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REVIEW OF EVIDENCE.

The following review covers only the evidence of the witnesses whose testimony is printed in the present volume, which has been taken since May, 1900. This testimony should be read in connection with that of earlier witnesses which was published in the preceding report of the Industrial Commission on transportation questions, Volume IV. On many subjects the evidence in the former volume was much fuller than that in the present volume. It has been the aim in the selection of the witnesses whose testimony is herewith published to cover subjects which were less fully investigated previously. A considerable amount of evidence bearing on transportation questions is also given in several other reports of the Industrial Commission. The subject of railway labor is exhaustively discussed in a special report printed in Volume XVII. The taxation of transportation companies is covered quite completely in the special report on the taxation of corporations, printed in Volume XI. Alleged discriminations by the railroads in favor of industrial combinations are discussed more or less extensively in the testimony on trusts and combinations, Volume I and Volume XIII. In the agricultural testimony, Volume X, there are a number of important statements regarding the system of grain elevators and their relations to the railroad companies. Other less extensive statements as to transportation questions will be found, by reference to the digests and indexes, in nearly all of the volumes published by the commission.

CONSOLIDATION OF RAILWAYS AND COMMUNITY OF INTEREST.

Mr. Schiff, of the banking firm of Kuhn, Loeb & Co., Mr. Woodlock, of the Wall Street Journal, and several other witnesses' refer to the tendency recently manifested toward the establishment of great consolidated railroad systems and toward community of interest between railroads hitherto competing. These witnesses generally assert that the primary motive in forming these combinations has been to prevent excessive competition, and they attribute the movement more or less directly to the effect of the interstate-commerce law in prohibiting pooling and agreements, and thus forcing the railroads to compete, often to the extent of cutting rates below the line of profit. The method by which community of interest is established is said to be largely by purchase of a certain proportion of the shares of one railroad by another railroad or by its largest owners, while consolidations are frequently brought about by lease or by outright purchase of one road by another.

Mr. Schiff, in particular, thinks that the tendency toward community of interest does not necessarily indicate a further movement toward absolute combination of railroads and the absorption of the smaller companies into the larger ones. He says that it certainly does not indicate a tendency toward a general combination throughout the country; that, for example, the Eastern trunk lines have a territory naturally distinct from that of the transcontinental lines west of the Missouri, and that there apparently is no disposition on their part to secure control of the Western lines. This witness and others allude to the recent purchase by the Union Pacific Railroad of substantial control over the Southern Pacific. Mr. Stubbs, third vice-president of the Southern Pacific, explains that the motive for this movement is to make a continuous line of the Union Pacific and Central Pacific, which latter road is owned by

1 Woodlock, p. 462; Schiff, pp. 770, 771; Ripley, pp. 289, 291, 294; Greene, p. 473; Stubbs, pp. 757, 764.

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the Southern Pacific. The movement toward a consolidation of the railroads in Colorado is also referred to, as well as the struggle of the Union Pacific and the Northern Pacific to secure control of the Burlington during the spring of 1901.

Mr. Stubbs, Mr. Schiff, and several others, mostly representing railroad companies, but including some shippers and independent witnesses as well, are inclined to think that the consolidation of smaller railroads into great unified systems will prove generally beneficial to the public. It will, in their judgment, make possible important economies in operation, will facilitate the prompt handling of freight and passengers, and will tend to improve the physical character of the properties. All these advantages, it is asserted, have already been observed as the result of consolidations recently effected. Many of these witnesses think, also, that the establishment of community of interest and harmonious relations between roads hitherto competing is likewise advantageous to the general public. It does away with the extreme competition which has often led railroads to transact business at a loss-a practice which these witnesses believe can not be to the interest of the publicand especially it removes the temptation to make personal discriminations, which accompanies extreme competition and to some degree also the temptation to discriminate between localities. Several witnesses declare that, in their opinion, it will not be possible for railroads, by combination, to establish excessive rates. There will always be the competition of sections of the country and of different countries with one another for the marketing of products, and the competition of water carriers still exerts a powerful effect. Public opinion is also a strong influence in controlling rates. A representative of a San Francisco board of trade is inclined to think that the establishment of through routes from ocean to ocean will prove advantageous to California by doing away with the motive of the railroads, as at present operated, to build up the cities of the Middle West at the expense of that State.2

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Two or three witnesses, however, notably Professors Ripley, Adams, and Parsons, think that the tendency toward railroad consolidation and community of interest, while perhaps in some senses advantageous is likely to result in increased charges because of the absence of competition, and that, therefore, additional control should· be given to the Interstate Commerce Commission over railroad rates. Professor Parsons especially lays stress on the public danger of placing such power in the hands of a few individuals, and thinks, accordingly, that Government ownership is desirable.3 One representative of the railroads thinks that there will ultimately be, and should be, several great systems in each section, working in some degree of harmony, but still competing. He thinks entire cessation of competition would be bad for the railroads, as well as the people."

POOLING.

The subject of pooling appeared to be of less interest to railroad men and others in 1901 than it was two or three years earlier, when the Industrial Commission first took testimony regarding it. The tendency toward community of interest is said by several witnesses to have made pooling less an object to be sought by the railroads. Two or three representatives of the railroads, however, think that the legalization of pooling, and especially of agreements as to rates, is still desirable,' and two representatives of chambers of commerce, as well as the secretary of the Minnesota Railroad Commission, agree in this point, though they would favor proper regulation of rates if pooling were permitted. Professor Ripley also thinks that pooling and rate agreements might be

1 Stubbs, pp. 757, 764; Greene, pp. 484-487; Thomas, p. 559; McLeod, p. 571; Rice, p. 742; Markham, p. 434; C. F. Adams, p. 829; Jackson, p. 847; McGovern, pp. 682, 683; Langley, p. 874.

2 Wheeler, p, 747.

6 Page 149.

3 Pages 281, 289, 294.

4 Page 386.

McGovern, p. 682.

Thomas, p. 558; Griswold, p. 515.

de irable in order to make rates more steady and more free from discriminations, but that regulation by the Interstate Commerce Commission would certainly be necessary if pooling were permitted.1

It is stated by one witness, representing the Memphis Freight Bureau, that there is believed to be an arrangement among the railroads at that point for the pooling of cotton business. The representative of the San Francisco Board of Trade thinks also that there is a "gentlemen's agreement" among transcontinental roads for the fixing of rates, which is very effective, although it is so arranged as not to violate the interstate-commerce act. A representative of the Southern Pacific Company says also that the transcontinental railroads hold conferences as to rates, while Mr. McGovern, of the Southern Classification Committee, says that the rates in the South are made chiefly by agreement among the railroads in the several traffic associations, although no road is bound to abide by the rates established.3

CAPITALIZATION AND REORGANIZATION OF RAILROADS.

Professor Ripley and Professor Parsons assert that American railroads are in many instances largely overcapitalized. While some roads, especially prior to recent consolidations, have kept their capital down to the basis of actual investment or even less in the case of a few lines which had been largely improved out of earnings, in many other cases the capital has been repeatedly swelled without corresponding increase in the plant investment. The recent increase in the capitalization of the Chicago and Alton railroad from $30,000,000 to nearly $100,000,000 is instanced as an illustration. It is held by Professor Parsons that the constant motive of privately owned railways is to conceal their true earnings by increasing capitalization, and he considers this one argument in favor of government ownership.*

Mr. Woodlock, railroad editor of the Wall Street Journal, and several witnesses representing railroad companies deny that American railways in general are overcapitalized. They compare the capitalization of American railroads, which is said to average about $61,000 per mile, with that of the British railroads, which averages from $220,000 to $240,000 per mile. It is asserted that the British railroads systematically add to capital every possible expenditure for improvement, however slight. These witnesses say also that the increase in capitalization of American roads has in many cases been justified by the improvement of the roads out of earnings. Some of them are also inclined to maintain that earning capacity is the proper basis of capitalization. Those who take this position add that the fall in the prevailing rate of interest has made it possible to issue larger amounts of bonds on a given earning capacity than before, and that the issue of stocks is a comparatively unimportant matter, because they do not create a fixed charge. Mr. Woodlock, however, admits that there have been instances of the abuse of capitalization in recent years; he refers particularly to the Kansas City, Pittsburg and Gulf Railroad, and apparently thinks also that the Chicago and Alton is now overcapitalized. This witness, as well as Mr. Thomas, of the Erie Railroad, are disposed to think that some regulation of capitalization by the Government would be perhaps desirable as a protection to investors. Professor Ripley speaks especially with approval of the Massachusetts law which requires that stocks and bonds of railroads and street railroads shall be issued only on the basis of actual investment and subject to the approval of the State railroad commission. He asserts that this provision has greatly increased the power of the railroad commission as regards rates and other matters, since the railroad companies have frequently to come to it for privileges. The chairman of the Massa

1 Ripley, pp. 289, 291, 294; Teisberg, p. 272; Anderson, pp. 639, 642; Wheeler, pp. 748, 749. Davant, p. 7; Wheeler, p. 749.

Stubbs, p. 764; McGovern, p. 654.

4 Ripley, pp. 291, 292, 306, Parsons, pp. 154, 155. See also as to the Chicago and Alton, Woodlock, p. 458; Schiff, pp. 775, 776.

chusetts commission also expresses approval of the results of this regulation of the issue of securities. He says that securities may be issued for certain specified purposes, and that the board, with expert assistance, carefully considers how much capital may be required for construction or other given objects. Reference is also made to the Minnesota law regulating the issue of securities by railroads in the same way as in Massachusetts.1

Some of these witnesses discuss also somewhat the proper basis for capitalization. Professor Adams, statistician of the Interstate Commerce Commission, is disposed to hold that actual investment should be the basis. He describes the detailed investigations of a special commission in Michigan regarding the actual value and cost of reproduction of railroads, and declares that it is desirable to make such investigations, not merely as a basis for taxation, but as a basis for estimating proper rates. It is impossible, he says, to decide as to the justice of rates unless we know how much return they secure to the railroads on their actual investment, rather than upon a capitalization which may be inflated. This witness thinks that the United States Government should undertake careful valuations of railroad property for these reasons. Mr. Woodlock and two or three other witnesses, however, are inclined to think that earning capacity is in general a proper basis for capitalization, and that in any case the amount of capital can not greatly affect rates, because competition of other roads and many other influences of an independent character enter into rates.3 They especially insist that cost of reproduction is not a proper basis for capitalization. Mr. Schiff declares that the amount of securities issued is a matter of little importance, that railroads must adapt themselves to the value of one another in competition, and that investors soon learn their real values.*

Reorganization and its effect on capitalization.—The effects of recent railway reorganizations are discussed by several witnesses. It is stated that many railways have long been burdened with large bond issues at high rates of interest. The same influences which depress general business conditions affect railroads severely, and often make them unable to pay interest, whereupon they are put into the hands of receivers. The depression following 1893 resulted in the bankruptcy of a very large proportion of the railroads of the country. In case of bankruptcy, according to Mr. Greene, some of the large security holders usually constitute themselves a committee of reorganization. The endeavor is to simplify the finances of the railroad, to cut off such branches or leased roads as may not be profitable, but to hold the system together as far as possible, and in particular to reduce fixed charges. Witnesses generally agree that recent reorganizations have not usually resulted in a reduction of the total capitalization of railroads, but that they have either lowered the absolute amount of bonds by issuing stocks in their stead, or by securing lower rates of interest, have reduced the fixed charges. In some instances, it is admitted, little restriction has been placed upon the issue of stocks in reorganization, but several witnesses hold that the existence of a large amount of stock, which has no imperative claim on earnings, has little effect upon the prosperity of railroads or upon the general public.5 Reference is made especially to the reorganizations of the Erie, Reading, and other roads.

One witness, Mr. Rice, thinks that a mistake is often made in appointing the president of a bankrupt railway as receiver. If his bad management has caused bankruptcy, the mere fact that he is familiar with the system does not justify leaving him in charge of it.

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1 Thomas, pp. 551, 559; Schiff, pp. 772-776; Woodlock, pp. 456, 458-462; Ripley, pp. 292, 293; Teisberg, p. 365; Jackson, p. 843.

2 Adams, pp. 381 ff.

3 Thomas, p. 551; Woodlock, pp. 456-458; Talcott, p. 635.

+ Page 773.

5 Greene, pp. 487, 488; Ripley, pp. 291, 297, 298, 304; Rice, p. 740; Talcott, p. 636. See also as to anthracite coal-roads, post, p. XXXIII.

Rice, p. 741.

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