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 railrcads—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.

2 Does not include proprietary or lessor companies.

3 Deficit.

* 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

a transportation standpoint. During the first decade of this century there was a wave of what might be described as "railroad imperialism" in the course of which many of the dominant railroad systems acquired stock control of other railroads at great expense to themselves and, in many instances, to the detriment of the railroads the control of which was purchased. For instance, during the early years of the century, the late Mr. Harriman and associated financiers utilized the Union Pacific Railroad to acquire control of the Southern Pacific and large interests in the Santa Fe, and other western and middle western carriers. In 1906 and 1907 the Commission conducted an investigation of the activities of the Harriman interests, and in concluding its report (12 I. C. C. 277, 304) stated:

Its

The function of a railroad corporation should be confined to the furnishing of transportation. Railroads should not be permitted to invest generally in the stocks, bonds, and securities of other railway and of steamship companies, except connecting lines, for the purpose of forming through routes of transportation, including branches and feeders. It is in the interest of the public to facilitate the consolidation of connecting lines. The credit of a railway company is founded upon the resources and prosperity of the country through which it runs. surplus funds and credit should be used for the betterment of its lines and in extensions and branches to develop the country contiguous to it. The testimony taken upon this hearing shows that about 50,000 square miles of territory in the State of Oregon, surrounded by the lines of the Oregon Short Line Railroad Co., the Oregon Railroad & Navigation Co., and the Southern Pacific Co., is not developed; while the funds of those companies which could be used for that purpose are being invested in stocks like the New York Central and other lines having only a remote relation to the territory in which the Union Pacific system is located. Railroad securities should be safe and conservative investments for the people. To this end the risks of the railroad should be reduced to a minimum. Everyone knows that railway securities fluctuate more or less, according to the prosperity of the times, and also by reason of the wide speculation in such securities. therefore adds an element of hazard to a railroads' capital and credit to have its funds invested in the stocks of other companies, thereby endangering its solvency and its ability to pay reasonable dividends upon its own capital stock. It is a serious menace to the financial condition of the country to have large railway systems fail to meet their obligations or go into the hands of receivers, and the object of legislation and administration should be to lessen the risks of railway investments.

It

Another notable example of the evils of unbridled stock purchasing activities by railroads occurred at about the same time when the New York, New Haven & Hartford Railroad Co. purchased a large stock interest in the Boston and Maine Railroad and undertook to acquire a practical monopoly of the freight and passenger business and the steamship lines and trolley systems in New England. The Commission investigated the financial practices and management. of the New Haven, and in its report in 1913 (27 I. C. C. 560), recommended that legislation along the lines proposed in S. 2610 should be promptly enacted. The report stated, at page 616, among other things, that:

In conclusion this Commission desires to call attention to one lesson from this investigation of national application.

No student of the railroad problem can doubt that a most prolific source of financial disaster and complication to railroads in the past has been the desire and ability of railroad managers to engage in enterprises outside the legitimate operation of their railroads, especially by the acquisition of other railroads and their securities. The evil which results, first, to the investing public, and finally, to the general public, cannot be corrected after the transaction has taken place; it can be easily and effectively prohibited. In our opinion the following proposi tions lie at the foundation of all adequate regulation of interstate railroads:

1. Every interstate railroad should be prohibited from expending money or incurring liability or acquiring property not in the operation of its railroad or in the legitimate improvement, extension, or development of that railroad.

2. No interstate railroad should be permitted to lease or purchase any other railroad, nor to acquire the stocks or securities of any other railroad, nor to guarantee the same, directly or indirectly, without the approval of the Federal Government. 3. No stocks or bonds should be issued by an interstate railroad except for the purposes sanctioned in the two preceding paragraphs, and one should be issued without the approval of the Federal Government.

After the World War, these experiences of earlier years were repeated on a large scale, particularly in the eastern region of the United States. In 1920 Congress passed the Transportation Act, which sought to encourage the consolidation of our railroads into a limited number of systems. It was the clear intention of this act that consolidation should be carried out under the supervision of the Interstate Commerce Commission and in pursuance of a general consolidation plan adopted by it. However, for a variety of reasons, consolidation did not proceed in the manner envisaged by the Transportation Act. Beginning about 1924, the eastern railroads, particularly, embarked on a policy of acquiring control of, or a position in, other lines in that region by purchasing stock of such carriers. Often these purchases bore no relation to any plan approved, or thought likely to be approved, by the Commission. Very few actual consolidations were achieved, as stock control was almost universally adopted as the method of effecting railroad combinations. From 1924 to 1931 about half a billion dollars was spent by the eastern railroads in this manner. Until 1929 this period was one of prosperity and high prices prevailed on the stock market. Consequently, most of these stock acquisitions were made at high prices, which aggravated the drain on the resources of the purchasing railroads. Undoubtedly, cause and effect were intertwined, and the enormous purchases themselves helped to stimulate the stock market and produce the boom which collapsed so disastrously in 1929. Partly as a result of these activities, a considerable number of the important railroads entered the depression with their cash resources depleted, their interest charges increased and, in general, in a weakened financial condition.

In November 1935, shortly after the New York, New Haven & Hartford Railroad Co. went into bankruptcy, the Commission again instituted an investigation into the history, management, financial operations, and expenditures of that railroad. In the course of this. investigation, the accounts and records of the New Haven were carefully examined and analyzed with a view to ascertaining some of the causes of its bankruptcy. The Commission's studies clearly disclosed that investments previously made by the New Haven in outside companies trolley lines; steamship companies, and other railroadsseriously weakened the New Haven and contributed to its eventual bankruptcy. These findings reenforced the conclusions and recommendations which were expressed in the Commission's earlier investigation of the New Haven. The results of this investigation were reported during April 1937, in New York, New Haven and Hartford Railroad Company Investigation, 220 I. C. C. 505. The accounting and financial transactions are reported in detail. At page 611 of the report potential losses resulting from investments in companies. not operated as parts of the New Haven system were shown by the

facts of record in that proceeding to be $105,093,670.35. In addition to the potential loss as of October 23, 1935, the New Haven's recorded losses in such transactions were found to total $70,343,000. In a pro forma balance sheet as of December 31, 1939, introduced by officials of the carrier in a hearing before the Commission concluded June 17, 1939, the stated value of investments in affiliated companies and other investments, including those operated as part of the system, totaling $190,681,908, is restated at $33,441,886, representing a loss of $157,240,022. In concluding its report of April 5, 1937, the Commission quoted the recommendations of its report of 1913, and said: That report was issued June 20, 1913. Much of what was there said deserves consideration here in the light of subsequent developments and existing conditions. For instance, of the total losses here reported, by far the greater part had their inception in expenditures for purposes other than construction, maintenance, or physical operation of the New Haven Railroad. The fact that approximately 97 percent of the original investments under consideration were made prior to July 1, 1913, is of little solace to the present security holders and those interested in the welfare of the New Haven. The drain on New Haven resources caused by those investments was a continuing one. This record fully supports our statement in the above report that "the evil which results, first to the investing public, and, finally, to the general public, cannot be corrected after the transaction has taken place."

It also may be well to take this occasion to point out that the New Haven is not the only carrier which has suffered greatly as a result of so-called outside investments and guaranties. While many illustrations might be given, reference to a few other carriers investigated by us will be sufficient.

* *

In Denver and R. G. Investigation, 113 I. C. C. 75, it is shown that"By contract * the Denver Companies, in substance, guaranteed payment of the interest on the Western Pacific first-mortgage bonds and further agreed, in practical effect, that following completion of the Western Pacific's railroad they would advance to that company such other sums as might be necessary to meet its operating deficits and maintain its railroad in operation.

"This ill-advised contract resulted in the rendering of a judgment against the Denver & Rio Grande under the obligation assumed for $38,270,343.17, when the Western Pacific's operations proved unsuccessful, and brought financial disaster to the Denver companies."

In Interstate Commerce Commission v. Pennsylvania R. R. Co., 169 I. C. C. 618, we discussed at length the matter of acquisition of capital stock of the Lehigh Valley Railroad and the Wabash Railway Co. by the Pennsylvania Railroad Co. and the Pennsylvania Co. At page 641 we said:

"The purchases of Lehigh Valley and Wabash stocks by the Pennsylvania gave no indication of direct financial profit at the time the purchases were made. Computations made by our Bureau of Inquiry and presented in its brief, the correctness of which has not been questioned by respondents, indicate that up to April 30, 1930, the cost to the Pennsylvania in interest paid and in interest lost on securities sold to finance the purchases amounted to about $9,072,006.25, which exceeds by $2,590,694.29 the amount of the dividends received on the stock acquired. It should be noted that the common stock of the Wabash acquired by the Pennsylvania, amounting to $36,290,000, par value, had never paid a dividend." * * *

In St. Louis-S. F. Ry. and C., R. I. & P. Ry. Stock Acquisitions, 186 I. C. C. 137, it is shown how certain purchases of capital stock of the Gulf, Mobile & Northern Railroad Co. and the Chicago, Rock Island & Pacific Railway Co. were made by the St. Louis-San Francisco Railway Co., and also purchases of capital stock of the St. Louis-San Francisco Railway Co. by the Rock Island. At page 149 of that report we said:

"This proceeding shows the easy manner in which the boards of directors of these railroads bore their responsibilities as such. Questions of large financial importance to the properties and to the stockholders to whom they stood in a fiduciary relation were decided by a few of the members in casual conversations. Large sums were expended or obligated on projects which, as a board, they had not considered and which, on the transactions being reported to them later, they readily ratified."

Both the St. Louis-San Francisco Railway and the Rock Island are now undergoing reorganization under section 77 of the Bankruptcy Act.