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we will probably want to call one or both of them back to deal with any questions which may be raised about the bill.

Commissioner Eastman will be the first witness,



Mr. EASTMAN. My name is Joseph B. Eastman. I am a member of the Interstate Commerce Commission and chairman of its legislative committee. But I appear this morning in behalf of the Commission together with Commissioner Mahaffie. Commissioner Mahaffie will make the major statement in regard to this bill because he had much more to do with drafting it than I did, and is much more familiar with the details of the bill, and he will go into the details and I will indulge in generalities.

Senator TRUMAN. You may proceed.

Mr. EASTMAN. This bill is based on recommendations which have been made in the last two annual reports of the Commission, but if you go through the annual reports of the Commission in the past and various special reports which it has made to Congress from time to time you will find that dating way back to 1906 there have been recommendations which bear upon this same general matter, urging the Congress to enact legislation enabling effective dealing with it.

The general purpose of the bill is to prevent wasteful use of railroad funds or credit in ways over which the Commission now has no adequate control and which have in the past resulted in financial injury to the railroads, from which a considerable number of them are now suffering.

For the moment there is comparatively little danger from this source because most of the railroads at the present time, as you know, lack both funds and credit. But we are all looking forward with hope to better railroad conditions and this seems to be an excellent time to lock the stable door for the future so far as these matters are concerned.

The essential duty of a railroad company, as everybody knows, is to serve the public in the operation of a railroad system. However, there are two main ways in which many of them can go beyond this duty and wander into other fields. and the most important of these ways is through their power to own stock in other companies. Most railroads have very wide power to own stock in other companies, and in that way they can acquire control of subsidiary companies, or create subsidiary companies, controlled through stock ownership, which may be of any character, and in this way the power of railroads to enter indirectly into other forms or businesses is almost unlimited.

I think it might be of interest to you to read a short quotation from a report which the Commission made to the Senate on June 11, 1914, reported in 31 I. C. C. 32, in regard to its investigation of the New Haven Railroad system.

Senator TOBEY. Is that "the other expenses investigation,” socalled?

Mr. EASTMAN. Well, it covered the "other expenses" among other things, but this was a very broad investigation into the financial operations of the New Haven Railroad system.

Senator TOBEY. All right.
Mr. EASTMAN. The quotation is as follows:

It was found in the investigation of the New Haven system that there were 336 subsidiary corporations, and the books of the New Haven road proper reflect only a small part of the actual financial transactions of the railroad. Many of the subsidiary corporations served no purpose save an evil one. They were used to cover up transactions that would not bear scrutiny, and to keep from the eyes of public officials matters that were sought to be kept secret.

Senator Truman. That was also true of the Van Sweringen railroads.

Mr. EASTMAN. It was. I continue the quotation:

The Commission should have the power to examine not only the books, records, papers, and correspondence of interstate carriers, but of subsidiary companies as well.

You see that was a recommendation made in a report to the Senate way back in 1914, and that recommendation is being carried out in this bill

Now, I think it would be interesting also

Senator TOBEY (interposing). And there has been no effort made in the interim, from 1914 down to the present time, to cover this thing. In other words, it has taken 25 years to get this matter up to some action.

Mr. EASTMAN. The Commission has spoken from time to time on the subject.

Senator TOBEY. But apparently to deaf ears.

Senator TRUMAN. You made recommendation after recommendation and the only outcome resulting are the hearings had on a bill offered by Senator Wheeler and myself.

Mr. EASTMAN. Apparently so. One of the reasons for the recommendation of the Commission in its annual reports in the past 2 years was the further investigation of the New Haven Railroad system which was made when that railroad went into bankruptcy and which investigation was conducted by Commissioner Mahaffie; and it was in the report of that investigation that this recommendation was expanded, going into details.

Senator TRUMAN. That is right.

Mr. EASTMAN. I think it would be of interest as indicating the extent to which railroad companies do have subsidiary companies which can be used as holding companies for general purposes throughout the country, to cite some of these companies. You will recall that an investigation was made of the "Regulation of Stock Ownership in Railroads,” which was printed as House Report No. 2789, Seventyfirst Congress, third session. That was in charge of Dr. Splawn, who is now Commissioner Splawn, and was made to the House Committee on Interstate and Foreign Commerce.

In that report
Senator TRUMAN (interposing). What was the date of that report?

Mr. EASTMAN. That report was referred to the House Calendar and ordered to be printed February 20, 1931. That report contains, and this is only one of the three volumes, very complete information in regard to holding companies which controlled railroads, and also the holding companies which were controlled by railroads. I will just give you some typical illustrations of the latter companies without in any way attempting to name them all.

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.

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

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

Senat Mr 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.

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. Commissioner 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) impruper 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 tlie 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.




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

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