Here, for example, is the Southwestern Construction Co. That was controlled jointly by the Baltimore & Ohio and the Southern Railway.

The New York Transit & Terminal Co. (Ltd.), controlled by the Baltimore & Ohio.

Securities Corporation of the New York Central Railroad Co., controlled by the New York Central Railroad.

Boston Railroad Holding Co., controlled by New York, New Haven & Hartford Railroad Co.

Pennsylvania Co., controlled by the Pennsylvania Railroad Co. Pennroad Corporation, controlled by or affiliated with the Pennsylvania Railroad Co.

Manor Real Estate & Trust Co., controlled by the Pennsylvania Railroad Co.

Mississippi Valley Co., controlled by the Illinois Central Railroad

Co.

Mississippi Valley Corporation, controlled by the Illinois Central Railroad Co.

National Investment Co., controlled by the Southern Railway Co. International Navigation & Trading Co., controlled by the Great Northern Railway Co.

Railroad Securities Co., controlled by Union Pacific Railroad Co. Standard Realty & Development Co., controlled by Western Pacific Railroad Co.

Adrian Realty Co., controlled by Buffalo, Rochester & Pittsburgh Railway Co.

American Contract & Trust Co., controlled by Pennsylvania Railroad Co.

Eastern Real Estate Co., controlled by Reading Co.

Southeastern Investment Co., controlled by Seaboard Air Line Railway Co.

Rock Island Improvement Co., controlled by Chicago, Rock Island & Pacific Railway Co.

Hudson Coal Co., controlled by Delaware & Hudson Co. That is one of a large number of coal companies.

Erie Land & Improvement Co., controlled by Erie Railroad Co. Samoset Co., controlled by Maine Central Railroad Co.

Nickel Plate Development Co., controlled by New York, Chicago & St. Louis Railway Co.

Western Improvement Co., controlled by Atchison, Topeka & Santa Fe Railway Co.

North Kansas City Development Co., controlled by Chicago, Burlington & Quincy Railroad Co.

Milwaukee Land Co., controlled by Chicago, Milwaukee, St. Paul & Pacific Railroad Co.

Northwestern Improvement Co., controlled by Northern Pacific Railway Co.

Now, these are typical cases of subsidiary holding companies which are controlled by various railroads.

Senator TOBEY. You might call those fateful illustrations.

Mr. EASTMAN. Yes.

Senator TOBEY. And some of them no doubt could be referred to as horrible examples.

Mr. EASTMAN. Yes, I think so. Some in New England could be called horrible examples. There are others that I have not investigated personally.

SenatMr TRUMAN. You may proceed.

Mr. EASTMAN. I would not want to admit that the Commission has no power to go into the affairs of these companies, but I think it is certainly not clear that it has that power. In other words, that is a debatable question. You might be able to read the power in some way into present provisions of the act with reference to the supervision of the Commission over affairs of railroad companies, but certainly the authority to examine their books and to go into their affairs is not at all clear, and this bill among other things would make that power clear.

Now, there is another way, the second important way, in which railroads can wander from the railroad business into other fields, and that is through the power of holding companies to hold stock in railroads and bring them into affiliation with other companies and thus use railroad funds or assets indirectly for undesirable purposes.

This bill is not a bill to control holding companies. There is another bill which deals with that matter, now pending before the committee, but this bill would give the Commission additional power to secure information in regard to their affairs.

Com

The reports and records of the Commission contain many illustrations of instances where through such subsidiaries as I have mentioned, or affiliates, or controlling holding companies, railroad funds and credit have been used to the financial injury of railroads. missioner Mahaffie is prepared to give you some illustrations of that. The question might be asked as to why there should be abuses of this character in view of the desire of managements of railroads to make profits for their stockholders, and to conduct the affairs of the railroads to the financial advantage of the owners. In the report which the so-called Committee of Three, headed by Commissioner Splawn, made to the President last year, and it was printed as House Document 583, Seventy-fifth Congress, third session, a very succinct statement was made in regard to railroad financial abuses, and this statement was:

Broadly speaking, they have been of four main types: (1) The acquisition of controlling interests in other railroads, or other transportation companies, at extravagant prices and often with a consequent improvident increase in indebtedness, and often associated also with the use of holding companies to this end and with a view to greatly minimizing the investment necessary for control purposes

Senator TRUMAN (interposing). For instance, the Pennroad Corporation and the Wabash are shining examples.

Mr. EASTMAN. Yes, sir. But the Pennroad Corporation did not acquire the Wabash. That was acquired by the Pennsylvania Co. Senator TRUMAN. Yes. But I think the Pennroad Corporation finally paid the bill, did it not?

Mr. EASTMAN. I do not think so. I think the Pennsylvania Railroad Co. paid the bill in that case.

Senator TRUMAN. I guess that is right.

Mr. EASTMAN. I continue the quotation:

(2) acquisition of terminal or other auxiliary properties from shipping interests on an extravagant or improvident basis for traffic-control purposes; (3) improper or misleading accounting for the purpose of concealing actual financial condition; and (4) unwise issuance of securities in the interests of those who market such securities.

Summing it up, the main reason, I think, for these abuses is the intense competition between railroads. There is the fear that the other fellow will get the advantage of a railroad in some way, and in the zeal to gain competitive advantage, to gain control of strategic properties, or to get control of traffic or to influence traffic, expenditures are made which become reckless through this element of fear which gets into the picture, and sometimes that is unfortunately coupled with a desire on the part of insiders to make a speculative profit on the side.

Senator TOBEY. It is sometimes an element of fear and sometimes a lust for power.

Mr. EASTMAN. Yes, sir; both elements are in there.

Senator TRUMAN. You may proceed.

Mr. EASTMAN. I believe this has been termed by some a straitjacket bill. I do not think it can be properly so called. It does not interfere in any way with legitimate railroad operations. What it deals with are activities which go beyond the real function of a railroad.

I have always had-well, not always, but for a long time—the feeling that our corporation laws were almost incredibly loose on that subject, and that the power given to corporations to acquire stock in other companies is one of the abuses which lies at the bottom of a lot of our evils and which ought to be controlled. But that is a State matter rather than a Federal matter, although it is possible it might be made a Federal matter.

Now, in addition to the fact that this bill deals only with those activities which go beyond the real function of a railroad, it does give the Commission a complete power of control, but it also gives the Commission full opportunity to extend relief wherever the exercise of that power proves to be unnecessary or would hamper legitimate activities.

I think these opportunities are very fully presented in the bill, but they could be added to if that were found to be necessary.

The bill is also drawn in terms which seem rather rigid, but the reason for that is because lawyers have discovered so many ways of avoiding statutes which are stated in simple language, and this bill is drafted in an attempt to avoid those possible contingencies.

It may seem to trespass on the activities of private companies to some extent, but you will note in these respects it is strictly limited to transactions in relation to railroads which directly concern the public interest.

I think that is all I need to say by way of an opening general statement, and I will now turn the matter over to Commissioner Mahaffie to go into in greater detail.

Senator TRUMAN. Commissioner Mahaffie, you may proceed with your statement.

STATEMENT OF CHARLES D. MAHAFFIE, MEMBER OF THE INTERSTATE COMMERCE COMMISSION, WASHINGTON, D. C.

Mr. MAHAFFIE. Simply as indicating to some extent the size of the problem, I have had taken from statement No. 55 the text of the Fifty-first Annual Report on the Statistics of Railways in the United States for the year ended December 31, 1937. These are summaries of general balance sheet, income, and profit and loss items of class I

steam railroads. I would like, if it is satisfactory to the subcommittee, for that to be inserted in your record. It is one sheet, and shows as I say the contrast or the figures as to investment in road and equipment and general expenditures; and this is why I think it might be of particular interest to the members of the subcommittee, "Investments in affiliated companies," broken up into the stocks of carrier corporations and noncarrier corporations, and bonds of both classes, notes of both classes, and advances of both classes, and a tabulation summary of other investments broken up into stocks of carrier corporations and noncarrier corporations, bonds of both carrier and noncarrier corporations, notes, advances, and miscellaneous items. The totals are shown for all districts and for the eastern, the southern, and the western.

Senator TRUMAN. Without objection that tabulation will be made a part of the record.

(The tabulation referred to is here made a part of the record, as follows:)

Class I steam railroads Summaries of general balance sheet, income and profit and loss 1

1 Copied from p. S-140, statement No. 55, text of the Fifty-first Annual Report on the Statistics of Railways in the United States for the year ended Dec. 31, 1937.

? Does not include proprietary cr lessor companies.

3 Deficit.

4 Includes $48,227,841, representing stocks and bonds the cost of which is inseparable.

Includes $2,250,000, representing stocks, bonds, and advances the cost of which is inseparable.

Class I steam railroads-Summaries of general balance sheet, income and profit and loss-Continued

Senator TRUMAN. You may proceed, Commissioner Mahaffie. Mr. MAHAFFIE. I have, Senator Truman, a statement of 16 pages in regard to the general purposes of the bill, the things it attempts to meet, and a general discussion of what the Commission has said about the need for such legislation, the things that we think make it desirable. I can read that to the subcommittee, or if the subcommittee wants to conserve its time perhaps it could be copied into the record as my statement and I could go now to an analysis of the bill.

Senator TRUMAN. I think it would be better if you would make it a part of the record and get down to an analysis of the bill.

Mr. MAHAFFIE. The principal purpose of the bill, S. 2610, the passage of which has been recommended by the Commission, is to prevent, in the future, the wasteful expenditure of carrier funds in purchasing securities or properties which are unnecessary for the legitimate operation of carrier business. The bill seeks to guard against the recurrence of these abuses in three ways. First, the bill supplements and clarifies the Commission's authority with respect to the accounts and records of carriers, and extends some of its powers to cover subsidiaries, holding companies, and other enterprises such as banks, brokerage houses, equipment companies, and so forth, which frequently engage in transactions with carriers. Second, the Commission is given power to supervise the issuance of securities by subsidiaries of railroads. Third, the bill subjects to the control of the Commission the expenditure of carrier funds for securities or properties which have no immediate relation to the operation and maintenance of existing carrier facilities. The desirability of legislation to accomplish these purposes has been repeatedly stressed in the annual and special reports of the Commission.

The abuses which this bill seeks to rectify are not of recent origin. For many years past the railroads, particularly in times of prosperity, have spent large sums of money for the purchase of stocks of other carriers, or for the purchase of properties which are unnecessary from