in 
 
 
 ^Reprinted from The Annals of the American Academy of Political and Social 
 
 Science, Philadelphia, January, 1916. , 
 
 ^ 
 
 Publication No. 972. 
 
 RECENT FINANCIAL INVESTIGATIONS BY THE INTER- 
 STATE COMMERCE COMMISSION 
 
 By Ernest Ritson Dewsnup, 
 Professor of Railway Administration, University of Illinois. 
 
 The act to regulate commerce gave to the commission, created 
 by it, authority to inquire into the management of the business of 
 interstate common carriers. No limitation upon the scope of in- 
 quiry so long as it concerned the management of the business of 
 carriers subject to the act would appear to have been imposed. 
 Under this authority, the Interstate Commerce Commission has 
 apparently had power, at any time during its existence, to investi- 
 gate not merely rates and traffic regulations but also any matters 
 concerning operation and fiscal administration that it chose to be 
 interested in. However, this large investigative power was allowed 
 to lie more or less in abeyance, so far as the last mentioned aspects 
 of railway management were concerned, for twenty-five years or 
 thereabouts. To some extent, it was incapable of effective utili- 
 zation on account of the failure of the original act to provide suffi- 
 ciently complete control over traffic and fiscal records and accounts 
 or adequate machinery with which to pursue inquiries of this kind. 
 The Hepburn amendment of 1906 remedied this by definitely 
 , assigning to the commission such control and bj'- authorizing the 
 .employment of special agents or examiners with full powers of in- 
 vestigation. 
 
 The half-dozen years immediately following the enactment of 
 I the Hepburn amendment were employed by the commission in 
 'molding into uniform pattern the myriad-shaped accounts of the 
 "T^carriers and in organizing a corps of inspection to assist in this de- 
 T^sirable simplification. By 1912, the commission evidently felt itself 
 tin a position to make use of its strengthened facilities of inquiry, 
 )and, with admirable courage, determined to try its hand upon no 
 jless important a corporate body than that of the New York, New 
 Haven and Hartford Railroad Company, including its ancillary 
 ' member, the Boston and Maine Railroad. 
 
 For some time prior to the investigation undertaken by the 
 
 1 
 
 ? 
 
 ^y^^^oO
 
 2 The Annals of the American Academy 
 
 coniiiiission in 1012, there luul been severe criticism of the operating 
 and tinancial methods of the Xew Haven system. The investiga- 
 tion, into which the commission entered as the result of an informal 
 inquiry by one of its special agents, turned out to be a most exten- 
 sive one, the hearings consuming thirty-seven days and resulting 
 in over six thousand pages of type-written testimonj\ The report 
 of the commission published in the stimmer of 1913^ stirred the 
 interest of Congress, and, in the following February, the Senate 
 passed a resolution instructing the commission to re-open the 
 examination of the affairs of the company and to make further 
 investigation of its financial transactions. In accordance with these 
 instructions, a still more intensive examination was undertaken, 
 in the course of which nearly fortj'' persons were placed upon the 
 stand — their testimony and the exhibits in connection with the case 
 requiring two thick volumes for their printed presentation.' 
 
 Very soon after the election of Mr. C. S. Mellen to the presi- 
 dency of the New Haven road,' that company proceeded to extend 
 its control of trolley lines in southern Xew England by bold and 
 hazardous steps. To this end it organized the Providence Securi- 
 ties Company which exchanged its 4 per cent debentures, guaran- 
 teed by the New Haven road, for the whole of the securities of the 
 Rhode Island Securities Company, a company which the United 
 Gas Improvement Company of Philadelphia had organized, in 
 July, 1902, to hold the capital stock of the Rhode Island Company, 
 the last named being the operating company (organized in June, 
 1902) controlling, under 999-year leases, about two hundred and 
 forty miles of trolley lines in Rhode Island. The cash investment 
 of the last named company appears to have been but little over 
 nine and one-half million dollars but, in its determination to secure 
 a monopolistic grip of the trolley situation, the New Haven spent in 
 money and securities over twenty-four million dollars, an astounding 
 expenditure in view of the fact that from the organization of the 
 Rhode Island Company until its purchase in 1906, it had failed to 
 pay a dividend; indeed, its income account showed a surplus of but 
 
 1 27 iTilerslate Commerce Commission Reports, pp. 560-617. The New England 
 Investigation. 
 
 * 63d Congress, 2d session, 1913-14. Senate Documents, vols. 19 and SO. 
 
 * November, 1903. Mr. Mellen had been president of the Northern Pacific 
 Railway Company from 1897, and previously, for several years, vice-president of 
 the New Uaven road.
 
 Investigation by Interstate Commerce Commission 3 
 
 $397,000 up to June 30, 1908. It was part of the agreement with 
 the United Gas Improvement Company that the New Haven should 
 also take over the Connecticut trolley lines, and here again a sum 
 was paid considerably in excess of their value — $10,000,000, accord- 
 ing to former president Mellen's testimony. 
 
 That the New Haven management was prepared to make the 
 most extravagant expenditures in its endeavor to suppress com- 
 petition is further illustrated in its acquisition of the New York, 
 Westchester and Boston Railway Company, a property which 
 ultimately cost it nearly thirty-six and one-half million dollars 
 for a line of eighteen miles in length.* The acquisition was under- 
 taken by a special committee with power to act, composed of J. P. 
 Morgan, William Rockefeller and G. M. Miller, with President 
 Mellen ex-officio. This committee was appointed by the standing 
 committee of the Board of Directors after Mr. Mellen had made a 
 statement concerning the "proposed competition between the Con- 
 necticut State line and the Harlem River." Five days later 
 (September 22, 1906), this action was approved at a regular meet- 
 ing of the full Board, fifteen of the directors being present. The 
 report of the Interstate Commerce Commission ^ states that the 
 full Board was not taken into the confidence of those directors who 
 wanted the Westchester securities purchased. However, the 
 testimony seems to indicate that, in appointing this committee in 
 such general terms, the directors were aware of the purpose of their 
 vote, though not anticipating so heavy a purchase price as was 
 actually paid. ^ 
 
 Some thirteen months later, the Morgan-Rockefeller com- 
 mittee reported to the Board that it had secured control of the 
 properties at a cost of more than eleven million dollars. For this 
 large expenditure, the New Haven became the possessor of two 
 "beclouded" franchises for lines parallel and in close proximity to 
 its own tracks. The tangible assets underlying the Westchester 
 
 ^ The line extends from 174th St., New York City, a distance of 6.83 miles to 
 Mount Vernon (fom- tracks), thence bifurcating into two double track lines, one 
 to New RocheUe (2.16 miles) and the other to White Plains (9.04 miles). A per- 
 petual lease gives also the use of the 3.72 miles of track between 174th St. and the 
 Harlem River over the tracks of the Harlem River and Port Chester RaUroad. 
 
 * SI Interstate Commerce Commission Reports, pp. 32-132. 
 
 ^ See 63d Congress, 2d session. Senate Documents, Vol. 19, p. 1015, Testi- 
 mony of [Director] WiUiam Skinner.
 
 4 The Annals of tue American Academy 
 
 and Port Chester coiiipanies and the City and County Contract 
 Company (the construction company), at the time of the acquisi- 
 tion of the property by the New Haven, would seem to have been 
 about four miUion one hundred and sixty thousand dollars. Both 
 franchises were being attacked in the courts and an application 
 for permission to consolidate the two projects and construct but 
 one road was held up by court injunction. To straighten out the 
 legal tangle and to secure the necessary amendments to the fran- 
 chises, President Mellen, with the aid of the late Thomas J. Byrnes, 
 sometime inspector in the New York pohce force, expended an ad- 
 ditional 81,500,000, the trail of this expenditure being hidden bj' 
 the transfer of New Haven securities to its subsidiary company, 
 the New England Navigation Company, which thereupon trans- 
 ferred them to its President, who happened to be the same C. S, 
 Mellen that presided over the parent company. The outlay of this 
 money secured for the New Haven road the control of 30,431 of 
 the 34,053^ Westchester shares still outstanding, worth, as Mr. 
 Mellen cj'uically testified later, about ten cents a pound. The 
 Interstate Commerce Commission, in its report, had no hesitation 
 in charging a corrupt purpose in the manipulation of this expen- 
 diture. In addition to the above payments, a further Sl,400,000 
 was paid out in settlement of the claims of parties in control of the 
 Port Chester Company, and of the damages accruing to Thorne 
 and Perry (who had been acting as agents for the New Haven in 
 securing the property) on account of the rescission of their contract. 
 In the course of the investigation by the Commission, it seems that 
 Thorne and Perry failed to account for 81,032,000 of the moneys 
 expended by them. 
 
 Thus it appears that the Morgan-Rockefeller committee of the 
 New Haven Board was responsible for disbursing over fourteen 
 million dollars for tangible assets, as already stated, of a little over 
 four millions. To complete the construction of the road, 822,000,- 
 000 was required, thus making 836,000,000 in all, the fixed charges 
 involving a payment of 81,250,000 per annum beyond the earnings, 
 and according to the testimony of the President of the road, the 
 earnings at the time of the investigation were less than 25 per cent 
 of the amount necessary to make the property self-sustaining. 
 Such finance savors of monopoly mania. That such eminent 
 financiers should have been responsible for it makes the matter only
 
 Investigations by Interstate Commerce Commission 5 
 
 the more astounding. To judge from Mellen's testimony, the rela- 
 tion of the highly paid President of a most important railway com- 
 pany to the late J. P. Morgan resembled nothing more closely than 
 that of the office boy to his "boss." The evidence does not reveal 
 the underlying purpose of Mr. Morgan in putting this deal through 
 and it might be said that, in reply to a direct inquiry from the 
 present chairman of the New Haven, the firm of J. P. Morgan and 
 Company asserted that in the course of the twenty years prior to 
 December 4, 1913, they realized a total net profit of not more than 
 approximately $350,000. from the handling of the securities of the 
 New Haven and its subsidiary companies.'' 
 
 The Billard transactions afford another example of the New 
 Haven's financial extravagance, as also of its defiance of statutory 
 regulation. The space at our disposal will not permit us to enter 
 into detail, but, in brief, these transactions arose out of a decision 
 of the Supreme Court of Massachusetts which made it very clear 
 that in acquiring a substantially controlling interest in the Boston 
 and Maine Railroad, in 1907, the New Haven had acted illegally. 
 The stock had been acquired in the name of the New Haven's 
 subsidiary, the New England Navigation Company. Accordingly, 
 the New Haven proceeded apparently to divest itself of the 
 property by having the Navigation Company sell the stock to a 
 Mr. John L. Billard. However, within about a year after this sale,A 
 the New Haven succeeded in securing the passage of a bill by the I 
 legislature of Massachusetts authorizing the incorporation of the I ,^\' 
 Boston Railroad Holding Company with power to acquire and I v 
 hold a majority of the stock of the Boston and Maine Railroad/ 
 (June 24, 1909). Thereupon, Billard was induced to sell back the' 
 stock to the Navigation Company which transferred it to the new 
 holding company. But when investigation came to be made, it 
 was obvious that at no time during the couple of years covered by 
 these transactions had the New Haven really relinquished its con- 
 trol of the Boston and Maine. Billard, a coal merchant of Meriden, 
 Conn., was by no means in a financial condition to handle such a 
 large deal. Actually he did not put out a dollar of his own money. 
 He did not even handle the shares. The $13,750,000 representing 
 the purchase price was raised by an advance of $11,000,000 by the 
 National City Bank of New York, on the stock deposited as col- 
 
 ^ See Railway Age Gazette, March 13, 1914.
 
 G The Annals of the American Academy 
 
 lateral, and the balance of nearly two and three quarter million 
 dollars was then taken care of through the acceptance by the 
 Navigation Company of an unsecured note of Dillard's. Neverthe- 
 less, Billard would seem to have pulled $2,748,000 out of the busi- 
 ness, for the securities were sold to him at S125 and bought back at 
 $150 per share, and this despite the understanding of the Board 
 of Directors of the New Haven that Billard was to receive only 
 a reasonable compensation for the service he performed. 
 Billard, by the way, took care to burn his books and papers, pre- 
 sumably to avoid embarrassment from any examination of them. 
 
 The monopolistic ambitions of the New Haven management 
 extended not only to control of electric trollej's and suburban and 
 main line railroads, but also to that of water communications. 
 Adopting its usual methods of "dummy companies and dummy 
 officers and directors," the railroad acquired control of half a dozen 
 of the leading steamship lines of New England at a total cost of 
 nearly twenty-five million dollars for property with a physical 
 valuation of about ten million dollars. 
 
 Space will not permit a description of the questionable practices 
 of the New Haven in the manipulation of its accounts, of its ad- 
 vances to subsidiary companies to enable them to pay dividends 
 which in turn were credited to the former road in its income account. 
 The commission states that 
 
 the accounts of the company are replete with instances in which proBts have been 
 declared to be earned by the transfer of stocks, bonds, and debentures, and securi- 
 ties of one of the subordinate and subsidiary companies of the New Haven sys- 
 tem, to another such subsidiary, and such profits are solemnly recorded as real 
 profits in working up the accounts of the system as a whole.* 
 
 Purchases of supplies to large amounts were made without bids, 
 and frequently from companies having men as directors who were 
 also on the Board of the New Haven. Lavish contributions to 
 both political parties were made, large sums were expended to 
 "educate" public opinion; one well known professor of law in New 
 England was paid .S1(),000 a year, besides payments to his brother * 
 
 and father of .?25 and -SoO a day. 
 
 The commission estimated that the loss to the New Haven 
 Company through waste and mismanagement, amounted to be- 
 tween S60,000,000 and §90,000,000, the burden of which will be a 
 
 • SI Interstate Commerce Commission Reports, p. 59.
 
 Investigations by Interstate Commerce Commission 7 
 
 heavy drain for many years upon its resources. Undoubtedly, the 
 present management, under the very capable direction of Mr. 
 Howard Elliott, in whose unimpeachable honesty the pubHc has 
 every confidence, will ultimately be able to restore prosperity to 
 the undertaking, but the task will be a difficult one. The new ad- 
 ministration, before the opening of the investigation ordered by the 
 Senate, had already entered into an agreement with the Attorney 
 General of the United States to divorce the New Haven Company 
 from the Boston and Maine, the trolley lines, and most of the 
 steamship lines, and certain other steps had also been taken to 
 free the company from the responsibility of those subsidiary com- 
 panies whose association with it had been criticized.^ 
 
 Just about the time that the first New Haven investigation 
 was drawing to a close, and before the commission had issued its 
 report thereupon, one of the well-known western railways, the St. 
 Louis and San Francisco Railroad Company, along with its sub- 
 sidiary, the Chicago and Eastern Illinois Railroad, went into the 
 hands of receivers. The receivership caused a good deal of com- 
 ment and finally led to resolutions by the United States Senate, in 
 the following June and July, instructing the commission to report 
 to that body all the facts connected with the purchase of the 
 Chicago and Eastern Illinois Railroad, and the St. Louis, Browns- 
 ville and Mexico Railroad by the Frisco company, and also with the 
 subsequent receiverships. The testimony secured for this report ^° 
 evidenced a policy on the part of the Frisco nianagement that was 
 marked by a high degree of financial recklessness. It seems that, 
 between 1897 and 1907, the Frisco undertook an extensive pro- 
 gram of acquisition of new lines, constructed by sjmdicates with the 
 probable understanding that the former would purchase them after 
 completion. There is some evidence to show that the prices paid 
 for these properties netted large profits to the subscribers. Officials 
 of the Frisco, including the chairman of the Board of Directors, 
 seem to have participated freely in these dealings. A somewhat 
 spectacular example of Frisco financing occurred in the case of the 
 South Texas lines. In its endeavor to secure a through coast route 
 
 ' A full statement of the action taken by the new management, and of the 
 terms of the agreement with the Department of Justice will be found in the 
 Railway Age Gazette, April 17, 1914. 
 
 ^° 29 Interstate Commerce Commission Reports, pp. 139-211.
 
 8 The Annals of the American Academy 
 
 between Brownsville, Texas, and New Orleans — a rather remote 
 traffic interest — the company advanced §33,000,000 for the con- 
 struction of lines and the acquisition of control of existing com- 
 panies. The loss to the Frisco on these transactions, including 
 discounts, commissions and an unliquidated sum of S5,000,000 due 
 to it by the New Orleans Texas, and Mexico Railroad, amounted 
 to more than eight million dollars. Neither the Brownsville line, 
 nor the New Orleans, Texas and Mexico has met its fixed charges 
 since 1910. 
 
 Prior to this, the Frisco had heavily involved its credit in 
 gaining control of the Chicago and Eastern Illinois Railroad. The 
 basis upon which the latter railroad was acquired in 1902 made it 
 essential that the Frisco should receive regularly dividends of 6 
 per cent on the preferred stock and 10 per cent upon the common 
 stock of the Chicago and Eastern Illinois, in order to pay the inter- 
 est charges on the stock trust certificates with which it had obtained 
 the securities of that company. Actually, the dividends paid by 
 the common stock were insufficient to meet the interest charges, 
 and, to May, 1913, the Frisco had suffered a loss thereupon of over 
 two million dollars or, deducting the interest on the stock certifi- 
 cates owned by it, a net loss of SI, 710,000. After December, 1011, 
 the subsidiary road ceased to pay any dividends at all. The price 
 paid by the Frisco to secure this line of entry into Chicago seems to 
 have been an extravagant one when comparison is made with the 
 dividend earning power of the Chicago and Eastern Illinois prior to 
 the acquisition. 
 
 An optimistic view of the effect of the Frisco alliance upon the 
 earnings of the Chicago and Eastern Illinois was responsible, per- 
 haps, for the cheerfulness with which the Frisco undertook the 
 financial responsibility. Indeed, there was a notable increase in 
 the gross operating revenue of that road from S6, 000, 000 in 1901 
 to $15,000,000 in 1912. But the management was not successful in' 
 achieving economy; the operating expenses increased with striking 
 rapidity (fourfold), and the operating ratio rose from 54.75 to over 
 80 per cent. The increased cost of materials and labor does not 
 constitute a sufficient explanation of such an increase. 
 
 In assigning causes for the Frisco insolvency, the commission 
 laid emphasis upon the disproportionate amount of funded in- 
 debtedness, the acquisition of new lines, the financing of the South
 
 Investigations by Interstate Commerce Commission 9 
 
 Texas lines, the Chicago and Eastern Ihinois deal, sale of securities 
 at low prices, payment of unearned dividends on preferred stock, 
 investment in stocks of non-dividend-paying industrial companies, 
 and payment of excessive charges upon the investment in and use 
 of terminal and coal properties. 
 
 Less than two months after the report upon the Frisco situation, 
 the financial methods of the management of one of the great and 
 supposedly carefully administered railway properties of the middle 
 west were brought to the attention of the public in the report of 
 the commission upon the Chicago, Milwaukee and St. Paul Railway 
 Company." 
 
 To bolster up the income of the St. Paul road for 1910, the in- 
 come account of that year was made to include all the interest, rents 
 and revenues, over four million six hundred thousand dollars, arising 
 out of the construction of the Puget Sound road in previous years. 
 At the same time, operating expenses were given an artificial de- 
 crease of more than five hundred thousand dollars by crediting to 
 the current year the salvage of cars destroyed previous to July 1, 
 1909. Since they had not been taken care of previously, these items 
 should have been handled through the profit and loss account. After 
 the Puget Sound road had been opened, construction of branch lines, 
 etc., still continued to be active, and, according to the accusation of 
 the commission, large amounts that should have been charged as 
 expenses of operation were entered under the head of cost of con- 
 struction. Furthermore, notwithstanding the requirement of the 
 commission, laid down in the classification of operating expenses 
 issued in 1907, that depreciation should be annually charged on 
 equipment, the accounts of the company failed to show any such 
 provision. These accusations constitute a lamentable indictment 
 against the St. Paul of endeavoring to deceive its stockholders and 
 the investing pubUc as to the true financial status of the company. 
 By the artifices above mentioned, the Puget Sound road was enabled 
 to contribute a 2 per cent dividend towards the St. Paul's dividend 
 of 1911, thus enabling the latter company to make a fictitious show- 
 ing of a dividend earned entirely out of current income. 
 
 The overstatement of income for the year 1909-10 led to a 
 book decrease in revenue and income, during the following year, of 
 more than two million dollars, which the company's report explained 
 
 " 29 Interstate Commerce Commission Reports, p. 508.
 
 10 The Animals of the American Academy 
 
 as due to its inabilit}- to obtain increased rates, and the great in- 
 crease in the cost of labor. Actually, the wage bill of the St. Paul 
 for 1910-11 was nearly fifty-six thousand dollars less than that for 
 1909-10. 
 
 The balance sheet of the Puget Sound road was also distorted 
 to the extent of showing a property investment of S100,000,000 
 greater than was actually the case. As explained by the president 
 of the St. Paul, the directors of that company were unable to 
 accept the stock of the Puget Sound road as the binding security 
 for the advances made to the latter, and so they had that company 
 issue first mortgage bonds approximating in amount the S200, 000,000 
 of constructional cost. But the law of the state of Washington, under 
 which the Puget Sound road was incorporated, forbade the issue of 
 funded debt beyond twice the amount of capital stock. To meet 
 this requirement, this company had to issue to the St. Paul an ad- 
 ditional 8100,000,000 of stock, which was carried on the books of 
 the parent company at merely a nominal value. The explanation, 
 though it makes clear that in this matter there was no intent to 
 deceive, was a very lame and unsatisfactory one. An accounting 
 could have been made in accordance with the commission's regula- 
 tions that would have shown, on the Puget Sound balance sheet, 
 a discount on securities sold of the 8100,000,000 of stocks issued 
 less the nominal amount for which this was carried on the St. Paul 
 balance sheet, the item being entered under deferred assets; or an 
 explanatory note could have been attached to the balance sheet 
 explaining the reason for the irregularity. 
 
 The most recent of the financial investigations of the Interstate 
 Commerce Commission has been that into the condition of the 
 Chicago, Rock Island and Pacific Railway Company, the final 
 hearings in connection with which were held last June.*^ The 
 acquisition of the control of the Rock Island in 1901 by Reid, Leeds 
 and the two Moores, the subsequent organization of the two hold- 
 ing companies, the Chicago, Rock Island and Pacific Railroad 
 Company of Iowa, and the Rock Island Companj^ of New Jersey, 
 with a capitalization of 8200,000,000 for the former and of 8150,- 
 000,000 for the latter, the concentration of control in the preferred 
 stock of the New Jersey corporation, all these matters are famihar 
 to the reader and need not be rehearsed here, but there are certain 
 
 " 36 Interstate Commerce Commission Reports, pp. 43-61.
 
 Investigations by Interstate Commerce Commission 11 
 
 less familiar facts that deserve attention here since they throw a 
 lurid light upon the possibilities of financial manipulation by such 
 men as those already named. 
 
 Apparently, the rights of the stockholders in the earnings of 
 thd company were deemed of little account. Salaries shown on the 
 payroll were supplemented by secret allowances and bonuses. 
 Presents of considerable sums were made to both officers and mem- 
 bers of the Board of Directors. About a million dollars was dis- 
 tributed to officials of the railwaj^ company in excess of their 
 salaries. Irregular payments were made for " supporting the market, 
 while the bonds of the railway company were being sold," for con- 
 tributions to campaign committees, for rebates to a Denver news- 
 paper, for securing discontinuance of a line of road being 
 constructed between Peoria, Illinois, and Clinton, Iowa. 
 
 Misrepresentation of assets was made unblushingly. As late 
 as June, 1914, the railway company carried an amount of nearly 
 six million, two hundred thousand dollars as surplus, based upon: 
 (1) a book value of nearly three and three-quarter million dollars 
 ascribed to the securities of the Trinity and Brazos Valley Railway, 
 a company then in the hands of receivers; (2) a book value of 
 $6,000,000 of Clover Leaf bonds, secured only by Chicago and Alton 
 Railroad stock having a current market value of little more than 
 one and one half miUion dollars; (3) a book value of $200,000 of the 
 stock of a Nebraska railway company and a construction company 
 that had no existence except on paper; (4) a book value of nearly 
 six million dollars attributed to the worthless five per cent debenture 
 bonds of the Iowa holding company. As pointed out by the com- 
 mission, a proper valuation of assets would have changed the so- 
 called surplus into a deficit of nearly twelve million dollars. 
 
 In general, financing operations of the Rock Island management 
 seem to have been distinguished by anything but business acumen. 
 When the fear of action under the Sherman law caused the divorce 
 of the combined Rock Island-Frisco interests, the sum realized by 
 the sale of the Frisco stock, which had been deposited as collateral 
 for the bonds of the Iowa company, was insufficient to redeem the 
 latter, but the Iowa compan}^, with no resources of its own, issued 
 seven and one-half million dollars worth of bonds to the Chicago, 
 Rock Island and Pacific Railway, almost at par, the latter raising 
 the 'cash by a bank loan. One million, three hundred and eighty-
 
 12 The Annals of the American Academy 
 
 eight thousand dollars' worth of these bonds was retired later, but the 
 remaining ?6, 112,000 was unable to be retired bj'- the Iowa company 
 as it had no assets. The Rock Island's investments in the stock of 
 the Chicago and Alton Railroad ended in a loss of over six million 
 dollars.'' Its agreement with the Colorado and Southern for the 
 financing of the Trinity and Brazos Valley Railway also ended unfor- 
 tunately. Advances of nearly three and three-quarter million 
 dollars were made, upon which unpaid interest had accrued, to 
 June 30,1914, of another three-quarter million dollars — in a property 
 whose annual income accounts have been replete with deficits and 
 which finally went into the hands of a receiver. 
 
 The incorporation of the Consolidated Indiana Coal Company', 
 in April, 1905, was made the occasion for paying, out of the treas- 
 ury of the railwaj' company to the general counsel of the latter, a 
 S30,000 a year official, the sum of 810,000 for drawing up the in- 
 corporation papers. The railway guaranteed the coal company's 
 bonds, and in consideration thereof received 82,400,000 (out of 
 $3,400,000) capital stock. To June 30, 1914, the railway company 
 had advanced 82,354,000 to the coal company, and, since 1910, 
 unpaid interest has amounted to more than four hundred thousand 
 dollars additional. 
 
 Other curious transactions might be mentioned, as, for instance, 
 that in which the railway company sold bonds of the Rock Island 
 Improvement Company (a subsidiary of the holding companies 
 organized to acquire transportation equipment and facilities for the 
 railway company) at less than par, only to buy them back at more 
 than par some six months later. 
 
 The ultimate result of the Reid-AIoore syndicate was to throw 
 the railway into a receivership. Here again, apparently, the sinis- 
 ter nature of the syndicate's policy is perceptible. It seems pretty 
 clear that the railwaj' could have arranged to meet all its pressing 
 obligations, in spite of the growing unsatisfactoriness of its financial 
 condition, but the syndicate wanted a receivership, presumably for 
 purposes of its own, and, without the knowledge of and regardless 
 
 " It has been suggested that the object of the Reid-Moore syndicate in 
 purchasing the Frisco was to avoid duplication of new railroad building, and that 
 the investment in the Chicago and Alton was with the idea of securing a better 
 line east of Kansas City than the admittedly unsatisfactory hne of the Rock 
 Island. But if these were the objects of the transactions, they neverthelesa 
 ended in disastrous failure.
 
 Investigations by Interstate Commerce Commission 13 
 
 of the interests of the stockholders, and without acquainting the 
 representative of the minoritj^ stockholders on the Board of Directors 
 of its intention, made application to the court. The bill for re- 
 ceivership seems to have been completed by the general counsel of 
 the company on March 29; though this fact was known only to a 
 select few. It is worthy of notice that, between that date and the 
 date of fiUng, April 20, the stock of the railway company began to 
 be largely dealt in on the market. The suspiciousness of this is 
 undeniable but there is no absolutely conclusive evidence that the 
 Reid-]\Ioore people helped to create the artificial price that was 
 reached on the Exchange. The editor of the Railway Age Gazette 
 expresses his opinion, which, though not conclusive, is worthy of 
 respect, that this whole stock movement looked "far more like an 
 attempt of a clique of comparatively small speculators to put up 
 the price than any attempt on the part of the controlling interests 
 to make a market on which they could unload their holdings." ^* 
 However this may be, a more reprehensible example of financial 
 jugglery, incompetence and heartless disregard of the interests of 
 investors than that of the Reid-Moore administration would be 
 hard to find. The syndicate took hold of a property whose shares 
 were valued at S175 and upwards on the market; by the time their 
 manipulations were completed, the shares were selling at a mere 
 ninth or tenth of that value, and for no small part of that decrease 
 the syndicate must be held responsible. 
 
 The above recital of the facts disclosed by the inquiries of the 
 Interstate Commerce Commission speaks for itself. Disillusion- 
 ment must surely have come to many who have had unquestioning 
 confidence in the supreme ability and unerring foresight of our states- 
 men of private finance. There has been too great a tendency in 
 financial circles to place the responsibility that legally accrues to 
 each individual taking part in the management of industrial enter- 
 1 prises upon the shoulders of ambitious colleagues. Of course, the 
 
 individual of unusual abilit}'' will always be able, and it is desirable 
 that he should be able, to exercise a powerful influence upon the 
 management. But this should not and must not be allowed to 
 justifj^ improper and dangerous concentration of power through the 
 neglect of directors to direct. 
 
 Our present type of railway directorate, and no doubt this 
 
 ^* Railway Age Gazette. June 11, 1915, p. 1228. 
 
 ? 
 
 $
 
 14 The Annals of the American Academy 
 
 applies to other fields of industrial administration, needs reorganiza- 
 tion. The example set by the government in its prosecution of 
 eleven directors of the former New Haven regime will have a salutary 
 influence in this direction. Every effort should be made to hold 
 directors to a strict accounting for maladministration of property 
 committed to their care. Such a policy, vigorously pursued, would 
 undoubtedly lessen the inclination of directors to treat their respon- 
 sibilities as merely nominal. There would be fewer instances of 
 plural directors, physicall}' incapable of keeping close supervision 
 over the managerial policies of their various companies. Railway 
 companies would be well advised to restrict the number of directors 
 upon their boards, and to see that each directorate is composed 
 largely of men in close touch with their properties. It should be 
 made obligatory upon every interstate common carrier to place, 
 after the name of each director in the annual report not only his place 
 of residence but also the amount of his bona-fide stock holdings in the 
 compan}', and there should be included in the report a tabular state- 
 ment, based upon the individual affidavits of the directors, showing 
 for each director his holdings of securities in other common carriers. 
 
 Each annual report of interstate common carriers should be 
 required to state in as plain a form as practicable not only the nature 
 and amount of all securities disposed of during the current fiscal 
 year but also the nature and amount of expenditures made out of 
 the resulting funds. In the case of properties purchased outright or 
 in which a controlling interest has been acquired, the amount paid in 
 cash or securities or in both should be specified and a brief descrip- 
 tion given of the property acquired and of the purpose of acquisi- 
 tion. Corresponding information should be furnished in the case 
 of leases. A statement of all guarantees of interest or dividend 
 payments assumed should be given. It is satisfactory to note that 
 a good deal of this information is now included in the reports of, 
 at any rate, the larger companies. 
 
 To facilitate more exact assessment of the standard of mainte- 
 nance maintained by each railway administration, there should be 
 required in each annual report: (1) a record of the main classes of 
 equipment, with the average age of each class; (2) a record of track 
 conditions, specifying the proportion of heav>' and light rails, 
 mileage of ballast of each class, subclassified so as to show depth of 
 ballast, number of treated and untreated ties, with average number
 
 Investigations by Interstate Commerce Commission 15 
 
 of years already in track ; (3) a structural report classifying the main 
 structures according to their component materials. 
 
 The above measure of protection to investors represents as 
 far as it is wise to proceed at the present, probably, for, despite the 
 powers enjoj^ed by the commissions of certain states, it is doubtful 
 whether the Interstate Commerce Commission, or any other 
 governmental agency, is in a position to control effectively and 
 safely the issue of railway securities. But the strictest scrutiny 
 of all financial transactions of the larger interstate carriers should 
 be maintained and no hesitation felt in holding a pubUc inquiry 
 where the situation seems to call for it. However, as between 
 federal and state control of securities, there need be little hesita- 
 tion in preferring the former. 
 
 It is but proper to say that the opinion of the commission, as 
 expressed in several places, but most fully in its report upon "The 
 New England Investigation," ^^ is that adequate regulation of 
 interstate railroads is impossible without national control of their 
 issues of stocks and bonds, as well as all leases or purchases of one 
 railroad by another, all acquisition of securities, all guarantees, and, 
 furthermore, that no interstate railroad should be allowed to expend 
 money or incur liability or acquire property "not in the operation 
 of its railroad or in the legitimate improvement, extension or de- 
 velopment of that railroad." Such an attitude is a very natural 
 reaction after the revelations of its inquiries, and Congress is not 
 likely to need much inducement to approve of it.^® 
 
 ^ 27 Interstate Commerce Commission Reports, p. 616. 
 
 " The Clayton Act of October, 1914, specifically forbids corporations from 
 acquiring the whole or any part of the stock or share capital of another corpora- 
 tion where the effect may be substantially to lessen competition, to restrain com- 
 merce, or to tend to create a monopoly. It also forbids any interstate common 
 
 I carrier, after two years from the date of the enactment, to deal in securities or 
 
 supphes, etc., or to enter into construction or maintenance contracts, more than 
 
 1 fifty thousand dollars in amount, with any other organization when the former 
 
 has any director or responsible official who is at the same time an officer of or has 
 
 * a substantial interest in the latter, unless the dealings, contracts, etc., are based 
 
 upon the most favorable competitive bids.
 
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