The Return of The Railroads to Private Ownership being Correspondence between Mr. J. P. Harris, Vice President The Citizens Savings and Trust Company Cleveland, Ohio and Mr. S. Davies Warfield, President National Association of Owners of Railroad Securities especially in regard to the so-called “Warfield Plan” Digitized by the Internet Archive in 2015 https://archive.org/details/returnofrailroad00harr_0 4 The Citizens Savings & Trust Co. EUCLID AVENUE NEAR EAST 9th ST. CLEVELAND. OHIO May 1, 1919 S. Davies Warfield, President National Association of Owners of Railroad Securities, Continental Building, Baltimore, Md. •Dear Mr. Warfield: Through the kindness of Mr. Baumgartner, a copy of the Statistical Exhibit which was filed with the Sen- ate Committee in connection with the so-called “War- field Plan” was received at my office during a brief absence on my part in the South. Since my return to Cleveland last week, we have been going over the matter very carefully, with the aid of your statements bearing dates of January 31st and February 13th, respectively, the above Statistical Exhibit, and a copy of Senate Bill No. S-5679, which purports to embody the Warfield Plan, and I regret very much to have to advise you that the conclusions to which we have been forced, as a result of this study, compel us to register emphatic disapproval of the Plan in its entirety, as well as to specific features involved. The matter was brought before our Board of Direc- tors Monday and discussed fully, and I was directed to convey to you the disapproval of our Board and, at the same time, to announce to you our inability to support, either by influence or contribution of funds, the program above proposed. You will recall that when I was in attendance at the meeting of the Committee of Seventy in New York, early in March, I expressed doubts as to certain fea- tures of the plan proposed, and my further study of the i plan has only confirmed these doubts the more strongly. As I stated to you at that time, the plan and the above Bill embodying it is, to our minds, a step in the direc- tion of outright Government ownership, and we are absolutely opposed to anything of that sort on prin- ciple. It has been stated that the Bill in question is, in effect, a compromise, that it is the most conserva- tive program that, in the opinion of its advocates, can be secured from Congress, and that unless we are willing to accept this program there is danger that something more radical will be put into effect. With this atti- tude we are not at all in sympathy, and we refuse to compromise in advance of the struggle. In this con- nection, may I not call attention to the fact that since the Warfield Plan was evolved there has been a very radical change in public sentiment against Govern- ment ownership in any form, which sentiment is gain- ing headway every day. Within the past few days we have witnessed, in connection with the Postmaster General’s control of the wire systems, the concrete results of the aroused public feeling on this point on the one hand, and of the uncompromising attitude with respect to the return of these properties of Mr. Mackay of the Postal Telegraph Co. on the other, which we believe is without doubt the one compelling reason for the Postmaster General’s proposal to return the cables and telegraph lines at the earliest possible date. Could anything demonstrate more clearly, with respect to the railroad situation, the unwisdom of any compromise whatever by those who have the best interests of the railroads, the security owners and coun- try at heart? I have in mind Lowell’s classic lines, “He enslaves his children’s children who makes com- promise with sin,” and so confident are we of the dis- astrous results which would be sure to follow the enactment of Senate Bill No. S-5679, that, as security 2 owners representing probably 325, OCX), 000 of railroad securities, we would much prefer outright Government ownership, with all of its accompanying objections, than any straddle such as the above Bill represents. The President in his Proclamation gave a definite promise to return the roads, and, in our opinion, the only way to return them is to return them. Taking up specific features of the Bill in question, we object most strenuously to a limitation of 6% on railroad earnings. Such a limitation would, in our judgment, ruin railroad credit for all time. Six (6%) per cent, is the minimum dividend that any prosperous railroad should pay, leaving only the pittance which may be derived from excess earnings for reinvestment, or for building up a surplus fund for lean years. The Warfield Plan makes no provision whatever for lean years, and by turning over excess earnings in the manner proposed it creates a situation, where, from the standpoint of the Government and the employees, it is a game of “heads I win, tails you lose.” If 6% is to be the maximum normal return, on what basis will it ever be possible to pay any railroad debts, or who would be willing to purchase any railroad securi- ties in the future? In the past few years railroads have been required to pay considerably more than 6% for funds, and the future must provide the means for taking care of the enormous obligations thus incurred. The Bill as drawn provides that the standard return shall be computed on the basis of 6% on “property investment,” but no attempt whatever is made to define what is meant by “property investment,” and so much discretion in regard to this matter is apparently left to Government agencies, that to our minds the pro- vision is calculated to produce the utmost friction and litigation between the carriers and the Governmental agencies' We have already seen the spectacle of an attempt to arrive at physical valuation, and while the Government has been spending years and millions in money in this attempt, we are still far from any help- ful or definite conclusions, or even suggestions. The theory of dividing excess earnings in three ways is, to our minds, a mistaken one. Organized labor has for years contended for a uniform rate on all railroads, regardless of size or their ability to earn them. Such rates have now been made effective. To use one- third of excess earnings to reward employees of pros- perous roads, or regions, would immediately create an inequality of rates, which would at once result in demands for further increases on all other roads to re- establish uniformity of rates, working conditions, in- surance or pension allowances, etc. The theory of labor participating has failed of convincing demon- stration even in small units and, in our judgment, if applied on the vast organizations of the railroads it would never work out practically, but would, instead, prove a boomerang leading to new labor troubles. One third of excess earnings is not sufficient to en- courage capital to finance improvements that would bring about economies of operation. For example, if on a certain railroad $1, 000, 000 spent for grade revision would promise reduction in operation amounting to 20% of the amount to be invested, one third of which would accrue to the corporation for payment of interest, the other two thirds going to interests that had no responsibility in providing the 31,000,000, how can one conceive that a Board of Directors would ever authorize the expenditure? This is not a hypo- thetical case, as I have in mind a specific instance of such an expenditure resulting in just the manner men- tioned, which, under the Warfield Plan, would certainly never have been authorized. The economic waste of continuing the old operation, in the above example, would go on forever, and not only would the public be deprived of superior facilities, but there would be abso- lutely lacking any incentive for judicious and effective supervision of the road itself. Another weakness involved in the distribution of excess earnings, as suggested in the above Bill, is that the plan takes too much out of the total excess earn- ings for the prosperous lines within a given region, not leaving enough to encourage these stronger lines to take over the weaker lines under their protection, building them up and strengthening them to give the public better service, which is both desirable and necessary, provided such consolidations are properly safeguarded by Governmental supervision. The proposal to create regional commissions com- posed of three men each, drawing maximum salaries of only ^7,500 each, and providing that no person shall be eligible who is in any way pecuniarily interested in any railroad property, or who owns any railroad stocks or bonds, or who holds any official relation to any common carrier, is little short of Bolshevism, for who could qualify, or who could be obtained under these restrictions, except some cheap lawyer or politician? It seems to me that we have already had more than enough of the theory that a man is disqualified for public service who happens to possess the evidence of success and fitness in the particular field in which he is called to render that service. Too large systems do not make for efficient or economic operation, and the attempt to lodge execu- tive powers in the hands of a few men supervising groups of systems, or large regions, or to group all the roads in certain sections into single systems, as has been elsewhere proposed, is most objectionable. Large sys- tems tend to congest both in their traffic and in their official handling, for the executive’s authority is neces- sarily too far removed from the activities which turn the wheels under the cars. Such an organization (and your proposed regional commissions and the National Rail- ways Association, with the powers vested in them, con- stitute such an organization) inevitably takes on bureau- cratic methods, which are necessarily slow, and the result is that the answer comes after the train has gone. Re- sponsibility is too far removed from the seat of opera- tion, with the result that not only is the esprit de corps destroyed, but efficiency of operation is reduced to a minimum. The proposal to create a body to be known as “The National Railways Association” to facilitate the return of the railroads to their owners would, I believe, be commendable, provided its functions should be con- fined within that scope, but to create such a body as a permanent institution to gather under its control one third of the excess earnings of all the railroads of the country, as provided in the Bill, is a measure fraught with the greatest danger. As money would accumu- late in the hands of the National Association, there is practical certainty that the aggregate fund would, in due time, far over-reach the immediate necessities of the Association, with respect to rolling stock purchases and the like, and it is beyond human nature to con- ceive that when this fund should become reasonably large in proportions, the Association would not begin to look around for means of spending it, either in the construction of competing railroad lines, or in the ini- tial steps of a program of actual Government owner- ship. In this connection, it is pertinent to point out also that the Railroad Administration, as a purely war measure, purchased a large amount of rolling stock, which, under war conditions, cost much more than the normal price for such equipment. The Railroad Ad- ministration has, as you know, attempted to force this equipment upon the railroads of the country, even at the exorbitant cost at which it was acquired, as just indicated. Such forced allocation of the equipment in question is, to our minds, unjust and immoral, and we are utterly opposed to any measure which may even remotely contemplate such action. Senate Bill No. S-5679 gives no assurance whatever that the National Association in leasing, or subletting, this Government equipment to needy roads would not do so on the basis of the original exorbitant and abnormal cost, and it is our contention that if the individual roads are to re- lieve the Government of its war purchases of equip- ment, this must be accomplished on equitable terms, with due reference to the normal cost of such equip- ment and only with the consent of the roads in ques- tion. In other words, we hold, as already stated, that the Government purchased this rolling stock as a necessary war measure, just as the Government pur- chased motor trucks and other war equipment, which surplus equipment the Government is now obliged to sell, or dispose of, at the inevitable sacrifice price, and if that is true in the case of motor trucks and other miscellaneous equipment, the same rule should apply in the case of railroad rolling stock, and the Govern- ment should absorb the inevitable loss on this score also as a necessary expense of the war. We shall be opposed, therefore, to any measure that may provide otherwise. To sum up our position, therefore, we find it im- possible to approve the Warfield Plan on the ground that it is a compromise, and an attempted straddle which, to our minds, is worse than outright Govern- ment ownership and quite impossible. Accordingly, we are unalterably opposed to the passage of the above Bill, and we take the position that the President and the Administration should carry out, in terms, the promise conveyed in the President’s Proclamation. We believe that the strength of the railroad security holders and the railroad owners should be directed toward securing the return of the railroads to their owners at the earliest possible date; that whatever Federal legislation is enacted to provide for improved conditions, over those which existed prior to the war, should confine itself to the elimination of multiplied jurisdictions and the centralization of control in the hands of the Federal Government as far as rates, wages, security issues and operating conditions are concerned. I mean by this that Congress should instruct the Inter- state Commerce Commission, or other supervising bodies, to correlate rates and wages so as to enable the roads to earn a proper return upon their invest- ment; in other words, to provide that rates be placed upon a level which will bear proper relations to the wages imposed by Governmental edict. We believe that many of the roads could be returned to their owners immediately. Others could be returned later, and in regard to still others specific plans might have to be worked out to avoid disaster, but, as stated early in this letter, in our minds the only way to return the roads, as promised by the President, is to return them, and we are utterly opposed to any compromise legis- lation which will in any way deprive the roads of their inherent rights, or move us one step nearer socialism or Government ownership. It is with great regret that we find ourselves in opposition to your program, which I trust we have not misconstrued, and you will under- stand, I am sure, our resultant inability to further sup- port the actions of the National Association of Owners of Railroad Securities in this connection, either with funds or with our influence. That our position may be known to the other mem- 8 bers of the Committee of Seventy, I am taking the liberty of forwarding a copy of this letter to each member of the Committee. The above Statistical Exhibit I am returning to you direct, under separate cover, and wish to express to you my great apprecia- tion of your courtesy in loaning it to me. Very truly yours, J. P. Harris, Vice President. NATIONAL ASSOCIATION OF OWNERS OF RAILROAD SECURITIES THE CONTINENTAL BUILDING S. DAVIES WARFIELD, President BALTIMORE, MD. May 3, 1919 Mr. J. R. Nutt, Cleveland, Ohio. My dear Mr. Nutt: I enclose a copy of my reply to a letter received from Mr. J. P. Harris, Cleveland, Ohio, copy of which he states he sent to the members of the Committee of Seventy. The action of this gentleman in sending his letter to the Committee of Seventy before its receipt by me with opportunity to answer, forces me to the conclusion that motives other than the interests of railroad security owners has prompted such action on his part. Apart from the lack of courtesy and due regard for conventionalities in such cases, his letter evidences such a lack of knowledge of our plan and Bill and their purposes that his analysis thereof must have been as much of a surprise to you as to me. Were it not for the “good of the cause” I should never have attempted to disclose the manifest absurdities of this gentleman’s position and burden you with the same. Very truly yours, S. Davies Warfield, President. 10 NATIONAL ASSOCIATION OF OWNERS OF RAILROAD SECURITIES THE CONTINENTAL BUILDING S. DAVIES WARFIELD, President BALTIMORE, md. May 3, 1919 Mr. J. P. Harris, Vice-President, Cleveland, Ohio. Dear Mr. Harris: I regret that you did not submit your analysis of the plan of the Association to some of us who have been giving a great deal of time to the problem and have followed closely the hearings before the Senate Com- mittee, as you would, I think, have found that both the bill (S. 5679) and the explanations of our suggestions before the Senate Committee accomplish exactly the reverse of your analysis. Indeed, so fundamental is your misconception of the entire matter that I am wondering if you could have examined inadvertently some other bill. For instance, you take exception to the bill because the standard return contemplated by the Plan is to be computed on the “property investment,” whereas you say: “No attempt whatever is made to define what is meant by ‘property investment’ This miscon- ception on your part is complete. It seems that you confuse “property investment” and “securities.” The bill provides (Section 17, p. 25, line 17 et seq.) that “The commission shall, as nearly as may be, es- tablish and maintain freight and passenger rates, or levels of rates or charges in each rate-making district that will enable the carriers as a whole in each district and subject to this act, to earn an annual net railway operating income equal to not n less than six per centum on the combined property investment account , determined in accordance with the accounting regulations of the commission.” Nothing is more definite, certain, easy of ascertainment and impossible to become the matter of controversy than the property investment accounts of the carriers and as this point was made clear by my testimony, was expressly defended as a proper basis for rate making in my letter to the Chairman of the Committee which is printed in the record with my testimony, and is clearly stated in that part of the bill which contains the mandate to the Interstate CommerceCommission, I cannot understand how you could derive any impres- sion to the contrary if you gave to the bill and to the testimony that discriminating reading which the As- sociation had some right to expect before any of its members should reach and circulate unnecessarily vehement conclusions adverse to those of the Executive Committee which were arrived at after careful con- sideration and were subsequently approved by the Committee of Seventy. It was, of course, unnecessary to employ the full expression “property investment account” at every point in the bill, but you will find it in a second mandate to the Commission on page 28, line 8. Indeed, the fun- damental basis of our plan is to give the Commission a mandatory and definite rule for rate making, and I am encouraged to know that you are the only one who has given our plan, our efforts or our bill more than a cursory analysis without discovering that we are op- posing the regional consolidations, and like mechanical devices, because of their delay, illegality, uncertainty and indefiniteness in assuring an adequate rate factor. You say: “The Warfield Plan makes no provision whatever for lean years.” On the contrary, if you had read either the plan or the bill you would have 12 found that, in addition to the one-third of their earn- ings over six per cent, the carriers receiving excess earnings may be permitted “in accordance with regulations to be prescribed by the commission and when and to the extent found desirable in the public interest, to set up and maintain on their books, before the excess earnings reduction shall apply, such corporate reserves as a margin of safety for the protection of their credit, or for working capital or otherwise, etc.” (S. 5679, p. 29, line 29.) Other reserves to meet contingencies and disasters are expressly contemplated both by the bill and by the plan and I am again forced to the conclusion that you have not read either with that care which the im- portance of the subject and the emphasis of your dis- sent would warrant. You comment on the employment of one-third of the excess earnings fund for the benefit of labor is equally unfortunate in its failure to analyze either the situation or the plan or the bill. You object to the distribution because labor has contended for a uniform rate — I suppose you mean wage scale — on all railroads and say that the use of labor’s one-third of the funds, as proposed by us, “to reward employees of prosperous roads, or regions, would immediately create an in- equality of rates (?), which would at once result in demands for further increases on all other roads to re-establish uniformity of rates (?), working conditions, insurance or pension allowances, etc.” We are not concerned with the machinery for this dis- tribution, nor whether it will be conducted for the benefit of all railway employees or merely for the em- ployees of the respective regions in which the fund is produced. We had carefully considered the point you mention and found, by analysis of the totals that 13 the total fund which labor would have received had the plan been in operation during the year 1917 would have been approximately 335,000,000 as against the total present wage account of 32,500,000,000 or about 1.4 per cent. It is obvious that a fund of this character must be employed not as a direct distribution but to purchase insurance or similar benefits as a reward for faithful and efficient service and would furnish a con- stant factor tending to assure loyalty and fidelity. Hence your supposition that the process involves profit sharing in an objectionable sense is not sustained by the facts. There is a consensus of opinion that proper remedial legislation will be greatly expedited if some recognition is made of labor. Your application of the plan to the supposed case of the expenditure of 31,000,000 to save annually 3200,000 mystifies me. You say that one-third of the corporate saving would accrue to the corporation for payment of interest on the improvement, “The other two-thirds going to interests that had no responsibility in the providing the 31,000,000,” and ask how can we conceive that a Board of Directors would every author- ize the expenditure? By expending 31,000,000 your property investment account would automatically entitle the road (one which is presumed by you to be earning in excess of the standard return) to retain 360,000, leaving 3140,000 excess earnings subject to excess earnings reduction, of this the railroad would receive 346,000 in addition to the 360,000 which you seem to have lost sight of entirely. You say that another weakness is that the plan takes too much surplus away from the strong roads and leaves them without means to take over the weaker lines. On the contrary there is a direct in- centive to the stronger line to pursue that course in order to retain a larger percentage of its excess earnings. 14 It is readily conceivable that the intercorporate agree- ment for consolidation would share this resulting bene- fit equitably between the two lines and further stimulate the process. Your criticism of the provision of the bill to the effect that the regional commissioners must not be pecuniarily or otherwise interested in any railroad security or property, etc., as being “little short of Bolshevism” is, I regret to say, as unfortunate as some of the other analyses contained in your letter. If you had examined or considered the bill with any care or discrim- ination whatever, you would have found that the qualifications adopted by us for regional commissioners are substantially the qualifications which are now and for years have been the qualifications for members of the Interstate Commerce Commission, and notwith- standing the bad results we have gotten from that Commission due to inadequate legislation, the fact remains that there has never been a breath of scandal or a word of reproach affecting the integrity of any member of the Commission since its organization in 1884 and the general confidence of the public in the good faith of the Commission, with the Bolshevist qualifications which displease you, is the one bulwark making it possible for the railroads to avoid absolute confiscation. If you think that what you term the personal unpopularity of Burleson, and the genuine antipathy of the American people toward government ownership makes it opportune for the owners of the railroads to go before Congress and demand that estab- lished safeguards which have been approved for a generation by the public are now to be junked, your idea of the common sense of the situation would, I fear, never coincide with the purposes of the Associa- tion. No less startling is your misconception of the Na- 15 tional Railways Association which is proposed in order to take over some of the burden of equipment forced on the carriers, assist in liquidating federal control, and, above all, to bring the members of the Interstate Commerce Commission in contact with eight of the best operating and financial men in active conduct of the railroads. To call this a step toward bureaucratic methods is positively amusing. The railroad trustees are to be nominated by the Boards of Directors of all the railroads, for limited terms, without compensation. Bureaucratic! It would provide an agency for the most profound public service and usefulness, with no visitorial power over the roads but with a desirable opportunity for aiding in a sound program of unifica- tion. You refer to the regional commissions and the Railway Associations as constituting a large system “which tends to congest both in their traffic and in their official handling.” Neither the plan nor the bill brings the regional commissions and the Railways Association in any remote contact whatever, except that they are mentioned in the same bill, so the para- graph in which you misunderstand those features of the plan does not really afford me anything sufficiently definite to respond to. You are apprehensive lest the National Railways Association accumulate too much money through the excess earnings fund. As this fund is always subject to the general adjustment of rates and as past experience shows that a fund much greater than we can expect could have been absorbed in providing a car supply reserve for the common use of all carriers and as the requirements in the way of extraordinary facilities for the joint use of carriers are increasing in cost and diffi- culty year by year, it is too obvious for serious concern that the fund would neither be adequate or excessive. You complain because our bill provides “no assur- 16 ance whatever that the National (Railway) Association in leasing or subletting this Government equipment to needy roads could not do so on the basis of the original exorbitant and abnormal cost, etc.” The bill goes as far in that direction as any thoughtful man could advise. It provides (Sec. 34, p. 59, 1, 24) that the National Railways Association “shall have power to purchase from the limited states all such equipment, cars, engines, or other railway property as may have been purchased * * by the United States. * * * The Association and the Railroad Administration shall have the power to agree upon such value, which may be less than the original cost thereof; and the Railroad Adminis- tration is hereby authorized to sell and transfer any such equipment to the Association or to others upon fair and reasonable terms.” So you see that it is quite clear that you are absolutely wrong in asserting that the bill does not go as far as it is wise or necessary. The present Federal control act and Mr. McAdoo’s budgets contemplated purchase by the railroads at cost. We propose that the Railroad Administration shall be authorized to purchase on a fair basis and it is absolutely absurd to suggest that the National Railways Association, operated by railroad men, and organized not for profit but to assist the com- merce of the people, would not offer a fair rental to the needy lines. As for your statement that the plan is a “straddle” or a “compromise,” I suppose you mean that it shows some faint recognition that we have passed out of the era of Jay Gould and Jim Fisk. The interesting program which you endorse contemplates, I note, the immediate return of the railroads, legislation or no legislation, but preferably with legislation centralizing 17 “rates, wages, security issues and operating conditions in the Federal Government,” and instructing the Com- mission “to correlate rates and wages so as to enable the roads to earn a proper return upon their invest- ment.” Permit me to say that there has been a great deal of that kind of talk, but this Association, being desirous of results, formulated a plan and a bill which exhibit a decent respect for the temper of the people and has received sufficient support to justify us in the belief that we may be able to have its fundamentals accepted by Congress. Let me express the hope that, in view of your great delay in expressing your disapproval, the necessities of the Association for additional emergency funds men- tioned in the letter which seems to have provoked your reply, has not been the cause of your criticism of our plan which had been before you and the general public for months. The fact that you are alone in your willingness to see the railroads thrown back on their owners “at the earliest possible date” and apparently without refer- ence to legislation— relieves me of any embarrassment which your ill-advised criticism might ordinarily entail, for there is not a thoughtful banker of my acquaintance who entertains your views as to the proper attitude for the security owners to adopt at this juncture or as to the unprotected return of the rail- roads. The great concern felt at the dangers of such a procedure is evidenced by the various plans proposed to Congress to avoid just the situation you wish to create, none of these plans would therefore meet your approval. Since you advise that you have communicated your views to your Board of Directors, and since those views as I have pointed out are so wholly unjustified by any provision of our bill, may I ask that you also lay this 18 communication before them — and be good enough to advise me of any others in addition to the Committee of Seventy to whom you may have communicated your erroneous impressions in order that I may keep the record straight in this matter of such grave im- portance. If you should desire any further information about this matter, permit me to request that you get in touch with me personally and not through corre- spondence, as I am too much occupied with con- structive work of the Association to enter upon pro- longed and unnecessary explanations of this character. Very truly yours, S. Davies Warfield, President. 19 The Citizens Savings & Trust Co. EUCLID AVENUE NEAR EAST 9th ST. CLEVELAND, OHIO May 9, 1919. S. Davies Warfield, President, National Association of Owners of Railroad Securities, Baltimore, Md. Dear Mr. Warfield: Your letter of May 3rd did not reach me until May 6th, although I had already seen a copy of it, which was received by Mr. Nutt the day before. I am very sorry to note that you have construed my criticism of the “Warfield Plan” as a criticism of you personally. You may be assured that such is not the case, if for no other reason than my high regard for you and your sincerity in this matter. I wrote my letter and dis- tributed it upon the assumption that not only you but all other members of the Committee would be inter- ested in knowing our views, to the end that there might be no misunderstanding of our position in the light of the action taken by the Committee of Seventy, and in regard to which you will recall I reserved judg- ment, pending further study, in my personal conversa- tion with yourself and one of your attorneys at the close of the meeting in question. I trust, therefore, that upon further reading of my letter, and further re- flection, you will understand that no improper motives have dictated my action or that of our Board of Directors. Accordingly, I shall refrain from answering such portions of your letter as may have been prompted by impressions to the contrary, and shall confine my reply to pointing out what seem to me to be your funda- mental errors as to our position and as to what your Plan provides. 20 I think that if you will read my letter again, you will find that, briefly stated, our fundamental objec- tions to your Plan are as follows: 1. You have intimated that it is either the “War- field Plan” or something more radical. Your position is indicated by your statement (Supplementary State- ment, February 13, 1919, bottom of page 10) “It may not sound popular to require that these excess earnings be put into a fund in the public interest, but the security owners of the railroads are face to face with either subjecting themselves to this or having the attempt made to reduce their securities to a point they know not where.” To this we cannot subscribe. Addressing Congress in December last, President Wilson said: “It would be a disservice 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 affirmative or helpful about them. Some new ele- ment of policy, therefore, is necessary,” and we refuse to believe that the President, who in his Proclamation gave a specific pledge to return the rail- roads to their owners without penalty, will break faith with his fellow countrymen. We prefer, therefore, to rely upon the honesty of public opinion in dealing with the situation, rather than to assume that the public will be unfair. 2. In answer to my contention that Senate Bill No. S-5679 makes no attempt whatever to define what is meant by “property investment,” you cite Section 17, page 25, line 17 et seq. Let me, however, under- line the essential words: “Not less than six percentum on the combined property account determined in accordance with the accounting regulations of the Commission . ” 21 The property accounts of the railroads were not re- quired to be kept, and were not kept, in accordance with any rules of the Interstate Commerce Commission prior to 1907, because there were no such rules. The great bulk of the investment accounts were on the carrier’s books prior to that date. Since June 30, 1907, property accounts are kept presumably in accordance with the rules of the Commission, but because of optional methods allowed, the accounting has been upon various bases. On the whole, there- fore, there is no such thing as “property accounts determined in accordance with the accounting regula- tions of the Commission,” unless you mean to allow the carriers a return only upon that portion charged since June 30, 1907. On this point, need I do more than call attention to the cases now being argued on behalf of the Kansas City Southern and other railroads to deter- mine this very point, which cases have been in long dispute and are now in process of being carried to the highest courts? 3. I repeat, no provision whatever is made for lean years. In your answer, you quote from the Bill, page 29, line 29 (?) (i. e. 10 et seq.). Again, I under- line the essential words: “Carriers receiving excess earnings may be per- mitted, under the direction of and in accordance with regulations to be prescribed by the Commission and when and to the extent found desirable in the public interest ,” etc. and “The Commission may in its discretion and when deemed desirable in the public interest, cause to be set up out of operating income,” etc. To our minds the record of existing Governmental regulatory bodies exercising such plenary and discre- tionary powers could hardly justify even the most 22 optimistic in finding any assurance whatever that under the provisions of your bill there will be any excess earnings, or any practical provision for the protection of railroad credit. To hold otherwise is a marvelous triumph of faith over experience. Net income is a result not only of rates, but also of operating conditions and volume and density of traffic. Suppose rates are established, which it is estimated will provide 6% on an agreed property investment, and actual practice, as has so frequently been the case, should fail to produce 6%. Who, under the pro- visions of your Bill, is going to make up the deficit to the railroads? In effect, would it not be a case of providing the medicine after the patient is dead? 4. In the final analysis, the “Warfield Plan,” as we view it, is a minimum guarantee plan and is, there- fore, a compromise with Government ownership, if not actually tantamount not only to Government control but practically Government ownership without compensation to the owners therefor. We consider the theory of a guarantee so fundamentally wrong that the method of arriving at the plan is inconsequential. It is true that your Bill does not specifically provide for this, but the inevitable end of the course proposed provides the equivalent of both Government ownership and operation, for when the Government says to the railroads, in effect, “You shall not be permitted to accumulate earnings to pay the principal of your out- standing bonds,” the Government will be compelled, in justice, to provide for such payments, and, when that point is reached, actual Government ownership and operation will begin. In conclusion, I repeat, in our opinion certain of the railroads could be returned to private ownership at once. I have already suggested the form of Federal legislation to provide for the return of the roads less 23 favorably situated at the moment, but we protest against the policy of compelling the public to contribute to a subsidy to maintain the improvidently built or man- aged roads, or of penalizing those systems which are efficiently operated and which are fortunately located with respect to their traffic, in order that some of the weaker systems, for certain of which a receivership might be the best antidote, may be saved, and certain securities which never should have been issued in the first place and which, in the public interest, should be re-organized, may be made secure. I have taken the liberty of writing you in lieu of a personal conference, because I wish all of our associates to know our position, and with that in view I am send- ing a copy of this letter to them. Very truly yours, J. P. Harris, Vice-President. 24