charges for the carriage of freight of different kinds are fixed at different rates according to their classification, and this difference, presumably at least, is gauged to some extent by a difference in the cost of transportation, as well as the form, size, and value of the packages and the cost of handling them. Notwithstand- ing the evidence of the defendant that if the rates upon all merchandise were fixed at the amount imposed by the commission upon coal in carload lots the road would not pay Its operating expenses, it may well be that the existing rates upon other merchandise, which are not disturbed by the commission, may be Bufflcient to earn a large profit to the company, though it may earn little or nothing upon coal in carload lots. In Smyth v. Ames (169 XJ. S., 466 ; 42 L. ed., 819; 18 Sup. Ct. Rep., 418) we expressed the opinion (p. 541, L. ed., 847; Sup. Ct. Kep., 432) that the reasonableness or unreasonableness of rates prescribed by a State for the transportation of persons or property wholly within its limits must be determined without reference to the interstate business done by the carrier, or the profits derived from it, but it by no means follows that the companies are entitled to earn the same percentage of profits upon all classes of freight carried. It often happens that to meet competition from other roads at particular points the companies themselves fix a disproportionately low rate upon certain classes of freight consigned to these points. The right to permit this to be done is expressly reserved to the Interstate Commerce Commission, by section 4 of that act, notwithstanding the general provisions of the long-and- short-haul clause, and has repeatedly been sanctioned by decisions of this court. While we never have decided that the commission may compel such reductions, we do not think it beyond the power of the State commission to reduce the freight upon a particular article, provided the companies are able to earn a fair profit upon their entire business, and that the burden is upon them to im- peach the action of the commission in this particular. As aptly illustrating these principles, see the Minnesota case as de- cided by the supreme court of that State (83 N.W., 60,). That court itself is given jurisdiction to supervise the rates of the State commission. As a further analysis of the exercise of a rate-making power, the Supreme Court of Texas, which also has jurisdiction over the rates prescribed by the commission, in the case of the Railroad Commis- #on V. Weld and Neville (96 Tex., 408), says: The performance of these duties requires that classification be made so as to secure equality as near as may be in the carriage of similar articles, and each shipper is entitled to have his property carried for a reasonable compensation for the service rendered to him. In making the classification and rates of charges, the railroad companies must also be protected in their right to have a fair return for their business ; but in determining this question the railroad commission must have in view the entire business operations of the railroads. A marked difference between the right of the shipper and the carrier in de- termining the reasonableness of rates consists in this : When considered from the shipper's standpoint, it must be reasonable as to the particular property carried- that is, the charge must not be more than a fair compensation for the services rendered to the shipper in the carriage of the particular property. When however the commission considers the reasonableness of rates from the standpoint of the railroads, it is not confined to the particular article, but must look to the whole business of the railroads, which are required to carry many articles at a loss, as a single transaction, which must be made up by levymg higher rates upon such articles as can bear it within the limit of reasonable cohroensation The rate and classification must be so arranged as to give a i*psult of lust and reasonable compensation on the entire business of the rail- road company, but the rate on each article need not be reasonable if considered alone- but the aggregate must, however, produce a reasonable return. The 638 INTEESTATE AND FOREIGN TBANSPOETATION. work of the commission, as prescribed by the article last copied, involves a comprehensive knowledge by the commission of the business transactions of railroads and of the various business interests of the people, so that by a just exercise of their ample powers the citizens may be guarded against extortions and unjust discrimination and the railroads be allowed a fair return for the service rendered to the public. We also quote from the decision of the Supreme Court of the United States in the leading case of Smyth v. Ames (169 U. S.) : It can not be doubted that the making of rates for transportation by railroad corporations along public highways, between points wholly within the limits of a State, is a subject primarily within the control of that State. And it ought not to be supposed that Congress intended that, so long as it forebore to estab- lish rates on the Union Pacific Railroad, the corporation, Itself could fix such rates for transportation as it saw proper, independently of the right of the States through which the road was constructed to prescribe regulations for transportation beginning and ending within their respective limits. On the contrary, the better interpretation of the act of July 1, 1862, is that the ques- tion of rates for wholly local business was left under the, control of the respec- tive States through which the Union Pacific Railroad might pass, with power reserved to Congress to intervene under certain circumstances and fix the rates that the corporation could reasonably charge and collect. Congress not having exerted this power, we do not think that the national character of the corpora- tion "constructing the Union Pacific Railroad stands in the way of a State pre- scribing rates for transporting property on that road wholly between points within its territory. Until Congress, in the exercise either of the power spe- cifically reserved by the eighteenth section of the act of 1862 or its power under the general reservation made of authority to add to, alter, amend, or repeal that act, prescribes rates to be charged by the railroad company, it remains with the States through which the road passes to fix rates for transportation beginning and ending within their respective limits. We are now to inquire whether the Nebraska statute is repugnant to the Constitution of the United States. By the fourteenth amendment it Is provided that no State shall deprive any person of property without due process of law nor deny to any person within its jurisdiction the equal protection of the laws. That corporations are persons within the meaning of this amendment is now settled. Santa Clara County v. Southern Pacific Railroad Co. (118 U. S., 394, 396; 30, 118) ; Charlotte, Colum- bia & Augusta Railroad v. Gibbes (142 U. S., 386, 391; 35, 1051, 1054) ; Gulf, Colorado & Santa Fe Railway Go. v. Ellis (165 U. S., 150, 154; 41, 666, 668). What amounts to deprivation of property without due process of law, or what is a denial of the equal protection of the laws, is often difficult to determine, especially where the question relates to the property of a quasi-public corpora- tion and the extent to which it may be subjected to public control. But this court, speaking by Chief Justice Waite, has said that, while a State has power to fix the charges by railroad companies for the transportation of persons and property within its own jurisdiction, unless restrained by valid contract or un- less what is done amounts to a regulation of foreign or interstate commerce, such power is not without limit, and that " under pretense of regulating fares and freights the State can not require a railroad corporation to carry persons or property without reward ; neither can It do that which in law amounts to a tak- ing of private property for public use without just compensation or without due process of law." Railroad commission cases. Stone v. S'armers' Loan & Trust Co. (116 U. S., 307, 325, 331; 29, 636, 642, 644). This principle was recognized in Dow V. Beldelmau (125 U. S., 680, 689; 31, 841, 844; 2 Inters. Com. Rept, 56), and has been reaffirmed in other cases. In Georgia Railroad & Banking Co. V. Smith (128 U. S., 174, 179; 32, 377, 380) it was said that the power of the State to prescribe the charges of a railroad company for the carriage of persons and merchandise within its limits — in the absence of any provision in the char- ter of the company constituting a contract vesting it with authority over those matters — was " subject to the limitation that the carriage is not required with- out rewar^, or upon conditions amounting to the taking of property for public use without just compensation, and that what is done does not amount to a reg- ulation of foreign or interstate commerce." In Chicago, Milwaukee & St. Paul Railway Co. v. Minnesota — Chicago, Milwaukee & St. Paul Railroad Co. v. Min- nesota Railroad & W. Commission (134 U. S., 418, 458; 33, 970, 982; 3 Inters. Com. Rept, 209) it was said: INTERSTATE AND FOREIGN TRANSPORTATION. 639 " If the company is deprived of tiie power of charging reasonable rates for the use of its property and such deprivation taljes place in the absence of an investigation by judicial machinery, it is deprived of the lawful use of its prop- erty and thus, in substance and effect, of the property itself, without due process of law and m violation of the Constitution of the United States, and in so far as it is thus deprived while other persons are permitted to receive reasonable profits upon their invested capital, the company is deprived of the equal protec- tion of the laws." In Chicago & G. T. Railway Co. v. Weilman (143 U. S., 3.39, 844; 36, 176, 179) the court, in answer to the suggestion that the legislature had no authority to prescribe maximum rates for railroad transportation, said that " the legislature has power to fix rates, and the extent of judicial interfer- ence is protection against unreasonable rates." In Budd v. New York (143 U. S., 517 ; 36, 247 ; 4 Inters. Com. Rep., 45) the court, while sustaining the power of New Yorii by statute to regulate charges to be exacted at grain elevators and warehouses in that State, took care to state, as a result of former decisions, that such power was not one " to destroy or a power to compel the doing of the services without reward or to take private property for public use without just compensation or without due process of law." In Reagan v. Farmers Loan & Trust Co., No. 1 (154 U. S., 362, 399; 38, 1014, 1024; 4 Inters. Com. Rep., 560), which involved the validity of certain rates for freights and passengers prescribed by a railroad counnission established by an act of the Legislature of Texas, this court, after referring to the above cases, said : " These cases all support the proposition that, while it is not the province of the courts to enter upon the merely administrative duty of framing a tariff of rates for carriage, it is within the scope of judicial power and a part of judicial duty to restrain anything which, in the form of a regulation of rates, operates to deny to the owners of property invested in the business of trans- portation that equal protection which is the constitutional right of all owners of other property. There is nothing new or strange in this. It has always been a part of the judicial function to determine whether the act of one party (whether that party be a single individual, an organized body, or the public as a whole) operates to divest the other party of any rights of person or property. In every constitution is the guaranty against the taking of private property for public purposes without just compensation. The equal protection of the laws which, by the fourteenth amendment, no State can deny to the individual, for- bids legislation, in whatever form It may be enacted, by which the property of one individual is, without compensation, wrested from him for the benefit of another or of the public. This, as has been often observed, is a government of law and not a government of men, and it must never be forgotten that under such a government, with its constitutional limitations and guaranties, the forms of law and the machinery of government, with all their reach and power, must, in their actual workings, stop on the hither side of the unnecessary and • uncompensated taking or dfestructioa of any private property, legally acquired and legally held. It was, therefore, withiij the competency of the circuit court of the United States for the western district of Texas, at the instance of the plaintifE, a citizen of another State, to enter upon an inquiry as to the reason- ableness and justice of the rates prescribed by the railroad commission. Indeed, it was in so doing only exercising a power expressly named In the act creating the commission." So in St. Louis & San FrancisOo Railway Co. v. Gill (156 U. S., 649, 657 ; 39, 567, 570) it was said that " there is a remedy In the courts for relief against legislation establishing a tariff of rates which is so unreasonable as to practically destroy the value of property of companies engaged in the carrying business, and that especially may the courts of the United States treat such a question as a judicial one, and hold such acts of legislation to be in conflict with the Constitution of the United States as depriving the companies of their property without due process of law, and. as depriving them of the equal protection of the laws." In Covington & Lexington Turnpike Road Co. v. Sandford (164 U. S., 578, 584, 594, 595, 597; 41, 560, 562, 566, 567), which involved the validity of a State enactment prescribing rates of toll on a turnpike road, the court said : "A statute which, by its necessary operation, compels a turnpike company, when charging only such tolls as are just to the public, to submit to such further reduc- tion of rates as will prevent it from keeping its road in proper repair and from earning any dividends whatever for stockholders, is as obnoxious to the Con- stitution of the United States as would be a similar statute relating to the business of a railroad corporation having authority under its charter to collect and receive tolls, for passengers and freight." And in Chicago, Burlington & 640 INTERSTATE AND FOREIGN TRANSPORTATION. Quincy Railroad Co. v. Chicago (166 U. S., 226, 241; 41, 979, 986) it was held that " a judgment of a State court, even if it be authorized by statute, whereby private property is taken by the State or under its direction for public use, without compensation made or secured to the owner, is upon principle and authority wanting in the due process of law required by the fourteenth amend- ment of the Constitution of the' United States, and the affirmance of such judg- ment by the highest court of the State Is a denial by that State of a right secured to the owner by that instrument." In view of the adjudications these principles must be regarde as settled: 1. A railroad corporation is a person within the meaning of the fourteenth amendment declaring that no State shall deprive any person of property with- out due process of law, nor deny to any person within its jurisdiction the equal protection of the laws. 2. A State enactment, or regulations made under the authority of a State enactment, establishing rates for the transportation of persons or property by railroad that will not admit of the carrier earning such compensation as under all the circumstances is just to it and to the public, would deprive such carrier of its property without due process of law, and deny to it the equal protection of the laws, and would therefore be repugnant to the fourteenth amendment of the Constitution of the United States. 3. While rates for the transportation of persons and property within the limits of a State are primarily for its determination, the question whether they are so unreasonaby low as to deprive the carrier of its property 'without such compensation as the Constitution secures, and therefore without due process of law, can not be so conclusively determined by the legislature of the State, or by regulations adopted under its authority, that the matter may not become the subject of judicial inquiry. The cases before us directly present the Important question last stated. Before entering upon its examination. It may be observed that the grant to the legislature in the constitution of Nebraska of the power to establish maxi- mum rates for the transportation of passengers and freight on railroads in that State has reference to "reasonable" maximum rates. These words strongly Imply that it was not intended to give a power to fix maximum rates without regard to their reasonableness. Be this as it may,, it can not be admitted that the power granted may be exerted in derogation of rights secured by the Con- stitution of the United States, or that the judiciary may not, when its jurisdic- tion is properly invoked, protect those rights. What are the considerations to which weight must be given when we seek to ascertain the compensation that a railroad company is entitled to receive, and a prohibition upon the receiving of which may be fairly deemed a deprivation by legislative decree of property without due process of law? Undoubtedly that question' could be more easily determined ' by a commission composed of persons whose special skill, observation, and experience qualify them to so. handle great problems of transportation as to do justice both to the public and to those whose money has been used to construct and maintain highways for the convenience and benefit of the people. But, despite the difllculties that confessedly attend the proper solution of such questions, the court can not shrink from the duty to determine whether it be true, as alleged, that the Ne- braska statute invades or destroys rights secured by the supreme law of the land. No one, we take it, will contend that a State enactment is in harmony with that law simply because the legislature of the State has .declared such to be the case ; for that would make the State legislature the final judge of the validity of its enactment, although the Constitution of the United States and the laws made in pursuance thereof are the supreme law of the land, anything In the Constitution or laws of any State to the contrary notwithstanding. Arti- cle 6. The idea that any legislature. State or Federal, can conclusively deter- mine for the people and for the courts that what it enacts in the form of law, or what it authorizes its agents to do. Is consistent with the fundamental law, is in opposition to the theory of our institutions. The duty rests upon all courts. Federal and State, when their jurisdiction Is properly invoked, to see to It that no right secured by the supreme law of the land is impaired or destroyed by legislation. This function and duty of the judiciary distinguishes the American system from all other systems of government. The perpetuity of our institu- tions and the liberty which is enjoyed under them depend, in no small degree, upon the power given the judiciary to declare null and void all legislation that is clearly repugnant to the supreme law of the land. « ^ ' ^ H( it: * * INTERSTATE AND FOREIGN TRANSPORTATION. 641 In the discussion of this question the plaintiffs contended that a railroad ara?f?Le<,^not"^ni^°.'^^'' '"'^ ^^^''^^^ ^"^ transportation as will e^ble U at all times, not only) to pay operating expenses, but also to meet the interest regularly accruing upon all its outstanding obligations and justify a dividend upon all Its stock; and that to prohibit it from maintaining rates or charges for transportation adequate to all those ends will deprive it of its property with out due process of law, and deny to it the equal protection of the laws. 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 mis- conception of the relations between the public and a railroad corporation It is unsound in that it practically excludes" from consideration. the fair value of the property used, omits altogether any consideration of the right of the public to be exempt from unreasonable exactions, and makes the interests of the cor- poration maintaining a public highway the sole test in detennining whether the rates established by or for it are such as may be rightfully prescribed as between It and the public. 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. Its authority to exercise the right of eminent domain and to charge tolls was given primarily for the benefit of the public. It is under governmental control, though such control must be exercised with due regard to the guaranties for the protection of its property Olcott V. Fond du Lac County Supervisors (83 U. S., 16 Wall., 678, 694- 21 382, 388) ; Sinking-fund cases. Union P. R. Co. v. United States (99 U. S., 70o' 719; 25, 496, 501) ; Cherokee Nation v. Southern Kansas Railway Co. (135 U. S ,' 641, 657; 34, 295, 302). It can not, therefore, be admitted that a railroad cor- poration maintaining a highway under the authority of the State may fix Its rates with a view solely to its own interests and ignore the rights of the public. But the rights of the public would be ignored if 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 services ren- dered, but in order simply that the corporation may meet operating expenses, pay the interest on its obligations, and declare a dividend to stockholders. If a railroad corporation has bonded its property for an amount that exceeds its fair value or if its capitalization is largely fictitious, it may not impose upon the public the burden of such increased rates as may be required for the purpose of realizing profits upon such excessive valuation or fictitious capitalization ; and the value of the property and franchises used by the corporation, as repre- sented by its stocks, bonds, and obligations, is not alone to be considered when determining the rates that may be reasonably charged. What was said in Covington & L. Turnpike Co. v. Standford (164 U. S., 578, 596, 597; 41, 560, 566, 567) is pertinent to the question under consideration. It was there observed: " It can not be said that a corporation is entitled as of right, and without refer- ence to the interests of the public, to realize a given per cent upon its capital stock. When the question arises whether the legislature has exceeded its con- stitutional power in prescribing rates to be charged by a corporation controlling a public highway, stockholders are not the only persons whose rights or interests are to be considered. The rights of the public are not to be ignored. It is alleged here that the rates prescribed are unreasonable and unjust to the company and its stockholders, but that involves an inquiry as to what is reasonable and just for the public. * * , * The public can not properly be subjected to unreason- able rates in order simply that stockholders may earn dividends. The legisla- ture has the authority, in every case where its power has not been restrained by contract, to proceed upon the ground that the public may not rightfully be required to submit to unreasonable exactions for the use of a public highway established and maintained under legislative authority. If a corporation can not maintain such a highway and earn dividends for stockholders, it is a misfortune for it and them which the Constitution does not require to be remedied by impos- ing unjust burdens upon the public. So that the right of the public to use the defendant's turnpike upon payment of such tolls as in view of the nature and value of the service rendered by the company are reasonable is an elelnent in the general, inquiry whether the rates established by law are unjust and unreason- able. A corporation maintaining a public highway, although it owns the property it employs for accomplishing public objects, must be held to have -accepted Its rights, privileges, and franchises subject to the condition that the government 642 ISTTEESTATE AND FOREIGN TRANSPORTATION. creating it, or the government within whose limits it conducts its business, may by legislation protect the people against unreasonable charges for the services rendered by it. It can not be assumed that any railroad corporation accepting franchises, rights, and privileges at the hands of the public, ever supposed that it acquired or that it was intended to grant to it the power to construct and maintain a public highway simply for its benefit, without regard to the rights of the public. But it is equally true that the corporation per- forming such public services, and the people financially interested in its business and affairs, have rights that may not be invaded by legislative enactment in disregard of the fundamental guarantees for the protection of property. The corporation may not be required to use its property for the benefit of the public without receiving just compensrftion for its services. How such com- pensation may be ascertained and what are the necessary elements in such an inquiry, will always be an embarassing question. As said in the case last cited : " Each case must depend upon its special facts ; and when a court, without assuming itself to prescribe rates, is required to determine whether the rates prescribed by the legislature for a corporation controlling a public highway are, as an entirety, so unjust as to destroy the value of its property for all the purposes for which it was acquired, its duty is to take into consideration the interests both of the public and of the owner of the property, together with all other circumstances that are fairly to be considered in determining whether the legislature has, under the guise of regulating rates, exceeded its constitu- tional authority and practically deprived the owner of property without due process of law. * * * The utmost that any corporation operating a public highway can rightfully demand at the hands of the legislature when exerting its general powers is that it received what, under all circumstances, is such compensation for the use of its property as will be just both to it and to the public." We hold, however, that the basis of all calculations as to the reasonableness of rates to be charged by a corporation maintaining a highway under legislative sanction must be the fair value of the property being used, by it for the con- venience of the public. And in order to 'ascertain that value, the original cost of construction, the amount expended in permanent improvements, the amount and marliet value of its bonds and stock, the present as compared with the original cost tif construction, the probable earning capacity of the property under particular rates described by statute, and the sum required to meet operating expenses, are all matters for consideration, and are to be given such weight as may be just and right in each case. We do not say that there may not be other matters to be regarded in, estimating the value of the property. What the company is entitled to ask Is a fair return upon the value of that which it employs for the public convenience. On the other hand, wliat the public is. entitled to demand is that no more be exacted from it for the use of a public highway than the services rendered by it are reasonably worth. We also quote from the case of Reagan v. Farmers" Loan & Trust Co. (154 U. S., 362), as follows: It is unnecessary to decide, and we do not wish to be understood as laying down as an absolute rule that in every case a failure to produce some profit to those who have invested their money in the building of a road is conclusive that the tariff is unjust and unreasonable. And yet justice demands that every- one should receive some compensation for the use of his money or property, if It be possible without prejudice to the rights of othei-s. There may be circum- stances which would justify such a tariff ; there may have been extravagance and a needless expenditure of money ; there may be waste in the management of the road; enormous salaries, unjust discrimination as between Individual shippers, resulting in general loss. The construction may have been at a time when material and labor were at the highest price, so that the actual cost far exceeds the present value ; the road may have been unwisely built, in localities where there is not sufficient business to sustain a road. Doubtless, too, there are many other matters affecting the rights of the community in which the road is built as well as the rights of those who have built the road. The foregoing quotations have reference more particularly to the question of the standard of reasonableness and the relative rights of the roads and the public in respect thereto. INTEESTATE AND FOREIGN TEANSPOETATION. 643 As bearing upon the same general principle, however, and having reference more particularly to the question of undue preference, or put in another form, unjust discrimmation, we quote from the deci- sion of the Supreme Court of the United States in the case of Texas & Pacific Railway Co. v. Interstate Commerce Commission (162 U. S.), as follows: " Subject to the two leading prohibitions that their charges shall not be unjust or unreasonable, and that they shall not unjustly discriminate, so as to give undue preference or advantage, or subject to undue prejudice or disad- vantage persons or traflSc similarly circumstanced, the act to regulate com- merce leaves common carriers as they were at common law, free to malte special contracts looking to the increase of their business, to classify their traffic, to adjust and apportion their rates so as to meet the necessities of com- merce, and generally to manage their important interests, and upon the same principles which are regarded as sound and adopted in other trades and pur- suits. Conceding the same terms of contract to all persons equally, may not the carrier adopt both wholesale and retail rates for its transportation services? " Again : " The English cases * * * establish the rule that in passing upon the question of undue or unreasonable preference or disadvantage, it is not only legitimate but proper to take into consideration, besides the mere difference in charges, various elements, such as the convenience of the public, the fair interests of the carrier, the relative quantities or volume of the traffic involved, the relative costs of the services and profit to the company, and the situation and circumstances of the respective customers with reference to each other as competitive or otherwise." « « ***** The conclusions that we draw from the history and language of the act, and from the decisions of our own and the English courts, are mainly these : That the purpose of the act is to promote and facilitate commerce by the adop- tion of regulations to make charges for transportation just and reasonable and to forbid undue and unreasonable preferences or discriminations. That, in passing upon questions arising under the act, the tribunal appointed to enforce its provisions, whether the commission or the courts, Is empowered to fully consider all the circumstances and conditions that reasonably apply to the situation, and that. In the exercise of its jurisdiction, the tribunal may and should consider the legitimate Interests as well of the carrying companies as of the traders and shippers, and in considering whether any particular locality is subjected to an undue preference or disadvantage the welfare of the communities occupying the localities where the goods are delivered is to be considered as well as that of the communities which are in the locality of the place of shipment. The considerations which the court has held in these cases ajid many others as guides in some degree at least, with no particular factor as controlling, must be alike applicable to a correct decision of the State, commission or the Interstate Commerce Commission. Wherein lies the difference? ,,.-,. t j.- 4 In every case the force to be given to the findings and actions o± either commission is because of their superior knowledge and oppor- tunity to know and determine the facts upon which they base their decisions, and it is assumed in every such case that the commission which rendered such a decision is possessed of such superior knowl- * ttwould seem entirely unnecessary to mention these fundamental principles, and we should not do so were it not for the very boldness oi the proposition, as we understand it, pre^nted to you by the rail- roads to do that which amounts to an abolition or wipmg out en- tirely of everything that has been done heretofore. 644 INTERSTATE AND FOREIGN TBANSPOETATION. We must not lose sight of the fact that in the history of govern- ment there has been a constant development of the principle that the weak must be protected against the strong. The distribution of the powers of Government as widely diffused as possible is but an in- surance against the control of the administration of laws by the strong fpr their own purposes against the interest and in destruc- tion of the rights of the weak. It is a matter of too common knowl- edge to even require a reference to it that the individual dealing with a great transportation company is perfectly helpless. He must de- pend upon the strong arm of the law. The great and powerful may depend upon their influence. It is immaterial to a great railroad corporati9n whether it handles an individual's ordinary business or not. But that is not the case with the great industries of the coun- try whose business is so important that they may bring into play competitive forces which will always enable them to reap the best of the bargain, no matter what the laws are or how ably and impartially they are administered. If it is a correct principle that the Govern- ment should be a Government for the people and by the people, as of general application, that is true in a superlative sense with re- spect to the matters of transportation. And as we approach the small business of shorter distance by the law. regulating supply and demand, the necessity for local control becomes greater, and so the right of the local community to select and provide its own means of regulation, subject of course to appropriate limitations, must be the better form. That local control by communities can not be less, of course, than the exercise by a sovereign "power of the functions of Government, and hence it must be the States which regulate it as to matters over which the States have jurisdiction, but in almost all instances the States have surrendered that right with respect to public utilities of cities. The States reserved that right in the organization and establishment of this Government. The principles of the law of regulation must be conformed to both by the administrative bodies of the States as well as the Nation. Nothing in experience or observation so far can be found which would justify the taking away of this right. V. THE BENEFIT OF THE STATE COMMISSIONS TO THE PUBLIC. We lay it down as a proposition that can not be gainsaid that the nearer the Government is to the people and the closer men are to the subject matter under their jurisdiction in the administration of law, with the accumulation of knowledge arising from immediate associa- tion and daily observation of conditions pertaining thereto, the more apt they are to avoid mistakes and to perform the functions of their offices beneficially. There is nothing so intimately associated with the daily life and business of men as commerce, and transportation is truly the lif eblood of it. It extends from the grass roots to the banks, to every possible avenue of production, sale, and consumption of that which goes to make up the sum total of the business of every com- munity. No words of description can adequately portray how every individual and every business in daily life is to be affected by it, and the less Imowjedge that a public official has of the entire situation with respect to the business of a community by daily and constant INTEBSTATE AND FOEEIGN TEANSPOETATION. 645 contact with it, the less capable is he to efficiently and properly regu- late and administer laws and to regulate in justness and fairness to all concerning such business, and particularly is this true respecting the service of tijansportation. Throughout the history of the world local self-government, honestly administered, has always been the best government and has been so regarded by the people themselves. I'articularly is that axiomatic, so to speak, in this country The power of the regulation of commerce and the transportation companies and the charges made and services rendered is the most lar-reachmg prerogative of government. Ordinarily the rules of conduct should be prescribed definitely by law. In this particular matter, however, experience has shown that it is wholly impractica- able to do that; hence the law defines the general rights, duties, and powers for guidance, and leaves the details in the hands of a board of commissioners to work out and prescribe, supposedly to fit the circum- stances as they m^y exist in varied form and by changes of time and conditions. The presumption of law is that the object to secure men capable and honest to admister the law will be accomplished. Like all human institutions there will be instances where that may not be accomplished for one reason or another for all of the time, but at last the people must be depended upon to govern themselves,' and in the end it must be expected that it will be honestly done. To say that a great State with its millions of people, law-abiding citizens, in an intelligent country like this, can not secure, will not secure, or do not secure as capable men as the Government can secure to perform the functions of office is contrary to experience. In some instances they may not ; in most instances they will, and that is manifest from the fact that the General Government must at last secure its talent from the various States. Perfection is not to be expected ; the best we can do in the administration of law is an approximation to any standard which we may prescribe. The State commissioits being acquainted with conditions in their respective States, in daily contact with its people, and understand- ing its business and necessities, have opportunities to know and inform themselves oh the details with respect to those things which they ought to know, ought at least to be able to determine what is right in the administration of the laws which it is made their duty to enforce. This is not said in disparagement or by way of criticism, or with any thought of that, respecting the Interstate Commerce Commission and its various employees whom they call to their aid of necessity, in order to perform the duties imposed upon the commis- sion under the act to regulate commerce. The idea is that there is at least as little danger of mistake and as great an opportunity for efficiency in the administration of the State laws respecting trans- portation locally within the State under the system which exists as there would be under any other method which could be provided whereby men must be depended upon to exercise these governmental functions. The people of a State are no more prejudiced than the people of the Nation composed of such States, and the contention that the people of the States are prejudiced against their railroads to the extent of dealing unfairly with them would seem to call for investigation to ascertain whether they were justified, if, indeed, they tiave such prejudice. We hazard the suggestion that the charge, ivhere made, of a State being prejudiced against its railroads has for 646 INTERSTATE AND FOREIGN TRANSPORTATION. its underlying motive the desire to escape the State regulation. It would seem improbable that the people of a State should be preju- diced against such great and important institutions without a justifi- able cause. If, therefore, by reason of existing prejudice the rail- roads of a State can not or do not obtain justice in the matter of the regulation of the business in such. State, let them search for the cause of such prejudice and remove it. It furnishes no ground for the destruction of the State commissions by such revolutionary change as to transfer their functions to the Federal Government. No one will expect, of course, that these State rates and transpor- tation services will go unregulated, and so the question naturally arises whether any proposition is offered that will be certain to result in a better system than we have now. There is no use of guessing at that, nor need we expect guesses as the basis of making any change, and much less should we accept the proffered solicitude for the public by the carriers, who have constantly attempted to escape all regula- tion. We insist that the regulation of the rates and the service of transportation locally within a State is even more important to peo- ple less able to protect themselves because of the small units of busi- ness, than is applicable to the great mass of traffic moving interstate. The people of the States are not objecting to the Government regu- lating those things which are within its constitutional rights, on utilitarian grounds or otherwise, but they do object, of course, to sur- rendering the control of their local affairs of this important sort, be- cause they do not see anything to gain by it. Not only is it not pro- posed that they shall gain anything by it, but the proposal involved of necessity is a loss to them for the purposes at last of an equivalent or greater gain to the railroads. The history of governing bodies or individuals of nations, from king to bailiff, is the history of a thirst for power. The concentration of that power affords the opportunity for its domination. The distri- bution of that power among the people makes it impossible to domi- nate it. It is often said that it is the tendency of the times to have a centralized government, and this committee is now called upon to rec- ommend that the most important function of government be taken from the States and concentrated at Washington — an object that is perfectly impossible of accomplishment. It was emphasized before you that we should tal^e stock and a survey of what we have done and are doing in the matters of the regulation of our railroads, supposedly for the purpose of ascertain- ing such evils as may exist in order that we may correct them. That was a laudable purpose. But if by taking stock and a survey of the situation we are at the same time to enter upon the experiment of abolishing the State commissions and placing the power in the hands of the Government to regulate our local affairs, the next inventory will be by and on behalf of the people to see how far their rights have been taken aWay and the control of their local affairs concen- trated in Washington. The result can not be doubted. CAN THE INTERSTATE COMMERCE COMMISSION BEITER ADMINISTER THE REGULATION OF STATE RATES THAN THE STATE COMMISSIONS? Space for bids, quotations, and references to numerous decisions of the Interstate Commerce Commission, Avhich has placed itself on INTERSTATE AND FOREIGN TRANSPORTATION. 647 record on this subject by the repeated announcement that the State commissions, being better acquainted with the local situation and local affairs, are better able to determine these matters coming under their jurisdiction than is the Interstate Commerce Commission itself. The mere fact that the railroads desire that the Interstate Conmierce Commission shall regulate and control the local rates in a State should not be given greater consideration than what the commission itself thinks. Those of us who desire to retain the State control and regulation of State rates by State commissions do not base that desire upon the question of the ability of the Interstate Commerce Commis- sion to perform the same service if the requisite opportunity afforded the means of doing it to the best advantage. We must all recognize that the Interstate Commerce Commission has been absolutely swamped with the demands made upon it in the administration of the laws respecting interstate commerce, and it is now urgently in- sisted that the members of the commission be increased and powers given to divide up the subject so that they can speedily and satis- factorily discharge their duties respecting interstate commerce. That body has found it advantageous to make use of the rates and regulations of State commissions in arriving at a conclusion with respect to the interstate rates. Since there is no possibility of uni- formity in the sense that there are any rules that can be laid down for making rates, they must of necessity be based upon the circum- stances of a given case. It seems to us perfectly patent that the action of the State commissions, as well as that of the railroads themselves, respecting similar rates and services to that which may be under investigation by the Interstate Commerce Commission in a given case, is a great advantage to the latter in reaching a cor- rect conclusion. Not that the Interstate Commerce Commission is bound to accept what the State commissions or the railroads may have done, but it is certainly a great advantage to know what they have done, and give it that weight to which the commission thinks it is entitled. If we should adopt any system of regional commis- sions, so-called, in certain districts or States, so that they will have the advantage of the knowledge to be gathered from familiarity with the matters with which they deal, would the Interstate Commerce Commission be any better off or any better able to decide what ought to be done because of the recommendation of such regional commis- sions than they are with access to the action of the State commissions and the railroads, which throw light upon the subject in the given case which the Interstate Commerce Commission may have under consideration. The proposal to establish regional commissions for the purposes which have been pointed out, and mainly to avoid the- charge of destroying the local control ajid the benefits of the serv- ice of those who are best acquainted or who would become best ac- quainted with the situation in a given locality, is but a mere induce- ment held out to meet the objection that by abolishing the State- comissions the local control is taken away. It has not been shown,, and can not be shown, that such regional commissions could better- regulate the local rates and matters of transportation than do the- State commissions when they properly perform the functions of their office. The right should remain with the State and it should^ be expected that the agencies which they employ in the premises will. 70342— PT 10—16 11 648 INTERSTATE AND FOREIGN TRANSPORTATION. be capable and efficient in the performance of their duties. The rates on a given railroad or any given locality upon one or more commodities for movement wholly within a State would not be any less local, and the proper adjustment thereof subject to the local situation, if regulated by the Interstate Commerce Commission than by a State conmiission. Every rate and regulation must depend upon the circumstances of the case, and be adjusted according to the situation as presented. The most that can be said, it seems to us, in behalf of turning over to the Interstate Commerce Commission the regulation of local rates within a State, is that it may lead to uniformity and a regulatory system better suited to the public needs than the existing method. It is intensely a practical question, and if due consideration be given to the subject matter to which these local rates and regulations apply it will at once be seen that no system of uniformity could possibly be adopted which would be based upon any intelligent theory. We heretofore pointed out that rates are the creatures of circumstances and must be regulated according to the circumstances. Unless the Interstate Commerce Commission could change these circumstances, it is a mere fanciful supposition that they could make the rates any better to suit the public needs than an efficient and well.- qualified commission can make themi What is the advantage, therefore, of undertaking such a radical change upon the mere guess that benefits will flow therefrom. STATE COMMISSION REGULATION AS A BALANCE WHEEL AGAINST THE DANGER OF RAILROADS DOMINATING THE FEDERAL CONTROL. At page 103, Mr. Thorn makes the significant statement, as follows : Our third suggestion would be — but before arriving at that third suggestion I wish to state that I do not for a moment contend that this railroad problem will have Its paflacea by the mere concentration of authority in the hands of the National Government. It will be helped ; it will be simplified ; it will be robbed of a great many of its dangers ; but there still remains an unsolved problem. It will be necessary, in addition to that, to perfect, to strengthen, and to reorganize the principles of Federal regulation. The object of getting It into the hands of one body is to have it where its processes can be readily con- trolled and readily perfected, so as to work up to a real solution of the problem ; and I want just here to digress to say that if all we propose is done there will not be, by virtue of that act alone, a single cent of additional revenue brought to us. We are not asking this committee, or asking Congress, to pass upon the suffi- ciency of our revenues ; we are not asking them by act, or by any act that you shall recommend, or that Congress shall pass, to increase our revenues. We are simply asking that you shall perfect mnchinery that can readily and adequately respond to a condition which in the public interest will require an addition to *ur revenues. Particular attention is directed to the espression that " the object of getting it into the hands of one body is to have it where its processes can be readily controlled and readily perfected, * * * there will not be, by virtue of that act alone, a single cent of addi- tional revenue brought to us." Then follows the further singular contradictory statement : " We are simply asking that you shall per- fect machinery that can readily and adequately respond to a condi- tion which in the public interest will require an addition to our revenues." We must confess that we can not understand the meaning of this language. INTERSTATE AKD FOREIGN TRANSPORTATION. 649 The State control of railroad rates and transportation of intra- state traffic is extraordinarily important, from a practical standpoint, as a protection against any wholesale harm which might follow plac- ing the control so far away from the people and their power of selection of the men who are to administer the law as to deprive them of the practical opportunity to secure their rights. We are not say- ing that the railroads would get control of the Interstate Commerce Commission or of the regional commission proposed, were they estab- lished ; although we have no doubt, neither can any intelligent person doubt, that they would do it if they could. But we are speaking more directly to the point that the greater the concentration of the powers of Government at Washington and the further the indi- viduals who administer the law are removed from the people and the subject matters which they control the greater will be the difficulty in the individual obtaining any practical and prompt relief against abuses and oppressions likely to be placed upon them by these great carrying companies. So long as the States can control it themselves, as to their local rates and transportation service, the more likely it is that remedial rights of the individual may be enforced. A few examples to illustrate the point we seek to make in favor of the continued control and the perfection of it may be useful in reaching a correct conclusion. The State of Illinois is — or at Least has been — ^the greatest corn- producing State, and Chicago is the great central corn market. Rea- sonable rates for the movement of corn to Chicago from points in Illinois are prescribed by the commission of that State. Of course, Chicago may and does draw its supply as v?ell from other States, but the very fact of the existence of a certain set of rates in that State to Chicago causes the railroads in serving the corn belt in Illi- nois or serving the corn belt in the Missouri Valley to seek the traffic and tonnage over their lines to Chicago, in order to do which they must make rates comparable to those in the State of Illinois. The same thing may be said of coal that is extensively produced there, as well as of live stock, and many other products. The people of the State are entitled to reasonable rates and should not be obliged to pay more in order that the general level of rates should be raised so that railroads reaching Chicago from elesewhere might profit by the transaction. It is easy to be seen that if such a rule should be adopted the rates in every State would be made up to the very highest notch that would enable any railroad supplying such a central market to make money out of its business. It would eliminate entirely the mat- ter of competition and the advantage of locality. There are 20 or more packing plants in the State of Iowa where hogs are extensively slaughtered and put into form for shipment everywhere, m competi- tion with the output of the great markets of the Missouri River and at Chicago. The hog raisers of the State of Iowa are entitled to reasonable rates to reach these points where they sell their hogs, and it would be manifestly unfair to force the people of Iowa to pay a higher rate on hogs than is reasonable to points in that State, m order that some other railroad reaching St. Paul from Iowa might charge rates high enough on hogs to make the business profitable, if it were necessary to accomplish that end. The rates, therefore, m the State of Iowa on hogs would naturally have a material bearing on rates to Austin, Minn., or to St. Paul, for the reason that the 650 INTBESTATE AND POEBIGN TEANSPOETATION. railroads reaching from the State of Iowa to those centers would desire to participate in the traffic originating on their lines or the lines of their connections. Omaha and Kansas City are large grain and large stock markets, located on the State line, which, as to Kansas City, is a more im- aginary one, running right through the exchange building in the stockyards, cutting off part of the facilities in the State of Kansas and part in the State of Missouri. The rates to Omaha from Ne- braska on corn and live stock is, of course, a State rate, and the people there are entitled to have the traffic move at a reasonable rate. Assuming such reasonable rate to be established, if that is materially lower than the interstate rate from Iowa to Omaha, the industries at Omaha would draw their supply as largely as possible from the State of Nebraska rather than from the State of Iowa. But the self-interest of the railroads themselves operating in the State of Iowa up to the Missouri Elver would induce them to adopt rates comparable with those of the State of Nebraska, in order to get the benefit of the traffic. At Kansas City the movement into market of live stock from the State of Kansas is either State or interstate, according to the line of railroad over which it moves and the route it takes in reaching the stockyards. Manifestly the rates must be the same both State and interstate, and since the State of Kansas prescribes the rates on the State traffic, it follows that the rates on the interstate traffic must conform to that standard. That is equally the case with ship- ments from the State of Missouri into the stockyards at Kansas City. The same applies to a large extent with respect to grain. Innumerable instances can be picked out to illustrate the same situation around the Qreat Lakes. Now, take the shipments to the Gulf ports, notably Galveston. The gi'eat State of Texas receives a large part of its supply of manufactured articles, goods, wares, and merchandise originating in Atlantic seaboard territory, either at the factories located at the ports or at the interior points from which the shipments are made through the po];ts, and thence carried to Galveston by water. If it is through movement or through shipment it is, of course, inter- state traffic and the State rates can not affect itj but that does not and can not eliminate the State rates from being a great factor and equalizer against unreasonable exactions that may oe made by all railroad routes from centers of manufacture of the same articles in the north and east, because anyone may establish his place of business and warehouse at Galveston, and receive and unload the shipments into his store or warehouse and thereafter sell and ship the same to any point in Texas upon the State rate. The result of the transaction is that the merchant at the interior point receives his goods which have paid the two transportation charges, namely, the cost to reach Galveston, plus the outbound cost to the interior. The same thing precisely wiU apply with respect to all Gulf ports and with respect to the Pacific coast. So long as this power exists in the State to regulate the amounts of rates and character of service within the State which its people will patronize if more advantageous than the interstate rates, just so long will it be beyond the power of the railroads or any regional commission, or the Interstate Commerce Commission, to do what INTEESTATE AND FOREIGN TKANSPOETATION. 651 might be accomplished, as anyone can readily see, with the power of the States revoked. The machinery, therefore, which Mr. Thorn states should be per- fected by this committee to readily and adequately respond to a •condition which, as he states, in the public interest will require an addition to "our revenues," involves the destruction of the safety appliance of the State rates to prevent the increase in revenues which are sought, unless it shall be just and reasonable in the eyes of the law, having due regard for the interests of the carriers, ship- pers, and the public. VI. THE PERFECTION OF THE MACHINERY OF REGULATION WHICH IS NEEDED. During the past 50 years of railroad regulation, beginning with the States and coming down to the more recent regulation by the