I iiiiiSSiiiil (i^arnsn Mtiiweroitg; SItbrarji Jltl;aca, S^etn ^ork .J..5.S.o.<^A.a,1; 1 P.rv o.t.. j;Ra,V\waL5^ Cornell University Library HE2757 1919 .A84 Remedial railroad legislaton 1919; olin 3 1924 030 125 045 Cornell University Library The original of tiiis book is in tine Cornell University Library. There are no known copyright restrictions in the United States on the use of the text. http://www.archive.org/details/cu31924030125045 Remedial Railroad Legislation 1919 Testimony before Senate Committee on Interstate Commerce and statements bearing on the return of the railroads of the United States to private manage- ment and operation, and on remedial legislation to accompany such return, as suggested by the Association of Railway Executives, January, 1919. PRELIMINARY EDITION Edited by RoBBRT S. BiNKBRD, Assistant to the Chairman. NEW YORK AND WASHINGTON jftSSOCIATION OF RAILWAY EXECUTIVES 1919 Remedial Railroad Legislation 1919 Testimony before Senate Committee on Interstate Commerce and statements bearing on the return of the railroads of the United States to private manage- ment and operation, and on remedial legislation to accompany such return, as suggested by the Association of Railway Executives, January, 1919. PRELIMINARY EDITION Edited by Robert S. Binkerd, Assistant to the Chairman NEW YORK AND WASHINGTON ASSOCIATION OF RAILWAY EXECUTIVES 1918 Table of Contents Introduction Resolutions of December 4 Committee Expanded to Twenty-four i: Plan of Association of Railway Executives 1 Mr. Thomas DeWitt Cuyler. testimony before Senate Committee on Interstate Commerce, January 9, 1919 9 Telephone message from Mr. Cuyler to Mr. Walker D. Hines... 10 Functions of Secretary of Transportation and Interstate Com- merce Commission 14 Functions of State Commissions .' 16 Effect of immediate return of roads 24 Mr. Alfred P. Thom, testimony before Senate Committee on In- terstate Commerce, January 14, 1919 54 Western Association of Short Line Railroads approves plan 54 Section 6 of Railway Control Act 57 Government expenditures on credit of carriers 59 Contract provision as to loss in respect to expenditures 66 Section 8 of contract with reference to additions and better- ments 72 Mr. Alfred P. Thom, testimony, January IS, 1919 74 Tables showing expenditures chargeable to capital accounts (Inserts) 80 to 81 Fundamental importance of organization and disorganizing effect of "Five year control" 87 Constitutional power to extend control in peace times 89 Some of the problems of readjustment 94 The question of intrastate rates after Federal Control ends 97 Interstate rates 99 Mr. Alfred P. Thom, testimony, January 16, 1919 107 Constitutionality of "Five year proposal" with reference to Sec- tion 10 of Railway Control Act 107 Average operating ratio for eleven months of 1918 Ill Capital and investment in railways 118 Some of the forces operating against public confidence in rail- way investment 135 NOTE — This is a preliminary edition only, to be fol- lowed by another, probably on the adjournment of the present session of Congress. Suggestions as to matter to be included or excluded will be appreciated. Mr. Alfred P. Thorn, testimony, January 17, 1919 142 Judge Prouty on "A Fundamental defect in the act to regulate Commerce" 142 State rates and their effect on investment 143 Field of investors limited 145 Judge Prouty on Interstate Commerce Commission ISO Argument for Secretary of Transportation 152 Position of Interstate Commerce Commission with reference to Secretary of Transportation 159 Memorandum on Initiation and Adjustment of rates 161 Federal Incorporation 168 Mr. Alfred P. Thorn, testimony, January 20, 1919 172 The labor question 182 Mr. S. T. Bledsoe, General Counsel, Atchison, Topeka and Santa Fe Railway Company, statement before Senate Committee on Interstate Commerce, January 20, 1919 203 Source of franchise rights of railroad corporations 204 State legislation as affecting mergers and consolidations 208 Conflict between state and national authority in regulation of rates and fares , 210 Exercise of the power of eminent domain 214 Unnecessary duplication of railroad facilities 215 Necessity for additional capital and the burdens imposed by state regulation upon securing same 216 Power to issue and sell stock 217 Power to issue preferred stock 219 Power to borrow money 221 Equipment trust certificates, etc 225 Convertible bonds 225 Bonds secured by mortgage on the railroad 228 Unstability of state regulation of securities 231 Power to regulate used for raising revenue 231 Mr. J. Kruttschnitt, President Southern Pacific Co., statement before Senate Committee on Interstate Commerce, Jan- uary 22, 1919 234 Private operation did not break down 234 Opinions as to efficiency of railroads under private management. 235 Traffic of 1917 and 1918 compared 239 Mr. McAdoo's seventeen reforms as compared with Associa- tion's plan 240 Economies 245 Fundamental features of Executives' plan 248 Appendix ,,...,. , 250 Mr. Samuel Rea, President, Pennsylvania Railroad Company, statement prepared for Senate Committee on Interstate Commerce 2S4 Private ownership, and individual operation and initiative, should be continued 25S Exclusive national regulation of rates, interstate commerce in- strumentalities, railroad securities and important capital im- provements 255 Confusion as to rates 256 Confusing regulations of some operating features 257 National regulation of security issues and important construction expenditures 258 Relief of the Interstate Commerce Commission 258 Department of Transportation 259 Regional commissions 260 •Rates — their initiation, approval and review 261 Statutory rule for reasonable and adequate rates 261 Wage regulatory board 262 Corporate unification; and co-operation with other carriers 262 Federal incorporation 263 Mr. Howard Elliott, President and Chairman of Executive Com- mittee, Northern Pacific Railway Company, statement pre- pared for Senate Committee on Interstate Commerce 265 New conditions demand new laws 266 Private ownership a success 266 The railroads did not break down any more than steel, cotton, ships, etc 268 Present great systems should be preserved '. 269 Credit to be maintained 270 Federal power supreme in cases of doubt 271 Difficulties of present situation 272 Present methods not best for peace times 274 Fear of five-year plan 275 The future 277 Secretary of Transportation 279 NOTE— Mr. Daniel Willard. President, Baltimore & Ohio Railroad, read a statement before the Senate Com- mittee on Interstate Commerce, on February 18th. It was impossible to present it in this edition, but it will be included in a later revision. Mr. Willard's statement is printed in a supplement to this edition, along with the complete testimony of Mr. Kruttschnitt. Introduction. On Novembei- 16, 1918, Thomas DeWitt Cuyler, Chairman of this Association, issued a call for a meeting of its member-roads to be held at the Chamber of Commerce, New York City, on Wednesday, December 4, 1918, for the purpose of beginning con- sideration of after-war railroad policy and legislation Those who attended the meeting of December 4th will not soon forget it. Throughout its deliberations it was animated by a high sense of patriotism and responsibility. Resolutions of December 4. The following resolutions were adopted: 1. "That private initiative, enterprise and responsibil- ity in the creation, extension, improvement, and operation of the American railways should, as a matter of National policy, be fostered and preserved, and that Government ownership and operation of these facilities is not conducive to the highest economic efficiency of the country." 2. "That the principle of reasonable, responsible and adequate Governmental regulation of these facilities is recog- nized and accepted, but such regulation should provide for encouragement, protection and upbuilding of the railways as well as for the correction and check of any abuses." 3. "That, in view of the termination of the war emer- gency which caused the taking over of the railroads and their operation by the Federal Government, the remaining period of Federal control should be characterized by a policy of restoration of the integrity of individual properties and of preparation for their return to their respective owners in the highest possible state of efficiency to serve the country." 4. "That a system of Governmental regulation or con- trol, to be applicable when the properties are returned, should be provided by Congress which, while safeguarding the public, will provide uniformity of regulation in essential matters, insure a business treatment of the vast interests involved, attract adequate capital and assure the commercial, manufacturing and agricultural interests of the country of transportation facilities which shall keep pace with their growing necessities, and deal equitably with questions affect- ing wages and working conditions of railroad employes." S. "That the Standing Committee, with the advice and assistance of the Law Committee, be requested to consider and report back to an adjourned meeting of member-roads proposals to accomplish the foregoing results and plans and methods to be favored in connection with the return of the railroad properties to their respective owners." 6. "That, in their consideration of the subject, the Committee invite the cooperation and assistance of advisers fairly representative of the best and soundest thought and experience of the country." 7. "That assurance be given to the Director-General of Railroads and his associates of our earnest desire to co- operate with them in the performance of their important and difficult trust and in the adoption of plans for the return of these properties to private management and operation, which plans shall be just alike to the public, to the owners of the properties, and to the employes engaged thereon." Committee Expanded to Twenty-four. At the conclusion of the general meeting the Standing Com- mittee met to make its preparations for carrying out the respon- sibilities imposed by these resolutions. It expanded its member- ship to twenty-four as follows, those added being indicated by an asterisk before their names: Thomas De Witt Cuylee, A. J. Eaeling, Chairman, Chairman. Chicago, Milwaukee &• St. Paul S. T. Bledsoe, General Counsel, Ry. Co. Atkinson, Topeka & Santa Fe Ry. ^^^^^ Elliott, President, ^.j^'^w'^w. Northern Pacific Ry. Co. *W. R. Cole, President, Nashville, Chattanooga & St. *S. M. Felton, President, Louis Ry. Co. Chicago Great Western R.R. Co. A. H. Harris, Vice-President, New York Central Lines. ♦Charles Hayden, President, Chicago, Rock Island & Pacific Ry. Co. E. M. Hyzer, Vice-President, Chicago & North Western Ry. Co. *L. E. Johnson, President, Norfolk &■ Western Ry. Co. *HowARD G. Kelley, President, Grand Trunk Railway Co. Julius Kruttschnitt, President, Southern Pacific Co. *E. E. LooMis, President, Lehigh Valley R.R. Co. L. F. LoREE, President, Delaware & Hudson Co. *Wm. Church Osborn, President, Texas & Pacific Ry. Co. Chas. a. PeabOdy, President, Illinois Central R.R. Co. ISamuel Rea, President, Pennsylvania R.R. Co. *BiRD M. Robinson, President, American Short Line R.R. Assn. W. L. Ross, Receiver, Toledo, St. Louis & Western R.R. Co. *Henry Ruhlender, President and Chairman, St. Louis-San Francisco Ry. Co. Frank Trumbull, President, Chesapeake & Ohio Ry Co. F. D. Underwood, President, Erie R.R. Co. H. Walters, Chairman, Atlantic Coast Line R.R. Co. Daniei. Willard, President, Baltimore & Ohio R.R. Co. The Committee thereafter met continuously at the Hotel Bellevue- Stratford, Philadelphia, from December 10th to 15th, 1918. After general discussion in the full Committee a Com- mittee on Draft was appointed consisting of Messrs. Kruttschnitt, Elliott, Rea, Willard and Trumbull, with Mr. Cuyler and Mr. Thom ex-officio members, and with Mr. Bledsoe and Mr. A. H. Harris cooperating. On Sunday, December 15th, the full Com- mittee unanimously approved the Sub-Committee's draft of prin- ciples which should be embodied in the new legislation to govern the operation of American railroads when restored to private management. At a general meeting of the member-roads, held at the Hotel Bellevue-Stratford, Philadelphia, on January 5, 1919, the report of the Standing Committee was unanimously adopted, and was presented by Mr. Cuyler as Chairman to the Senate Interstate Commerce Committee on January 9, 1919. The plan is printed on the pages immediately following. R. S. B Plan. Principles Which Should Be Incorporated in a Plan Providing for Government Regulation of Carriers Engaged in Interstate Commerce. Unanimously agreed to by Standing Committee of Association of Railway Executives December 11-15, 1918; unanimously adopted by Association of Railway Executives January 5, 1919; presented by Thomas DeWitt Cuyler, Chairman, to the Senate Committee on Interstate Commerce January 9, 1919. The fundamental and essential purpose to be accomplished is to furnish the public with safe, efficient and adequate transpor- tation at the lowest cost consistent with such service, and with due regard to the just interests of the owners and employes, and also adequate to the nation's needs even in times of great national emergency or peril. It should be realized that the commerce to be provided for, whether in peace or war, is not essentially, or in large part, local, but is in its most important and controlling aspect interstate and continental. Manifestly any system which is adopted should be adequate to deal with and supply local needs as well as to meet the larger purposes referred to, and consequently it is necessary to consider whether instrumentalities of commerce whose prin- cipal functions and importance are interstate and continental should in matters affecting their capacity to serve on equal terms the entire public, be subjected to many local authorities or to an authority representing all localities. The interests of the whole people demand, that, in any plan or policy which is adopted, provision shall be made: (a) For adequate service and facilities to meet not only the present requirements but the growing and expand- ing needs of our population and of our domestic and foreign commerce. (b) For new and additional construction when justified by public convenience and necessity and for the elimina- tion and prevention of waste in unnecessary and inju- dicious construction. 1 (c) For the proper co-ordination of the carriers' lines, facilities and organizations and for the consolidation thereof under proper limitations whenever necessary in the public interest to meet and provide for the rea- sonable demands of our domestic and foreign com- merce. (d) For the prompt and orderly co-ordination of the lines, facilities and organizations of all carriers into a unified and continental system whenever required in the pub- lic interest, because of extraordinary national emerg- ency or peril. (e) For a rate structure which will provide sufficient revenues and create sufficient credit to accomplish these purposes. To this end, the following principles should be adopted: Private Ownership Should Be Continued. 1. Private ownership, management and operation of the American railways should, as a matter of national policy, be continued. Regulation of Interstate Commerce a National Function. 2. The power of regulation of the instrumentalities of interstate commerce, as to all things substantially affecting them, including all rates, state and interstate, should be exclusively in the hands of the national government; but these national func- tions should be administered through governmental machinery or agencies responsive to the needs of and convenient to the people of the several states to the extent and the manner hereinafter suggested. State commissions should not be interfered with by the Federal Act except so far as necessary to carry out the pur- poses herein mentioned. Administrative Duties of I. C. C. Should Be Transferred. 3. The Interstate Commerce Commission, which has here- tofore been the sole Federal agency provided by law to deal with such matters should be relieved from its executive and adminis- trative duties, except as to Federal valuation and as to account- ing, and should act as a quasi- judicial body clothed with authority to pass upon all questions concerning the reasonableness and adequacy of rates and concerning discriminations coming before it on complaint of any party interested, or referred to it as hereinafter provided. Secretary of Transportation Should Be Established. 4. A Department of Transportation should be created, the head of which should be known as the Secretary of Transpor- tation. He should be a member of the President's cabinet and should be vested with the following powers and duties: (a) To carefully observe the transportation needs and transportation facilities of the country, and, by sug- gestion and co-operation with the carriers, and, by recommendations from time to time to the Interstate Commerce Commission in respect to the necessity for rates and revenues adequate to provide and maintain the proper service and to create the credit required to meet the needs of the public for facilities, while at the same time protecting the just interests of employes, of owners, of shippers and of the traveling public, to endeavor to insure the provisions of adequate trans- portation facilities for the real transportation needs of each situation. He should be charged with the responsibility of recommending from time to time to the President such measures and policies as in his opinion would promote the interests of the public and the adequacy of the transportation service; (b) If he find that a carrier is at any time so congested or otherwise unable to properly handle its traffic, he should have power to distribute such traffic over other lines and routes on such terms as between the several carriers as he may find to be just and reasonable under the circumstances, subject in respect to such terms to appeal to the Interstate Commerce Commis- sion; (c) If he find it to be practicable and in the public inter- est, he should have power, in the event of the failure of the interested carriers to agree, to require the use of the terminals of any carrier by another or other carriers on such terms as he may fix as reasonable and just, subject to the right of appeal of any interested carrier to the Interstate Commerce Commission ; (d) In cases of serious national emergency, he should have power to direct that, during the continuance of such emergency, the carriers should co-ordinate their facilities and operations and operate their properties as a unified national system on such terms as he may find to be just and reasonable in the public interest. Proper provision should be made for just compensa- tion to any carrier injured thereby. (e) If he find it necessary in order to provide adequately for the movement of traffic, he should have power to require any carrier to distribute its cars to other lines on such terms as he may deem- just, subject as to such terms to an appeal to the Interstate Commerce Com- mission. (f) He should have power to require any carrier to dis- tribute its cars among its patrons in accordance with their needs and the public interest in the same man- ner and to the same extent as the Interstate Commerce Commission is now by law authorized to do. New Construction Should Be Controlled. 5. No new or branch lines of railroad or large and expen- sive terminals should be constructed unless a certificate of public convenience and necessity is first obtained from the Secretary of Transportation. Administrative Duties to Secretary of Transportation. 6. The executive and administrative functions of the Inter- state Commerce Commission, except as to accounting and as to Federal valuation of railroad properties, should be transferred to the Secretary of Transportation. Carriers Should Have Power to Initiate Rates. 7. The carriers should have the power to initiate rates, schedules of which should be filed with the Interstate Commerce Commission, with the Secretary of Transportation and with the State commissions of the States in which the rates are applicable and through which the carrier operates ; and, if not suspended as hereinafter provided, such rates should become effective thirty 4 days after the same have been so filed, unless a shorter period is in special cases authorized by the Secretary of Transportation. It should be made the duty of the Secretary of Transporta- tion to promptly consider the new rates so brought to his atten- tion, and he shall either: (a) Approve the same, giving his reasons for such ap- proval or (b) Permit the rates to go into effect without his specific approval or disapproval, or (c) Disapprove the same, giving his reasons therefor. In case he disapproves any rate or fails to specifically ap- prove or disapprove it, he may suspend it for a period not exceed- ing sixty days and refer the same to the Interstate Commerce Commission for consideration and determination. Statute Should Provide Rule for Rate Making. 8. The statute itself should provide the rule of rate-making, and should require that rates be not only what has been called reasonable, but adequate and sufficient to enable the carriers to provide safe, adequate and sufficient service, to protect existing investment and to attract the new capital necessary in the public interest, and, to that end, the statute should, among other things, specifically provide that the level of rates must properly reflect the cost of wages and all other expenses incident to the furnish- ing of transportation. Power of I. C. C Over Rates. 9. Rates, whether approved or disapproved by the Secre- tary of Transportation may by complaint be brought before the Interstate Commerce Commission for consideration, which should have power to pass upon the reasonableness and adequacy thereof, subject to the statutory rule in regard to rate-making, and, in any proceedings before it in respect to rates, the Commission should give due consideration to any recommendations in respect thereto made to it by the Secretary of Transportation. Rates approved by the Secretary of Transportation should be presumed to be reasonable and proper until found otherwise by the Com- mission. Power to Establish Minimum Rates. 10. In any proceedings before it in respect to rates the Interstate Commerce Commission should have the power to pre- 5 scribe minimum as well as maximum rates and to determine the relation of rates and differentials whenever necessary or appro- priate to establish or maintain a rate structure or a relation or differential found by it to be just and proper. Existing Rates to Continue Pro Tempore. 11. The statute should provide that existing rates, put into effect by the Director General of Railroads should be continued in effect until changed by the Interstate Commerce Commission as provided by law, or as provided in Paragraph 7 hereof. Carriers as Rate Complainants. 12. Any carrier should be given the right to complain of rates of. another carrier in the same manner and to the same extent as a shipper might do. Regional Commissions of I. C. C. 13. The Interstate Commerce Commission, in order that matters within its jurisdiction may be dealt with more promptly and satisfactorily and with a fuller appreciation of all the cir- cumstances and local conditions, should be directed to divide the United States into such number of regions as it may deem wise, and certify the number of regions and their boundaries to the President, who should appoint for each region a Regional Com- mission, which should be a board of primary jurisdiction, con- sisting of one member for each of the States embraced therein. The Regional Commissions should have authority to hear and determine all complaints in respect of matters within the jurisdic- tion of the Interstate Commerce Commission arising in their respective regions and to make reports thereon to the Interstate Commerce Commission, such reports during a fixed period to be subject to exceptions by any of the parties, as in the case of reports by Masters in Chancery. If no exception is filed within the time limited and it is not otherwise ordered by the Interstate Commerce Commission, the orders and findings of the Regional Commissions should automatically go into effect. If there are exceptions, or the Interstate Commerce Commission considers the issues involved of sufficient importance to so order, a hear- ing should be had before it on such exceptions, or on the matters made subject to reconsideration by order of the Commission, and the order of the Commission should have the same effect as now provided by law in respect to its orders. 6 Regulation of Express Rates and Contracts. 14. Express rates should be dealt with in the same manner as freight rates. Contracts between express companies and rail- road companies for division of express earnings should not be- come effective until approved by the Secretary of Transporta- tion. Modification of Clajrton Act. 15. Section Ten of the Clayton Act should be so modified as not to unduly hamper the proper transaction of business. Restraints on Cooperation Should Be Modified. 16. Existing laws should be so far modified as to authorize upon approval by the Secretary of Transportation as being in the public interest: (a) Acquisition by a carrier engaged in interstate com- merce of the properties, stocks or securities of another or other carriers; or consolidations and mergers of such carriers ; (b) Agreements between carriers engaged in interstate commerce in respect to rates and practices ; (c) The pooling of cars and other transportation facili- ties ; (d) The division of earnings in connection with the elim- ination of unnecessary train service. All such agreements and arrangements should be filed with the Interstate Commerce Commission and with the Commissions of the several States whose traffic is affected as well as with the Secretary of Transportation and be open to public inspection. Settlement of Question of Wages and Working Conditions. 17. Continuity and regularity of transportation are abso- lutely essential to the public. Both the capital invested and the labor employed in transportation are therefore engaged in a business vitally affecting the public interest, and by engaging therein assume the implied obligation not unreasonably to impair or interrupt the movement of trains. Questions of wages and working conditions affecting individual railroads should be set- tled, if possible, by officers of the railroads and representatives of the employes. A board should be constituted, under the Secre- tary of Transportation, on which the employes, the employers, and the public, should have equal representation, with the duty 7 and authority to investigate and report to the Secretary of Trans- portation on the merits of any controversy, which the parties are unable to adjust, arising in the railroad or other transportation service, either in regard to wages or in regard to conditions of service; and, pending such investigation and report and for a reasonable time thereafter, there should be no lockout by the carriers and no concerted action on the part of employes which would have the effect of interfering with or interrupting the orderly movement of the United States mail or interstate or for- eign commerce. The scale of wages and the expense incident to any change in the conditions of service recommended in the report of such board, if put into effect, should be accepted and recognized in the making of rates, as a legitimate expense of transportation. Funding of Indebtedness to Government. 18. Provision should be made for the funding by the United States of indebtedness of carriers to it growing out of Federal control. National Control of Security Issues. 19. There should be in the Federal Government the exclu- sive governmental power to supervise and authorize the issue of securities by railroad carriers engaged in interstate or foreign commerce or by holding companies controlling any such carrier. Federal Incorporation. 20. A system of Federal incorporation should be adopted into which should be brought all railroad corporations engaged in interstate or foreign commerce. Such system should be compul- sory and not elective. It should preserve to corporations rein- corporating under it, not only all of their contract rights and other assets of all sorts, but also (except as to any feature con- trary to an Act of Congress) their existing charter powers, and they should also possess the general powers conferred upon all corporations organized under the Federal Act. The system of incorporation should provide a means of consolidation and merger for existing corporations engaged in interstate or foreign commerce, with the necessary power of condemnation, provided the Secretary of Transportation finds that such consolidation or merger is not contrary to the public interest and approves the same. 8 Testimony. Mr. Thomas DeWitt Cuyler, Chairman, Association of Railway Executives. Before Senate Committee on Interstate Commerce, January 9, 1919. Mr. Cuyler. My name is Thomas DeWitt Cuyler; my ad- dress, Philadelphia, Pa. I am a director in the Pennsylvania Railroad Co., and in various subsidiary companies belonging to the Atchison, Topeka & Santa Fe Railway Co. and a member of its executive committee; director of the New York, New Haven & Hartford Railroad Co. and a member of its executive committee ; and also occupy a similar capacity in the Long Island Railroad Co. and in various subsidiary companies belonging to those different roads, and I am a lawyer by profession. Perhaps, Mr. Chairman, I ought first to explain a little the Association of Railway Executives, which was originally known as the "Railway Executives Advisory Committee," and which was formed about, I think, the year 1912. At that time the condition of the railroads, so far as their revenues were con- cerned, had become so alarming that the railway executives felt that there ought to be some committee or association for mutual conference and to consider the general railroad situation. I did not become chairman of the committee until May of this year, and had no connection with it in any way; in fact, I knew but little of it until that time. It was then deemed wiser that someone who was not himself a railway executive should be chairman of the committee, and I was elected on the 1st day of May, I think. Since that time the duties of the committee have been much more active, in that the question of the relations with the Government under the Government control has been very potential, and that committee has become, so to speak, a clearing house between the railroads and the Government. That association is composed of about 92 per cent of the trackage of the country, and there is a standing committee of 26 members — ^it has recently been enlarged to that number — and a subcommittee of that standing committee has prepared the plan that I have to submit to you, which was in turn submitted to the meeting of the general managers of the roads, held in Philadel- phia last Sunday. Telephone Message from Mr. Cuyler to Mr. Walker D. Hines. Before proceeding to submit to you the plan I think it proper to read to you a telephone message which I sent to Mr. Walker D. Hines on the 12th of December, bearing upon Mr. McAdoo's proposition for an extension of the time for five years. My reason for doing this is that Mr. McAdoo, you will perhaps remember, while testifying rather created the impres- sion at first, although I think he withdrew it afterwards, that the railway executives had been favorable to that extension, arid in order that there may be no misunderstanding on that subject, I want to read this telephone message which I sent to Mr. Hines on the evening of December 12 and which I know was conveyed by him to the Director General. That message was the result of a talk I had had with Mr. McAdoo on Monday, two days before, in which he had suggested this plan for an extension of five years. I told him then that we would have a meeting of the standing committee on the following Wednesday, two days afterwards, and that I would submit that plan to them, and I added that, so far as I was personally concerned, I was so much opposed to it that I was afraid I could not submit it fairly, and it was then suggested that Mr. Hines might attend to the submission of it; but it was finally decided that I should do so, and, as a result of that, I sent this message in person, at the instruction of the committee, to Mr. Walker D. Hines, who received it personally, and it was taken down in shorthand. This was on December 12, 1918, and the telephone message was as follows : 10 As the result of our interview with Mr. McAdoo on Monday, I laid before the standing committee of the Association of Railway Executives the statement made by Mr. McAdoo that day as to the possibility of the early return of the roads or in lieu thereof the possibility of extending the term of Federal control for a period of five years. In view of Mr. McAdoo's letter to the chairman of the Interstate Commerce Committees of the Senate and House, I as- sume that Mr. McAdoo does not wish a further conference on the subject with the gentlemen who were present at that meeting. The executives have very fully considered the suggestion of Mr. McAdoo as to the extension of the term, and have come to the conclusion that in view of the time still remaining for Federal con- trol it is unnecessary now to extend the time. They felt that the period of 21 months after the formal proclamation of peace should furnish ample time for the consideration and adoption of any plan that might be a wise one for the railroads and the country. In the last paragraph of the President's admirable statement as to the railroad problem he used the following language : "The one conclusion that I am ready to state with confidence is that it would be a dis-service alike to the country and to the owners of the railroads to return to the old conditions unmodified. These are conditions of restraint without development. There is nothing -aflSrmative or helpful about them. What the country chiefly needs is that all these means of transportation should be developed — its railways, its waterways, its highways and its country-side roads. Some new element of policy is therefore necessary — necessary for the service of the public ; necessary for the release of credit to those who are administering the railways; necessary for the protection of their security holders. The old policy may be changed much or little, but surely it can not always be left as it was. I hope that the Congress will have a complete and impartial study of the whole problem instituted at once and prosecuted as rapidly as possible." With those expressions the railway executives are in entire ac- cord. They are now devoting themselves to this serious problem, and hope to evolve a plan that may commend itself to the owners of the roads, the security holders, the Government, and the public at large, recognizing a close relationship with the Government, which will be a protection alike to the public and the owners and the se- curity holders of the properties and their, employees. This can not be done in a day, but we are extremely hopeful that a constructive plan based on sound general principles may be submitted at an early date (either to the present Congress for their consideration or to the Sixty-sixth Congress). We would urge upon the Director General the importance, in conformity with the President's statement, of time to consider plans for the future, and that any return of the roads may be deferred until at least this opportunity has been afforded. We can not help but urge upon the Director General the great disaster that in our 11 judgment would ensue both to the owners of the roads, the security holders, and the public at large if the roads should be returned, until time had been given to fully consider these problems. It would seem that the President had this distinctly in mind in the words uttered by him. The executives, of course, desire to act in entire harmony with the Director General and to aid him, as they have in the past, in every way in carrying forward the work of the railroads under Federal administration, and they hope that the position taken by them may commend itself to his judgment. Now, that message, sir, was submitted to the meeting of the general membership roads last Sunday and unanimously ratified and confirmed by them, and I know of no dissenting opinion at all from that position. With that preface, sir, I will read the proposed plan. The Chairman. Very well. Mr. CuYLER. And I would like it to be understood that, of course, this is a plan which while we believe it is sound in its basic principles and one that should be followed, is not a hard-and-fast plan. In other words, it is not in the form of a bill and is simply submitted to the Senate for its consideration, as expressing what the railway executives think is the best solution of the problem. Mr. Thom. How many railway executives are in the as- sociation ? Mr. CuYLER. About ISO or 160. Mr. Thom. Representing all the railroads? Mr. CuYLER. Ninety-two per cent of the trackage. Mr. Thom. Are any short-line railroads represented in the association ? Mr. CuYLER. Recently the short-line association has be- come affiliated with us and is represented on our committee. Mr. Thom. How recently is that? Mr. CuYLER, Within the last month. Mr. Bird M. Rob- inson has been elected a member of the association and a mem- ber of the standing committee. Senator Pomerene. Do the short lines approve this plan that you are about to present ? 12 Mr. CuYLER. Yes, sir; Mr. Robinson was present at the meeting of the standing committee and approved it, and he was also present at the meeting last Sunday. Senator Pomerene. Have you had any conference with shippers on the subject of this plan? Mr. CuYLER. No, sir. The Chairman. So we are to understand that this plan practically represents the views of the railroads of this country. Mr. CuYLER. Yes, sir. The only large system that is not in it is the Southern Railway. They are not members of the association. But with that exception all of the large systems are members, and most of the small systems. Mr. Fairfax Harri- son, president of the Southern Railway, attended our meeting in New York, at which there was general discussion before this plan was prepared; but he simply attended as an invited guest, and I have not heard from him at all as to the plan. I ought also to add, inasmuch as I have stated that I am not a railroad executive myself and not versed in the technique of railroading, that I will be followed by Mr. Thorn, Mr. Krutt- schnitt, Mr. Willard, Mr. Rea, Mr. Elliott, and Mr. Bledsoe, of the Atchison Railway, all of whom have prepared other state- ments bearing upon the details of the plan. This plan was adopted in Philadelphia and confirmed at a general meeting in Philadelphia on January 5, 1919, and is as follows: [This plan, entitled, "Principles which Should be Incorpor- ated in a Plan Providing for Government Regulation of Carriers Engaged in Interstate Commerce," is printed in full, beginning on page 1 of this document. Following the reading of Section 16 of this plan by Mr. Cuyler the following colloquy took place: Senator Pomerene. Do you mean by that that they should be subject to the approval of the Interstate Commerce Com- mission ? Mr. Cuyler. No; not subject to their approval; but sim- ply that they should be filed, and subject to the appeal herein- after provided, to the Interstate Commerce Commission. 13 Mr. Cuyler's testimony continued as follows: Now, I think I ought to say, Senator, in further answer to your question, which I did not answer very fully, that this plan has been submitted to some other association; for instance, the Ilinois Manufacturers' Association has had it before them, and has adopted it. Senator Pomerene. What association , is that? Mr. CuYr.EE. The Illinois Manufacturers' Association, which I believe, is a large commercial organization in Illinois. The plan has also been submitted to a meeting of chambers of commerce of the Central West, held in Chicago, and has had their approval ; and also to various individuals in different part of the country, who are in affiliation and touch with railroads. We have felt, however, that it was not proper, in view of the fact that the plan only received the approval of the general membership body last Sunday, to submit it to anyone until we had submitted it to this committee here. Functions of Secretary of Transportation and Interstate Commerce Conunission. The Chairman. Mr. Cuyler, I see that you recommend here a cabinet officer, to be known as the "Secretary of Trans- portation," who would, if this plan were carried out, practically assume the functions now exercised by the Interstate Commerce Commission. Will you state just why your organization prefers that to the present arrangement? Mr. CuYLER. Our thought is this. Senator: We believe that the present Interstate Commerce Commission is overburd- ened, and that no body of men can do the work that that body is attempting to do, both on the administrative side and on the rate-making side, as well as on the judicial side; and that, in any event, there must be some relief provided for that commis- sion; and we have felt that it would be a greater protection to the country at large — the shippers and the railroad owners — if there were another body or another officer whose duty it would be to do the work that we have outlined to be done by the Secre- tary of Transportation. We have also felt that the Secretary of Transportation, being a member of the Cabinet, would have the 14 ear of the President at all times, and would therefore be in a better position to represent to him the needs of the country at large with respect to transportation. Of course, if there could be a commission created, to consist of a small number of highly paid men, and you could get well- trained, efficient men, whose term of office would be of sufficient, length to relieve them from any fear of political pressure, per- haps that might be a better method. The Chairman. Are you not afraid of the pressure of political influence in constituting a Cabinet officer to do this very work? Mr. CuYLER. We are not so much afraid of that. Senator, as we are of the other. We believe that when a man goes into the Cabinet he feels a keen sense of high responsibility, which makes him rise above that kind of pressure to a very large ex- tent. That may not, in point of fact, always be so ; but we think that, in the long run, the Cabinet officer you would get in that way would rise to the occasion. Senator Gore. Is it your idea to take the executive pow- ers and functions away from the Interstate Commerce Commis- sion, and to delegate them only to the Secretary of Transporta- tion? Mr. CuYLER. Yes ; making the Interstate Commerce Com- mission a quasi- judicial body. Senator Gore. Advisory and quasi-judicial? Mr. CuYLER. Yes. Senator Gore. Several of the European countries have adopted the policy of segregating the executive functions from the advisory and rate-making powers, have they not? Mr. CuYLER. They have, I believe. I think that is so in France. Senator Gore. And in Germany, I understand. Senator Watson. Mr. Cuyler, you provide there for a Sec- retary of Transportation with certain duties and powers and cer- tain other duties and powers are to remain in the Interstate Com- merce Commission. You also provide for the retention of certain power, at least inferentially, by the various State commissions; 15 and you also make provision for regional commissions. Have you not more machinery than is necessary? Mr. CuYLER. We helieve not. We believe it would be an assurance to the public that their local interests in the several localities would be better safeguarded if there were in that local- ity a representative of the Interstate Commerce Commission, who would be cognizant of the peculiar needs of that particular com- munity. Functions of State Commissions. Senator Pomerene. What relation would exist between the regional commissions and the State commissions? Senator Watson. I was on the point of asking that very question. Mr. CuYLER. Only an advisory relationship. Our idea was that the State commissions should be relegated practically to police powers and duties, but that they could make recommenda- tions from time to time to these regional commissions. The Chairman. Will you not repeat what functions you think the State commissions should perform? Mr. CuYLER. We think the functions of the State commis- sions should be limited to police powers and duties, and that they should be simply an advisory body in their relationship to the regional commissions. Senator Watson. Let us take a concrete example, for the sake of illustration. Take the question of the construction of a road, or a grade crossing Mr. CuYLER (interposing). The elimination of grade cross- ings? Senator Watson. Yes. Where would you put the author- ity to determine that? Mr. CuYLER. In the regional commission. Senator Watson. Then, what power, if any, do you leave the State commission under this proposition? Mr. CuYLER. Upon a moment's reflection, I think I may be wrong as to that. I think that as to the details it should go to the State commission — ^that is, purely State matters. 16 Senator Watson. Has anybody drafted a bill in specific terms setting forth your plan? Mr. CuYLER. No, sir; and for the veiy reason that we did not want it regarded in that shape. Senator Cummins. Mr. Cuyler, my first impression is that the proposal you make is strikingly similar to the law under which the roads are now being operated without the guaranty. What is the difference between the plan you propose and the plan that Mr. McAdoo is now pursuing? Mr. Cuyler. There is one important thing, and that is that Mr. McAdoo in his present situation has full power over every- thing — rates_ and everything else. Our proposed plan differs from the present law in that the rate structure shall at all times be adequate to meet the demands of the road with respect to wages, operation, and return upon investment. Senator Cummins. That is accomplished by the guaranty now, is it not? Mr. Cuyler. Yes; it is. Senator Cummins. And you would propose to accomplish it in the same way under your plan? Mr. Cuyler. Under an act of Congress; yes. The Chairman. Mr. Cuyler, I want to ask you the ques- tion that was asked in a different way by Senator Watson. Un- der your proposed plan, what do you subtract from or what duties do you propose to take away from the State commissions as they now exist? Mr. Cuyler. We would take from them their rate-making power. The Chairman. That is the principal thing ? Mr. Cuyler. Yes. We feel that the State commissions ought to be continued; that they are useful bodies and essential to the roads, and that we should have, in a measure, their assist- ance; but when it comes to a question of rate making, we feel that is a national question the determination of which should be lodged in some central Federal body. Senator Watson. You would give to the roads the power to initiate rates, but you would take from the commission the power to suspend those rates? 17 Mr. CuYLER. Yes. Senator Gore. And invest that power only in the Secretary of Transportation? Mr. CuYLER. Yr,s. Senator Watson. And is not that the main reason for your advocating the creation of a Secretary of Transportation ? Mr. CuYLER. Well, I would say that it is the large reason for it. The roads have felt, as years have gone by, and especi- ally for the last few years, that the question of rates has become so pressing and so vital that they should have the power of initiat- ing them, if it can be done. Senator Watson. If Congress could pass an act that would compel the Interstate Commerce Commission to decide a question of that kind, say, in 60 days, instead of waiting a year or more to decide it, would not that somewhat obviate the necessity for the creation of the proposed secretary of transportation? Mr. CuYLER. It might. Senator; but, as I said before, we feel that the interests involved are so huge and vast that no one body can handle the proposition from every angle to the satisfac- tion of all concerned. Senator McLean. I suppose the regional commissioners might do a great deal of the detail work which now occupies the time of the Interstate Commerce Commission and in that way relieve that body of a large part of its labors ? Mr. CuYLER. Very largely so. Senator ; and, of course, they would also have the advantage of being people who probably would live in the same community, and who would have the con- fidence of the shippers who might question rates. Senator McLean. In that way the Interstate Commerce Commission proper might have time enough to attend to the executive end of their work? Mr. CuYLER. That is a possibility, of course. Senator Pomerene. Do you give to the Interstate Com- merce Commission the power to modify rates on its own motion or initiative? Mr. Cuyler. Yes, sir. Senator Gore. The right of appeal lies in the secretary of transportation in regard to rates? 18 Mr. CuYLER. To the Interstate Commerce Commission; yes. Senator Pomerene. But only on complaint? Mr. CuYLER. Yes. Senator Pomerene. That is, complaint by the shipper? Mr. CuYLER. Or a complaint by one road against another. Senator Gore. By either party at interest? Mr; CuYLER. Yes. Senator Cummins. You have, I suppose, considered the difficulties that would arise through the frequent change of the secretary of transportation as a Cabinet officer, and the fact that he might be a man who had very slight knowledge of transporta- tion and its problems ? Mr. CuYLER. We realize that, sir. Senator Cummins. Do you think it is wise to give to such a man the powers your propose? Mr. CuYLER. We felt this : It is a subject that is open to more debate and difference of opinion than any other, and there was a great diversitj* of opinion among the members of the com- mittee before we arrived at a conclusion, but the more we dis- cussed it, the more we came to the conclusion that it was the best solution of the problem, and finally we all came around to that view. For instance, in the Standing Committee, where there was at the start considerable division of opinion — there were 24 mem- bers present out of 26 — they finally unanimously voted the whole 24 members, after a discussion which lasted from Wednesday morning until the following Sunday afternoon, continuously, that it was the wise thing to do ; and the same way at the meeting last Sunday in Philadelphia, of the membership roads, at which there were some 150 men present, there was extended discussion on that point, and the very point raised by you, sir, was thoroughly discussed, and finally that body came to the same conclusion unanimously. Senator Gore. Do you think that your suggestion for segre- gating the executive powers and taking them away from the Interstate Commerce Commission should apply with equal force to taking away from them the quasi-legislative power to make rates ? 19 Mr. CuYLER. We feel so, Senator. We feel that it has been demonstrated by the past that that power should rest in the roads, subject to proper regulation. Senator Goke. Have the rates made by the Director General been as satisfactory as those made by the Interstate Commerce Commission, speaking by and large ; I mean, with respect to their relation to other rates? Mr. CuYLER. I hardly feel myself qualified to pass upon that. I am not a railway expert myself. Senator Gore. The reason I ask that is that the principal factor in rate making is the relation to other rates, and not to disturb the equilibrium by cutting into them, where perhaps you do not intend to. Mr. CuYLER. I do not believe that the rate making by the Director General has been scientific at all in its nature. Senator Gore. Could it not be scientifically done if it were in the hands of a body of men who had had long experience, and who had surveyed the whole situation, by comparison based on observation and experience? Mr. CuYLER. Senator, do you not think that the railroad executives have had more experience than anybody else in that way? Senator Gore. I do; yes. Br. Cuyler. Of course, their action should be subject to review by a judicial body. Senator Gore. That is undoubtedly true, but the element of interest enters there, and renders them perhaps partial judges, you see, so that it would have to be reviewed by an impartial tribunal. -^ - ■ Mr. Cuyler. I have no doubt, sir, that we would be satis- fied with any plan that would prevent the interminable delays that have occurred in the past. Senator Gore. Your main objection is to the delay? Mr. Cuyler. Yes. Senator Gore. And your chief desire is expedition? Mr. Cuyler. Exactly. The Chairman. Mr. Cuyler, I am very favorable to this regional division of the Interstate Commerce Commission. If 20 that plan were worked out so that the needs of each community could be brought immediately to their consideration, and then, upon the recommendation of these regional commissions, to the central commission, do you not think that would be a very vital element in eliminating the delay you now complain of in rate making? Mr. CuYLER. It might. Of course, delay would ensue, be- cause it would have to go first to the regional commission, and then to the Interstate Commerce Commission. I feel that if the Interstate Commerce Commission is to continue to be charged with the responsibility of rate making; then some limitation as to the time to be allowed for the suspension of rates must be pro- vided by law, in order to protect the roads. The Chairman. My idea is that a vast amount of detail that is now imposed on the central commission would in that way be largely eliminated, and put onto the regional commissions, so that this very matter of rate making could be more expeditiously attended to by the central commission than it now is, because they now have to do all the work at Washington for practically the entire railroad system throughout the country; whereas, by a proper provision of law, to divide this up and to put these duties upon the regional commissions, they would be largely relieved of this detail work, and could probably give more time to the matter of rate making. Mr. CuYLER. That is true, if it were provided that the Interstate Commerce Commission should act within a given time ; but its powers of suspension should not extend beyond a given time. The Chairman. Do you think that if the central commis- sion were limited by law, as you have indicated, it would in a measure relieve the necessity of your suggestion for a Cabinet officer? Mr. CuYLER. I think it would, in a measure; but I still think that a Cabinet officer would be very, very useful in direct- ing the transportation needs of the country. The Chairman. I am rather of the opinion that a Cabinet officer charged with the powers that you have suggested her?, and 21 probably changing every four years, as suggested by Senator Cummins, might create a condition in the railroad business which would be like some others we have here; that we would never know what was fixed or settled, because each man would have his own opinions, and might come in and upset all that had been done theretofore, more or less arbitrarily, as seems to be the tendency to-day, when the incumbents of public offices are chang- ing so rapidly. Senator Gore. That objection would not lie so much if the power of the commission were purely executive? Mr. CuYLER. No; I think it would not. Senator Gore. Have you run through your mind at all the question of what regions the country ought to be divided into, if the regional plan be adopted? Mr. CuYLER. I have not. That would have to be decided by the President, but I take it that it would work itself put nat- urally. Senator Gore. Similar to the present southern, western, and eastern traffic territories? Mr. CuYLER. Yes. Senator Gore. There has been a great deal of agitation about dividing the railroads into traffic regions, and compelling the movement of traffic along those predetermined lines, irrespec- tive of local conditions. Mr. Cuyler. We are against that. We are against any regional arrangement that would take away the competitive features. Senator Gore. It has struck me as unscientific, and that it would be going backward instead of forward, but I was wonder- ing if your regional proposition would not tend in the same direction. Mr. Cuyler. I do not think so, because the roads would remain practically as they are. Senator Gore. Under your suggestion, in each region you would have a representative from each State in that region sit- ting on that regional board ? Mr! Cuyler. Yes. 22 Senator Gore. Would not that sort of regional division be subject to the same objection — that its lines would, after all, be more or less arbitrary, and would cut across systems and cut across natural traffic lines ? Mr. CuYLER. But you would have all the roads in existence and competing with one another. Senator Gore. With the right of appeal to a common authority ? Mr. CuYLER. Yes. Senator Gore. I understand ; but would it not be better to appoint your representatives from each State on a central body, and then when a question arises, to assign it for consideration to those men who were most familiar with the territory in which the controversy arose, instead of cutting the country into arbi- trary sections, and having the representatives from the States in those sections consider questions which, of course, would over- lap, because transportation is largely a national affair? Instead of that, to let -the Interstate Commerce Commission designate the members from the different States which might be involved in a particular controversy at a given time? Mr. CuYLER. In other words, the regional director would have a sort of roving commission? Senator Gore. Yes. Have the same representative from the State all the time. Take the Southern States ; instead of con^ stituting those into one region, with representatives sitting as a board for that region — or, let us take the Illinois Central, which would involve two regions — from Chicago to New Orleans; would it not be better to assign the standing representatives from Illinois, Kentucky and Tennessee to decide that case? Mr. CuYLER. Our only thought was expedition; that the complainant should have some place to which he could go and get relief at once. Senator Gore. Well, that would be almost automatic in its operation. Mr. CuYLER. Then, I should see no objection to that plan. Senator Gore. It looks to me if a regional suggestion like yours is practically the same as a general subdivision of the 23 country into regions, arbitrarily, and not based upon any natural division of traffic. Mr. CuYLER. There is some force in what you say, and that gives me again the opportunity to impress upon you that this plan is altogether tentative. Effect of Immediate Return of Roads. The Chairman. Mr. Cuyler, has your body considered what would be the effect of a return of the roads to their old status before some legislation other than that we now have has been enacted ? Mr. Cuyler. Yes, sir; we have considered that very seri- ously and we think the effect would be most disastrous. The Chairman. In what respect, particularly? Mr. Cuyler. In the first place, the roads owe vast sums of money to the Government, due on demand, and while I can not conceive that the Government would so exercise that demand as to create a panic and ruin to the roads, at the same time it exists. The Government has taken over a great many of the securities of the railroads. For instance, the New Haven Rail- road has borrowed some sixty or seventy millions of dollars from the Government, and every dollar of securities that they own is in the Treasury of the United States; and so with other roads. Take the Pennsylvania Railroad : Its annual requirements on its lines east and west amount to about $200,000,000 a year. And just here let me say that I want to correct the impression that Mr. McAdoo created that the roads have not been willing to go along with the Director General. I think that, with the exception of the allocation of cars, there has scarcely been any refusal to carry out his orders. Now, with regard to the allocation of cars, the Government in March gave a huge order for cars, and the roads were not consulted in any way with regard to it. Only about 14 per cent of that Government order has been filled, but we were asked to take those cars, and on a good many of the roads the cars were entirely unsuitable for their purposes. For instance, on the Atchison Road a thousand gondola cars were assigned, I think, to them, and they could not use them at all on account of the way that the road has been constructed, 24 Senator Pomerene. Were they the standardized car? Mr. CuYLER. Yes; but the Atchison had a peculiar car, and they could not use these cars at all. On the Pennsylvania Railroad we were asked to take a thousand 55-ton coal cars. Now, our standard coal car is 70 tons, and we would have been handicapped for perhaps 20 years — ^the approximate life of a car — with the difference between a 55-ton and a 70-ton car, and that would have meant most uneconomical operation for us. A good many of the roads had put in their orders in November and De- cember for cars and then the Government went ahead, without consulting the railroads in any way, and placed this huge order for cars, and to-day I think that most of the roads of the country have idle cars standing on their tracks. Now, that is a very seri- ous matter. That car order amounted in money to more than all the car trusts outstanding to-day. It was an order of about $330,000,000, I think. Senator Gore. That was a car order given by the Govern- ment? Mr. Cuyler. Yes, last March; and there was not a rail- road consulted in advance. Senator Gore. And those cars did not conform to the standard, you say? Mr. Cuyler. On a good many roads, no. Senator Townsend. Is it possible to have an economically standardized car? Mr. Cuyler. I do not think so, Senator. Senator Townsend. I understand that the Commission does not think so, either. Mr. Cuyler. And the same way with locomotives. Senator Pomerene. You mean for the various roads? Mr. Cuyler. Yes. Senator Townsend. Why is that so? Mr. Cuyler. Because , the terminal facilities and ware- houses, etc., on the various roads have been built to accommodate a certain type of car and can not be operated with any other type of car successfully. Senator Townsend. Can you build a car that can be used generally for various transportation purposes, economically? 25 Mr. CuYLER. I would rather have one of the railroad presi- dents here answer that question. Senator Townsend. Very well. The Chairman. Mr. Cuyler, what is the opinion of your body as to the present rates inaugurated by the Director General, and the wage scale? How would that be effected by State law, if they were to go back now? Mr. Cuyler. We feel that those State laws would ipso facto become operative. We believe that if the roads went back without legislation by Congress, they would become effective at once. The Chairman. Have you calculated to what extent that would affect your revenues? Mr. Cuyler. No ; but it would be a very large sum. Senator Townsend. Do you believe that if the roads were to go back now to private ownership, with the provision as to pooling and the use of joint terminals, the railroad would main- tain the present scale of wages? Mr. Cuyler. I think. Senator, that is a question of the law of supply and demand. I can not get out of my head that the railroads of the country should be in exactly the same posi- tion as any other business and meet the wage scale that is pre- vailing, in order to obtain proper labor. The Chairman. Do you think the present wage scale that has been inaugurated by the Director General is wisely and equi- tably, as well as economically, adjusted as between the different classes of labor employed on the railroads? Mr. Cuyler. 1 do not feel qualified to answer that question, Senator. Senator Kellogg. You are going to have practical railway men here to answer all those questions, are you not ? Mr. Cuyler. We are going to have Mr. Kruttschnitt, Mr. Willard, Mr. Rea, Mr. Elliott, and Mr. Bledsoe all make state- ments. Senator Kellogg. I want to ask one question of you: I see that you have suggested that the railroads be permitted to consolidate and pool simply upon the authorization of a secre- 26 tary of transportation, without any public hearing of testimony or objection from the people to be affected. Do I correctly under- stand that? Mr. CuYLER. No, sir. That is merely a skeleton plan.. We believe and expect that the bill should provide that there (be proper hearings on all such applications. Senator Kellogg. Hearings before whom? Mr. CuYLEK. Before the secretary of transportation. Senator Kellogg. Do you not believe that competition as to service between the great competing routes of this country is a valuable thing to the people of this country ? Mr. CuYLER. Most assuredly. Senator Kellogg. And should be maintained ? Mr. Cuyler. Absolutely. Senator Kellogg. Now, would not the Interstate Commerce Commission be the proper tribunal to try that question of how many lines or what lines should be allowed to consolidate — ^be- cause when it is once done, the rights of the people are taken away, so far as competition is concerned? Mr. Cuyler. I would feel that to be the case. Senator, if you would relieve them of their other duties, and giye them an opportunity to act expeditiously on such applications. I think the Interstate Commerce Commission has done all that anybody could possibly do under the circumstances, and I do not want to be understood as criticizing it in any way; but I do think they are burdened to death. The Chairman. If the Senator will excuse me, I want to ask you now about one of the chief things that occurs to me. I want you to explain to me how there is to be any incentive for competition in service, when we propose to eliminate and prac- tically have eliminated competition in rates ? What incentive have you for competition in service, other than a philanthropic feeling, unless you get paid for it ? fore, each road is anxious to do its very best, in order to attract that business. Mr. Cuyler. We have this incentive: That the road that gives the best competitive service will get the business ; and, there- 27 The Chairman. The reason I asked you that question was that Mr. Qark here suggested, under the plan he proposed, that adequate service would be enforced; and I think perhaps there is some force in that, because we have got to have a unified sys- tem of roads in this country; it seems to me that is inevitable. We have got to have terminal facilities for serving the public, regardless of whether the railroads want them or not, and we have got to have extensions of service throughout the country, so that the established communities can, in part, bear the burdens of those that are now in process of development, and the service under these different plans that have been submitted to us here will be more or less compulsory ; and, as you say, competition in service will mean that with two roads within a given competitive community, if one road can carry all the traffic, by virtue of its good service, that will prove that the other road is not necessary. Mr. CuYLER. I think that is a misfortune of the other road, if it is not competently managed so as to attract the traffic. I can give you an illustration by taking the competitive service between the Pennsylvania Railroad and the Philadelphia & Reading be- tween Philadelphia and New York. Now, I do not believe there is any other service equal to that, from the competitive stand- point. The Pennsylvania Railroad was getting the great bulk of that business. We would run hourly trains with eight or ten cars, and with two or three parlor cars. Now, the Philadelphia & Reading Railroad decided to make its service more attractive, and it began to run more parlor cars on its trains. There were certain districts, for instance, in the northeastern part of Phila- delphia that they reached, where there was constant travel be- tween Philadelphia and New York, and they began to cater to that, and it was a great benefit to the community, and, incident- ally, the Reading has seemed to feel that it helps them in their business. The Chairman. Is it not your experience, when one road has succeeded in getting all of the tonnage, or a majority of it, under the same rates and charges as made by its competitor, and is, therefore, making a larger percentage of return under that given rate, than its competitor, that the tendency on the part of 28 the shipping public is to lower the rate on the successful road, because of the excess earnings on the capital invested? Mr. CuYLER. That is true. Senator, and that is one of the great problems that we have tried to think over, and for which it is very difficult to find a solution. The Chairman. We have that before us now ; that certain roads are receiving beyond what might be termed a reasonable compensation as compared with other roads, and when we inves- tigate we find they are carrying more tonnage, and, consequently, getting a larger dividend on the capital invested than the other roads ; but the shipping public feels that, as they are earning this seemingly excessive amount, the rate should be lowered; and if you do lower it, you kill oif the other road that, for one reason or another, has not been carrying so large a volume of traffic; and yet the people living contiguous to the road that is not so successful seem to be entitled to the same rate as the people liv- ing contiguous to the successful road, because the shippers have to meet in a common competitive market in the sale of their goods, and if you lower the rate on the successful road, in order to decrease its earnings, the other road will be driven out of business, and if, on the other hand, you increase the rate, you simply multiply the complaints that the successful road is earning more than it should earn; and if you make any differ- ence in the rates, in favor of the poorer road, you simply destroy their competitive power. Mr. CuYLER. That is absolutely true, Senator, and there is no subject about which we have had more discussion than that one. Senator Gore. Is not that one of the insoluble problems ? Senator Watson. You can not take away the natural ad- vantages of successful management. Senator Townsend. Have you discussed in your paper — I was, unfortunately, not here when you read it — the question of what you are going to do with the little road ? Mr. CuYLER.' No; that is not discussed. Senator'GoRE. That has always struck me as one of the almost insoluble problems ; that is, the competition between effi- 29 ciently managed roads and those that are inefficiently managed ; to make a rate that will yield a fair return on the capital invested, and yet be fair to the public. They have worked out a system in Boston, I think, on the elevated roads, allowing a return of, I think it is, 6 per cent on the capital invested, and where the earn- ings do not equal that, then the rates automatically go up until they do; and when the earnings go above that amount, automat- ically the rate goes down. Would there be any way of fixinjg just and reasonable rates so that where an efficiently managed concern earned too much the excess would go to the public ? Mr. CuYLER. The excess should be divided up, yes. You intimated that that has been successful in Boston. It has been very unsuccessful. Senator Gore. I did not say "successful." I said it had been worked out, Mr. CuYLER. They are asking an increase in the fare on the Boston elevated roads up to 10 cents. They are up to 8 cents now. Senator Pomerene. Mr. Cuyler, has the feeling been gen- eral among the railway executives and other railway people that the Interstate Commerce Commission has not been liberal enough in its advance of rates? Mr. Cuyler. Yes, sir; we have felt they have not been liberal enough. Senator Pomerene. That is simply preliminary to what 1 was going to ask you. Commissioner Clark yesterday presented certain tables here, and, without going into them in detail, they show during the past 10 years, generally speaking, substantial increases in the rate of dividend, and substantial increases in the surplus account of the railroads during those years. Mr. Cuyler. Taking the roads as a whole, a good many of them have improved their condition. On the other hand, a good many have not. I think Mr. Kruttschnitt will deal with that very fully. Take the Pennsylvania Railroad, for instance, that road used to devote as much of its net income each year to improving its property as it devoted to dividend payments. We used to pay a 6 per cent dividend each year ar>d put an equal amount tack 30 into the property. To-day we are barely panning out our divi- dend. , , iMm Senator Pomerene. That is, at the present time ? Mr. CuYLER. Well, for the last three or four years. Last year we earned 7 per cent and the year before that 8 per cent, but we have gone down steadily. Senator Pomerene. Do you claim that that is due to war conditions ? Mr. CuYLER. No; this was long before that. Our capital requirements, with the tremendous volume of tonnage on the Pennsylvania, are very great. Our earnings were not sufficient to maintain our property, after paying the dividend, and we have had to borrow money, and, of course, we have had to pay inter- est on those loans, which has reduced our surplus account. Senator Townsend. What do you propose to do, under this scheme of yours, for maintaining the small independent road ? Mr. CuYLER. We have no particular plan, sir. We propose, of course, to give the power to the secretary of transportation to permit mergers, consolidations, etc. Senator Townsend. What, for instance, do you think the Peimsylvania Railroad would do toward consolidating these small lines that are tributary to it — consolidating them into the Penn- sylvania Railroad? ' Mr. CuYLER. I think we would be very glad to have them in. I i , ' Senator Townsend. All of them. Mr. CuYLER. That I could not say, without studying the situation. There are a great many of them that are tributary to the Pennsylvania Railroad. Senator Townsend. Have you experienced real difficulty in financing your road. Mr. CuYLER. Yes, sir ; we have. We find it more and more difficult all the time, and we have to pay a higher rate for our money. Senator Townsend. What makes that difficulty? Mr. Cuyler. The fact that the margin between earnings and our surplus account is getting less and less all the time, and 31 also a feeling, I think, among the bankers that the railroads are not properly treated by the Government. Senator Townsend. Do you not think that the railroads have overworked that in the last few years, and in other years, to get higher rates ? Have they not practically depreciated their own ability to finance themselves ? Mr. CuYLER. I do not feel that way. Senator, as to the roads with which I have been connected. Senator Townsend. Do you think if you could merge the small lines tributary to the Pennsylvania Railroad, that you could finance them under this scheme of yours. Mr. CuYLER. I think we could ; yes, sir. I think the roads generally could finance themselves, if the bankers and the invest- ing public felt that there was a proper superstructure of rates that would insure their return. Senator Townsend. A large part of the matters rests upon rates ? Mr. CuYLER. It seems to us that it is the keynote of the whole situation. Senator Townsend. Could you operate the railroads suc- cessfully on the present rates? Mr. Cuyler. Assuming the present rate of wages and cost of materials, and everything of that kind? Senator Townsend. Yes. Mr. Cuyler. No, sir ; and I do not think the Government could either. i Senator Townsend. You think you would have to have higher rates in order to maintain the railroads, even under the present condition of Government control? Mr. Cuyler. I think so, undoubtedly. I think you will find, in any event, that the Government will very shortly have to in- crease its rates, although it is not perhaps my province to say so. Senator Townsend. The Director General maintains that they will be lowered. Mr. Cuyler. So I understand. Senator Kellogg. But every move he is making now is upward. Mr. Cuyler. Yes. 32 Senator Townsend. You do not think it is probable that the present administrator could reduce the rates on the roads in the next five years ? Mr. CuYLER. I think not only that he could not reduce them, but even on the present rates a deficit will be shown in 1919. Senator Townsend. What would be the effect if you had charge of the roads and attempted to reduce wages? Mr. CuYLER. Senator, I think it would be a bold man who would answer the question. I come from the quiet town of Philadelphia, and I do not want to get into trouble. Senator Gore. Do you think if the Government owned the roads it would ever reduce the wages? Mr. CuYLER. I do not think it would Senator Townsend. If the Government should continue to control railroads, it is almost certain that wages would not be lowered, is it not ? Mr. CuYLER. I believe so. I may say that I am, perhaps, not an unbiased witness on that subject, because I am so strong in my feeling that the railroads ought to be permitted to conduct their business the same as any other line of business, in that respect. Senator Townsend. If you were to take charge of the roads, under this scheme of yours, can you with equal certainty say whether the wages would be lowered or not? Mr. CuYLER. No, sir ; I think that has.got to be dependent entirely upon trade conditions. Senator Townsend. And you would expect a higher rate for traffic even than is paid at the present time, under the present administration ? Mr. CuYLER. If wages are to be maintained, as they now are, and the cost of materials and supplies keeps up, yes. Senator Townsend. And you would have one man, ap- pointed by the President, to initiate those rates? Mr. Cuyler. No; we would give the power of initiation to the railroads. . 33 Senator Townsend. Oh, yes ; and that is where you differ from the present plan ? Mr. CuYLER. Yes. Senator Townsend. I understand Senator Cummins to say it was quite like the present scheme. Mr. CuYLER. Well, it is in a good many ways. Senator Townsend. But not in that? Mr. CuYLER. No. Senator Townsend. Under the present system, the Gov- ernment originates the rates; and under your scheme, the rail- roads would originate the rates ? Mr. CuYLEE. Exactly. Senator Townsend. If you will kindly repeat that to me, so that I may understand it — what rights have the public, under that scheme, after you once originate them? Mr. Cuyler. They have the power of appeal at once to the Interstate Commerce Commission. Senator Townsend. Do you provide that the Interstate Commerce Commission shall be supreme in its decision? Mr. Cuyler. Yes. Senator Townsend. And you would base that upon the present definition of "just and reasonable rates"? Mr. Cuyler. Yes, excepting this, that we provide very fully in the plan that the rates, as a basic proposition of law, must at all times be sufficient to provide for meeting the wage scale, the cost of operation, and a return upon the investment. Senator Townsend. Are not those things now necessarily considered by the Interstate Commerce Commission as part of the cost of operation? Mr. Cuyler. We do not feel so. Senator Townsend. Do you think the Commission ignores the question Mr. Cuyler (interposing) : I do not think they ignore, but I do not think they take a very full or broad view of it; and, besides, it is not compulsory with the Commission to do so ; they may or may not, and they may differ from time to time. Under the proposed law, that is compulsory on the Commission; it would have to recognize those conditions. 34 Senator Townsend. You propose a new definition for the establishment of rates? Mr. CuYLER. Only this change : that the rate structure must be sufficient, as I said, to meet the wages, the cost of operation, and a return on capital invested. Senator Pomerene. This is the language, Senator, con- tained in that statement: 8. The statute itself should provide the rule of rate making and should require that rates be not only what has been called rea- sonable, but adequate and sufficient to enable the carriers to provide safe, adequate, and sufficient service, to protect existing investment and to attract the new capital necessary in the public interest, and, to that end, the statute should, among other things, specifically pro- vide that the level of rates must properly reflect the cost of wages and all other expenses incident to the furnishing of transportation. Senator Townsend. Thank you, Senator. Now, if I un- derstand that correctly, under this plan the railroads and their employees could practically determine what the public must pay for the use of the railroad facilities? Mr. CuYLER. Yes, sir. Senator Townsend. And the people would have nothing to say about it? Mr. CuYLER. No, except the right of appeal on complaint. The Chairman. Mr. Cuyler, you provide here for mergers, consolidation, and joint use of terminals. The Director Gen- eral of Railroads, I take it, bases his hope or his expectation of lowering the rates upon that very principle — the joint use of terminals, the pooling of facilities, and the common use of the means of constructing cars and engines. To what extent do you think that wotild economize in the cost of transportation ? Mr. Cuyler. I think, Senator, it would economize to some extent, but not nearly so much as one would suppose. I can not carry the figures in my mind, but I saw some figures, and I think Mr. Kruttschnitt has them, as to the extent of saving by the short haul ; using the shortest road as against the long haul. Mr. Kruttschnitt. Yes, I have made some studies on that. The Chairman. Well, we will come to that when Mr. Kruttschnitt is on the stand. 35 Mr. Cuyler. You will find it a surprisingly small per- centage. Senator Underwood. Mr. Cuyler, I have read this paper with a good deal of interest and have listened to your state- ment, and there are some very interesting suggestions that you make. I think your paper divides itself into two parts, as far as I have studied it: One is the fundamental principles that you propose to change hy legislation, or rather to establish or re- establish by legislation, and the other is new machinery. For instance, I take it that the regional commissions, the creation of a secretary of transportation, and all matters of that kind are merely matters of machinery for carrying out the principles? Mr. Cuyler. Yes, sir. Senator Underwood. And that there is no principle partic- ularly involved in those suggestions as to which is the best sys- tem to adopt to carry out the principle. Mr. Cuyler. Yes. Senator Underwood. Now, I am not so much interested in the machinery, because at this time, although we can not write a workable bill without considering it in the end, I think the committee wants to make recommendations that will last, and we have got to establish the fundamental principles first, and then let the machinery be adapted to suit them. Now, I warit to ask you what are the fundamental under- lying principles that you propose that we should pass legislation upon? Mr. Cuyler. The rate making. Senator Underwood. You say, "the rate making," but what you really recommend here is that the Government shall make a guaranteed return to the rate-making powers? Mr. Cuyler. That is what it practically amounts to, Sen- ator. Senator Underwood. That is proposition No. 1, as a matter of principle? Mr. Cuyler. Yes. Senator Underwood. Then, a second proposition of prin- ciple that you say should be established is that the Government 36 should control and regulate the future issuance of railway se- curities ? , Mr. CuYLER. Yes, sir. Senator Underwood. And as a third matter of principle that you lay down and recommend, the anti-trust laws and the anti-pooling laws should be repealed as to railroads, under cer- tain conditions, so that, with proper regulations, you can effect combinations ? Mr. CuYLER. Yes. Senator Underwood. Those, as I have studied your paper, are the three main principles on which you propose that legis- lation be enacted. Are there any more? Mr. CuYLER. No. I think. Senator, you have very clearly covered them all. As you say, the others are questions of ma- chinery, as to which men may differ as to the best plan. Senator Underwood. Now, I do not think there is much question anywhere as to the necessity for legslation for the future iregulation of the issuance of securities in some form; and if there is any difference it is largely on the questions of machinery, and how it should be brought about, and not as to principle? Mr. Cuyler. Yes. The Chairman. Do you not also recommend here the elimination of State charters and the substitution of Federal charters for the roads? Mr. Cuyler. Yes, we do. That is a fundamental part of it. Senator Underwood. You recommend a Federal charter instead of the State charters? Mr. Cuyler. Yes; but, after all. Senator, that is really machinery. Senator Gore. Do you not think we might, without dis- turbing the State charters, and without resorting to Federal in- corporation, allow the charters to remain as they are, emanating from the States, and adopt a system of Federal license, so far as interstate carriers are concerned, and arrive at regulation of the issuance of stock in that way ? 37 Mr. CuYLER. I think we might, but I do not think you would entirely compose the situation between the National Gov- ernment and the States. Senator Gore. That might be true, but I am thinking of a hurdle that is usually pretty hard to take — the State proposition. Senator Underwood. Mr. Cuyler, I think all minds meet on the necessity for the regulation of future issuance of securi- ties. I do not think there is very much contention, so far as I have heard, as to the advisability of repealing the anti-trust laws, and the pooling laws, if proper regulations can be made to protect the public interest; so that, really, the principles that you enunciate work themselves down practically, eliminating the question of whether you shall work with a Federal charter or a State charter, to the question of a guarantee of a return to the railroad that will enable it to carry on its daily work, with a reasonable return on the capital invested. Mr. Cuyler. Yes, sir. Senator Underwood. That is what it comes down to? Mr. Cuyler. Yes. Senator Underwood. That is the main issue, as I see it, that lays before the committee, about which there is any contest. The question of that guaranteed return rests on the exercise of the rate-making power, through which you tax the public to pro- duce this guarantee? Mr. Cuyler. Yes. Senator Underwood. Now, you represent, primarily, the invested capital in the railroads — the privately invested capital; and that is what your interest is? Although you may be inter- ested, personally, or otherwise, in operation, the direct interest you represent is the capital invested by private individuals, as I take it? Mr. Cuyler. I think it is hard to separate the two, Sen- ator. One goes with the other. Senator Underwood. The operation, of course, goes with the other, but it is an incident? Mr. Cuyler. You cannot have inefficient operation and produce the desired results from the standpoint of capital. 38 Senator Underwood. What I mean is that the reason you are here is not because you are an operator, but because you represent capital invested in the properties? Mr. CuYLER. I would not say that, except in so far as the railroad executives represent the shareholders and the stock- holders, who are the owners of the property. Senator Underwood. I realize that, but perhaps I do not make myself clear. What I mean is this : That if you did not represent private property interests in this 'proceeding, you would have no standing before this committee, because the mere fact that you wanted to represent yourself, and to continue a job that you and your associates might like to hold, would give you no standing before this committee; and it is the fact that you represent great interests of capital that fixes your standing here ? Mr. CuYLER. Yes. Senator Underwood. Now, what I want to know is if the Congress were to enact legislation that would guarantee to this great interest, the private capital invested, what you say ought to be guaranteed to it, and if there were sufficient return from the rate-making power to carry on the railroads, to pay for the necessary betterments and repairs for the continuation of it; and with a reasonable return on the property invested, what right would the interests that you represent have to go further than that, so far as the public is concerned? Would not that action foreclose any rights that the interests you represent have to demand action at this table ? Mr. CuYLER. You mean by that. Senator, in the way of a guarantee of return by the Government? Senator Underwood. No. If the Congress were to guaran- tee, by the exercise of the taxing power to collect freight rates and passenger rates, to the capital invested that you represent, that there would be enough return made on each solvent railroad to run that railroad, to provide for betterments, improvements, repairs, and extensions, possibly, and then a reasonable return on the capital used, what further right have you got to ask any- thing of the public in reference to that? 39 Mr. CuYLER. I do not feel that we have any further right to ask. If our rate superstructure is sound, that is all we have to ask. Senator Underwood. That is the way I feel about it, so our minds meet. If you ask us to give you that right by estab- lishing it in the law — not as to the reasonableness of a single rate, but the reasonableness of a body or budget of rates, that will allow you to carry on the transportation business — what right have you to ask of the committee that it shall continue to give the power of the establishment of rates for the railroads? Mr. CuYLER. Only that we are engaged in a great public operation, and that we should have, to that extent, independ- ence of action. Senator Underwood. Suppose we take out the public and put the Government in place of it, and the Government guaran- tees to you that you are going to have a specific return on your property — enough to run the railroad, and for betterments, im- provements, extensions, and repairs, and to pay a reasonable return on your capital — when it comes down to exercising the power to regulate the rates, would you expect to exercise that, or would you expect the Government to exercise it so that it could make good that guarantee? Mr. CuYLER. I think we ought to do it. I do not think we should be trammeled to that extent, because, after all. Senator, you must remember that the rate we ask is only sufficient to take care of the current expenses of operation, the cost of im- provements and betterments, and a return on the capital in- vested — a fair return. Senator Underwood. There are two sides to this question: The capital-invested side, which is a right and proper one, and the public or shipping side, which is interested in the efficient maintenance and operation of these arteries of transportation. The original charters fixed the right in the interest of the public, and that public interest still remains with us. Now, I believe that unless the invested capital can have a sufficient return out of its rates to carry on the business and to pay its interest, the rail- road will fail and will go into bankruptcy. 40 Senator Cummins. May I ask a question there. Senator Underwood, in connection with the inquiry you have just made ? Senator Underwood. Certainly. Senator Cummins. If the Government is to guarantee a return upon the capital invested, why should not the people get that capital at the rate that is common to Government-guaranteed capital ? Mr. CuYLER. You ask me that? Senator Cummins. Yes. Mr. CuYLER. My understanding of that is that I do not believe — I suppose you have in mind your very striking plan — but I feel this: In the first place, I do not believe the American people will ever consent to invest the vast amoufit they will have to invest in order to buy these roads, and then give them up. I think if you once get them into your hands, you will find it diffi- cult to get them into the hands of private companies, because I think it would be very hard to organize private companies with so little return as an inducement, to take over the property. Senator Underwood. Now, coming back to my other prop- osition, you say that if the Government were to guarantee you an ample return on your property invested, you still think that the directing force of the railroads should have the right to make the rates, instead of the Government, which would be guaranteeing the return to you ? You would not do that in your own private business? You would not make a guarantee that that there should be a return on a particular piece of property, and then allow the other man to exercise the power as to the rental values and other things of that kind? Mr. CuYXER. No; but I do not know whether the case is quite analagous. It seems to me that if we provide this right of appeal, and protect the shippers and protect the people of the country at large, so that the rate can not go beyond what is a proper rate to cover these various items that we have dis- cussed, there is not so much surrendered. Senator Underwood. That is just the question I am coming to. I believe in doing the fair thing by these railroad properties, and I think we have got to do the fair thing, if we expect to continue them as live corporations to serve the public. And if 41 we do not do the proper thing, they will go to the wall, and we will have no transportation system. It is my purpose to treat them as fairly as I know how ; but there is another interest which I think is as gTeat and as vital as yours, and that is the interest of the shipping public, and that depends upon the proper ad- justment of these freight rates. Mr. CuYLER. That is true, Senator. Senator Underwood. Assuming that the law guarantees to you a fair return, such as you have suggested yourself, then I assume that the aggregate of those rates could not exceed the amount of that guarantee ; that in the budget making they would have to come up to that amount. So it comes down to a question of whether that budget shall primarily be fixed by you or fixed by the law?. Now, is it not in the interest of the shipper that in fixing the relative items of that budget, the shipping public should have a voice with regard to the rate on which the traffic and the commerce of the Nation must move, rather than private individ- uals selected by stoickholders, who are not interested from a public standpoint primarily at all? Mr. CuYLER. In answer to that. Senator, I am frank to say that I think there is a good deal of force in what you say; and if we can attain what we ask for in this paper, in the way of protection in rate making, then I think there is nothing fur- ther that we would ask. Senator Underwood. And if the rate is guaranteed by the Government, the Government should have the fixing of it, and not the private capital invested? Mr. CuYLER. I should not object to that myself, speaking personally. Senator Kellogg. This subdivision 8, it seems to me, has been properly interpreted by Senator Townsend. It says : The statute itself should provide the rule of rate making and should require that rates be not only what has been called reason- able, but adequate and sufficient to enable the carriers to provide safe, adequate, and sufficient service to protect existing investment and to attract the new capital necessary in the public interest, and, to that end, the statute should, among other things, specifically provide that the level of raftes must properly reflect the cost of wages and all other expenses incident to the furnishing of trans- portation. 42 Now, with the exception of protecting the existing invest- ment, assuming the existing investment to be a fair and reason- able investment, that provision simply declares a rule of law by which the commission shall be guided in fixing a reasonable rate, does it not? Mr. CuYLER. Yes. Senator Kellogg. And the rule of law now is that the rates shall be adequate to furnish these things, and they reflect the cost of wages and other expenses ? Do you mean, in addition to this, that the Government should pay those things? Mr. CuYLER. No, sir. Senator Kellogg. Then, the power to decide whether the rate of a railroad is adequate to pay the cost of operation and to furnish or to attract the necessary capital, and to enable the <:arriers to provide safe and adequate transportation, must be left to a governmental commission, must it not? Mr. CuYLER. It must. Senator Kellogg. Or else the public would have no pro- tection ? Mr. Cuyler. No. Senator Kellogg. Then, what I understand is that you wish a rule of law laid down, which is practically the rule of law of to-day, and will you tell me what guaranties you could pro- vide for the enforcement of that law, beyond conferring on some commission the duty to properly interpret and enforce the law? Mr. Cuyler. We do not feel. Senator, that that is the rule of law as carried out by the Interstate Commerce Commission to-day. Senator Kellogg. Well, as to existing investment, they are not obliged to take that into consideration. I do not know what the "existing investment" means. Senator Pomerene. They do aim to do all these things in their present rate making? Mr. Cuyler. Yes, but the machinery is so complex and long-drawn-out, that conditions change before it is decided. Senator McLean. It is all a question of fact upon which there may be a very wide difference of opinion ? 43 Mr. CuYLER. Except this, Senator, that the railroad credit has gone down steadily, and it is a great deal more difficult for the railroads to borrow the necessary money to meet their re- quirements. The Chairman. Did I understand you to say that your criticism of the Interstate Commerce Commission is not that they have not the power under the law to do what you propose here, but that the delay is so great that the conditions change before the relief comes? Mr. CuYLER. Yes, to a very large extent, and I think that would be very much helped by giving the carrier the power to initiate the rate. The Chairman. Taking the line of argument developed by Senator Underwood a while ago, by analogy, did you ever know of a railroad company that leased its line and its property to another railroad company, and retained the right to make the rates on the leased property? Mr. CuYLER. No, I never did. The Chairman. Is not that an analogous situation to this ? Mr. CuYLER. Yes, to some extent it is. The Chairman. If a man guaranteed you a certain amount of return on your property, and paid you that return, you would have no further interest in the rate he charged for service, would you? Mr. CuYLER. No, provided, of course, that the property were maintained properly in the meantime. Senator Kellogg. The rule of law is that the Government is to fix rates for an industry that is impressed with a public service, and while the Government has the right to fix the rates, the rates must be reasonable and adequate, and that means that they should be sufficient to pay the honest cost of operation — I do not mean padded cost ; I mean the honest cost of operation Mr. Cuyler. Yes. Senator Kellogg. And a reasonable return on the capital, and to furnish reasonably adequate transportation facilities ; that is the rule of law now, is it not? Mr. Cuyler, It is, but when you come to work it out, in point of fact 44 Senator Kellogg (interposing). Yes, but it has to be worked out by some public authority, or else the railroads will do it themselves; they will get the guarantee, and will not be subject to public regulation at all — ^you do not mean that, of course ? Mr. CuYLER. Oh, no. Senator Kellogg. Of course not. Mr. CuYLER. I do not mean that we should be beyond pub- lic control at all; but I do insist that the condition of the rail- roads under existing law is such that there is no inducement for people to buy their stock, or even their bonds. The market price of long-time railroad bonds, that are of undoubted value, is stead- ily decreasing all the time. Senator Gore. Well, that is true of industrials also, and bonds generally, is it not? Mr. Cuyler. Not to the same extent, Senator, I think. Take the Pennsylvania Railroad stock. There is a stock that sold at par, 50 in the seventies and eighties, and is selling now below par — a railroad that has maintained its dividends for generations. It is just a lack of confidence on the part of the people. Senator Gore. Is not this one of the conditions that has operated to depreciate railway bonds; that a large amount of bonds would mature when the bond market was unsatisfactory, and they would issue short time notes, running for two or three years, and then would find that the bond market was worse than when the bonds were issued? Mr. Cuyler. That is, to an extent, true, but take long time bonds: There is a security that is greatly in favor, and which trustees would like to buy. Senator Gore. But the demand for bonds has decreased as the rates of interest have increased ; but do you not think there has been an unfavorable reaction due to the agitation carried on in the country by the railroads themselves for an increase in rates? I have noticed on the folders of the railroads advertis- ing matter appealing to the public to favor an increase of rates. Has not all that agitation tended to depress the credit of the railroads ? 45 Mr. CuYLER. Undoubtedly, if the security holder feels that the rates are not sufficient, it makes him skeptical. Now, all that talk about the railroads being in a state of collapse when the Government took them over— as a matter of fact the railroads were never in a more highly organized and efficient condition than when the Government took fhem over. Senator Gore. If the railroads had been allowed to pool their traffic and earnings, and to route their freight, and had not been harassed with conflicting preferential orders, do you not think they could have met the situation? Mr, CuYLER. I think they could have met the situation better than the Government met it. Senator Gore. The Government did not have to respect the anti-pooling laws, and all that? Mr. CuYLER. No, and if the Government had been embar- rassed in that way, the proposition would have broken down. Senator Gore. I think so too. Senator Underwood. If you will allow me to make a sug- gestion there. Senator. If we knew the value of the railroads in advance of legislation, and were going to fix that value at so many billions of dollars, and then guarantee a fixed return of four or five or six per cent, the incentive would, to some extent, undoubtedly be diminished as to the efficiency of the road? Senator Gore. Yes. Senator Underwood. But, as I understand, the proposal that these gentlemen make is not for Congress at this time to arbitrarily fix the value of this property, but to leave to a GoV' ernment board — whatever that may be— the right to determine what is a reasonable rate on the value of that property — some might call it "invested capital" ; some might say "on the capital used," but at any rate, the Commission, or the Secretary of Transportation, or whoever the Government authority might be, would determine what was a reasonable return on that property invested; and, of course, that question would resolve itself not merely around the question of the actual cost of the machinery that was involved, but also around the efficiency and the capacity of the railroad to perform its service; and, therefore, there 46 would be an incentive to render as efficient and satisfactory serv- ice as possible. Senator Gore. Would it be your idea, then, to allow the roads to retain at least a part of the earnings in excess of the guaranteed amount? Senator Underwood. Of course, that would be a matter of detail. Senator Gore. If you did that undoubtedly the incentive would remain. Senator Underwood. That is a mere matter of machinery. The general proposition is for a guaranteed return. Senator Gore. If they received the same earnings without reference to efficiency, the effort to maintain efficient operation would disappear, because they would only be interested in the guarantee. Senator Underwood. It seems to me that the value of the road, and its operating ability, would be among the things that would come before the board that fixed the reasonable return, and, therefore, the question of efficiency would still exist. Of course, I recognize that with a fixed flat valuation of the rail- road, and flat return, there would be no incentive; but that is not the proposal that is before us. Mr. CtTYLER. I should be very sorry to see any legislation that would in any way militate against efficiency of operation of the railroads. Senator Townsend. I want now to emphasize what I think appears in your plan : It seems to me that you have devised a scheme that would properly protect the railroads and their em- ployees, but it occurs to me that it has overlooked, to some ex- tent, what I regard as the principal object of maintaining a transportation system, and that is the service to the public. I am not, and have not been, favorable to Government ownership, because I felt that private ownership could be properly regulated ; but it seems to me that the scheme that you have presented here largely ignores the people — ^the public, for whom primarily these roads were built, and for whom they should be operated; that it has left them rather at a disadvantage. That is the way jft occurs to me. 47 Mr. CuYLER. We have felt. Senator, that we have safe- guarded that by the appeal to the Interstate Commerce Commis- sion, which has the judicial power to protect all. Senator Townsend. If you are going to change the present law — and you assume that you are — although I do not see that you have, particularly — but you assume in your discussion that you are giving certain powers to the railroads in the matter of the payment of wages, and in other matters which must be vital in determining what the people shall pay for the use of the rail- roads, and the Interstate Commerce Commission has nothing to do with that, under your definition? Mr. CuYLER. If we can not agree with the employees as to wages, for instance, we provide for arbitration. In other words, we have provided a scheme by which we think the transportation systems of the country can be maintained at their highest effi- ciency, and at the same time that the rate shall not go beyond the point where the Interstate Commerce Commission can not con- trol it. '. Senator Townsend. Do you think you have provided any very adequate protection for the public interest in reference to the capital used or employed in the railroad business ? Mr. CuYLER. We think we have. Senator Townsend. I did not hear that, but it occurs to me that that is of very great importance to the public. Mr. Cuyler. It is vital. Senator. Senator Townsend. That is, to know how you are using the capital, what your capital is, and whether it is actually in- vested for the public? Mr. Cuyler. We have provided that no securities shall be issued, except by consent of the Secretary of Transportation, on his certificate. Senator Townsend. Is there any appeal from his decision on that ? Mr. Cuyler. I think not. Senator Underwood. Mr. Cuyler, in your plan is not the proposition of allowing you to initiate the rate a weakness to the system you propose, rather than an asset ? You propose that yovl 48 shall initiate the rate, subject to appeal, and then, as I under- stand it, the rate that you initiate goes up in detail to the Inter- state Commerce Commission to determine whether it is a reason- able and just rate or not, in detail. On the other hand, you are contending that you are entitled to a budget that will be suffi- cient to maintain your property. Now, when the rate goes to the Interstate Commerce Commission in detail, how is that Com- mission going to pass on what is a reasonable budget? Is not that the very difficulty from which the railroads are suffering to-day — that the question is passed on in detail and the budget is not before them? On the other hand, if the law provided that they should allow you a budget sufficiently large to meet the re- quirements that you contend for, then the commission, or what- ever body would determine it, could pass on the reasonableness of the budget, and not on the reasonableness of the rate, and that would be more of a guarantee, it seems to me, of what you really desire, than to allow them merely to pass on the reason- ableness of specific rates, where appeal is taken? Mr. CuYLEE. It seems to me. Senator, that the only diffi- culty with a budget is that we could not have a hard and( fast budget, because the transportation conditions change, perhaps monthly, all the time. Senator Underwood. That is true, but if the power to fix that budget were left in a governmental body, that body would be just as capable of fixing the reasonableness of the budget as the reasonableness of the rate? Mr. CuYLER. I simply come back to what I said in the be- ginning, that if we are permitted to maintain the property, and to provide adequate transportation, facilities, and to protect our investment, we have no quarrel with any plan that may be devised with that end in view. Senator Cummins. Mr. Cuyler I made a comment a few moments ago to the effect that there seemed to me to be a very close parallel between the plan you propose and the plan under which the railroads are now being operated, and that the essen- tial difference — ^the only one that I see — is that we now give to the railroads a definite guarantee, while under your plan the 49 guarantee would be indefinite, I want to get your views about one or two things, because, easily enough, I may be mistaken in my conclusion. First, you propose to take away from the Interstate Com- merce Commission its administrative and executive functions, and to leave it with only judicial or quasi-judicial functions ; that is your first proposition ? Mr. CuYLER. Yes. Senator Cummins. And you propose to give to a secretary of transportation, who shall be a Cabinet Officer, and not a per- manent official, the administrative functions now exercised by the Interstate Commerce Commission, together with certain other functions that you specify in your plan ; that is true, is it not ? Mr. CuYLER. Yes, sir. Senator Cummins. I note that you say that among the other powers of the secretary of transportation, there should be — — (a) To carefully observe the transportation needs and trans- portation facilities of the country, and, by suggestion and coopera- tion with the carriers., and by recommendations from time to time to the Interstate Commerce Commission, in respect to the necessity for rates and revenues adequate to provide and maintain the proper service. And so on. Now, that is just what the present law does, is it not? Mr. CuYLER. I am not familiar with the terms of the pres- ent law. Senator Cummins. It gives to an administrative or an ex- ecutive officer the right, and imposes upon him the duty, of ad- vising a judicial tribunal with respect to the way in which the case should be decided? Mr. CuYLER. I am not familiar enough with the present law to express an opinion on that. Senator. Senator Cummins. Why do you permit in your plan, as the law now permits, an executive officer to recommend to a judicial officer what should be done? Mr. CuYLER. We feel that if there were one man, and he a Cabinet officer, that he would be so imbued with the importance 50 of proper management of the railroads, that he would keep in close touch with the situation, and that he would be much more easy to consult with than a larger body would be. Senator Cummins. Yes. At any rate, that is exactly the authority given to the President or to the director general in the present law, is it not ? Mr. CuYLER. Oh, you were speaking of the Federal con- trol act? Senator Cummins. Yes. Mr. CuYLER. I thought you meant the Interstate Commerce act. Senator Kellogg. I think that under the Federal control act the director general absolutely fixed the rates ? Mr. CuYLER. He does. Senator Cummins. That is simply in issuing them and put- ting them into effect, but when a case comes before the Inter- state Commerce Commission, the director general is given author- ity to ' make certain recommendations or certain certificates, which are expected to control, to a degree, the action of the Ju- dicial officers. In your paragraph (b) you give to the secretary of transportation authority to at any time distribute the traffic over such lines and routes, and on such terms as between t^he several carriers, as he finds to be just and reasonable under the circumstances ? Mr. CuYLER. Yes. Senator Cummins. Now, that is just what the Federal con- trol act gives to the director general, is it not ? Mr. CuYLER. Yes. Senator Cummins. And the only modification with regard to that is that you suggest there should be an appeal to the Inter- state Commerce Commission from the action of the secretary of transportation? Mr. CuYLER. Yes, sir. Senator Cummins. Under what rule of law, or by what guide would the Interstate Commerce Commission act in such circumstances ? Mr. CuYLER. On the question of cost of operation, the wages, and the return on the capital. 51 Senator Cummins. It would not be acting judicially, but administratively, would it not, under such circumstances? Mr. CuYLER. I take it that it would be a judicial review of the order of the secretary of transportation. Senator Cummins. But in order to secure a judicial review, there must be some law or some test, or some standard. Now, what would be the test ? Mr. CuYLER. The test would be whether there was an ade- quate return to meet those purposes. Senator Cummins. The only test would be whether the car- rier was able to properly handle the traffic? Now, in paragraph (c) you give to the secretary of transportation the authority to require a common use of terminals at any time if he finds it to be in the public interest. Now, that is just what the director general is authorized to do under the present Federal control act. Then you provide, in paragraph (cf) that in cases of serious national emergency, he should have power to direct that during the continuance of such emergency the carriers should coordinate their facilities and operations and operate their properties as a unified national system on such terms as he may find to be just and reasonable in the public interest. Proper provision should be made for just compensation to any carrier injured thereby, it concludes. Now, that is giving to the secretary of transportation a power which Congress included in the Federal control act, and you propose that the secretary of transportation shall determine, without any appeal or any review, when a "national emergency" has arisen and how long it may exist. We have given that au- thority during the war, but without defining what a "national emergency" is. Do you think it is wise to give such power as that to the secretary of transportation? Mr. CuYLER. We have felt, so far as the Federal control act is concerned, that a great many of its features are very wise provisions in relation to the railroads, but not under a one-man power. Senator Cummins. They would be under one-man power under such circumstances, would they not? 52 I Mr. CuYLER. Yes, but only in case of such emergency. Senator Cummins. And a "serious national emergency" might be held to be an inadequacy of transportation? Mr. CuiTLER. We would have no objection to such limita- tions being put in there as would prevent that. Senator Cummins. If the secretary of transportation felt that the roads were not performing their full duty, and were not answering their full responsibility, he could make perpetual just such a situation as we are now experiencing? Mr. CuYLER. If that is so, there should be provisions put into it that would properly safeguard against that. The Chairman. The hour for recess having arrived, the committee will stand adjourned until 10 o'clock to-morrow morn- ing, at which time we will ask you to appear again, Mr. Cuyler. Mr. Cuyler. I have to go to Philadelphia to preside over a large meeting to-night, and I have another meeting there to- morrow. The Chairman. Are any of these other gentlemen who will appear here entirely competent to answer questions similar to those you have been answering? Mr. Cuyler. Oh, entirely so, sir. The Chairman. Then, will that be satisfactory? Senator Cummins. Oh, that will be satisfactory to me; yes. The Chairman. Then we will adjourn now until 10 o'clock to-morrow morning. (Whereupon, at 12.05 o'clock p. m., the committee ad- journed until Friday, January 10, 1919, at 10 o'clock a. m.) 53 Testimony. Mr. Alfred P. Thorn, General Counsel of the Association of Railway Executives. Before Senate Committee on Interstate Commerce, Washington, D. C, January 14, 1919. The Chairman. Mr. Thom, you will state your full name, address, and whom you represent — what part of the railroad interests you represent. Mr. Thom. My address is 320 Munsey Building, Wash- ington, D. C. I am general counsel for the Association of Rail- way Executives. The Chairman. Now, Mr. Thom, have you got a state- ment which you desire to make, without interruption, or is your statement such that you would not object to having questions asked of you while you go along? Mr. Thom. I would not care for any hard-and-fast rule to be adopted, Mr. Chairman. I would think it would perhaps con- duce to brevity if I might be allowed to make my statement first, and then be questioned later. I have no written statement and, therefore, I will take the privilege of standing while I make my statement in chief. Western Association of Short Line Railroads Approves Plan. I wish to present a letter dated January 8, 1919, and signed by the Western Association of Short Line Railroads, through its president and vice-president, and addressed to me, but intended for the committee, and which I will read into the record : The New Willakd, Alfred P. Thom, Washington, January 8, 1919. Counsel Association Railway Executives, Washington, D. C. Dear Sir : As president and vice-president of the Western Asso- ciation of Short Line Railroads comprising the independently owned and operated railroads in the 11 States west of the Rocky Moun- tains, we desire on behalf of our members to most heartily indorse the action of the Association of Railway Executives as to the time and manner of releasing railroads from Federal control, and assure you of our most hearty co-operation and support in bringing about favorable legislation which will solve this complicated problem. Yours very truly. Western Association of Short Line Railroads, D. M. SwoBE, President. L. G. Cannon, Vice-President. 54 Mr. Thom. At the outset, Mr. Chairman, I shall venture to say a word in reply to what has been said here, more in the way of suggestion than of actual statement, about the lack of co- operation on the part of the railway executives with the Railroad Administration. If there has been any lack of cooperation, we have not known it. If there has been any lack of cooperation, it has vio- lated the entire spirit and purpose which we have had in this matter. Perhaps there has been no more stupendous event in the history of commercial affairs than the taking over by the Govern- ment of some fifteen or twenty billions of dollars of property away from its owners, to be operated by the hand of the Govern- ment, and with all its tremendous effects upon the business and organization of these properties. And yet the record of these railway executives from the 11th day of April, 1917, when they were summoned to Washington by the Government to coordinate the railroads of the country into one harimonious system, to this date, has been one of patience, of dignity, and of cooperation. You gentlemen have seen no complaints, and you have seen no agitation originating with these executives in the public press. You, in your official capacity, at this Capitol have had no ap- proaches from these executives in order to throw one iota of difficulty in the way of the successful management of the proper- ties. On April 11, 1917, when these executives were called into session by the Government, in less than five hours they subor- dinated all their individual and separate interests and combined then and there into one unified and harmonious whole for the purpose of doing their part of the work of this war; and I think it is the universal consensus of opinion that, except as they were prevented by obstacles of existing law, they did all that was humanly possible in that direction; and I think, further, that during the whole time of the consideration of the Federal control bill, during the whole time of this Railroad Administraton, that same spirit of not pressing to the front any selfish or individual interest, but cooperating with the bureaus of the Government for the great objects it had in view when it took these railroads 55 over has been the predominant and the controlling purpose of these men. So far as I know individually, Mr. Chairman, there has been but one subject on which there has been any decided disagree- ment, and that is in respect to the allocation of the equipment which has been purchased and which I shall allude to as I pro- ceed. With that statement, I will proceed to the consideration of the present proposal that these properties shall now be retained in the Government's hands for an extended period of five years, during what we all realize will be a season of profound peace. We think, in no captious spirit, with no desire or purpose to ignore the authority and the influence which comes from a gov- ernmental proposal, that we owe it to the interests we represent and we owe it to the public to express in a quiet, careful and dignified way our objections to that proposal. Little has been said here of the principal danger which has come to these properties through Government control. Perhaps little is realized in the public mind as to what that great danger is ; and yet, when it is suggested and is considered, it seems to me that it is one of the most controlling considerations which could possibly exist. The Government in taking these railroads over has not merely our physical property, it is not using merely our rails, our roadbed, and our engines, and our structures; it is using, in addition to that, the credit of these railroads. Now, as a war purpose, to accomplish national ends, in a period of great peril, we will accept, for the purpose of this argument, that that was a legitimate and a necessary thing to do; but we challenge the soundness of the proposal that now for a period of five addi- tional years it is necessary not only for the Government to have these physical properties but it shall have absolute control of our credit; that it shall tell us what debts we ought to create; that it shall tell us what we ought to buy and what we ought to do, and that year by year and day by day instead of the credit of these carriers being in their control and subject to the judgment of their owners that credit shall be taken entirely away from them and exercised by a Government official. 56 Section 6 of Railway Control Act. I call attention to section 6 of the Federal control act. I shall read it into the record : Sec. 6. That the sum of $500,000,000 is hereby appropriated out of any moneys in the Treasury not otherwise appropriated, which, together with any funds available from any operating income of said carriers, may be used by the President as a revolving fund for the purpose of paying the expenses of the Federal control, and so far as necessary the amount of just compensation, and to pro- vide terminals, motive power, cars, and other necessary equipment, such terminals, motive power, cars, and equipment to be used and accounted for as the President may direct and to be disposed of as Congress may hereafter by law provide. The President may also make or order any carrier to make any additions, betterments, or road extensions, and to provide terminals, motive power, cars and other equipment necessary or desirable for war purposes or in the public interest on or in connection with the property of any carrier. He may from said revolving fund advance to such carrier all or any part of the expense of such additions, betterments, or road extensions, and to provide terminals, motive power, cars, and other necessary equipment so ordered and con- structed by such carrier or by the President, such advances to be charged against such carrier and to bear interest at such rate and be payable on such terms as may be determined by the President, to the end that the United States may be fully reimbursed for any sums so advanced. Any loss claimed by any carrier by reason of any such additions, betterments, or road extensions so ordered and constructed may be determined by agreement between the President and such carrier; failing such agreement the amount of such loss shall be ascertained as provided in section 3 hereof. That is as much of the section as is necessary for the pur- poses of my argument. The balance of that section relates to the operation of canals, etc. Now, the committee will appreciate that there is no limit in express terms put upon that power. The President may, without any express limit, make or order any carrier to make any expen- ditures he may designate, for any of the purposes there men- tioned. The enormous power thus created can not be overstated. It may be wisely and considerately exercised, or it may be harshly and ruinously exercised. Whether it will be the one thing or the other, depends upon the jud^ent and sense of fairness and right of the man who is exercising that power. We do not know 57 from day to da> who that man will be. We know there has been one man for a year, up to this time ; that there is another man in ofifice now ; but we do not know who will be in office in the next six months. We have not even a knowledge of the personality which will limit the exercise of this power, which goes to the very foundations of the credit and of the solvency of these properties. We do know that the tendency would be to use the credit of the carriers, and to spare the credit of the Government. The very moment that this revolving fund becomes a disappearing quantity, the very moment that a real financial problem presents itself to the Railroad Administration, that very moment there will be a temptation to mobilize the credit of these carriers, and to use it to the relief of the credit of the Government. Now, how can we look with unconcern upon the continu- ation of a power of that immense magnitude for an additional period of 5 years, in a time of profound peace, when there is no great national emergency that requires the sacrifice, and when we are asked to subordinate not only the use and management of our physical properties, not only the chance of keeping to- gether the organizations which are essential to their success, but where we are asked for 5 years more to put beyond our reach, and in the hands of someone else — a Government official — ^the entire credit of these properties? We have been charged, Mr. Chairman, with having some human nature in this matter; we have been told that we are as good as can be expected of people still retaining human nature; but I have not observed, when it comes to the throwing of bou- quets, that even Government officials always throw the bouquets at other people, or that all the orchids and American Beauties are handed to others. There is as much human nature in love of power as there is in love of property; and the temptation to a great success — the temptations to achieve a notable result, appeal as much to the human nature which is in the official breast as the desire to protect what a man owns appeals to him. So all human nature is not on one side. 58 Government Expenditures on Credit of Carriers. I alluded a moment ago to a matter relating to the policy of the management of these roads about which there has been a difiference. Before making further reference to that, however, I desire to call attention to what is involved in amounts in this matter of expenditures on the credit of these carriers. I have here a statement showing that from January 1, 1918, to November 10, 1918, there had been created, as a capital charge against these companies, by the Railroad Administration, $1,175,- 000,000 of indebtedness. I do not mean to say that all of that ought not to have been done ; I do not mean to say that much of it ought not to have been done; but I call attention to those figures in order to indicate to you the seriousness and the mag- nitude of this problem. Now, what does that involve? That involves the purchase at war prices of $1,175,000,000 of additions and betterments, which, when obtained by these companies, will at once become a disappearing asset. We are confronted with the probability that when we come back into the possession of these properties, or shortly thereafter, two-thirds of that cost which has been put upon us at the present basis and level of high prices will have disappeared, and instead of having an asset of $1,175,000,000, to represent an indebtedness of $1,175,000,000 we will have one-third of that amount, or that about $800,000,000 of that expenditure will have disappeared as an item of value on our accounts. I call attention to that not for the purpose of criticism, and not for the purpose of assailing the wisdom or the justice or the righteousness of the expenditure, but for the pur- pose of indicating to you that there is an important matter of judgment involved in the question of whether or not these expen- ditures shall be made, and that that judgment is one which naturally we feel we ought to participate in, as we have to bear the burden. Now, the proposal is not only to do that in time of war, but in a time when there is no national emergency, when we shall have peace, and merely for purposes of experimentation, with the power to repeat and repeat that enormous scale of expenditure throughout those five years. 59 Now, to indicate the temptation in respect to the exercise of that power, let me call attention to what has been done in respect to this matter of the purchase of equipment. I have read to you the provisions of this law. The first paragraph of section 6 confers the power upon the Director General to purchase cars and equipment for the Government. The second paragraph is the alternative power to purchase cars and equipment for the rail- roads and on their credit. What did Congress anticipate about that? I hold in my hand the report of this committee, when it sent to the Senate the Federal control bill, and I read from what this committee said on that subject when it presented its bill to the Senate: Section 6 is a very important section. It provides for a revolv- ing fund to be made up from an initial appropriation of $500,000,000, together with any excess earnings of any of the carriers. This fund is to be available to the President for the purpose of paying the expenses of the Federal control, supplying any deficit in the just compensation accruing to any carrier, and to provide for rolling stock and terminals, to be used and accounted for as the President may direct, and to be disposed of as Congress may hereafter by law provide. This contemplates that engines, cars,' and perhaps terminals will be purchased or constructed by and will belong to the United States. This rolling stock will be used wherever war and national needs demand, precisely as the Pullman and other private car lines are now used on the lines of the various carriers as the needs of industry or the demands of the seasons require. The ultimate disposition of this rolling stock must await postwar legislation. This section contemplates that such rolling stock, although' owned by the United States, will be used on the lines of the various rail- roads and the use charged for upon the books of the companies, so that at the expiration of Federal control the bookkeeping of each railroad company will reflect, as hitherto, the traffic which has moved over each road and the cost of operation. The section further provides that the President may, on or in connection with the property of any carrier, make or order any company to make additions desirable either for war purposes or in the public interest. Doubtless it will be necessary, in connection with Army camps and shipyards, to make substantial extensions of railroad and other carrier property. Your committee believes that such additions and extensions should become and remain the prop- erty of the separate carriers; that there should be no confusion of title as to real estate, tracks, and other fixed property between any railroad company and the United States. As it is possible that some such additional facilities thus made to the property of various carriers will in times of peace be found worth less than the cost 60 thereof, this section provides that claims for loss or damage accruing from such compelled investment shall be settled either by agreement between the carrier and the President, or, failing such agreement, shall be ascertained by due process of law, as provided in section 3. Senator Kellogg. What are you reading from ? Mr. Thom. The report of this committee to the Senate. Senator Kellogg. Thank you. Mr. Thom. Now, at the time that report was made, the succeeding paragraph of section 6 did not include the power of the President to purchase on account of the carriers' cars and other rolling stock. When you reported your bill to the Senate you had the entire power of purchasing cars and rolling stock and cars confined to a purchase on Government account, and you made plain the policy of this committee by using the language which I have stated in your report, in which you have said, "This contemplates that engines, cars, and perhaps terminals will be purchased or constructed by and belong to the United States." Now, that was the policy of this committee. When the bill was reported from the House, it had not only the power that you had included in that first paragraph of section 6 but it had the power, as now included in the law, that the President should also have the power to purchase this rolling stock, etc., on the credit of the carriers. But let us see what the House said in respect to what they intended by that. I am reading now from the House committee's report. You will find it. Senator, on page 3 : Section 6 provides for a revolving fund, to be made up of an appropriation of $500,000,000 from the Treasury and any excess revenue derived from the operation of the companies. This revolv- ing fund may be used by the President to provide equipment, addi- tions, and road extensions, and to make advances to the companies, so far as necessary, for these purposes. This section contemplates direct ownership by the United States of the new railroad equipment and perhaps of some terminals. It does not contemplate ownership of such road extensions, tracks, etc., as may be necessary in connec- tion with army camps, shipyards, etc. In the opinion of your committee the title to such additions and extensions should be in the various companies and not in the United States. But as some such extensions will be made for war purposes and cost more than their value during peace times the right of the company to have a just portion of this compulsory investment paid by the Government is i>rotected. 61 So that we have both Houses of Congress— the one with- holding from the President the power to purchase any equipment on behalf of these carriers, the other giving him the alternative power to purchase equipment on behalf and on the credit of these carriers; but both reported that the purpose and theory and object of this revolving fund was that equipment was to be purchased and owned by the United States. Now, gentlemen, what has been done about that ? What has been the policy of the administration? It has been to buy every engine and every car at the expense and on the credit of these carriers. Now, I alluded a moment ago to one point on which there had been a failure of cooperation between us and the administration. This is the^ point : We have insisted from the outset that the policy of Con- gress, as indicated in these reports, that the power of the Pres- ident as contained in the act of Congress in which he could do one or the other, was to use a part of that revolving fund for the purpose of relieving us in the purchase of these engines and cars at three times their normal value. These engines and cars will come back to us, the cars costing $3,000 and worth one thousand; and the engines will come back to us costing over $80,000 and worth twenty-nine or thirty thousand dollars. Our indebtedness will be enlarged by this tremendous amount, and our assets will have shrunk and disappeared to the extent that the cost of these things were excessive above times of peace. Now, without any captiousness or active antagonism, we have laid before the Director General our view on this question of the pur- chase of equipment, and have insisted that a fair interpretation of this act of Congress was that the Government should bear a part of these excessive war costs of equipment. The equipment has been bought en masse, and it has been allotted to the carriers without consultation with them. Some of the carriers thought they were over-supplied and that they ought, therefore, not to be saddled with any part of this expense ; that they were fully equipped to do their entire charter duties in the furnishing of equipment in the public service. 62 Now, was not that a fair attitude to present and to insist on ? Is there anything captious or lacking in cooperation when a mat- ter of this monumental importance is involved, and we simply insist — some of the carriers — that they are already fully supplied with equipment and should not be obliged to buy more at these high war prices ; and other carriers insist that the kind of equip- ment which has been purchased is not needed and is not usable for their purposes; that it does not conform to their standards; that it can not be economically operated under their traffic con- ditions ? And there, gentlemen, is the sum and substance of every suggestion of opposition or antagonism or lack of cooperation that has appeared between these railway executives and the Fed- eral administration of these railroads. Whatever view you may take, we think we are justified in taking the view that this com- mittee and the committee of the House knew what it intended to do about the purchase of this equipment; that, sitting here in your legislative capacity, it was not your intention to put the whole cost of all this equipment on these carriers, but that the Government, because of these war costs, because it had taken possession of these properties as a war measure, because it was a thing in which the whole people were interested, as much as furnishing engines to Russia or engines to France — ^that the public ought to take a part of that burden of these excessive war costs in the purchase of this equipment. Senator Kellogg. Who has actually paid for them? Mr. Thom. The railroads are paying for them. Senator Cummins. I would like to ask a question there, just because I may forget it. Has there been any indication of a continuation of that policy since the war closed? Mr. Thom. No ; I do not think so. I think that the inten- tion of the administration is to recognize the difference between war conditions and peace conditions in the matter of putting these expenses on to the railroads; but there still will be the question of judgment, and there still will be the question of whether we can view with unconcern the settlement of those questions and the standards and principles on which they are to be decided during an extended period of five years. 63 The Chairman. Mr. Thorn, may I ask you, right at this point, what amount or to what extent had the railroads contem- plated spending money for new equipment, etc., before they were taken under Federal control? Had you not issued some statement, or was it not known that you were contemplating an equipment expenditure that would approximate this, before the Government took the railroads over ? Mr. Thom. I can not tell you the figures, but, of course, we were contemplating, and necessarily were obliged to contem- plate, an extensive program of additions and betterments. Senator McLean. Did the Government purchase as cheaply as you could have purchased ? Mr. Thom. I can not tell you that, Senator. Of course, among the railroads of the country generally there was a feeling and a movement, before the Government took charge, that there should be an increase of a hundred thousand cars, which the Government subsequently ordered. The Chairman. Now, do I understand that that 100,000 cars was recognized by the railroads, before the Government took them over, as necessary to meet the conditions? Mr. Thom. The War Board, as I am advised, in discussing their program for the future, were of opinion that a hundred thousand cars should be bought, but they did not say that road "A" should take a certain number of them, or that road "B" should take a certain number of them, or allot them on any basis except the basis of where there was a deficiency in equipment on a particular road; nor did it at all follow that a judgment once formed as a desirable thing for the future should not be modified and would not be modified by railroad managers, be- cause of the tremendous cost of the program, which was all the time advancing. The Chairman. You do not mean by that statement, Mr. Thom, that the railroad managers would curtail the purchase of equipment necessary to meet the emergency because of the mounting cost, under the emergency in which we found our- selves ? 64 Mr. Thom. I mean, Senator, that it is a matter of business judgment whether at a given moment or time an expense is justified. I mean that all those things go to make up a business judgment in respect to the management of these properties, and I mean that when that power is taken from the carriers and is exercised by a Government bureau we can not expect the same amount of consideration for business conditions as the railroads would have been justified in exercising if they had had the power. Senator Cummins. Just a moment. I want to clear up the understanding. The Government has spent, you say, something like a billion one hundred million dollars? Mr. Thom. No; I did not say they had expended that. That is their program. Senator Cummins. And that is to be charged up to the rail- roads ? 'Mr. Thom. To capital account; yes. Senator Cummins. You do not claim that they could do that in the future, do you — that the Government could do that in the future? Mr. Thom. I do not claim they would; but if you extend this law, I do not see any reason why, if it is valid, they could not. Senator Cummins. They could not, simply for this reason : That part of the law says "The President may also make or order any carrier to make additions, betterments, or road extensions, and to provide terminals, motive power, cars, and other equip- ment necessary or desirable for war purposes, or in the public interest, on or in connection with the property of the carriers." Then it says, "He may from said revolving fund advance to such carrier all or any part," and so on. Now, you do not construe that to mean that after the war closes a carrier can be made to pay for this equipment, do you? You do not think that is a continuing power? Mr. Thom. I think it is. Senator; not with respect to war purposes, but for anything "in the public interest." War pur- poses, of course, have disappeared; but the other one, of course, continues. Senator La Follette. It survives. Mr. Thom. Yes. 65 Senator Cummins. 1 had not so construed that law. Mr. Thom. Is not that the proper construction, when your attention is called to it? Does he not have continuing power, if this law is continued for five years, to order a carrier to make any purchases that he may see fit "in the public interest?" Senator Cummins. Maybe that is so. The Chairman. Does it not say so? Senator McLean. The next paragraph provides that — Any loss claimed by any carrier by reason of any such additions, betterments, or road extensions so ordered and constructed may be determined by agreement between the Prsident and such carriej; failing such agreement, the amount of such loss shall be ascertained as provided in section 3 hereof. You think that does not apply to depreciation in the value of the equipment purchased? Contract Provision As to Loss in Respect to Expenditures. Mr. Thom. In the contract which has been offered us by the administration it is provided that — No loss shall be claimed by the company and no money shall be due to it in respect to such additions, betterments, road exten- sions, terminals, motive power, cars, or other equipment mentioned in this paragraph upon the ground that the actual cost thereof at the time of construction or acquisition was greater than under other market and commercial conditions; and for the purpose of determining such controversy, the amount paid for any additions, betterments, road extensions, terminals, motive power, cars, or other equipment shall be deemed the fair and reasonable cost thereof, and shall be taken as the basis for such determination. Now, I want to go back to this series of questions which have been asked me about the exercise of this power, but I want now to digress sufficiently to make my position with respect to this matter clear. Senator McLean. What matter ? The contract ? Mr. Thom. Yes ; what I have just read from the contract. I do not think that the Government's attitude about that is illog- ical. If it is our duty to purchase this equipment and to make these additions and betterments, if Congress had the right to say that we should have a continuing duty notwithstanding Fed- eral control, then T think that the Government naturally might 66 take the position that the whole burden of the price of that should fall upon the carriers. If it was their duty to supply additions and betterments, if Congress had a right to say that. Congress had a right to say also that they should supply it, if it is necessary to buy it at war prices. I think it was a harsh thing to do ; I think that it was a thing that neither this committee nor the House committee intended, because the House committee, and the Senate committee practically also said: "As some of such extensions will be made for war purposes, and will cost more than their value, during peace times, the right of the com- pany to have a just proportion of this compulsory investment paid by the Government is protected." Now, both committees said that we were face to face with the policy that we must bear the entire burden of war prices, logical as I have said from the standpoint of the imposition of a duty, but harsh, as it seems to me, as the imposition of a burden that was necessarily a burden created by the needs of the whole people, and we ought not to have been required to bear all the expenss of the war additions to our properties. To revert now to your question about these orders for addi- tions and betterments and for equipment : I will ask you to recall what I have heretofore stated on that subject. I have not stated that these purchases were excessive; I have not stated that the additions and bettemients which were ordered were excessive; but I have claimed two things about them, one is that granting that every order was justified, that a need existed for everything that was ordered, rather there was a certain latitude of business judgment as to the exact moment that these things should be undertaken ; and the second is that we can not contemplate, with- out a feeling of great alarm, the continuation of that power for an additional period of five years. I have not allowed myself here, and I have not allowed my- self elsewhere, to get into a critical or impatient attitude of mind toward the Railroad Administration. I have realized the immen- sity of their problems ; I have realized the great ability that they have exhibited in meeting them, but I have not been oblivious to the tremendous power which it was found necessary to repose in 67 them for war purposes; and my appeal to you here to-day is that it is not necessary, in a time of profound peace, to continue those enormous and destructive powers. Senator La Follette. Mr. Thorn, what proportion of the $1,175,000,000 was actually delivered? What portion of the con- tracts were executed? Mr. Thom. I can give you that. Senator. Senator La Follette. Just approximately. Mr. Thom. The amount authorized from January 1 to December 10, 1918, chargeable to capital account, in addition to those chargeable to operating expenses was $1,175,848,883. The expenditures from January 1, 1918, to September 30, 1918 — that is, a month and 10 days short of these authorization — was $403,864,950. Senator La Follette. Now, as to the balance of the author- izations, will those authorizations be subject to scaling down to peace-time prices? Mr. Thom. No; not in many cases. We have brought to the attention of the Railroad Administration, since the armistice was declared, the desirability of canceling as many of those orders as we could, and we met with very cordial cooperation in that theory, and I am sure they undertook to do all that they could in that respect. Of course, we can not peel down to peace prices on any that we can not countermand, but whatever could be countermanded of this amount that I am telling you about. Judge Lovett, who was in charge of this department, showed every purpose and inclination that he would do it. The extent to which he has done it, I can not tell you. Senator La Follette. You do not know approximately to what extent that has been done or what has been accomplished in that direction? Mr. Thom. No, I do not; but I have personally had con- ferences with him on this subject which you have brought out, and have laid before him that this seemed to me to be a period for building back to a return of these properties, and that no more of those expenditures than were beyond recall and were absolutely necessary should be continued ; and I have found him 68 very responsive to that thought, and I am sure that they have done all they could in that direction. Senator Pomerene. Up to date what proportion has been canceled ? Mr. Thom. I can not tell you. I do not know what that is. The Chairman. May I ask you, Mr. Thom, if any of these purchases of rolling stock or general equipment are not necessary during peace times? That is, is the present rolling stock and equipment sufficient to adequately meet the demands of the coun- try immediately now? Mr. Thom. Senator, that question anticipates a branch of the argument which I will make hereafter. Of course, one of our problems is the uncertainties of the readjustment period. We do not know how business is going to respond ; we do not know how it is going to be transferred from one carrier to another ; we do not know whether a period of idle cars is coming. That is one of the problems I want to discuss here in connection with the proposal to return the properties at once, without prepara- tion, and therefore, with your permission, I will postpone my answer until I get to that part of my statement. The Chairman. Very good. Mr. Thom. Now, I think it fair to say that there has been no tendency observed on the part of the Railroad Administra- tion — and as long as human nature is left there probably will be none observable — ^to throw onto the Government any part of these costs as an initial measure. Senator Cummins. You will recall that Mr. McAdoo said he thought the $200,000,000 deficit this year, or last year, ought to be paid out of the General Treasury ? Senator Kellogg. I think he corrected that, and later said he thought it ought to be paid out of profits. Mr. Thom. That is a matter of operation. Senator Kellogg. I understood him to say that it ought to be taken out of the profits for next year. Mr. Thom. Whatever it is it is a deficit in operation. Senator Cummins. He said that it should not be made up by an increase of rates. 69 Mr. Thom. Whatever the figure is and whatever the pol- icy in respect to it is, we must bear in mind that that is a question of operation. It has no bearing upon the question of capital expenditures, to which I am addressing my remarks. The ques- tion to which I am addressing myself now is the necessary and serious effect upon the indebtedness of these carriers on capital account of these tremendous purchases made at war prices ; and I have tried to bring to your attention the seriousness of our prob- lem when I show you that as offsetting that great indebtedness there is a disappearing asset, and which will probably disappear to the extent of $800,000,000 out of the $1,175,000,000 involved— two-thirds of it. The Chairman. Mr. Thom, if the railroads are forced to assume that, it would ultimately be reflected in the rate structure, would it not — ^that additional indebtedness? Mr. Thom. We do not know. That is for some other gov- ernmental body to determine. We have opinions, which doubt- less your question indicates you have, that that is so; but then that raises the question of whether or not the users of transpor- tation should for all time be paying interest on that capital charge, which was incurred not for their benefit but for war purposes. That raises that very serious problem. The Chairman. You could not say it was not for their benefit. It was used for the general benefit under war condi- tions. The reason I asked you that question is that Mr. McAdoo said here frankly that the reason he raised the rates 25 per cent was for the purpose of taking care of the necessary increase in wages. Therefore it was a tax on the general shipping of the country in order to offset the loss that would be incurred in pay- ing wages ; and I thought perhaps that some effort would be made to absorb this additional expense by a still further increase of rates. Mr. Thom. Well, every increase of rates antagonizes the shipping public, and we can hardly look with unconcern upon a situation that will involve us in untold increases of rates. Senator Cummins. Do you not think you are protected by that part of the law which provides that any loss claimed by any 70 carrier by reason of any such additions, betterments, or road extensions, so ordered and constructed, may be determined by agreement between the President and such carrier, and failing such agreement the amount of such loss shall be ascertained as provided in section 3? Mr. Thom. Senator, I was about to discuss that, and I would like for you, as a lawyer, to put yourself in my position, and assume that you are confronted with a capital charge from which there is no escape for your client, and to be told that you can go into the Court of Claims and reimburse yourself for that amount, with the remedy an appropriation by Congress. How good a remedy would you consider that? Senator Cummins. It depends on how much confidence you have in Congress. Mr. Thom. I am asking you how much you have. I am asking you to put yourself in my position, and; to say how far litigation is a remedy for any wrong or a basis for the enjoyment of any right; and, moreover, whether or not that difficulty is enhanced when there is no execution possible, and the railroads would have to go and say to Congress : "We need an appropri- ation to pay these debts." Senator Cummins. My real answer to your inquiry is that I think you have quite as much reason for confidence in Congress as I have. Mr. Thom. I am sure I have, and I am sure we both have great confidence. The Chairman. Along certain lines. Mr. Thom. But I do not believe that Congress falls over itself to make appropriations to pay debts of railroads. 1 believe that Congress is a body of many minds ; it is a delibera- tive body; it is controlled by many conflicting and divergent forces; and a man who starts in to get an appropriation to pay a private debt is not always on a bed of roses. He sometimes fails. Perhaps the records of Congress would indicate how ap- propriations have been considered by many of you gentlemen to be entirely justified, but the united mind of Congress has not seen fit to make the appropriation. 71 Senator Cummins. This world is not intended to be a bed of roses. Mr. Thom. No ; that is so. But, seriously, I think we must all agree that a right dependent upon litigation, to be first carried to the courts, with all their delays, with economic questions to be tried, which in themselves are broader and less definite than other rights, and with your remedy, after you have been awarded damages by the courts below, made dependent upon an appro- priation by Congress, is hardly an offset for the right to make us give a note for a debt. Senator Cummins. My question was really intended to call for an answer upon this subject, whether the law will permit you to recover from the Government the loss you may sustain by reason of the high price Or high cost of these additions and bet- terments ? Mr. Thom. My understanding of the contract is that there was a great difference of opinion as to what that law provided. I took your view, that the law would provide for it, but we were confronted with the necessity of agreeing to the interpretation of that law in the contract. Senator Cummins. It excludes that idea? Mr. Thom. Yes. Senator Cummins. I did not know that. Mr. Thom. I read it a moment ago. If you will look at Section 8 of the contract, you will see it. The Chairman. Just read that particular provision of the contract again. Section 8 of Contract With Reference to Additions and Betterments. Mr. Thom. There are two provisions — ^paragraph b and paragraph c of section 8. I will read the provisos of both of them, because they are both related to the same subject. Section 8 of the contract contains the provisions intended to carry oitt that portion of the law you have just mentioned. It is headed "Claims for losses on additions, etc." The first paragraph of section 8 provides for notice to the carrier of additions and bet- terments that are ordered by the Railroad Administration. The 72 second one provides what we shall do with respect to any claim that we may have for loss. And section B, as a whole, reads as follows: (b) Any claim of the company for loss accruing to it by reason of expenditures for additions and betterments made to the property of the company during Federal control in connection with or as a part of the work of maintaining, repairing, and renewing the company's property and chargeable under the accounting rules of the commission in force December 31, 1917, to investment in road and equipment, except such expenditures as are incurred in connection with the replacement of buildings and structures in new locations, may be determinated by agreement between the Director General and the company, or failing such agreement as to the fact or amount of such loss, the questions at issue may, upon the appli- cation of either party at any time after the filing of the statement of claim hereinafter referred to, be ascertained in the manner provided in section 3 of the Federal control act : Provided, however, That no loss shall be claimed by the company and no money shall be due to it in respect of such additions and betterments upon the ground that the actual cost thereof at the time of construction was greater than under other market and commercial conditions; and for the purpose of determining such controversy the amount paid for any addition or betterment shall be deemed the fair and reason- able cost there and shall be taken as the basis for such deter- mination. That is as far as it is necessary to read in, order to bring out that idea. Now, the next one, paragraph c, reads as follows : (c) Any claim of the company for loss accruing to it by reason of any additions and betterments which are not made in connection with or as a part of the work of maintaining, repairing, and renewing the company's property or accruing to it in connection with maintenance in the replacement of buildings and structures in new locations, or by reason of road extensions, terminals, motive power, cars, or other equipment made to or provided for the property of the company during Federal control, may be determined by agreement between the Director General and the company, or, failing such agreement as to the fact or amount of such loss, may, by proceedings instituted not later than six months after the end of Federal control, be ascertained in the manner provided in section 3 of the Federal-control act: Provided, however. That no loss shall be claimed by the company and no money shall be due to it irf respect of such additions, betterments, road extensions, terminals, motive power, cars, or other equipment mentioned in this paragraph upon the ground that the actual cost thereof at the time of construc- tion or acquisition was greater than under other market and com- mercial conditions. And so forth. 73 Senator Cummins. Are you reading from a contract that has been signed, or is this a general form? Mr. Thom. This has been signed by some of the roads, and it is the general standard form of contract that has been author- ized. Senator Cummins. I understood that there had been a great deal of controversy about that phase of the contract, and that it had not been agreed to by many of the roads. Mr. Thom. Every contract that has been signed has that in it. The Chairman. The hour of 12 o'clock having arrived, the committee will adjourn until to-morrow morning at 10 o'clock, at which time, Mn Thom, you will appear again. Mr. Thom. Yes. (Whereupon, at 12 o'clock noon, the committee adjourned until Wednesday, January 15, 1919, at 10 o'clock a. m.) Testimony. Mr. Alfred P. Thom — resumed. January 15, 1919. The committee met, pursuant to adjournment, at 10 o'clock a. m.. Senator Ellison D. Smith, presiding. The Chairman. The committee will come to order. Mr. Thom, you may continue your statement. Mr. Thom. Mr. Chairman and gentlemen, yesterday I en- deavored to emphasize the objections, from the standpoint of the carriers, to Mr. McAdoo's proposal for a five-year extension, by attempting to outline the effect of the power contained ill section 6 of the act over the credit of the carriers. I had before me then a table which brought the capital expenditures authorized by the Railroad Admini.'-tration up to November 10, 1918. Since then I have been furnished with a statement showing the amount of the authorized expenditures on capital account for the carriers brought up to December 1, 1918. 74 On November 10, 1918, the amount authorized, in round numbers was $1,175,000,000. By December 1, 1918—20 days later— it had gone up to $1,254,000,000. Without in any way criticizing or calling in question any of these capital expenditures, except those involved in the arbitrary allocation of equipment — ^because I have not sufficient acquaint- ance with the details of these expenditures to know whether they are fairly the subject of criticism — I use those figures to indicate the immensity of the power to be exercised by the Government, against the judgment and without the consent of the carriers, to load them up in one year — in 11 months of one year, now — ^to the extent of a billion and a quarter of dollars. The Chairman. Mr. Thom, may I ask you a question right there ? Mr. Thom. Certainly. The Chairman. Did or did not the Railroad Administra- tion ask the different railroad corporations to indicate to it what amounts of expenditures were essential before it entered into the expenditure of this enormous amount that aggregates this eleven hundred million dollars? Mr. Thom. They asked them for a budget. The Chairman. Can you state to the committee what that budget was — how much it aggregated? Senator Underwood. I did not exactly understand you, Mr. Thom. Did you say that the Railroad Administration asked the railroads for a budget? Mr. Thom. For a budget; yes, sir. In the table which I have before me here, to the 1st of December, 1918, the figures do not appear, which do appear in that respect on the table here to November 10, 1918. The amount of the budget on additions and betterments, excluding equipment, was $433,000,000, and the Railroad Administration added between fifty-two million and fifty-three million dollars. The Chairman. And tliat was for what items? Mr. Thom. For what? Mr. Chairman. Yes. Was that to cover the entire needs of the roads, that would be charged to capital account? 75 Mr. Thom. Some of it was charged to capital account, and some of it was charged to operating expenses, apparently, from this paper. Senator Townsend. What did you put in for betterments ? Mr. Thom. The amount up to December 1, 1918, for addi- tions and betterments, chargeable to capital account, was $1,254,396,158. Senator Townsend. That is what you asked for? Mr. Thom. No. Senator Townsend. I asked you what you asked for — what did the railroads ask for? Mr. Thom. I read that the budget figure was $433,000,000 up to November 10, 1918, for additions and betterments, exclud- ing equipment ; to which the Government added $52,825,000. Senator Townsend. Now, what did you ask for equip- ment? You excluded equipment. Mr. Thom. Yes; I excluded equipment. Senator Townsend. What did you ask for equipment? Mr. Thom. The amount of equipment that was included in these budgets was $486,000,000; and the Railroad Administra- tion added six and one-half millions. The Chairman. As I understand it, then, the total of what you asked for equipment and improvements aggregated something like $900,000,000? Mr. Thom. $941,000,000; and they added to it sixty-one million four hundred and seventy-one thousand, up to November 10, 1918. Senator McLean. Was that budget based on prevailing prices or war prices? Mr. Thom. The budget was a suggestion of what should be obtained. But I want to draw this distinction : It was not sup- posed, when that budget was asked for, that the Railroad Admin- istration was going to depart from the policy indicated in the reports of the committees of both Houses of Congress — ^that the Government was to own the equipment. Now, I want to make myself clear on this point : I atn not attacking these figures. For the purposes of my argument, every 76 one of these expenditures might have been necessary and might have been justified. I am saying, however, that whether they were necessary at the time, and whether they were justified, is a matter naturally admitting of a difference of judgment, and that, under the plan of this act, there is no place for the judgment of the railroads ; there is no power of preventing these purchases, but that unlimited power is conferred upon the Government to make them over the protest of the carriers. Now, granting that they were all justified; granting that the judgment of the Rail- road Administration was wisely exercised, I still call your atten- tion to these figures to show the enormous power that vests in the Government over the credit, and, therefore, over the very life of these instrumentalities of commerce. Senator Kellogg. More particularly as to the proposed five-year extension? Mr. Thom. Yes. And now I want to ask you, having called your attention to that immense power, whether wisely or un- wisely exercised, what is the meaning of that power, if you extend the Government's control of these instrumentalities, with no modification of that power for an additional period of five years ? What sums are involved ? The Director General of Rail- roads testified, or wrote in his letter to your committee, that at least $500,000,000 a year would be necessary for the five years in order to create the additions and betterments that were needed in the public interest. If these figures are any indication, instead of its being $500,000,000 a year, it will be in the neighborhood of a billion and a half dollars a year for the five years, because here are expenditures aggregating $1,254,000,000 in 11 months. Now, without criticizing the exercise of the judgment or the discretion of the Railroad Administration, I ask you to pause and consider for a moment, from the standpoint of the stability and value of these properties, what a continuation for five years of a power which has resulted in 11 months in putting an indebt- edness on these railroads of a billion and a quarter of dollars may mean? What will be possible in the five years no man can foresee. Therefore, on that ground alone, on the ground of the power that it gives to a governmental agency, without any check in the 77 way of the consent of the persons who are to pay the bill, with- out any requirement of assent or consent from these carriers, who are to owe this money, to extend that power now for five years, and to put it in the hands of a man who may be designated by the President and who need not be confirmed by the Senate, we can not look upon the proposal with unconcern. Senator Townsend. Let me ask you a question right there, Mr. Thom, because I do not quite understand it: Your budget provided for $950,000,000; that is to say, the railroads recom- mended an expenditut-e of $950,000,000 for additional equipment and betterments; and the Railroad Administration expended $1,200,000,000? Mr. Thom. You have got the dates a little mixed, Senator. I read from two statements. The statement that I first read from yesterday brought the figures up to November 10, 1918, only. This morning I brought it up to December 1, 1918; and you were remembering one figure from the statement of November 10, 1918, and another figure from the statement of December 1, 1918. Now, the figures on the same statement are these : The amount of the budgets, including equipment, was $941,000,000. The amount chargeable to capital account alone, outside of the amounts that go into operating expenses, for the same period was $1,175,848,000. The Chairman. That was for the same length of time? Mr. Thom. Yes; for the same length of time. The Chairman. That Government's expenditures and what you asked for combined? Mr. Thom. Yes. Senator Townsend. In that recommendation, of whatever date it was, in your budget of $941,000,000, do you think that that was a proper amount for the Railroad Administration to expend on these properties. Mr. Thom. I do not know. I am using these figures merely to indicate the extent of the power ; and I am not criticizing the Railroad Administration for these expenditures, because I am not well enough versed in the needs of the railroads to do that. Senator Townsend. They had a right to rely upon your suggestion that that amount would be necessary, did they not? 78 Mr. Thom. 1 do not know how that budget was made up. 1 do not know whether it was made up by the boards of directors or by the Federal managers, or how. But what I am getting at is merely to call attention to the enormous amounts involved. Senator Townsend. I understand that very well ; but there was another thing that occurred to me, and that is that you were complaining, as I gathered, that too much money had been ex- pended; that too much of a burden had been placed upon the '■ailroads ? Mr. Thom. I tried to exclude that idea from the argument altogether. I do not know, outside of the arbitrary allocation of equipment, whether too much money has been spent or not ; and, for the purposes of my argument, I consider that immaterial. What I do consider to be material is that you gentlemen, in con- sidering the question of an extension for five years, ought to understand what is involved in the way of power. Senator Pomerene. Mr. Thom, while we are discussing those figures, let me ask you this : You gave yesterday and to-day certain totals of contracts authorized, including certain totals of betterments and extensions. Is there any objection to incorpor- ating those tables, in their entirety, in the record ? Mr. Thom. None at all, sir. Senator Pomerene. Then I wish that might be done so that we may have them for analysis. The Chairman. Without objection, they will be incor- porated in the record. (The tables above referred to appear in full as inserts between pages 80 and 81.) Mr. Thom. Now, all that is in reference to only one of the features of a power so extensive and so far-reaching that we can- not contemplate, with unconcern, the extension of it for five years. Senator Cummins. Mr. Thom, your point, as I gather, is that a power of that kind, if it can be justified at all, can only be justified by the exigencies of war? Mr. Thom. That is it exactly. Now it is proposed, in a period of profound peace, to extend that power which will mean 79 or may mean, depending upon the way in which it is exercised, that instead of the capital indebtedness of these companies stand- ing where it is to-day, at the end of five years it may be six or seven billions of dollars greater, and that without the exercise of a scintilla of the discretion or the judgment of the boards of directors of the companies with respect to it. The Chairman. Mr. Thom, may I ask you one other ques- tion there? Mr. Thom. Yes, sir. The Chairman. Is that eleven hundred and odd million dollars actually expended and charged to capital account, or is that the total of what has been expended plus what has been authorized? Mr. Thom, It is not all expended. The tables which have just been introduced show what has been expended of that eleven hundred and seventy-five million dollars ; but what has not been expended has been authorized and has been treated as a capital charge. The Chairman. Has there been any disposition, since the armistice, on the part of the administration, to modify those authorizations ? Mr. Thom. If you will recall. Senator, that question was discussed yesterday, and I stated to you then that I had observed in the administration of the office by Judge Lovett that there was a purpose to cancel every obligation that they could cancel, to, make as few new committals as possible, and to deal with the matter in a very considerate and just way. Now, who is going to be the director of capital expenditures for the next five years ? What he will do will be a matter of his policy. And discussing, as I want you gentlemen to understand that I am discussing, this matter all the time from the standpoint of that power, and not from the standpoint of past abuse of power, can any man charged with the responsibilities of these properties look except with alarm upon a power which, if exercised by the Government, carries no burden to the Government, for which there is no dis- cretion reposed in these carriers, and when the carriers have to bear all the burdens? 80 [D. C. E. Form 101 — U. S. Railroad Adminiatration, Director General of Railroads.] Authorizations and expenditures in connection with xvork chargeable to capital account as o/ Nov. 10, 1918. CLASS I RAILROADS. Class of work (1) ADDITIONS AND BETTERMENTS. (Excluding equipment.) Widening cuts and fills, filling trestles, etc Ballasting Rails and other track material Bridges, trestle*, and culverts Tunnel and subway improvements Track elevations or depressions Elimination of grade crossings Grade crossings and crossing signals Additional main cracks Additional yard tracks, sidings, and industry tracks . Changes of grade or alignment Signals and interlocking plants Telegraph and telephone lines Roadway machinery and tools Section houses and other roadway buildings Fences and snowsheds Freight and passenger stations, office buildings Hotels and restaurants Fuel stations and appurtenances Water stations and appurtenances Shop buildings, engine houses, and appurtenancfs. . . Shop machinery and tools Electric power plants, substations, etc Wharves and docks Coal and ore wharves Grain elevators and storage warehouses Real estate Assessments for public improvements All other improvements 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23, 24. 25. 26. 27. 28. 34. Total (excluding equipment) . EQUIPMENT 35. Locomotives, steam Ordered by Railroad Administration . 36. Locomotives, other 37. Freight-train cars Ordered by Railroad Administration . 38. Passenger-train cars 39. Work equipment 40. Motor car and trailers 41. Floating equipment 42. Miscellaneous equipment 43. Improvements to existing equipment Total equipment . 1918 budget. (2) 44. Construction of extensions, branches, and other lines. . Total all work. $5,097,989 9,379,271 31,365,483 38,185,921 2,185,242 4,112,536 7,438,957 631,082 44,574,583 97,199,114 6,359,027 10,962,462 5,129,149 955,857 1,306,847 817,655 20,138,359 199,282 6,090,558 13,430,047 62,694,927 9,142,488 10,781,347 3,236,167 7,024,937 2,914,202 3,309,141 1,179,306 27,889,552 $433,731,488 $196,926,868 212,858,464 28,459,830 6,538,810 557,039 5,323,337 507,923 35,807,654 $486,979,925 $20,330,489 $941,041,902 Additions to budget. (3) $864,633 329,776 1,411,428 1,512,709 94,083 323,517 372,768 69,316 3,533,884 14,369,943 318,988 1,666,063 466,831 280,660 314,181 107,378 2,908,471 263,112 1,650,249 1,706,624 9,256,573 4,636,668 2,455,969 2,666,420 307,073 118,296 28,981 411,9^1 379,192 $52,825,757 155,337 1,771,745 20,200 412,342 84,724 4,135,765 $6,580,113 $2,066,072 $61,471,942 Work specifically authorized on D. C. E. Forms 1, 2, 3, and 4, to Nov. 10, 1918, chargeable to — • Operating expenses. (4) $3,067,061 3,275,271 46,056,163 24,232,283 863,220 1,676,752 1,183,995 165,667 5,780,288 9,281,505 2,906,950 2,420,807 745,318 84,649 208,850 452,329 3,808,314 27,091 1,109,456 1,907,836 6,465,459 1,325,637 2,072,696 524,607 661,002 437,163 15,538 59,180 284,706 $121,099,793 19,276,960 $19,276,960 $23,836 $140,400,589 Capital account. (5) $7,101,168 10,521,021 31,553,047 38,879,214 4,008,516 13,423,050 11,966,544 1,439,032 57,914,301 114,841,142 8,780,638 13,800,195 5,520,453 1,696,214 2,786,560 2,143,709 29,245,446 679,177 7,756,753 10,672,695 52,772,474 20,172,327 20,912,341 4,891,347 5,416,026 2,668,523 579,662 1,955,123 6,453,243 $490,549,941 $116,650,975 76,873,355 2,359,213 94,716,146 289,460,000 12,417,401 7,016,124 587,558 5,129,889 603,677 40,421,567 $646,235,905 $39,063,037 $1,175,848,883 Expenditures from Jan. 1, 1918, to Sept. 30, 1918, charged to — Operating expenses. (6) $996,780 1,223,915 8,441,692 7,771,538 515,724 312,950 318,830 83,142 1,513,549 2,092,494 606,108 629,301 406,890 15,091 85,431 173,401 986,534 2,008 320,188 573,852 1,730,632 307,501 321,253 276,433 284,012 81,321 1,722 60,662 143,093 $30,276,047 5,213,654 $5,213,654 Cr. $6,576 $35,483,125 Capital account. (V) $3,250,776 3,463,873 11,574,965 17,560,499 701,773 2,134,334 2,842,244 823,820 21,669,185 39,128,671 2,621,982 4,746,873 2,046,069 1,064,181 1,846,772 727,926 14,050,643 220,430 2,590,363 4,281,751 15,698,759 5,467,487 4,978,991 644,677 3,077,488 1,972,361 555,342 1,086,808 2,887,854 1173,716,897 $51,183,399 2 23,857,762 1,684,932 66,404,773 2 44,490,812 8,836,325 1,537,526 58,547 632,523 221,932 17,277,675 $216,186,206 $13,961,847 $403,864,950 Unexpended balance chargeable to — Operating expenses. (8) $2,070,281 2,051,356 37,614,471 16,460,745 347,496 1,363,802 865,165 82,525 4,266,739 7,189,011 2,300,842 1,791,506 338,428 69,558 123,419 278,928 2,821,780 25,083 789,268 1,333,984 4,734,827 1,018,136 1,751,443 248,174 376,990 355,842 13,816 » 1,482 141,613 $90,823,746 14,063,306 $14,063,306 $30,412 $104,917,464 Capital account. (9) $3,850,392 7,057,148 19,978,082 21,318,715 3,306,743 11,288,716 9,124,300 615,212 36,245,116 75,712,471 6,158,656 9,053,322 3,474,384 632,033 939,788 1,415,783 15,194,803 458,747 5,166,390 6,390,944 37,073,715 14,704,840 15,933,350 4,246,670 2,338,538 696,162 24,320 868,315 3,565,389 $316,833,044 $65,467,576 53,015,593 674,281 28,311,373 244,969,188 3,581,076 5,478,598 529,011 4,497,366 381,745 23,143,892 $430,049,699 $25,101,190 $771,983,933 Division of Capital Expenditubes, Washington, D. C, November 12, 1918. I Expenditure in excess of authorization. ' Expenditure to date. The Chairman. Did I understand you to say "past abuse" or "past use of power"? Mr. Thom. I say I am discussing it without reference to the question of past abuses of power. I am discussing it from the standpoint of the existence of the power and what it may mean. Senator Watson. How do you distinguish between that power and the power that you propose to vest in the man who is to be "Secretary of Transportation" in the Cabinet ? Mr. Thom. There is no such power as that contemplated for him, but I will discuss that when I come to it. Senator Watson. You have not reached that yei ? Mr. Thom. No; not at all. Senator Watson. Very well. Mr. Thom. I am discussing now. Senator — ^you were not here yesterday — the alternative proposals of the Director General of Railroads to extend this period for five years or to return the roads in the immediate future to the carriers. I am now discuss- ing that entirely, and I have not come to our proposal at all. Senator Watson. Very well. Mr. Thom. Now, reverting still to the question of the five- year extension, I have indicated to you the extent of the power that it is proposed to exercise over the credit of these carriers. Let us now come to another aspect of the matter. Senator Pomerene. May I ask you a question in that con- nection ? Mr. Thom. Yes. Senator Pomerene. Does this fact have any influence on your judgment: That in this proposition to extend Government control for five years the country is left totally in the dark as to whether that means ultimate Government ownership or a return of these properties in their then condition, whatever that may be, to the present owners ? Mr. Thom. Yes ; I want to advert to that, Senator, a little later, if you will permit me. Senator Pomerene. Yes. Mr. Thom. To bring back the connection, you will recall that I have suggested the matter merely from the standpoint of 81 the power to be extended for a period of live years of profound peace over the vital thing of the credit of these carriers. Now, I wish to advert to the power that it is proposed to give for this period of five years of profound peace over the business of these carriers. Senator Cummins. Before you go to that, I have had it in my mind ever since yesterday, really, to ask you wh)' did the rail- roads agree, imder section 6, that the loss or damage which might occur to the railway companies should not be considered by the Government — why did you surrender that claims right? I do not express any opinion myself ; but why did you do that ? Mr. Thom. Senator, did you ever try to negotiate with the Government ? Senator Cummins. In a way; yes, I have tried to negoti- ate at times with certain branches of the Government. Mr. Thom. Well, it is very little of negotiation, is it not? At last you have to accept the final conclusions that they make, or take whatever course else is open to you. Now, what other course was open to us? When we came to a position of that sort in these negotiations we had to determine this question: Which was best for these railroads, to accept the final proposal of the Governm'ent on these subjects or to go to the Court of Qaims for our compensation? That was the situation. Now, if we went to the Court of Claims, naturally we would reach no conclusion in the case of these one hundred and seventy odd car- riers within the lifetime of this generation. When we finally got to the Court of Claims and got a judgment Federal control would have been ended, the amounts which had been derived from the operation of these roads would have been turned into the Treas- ury, and we would have been relegated to an appropriation by Congress. Senator Cummins. But as I remember the law of last March, the contract that you were called upon to make, or that the President was authorized to make, related to compensation. Mr. Thom. No; it related to a great deal more than that. Senator Cummins. It did not relate to these items, such as I have mentioned ? Mr. Thom. Oh, Yes. 82 Senator Cummins. Where in that law was the authority given to agree upon those points ? Mr. Thom. The first section: The President is further authorized in such agreement to make all other reasonable provisions not inconsistent with the provisions of this act or of the act entitled "An act making appropriations for the support of the Army for the fiscal year ending June 30, 1917, and for other purposes," approved August 29, 1916, that he may deem necessary or proper for such Federal control or for the determination of the mutual rights and obligations of the parties to the agreement arising from or out of such Federal control. Senator Cummins. That does not touch the subject of com- pensation. That was a right that was given to the President to make arrangements and contracts subsequently? Mr. Thom. Senator, put yourself in our place. The Con- gress did not say that the President must pay us the average of the three years, but that was the maximum ; and whenever there was a difference on a contract provision, if a question arose, how that would affect his decision of the question of how much he would pay. Our position was not a strong one under this act for negotiation. There were so many ways in which we could be destroyed ; and, at last, we had to balance the advantages and the disadvantages of the proposition, taken as a whole. Now, under those circumstances we had to accept many provisions of the contract which we did not approve and which we earnestly protected against. There is this to be said, however, for what you are now talking about. If Congress had the power, notwith- standing the fact that these carriers were no longer operating these roads, to require them to make additions and betterments to their properties, needed for war or for public purposes, then it would have the power to require that to be done at the prices which they would have to pay to do it ; and the argument is not withotit force that, as to those of these improvements that would have been necessary if Federal control had not ensued, the car- riers would have had to buy whatever was necessary at war prices, so that the proposition that we should bear the war prices of what was deemed necessary — I mean to say, what was ulti- mately found by the courts to be necessary for us to do — was not without some force. 83 Now, we reserved the power, in the provision to which you refer, to object to and to recover for any improvement which would not be useful to us in time of peace; but if it would be useful to us in time of peace, if it was an improvement which ought to have been put upon the property, the argument is not without force that whatever it cost, obedient to the law of Con- gress, we should bear. There is some force in that argument. At any rate, force or no force, we were confronted with it as an ultimatum, and we had to decide the question: Shall we take the contract with that in it; shall we endanger the standard of our return; shall we endanger the chance of making any contract at all and take the risk of going to the Court of Qaims to get any compensation for these properties when we shall have lost possession of them? Senator Cummins. What you say leads to the conclusion that the administration declined to make any contract with you respecting compensation unless you waived the claim for loss on account of these betterments and extensions? Mr. Thom. They did not put it in the words you are put- ting it in, but they said, "This is what we must have in a con- tract." Senator Cummins. I can not quite understand that, be- cause, of course, the President was not authorized to do anything contrary to the law, which governed him anyhow, in this respect if in no other, that the loss claimed by reason of any such addi- tions, betterments, or road extensions, may be determined by agreement between the President and such carrier? That loss could not possibly be ascertained until after the additions had been made, and after the condition at a subsequent time had been ascertained. Mr. Thom. Not until Federal control was over could it be ascertained, but we could not get an admission of that proposi- tion. Senator Cummins. I am not saying that there would be any loss on account of high prices for construction or material, but I can not possibly see how it could properly find its way into a contract for compensation made before the control had ceased. 84 Senator Kellqgg. May I make a suggestion, Senator ? Senator Cummins. Certainly. Senator Kellogg. Section 6 says that the President may make, or order any carrier to make any additions, betterments, etc. ; and the same section says that any loss claimed by any carrier arising from any such additions, betterments, or road extensions, so ordered and constructed, may be determined by agreement between the President and such carrier. Now, as they were making a contract covering compensation had not the President full authority to say, "You must waive that loss or we will not make a contract with you?" Senator Cummins. I doubt that very much. Mr. Thom. I think it would be very interesting to you, Senator, if you could get a file of these various proposals for a contract which marked the period between the 21st of March, when this act became a law, and the time when the Director Gen- eral promulgated what he was willing to do. When we pre- sented our draft of contract, we presented it in the language of the law on this subject that you are now talking about. We did not modify it; but we had gradually to come to the conclusion, first, of whether we would have a contract or would go to the Court of Claims. And we saw no remedy in the Court of Claims; we saw nothing but ruin if .we went to the Court of Claims. Even the President had the authority not to give us 90 per cent of the estimated compensation, if he saw fit. There was no limit to his power over our destinies, and when we came to a provision of the contract which we did not approve and which we would like to have rejected, we were met with the problem: is the Government's adherence to this proposition final, and does it mean that if we do not accept we must go to the Court of Claims ; or can we still carry on the negotiations to make the thing better? Now, we had to decide those questions time after time, and after many instances of final ultimatum, we went again to the proposition and obtained an improvement. But here was a point which we could not get beyond - Senator Cummins (interposing). I can understand your position if the Government assumes the attitude that it would not 85 make any contract for compensation unless this particular matter was included in it. I can understand that; but I can not very well understand it if that provision could have been excluded and you were given your option to go to the Court of Claims upon that or to make a contract. Mr. Thom. You may rest assured, Senator, that we did the very best we could about that proposition — the very best we could ; at least, the best we thought we could. Senator Underwood. Mr. Thom, I am not very much inter- ested in what happened in the past, during the war, in this and many other things, except as a guide to the future, because, of course, we took many chances; and I am in thorough accord with the view that you express, that it is very dangerous to give unlimited power to one man without any checks and balances to protect the interests of the public which are involved. But I want to ask you this question about these contracts: The expenditures that the Director General has put on the railroads as charges have undoubtedly been greater than the railroads carried before the war — very largely greater — but is not their condition, from a war standpoint, better than if the Government had not taken them over, even with all that was done? Mr. Thom. That is a matter of opinion. Senator, and I do not think that I know enough of the railroad situation to answe- "* definitely. I have always believed that it was a wise thing ior the President to take over these railroads under the conditions. Senator Underwood. I mean that when you balance the books on the war conditions — that is no part of what we have got to consider to-day, except where it throws light on the future — ^the rates on all the roads were materially increased; your earning capacity, so far as one side of the ledger is con- ^ cemed, has been materially increased by Government control, and that would have been difficult of accomplishment if the roads had been under private control, I take it. On the other hand, it may be said that your expenditures largely increased, espe- cially in the amount that you had to pay for labor; but as war conditions came on and the cost of living increased the railroads 86 would have been practically driven to increase the wage scale, would they not, anyhow, in war times ? Mr. Thom. They might have been. Senator Underwood. Now, balancing the ledger from that standpoint, the fact that you did get an increase, and a large increase, in rates, and then, on the other hand, that the expen- ditures were largely increased by reason of war conditions, and taking the whole balance on the ledger, were not the railroads better off by having the Government carry them through this war period than if we had left them in private control, from a financial standpoint? Mr. Thom. As I stated before, I always approved the President's taking them over for public reasons. I am not com- plaining at all, and I hope you will not understand me as com- plaining, of what has been done in the administration of these properties, except in the one particular of arbitrary allotment of equipment. I am not complaining in any other respect, but I am trying to indicate whether or not that control ought to be extended for five years of peace. Senator Underwood. I think it is a very sound argimient, from the standpoint of the public, that to put a vast power in the hands of one man to exercise arbitrarily is a dangerous thing in a republic. Senator Cummins. My questions were only intended to' develop how dangerous the power is, in view of the remedies that are provided for in the act itself. Mr. Thom. Thaf is a very proper angle from which to view the subject, it seems to me. Senator. Fundamental Importance of Organization. Now, as I said, I have discussed yesterday and this morning the question of the extent of this power over the credit of the carriers. I wish now to call attention to the extent of the power over the business of the carriers during the proposed five years. One of the elements of value to each individual carrier is its good will, speaking in general and not very accurate or scientific 87 terms — the business it has been able to attract to itself. The management of one railroad will so address itself to the good will of the public that it will receive patronage. Everybody knows that that is a matter of substance and a matter of value to that road. Now, what will become of all that business in five years? Will there be an opportunity of returning at the end of five years the thing you got, with its accompaniment of earn- ing capacity and relation to industry, or will there not be an entirely dislocated and destroyed relationship to industry in an- other five years ? And take organization. There is a gentleman sitting in this room now who said upon this witness stand last January that he had much rather have his road returned to him without rails, if you would give him his organization, than with rails if you were to take away his organization. Organization means capacity to efficiently perform the serv- ice. If you give men notice that for five years these roads are to be out of the hands of their owners, how will the owners keep their organizations together? Young men of ambition are not going to cut five years out of their lives on an uncertainty as to whether they will have any relationship to the subject matter to which they have been devoting their attention, at the end of that time ; they will seek other avenues of employment, and it will be impossible, at the end of five years, for these railroads to be in position to take back, with an efficient organization, the properties when you return them to them. So that, whether you consider it from the standpoint of credit and debts ; whether you consider it from the standpoint of business, or whether you consider it from the standpoint of organization, the proposal is to radically alter, if not destroy, the subject matter you took away, and to return something else. Senator Townsend. To what extent, Mr. Thorn, has the Railroad Administration retained the present organizations? Mr. Thom. They have retained a great many or a great deal of the present organizations, up to a certain level; but, in most cases, the managing men, such as the presidents and people charged with that kind of responsibility, have been displaced. Now, let me ask you one other question: Leaving, now, the aspect of this matter as it addresses itself to the interests of 88 the railroads, let me ask you to turn your attention for a moment to what will be the attitude of the public and of Congress at the end of five years in respect to the return of these roads? You will be confronted then with immense debts to the Government from these carriers, the extent of which I have tried here to indicate. You will be confronted then with an entirely altered system of transportation, to which the public would have adapted itself. You will have created your own organization. How does that affect the problem of what you shall do? Sup- pose the amount of indebtedness which has been created by the Government for the carriers to the Government should be of such magnitude that the only way you could deal with the subject would be to take the assets in order to collect the debt? In other words, will not this experiment of five years, which has been advocated here, coerce Congress into a decision upon the question of Government ownership, not based upon the com- parative advantages of Government ownership and private owner- ship, but based on a financial necessity which has grown up out of an extended Federal control? I think we all must admit that this great issue of Government ownership must, in the public interest, be determined, not by accident, but on the merits; not as the result of some unforeseen governmental policy in the past, but on the merits of whether or not it is best, as a per- manent policy, for this Government; and yet, at the end of five years, with from two and a half billions of dollars, as the Direc- tor General has estimated, up to seven billions of dollars, as the actual figures, if carried on for the five years, would indicate Congress may have to decide that momentous question, not on its merits, but on the issue of whether or not it is the best way of collecting a debt. Constitutional Power to Extend Control in Peace Times. Now, I would like to turn my attention for a moment to the question of the constitutional power of the Government to make . this extension in time of peace. It is proposed by the Director General that Congress shall take these roads for the purpose of experimentation, to experiment with reference to a future c6n- clusion as to what will be a proper system of regulation. When we seek for the basis of the exercise of such a power by Con- gress in times of peace, we must find it alone in the commerce clause. That clause gives to Congress the right to regulate com- merce. "Regulation" is the adoption of a rule of conduct — the establishment as to commerce of the rules of conduct under which it shall be conducted. It is an immense power when it involves dealing with private property. I think it is a sound constitutional proposition to say that before private property is taken as a part of the regulation of commerce the congressional mind must at least be made up as to the regulation it intends to adopt. It must have determined that this thing must be regulated ; the congres- sional mind must have become satisfied as to the system of regu- lation that it intends to put into operation. I think we all must admit that there is a fundamental difference between experimen- tation and regulation; that the condition of the congressional mind must be different when it enters upon a program of experi- mentation than when it enters into a program of regulation. With the safeguards thrown around property by the fifth amend- ment, the power to deal with it under other articles of the Con- stitution must be clear in order to be valid. Now, without Congress having determined on a system of regulation, with Congress expressly saying that it has not deter- mined on a system of regulation, does there, under the commerce clause, exist a power to enter upon a system of experimentation? Of course, the argument is that this is a regulation for the five years ; that it is temporary regulation ; but that, it seems to me, confuses the distinction between a system of experimentation to end in five years and a system of regulation which Congress has determined on to exist for five years or more. Let me bring the matter concretely to your attention : Sup- pose you translated into a congressional act the purpose and the policies that have been urged upon you by the Director General, and you say, upon the fact of your act, "Congress, not being advised as to how to regulate commerce, but deeming it wise to find out, institutes for five years a system of experimentation, in respect to that matter, after which it will make up its mind bow to regulate commferce" 90 Now, that is the proposal here. There is not one word that I have put in there that has not been uttered from this witness chair. Senator Pomerene. That does not quite accurately state the proposition. The proposition is not that we will take the railroads for five years, but that at that time they will begin to make up their minds as to what they will do. Mr. Thom. Yes, sir; I accept the amendment. Suppose you were to put that kind of an act on your statute books ; sup- pose you were to put into legislative language the suggestion and the reasons for the suggestion that has been made here, and declare to the world that that is your purpose? HOw long do you suppose that it would take the Supreme Court to distinguish between that experimentation and the regulation of commerce? There is another view which it seems to me we ought to consider in connection with that matter. The proposal here is to take these roads for five years, for a rental; to compensate the owners by a rental for five years. When rental is paid for the taking of property the idea is necessarily involved that you can return the thing you took. If, by the very nature of your process you alter the thing you took, you modify and change its value, and you can not return it to the owner, the rental can not pay for it. Now, what does this proposed experimentation involve ? It does not involve the rental of a building, where you pay for its use; it involves not only your rental of this property, but your rental of its credit. What you take is not only the physical properties, but you take the financial management, and for a period of five years you are exercising the power not only over the physical properties, but over the credit of the carriers, and, at the end, instead of your being able to return the physical properties that you take, and which your rental is supposed to pay for, you return them loaded up with an avalanche of debt, created at your discretion, and in which the carriers had no right or power of protest or objection. But you do not only do that Senator Cummins (interposing). Mr. Thom, before you go on with that, I recall that you suggested yesterday a difference 91 between taking property, such as the railroads, and a building that may be said to be permanent in its character. But there is another point there : Suppose the Government wanted to take a building, or the use of a building, to-day, and we will assume that the fair rental value of that building to-day was a thousand dollars a year. How long could the Government take the use of that property upon the value of the present moment ? Mr. Thom. Exactly. That is a very valuable contribution, Senator. In other words, it must be a changing amount, if it is to be just compensation, if the value is changed meanwhile. _ Senator Cummins. The value of the use might rise or might fall. Mr. Thom. Exactly. Senator Cummins. And I have been in very grave doubt, in considering the taking of the use of property, instead of the property itself, as to what length of time the Government could take the use, paying the value of that use ascertained as of the time of taking. Mr. Thom. Exactly. I think that is a very substantial suggestion. Now, passing on from that point Senator Kellogg (interposing). Before you leave that point, let me ask you this : do you believe that, under the clause of the Constitution that private property shall not be taken for public use without just compensation, the Government has a right, as Senator Cummins said, to take private property — the possession of it — and to use it, and to merely pay a rental on it for an in- definite time, or for any time beyond the necessities of a great emergency in times of war? Mr. Thom. That is just, as I understand, another way of stating what Senator Cummins has said ; and I have stated that I regard that as an excedingly substantial thought in connection with this matter. Senator Kellogg. The Supreme Court has determined, has it not, that an act which takes a man's property without making provision for compensation is in itself unconstitutional? Mr. Thom. Undoubtedly. 92 Senator Underwood. In the last analysis it comes to the court to determine whether just compensation can be paid by way of rental or by way of payment for the fee. Mr. Thom. I am waiving the general propositions brought out by these questions, and I am taking this particular one in order to come to the conclusion which I think is in your mind, Senator Underwood, from the questions you have heretofore asked. In addition to taking the physical property and the con- trol over the credit of these carriers for five years, they likewise take control over the business of these properties and over the organizations of these properties. Manifestly the consequences of taking control of the credit, of taking control of the business, and of taking control of the organization, project the period of Government interference with that property beyond the actual number of years for which it was taken. They carry it beyond that. The interference — which means the taking — is not in this class of property, as it may be with respect to others, confined to the five-year term ; it projects itself beyond. Now, how far does it project itself? Is any man around this table wise enough to say? And if that be so, then, in this class of property, when you take it in time of peace for a given period, the consequences of that taking go so far into the future that you can not be satisfied that you will be able to determine it by taking anything less than a fee. Senator Cummins. That leads me to inquire what pro- vision is there in your contract for compensation or reparation for loss of business? Mr. Thom. Nothing, because that was not made possible by the act of Congress. If we had tried to get that, we would have had to go to the Court of Qaims. Your provision was that whatever they took should not be paid for at more than a certain figure, and therefore when we got that figure we got all that the President was authorized to give us. Now, it seems to me, therefore, that in connection with this question of extending this time you are met with the very serious problem of whether it will not involve, when we come to compensation, the payment for these properties in fee. 93 Now, you say, "But all that happened under this Federal- control act." Yes, but it happened while this country was at war, and I appeal to that fact as to the attitude of these carriers in respect to raising none of these questions, which were as fresh in our minds then as they are now, as an indication of their co- operative spirit, intending to stand by this Nation and to throw no obstacles in its way while it was engaged in this fearful world conflict. Senator Underwood. It has not been decided yet, except where the carriers made contracts and eliminated the question as to whether taking over in war times must be paid for by a rental or a fee? Mr. Thom. No; that has not been decided yet; at least that point has not been raised. Senator Underwood. By the contracting carriers? Mr. Thom. It has not been raised by the contracting car- riers, who are representative of the largest carriers in the coun- try. Therefore it seems to me, and we respectfully submit, that from whatever standpoint you consider this proposal to extend this period for five years it cannot be sustained. Some of the Problems of Readjustment. Now, what is the alternative? The alternative proposal is to return these carriers at once, or practically at once, to their owners. Can any considerate man fail to recognize the fact that a vast change has been created in world affairs, extending to every department of industry, by the results of this war ? What is to be the basis of doing business in the future? Is any man here yet wise enough to state what that basis will be ? The Gov- ernment itself recognizes that there is a period of readjustment necessary in bringing men back to the arts of peace, and when you discharge men from the Army there is a governmental effort made to secure for them work in peaceful avocations. War in- dustry has been dislocated by the establishment of war industries departments of the Government, which are busily engaged in trying to determine how, without shock, industry may be led back into the old peace ' ' - ues of business affairs. 94 Why should that effort at rearrangement, that policy of readjustment, that time of preparation, be denied alone to the railroads? Have they no problems to meet in this readjusted world of business ? Can they go back to the old systems and to the old conditions? If so, they stand alone in the whole world of industry. Nor is their problem the same that it was when they were taken over. It has been found necessary to vastly in- crease the scale of their operating expenses. When they come back into the hands of their owners, they come back with that load of increased expenses upon them. They must have some way of providing for it. What is the extent of that load? The operating ratio — what is known to railroad people as "operating ratio" — is the percentage of expenses to earnings. The operating ratio of the railroads for the year ended June 30, 1915, was 70.3 per cent; the operating ratio for the year ended June 30, 1916, was 65.4 per cent ; the operating ratio of the year ended June 30, 1917, was 67.5 per cent. In 1918, the operating ratios by months, have been these: January, 94.97 per cent; February, 89.96 per cent ; March, 77.46 per cent Senator Kellogg. Right there, let me ask you if that was not undoubtedly owing very largely to the condition of the weather? Mr. Thom. In the first part, perhaps, but we will come down to where the weather has been better. Senator Kellogg. I understand. Mr. Thom. April, 75.73 per cent; May, 75.49 per cent; June, 110.62 per cent. Of course, that is due to payment of back wages. July, 67.64 per cent; August, 71.40 per cent; Sep- tember, 75.92 per cent ; October, 78.35 per cent. Senator Pomerene. What is the the average for the 10 months ? Mr. Thom. I can not tell you the average. I have not got it here. Senator Cummins. A statement of that has been given. Senator Kellogg. May I insert November there? Mr. Thom. Certainly. Senator Kellogg. November, 80.74 per cent. 95 Mr. Thom, Now, in October, 1917, the operating ratio was 67.98 per cent; in October, 1918, it was 78.35 per cent. In No- vember, 1917, it was 73.29 per cent, and in November, 1918, what was the figure. Senator Kellogg? Senator Kellogg. 80.74 per cent. Mr. Thom. 80.74 per cent, as Senator Kellogg says. Senator Cummins. Can you teU the committee how much the back pay would modify those results in October? Mr. Thom. No, Senator; I do not know. Senator Cummins. In October and November? Mr. Thom. I suppose there is some overlap after the month of June, when most of it was paid, but I can not imagine that it was very great. However, I have no figures on that. Senator Cummins. The figures have been given approx- imately, and, of course, ought to come out of that. Mr. Thom. The point I am making is that the problem of a railroad, admitting the propriety of every one of these expen- ditures, and admitting that they were necessary — the problem that confronts the railroad with an operating ratio of 78 and a fraction per cent, as against the problem that confronted it when it was 67 and a fraction per cent, is a very different one. It means that there is something necessary to be taken care of. It means that there is some time necessary to adjust yourself to that new standard of expenditure. You can not plunge, without a moment's warning, with an operating ratio of 78 and a fraction per cent — 11 per cent more than for the same month of the previous year — into the business world without preparation. Something has got to be done to take care of that situation. Now, what is taking care of It? How is it taken care of, even in part? And whether it is entirely taken care of I shall not discuss. But what is the existing condition that is supposed to take care of it? With an expense account practically fixed, it has been the plan of the Director General to take care of that in the revenues and he has increased the rates. Are we to have the benefit of those increased rates when it comes back to us ? What is our reliance for the increased rates that have been established 9i by the Director General when the properties come back to us? Is there to be an undisturbed allowance by the public of this standard of rates which the Director General has fixed? And if there is not, how can we manage our problem? There is a difference of opinion— a formidable difference of opinion — among lawyers as to what becomes of the rates which the Director General has put into effect when Federal control ends. Some lawyers contend that those rates will persist until changed, the interstate rates, by the established system of dealing with interstate rates, and that the State rates, until changed by the State commissions or the State laws, will likewise persist. I shall not attempt to express an individual opinion on that subject, but I will give the argument that we will have to meet. It will be said, when a State rate established by a State statute or by a State commission is sought to be enforced by a State authority, that the effect of Federal control was merely to suspend the State laws and not to abrogate them. The Question of Intrastate Rates After Federal Control Ends. It will be said that the Federal control act in the fourteenth section puts a limit upon those rates when it says that the Fed- eral control of railroads and transportation systems herein and heretofore provided for, a part of it being the rate system, shall continue for and during the period of the war and not exceeding 21 months thereafter, and it will be said that when the Federal control acts ceases, by its terms the rates which were put in as a war measure and as a part of Federal control fall with it. That is what will be said. It will further be said that that has already been determined by one of the courts of this country. Senator Cummins. You apply that to interstate rates as well as to State rates? Mr. Thom. Yes ; I am coming to that in a moment. Senator Cummins. Section 15 covers that. Mr. Thom. Yes. This very question has arisen in the cir- cuit court for the State of Oregon, county of Baker. Maybe you know who the judge was. Senator Poindexter. Senator Poindexter. Was it a State court? Mr. Thom. Yes. 97 Senator Poindexter. No; I do not recall now who the present judge is. Mr. Thom. But, at any rate, this opinion was delivered by him and was evidently in a case well argued and well considered. Senator Watson. When? Mr. Thom. There is no date given, but it must have been in the last year, because the facts of the case were these. Some- one now tells me that it was in June, 1918. The facts of the case are these : A railroad had been taken under Federal control and had subsequently been surrendered by the Government. During the period of Federal control the director general increased the rates On that road. When it came back and Federal control as to that road had ended, then a bill for an injunction was brought by a shipper, which was a sawmill and planing mill operated in Baker, Oreg., to enjoin the federally made rates of the director general and to insist that the rates theretofore existing, as made by the State, were the legal rates and should be paid. That raised the direct question. I will not read the opinion, but I will read one clause from it. Senator Cummins. Is that one of the short-line roads? Mr. Thom. Yes. Senator Cummins. Dismissed on the 1st of July? Mr. Thom. Yes. It might have been dismissed before the 1st of July, but, anyhow, it was one of the short-line roads and one that was dismissed from Federal control. Here is the con- clusion that the court reaches on that subject: When the Government took control of and operated the road and established the rate it should collect, the State authority over the road and the State rate were suspended merely, and when the control and operation of the road was restored to the private owner, then, necessarily, it became subject to the laws of the State, and the rates fixed by the State authority, under the provisions of the statutes of the State, the only legal rates. Now, that was the conclusion that that court reached. What will be our position if Federal control ends at once, with this fixed standard or increased standard of operating expenses and with this situation about our rates? Here is the statute of a State that fixes a 2-cent passenger rate. The director general says, "It shall be 3 cents during Federal control." Federal control ends. 98 "Has the director general's act during Federal control and for war purposes" it will be asked, "repealed the statute of the State or has it merely suspended it ?" Whatever may be our conclu- sions on the subject, I think we will all admit that it is a serious question. It is a question so serious that the revenues of these carriers can not with safety be allowed to rest upon that alone. It win at least mean litigation as to what is the effect of ending Federal control over rates. Now, with this enormous level of expense, can the revenues of the carriers be safely left to rest upon the uncertain outcome of litigation? That is a question which I think should challenge the most serious attention of gen- tlemen with your responsibility. What is to become of this fabric during litigation ? What is to become of this enormous body of securities if the litigation be ended unfavorably to the railroads ? Let us take the State of Georgia. That State makes its rates from a Georgia point to a Georgia port. It is a historic controversy there, and the State has always insisted on making those rates. They are below the level of the interstate rates. The rate, therefore, which interstate traffic bears in Georgia is the sum of the water rate to the Georgia port plus the State rate from the Georgia port to the Georgia point. That is how com- merce can move into Georgia. Consequently every rate from New York, a water point, to a Georgia point by rail is affected by that situation. Every rate from Chicago, a competing market with New York, to a Georgia point is aflfected by that rate. And so, if these State rates fall, if our litigation on that subject is tmsuccessful irrespective of any acts of the Federal Government directed to the interstate rates alone and not related to the dis- crimination of State rates against interstate rates — irrespective of any such act as that — our fabric of rates and consequently our revenues, tumble like a house of cards. Now, can we look upon that situation with unconcern? But more than that, gentlemen, leaving aside the question of rates absolutely and going now to what will be the volume of business under peace conditions Interstate Rates. ' Senator Cummins, (interposing). Mr. Thom, you have not answered my question as to whether the same uncertainty which 99 exists with regard to the duration of State rates established by Mr. McAdoo exists with regard to interstate rates established by him? Mr. Thom. We made some investigation of that question yesterday afternoon to find out how the interstate rates had been filed. From the best information we can get, the interstate rates have been filed by the director general with the Interstate Com- merce Commission in the name of the carriers — in other words, in accordance with the act to regulate commerce — and if that be true those rates have the support not only of the director general, but of having been put in under the act to regulate commerce, and may persist until changed by the Interstate Commerce Com- mission. Senator Watson. But the Interstate Commerce Commis- sion did not have anything to do with passing upon those rates? Mr. Thom. No; they did not have to pass on rates under the act to regulate commerce, either. Senator Watson. Certainly not; but I was wondering whether they had given their approval to those rates or taken any action in regard to them. Mr. Thom. I suppose, Mr. Clark, that some of the rates made by the director general have been attacked before your commission, and have been passed upon, have they not? - Commissioner Clark. Yes ; except that in no case has the commission entered an order reducing in cents per hundred pounds, or other unit, the rates fixed by the director general. The cases we have passed upon have required only the removal of undue prejudices, which does not effect changes in the rates from one place to another. But if I may, without intending to inter- rupt you, I would like to say with regard to what you said about the filing of those rates, that they are filed in the name of the United States Railroad Administration, W. G. McAdoo, director general, on every one of the tariffs. Mr. Thom. But we were told that, in addition to that, there was also the name of the carrier on it. '» Commissioner Clark. As indicating the lines over which the rates applied. 100 Mr. Thom. If it be true that these rates were filed by the director general, and not by the carriers, they would not con-, form to the act to regulate commerce, and the same problem would exist with respect to them. Commissioner Clark. I think I can clear that point up, if you will permit me. Mr. Thom. I shall be very glad to have you do it. Commissioner Clark. There is no rate that has been filed with the commission by the director general that is in conflict with any outstanding order of the commission and which could be invoked in the same way that this Oregon court invoked State commission-made rates in Oregon. This whole plan of Federal control was adopted by the Congress as a war measure, sanctioned by the Federal control act. The President was au- thorized to initiate rates by filing them with the Interstate Com- merce Commission. The President was of the opinion that this increased level of rates was necessary as a war measure. The question naturally arose as to what complications would be created if the President filed rates which would, in substance, Be in conflict with the maintenance requirements of an order of the commission that was outstanding and which had not expired by statutory limitation; and, after consideration of the whole situation, and in conformity with the wishes of the director gefl- eral, and to avoid all of these complications, we struck off the maintenance requirement from all our outstanding orders, so that there would be no such conflict. Therefore, I say that there is now no rate on file with the commission for federally controlled roads that is, or would be, in the event of immediate termination of Federal control, in conflict with an outstanding order of the commission. And, therefore, they would be the only rates that are on file with the commission, under which a carrier could con- duct transportation. Senator Underwood. The rate then, Mr. Gark, would stand, in your opinion, until changed? Commissioner Clark. Senator Underwood, we have held in the case of the railroad that was taken under Federal control, and that by virtue of the director general's action and order, filed 101 increased rates, and was subsequently released from Federal control, that the increased rates, being the only rates on file with the commission for that carrier, were its legal rates until changed in the orderly and regular manner. Senator Kellogg. I would like to ask Mr. Clark right there : Is it also the opinion of the commission that if the roads were released, the State statutes providing for rates and the State orders made under authority of law, as to intrastate rates, would go into effect? Commissioner Clark. The commission has no crystalized consensus of view on that point. Senator Kellogg. If those State rates did go into effect, they would be bound, in many places, by the competitive force of those rates to drag down the interstate rates, would they not? Commissioner Clark. They would have a very decided effect upon the interstate rates. Senator Cummins. The commission has held that section 14, which provides that the Federal control of railroads and transportation systems herein and heretofore provided for shall continue for and during the period of the war and for a reason- able time thereafter, not exceeding 21 months, does not cancel rates that are established by the Director General with the ex- piration of that time? Commissioner Clark. Yes, sir. Senator Cummins. So that it may be assumed that it is the present opinion of the commission that those rates will continue ? Commissioner Clark. It is the definite view of the com- mission that as to any road, or as to all of the roads, if Federal control ceases, the rates then on file with the commission are the only rates under which that carrier can transact business or conduct transportation. Mr. Thom. You are confining yourself to interstate rates in that remark? Commissioner Clark. Yes; I am speaking solely of inter- state rates. 102 Mr, Thom. Yes. Now, gentlemen, I was about to address my- self to another one of' these problems of the railroads, affecting their revenues after Federal control is ended, if ended now. You will remember that the carrying capacity in coastwise vessels was absolutely destroyed by the exigencies of war. Where ships were big enough and valuable enough they were drafted into the service of the United States. The menace of the sub- marine had its efifect upon water-borne coastwise traffic. Taking these causes together, the water-borne coastwise traffic during this period of Federal control has been thrown onto the rail- roads; it has been thrown inland — taken from the sea. That affected the volume of railway traffic. Now, restore your coast- wise trade on vessels; reestablish your lines. Are we not con- fronted with the effect that that will have upon the volume of traffic available to the railroads ? Senator Watson. Do you know what that amounted to? Mr. Thom. No, sir; but it was very large. So when we come now, even with stable rates — even if the rates are unaffected by the transition — we have still to be confronted with the ques- tion of the volume of our traffic when the roads come back to us. Senator Cummins. You include in that traffic through the Panama Canal? Mr. Thom. Yes, sir. Not only in the concrete instance that I have alluded to of the reestablishment of vessel-^orne traffic, but no man is wise enough to foresee what the effect of the reorganization and readjustment of industry is going to have upon the volume of railroad traffic. All of us were amazed within the last year or two to hear that a new city had grown up on the James River near the city of Petersburg — Hopewell. That city has now disappeared almost entirely. The need of it for manufacturing powder has disappeared with the disappear- ance of the requirements of war, and Hopewell no longer exists except in a scattered and unimportant way. Now, that process is going on all over the country. Industries established and which were great tonnage and revenue producers during the war are not now operating and are in a condition of transition or of abandon — transition back to some other line of industry or of abandonment of the whole field of their operations. 103 Senator Cummins. What effect will the increase in land rates have upon water-borne tra.ffic? Mr. Thom. Land rates? Senator Cummins. The increase in railway rates — what effect will that have upon the volume of water-borne traffic? Mr. Thom. Of course, that will throw more traffic on the water, naturally. Now, is it wise to project us back into an industrial world disturbed by all these conditions that I am now speaking of? With the industrial world in a process of recrystallization, where lines of traffic and volumes of traffic and subjects of traffic are all more or less matters of future evolution, to project us back, with this greatly increased scale of expendi- ture, into an uncertain world of that sort, it seems to me, would be unthinkable. No man can forecast what the results would be. In dealing with a subject of this sort I am always reminded of what Mr. James C. Carter once said about the difficulty of making a code to cover the future law. He said: "You might as well ask the naturalist to classify the fauna and the flora of an un- known world." And yet, here this great industry, which is in times of peace as it has been in times of war, the foundation of American industrial life, it is proposed, shall be projected back into that condition of uncertainty where its rates are un- certain and where its volume of traffic is uncertain and where its expenditures have been advanced to this high point and are still uncertain. Now, can a thing such as that be justified by any man who has taken a fair view of the future of these companies ? The Chairman. What would be the conditions under which you would suggest they be returned? I mean by that, what condition would be propitious, in your opinion, for their return? This is going to be a very uncertain period of readjust- ment ; it is going to take more or less time. Now, do you think 21 months would be sufficient time ? Mr. Thom. I think we ought to wait until Congress has had an opportunity of legislating, and then hand the roads back. But I think that the idea of turning these roads back, unassisted by legislation by Coi^jress, into the untertainties and darigfers and 104 difficulties which I have tried to bring to your attention, would be something so unjustified as almost to be, as Senator Cummins said the other day, criminal in its nature. Senator Watson. Your position is, then, Mr. Thom, that you are opposed to the five-year extension first, and you are opposed to turning the railroads back until Congress shall have had ample time to legislate with respect to them? Mr. Thom. And I think that 21 months after the war is ample time. Senator Watson. Precisely. Then you would favor a resolution fixing specifically the term of 21 months as the time within whidi the roads should be turned back? Mr. Thom. I hope that no such thing as that is necessary. Senator Underwood. I understand you want constructive legislation, and the minute that is passed you want the roads to go back? Mr. Thom. Exactly. Senator Watson. But the point, I understand, is that there is a threat to turn them back now ? Mr. Thom. Yes. How serious that threat is I do not know. I can not believe that any responsible administration would want to turn them back without at least giving Congress an opportunity to legislate, nor will it anticipate Congress in the act of legis- lating. Senator Watson. That is a matter of y^r personal opin- ion, Mr. Thom, as to whether or not a man would do that? Mr. Thom. That is so. Senator Watson. But I understand there is a threat to turn then^ back. I say "threat" because I think it is a threat. Now, the question is this : Is it the business of Congress to sit here and permit that uncertain state of affairs to continue, or can they not fix a definite time when the roads shall be turned back? Mr.' Thom. I think that if Congress saw that great dis- aster was about to be inflicted on the American nation it would he its duty to act to prevent it. 105 Senator Townsend. In the course of your discussion are you going to make suggestions as to what legislation should be enacted ? Mr. Thom. Yes, sir; I am. Now, gentlemen, I want to call attention to this, as a conclusion of what I have said so far : If this proposal to return the roads in five years is adopted, complications will have been created where it will be a serious question whether they can ever be returned. If the alternative of returning them now, without preparation, is adopted, then private management will be so discredited by the inevitable results that the same tendency of national thought will be started against private ownership and in favor of some other system; so that on either horn of this dilemma which has been presented here — the five-year extension or the immediate return — the result must be to force the thought of the public in the direction of one solution of this problem, and that solution not private ownership. Senator Cummins. This may be rather a leading and diffi- cult question to answer, but I would like to have an answer, if you feel at liberty to give it : Suppose you knew that if Congress at this session does not extend the time to five years, in accord- ance with the recommendation of Mr. McAdoo, the President would return the railroads just as they are, and without legisla- tion, on the 4th of March; what would be your position then? Would you rather have them back, with all the confusion and difficulties in the way, or would you rather take the five years? Mr. Thom. Personally speaking, I would rather have them back. I think the five-year extension is an experiment that can lead to but one conclusion, and that is the Government will find itself in such shape that it will never give them back. Now, Mr. Chairman, I have arrived at the point of my discussion where I want to take up the plan that we propose. But a few minutes not remain before the end of the session of this morning, and I do not think I could make any progress if I started on that before the next session. Senator Kellogg. If that is the case, I would like to sug- gest an executive session for a few minutes. I want to offer a resolution, if the members feel that they could spare the time now. 106 The Chairman. We have 10 minutes yet. You move then, that we go into executive session. Senator ICellogg. Yes. (The motion was unanimously agreed to.) The Chairman. The committee stands adjourned, with the exception of the executive session, tmtil to-morrow morning at 10 o'clock, at which time Mr. Thom will reappear. Mr. Thom. Yes. (Whereupon, at 11.50 o'clock a. m., the committee adjourned until Thursday, January 16, 1919, at 10 o'clock a. m.) Testimony. Mr. Alfred P. Thom — resumed. Thursday, January 16, 1919. The committee met, pursuant to adjournment, at 10 o'clock a. m., Senator Ellison D. Smith (chairman) presiding. The Chairman. The committee will come to order. Mr. Thom, you may proceed with your argument. Mr. Thom. Mr. Chairman and gentlemen, upon reviewing, in my own mind, what I said yesterday, I find that, in connection with the discussion of the question of the constitutionality of the proposed extension of five years, I omitted one point entirely, to which I desire to call attention; and, with permission of the chairman, I would like to mention that point now and have it reported in connection with that part of my presentation. The Chairman. Very well. Constitutionality of "Five Year Proposal," With Reforence to Ssction 10 of Railway Control Act. Mr. Thom. Entirely independently of die points to which I asked the attention of the committee in regard to the consti- tutionality of the proposal, and confined to the proposal, as I understand it, to extend this system for a period of five yfears, 107 I wish to have the constitutionality of the proposal considered in connection with the provisions of section 10 of the act, the first sentence of which I will read : That carriers while under Federal control shall be subject to all laws and liabilities as common carriers, whether arising under State or Federal laws or at common law, except in so far as may be inconsistent with the provisions of this act or any other act applicable to such Federal control, or with any order of the President. The effect of that provision is to give the President the power, by his orders, to override the provisions of the act to regulate commerce. What he says on the subject of regulation becomes supreme over the acts of Congress; and, by section 11 of the act, any disobedience to those orders is made a crime. Now, that, of course, is justified during war times, by sec- tion 16 of the act, which declares this to be emergency legislation enacted to meet conditions growing out of war. Aside entirely from the question as to whether that would be valid even as a war measure, you are confronted with the question of whether it is valid in times of peace. Bearing in mind that the provision is that existing laws governing common carriers, made by Federal authority or by State authority, shall continue in existence, unless otherwise ordered by the President, and the provision that dis- obedience to his orders is made a crime, you are confronted with the question of whether or not it would be a valid exercise of legislative power to continue that power in the President in times of peace. Now, your power is to regulate commerce; Congress is the only body that can regulate commerce. There is no constitutional authority for the President to regulate commerce, and you can not delegate to anybody else, or to any official, or to any tribunal your legislative power. So that if this extension is made, it is made as a regulation of commerce, and under the power of Con- gress to regulate commerce ; and the proposal hei-e is not for Congress, during that period of time, to regulate commerce ; but that it shall confer the power upon the President to regulate commerce. Now, I submit that in times of peace, whatever may be the rule in times of war, it is unconstitutional to confer upon the 108 President power to regulate commerce, and that that is the necessary effect of the proposal to extend this bill for a period of five years. Senator Underwood. Mr. Thom, I don't exactly grasp your position there. I concede what you say in respect to the sole power to regulate commerce being in Congress and not in the President ; and we might pass drastic laws stating that the freight rates and passenger rates shall be so much, without any give or leeway to them; but Congress has exercised that power by dele- gating it to somebody else. Now, do you make a distinction between our delegating our powers to the Interstate Commerce Commission, for instance, which is accepted by the courts as within our right to do, and our delegating them to the President? Mr. Thom. Not at all. Senator Underwood. Not as the President, but to Wood- row Wilson? Mr. Thom. Not at all. Senator Underwood. Then I do not exactly grasp your idea. Mr. Thom. The power that you have delegated to the Interstate Commerce Commission and the power you have dele- gated to the President are essentially different. Senator Underwood. I will ask you to repeat it, so that I may have it clearly in my mind. Mr. Thom. Yes. Now, you have delegated to the Inter- state Commerce Commission the power to apply a congressional rule of rate making. Senator Underwood. Yes. Senator Kellogg. Reasonable rates. Senator Underwood. We fix the basis, and they apply the rule. Mr. Thom. Yes. My point is that you do not do this with respect to the President. Senator Underwood. That we give him an arbitrary power? Mr. Thom. Yes ; and not only in respect to rates. What I am attempting to illustrate has no reference to rates alone but 109 to the entire scope of the act to regulate commerce, dnd all other acts of Congress and all State laws. Of course, the State laws do not make any difiference, for the purposes of this argument; but the point that I am making is that the clause I have read is broad enough, without establishing any rule to guide the Pres- ident, to give him entire authority over the field of legislation by Congress on this subject. I will read it again, so as to make my point clear : That the carriers while under Federal control shall be subject to all laws and liabilities as common carriers, whether arising under State or Federal laws or at common law, except in so far as may be inconsistent with the provisions of this act or any other act applicable to such Federal control, or with any order of the President. Now, that is not confined to rates; it is not confined to anything. It covers the whole field of regulations and establishes no standard by which the President is guided, but gives him the arbitrary power, by his orders, to override the legislation of Congress to any extent which, in his discretion, he may see fit. Senator Cummins. Mr. Thom, I think it was unconsti- tional, even during the war, to grant any authority of that kind to the President; but assuming that we could pass a law repeal- ing all our own laws, and simply delegate to the President the power to regulate commerce, which we have been exercising, is there not a good deal of difiference between doing that and passing a law which confers upon the President the right to repeal or abrogate any law that Congress might have enacted ? Mr. Thom. There is a diliference of a very substantial nature. Senator ; but I can not agree with the assumption, if you mean it, to put out as a possibly valid thing that Congress may delegate to the President the power to regulate commerce. Senator Cummins. I have said that I think we could not do it even in time of war, much less in time of peace. Mr. Thom. Exactly. Senator Cummins. But even then an act of Congress which simply attempts to authorize the President upon any subject — I do not care what it is — to repeal or set aside an act of Congress, is subject to other objections than mere inability of Congress to delegate a power granted in the Constitution. 110 Mr. Thom. Yes; and it is effectively answered, it seeni.s lo me, and finally answered, by the realization that the repeal of m law is legislation, just as much as the making of a law is legis- lation; and you can not delegate the power to repeal any more than you can delegate the power to make. Senator Cummins. Suppose we had simply said at the beginning of the war that the President is authorized to repeal or set aside all laws that Congress has ever passed upon any subject; that would be clearly distinguishable from an attempt to confer upon him a specific power which the Constitution had granted to us ? Mr. Thom. Yes; and here it seems to me if this were proposed to be done for five years, passing the question of what was possible under the war power, that it would be an entire abandonment by Congress of its constitutional function, and put- ting it into the hands of another department of the Government, as to this subject matter. Senator Pomerene^ Is not that the purpose of the request for a five-year extension? Mr. Thom. Well, I do not know about that, Senator; but I would like what I have said on this subject to be incor- porated with my remarks of yesterday, when I was discussing the constitutional features of this case. Average Operating Ratio for Eleven Months of 1918. Now, I was asked yesterday by one of the Senators for the operating ratio for the 11 months ended November 30, 1918. What I read was the operating ratio, month by month. I was asked for the average. That average is this: For the 11 months ended November 30, 1918, the operating ratio was 80.73 per cent, as compared with 70.18 per cent in 1917 for the same months. Senator Pomerene. Ten per cent increase. Mr. Thom. Yes. I was asked further what would have been the operating ratio for June, 1918, with back pay excluded — with the payments that were made as back pay excluded. Exclusive of this back pay the operating ratio for June, 1918, would have been 76.80 per cent, as compared with 67.37 per cent in June, 1917. Ill Senator McLean. You do not know what the average operating ratio would be, taking out all the back pay in 1918? There was back pay to come out in other months than June, as I understand it. Mr. Thom. No Senator; I do not know what that would be. Would you like to have that worked out, if he can get it? Senator McLean. Well, if we are to make an accurate comparison, it seems to me that the back pay should be eliminated from all the months. Mr. Thom. We can hardly make the comparison then, for the reason that during some of the months these increases in rates were in effect. Senator Kellogg. After July 1 you could eliminate the back pay ? Mr. Thom. Yes. Senator Kellogg. And as that was the time that the rate increases went into effect, you could make a comparison from July to January ? Mr. Thom. From July to January? Senator Kellogg. Yes. Mr. Thom. But that would be during the time of the in- creased rates. Senator Kellogg. Yes; and that would be the only fair comparison. Senator Underwood. I beg your pardon, but I do not see why we should not include the back pay. The proposition that Mr. Thom is discussing is the question of continuing the pres- ent status, and this pay is in the present status and a part of it ; and it seems to me that in comparing last year's work and last year's operation of the railroads the back pay, or whatever was paid — ^back pay or any other kind of pay — it was not "back pay," because the director general says he had proAised it. The Chairman. In other words, it was a part of the oper- ation by the Government, and entered in as an item of expense ? Senator Underwood. Surely. Senator McLean. Would that back pay be continued in the future? 112 Senator Underwood. It is continued now. Senator Kellogg. The increase is continued. Senator Underwood. I understand tliat the director gen- eral agreed to work out a plan for an increase of wages, and agreed with the men who were operating the roads that when he had worked out his plan and had reached a satisfactory basis he would grant them that increased pay back to the 1st of Jan- uai-y. That is really not '"back pay" at all. Senator Cummins. The difficulty with that, Senator, is that the back pay ran to the 1st of January and the increased rates or revenue did not take effect until the 1st of July. Senator Underwood. Well, that is true; but that is one of the items in the proposition; but, so far as the back pay is concerned, I do not see that there really was any "back pay" at all. The Government just deferred paying these men, from January until July, a part of their wages that they agreed to pay them. Senator KLellogg. What I thought about that was that the pay, having been fixed anyhow in the months of July, August, September, October, November and December, to take the regu- lar pay, without adding any back pay, and to take the regular increased rates, would show a fair comparison between this year and last year. Mr. Thom. I misunderstood you for a moment. Senator; but what you mean is to let the advanced scale of rates apply during those months? Mr. Kellogg. Yes. Mr. Thom. But to eliminate any amounts that were ap- plicable to the previous months? Senator Kellogg. Yes; just take the regular wages as in- creased. Mr. Thom. Yes. Senator Cummins. Mr. Thom, are the expenses of what is known as the "administration" included in the ratio that you have given us? Mr. Thom. No. Senator Cummins. Why do you not put them in? 113 Mr. Thom. I do not know what they are. You have asked tor them. Senator Cummins. They are just as much a part of the expenses of the railroads as the wages of the brakemen. Mr. Thom. You ask me why I did not put them in. I did not make this statement. Senator Cummins. Oh, I see. Mr. Thom. But I am taking it as they presented it to the Interstate Commerce Commission — ^their figures — and Mr. Mc- Adoo, or someone, told you on the stand here that the overhead expenses of the administration — the central body — were not in- cluded. Then somebody here — perhaps the whole body — ^asked for a statement of what those figures were, and I assumed they would be furnished ; but they are not in these figures. Senator Cummins. They are not in here, and that would increase the ratio of operating expenses to revenue for the pres- ent year. Mr. Thom. Yes. Not only that. Senator, but it is also nec- essary for you to remember this: That in the figures for 1917 were included the corporate expenses of the carriers, the sal- aries of their presidents, etc., and their general expenses of maintaining and keeping up their corporate life. All those amounts were in the figures for 1917 and previous years. Now, that expense has been put oflf on the corporations by the Railroad Administration, and they no longer bear that. Senator Cummins. I would like to see a table made up on the proper basis, including all those expenses, so that we might know exactly what they aggregate. Senator Watson. I presume one reason they have not done that is because they could not get them ? Mr. Thom. Who has not done it? Senator Watson. That you have not, because you could not get it? Mr. Thom. Yes; that is true. Senator Watson. My recollection is that Mr. Clark stated — and if I am in error he can correct me, inasmuch as he is in the room now — that they have not been able to get the expenses of the administration up to the present time. 114 Senator Cummins. But I assume there is no secrecy about it? Senator Watson. Oh, no. Senator Cummins. And that Mr. Thorn, or some of his assistants, coufd get those figures by asking for them. Mr. Thom. I have misunderstood the facts, if those figures have not been asked for by this committee. Senator Watson. They have been; and the Director Gen- eral promised to furnish them. Senator Kellogg. Those figures have been asked for by the committee ; but even those figures, as Senator Cummins says, will not include the corporate expenses which were paid by the corporations themselves and which are not included in the oper- ating expenses. Senator Pomerene. That is, the so-called "organization expenses ?" Senator Kellogg. Yes; the salaries, etc., of the general counsel, and various officers of the organization. Mr. Thom. To make the two things comparable, as I un- derstand it, you would include, as was done in the figures of 1917, the corporate expenses, and in the figures of 1918 you would include the things that took their place — the overhead ex- penses of the administration — and make allowance for the fact of the corporate expenses having been put over on the cor- porations ? Senator Pomerene. No. You would have to include those, would you not, if you were giving us the ratio between the oper- ating expenses and the operating income ; that is, unless you go on the theory that the corporation or organization expenses were not a legitimate charge? We can not go on that theory, and I dare say that no one else would. Mr. Thom. My proposal was to include them. Senator, just as yours seems to be. The Chairman. But would it not be the fact, Mr. Thom, that in the amount you allowed the railroads as their earnings you took care of that; and, therefore, it comes out of the earn- ings of the road? You have set aside that amount in the com- 115 pensation allowed to take care of these expenses, and then in' addition to that you would add what the Government had as- sumed to pay its' operators, to what it earned in excess of the earnings given you? Mr. Thom. No, Senator; here is what has happened: VV^hen the figures of our standard return were arrived at, there was deducted, as an operating expense, all these corporate expenses I am alluding to, so that when the rent money, as I will call it for short, is paid to us, it is reduced by the amount of our cor- porate expenses, because that is a part of the operating expense that was deducted. Now, notwithstanding the fact that we paid it in a reduction of our rent, we are paying it over again, be- cause the administration says that it is not a charge that it will assume. That is what has happened to the corporate expenses. Senator Cummins. Whether that is a correct theory or not, what I would like to see — and I am sure the other members of the committee would like to see — is a comparison with reference to the cost of transportation in 1918 and 1917; what it cost the people of this country to get the transportation which they had. Now, in making that comparison, you would not put in the corporate expenses for 1918? Mr. Thom. No. Senator Cummins. Because the people did not have to pay those expenses? Mr. Thom. No ; not for that purpose. Senator Cummins. For transportation? Mr. Thom. No ; not for that purpose. As I understand it, this committee has asked for those very figures, and will have them before it. Of course, they are not available to us any more than they are to anybody else — any member of the public. Now, Mr. Chairman, I wish to ask your attention to the proposal made by the Association of Railway Executives for a future plan of Government regulation. I would like, for pur- poses of convenient reference, to have this proposail which has been read to you by Mr. Cuyler inserted at this point of my remarks. Senator Watson. Was not that included in the report hitherto published? 116 Senator Cummins. Yes; Mr. Cuyler read it into the record. Senator Watson. Then, Mr. Thom, you would not want to read it into the record again? Mr. Thom. What I want is that if anybody hereafter by accident should read what I have to say, they would find the plan that I am discussing in connection with my remarks. Senator Watson. Very well. The Chairman. Without objection, that will be done. (This plan appears on pages 1 to 8 of this document.) Senator Pomerene. Does that plan represent the unanimous views of your organization? Mr. Thom. I think that I will have to answer that in this way: There was some discussion of certain features of it at our last meeting in Philadelphia, and one or two gentlemen dissented in the discussion from certain features ; but when it came to a vote, I do not recall that there was any negative vote. It is the action of the association, and if there is any dissent from any feature of it, it is not numerically large. Senator Pomerene. What I had especially in mind — and it may be that a second reading of the plan would satisfy the doubt or the thought I had in mind — ^was that you speak of a "secretary of transportation." Now, was it your thought that that should apply alone to railroad transportation ; or should this secretary of transportation have jurisdiction and control of all water trans- portation and any truck transportation systems that might be established? Those are important elements in considering the general proposition of transportation; and I was interested to know whether you intended to embrace all transportation within the jurisdiction of a secretary of transportation? Mr. Thom. Senator, we have felt that we ought to un- dertake to speak alone for the kind of transportation that we represent. Senator Pomerene. But there is such an interrelation be- tween water transportation, especially, and rail transportation that, assuming that we should arrive at the conclusion that there should be a secretary of transportation, I could not see any logical reason for excluding from his jurisdiction the water 117 transportation or truck transportation or any other system of transportation. Mr. Thom. And neither do I; but we, of course, feel a hesitancy in undertaking to bespeak the sentiments of these other interests. If you ask me my personal view, I agree with you. I think his jurisdiction should extend over the whole field of interstate and foreign transportation, so far as the Gov- ernment's hand reaches it at all. Senator Pomerene. In other words, it was because of your innate modesty that you did not want to speak for the other interests? Mr. Thom. Yes; I am trying to introduce myself to you in that role. At the very outset of your deliberations, you are met with the necessity of determining the fundamental ques- tion of whether the future system of regulation of commerce in the United States is to be by Government ownership or by private ownership. If you decide in favor of Government own- ership, that, of course, will put on one side a great deal of the discussion which you will hear, because it will be utterly in- applicable. In what I shall say, I shall assume that for the time being at least, whatever may be the development of the fu- ture, Government ownership will not be selected by Congress as a method of regulation. I shall not attempt, Mr. Chair- man, to discuss the merits or demerits of Government owner- ship. I do not know that I could add to the fund of argument or information that has already been presented, in one form or another, and available to this committee, on that subject. Capital and Investment in Railways. I am merely, in presenting this side, trying to interpret as I see it the public sentiment of this country as not at the mo- ment ready to do otherwise than to continue the system of pri- vate initiative and ownership. And what I shall say, therefore, will be directed toward the aspect of this case which relates entirely to the system of regulation, which involves the owner- ship and operation of these instrumentalities of commerce by private indivtduals. 118 There is one thing which, at the beginning of the discus- sion, I think we should also have understood: If the public mind of the country and the mind of Congress is not now con- vinced that there is not a bountiful and adequate supply of pri- vate funds available for investment in this class of industrial activities, and that all that is needed is the hand of regulation and control, we might as well proceed no further, because we are convinced that Congress would be proceeding upon a false assumption ; we are convinced that it can no longer be said that money, capital, is waiting for investment in this class of enter- prise; that inducements for its investment are already strong enough; and that all that is needed is for Congress or the Gov- ernment in some aspect of its activities to lay its hand upon it and regulate how it is to be used. Our belief is, and the belief on which I shall attempt to discuss this question is, that capital has now to be attracted into these enterprises or it will not come; and unless Congress is willing to accept that view, and if it should legislate upon the theory that it does not have to be attracted but must be checked and controlled, then my belief is that every moment you devote to this subject is wasted, be- cause your assumption will be not supported by the actualities of the situation and you will be legislating in favor of a situa- tion that will crumble at the first frost that comes upon it. Conditions in this country have been going on, tendencies have originated and are in operation, forces have grown into controlling power, that have made the flow of capital into these enterprises come to a standstill, and it is no longer available. I do not think, as I shall try to indicate to you, that the fact about this matter is a matter of statistical treatment ; I do not believe that you can correctly appraise the present financial situation by looking at a table of figures as to results of opera- tion. I think you have got to go beyond that, as I shall attempt to develop as I proceed. But at the very outset I wish to call attention to some things that the figures show, in this very in- teresting table that was presented by Mr. Commissioner Qark. The committee will appreciate that the year 1910 was one of the epochal years in the matter of railroad regulation. In that year Congress carried its system of regulation further than it 119 had ever done before. Since that year the railroads have been operating under this enlarged Federal control. I wish, there- fore, to ask your attention to some of the figures which the sta- tistics of this country reveal in respect to the operation of rail- roads, taking the year 1910 as a base. Senator Watson. Why 1910, any more than any other year Mr. Thom. Because, as I have just said, there was a new system of regulation that went into effect at that time. Senator Watson. And that is the reason you take that year? Mr. Thom. Yes. Now, from this statement, if you gentle- men have it before you — I would like for you to be able to fol- low the figures. Senator Pomerene. Is that the statement introduced yes- terday ? Mr. Thom. No. The statement introduced by Commis- sioner Qark a few days ago. In the year 1910 the operating income amounted, in round figures, to $826,000,000. In 1911 the operating income had fallen to $768,000,000, in round figures — a decrease, in round figures, of $58,000,000. In 1910 the investment account of the carriers was, in round figures, $14,557,000,000. In 1911 that investment figure had grown to $15,612,000,000. Senator Pomerene. Do you use that term "investment fig- ure" as interchangeable with the book cost of the property? Mr. Thom. The book investment; yes, sir. And I want to explain here that whatever criticism there may have been in the early days of that book account, I think it will be admitted that every dollar that is shown in this book investment account since 1907, when the Interstate Commerce Commission changed its rules on that subject, represents an actual dollar; so that where there is an increase it means an increase in so many actual dollars, whatever may be the dispute as to the early book in- vestment figures. Since 1907 the investment accounts of these railroads have been kept under the strict supervision of the In- 120 terstate Commerce Commission, and when a dollar is added to book investment it means a dollar invested. So that between 1910 and 1911 there was an increase in investment of $1,055- 000,000. Senator Cummins. I want to understand that, Mr. Thom. Do you mean that if a company issued $1,000,000 of stock and sold it at 90 cents on the dollar, the book investment would show only an addition of 90 per cent? Mr. Thom. Yes. Senator Cummins. It excluded all commissions? Mr. Thom. It showed the dollar invested. It had noth- ing to do with the capitalization side. It showed the dollar invested. Am I not right in that, Commissioner Qark? Commissioner Clark. I think so. Senator Pomerene. Let me understand clearly, following the question of Senator Cummins : That would not show the commissions paid, then? Mr. Thom. This is the investment. It is not the expense of raising capital at all. It is the investment. Senator Cummins. It shows, you say, the net amount that was raised by whatever means, and that actually came into the hands of the company? Mr. Thom. Leaving aside the question of how they got it, from whatever source, it shows the dollar invested — 100 per cent. Senator Pomerene. In physical property? Mr. Thom. Yes ; that is what it shows. So that from 1910 to 1911 there was a decrease in operating income of $58,000,000, and an increase in investment of $1,055,000,000. Senator Cummins. One more question, Mr. Thom, so that it will be perfectly clear: This investment account, of course, shows investments in property from surplus earnings, as well as from any additional capitalization ? Mr. Thom. Yes; from whatever source they come, that is true. But there is the fact, as I have read it, as shown by this paper. 121 Now, passing to 1912, and comparing 1912 with 1910, we liave an operating income which has fallen to $751,000,000 in round figures, a decrease of $65,000,000, while the book invest- ment has gone up to $16,004,000,000, or an increase, as com- pared with 1910, of $1,447,000,000. In 1913 we have an operating income of $831,000,000, which is an increase of $5,000,000 over 1910, and a book investment of $16,588,000,000, or an increase in book investment of $2,031,- 000,000 over 1910. In 1914 the operating income fell to $705,(XX),000, a decrease from 1910 of $121,000,000, while the book investment had risen to $17,153,000,000, or an increase of $2,596,000,000 over 1910. In 1915 the operating income had fallen to $728,000,000, which is a decrease of $98,000,000. The book investment had risen to $17,437,000,000, an increase over 1910 of $2,880,000,000. In 1916 the operating income rose to $1,043,000,000, which was an increase over 1910 of $217,000,000, while the book in- vestment had risen to $17,684,000,000, or was greater than in 1910 by $3,127,000,000. Now, I invite your attention to the fact that in but two years from 1910 to and including 1916 was there as great an operating income as in 1910. I invite your attention again to the fact that the property which produced that result had risen from 1910 to 1916, so as to show a greater investment in 1916 over 1910 of the extent of $3,127,000,000. Now, what is the significance of those figures? Senator Watson. During that time, as Mr. Clark testified the other day, how do you account for the fact that the surplus accumulated from $1,371,000,000 to $1,935,000,000— an increase of practically $600,000,000 in the surplus during that same time? Mr. Thom. I am coming to that, Senator, but I will an- swer it briefly now. That entire surplus, speaking generally, came from other sources than the operation of the railroads, as I will show in a moment. Senator Kellogg. I suppose it was also invested in prop- erty, rather than being carried as cash in hand, was it not? 122 Mr. Thom. Oh, yes; in some kind of property; I do not know what it was. Now, we are talking about credit; we are talking about why men should put more money into these railroads. Here we have an increase in investment in these railroads in 1916 of $3,127,000,000 over 1910. Now, what was its return from op- erating income? How much did you earn on that? You had in 1911, $58,000,000 less to pay on the increased investment than you had in 1910. Now, remember, gentlemen, you are busy with the question of whether money is seeking this investment. You are asked, or I am asked, or somebody is asked to put more money in. Well, here is somebody who has put in $1,055,000,000 between 1910 and 1911 in these enterprises, and the results of operation to pay a return on that are $58,000,000 less in the second year than in the first. In the third year, to wit, 1912, although there is an additional capital to have a return on of over $2,000,000,000, you have $65,000,000 less of operating in- come to pay it with. In 1913 you have an increase in operating income, as a return on your additional capital, of $5,000,000; but you have over $2,000,000,000 of increased investment to pay it on, and that means that for the first year in those three, and that the only year between 1910 and 1916, you have something to pay on your new capital. And how much is it? It is $5,000,000 to pay a return on $2,000,031,000, or one-quarter of 1 per cent. In 1914 you have, as compared with 1910, $121,000,000 less to pay a return on an additional capital of $2,596,000,000. In 1915 you have $98,000,000 less than you had in 1910, and you have $2,880,000,000 of additional capital to pay on. In 1916, which was the banner year in the entire history of these roads, you have $217,000,000 more than you had in 1910, but you have $3,127,000,000 more of capital to pay on, or seven- tenths of 1 per cent. [Corrected later by Mr. Thom to read "seven per cent."] Senator Pomerene. That is. on the increase? Mr. Thom. Yes; the increase. Now, we are talking. Sen- ator, about what is going to induce an increase in the invest- 123 ment; that is what we are talking about. We are dealing here with the question of credit and the attraction of capital, and we take capital which has gone into these roads — some from earn- ings, some from other sources — and we find out that there is nothing in the operating income of these properties that gives any guarantee at all of a return on the money. Senator Underwood. That is, you mean taking them on an average, Mr. Thom? Mr. Thom. Of course, that is what I mean. I am talking about the general railroad situation. Senator Underwood. I am not combating your argument, because I think it is the crux of the whole proposition; but to come right down to an analysis of it — and that is what we have got to do before we undertake to legislate — is not the real analy- sis of these figures this, that railroad capital did increase over $3,000,000,000 in this period of time you have referred to and the general operating revenue was falling off in that time; but, nevertheless, there were a number of investors who did invest money to the extent of $3,000,000,000, because it is there on the books? And the way that happened was that some of those roads during that period of time were making ample revenue, and, therefore, they could float their bonded indebtedness and their other securities, whereas some of them were not and were getting behind all the time. Is not that the real analysis of it? That is how you got your capital increased. Now, we are con- fronted with that same situation right now. There are railroads which, if we turned them back to their private owners to-day, could go ahead and issue their securities and maintain themselves ; but if we did not look at this proposition from the standpoint of the public — the service to the public — and only took into consid- eration the solvent roads, we would soon have the public with- out service, because it is the weak roads that we have got to take care of. Is not that true ? Mr. Thom. That is true. Senator; but I think I would like to discuss that in a more extended way than a mere answer to a question, and which I had intended to do. Mr. Kruttschnitt has called my attention to the fact that in my statement here I 124 have made one rather considerable mistake. I had gone over it with a gentleman in whose accuracy I had entire confidence, as I thought I had in my own ; but I stated just now that the results for 1916 showed seven-tenths of 1 per cent. I ought to have said 7 per cent for 1916. Senator Pomerene. That is, 7 per cent on the increased in- vestment ? Mr. Thom. Yes. Senator Cummins. Mr. Thom, before you pass from that point, let me ask you this: It is true, is it not, that when you came to 1916 and had a book account or a book cost of prop- erty of $17,664,000,000 Mr. Thom (interposing). $684,000,000. Senator Cummins (continuing). That about $11,000,000,000 of that amount were represented by long-time bonds bearing, on an average, say, of 4j^ per cent interest ? Mr. Thom. Well, I do not know the average, but, of course, a large proportion — about $11,000,000,000 — was in bonds. Senator Cummins. And these men, whoever held these bonds, had taken them, believing that it was a good investment at that rate of interest — I think it is safe to say that it is about AYz, or possibly a little under that — and you had the entire dif- ference between that 4J^ per cent interest upon those bonds and the 5.90 per cent that the property earned upon the book cost to apply either to surplus or dividends on stock? Mr. Thom. Well, undoubtedly. Senator Cummins. Yes. And your operating income for 1910, the year in which you began with your illustration, ex- ceeded any previous year in the whole history of railroading by nearly $67,000,000, did it not? Mr. Thom. I have not compared that. You are doubt- less right about it. I do not know. Senator Cummins. And can you mention a single instance, or, at most, more than one instance, in which the Interstate Commerce Commission reduced any rate which had been made by the railroad companies upon any traffic in this eastern country? Mr. Thom. No, I am not attacking the Interstate Com- merce Commission 125 Senator Cummins (interposing). It has never reduced any rate upon which any considerable amount of traffic moved in this eastern territory, has it? Mr. Thom. Not that I know of. Senator Cummins. No. Mr. Thom. But I am discussing the thing from the stand- point of credit. That is what I am trying to do. Senator Cummins. It seems to me that the suggestion is that hostile or unfriendly regulation has brought about an un- satisfactory financial condition of your properties. Mr. Thom. Now, Senator, if you will just bear with me a while, I am going to develop my view of that. The Chairman. Mr. Thom, before you pass from that, I notice in the years that you use here to show the increased in- vestment and the decreased returns, that the average rate of divi- dend for those identical years began to rise with that very year. In 1910 it arose from 6.53 per cent in dividends paid to 7.50 per cent; in 1911, to 8.03 per cent; in 1912, to 7.17 per cent; and then it drops down ultimately, in 1916, to 6.48 per cent; so that taking those six years and comparing them with the six years preceding, your rate of dividend paid by dividend-paying roads was greater than it was in the former period? Mr. Thom. Yes, Senator; that would be naturally the case when you eliminate the low-dividend-paying roads. The Chairman. Then, that carries out the idea that Sen- ator Underwood was trying to develop, that even under this largely increased investment there were strong roads that paid dividends ? Mr. Thom. Oh, yes; and there has been no denial of that ; but I want to ask your attention to this : If you will look at the percentage of stock-yielding dividends, which is also in this statement, you will find that the percentage of stock that paid any dividends at all fell from 66.71 per cent in 1910 to 60.38 per cent in 1916. The Chairman. Let me ask you another question there, Mr. Thom. Mr. Thom. Just let me finish that idea first. The Chairman. Yes. 126 Mr. Thom. Now, suppose you have two stocks, one paying 10 per cent and the other paying 5 per cent, and of equal amount. Now when you average them, they will pay 7^ per cent, will they not? Now, suppose you strike out the 5 per cent stock altogether, and do not pay anything on that; then your average would show 10 per cent, would it not? So, as you reduce the number of dividend-paying stocks from 66 per cent down to 60 per cent, and strike out thereby the weaker roads and the roads that are paying the smaller dividends, naturally the divi- dend average on the others rises. The Chairman. Now, may I ask you this question? That leads right up to what I intended to ask you: Have you any way of knowing on what roads this money was invested? Was it on the weak roads or the strong roads? The dividend-pay- ing roads, or those that did not pay dividends? Mr. Thom. I suppose it was invested in dividend-paying roads. The proportion in which it was invested, however, I do not know. Senator Cummins. Will you tell me, Mr. Thom, what per- centage of the traffic of the country was moved by dividend- paying roads? Mr. Thom. No; I do not know. Senator Cummins. Well, it was a very large percentage, was it not? Mr. Thom. I should say so. Senator McLean. In the column showing the amount of dividends paid it is made clear that they were reduced from $405,000,000 in 1910 to $342,000,000 in 1916; that is to say, in the banner year, 1916, they paid in dividends $60,000,000 less than in 1910? Mr. Thom. Exactly. Now, I want to draw some other in- ferences from this table, which I will ask you gentlemen to consider : First. That with the exception of 1913 there was a very much lower operating income each year up to 1916 than for 1910. That I have already discussed. Second. That in each of these years there was a very large addition to the property investment, so that the investment was 127 growing and the return was lessening. I have already discussed that. Third. That in no year after 1910 and before 1916, except 1913, were the earnings sufficient to pay the interest and divi- dends that were paid. Now, if you will add together the interest and dividends on this table and apply merely your operating results as a fund to pay them, then you will find that in no year during that time was the operating income sufficient to pay the dividends and the interest that were paid. Senator Underwood. Well, how did they get it? Mr. Thom. They got it from other sources. Senator Underwood. I know, but from what sources? Mr. Thom. Other investments? Senator Cummins. Where did they get the money with which to make other investments? Mr. Thom. Oh, they got it through the results of previous years. Senator Underwood. In the main, they must have been paying out of surplus to accomplish that result, must they not, Mr. Thom? Mr. Thom. To accomplish what result? Senator Underwood. To be able to pay large sums in dividends? Mr. Thom. That is what I am coming to. I will read the aggregate figures into the record, if you would like them. I have the aggregates here. The interest and dividends for 1910, together, that were paid amounted to $805,353,472. The operating income for that year amounted to $826,467,756. There- fore, that year the operating income was sufficient to pay the interest and dividends. Now, second, the interest and dividends paid in 1911 amounted to $870,522,228, while the operating income for 1911 amounted to only $768,213,345. The interest and dividends for 1912 amounted to $829,- 342,042, while the operating income for that year amounted to $751,266,806. 128 The interest and dividends paid in 1913 amounted to $803,- 830,306; the operating income for that year amounted to $831,343,282. For 1914 the interest and dividends aggregated $890,553,240, while the operating income for that year amounted to $705,- 883,489. For 1915 the interest and dividends amounted to $792,663,- 959, while the operating income for that year was $728,212,079. So that those figures bear out this conclusion that for no year after 1910 and before 1916, except 1913, were the earnings sufficient to pay the interest and dividends. Fourth. That the aggregate operating income from 1910 to 1916, inclusive, was not enough to pay the aggregate of the interest and dividends paid in that period. Senator Pomerene. By how much? Mr. Thom. The aggregate interest and dividends paid in that period — no; I will get those figures, Senator. I do not seem to have them. Senator Pomerene. I will ask that they be inserted. Mr. Thom. I will ask one of you gentlemen here to make that calculation for me, and to have it ready. Have you got it there? A VOICE. Yes (handing the paper to Mr. Thom). Senator Watson. During all that time they did pay the interest and dividends, did they not ? Mr. Thom. Yes ; I am coming to that. The Chairman. Right at this point, I would like to have this made clear to me : Right at this time that you are compar- ing those figures of earnings, as shown by operating income, I see that taking the very year beginning with the real investment — as you say, "the dollar investment" — your surplus was $1,371,- 000,000, as compared with $800,000,000 in 1909— an increase of half a billion dollars— and that it steadily increased from that year to 1916, when it was approximately $2,000,000,000 in that very period. Mr. Thom. Senator, that is what all these gentlemen are asking about now, and I am asking if you will wait until I can get to that, and I will explain it. 129 Senator Townsend. Can you tell me why 1916 was so much more favorable than the other years? Mr. Thom. Oh, they had a tremendous traffic that year. That was an exceptional year. Senator Townsend. Is there any probability that that would have been much lessened in 1917 if you had had normal con- ditions ? Mr. Thom. I do not know what you mean by "normal conditions." Senator Townsend. If we had not gone in and taken charge of the railroads? Mr. Thom, We were in charge of the railroads in 1917. Senator Townsend. What were they in 1917? Mr. Thom. They were very good. Senator Townsend. About the same, were they not? Mr. Thom. A little less. Senator Townsend. Now, suppose that this table shows that there has been an increase in the operating income, com- patible with the increase of capital, would that throw any light on the question as to what was happening to the unprofitable roads ? Mr. Thom. Not necessarily, because this is an aggregate statement. Senator Townsend. And if the facts are that this increase of capital has occurred to the profitable roads and the loss has continued to increase with the smaller roads, it does not give us very much information on the subject, does it, as to what the Government ought to do with the railroads? Mr. Thom. No. I am going to argue in a moment against deciding this question on statistics; but I am trying to suggest some of our views about the statistics that are already in the record. Now, I have read four of my conclusions. Now, I want to read the fifth — and the object of the two preceding ones, the third and fourth, was to establish the fifth. That there was an insufficiency of operating income to pay the interest and divi- dends that were actually paid in the whole of that period; and that, therefore, the additions to the surplus did not come from 130 earnings. Now, if we paid out more in interest and dividends during the whole period from 1910 to 1916, than the aggregate of our operating income, then our surplus did not come from earnings. Senator Watson. Are you going to tell us after a while where it did come from? Mr. Thom. Yes. Sixth, that from 1910 to 1916 the funded debt increased about $2,200,000,000, and stock increased only about $733,000,- 000; in other words, that the funded debt increased about three times as fast as the stock. Seventh, that in no year from 1910 to 1916 did the roads earn as much as 5.36 per cent on their book investment, which the Interstate Commerce Commission, in the Eastern Rate case, held was not adequate, in the public interest. Eighth, that the average for all these years was only 4.94 per cent, which was less still than the 5.36 per cent which the Interstate Commerce Commission held was not an adequate re- turn in the public interest. Senator Pomerene. How much? Mr. Thom. It was only 4.94 per cent, and they held that 5.36 per cent was not an adequate return in the public interest. Senator Cummins. One of the conclusions to be drawn from that statement you have just made is this, is it not, that the investing public would rather have a bond at 4J^ per cent than stock that paid on an average of 6 or 7 per cent? Mr. Thom. Senator, what the investing public would rather have and what is safe financing are different questions. Senator Kellogg. Right on that point, let me make this suggestion. From 1902 to 1916, a period of 14 years, I notice the percentage of stock to the total obligations of the railroads of the country was constantly decreasing and the percentage of bonds constantly increasing. Mr. Thom. Yes. Senator Kellogg. So that, while in 1902 the railroads had issued practically half capital stock and half bonds, in 1916 the bonds had risen to 60 per cent, or nearly that, and the stock had gone down to 40 per cent. Now, of course, you can not always 131 have a low rate and high market-valued bond if the bond issue is going up and the stock issue going down; that will stop some time, and, before you close, I would like to have your views on that subject. Mr. Thom. I am going to refer to that. Senator Cummins. That is what I said — ^that the people would prefer an obligation bearing 4^4 per cent interest, se- cured by a mortgage, to an uncertain obligation of the company, even though it was paying regularly from 6 to 7 per cent. Senator Kellogg. If they arc going to have a 4J^ per cent bond, they have got to increase their stock issue in some way; that is, I mean for investment in the property. Mr. Thom. I have been asked where that increase in sur- plus came from. Of course, you will appreciate that surplus may be, perhaps, divided into what may be called "free sur- plus" and "profit and loss." Amounts in profit and loss may be carried into surplus and will increase the surplus, but will, of course, decrease the profit and loss. We have no statement here as to how the profit-and-loss account went during that time, but here is the way I am told that surplus grew. It appears from this dividend statement that between 1910 and 1915 the operat- ing income declined from $826,466,756 to $728,212,079— a de- crease of $98,254,677. At the same time surplus increased by $185,779,417. To get a perspective of the situation, one may look at the period from 1910 to 1915 as a whole rather than at the two dates beginning and closing the period. Confining ourselves only to the principal items in the income account, operating income during the five-year period was as follows: July 1, 1910, to June 30, 1911 $768,213,345 July 1, 1911, to June 30, 1912 751,266,806 July 1, 1912, to June 30, 1913 "831,343,282 July 1, 1913 to June 30, 1914 705,883,489 July 1, 1914, to June 30, 1915 728,212,079 Five-year period $3,784,919,001 In addition to operating income, the railways of the United States derive a considerable return, in the shape of interest and dividends, from investments in securities (whether railway or 132 other securities). The aggregate return on investment during the five years was as follows: July 1, 1910, to June 30, 1911 $262,385 607 July 1, 1911, to June 30, 1912 204,075,335 July 1, 1912, to June 30, 1913 216,581,250 July 1, 1913, to June 30, 1914 217 419 368 July 1, 1914, to June 30, 1915 163,322405 Five-year total $1,063,783,665 The roads paid out the following total amounts in interest and dividends: Interest : — July 1, 1910, to June 30, 1911 $435,847 012 July 1, 1911, to June 30, 1912 453,563,759 July 1, 1912, to June 30, 1913 465 250 995 July 1, 1913, to June 30, 1914 485,1 18!645 July 1, 1914, to June 30, 1915 498,071,964 Five-year total $2,337,852,375 Dividends : — July 1, 1910, to June 30, 1911 $460,089,540 July 1, 1911, to June 30, 1912 400,211,370 July 1, 1912, to June 30, 1913 368,552,632 July 1, 1913, to June 30, 1914 451,263,197 July 1, 1914, to June 30, 1915 325,900,869 Five-year total $2,006,017,608 For the five-year period as a whole we have, then, the fol- lowing showing : July \, 1910, to June 30, 1915. Operating income $3,784,919,001 Returns from investments 1,063,783,665 Total general income $4,848,702,666 Interest $2,337,852,375 Dividends 2,006,017,608 Total $4,343,869,983 Balance $504,832,683 This balance of $504,000,000 is subject to certain changes on account of miscellaneous income and deduction items not here considered, but it may be taken as setting forth the principal portion of the income balance for the period. It will be noted 133 that the balance is considerably greater than the increase of $185,000,000 in surplus during the same period. The diiference or excess is accounted for by various factors not introduced here, such as net rentals of all kinds, discount on securities, miscella- neous items, and the like. Surplus represents two things, namely, total appropriated surplus (the table below indicates the items included) and profit and loss balance, and, as already emphasized, is a cumulative figure. The following statement shows the changes in the de- tailed account in so far as available as between the years 1910 and 1915: ITEM 1915 1910 01 Increase (-f ) ■Decrease ( = ) Additions to property through income and surplus $445,861,499 82,886,387 70,222,458 49,147,914 64,938,533 (*) (*) (*) (*) (*) Funded debt retired through income and surplus Sinking fund reserves Miscellaneous fund reserves.. Appropriated surplus not spec- ifically invested Total appropriated surplus Profit and loss balance $713,056,791 843,730,385 $331,870,865 1,039,236,794 +$381,185,926 = 195,506,409 Total corporate surplus. .$1,556,787,176 $1,371,107,659 -F$185,679,S17 (*) Detail not shown. It will be observed that the total appropriated surplus in- creased $381,000,000 while the profit-and-loss balance decreased $195,500,000, making a net increase in corporate surplus of $185,600,000. Total corporate surplus should not be confused with profit-and-loss balance, as the latter is only a part of the surplus. It may be regarded as free surplus, in the sense that it has not been set aside for a specific purpose. Mr. Thom. Senator Pomerene, you asked a moment ago by how much the operating income failed to meet the aggregate of interest and dividends paid during that period. Senator Pomerene. Yes; that is, from 1910 to 1916, in-^ elusive ? 134 Mr. Thom. Yes; both years inclusive. The operating in- come was less than the interest and dividend payments for the years 1910 to 1916, both inclusive, by $154,663,578. Now, gentlemen, as I have said, I have thought it proper to make reference to this table of statistics, as it had been in- troduced, but I do not consider that the immense question of railroad credit is dependent upon a table of statistics. I think we have got to broaden ourselves out beyond a consideration of mere figures to be able to have an intelligent and sympathetic appreciation of the economic forces that are at work to make or to mar the railroad credit. In my opinion, you may be able to show entirely adequate income to take care of your capital charges and to meet your necessary expenses, but unless you can give some assurance of the permanence of the policy that will continue that adequacy, you will still not have dealt fairly or effectively with the question of railroad credit. The results to-day may be entirely adequate, entirely satisfactory, and yet there may be such a doubt in the public mind as to the per- manency of the policy that will continue that scale of return, as to absolutely destroy confidence in the credit of those companies. Some of the Forces Operating Against Public Confidence in Railway Investment. So I say that if we are going to get a fair conception of the situation as it presents itself to-day we must broaden out beyond mere tables of statistics; we must determine this question not upon past performance, but upon the promise of the future, and we must endeavor to fairly understand and fairly appreciate and sympathetically consider the forces that are at work. Now, I wish to invite your attention to some of those forces and to try to demonstrate why it is, in large measure, that the public confidence in these investments has declined. Granting, as I have said, that the rates which the railroads have enjoyed have been entirely adequate — and by granting that I am not conceding it, nor am I using it any more than to illustrate and to enforce the considerations which seem to me to control this subject — ^but granting a situation in which, from a table of statistics, you can demonstrate that the returns from these railroads have been en- 135 tirely adequate for their needs, you can readily understand that a situation may arise where, if there is no confidence in the per- petuity of the forces that will continue that desirable situation, the public mind will be averted from this source of investment as an attractive source. Now, what does the investor see when he comes to the railroad field of investment? What are the things that must force themselves upon his mind, especially since the year 1910, which we have taken here as a basis, and in which a larger measure of governmental control was arrested? What did the events of that year force upon the attention of the railroad in- vestor, as he gradually came to appreciate what forces were at work? The first fact that he can not get rid of is that he, in this line of business, has no control whatever over his ex- penses. The scale of his expenses is made for him ; not by him. It is made partly by the demands of labor ; partly, as in the case of every other industry, by the current prices ; and partly by the exaction of duties which cost money, made by public authority. Senator Watson. There is no way to help that, is there? Mr. Thom. What? Senator Watson. There is no way to help those conditions that you are describing now ? They will still continue ? Mr. Thom. I think there is a way to help them. Senator Watson. Do you ? All right ; that is what we are anxious to find out. Mr. Thom. I say that a part of his expenses are made by the exactions of public authority. There is no way to relieve us of the prices in the general market. I lay aside, for a future part of the discussion, what may be done in respect to labor, and, confining my remarks to the addition to our expenses by the exaction of public authority, what do we find? We find that not only may those expenses be increased by one govern- mental regulating body, but there is an important control over our expense account in every State through which we run. We find, therefore, that we have to appeal on the expense side of our ledger, not only to one central body that takes a compre- hensive view of the whole transportation field, but we have also to meet the irresistible control of every State through which 136 we run. We must further realize that the questions of what those expenses should be are not always determined by business considerations, but conditions of public demand, neighborhood political situations, the desire for prominence and for place by men who would make friends in their communities by exacting expenditure by the railroads, each forms an element in the prob- lem. So that on our expense account side the investor has no control of it, nor is there any one responsible body that does have control of it. Whatever might be the policy of this committee, whatever might be the policy of the Interstate Commerce Com- mission, or other Federal controlling or regulating agency, we find that under the present system of regulation, that is not final, but that we have to meet, even on the expense account of our ledger, influences which we can not control in every neighborhood through which we run. Now, turning to the revenue side Senator Cummins (interposing). Just a moment, before you do that. You have excluded labor and the general market for supplies. I wish you would be a little more specific in regard to the expenses that are controlled by either national or State authorities. What are they? Senator Watson. I suppose it is elevating tracks and the like. Senator Cummins. I am asking him. I just want it to go into the record from Mr. Thorn — some idea about what these ex- penses are. Mr. Thom. I am going to tell you. They are crossing ex- penses, station expenses, elevation of tracks, separation of grade : there is an infinite number of matters of police power, which we can not control. Senator Watson. How are you going to get away from them? Mr. Thom. Well Senator Watson (interposing). That is what I asked you awhile ago. Mr. Thom. We do not propose to get very far away from them, but I am talking now of what is the matter with railroad credit. 137 Senator Watson. Precisely. Mr. Thom. And I am trying to give a complete survey of that field, and to see how much of it we can eliminate. Senator Watson. Yes; and that is just exactly what I am asking you. You have stated certain conditions here. You do not eliminate the labor proposition, and you do not eliminate the market price proposition, do you? Mr. Thom. We think we do, comparatively, eliminate the labor difficulty. Senator Watson. How? Mr. Thom. By making rates respond to labor costs. The Chairman. Do you intend to take up each one of these items, as you develop them, and to show how you propose to modify or eliminate them? Mr. Thom. Yes. Senator Watson. That was the object of my original ques- tion; to find out how, if these are the objectionable things, you are going to eliminate them. Mr. Thom. I am trying to describe the entire problem. Senator. Senator Watson. These items, that you have enumerated, of police regulation, cost of labor, and so forth, do they vary greatly during the years, or is that sort of a fixed amount that you can approximate? Mr. Thom. I can not answer you on that. We will have one of the railway executives before you to tell you about that. I do not know. Senator Watson. That is one of tlie very necessary things that, as public servants, you have got to meet. Mr. Thom. Undoubtedly; and when you talk about what attracts capital and what repels it, what we have to meet, whether legitimate or illegitimate, is a matter to be considered. Senator Watson. Yes. Mr. Thom. I wish the committee would confine its atten- tion to the point I have under discussion at the moment, and that is the forces that are at work to prejudice railroad credit. Some of those we may never be able to get rid of, but it is desirable to know about them, in my opinion. 138 Senator Poindexter. One of them you can get rid of, and that is the diversity and conflict of the varying regulations of State commissions, can you not? Mr. Thom. Yes. I just want to call attention to the fact — whether it is a permanent part of the problem or not — that the expense account which the investor must consider when he deter- mines whether he will put his money in this or in some other avenue of investment, is practically beyond his control. Now, I want to turn to the question of the revenue side. Is it not a just thing to say that an investor finds that the reve- nues are entirely beyond his control also? They are fixed for him by governmental authority. How much he is entitled to earn is not for him to say, but he must go to a governmental authority for it. Now, pause one moment to consider the im- mense bearing of that fact upon the attraction of an investment. No control over your expense and no control over your reve- nues. If your revenues at the moment are adequate, there is no assurance that they will continue adequate. If your statis- tical history is one of fair treatment, the investor, coming into this property, must face an uncertain future as to whether the same results will be had as in the past. Now, what else does he find about the revenue side of his ledger? Not only is that fixed and limited by public authority, but it is fixed and limited by a great number of governmental authorities. There is no man, there is no tribunal, charged un- der our system of regulation with the authority to decide that business question. You can not find him in Washington, nor can you find him alone in any State capital, but you find men with power over your revenue account both in Washington and in the capital of every State through which you run. So that although there may be a liberal policy here, and although there may be here an adequate conception of the busi- ness necessities of the case, there is such a part of our revenues involved in other authority than your authority that your de- cision can not save the situation, unless you are prepared to ac- cept for interstate commerce the fair burden that is declined by a State authority; unless you are willing to make up, m the 139 allowance and in the charges on interstate traffic, whatever is, in departure from your policy, declined by a State authority, then it is not in your power to handle this situation. Nor can we find in any State authority to handle it for the States. The sit- uation may arise— and frequently does arise — where the policies of two States, side by side, radically differ on these subjects. You may find in one of the States as liberal a standard of pub- lic service as you may find in Washington ; you may find in some of the States as great a willingness to bear their share of the burden as you find in Washington ; but you are obliged to find it in all the States, in order to distribute fairly the burden of sus- taining these public facilities; and you must find it in all of the States in order to sustain a confidence in the regulation of the plane or level of your revenues. Now, how is that to be brought about? It is necessary for us to appreciate that the only question between national regula- tion and State regulation is not embraced in the mere matter of discrimination as to the terms on which any special traffic moves. The Shreveport doctrine deals with that aspect of the case, that interstate commerce shall not move on less favorable terms than State traffic of a competing shipper; but there exists this tre- mendous fact, that if we are to sustain, upon a level of efficiency approved by the Federal Government, these instrumentalities of interstate commerce, there must be some authority to dis- tribute equitably among the users of that instrumentality the burdens of sustaining it. Now, suppose that is not the case, and suppose one State says, "What we have is good enough for us ;" and the needs of the Nation and the needs of the State right on the other side of the border cause them to put a higher standard upon the needs of commerce and upon what should be done to make it efficient and helpful in the public interest ; and suppose the State that is satisfied and is not progressive, declines to let any of its commerce, even that part of its commerce which is in com- petition with commerce elsewhere, bear a part of the burden of this higher standard — what is the result? The result is either one of two things: Either the National Government and the more progressive State must surrender their standard of effi- 140 ciency for these instrumentalities of commerce, or if they do not surrender them they must pay that part of the bill which the niggardly State refuses to contribute. Under your present system of regulation we are helpless in the face of this problem. We must go not only here, but to each State through which we run in order to have the level of our revenues fixed. I am told that about 23 per cent of the reve- nues of the carriers of the United States comes from State traffic. Senator Poindexter. Twenty-three? Mr. Thom. Yes. About 15 per cent of the volume of traffic comes from State traffic. Now, suppose that we have a dozen different policies in a dozen different States, bearing upon the amount that is to come from that 15 per cent in the volume of traffic, and that 23 per cent in the amount of our revenues? Senator Pomerene. Are you now making an argument in favor of continued control under the Railroad Administration? Senator Townsend. I was going to ask him if he was argu- ing in favor of Government ownership. I want to ask you right there what percentage of the States are wicked ones, in the sense that they will not cooperate with the Interstate Commerce Com- mission to have a unified policy? Do you know the proportion of them? Not all of the States fail to cooperate, do they? Mr. Thom. No ; but a good many of them have rates on a very different level from that which the Interstate Commerce Commission has declared to be proper and necessary. Senator Townsend. What proportion? Mr. Thom. I can not tell you. A great number of them. Senator Watson. If it should become the policy of the Gov- ernment or of the Interstate Commerce Commission to make up those deficiencies, would not the tendency of the local authorities be to cut rates all along the line and let the General Government or the public make it up? Mr. Thom. Yes, sir. The Chairman. The hour for adjournment having arrived, the committee will stand adjourned now until to-morrow morn- ing at 10 o'clock. (Whereupon, at 12 o'clock noon the committee adjourned until Friday, January 17, 1919, at 10 o'clock a. m.) 141 Testimony. Mr. Alfred P. Thom _ resumed, January 17, 1919. The committee met, pursuant to adjournment, at 10 o'clock a. m.. Senator Ellison D. Smith, presiding. The Chaiem-'VN. The committee will come to order. Mr. Thom, you may proceed. Mr. Thom. Mr. Chairman, while I have no objection at all, as I said to the committee in the first instance, to being inter- rupted, I have concluded that it would probably be in the interest of economy of time if I would ask the committee to let me pro- ceed with my line of argument, because I have taken up a great deal of time in getting back onto the line, as questions have diverted me ; and unless a question is necessary at the moment — and in that event I hope the committee will not hesitate to ask it — I would like to proceed consecutively, and I think I can get through in comparatively brief time, if I may be permitted to pursue that course. The Ch-airman. You address that to the committee. Of course, they will use their own judgment as to the questions they may desire to ask. Mr. Thom. Yes ; and that is what I want them to do. I just wanted to make that suggestion — that I think I will finish my opening statement sooner if I may pursue my line of thought consecutively to the end. Judge Prouty's Views. When adjournment was taken yesterday I was trying to impress upon the committee my view that this matter of the condition of railroad credit could not be determined by a sta- tistical statement, but must be ascertained by an intelligent and sympathetic appreciation of the forces that were acting upon the future of the properties. I stated that no matter what might at the moment be the returns on these properties that related to the past, and credit always is based upon confidence in the future, I was gratified to find in an address which I had not previously seen, made by one of the most eminent men who has ever been on the Interstate Commerce Commission — .Judge 142 Frouty — a verification of that view. This was an address made before the American Bar Association, in 1907, on the subject of "A Fiindamental Defect in the Act to Regulate Commerce," and the paragraph to which I allude is as follows; after alluding to something that he says is obvious to all, he proceeds : What is not always so clearly apprehended is the danger of de- terring capital from seeking this form of investment in the future. If the demands upon our railroads are to be met, enormous sums must be expended in extensions and improvements. These expendi- tures cannot be made out of earnings; they must come largely from new money drawn from the investing public. The ability to obtain this now and hereafter will depend upon the confidence which men have in the security of their investment. It is not enough that earnings are ample to-day, if they are likely to be unduly reduced to- morrow. Every system of regulation should therefore assure cap- ital of just treatment. Pursuing that line of thought, I had asked the attention of the committee to the facts that must confront any investor when he is considering this form of investment; that he must find that he could not control his expenses ; that he must find that he could not control his revenue. I had referred also to the fact that the control of his revenues was not one consistent control, but was divided among a great many different governmental tribunals, all perchance with differing policies, and all actuated by different views. I had alluded to the amount of State traffic, and, just as I was concluding, I had said that my understanding was that about IS per cent in volume of the freight traffic was State, and that about 23 per cent of the revenues were State. Of course, that leaves out the passenger revenues. Now, I am told that about one-half of the passenger revenues are State. And, of course, that 23 per cent includes the one-half of the revenues derived from the entire passenger service. State Rates and Their Effect on Investment. Speaking generally, the country over. State rates are lower than interstate rates. We see it in a great many cases ; we know of it in the Shreveport situation; we know of it in the Natchez situation. The members of the committee will recall the appear- ance before it of Senator Reed, of Missouri, to complain of that situation as respects Missouri and Illinois, and as respects Kansas City, Mo., and Kansas City, Kans. ; and we know of the situation 143 of Memphis and Arkansas. But a notable case which illustrates that has been decided by the Interstate Commerce Commission — the 1915 Western Rate Advance case, Thirty-fifth Interstate Commerce Commission Reports, page 588. There an applica- tion was made for an advance of the rates, among others, as I recall it, on dressed beef, or on live stock — ^maybe it was live stock; yes, it was live stock — and the Interstate Commerce Com- mission concluded that there ought to be more revenue from that source than from other sources ; but they disposed of it in this way: No one denies that the State rates are generally far below the interstate rates ; yet the suspended tariff proposed to widen the gulf between the two sets of rates, and correspondingly to increase the burden on interstate traffic, and proportionately lift the burden of the State traffic; nor has the claim been advanced, even much less substantiated, that interstate live stock is so much more expensive as to justify the existing excess of interstate rates over the intra- state rates. This record does not show whether both the intrastate and the interstate live stock traffic bear their just proportion of the transportation burden. And then, at another point a little lower down in the opinion, they proceed: It may be suggested that in a number of other cases previously disposed of by the commission the discrepancy existing between State and interstate rates was not permitted to influence the dispo- sition of those cases. That may be true, but it is also true that in the well-known Shreveport case — and others which are mentioned here — the relation between State and interstate rates was directly put in issue and decided. Considering the enormous volume of the traffic, the unusually wide discrepancy existing between State and inter- state rates, and the very substantial effect which the lower State rates must have upon the revenue derived from live stock by these carriers, it may be said that the commission has never before had a case comparable in this respect with that part of the present pro- ceeding which deals with the rate on live stock and packing house products. For these reasons we believe that the difference in the level of State and interstate rates which has been so forcefully pressed upon our attention in this case becomes a material factor in judging of the propriety of the proposed increase in rates. And the commission declined to increase the spread between the State rate and the interstate rate. Now, certainly it is a very striking fact, which I have learned from what I consider the most reliable authority, that in every 144 one of the States south of the Potomac River and east of the Mississippi the rates are State made, and that the State rates of no two States are the same. Now, the inference from that is that here is an unfair and unequd distribution of burden created by the States themselves. That is not only an interest of inter- state commerce against State commerce, but it is an interest of State against State. The State which permits its traffic to bear a higher burden of transportation charge than its neighbor is deeply interested in having that burden equalized. It is a right of that State to have it equalized. It is not only a right of the State to have an equalization between its State rates and the rates . of its sister State, but, inasmuch as the largest interest of every State is in interstate traffic, it is in the interest of every State to have the inequality of burden between its interstate traffic and State traffic of other States equalized. This is no question of violating State rights ; it is no question of invading State prerogatives. It is a question of whether or not, in a matter of common interest to many States, one State can be permitted to determine the standard of charge and the propor- tion of burden — the proportion of the common burden — which it will bear. Of course, if Government ownership comes there will be no State question at all, because, necessarily, if it is Gov- ernment ownership, it will be by the National Government, and the National Government will control the whole field, except in so far, of course, as it might elect to surrender the power to a State to make an inequality of burden, which is hardly con- ceivable. Field of Investors Is Limited. Now, another thing that is the matter with railroad securi- ties as an investment is the fact that necessarily the spirit of hope has been taken out of them. There remains no chance for specu- lation; there remains no chance for large gains due to special management. The whole of that portion of capital that is influ- enced in respect to the matter of its investment by the hope of a speculative return is put to one side. We know there is a large amount of capital that is influenced by hope of speculative return. There is no field for that any longer in railroad securities. There 145 is no longer any possibility of creating that hope in railroad in- vestment. You are confined in the matter of your railroad invest- ment to that class of capital that will be satisfied with a small and an assured return. Money making in railroad investments is no longer possible. All the investor in railroad securities has a right to expect is a moderate but an assured return; but you can not attract the man who will be satisfied with a moderate return unless you add to that the element of certainty. The man who will accept un- certainty is the man who is rewarded for it by a speculative expectation, and when you get to that class of investors who will be satisfied with a moderate return you have got to give them an assurance of certainty as to that return. Now, that is a great limitation upon railroad credit. It excludes from it a vast amount of active capital. Another one of our difficulties in this matter of railroad credit is the territorial limitations upon it. There are vast reaches in this country where there is no investment in railroad securities. I will illustrate that. Since the income-tax law was passed it has been possible to trace the ownership of a block of $100,000,000 of the bonds of one of these carriers. It is a carrier of the South, and only iyi per cent of that $100,000,000 cf bonds is held in the South. To a smaller degree that is true of the West; and as to our immediate future, the whole of the European financial market is closed to us because they need everything at home. So that in your dealing with this question it is a factor for you to consider where the money territorily is to come from and whether the whole financial strength of this Nation is available for it. Certain sections of the country have gotten into the habit of investing in other directions. Senator Underwood. Mr. Thom, I am interested in that statement for this reason : I understand how you ascertained the ownership of this stock, if you took the trouble to do it Mr. Thom (interposing). Bonds. Senator Underwood. Yes ; these bonds, I should have said. But did you ascertain from the point of payment of the dividends, or from the actual residence of the owner? 146 Mr. Thom. I did not do it. Senator Underwood. I mean, was it ascertained in the one way or the other, by some one else ? Mr. Thom. I do not know. The statement was made to me that the ownership of the bonds was traced, and that it was as I have stated it. Senator Underwood. It might be possible, for instance, if I own a bond of one of these southern railroads, that the dividend would be paid in New York? Senator Kellogg. You mean the interest i Senator Underwood. Yes; the interest dividend. Is that where you trace the ovraership? Mr. Thom. Oh, no. You trace the ownership through the income-tax certificate, which must be signed by the owner. Senator Underwood. Yes ; but it is a question of where that goes with the certificate. Mr. Thom. No ; not where it goes with the certificate. You have to put upon your income-tax certificate the name of the owner of the bond, with his address, and it is through that process that this thing was done. Senator Underwood. That is what I wanted to know. I wanted to know whether it came from those certificates. Mr. Thom. Yes; it came from the certificates. Now, I digress from the general line of my argument for a moment to call your attention to this fact: Many men's minds drift to the prices of outstanding bonds or stocks of railroads to ascertain what their credit is. Now, they find, when they go to the bond list, that the prices of railroad bonds compare or keep up well with the prices of other bonds, and the conclusion is accepted that that means that the railroad credit is equal to the credit of these other companies. The outstanding bonds of railroads is the thing that you, in your legislative capacity here, are not interested in at all. Those bonds are bonds of preferred Hen ; they have already been disposed of ; they have their market price made for them by the security which they have. Now, when you deal with the question of railroad credit all the se- curity represented by outstanding bonds is swept aside and you 147 are dealing with the balance. You are dealing with what is left. You are dealing with a condition where junior bonds have to be placed upon these properties and where the question is how they can be sold. You are dealing with a margin. Senator Underwood. Along that line, Mr. Thorn, have you any idea of how much of the present outstanding bonded indebt- edness or indebtedness of the railroads — I will not say "bonded indebtedness," because the whole indebtedness is what we are covering — is bonds that are on long term, and how much of the indebtedness is on short-term notes or maturing bonds? Mr. Thom. I will have to get that for you, Senator. I do not know. A very large amount is on outstanding bonds. Senator Underwood. I thought there were a very large number of railroad securities maturing right at this period. Are there not? Mr. Thom. I should not be surprised; but they have their lien; they have the lien which they had when they were issued, and those which are maturing now are probably the underlying bonds — the best of all — and they have a preferred lien. But, more than that, you are interested in this question; you are interested in the question of whether or not you can sell the stock of these companies, in dealing with this question of credit. The danger line has already been passed as to the com- parison of the debt and the stock. More than 60 per cent of out- standing securities is in bonds. In 1900 it was less than 50 per cent, and when T say "60 per cent" I mean 60 per cent of the net outstanding capital, eliminating duplicate holdings. Now, in 1900 it was forty-nine and a fraction. It has grown now until it is over 60. And so you see the prices of the stock, which indicate the margin, all the time declining. You see the proportion of capital which is evidenced by bonds all the time increasing; and we have got the problem before us of what we can do to invite input of capital into these properties on stock, so as to restore that equilibrium. Now, let us look at some of the facts which we must give importance to in considering this question of the real condition of railroad credit. In the first place, we see the fact that in the 148 years 1915 and 1916 there was a smaller mileage construction in this country than had ever occurred before in its history since 1848, except during the period of the Civil War — not as much as a thousand miles. We have the additional fact that the Penn- sylvania Railroad Co. has not been able to dispose of a share of stock for five and a half years. And let us look at the capitaliza- tion of that company. The capitalization of the Pennsylvania Railroad is 75 per cent stock and 25 per cent indebtedness. Senator Cummins. Is what? Mr. Thom. Seventy-five per cent stock and 25 per cent in- debtedness. That fact accounts for their being able to sell an issue of $50,000,000 the other day. Senator Poindexter. Of bonds? Mr. Thom. Of bonds; because of the immense dispropor- tion in favor of their stock issues over their indebtedness. Now, for five and a half years that company has not been able to sell one share of stock. Take the New York Central. The New York Central is about the other way. There is about seventy-odd per cent of its capitalization in bonds and 25 per cent or more in stock. When their stock was recently selling above par they thought they would be able to raise some money by putting out $25,000,000 more of stock. They offered it on the market, and immediately the stock dropped below par, and they had to withdraw the issue. In the year 1917 the Southern Railway Co. was confronted with this situation: The entire improvement fund available to that company was evidenced by its development in general mort- gage 4 per cent bonds. Those bonds fell so low — below 60 — that it could not be justified in selling them in order to produce an improvement fund. An effort was then made to issue another mortgage, as interest rates had fallen, of 5 per cent bonds to take the place of this 4 per cent bond, and every arrangement was made to put that bond on the market, but when the time came to launch the loan they found it was utterly impossible to do so, and they had to withdraw it. I have attempted to depict this condition of railroad credit so that you may have before you at least my point of view with 149 respect to the problem in establishing a new system of dealing with these railroads. Senator Watson. How can we by legislation change or im- prove that condition? Mr. Thom. Well, that is the very point that I want to argue now, Senator. I say, there is your condition. Now, you must, if you are going to deal successfully with this problem, meet that situation, it seems to me, in some way. It calls for a calm, dispassionate consideration of existing systems of regulation. It is a delicate matter to handle, because what is said may be inter- preted into criticism of men or administration, whereas that is not my purpose and I am not considering the question from that standpoint. I think, in a m.atter of such solemn consequence to the future of this country as is a successful method of dealing with the facilities of transportation, it calls for frankness and fearlessness and an analysis of their defects and an appraisal of their merits and a determination upon the question of whether • or not they are adequate for the national exigencies at the time. Judge Prouty on Interstate Commerce Commission. What I shall say will be devoted to a criticism of systems and not of men. Now, I am somewhat emboldened as to the propriety of that course by a criticism of the system now existing made by the eminent man to whom I alluded just now — Judge Prouty — in which he points out the defects in the present system, from his standpoint, and makes practically the same suggestion as to a cure for them that I shall ask you to adopt. In 1907 he said, in the address to which I have just alluded. this: The conclusion of the whole matter is this: If the Interstate Commerce Commission is vested with a jurisdiction so tremendous in extent and of such finality, every effort should be made to provide a body adequate to the trust. That commission under the present law is charged with two sets of duties, requiring diverse qualifica- tions for their discharge. It stands, first, as representative of the Government to see that these highways are in fact public. It is commanded to enforce the provisions of the act to regulate com- merce. It must see that rates are reasonable and just; that the practices and regulations of railways are not oppressive ; that the penalties provided by the act are enforced. In the near future its ISO powers must be extended to the operation of the railways as well. These duties are largely executive. They can best be discharged by a single head, responsible to the Executive and answerable to the spur of popular criticism. Senator Cummins. What is that? Mr. Thom. "Answerable to the spur of popular criticism." He then continues : Second, this commission is in essence a judicial tribunal, which hears and decides complaints. The qualifications of such a body are the exact opposite of the other. Its membership should be numer- ous, so that its decisions may be the resultant of independent minds. It should be entirely withdrawn from all political and personal in- fluences, and it should have time for the deliberate consideration of the matters coming before it. I very much doubt whether the same body can properly dis- charge both these functions. In the end it will either become remiss in its executive duties or will in the zeal of those become unfit for the dispassionate performance of its judicial functions. Whatever may have been true in the past, the time has come when the com- mission should be relieved of all its duties except the hearing and deciding of complaints. There are several ways in which this might be accomplished The commission itself might perhaps be reorganized and its duties divided. Its executive functions could be transferred to a bureau in some department. I have myself thought that a new department should be created. Such a department would from the first have occupation in plenty. No department would be oftener applied to by all classes, nor would any be of more service to the whole public, railways and patrons alike. In beginning this paper I had intended to refer more in detail to this matter, but my limit has been reached before my subject, and I can only urge the desirability of accom- plishing the thing in some manner. Now, it seems to me that the very organization of the Inter- state Commerce Commission, and of all commissions, incapaci- tates it or the performance of duties in respect to business in the future. When the Interstate Commerce Commission was or- ganized the thought in the public mind was that it was necessary to have a body of repression and correction. The public opinion has advanced to the point where you want not only a body of repression and correction but a body of guidance of future conduct. Now, Mr. Qark, in his wonderful testimony given here a few days ago, which made us all renew our admiration and respect for him, likened the duties of his commission to the duties 151 of this committee. He said he thought that a wiser conclusion could be arrived at by a number of men on a commission than by one man, just as this committee could arrive at a wiser conclusion than one man could arrive at; and he likened it also to the Supreme Court of the United States. The fundamental thing that a court does is to deal with the past, and it is organized for that purpose. It deals with controversies that have arisen, in every aspect of its activities, except its injunctive one, and there it is given the attribute of possible prompt action by the ability to issue in advance a preliminary order. Now, if we are to succeed in the private management of these properties, we must have the opportunity for prompt action. We must be able to adapt our business methods quickly to busi- ness conditions. We can not wait, if we are to be successful in business, for such deliberations as the Supreme Court, for ex- ample, takes in reference to its cases. Argument for Secretary of Transportation. Now, I sympathize with every word Mr. Clark said in respect to the time that that commission has taken in deciding cases. Unless the commission is willing to avail itself of its reservoir of accumulated information and to act at once on these enormous questions without hearing — why, manifestly, hearings take time, and I do not doubt, as he said, that a great deal of the time which the Interstate Commerce Commission has taken in deciding these tremendous cases has been because of applications of the lawyers of the carriers, and of other lawyers, for time in which to prepare and present their cases. It is inseparable from the situation ; it is an outgrowth of the system. Senator Underwood. Mr. Thom, if it does not interrupt you, I would like to ask you a question right there. Do we not reach the dividing line right at that point between a government of law and a government of men, as to whether we are going to leave these important questions unrestricted to a man to decide or whether the Congress, exercising its function, is going to establish certain rules of law for the government of these carriers and then have men decide whether or not the carrier is within the rules of the law? In other words, if we are going to leave the 152 unrestricted right of men to govern these properties, there may be a very strong argument for one-man government and one-man executive ; but if we are going to establish the basis by law for certain rules and regulations that must be complied with and lived up to, then do we not want a court decision from a body of men to determine whether they are within the law or not? Mr. Thom. Senator, if you will pardon me, I propose to deal with that question when I come to it. Senator Underwood. I did not wish to interrupt you ; but I did not want you to overlook that, because that thought is in my mind, and I wanted it cleared up. The Chairman. Senator Underwood, you were not present when Mr. Thom requested that, as far as possible, he be allowed to make his argument and then have questions propounded to him after he concludes his preliminary statement? Senator Underwood. I am very glad to conform to Mr. Thorn's wishes in that respect. I was not here when he made the request, or I would not have interrupted him. Mr. Thom. It was simply in the interest of the saving of time. Senator. I shall be very glad to answer all these questions afterwards, or even now, if you desire. Senator Underwood. No ; I did not happen to be in my seat at the time you made the request. Mr. Thom. My argument is that if we are to succeed as a business enterprise, the machinery which controls us must be suitable for prompt and adaptable action ; it must be able to act with as near an approximation to what a business man would do in the control of his own business as the exigencies of the public interest will permit. Now, we have, I think, in the commission form of govern- ment and regulation, lost sight of that essential requirement of business conditions. We have organized the bodies of regula- tion on the basis of deliberation and on the basis that no business step can be taken until the end of deliberation, be it six months or be it a year. Now, there is a situation which I believe you gentlemen will have to deal with. You will have to determine, first, whether 153 or not it is a fatal obstacle in the way of business success to have taken away from business management the opportunity of ready adaptation to changing conditions; and then you will have to determine whether or not it is possible to create such machinery as will give a capacity for promptness to governmental regulation. Now, there is another thing which I think is a weakness in the Interstate Commerce Commission and in the commissions of the several States. I think they are too dependent upon the power which has their life or death in its hands. They may be brave enough to withstand influence, but if you are going to deal with systems, you ought to establish systems where they will not be called upon for courage in order to perform independently their duties. Now, I \vill illustrate what I mean: I was thrown a little while ago with a man who had had a long and successful experience as a commissioner of one of the States. He retired from the position with the respect and confidence of everybody, so far as I know. I think it is the history of his State that they were inclined to deal in a businesslike way, as far as possible, with these instru- mentalities of commerce, and he told me this: He said, "There never was a movement in the commission, of which I was a member, to increase rates, that it was not immediately followed by a bill in the legislature to abolish the commission," and that when the question came up, which ought to be decided on its merits, of whether the railroads, in the public interest, required greater revenues, that question had to be decided with the guillo- tine over the heads of the men that had to decide it. We do not have to go very far from home in determining this question of the dependence of commissions on the favor of legis- lative bodies. We all recall that in 1917. when an application was made to the Interstate Commerce Commission for an increase of rates, and that body had the matter under consideration, and it was suggested in some quarters that there was a favorable pros- pect of having the rate increase granted, you gentlemen know, of your own knowledge, that resolutions were introduced in the Senate for an inquiry — a congressional inquiry into that question. 154 Now, what does that mean? Let us be frank. What does that mean? Here was the Senate, which must confirm the ap- pointment of any man to membership on the Interstate Com- merce Commission; and here was a matter before the commis- sion, in its official capacity, which ought to be determined on its merits, and a resolution is introduced which serves notice that any decision of that case in a particular way is going to be made the subject of senatorial inquiry, and that inquiry by the body that has the power of life and death over the members of the commission ! Is it too strong a characterization of that action to say that thereby there was established, or, at least, was capable of estab- lishment, a system of terrorism over the commission in the matter of the decision of a case before it? Now, gentlemen, we think that a bureau of Government oc- cupying that exposed position, which may be attacked by the body that holds authority over its very existence, or the confirmation of its successive members, as they come before it for approval, is not in possession of that independence which must obtain if these transportation interests are to be put upon a sound and stable foundation. We, therefore, do not think that the governmental authority in respect to these matters ought to be exercised through a mere bureau of the Government. We think a bureau is in too exposed a position. It does not possess, in its very organic creation, the capacity for independence and businesslike judgment which this problem calls for, and we turn elsewhere to see what we can suggest to strengthen that situation. We think that we are safe in saying that the higher the position a man occupies in the Gov- ernment the greater is his opportunity for courage and the greater is his sense of responsibility. I think if you will look through the gradations of your legislative life you will find that the men who get to the top are capable of a broader outlook, more courage- ous action, and are more responsive to the calls of responsibility. We think that goes throughout the whole political fabric. In saying that we recognize that we can not get away from politics. 155 The very warp and woof of our national life is politics. It is a Government by politics; but there is a difference between petty politics and great politics. We know that when you regulate us you inu.st regulate us through political agencies ; but our plea to you is that you regulate us by political agencies that are the highest, the strongest, and the most responsible, and we therefore ask of you that in the fundamental matters to which I shall call your attention you create a department of this Government and put over it a Secretary of Transportation who shall discharge the duties which I shall outline in a few moments. We believe that we will find more strength at the President's table than we will in a bureau of the Government — strength not only in our favor when we are right, but, you must also realize, strength against us when we are wrong — because the policies then will be the policies of the national administration. Is it not true that transportation is one of the great interests of the people? We have just seen that, in time of v^rar, it \\as essential to the armies and the navies and the victory. In time of peace it is more necessary, day by day, than the armies and the navies. It is, to use the language of the President, "the one common interest of our whole industrial life." You have a member of the Presi- dent's cabinet, sitting at his table, to represent the interests of commerce; you have a member of his cabinet, sitting there at his table, to represent the interests of the Army and of the Navy; you have one sitting there to represent the interests of agriculture. Why is it that transportation is not of sufficient importance and of sufficient dignity to be represented there also? Why ought not the question of the adequacy and sufficiency of trans- portation facilities, upon which the whole country is dependent, be of sufficient importance to have a man sitting there, charged with the duty of seeing that they are adequate, and making his position on the subject a matter of national policy? By that means every interest of transportation — and I do not mean pri- vate interests : I am discussing public interests — every interest of transportation which he recognizes will be a matter that he can bring at once to the attention of the President, to debate in his 156 cabinet, and to the test of whelher or not it will be made a matter of national administration poiic)'. Charge him with the duty of seeing that the people of this country and the commerce of this country are adequately supplied with transportation facilities, and you have him in a position where he is the least amenable to petty political conditions or forces, where he has the largest sense of responsibility, and where his opportunity to make a national need a national policy is made possible. Now, we feel that the creation of such a department, with a secretary at its head, will enable us to have promptness in the adaptation of our relationship to the recurring and changing business conditions of the country. We feel, too, that where we are right the battle will not be, as heretofore, between us, in our weakness, and the shipping public, or whoever else opposes us on the other side ; but the thing will be determined on a wise national policy, and will be fought out, with the administration on one side and its opponents on the other. All we have got to do, in order to avail ourselves of that opportunity, is to be right in our contention — and we ought to have the responsibility put upon us of being right or wrong. But where we are right, there ought to be machinei-y that will see to it — and which is strong enough to see to it — that the policies which are right shall come into effective operation, in the interest of the public. Now, I am told that there will be opposition to this from two sources: one, one of the political parties, and the other the other political party. [Laughter.] Senator Cummins. It is comprehensive, anyhow, is it not? Senator Watson. Yes ; it is comprehensive. Mr. Ti-iOM. That each one of the political parties would hesitate to trust such authority as this in the hands of the other. I, of course, do not know how that is. I hope it is not true, but if there is any apprehension on this subject I believe it to be ex- aggerated. I do not believe that the fact of there being created a secretary of transportation, with his seat at the President's table, will give such a political advantage to the administration as might be supposed. It is not proposed that he shall have any relationship with the great army of employees ; he would have 157 no right to give orders to them. Their relationship to the com- panies will be the same as heretofore, and if he should attempt to intimidate or to control the managements then we all know that the managements can not intimidate and control the em- ployees. Senator Townsend. I did not get that sentence. "Can" or "cannot"? Mr. Thgm. Can not. The employees have their own indi- vidual policies and their own individual politics; and the danger of creating a political machine, which could hand from one party to the other, accordingly as "they are in power, the votes of the employees, is, in my opinion, vastly exaggerated. I do not believe it is possible. We had a little instance the other day : There was a member of the President's Cabinet, not with the limited authority which we are suggesting shall be given to the secretary of transporta- tion, but with a direct relationship to every railroad employee in the land. I have no reason to believe that any attempt was made to influence them ; but I believe that if an effort had been made to influence them, the result of the election would not have been different from what it was. And we had an election in Congress the other day in which, notwithstanding this relationship, the opposing party was successful. Senator Poindexter. Probably it was on account of that relationship. Mr. Thom. Then, if that be so, one party ought to be very glad to see the other have the secretary of transportation — if it is a disadvantage. [Laughter.] And I believe the truth lies there, Senator Poindexter. I believe that if any man in the President's cabinet should attempt to use his power to band together a great political force of the employees, it would be so resented by the other American people and by the employees themselves, that it would be a disadvantage, instead of an advantage. Senator Cummins. Does that mean that this man did that, and met with that fate? Mr. Thom. No. I said expressly that I did not believe he made any such effort; but I am talking about the country having 158 gone through, without material difficulty or danger, a situation with a member of the cabinet controlling the railroads. Now, gentlemen, those are our reasons for favoring a secre- tary of transportation. I ask your very earnest consideration of them. You are dealing with a great problem; you are dealing with a difficult problem. It is a situation where strength must be brought to it; it cannot be left to struggle along and stagger and fall because of faulty regulation. Now, consider whether you will not be strengthening this great industry and promoting the public interest by creating a responsible cabinet officer whose duty it shall be to look out for the adequacy of your transportation facilities and to be responsible for them. Position of Interstate Commerce Commission With Reference to Secreteuy of Transportation. Now, the next question arises. What ought the Interstate Commerce Commission to do if that plan is adopted? To what duties, necessarily, does the adoption of that idea relegate the Interstate Commerce Commission? It relegates them to the position which is outlined in Mr. Prouty's statement, to which I have alluded. I do not think that American public opinion will accept the view of an uncon- trolled head, of an uncontrolled secretary of transportation. I think, in order to satisfy public opinion, there must be a check upon an officer with that authority and power. Now, where ought that check to be found? It ought to be found in a de- liberative body. It ought to be found in the Interstate Commerce Commission. There ought to be the authority to check the action of anybody — no matter who he is — that has charge of these trans- portation interests. Some authority must be created in order to satisfy public opinion, in order to meet public conviction. There is a body, made to your hand. Judge Prouty said you ought to separate its executive functions and bestow upon it only judicial functions. That is a suggestion that we also make,/ that, with the exception of Federal valuation and control over the accounting system, the duties of the Interstate Commerce 159 Commission be confined to hearing and determining controversies over rates. Some suggestion has been made here, in questions, as to whether or not the whole power of fixing rates ought to be in the Interstate Commerce Commission, with no power of initiation in the carriers ; that they not only have a right to make maximum and minimum rates, but the rate itself. A great deal can be said in favor of that proposition : but it seems to me that there are cer- tain considerations, of a substantial character, which ought to be taken into view in connection with it, and one of those consid- erations is this : How far can a rate-making body, such as the Interstate Commerce Commission, or any commission, respond readily to the needs of shippers for adapted rates? Now, it is common experience that a rate proposal arises in this way, fre- quently: There is some interest that desires to establish a new enterprise on the line of a road. One of the factors that must be determined is the transportation charges which it will be under, if it does establish itself on that road. Another thing that must be considered is the whole commercial field that will be available for it when the industry shall have been established. Now, what happens is that the man who proposes to establish that enterprise will have at his disposal the whole commercial force of the railroad, in giving him information as to the field which is available to him. in giving him information as to the rate situations, and other situations which he will have to meet; and thereupon, by arrangement between the two, a rate is fixed .^nd initiated by the carrier to meet that commercial necessity. In other words, the terms on which men can do business are con- trolled by the rates, and there must be an Opportunity for flexi- bility and promptness in making these rates. There is a memorandum on that subject, which has been prepared for me by a very competent rate man, which I shall not read in full, but which I shall ask to have incorporated in my remarks. I will read one or two of these headings. I want to call attention to the fact that whatever nomenclature we may adopt, what we are proposing does not amount to a guaranty about rates. A guaranty involves the idea of responsibility for 160 results, to the extent that if there is a deficiency it shall be made good by a money payment. That is one definition of a "guar- anty"; and I am aware that the term "guaranty" may be con- sidered from the standpoint of an assurance in the law that the rates will be sufficient for a certain purpose. Now, what we are asking is no guaranty of either sort. We are asking for permis- sion to work out our own salvation under a statutory rule that will make rates adequate, and if there is a failure in the result we are not asking anybody to make it good. Now, with that explanation I will read one or two of these questions and answers, and will ask that the memorandum, in its entirety, be incorporated with my remarks at this point. (Thereupon Mr. Thom read aloud several portions of the said memorandum, which appears in full below, as follows:) Initiation and Adjustment of Rates. Under the impression that the proposal of the carriers contem- plates a guaranteed return upon their investment, the question has been asked why they should be authorized to initiate rates. Answer. — First. The carriers have not asked for and do not expect a guaranteed return upon their investment. They desire to be permitted to earn sufficient revenue to provide safe and sufficient serv- ice, to protect their existing investment, to attract new capital neces- sary in the public interest, and to reflect the cost of wages incident to furnishing transportation. They accept the primary responsi- bility of earning as much revenue as possible by the encouragement of industry, development of traffic, economy of operation, and effi- cient management. Second. The carriers always have initiated rates and should continue to be unhampered in doing so, except as their rates are subject to review by a governmental agency upon complaint of a shipper, as now provided by law, or upon complaint of another car- rier, as now proposed by the railroads, and subject, upon such com- plaint, to the authority of the Interstate Commerce Commission to prescribe a minimum as well as a maximum rate, as now proposed by that tribunal. The encouragement of industry and development of traffic require the initiation of commodity rates where only class rates may exist, or reduction of commodity rates which may not be low enough to move the traffic. To whatever extent commerce may be stimulated and profitable traffic developed by such reduced rates, it becomes unnecessary to obtain revenue by increased rates ; but when the revenue obtained by the development of traffic and efficient handling thereof shall be insufficient to meet the conditions which it is proposed shall be given consideration in determining the rea- sonableness of rates, it should continue to be the privilege, and 161 should be the duty, of the carriers to initiate the necessary increased rates which will be subject to suspension, but which should be allowed to be promptly made effective when they meet the test of reasonableness which the carriers have proposed. Third. The prompt initiation of rates by the carriers facilitates the business of the shippers and promotes the commerce of the country. When an industry is born or is determining its location its very life depends on what the inbound and outbound freight rates are going to be, and what markets can be reached. The experience of the railroad's entire staff is available to those contemplating the creation or location of the industry, and it is not imusual to rely upon this intimate acquaintance with the section of the country served by a given line for information as to sources of supply, and available markets of distribution. Such ofiScers are expected to say what the inbound and outbound cost of transportation will be. If unable to do so, the project would be retarded instead of facilitated. Indeed, the initiation of rates by the carriers is one of the elements of individual initiative which makes the private control and man- agement of transportation so much preferable to the users of the railroads than governmental control or ownership, and the indi- vidual carriers should be encouraged to initiate rates that will stim- ulate traffic, in order to obtain as much revenue as possible without the necessity of increased rates. Fourth. While no objection is offered by the carriers to a na- tional governmental agency being authorized to initiate general ad- justments of rates to maintain a proper relation between income and expenses, the individual carriers should not be relieved of their share of the responsibility to initiate rates to produce the requisite revenue ; and no governmental rate-making bureau could as promptly and intelligently initiate the commodity rates throughout all sections of the country which are necessary to develop its commerce. For example, if rates could only be initiated by the Interstate Commerce Commission, that tribunal would, of course, undertake, by ex- haustive investigation, to inform itself as completely as the traffic officers of the individual line are already informed when they make the rates necessary to move the traffic, so that as much time would be taken in the original establishment of such rates as is now con- sumed by the commission in determining the reasonableness of a rate when brought before it on complaint. Commissioner Clark, speaking for a majority of the commission, has not recommended withdrawal of the carriers' privilege to initiate rates. His recom- mendation that the commission be authorized to prescribe minimum as well as maximum rates has reference to rates which are brought before the commission on complaint, and contemplates the correc- tion of any rate that may have been made lower than is found to have been proper or necessary, and to remove discrimination when found, upon investigation, by requiring increase of the lower rate, where the higher rate is found to be not more than reasonable, and this is also contemplated by the recommendation of the carriers. 162 It is unnecessary to seek any better illustration of the benefit to commerce which has resulted from the initiation of rates by the carriers than the development of the California citrus fruit indus- try, which is brought to our attention by Commissioner Woolley's quotation from the opinion of Commissioner Lane in 1911 in the Arlington Heights fruit case, wherein a rate from Cahfornia to the Missouri River, which was found to be not more than reasonable, had been extended all the way to the Atlantic seaboard. The State of California produces about 15,000 carloads of lemons per annum, for which the more sparsely settled western country does not afford a sufficient market. They must, therefore, be delivered in the East in competition with lemons from Sicily coming to the Atlantic and Gulf ports. Commissioner Lane expressed the opinion that" the commission could not itself prescribe or require the extension of the Missouri River rate to this large blanket of destination territory, but finding that neither shippers nor carriers wished it destroyed and that it was not in conflict with the provisions of the law, the adjustment was approved by the commission. Likewise, the initiation of rates by the carriers has given the widest possible markets to grain, potatoes, vegetables, and other products of the soil ; and has given the consumer the benefit of the competition of these products in markets which they could not other- wise have reached — in the face of which a mileage scale of rates has been proposed to better protect the man on the farm and the con- sumer, and to more equitably develop our agricultural resources. A nation-wide structure on a mileage basis would probably be more injurious to the man on the farm and to the consumer than to any other class of people. The constant changes in conditions and the rapid development of the country require that the initiation of rates shall not be cum- bersome procedure, if the needs of commerce are to be promptly met. There must be sufficient flexibility of rates, at least upon staple products, to promptly meet the needs of commerce, while the sole initiation of rates by a governmental bureau would tend to rigidity and be open to much the same objection as an inflexible scale of mileage rates, which, in my opinion, would shackle the industry of transportation and cripple the commerce of the country. Mr. Thom. Now another reason which influences us to advocate that the carriers should have the power of initiating rates is that there should be some machinery to make the changes in rates promptly. If the Interstate Commerce Commission has the power, and the sole power, to initiate or fix rates, the question of whether they put their machinery in operation may be con- trolled by conditions and considerations which do not make for promptness, and there will be no way, unless some special way be created in the act, to stimulate that action. Of course, it might 163 be that if you gave the commission entire power over rates, and authority to fix them all, you might confer upon the Secretary of Transpoi-tation the power, and make it his duty, to bring to the attention of the commission any state of affairs that required a change in the rate structure, and that would be a method of stimulation. It may be that this problem can be worked out on one or other of these lines, and our desire to initiate rates is not founded on any pui-pose but to get the best and most adaptable means of making our transportation facilities meet most readily the public needs. If you think that another method is better you will find no captious opposition on our part. We feel that with the power to initiate rates as heretofore, with the power of suspension in the Secretary of Transportation, and with the power of setting them aside in the Interstate Commerce Commission, every public interest will be protected. You will observe that in our plan we propose to reduce the time of suspension from 10 months, as at present, to 60 days. The idea in that also is promptness. If we have a need for additional revenue, and rates are adjusted to bring about that object or that result, then a business concern can not wait 10 months for the result. The answer will of course, be made that the Interstate Commerce Commission can not decide that case in 60 days. In most cases, that is true. In a great many of the cases there would be no opportunity for a decision in 60 days. But the interests of the shipper can be provided for by creating a system of reparation if those rates are allowed to go in at the end of 60 days, and make the carriers refund any amount that they have been charging in excess of what is a proper rate. That system of reparation— which all will admits is not entirely satisfactory — seems to be the lesser of the two evils— the two evils being, first, to cripple the transportation facility by withholding for 10 months revenues which are ulti- mately determined to be necessary in the public interest; and, second, having the shippers pay more than may ultimately be determined to be right ; but requiring the carrier to pay back the excess of the charge. 164 Senator Townsend. Have you discussed in your talk her« how you would make reparation to the consumer, who ultimatelj pays that tax? Mr. Thom. No; I have not; and that is what I alluded to a; one of the difficulties in the system of reparation. I think thai the requirement that the carrier shall pay to somebody any excess in charge will be a check upon any wild suggestion of increase in rates. Now, gentlemen, I believe that you ought to work out through such machinery as our plan here suggests, a method oi regulation of these carriers, and that you ought to deal with rates either from the standpoint of making the Interstate Commerce Commission the rate-fixing body or preserving the initiative wit! us and giving them the check, and the secretary of transportatior also a check, upon any action we may take with respect to rates Now, as a part of this matter of rates, I think if we woulc divest ourselves of all consideration for existing institutions there is not a man around this board who would not say that if the Government is now to adopt a policy of making the rates ade- quate, there ought to be but one authority to make those rate; adequate. How can your national authority make them adequate with fairness to interstate commerce, if a substantial part of th« rates can not be controlled by the national body, but are undei the control of the State? How are you going to work out youi problem of adequateness of revenue through a governmenta agency which can control only a part of the subject? In order to reach your result, either you must be willing tc put upon interstate commerce the burden of making up an} deficit that the States may not be willing to pay or you must let the adequacy of revenue go. If you are going to control the subject at all and adopt a policy by which there shall be adequacy of rates to insure adequacy of public service, then you have got to control it in one body, and you can not control only a part oi the subject. Now, as to the rule we suggest for rate making; it is this: The statute itself should require that rates be not only whaf has been called reasonable, but adequate and sufficient to enable 165 the carriers to provide safe, adequate and sufficient service to protect existing investment and to attract the new capital neces- sary in the public interest; and to that end the statute should, among other things, specifically provide that the level of rates must properly reflect the cost of wages and all other expenses incident to the furnishing of transportation. Now, the question was asked here: "How does that differ from the present rule? Is it not now the law that rates must be adequate as well as reasonable? Is it not now the law that expenses must be properly reflected in the rates?" My answer to the first question is, "Yes ; theoretically." It is now the law that a rate can not be reasonable unless it is ade- quate, in my judgment. But in actual administration, in my judgment, the question of adequacy has become minimized in comparison with the question of low rates. I think the tendency of administration is to think more of low rates than of adequate rates, and I think the whole influence and pressure from the rate-paying bodies is in favor of that view. Now, we say that when the statute itself calls attention, as a national policy, to the necessity for adequacy, there will be an element of strength put behind the administrative bodies in de- termining the level of rates; that when the statute emphasizes the rule that a rate must be adequate, the commission, in admin- istering that rule, will feel justified in giving as much prominence to the question of adequacy as they will to the question of small ness of the rate. But it has not all the time been conceded that the commis- sion has authority to consider the question of adequacy of the rates. In the Eastern Rate case, 20 I. C. C. Reports, 247, 248, this was said by the commission : These advances are justified by the defendants upon the ground that the cost of operation has so increased that, although gross oper- ating income has continued to grow, the net operating income has become and is insufficient. Some claim was put forward by cer- tain carriers that certain of these advances were justifiable upon grounds other than the need of additional revenue, but this is not much insisted upon. The justification presented by the carriers is the want of additional revenue, and the question presented to us is, Are these defendants justified in laying this additional transporta- tion burden upon the public for the purpose of obtaining greater net revenue? 166 Strictly speaking, this commission has no jurisdiction to hear and determine that question. We have no authority as such to say what amount these carriers shall earn nor to establish a schedule of rates which will permit them to earn that amount. Our authority is limited to inquiring into the reasonableness of a particular rate or rates and establishing that rate or practice which is found lawful in the place of the one condemned as unlawful. Now, there has been a steady advance from that decision by the commission; they have been considering scales of rates and the adequacy of revenues since then, but it has been a progress hampered by this conception in the minds of some — not a con- fident exercise of power, but an exercise of a power which they have construed to come out of the necessities of the case. Now, we want in the statute itself to confer that power, so that there can be no doubt of it in any mind hereafter. The Chairman. Who wrote the opinion you just quoted, Mr. Thorn ? Mr. Thom. I think. Judge Prouty; did he not, Mr. Clark? Commissioner Clark. I think he did. Senator Cummins. Was he speaking about a single railroad or a group of 38 railroads, or something like that? Mr. Thom. He was speaking of the eastern group. Senator Underwood. Mr. Thom, I do not want to interrupt you, but I want to get my mind straight. I know how interrup- tions interfere, but still I am thinking on this question. Mr. Thom. I am glad to have you do it. Senator. Senator Underwood. I want to know your opinion as to whether the conflict between the adequacy of rates to support the system and the effort to secure lower rates is due primarily to a conflict between higher and lower rates, or whether it is due to an effort on the part of the shipper to secure competitive serv- ice or competitive markets? Is not the real conflict that comes before the commission, as these rates develop, an effort on the part of the shipper to reach his markets ? It is not so much the amount of the rate as it is the competition in the various markets of the country, is it ? Mr. Thom. Senator, I think it arises from both causes. Of course, the matter of equality of terms in reaching the market is a matter of prime importance, but there is also a great jealousy 167 on the part of the public as to the amount of the rates, and that is such a jealousy that it is a difficult one to withstand, it is so widespread; so I do not think we can arrive at a correct con- clusion about this matter if we ignore either one of the thoughts that you have suggested. I believe they both enter into the problem. Now, we were asked also — some Senator asked — whether or not it was at present the law that the expense of labor must be reflected in the rate ? Now, in that same case this was said : Railroad labor, certainly organized railroad labor, is probably as well paid, and some say better paid, than labor of all other kinds, upon the average. Railroad employees will hardly expect to re- ceive wages which exceed those paid to other forms of labor for the same grade of service, and this commission certainly could not permit the charging of rates for the purpose of enabling railroads to pay their laborers extravagant compensation as measured by the general average compensation paid labor in this country as a whole. Now, if that means what it apparently says, it means that railroad wages are not beyond question when rates are under consideration — the level of railroad wages. It may be, as a prac- tical matter, that they would be excepted, but you will observe that that is not a concession by the commission, but they hold the door open to say that they will have the power to examine the scale of railroad wages, as well as the power to examine the prices paid for supplies, and to say whether or not they are extravagant. Now, to get rid of that, to make it certain that railroad wages are to be considered a factor and are to be accepted by the com- mission in the making of rates, we have embodied what I have read to you in our plan. Federal Incorporation. Now, there is one other feature of this plan, which has several branches, which I shall ask the privilege of discussing before you. I shall not go into it more in detail than to con- sider in its various branches this one other point, and that is this : What ought to be the extent of Federal authority over the organ- iaztion of these railroad companies, and in the several matters of the bearing of organization on regulation of the issues of 168 securities, and on the policy, wliich seems to be gaining in public favor, of consolidating these railroads, and of estabHshing a uniform railroad system throughout the United States? Now, we ask Federal incorporation. Let me ask your attention for the moment to the need of Federal incorporation from these various standpoints. We think, beyond doubt, that you have the power to incor- porate these instrumentalities of commerce under the Federal ]a.w, and that, likewise, you have the power to make your system of incorporation compulsory. I shall not attempt to make the entire argument, but I shall sketch it. Your power to incor- porate has been held by the Supreme Court of the United States to grow out of your power to regulate commerce. If a national system of incorporation is, therefore, a proper exercise of the regulating power under the commerce clause, then, undoubtedly, the corollary of that is that it can be made compulsory. If you can regulate, you can compel obedience to regulation. And the whole question of whether or not it can be lawfully made compulsory is answered when you answer the question of whether or not incorporation is a proper exercise of the power of regulation. You meet your question and you decide it when you determine that incorporation is a proper exercise of the reg- ulating power. And if incorporation be properly a part of the regulating power, then it can be made compulsory, because "reg- ulation" means "compulsion." I have no doubt, personally, on that subject. I know there are eminent men who take a different view, but we feel, after long consideration of that question, that there is no possible constitutional doubt about the power. Now, I have here, and perhaps I had better put it into the record, an opinion by Richard Olney on that subject. It is a wonderfully clear and concise document. He approached the subject with doubt about the power; he came out of it perfectly clear in his conviction as to the existence of the power ; and he has expressed it here in a table of numbered propositions, which are wonder- fully impressive in their statement. Senator Cummins. I may say to Mr. Thom that that opin- ion is already in the record. 169 Mr. Thom. In the Newlands' hearings? Senator Cummins. Yes; and that has become a part of this record. Mr. Thom. Yes; it is in the Newlands hearings, and those have been made a part of this record. The Chairman. Then it is not necessary to print that again. Mr. Thom. Now, why do we find it desirable to have com- pulsory incorporation? As Senator Cummins intimated to one of the other Senators a few days ago, my own view of the con- stitutional power of Congress is that even if these incorporations by the States be preserved, it is in the power of Congress by legislation to enlarge the powers of a State corporation, if that be a proper matter of regulation; but we will never have that proposition accepted without litigation, and the question be- comes a most important one in connection with the question of the regulation by Congress of the issue of the securities of these railroads. I think there is perhaps little difference of opinion, if any, that Congress ought to possess and to exercise the exclu- sive power to regulate the issue of securities by carriers engaged in interstate commerce. My impression is that the Association of State Railroad Commissions has so advised. Of course, it is unthinkable that in a matter of financing, which requires prompt- ness and capacity for action, there should be simply superadded to the power of the States to regvilate the issue of these securities the necessity for Congress or a Federal body also to act. The object of everybody is to obtain governmental supervision and regulation, but to do it in a way that will not unnecessarily impede or unduly hamper the transaction of business. Now, you can not go to a dozen different bodies when you vrant to issue your securi- ties, and get the authority of all, without an undue waste of time. Nor can you have an effective regulation of these instrumentalities by Congress if its authority is merely permissive, and if the whole financial proposal may be destroyed by the inaction or the unfavorable action of one of the States. It can not be a divided power. Now, suppose Congress undertakes, with the corporations still State corporations, to authorize the issue of such securities 170 as the judgment of Congress approves as in the public interest, and there is the State charter, and there is the prohibition of the State law, or there is the condition of the State law, which is attached to the issue of these securities, and which is not satisfied. Why, manifestly, when that issue goes to the bankers for disposal, it will be referred to their lawyers — and the lawyer of a banker takes no chances ; he undoubtedly will advise that that issue shall be not accepted until the question be passed on by the Supreme Court of the United States ; and there is your litigation, and there is your delay. Now, we want to get rid of that ; we want to dispose of that possibility by having all of these corporations made Federal cor- porations, where there can be no dispute about the power of the Federal Government to control its own creature. Now, as to one other matter, there is a growing public opin- ion, if I read it aright, in favor of the consolidation of a number of weak roads with strong ones, in order to solve some of the transportation problems. That matter has been debated, it seems to me, from the standpoint that the Federal laws are all that stand in the way of that consolidation; that the Sherman anti- trust law and others are the things that stop it. They do stop it, but they are not all that stop it. I have here a paper which I expected would be introduced by Mr. Bledsoe, as one of our witnesses ; but the rule of the com- mittee confines us to one other beside myself, and, therefore, he will not be able, at this time, at least, to appear ; and I shall ask that this paper on the conflict of Sta^e laws be incorporated as a part of my remarks — his paper. It may be found of value to the committee. Now, if I may have five minutes more, I think I will relieve you gentlemen, (The pamphlet prepared by Mr. S. T. Bledsoe, general counsel the Atchison, Topeka & Santa Fe Railway Co., entitled "Conflict of law in regulation of securities, capitalization, rates, and incidental matters," read by Mr. Thorn on January 20, is printed in full in this document, beginning on page 203.) Senator Cummins. There will be several questions, I take it. Senator Watson, I think we ought to adjourn now. 171 The Chairman. The committee will stand adjourned now until Monday ; and I hope the witnesses, or those who desire to appear, will see the necessity of getting their statements and their arguments down to as concise form as is possible. We want to hear the different angles of this proposition, and in order to do that we must get them boiled down as much as possible. The committee will stand adjourned now until 10 o'clock Monday morning. The committee thereupon adjourned until Jan. 20, at 10 a. m. Testimony. Mr. Alfred P. Thorn — resumed. January 20, 1919. The conmiittee met, pursuant to adjournment, at 10 o'clock a. m.. Senator Ellison D. Smith, presiding. The Chairman. The committee will come to order. Mr. Thom, you may jjroceed with 3rour argument. Statement of Mr. Alfred P. Thom, Monday, January 20, 1919. Mr. TiiOM. Mr. Chairman, I am very near the end of what I shall say to the committee in my opening statement. On Friday I was speaking of the suggestion of national incorporation, com- pulsory in character, and had spoken of the desirability of it from the standpoint of dealing with securities. I also had gotten to the point of suggesting that it would be found that that, or some- thing similar, would be necessary from the standpoint of dealing with the question of consolidations. The mind of the public and of Congress seems to be tending in the direction of the desira- bility of having a few systems of railway, rather than a great number divided up into some weak and some strong systems, and that perhaps the question of the weak and the strong roads can be dealt with in some way through a process of consolidation. The impression seems also to have existed that the only thing in the way of that is the Federal antitntst laws, and that if we got rid of the Sherman antitrust law and similar laws the way would be open for these consolidations. I desire to call your attention to the fact that that is not the case : that if you were to wipe off the Federal statute books the Sherman Act and all other acts of a similar nature, you would 172 still find it impossible to make the consolidations which you may lind that you want to make ; and that is because of the legislation of the various States. There are over 30 States which forbid the consolidation of parallel or competing lines. Those States are Arizona, Arkansas, California, Colorado, Georgia, Idaho, Illinois, Indiana, Iowa with certain qualifications, Kentucky, Louisiana, Michigan, Minnesota, Missouri, Mississippi, Montana, Nebraska, Massachusetts if both lines enter Boston, North Dakota, North Carolina, Ohio as to consolidated corporations, Oklahoma, Ore- gon, Pennsylvania, South Dakota, South Carolina, Tennessee, Texas, Utah, Virginia, Wisconsin, West Virginia, and Wash- ington. Senator Pomerene. From what are you reading, may I ask? Mr. Thom. I am reading from the statement which I asked to file as a part of my testimony, prepared by Mr. Bledsoe, on the subject of Conflict of State Laws, and I am going to put it into this record. Senator Pomerene. I was not able to be here on Friday, because of another committee hearing, and you may have cov- ered what I am about to ask you; but I gather that it is your thought, from what you have said this morning, that there ought to be some affirmative legislation directing and authorizing these consolidations, notwithstanding the State statutes? Mr. Thom. My thought is that you ought to make a Federal incorporation of all instrumentalities of commerce that engage in interstate commerce, and then authorize the consolidation of your own chartered companies. Now, in addition to what I have said as to absolute prohi- bition, there are a number of the States where in order to have a consolidation which is permissible you must obtain the approval of the State authorities. I will not go into the detail of that. It is all here in the paper which I shall file ; but I am calling your attention to it now merely to show that if you desire to pursue a policy of incorporation you can not stop short by simply abol- ishing the Federal statutes which prevent it ; you have got to go further. Now, there is one other thing that is necessary in that same connection. 173 Senator Pomerene. Let me ask you this question, in that con- nection, to get your view ; 1 have not matured my own thought about it. You speak of certain States which forbid consolida- tion of parallel lines? Mr. Thom. Parallel or competing lines. • Senator Pomerene. Parallel or competing lines? Mr. Thom. Yes. Senator Pomerene. Well, assume for the sake of the argu- ment that we were to authorize national incorporation for the purpose of taking over these roads; what would be the effect, legally speaking now, v/ith reference to those parallel and com- peting lines? Mr. Thom. Of the State prohibition? Senator Pomerene. Yes. Could these local companies evade the provisions of the State laws by transferring their properties to the national incorporation? Mr. Thom. Undoubtedly. If you incorporate a railroad the National Government can control it in respect to its consolida- tions or anything else, irrespective of State laws, for the reason that you would be doing that as part of your power to regulate commerce; and your authority over the regulation of commerce is supreme. Senator Pomerene. I have not any doubt, under some recent holdings of the Supreme Court, that you could; that, technically, we have the authority to make practically every intrastate road an interstate road. Mr. Thom. I do not think there is any doubt about it. Now, I want to call your attention also to this fact: That I have not read the names of the entire 48 States, but only the names of States exceeding 30 in number — probably 33 — that if you will examine the geographical situation of those 33 States you will find that their laws against consolidations will practically forbid you from mak- ing any consolidations at all, because all the roads you will want to deal with will be found to lie in one or other of those States, as to a part of them. Senator Kellogg. I thought you just suggested that you thought Congress could authorize it ? Mr, Thom. I stated, in reply to Senator Pomerene, that if the 174 National Government proceeded through the method of national incorporation they could authorize it. I state further, that I think that the power exists for the National Government to regulate it even as to State charters; but that will not be done — can not be accomplished without serious litigation ; whereas there would be no litigation if you proceed through the method of national incorpora- tion. Mr. Bledsoe calls my attention to the fact that nearly every State has antitrust laws patterned after the Sherman law, so that you can not even have joint offices, etc. — that is, as to some of them. Now, there is another feature that I wish to advert to briefly, and that is that if the National Government shall conceive that the time has come when there ought to be economy in the matter of expenditures for transportation, in the matter of creating new systems of transportation, and should enter upon the policy of re- quiring a certificate of convenience and necessity from some public official, you will there find the policies of the State also menacing your policy; and I believe when you read this pamphlet you will find out that if you are to have a national policy, if that is your purpose, if you think that is necessary in the public interest, your pathway will be crossed at every step by the antagonistic theories of State control, and that if you are going to have a harmonious system you have got to have a system in which the Nation shall take charge of the whole situation. Now, one other thing and I shall have finished my statement in chief. Senator Watson. Suppose you have a national incorporation act. How can you overcome the power and efifect of a State statute unless by definitions you make all commerce "interstate commerce?" That is to say, if any traffic is hauled in a car with interstate commerce, or if it is hauled in any train engaged in in- terstate commerce, or carrying interstate traffic, how are you going to overcome, except by definition of "interstate commerce," the power of the State law? Mr. Thom. Senator, I think there is no difficulty about that without the definition to which you allude. Senator Watson. I confess that the one great question that disturbs me more than any other thing in connection v/ith this 175 legislation, is the problem of the State commissions and the force of the State laws. Mr. Thom. It is settled by the decisions of the Supreme Court of the United States that the jurisdiction of Congress can be made co-extensive with the instrurrent of interstate commerce without reference to the business that it does — co-extensive with the in- strument. You can, for example, by your laws, control what shall he done in respect to safety on a train moving on an interstate road in strictly intrastate business. Senator Watson. That is done by express statutes? Mr. Thom. Well, that is what I am saying. I am saying that Congress has the power. We are talking now of the adop- tion of a statute. Senator Watson. Yes. Mr. Thom. Congress has the power to take the entire in- strument of interstate commerce under its power to regulate commerce — to take the enti't instrument, and to govern it in all its aspects, whether those aspects be related simply to interstate traffic or to State traffic. Senator Ct'mmins. I have asked you once or twice a question on that point — possibly privately; I do not know whether I have asked you publicly or not ; would it interrupt you if I should pro- pound a question now? Air. Thom. Not at all. Senator. Senator Cummins. I think your reasoning is absolutely conclusive and perfect, so far as the control of the Federal Gov- ernment over the instrumentality that it creates for the purpose of carrying on business is concerned ; but suppose the State says that this instrumentality which we have created for the purpose of doing interstate business, shall not be permitted to do intra- state business; how are you going to get rid, then, of that un- doubted power on the part of the State? Mr. Thom. Senator, you have asked me that question sev- eral times, and you will remember Mr. Roosevelt's reply to a visitor, when, after stating his case he said: Yes, sir; I have been thinking a great deal of this matter of yours. In fact, I have been thinking of nothing else since you came into the room. 176 Well, while I have not given your question the absolutely thorough examination to which its importance entitles it, I have given it enough attention to arrive at a conclusion entirely satis- factory to my own mind. I think that Congress has the power to incorporate or to charter a common carrier in interstate com- merce ; rather, I will put it this way : That under its power to regu- late interstate commerce, Congress has the power to charter a common carrier. It has done so many times; it has done so in the Texas-Pacific case; it has done so in the Union Pacific case. Senator Kellogg. And the Supreme Court has held that it has a right to do it ? Mr. Thom. Yes ; and it has a right to do it. Now, having chartered such a company, manifestly that company can enter any State, and there is no way of stopping that. Senator Cummins. That is clear. Mr. Thom. When it gets into the State, your question arises : How far can a State treat that company differently in respect to doing business for which it was chartered, from the way it treats a company chartered by itself ? Now, you will find that question most interestingly discussed by Chief Justice White, then Mr. Justice White, in the case of the Pullman Company, in 216 United States Reports. Senator Cummins. But there is one element that was not treated in that case, and which I think you have overlooked in your statement just now made : The Federal Government can not charter a company to do an intrastate business alone; that is not within its power of regulating commerce among the States. Now, it charters its company for the purpose of doing an interstate business Mr. Thom (interposing). No. Senator Cummins (continuing). And it may, of course, with the consent of the State, do an intrastate business as well ; but rny question is if the State objects — and I do not think any State would — but then if it should object to a Federal instrumentality doing business that is not within the scope of the Federal Consti- tution, how are you going to get away from it ? 177 Mr. Thom. Senator, I had not quite finished when you asked this last question. My premise was that, as held by the Supreme Court, and as often done by Congress under the power to regulate commerce, Congress can charter a company to do a common carrier business. That includes both interstate and intrastate. Now, you get into the State by a power which the State can not control ; you get there with power from the National Government to do an interstate and intrastate business, or, in other words, an entire common carrier business. Now, the fourteenth amendment then steps in and prevents the State from denying to that com- pany the equal protection of the law — a limitation not on the National Government in respect to the States ; but the fourteenth amendment steps in and says that the State shall not deny to any person chartered by another State or chartered by the Federal Government the equal protection of the laws within its borders; and it would be a denial of the equal protection of the laws to say to that company "you can not do the same kind of business that a company chartered by the State can do." That has been carried so far that a State can not tax the incorporation of an- other State at a higher rate for doing intrastate business in that State than it does its own corporations which are doing an intra- state business. The equal protection of the law extends to the protection of that company in doing business on an equality or plane with any incorporation of the State itself. Now, Chief Justice White says, in this opinion that I allude to that the doctrine is this : that while a State, if it may forbid a corporation from entering its borders, may do so for a bad reason, as well as a good reason; it may do so without any reason at all ; but he says that when you once get the authority of law for the company to enter the territory of the State and do business, then it is impossible for the State to limit it by taxation, or in any other way ; and he especially mentions that it can not forbid that corporation to do an intrastate business in the State. Now, I be- lieve that to be a sound doctrine, and I think that is what the fourteenth amendment means. Senator Cummins. But then it does not convince me. al- though I do not quarrel about the latter part of your conception 178 of the fourteenth amendment; but your reasoning, carried to its legitimate end, would mean that because the Federal Government can organize a corporation under its power to regulate interstate commerce, it can also, in connection with that, give the company the power to run a dry goods store in any one of the States, be- cause a right to regulate a dry goods store is just as clear as a right to regulate intrastate commerce? Mr. Thom. You would have there to solve the question as to whether or not it was a pertinent thing to enter the dry goods business, as it is to enter into the region of commerce within the State. I think you will find, throughout the decisions of the Su- preme Court, that a right to do an intrastate business is a con- comitant of and naturally falls within the same class as intrastate business in interstate commerce, and that you would burden your instrument of interstate commerce, you would cripple it if you per- mitted such a power to the State beyond the power of the effective exercise of your interstate power if you did not have the power of letting it enter the whole field of commerce ; and we have got the fourteenth amendment to create the difference between the State and the National Government in that respect ; and when the instrument of interstate commerce gets into the State, by virtue of your power to regulate commerce, with its concomitant, which it is competent for you to put upon it, to do a common carrier busi- ness, to keep from undulj"^ burdening interstate commerce, then the question arises whether there is any power in that State to deny the equal protection of the law to that instrumentality over one of its own creation in respect to interstate business. Senator Cummins. The question has never arisen, because no State has ever forbidden or attempted to forbid any Federal instrumentality in the way of a common carrier from doing in- trastate business ; but to me it is a very interesting question. Mr. Thom. If you have not read that decision of Justice White, I think you will find it very interesting. Senator Cummins. But that has only to do with the terms upon which a foreign corporation — foreign to the State — can come in and do business in that State? 179 Air. Thom. No ; he discusses the whole question of the power of the State to prevent the doing of an intrastate business by a corporation that comes lawfully into the State. I do not mean to say he discusses it in a way that makes that the deciding point in the case, but in order to arrive at his conclusion and to justify his concurrence with the court he discusses the whole subject. Senator Cummins. Then the sum of your argument is that because we have the right to create a common-carrier corpora- tion for the purpose of regulating interstate commerce, we have the right to clothe that corporation with authority to do an intra- state business; that is, to regulate a business which is not within our constitutional power ? Mr. Thom. Not to entirely regulate it, but you have a right to let that company do the business. The State may also charter another company to do a strictly intrastate business, if it wants to. Senator Cummins. You have no doubt about the right of the Federal Government to forbid a State corporation doing an inter- state business? Mr. Thom. None at all ; but it has no right to forbid a State corporation from doing an intrastate business. Senator Cummins. The Federal Government can forbid a State corporation doing an interstate business, but a State govern- ment can not forbid a Federal corporation from doing a State business ? Mr. Thom. I do not think it can. Senator Cummins. It seems to me those two things are a little inconsistent. Mr. Thom. I think the more you look at it the firmer you arrive at the conclusion that it will be utterly impossible for it to do it. Senator Pomerene. Senator, do you mean by your last ques- tion to limit it to corporations doing a common-carrier business or to all corporations? Senator Cummins. I mean to limit it to common carriers; that is, to any regulation of interstate commerce. It has bothered me, and it is very material in all our regulation of interstate com- merce, as to whether if we wanted to regulate interstate commerce 180 by creating a corporation for, say, conducting a coal mine — which I think is within our power — we could give that corporation the power to conduct a purely local business or intrastate business without the consent of the State. Senator Kem.ogg. I do not know that a legal discussion will do us any good, but in that Pullman case and in the Western Union case the question involved was whether a statute of the State of Kansas, which required each of those companies to take out a license before it should be permitted to do a purely intrastate business in the State of Kansas, and to pay a certain tax for that license, was valid. The Supreme Court held that it could not be required to do it; that the State had no power to prohibit the corporation from doing an intrastate business with its interstate business, or to require that, as a condition of its taking out a license, it should pay a tax on its capital. Mr. Thom. And on the same terms on which a State cor- poration might do it. Senator Keli.ogg. The difference, I think, is this : That un- der the Constitution, which is the supreme law of the land over interstate commerce, where it conflicts with the State law the Federal law is supreme. Mr. Thom. I want to say this, merely in conclusion, on that subject: That the Congress of the United States in assum- ing to use an instrument of interstate commerce is not to be bur- dened by the condition that if it does an interstate business it must do it under such disadvantages that it will stand on a different plane from any other common carrier. That, as Chief Justice White points out, would be a burden on interstate commerce, direct in its nature and prohibited by the fourteenth amendment. Senator Kellogg. Going back of that case a long way, Chief Justice Marshall, in the Bank case, held that Congress might cre- ate a bank not only to perform governmental functions, but to do a private business, which had nothing to do with governmental functions, except that it was profitable and made the bank a greater success. Mr. Thom. I had in mind to say, Senator, that under a power in the National Constitution very much less distinct than the com- 181 merce power — because I have never found any man yet exactly able to tell me where the power of Congress lies — in what specific provision of the United States Constitution, except the power to coin and issue money, etc. — to justify the creation of a bank, and yet under that indefinite power we have national banks all over this country, doing a strictly local business — the business of a private firm. The Labor Question. Now, there is one other subject merely that I want to mention, and then I will be at your disposal for cross-examination. We have presented in our plan a proposal as to the way to deal with the labor question. Senator Kellogg. To deal with what ? Mr. Thom. With the labor question. Everybody realizes that is a most difficult subject. There are many ways in which it may be done. The thing ultimately to be accomplished is that interstate commerce may move without interruption from any cause that the Government can control. We feel that the capital invested in interstate commerce ought not to have the power to interrupt it; we feel that the labor employed ought not to have the power to interrupt it ; but as to the method, whether that em- braced in our suggestion, or some other, shall be adopted, we are entirely open minded about it. It may be that some better method can be devised by which the interests of all the parties may be more equitable and properly protected. This method has appealed to us as probably as unobjectionable as anv other ; but we are en- tirely open minded on that subject, and will not be found insistent on any particular method. That is all that I ask to say in my examination in chief. Senator Townsend. Will you repeat briefly what your method is ? I was not here all the time. Mr. Thom. Our method is to have a board created, on which the public, labor, and the employers shall be equally represented, and that that board shall be charged with responsibility, in case of a labor conflict, either as to the scale of wages or as to working conditions, to make an examination into the whole subject, and report on it; and until a reasonable time after the report, there 182 shall be no interruption either by the employer or the employee of the public service. Senator Townsend. Who is to make the final decision ? Mr. Thom. There is no final decision; just a question of pub- licity. Senator Kellogg. I was not here during two days of your statement, so I will have to read it all before I can ask you any questions in relation to it. When I do so, I may wish to ask you a few questions, if the committee will permit; but at this time I would like you to state what this surplus that you were talking about — increase of surplus of the railroads — is Invested in, and whether it is cash, or whether it is property? Please explain that. I asked you that question at the time, but you did not answer it, as I understand you. Mr. Thom. The word "surplus" is an unfortunate bookkeep- ing term, in that connection. It ought to be regarded as simply the excess of assets over liabilities. What the bookkeeper does is to enter on one side the assets of the company, and on the other side the liabilities of the company; and then he subtracts the liabilities from the assets, and the excess is put down as "sur- plus." It might be a situation like this might arise, in order to make it simple; there might be one entry, on the assets side, of "investment in road and equipment." There might be two entries on the liability side "capital stock" and "indebtedness." If the "investment in road and equipment" is greater than the sum of the other two, there would be a "surplus," because there would be an excess of the assets over the liabilities. Now, the fact that there is this excess is no indication whatever of how it is invested. It is always invested, and generally in road and equipment. Senator McLean. It does not represent cash ? Mr. Thom. It does not represent cash at all. It might repre- sent cash if you happened to have it, but the road does not have it. There is hardly any cash in the treasury, beyond the mere work- ing capital, but that excess will be found in one item or the other on the assets side, and it is not, of course, possible, without going into the particular transaction, to find out which one of those items is under ; but it is not anything more than the excess of the assets 1R3 over the liabilities, and it is always in some sort of asset besides money, except to a very small extent — some working capital. Senator Kellogg. Now, a few other ciuestions, and one of them is this : You advocate Federal incorporation and permission to make some consolidations. Would you permit all competing systems of the country to consolidate ? Mr. TiiOM. I would not. I would have that regulated in a very intelligent way, and in a way consistent with a compre- hensive policy, by public authority. Senator Pomerene. May I suggest something there. Senator? Senator Kellogg. Certainly. Senator Pomerene. And your thought, I take it, is that this consolidation should be subject to the continuing jurisdiction and control of this public body? Mr. Thom. I do not know that I catch your idea. Senator Pomerene. Well, for instance, suppose a consolida- tion is authorized upon certain terms and conditions. Now, later on the controlling body concludes that those terms and conditions ought to be modified, or that their former order was unwise; should they not have the power to modify that? Mr. Thom. I had not given consideration to that, Senator, but it strikes me that there are some serious objections to that. As soon as you have authorized one company to purchase the property of another, and to consolidate with it, of course there are certain property rights that have thereby become crystallized. I think that a great many companies would hesitate, if the terms on which they could do that might be changed after the thing was done; but the control or the regulation of the consolidated body would continue in the national authority. Senator Pomerene. I know, but you are looking at it now wholly from the standpoint of the railroad. Commercial condi- tions and traffic conditions are constantly changing; and having that thought in mind, why should not this controlling body have some continuing authority, because any man, no matter how wise he may be, might make an order, just as Congress may pass a law, which represents his best views on that subject, but later ex- perience may indicate that a mistake has been made? Now, in 184 the interest of the public why should they not continue to have control? I am assuming, of course, that any change that will be made will be for good and sufficient reason. Mr. Thom. I suppose you also assume that any change that was made would be subject to the fifth amendment? Senator Pomerene. Oh, yes; surely. Mr. Thom. That it could not be made without properly pro- lecting the property interests involved? Senator Pomerene. Undoubtedly so. Mr. Thom. If the property interests involved are properly taken care of, I see no reason why that should not be done. Senator Pomerene. Congress would have to do that, whether they desired to or not. Mr. Thom. Congress would have to do what — protect the property interest involved? Senator Pomerene. Yes. Mr. Thom. Yes; unless it arose out of the acceptance of a charter provision. ' The Chairman. You said you would have this consolidation under a public body. Do you mean that it would be left optional with the roads as to whether they should be consolidated ; that is, that the public power should be exercised only to the extent of per- mitting them to consolidate and not of compelling them? Mr. Thom. That is as far as we have yet gone in our pro- posal. I know that some men who have given this matter great consideration think that there ought to be a compulsory power. We have not gone that far as yet. Our proposal is, as you sug- gest, that it shall be permissive and not compulsory. The Chairman. The question of Senator Pomerene would indicate that the power to retain would come after you had exer- cised the right, under your permissive plan, to consolidate under certain rules and regulations laid down by this governing body, and then, according to your contention, they would be allowed to dis- solve at their instance, but not at the instance of the power that laid down the regulation. It seems to me, under those conditions, your governing body would have no power at all except to permit what, perhaps, under the Federal incorporation you would have anvhow. 185 Mr. Thom. Well, I assume that whatever is done in respect to consolidation of parallel or competing lines would have to be done subject to governmental approval. Now, whether it should go further and say that the Government should have a right to compel it is another question, and we have not advanced that far in our consideration of this question. The Chairman. Would you go so far as to say that once you had consolidated by governmental approval you could dis- solve that combination without Government approval ? Mr. Thom. Oh, no. The Chairman. Once it is made by governmental approval, it must stand until the power that approved it approves the dis- solution ? Mr. Thom. Yes; and then that power must be exercised under the limitation of the fifth amendment. The Chairman. You would not go so far, then, as Senator Pomerene suggests, that the governing power could order you to dissolve ? Mr. Thom. No; not without the protection of the fifth amendment. Otherwise people would not invest in railroad prop- erties. You have got to consider how far you shall go in con- trolling the investment in these properties. People would not invest if what they invested in might be wrested from them un- der ruinous conditions. Senator Pomerene. The thought I had in mind was that this continuing jurisdiction over the terms of consolidation should be somewhat akin to the continuing control by the Interstate Com- merce Commission of the subject of rates. Now, under that you have the protection of the fifth amendment, and I am assum- ing that whatever would be done in that behalf would have to be reasonable and with due regard to the property interests. Mr. Thom. Yes, Senator, I think I understand your point of view now, and I have given my answer. Senator Pomerene. That is simply a tentative view. Mr. Thom. Yes. Senator Pomerene. I wanted to hear you develop it. 186 Senator Kellogg. Then, Mr. Thorn, as I understand, you would not do away with the competition in service at least be- tween the principal competing roads of the country? Mr. Thom. No ; our proposal is to retain that. Senator Kellogg. Now, there has been practically no competi- tion for many years so far as rates are concerned, and there can not be such competition, because between competing points the rates on all lines must be the same? Mr. Thom. Yes. Senator Kellogg. But is there not or has there not been heretofore under private ownership a great degree of competition as to service which has been of benefit to the public? Mr. Thom. We have thought so. Of course in a time when the transportation facilities of the country are not equal to the business and everybody has as much as they want and more you do not find the stimulus of competition to the same extent; but the normal condition of the country is where transportation com- panies have to seek the business, and the method they have of seeking it is to try to give the best service. Senator Kellogg. And that competition extends down to the local ticket and freight agent, who looks after the business of his customer ? Mr. Thom. Undoubtedly. Senator Kellogg. Expediting shipments? Mr. Thom. Yes. Senator Kellogg. Furnish cars promptly, giving better trains and better train service, both passenger and freight ? Mr. Thom. And even to the question of manners. Senator Kellogg. Even to the question of what? Mr. Thom. Manners. Senator Cummins. Very important, too. Senator Kellogg. That might be applied now sometimes with advantage. But all that competition has been of very great benefit to the public, has it not ? Mr. Thom. We think so. Senator Kellogg. Yes. And now, to keep that competition, the principal lines of the country, like the New York Central and 187 the Pennsylvania and the Union Pacific and the Northern Pacific and the Great Northern and the Southern Pacific, must be main- tained as separate competing organiaztions ? Mr. Thom. That is what seems to us. Senator Kellogg. Your idea is that if consolidations were permitted they should be judged in each case with the view of keeping the main lines of transportation competing? Mr. Thom. Yes. Senator Kellogg. And each case decided upon its own merits ? Mr. Thom. Yes, sir. Senator Kellogg. I think there might be this in Senator Pomerene's suggestion : That the power that permitted that con- solidation — the Interstate Commerce Commission — should have, of course, a continuing control over the service that those compa- nies should give. Now, I take it from what I saw and heard of your statement that you recommend a Cabinet officer to be the head of transportation? Mr. Thom. Yes. Senator Kellogg. You think it very desirable, do you not, that the railroad administration of the country be kept out of politics ? Mr. Thom. I do not think it possible to keep the railroad administration of the country out of politics. I think it is a question merely of the type of politics. We have a government of politics, and if there is going to be Government regulation it must be, in a sense, a political regulation; but we want the most responsible and the most independent regulation that we can get. Senator Kellogg. You did not understand me. Of course, that is true. I did not make myself clear. Of course, the ques- tion of what regulation there should be, and, in fact, all the problems which Congress or a legislature must consider, are political questions, to a large extent, and must be decided in political assemblages, and so forth; but I do not mean that; I mean directly involving the management of the railroads in a political party. That is what I mean. 188 Mr. Thom. I think that whoever you appoint to manage or to regulate is still surrounded by a political atmosphere, and the importance of having that atmosphere such that will get the least dependent political agency and the most responsible polit- ical agency becomes of transcendent bearing. Senator Kellogg. Why should not practically all the duties of the Federal Reserve Board be performed by a Cabinet officer? Why do we try to make it a nonpolitical body, with long terms, so that no President may have the appointment of all of its members within his term? Why not let the Secretary of the Treasury be the dominant man who shall perform all the execu- tive duties of the Federal Reserve Board? Mr. Thom. We have thought you are probably going to extend the power of Federal control, and that we have got to introduce the element of promptness as to the method of regu- lation, so that we can do things in the future quickly. Now, if you are going to regulate us by a board, the essential quality of which is deliberation, like the Supreme Court, like the commis- sion, we are going to find an element of incapacity to adapt ourselves as readily as we should to changing business conditions. Therefore, we want , a single head to be the initiator of these things, subject to the check of the deliberative body. Senator Kellogg. Let me make this suggestion : If it were deemed advisable to have an executive head to the railroad regulation of the country, why not select a man who is not a member of the Cabinet, and give him a long term and a salary sufficient so that it would attract the very best ability in the country, and put him in charge of it? Mr. Thom. Our view about that is this, Senator : We think that whoever is in charge of it should be responsible for the adequacy of service. An element in adequacy of service is sufficient rates to create the proper service — I mean sufficient revenue to create the proper service. Now, we think that the national administration ought to be made responsible to the American people for adequacy of service, and that the man who is at the head ought to have a seat at the Cabinet table, so that he can bring his views of the necessi- 189 ties of service directly to the President, and iiave whatever con- clusion is arrived at made an administration policy. Senator Kellogg. Mr. Thorn, without in the slightest de- gree intending to reflect upon the Cabinet officers — ^because most of them are very able men^ — in the administrations that I have known, they are appointed for four years, and they are the political advisers of the President, and they are interested, un- doubtedly, as they should be, in the political success of his ad- ministration, and do you not fear that in the face of a presi- dential or congressional election, a Cabinet official would hesi- tate to do anything that he thought was not popular, as to the railroads, until after his election? Mr. Thom. We believe. Senator, that the thing that would make any administration most popular would be to make a suc- cess of this transportation problem, and we do not believe that the man who has arrived at that position of responsibility can be controlled by small and narrow considerations to the extent of a man without that responsibility; and if we once put upon the administration the responsibility of seeing that there is an adequacy of service, we believe we have got it then in the most responsible shape in which it can be, and I do not fear these political consequences to which you allude, anything like I fear the political dependence of a body that whatever it may do, or whenever it may do a thing contrary to what the patrons of the railroads may, at the moment, be protesting against, is made subject to a resolution of inquiry on the Senate floor, as to whether or not the thing ought to be done in a particular way. Now, that is a degree of dependency about which we have the most serious apprehension. Senator Kellogg. My mind is entirely open on it. I just wanted to bring out your views. Mr. Thom. I was asked that the other day. You were not present. Senator Kellogg. No ; I was not present. Mr. Thom. I gave the committee the views I have in re- ?pect to that. Senator Kellogg. I have no further questions at the moment. 190 Senator Cummins. Mr. Thorn, early in your argument or statement, you traced the effect of the regulation which we have now, or had before the Government took possession of the railroads, upon the investor, and I think you said that the Gov- ernment had assumed the authority to determine what the rev- enue of the railroad companies should be, and also the authority to determine what the expenditures of the railway companies should be? Mr. Thom. In a measure. Senator Cum mans. That was the substance of it. And in- asmuch as any prospective investor looked forward to a situa- tion in which neither his company nor he could control either the revenues or expenditures, it was not a very inviting prospect ? Mr. Thom. Yes. Senator Cummins. That was the substance of your argu- •nent ? Mr. Thom. Yes. Senator Cummins. The plan that you have suggested does not contemplate any change in that respect, save in method? That is, you expect the Government still to control the revenues and still to control the expenditures? Mr. Thom. Under a different measure of how they are to be controlled. Senator Cummins. Certainly. Mr. Thom. And under more responsive machinery. Still, the ultimate power would be in the Government. Senator Cummins. No matter how effective the machinery might be and no matter how much improvement it might be over what we have now, that is still the situation? Mr. Thom. The Government would still control. Senator Cummins. We have the Government controlling the revenue and the Government controlling the expenditures? Mr. Thom. Yes. Senator Cummins. Do you not think that any govern- ment which controls the revenues of an enterprise and the ex- penditures of an enterprise, and thus determines the outcome or the profits of that enterprise, should accept the responsibility 191 which naturally goes with the power to control revenues and expenditures ? Mr. Thom. It should, in one way or another. Of course, there may be a difference as to the extent of the acceptance of that responsibility. Theoretically, I follow your question that there ought to be the fullest acceptance. There may be diffi- culties in the way of obtaining that full acceptance of respon- sibility. Senator Cummins. I think I perceive the difficulties, but when we, as a Government, assume authority which you have described, to determine what you shall receive and what you shall expend, it would seem to me that there would follow, neces- sarily and logically, that the Government ought to undertake to see that a proper return upon the capital invested is forthcom- ing. In other words, it ought to guarantee the return upon the capital which you are offering the public? Mr. Thom. Theoretically speaking, of course you are right. Senator. The only question is whether or not there are diffi- culties in the way of obtaining that guarantee which are so enormous that you can not judiciously obtain the proper guar- antee. Now, for example, suppose that the guarantee were to lead to Government ownership. The objections from a public standpoint to Government ownership may be so enormous that it may be wise to seek some means short of a final and ultimate gr.arantee. Senator Cummins. I can appreciate that there are other things to be considered than the mere return; but putting them aside for the moment for future consideration, if the Govern- ment, exercising this authority over revenues and other ex- penditures, accept such responsibility and can attract and secure capital at the ordinary rate which is recognized in a Government obligation, it would seem to me it ought to do it, logically. Mr. Thom. Logically, unless there is some objection to it which makes us stop short of that final conclusion. Senator Cummins. Surely. I turn now for a moment to your proposed director of transportation holding a Cabinet position. You said, and upon its face it seemed very impres- 192 sive, that we had established a Secretary of Agriculture to look after that interest; we had established a Secretary of Commerce to be the guardian of that interest; and a Secretary of Labor to supervise that field of activity; and that you could see no reason why the transportation of the country, which is a funda- mentally vital interest, should not have the same protection and the same representation; that was your argument, was it not? Mr. Thom. Yes. Senator Cummins. Well, do you not recognize that the power which you have proposed to give to the secretary of transportation in the plan you have suggested is essentially and radically different from the power which Congress has given to tlie Secretary of Agriculture or the Secretary of Labor or the Secretary of Commerce, or any other Cabinet officer? Mr. Thom. I do. Senator Cummins. Yes. We have not given the Secretary of Agriculture authority to fix the prices of agricultural prod- ucts, and no one proposes, up to this time, that it shall be done. Mr. Thom. And I do not suppose that you intend to give it to any Government body in times of peace. Senator Cummins. Nor have we invested the Secretary of Labor with authority to determine what wages shall be paid throughout the country. Mr. Thom. That is true. Senator Cummins. You would think it would be very un- wise that we should do so, I assume; and the same is true of the Secretary of Commerce. Mr. Thom. Now, then, if you will permit me Senator Cummins (interposing)., Therefore, when you propose to give to the secretary of transportation the vast powers that are suggested in your plan, you are establishing an entirely different relation between the secretary of transportation and the people from that which has been established between the Secretary of Agriculture or the Secretary of Commerce, or the Secretary of Labor, and the rest of the country, are you not? Mr. Thom. Yes; because we find that the Government is looking, at the question of the extent of regulation over trans - 193 portation in a very different way from that in which it is look- ing at the regulation of agriculture or the regulation of com- merce. We find that the Government is fixing the price of transportation through some of its agencies, and, therefore, we are confronted with a different situation from what exists in respect to the products of agriculture or labor or commerce. We have got to accommodate whatever plan we have to that fundamental necessity of the Government to fix the price of transportation. Senator Cummins. I recognize that, Mr. Thorn, and I know that the Government must continue to exercise this control over a public property, such as is found in our transportation facili- ties; but all that I was trying to make clear was that it did not follow because we had established Secretaries of Agriculture, and Commerce, and Labor, that therefore we should establish a director of transportation, giving that individual, that one per- son, the vast authority which you have suggested in your plan. Mr. Thom. Now, when you come to the question of the vast authority, I think you will find that it is not as great as is prob- ably inferable from the use of that word. There is nothing that he does that is not reviewable by another governmental body; nothing that he does in respect to rates that is not reviewable. Senator Cummins. Yes. That brings me to the exam- ination of that point for a very few moments. The Interstate Commerce Commission, to which you propose an appeal in cer- tain cases from the director of transportation Mr. Thom (interposing). In every case. Senator Cummins (continuing). Is to be, practically speak- ing, a judicial body? Mr. Thom. Yes. Senator Cummins. And, being a judicial body, is sup- posed to be governed by certain rules and regulations and laws and standards that are prescribed by Congress, or by the com- mon law. Now, in the executive functions which are to be performed by the director of transportation, what rule or stand- ard could the Interstate Commerce Commission apply in case of an appeal to that body? 194 Mr. Thom. I was alluding to rates when I said that an appeal or review was provided by the Interstate Commerce Commsision. I had that alone in mind — rates. Senator Cummins. But the remark, then, or the observa- tion which you made with regard to appeal and corrections through appeal, would not apply to the vast volume of execu- tive work or direction which the secretary of transportation would perform? Mr. Thom. Not unless Congress found it necessary to so provide. We have not suggested it in our plan. Senator Cummins. The thing that you had in mind, then, was that if the secretary of transportation approved rates that were initiated by the carriers, and they were put into effect, any- one who was interested in tliose rates could prosecute an appeal to the Interstate Commerce Commission and have the rate cor- rected if it were found to be wrong? Mr. Thom. That is, as to rates approved. Now, as to rates on which no action is taken and as to rates disapproved, there is another method in addition to that. Senator Cummins. Yes. Would the standard that we have now given to the Interstate Commerce Commission for the weighing of rates or for the consideration of rates be the same under your plan that it now is? Mr. Thom. No. It would be the same, theoretically, as it now is, because I think the word "reasonable" was intended in the law to cover the adequacy of the rates ; but I think that that aspect of the matter has been gotten away from, and you should establish a rule which would bring it back to its original purpose of having not only rates which are low enough but rates which are high enough to satisfy the needs of the public for public service. Senator Cummins. Yes. Do you intend to abolish th we handled in 1917, and we handled it with perfect success ; and I can say we could handle just as much traffic, or a little more than we handled in 1917, equally satisfactorily. Senator Townsend. Have you engines enough to do the work? Mr. Keuttschnitt. Plenty. Senator Townsend. Have there been any of these stand- ardized engines placed on your road? Mr. Keuttschnitt. No. Senator Townsend. You are still operating with the old engines that were built for your special service? Mr. Keuttschnitt. Yes. Senator Townsend. Your engines never leave your line, do they? Mr. Keuttschnitt. Substantially never. We have, in times of stress, lent neighbors locomotives, when we could spare them. The War Board started the policy of forcibly shifting locomotives about, during the heaviest traffic of 1917. There were quite a number of orders issued for one road to help another at that time. Senator Townsend. Were these engines assigned under that order to roads that were capable of carrying them? 70 Mr. Kruttschnitt. Oh, you mean this Director General's order r Senator Townsend. Yes. Mr. Kruttschnitt. I do not know what theory they adopted. This order came to us like thunder out of a clear sky • we never dreamed that we would be ordered to buy cars, because we considered we had provided for our needs. I do not know on what principle they assigned the cars, but, in answer to our objections, we were simply told that in the opinion, I think of Mr. Gray, who was quoted by Mr. Lovett, we ought to have the cars because we needed them. Senator Townsend. Do you know their reasons? Mr. Kruttschnitt. No; except that their judgment was that we did need them, as against our judgment that we did not. Senator Townsend. Was there any complaint made against you that you had not handled the traffic properly? Mr. Kruttschnitt. No. On the contrary, during 1917, the complaints against the roads west of the Mississippi Rivei were singularly few, or almost altogether absent. We never handled our traffic as satisfactorily as we did in 1917. And, moreover, the most convincing argument that we could possibly adduce was given to the Director General, and that was this: We must pay rental for every foreign car that is on our rails, and we receive rental for every car of ours that is on foreign rail- ways. We conducted all our traffic in UH7, and for three years peceding that, with a net excess of rentals leceived for our cars, over what we paid for foreign cars, of $1,250,000 a year. Senator Townsend. Just one more question in connection with the other subject you were discussing, where you proposed by combinations of some sort to eliminate unnecessary trains : Now, as between St. Paul and Chicago, do you have through trains on the various lines, that simply do business between St. Paul and Chicago, and nothing else? Mr. Kruttschnitt. That do local business? Senator Townsend. That do nothing but through business. Mr. Kruttschnitt. Well, I would prefer not to answer that. I really do not know. 71 Senator Townsend. If you have intermediate business on all trains between Chicago and St. Paul, how are you going to eliminate trains and serve all the people on those lines equally well? Senator Pomerene. At intermediate points. Senator Townsend. Yes; at intermediate points. Mr. Kruttschnitt. Perhaps the question was asked, or the answer given, before you came in ; but I assumed that all of the trains between those points did do some, at least, intermediate business; and I said that I did not see how, if trains were all run on one road, the intermediate points could be served. Senator Townsend. That was a puzzle to me. If you have explained it, I do not care to have you go into it again ; but I could not quite understand how you could consolidate your train service and take off three trains, and let one train serve where four had been serving before, and still accommodate anything but the two terminals. Mr. Kruttschnitt. By eliminating the trains over the different roads. If road A ran a train in the morning, we will say, at 7 o'clock, the next train would be put on road B, we will say, at 9 o'clock in the morning, and then on road C at 10 o'clock in the morning, and so on, and the service would be divided amongst the different roads ; the resulting eiifect would be the cutting out of three trains out of four. Senator Pomerene. I understand it has been arranged by the chairman of the committee that the shippers will be heard next. There are several other gentlemen here representing the railroads, who desire to be heard — Mr. Elliott, Mr. Rea, and 'Mr. Willard — and they have statements prepared, and I assume that an opportunity will be given to hear them later, and if not, certainly that they will have the privilege of submitting their statements to the committee. Senator Townsend. I think they ought to be heard. Senator Pomerene. I think so, too. Senator Gore. I wanted to ask you one question, Mr. Kruttschnitt. When you were before us a year ago, you stated lliat your chief fear about Government operation was that your 72 organization would decline in efficiency and morale. Have you remarked any tendency in that direction in the year's operation, or is your organization still in first-class order? Mr. Kruttschnitt. When the Government took over the railroads on the 1st of January, 1918, there were no material changes made in the organizations until the 1st of July; and then the Director General issued an order that he would not retain any of the corporate officers, and that the officers that remained with him would not be allowed to do any corporate business; in other words, the line was sharply drawn between corporate officers and operating officers. As to the operating officers I do not know that we can tell very much. We do know some things that have been done, but we can not tell everything that has been done until we have an opportunity of going over the organi- zations and over the roads on their return; but we do know that a great many men have been let out, and systems have been cut. For instance, the Southern Pacific lines north of the Oregon State line report to Regional Director Aishton at Chicago. The lines from the Oregon State line to Ogden, Utah, and El Paso, Texas, are under the jurisdiction of Regional Director Holden, in Chicago. The lines east of El Paso are under the direction of Regional Director Bush in St. Louis, and the lines east of El Paso have been still further cut up by having different Fed- eral managers; that is, one of the Federal managers reports- no, they both report to Bush, but they have cut off the Houston & Texas Central, and the Houston, East and West Texas, and put them under different Federal managers. Senator Gore. Then it is not managed as a system, but in segments ? Mr. Kruttschnitt. No ; it is rather badly cut up. Senator Gore. Any regional division of the country would result in similar arbitrary divisions, would it not? I refer now to a scheme that has been several times proposed, to divide the country into five or six regions and to classify all the roads in one region. That would result in cutting across a good many systems, would it not? Mr. Kruttschnitt. Yes, sir; very much so. 73 Senator Gore. I remember you said that the spirit of your men, from the ground up, was in tiptop shape at that time, and that you had regular lines of promotion, I believe, and that the morale of all your men was good. Do you happen to know what the difference in that regard is now? I do not mean as to the higher officers, but as to the men themselves Is your touch with them such that you can tell us that? Mr. Kruttschnitt. I, personally, have not been over our lines, I am sorry to say, for over two years; but from what 1 hear from the corporate officers in California and Texas the men are troubled about uncertainty as to the future; they do not know what is going to happen. They are a good deal worried, and we have lost quite a good many good men, who have gone away on account of that condition. Senator Pomerene. Does that apply to operating officers as well as to corporate officers? Mr. Kruttschnitt. Entirely to the operating officers and not to the corporate officers. Senator Gore. I was referring to the trainmen, engineers, firemen, and section men. Mr. Kruttschnitt. I am not very familiar with them, as I say, because I have not been over the line, and I am sadly out of touch with the local conditions. Senator Pomerene. Anything further. Senator? Senator Gore. No. Mr. Bledsoe. I understand that the matter of hearing Mr. Rea, Mr. Willard, and Mr. Elliott will be postponed until a later date? Senator Pomerene. I think so ; and I think you had better get in touch with the chairman of the committee. Personally, I will be very glad to hear them, and think they should be heard. Mr. Bledsoe. Yes, Senator; that would be better than simply submitting their statements. Senator Pomerene. Yes. The committee will stand ad- journed, then, until to-morrow morning at 10 o'clock. {The figures referred to by Mr. Kruttschnitt at page 58 of this record appear in full, as follows:) 74 Income and Profit and Loss Accounts of the Railways Considered as a System for the Year Ended June 30, 1916. (From I. C. C. Statistics of Railways, 1916, p. 51.) Average operated mileage represented miles 257,511.82 Operating income Railway operating revenues $3,472,641 941 Railway operatmg expenses 2 277 202 278 Net revenue from railway operations 1,195,439,663 Railway tax accruals |1S1 599 341 Uncollectible railway revenues 822532 '- — 152,422,373 Railway operating income 1 043 017 290 Miscellaneous operating income ' ' i^zggQ Total operating income 1,046,457,257 Non-operating income : Rent from locomotives $85,139 Rent from work equipment 1,268,699 Miscellaneous rent income 8,568,934 Miscellaneous non-operating physical prop- erty 2,999,671 Divided income 95,726,677 Income from funded securities 47,554,335 Income from unfunded securities and ac- counts 25,784,668 Income from sinking and other reserve funds 3,286,124 Release of premiums on funded debt 431,665 Miscellaneous income 2,498,356 Total nonoperating income 188,204,268 Gross income 1,234,661,525 Deductions from gross income: Hire of freight cars — net debit balance .... 25,222,089 Rent for passenger train cars 1,270,536 Rent for floating equipment 1,975,729 Joint facility rents 15,962,175 Rent for leased roads 3,701,658 Miscellaneous rents 5,759,064 Miscellaneous tax accruals 2,738,683 Separately operated properties — net loss . . . 4,395,753 Interest on funded debt 473,855,003 Interest on unfunded debt 20,248,475 Amortization of discount on funded debt.. 3,465,919 Maintenance of investment organization. . . 740,163 Miscellaneous income charges 3,928,035 Total deductions from gross income 563,263,282 Net income : 671,398,243 75 Appropriations for yeaf : Dividend appropriations $340,467,970 Stock and debit discount extinguished...-. 22,900,576 Miscellaneous appropriations 18,819,073 Total $382,187,619 Balance for year 289,210,624 Net adjustment through profit and loss debit 377,427 Surplus for year 288,833,197 From Commissioner Clark's statement: Surplus at close of year 1916 1,935,019,191 Surplus at close of year 1915 1,556,787,176 Increase during 1916 378,232,015 Surplus from 1916 operations, Interstate Commerce Commission income account as above 288,833,197 Difference '. 89,398,818 EXPLANATION OF DIFFERENCE, Comparison of the accounts of the several railways as of June 30, 1915, and June 30, 1916, shows that changes in surplus during the year occurred because of the following factors : 1. Reorganizations, consolidations and mergers: Deficits written off $58,884,207 Surplus written off 4,698,538 Net increase in surplus 54,185,669 2. Increase in investment account because of earlier appropria- tions of income, not written in through the income ac- count for 1916 34,466,198 3. Other factors 746,951 Total 89,398,818 (Whereupon, at 11.10 o'clock a. m., the committee ad- journed until Friday, January 24, 1919, at 10 a. m.) 76 Appendix to Mr, Kruttschnitt's Testimony. Memorandum on Comparative Freight Rates and Comparative Capital Per Mile, United States, United Kingdom, France and Germany Comparative Freight Rates The most recent general comparison of railway statistics of the United States with those of foreign countries is a bulletin of the Bureau of Railway Economics, Number 100, entitled "Comparative railway statistics, United States and foreign countries, 1913." The comparisons in this bulletin are mostly of the calendar year 1913 or the period most nearly approaching that year, and may be considered as the last normal statistics preceding the war. The statistics for the United States, United Kingdom, France and Germany quoted below from the Bulletin, were secured from the official railway reports of the respective countries as follows : United States : Twenty-sixth annual report on the statistics of railways in the United States for the year ended June 30, 1913, Interstate Commerce Commission. United Kingdom: Returns of the capital, traffic, receipts and working expenditure, etc., of the railway companies of the United Kingdom, for the year 1913, Commercial Department, Board of Trade. France: Statistique des chemins de fer Franchais, au 31 Decembre, 1913, interet general. Ministere des Travaux Publics. Germany. Statistik der im Betriebe befindlichen Eisen- bahnen Deutschlands, Rechnungsjahr 1913. The average receipts per ton in 1913 were as follows for the four countries : United States •••• $1-068 United Kingdom 0-778 France 0.898 Germany 0.773 The principal reason why the average for f.ie United States is higher than for the other three countries is that the average haul per ton is very much greater than elsewhere. In the United States the average haul m 1913 was 260 miles, in France 77.8 miles, and in Germany 62 miles. In England the average haul is estimated by W. M. Aoworth, the British economist, at from 25 to 30 miles. The average receipts per ton-mile in 1913 were as follows (cents) : United States 0.729 France 1.161 Germany 1.244 Here again official returns are not available for the United Kingdom, although Mr. Acworth estimates it at about 2.3 cents. Mr. Edwin A. Pratt, an English writer on railway subjects, in a book published in 1906 entitled "Railways and their rates," devotes a number of pages (6 to 11) to the subject of compara- tive freight rates in the United Kingdom and the United States. He accepts without argument the general claim that railway rates on that side of the Atlantic are substantially higher than they are on this side, and devotes his attention mainly to explain- ing why such is the fact. Another British writer, Mr. (now Sir) George Paish, in a book published in 1902 under the title of "The British railway position," makes a number of comparisons of the efficiency, earnings and expenses, train loading, etc., of American and British railways, the advantage being always with the American roads. In respect to average receipts per ton-mile, Mr. Paish presents a comparative table (page 36), showing that in 1900 the average on the Pennsylvania Railroad was about 0.55 cent per ton-mile, while on the London & North-Western Rail- way of England it was about 2.41 cents. Turning to a comparison of freight charges in the United States, United Kingdom, France and Germany, based on similar commodities hauled for corresponding distances, there have been a number of studies along that line. For example. Professor Henry C. Adams, then in charge of statistics and accounts of the Interstate Commerce Commission, prepared in 1905, at the request of the Senate Committee on Interstate and Foreign Com- merce, a table showing specific freight rates on a number of selected commodities in the United States and in Prussia-Hesse. In the case of both countries, the points selected were those 78 between which freight actually moved in some quantity. On bituminous coal for certain specific distances, from 300 to 600 miles, the American rate was from .332 to .524 cent, while the Prussian rate was .727 to .823 cent, the longer distances in each case showing the lower rate per ton-mile. On woolen yarns, for distances from 320 to 670 miles, the American rate was from 1.48 to 2.18 cents, while the Prussian rate was from 2.04 to 2.17 cents. On cotton yarns, for distances of from 50 to 330 miles, the American rate was from 1.13 to 5.66 cents, while the Prus- sian rate was from 2.46 to 3.00 cents. On coffee, for distances of from 270 to 330 miles, the American rate was from .91 to 1.18 cents, while the Prussian rate was from 1.75 to 2.03 cents. On unmanufactured tobacco, for distances of from 370 to 630 miles, the American rate was from .87 to 1.73 cents, while the Prussian rate was from 1.72 to 1.74 cents. These rates were published in a digest of hearings on regu- lation of railway rates. Appendix IX, Prussian Railway Tariffs, Senate Document 244, Part 2, 59th Congress, 1st Session, pp. 22-24. The Bureau of Railway Economics in 1915 issued a com- prehensive statement of comparisons of rates on certain com- modities for specific distances in the United States and a num- ber of foreign countries. The material was drawn in the first instance from consular reports to the United States Water Ways Commission and most of it was carefully verified by the Govern- ment of the various countries affected, although complete veri- fication proved impossible in some cases on account of the out- break of the war. The statement was published as a bulletin entitled "Comparison of railway freight rates in the United States, the principal countries of Europe, South Australia and South Africa." . From the foregoing bulletin the following information has been drawn with regard to rate comparisons as between the United States, United Kingdom, France and Germany. It will be understood that the comparison in each case is between the United States and a particular country, and is based on the number of quotations and the specific distances covered by that comparison. The result is that the American averages vary from 79 comparison to comparison because of the different composition of the rates which went to make them up. The point to be emphasized in each case is, the American showing in each pair of comparisons. The average charge per ton-mile, in cents, was as follows in each case : Grain United States 1.916 United Kingdom 2.S68 United States I.ISS France 1.31S United States 795 Germany 1.2S4 Bituminous Coal United States 840 United Kingdom 943 United States 597 France 832 United States 532 Germany 755 Iron Ore United States 576 United Kingdom 1.107 United States 401 France 552 United States 444 Germany 580 Lumber United iStates 1.691 United Kingdom 2.931 United States 1.026 France 1.006 United States Germany Stone United States 1.501 United Kingdom 2.737 United States 770 France 823 Fertllker United States 2.029 United Kingdom 2.271 United States 1.471 France 1.546 Logs United States 1.538 United Kingdom 4.837 United States 959 Germany 1.353 Iron and Steel Products United States 963 France 1.039 United States 1.006 Germany 1.330 Comparative Capital Per Mile Bulletin 100 of the Bureau of Railway Economics shows that the capital per mile of line in 1913 was as follows in the United States, United Kingdom, France and Germany: United States $65,861 United Kingdom 274,027 France 150,439 Germany 2. . . 120.049 80 If it be argued that one reason for the low capitalization per mile in the United States is due to the fact that a smaller proportion of the American lines are double tracked than in Europe or on the Continent, railway capital of each country can easily be reduced to averages per mile of main track (1, 2, 3, 4, etc.) and per mile of all track (main track, yard track and sidings) the showing for 1913 then will be as follows: Capital Per Mile: 1913 Per mile of line Per mile of main track... Per mile of all track.... United United France States Kingdom (1912) Germany $65,861 $274027 $150,439 $120,049 55,697 159,680 103,904 85,620 41,480 117,173 58,437 It will be seen that even when placed upon a mile of main track or mile of all track comparison, the American railway capital is much lower than that of any of the three foreign coun- tries named. Such a statement as the foregoing does not, of course, tell the whole story, inasmuch as a mile of line costs con- siderably more to build than a mile of additional track. When a second track is laid, there is either an additional cost for right of way, or at least the cost is not proportional to the cost of the original construction. The same is true of grading, filling in, ballasting, track or signal facilities, additional buildings, etc. In other words, a comparison between the United States and the other countries on the basis of all tracks is advantageous to the other countries and disadvantageous to the United States, in so far as the proportion of additional tracks is greater abroad than here. 81 Statement Mr. Daniel Willard, President, The Baltimore and Ohio Railroad Company, Read before the Senate Committee on Interstate Commerce, February 18, 1919. The steam railroad system of the United States, of approxi- mately 260,000 miles of main lines, representing an investment in property of about $18,000,000,000, has been developed almost wholly by private initiative with private capital, and until Decem- ber 28, 1917, the control, management and operation of this great enterprise was vested in the owning corporations, subject to governmental regulation. On the date above mentioned the President of the United States, acting under special authority granted by Congress as a war measure, took possession and as- sumed control of practically all the steam railroads and proceeded to operate them through duly appointed officials as if they were in fact the property of the Government — and Government control and operation of the railroads still obtains. Federal Control for War Needs Unfortunately there seems to be in many quarters a lack of definite understanding of the circumstances which promoted and justified this act of the President. It has been suggested — in fact ^lefinitely stated by men whose opinions should have great weight — that the economic policy which among other things had induced the investment of $18,000,000,000 of private capital in railroad facilities, had broken down, that private management had failed and that it has now become necessary in the public interest to abandon the policy developed through more than eighty years of actual experience and substitute therefor some new and untried experiment. Undoubtedly certain changes in our policy of rail- road regulation should now be made, but the very defects which have been developed in practice under the existing plan point the way to the needed remedies. My entire business life has been spent in the railroad service, and for nearly two years I served as Chairman of the Transpor- 82 tation Committee of the Advisory Commission of the Council of National Defense, and with your permission I should like to re- view briefly some of the circumstances which culminated in Fed- eral control and operation of the railroads, and I shall also ven- ture to offer some suggestions as to the essential requirements of a future policy for the regulation of the railroads. As Chairman of the Transportation Committee of the Ad- visory Commission, it became my duty to make recommendations to the Council of National Defense concerning transportation matters. Almost before the Advisory Commission could be or- ganized, however, this country entered the war, and the program of the Commission from that time forward was dominated very largely by that fact. It soon became apparent that in such an emergency the more important agencies of transportation should be so coordinated that they might, so far as possible, work to- gether in a helpful and efficient manner, and further, that in rela- tion to the steam roads there should be established a unity of control or direction beyond anything that had hitherto been found necessary in times of peace. At the suggestion of the Council of National Defense a con- ference of the chief executives of all the principal steam railroads in the United States was called to be held in the City of Wash- mgton on April 11, 1917, and at that conference the situation was explained by the representative of the Council, and it was recommended that there be created a Committee or some agency clothed with sufficient power to bring about unity of direction of all the steam railroads in order that the transportation needs of the situation might be promptly and effectively dealt with. After a brief discussion by the executives so assembled, the following resolution was unanimously adopted: "Resolved, That the railroads of the United States acting tarough their chief executive officers here and now assembled, and stirred by a high sense of their opportunity to be of the greatest service to their country in the present national crisis, do hereby pledge themselves, with the Government of the United States, and with the govern- ment's of the several States, and one with another, that during the present war they will coordinate their opera- 83 tions in a continental railway system, merging, during such period, all their merely individual competitive activities in the effort to produce a maximum of national transpor- tation efficiency. To this end they hereby agree to create an organization which shall have general authority to formulate in detail and from time to time a policy of operation of all or any of the railways, which policy, when and as announced by such temporary organization, shall be accepted and earnestly made effective by the several managements of the individual railroad companies here represented." This action by the Executive Officers was promptly con- firmed by the Boards of Directors of practically all the steam railroad companies in the United States. A Committee, consisting of five railroad presidents, was ap- pointed. The Committee established offices in the City of Wash- ington, and proceeded immediately with its work. Other com- mittees, representing the Electric Railways, the Inland Water- ways, and Motor Transport on the highways, were also formed for the purpose of procuring greater coordination of effort be- tween these several agencies of transportation. Temporary Unification Cost Suspension of Competition My experience with these Committees convinced me that it was desirable, in fact necessary, that 'in time of war or unusual emergency, all of the more important agencies of transportation should be so coordinated that, taken together, and as a whole, they might be said to form a National System of Transporta- tion. I am, therefore, under certain conditions, in full accord with the Director General wherj he urges the desirability of uni- fied control of the steam railroads, but unified control, like all things else of real value, must be paid for in some manner, and the price of unified control is the sacrifice of competition of serv- ice. There cannot be unity of control and competition of service at one and the same time — ^the two things are incompatible. Com- petition of service has probably done more than any other one thing or influence to raise the standard of equipment and per- formance of American railroads, and as a policy it should not be 84 lightly given up, and in no event should it be abandoned unless something else of equal or greater value be obtained in its place. I do not, however, share the views of the Director General that unified control, when desirable, cannot be had under private ownership with governmental regulation, and the information which Mr. Kruttschnitt has laid before this Committee concern- ing the results of unified control of the steam railroads obtained by the so-called Railway War Board, for a period of nine months preceding Federal control, afifords a most substantial basis for my belief. That a condition finally developed which the volun- tary organization created by the railroads, subject as it was to many statutory restrictions, was unable to deal with promptly and effectively, must be admitted, but we have the direct state- ment from the Director General that he also would have been unable to deal effectively with the same situation had it not been for the fact that he was authorized by law to ignore the restric- tions which applied to the railroads under private operation. War Needs Different From Peace Needs I doubt if there has ever been a proper appreciation of the confusion that was caused in this country in connection with all industrial and transportation matters, incident to the sudden change in 1917 from a peace-time to a war-time basis, and much was required besides the mere unification of the railroads to bring order out of the confusion so resuhing. As time went on, how- ever, the necessary remedies were first discovered and then ap- plied, the war-time basis became the normal basis, and order was gradually re-established. Senator Pomerene will recall some of the difficulties and complaints that were brought to his attention when the Railway War Board undertook in the early summer of 1917 to restrict the movement of road-building material, in order that the transporta- tion facilities so used might be available for purposes that seemed to bear a more intimate relation to the conduct of the war. It de- veloped that in the State of Ohio large sums of money had been appropriated for road-building purposes, much work had already been started and many miles of road under repair had been made impassable, and to discontinue at that time the movement of 85 necessary road-building material would have resulted in a general stoppage of the work and much loss and inconvenience to the public. This situation, which was brought to my attention by Senator Pomerene, was laid before the Railroad War Board, a conference was arranged with the Highway Commissioners of the state and a program was agreed upon whereunder work already started would be completed and the necessary material for such completion would be moved; but an agreement was also reached that when the work so provided for was finished, additional im- provements of that kind, if not actually necessary, would be deferred in order that the transportation facilities so used might be applied to other and more important purposes. I mention this case as simply one of innumerable instances of a similar kind that had to be dealt with in the early days of the war. It was not possible at that time, or in any event did not seem wise, for the railroads to place such restrictions upon the ordinary peace-time commerce of the country as were found to be necessary and prac- ticable later on. It will of course be understood that at the time to which I refer, the railroads as common carriers had no legal right to withhold cars from anyone desiring to ship, regardless of the character of the shipment. The congestion of freight traffic at the eastern terminals in the Fall of 1917, referred to by the Director General, was due largely to an unprecedented condition of commercial and indus- trial readjustment which the railroads were obliged to deal with, while at the same time having some regard for the existing rules and regulations established by law. During the Summer and Fall of 1917, for instance, there was an entire lack of adequate machinery for organization to deal with the export situation. Not infrequently arrangements were made to assemble at the Atlantic seaboard, cargoes of foodstuffs, we will say, for an expected steamer, only to learn when the steam- ship arrived — sometimes even after it was partly loaded — ^that under the exigencies of the foreign situation, munitions were more urgently required than foodstuffs, and freight already in the vessel's hold would be removed and extra efforts made to hastily accumulate such a cargo as the needs of the situation required. This condition of course resulted in a gradual accumulation at the 86 several North Atlantic ports. Later on Export and Shipping Control committees were created to deal with such matters, and arrangements were made so that freight proceeded forward in a more orderly manner. These particular questions and many other of a similar kind were not primarily and entirely matters of railroad control and operation, although closely related thereto, but were problems that developed, and naturally so, out of a condition of world war, and later on were dealt with more or less effectively by the diflFer- ent governmental agencies established for that purpose. Railroads Did Not Break Down Under Private Operation It has frequently been asserted that the steam railroads in the United States under private ownership had broken down, and that it became necessary on that account for the Government in a time of great and unprecedented emergency to take possession and assume control of the physical properties. I cannot agree with those who hold that opinion, nor can I find anything in the record of performance of the Carriers under private control and operation, or in the record of performance during twelve months of Federal control and operation that gives support to that asser- tion. On the contrary, the record of actual performance under Federal control of the same properties with almost exactly the same facilities and with substantially the same official staff, is the best and most convincing evidence that the railways, both as to physical properties and personnel, had not only not broken down but were in fact most efficient agencies of transportation. I was not opposed to the taking over of the railroads by the President in December, 1917. Congress itself had foreseen the possible necessity for such action as a war measure and had pro- vided for it by suitable legislation passed eighteen months before, and at a time when the railroads were carrying a greater volume of traffic than ever before, and when no one ventured to suggest that they were even threatened with breakdown. What actually happened was this,— railroad facilities, par- ticularly in the East, have been developed to meet the normal peace-time requirements of commerce, with an excess capacity 87 sufficient for such increased demands as might reasonably be expected, and while there have been times when the railroads, or some of them, were unable to fully meet the temporary demands for transportation, upon the whole they seem to have met the sit- uation as well as might reasonably be expected. Motives of self- interest prompted the Carriers to do that much, and to do more would have been contrary to principles of wise and prudent pub- lic policy. Centers of industry and population, commercial or traffic routes, and habits of trade are matters of slow growth and in times of peace are not subject to quick or violent changes. Conditions growing out of the war, however, brought about radi- cal, unexpected and sudden changes. "Existing industrial cen- ters were greatly enlarged, new centers of population and indus- try were hurriedly created; ships engaged in coastwise traffic were withdrawn and the tonnage which had previously been car- ried in that manner was throv^n upon the railways. The nat- ural confusion resulting from these changes was reflected in lack of orderly coordination of shipments and facilities. The rail- roads as common carriers were required, even in such an emer- gency, to square their operations with some regard for the regulations and limitations provided for peace-time conditions, but even so, they carried tonnage of all kinds to the seaboard so much faster than it could be absorbed or taken away by the ocean carriers, that the eastern terminals first, and others after- ward, became seriously congested or blocked. A policy of en- forced competition based upon Congressional enactments did not and could not readily adapt itself to the unforseen situation. Further, the control over railroad rates and practices which had been vested in the State and Interstate commissions Could not be, or in any event was not, so exercised as to promptly and amply satisfy the changed conditions brought about by the war, and consequently the financial condition of many of the carriers, because of rapidly mounting cost of operation, became critical. In short, a policy of regulation designed to deal with peace-time conditions, failed to satisfy the requirements created by war, and we are now confronted with the problem — if private owner- ship is to continue — of providing such a system of regulation as will not only properly protect and promote the interests of the 88 public and the carriers in times of peace," but which will also quickly and easily adjust itself to the requirements either of peace-time or \var-time emergency. Private Operation Under Government Regulation Has Not Failed Private ownership and operation of the railroads as a policy have not failed. Regulation as a government policy has not failed. It has been clearly shown, however, that a system of regulation designed for peace-time conditions might not, and in fact did not, properly function in time of war, and as it was necessary to act promptly, the Government assumed control of the railroads and proceeded to run them as if there were no restrictive laws and regulations. Actual experience now leads to the conclusion, so it seems to me, that the railroads under private ownership, and subject al- ways to governmental regulation, should be lawfully authorized to do whatever would be done in the public interest under Govern- ment ownership and operation, or is actually being done in such interest at the present time under governmental control and operation. Recommendations of Railway Executives I am familiar with the recommendations that have been sub- mitted to this Commission by Mr. Cuyler on behalf of the Asso- ciation of Railway Executives, and further and ably elaborated by Mr. Thorn, and I approve and endorse the general plan so out- lined, because I believe that if adopted and put in effect with a firm desire to make it succeed, it would provide such method of procedure and such agencies of control as would enable the rail- roads in the future under private ownership to deal promptly and effectively with any probable emergency which might arise, and, if in connection therewith Congress will establish a definite and adequate rule for rate-making as related to the invested capi- tal, the credit of the Carriers which has been seriously dis- turbed by the uncertainties oi the past will again and in time be sufficiently restored to attract the large sums of new capital con- stantly required for the additional facilities and equipment neces- sary to keep pace with the growing commerce of this country. 89 Recommendations of Interstate Commerce Commission I have listened to the report and recommendations submitted by Mr. Clark on behalf of the Interstate Commerce Commission, and to his suggestive comments thereon, and if his recommenda- tions should be adopted and made efifective by suitable legislation, I believe they also would go far towards meeting the requirements of the situation. The two plans have much in common, but the one suggested by Mr. Cuyler would give to the Interstate Com- merce Commission exclusive authority to deal with all rates and security issues, would have Congress provide a definite rule for rate-making, and would create a new Department of Transporta- tion, the head of which would have a seat in the President's Cabinet. Such a Department, in my opinion, is desirable pri- marily in order to bring about that cooperative development and use of the different agencies of transix>rtation which are needed in the public interest. There are in this country at the present time approximately 260,000 miles of steam railroads, 48,000 miles of electric railways, 26,000 miles of navigable rivers exclusive of lakes and canals, and about 2,500,000 miles of highways. These several agencies of transportation, taken as a whole, may be said to constitute our national system of transportation, and how to develop and secure the fullest and most economic use of all of these several agencies, constitutes our transportation problem in its broadest sense. There is now no single officer or agency of the Government whose duty it is to study the transportation problem as a whole. A Secretary of Transportation could perform that duty and at the same time could relieve the Interstate Commerce Commission of much of the purely administrative work now im- posed upon that body. It is not proposed, nor is it desirable, that the Secretary of Transportation should have executive authority either over the personnel or physical property of the railroads or other transportation agencies. It is suggested that he should study the transportation problem as a whole and advise the President how the public interests may be best promoted in that connection. There is no escaping the fact that since 1910 the clearly es- tablished trend of railway credit in this country has been steadily downward, and while many different matters may and do affect 90 financial credit, nothing can possibly create or support such credit in the absence of adequate and assured income, and railway income is dependent primarily upon the rates and charges a rail- way is authorized to collect for the service which it performs. Commissioner Clark, speaking for the Interstate Commerce Com- mission, said — "The rates should not be higher than the shipper may reasonably be required to pay, and should not be lower than the carrier may reasonably be required to accept." This rule for rate-making, while seemingly equitable and fair, is indefinite and fundamentally uncertain in its application and on that account 's unsatisfactory as a basis for credit, and it was because the need of a definite and dependable rule for rate-making as related to invested capital was believed to be essential, that the Railway Executives have recommended that Congress provide such a rule. Mr. Warfield on an Adequate Return Mr. Warfield on behalf of the "National Association of Own- ers of Railroad Securities" has proposed a definite rule for rate- making. His recommendation, as I understand it, contemplates that rates shall be established in each of the so-called rate regions so as to' yield, as nearly as may be, a fixed percentage return upon the combined value of the property devoted to the public use by ihe railroads in that region, with the limitation that if any indi- vidual carrier in such region shall be able to earn from rates so fixed a greater return upon the value of its property than the rate per cent, fixed for the region, two-thirds of such excess shall go to the Government. While this plan does not contemplate a positive guarantee of any fixed amount, it would afford a definite guide or measure and would in my opinion be a decided improvement upon the methods of the past. He suggests that 6 per cent, be the fixsd rate of return upon the value of the property as shown by the book investment account of road and equipment. While I recognize that the rate of return to be allowed, the manner of ascertaining the value of the property, and the disposition of so-called excess earnings may well be matters for discussion, I think there can be no difference of opinion concerning the sound- ness of the principle underlying his recommendation, and I firmly believe that no less a rate of return than 6 per cent, upon no less 91 an amount than the combined book property investment account of all the railroads taken as a whole, will be sufficient to establish and sustain the credit of the Carriers. My own study of the problem leads me to the conclusion that a rate of return of 6^ per cent, upon the combined property investment account of all the railroads is not too large, and a rate of 6 per cent., I fear, may prove to be too small, and it may be fairly said that the suc- cess or failure of private ownership of the railroads as an eco- nomic policy, rests upon the wise and correct determination of this particular phase of the problem. When we say that the net operating income of a railroad is equal to 6 per cent, upon its property investment or invested capital, it must not be assumed that the whole of that amount is available for interest and divi- dends, because experience has shown that not less than Y-z per cent, upon invested capital, and preferably more, must be spent each year by public utilities such as railroads, for additions and improvements which do not increase the earning capacity of the property, and inasmuch as such expenditures must be made and cannot be charged to operating expenses, they must either be paid for out of operating income or else be capitalized, and the latter course would mean ultimate financial disaster. It is for this reason that I doubt whether a return of 6 per cent, upon prop- erty investment — which would really mean not more than 5j4 per cent, for interest and dividends — would be sufficient to properly sustain credit through a series of years. In the application of such a plan as the Security-holders sug- gest, it should be kept in mind that in no event would any indi- vidual Carrier receive excessive returns, because of the partici- pation of the Government in all earnings in excess of a fixed amount; the excess earnings so accruing to the Government should be used in such manner as would best serve the public interest. All are seemingly willing that railroads should be permitted in the public interest to pay a fair return upon the fair value of their property devoted to the public use, but I am convinced that it has now become necessary that someone speaking with author- ity should say definitely what is a fair rate of return and upon what definite amount. Congress undoubtedly has authority to fix 92 the rate of return on property devoted to the public use, and until some fairer or more accurate basis is found for determining the value of the railroad properties so used, I respectfully sub- mit that the book investment accounts of the Carriers as a whole afford the best evidence of such value. As bearing directly upon this phase of the general problem, the Interstate Commerce Commission in 1914 unanimously found that a return of 5.36 per cent, upon the combined book investment in road and equipment of the thirty-eight railroads involved in the Five Per Cent. Rate Case was lower than was justified either in the public interest or in the interest of the Carriers, and upon that basis authorized the Carriers to advance their rates. At that time interest rates were upon the average about one-fifth lower than they are today, or are likely to be in the immediate future, and if 5.36 per cent, was too low then, 6 per cent, now would seem not too high when applied to the same basic account. While the Commission was careful to say in connection with this de- cision that its use of the book property investment account should not be construed as an endorsement on its part of the cor- rectness of such account, it did, nevertheless, recognize the fact that even upon that amount a return of 5.36 per cent, was too low. Under such a plan as I am discussing, it would of course be the duty of the Interstate Commerce Commission or some other agent of Congress to see that an adequate rate structure was established and maintained, and in that connection it would be a mistake, I believe, to minimize the difficulties growing out of our present dual system of rate regulation. It seems clear that Con- gress has ample authority to deal with this matter if it chooses to do so. I am in favor of leaving the States as free as possible to deal with all matters afifecting transportation, subject only and always to the one qualification that they shall not seek or be per- mitted in the interest of any particular State to place an undue burden upon the commerce of all the other States. RaUway Labor and Its Compensation The labor phase of the railroad problem is indeed most im- portant, as has already been pointed out, but, as has been shown by Mr. Garretson, it is a common factor to be dealt with under any 93 form of control or operation. Clearly it is in the public interest that those who man the trains and engines or whose duties are in any way related to the safe and proper operation of the roads, should be a selected and reliable class of men, and it is also in the public interest that they should be well paid and provided with safe and suitable working conditions, and further, after they have become incapacitated for the more exacting duties of the railroad service, they should be provided if possible either with work more suitable to their physical condition, or with a pension or annuity based upon their average earnings over a period of years, and the expense incident to this reasonable arrangement should be tncluded in the cost of the service rendered to the public. When questions arise concerning wages or working condi- tions, involving matters that cannot be settled directly between the officers and the employes, it would seem not unreasonable nor unfair to provide by law that the questions in dispute should be submitted to some impartial body selected to deal with such matters. The controversy should be promptly investigated and the facts made known to the public, and then if the parties fail to reach an understanding, there should be a certain period, per- haps thirty days, during which it should be unlawful to bring about either a lockout or a strike, the effect of which might impair the regularity of the train service. I am opposed to so-called compulsory arbitration. I do believe, however, that in the case of the great transportation companies where the service is af- fected with a public interest, that the freedom of labor as well as the freedom of the capital employed in such undertakings may be fairly subjected to certain limitations. The so-called New- lands Act, designed to deal with such questions, has not in my opinion wholly fulfilled the expectations of the framers of the act. I am not in favor of such a division of excess profits with labor as Mr. Warfield suggests, because such a plan in my opinion would be extremely difficult of fair application and does not rest upon the right principle. I believe thoroughly in good wages, and if a man does work of unusual value he should receive unusual reward, but the two should go together, and that would not neces- sarily follow under Mr. Warfield's plan. I agree fully with the idea advanced by Mr. Plumb on behalf of the Four Brotherhoods 94 that the best results will be obtained when men are actuated by hope of reward, and not by fear of punishment, and in no line of gainful endeavor has there been greater opportunity for advance- ment and reward than in the railroad service. Private ownership will preserve the conditions which have made such advancement possible. Hundreds of boys have entered the railroad service at the very bottom of the ladder, and without wealth or influence have risen by virtue of personal application, skill and merit to positions of prominence, influence and honor, and while, because of the semi-public character of the service, railroad officers have not the same opportunities to acquire wealth that are offered in other lines of endeavor, the opportunity which such a career has offered in the past for constructive service has made railroading, as a career, attractive. The very great majority of the railroad officers today from the lowest to the highest have reached their present positions through well established lines of promotion and because they were believed to be fitted for the enlarged responsi- l)ilities placed upon them. Having entered the railroad service as an unskilled laborer when only eighteen years old, I have seen and known the things of which I speak. Private ownership and operation will preserve and enlarge the opportunities to which I have referred. Government ownership and operation, in my opinion, would in a large degree destroy them. Good Features of Present Control Can Be Retained Director General McAdoo in his very interesting report re- ferred specifically to a number of different reforms which he rec- ommended be continued under whatever form of control might ultimately be decided upon. I agree fully with his recommenda- tions in that connection with two or possibly three exceptions. The exceptions in mind are, in my opinion, of somewhat doubtful value, but even so I would favor giving them careful considera- tion. I am opposed, however, to the five year extension of the period of Federal control, recommended by the Director General, because I believe that if such extension is granted, by the end of that period it would be practically impossible to restore the roads to the owners, and Government ownership would be the only alternative, and I am opposed to the policy of Government 95 ownership and operation of the railroads. Director General Hines has stated to this Committee that, "In itself continued Government operation of the railroads is not necessary for the rendition of the public service, and will be increasingly difficult and therefore on its own merits as a separate executive proposi- tion ought to be discontinued promptly unless there can be an extension which will remove the difficulties." The occasion which justified the taking over of the railroads having passed, it is now, so it seems to me, the clear and peremptory duty of the Govern- ment to restore, as soon as may be, the properties so taken, to the rightful owners. This should be done as soon as Congress can provide, by suitable legislation, for the relinquishment of Federal control. In the meantime it is certainly the moral duty of the Government to protect the property from unnecessary harm or disarrangement, in order that it may be restored in "As good repair and in substantially as complete equipment as it was in at the beginning of Federal control." Recommendations of Railway Brotherhoods I have carefully considered the plan submitted by Mr. Plumb on behalf of the Fk>ur Brotherhoods. Aside from the fact that I believe his conclusions are erroneous concerning the possi- ble savings to be effected in cost of capital, it seems to me that his plan has all the objections which in my mind are associated with Government ownership and operation. He proposes that the Government should furnish the facilities and capital needed, and that the railroad officers and employes should operate the properties, and, having a two-thirds majority of the Board of Directors, they would evidently be in position to manage the properties as they might elect, and while I have no doubt it would be their honest purpose to operate the roads efficiently, I simply do not believe that efficient operation would be possible or probable under the plan they propose. Frequent references have been made during the progress of this hearing to the large annual saving in cost of capital which could be effected if the railroads were owned or at least financed by the Government, and it has been suggested that the Govern- ment could obtain the necessary capital at four and one-half per 96 cent. I venture in this connection to call the attention of the Committee to the statistical statement submitted by Commis- sioner Clark. It will be observed that the operating revenues and the operating income of the railroads during the year ended June 30, 1916, were the largest of record. The operating income ^ of that year, at $1,043,839,822, was equal to 5.9 per cent, upon the book property investment as reported to the Interstate Com- merce Commission, and was substantially the same rate of return upon property investment that is recommended in the Security- holders' plan ; but the amount paid out for interest and dividends during the same year, at $816,643,910, was only 4.6 per cent, upon the book property investment account. The difference be- tween the amount earned and the amount distributed in interest and dividends, equal to $227,195,912 or 1.2 per cent, upon the property investment, was reported as surplus and undoubtedly was used in large measure to meet expenditures of the character which I have already suggested should be paid for out of operat- ing income. During the same year it also appears that upon the total funded debt of all the railroads, aggregating $10,938,086,453, interest payments amounting to $474,534,514 were made, equal however to only 4.34 per cent. It appears, therefbre, that nearly $11,000,000,000 of the existing railroad capital received less than 4.5 per cent., and clearly there could be no immediate saving by Government purchase or otherwise, upon that poi'tion of the existing capitalization. Railroad credit under wise governmental regulation should be second only to the credit of the Government, and as it falls below that standard, to that same extent does it reflect adversely upon the wisdom and operation of our scheme of regulation. Minimum Constructive Program. If Congress, as a minimum program: 1. Will provide a definite and workable rule for rate- making as related to capital, by fixing an adequate per- centage ratio of railway operating income to the com- bined property investment account of the railroads as a whole, along general lines such as I have discussed ; and 2. Will affirmatively authorize the railroads to com- bine their properties and operations, subject to govem- 97 mental approval, as and when shown to be desirable in the public interest; and 3. Will affirmatively authorize the carriers to issue securities for construction, equipment, enlargement of their properties, and for the refunding of obligations, sub- ject to exclusive supervision of the Federal Commission ; and 4. Will provide for the extension, for a reasonable period, of the indebtedness of the Carriers to the United States for advances and loans made by any governmental agency during Federal control; and 5. In addition thereto, will either create the new agen- cies which have been suggested, or enlarge and extend the existing regulating agencies so that matters requiring gov- ernmental determination may be promptly disposed of ; Congress will then have dealt with the matters fundamentally essential at this time. With such legislation, I believe that the difficulties which have confronted private ownership and opera- tion of the railroads in the past will be very greatly reduced if not entirely eliminated, that the railroad credit will be re-estab- lished and that the public will be provided with ample transporta- tion facilities at reasonable rates and at lower rates than they would be required to pay under Government ownership or control. 98