BEFORE THE Public Utilities Commission OF THE STATE OF ILLINOIS. IN THE MATTER OP PROPOSED GENERAL HEARINGS CON- CERNING THE ABILITY OF UTILITIES TO MEET THE DEMANDS FOR SERVICE AND TO MAKE THE NECESSARY ENLARGEMENTS AND EX- TENSIONS THEREFOR. TRANSCRIPT OF TESTIMONY if |:M;,:' .^'• •' ' ■■ ' '■* '■■ ■' ' ‘ I. CENTRAL CIRCULATION AND BOOKSTACKS The person borrowing this material is re- sponsible for its renewal or return before the Latest Date stamped below. You may be charged a minimum fee of $75.00 for each non-returned or lost item. Theft, mutilation, or defacement of library materials can be causes for student disciplinary action. All materials owned by the University of Illinois Library are the property of the State of Illinois and are protected by Article 16B of Illinois Criminal Law and Procedure. TO RENEW, CALL (217) 333-8400. University of Illinois Library at Urbana-Champaign JUL 2 4 2000 When renewing by phone, write new due date below previous due date. L162 I| 4 b INDEX. Witnesses. page Barney, R. C 469 Berry, 0. F 320 Blair, Henry A. — Direct examination 42 Cross-examination • 212 Bloom, Edgar S 300d, 342 Chandler, H. P 282 Cheadle, C. B 486 Colean, W. H 495 Compton, Wm. B 451 Corey, Chester — Direct examination 87 Choss-examination 287 Dawes, Charles G. — Direct examination 72 Cross-examination 220 Denman, B. J 343 Folds, Charles W. — Direct examination 163 Cross-examination 168 Forgan, David R. — v Direct examination 97 Cross-examination 284 Forgan, James B. — , Direct examination 113 Cross-examination 116 Hagenah, Wm. J 386 Hodges, B. E 448 Holbrook, J. H 475 Hulbert, E. D. — Direct examination 46 Cross-examination 290 11 Witnesses. Insull, Samuel — page Direct examination 7 Cross-examination 195 Jones, Breckenridge 457 Jones, Edwin E 441 Masserang, John B 472 Noble, C. A 510 Piez, Charles — Direct examination 143 Cross-examination 145,161 Prather, R. V 436 Reynolds, Greorge M. — Direct examination 242 Cross-examination 262 Richberg, Donald R 178 Samp s ell, Marshall E 368 Sawyer, W. H 330, 356 Schweppe, Charles H. — Direct examination 105 Cross-examination 289 Spivey, A. T 506 Stuart, Harold L 58 Summers, C. P 480 Sunny, B. E 27,212 Tissier, F. A 503 Wheeler, Harry A. — Direct examination 13(5 Cross-examination 285 Order of Illinois Public Utilities Commission, dated April 20, 1920, that General Hearings be Held 1 Ill Exhibits. PAGE Bloom Exhibit 3 — Comparison of Revenues, Ex- penses and Net Earnings for years 1916 and 1919 (C. U. T. Co.) 307 Corey Table — Memorandum of Recent Short Term Issues 88 Hagenah Exhibit 1 — Commodity Prices in Eng- land — Index Nos. 1817-1916 392 Hagenah Exhibit 2 — Commodity Prices in the United States — Index Nos. 1860-1919 395 Hagenah Exhibit 3 — Relative Fluctuations of Commodity Prices at Wholesale and Retail and Wages in U. S. during Civil War and seven years after its close 398 Hagenah Exhibit 4 — Money in Circulation 402 Hagenah Exhibit 5 — National Debts and Interest Rates Changes in Percentage of Gold Re- serve to Note Issues 407 Hagenah Exhibit 6 — Notes in Circulation of World’s Greatest Banks 409 Hagenah Exhibit 7 — Index of Prices of Invest- ment Bonds 412 Hagenah Exhibit 8 — Bond Prices 1901-1920 414 Legal Argument (Statement) by Mr. Dunbaugh. . 293 Letter Oct. 1, 1917 — Sec’y of War Baker to W. H. Hays, Chairman, Indiana State Council of De- fense 301 Prather Questionnaire 436 Resolution — City of Aurora, 111 513 Resolution — City of Peoria, 111 496 Resolution of — Chicago Association of Credit Men . . Chicago Chamber of Commerce Citizens Association of Chicago Commercial Club Illinois Manufacturers Association . . Industrial Club of Chicago Traffic Club Union League Club ^296, 297, 298 v Digitized by the Internet Archive in 2017 with funding from University of Illinois Urbana-Champaign Alternates https://archive.org/details/beforepublicutilOOilli BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF ILLINOIS. In the Matter of Proposed General Hearings Concerning the Ability of Utilities to Meet the Demands for Service and to Make the Necessary Enlargements and Extensions Therefor. > TRANSCRIPT OF TESTIMONY, CHICAGO HEARING. The Public Utilities Act provides that the Com- mission shall have general supervision of public utilities and shall keep itself informed as to the manner and method in which their business is con- ducted, and shall examine such public utilities as to the manner in which their plants are operated, with respect to the adequacy of their service. In connection with hearings now pending before the Commission, representations have been made as to the urgent necessity for the enlargement and extension of the plants and equipment of certain utilities in order that they may be able to keep up with the demands of the public for the service ren- dered by them. Bepresentations have also been made to the Commission in connection with said hearings as to economic and financial conditions which it . is alleged make it difficult to provide the money necessary for such enlargements and extensions. It is claimed that the problems confronting the public utilities are general in their nature and that the ability of these utilities to meet the future demands of the public is dependent upon the prompt solution of those problems. Wliile the Commission takes no- tice of these general conditions, it is desirable that the specific facts relative to the financial difficulties which have been encountered by these utilities in making indispensable enlargements and extensions should be presented in order that the Commission may have accurate information as to the precise sit- uation. It is thekefoke okdeked that general hearings shall be held for the purpose above stated, in the hearing room of the Commission, Room 724 Insurance Ex- change Bldg., Chicago, Illinois, on Thursday, April 29, 1920, at 10 o’clock a. m., and in the hearing room of the Commission in the State Capitol at Spring- field, Illinois, on Monday, May 3, 1920, at 10 o’clock a. m., and that opportunity shall be afforded at said hearings to interested utilities, civic associations, and municipalities to present evidence and sugges- tions concerning the subject above mentioned. It is desired that, so far as practicable, interested par- ties in Cook County and Northern Illinois shall at- tend the hearing at Chicago, and that interested parties in the remainder of the state shall attend the hearing at Springfield. It is further ordered that the Secretary of the Commission transmit information as to the time and place of said hearings to interested utilities, civic associations, and municipalities. By order of the Commission, at Springfield, Illi- nois, this 20th day of April, 1920: (Signed) R. Aulan Stephens, Secretary, 8 State of Illinois Public Utilities Commission. Chicago, 111., Thursday, April 29, 1920. In the matter of proposed general hearings concerning the ability of utilities to meet the demands for service and to make the necessary enlargements and extensions therefor. Present : Chairman Wilkerson, presiding. Commissioner Lucey, Commissioner Shaw, Commissioner Funk, and Commissioner Dempcy. Chairman Wilkerson: In the matter of proposed gen- eral hearings concerning the ability of utilities to meet the demands for service and to make the necessary en- largements and extensions therefor. The Commission made an order on the 20th of April, 1920, and directed attention to the provision of the Public Utilities Act which provides that the Commission shall have general supervision of public utilities and keep itself informed as to the manner and method in which their business is conducted, examine such public utilities as to the man- ner in which their plants are operated with respect to adequacy of their service, and the order further recites that in connection with hearings which are now pending before the Commission there have been representations as to the necessity for the enlargement and extension of plants and equipments in order that the utilities may be able to keep up with the demands of the public service. Representations have also been made in connection 4 with those hearings as to economic and financial condi- tions. It is alleged it is difficult to provide for the neces- sary enlargement and extension. It has been claimed to the Commission that the problem that confronts the util- ities in this respect is general in its character, and for that reason it was deemed in the interest of the orderly presentation of these matters and economy of time that there should be a general hearing at which an oppor- tunity would be afforded to such utilities and civic asso- ciations and municipalities who might desire to submit evidence or make representations to the Commission to present those matters in a connected and systematic way and thereby avoid the confusion in presentation which might result if the matter were brought to the attention of the Commission in isolated proceedings, and for that purpose a hearing was fixed today. Some of the interested parties have already indicated to the Commission their desire to be heard. I think Mr. Bangs stated that certain utilities, and perhaps other companies, bankers, and so forth, would appear here this morning and desire to be heard. Have you a list, Mr. Bangs, of the parties who desire to be heard, so far as you are concerned? Mr. Bangs : Yes, Mr. Chairman. The utilities of Cook County and the adjacent territory that are included in this hearing under the order of the Commission are rep- resented here today by Mr. Samuel Insull, Mr. B. E. Sunny and Mr. Henry Blair. These gentlemen desire to make statements and preferably under oath, with refer- ence to the matters referred to in the order that the chairman has just read. Mr. Insull is here as president of the Commonwealth Edison Company, the Peoples Gas Light & Coke Com- 5 pany, the Public Service Company of Northern Illinois and as chairman of the Board of Directors of the Chicago Elevated Railway Company. Mr. Budd, the president of the latter company, is out of town. Mr. Sunny 'is here as president of the Chicago Tele- phone Company and Mr. Blair as president of the Chi- cago Surface Lines, and chairman of the Board of Operations. These gentlemen have requested some of the represen- tative bankers and investment bankers of Chicago to ap- pear before the Commission and give their views on the present financial and economic situation as it affects the Public Utilities and their securities. For the convenience of the Commission we prepared a list of the witnesses who will appear today and brief interrogatories that show the scope of their testimony. Chairman Wilkerson: Before we proceed with the statements of these witnesses, are there any other inter- ested parties who desire to be heard at this hearing? If so, will you please give your names to the secretary. Any other interested parties who desire to be heard in con- nection with the matters covered by the order, please give their names to the secretary. Mr. Richberg: Donald R. Richberg, special counsel for the City of Chicago in gas matters. Not offering any evidence but desiring to be heard upon the question. Chairman Wilkerson: Any one else who desires either to present evidence or to be heard in suggestions to the Commission on the subject covered by the general order? Mr. Cleveland: If the Commission please, Mr. Jacob Ringer and perhaps myself may want to be heard in ref- ereuce to the Telephone case, and Mr. David H. Jackson and Mr. Ro])oi'ts and myscir may want to bo hoard about 6 the elevated case, and Mr. Eoberts and myself on the Surface Lines case on behalf of the City of Chicago. We will do this with a view of aiding all we can in the hearing and presenting our views, but of course it will be understood we are not waiving any rights we may have, and then insist that matters of this kind, so far as these three pending cases are concerned, should be heard and disposed of so far as they apply to those particular cases. We do not want to waive that position. Chairman Wilkerson: Anyone else who desires to be heard in connection with the matters covered by this gen- eral order? Any other interested parties who may de- sire to be heard will be given the opportunity at the ap- propriate time by giving their names to the secretary of the Commission. Arrangements will be made to receive their testimony or their statements. Having in mind that there are a large number of state- ments to be made to the Commission today and in the interest of an orderly presentation of the matters covered by the order, the Commission has determined that par- ties who desire to submit statements shall be permitted to do so, without interruption, except as some member of the Commission may desire to ask questions. If any of those interested in the hearing may desire hereafter to cross-examine, any of the witnesses who have appeared this morning, that fact may be indicated to the Commis- sion in an appropriate way, together with the subject upon which the cross-examination is desired, and ar- rangement will be made later for that part of the hear- ing. It was thought that this matter would be presented in a more connected and more systematic manner to the Commission if these parties who have availed themselves of this opportunity be permitted, so far as their main 7 statements are concerned, to proceed without interrup- tion, and the matter of further examination or cross- examination be taken up later. Those who may desire to submit evidence will be sworn, please. (Colloquy omitted.) Chairman Wilkerson : The questions which have been handed me, Mr. Insull, as an outline for your statement are the following: 1. Will you state the situation of the companies, which you represent here with regard, first, to the normal growth of each one of the companies. . 2. The present demand for extensions and enlarge- ments. 3. The ability to meet that demand. 4. The amount of new capital which the company would need to build the necessary extensions to the plant, and 5. The experience which you have had in attempting to secure new capital. I assume you have a copy of that outline before you and with that before you you may proceed to make your statement. Samuel Insull, a witness herein, having been previously sworn, testified as follows : The question, Mr. Chairman, involved really involves all the utilities of Chicago and is such an im- portant one and of such wide scope that I will pref- ace my remarks by presenting a few figures showing what is really the extent to which the community as a whole is concerned. In presenting figures I am dealing 8 with gross figures. For instance, the assets of the Com- monwealth Edison Company exceed gross $130,000,000. There are some offsets to that, of course, and it employs 5,300 people and supplies 1,600,000,000 kilowatt hours of electric energy to 415,000 premises in the City of Chi- cago. That is more energy than is turned out in any center of population of the world, where steam is the basis of the energy. The Chicago Telephone Company has assets gross used in Chicago of upwards of $72,000,000, employs 12,900 people, and carries 743,000,000 messages per an- num for 550,000 telephones. That is one of the largest institutions of its kind in the world. I presume, that the city of New York is the only city where those figures would be exceeded. The Peoples Gas Light & Coke Company has gross assets of $111,000,000. It employs over 5,000 people and delivers in excess of 26,500,000,000 feet to more than 700,000 meters per annum. That is the largest output of gas in the United States with one exception. The Surface Lines have assets of upwards of $186,- 000,000, and employs 13,000 people and carries 1,300- 000,000 passengers per annum. The Chicago Elevated Railways have assets of up- wards of $120,000,000, employs 5,400 people, and carries 185,000,000 passengers a year. The combined utilities of the city have upwards of $620,000,000 gross assets, and receipts of upwards of $135,000,000 a year and employ upwards of 40,000 em- ployes. At present prices of labor and material it is very doubtful whether their property could be duplicated for 9 loss than $1,000,000,000 to $1,250,000,000, and it would take upwards of ten years to build the plants that they are operating. Now, all through the war those properties have been endeavoring to operate at a minimum of capital expen- diture. Altogether apart from the ease or difficulty in getting the money, partly from pressure from the Fed- eral Government and partly from pressure exerted through the Illinois Commission and partly as a matter of patriotic duty their endeavor was to get through with the war with the tying up of the least possible amount of capital, and manage to function, so at this time they are confronted with the necessity of very large expenditure. Take the Commonwealth Edison Company, for in- stance. In order to bring itself up to the necessary mar- gin of capacity that it thought desirable prior to the war they need to spend about twenty million dollars. You have had before you an application from the Chi- cago Telephone Company based upon the necessity of their spending twenty million dollars. The Peoples Gas Light & Coke Company within the last few months has arranged through other corporations to have spent for their benefit around eighteen million dollars, and including that expenditure and the expendi- ture that they ought to make themselves, they need to spend about twenty-five million dollars. The Chicago Elevated Roads have to spend not less than ten million dollars. I am not as familiar with the figures of the Surface Lines as the other figures, but Mr. Blair is going to tes- tify on that particular subject, but I think it is safe to assume that they ought to spend right away twenty-five 10 million dollars, or take it as a whole, the utilities of this city need to spend in order to bring their facilities up to what they would have been under normal conditions, if we had gone ahead in a normal way and not had the great war, and money was at a normal price and material and labor at normal prices, they would have over the period of the war probably exceeded the expenditures that I have stated ought to be made to bring their plants up to a condition so that they can function and respond to the ever growing requirements of a flourishing metropolitan community like the City of Chicago. Now, the difficulty in the way is the question of rais- ing money. I am wandering a little astray from the question as it has been put to me, but it is such a broad subject that it is the only possible way that I can answer the question. It is necessary to present to you some of the difficulties that confront us in affecting the cost of the money. It comes down to a question of aifecting our credit. Our investors who invest in our junior securities have been very much concerned during the last two or three years as to the general outcome of this class of in- vestment. That is caused partly by the agitation that takes place in this community ever and anon with rela- tion to one or another of the public utilities, and making of those utilities the football of politics is one of the fun- damental underlying causes affecting the credit of these great institutions, which if they fail to flourish the com- munity must fail to flourish because it would not be pos- sible for a community like Chicago to function properly unless its great utilities were able to do their share of functioning properly. Now to my mind that is the most serious problem that you gentlemen have to meet in con- 11 nection with adjudicating on the subject of rate of return to public utilities. If a man can go and invest his money in a farm mort- gage at six or seven per cent and be reasonably sure of getting his principal back when the mortgage becomes due, there is not any particular reason why he should invest his money at six or seven per cent at the risk of a public utility that is being attacked from day to day ostensibly for the public benefit, but as is very generally recognized, not infrequently for the individual benefit of the politician who makes the attack. Now, as I say, that is to my mind the most serious thing, more than the working of supply and demand in its effect on the value of money, more than any other cause that is the question that affects this proposition. Another question is the question of valuation of prop- erty. Certainly the junior securities of these public utility properties, that is the securities that are not evi- denced by some form of prior lien are likely to be very seriously affected by the general trend of policy of the Public Utilities Commission on the subject of Valuations. The extent to which the companies will be treated lib- erally on the various phases in connection with valua- tions of property, the extent to which the money put in by the investor for the development of the property, and probably employed in the purchase of large amounts of plant and material (scrapped from time to time in the development of the utility business in which the money is invested) the extent to which this body will recognize that class of investment in any valuation has a very im- portant bearing on this subject. Those are the two questions, which to my mind bear more than anything else, except rates, and as I under- 12 stand the question of rates does not come within the scope of this question presented to me — those two problems have more to do than anything else with the question of establishing of credit. Chairman Wilkerson: The question is the rate of re- turn. Mr. Insull: My remarks are based on the assumptioii that rates for service will be given on the basis that will allow the payment of all necessary operating expenses and depreciation and reserve charges, and with such ad- dition as a rate of return — whatever rate of return should be necessary, so that I am not going to refer today to the' question of rates for service. I presume the two properties that stand about on a level, so far as credit is concerned, the two properties here in Chicago, are the Commonwealth Edison Com- pany and the Chicago Telephone Company. One is owned in the community. There is a relatively small amount of stock of its junior securities held out- side of the State of Illinois, a relatively small amount held outside of the City of Chicago in the State of Illi- nois, so that company is sensitive to the etfect on its one junior security, its stock, so far as the question of raising- money is concerned. It has paid for a number of years eight per cent divi- dends, so it has paid what would be considered in ordi- nary and normal times liberal dividends. With the money market in a normal condition its stock would ordinarily range above a six per cent basis, which would be one hundred thirty three dollars a share, in fact, one hundred and forty dollars is about a fair basis in normal times. • At any time that they are offering their stockholders stock at par, new stock for subscription in normal time^ 13 that stock would go as high as 160. At this time it is a relatively weak security in the market varying from 104 to 108. Now, the Telephone Company is in somewhat a differ- ent position. Their stock is to a very large extent held by the American Telephone & Telegraph Company, and their stock does not come on the market. Now, if you take our bonds, the Commonwealth Edison five per cent bonds which in normal times the company was able to get on an average for years either so close to par or in extraordinarily low money market conditions above par, that it had practically no discount to write off on its bonds for years, those bonds are now in the market today at 81. It is necessary for the Edison Company to raise be- tween four and five million dollars this year, as part .of the expenditures that I stated we had in contemplation to bring our property up to normal capacity. There is no possible way of raising that money by selling our bonds. The discount would be so great on a five per cent bond, that the Commission would very rightly hesitate in granting us permission to sell the securities. Probably the only way to raise money for that purpose this year is to issue short time securities with probably bonds as col- lateral. What that money would cost us is very difficult to state at this time. We could only tell when we actually come to sell the securities. Money has been growing in- creasingly more expensive from month to month. Now, take the case of the Peoples Gas Light & Coke Company, they have recently made an agreement under which the Koppers Company of Pittsburgh, a company that installs and finances gas plants, will spend about eighteen million in building two gas plants for them. 14 The Koppers Company formed a subsidiary for that com- pany as a manufacturing company, to carry out the op- eration. The Gas Company will eventually acquire that corporation. It is very desirable that it should acquire it some time' within the next six years as the plants are built. I think the cost of money is pretty well illustrated by the placing of the bonds of the subsidiary created for the building of those plants, the Chicago By-Products Coke Company. As I was saying, the company that has been organized to build these new plants for the Gas Company is financed partly by the issue of four and a half millions of stock and thirteen million first mortgage bonds and six hundred thousand dollars second mortgage bonds. The bonds put out were serial bonds running from, 1 think, it is two to eighteen years. They bear seven per cent interest. They were guaranteed, principal and in- terest by the manufacturing company that is installing the plant and that concern is worth net assets of up- wards of seven and a half million dollars. In order to place those bonds it was necessary for the contracting company to arrange with its principal stock holders to put up thirteen millions of marketable se- curities, and it was specified that those securities should not be public utility securities, behind the thirteen mil- lions of bonds sold. I have been told this week that I was very fortunate to have concluded the negotiation for the installation of those plants when I did, as if it was up today it would not be possible to supply the money at any price. I do not know exactly what that money cost the concern that is in- stalling the plant. The bonds were also guaranteed, prin- cipal and interest by the Peoples Gas Light & Coke Com- 15 pany. That may not seem to be a very good guarantee just at this time, but in view of the fact that the Peoples Gas Light & Coke Company take all of the gas that is manufactured, why indirectly — and pay a given price for it, and cannot run their business without taking it — their guarantee is of some value in the situation. Notwith- standing the guarantee of the manufacturing companies, notwithstanding the guarantee of the Peoples Gas Light & Coke Company and notwithstanding that the property is amply good for the bonds issued with a very fair mar- gin in junior securities, it is not possible to place those securities except that they be backed by an amount of securities equal to the amount of bonds, and that that security should be other than a public utility security. Now, the situation of the elevated roads, so far as ob- taining mone}^ is concerned, it is an impossibility. They have twelve million dollars, I think it is, of overdue notes out at this time. They are in the hands of a noteholders’ protective committee. Practically the same situation if the securities behind those notes represented property instead of securities, they would be in the hands of a re- ceiver. They are practically in the hands of a receiver today. They are paying no interest on the notes so their chance of financing is absolutely nil. To go back to the Gas Company, it is not possible for the Gas Company at this time to sell its bonds. They are quoted in the market, thmr refunding bonds, which is their largest issue, are quoted in the market between sixty and sixty-three, and in another case I bore witness to the fact they are losing eighty-five hundred dollars a day at this time, and you can well understand that it is pretty hard for them to get money. Now, all these various conditions, together with the fact 36 that government securities are selling on a basis giving a very big return, that all classes of industrial securities are selling on a basis to give a very big return, all these various factors and the fact that there is not enough money to buy these securities otfered throughout the country at this time, irrespective of whether they are public utilities securities or others, why that makes money extremely expensive for the utilities. The impairment of their credit, owing to the fears of the present security holders and the great demand for money for other purposes, and a fact that I have not touched on, the great demand of money for utility pur- poses on account of the very large increase in the cost of all classes of labor and material, which means that money only goes about half the distance that it has gone heretofore, make the price of the money very high, indeed. My judgment is that so far as new money is concerned, that the utilities as a whole have got to pay for that money anywhere varying from eight to ten per cent dependent upon the credit and standing of the par- ticular institution requiring the money. I would consider eight per cent money, or to put it con- cretely, I would consider eight per cent money for the Commonwealth Edison Company under the conditions that exist today very cheap money, if I could get it for say, five years. Other institutions, I would consider for the Peoples Gas Light & Coke Company ten per cent money cheap money at this time. I was reminded by one of my counsel here that what I am discussing, while it affects the rate of return, does not mean that it should be the rate of return on the property as a whole. . That is a question I think for your Commis- 17 si'on to decide. T can tell you what it costs me to get money. What rate of return we should have on the property as a whole in order to enable us to get that money involves your giving us a rate that will first of all maintain our credit, that will give a sufficient return to our junior se- curity holders so that they won’t lose confidence in their junior investment. With those two things the senior securities cannot be sold in my judgment for the benefit of properties of the highest credit on a basis that would yield less than eight per cent, and for concerns of less credit on a basis that would yield less than ten per cent. In closing, I would like to say I do not mean to say • there are not extraordinary cases where you can get some cheaper money. In the Public Service Company of Northern Illinois we came to your Commission for authority to issue some preferred stock and by selling it in very small amounts to our customers, on the installment plan, we have been able to get some six per cent money, but that is extraordi- nary. That is getting at a class of investor that is not in the habit of buying securities and that is in the habit of saving in very small amounts, and fixing our situation so that he could get our securities in small amounts. That is about the only exception, that class of investment, to the general rule. . ; I think that is all. Commissioner Shaw: Mr. Insull, what is the present condition, we will say, as to the Commonwealth Edison Company and the Public Service Company of Northern Illinois? When I say condition I am referring to your 18 plant, the capacity of the plant, to meet its present de- mands, and you may say its future demands, we will say, for the next one or two years. Mr. Insull: We will be very close in both institutions, very close indeed for power during the winter load of 1920. If we have luck and can keep all of our machinery running we will just get through, and of course we put in units each of very large capacity, so that the loss of one unit makes a very great difference, we will be pressed very hard. Our present plans contemplate the expenditure between now and the end of 1920 of sums that will make it neces- sary to raise at the very lowest figure during this year and next year about ten million dollars, of which five mil- lion dollars must be raised during the balance of this year. With the stuff that is ordered but not financed it will carry us through the next year and the year after, but with the stuff we now have we can just squeeze through next winter. Commissioner Lucey: Have you made any computa- tion or have you any figures indicative of the number of institutions and the number of employes in those institu- tions that may be dependent upon these companies for power or other facilities necessary for their function. Mr. Insull: No. The entire transportation system is dependent upon us for its power, the entire transporta- tion system of Chicago, but I have never made estimates as to the number of employes that would be affected by a shutdown on our industrial power business. Commissioner Lucey: I asked that question in order to ask you if the fact of an institution of that character 19 which has so many customers and of such importance, hiis not such an assured continuity that there could not be any lack of credit, with the thought in view that this is a continuing business, that presumably it will earn dividends, at least have interest charges and under those circumstances, and under those conditions what is the reason that it has difficulty in financing itself even in these days? Mr. Insull : I think general distrust of this class of se- curities for the reason I have stated. Commissioner Lucey: I am saying this institution, which unquestionably supplies a great many industries, and there being no question about it being a continuing business, is that also subject to that same general remark that you have made? Mr. Insull : The only evidence I think on that sub- ject would be the prices at which our securities are quoted in the market, and the daily conversations that I have with my stockholders. Commissioner Lucey: That condition which you out- line should not be applicable to the Commonwealth Edi- son Company because it has had no — Mr. Insull: It is very deplorable that it should. We have not had to come to the Commission for relief on rates. Commissioner Lucey: You have not been to the Com- mission since it was created. Mr. Insull: No. Commissioner Lucey : Your business is going on under the same control. Mr. Insull: Yes. Commissioner Lucey : It is growing constantly. 20 Mr. Insull: Yes. . - Commissioner Lucey : It is presumably making money without going into that feature of it! Mr. Insull: Yes. Commissioner Lucey: Its credits ought to be in the banks as good as it was in 1912 and 19131 Mr. Insull : Yes. - • Commissioner Lucey: Yet it is affected in the same way as the other utilities. Mr, Insull: Yes. I have discussed so freely the Com- monwealth Edison Company because I cannot myself see any reason for it. Relatively it is not doing as well as it did before the war but it has never changed its rate of depreciation charge. It has never changed its reserve charges in its accounts. Its accounts are kept precisely the same as they were before the war. We are going along just the same and yet I would be afraid to offer — I am talking absolutely candidly, talking just as candidly as I would to my Board of Directors, although I realize I am talking publicly — I would be afraid to offer a large lot of Commonwealth Edison Company stock to the stock- holders and expect to see them subscribe to it at par, and it would give them an eight per cent return and it would put up in reserve ample funds to protect the property in the future and protect us against any of the difficulties that I have referred to here, such as difficulties as to valuation and apparatus becoming obsolete. There is no question about it. I don’t understand it, Mr. Commis- sioner. Commissioner Funk: I don’t quite get the distinction or the difference. You spoke of two utilities with which you are connected. 21 Mr. Insull : Three. Commissioner Funk : The Peoples Gas Light and Coke Company, you said if you could borrow money for them at ten per cent for five years, you would consider it very cheap money? Mr. Insull: Yes. Commissioner Funk : If you could borrow money for the Commonwealth Edison Company at eight per cent for five years you would consider that cheap money? Mr. Insull: Yes. Commissioner Funk : Without particularly comment- ing upon the financial conditions of the two companies, it is well known that the Commonwealth Edison Com- pany has not passed any dividends ? Mr. Insull: Yes. Commissioner Funk: That is correct? Mr. Insull: Yes. Commissioner Funk: And the Peoples Gas Light & Coke Company has passed a number of dividends? Mr. Insull: Yes. Commissioner Punk : And yet the same general situa- tion, the difficulty is there, and the only measure of dif- ference is two per cent. Mr. Insull : A little difference in credit. Commissioner Funk: Two per cent in the rate of in- terest. Mr. Insull: That is twenty-five per cent in the cost of money. Commissioner Funk: Yes, but. the difficulty is there just the same. 22 Mr. Insull: Yes, there is no doubt about it. Commissioner Funk : So it is hard to see through the cloud or to see the answer. The Commonwealth Edison Company is conceded to be well managed and prosperous and always paid its dividends! Mr. Insull : Yes. Commissioner Funk : And that, of course, is the light that we are seeking. Mr. Insull: Mr. Dunbaugh, Mr. Shaw asked me if you understood, in order to meet our demands in 1921 we have got to start installing the apparatus this year. I told him I thought you as an engineer thoroughly under- stood that side of it. Commissioner Shaw : I do not know whether I do or not. The purpose of my question is to make that state- ment if that is true. Mr. Insull: Yes, it takes from two to three years to build a plant on the scale that we have to build it in Chicago at this time. Possibly the second winter you can get partial use of some of the plants, but the work started in 1920 would not come into general use until 1923. You have to start between two and three years ahead. That is so generally of all these large utilities whether it is electric light or gas or anything else. Chairman Wilkerson: Returning to the question to which Senator Funk directed attention. As I understand you stated as your conclusion that this general situation which you described in the first part of your testimony affected not only those utilities which were not only di- rectly concemed, but affected the credit of the other util- ities like the Commonwealth Edison Company which was not directly concerned, but which were utilities in this state. 23 Mr. Insull: There is no question about it, whatever, Mr. Chairman, no question whatever that the general atti- tude of the community toward the utilities of Chicago af- fects the best and the poorest, and in speaking of that attitude I would speak in all fairness not alone of indi- viduals who for political purposes attack utilities, but I would say go further. This is a place for concession and candor — Chairman Wilkerson: Yes, sir. Mr. Insull : I would go further and state that I think that one of the greatest drawbacks on my line of business in this community is the lack of support that a great in- dustrial set of institutions employing six hundred million dollars of capital and transacting one hundred and thirty- five to one hundred and forty millions of business a year, that the lack of co-operation and support on the part of the press of the city is a very serious thing so far as the financial stability and credit of those financial institutions is concerned. I know in making that statement I lay myself open to personal criticism, but being responsible more than any other man in this community for very large investments of other people in public utilities, I think it is a good thing once in a while to face the situation and state the facts just as they are. Commissioner Shaw: Mr. Insull, going back to my former question a little more in detail, it has been repre- sented to the Commission especially as concerning some of the downstate utilities that during the war they were unable to obtain units such as boilers and generators for various reasons, one being that the government was com- mandeering during the war, on account of the shipbuild- ing, that class of units; another the inability to obtain 24 labor and also in connection with that their maintenance was not kept up to standard and for all those reasons many of the plants are now being operated, so to speak, overloaded or beyond their capacities. I was wonder- ing whether, take, for instance, the Commonwealth Edi- son Company and the Public Service Company of North- ern Illinois, whether they find themselves at this time in a similar condition as represented by some of the downstate utilities. Mr. Insull: Yes, sir. That condition still continues and must continue until we catch up and get our plants up to date. Deliveries are very hard to obtain, not only on large units but on smaller units, very hard, and that situation, I think, will last for, oh, maybe three to four years on very large units, and about two years on smaller units. Commissioner Wilkerson : This one further question I would like to ask you, Mr. Insull. You have spoken of certain of these enlargements and extensions as being absolutely indispensable. Mr. Insull: Yes. Chairman Wilkerson : You said in the case of the Com- monwealth Edison Company, you must begin by a certain time. Mr. Insull: Yes. Chairman Wilkerson : To make provision. Mr. Insull: Yes. Chairman Wilkerson : Or the time will come when you cease to function properly to serve the public. Mr. Insull: Yes. (fiiairman Wilkerson: Now, assuming that so far as 25 this Board is concerned, it decides the matter before it according to the law and values property as the law re- quires it to value it, giving consideration to all the ele- ments which the law requires, and assuming it grants a rate of return, the rate which it is obliged under the law to grant, giving consideration to all the elements which are to be considered, have you any concrete suggestion as to how the raising of the funds necessary for these indispensable enlargements and extensions is to be han- dled at this time, whether by way, — if I may make a suggestion — have you any plan worked out along the line of a rate large enough to take care of the immediate neces- sities with provision for the ultimate return of that out of earnings. Mr. Insull: I think an institution like the Common- wealth Edison Company, which under any circumstances of course has substantial credit, should go out into the market and borrow the necessary money, get the money for the purpose and obtain it for as long a period as it can economically at these high rates, not exceeding five years, backing the five years security with such bonds as they may be able to get by authority of the Commis- sion. I see no other way in the case of the institution whose credit is gone, I see no other way than for it to be done through the rate. In some cases, you can see what we were able to do with the Peoples Gas Light & Coke Company, raise a very large sum of money through an outside organization, but that is always very objection- able because it lays the management open to the criti- cism they are parties to some inside deal, and very ob- jectionable from the position of a man like myself, that is the only other way you can do unless an appeal is 26 made to your Commission to establish rates on such a basis as will allow enough margin to provide the neces- sary money for absolutely necessary extensions. The stopping of functioning in the case of the Gas Com- pany is to my mind more serious than any other, apart from the convenience of the community, because of the time it takes to start up again and the loss of life pos- sible in starting up, and next to that, I presume the transportation is the most important, and next to that I presume the supply of energy. Now you are fortunate in Chicago, you do not have to tax the customers of the utilities in their rates necessary to provide the money to enable them to function. I see no other way to do it than what I would call the smaller investment of the Peoples Gas Light & Coke Company. I see no other way to do it with both the surface and elevated transportation companies. Chairman Wilkerson: That completes what you have to say? Mr. Insull: Yes, sir. I will be very glad to be at the disposal of the Commission on this or any other subject any time you want me or for cross-examination. Chairman Wilkerson: We may desire to have you re- called, and we will indicate the time later. Mr. Insull : I will be out of town next week. Chairman Wilkerson: If there is a further hearing and it is now obvious we will not get through today, it will be some time the week after next, the regular Chi- cago week. Mr. Cleveland: We will desire to cross-examine Mr. Insull. (Chairman Wilkerson : You will? 27 Mr. Cleveland: Yes, sir. Chairman Wilkerson : Very well. We will arrange for the time. B. E. Sunny, a witness herein, having been first duly sworn, testified as follows: Chairman Wilkerson: You may proceed with your statement following the outline handed to Mr. Insull. Mr. Sunny: Mr. Chairman, I agree with all of the statements made by Mr. Insull, except the last one with reference to the stopping of the supply of gas or the traction service. I think a more serious situation would be the shutting down of the telephone system so people could not talk. Chairman Lucey : It might be a good thing some times. Mr. Sunny: We have been developing the telephone service pretty fast in Chicago during the past ten years. At that time there were 253,000 telephones and now there are 557,000, so that in answer to your question as to the rate of growth I would say that it has been during the past ten years 41,500 telephones a year. In 1918 the growth was only 20,000 on account of the war condition, but in 1919, the war having ended, we made an effort to clean up all of the outstanding orders and we put in 62,500 telephones in that year. The total addition to the plant in the ten years, as shown by the books was $53,000,000 or an average of $5,300,000 yearly for the ten years. In 1917 the addition was $8,400,000. In 1918 it was $5,700,000, and in 1919, $5,015,000. 28 The rate of addition ought to have been the same in 1918 and 1919 as in 1917, and we have suffered recently very much from shortage in facilities because the six million dollars which ought to have been spent in those two years could not be because of the condition of the market for labor and material. In making up the construction program for 1920, some months ago, we included provision for providing the spare property which we must have to fill orders prompt- ly, and planned to spend eighteen million dollars in 1920, but after several weeks it was plain to us that we could not possibly spend that amount in a year because of the market for labor and material, so we cut it down to four- teen million dollars, and then later on reduced it to ten million five hundred thousand dollars, which we regarded as the minimum amount which ought to be spent. Having added 62,500 stations in 1919 we had exhausted about all of the spare facilities of every kind that we had, both in the city and in the country, and now we find our- selves in a condition of having some forty thousand un- filled orders on hand; and for the year 1920 it would be reasonable to estimate that if we could go on the old basis, on the pre-war basis, we could easily add sixty thousand telephones in the city and ten thousand tele- phones in the suburban division or a total of seventy thousand in 1920. In thirty-three of the city exchanges twenty-one of the switchboards are almost fully loaded so that there are no spare facilities for new subscribers. In eleven of the exchanges, and they are all very im- portant exchanges too, two in the business district and .29 nine in the residence district, it is impossible to add any subscribers whatever. That same condition is rapidly spreading to other exchanges, so that in a very short time we shall not have any spare facilities with reference to switchboard at all, or so little that it will be negli- gible. The telephone system is made up of some two million miles of wire in a great many miles of cable, both under- ground and aerial, the cables carrying from fifty pairs to twelve hundred pairs of wires. At the end of each cable there is a terminal board where the wires are brought out and facilities are provided to connect with the wires in other cables, or with the distributing system. Now, we found on a recent survey in twenty-four per cent of those terminals there are no spare wires. Ten per cent is normal, or is as high a percentage as should be permissible in good practice. • Because of the increased traffic in the city and outside the number of trunk lines between the thirty city ex- changes is insufficient and ought to be materially in- creased. In the toll service, to points forty or fifty miles from Chicago and to points within that distance we need four hundred and fifty additional circuits, but the pole lines are fully loaded and additional plant can be provided only with aerial cables, requiring complete reconstruc- tion. Keferring again to the demands for service in Chicago, I said that we had about forty thousand unfilled orders on hand. 30 The possibilities of growth in the telephone service in Chicago is rather stunning. There seems to be almost no limit. The telephone has reached a place in the busi- ness and domestic routine which makes it indispensable. No particular argument is needed on that point. We find that there are 620,000' families in the city and that there are 334,000 residence telephones. In some of those residences there is more than one telephone. I think that we can concede, that within a brief time, every family in Chicago will have to have a telephone. This will require about 300,000 additional telephones which at $200 apiece will call for about $60,000,000. Then there are 88,000 business firms in Chicago, the annual growth in business telephones will probably be fifteen per cent, so that within a short time it will easily take one hundred million dollars to take care of the de- velopment of the telephone service in Chicago without any solicitation whatever. With respect to the financing of the telephone work, when we fixed on a budget of ten million dollars for 1920 we offered several banks, acting as a syndicate, an issue of ten million dollars seven per cent notes, secured by eleven million seven hundred thousand dollars five per cent first mortgage gold bonds of the company maturing September 1, 1923, and received a bid therefor which would make the money cost the Telephone Company nine per cent. As the earnings last year and the book value of the property, which is very conservative, very much under its cost of production, was less than five per cent, it was obvious that the company could not get anywhere near 31 earning nine per cent on the new money, and had to decline the offer. The incident was given quite a little publicity, and as there has always been very stiff competition between the bond houses for good issues of bonds we rather ex- pected that we would have some offers from other bond houses, but aside from one inquiry by telephone, no one seemed to be interested. There is nothing particularly significant in the expe- rience of the Telephone Company. Other issues of notes that have been put out recently, or at the same time, have cost the issuing company nine per cent, and in a number of cases a higher rate of interest. There have been a good many expressions of surprise about this high rate of interest on utility securities during the last few weeks, but I think after all we ought not to be surprised about it. Increasing the rate from what it used to be, five and six per cent, to nine per cent, amounts to an increase in the wages of capital which like the wages of labor were bound to go up. As we all know wages and food and cloth- ing and the cost of living generally have doubled, so that I think it is reasonable to expect that the cost of providing new capital for utilities and for industrial purposes will go up at the same rate as fast as it can get there, and this high rate will probably last as long as the high cost of living lasts. With regard to the question as to the time element in providing plant that in the pre-war days a building for a telephone exchange took about a year, and it required another year from the time the building was finished until the switchboard was installed and put in service. Under the present conditions it will take from two and a half to three years. 82 Commissioner Funk: You said there were about forty thousand unfilled orders to fill, I understand. Mr. Sunny: Yes, sir. Commissioner Funk: How does that compare with prior to 1915? Mr. Sunny: It is about three times larger than the old normal figure. Forty thousand orders are made up very large, I would say eighty per cent for the low priced telephones, for residence purposes, the four party resi- dence telephones, and the other twenty per cent for the higher class of residence telephones and business tele- phones. We make it a point, of course, to fill all the ap- plications for business telephones just as quickly as it can be done, because a business house cannot get along without the service. Commissioner Funk: As an average, how long after application has been made for service in a residence, how long would it be before service is supplied? Mr. Sunny: It used to take about ten days, but in some cases now it will be two years before we can fill some orders. Commissioner Funk : It depends upon the exchange to which that phone would have to be attached? Mr. Sunny: Yes, sir. Commissioner Shaw: Mr. Sunny, have you made any investigation to ascertain what industries that might be considered sound financially have to pay for money at the present time, those that are not subject to regula- tions? 33 Mr. Sunny: I know only in a general way, Mr. Com- missioner. I have not made any special inquiry. I have only the same sources of information that have been open to all of us, but I have looked over the reports with a great deal of care and interest, and I find that some in- dustries are able to get money a little cheaper than the utilities. Others, not so well known, are paying a little more. Commissioner Lucey : It is not entirely a shortage of money, as I judge, from the fact that you have changed your appropriation. There are other conditions that affect your ability to do your construction work. Is that the shortage of labor I Mr. Sunny: Of course the war condition is at the bottom of the whole trouble, and in our business it mani- fested itself in three ways. It cut off the expenditure of six million dollars which we otherwise would have had to spend in 1918 and 1919 for additional facilities, because we could not at that time get the labor or material ; then there has been an excessive demand for telephone serv- ice, more active than at any time in the past ten years, and now on top of those two other things, we have the very high cost of money. Commissioner Lucey: Even if you had the money, if the money was not so expensive, or if you were willing to pay the cost and could get it, isnl it true as a result of the shortage which followed the lack of production dur- ing the year or two of the war, now in the effort to catch up with that there is necessarily going to be a shortage of the supply until such time as that supply can be filled and you get back to operating at normal? Mr. Sunny: Yes, sir. 84 Commissioner Lucey: And therefore you cannot sup- ply the demand partly for that reason, and the money market may not be altogether to blame? Mr. Sunny: The money is important, of course, but if we had it all in the bank — to our credit we could only use it just so fast, and that would be rather slow on ac- count of the labor and material market. Chairman Wilkerson: How much of this work of en- largements and extensions that you have referred to, do you regard as absolutely indispensable if your com- pany is to continue to serve the public? Mr. Sunny ; I would say *in answer to that question that it is extremely important that the Telephone Com- pany spends twenty million dollars just as fast as it can be sensibly and satisfactorily spent. Chairman Wilkerson: What is your solution about getting the twenty million ? Mr. Sunny: It would be useless at this time to attempt to get more than ten million, because that is all we can spend in the next twelve months, if we can spend that much. Chairman Wilkerson: You have not got that yet? We have not got that yet, and unless there is an improvement in the market conditions so that money can be had for very much less than nine per cent, the only ‘Solution is in a general increase in rates which will give a telephone company a revenue which will permit it to pay the high interest rate. Chairman Wilkerson: Did you have in mind if pro- 35 vision was made in rates for money, to make these abso- lutely indispensable extensions, that there should be some plan by which ultimately that would he taken care of in the capital account in the proper way and would be re- turned to the earnings of the company which would be considered in determining what is a fair rate of return in the future? Mr. Sunny: I think it would be entirely possible and practicable for the Commission to make the rates as high as might be asked for by any utility, because after all it is not a matter of money now. It is a matter of supply- ing the service at all, and the service is the most im- portant thing. I think the utilities are in such a condi- tion that they ought to be given carte blanche to do pretty much as their judgment dictates, to get the properties up to the highest efficiency in every way. The tendency has been all over the country with reference to Commis- sions and courts and city councils having rate jurisdic- tion, and I say this without, of course, any offense what- ever — Chairman Wilkerson: You cannot hurt our feelings. Mr. Sunny: To see how far the utility can go and live at all, and we have been experimented with at a tre- mendous clip, and are in a desperate plight. I think it would not be going too far to ask that we be given a free rein for a considerable period, with the one limitation, that we don ot pay any higher dividends on outstanding stock than we are now paying, or declare any extra dividends, then if after a period of two or three years it is found that the high rates produce a larger revenue than is necessary, such larger revenue will be found in the surplus of the company, and the rates can be 36 readjusted. Utility corporations are not here for the day only. They are permanent. Each one of them will last as long as the City of Chicago, so that I think it is only fair to let them once in a while outline the basis on which they think they can do business, and better serve the public. Commissioner Lucey: There is not any shortage of money in the country, is there? Mr. Sunny: Yes, sir, I think there is. Commissioner Lucey: As compared with the pre-war period? Mr. Sunny : There is a very much larger quantity but the demand is greater. Commissioner Lucey : The demand is proportionately larger. Mr. Sunny: Yes. Commissioner Lucey: But there is a larger quantity in money? Mr. Sunny : I think there is. Commissioner Lucey: Since the passage of the Fed- eral Reserve Act any way money is a little hit easier to get than before, under certain conditions? Mr. Sunny: Yes, sir. Commissioner Lucey: There is apparently no great difficulty in these industrial concerns financing them- selves, judging from the number of their securities that are being offered on the market, is that your viewpoint? Mr. Sunny : That is my observation too, and of course the answer to that is they can pay any price that is asked 37 for money because they can add the higher rate of inter est to the production of their factory or enterprise. Commissioner Lucey: Well, in looking over the list I see the industrials along here running at a yield at least comparable to that which some of the utilities are offer- ing their stock. I judge from the newspaper reports that the industrials are securing the money which is being in- vested at the present time, at least I imagine that is the viewpoint that you have'? Mr. Sunny: Yes, sir. Commissioner Lucey : That the money is going into in- dustrials as against utilities. Mr. Sunny: Yes, sir. Commissioner Lucey: Now, in the case of the Chicago Telephone Company, Mr. Sunny, its credit is as good as that of any industry in the City of Chicago I Mr. Sunny: Yes, sir. Commissioner Lucey: It should be? Mr. Sunny: Yes, sir. Commissioner Lucey: Never passed any dividend — the management is not criticised, its condition on the whole is good, and the question presents itself as to why its securities are not being taken. Is it a matter of prej- udice in the mind of the public who buy the securities or is it that you have difficulty in convincing the gentle- man through whom you have to present those securities to the public that utility securities should be taken? In other words is it prejudice now in the mind of the gen- eral public or is it lack of enthusiasm, to talk plain as Mr. Insull suggested a while ago, on the part of the in- vestment bankers who are the medium of exchange, as it were, between the utility corporation and the public? Are they the ones that dislike to take the securities ? 38 Mr. Sunny: I think that the fashions change with ref- erence to securities as in everything else. Sometimes the market is for railroad securities, sometimes for utility securities, and sometimes the market is for industrials. In the past two years, and growing out of the war con- ditions the popularity has all gone to the industrials and the railroads and utilities have been in the background. The utilities all over the country are in the same con- dition with reference to the attitude of the public as in Chicago. Mr. Insull spoke of the fact that the Chicago Telephone Company was largely owned in the east by the American Telephone & Telegraph Company. That company has a very large issue outstanding of eight per cent common stock which has paid dividends at that rate for a great many years. The company is of unquestioned financial standing and its stock is selling at ninety-five or about ten points under the Commonwealth Edison Company stock paying the same rate of dividends. Commissioner Lucey: Its bonds are being offered to net 7.90%? Mr. Sunny: Yes, sir. Commissioner Lucey: This prejudice that the ques- tion of popularity of the securities, — that the fashions change, — to use your own expression, the idea in the mind of the public, the investing public, is what are good se- curities and bad securities, and the popularity of one class as against another is not a result of accident, of course. It is a result of education or propaganda, or something else, which convinces the investor instead of buying A. T. & T. bonds, or stocks of the Chicago Tele- phone Company, or the Commonwealth Edison Company or some other regulated utility, that he better put his 39 money in some of these industrials which are quoted at about the same price? Now, that is because he thinks so. There has some- thing occurred to make him think so, and it seems to me that the utility, such as your own, using that as an illustration, ought to have no difficulty in convincing the public in and about Chicago that its securities are desirable, that the property back of the investment is sound, that the security ought to be readily marketable, if it is not anything else than the education of the public! Mr. Sunny: It seems to be not so much a question of credit of the individual company, but association. Chairman Wilkerson: You are in bad company! Mr. Sunny: We are all classed together. If Mr. In- sult could make it plain to all the people in Chicago how strong his company is, how well managed it is, what con- servative capitalization it has, the stock would probably go back to the old figure of 125 or 130. If we could reach all of the people who are interested in the bonds, in our bonds, and they are for the most part owned in and around Chicago, some nineteen million, if we could make them feel confident that nothing could possibly happen, and that in 1923 they will get one hundred cents on the dollar in cash for their bonds and get their interest in the meantime those bonds would not be selling at 90 now, but would be selling at par, but it is impossible to reach those people and they are frightened. They are not prej- udiced so much as they are frightened. There is a uni- versal fright with reference to utility securities all over the United States. Everybody believes in the great serv- ice they are performing, but they are afraid to have any- thing to do with the utility in a financial way because it is subject to regulation, and that regulation they think is 40 very often influenced by political considerations ; further- more there is not a satisfactory public sentiment behind the rate making body which will enable rates to be made that are just and fair. Commissioner Lucey: That is, the investing public do not think the Utilities Commission will give the util- ity a suflilcient rate of return to make the investments desirable! Mr. Sunny: I think there is much feeling of that kind. Commissioner Lucey: Of course the public at large, according to the newspapers, have been thinking the Commissions have been granting too high rates, to the utilities. Another thing, I note that the municipal bonds are running about the same rate that they were proportion- ately before. Is that, in your opinion, altogether by rea- son of the fact that they are not subject to certain taxes that other bonds are subject to! Mr. Sunny : I think some of the bankers or bond peo- ple would be more competent to answer that question. I think that the reason that you have intimated is the true one, tax exempt features and the general return can be had on a purchase of that class of bonds, especially government bonds. Commissioner Shaw : Mr. Sunny, I wondered at times if perhaps the better operating utilities could obtain money under favorable conditions as some of the bet- ter industries. For example, I have now before me a newspaper ad- vertisement of the Associated Simmons Hardware Com- pany. Their gold notes now are being offered to the pub- 41 lie in Chicago through Halsey, Stuart and . Continental and Commercial National Bank. Now, the advertise- ment sets forth their net assets are three times these gold notes offered, and also further sets forth that the net earnings are four times the interest charges. As I understand the rule laid down by the bankers that ought to be gilt edge in an industry not subject to regulation. Now they are offered on a basis of seven and a half per cent. At the same time there is offered for sale here in Chicago, through the Illinois Trust & Sav- ings Bank and Halsey Stuart and Company, a portion of the twenty-five million dollars, seven per cent, converti- ble notes of the Southwestern Bell, a subsidiary of the American Telephone and Telegraph Company. I as- sumed the Chicago Telephone Company was as strong financially as the Southwestern Bell, and that is offered on the basis of seven and six-tenths per cent, or substan- tially the same. Those two, in other words, are about on a par as to the cost of financing themselves. Maybe there are other troubles beyond what you gentlemen have in mind. In other words, the money market has got up to the level now where it is on an eight or nine per cent basis for all those that need to obtain funds? Mr. Sunny: They are pretty much alike, Mr. Com- missioner. The price to the public seems to be about seven and a half per cent, and the price to the issuing company from nine per cent up. Chairman Wilkerson: That is all. Mr. Cleveland: We desire to cross-examine Mr. Sunny. Chairman Wilkerson : The same understanding. You may have the same understanding with all the witnesses. 42 Henry A. Blair, a witness herein, having been previously sworn, testified as follows: Chairman Wilkerson: Have you the question that was submitted by Mr. Bangs before you, Mr. Blair? Mr. Blair: I received that just this morning, and I am not prepared to give the actual figures, but I think I can answer the questions here substantially correct. Chairman Wilkerson: I take it, for the purpose of the particular case pending before the Commission, the exact figures are in the record? Mr. Blair: Yes. Chairman Wilkerson: It is more a statement of the general facts and whatever representations you care to make to the Commission along the line of the questions. Mr. Blair: I think all of the statements that have been submitted to the Commission, I think, would answer fully the questions that are brought up there in this paper, but I think I am prepared to answer the questions approximately correctly. The normal growth of these properties has been on an average of for a number of years based on two or three per cent of the riders, car riders, which represents the revenue entirely of the traction property. It is the rider who gives them their revenue, and they have no other means of providing it in any way. The statements that were made by the two witnesses, Mr. Sunny and Mr. Insull on the general situation I con- cur in fully, and it applies to our property as well as to theirs, only to a very much greater extent, because our condition as transportation property is rather in a dif- ferent situation and different manner and way of creat- ing revenue. 43 During the last ten years in regard to the demand for extensions and so forth, from 1908 up to the present time the Surface Lines have spent in the construction, exten- sions, betterments and so forth, one hundred million dol- lars, or for a period of practically up to 1917, which is the time the last bonds were sold, the amount was in the neighborhood of about $85,000,000. The last few years the only means has been by loans and what little receipts that we might get along with to take care of the city requirements wherever they make street improve- ments and so forth, where they are necessary every year under almost any conditions. Our ability at the present time to finance extensions, equipment, and so forth, I would say on the return that we were receiving is impos- sible. I have taken this up with the banking interests and people in the past who have furnished this one hun- dred million dollars and they see no way excepting by a better return than we are receiving at the present time. It is a question of credit entirely, I think ; in fact I know, whether we can or cannot make extensions, get equip- ment, and go along with these properties. The necessity is very great. I would say that this property at the pres- ent time could spend from fifteen to twenty million dol- lars, which would be a benefit to the public and add an earning power to the company properties themselves. There has been such a tremendous increase in cost, and our revenue like most public utilities is standard- ized. While the cost has gradually gone up and gone up, the means or rates that we receive have practically been wiped out, and I can see nothing but a calamity if that situation should continue for any great time. I cannot conceive of a city like Chicago being de- prived of transportation, and I cannot conceive of peo- 44 pie generally attacking and trying to destroy rather than to give the opportunity to increase and extend. They have had no opportunities in the period of the war. Con- ditions have been created here through no fault of man- agement, no fault of any human beings that are operating public utility properties, or any other properties. I think the City of Chicago, in the next ten years, should have to spend in transportation not less than one hun- dred and fifty million dollars to give it what they should have and to take care of the people. During the month of March we carried on an average every day 3,700,000 passengers. That includes revenue passengers and transfer passengers. Commissioner Lucey: You are speaking only of the Surface Lines? Mr. Blair: I am speaking only of the Surface Lines; the requirements for this property I would say today should have not less than three to four hundred addi- tional cars. Chairman Wilkerson : Is that the very lowest number that will enable you to handle the traffic in Chicago ? Mr. Blair: I think so. Chairman Wilkerson: Three to four hundred. Mr. Blair: Yes, sir. Chairman Wilkerson: Yes. Increase? Mr. Blair: Yes, sir. The cars that represent 3,158 cars on our system stands in the capitalization at $6,700 a car. The specifications for the same car submitted to the car builders, they asked over $15,000 for the same car, the identical same car. Four hundred cars, you will see, will cost us six million dollars. The extensions, the necessary improvements and so 45 forth we could easily spend ten million dollars if we had it at this present time. It is a question entirely of credit. The Traction Companies or the transportation companies of any city in this country rely entirely on the rider, and when the cost has gone up to a point where you meet that, our resources and our credit have gone. You have got to build that up or we never can construct or take care of the people that we are asked to give service. I do not know but that answers most of the points that are here, Mr. Chairman. I do not think there is anything else that I have to say. It has been so thoroughly cov- ered by Mr. Sunny and Mr. Insull in a general way. Chairman Wilkerson : What are you going to do about those two hundred cars, Mr. Blair? Mr. Blair: We will simply have to hope for them. That is the only thing that is left for us. Chairman Wilkerson: Well, what effort have you made to get them? Mr. Blair: Mr. Chairman, we have made or used every effort possible. We have tried to handle the cars through the car company, and so far it is impossible. The cost is so great the companies are unable to do it, we cannot finance it. Chairman Wilkerson: You cannot get the money? Mr. Blair: We cannot get the money. We could not sell a bond today at any price. It is not a question of what the rate is. We could not sell it at all as long as our return stands as it is. We have got to get costs. We have got to take care of all of our obligations. We have got to get sufficient to take care of the requirements for a few years ahead and we have got to give — get sufficient to show the bankers and investors that they are going to get their principal and their interest. Chairman Wilkerson: I think that is all, Mr. Blair. E. D. Hulbekt, a witness herein, having been first duly sworn, testified as follows : Chairman Wilkerson: I will read the outline, the question which has been submitted by Mr. Bangs to be answered at this hearing, which is the following: 1. What is the situation with reference to the demand for capital by industrial concerns and public utilities? What are the present interest rates for permanent financing and what rate of return must utility properties earn to attract new capital? 2. Would living conditions and the general business situation in Chicago be affected by the inability of the public utilities to secure capital for extensions and bet- terments ? With that outline, will you proceed to answer the ques- tion? Mr. Hulbert : I will not be able to say very much ex- cept a repetition of what has been said here. I do not know as I understand exactly what is the situation with reference to demand for capital by industrial concerns and public utilities. Chairman Wilkerson: I think perhaps for the record you had better have Mr. Hulbert state the bank with which he is connected. Mr. Bangs: Yes, the record ought to show that. Chairman Wilkerson: Will you interrogate him for a few questions? Mr. Bangs : Mr. Hulbert, will you state very briefly your banking experience in Chicago, and the banks with which you are connected now and in what capacity? 47 Mr. Hulbert: I have been in Chicago about 25 years, been during that time vice-president and president of the Merchants Loan & Trust Company; at the time being I am also president of the Illinois Trust and Corn Ex- change National Banks. Mr. Hulbert: Now, I think perhaps I ought to dis- agree with some opinions that have been suggested here, that there is plenty of money to go around, it is only a question of credit, that is not the fact. There is a greater shortage of capital just now, greater difficulty in obtain- ing credit than there has been any time in the last fifteen years. That is one part of this situation that ought to be borne in mind. Bankers, investment bankers, especially, are discrimi- nating very carefully about what kind of offerings they make just at present. 1 think I ought to say there has been a change in that respect within the last few weeks. There is a very strong feeling among bankers that no new issues should be put out, industrial or utilities or railroad, unless there is an absolute necessity for that issue. We object decidedly to having issues put out for the ’ purchase of new property or anything else except some essential need of that concern. ' It is quite true, as Mr. Sunny suggested, that the price of money has gone up without regard to the monetary conditions. The price of money is higher now than it was. It has gone up with everything else, and neces- sarily so. We have got to get accustomed to new figures. We used to have a feeling that six per cent was about the limit that a solvent concern in good standing ought to pay. That time has gone by. I had some figures made this morning for my own 48 information, some of it is new to me and perhaps would be to the Commission, but I wanted to ascertain the pres- ent market return, rate of return on first mortgage utility bonds in Chicago, as far as we are able to get them. First on the list, is the Chicago City Eailway, first mortgage 5’s, due in 1927, bid 65^, asked 66^. That is about a 12| basis return for first mortgage of the City Railway. Ten years ago we thought that was the best utility bond that had ever been put out anywhere. Of course it goes without saying that that company’s credit at present is practically nothing. When its first mort- gage is selling about 12.75 basis there is no use in that company trying to do any financing, it is out of the ques- tion. Chicago Railways Company, for some reason the first mortgage bonds are not quite as saleable as the others. Their bonds are selling at the present time or offered at the present time on a fourteen per cent basis. The same situation applies to them, of course. The Commonwealth Edison Company first mortgage 5’s are selling on about a seven per cent basis. That is a very fine security and perhaps it is a good indica- tion, a good criterion of what the market is for the very highest class of utility bonds at the present time. The Chicago Telephone Company first mortgage bonds bid 90, asked 90f. That is about 8.8 basis, practically nine per cent basis. Mr. Sunny, I noticed expressed some surprise that the bankers made a rate of nine per cent on his ten million dollars of notes. A banker, gentlemen, is only, as the Commissioner suggested, an intermediary between the borrower and the public. We have to consider what these notes will sell at. 49 Now, we are immediately confronted by this situation : Here is a first mortgage bond of the Chicago Telephone Company selling on a nine per cent basis. What argu- ment can be made to sell an unsecured note on a better basis than that, or buy an unsecured note on a better basis than that. The Elevated Roads, of course, are hardly worth con- . sidering. The Metropolitan and West Side seems to be selling on about an eleven per cent basis, and the South Side over sixteen per cent basis. They are, of course, out of the pale when it comes to the consideration of finances. The Peoples- Gas Light & Coke Company refunding mortgage 5’s are selling on about a nine and a quarter basis. Mr. Insull said he would consider ten per cent today a fair rate for tliat, but he knows he cannot borrow money for the Gas Company at any rate. The Gas Com- pany has no credit. It could not borrow it at ten or fif- teen or twenty per cent probably. Now, the next question, what are the present interest rates for permanent financing. I suppose that means permanent financing of concerns in good credit. I think it has been brought out here pretty thoroughly some- where that somewhere from seven to nine per cent is about what it cost. The securities must be offered to the public on about a seven per cent basis. You cannot sell it on any better than that. I think perhaps, I ought to state that one of the diffi- culties in financing of these matters now has arisen out of the income tax. The large investors we used to de-‘ pend on to absorb these securities do not buy them at all now. They would not even buy them on a seven or / 50 eight per cent basis. They cannot afford to. The men with large incomes whose income tax now runs from thirty to forty per cent used to be the large purchasers of these securities. Now, of course, a man cannot atford to buy seven or eight per cent securities if lie has to pay forty per cent tax, when he can buy government securi- ties on pretty nearly a six i^er cent basis, or municipal bonds, which are tax exempt. Chairman Wilkerson: They are selling these securi- ties and re-investing? Mr. Hulbert: Yes, they are doing that, and that has affected this whole situation very seriously. The next question is what rate of return must utility properties earn in order to attract new capital. I notice Mr. Insull dodged that question and put it up to the Com- mission. The only suggestion I want to make is that I assume the Commission will all agree that we ought to come to a condition where financing can be done by the sale of stock ; we have got away from that as a temporary expedient. We talk about three or four year notes as permanent financing. That is not permanent financing. It is very temporary and very unsound. Conditions are going to be worse probably then than it is now in many respects. Now, assuming that the present market price for money is seven or eight per cent, at least, you cannot induce any investor to put money into the stock of a utility unless it is earning more than that. No industrial concern could get bank credit today unless it was earn- ing considerably more than ten per cent. Anything under ten per cent would be considered a poor showing for an industrial concern, but of course none of us want to see utilities permitted to earn any more than is neces- 51 sary to establish a decent credit. They should not be permitted to earn what industrial concerns do, because they are protected and are practically a monopoly, and when people are ^ven a monopoly they ought to be regu- lated. We all agree to that. But I do not see how you can attract capital to stock issues of utilities, and that is the only decent financing that can be done, and that the banks have nothing to do with, unless they can show a return of ten per cent. The next question, would the general business and do- mestic situation in the City of Chicago be affected by the inability of its public utilities to secure capital for ex- tensions and betterments! It seems to me we do not need much argument about that. It has been brought out what we all know, these utilities have about reached a limit of their service. The population of the city seems to be increasing about 70,000 a year. It has increased 70,000 a year for the last two or three years, and these utilities have not kept up with that. They are behind. I do not think it needs any argument to say that the comfort, health and prosperity of the city depend entirely on keeping these things up. Now, as I said, nobody wants to see the public utilities make enough money so they can make betterments and extensions out of earnings. The public would not sub- mit to it and ought not submit to it, but they should be able to make money enough to base credit on, so they can borrow money or sell stock to make betterments and ex- tensions, preferably sell stock. It has been the history of all these concerns, I do not need to say that to you, that periodically they must get in new capital. That is true of every public utility that is good for anything. They never seem to get the ter- 52 ritory saturated, and I think my own position is that ought to be done by a stock issue. That is the best thing. The next best thing, of course, is the issue of bonds, but in either case there must be something on which to base credit. I think that is all, Mr. Chairman. Commissioner Funk: Mr. Hulbert, I am a little bit confused in my own mind about the fact it is constantly suggested to the Commission the unfavorable compari- son of the finances of utilities as compared with indus- trials. Is there any marked line of the way in which the financing of utilities today under present conditions is done, as compared ’with industrials? That is today, is this a fair statement of the situation? The utilities are unable to sell their stocks and bonds at the present time as you suggested, therefore to get in needed new capital they have to resort to the short time note proposition. Now is that the situation with the industrials? Mr. Hulbert: Yes, sir. Commissioner Funk: Or are they selling their stock which gives an ownership in the property which makes it attractive to the investor in that he may participate in the profits, promised profits that are set forth? IsnT it true quite a considerable part of the industrial financ- ing is not through the short term note proposition but placing of the stock, which is the ownership of the busi- ness, which as I say, may make the promised profits, that therefore offers unfavorable comparisons to the utilities? Is that a proper view to offer of the situation? Mr. Hulbert : It had not occurred to me that that was so before. You know, of course, banks do not come in contact with stock issues very much unless it happens to be some of their own customers. I am rather of the 53 impression there has been a good deal of difficulty dis- posing of stock of industrial concerns in the last year. Of course, in some cases where the stock is selling above paf, you can get stockholders to take new stock at par because they see some speculation in it, but my impres- sion is that most of the industrial financing has been done the other way. Commissioner Funk: Short term notes! Mr. Hulbert : I hope you are right, as I would rather see it in the form of stock than the other way. I think we are going to have a big strain on these things. There is not such a big difference. There is a difference of per- haps one per cent in the rates on these short term indus- trials and first class utilities. I think it is perfectly nat- ural that an investor discriminates at this time a little against the utilities. He feels that everything is going up that the utility works with and that they have not the same control over price of the product as the industrial has. I think that is all. There is a little hesitation about it, and we know there are a lot of utilities whose credit has been entirely de- stroyed by the situation they are in, and that reflects somewhat on the better class. Commissioner Lucey : What is the outlook for money in the next year or two, what is your opinion! Mr. Hulbert : Of course a year or two is a long time for us to look ahead, but I will say frankly there is a good deal of feeling of anxiety among bankers as to the outlook for next year, a good deal of anxiety. The de- mands of business are extraordinary. It requires a great deal more money, as you know, to do the same amount of business now than before, and there is not much chance of that changing that T can see, and as I said before we 54 feel that there are certain things in the way of financing not only industrials but utilities, that must be done, and those things will be taken care of if the proper credit basis can be had for that, but at a higher rate of interest. There is no question about that. The interest rate is going to be high. Commissioner Shaw: Mr. Hulbert, will the Federal Reserve Banks re-discount any public utility paper or bonds or notes? Mr. Hulbert: No, sir, no, sir, they absolutely are pro- hibited by law from doing so. Commissioner Shaw : Are they prevented by law from doing so? Mr. Hulbert: Yes, sir. That is the law provides spe- cifically what they may discount. Public utilities, any note whatever secured by collateral, either bonds of pub- lic utilities, or railroads, or what not, are not eligible. Commissioner Shaw: Assume that the law was amended, would that improve the condition any as to better classes of public utilities, and assume the compa- nies would lay down their own specifications as to re- quirements? Mr. Hulbert: I would say it would be an exceedingly unsound and dangerous thing for the Government to do. What would happen if such a thing were done, would be for a short time you would find the pressure eased and prices and the securities would go up, but it is a good deal like feeling good when you are getting drunk. You are going to have a headache afterwards. There is going to be a reaction from that sort of thing. The vital, fun- damental principle of the Federal Bank is they discount nothing which is not liquid, nothing they cannot collect on, and the law is founded on the principle that no long 55 time note of any form shall be allowed in the bank, and they should not. If we ever depart from that principle we are lost. There is one thing now that is a real danger, and that is that the Federal Reserve Banks are filled up with government securities. It is the most non-liquid they can have. They cannot realize on them. They cannot do anything with them, and that is probably responsible for sixty per cent of the trouble that we are in here now, but that was a war measure. We cannot help it. It had to be done, but it is a fact we must not forget, these Federal Reserve banks are clogged up today with a lot of stuff they cannot realize on. If you undertake to put on a lot of public utility bonds — Commissioner Shaw : I had more in mind short term notes being issued, one or two years. Mr. Hulbert: The Federal Reserve act limits eligible paper in the commercial line to three months. That means paper that is liquid, in three months time that paper will be paid. That is the only real safeguard they had. I am afraid they have not adhered to that strictly. Commissioner Lucey: Do you think it would be good financing or proper way to handle the situation as it ex- ists in order to relieve possibly the strain which exists now and may be coming for the next two years if this mass of government bonds should be re-financed by an issue of long term bonds extending over seventy-five or one hundred years and let posterity, that has never done much for us, take care of some of it. Mr. Hulbert : I would like very much to see that done. I think we are carrying more than our share of the load just now. Commissioner Lucey: Wouldn’t that ease up this sit- uation? 56 Mr. Hulbert: It would decidedly. It would ease up the whole situation if some way could be found. I do not know that I quite got the amount. You said seventy- five or one hundred million. Commissioner Lucey: No, I say to take this indebted- ness that exists and extend it over a period of years, whatever it may be, say seventy-five or one hundred years. Mr. Hulbert: Yes. Commissioner Lucey: Liquidate it as those years came along. Mr. Hulbert : That would be very great relief, yes, sir, very great relief. Commissioner Lucey: Another question before you leave. Do you find, Mr. Hulbert, that there is any real prejudice in the mind of the investor against the public utility as such. Mr. Hulbert: Why, I think, Mr. Commissioner, that there is a feeling in the minds of the public, that is I am expressing my own feeling now, that a majority of the public utilities in the country are having difficulty in making both ends meet, and there is in my mind a preju- dice against those securities. I presume the public gen- erally feels that way. There is a feeling they are sub- ject more or less to political attack and regulations that are hurtful. Whether it is true or not, that impression exists, that they have difficulty in adjusting their reve- nue to any increased expenditure unexpected. I do not think we can get away from that. I think there will be always that prejudice. Commissioner Lucey: As a matter of fact the fact that the utility is regulated instead of creating any preju- ice against it should be a manner and means of convinc- 57 ing the investing public that the securities which are passed and approved by the Commission are good and should be taken on the market? Mr. Hulbert: Well, I want to say that I am very strongly in favor of the system of giving public utilities a monopoly under such regulations as we have here, but I am trying to state what I believe to be the facts in re- gard to the feeling of the public. I think there is a lit- tle feeling perhaps that is justified, in readjustment, while the approval of the Commission at the time the securities get out, is very important and very helpful; we all realized that as bankers and always advertised it, as you have probably noted, but I think it is perhaps nat- ural that we all feel that any change in conditions is adjusted more slowly among industries. I think that is necessarily so. We cannot help that. Commissioner Lucey: The chances are, or rather in- stead of making the statement I rather ask it as a ques- tion, if in your judgment because of this misunderstand- ing on the part of the public as to the purpose, the real purpose and manner and method and object of public reg- ulation. Mr. Hulbert: I think they should have better infor- mation and of course the public and the bankers are con- fused by disputes of jurisdiction as to whether the city has control of certain regulations or whether this Com- mission has. We hear all these differences, and natur- ally that is a little disturbing. Commissioner Lucey : I do not think there is any seri- ous dispute now on that subject. Mr. Hulbert : I hope not. Mr. Cleveland : The question of the control of the city is real. I have been told to keep still but these gentle- 58 men seem to think it is funny. The fact is that the ques- tion of jurisdictions that are here in legislative and judi- cial ways will have to be taken into consideration. Laugh- ing don’t change it. Mr. Hulbert: That is part of the atmosphere of the thing and we cannot help that, of course. Mr. Cleveland: Yes, 1 tried to. refrain from making any remarks, but if you want them I will give them to you. Chairman Wilkerson : We will adjourn till two o’clock now. Whereupon an adjournment was taken until two o’clock p. m., April 29, 1920. Chicago, 111., April 29, 1920, 2 p. m. Parties met pursuant to adjournment. Present: Same as before. Chairman Wilkerson: You may proceed now. Harold L. Stuart, a witness herein, having been first duly sworn, testified as follows : Mr. Bangs : Will you tell the reporter your name, and present position, and what your experience has been in banking! A. Harold L. Stuart, president of Halsey, Stuart & Company, investment bankers: I have been in the invest- ment business for twenty- five years. Q. Will you just make a statement in answer to the interrogatories that you have previously read! A. I think that this first question divides itself into two or more parts. In regard to the situation with ref- 59 erence to the demand for capital by industrial concerns, I will say that the demand has been enormous. In the whole financial history of the country there has never been such a demand on the part of industries for capital as there has been since the armistice, and due to the prof- its which industries have made on account of the war they have been able and willing to pay the price neces- sary to raise the money which they required. The de- mand for capital on the part of the public utilities has also been great, but that demand has only been satisfied to a moderate extent, a fraction of the amount of money asked for due to the fact that the investing public have preferred to buy industrial securities, rather than public utility securities. The investment banker or anyone dealing in securities has no control over the investment market, nor has he any control over the kind of securities which an investor will buy. A man who has been an investor in public utili- ties already has his money in, and unless he is satisfied to put additional money in there is not any power that can make him put it in unless he feels that it is safe, so the investment banker is really the go-between in raising the money, and he supplies naturally what the investing public and what his customers will take. Chairman Wilkerson : I suppose his advice has some- thing to do with it. It is like a lawyer stands with his client. Mr. Stuart: I think that was so at one time, but I think since this country has grown to be so much of an investing country, that the great majority of investors — of course it is always so of institutions who buy, banks who buy and insurance companies who buy, and it has now gotten so even the small investor who is an experi- 60 enced lender of money, he has his own ideas about these things, and I think that the chief value of an investment banker’s recommendation now in the eyes of the investor is that the property is there, and that the securities have been legitimately issued — but there is no such thing as an investor now following an investment banker in blind faith. The present interest rate for industrial securities which have dominated the market for so far as corporate financing is concerned, as I have said, since the armis- tice has ranged anywhere from say six and three-quar- ters per cent a year ago, up to eight per cent and even higher now, and that is the income that has been offered to the ultimate investor. Now, below that, of course, have to come the expenses of issue, bankers’ commissions, and so forth. Commissioner Funk: You are speaking of stock, I take it, industrial stocks? Mr. Stuart: No, sir, industrial bonds and notes. All my remarks are confined to credits and not to evidences of ownership. Commissioner Funk : Bonds and notes. Mr. Stuart : Credits, yes, sir, bonds and notes. Most of this industrial financing has taken the character of short term indebtedness, and I think in most cases that the industries expect to pay not only the interest on these short term loans but the principal as well, out of earn- ings. I am quite sure that is so in the majority of cases. Commissioner Lucey: That could not be so naturally for large sums of money. Aren’t some of these short term notes used simply to carry the corporation over this present period so it may be permanently financed on a sounder basis later on. 61 Mr. Stuart: That is so in some cases but in the ma- jority of cases the earnings are large enough so that the interest and serial payments — they are usually made to mature in series — can be paid out of earnings. The rate of interest on public utilities securities has steadily de- clined and it is only the better known and larger utilities that have been able to borrow any money at all to speak of. Mr. Cleveland: I do not think Mr. Stuart meant to say what he said: You say the rate of interest on public utilities securities have steadily declined. Mr. Stuart : The yield to the investor. Commissioner Funk: When you speak of the utility obligation are you speaking of the same character you just spoke of as to the industrial? Mr. Stuart: No, sir, I intended to distinguish between the two. Commissioner Funk. Well, I would like to hear that. Mr. Stuart : I have intimated that the investing pub- lic do not seek public utility investments at all and sub- stantially speaking any public utility securities that are sold are only sold with difficulty. I think that finishes the first question. The second question will the general business situation in the City of Chicago be affected by the financial stand- ing of the public utilities and their ability to secure capi- tal for extensions and betterments. In my opinion it would be seriously affected, not only as to Chicago but as to any community, because I believe that the public utilities have demonstrated that they are a necessity, a great convenience to the public, and I think other things being equal the population will flow where 62 they can get the conveniences of life, conveniences and necessities. Commissioner Wilkerson : Can I draw your attention again to the third subdivision of that first question? Mr. Stuart : Do you mean about what rate it is neces- sary to earn? Chairm.an Wilkerson : Yes. Mr. Stuart: My reply to that would be that a utility in order to command capital would have to be permitted to earn enough money to take care of all of its operating expenses, including maintenance, depreciation and enough margin over its interest and dividend requirements to at- tract additional capital, and I think that the question of interest rates in order to attract capital is just one side of the question. I think that an investor in the future in public utility securities has got to feel that his investment will be fairly treated and that the property to which he loans money will not have to be in the position of fighting for its life all the time. As I said before the man who already has his money in you can control, but there is not anybody who has or can control the investor of today who has not yet put his money in, or who has not, due to conditions that he is not satisfied with refuses to put any more money in. Chairman Wilkerson : To speak concretely, this is one branch of a question which arises in every case before the Commission. It is the duty of the Commission in a rate making pro- ceeding to determine the fair value of the property, to take into consideration the elements which the courts have said we are required to consider. Mr. Stuart : Exactly. Chairman Wilkerson: Then, in addition to that, wo must determine what is a fair rate of return on the fair value as fixed. Now that third subdivision of that question I think is directed to that, and if you have any opinion measured in rate of per cent I Avould be glad to have you answer that question. Mr. Stuart : It seems to be that the fair rate of return would be a return on the value of the money at the time it went in. For instance, supposing today that money costs one of the large utilities eight per cent — as a matter of fact they could not get it for eight per cent, I do not think — why is not the rate that money is worth at the time it is invested the criterion? Commissioner Lucey: Do you mean the money that went in at four and a half should be paid four and a half? Mr. Stuart: For all time. Money that goes in today at eight costs eight for all time, the money that goes in at six costs six all the time and the average would be all right. That would be determined at the time the rates were made. Commissioner Wilkerson: You think a rate of return based on an application of that principle would restore the impaired credit. Mr. Stuart: I do. The rate I speak of would be the minimum and that would be a guaranteed rate. In order to attract capital you would have to have some kind of margin above that or you would not be able to get additional capital. An investor puts money in securities, he does not want to see the seven per cent 64 covered, but wants to see nine or ten per cent. He wants to see a big margin above his interest charges. I do not believe that there is a public utility in the United States today, the market value of whose security is equal to the cost of the property, not the reproduction value of today’s prices, but the cost of the property. Commissioner Lucey : I would not agree with you al- together on that. Mr. Stuart: I would like to know what it is, if there is one. Mr. Ringer : The Chicago Telephone Company. Mr. Stuart : Now, what is the market value of the Chi- cago Telephone Company’s bonds and stocks'? Mr. Ringer : Their testimony is here today the bonds were selling at ninety ; no testimony as to the stock. That is forty million dollars selling at par, that is the amount of the stock, and bonds at ninety. The statement was made by someone here today that the fair value today was about seventy-two million dollars. Mr. Sunny : Eighty-six. Mr. Ringer: The statement was made in the record, Mr. Insull said the present value of the property was above seventy-two million. Mr. Sunny: That is the City of Chicago alone. Chairman Wilkerson: You agree eighty-six is above seventy-two? Mr. Ringer: Yes, I agree to that. The total outstand- ing bonds and stocks are considerably below that at the market. Mr. Stuart: That is what I said. I said I do not be- lieve that there is a public utility in the United States 65 the market value of whose security is equal to the cost of the property. That is what I said. • Mr. Ringer : The cost of that — you get the cost right there, and you will find our statement is correct and yours is somewhat in doubt. Mr. Stuart: There is about fifty-eight million. The cost of the property is eighty-six. That is what I meant to say. Mr. Ringer: What are the figures you had*? Mr. Stuart: The market .value of the securities is fifty-eight and the cost of the property eighty-six. Mr. Ringer : Cost of the property is eighty-six. Mr. Stuart: Yes, sir. Commissioner Lucey : I understood your statement, at least I took exception to it, you did not limit it to utilities in Chicago you said in the United States. Mr. Stuart: Oh, yes, sir, I made that broad. You mean about the market value of the securities? Commissioner Lucey: Yes. Mr. Stuart: Yes, I made that broad, general state- ment. Commissioner Lucey: You said there was no utility in the United States — you did not mean there was a utility in the United States whose cost was equal, I under- stood you to say, to the value of its securities, now you say the market value. Mr. Stuart: Wliat I intended to say was this. That I do not believe there is a utility in the United States the market value of whose securities was as high as the actual cost of the property; not replacement value on today’s high prices. / 66 Chairman Wilkerson: Are you familiar with the con- ditions of those companies in New York, the Interhorough Rapid Transit? Mr. Stuart: Yes. Chairman Wilkerson: Assuming the correctness of the statement, how do you explain the present chaotic conditions of those companies in New York, assuming they have property so much in excess of the market value of their securities? Mr. Stuart : For instance, take the Interborough Rapid Transit. Chairman Wilkerson : In the hands of a receiver, and been all split up and paying half a dozen different fares around the different parts of the city. To what do you attribute that? Mr. Stuart: I do not think I understand the question but in relation to the market value, take the Interborough Rapid Transit Company bonds that were originally sold at something above ninety, now selling around fifty. As- suming there was nothing else that went into the prop- erty but the bonds, the fact is that the property must have cost something above ninety, and on the bonds the market value is fifty and they are still paying interest. Commissioner Lucey: You said a while ago that you thought the rate of return should be at least the same rate of return that money was worth when it was put into the property. Did I so understand you? Mr. Stuart: Yes, then I amplified that by saying that should be the lowest guaranteed return for all time, but there would have to be a margin above that in order to attract capital. Commissioner Lucey: That margin above that would 67 not be for purposes of dividend! That would be as a sort of guarantee fund that the company was able to keep itself rehabilitated, in other words, liberal depre- ciation account. Mr. Stuart: I see your point. I was speaking from the point of vieAV of credit, not as a stock ownership, but I was thinking of a dealer in bonds, the kind of a state- ment that a property would have to make in order to attract capital. That would be so far as credits are concerned. Now then, I presume a buyer of stock, a buyer of equity in a property — Commissioner Lucey: What do you mean by credits, bonds! Mr. Stuart : Bonds and notes, promises to pay. Commissioner Lucey : Do you think that the bonds and notes should be satisfied with the same rate of return that money was worth at the time the institutions were built! Mr. Stuart: Supposing we will say there was a dif- ferent series of money went into a property, one at five — Commissioner Lucey: Let us go on the theory the property was built twenty-five years ago, or twenty years ago when money was worth, sa^q five per cent. Mr. Stuart : But it would be impossible for a property built twenty-five years ago to remain stationary. It would have either been out of business or been a borrower many, many times since that time, and the average rate over the last twenty-five years, might have been, let us say, five and a half per cent. That would be from the stand- point of the buyer of the securities. Commissioner Lucey: Do you know of any securities today, either public utilities or industries, credits, as you 68 call them, that you can put on the market at anv such rate? Mr. Stuart: No, sir, you could not today, hut I said that I thought for instance today if a buyer of credit would want to see, assuming that he bought the credit or the bond or note on a seven per cent basis, he would want to see nine or ten per cent there of earnings on the property. He would want some margin above his seven per cent. Commissioner Lucey: Of a public utility that is a monopoly, with the depreciation being taken care of and sufficient money to pay operating expenses assured, de- preciation fund assured, why is there any necessity of a difference of four or five per cent margin that cannot be used for any purpose by the utility? Mr. Stuart: I think that perhaps I did not make myself clear. The rate of interest that I spoke of was from the point of view of the senior money that goes in, the money on the mortgages and bonds and notes, which would have to be on a basis not only to meet current mar- ket rates of interest, but so safeguarded that an investor, a new investor coming into the market buying those se- curities would be satisfied that his investment in the fu- ture would be protected. Commissioner Lucey: All right. Now, at the present time with securities being issued and following more the decisions of the courts, we will say the rate of return ought to be somewhat roughly equal to the value of money in that community, which Commissions have guaranteed, what is the reason today that utilities whose credit seems to be good, whose rate of return has been fair in the past and are not over capitalized, that in the ordi- nary course of events their credit would be worth better 69 than par in the market in normal conditions, what is the reason today that in competition with the industrials, though they sell to net the investor about the same rate of return, why is the industrial preferred to that particu- lar utility? Take the one you were talking about as an illustra- tion, the Chicago Telephone Company comes within that classification. Mr. Stuart : I think there is a general indisposition on the part of the investing public to purchase public utility securities. I think the general investing public would confound all classes of public utilities, and I should say that the present state of mind of the investing public is that they would rather buy almost any sort of invest- ment than public utility securities. It is not at all in- frequent for an investment banker to have the experience with some investor that he may have known and done busi- ness with for years, to tell him or send word to him that he does not want to invest any longer in public utilities. Commissioner Wilkerson: Now, as a result of your experience to what is that to be attributed? Mr. Stuart: I would say that they feel that the pub- lic utilities have not been allowed to earn enough money on their investment to make it absolutely safe, and in cases where relief has been necessary and granted, and the relief has been so slow in coming that the investment has been jeopardized. Commissioner Lucey: I want to ask you, Mr. Stuart, to state flatly or definitely as you can, what is the value of the public utilities credits, so-called, that are in the hands of the public in this country? Mr. Stuart: Do you mean the securities that are out- standing today? 70 Commissioner Lucey : Yes. Mr. Stuart: I prepared a brief list here of some of the better known companies. Commissioner Lucey: I mean in a general way, I do not want you to itemize this company or that. How much is outstanding? Exclude the railroads from that consideration, if you can. Mr. Stuart : The basis of securities of the public util- ities now outstanding? Commissioner Lucey: Not the basis of them, but the amount. Is it a billion, two billion, or three billion or what is outstanding? Mr. Stuart: I cannot answer that. Commissioner Lucey: Have you any idea? Mr. Stuart: No, sir, that would be at the moment for me a wild guess. Commissioner Lucey : There are statistics on that sub- ject? Mr. Stuart: They could be made up, yes, sir. Commissioner Lucey: And who or what institutions as a class have been the investors in this class of se- curities ? Mr. Stuart : The great majority of them undoubtedly are held in my opinion by private investors and estates. Commissioner Lucey: To what extent are the insur- ance companies investors in utility securities, do you, know? Mr. Stuart : At the present time except in rare cases, they are not investors at all in public utility securities. They have been in times past as have been some of the savings banks. 71 Commissioner Lucey: Do you know to what extent those institutions are holders of investments as hereto- fore made? Mr. Stuart : No, sir. A large amount in the aggregate, undoubtedly. Commissioner Shaw: Mr. Stuart, in times past the Commission has been advised that an operating utility in which the net earned was twice the interest charges, was considered by the investing public and bankers as being A-1 securities. Does that rule hold good at this time ? Mr. Stuart: It should; now it would be even more true than it has been in times past. Commissioner Shaw: That being true, would not then the relations between the outstanding bonds and notes and the stock that might represent the value of the property, have some bearing upon the company’s credit? Mr. Stuart: It has a great bearing, and I think that one of the great weaknesses in the public utility financial structure has been that they have not been permitted to earn enough in the past to put out what you call junior securities, that is preferred and common stocks, and sell them for cash. Commissioner Funk: It is frequently stated to the Commission that utilities have difficulty in competing in the market for money with industrial concerns. Have you observed that there is any difference in the kind of obligations that are offered, taking the utilities as one class and industrials as another. I mean does it happen at the present time that the utilities are offering short term notes, whereas the situation might be described that the industrials are offering stock or bonds? 72 Would that make any difference in the difficulties that the utilities are confronted with in securing the money? It has been stated that the utilities cannot sell their stocks and bonds, that the money they raise today has to be by short term notes. Mr. Stuart: Yes. Commisisoner Funk : I thought possibly the situation was that large industrial concerns are not raising their money by short term notes but by selling stocks and per- haps to some extent bonds. Would that be a fair state- ment of the situation? Mr. Stuart: There have been a great many hundred million dollars worth of industrial short term notes, and short term bonds put out. Commissioner Funk: Don’t they quite frequently carry rights as to conversion? Mr. Stuart : Yes, into stock of the company, conversion into stock of the company. Commissioner Funk : So that would make those issues more attractive than utility obligations which are offered? Mr. Stuart: Yes, sir, even if the utilities were offered at a higher rate. Commissioner Funk : That is all. (Witness excused.) Charles Gr. Dawes, a witness herein, having been first duly sworn, testified as follows : Mr. Bangs : Will you qualify yourself by giving your name and experience. Mr. Dawes: Charles C. Dawes. 73 Mr. Bangs : State your present business. Mr. Dawes: I am a banker at present, president of the Central Trust Company of Illinois, and I have been interested in public utilities business in one way or an- other for the last twenty-five years. That is not saying I am qualified to be a witness. The longer I stay in it, the less I think I know about it. Chairman Wilkerson: You are perhaps as well quali- fied as most of us. General. Mr. Dawes : If there is anything that I can be of use to the Commission in, I believe it would be better if I would just go my own way rather than be questioned, because there are some things which occur to me in connection with this situation. Commissioner Wilkerson: You may proceed. Mr. Dawes : And while my interests are not here in Chicago, they are scattered pretty well over the United States, and we have had situations similar to this, and have dealt with quite a number of the Commissions. Now, on listening to Mr. Stuart’s testimony here, I am impressed, and I think the Com^mission is impressed, with the difficulty of formulating set rules they are going to apply usefully to any conditions in a particular locality. That is especially so in reference to what General Lucey spoke of, as to a rate of return on public utilities that is going to attract capital. It seems to me that it is impossible to say and depends upon so many circumstances, but there is one circumstance which affects the flow of capital to any enterprise and that is the de- gree of safety which the investor feels will characterize the investment in that enterprise, and one of the misfor- funes of the public utility business, and it is nobody’s 74 fault, as far as that is concerned, that the public utility business for the benefit of the community has to be in the public mind, and certainly in politics, and one of the reasons why public utilities securities at this time sell on less basis than anything else, and particularly here in the City of Chicago is because the public utility business is known to be more or less of a football in politics; in other words, the public utility business in Chicago is not handled as an ordinary business proposition should be in the interest of the people of the City of Chicago. Now, I am not speaking of the interest of the public utility holders, but the interest of the people of the City of Chicago where they will be best subserved by the best business treatment of these corporations on the part of the public officials, and it has been my experience when there is injected into business sentiment argument de- signed to appeal to the prejudice of people or designed to divert their attention from the business and equitable propositions involved, in other words, under an argu- ment on the square that the distrust of the investor im- mediately follows in the securities. In other words, that the injection of the street railway question out on the stump and as an issue, it may be necessary, I do not say it is not necessary, but it tends to discourage capital for which there is always competition, and if capital can find that kind of business in which it is not subject to that particular kind of attack, why it will seek that business, and the result is that the competition of other business in my judgment is somewhat responsible, the lack of feeling of confidence and safety in the general situation. That is the situation as T find it, in public utility se- curities. In the City of Chicago they say we do not want to buy into a lawsuit, we do not want to buy into a political wrangle, and I have thought therefore in a general way that the Commissions, the public bodies charged with protecting the interests of the people best protect the interests of the people by assuring a condition of stability. You once assure a condition of stability which gives the investor in the security a reasonable feeling that his status will not he disturbed by political attack in the future, that will result in capital becoming cheaper to public utilities and will result in the ability of the Com- mission fairly to lessen the charges upon the public. Now, it is impossible to say that six per cent is suffi- cient return on street railroads, a guarantee of six per cent. If the public is sure that a guarantee under this form of administration, and I think it will be in time, means six per cent, and does not mean attack from this political organization or that political organization, in other words, that it is a straight business proposition, capital will come in to a certain extent into these prop- erties for six per cent because of the margin which is al- ready invested and will be a margin for security, but you will not get any money invested in the public utility business in new transactions or enterprises for six per cent, because a man can get a better form of security where he is perfectly safe on six per cent return, and he will not take the risk in a doubtful enterprise or new en- terprise to secure the same return he can get safely. Now, I think it was characterized in the work of this Commission. I think they had led the investing public to believe that they are fair so far as the protection of its interests are concerned. That is indicated by all that you have done. In other words, so far as I can see this 76 Commission has handled the matter on a business basis, and I for one am getting to have confidence in the judg- ment of the Commission, even though it is necessary for you from time to time to make these adjustments. It is quite difficult to get people to believe they are safe in in- vesting their money if they feel there should he constant adjustment of the rates and charges, but if they have con- fidence underneath that constant readjustment, which I assume there must he, there is the fixed determination to treat capital with justice, not to confiscate and make it a political football, and to run for office, it is entirely pos- sible to get capital into these investments, and I think the Public Utilities Commission of Illinois will take that posi- tion and the people are the ones who always have to pay the expense of mistakes. They have to pay the expense when politics are unjustly and improperly in a business question where their interests are at stake. It all comes back onto the public because these public utilities are going to run some way and the people are the ones who have got to stand the expense of their run- ning. Then it seems to me this large amount of capitaliza- tion which we speak of is but a small item in the return. These roads wear out every so, of ten, and eventually the people have got to pay the cost of service, and if the prop- erty is allowed to run down under a mistaken applica- tion of rate of fare, in the long run the people have to be charged for building them up and they suffer in serv- ice, and as I have looked at it, the Public Service Commis- sion of Illinois is impressed with the fact they will repre- sent the people and their attitude properly as represent- ing the people in connection with this thing, is to have that policy and fix those fares which will enable those roads 77 to operate most cheaply for the benefit of the people and this rate of interest is one of the things that is concerned. I have not gone into this question in detail as to the amount of money needed in Chicago. Some one told me eighty million dollars is needed to put these roads in a condition to run the most economically, and with proper regard for the service of the pulfiic. Commissioner Lucey: That was all of the utilities, everything. Mr. Dawes: Yes. Now, right here, we are trying to get some money for another corporation in which I hap- pen to be interested, a very strong corporation, and it is very difficult to get money in any large sums in competi- tion with New York corporations at short of seven and a half to eight per cent. In answering what Mr. Stuart said, it is impossible for the Commission or anyone else to determine with all these, with all these varying conditions, with high money at this time and low money at this time, just exactly what fixed amount you have got to allow the public investors to come into these things, and I do not think you can formulate any fixed rule. The only thing is to see a situation and approach it fearlessly, knowing that the best interests of the public are subserved by correct treatment irrespective of preju- dice, and that would be in the long run the best way to get money back into the public utilities. It is difficult to coax it now. I have been away for two years and when I got back I found the Chicago City Railway bonds selling at 62, and they were put out at 95 to 98. The first mortgage bonds of the Chicago Railways that 78 were selling a few years ago at 95 to par are selling down to G2 or 63. Now what is the reason for that? It is largely because the people have become imbued with the belief that they are encountering more than the ordi- nary business risk in their investment, in other words, that they are in jeopardy from the attitude of political bodies, and from the fact this thing is in politics. I do not know how you can take it out of politics because human nature is human nature, and as long as we live in a democratic form of government there are going to be those that pose as the true friends of the people, and as long as they get the ear of the people they will be heard, and they should be heard, but when our public bodies are impressed with the belief that ultimately the burdens and mistakes must fall upon the people there lies the hope of the public utilities, and they are in a dis- couraging and distressing situation at the present time in Chicago, especially street railways. Showing the way this matter of the interest rates af- fects how you can get money. If we have got a plant here that is worth one million dollars free and clear and you want to raise one million dollars to improve it and the earnings are such that the investor is reasonably satis- fied that he can get, that he would be paid his interest rate, you can issue your mortgage bonds and sell them at a fair rate, the element of safety comes in there ; but if you have first mortgage bonds that are on a closed mortgage, the conditions may be the same as everything else but the form in which the securities are issued. That firm will go broke, if it made a mistake in the underlying mortgage, so it has to rely on a second mortgage, so it cannot get its money. These railroads in Chicago were all improperly 79 financed. We had a great shakedown, a cutdown, and we thought that the first mortgage bonds that were issued for new money were good bonds, and yet they are selling at 65 to 88 per cent of the value of new money, with everything they had behind it, and the only answer to that is the attack of the politician upon the street car service, the injecting it into campaigns as a political issue — the value of those securities, and with all due re- gard we would either have to have the city take these properties and operate them which will mean immensely greater burden upon the people eventually, or you have got to satisfy them that in some power of government there will be always controlling it the spirit of fairness to the people themselves in connection with the just ap- plication of law to these public utility corporations. I do not make any plea for the corporations themselves or anything of the kind, or the security holders — Heaven knows they are practically wiped out now — hut in the name of that phrase so precious to the politicians, ‘^the people themselves,” in the long run it is due to somebody to be conservative and rocognize that the true interest of the people depends upon somebody standing up against these demagogic and unfounded facts pre- sumably and ostensibly made in their interest. It is a danger in this country today that we do not have the argu- ment on the square as to really what is to the interests of the people in the long run. Commissioner Lucey: There is not any doubt in your mind that the real value is underlying these securities you mentioned, notwithstanding the fact they may be sell- ing in the market at much less! Mr. Dawes : Absolutely. The first mortgage bonds of the Cliicago Railways and Chicago City — 80 Commissioner Liicey: That property is worth the money? Mr. Dawes: Yes, there is no question about that. Commissioner Lucey: Those bonds ought to he sell- ing at par? Mr. Dawes: Those bonds are as good or better than the bonds Avhich have got to be sold to give you this new capital to make it possible for these roads to serve the public. Now, what is that condition? You cannot say they are not safe, because I believe they are safe. I believe there is that in government which would protect in spite of all the attacks of those endeavoring to take away the rights of the investor, that there is still that force in govern- ment realizing that the eventual interest of the people depends upon the public utilities running and running right that will protect those bonds, because it has either to be municipal ownership, or capital has got to come in at reasonable rates into these securities. If they are going to sell additional bonds, I do not know where they are going to secure them, with the pres- ent bonds selling down to 62 or 65, that is pretty near an eight per cent basis, those five per cent bonds. I am not a special pleader, but how in the world you are going to get the money at that rate and charge a fare, I do not know, and your public oi3eration will be a fail- ure. That has been my observation. I was going to say, there is an assertion and I apologize for the assertion, but in my judgment I would say that the public operation will be a failure. How can you with your present rate of fares and how can this Commission, with fairness to the public fix a high 81 enough fare so that you can afford to exist and extend your roads on eight per cent money? Now, the solution of this thing is that in some way you must re-establish public confidence which will result in the bonds selling somewhere near what they are worth, and how you can do it when everybody on the street balks, running up a blind alley, and saying there is water or Wall Street controls it and everything, I am up a stump, as far as my judgment is concerned. It is the most difficult situation that any public utility commis- sion has inside of the Union today, the one you con- front in the City of Chicago, and the situation of the Street Railways. I do not know anything about the Tele- phone Company. The street railways is the most criti- cal, because you are apparently in a position where peo- ple are willing to play politics with the railroad irrespec- tive of the ultimate result and disastrous result to the people. Chairman Wilkerson: I suppose the only thing to do is for the Commission to follow the law, and let the poli- ticians say what they please about the results. Mr. Dawes : I have every confidence that this Com- mission will do that, and not only in accordance with the law, but also the wise thing. Commissioner Funk : Of course. General, the fact that these bonds that have been issued are below par, is not due to any action of this Commission or any similar commission. I take it that the same situation appears in government bonds. Mr. Dawes : Exactly so. Commissioner Funk: Men have invested their money at a certain rate and it has resulted after their invest- 82 nient that the rate of interest has gone higher so the holder of a government bond or five per cent Chicago Railway bond might sell his bond so as to reinvest his money at a higher rate, and the constant selling causes decreases. I do not think we are interested so much in the price of these bonds that have besn issued. Men • made their investment at a certain rate, that is, they made their bed and they can sleep in it, but our problem is to the financing of these utilities today and in the im- mediate future. Mr. Dawes: I only use that as an illnoLration of the fact that these securities are less in my judgment because of the constant political agitation of the street car situa- tion in Chicago. These first mortgage bonds are closely held bonds, that is, it is the small investor who holds it. That is not at all the situation with government bonds at all, be- cause it is not a question of the government being in- volved. It is a question of oversupply pressing on the market at this time. Now, you will find bonds are selling now on five and a half per cent basis in corx)orations, not public utility corporations, but it is because so few are offered, they have good will and people do not like to change their investment, and they see the things in connection with the securities which were considered first class securities at the time they were issued, and there was wide distribu- tion, and it is not due to the fact of the interest rate hav- ing advanced so altogether, but it is because they have lost confidence in the stability of the street car situation here in Chicago. It was pointed out that the Chicago Railway first 5s at 62 yields 131 per cent on the investment if carried 83 through. It is impossible for you to finance these roads a't any such cost as that, and just how this Commission is going to take any action which makes it possible to finance these roads, it does not seem to me they can do it. You cannot put in such a rate of fare here in justice to the public with 13i per cent money. What is the answer to those things? The answer is one which you probably won’t have. If this situation could be treated without the standpoint of petty politics or municipal politics or state politics, so the investors would have the confidence that the gen- eral status quo was going to be held, that would be dif- ferent. Commissioner Shaw : In an order recently issued by the Tennessee Commission involving street car fares in the City of Memphis, the Commission, after making a finding as to the fair value of property, proper allow- ance for operating expenses, depreciation and rate of re- turn, in addition thereto, provided there should be cre- ated what was termed an emergency fund, we will say there should be built up from earnings after all these other conditions have been taken care of, say five hun- dred thousand dollars for illustration, that that should be contributed to that fund up until it arrived at seven hundred thousand dollars, then there should he a reduc- tion. In other words, the fund should be held between five hundred thousand and seven hundred thousand and carried there for emergency pui’poses. Now, I would like to know if in your experience and judgment involving securities whether any such scheme as that would tend to stabilize securities. Mr. Dawes: I do not know as I fully got exactly in 84 my mind what that is. This fund would bo created out of the net earnings? Commissioner Shaw: It would he charged to operat- ing expenses over and above the other charges that I men- tioned. Simply carried there for the purpose of an emer- gency fund, and emergency conditions. Mr. Dawes: I think that whole problem of deprecia- tion is one of the most difficult — Commissioner Shaw : That is not a depreciation fund. Mr. Dawes : It is not a depreciation fund, it is an addition to that? Commissioner Shaw: It is separate and apart from the depreciation fund, purely an emergency fund; they have taken care of all those and simply carry it there as an emergency fund to meet unforeseen emergencies, as I understand the scheme of the order. Mr. Dawes : I am not an expert on those things and I do not suppose my public utility friends would approve that, but it might be a very good scheme in connection with these things to provide a fund, hanging between, you might say, for emergencies to act as a stabilizer, like a governor on a steam engine. It Avould strike me offhand that might be a very good idea in connection with it. In other words, there could be suspended between the public and the investor that fund to which the investor would not have title unless needed for protection. I think that is a good scheme. In other words, then the politicians, you see, could argue all they please on the other side of that fund, inside of this fund in which it would ruin the’ investor and stop the flow of money. I think that is a good scheme. In other words, let them take their hands off the fellow 85 that is going to put in new money and not raise up the bogey man and scare him out. You have to do something of that sort. Commissioner Lucey: Have you in your mind the value of the public utility securities outstanding in the country? Mr. Dawes : No, I have not. I have had so much trou- ble with what I have had out, I have not had time to find out. Mr. Dunbaugh: We can get that information for you by the next hearing. Commissioner Lucey: I think that would be a good thing to get that and show it, and also show what propor- tion they held as a permanent fund, permanent securities. Chairman Wilkerson: I think there was a report of some Board in Washington a few months ago, in which that information is tabulated. Mr. Dawes : I would like to have some of you gentle- men representing the city ask me some questions. Mr. Cleveland : We are going to accept your invitation with the greatest pleasure, and just as soon as the week after next comes there will be nothing give us greater pleasure than to ask you some questions. Mr. Dawes : I really would like to get your ideas. You asked Mr. Stuart some questions. I would like to have you ask me some now. Mr. Cleveland: We will ask you at the proper time. Chairman Wilkerson: You may proceed now if you desire. Mr. Cleveland: No, we will cross-examine with refer- ence to the stump speech just the same as we do the 86 others. We will put it off until the week after next. We will cross-examine him. Mr. Dawes : I suppose I have probably given oppor- tunity for some stump speeches, to inject them if you can^ but let me tell you that if your idea of cross-examining me is your idea of cross-examining somebody who is run- ning for office, that I will not submit to it. I will testify as to the general conditions and to the conditions of rates and fares and condition of the street car companies in the City of Chicago. If you want to examine me as to my private business and all of that sort, is that your proposition? Mr. Cleveland: Our purpose is going to be to ask you with reference to the facts and ask you to kindly tell the truth. Mr. Dawes: Yes, that is the point, but I will not be put on trial for political purposes by you or anybody else. I am not a politician. I am not in that particular kind of business. Mr. Cleveland : We had not any idea you had anything you wanted to conceal. We will try not to bring out any- thing you want to conceal. Mr. Dawes : I have noticed the fair way in which you have directed all arguments on the street car question, and I want to say, as an individual, I do not want to be subjected to such things. Mr. Cleveland : I know you do not want to be sub- jected to cross-examination, but on your invitation you will be. Mr. Dawes : I think I might possibly survive it. (Whereupon a short recess was taken.) 87 Chester Corey, a witness lierein, having been first duly sworn, testified as follows : Mr. Bangs : Will you give your name and position, please? Mr. Corey: Chester Corey, vice-president of the Har- ris Trust & Savings Bank. Mr. Bangs : State your general experience, briefly. Mr. Corey: I have been in the bond business for be- tween twenty-five to thirty years. The question is asked what is the situation with reference to the demand for capital by industrial concerns and public utilities? I would like to call the Commission’s attention to the fact that in the four weeks, beginning March 22, 1920, there were actual issues of notes and bonds of various kinds of public utilities and industrials brought out to the amount of $245,890,000 of major issues. There may have been some minor issues we have no record of. Mr. Cleveland: Is that in the whole country or Chi- cago ? Mr. Corey : In the whole country. I will give you the list. MEMORANDUM OF RECENT SHORT TERM ISSUES. ISSUE — Amount Rate % Maturity Price Yield Week of March 22d — Dayton Power & Light Co $ 2,000,000 Eastern Wisconsin Elec. Co. . . . 1,200,000 Cuba Railroad Company 1,700,000 Canadian Northern Ry. Co.... 12,000,000 Canadian Pacific Railroad 12,000,000 Cleveland Metal Products 4,000,000 Continental Motors Corp 5,000,000 Western Electric Co., Inc 25,000,000 Anglo-American Oil Co 15,000,000 Week of March 29th — Union Elec. Lt. & Fr. Co 2,500,000 United Lt. & Ry. Co 2,000,000 Bell Telephone Co. of Canada.. 5,500,000 Hooker Electro Chemical Co.. 1,000,000 Week of April 5th — Pennsylvania R. R. Co 50,000,000 New York Central R. R 36,225,000 B. F. Goodrich Co 30,000,000 Consolidated Textile Corp 3,000,000 Week of April 12th — Associated Simmons Hdw. Co. . 7,500,000 Air Reduction Co., Inc 2,000,000 Oklahoma Gas & Elec. Co 765,000 Ohio State Telephone Co 1,000,000 Southwestern Bell Tel. Co 25,000,000 Milwaukee El. Ry. & Lt. Co 2,000,000 7 1923 98% $7.50 7 1923 98 7.75 7 1920-30 7.50 51/2 1924 6.90 6 1920-32 99% 6.75- 6.625 7 1930 971/2 7.35 7 1922-25 100 7.00 7 1925 981/2 7.35 71/2 1925 100 7.50 7 1923 97% 8.00 7 1922 98 8.00 7 1925 98 7.50 7 1922 98% 7.75 7 1930 100 7.00 7 1921-35 100 7.00 7 1925 981/4 7.40 7 1923 981/2 7.50 7 1925 98 7.50 7 1930 97 7.45 7 1921 98.72 8.00 7 1920-25 99.76 7.50- 8.00 7 1925 971/2 7.60 7 1923 98% 8.00 89 Commissioner Lucey: What period of time? Mr. Corey: The four weeks beginning March 22, 1920. Commissioner Lucey: Public utilities securities? Mr. Corey: And industrials. The highest priced se- curity brought out, that is the lowest yield was certain particular securities of the Canadian Pacific Railway equipment bonds. They were issued as serial bonds, and they were brought out to yield from six and five- eighths to six and three-quarters per cent. There were a number of issues brought out so that the investor could get an eight per cent yield. While I have not attempted and it would be a very difficult thing to get — I do not mean difficult, but I have not taken the time to get a weighted average, I think it is safe to say that the average yield was not far from seven and a half per cent. Mr. Cleveland: Do you mean yield to the investor? The net yield to the ultimate investor ? Mr. Corey: Yes. Mr. Cleveland: Or does that include commissions? Mr. Corey: No. The net yield to the ultimate in- vestor. I will come in a moment to the cost to the company. That money cost the borrowing corporations from a min- imum of 6.90' to a maximum of lOf and the average, I am very sure is not very far from eight and a half per cent. The Canadian Pacific was the first of the important corporations during this period to bring out their financ- ing and they got the cheapest money. A good many of the securities on this list can be bought today for lower prices than those at which they were brought out. 90 Now, the question comes from the standpoint of the man responsible for the financial management of any cor- poration, either industrial or public utility, can he af- ford to take money for which he must pay we will say an average of eight and a half per cent, in some cases more and in some cases a little less, unless he has a pretty good assurance, unless he can at least get his hat back on that money. I do not think that needs to be enlarged. The question of going out and borrowing money and paying eight and a half per cent, what is the object of taking it and getting it if you cannot at least get your hat back. I mean by that if you borrow money at eight and a half per cent and invest it at eight and a half per cent, you are getting what I call your hat back. You come in the door and go out the door. If you borrow it at eight and a half and get ten per cent why you get something. There is one very fundamental difference, it seems to me, between industrial financing and public utility financing as they are both practiced today, espe- cially as regards the notes or bonds that each of them put up. The theory of industrial financing, as regards bonds, is the payment of the bond, by the extinguishment of the debt. The theory of public utility financing not necessarily because it is the correct theory, but because it is the only possible theory, is when a debt becomes due, it is refunded. Now, any gentleman in this room who has had a banking experience, knows what I mean when I refer to the class of borrower who is a steady boarder ; he may be good in the sense that he owns more than his debts, but he is never able to pay his debts. He has to keep on refunding them. That is your public utility. Your industrial, insofar as it borrows money by the use of bonds or notes,— there may be exceptions, I am 91 dealing with common customs — borrows that money on the understanding that though the operation of serial maturities, or through the operation of sinking funds that money is to be repaid and the debt extinguished. I think that element is one of the reasons why the indus- trial note or bond has been a popular form of invest- ment, especially during the last two years. Mr. Cleveland : Could I ask one question, just to clear up something? Chairman Wilkerson: Sure. Mr. Cleveland: Do the industrials figure that their earnings will take care not only of the interest, but pay the principal? Mr. Corey: Yes. They have no other source of money except this. Of course some industrial issues and some public utilities issues, for that matter, come out as con- vertible issues, where promise to pay is convertible into non-forecloseable obligations, that is, stock. So my state- ment is open to that variation, if you please. Mr. Cleveland: Yes. Mr. Corey: But that is turned from a non-maturing, non-forecloseable, non-enforceable, obligation into a piece of paper which is in effect an interest in the business, a partnership. Mr. Cleveland: The industrials figure their earnings will take up their obligations as they go along? Mr. Corey: Yes, and the public utilities do not be- cause they cannot, or at least that is one reason. The question of any company, industrial or public utility, borrowing money, is not a question of theory. It is a question of hard, cold facts, can they get it, can they get somebody to let them have it, and what will they 92 pay for it, and the elements, as I see it, that enter into the public utilities, the fundamental elements, are not very numerous, nor very complicated. No public utility can in my opinion enjoy credit which has no means of obtaining money for capital expendi- tures for extensions, other than by borrowing. The cor- poration who must, in order to pay for extensions and additions, in order to pay for the development of its busi- ness, the corporation that must borrow all the money that it needs for this purpose, year in and year out is destined for the financial grave yard, absolutely. It may take it some time to get there, it may take some corporations longer than others, but a corporation to permanently en- joy credit, must have other means of getting money, and those other means are preferably two, one is proceeds from the sale of stock and the other is some excess of earnings which are available for capital investment, and unless a public utility corporation can show in earnings a condition sufficient to pay those operating expenses, taxes, to provide for maintenance and full depreciation, to pay its charges, to pay dividends on that part of its investment represented by stock, and leave a comfortable surplus, the credit position of that company is not satis- factory even though because of a small bonded debt, it may be able to go out and borrow some more money. Unless you have a corporation that earns $100 after the payment of the operating expenses and fully provides for maintenance and depreciation, and that corporation pays out eighty dollars of that hundred dollars, as fi^ed charges, as interest on debt that has to be paid off, there is a receivership and trouble, nine times out of ten that company has no credit. If that same eighty dollars is paid out, for the sake of figures, forty dollars in inter- 93 est and forty dollars in dividends, that company has very strongly established credit, so that the problem of the public utility is not simply the problem of what they have to pay to go out and borrow money, it is a problem of keeping the house in order, so as years go by they are able to go out and get money, regardless of the price they have to pay for it, and unless, as the years go by, the pub- lic utilities can put in a certain amount of the money from the sale of stock or from the earnings, or preferably both, the time is going to come when they just cannot get money. I had not been asked to say this by anybody but I think I would like to point out to you, gentlemen, this phase of it. The bonds of the Chicago Telephone Company become due December 1, 1923. That is three and a half years. When that time comes — two years and a half — when that time comes if the Chicago Telephone Company is going to get away with that financing at all on any kind of re- spectable basis, it has got to have credit, and whether it has credit or not, it seems to me is more or less de- pendent upon the treatment that it receives from the state, and therefore the problem of the Chicago Tele- phone Company with all its bonds maturing then, is a little different. It seems to me the company requires a little different treatment than if its bonds ran, we will say to 1940 and the problem was the raising of five mil- lion dollars or ten million dollars or fifteen or twenty mil- lion dollars, whatever it is they need from year to year, because two years and a half — When did you say those bonds came due? Mr. Sunny: December 1, 1923. Mr. Corey: That is three and a half years, yes 94 Mr. Corey: As regards this second question, will liv- ing conditions and the general business situation in Chi- cago be affected by the inability of public utilities to se- cure capital for extensions and betterments? Why unless somebody insists I am not going to try to argue that. I think the answer is perfectly patent. Chairman Wilkerson: You think that question an- swers itself? Mr. Corey: I think so. I think I have taken up all your time I want to. Commissioner Lucey. Is it your understanding, Mr. Corey, or rather, isn’t it the understanding that invest- ment in the shape of bonds or stocks of public utilities are never intended to be repaid, that is, they are not intended to be wiped out? The theory here is to allow them to continue as permanent investments? Mr. Corey : There is no question about that. To just what extent that theory is sound I would say depends principally upon the extent to which the security of the investment is guaranteed. You go out and buy bonds of the X Y Z Company, you take your chance, the com- petition of a thousand and one things that enter into a commercial enterprise. You buy the bonds of a public utility and there are a good many safeguards and pro- tections thrown around them by the state. If the state is going to fall short by looking after these investors on the one point, which is the actual safety of his money — he is dissatisfied and he won’t make that kind of invest- ment. He may not analyze it and say he is dissatisfied with the theory of refunding, or the lack of it, but he does not want to put his money into something where there is any doubt about the prompt payment of his prin- 95 cipal and interest and the credit of the corporation, so that his securities will have a market value based on market conditions and not based on some artificial con- dition. Commissioner Lucey : Why should there be a different rule with the industrial company which is a money mak- ing company, and the utility which is theoretically at least supposed to be making money for its stockholders? Why should there be a different rule? Why should not the debts of the public utility be paid off at some time? Mr. Corey: Why, I think there you are opening up a very broad question. If the community, through fares or rates, whatever you may call them dependent upon the class of company it is, wants to return the investment to the man who has made it, I do not see anything funda- mentally wong, but it is certainly wrong to take it away from him without paying it back to him. Commissioner Lucey: On that so-called American plan, isn’t there the danger of the continual increase of bonds or stocks or credit, as you may term them, so that after a certain number of years, the sum of the whole will certainly exceed the value at that time in the prop- erty, and then on the theory of granting a return, which return will have to be a sum of money sufficient to pay in- terest on the indebtedness and rate of profit on the in- vestment, if all rehabilitations are going to be made out of the issues either of stocks or bonds? Mr. Corey: Well, I don’t know as I can fully get your idea, but there is this practical situation, that if a cor- poration has not enough credit to sell stock it may have, enough credit to sell bonds, and if it has to have money it naturally avails itself of its one method of raising money, and that unquestionably has a tendency to pile up 96 an undue amount of fixed indebtedness. I do not know whether that answers your question. I do not know as I grasped it. Commissioner Shaw: Mr. Corey, the Chicago Tele- phone Company is now before the Commission in a rate proceeding. According to the record they have now to the credit for depreciation about twenty million dollars which is invested in property. Assuming that is true, would that better the credit of the company or should it not improve the credit of the company, the depreciation having been gotten from the consumers'? Mr. Corey: I do not know that I fully grasp just what you mean. The company may be carrying on the liability side of its balance sheet a reserve of what amount, did you sayT Commissioner Shaw: Twenty million dollars. Mr. Corey: All right, twenty million dolars. Commissioner Shaw: Suppose the value today is eighty-six million dollars and the outstanding securities are sixty-six million dollars. Mr. Corey: Yes. Commissioner Shaw: Necessarily then the deprecia- tion reserve would be represented in property if the com- pany is operating. Mr. Corey: Surely. Now, what is your question? Commissioner Shaw: Would that not improve the credit of the company and should it not improve the credit of the company when it comes to selling securities ? Mr. Corey : There is no question about it, but you are not dealing with a theory, you are dealing with hard, cold facts when the company comes to borrow money, it 97 must pay the going' rate, or else it is going to go without the money, because concerns that are on that list, some of the concerns have international credit. The public utility whose financial condition today is precarious is probably in a position where they cannot get money. Whether they will pay eight, nine or ten per cent. Commissioner Shaw: That condition in a measure would meet your argument, that it is not sound financially for the company in the public utility business to have all the property represented in outstanding securities! Mr. Corey: No, that was not my argument, sir. Commissioner Shaw: I misunderstood you. Mr. Corey: No, my argument is to draw a very dis- tinct line between the bond or obligation, the promise to pay and the partnership interest, in other words, stock ; and I can see no reason why any company of any kind should not have out capital obligations to the full amount of investment. In fact, it seems to me, it would be fool- ish if they did not have. I was speaking of the danger of an undue preponder- ance of funded debt in an attempt to draw a sharp line between the two forms. David R. Forgan, a witness herein, having been first duly sworn, testified as follows : ^Mr. Dunbaugh: Will you state your name for the rec- ord, and just briefly your banking experience and then proceed to answer the questions that have been asked of the other witnesses. Mr. Forgan: David R. Forgan, president of the Na- tional City Bank of Chicago. I have been in the bank- 98 ing business 43 years, in other words, ever since I left school at 15. Answering the first question, what is the situation with reference to the demand for capital by industrial concerns and public utilities, I would say that never in my experience have I seen so great a demand for perma- nent financing on the part of industrial companies and public utilities. The demand for credit has extended our credit facilities in this country to the limit. I thought when the Federal Reserve bank was established that we would probably never see the time when the reserves against liabilities set by the law for the federal reserve banks would be reached. We went through the war without getting anywhere near reaching them. Today we have reached them. The Federal Reserve Act places forty per cent reserves against the federal reserve liabilities as the low mark, subject to a further provision that they may go down to thirty-three per cent on an increasing scale of fines or paying a tax, you might call it. The Federal Reserve bank today of Chicago is under the forty per cent mark. At least it was the last time I heard of it, a few days ago. The Federal Reserve Bank of Chicago today has itself borrowed over forty million dollars from other reserve banks in the country that are not feeling the strain so much as we are here in Chicago. In these circumstances what we call money or credit is very, very scarce and very expanded. I would like to see the loans in my own bank for example reduced twenty-five per cent if I knew any way of doing it. I do not know of a bank in Chi- cago that would not say the same, thing. Now, in these circumstances, when you come to ask this further part 99 of this question, what are the present rates for perma- nent financing, well, I suppose you heard other exam- ples here, but you can pick up any offering of any bond house and get such securities as the five year notes of the Western Electric Company at seven and three-eighths per cent. I saw lately an offering of public utility bonds for sev- eral companies, all of which were owned and operated by Stone & Webster of Boston and Chicago and other places-, and Stone & Webster stand very high as operating engi- neers and owners of public utilities, and every one of these companies were offering the securities to pay over eight per cent, from eight to eight and three-quarters, of Stone & Webster ’s owned and operated securities. Of course, this is very unusual and you might say it might be temporary. The trouble is that it is not tem- porary. As far as any one can see now there mil be very little let-up in the situation, I hope for some, but there will be very little in the next two or three months, and then we have the fall crop moving situation on top of it all, which always causes a still further expansion of credit, so you see while today it is very difficult indeed for any in- dustrial or public utility to borrow money at all, if they do borrow money they wifi have to offer to the public, the security at at least seven and a half per cent, and that of course would cost the company the commissions which must be paid to the houses that distribute these securi- ties, which, generally speaking, would be at least one per cent more. So that I do not think that any corporation or public utility no matter how sound might be its condi- tion could borrow in the way of permanent financing, three or four or five years, or more, today, at less than eight and a half per cent. 100 Now, the next part of the question, gentlemen, is rather a difficult one, what rate of return must utility properties earn in order to attract new capital. I presume by capital is meant what the term means, that is, stock capital, not money on bonds. There is a great difference between bonds and stock. The man who buys the bond of a concern becomes its creditor and has in his position its promise to pay the money with in- terest. The man who buys stock in a concern becomes a part- ner in that concern and liable to a certain extent for the debts of the concern. In the case of hanks, for example, he is liable for twice the amount of his holdings, so there is a big difference between buying bonds and stock. I do not know what rate would have to be offered for pub- lic utilities today to induce people to buy stock. I do not think you can induce me to buy at any price, although I might be inclined to buy the bonds. Anybody who is not now a partner in public utilities I think would need a guardian if he wants to become one because — I am saying that with all due respect — ^because public utilities are in this market looking for money, cities are growing, facil- ities must be added to, telephone companies must continu- ally put in telephones for new subscribers, for example, and they are in the market competing with industrial con- cerns that are making thirty and forty per cent on their capital and who can show such earnings for years back, and that is why I say public utilities cannot afford to make such return. It would not be right, it would not be fair to the public that they should be allowed to make the same kind of returns that the ordinary industrial con- cerns are making today; no one would advocate such a thing, but still when they come into the money market 101 for money they are competing with these industrial con- cerns, and consequently, to my mind, they must be al- lowed to make a very large margin over what they under- take to pay in the way of interest. That margin is usu- ally placed by investors at a minimum of twice the interest charges. If a concern does not show earnings for the past num- ber of years, three, four or five years at least, of twice the interest charges, the security will be very hard to sell. That margin, of course, is looked to by the investor as a margin of safety. For example, if an industrial company were offered. today — were to offer today or a 'public utility were to offer today first mortgage bonds secured by all the properties, and the property was worth twice as much as the issue of the bonds, so that you are only issuing bonds to fifty per cent of the value, all that would be so far so good, but if the earnings for the past three, four or five years showed barely the seven and a half per cent, or whatever it was they had to pay, there is no one would buy the securities because they would say there is no margin for safety for me, I want to invest in this other concern here who is offering its securities at an equally good rate which shows a margin in my favor of three or four or possibly five or six times the amount of interest charge. The second question is would living conditions and the general business situation in the City of Chicago be af- fected by the inability of public utilities to secure capital for extensions and betterments? Well, of course, that can practically answer itself. It certainly would affect the living conditions, if there was a break down in public utilities such as the Street Rail- way Company, we all know that that would have a very W2 great effect on the living conditions of the people and on the business situation. In a big city like this most of our help live three or four or five or six or eight or ten miles from our offices or our places of business. I think that question really is self evident. Commissioner Shaw : Mr. Forgan, it was said by many that the carriers are not in as good a condition as they should be and there has been a breakdown. Whatever condition they may be in, taking into consideration the condition they are in, is it affecting the business interest of the country today, the conditions of the railroads as they are now, and speaking generally now? Mr. Forgan: Yes, sir. I think the condition of the railroads today is affecting everything. It has its influ- ence on financial conditions which I have described at first. The lack of prompt transportation causes what we bankers call frozen credit. A man may for example ship a carload of something. Ordinarily it ought to get to its destination perhaps in three or four or five days. He draws a draft at sight with a bill of lading for the goods and the bank cashes that draft and sends it with instruc- tions to hold the draft until arrival of the goods. If the goods got there in three or four or five days we would have returns from that draft in another day. If, how- ever, on account of the transportation, breakdown in fa- cilities, that car is held up somewhere, lying around some- where, and it has not reached the payee of the draft for three weeks, then our money would be — while he had ex- pected it to be tied up for three or four or five days, it is tied up for three weeks, and that is the situatiou today. 103 In Chicago we do a large business with what we call country banks. That means other banks in every size of town, big or little, all over the west, northwest and south- west and the commonest thing today is to receive a letter from a bank in one of these towns to the effect on account of the lack of cars or strike or the lack of transportation, for some reason or other shippers cannot ship live stock or grain or something else they want to ship and there- fore they need an accommodation to tide them over so they borrow from the city banks and we borrow from the Federal Eeserve Bank. That is what is causing the acuteness of the strain today, but of course general con- ditions have existed for a long time very largely on ac- count of the fact that the Government had to borrow about twenty billions of dollars of money and today the Federal Reserve Bank is carrying a whole lot of that liberty loan yet. It has not been absorbed or paid up for by the investor. Chairman Wilkerson: Speaking of the railroad situ- ation, it is your opinion, I assume, looking backward, the country would have been vastly better off if the read- justment of rates would have come in time to have pre- vented the breakdown which we are now suffering. Mr. Forgan: Yes. Chairman Wilkerson : That is looking backwards and having the benefit of the experience. Mr. Forgan: Yes, sir. Chairman Wilkerson: And also assume it is your opinion we should profit from that lesson in dealing with the present situation. Mr. Forgan : It is my hope. I am beginning to doubt whether we ever profit by anything in this country, but I still hope. 104 I would like to say a word, if you will allow me, sir, in answer to the question you put to my previous essay here. You talked about depreciation reserve on the liability side. Now, in the case of the Telephone Company, as I understand it, that depreciation reserve is put there in ac- cordance with orders of the Interstate Commerce Com- mission and does not mean that there is a fund invested in property but simply means that the property on the other side of the balance sheet is worth that much less than what it shows. For example, if you have a prop- erty at fifty millions and the depreciation of it is five per cent a year, you may write down that depreciation by writing your fifty millions down to forty-seven mil- lion five hundred thousand. Then your property is forty - seven million, five hundred thousand. Or you may put in the other side of your statement depreciation reserve of two million five hundred thousand dollars. You have not got two million five hundred thousand more property value. You have simply a reserve for depreciation. Your property on this side is worth that amount less. You could have depreciated it by writing it down, but instead you put a credit on the other side for it. That is, as I understand, the depreciation reserve of a tele- phone company. Mr. Ringer: Is that testimony or merely an illustra- tion of what may occur in the bookkeeping? It is not to be regarded in any way as the real fact in reference to the Telephone Company? Commissioner Lucey: You can take that up on cross- examination. Chairman Wilkerson : That is all. 105 Charles H. Sohweppe, a witness herein, having been first duly sworn, testified as follows : Mr. Bangs : I suggest you give your present position and experience before you start in to answer the ques- tion. Mr. Schweppe: My name is Charles H. Schweppe. I am a partner of Lee Higginson & Company, investment bankers. I have been in this business between 15 and 20 years. In answer to the first question what is the situation with reference to the demand for capital by industrial concerns and public utility concerns. I think since Feb- ruary 1 — Mr. Corey said since March 22 — , about roundly two hundred and fifty million dollars worth of securities has been brought out, mainly bonds and notes. I think since February 1 probably four hundred and fifty mil- lion worth of bonds and notes of industrial and public utility companies, and possibly one or two foreign issues have been brought out. I added up a list hurriedly be- fore I left my office. Most of those issues have been sold by the original houses of issue, but I think a great many of them are yet to reach the ultimate consumer. The rates of interest have been very high. Just re- cently a concern which I have regarded for ten years as one of the prime public utility concerns in the country, the Pacific Gas & Electric Company of San Francisco, has sold five year notes, and they are almost on a seven and three-quarter per cent basis, to the ultimate investor, and without knowing exactly I imagine the money must have cost between nine and nine and a quarter per cent. 1 regard the Pacific Gas & Electric Company as a very 106 good illustration of what it costs very good public utility companies today to get new capital interested in their business. What are the present interest rates for permanent financing and what rate of return must public utility properties earn in order to attract new capital. I have here a list of the local public utility companies. The Surface Lines net from 12.10 to 12.95, the out- standing bonds, first mortgage bonds. The Commonwealth Edison Company, first mortgage bonds, which I consider one of the premier public utility securities of the country is on a 6.8 per cent basis. The Northwestern Elevated is on a 8.8 basis. The Peoples Gas Light & Coke Company long term bonds are on a 8.9 basis. The Public Service Company of Northern Illinois is on a 7.45 basis. The Chicago Telephone Company, in the last report that I have seen earned a little over four times all its interest charges on its funded debt. The Commonwealth Edison Company earned about 3^ times its interest charges. The Peoples Gas Light & Coke Company just got across the line, 1.03 times, just barely earned its inter- est charges. The Northwestern Elevated almost 11 times the in- terest charges. The Chicago Eailways Company also just got across the line, 1.04 times. The Chicago City Railway Company almost If times. The ultimate investor I think wants public utility se- 107 nior securities, the company issuing first mortgage or first and refunding bonds to earn about twice the inter- est charges. I think when the bond men consider a new issue of the company where the earnings are less than one and three-quarters times interest charges they shake their heads in a negative way. We do not want them. I think the Peoples Gas Light & Coke Company and possibly the Northwestern Elevated Company and I am sure the Chicago Railways Company and Chicago City Railways Company, on account of their showing as to net earnings in relation to interest charges on the funded debt, would have a good deal of difficulty today financing in Chicago on any basis where investment bankers are situated. ‘ Chairman Wilkerson : Would it be much easier for the Chicago Telephone Company! Mr. Schweppe: Yes, sir. I think so. Recently the Chicago Telephone Company asked a group of banks and one or two bond houses to figure on ten million dollars of notes falling due December 1, 1923, as you may know, and they did not accept the proposition. When it was mentioned to me I was sorry that we were asked to do it just at the time it was, about five weeks ago, because we have been connected with the Chicago Telephone Company financing since 1908 when they first made this first mortgage bond issue, and at that time there was a sort of joy to our business here to have an opportunity when we were awarded that first issue of five million dollars with the Merchants Loan & Trust Company and First Trust & Savings Bank. We regarded it as very prime business. Had we been awarded these ten million dollars, and they would have been a high rate of inter- est, seven per cent bonds, we would have had a great deal 108 of difficulty to have sold them, I think, just because I feel public utility issues are not popular today. Chairman Wilkerson: The difference you mean be- tween the utilities such as the Telephone Company with its high earning and the other one, that it is just getting by on bond interest is that the Telephone Company would have no difficuly in getting the money. Mr. Schweppe : That is right. Chairman Wilkerson: And the other company could not get the money? Mr. Schweppe : I think the Chicago Telephone Com- pany could have got the money but the cost of the money was pretty high. From the point of view of reaching the ultimate investor it would have been difficult in the locality from Buffalo east to New England, where origi- nally a good many of the Telephone Company bonds were placed; it is my opinion it would have been very difficult for my firm to have done a great deal of business in there, so we would have to depend largely on the in- vesting public in the central west. As to question No. 2, what rate of return must public utility properties earn in order to attract new capital. I tried to embrace that in what I said. No. 2, I have not anything to add to what my predecessors have said. I think it more or less answers itself. It is my opinion living conditions and the general busi- ness situation in our city would be very materially af- fected if the public utility companies do not keep abreast of the time. Commissioner Shaw: As I understand you, Mr. Schweppe, as a general proposition the yard stick that the investment banker applies when application is made 109 for the purpose of the sale of securities, is that the net exceeds the interest charges. Mr. Schweppe: May I ask if you mean the invest- ment banker or investor. Commissioner Shaw : The investor. Mr. Schweppe : Yes. Commissioner Shaw: That is, in other words, he is not materially concerned in what the valuation might be or what the rate of return might be, but what actually happened. Mr. Schweppe : Oh, yes, it is my opinion that he ex- pects a reasonable margin of safety on valuations. He has not got so used to seeking a sinking fund in a public utility bond, and I think that is one reason why some of our great institutions and large trusteeships have not bought public utility bonds of late. I do not know the ratio, but in looking over the investments of five of the larger insurance companies I recall that their public util- ity purchases have not been large in the last four or five years, and I think one of the reasons why they have bought is very few public utility issues have had a sink- ing fund. It is a continuous promise to pay. They ex- pect those issues will be refunded, and while the invest- ment banker that deals with that company may furnish the money, yet that company is known to be in the market almost continually, and is with the Commercial Bank, if a concern keeps on loaning one hundred thousand dol- lars a year, year in and year out, that bank is going to try to get the money, if its management don ’t get it, their board of directors if it is on the job, will say to the president of the bank, or the cashier, better get the loan reduced, or if possible paid off in time, and I assume most boards of directors of Chicago banks would be glad to have that 110 fellow go somewhere else to do business. They do not want his loan year in and year out because it is not good commercial business and it is not good banking. Commissioner Lucey: In your opinion there is in the minds of the investing public a prejudice against public utilities ? Mr. Schweppe : Yes, sir. Commissioner Lucey : That applies to all utilities, the good as well as bad? Mr. Schweppe: Yes, sir. Commissioner Lucey : I mean as to their financial con- ditions when I use that term? Mr. Schweppe : Yes, sir. I think a good public utility bond can be rigged with the proper revisions, current rate of interest, and while a bond trust deed running five or ten years can be placed today, and I think that one job that good investment houses have before them is it pos- sible to bring back these customers who used to be in the bonds five or ten years ago. Commissioner Lucey: There is no question but what they can be placed, because many of them are in the mar- ket, notably the one you referred to a while ago to net 7.70, the Pacific Gas & Electric Company. Mr. Schweppe: Yes, I was in the conference in con- nection with that concern, and a large number of those bonds will probably be placed within the State of Cali- fornia, because they are legal for California Savings Banks. The house which is first attached to that thought they could place one-half or three-quarters of the bonds within the State of California, showing the people of that state thought well of it. Commissioner Lucey : This utility and many others in Ill this list here are being financed in competition with the industrials? Mr. Schweppe: Yes, sir. Commissioner Lucey: Now, evidently that prejudice that you speak of does not extend to these institutions. Mr. Schweppe : No, but on the other hand I think the large investment banker prefers to handle a good indus- trial issue at the present time compared with the good public utility issue. Commissioner Lucey: Is your answer based on local conditions, or is it based on knowledge of conditions in general? Mr. Schweppe : I mean from the Atlantic to the Pa- cific, because I have just recently been across from New York to San Francisco, and talked with many men in many places. Commissioner Lucey: It is not localized? Mr. Schweppe : No, I meant it generally speaking. Commissioner Lucey: That is all. Mr. Bangs: These are all the witnesses who were able to attend today. It is possible when the hearing is adjourned there will be some other witnesses we want to testify. Mr. Reynolds is out of town. Chairman Wilkerson : Any other witnesses who want to testify this afternoon? It was indicated by some of the counsel this morning they might desire to cross-examine some of the witnesses. If you indicate that to Mr. Bangs we will arrange to have the witnesses present at the next hearing, and after the testimony of the witnesses will be taken we will be pleased to have such suggestions and observations as in- 112 terested parties may desire to submit to the Commission on the subject. Did I understand you to say, Mr. Richberg, you had some testimony to offer or that you merely desired to be heard at the conclusion of the evidence? Mr. Richberg: No, I did not make the suggestion I had any testimony to offer. I merely said I had a state- ment that I desired to make in connection with that. Chairman Wilkerson : Do you prefer to wait until the testimony of the witnesses is completed? Mr. Richberg: I have no particular desire, as far as I am concerned, to wait for the cross-examination. I have no particular cross-examination in mind at the present time of these witnesses. Chairman Wilkerson: Let the record show that this hearing is adjourned until Wednesday the 12th of May in Chicago at 10 o’clock A. M. At that time you may offer further evidence if you desire, or if any other parties desire to present evidence, an opportunity will be afforded and the cross-examina- tion of such witnesses as you may indicate to counsel. Mr. Cleveland: We want to cross-examine them all. Chairman Wilkerson : All right. And then such state- ments as you desire to make, Mr. Richberg, and other gentlemen. Whereupon an adjournment was taken until Wednes- day, May 12, 1920, at 10 o’clock A. M. IIH Chicago, Illinois, May 12, 1920, 10 a. m Parties met pursuant to adjournment. Present: Same a*s before. (Colloquy omitted.) Chairman Wilkerson: This is a continuation of the hearing of the 29th of April, and all understandings that we had relative to that hearing may be taken as applying to the continuation. Proceed. James B. Fokgan, having been duly sworn, was examined in chief by Mr. Dunbaugh, and testilied as follows : Q. Mr. Forgan, will you state for the record your name and official position with the bank that you are con- nected with, and then proceed to answer the question that was put to the bankers at the last hearing, and perhaps, for the record, I might read that question, Mr. Commis- sioner. Chairman Wilkerson: You may read it. Mr. Dunbaugh: First. What is the situation with reference to the demand for capital by industTial con- cerns and public utilities? What are the present interest rates for permanent financing and what rate of return must utility properties earn to attract new capital? Second. Would living conditions and the general busi- ness situation in Chicago be affected by the inability of the public utilities to secure capital for extensions and betterments? 114 A. My name is James B. Forgan. I am at present chairman of the hoard of directors of the First National Bank and First Trnst & Savings Bank, Chicago. My answer to these questions will he as follows : The demand for capital by both industrial concerns and public utilities has been and still is very heavy. The principal reason for this is that during the war capital was not available for the enlargement of utility plants or even for their proper maintenance and most of the utility companies are behind in the work necessary to be done to extend and equip their plants to meet the increased de- mands on them by the public for service. The same con- dition prevails, although not so generally, with industrial concerns. As it takes fully twice as much money or credit now to do the same volume of business or to make the same extensions or improvements as it did before the war, it is just about twice as difficult to secure money or credit now as it was then. The situation for the public utilities, even the best of them, is a desperate one and both in the interest of their security holders and in the interest of the general public, they need all the help you can give them. In regard to the present interest rates for permanent financing of such concerns as are in a position to borrow at all, the rate required by the investor is around per cent., which means about 9 per cent, to the borrower. I think utility companies would require a guaranteed earning power of at least the current rates, being paid by industrial companies on preferred stocks, that is from 7 to per cent., in order to attract new capital. Where they can get such a guaranty, I donT know, unless you, the Public Utilities Commission, can arrange it for them by fixing their rates for service sufficiently high to ac 115 complish it. It is certain that without some such foun- dation to work on none of the Chicago Street Railways, whose first mortgage bonds are now selling at ridicu- lously low prices, could float an issue of bonds at any rate of interest ; not to mention an issue of stock. Then in answer to the second question : It is self-evident and goes without saying that living conditions and the general business situation of Chicago would be seriously affected by the inability of the public utilities to secure capital for extensions and betterments and thus be able to keep pace with the growth of the city and the increase of its business. The city has now grown far beyond the facilities afforded by its transportation utilities, while the Telephone Company is away behind in its orders for telephones, and the other companies are all short of the facilities they should afford their patrons and would be glad to afford, as soon as they see an oppor- tunity of financing the necessary extensions, equipments and improvements. That is all I have. Mr. Cleveland: We desire to cross-examine Mr. For- gan. Chairman Wilkerson : The same understanding. Mr. Cleveland : I am willing to do it now if it is de- sired, or later. Chairman Wilkerson: Do you prefer to have Mr. Cleveland ask you questions now? A. I have no objection, and I have to be in Washing- ton next week at a bankers’ meeting, and I will be away all next week. Chairman Wilkerson: If there is no objection, you may proceed and ask him what questions you wish. 116 Cross-Examination by Mr. Cleveland. Q. Mr. Forgan, you have been in the banking busi- ness for a great many years, have you not? A. Yes sir, half a century. Q. In the matter of making loans what are the matters of prime necessity? A. Well the first would be that the borrower should have sufficient assets over and above his liabilities to warrant your lending it to him, and his business was in such shape to show that the earning ca- pacity of the business was satisfactory and able to pay the interest on the loan, and the loan at maturity. Q. Is it or not a fact that the safety of the invest- ment itself is the matter of prime necessity? A. The safety of the investment itself would be the first con- sideration, yes. Q. It would make no difference how much interest was being paid unless there is security for the principal? A. Not unless you get hold of one of those fellows that says there is a sucker born every hour, and says there is a possibility of selling everything you print. Q. You have known in times past here of a certain gentleman who conducted one bank anyhow, who said if he could get three or four installments of interest, the principal became a matter of secondary consideration, but that would not be sound investment? A. No. I have heard of bankers who said they did not give a damn for the principal if they could collect interest. Q. That would be absolutely unsound, wouldn’t it? A. That would be unsound, yes. Q. Is it or not true that from the standpoint of an investment for capital or of making a loan, that the title 117 to the security is a matter also of • prime importance ? A. Yes. In the matter of loans, such as we are talking about here, of course, attorneys who are generally spe- cialists in that line of business are employed to investi- gate all of the legal requirements. Q. Now, if you would take a case where the cost of the property, the absolute cost of the property is ascer- tainable, and it appears that that property is already mortgaged for substantially all, or more than the cost of the property, there would not be any hope of getting any further loans on that property, would there, unless there was new capital put in ? A. I would think not. Q. And there would be no chance of inducing new cap- ital to be invested under those conditions, would there! A. Well, of course, unless you could show that condi- tions were going to be established under which the new capital put in would get some such guaranty as I have suggested in my remarks, or get some guaranty that the interest would be paid or the dividends would be paid. Q. The mere guaranty of interest would not help any, would it, unless the principal was secured! A. Well, the principal would have to be secured too, yes. Q. Now you spoke of the telephone company and the elevated and the surface lines. As I understood you to say the city has outgrown their present equipment, that is true, isn’t it! A. Oh, yes. Q. And they liave not adequate equipment to give the public the service they are entitled to, that is right, isn’t it! A. They have to have equipments and extensions. Q. I mean as it stands now, the equipment is inade- quate? A. Yes. Q. And they need and must have new capital to make 118 the necessary extensions'? A. That is what I believe, yes. Q. And to get the equipment that is necessary to re- move the inadequacy, that is true, isn’t it, Mr. Porgan? A. Yes, that is true. Q. And in order to solve the problem by means of rate making, it would be necessary that the rates should be sufficiently high to provide that new capital, wouldn’t it, or induce its investment? A. Why, yes, they would have to have the rates sufficient to induce the capital to come in. Q. Yes. Now, what in your opinion would it be neces- sary to do in the way of rates in order to induce the capital to come in? A. In connection with which com- pany are you talking about? Q. Well, the surface lines, for instance? A. Well, I don’t know; I would not undertake to pass upon that. I think the commission have been on that for months, and I could not settle that in a minute. Q. The money market conditions are not peculiar to Chicago, are they? A. No, they have been much the same all over the country. Q. All over the world, isn’t it? A. Oh, yes. It is worse on the other side, across the Atlantic. Q. It is a fact, isn’t it, that even government bonds drawing four and one-quarter per cent are selling for eighty-five or less? A. Somewhere about that. Q. How do you account for that, Mr. Forgan? A. Well, the government did not put them out — there is a pretty long story on that if you get me on that subject. The government did not pay enough for them at the start. The government appealed to patriotism in order to sell 119 the bonds, and response came from the patriotic stand- point, and the people that bought them bought them with- out properly anticipating what was going to happen in consequence of the war to the money market, and in the enthusiasm at the time they took the bonds and took them too low. That is all there is to that. Q. Now, isn’t it a fact that we are at this time in a period of very gross inflation in everything — in your . opinion? A. No, I would not say there was gross infla- tion. There is undue extension of credit, and that of course is produced by conditions connected with the war. There is a large expansion of credit, I would say. Q. Is it or not true that the banks of Chicago — and for that matter, all over the country — have adopted a pol- icy of curtailing credit! A. They have adopted a policy of discriminating as to the kind of credit they will give with the hopes they will be able to take care of the essen- tial credit by refusing to take care of what might be called the non-essential credit. Q. You spoke of the rate of interest being 7^ per cent, to the borrower, and as 9 per cent. — it costs the borrower 9 per cent, and the lender gets 7-J per cent., is that right! A. What I said about that was that certain companies as are being considered here, such of them as were in po^ sition to borrow at all — Q. Yes. A. — ^would have to give the borrower about per cent, which would mean they would have to pay about 9. Q. Just how do you get around the laws of the state against charging usury on that basis ! A. If my lawyer is right, you are not posted. I understand that we can charge corporations anything we have a mind to. There 120 is no usury law in connection with corporations. That only applies to individuals. Q. That is the theory that you are going on? A. I suppose it is. Q. At any rate, you are going on the theory in mak- ing your statement that the law limiting the rate of inter- est by contract to 7 per cent, does not apply to corpora- tions? A. Does not apply to corporations or to securi- ties of this kind which are bought and not in the way of just a mere loan being made. I believe there is something in that, but I am not a lawyer, and I would refer that to my attorney. Q. Do you directly or indirectly hold or own any of the securities of the surface lines or telephone company or elevated? A. Yes, we hold some, and have handled the elevated ; we have handled the Chicago City Railway and the telephone company, these three, and the others we have not handled. Q. In your opinion, at the present time, under condi- tions as they stand now, is it possible for the Chicago Surface Lines to borrow any money? A. Not in their present condition, I think. Q. Or the elevated? A. No. Q. The telephone company can borrow money if it pays the rate of interest? A. The telephone company recently made arrangements to which we were parties to lend them some money. Q. How much, Mr. Forgan? A. I forget. I think it was ten millions or something, I am not sure, though; I think it was ten millions. I know we were parties to a hona fide offer I made them. Q. What was that hona fide offer? A. I cannot give 121 you the details of it now. It cost the company somewhere about 9 per cent., or it would have if they would have taken it. At the time we were disappointed we did not get it; now we are glad we did not. Q. Mr. Forgan, when you spoke of these companies needing new capital, do you mean new capital in the way of further loans that have to be repaid or the investment of new money by owners! A. Well, I do not see very well how they are going to get owners to come in in the surface lines, but of course if they were going to be prop- erly financed what they need would be money put in by the owners. Q. They would need new capital! A. They would need new capital. That is really their crying need, but take the Chicago Railways Company, since they got their ordinance they have got all their money by borrowing, as far as I remember; they have never tried to issue new capital, and I do not think they are in position now to do it. Q. Taking a concern — You are familiar, more or less, with the ordinances of 1907, are you not! A. Oh, yes. Not quite fresh, up to date. Q. You know how they build up the purchase price there, do you not, Mr. Forgan! A. I know there is a purchase price which the city would have to pay if they took over the road, yes. Q. If it would appear that the properties were mort- gaged for all or substantially the full amount of that pur- chase price, would that in your judgment be an element to be taken into consideration in determining whether the companies could borrow new money or get new invest- ment! A. That is, whether the purchase price was a 122 fixed value, something they would finally get for the prop- erties. Q. Yes. A. Why, certainly. Q. The point is whether, if the companies are mort- gaged for substantially all of that purchase price, this agreed purchase price, representing the cost of the prop- erty, would that be an element that would be important to take into consideration in passing on their ability to get new money by loan or investment? A. Oh, yes, quite essential. Q. And would the fact that the rights of the company in the streets will expire on February 1, 1927, — would that be a matter that would be important to consider in the matter of making a loan to the company or procuring capital to go into the company? A. Well, these are the matters that have been considered always when we have made loans to them in the past, and we also believed there was a sufficient margin there to warrant the loans up to the present time. Q. Yes. Now, would it be a material consideration that their rights in the street expire on February 1, 1927 ? Chairman Wilkerson: If they do. A. If they do. Mr. Cleveland: If they do, yes. A. Yes, that would have to be a matter that would have to be considered, yes. Q. You made some general statement in regard to the utility. Do you discriminate in any way between those utilities who have got quite an equity in their assets and those which have none? A. Why, certainly. Q. Now, is the condition which is now prevailing due partially to a shortage of labor and high price of labor? 123 A. Oh, that is one element, of course ; that makes — ^ac- counts for the expansion of credit that I said exists. It requires now about twice as much money to do the same volume of business that it did when labor was half the price and material was half the price. It requires twice as much credit, and that is the reason we have so much credit. Q. Now, do you have an idea about whether this con- dition that is existing will continue, or whether there will be a change, and if so, when? A. Well, I am like every- body else. I am living in hopes that it will change, but ‘I do not think it will change very soon. Q. About when do you think there will be a change? A. Oh, I could not say; I could not say. Mr. Cleveland: I think that is all. Chairman Wilkerson: Any further examination? Commissioner Lucey: As I understood your state- ment, with your bank, the utility or the company or the individual, either gets credit or he does not. The rate of interest he is willing to pay does not cut much figure on that proposition. A. Not in regard to whether he gets it or not. It does whether he gets it from us or not. We want our own price. We enter into competition in the matter of terms. Commissioner Lucey : What I am trying to get in the record here is the statement from you that if the com- pany was not entitled to credit the rate of interest which it might offer would not cut much figure? A. It would not cut any figure with us at all. Q. With the Chicago Telephone Company which has been discussed here there is no question of the values of the securities of the telephone company in your mind? A. Not up to the present time there is not. 124 Commissioner Lucey : No. A. We have always been in a position to handle their securities when they come out up to the present time, and have always taken an interest in them and always bid on them. Of course, that is a very good illustration as to the ditference between them and other companies. Take the Chicago Railway Company, whose bonds we have largely handled, a case like that, there a very strong prejudice exists, and it reflects on utility companies, it reflects on the telephone company and all the rest of the utility com- panies just in this way: Say a servant girl comes in to our counter, and did come in, and bought a thousand dol- lar bond of the Chicago City Railway Company. We told her it was a first mortgage bond, the property was good, a good margin there when we sold it, and we charged her pretty nearly par for it, around par. She carries it along for a few years, and she comes in to us, and she says she has to get two or three hundred dollars of that money, of that thousand dollars she has got there, and she produces her bond and she wants to sell it back to us. We are put in the position of having to tell her we can only give her 65 cents to the dollar for her money, and she is very much disappointed and it is pretty hard to explain to her what the trouble is. Now, the men at our counter are going to defend themselves the best they can, they are going to put the whole of the weight and the burden of the blame right on the street railroad company. They are not going to take any more of the blame than they can help, so they pump that girl full of information about the condition that exists in connection with the street railroads and the high cost of everything has in- creased their expenses, and they are not getting income enough. She goes away with a sort of vague idea of what they try to explain to her; but she tells everybody she 125 comes in contact with she is through, she is not going to huy any more bonds at the First Trust & Savings Bank; that she took it back and all she can get is 65 cents on the dollar, and that spreads like wildfire, and it hurts us and the community and everybody. Another man would come in, perhaps a business man, and bought ten, fifteen or twenty thousand dollars, the same way, and he comes back, he watches the quotations and knows where his property is going, and he under- stands the situation, but he makes up his mind at that time he is not going to invest in public utilities, and he goes off and the thing spreads. That is the way the thing goes until the dealer in utility bonds has the greatest difficulty in the world, unless he can show a very strong situation in selling a utility bond at all. Now, I am not giving you imaginary cases. That happened to one of my own servant girls, that I am talking about now; but this is only one of the thou- sands that I encounter all tlie time, and the thing is going on perpetually across the counter, we defending our- selves as having sold a good bond when we sold it, but conditions are now so it is only worth 65 cents on the dollar. Commissioner Lucey: That is true, even though the value of the security is unquestioned, in your mind, like the Chicago Telephone Company! A. Anybody that has got stung once won’t come back and take a bond from you. Commissioner Lucey : The rate of interest which you and your associates ask the company, telephone com- pany, and which it thought it could not afford to pay or 126 did not wish to pay — anyway it did not pay — was not prompted, I imagine, by any idea that there might have been in your minds or in the minds of your associates as to the lack of security back of what was tendered? A. No. Commissioner Lucey: But was on account of the in- dustrial rate which has raised all rates of interest and which you felt they would have to pay in order to compete with the industrial? A. Yes. In regard to that matter, I know the matter came be- fore me once or twice, and Mr. Trailer, who was negotiat- ing, said, am going over to see Mr. Sunny, I think we can land that. ’ ’ ‘ ‘ He is beating us down. ’ ’ The worst of the people is our own directors, they will never pay as much as anybody else. He was going after it to get all he could, and I know he made some concessions. Finally, when Mr. Sunny got us where he could not get us any lower he declined altogether. Commissioner Lucey: He evidently got it down as much as he wanted to? A. No; he did not as much as he wanted to. I men- tion that just to show the way things go. Commissioner Lucey: Now, referring to the securi- ties of the underlying companies, of what you and we call the surface lines, are you familiar with the valuation of that plant, have you in your mind a valuation of those surface lines? A. I have nothing in my mind at all about anything outside of the Chicago City Railway, with which I have been more or less connected during all my banking career in Chicago. 127 Q. Roughly, for the illustration, the purchase price was approximately $55,000,000, and they have issued since that time in the neighborhood of $100,000,000, a lit- tle more than that, I guess, Mr. Blair, one hundred and ten? Mr. Blair : About $158,000,000. Mr. Cleveland: That includes the fifty-five. Commissioner Lucey: The fifty-five million dollar bonds and bonds that have been issued now amount to about $158,000,000. At the time your bank and your associates took those bonds which were issued since the ordinance of 1907, and which since the creation of this commission have come, of course, before this commission, and all the time subse- quent to 1907 all those bonds were issued for betterment to the plants and not to pay operating expenses, and were issued as a result of orders made by the Board of Super- vising Engineers created .under these ordinances, and the expenditures which are covered by those bonds were virtually approved by the city through its Board of Su- pervising Engineers, — I will ask you if at the time those bonds were taken by you you had any question in your mind as to the value of the underlying securities? A. We had not any, or we would not have undertaken it. Commissioner Lucey: And as a matter of fact, look-^ ing at it now, as to the value, do you have in your mind, as a business man of Chicago and a man who is in the habit of passing on the value of securities, — if there is any question in your mind that those bonds now, as a matter of fact should be worth the par value thereof, instead of the value between sixty and sixty-five at which they are selling? 128 A. In my remarks I referred to the value as being ridiculously low, and when I said ridiculously, I meant it. I think the value should he there. Of course, all the re- cent improvements and whatever they have been able to do on these properties has been done at the increased cost of labor and the increased cost of material, and everything, so that all of the improvements they have been able to put on it must have gone in under present conditions, and the property should therefore be valued at what it would be reproduced for. Q. Well, what I have in mind is that the value of these bonds which you and others took represented additions and betterments and extensions of the property? A. Of the property, yes, sir. Q. And in the banking sense, that is value which goes back into the property? A. Yes. Q. And makes the property worth that much more? A. Yes. Q. As a matter of fact, notwithstanding what the sur- face lines securities are being offered in the market today for, — or any other utility that you have in mind that is a good utility, there is no question in your mind as a banker that the bonds — that the absolute value is in these securities notwithstanding the prejudice on the part of the public, that the dollars or value are there, as a matter of fact? A. Yes, if they were allowed to use them on fair returns. Q. Is it your thought that the situation as to the sur- face lines, as a result of the conditions that have existed here, stated candidly, where it has been obliged to come to the commission for authority to increase its rates to meet the present high cost of everything, and the fact that the City of Chicago is opposed to that, and has been bontest- 129 ing- it, and making diverse and various claims relative to it, has that in any sense affected the Chicago Surface Lines to a greater extent than for instance it has affected other utilities, which have not been placed in that posi- tion? A. I think there is no doubt about that. Decid- edly it has had that effect. Q. These securities which are being offered on the market and which are now at a low rate, — and I only use the surface lines as an indication because they are at an exceptionally low rate, in common with nearly all other utilities, — have you any opinion as to what makes the utility bonds and utility securities under government regulation, whether it is national or state, apparently less desirable and less taken by the public than the industrial bonds and securities which are not under public regula- tion and are subject only to the regulation of those who control the institution? A. Well, yes, there is a doubt in the public mind, I think, as to whether such utility compa- nies as you refer to, will get such treatment as will enable them to get revenue enough to meet the increase of ex- pense. There is a doubt in my mind about it. I hope the doubt is wrong. Q. Well, stating it candidly, the public think the Utili- ties Commission will hold them down too close on valua- tions? A. Yes, sir. Q. Or rates of return? A. Yes, sir. Q. And therefore, being under public regulation, they are afraid to take these securities? A. Yes, sir. Q. That is what you have in your mind as a matter of fact? A. Yes; afraid to take the chances. The nat- ural thing expected of the commission is to take care of the great mass of the people in regard to what fares they are going to pay, rather than to take care of the utility 130 companies and their security holders. That is what I mean is in the atmosphere. Thai is the idea. Q. Mr. Forgan, as I understood you, it is your judg- ment that the value back of, say the Chicago City Rail- way, is probably just as much today when the bonds are sixty or sixty-five, as when they were one hundred or more! A. From the standpoint of valuation of property that exists today, yes. Q. What would be your judgment as to the bearing of this fact, that on the market they are worth sixty to sixty-five and due to the greater demand for money than there is of supply, that the investor might refrain from investing in a utility bond when he could invest in a mu- nicipal bond, which would be tax exempt, under the in- come tax law. A wealthy man would hesitate, I should think, to invest in a public utility bond, the income of which would come under the application of the income tax! A. Yes. Q. Particularly if he gets into the higher sur-taxes! A. Yes. Q. Whereas, on the other hand, he could invest in a . municipal bond, which, as I understand, is exempt, nat- urally the investor would look to the municipal bond. Now, if you could explain to us, — assuming that we agree on that proposition, why, then, he comes into the indus- trial field, — ^it would clear up, in my mind at least, some- thing that I don’t understand. A. Well, of course, it de- pends on who is investing. I do not think there is any doubt that men of large incomes have been considering that very seriously. Now, not only that, but they have been selling out, and that has had a very material effect on the market, they have been selling out their holdings in in- dustrial and utility bonds for two reasons — from the 131 standpoint of the income tax, the one is they can deduct their losses on the sale from their income and the other is that when they have done so and put part of the loss over on the government, they can then buy tax exempt bonds, and we run across that all the time in large amounts, but it is not all the large income people that in- vest in these bonds. The illustration that I gave you of the servant girl is perhaps among the smaller, but there are women at our counter all the time, and we have six or seven men doing nothing else but selling bonds the same as a grocer sells sugar over the counter, and we have six or seven men attending to that day in and day out the year around. Now, there is a general flow of these. These are not people that are bothered with income taxes, but I think you are perfectly right, where the investor has to con- sider the income tax, he discriminates against that kind of a security now. Q. Are there still some bonds and securities coming from abroad, Mr. Forgan? A. I think, they have got down pretty well to the bottom of their pile. About the only things I hear of now is some Scotch Companies and other companies that put out debentures over there against farm mortgages they got in this country. They have got down to selling them. The last negotiations we have had were three purchases of farm mortgages. That is getting down to the bottom of the bag. There is nothing else to send. Of course you understand for these companies that have these farm mortgages, it is a splen- did time to sell out. They send them over here and sell them in dollars, they are payable in dollars, and get their exchange about 25 per cent, discount and they get their money over there, and make money on buying 132 the sterling, but they are down to that. I do not see any other kind of securities coming over at all. Commr. Lucey : I was going to ask you if as a matter of fact the foreign investor, if he has not already liqui- dated his bonds, might not sell them over here and sell them on the market at quite a substantial discount and take his money home and still make a substantial profit by reason of the rate of exchange. A. The rate of exchange would be about 25 per cent. 20 to 25 per cent, on sterling, I mean. Mr. Cleveland : Mr. ’ Forgan, does the fact that the Commission has the power to reduce rates, as well as increase rates, affect the value of these securities! A. Yes, they fear they wonT stay put. ^ It exists. Q. Now, if it should be brought to the attention that the representatives of these companies had publicly taken the position that there was $85,000,000 to $90,000,- 000 in this capital account that represented no property at all, that would have some bearing on the stability of the bonds, would it not? A. Yes, if that could be estab- lished, but I should hope it could not be and it would not be. I do not think there is much possibility of that. Q. If it should further appear that the companies rep- resented the full value of their property for the purpose of taxation, that it was only $52,000,000 as against $158,- 000,0.00 in their capital account, that is also a matter that might have some bearing on the stability of the securi- ties A. Oh, well, I do not think that would bother the people at all. Q. That is to say you think the financiers would re- gard the fact that there was some undue reduction in valuation for taxation purposes as no indication of the 133 question of value at all? A. Well, it would have some indication perhaps of value, but it would not affect those who went in to make such investigation into ,the value of the property as they would have to make before they passed judgment upon it. Chairman Wilkerson: You understand property, for the purpose of taxation is valued on one basis in this state, whereas for rate making purposes it is valued on another basis ? A. Yes. What is the good of dodging the question? The matter of taxation of every big concern is a matter of compromise right through, banks and everybody else. Chairman Wilkerson: That is generally understood. A. That is generally understood, yes, sir. Mr. Cleveland: The matter of valuation of property for rate making purposes, — now I am speaking of rate making purposes, — is that the same as the valuation of the property for the purposes of making loans or making sales or investments? A. Well, if it is not, they would not be able to make the loans. The two will have to hang together or you won T be able to borrow. Q. That is to say in your opinion, the property should be valued for rate making purposes on the same basis as it is valued for the purpose of making loans or sales on investments, is that correct? A. I think so, yes. Q. Now, if it should be brought to your attention that in this capital account there are included such items as $10,000,000 for franchises which are not properly in- cluded for rate making purposes and other similar items, would that affect the value of these securities and the 134 stability! A. If we made iip our minds the franchises were not worth anything we would have to cut it out. If we made up our minds it was worth something we would leave it in. Q. Supposing it was brought to your attention that in this capital account there was included a vast amount of old equipment that was discarded and of no value at all except for junk, would you still make loans or in- vestment on the theory that that property was as good as new! A. Oh, no, but that is a matter for the engi- neers and not for the bankers. We have to rely upon the engineers. Q. But the bankers, notwithstanding any valuation that would be made by any governmental body, if there was a big loan the bankers would have a valuation made for themselves, would they not! A. That might not be practical. They might be willing to take the valuation of competent engineers employed either by the com- panies themselves or by the commission here or by who- ever else employed them to do it, — if we believe them to be reliable engineers and put confidence in their state- ment, — ^we would accept it. Chairman Wilkerson : When these bonds of the under- lying companies of the surface lines were disposed of, did you regard as accurate and reliable the valuation which had been made by the Board of Supervising En- gineers ? A. We did. Chairman Wilkerson: You took those! A. Yes, and accepted them. Chairman Wilkerson: And accepted them. A. Yes. 135 Q. And the fact that the City of Chicago through its officers has placed the stamp of approval on those valuations, did that have anything to do with your mak- ing up your judgment as to whether they should be accepted? A. Yes, they have a franchise on the basis of that. Mr. Cleveland: Then, Mr. Porgan, in buying these bonds, did you take into consideration or assume that the contracts between the City of Chicago and the Surface Lines were valid and binding contracts? A. Oh, yes, we believe them to be. Q. If someone had told you at that time that it rested in the power of the City Council or its successors in that regard, the Public Utilities Commission, to reduce the rates of fare provided in those ordinances whenever they wanted to, would that have affected the stability of those securities? A. Well, I do not know that I can go back on that hypothetical case, because we did not have that to consider at that time, but we would consider it now. Mr. Cleveland: Yes. That is all. Chairman Wilkerson: Call the next witness. Harry A. AYheeler, having been first duly sworn, was examined in chief by Mr. Dunbaugh and testified as follows : Q, Mr. Wheeler, will you state your name and con- nection with the bank with which you are connected, and also your connection with the National Association of Commerce, and then proceed to answer some questions that have been asked of the other bankers which I think you have already seen? A. My name is Harry A. 136 Wheeler. I have been connected as the vice-president of the Union Trnst Company of Chicago for 10 years. Prior to that for 10 years as president of a corporation having to do with industrial and commercial credit, and in connection with the Chamber of Commerce of the United States, its president for three out of the nine years of its existence. On the questions that have been propounded to the other bankers, I am assuming that the Commission will be perfectly satisfied with the representations made by those who are charged with the management of these properties with respect to the necessity for future ex- tensions, or capital extensions of these properties. My judgment in that matter would be of only the same value as that of any other citizen w^ho might estimate the growth of the community and the resulting growth and demand upon the utilities that serve the public. Ob- viously with a city like Chicago growing in population as it is, growing in industrial importance, as it is, grow- ing in the number of homes and habitations to house the people that are coming and who need better facilities than they have enjoyed in the past, we must admit that there will have to be either an expansion of services or a lack of service of those things which the people have come to believe as their right and as the things that come naturally to them as conveniences and comforts. But you also must take this into account, that beside the ques- tion of personal comfort and convenience is the import- ance to the commercial and industrial life of the city by virtue of these services, that of getting employes to and from work, that of supplying power with which to operate our factories, that of supplying lights with which to light them when the season is short, that of supplying the means of communication without which industrial 137 expansion cannot take place. So that there is no question of the desirability for extensions to be made to keep pace with the reasonable demand of commerce and industry and of public comfort. Personally, I hold this very rigid view, that there should be at this time no extensions that cannot be proven to be absolutely necessary to the commercial needs or to the physical needs of the people of the city, and any improvements that are contemplated beyond that of ren- dering the reasonably necessary service for the welfare of the community are improvements that should be de- ferred until some time when they can be made under conditions of less stringency than at present. Now, with respect to the rate of return it seems to me that it is all a matter of the competition of the instru- mentalities of service and of commerce for money. There is only so much money that can be legitimately had for use. There is only so much of that money that can go into public utility service. The competition is increas- ing every year. The listings on the New York Stock Exchange in the last 10 years have run from probably 393 stocks in 1910, to nearly 600 stocks in 1920. On our own Chicago Stock Exchange, those listings have also increased, not per- haps to the same extent but to a very marked extent, prob- ably from about 50 or 54 to 95 or nearly to 100. The same condition is true with respect to the bonds. The listing of bonds on the New York Stock Exchange and here will show a like condition, showing that the offerings in competition with former securities are increasing con- stantly. Then if you add to that the great mass of un- listed securities, those that may be sold on the curb or those that may not even be sold, but are nevertheless, 138 offered as preferred stock and as industrial securities by the houses who make that their special business, you will find that in these last 10 years, you have increased the competitive element between people desiring money to a point of infinitely more than doubling the offers and opportunities of investment than were existent 10 years ago. Furthermore, I think this must be taken into ac- count, that insofar as utilities are concerned, when those services were being developed, as when the railroads of the country were being developed, the public desiring a service that would add to their comfort were not only very ready that liberal franchises should be given, but that liberal rates of return should be had. Now, the fact that abuses have been the result of that liberality may be admitted, but the consideration of the present time in the light of the abuses of the past will not mend the present situation, and in consequence it seems to me that the temper of the public mind with relation to the utilities securities has suffered a marked change. First of all, in the uncertainty perhaps of the franchise conditions that underlie the utilities, upon the rate of return which they may earn, upon the general criticism that has come upon them from all sources, sometimes deserving and sometimes grossly unfair, — these have all affected the public mind, and the public mind is the thing that is going to conclude whether or not securities may be sold and the price at which they are go- ing to be sold. It is not the bank rate. The banks cannot ’ absorb them. We can underwrite them, but we have got to ^ pass them on, and we must create a public mind that will accept with confidence these securities, else of course they cannot be sold, and then they could not be accepted by us in the first instance. 139 Now, the trend of the utility market has been a slou'gh- ing off of values in particular on the old securities; I believe we will all agree that that is the result of a higher average interest rate obtainable in other things. Their security is cut out on a four and a half or five per cent, basis. It must necessarily react in its market value to the interest rate that is obtainable upon securities of like character that are of a newer issue. And it is not a mat- ter whether capital is back of that company in physical assets that might represent the hundred cents on the dol- lar for the shares of stock or bonds outstanding, it is the fact that if those bonds or that stock yields four and a half or five per cent, and it comes into competition with issues that are well known of a larger earning power of seven and plus, seven and eight and more, then of course, the market value of that security must decline in conson- ance with the rate of return of the day. I think also there is this factor that we must take into account. There is doubt in the public mind as to the permanence of the conditions of return for the utilities, and when they are putting that doubt, a doubt that is born with the fact that there are other forces than the executive power of the corporations themselves that have to do with those returns, the controlling and regulating forces that necessarily are charged with the obligation of seeing to it that the public has a service and at the lowest possible rate, they turn immediately to the indus- trial securities where, as it has been said this morning, there are no such limitations, and they find themselves very much more attracted to that form of collateral. Now, it is equally true that the public mind on this question is affected by its experience. Where at an equal time or on an even date, the investor bought a 140 utility security, and an industrial security, on today’s price to realize on them both they are likely to find that the utility has suffered severely in the market, as against the industrial rate. Furthermore, the public has been educated in the last few years to a much wider range of securities for invest- ment. It was not many years ago when the average in- vestor in the city would prefer that thing which they could see and use. They bought the mortgage on city property, and they bought the security of the utility companies because they were near at hand, they were home securities, and as a consequence gave them greater confidence in them. In these last few years the very thing I have mentioned, as the extension of the listings of the securities on the exchanges of the country, and the government securities that have been brought out, which always run at a certain differential between the government rate and industrial or utility rates, and the foreign securities that have come to our shores, and the general education of the investing public to more broadly consider investments have all drawn away from what was at one time a disposition to prefer the securities of the home utility, and now they are spread all over the face of the earth. It seems to me, gentlemen of the Commission, that any rate of return must be such as to permit competition with the other securities or services that the public are invited to invest in. It seems to me, too, that there is another thing that might have your consideration. As in the development and extension of our utility services, as in the development of our industrial operations or anything else in which we are operating today, the cost 141 of extensions and betterments and improvements is naturally excessive as the market for commodities is ex- cessive. You cannot have index number rates showing on the bulk of your commodities from 100 in 1913, to 253 in March, 1920, without having that condition evident that extensions and improvements that are necessary to serve the people are to be made at a peak point in all probability where the cost will have to be rapidly writ- ten down, or if capitalized at present cost interest will have to be paid upon that capital for many years to come; and my suggestion for your consideration is this, that in the fixing of the rate of return it is quite legitimate to consider that natural excess cost of introducing these agencies of service today and letting the rate, at least temporarily, as it is in your power to do it, cover not only a fair return upon the capital investment but like- wise the consideration of taking up that excess in this day when all of our prices are scaled high and when our wages are scaled as high as our commodity prices, and -when we are better able to absorb these extraordinary and unusual expenditures by virtue of the cost of com- modities, than we will be later on when in the natural reaction we will come to a more normal basis in connec- tion with our commodity prices in this country. So that it seems to me we have to consider the fact that securi- ties will not sell at the old rate that they must sell in competition with all of the securities that are offered and multiplying in numiber; and that there is difficulty in getting capital enough to go around in any event, and we must provide, if we expect to have the facilities for the public, that which will enable the corporations charged with that duty to operate on a basis that will permit those reasonable extensions ; on a basis that will not capitalize them as of a date in the future, but something 142 they will share by having* ourselves absorb part of it at the present time, and letting the future bear only that which might be the normal value of properties and secur- ities in the depreciation that must be taken hereafter. We have done that same thing in the industrial field, in all our war services, as you well know. During the war, in the building of plants, we were given very large depreciation by virtue of the unusual cost of production at that time, and the unusual wage element that entered in. Plants that were built then that are not in use today were very wisely depreciated in value, be- cause it may be some time before they actually come into demand. Labor conditions likewise are the same. The produc- tive power of the man has been reduced by the uncertain conditions that exist in the country, and all of these things make it necessary that we should consider ab- sorbing a part of the cost of permanent improvement at the present time, not as a charge against the future for 100 per cent of their cost, but rather that we should absorb that which is abnormal and unusual at this time in order that we do not capitalize for the future those values that cannot be sustained when the reaction comes. That is all, Mr. Chairman. Chairman Wilkerson : Do you care to be cross-exam- ined now or what is your own preference about that, Mr. Wheeler? Mr. Wheeler: It is immaterial to me, but I would like to be released by half past 12, if I may, for I have another meeting. 'Mr. Cleveland: If they have other witnesses, we will let that be deferred for the present. 143 Chairman Wilkerson: If you desire to ask him any questions later on, we will let you know. Mr. Dunbaugh: That is all with Mr. Wheeler. Chairman AVilkarson: Call your next. Mr. Dunbaugh : Mr. Piez. Chairman Wilkerson: You have been sworn? Mr. Piez: Yes. Chairman Wilkerson: You may proceed with your statement. Mr. Piez : Charles Piez, President the Link Belt Com- pany, President Electric Steel Company, both of Chi- cago. I want to apply myself more directly to the second question that has been asked, and that is the influence of the development and expansion of public utilities on the manufacturing enterprises of this city, and I want if you will permit, to draw from my own experiences in submitting my statement. About five years ago, I joined with several associates to organize the Electric Steel Company, which makes steel castings through an electric process. It is a con- tinuous operation and depends largely on a continuous supply of power, and on an assured supply of power. In the five years we have jumped from practically nothing to become one of the largest of the 25 largest users of electric power in this city, purchasing our power from the Commonwealth Edison Company. I think our bills now run somewhere between $8,000 and $10,000 for power, per month. I am interested in similar enterprises in Philadelphia, where we purchase power from the Philadelphia Electric 144 Company. The Philadelphia Electric Company, how- ever, is working very much closer to the limits of its ca- pacity than is the Commonwealth Edison Company, to such an extent in fact, that whenever anything happens at the power house, our supply is cut off. The success of our enterprise there has been very seriously jeopardized through that fact. In fact, we have been shut down twice during a month, which means the cessation of operation, the re-lining of furnaces, and extraordinary expense, fail- ure to make deliveries, and so forth. I feel from that experience and the experience that other manufacturers in this city have had, that the development of public utilities should lead and outline the development of industries. That is true not only in the case of power production, but it is true of the telephone service, and particularly true of street car service. We employ at our 39th Street plant about 1,000 men. We draw not on the immediate neighborhood for those men, but have to draw on a very wide area. It is not particularly a residential section, and poor street car service simply limits the area from which we can draw and makes it harder for us to get men. So, poor tele- phone service or the lack of proper expansion of that service limits our ability to do business, and I think it is absolutely essential from the standpoint of the manufacturers of this city, that such returns be allowed public utilities that they can extend their facilities to make them keep step with the growing development of the industries and the needs of this community. That ends my testimony. 145 Cross-Examination by Mr, Cleveland. Q. What is your experience, Mr. Piez, as to the ade- quacy of the telephone company’s service and of the street car company’s service? E. Well, I consider the street car service extremely inadequate, because I have watched for many months and many years the tre- mendously crowded condition of the cars whenever our men leave our plant. Q. Will you describe that just briefly, what that crowded condition is ? A. It means that many men are not able to take a car in less than 10 or 15 minutes, they come there absolutely crowded. The men try to hold on behind and they are jammed in such a way that human beings should not be, and they are not very comfortable under the conditions. We are on a cross line there you know. Q. Yes. A. And then there is another wait, because the cross-town line simply serves to transfer our men to the north and south lines. Q. Have they reached the point in your neighborhood of letting then! ride on the roof? A. Not yet, but it may come to that. Q. They are hanging on the sides? A. They are hanging on the sides in a very dangerous way, and on the rear. Q. Are you depending any, or do your men use the elevated to any considerable extent? A. Not to any great extent. Q. It is the surface lines? A. It is the surface lines I am particularly interested in. Q. The telephone, what do you find as to the ade- 146 quacy of that service now? A. Well, I do not think onr service is as good as it was some years ago. I am not as conscious of the crying need for extensions there as I am in the case of the street car company, and as I am in the case of the Commonwealth Edison. I feel that we ought to he assured that their extensions will at least keep step with our needs as far as the street cars are concerned, and I feel that they have lagged way behind our needs. Q. You need . A. Additional cars. Q. Additional cars and equipment? A. Certainly. Q. If they had additional cars, could they operate them on the rails, or would they need new rails, too? A. I have not made an investigation as to that. Mr. Cleveland: That is all. Commissioner Lucey: Are you through, Mr. Dun- baugh ? Mr. Dunbaugh : I was going to ask him one more question. Q. MTiat in your opinion has the war had to do with the present condition of the utilities? A. I was con- nected for over 20 months with the Emergency Fleet Corporation. Q. What was your connection with that? A. I was vice-president and general manager. In the latter part of my stay, director general of the Emergency Elect Cor- poration. I know as far as we are concerned, I was a member of the Utilities Committee of the War Industries Board and we discouraged in every way possible invest- ments in public utilities because the labor and material had to be used in the more essential enterprises. In some cases, however, the Government did find it neces- 147 sary to extend the utilities, and I think the general effect of the war has been not only to make it more difficult for the utilities to get proper capital, but made it difficult for them to get labor and material for putting it in. Mr. Dunbaugh: That is all. Commissioner Lucey: Has there been a marked in- crease, Mr. Piez, in the wages of the men of your plant since the outbreak of the war? A. A very marked increase, yes. Q. Eoughly what percentage? A. I should say that common labor has been increased from 220 to 240 per cent. It is somewhere between two and a quarter and two and one-half times what it was. The skilled mechanic has not increased as much as that. The lower priced labor has gone up very much heavier. Q. That has been your experience, and we may assume similar conditions have existed? A. Yes. Q. And now exist in all lines of labor? A. Yes; that is typical. Q. And it is reflected in the materials ‘you purchase and produce? And it is reflected in your selling price when they go on the market? A. Yes, I had occasion to submit to the board two weeks ago what working capital we had today as compared to the year 1916, which was a very flourishing year, and which had very much lower basis of value. Our working capital now is two and a half times as much today as then. Our pro- duction in 1 910, was only 10 per cent, less, that is actual pounds produced in our plant. The increase is very slight, but the money necessary to carry on the business, by reason of the very tremendous advance in the mate- rials and labor, was two and one-half times what it was four years ago. 148 Q. Have you made any study as to the condition of the companies you referred to, the utilities in the city here, as to their capitalization, value of their properties, and what may or may not be necessary in order to permit them to function properly? A. I have not, hut about a year ago I sold whatever interest I had in the utilities here. Q. Was there any special reason for selling out then, because they were utility properties, or anything else? A. I knew of the common prejudice against them, yes. Q. What do you refer to when you say the common prejudice against them? A. I made these investments largely because I felt they were safe. I am not in the habit of speculating outside of my own business. What money I accumulate there I want to put into safe invest- ments, so I invested in railroad securities and some bonds of the Chicago Telephone Company and the Common- wealth Edison Company of this city. And, my general belief is that any property subjected to the regulation of a commission is a rather hazardous property. I am saying this with all due deference and I am not mak- ing any remarks or charges against this Commission. Q. Do not hesitate on that account. A. I know, Gen- eral. you are absolutely used to that sort of a charge. I want to say this : My experience as a railroad investor goes back a good many years, and I think the Interstate Commerce Commission has perhaps been as much re- sponsible for the general prejudice against commission control as any other body in this country. I think it is absolutely certain that the Commerce Commission con- sidered regulation as a restraint, and it strangled the property practically, and I saw whatever investments I had in such roads, the good roads, the Pennsylvania 149 Railroad, for instance, gradually declining, declining in their price and declining in their returns, and I made up my mind I had better get out before I hit the bottom, so I did. Q. While the going was good? A. Yes, sir; I am glad I did. I put the money into industrial enterprises and Q. Of course, at that time a year ago, as is true now, the returns on the investment which you had made were and are much lower than you might have made on indus- trials in the market? A. I would not have changed on that account, what I was after was security. I had grave doubts as to whether those values at that time would be maintained in the long run. Q. There was no question in your mind when you made those investments, that the underlying value of those plants and institutions in which you invested was good? A. Not at all. Q. As a matter of fact, looking at it in a business way, have you seen anything since other than what you may now think, — is this uncommon prejudice which you referred to, which may be in the air, and may be in men’s minds, whether or not it is justified? As a business prop- osition have you seen any decline in the actual value of those properties from what they were at the time you made those investments? A. No, sir; I have not, but this thing concerns the investor, and that is, how readily are these stocks marketable? If there is a general prejudice against them, whether their value is maintained or not, their marketability is hard, and I like to have securities that are fairly liquid. Q. Well, that is your personal idea? A. Yes, that 150 is my personal experience, I only offer it as a personal experience, one of many similar ones that I have had. Q. As a manufacturer in the City of Chicago, you are undoubtedly very materially affected by the pros- perity or non-prosperity of these utilities from which you have service which you demand and need? A. Abso- lutely; we believe service is primary and the rate second- ary. Q. I judge it is your viewpoint that these companies should he given a sufficient opportunity to earn money with which to supply street cars or telephone instruments or dynamos or any other machinery or equipment that they need, in order to supply the wants of the city? A. I certainly feel that way. General, or we will have to go to some other place for any further expansions that we have to make. Q. And the lack of that situation is not only reflected in the prosperity of your company in which you are unquestionably interested, but it is reflected as well in the conditions and opportunities which the men who work in your plant, enjoy, in their efforts to get to and from their work? A. It makes the community a more desir- able one to live in, and therefore, a better place for manufacturers to be in, if the utility companies are pre- pared to give adequate and comfortable service, par- ticularly so far as the service that the men are directly interested in is concerned. Q. As a matter of fact, isn’t it your viewpoint or isn’t it your idea that the intention was such that when these corporations were subjected to public regulation, instead of having a bad effect on the corporation as compared with an industrial, which is not regulated, that in truth and fact the security of the regulated utility should 151 be a better and sufficient security than the unregulated industrial property, because it is not subject to the dangers which the industrial, your own business for instance, must meet, without protection of any Board or Commission to fix its rates or terms and guarantee it, say, against competition and against confiscatory rates and against many other annoyances and contingencies that in your private business you must compete with by yourself and your own Board of Directors; wasn’t that the intention in your mind, wasn ’t that your understand- ing of the regulation of the utility? A. It certainly was. I realize, of course, being monopolies, regulations had to be effected. I feel that constructive regulation would certainly be helpful to the securities and the utilities themselves. There are, of course, advantages in monop- oly df properly restrained, compared with open compe- tition such as large industries have to engage in, so from the standpoint of the private investor who has some money to put into these securities, I felt at the time the control of the utility by this Commission was a good thing, because I invested in the properties after this Commission was appointed. I am not prejudiced against regulation; I feel, how- ever, some hesitation about the effect which public clamor might have on a Commission. I am not saying this Commission. Of course, the users always feel that they are paying higher prices, we as users feel as Mr. Sunny felt in the matter of his bank loan, that we want to get the lowest possible rates. We are not particularly concerned about the amount of the investment or the re- turn on the investment ; that is the business of the utility company. It is a bargain or barter between us, so the consumers are always on the side of the lower rates. 152 So the Commission is in a very difficult position to resist public demand for reductions and to insist that rates be maintained at a point that not only will there be ade- quate return to the investors, but an adequate return to enlist additional investments to permit the necessary expansion of industries and to maintain a proper rate of depreciation. Q. Would there be in your mind any question that if the truth about the situation could be gotten to the public at large, if they were given an opportunity to learn the real facts, if anyone can devise a manner or method of giving that information to them, rather than the per- verted statements of what may or may not be the facts, or what someone may think is a fact, but which may be found different by the Board when fina/lly deter- mined, — what I had in mind was if the public was apprised as to what the situation really was, do you still think there would be in the mind of the average man this prej- udice you spoke of 1 A. It is a little hard to eradicate a general prejudice, but I think such hearings as this, to air these questions publicly, will have the effect of re- storing the public confidence. Of course, this is an un- usal time, there is a good deal of competition for what- ever money is available, but it is true, nevertheless, there is a prejudice against investments in public utilities, and the good share with the poor that disadvantage in a bor- rowing capacity. Q. That prejudice arises in the mind of the public from some cause? A. Yes, sir. Q. It didnff grow, you don’t inherit any prejudice against a public utility? A. Some prejudice is in the air, it may not originate in Illinois, may be down east, and spread to Illinois. I think the recent passage of the 153 Transportation Act, its definition of what costs should be, its statement as to what the average return should be to the investors, is going to have a very helpful effect in restoring public confidence in the railroad securities. Now, I think, reflectively in the public utilities, because more or less that Act will become more or less the basis of consideration of all of the problems of the public utili- ties in adjudications. 1 think the process of restoring public confidence is on the way, public confidence has got to be earned through a long period, and any un- toward action at any time may destroy it. Money is exceedingly hesitant and a timid sort of affair, it does not go boldly into enterprises and gamble, but the in- vestor is a very timid sort of a chap and he wmnts to be dead sure, pretty nearly, particularly when the return is low. Q. You spoke of the Interstate Commerce Commis- sion as having interpreted its powers as a restrictive Commission? A. That is my impression. General. I might be wrong as to that, but that is a very strong im- pression. Q.. And quite a number might possibly agree with you. And when this Commission, using Illinois as an illustra- tion, came in, they all came in about the same time, this one came in in January, 1914, it found a great many utility corporations which through mistaken no- tions of regulation, if regulation it was, by municipali- ties, had rates based either upon no valuations or as a result of dickering with city councils, who either did not know or did not care what the situation was, and the Commission started out on its way by reducing rates the first two or three years, very largely, and then there came the conditions in this country as a reflection from 154 the war breaking out in Europe and the period of cur- tailment began to take effect, followed by the war in our own country, and the conditions would still exist, and the Commission found it necessary to advance rates in order to meet costs and expenses incident to that condi- tion of affairs which changed the public opinion, I rather im.agine, in the usefulness of the Commission. What I am trying to get at is, while this Commission or its predecessor was reducing rates and reducing valuations, it was a very popular commission and was considered a great good to have been created, but the gentlemen who have inherited the situation finding opposite conditions, making it necessary to increase rates, have not been as popular, either with the public or municipalities and that condition of affairs — or let me ask you if you think that condition of affairs by reason of the stirring up of the utility question, with what follows after, the outcries from the mayors and city councils of the municipalities or consumers, have rather prejudiced the public against the whole utility proposition, without really knowing what the facts may be or are? A. I think that is true. Of course, the members of the Commission have my very deep sympathy in their efforts. I appreciate their position, very fairly, but nevertheless the work has got to be done and I am here to assure the Commission that constructive effort on its part will at least have the earnest support and the cordial approval of all the in- dustries in the city. Chairman Wilkerson: You are a man of very wide affairs. Do you know of any way in which we can make men tell us the truth? That seems to be our chief diffi- culty, to prevent their lying to us. A. If I had that kind of a method, I think I would syndicate it. 155 Mr. Cleveland: Mr. Piez, is the population of Chicago growing rapidly? A. Well, Mr. Cleveland, you are about as well versed in that as I am. Q. I am not testifying. A. I was not testifying on that particular part, I am not in touch with the abso- lute percentage. I noticed we had a very wholesome growth, but I cannot tell you the exact percentage or increases. Q. When you speak of capital being procured, you mean to get new money to invest in the business, do you not? A. In what particular sense do you mean that? Q. You speak of capital, you mentioned capital? A. Money, yes, I did not mean capital. I mean money, of any kind, to effect advances, either credit or capital. Q. Yes; is it your idea that money for necessary ex- tensions to be made, I do not mean by that depreciation, but to make extensions and enlargements, should be raised by means of rates paid by the public? A. What I mean is if you are going to get additional money to in- crease or expand your enterprises, you have to establish two things, first, an assurance in the profitable nature of your enterprise, and second, an assurance as to a suffi- cient rate of earnings to induce men with money to invest. That is what I meant. Q. Of course, if you take a new enterprise A. You cannot force an investment. In other words, you have to induce it, and you have to induce it by estab- lishing confidence and holding out fairly good terms of return. Q. I am speaking, take an established concern, a pub- lic utility, that wants to make new extensions, is it your 156 idea it would be proper to impose rates on the people in order to get money to make these extensions? A. If the extensions cost twice as much as before, and assum- ing the return remains the same, manifestly you cannot pay interest on the money necessary to make the exten- sions at the time. I agree with Mr. Wheeler very thor- oughly you have to do something with rates to induce investors to come in and invest the money, and then you have to do enough with rates to write oft a part of that investment, so it wonh be a burden on the community hereafter. Q. Whatever it is, the investment should come from the outside and not from rates, isn^t that true, for exten- sions? A. I don’t gather that, our money comes from the selling price of our product, and I assume the utili- ties get their return from the selling price of their ser- vice, and that selling price is regnlated by the Commission in the matter of rates, and so, therefore, the rates directly affect your income. Q. Then if I understand you correctly, take the Sur- face Lines, if you — if they were to build an entirely new extension, you think the rate payer should be subjected to paying sufficient rates to furnish capital to the com- panies to make that extension? A. Let me say this: Suppose it was absolutely necessaiy to the community that extensions be made, and no money could be secured except by an increase of rates, would you justify that rate in order to have the facility? Q. I am trying to get your viewpoint? A. I am asking you on that. Q. I might not give the right answer. Do you think they should be imposed on the people to provide capital to make the extensions? A. I think that is not quite 157 what you mean ; rates should be imposed to provide cap- ital, or invite capital? Q. Provide? A. Provide. Q. I mean provide capital. A. It is not satisfactory to answer a question by asking another one, of course. Chairman Wilkerson : You may. A. But if that is the only way to get it, what else is there to do? Mr. Cleveland : I am just asking you. A. I don’t see any other way out of it, I do not see that anybody is going to make you a gift of the exten- sions. Q. If it is shown that there is an inadequacy of service, is it your idea that that inadequacy should be removed by an increase in the rate of fare? A. I am telling you this car service is terribly inadequate, and I have not gone into the question of the justice of it, and I don’t know anything about the amount of money invested in the street car service, but I do say that a continuation of the present service is a detriment to the community and something ought to be done about it. I think this thing ought to stop and the two sides ought to get together and give us the service that we need. Q. Has it ever occurred to you that in the Street Rail- ways Company, for instance, in order to get the exten- sions on which they are to make more money, that the stockholders or some of the people who are interested in it might put up the money to make those extensions, instead of calling on the people to furnish those exten- sions? A. That depends a little on the confidence the stockholders have in the enterprise. I can hardly answer that without going into the result of the operations from 158 a financial standpoint. I know this is — if I am at the head of an industry and I have not shown profits for some years, it is mighty difficult for me to have my stockhold- ers put up money. I suppose there is a certain analogy between the conduct of the industry and the conduct of a public corporation. Q. Well, that don’t quite answer the question, do you want to let it stand at that, is that as well as you can answer it? A. That don’t answer the question? Then I don’t understand the question. Q. My question is whether in case — ^we assume that they need extensions, that the service is inadequate, is it your view that the stockholders should not be called on to make the necessary extensions to remove the inade- quacy, rather than calling on the people to pay, provide, that money by means of increased rates? A. Can you force the stockholders to invest? Q. You are just asking questions back. A. You are not giving all of the conditions of the problem. Q. Why can’t you answer? A. Are you assuming for instance that this concern has paid adequately and is giving adequate returns to the stockholders, so that they have confidence in its continued earning power, is that one of the bases of the question? Q. I am assuming that they are having a service that is inadequate and have a need of extensions. A. I am just here as a private citizen. Q. Whether it is your view that this company should go to the people and say, ‘ ‘ Here we need extensions, you pay for them and we will make the extensions and we will keep them ourselves ? ” A. How else can you raise it? Do you expect the stockholders to make a contribu- 159 tion to the public? I am simply asking the question in order to get your answer to that, and then I will be in a position to answer fully. Q. If you want to know my position, it is, if they want a system to pay rates, they should invest the money necessary for the extensions, that is my view? A. Well, they should be reasonably sure of the rates before they invest the money. Q. Yes, they ought to have the investment, they ought to put the investment in? A. What? Without assur- ance of return? I do not know where you could find them; I would like to corral some stockliolders of that sort. Q. Now, then, you have your investments in steam railroads? A. No, sir; I am out of railroads and utili- ties. Q. It was steam railroads, it was not the Surface Lines or the Elevated Lines? A. No, sir; just steam rail- roads; no, I have never gone in for the Surface Lines, thank Heaven. Q. Now, I understand you to say that you have — ^you think in cases of monopolies, these are monopolies, are they not, here? A. Yes, sir. Q. That regulation is proper? A. I agree to that, yes, sir. Q. As long as regulation is proper, this — it is a mat- ter of public consideration what regulation is given, nec- essarily so, isn’t it? A. Yes, the broadest kind of public consideration. Q. Yes. A. Not the immediate needs, but the needs of the community for the future, taking into account the proper expansion. 160 Q. It is necessarily an incident to that, first, that the people will have a right to consider the kind of service that they are getting and the kind of regulation that they are getting, that is true, isn’t it? That is true if you have regulation? A. If you have regulation, yes. The obligation is, of course, then, to furnish the proper kind of information to the people so that they may judge properly. Q. And the only way to do that is to get the truth to the people, that is the only way, isn’t it? A. As I see it. Q. If they get the truth to the people and the people know that the company is trying to operate on mis- man- agement and trying to operate on watered stock, the truth is liable to do some harm to the company, isn’t it? A. Do you claim that that is the situation here ? Q. I say that the truth would hurt them then? A. Is that a hypothetical question or does it apply to this case ? Q. It is a hypothetical question. If the truth showed a rotten condition, it would not do the company any good? A. Certainly not. Q. The thing to do then is to get the truth to the people, and it is up to the people who are interested to bring the truth to the people, isn’t it? A. I shquld say so. Q. And it is all depending on what the truth shows what the — whether the public utility will be helped or hurt? A. That is the purpose of this hearing, isn’t it? Q. Well, That is one of them. A. Yes, sir. Q. And another one is the — about the extensions. You agree that they need extensions? A. I agree that 161 the service is rotten rticI that they need extensions and I think you will agree with me, that the people who are operating the companies ought to get the money some- how to make these extensions. Q. You have not developed any way of getting it? A. That is up to them. Q. I can very readily tell a way if you want me to testify, but I am not on the witness stand. That is all. Cross-Examination hy Mr, Ringer. Q. Suppose the utility in question had during its en- tire corporate existence shown splendid management and a very handsome return to the stockholders and a con- stant growth in the value of the property, would that change your answer to the method of raising the re- quired capital for the proposed improvement? A. I do not believe there would be any question about raising the required capital under such conditions as that. There might be temporary questions. Of course this thing has to be borne in mind. Q. I beg your pardon? A. This thing has to be borne in mind in all of these matters, and that is rate of re- turn to enlist capital has to be increased. It is very much so today when industries are paying seven and one- half per cent, on commercial paper, instead of four and a half. You have to realize like labor capita] is earning a higher rate of pay. Unless you give that question con- sideration, you will fail to enlist capital or a proper amount of capital to make extensions, irrespective of any local questions which may affect the value of property. This Commission has to bear in mind that rates have to advance with the rise of capital in the open market, oth- 162 erwise you are going to sag and lag behind and not get proper capital to make your extensions. Q. Suppose the stockholders in our utility in ques- tion — A. You know — I want to say this, I am not an expert on public utilities, I am an expert in manufactur- ing. If you gentlemen want my personal opinion and answer to this hypothetical question I am perfectly will- ing to spend the time, but I do not want to qualify as an expert for this Commission, because they realize I am not. Q. Take with an industrial corporation, suppose the stockholders of an industrial corporation during the en- tire life of their stock holding had received very hand- some returns running from 8 to 50 per cent, on their in- vestments, and had since their original investment been many times repaid the amount of the investment and the plant had grown immeasurably during the entire life of their investment and these self-same stockholders who originally invested capital are still stockholders, — would you conceive it possible for those stockholders to dig some way into their own pockets to raise the required capital to cover the contemplated extensions ? A. I think a wise management, if the earnings had been anywhere from 8 to 50 per cent. — Q. I donh mean earnings, dividends actually paid? A. — would have provided for the extensions out of the earnings. Mr. Einger : That is all.. Mr. Eichberg: I would like to ask one question that I think the record is inadvertently not clear on. Chairman Wilkerson: You may proceed. Mr. Eichberg: Did you mean to say the average of 163 all wages had increased between 225 and and 240 per cent.? A. No, I said common labor, the lowest priced. Q. The lowest priced? A. Yes, sir. I said that. Q. You mean that applies generally across the United States? A. Yes, I think the common labor has gone up somewhere between two and a quarter and two and one- half times. Q. I think the record may have borne a misimpression on that. A. I made that statement very clearly. Q. Are you familiar with the Government’s statistics on the average increase of wages to labor in the last four years? A. I am not; I know what it has been in my own industry. If it is essential to the record, I will look it up and give you the facts. Mr. Eichberg: That is all. Mr. Dunbaugh: That is all. Chairman Wilkerson: Call your next. Mr. Dunbaugh: Mr. Folds. Mr. Folds: Charles W. Folds, member of the firm of Hathaway, Smith, Folds and Company, brokers and bankers; chairman of the Board of Federal Securities Corporation. Mr. Dunbaugh: You have seen these questions? Mr. Folds: I have not only seen the questions, but I heard the replies today, and I generally agree except to this extent: I think Mr. Forgan is wrong, — that the Telephone Company could borrow at a net rate of 9 per cent today. I think it would cost them 94. I think their securities would have to be sold to the public at 7f or 8 per cent. That is a temporary condition, however, and not a permanent condition. We are offering the 164 choicest notes today at 74, and are offering notes of very strong industrial corporations with many times quick assets as well as permanent assets back of them, on an 8 per cent, basis, running for a year and a half to two years. I believe that any public utility operating at the present time could not sell long-term securities, it would have to be for short time borrowing, and neces- sarily very expensive. I do not believe the public will take their long securities under the present conditions. I think the main difficulty in my mind as to the financing of these public utilities is the attitude of the public mind. I am going to lay the attitude of the public mind to sev- eral causes, one possibly a general antagonism against public utilities and monopolistic organizations. It is a natural thing for an individual to feel that the big cor- poration, which has a special kind of franchise, is nat- urally opposed to him. It is unfortunate, but that is sort of ingrained in the human system. Second, the greatest obstacle to the whole thing is politicians who make po- litical capital and political footballs out of everything that they can possibly put their hands on, and I lay the charge right at their door more than anything else of the inability to get money required to give service that we need. The third is the general conditions throughout the country. I think we need a campaign of information to the public so that they will understand that these cor- porations really belong ‘to them indirectly, not through public ownership, which to my mind would be a fizzle, but through a commission such as I am sitting before now, and that they belong to them to see that they get reasonable rates. On the other hand, the utilities have to receive proper rates to get a return on their invest- ment, in order to give service. 165 I agree with Mr. Piez, that we have to have good serv- ice. I am a director in one or two industrial concerns and we have had a great shortage of labor and we have had great difficulty in housing our labor after we get it and also great difficulty in getting labor, and the tremendous difficulty of either getting adequate telephone service or street car service, and in some cases having the gas mains expanded. I think that question is one that any man living will answer in the affirmative if he studies it over. I think that covers my testimony. Mr. Bangs: You referred to the money market as temporary, what did you mean by that? A. What I meant is the very extreme point is tempo- rary. I think myself we are going to be in high rates for a long time to come. What Mr. Porgan said about a general increase in values has gone by. Our Grovernment in one way, to my mind, is partly re- sponsible for it unwittingly. They started in on war con- tracts, the cost plus system, and they told their con- tractors they could have cost plus 10 per cent, and they immediately began competing for labor and material and everything else on that basis and every one had to fol- low. That is one of the outcomes of the war. We have got to that situation where it is very hard to come down from our pedestal. What I call a temporary situation is over five years. I think it will be five years before we get down to pre-war rates, but I think we will come down next year to somewhat better than we are now. Chairman Wilkerson: If this Commission were to grant advances in rates to all of these utilities which would give them a return comparable with the re- 166 turns being received in industrial lines, do you think that with public sentiment the way it is now, securities could be marketed! A. I think they could. Personally I would not go as far as that; I do think a public utility needs a return quite as great as that in the industrial lines. Q. What I was trying to get at, was your view as to the effect of this agitation which I suppose we will al- ways have with us, because we have always had people preaching confiscation. A. I think it will be very un- popular. In a speech I made a while ago on which you were to be with me on the program, a man shouted out, ‘^How about this six-cent carfare!” There were 1,500 people present there, and I had him brought up before me on the stage and I asked him in regard to the wages he was getting and so forth, and when I got through he said, ^ Wou win,” right out before the crowd, no question about it. He was getting nearly three times as much wages down at the stock yards as he was three years ago, and he was hollering about a one-cent increase in the fares. He is human, he is going to holler at every- thing. That is the American spirit. But, as a matter of fact, if you put out the reasons fairly and tell him so that he will understand, he will go along. I don’t want to pay any increase any more than anyone else wants to, but we have to, — see how we paid the income tax. Commissioner Lucey: Do I understand you to say that you agree with Mr. Piez on the effect on the city generally oAving to the shortage, if shortage there may be, in telephones, street cars, lighting and so forth! A. I will be more definite.’ I am a director in a for- eign corporation in another state, a night’s ride from Chicago. A year ago we bought a property in Chicago 167 and paid $170,000 for it. We are still holding it and pay- ing taxes. We have not moved here, hecanse, on a care- ful investigation, the committee found it would be prac- tically impossible to get the working men out there be- cause the street car men have not improved the extension, and these various other problems, so that we are in doubt whether we will ever move to Chicago or not. We are offered $100,000 profit on our investment, and we are thinking maybe we will sell it and stay where we are. I offer that as a concrete illustration. Q. Is that a typical illustration of what you mean, of what you have in your mind when you talk about the effect on business and the confidence in general through the inadequate service of these utility corporations? Would you cite that as typical? A. I think there is a great deal of that. There is a great deal of business that will come to Chicago and certain business that will in- crease every year if we have the adequate facilities. Q. IsnT it a fact that the shortage of these facilities is reflected in the returns of not only the particular busi- ness such as your own or which might be affected by insufficient transportation facilities, but doesn’t it affect the grocer, the shoe merchant, the clothing merchant and every other business of every kind and character in the city? A. It does. Q. In other words, the public in general? A. Yes, sir ; it is so, absolutely. Commissioner Lucey: I think that is all. 168 Cross-Examination by Mr. Cleveland. Q. Mr. Folds, this Federal Securities you mentioned, is that a Government institution? A. No, sir. Q. It is a private concern with the Federal name? A. It is a concern started by the young men associated with me in the Liberty Loan. I don’t give any time to that, I just mentioned it. Q. You agree, take the Surface Lines and the Elevated and the Telephone Company, particularly the Surface Lines and the Elevated, their service is rather inade- quate, isn’t it, at this time? A. It is not adequate to what we should have. Q. It is inadequate? A. Well, it is inadequate to the needs of Chicago; yes, I think it is as adequate as any human being can make it with what they have to do with. Q. The city has outgrown the system? A. Yes, sir; it has. Q. You don’t have to use it much yourself ? A. Ido. Q. Well, I thought you had an automobile. A. I have an automobile, but I use the street cars too. Q. You realize in the case of a monopoly regulation is proper, don’t you? A. Yes, absolutely. Q. And it is a matter in which the people are con- cerned, you agree to that? A. Yes, sir. Q. And you think a campaign of education should be carried on for the people to make them realize what the situation is, do you not? A. I do. Q. Is there any objection to such a campaign being carried on from your viewpoint as an investor, provided the statements made by the people are honestly and justly made? A. None. 169 Q. Did you personally participate in conducting the adoption of the ordinance in the fall of 1918? A. What ordinance was that? Q. The one to the Street Railways Company? A. I favored giving them an ordinance. Q. And you know that the Surface Lines maintained a bureau for the purpose of advocating the adoption of that ordinance? A. Yes, sir. Q. You also knew that the grand jury made a state- ment that the evidence before it showed that the ordi* nance had been obtained by bribery, didn’t you? A. No. Q. You did not read that? A. No. Chairman Wilkerson: Was anybody ever prosecuted or indicted for that? Mr. Cleveland: No. Chairman Wilkerson: What then has the statement made before the grand jury to do when intelligent men in this community do not either indict or prosecute on it? The time has come when these insinuations and innuendoes on these things should be stopped. That is my own view about it. Mr. Cleveland : You figured it was all right and proper for the representatives of the company to go before the people and point out the merits of that proposition? A. Absolutely. Q. You would not say it was being fair-minded, — there was no reason why the people opposed to it should not go out and point out their objections? A. Not if they approached it with the idea that they were working for the people of Chicago, and not working for some po- litical conviction. 170 Q. You do not think so? A. That has been my idea for 25 years, both Democratic and Republican, absolutely. I have no use for it and I am getting sick of it. Q. You are opposed to men in public life? A. No, sir; I am not opposed to men in public life. Q. Making an issue on the street oar question? A. I am opposed to men in public life lowering themselves and their moral standards to make use of things which as a business proposition they would throw out of their office, but in public life they take up. Q. Suppose they tell the truth about those things? A. I do not believe they do. I do not believe there is a man in the city hall who has told the truth about this in 20 years. Q. It is possible some of them do not believe you tell the truth? A. Well, let them come around and tell me that to my face. Q. They might do that. A. All right. Q. The question about that is, it is a matter of public consideration, isn’t it? A. Yes, sir. Q. And as long as it is a matter of public considera- tion, politics being in the case of a man — a politician being a man who has in mind the serving of the people, which is a correct definition of it — A. He has it in someone else ’s mind, not in his own. Q. I know, that you great financiers laugh at that, you are opposed to a man that does that, that is the definition, you probably had not read the dictionary on it. That is what a politician in the proper sense is. If that is what a politician is, a man who has in mind the service of the people, do you have objection to that kind of a politician? A. Yes, I do not think those questions should be po- litical at all. 171 Q. If you were to go before the people, they are necessarily political, aren’t they? A. I do not think they need to go before the people. Q. I thought that was the truth? A. I think the people could develop and appoint men such as this Com- mission and others, that will deal with these questions better than a lot of uneducated voters and politicians could. Q. It is your idea that this ordinance of 1918 which was referred to the people and defeated by the people, would be better passed upon by some business men who are in favor of it? A. Not business men; I am willing that every side should have a chance. Q. But not submitted to the people? A. Yes, sub- mitted to the people. Q. There should be some submission to the people? A. Yes. Q. The only tribunal that can have it considered is before the people? A. I do not consider politics in the sense we are talking about it. Q. The only ditference between you and me is that we do not use politics in the same sense. A. I hope not. Q. Do you consider that the value of the securities of the public utilities depends at all on the question of their ability to make a valid and binding contract that they can live up to? A. Repeat that. Mr. Cleveland: Read it. (Question read.) Chairman Wilkerson: Answer it if you can. A. I think that is one thing to be considered. You 172 are only stating part of the question ; you are not giving the whole thing; I think of course for every side of -the question, either party has to be able to live up to its contract or show good faith that it will live up to its con- tract, or else it will affect the value of the securities — Q. You have handled a great many of these Surface Lines securities? A. Not in my own business; we do not handle them at all. Q. You do not handle them at all? A. I bought them in other ways, though, that I am connected with. Q. Assuming that some commission or the city council had undertaken to reduce the fares provided in the ordi- nances below what they were described to be after the bonds were issued on them, would you say that it would be improper politics to go before the people and urge on the people that that was an unfair and unjust thing to do? A. No. Q. Would you, Mr. Folds? A. I do not think it would be done, though. Q. No, just raise them, that is your only idea, is it? A. No, it is not. Q. Now, isn’t it a fact, Mr. Folds, that the stability of an investment is the thing of prime necessity in order to make it attractive to the public? A. The stability of the investment and the earning power, more partic- ularly the earning power. Q. Well, you have got to have security behind it, don’t you, so that they think they are at least sure to get back the principal? A. Yes, but I would not loan one thou- sand dollars on a building if I thought it was going to be empty for the next five years, because I would get no return on my investment, even though it was worth one million dollars. 173 Q. If the building was worth one million dollars, you would not loan ten million on it, even if you got a rate of return of 10 per cent., would you! A. No, sir; I would not. Q. Now, you have decided in advance that public ownership is going to be a fizzle? A. I feel satisfied. Q. Have you considered any of the systems where there is public ownership prevailing? A. Yes, and I think it would be a very difficult matter to point one out that would not be run better by private management, in- cluding water works and other things. Q. Your idea is that water works, gas plants, great and small, should be private ownerships? A. That is my private opinion. Q. Yes. A. Under public ownership I think they should be carefully regulated. Q. Isn’t it true, however, that from the beginning of the government of this state, public ownership has prevailed with reference to certain things more or less? A. Yes, sir. Q. Sometimes it has been water works, sometimes gas works, sometimes electric lights, that is true, isn’t it? A. Yes, sir. Q. The question of public ownership is not a matter that depends on any universal principle but has to be taken up in relation to the particular things, isn’t that true? A. Yes, sir. Q. Isn’t it a fact, that on the market today the bonds issued by municipalities for public utilities operated by them will rate higher than the bonds issued by private concerns operating public utilities? A. Yes, sir, because by a very unjust law we allow them to be tax exempt, 174 under the present tax law. Of course, it naturally follows that those things are higher. These things are on a level when it comes down to a man, at a desk, with a pencil, who knows how to figure. Q. Can there he any doubt, suppose the work is hon- estly done, that a public utility owned and operated by public ownership is the safe investment? A. A public utility owned and operated through — Q. Through public ownership, if it is dealt with hon- estly? A. If the community is a prosperous one and a populous one of course it is, — you would not want me to say that the City of Chicago bonds are no good; that would be foolish, but the City of Chicago is going to get to tl;ie point where their bonds will he just like the Chi- cago Railways Company. Q. Well, you are indulging in prophesies? A. If the City of Chicago should go to the Street Railways Com- pany and want to borrow money on the bonds they would have to pay 9 per cent. Q. Well, I agree with you on that assumption? A. Taking it over on the city halPs valuation. Q. No, we donT want to take any valuation, we will build up our new system. A. You get it out of the tax payers, you have twenty or twenty-five million dollars of our money. Q. That is your money? A. It is the public’s. Q. Who does that belong to, the public or the street car company? A. I think it belongs to the public. Q. Paid under the contract? A. I forget, I thought that was paid out for a subway system as we needed it. Q. For what? A. . To be paid out for a subway sys- tem as we needed it. 175 Q. For whom? A. The politicians don’t want to go into it. Q. For whom? A. For the city, but leased to the street railway company. *Q. To be used exclusively by the Street Railway Com- pany? A. Yes. Q. That is your idea? A. Yes, they paid the money. Q. You listened to Mr. Forgan and you heard him make some statements on cross-examination, aside from what corrections you made, do you substantially concur in what he says? A. Yes, sir. Mr. Cleveland: That is all. Mr. Ringer: How is the telephone service? A. About as fair and about as poor as in most of the cities, I think it is better than in New York. Q. Satisfactory? A. No, I would not say it is all we want, but it is fair. Q. You think the service would be improved if a higher rate of wages would be paid to the employes? A. I am not a telephone administrator, but I imagine that would be — they would have more ease in getting employes. I know what we are paying an operator on our switchboard, and I know we are paying a great deal higher salary than the Telephone Company can pay, but if we lose the operator tomorrow, we can send down to Washington street and get one of their good girls. Nobody limits us to what we are paying, we can pay $125 a month if we want to. Q. You think at present we have reached the peak prices on material and labor? A. I do. Q. Don’t you think any valuation based on these 176 peak prices, with the idea of using the peak prices for per- manent valuations is unfair! A. I agree with Mr. Wheeler on that, you have to consider these prices if you are going to get anything, and you have to also give a small margin to write off these things as we go down. My idea of the whole affair is that the prices should ad- vance and recede as things permit. I do not think tele- phone rates should go up and stay up for all time, but if the time ever comes when they may go down, — I doubt if that -time will ever come when they may go down, — I think they should. I think the same with regard to street car rates and gas rates. You have to meet the situation. Q. You are in favor of everything going up! A. No, I deprecate it very much. I can show you a letter that I sent out to my customers on that. Q. You are in favor of everything going up, including the street car company! A. I think they have to right now, because when we close all the shops and factories and the people stand in the bread lines and the United Chari- ties, of which I am president, has its back broken, I think at that time the public utilities’ wages will probably re- duce, and then I will be on the other side of the fence, but right now, I think they have to have it to give service. Q. What effect would it have on this investment stand- point if rates should go up this year and down the next year, or the Lord knows where they will go! A. I am glad you asked that. If I can get before this Commission and show the public that the attitude of these people is, under a proper valuation of their property and a fair conduct of their business, only to get a fair return for their capital, whether up now or down later or still fur- ther up, according to the general situation, then the public will come in and invest in those securities. 177 Q. I suppose you have to take into consideration the exigencies of human affairs, which may result in a change of the personnel of the Commission! A. That is true, and, therefore, you have to give them something for a margin. Q. Give them plenty of margin and credit it against expenses! A. Not plenty, just enough to guard against the future. Commissioner Shaw: Is business being injured at the present time by reason of the service being rendered by the carriers, the railroads! A. Very much. Q. If there was the same breakdown, as you may call it, by the utilities, such as the gas, telephone and street car company and so forth, would the effect on business be the same ! A. It would be worse because it would be more direct, very definite, and a more local proposition. The railroad situation has a great deal to do in the pres- ent tightness of money rates, millions of dollars of pro- duce are tied up in freight yards all over the country that they cannot get their money out of. Commissioner Shaw: That is all. Chairman Wilkerson : Is that all! Mr. Dunbaugh : That is all. Chairman Wilkerson: Do you want to make a state- ment, Mr. Eichberg! Mr. Eichberg: Yes, I wish to make a statement. Mr. Cleveland: It is getting late, why not adjourn until 2 o’clock, now. Chairman Wilkerson : All right, we will adjourn until 2 o’clock this afternoon. Adjourned until 2 p. m. 178 Wednesday, May 12, 1920, 2 o’clock p. m. Hearing met pursuant to adjournment. Present: Same as before. Commissioners Wilkerson (presiding), Lucey, Dempcy, Shaw and Funk. Commissioner Wilkerson : You may proceed with the next witness. Mr. Eichberg: I have not been sworn, Mr. Commis- sioner. I am going to make just an informal statement. That is my understanding. Commissioner Wilkerson : Do you want to make it un- der oath? Mr. Eichberg: I am perfectly willing to. I do not know there is any distinction. (Whereupon Mr. Eichberg was sworn by Commis- sioner Wilkerson.) Donald E. Eichberg, called as a witness herein, having been first duly sworn, testified as follows : My reason for asking an opportunity to present this statement is, in the first place, because indiscriminate condemnation of all public representatives who oppose the wishes of public utilities is as unfair in my judgment, and I might say ‘^demogogic” as indiscriminate abuse of all public utility operators, because of the scandalous conduct of some of them. Therefore, I should like to pre- sent something of the point of view of the representative of the public. In the second place, I would like to call attention to the fact that the utilities themselves here have been, or 179 are often, the cause of discrediting these public officials who try to be fair with them. I can cite a personal instance in which I risked and received considerable public criticism for negotiating an agreement with a public utility whereby the quality of the service was lowered, in exchange for lowering rates ; and as the Commission will recollect, that utility at- tempted before this Commission, to break that agreement and to obtain higher rates within five months of the signing of it, which the Commission refused to allow. Before proceeding to a more formal statement I also wish to state what I have to say reflects in no way the individual views of the other representatives of the city who are present for the city administration, and they are not to be charged with anything I may say. These are my views. They may differ radically with them, or they may be in some agreement with them, but they have not participated in the preparation of this statement. As special counsel for the City of Chicago in gas mat- ters, I desire to make a statement upon the matter of financing extensions in public utility service which is now before the Commission. This statement I base on a study of public utility problems extending over approximately 20 years, including about 16 years of active practice as a lawyer largely concerned with public service questions. The public interest in behalf of which this appearance is made is found not only in the customers of public serv- ice companies, but also in salaried workers and wage earners whose profit from their labor is diminished by in- creasing interest rates and in the present investors in public utility securities whose available capital is dimin- ished by the same cause. There are certain fundamental considerations of imme- 180 diate as well as ultimate importance which should be presented to the Commission. The responsibility for maintaining the financial integrity of public utilities should not be imposed entirely upon their customers until at least it has been determined whether the owners and operators of these utilities have fully met their pri- mary responsibility. Public officials should not be asked to give legal sanction to interest charges prescribed as usurious and made illegal until at least they have con- sidered the effect upon the community welfare which may result from such action. This Commission has been asked to accept high interest rates as the result of the opera- tion of natural economic laws. The Commission should at least consider whether these rates partially result from artificial laws put in force through concentrated control of credit and industry, strengthened through a world war. The Commission is asked to increase heavily the cost to the public of private ownership of public utilities, as a measure for preventing that public ownership which may result from a further demonstration of incapacity or lack of responsibility in private management. Should not the Commission consider whether the proposed relief will accomplish this purpose, or, may simply result in increas- ing enormously the capital investment and the capital charges to be assumed by the government if forced event- ually to take over this public service to protect the gen- eral welfare ? This question is not asked by a convinced proponent of public operation of public utilities. I ask it as one somewhat fearful of that consequence. But is it not high time for conservative capitalists to decide whether they will use every effort to support private own- ership of public utilities, or whether they are ready to 181 accept the alternative of governmental control! The half way measures now advocated before this Commission are inadequate for any permanent solution. Mr. Hulbert, president of several banks, stated that three or four year notes were not permanent financing. He said, ^Ht is very temporary and very unsound.’^ Mr. Corey, vice- president of the Harris Trust & Savings Bank said, ^‘The corporation which must in order to pay for the develop- ment of its business, the corporation that must borrow all the money that it needs for this purpose year in and year out, is destined for the financial grave yard, absolutely. Under these circumstances any constructive action on the part of this Commission must involve considerations of the underlying causes of present utility diseases and adoption of a policy which will work toward permanent improvement. It is my purpose to indicate that the sug- gestions offered igiiore certain major causes and that the remedies proposed are likely to aggravate the malady they are offered to cure. First, what are the causes of present public utility diffi- culties ! Political agitation was the principal explanation offered by the previous witnesses. Of course, these gen- tlemen themselves know, or ought to know, that polit- ical agitation is an effect and rarely the cause of any- thing. Politics was a football of the public utilities long before the utilities became a football of politics. The struggle to drive the public utilities out of politics has raged in every state and every large city in the United States. The original public utility promoters went into politics to get wealthy and their heirs remained in poli- tics to protect the spoils of victory. The operators now complain of lack of public confi- dence in the utilities. What is there in the record of the 182 utilities to promote public confidence? Does history re- cord that the public would have benefited by placing more confidence in Mr. Yerkes or Mr. Harriman? The record of the public utilities as public servants in any community, from Maine to California, at any time during the last 50 years, is not such as would naturally inspire public confi- dence in the efficiency and economy of their service or in the value of their securities. But the public is told that the character of the operators has changed, that their main motive now is to be faithful public servants. Do the utility operators ever realize how the personal pros- perity of many past and present utility promoters clouds this claim in the mind of the average individual? It is difficult to find a prominent public utility which is not the source of some conspicuous fortune and the public curiously enough assumes that these fortunes have been made out of the public. Furthermore, have not the customers of public utilities as well as their security holders in many localities, and many times, observed the operators and their friends buy- ing and selling utility securities and profiting heavily by inside information, and also by favorable contracts with friendly interests, at the expense of the security holders and the general public? Under these circum- stances is it surprising that protestations of high aims and public spirited purposes even by blameless operators fall upon deaf ears? The first step to take the public utilities out of poli- tics is for the public utilities to get out of politics, and if they do not dare to take that step it may be suggested that they might get out of the lowest grade of politics and operate only on the higher levels. The first step to encourage public confidence in the virtue of public utility 183 operators is for the stronger operators to persuade the weaker brethren to more frequent exhibitions of those elementary virtues whereby men restrain themselves from making private profits out of breaches of public trust. I make these statements in detail merely to point out that public aversion to utilities is not anything which is created or resulted apparently out of political agita- tion. Another reason for lack of public confidence in utility securities is stated to be the present low market value of these securities and the principal cause of these low values has been asserted to be regulation by public util- ity commissions. The Commission will recognize that up to the present time commission regulation has had little depressing effect on the market value of securities which were essentially sound, but the rising interest rate, en- couraged by the same gentlemen who appear as wit- nesses, has depressed the value of existing sound securi- ties. These gentlemen now propose that the Commission sanction a much higher rate for public utility securities and thereby further depress present values. Then they will be able to prove their present proposition that com- mission regulation has undermined the investors’ confi- dence in even sound public utility securities. Has commission regulation anything to do with the fact that Commonwealth Edison five per cent, bonds have been selling below 801 Not yet. But if this Commission 'establishes a seven per cent, rate for first class utility bonds every Edison company bondholder may credit the Commission with permanently reducing the value of his investment. Yet, Mr. Insull, who is presumably inter- ested in protecting those who have already invested in these bonds, comes before the Commission and advocate? 184 a policy of stabilizing a high interest rate which will cause further loss to his already unhappy bondholders. There are many instances where commission regula- tion has denied to the victims of financial misrepresenta- tions the right to squeeze the public to make up for their bad judgment in buying securities representing an invest- ment of hope instead of capital. The Blue Sky securi- ties issued by public utilities have suffered from commis- sion regulation, but it will be difficult to find an instance where a public utility commission has denied a fair re- turn upon capital actually and prudently invested in a public utility enterprise after competent evidence of such investment has been presented to the commission. The real issue which seems to be presented to the pub- lic utility commission today is : Is it in the public inter- est to impose on the public the burden of making good the shameful exploitation of public utilities in the past and to start afresh on a basis which will guarantee the soundness of existing securities and those issued in the future*? There are two parts to the program put forth to accomplish this purpose. One is the temporary re- lief afforded by allowing high interest rates. The sec- ond, is the permanent relief afforded by approving the transformation of lead in public utility capitalization into gold through the use of so-called ‘ ‘ reproduction values. ’ ’ Taking up the first part of the program I suggest an inquiry into the effect upon the community of stabiliz- ing a high interest rate through commission action. It seemed to be the belief of the witnesses appearing before the Commission that the general conditions have made a high interest rate logical, natural and just, and the commission had no option except to accept this fact and give it official approval. It was stated that capital was 185 scarce, that credit was over extended, and that therefore, investors could demand and would demand a higher rate, and that their demands must be met or else no further capital would flow into the public utilities. The Com- mission was thus faced with a demand from representa- tives of capital for a higher wage, backed by the assur- ance that unless a higher wage is allowed, public utility service will be crippled by a refusal of further capital contributions. This demand must sound to the Commis- sion as somewhat similar to the demand which has come from time to time from representatives of labor asking for a higher wage and backed by the assurance that un- less a higher wage is allowed, public utility service would be crippled by a refusal of further labor contributions. A distinction between the two demands was indicated by the statement of certain bankers that they appeared not as representatives of investors but merely as intermedi- aries between the investors and the public utility oper- ators, and, of course, the Commission is informed that the investors are not organized into national or international unions but only partially organized into local unions of stockholders. Therefore, when the public utilities are threatened with disaster from a capital strike it is diffi- cult to find any one to punish or to lecture for failure to accept the responsibility for keeping the public ser- vice in continual operation. Thus a capital strike is in many ways more difficult to deal with than a labor strike, but it should be recognized that the demands are similar. It should also be recognized that, so far as credit is con- trolled through organizations of bankers and investment bankers, there is a grave responsibility on those who ad- mittedly exercise a considerable control over credit to exert their power to assist in the financing of public util- 186 ities ; and that they are subject to severe criticism when they fail to exhibit a feeling of responsibility. It might be pointed out that savings deposits still draw the three per cent, interest that they drew many years ago and that certificates of deposit draw two and three cent, as before. It appears therefore, that there is sufficient understanding between the banking in- terests to prevent any competitive increase in the rate of interests on savings deposits although their representa- tives will assure the Commission that they are unable to prevent competitive increases of interest on sound public utility bonds. One of the bankers appearing as a witness, stated that, ^‘public utilities are in the market competing with industrial concerns that are making 30 and 40 per cent, on their capital and who can show such earnings for years back.’’ But none of the bankers tes- tified that they had made any exceptional effort to con- vince investors that a certain proportion of investments must be made in public utilities or else investments in industrials will suffer, as many of them are now suffering, from the lack of public utility facilities. Some of the witnesses appearing before this Commis- sion, all of whom were men of high standing and excep- tional ability, exhibited curious ideas of political econ- omy, which is one of the reasons I suggested the desirabil- ity of further evidence, indicating that perhaps one of the difficulties in the present situation is the lack of an appreciation of the long distance effects of policies ac- cepted for the moment as desirable because profitable. A leading public utility operator stated: ^‘Increasing the rate from what it used to be, five or six per cent, to nine per cent, is really increasing the wages of capital, which like the wages of labor were bound to go up.” An 187 eminent banker following this witness referring approv- ingly to his testimony said, ‘‘the price of money is higher than it was. It has gone up with everything else and necessarily so. ’ ’ It seems that a primer on political econ- omy might convey useful information to these witnesses. The idea that money should command a higher interest rate because it is cheaper is somewhat amazing. A wage earner may demand more money because cheaper money gives him less actual return for his labor, but if money demands more money because it is itself cheaper, it is, in fact, simply asking for a larger profit than before. That is the real effect of the demand for higher inter- est rates. Interest on capital is produced by surplus labor. There is no value in property save that which is given to it from day to day by the labor of the day. If capital increases its demand from 6 to 10 per cent, it is requiring 66 per cent, more surplus labor to be devoted to meeting capital charges. It should be recognized that this is an enormous demand to place upon labor. It should also be recognized that if the productivity of labor rises through the use of machinery, so that labor can meet this demand, the result is that the benefits of improved methods of production are disproportionately absorbed by the contributors of capital; that labor is denied its fair proportion of these benefits and that the dissatisfaction of labor with this result is deep, inevitable and of dangerous consequences. The purpose of suggesting these considerations to the Commission is to point out that an increasing interest rate is a bad tendency from any broad point of view and one which the Commission, as a body of public officials, should hesitate to accelerate. Of course, there is a larger margin of profit for banking interests in a higher interest 188 rate and the public utility operators, who need continually the aid and support of these interests, cannot be expected to testify in opposition to their views. But the Public Utilities Commission of the State of Illinois may well hesitate to decide an issue of this importance upon evi- dence presented only by interested parties on one side of the case. Such statements as I am making can have but little weight against the authority and prestige of previous witnesses but I hope that by these statements I may be able to indicate the desirability of action by the Commission calling for the presentation of evidence from authoritative representatives of the public, from men of vision in the universities and from men repre- senting the productive labor which is called upon to pay these interest charges. Certainly the record should not be limited to witnesses representing special interests and special pleaders in their behalf. In order to assure the Commission that I do not ap- pear merely as a critic of the work of others, but have certain constructive suggestions to make regarding the handling of the present problem I ask the indulgence of a little more time to present a suggestion in regard to the second part of the present program, which is the revalua- tion of public utilities with the design of re-inflating present deflated securities which do not represent actual investment. In order to restablish the stability of the public utility securities they must be placed on the basis of a practically guaranteed return, so that while bearing a moderate interest return, they can be sold without the inducement of a speculative increase in value. To ac- complish this result the utility operators should reject the bad counsel of those engineers who seek to establish the ever shifting reproduction value as the basis for the return. The state or federal government may prop- 189 erly assure the holders of public utility securities of a constant return upon money invested but cannot prop- erly assure them of a fluctuating return upon a so-called '‘value’’ which inflates or deflates according to the gen- eral price levels. It is harvest time for engineering experts when they can revalue public utility properties every few years. The cost of the valuation of the properties of the Peoples Gas Light & Coke Company has already far exceeded $1,250,000, but these efforts are destructive of that sta- bility in security values which would make it possible to finance public utility extensions at a reasonable cost. If public utility commissions and public utility oper- ators would co-operate in the effort a program somewhat along the following lines would permit financing utility needs at a smaller cost than has been suggested as pos- sible by any of the previous witnesses. First, a base value of existing property must be fixed upon the basis of the investment prudently made and remaining in the property. Second, an allowance may be made for development of the property taking into consideration contributions made and losses suffered in various ways to bring the utility to its present condition. This allowance offers the only fair field for the exercise of discretion as to how far the public interest Avill be advanced by forgiving improvi- dence or even dishonesty in the development of the enter- prise. If any validation of wholesale stock watering or approval of a larger fictitious capitalization is necessary to rehabilitate a utility, public officials cannot assume this responsibility. Third, upon the investment so determined a rate of return should be allowed covering the return appropri- 190 ate to the capital obligations represented in the prop- erty plus proper depreciation and maintenance charges. Fourth, upon the authorization of the issuance of fu- ture securities a revenue should be allowed for and seg- regrated in the rate sufficient to pay a fixed return. In the case of bonds, it might be desirable to provide an additional amount for a sinking fund for serial retire- ment. In the case of stock, the rate might be subject to adjustment according to financial conditions, so as to encourage further investment for extensions as needed. Fifth, returns for capital provided for in the commis- sion’s orders should be set forth as assurances of a find- ing by the commission of actual investment and the rate determined as that commanded by the money invested, not subject to increase or deduction according to any theoretical increase or decrease in the theoretical selling value of property which cannot be sold because devoted to public service. Sixth, the commission supervision over the utility and its accounts should assure the public that no money de- rived from depreciation charges or other reserves will be disbursed as profits. To insure this protection no payments for use of capital should be permitted in excess of the regular return allowed, except upon a special ap- proving order of the commission. If the relation of investment to securities outstanding in certain corporations is such that no proper commission order would bring existing securities up to a price level which would permit the issuance of similar securities except at prohibitive cost, which I understand to be the situation confronting the Commission in certain cases, the Commission might properly refuse to authorize fur- ther securities except preferential securities approved by 191 the necessary present security holders upon which a re- turn could be assured, and the funds to provide the return could be segregated in the company’s accounts. In other words, if a utility is improperly financed it must reor- ganize itself, but if it is soundly financed the Commission can give practical assurance of the value of its securities in the future. It is recognized, of course, that the government should not guarantee a return to a private enterprise, but gov- ernmental assurance of a reasonable fixed return is the responsibility constantly assumed by commissions and if assumed in a more formal manner than at present should go a long way toward stabilizing public utility securities and enhancing their value, while at the same time reduc- ing the capital burden on the public. The foregoing suggestion is not presented as anything peculiarly original or advocated as a complete program. It is merely put forth as a suggestion of the lines along which, with co-operation between public utility commis- sions, public utilities, and banking interests, it may be possible to work toward a permanent improvement in the present public utility situation. I hope it may be re- garded as a service if it is effective to stimulate discus- sion of some practical plan that will do more than merely postpone for a year or two the solution of an existing evil which may present, in a year or two, more vicious alternatives than are now before us. Learned writers as conservative as Professor Taussig of Harvard, have asserted that the test of democracy may come in its abil- ity to solve public utility problems. It is a great responsibility which rests upon this Com- mission to determine a general policy such as the one now under consideration and the Commission may well 192 draw to its aid the counsel of those members of the com- munity who have not yet appeared before the Commis- sion who represent unbiased opinion regarding the im- portant social, industrial and political factors which should be taken into consideration. Commissioner Wilkerson: You may proceed. Commissioner Funk: I would like to have you give us your idea on the rate of return ; I did not get it clearly ; you read it rather rapidly. Do you think that the rate of return should be a fluctuating figure that might in some respects or to some extent correspond with the fluc- tuations in the rates of interest! Mr. Richberg: I think that as far as stock is con- cerned that the base on which the return is made is fixed ; that there should be a margin, for necessary change in the rate, allowed in order to meet the demand for money at a particular time. Commissioner Funk: That is not just exactly clear. Suppose there is a property that is valued at $1,000,000. Mr. Richberg: Yes. Commissioner Funk: — and the stockholders put up $500,000, and it is bonded for $500,000. Now, the people that own the $500,000 of stock, either benefit, or other- wise, according to the prosperity of the company. Mr. Richberg: Yes. Commissioner Funk : And the property is valued 'at a certain figure by this, or any other commission. Is it your view that the rate of return upon that property, * the ownership of which is in the people, who own the $500,000 of stock with no fixed return when the stock is issued, no seven per cent, or anything of that kind, they get what they get 193 Mr. Eichberg: Yes. Commissioner Funk : — how should the rates be fixed by a.commission so that the rate of return to these people who owned those properties through the $500,000 worth of stock issued, should it advance or decline, correspond- ing to the fluctuation of interest rates, prevailing? Mr. Richberg: I think, yes, it must be reflected; it must reflect the prevailing interest rates with reasonable consideration by the Commission as to whether they are merely temporary or permanent. In other words, a general rise in the rate demanded by money must be taken into consideration by the Com- mission, certainly. Commissioner Funk: I am conceding that the money for the improvements, or the enlargements, may cost the property a higher rate today than it did five years ago — Mr. Richberg: Yes. Commissioner Funk : — and that the rates established by this Commission would affect that fact; however, in consideration of that particular change, in taking into consideration, in view of that particular change, would, of course, would probably be higher, whether short term notes or some sort of preferred stock, or whatever it might be, I was wondering what your views were, to what extent the rate of return should fluctuate? Mr. Richberg: As to the balance of the stock? Commissioner Funk: Yes, the original issue. Mr. Richberg: I think the rate there should not be subject to any increase, except so far as over a broad period there may be an entirely different level for rates in the community; then I think they would have to be 194 taken into consideration, even as to money previously in- vested. Commissioner Funk: That does not give me much comfort. Who knows whether the scale of rates, or sphere of rates in now are temporary for three months, or for three years; that is the thing before us? Mr. Eichberg: I think that is a question entirely of your best judgment ; whereas, in this present situation it has been stated by witnesses who are competent to tes- tify to that certainly, that this is an abnormal situation. Commissioner Wilkerson: I have a number of ques- tions which the Commission would like to ask, but first, I would ask if you have a copy of the statement from which you read so the reporter can have it? I should like to have it accurate in the record. Mr. Eichberg: Yes, I have an extra copy which I mil hand to the reporter. Commissioner Wilkerson: The Commission or perhaps some of the parties may desire to ask some questions at . a later time but we have some other witnesses here now that we would like to release. Mr. Eichberg : I would be glad to step aside. Commissioner Wilkerson : The order which appointed this meeting, Mr. Eichberg, provided that an opportunity would be afforded, not only to the utilities interested but to any others who might desire to submit their views to the Commission. Mr. Eichberg: I understood so. Commissioner Wilkerson : Have you any suggestions as to that, how that should be done? Do you know of any gentlemen who would care to submit any views to the Commission that may support your position? 195 Mr. Richberg: I think, as a matter of fact, that evi- dence might be, more desirable, is of such a character as might more naturally flow to the Commission upon a suggestion from the Commission rather than from any outside party. Commissioner Wilkerson: We have asked no one to appear here to testify. They have come in because we have appointed this hearing. Mr. Richberg: Yes, I understand. Commissioner Wilkerson: You may proceed with the hearing. (Witness withdrawn.) Samuel Insull, a witness heretofore called herein, hav- ing been previously duly sworn, was examined on cross by Mr. Cleveland, and testified as follows : Commissioner Wilkerson : Mr. Samuel Insull recalled for further examination. Do you desire to ask any ques- tions 1 Mr. Cleveland: Yes, sir. This is ' cross-examination. Commissioner Wilkerson: Recalled for further exam- ination. Mr. Cleveland: It is for cross-examination. Commissioner Wilkerson: You can characterize it what you will. Mr. Cleveland : Mr. Insull, why do you think that pub- lic utilities should be monopolistic rather than competi- tive in a given community'? A. I think in the nature of their business they have got to be monopolistic. 196 Q. Being monopolistic, they would necessarily be sub- ject to public regulation in the interest of the people, would they not! A. Certainly. Q. That being so, the question as to their capitaliza- tion or over-capitalization, their management and their rate of return, are matters of public consideration, are they not! A. Yes, sir. Q. And properly so, are they not, Mr. Insull! A. Properly so, sir. Q. And as long as the consideration of these questions is carried on and conducted in a fair and proper manner there can be no possible cause for objection to such con- sideration, can there! A. Certainly not, I, myself, have been advocating the public regulation of public utilities in return for monopoly since the year 1896. Q. Now, you said that the present condition of some of the utilities — I will speak more particularly about the elevated railroads, the Chicago Telephone Company and the Chicago Surface Lines, — that their present financial difficulties were due to politics ; just what do you mean by that, Mr. Insull! A. I do not think I made such a state- ment, Mr. Cleveland. Q. Just what was it, did I understand you to say that — A. Have you not my evidence before you! Q. I understood you to say it was made the football of politics. A. If you will please read my evidence, I will try to explain it. Q. The question is, do you know what I have reference to, Mr. Insull! A. I would prefer you to put your ques- tion, sir. Q. All right. I will put it this way then: For the present you take for illustration the Chicago Surface 197 Lines ; you gave as a valuation of those properties $186,- 000,000; where did you get that figure, Mr. Insull? A. Those figures came from the balance sheet. You will find them on the ‘ ‘ asset side of their balance sheet. Q. You do not pretend to have any personal knowl- edge in regard to the actual valuation of the surface lines, do you! A. No. I do not believe they could be duplicated for double the money. Q. Have you been — That is a reproduction for dou- ble the money? A. Yes. Q. You have not — Double what money! A. Dou- ble the amount of money invested. Q. How much do you understand : $186,000,000 is what you understand to be invested! A. I understand the $186,000,000 was the amount of assets the surface lines had, just as I stated. Q. On the basis of reproduction, new, or what basis! A. On the basis of the statement as shown by their bal- ance sheet. Q. You have not been familiar with the evidence that has been introduced in regard to the valuations of these properties, have you, Mr. Insull! A. I do not know what you are referring to, Mr. Cleveland. Q. There has been a long hearing going on before the Commission here, where there has been a great deal of evidence introduced in regard to the valuation of these properties. A. I have read nothing except the head lines of the articles when they appeared in the news- papers. I have read none of the transcripts of the evi- dence. Q. Are you familiar with the 1907 ordinance! A. Reasonably so, sir. 198 Q. Are you familiar with the method in which the capital account or purchase price is to be built up under this ordinance? A. Reasonably so. Q. If it is a fact, assuming it to be a fact, that these properties are actually worth not to exceed $129,000,000 ; and they are mortgaged for $144,000,000, you could not expect them to have any credit, could you, or to get any new money, be able to get any new money? The Witness : Will you please read that question? (Question read.) Commissioner Wilkerson: Read that question again, please ? ' (Question read.) Commissioner Lucey : It occurs to me that your ques- tion, Mr. Cleveland, is not based on anything that is in here in the nature of direct evidence. Now, if it is a proper hypothetical question, it ought to embody the ele- ments that have been presented here. Mr. Cleveland : We proved by our witnesses that even on the basis to reproduce new — Commissioner Lucey: I have no objection to your asking any question, of any kind, which belongs in this hearing, but the evidence in that railroad hearing, of course, is not in this hearing. Mr. Cleveland: I am assuming that is the valuation. Commissioner Lucey: Of course, on any kind of a question of that kind, you could assume there was $140,- 000,000 in mortgages. Mr. Cleveland : I am cross-examining Mr. Insull. Commissioner Lucey: And the question answers itself. There is no direct evidence on anything that this witness has said, or that any other witness has said. 199 which is a proper foundation for the hypothetical ques- tion you assume. Mr. Cleveland : This is cross-examination, and I want to find out from Mr. Insull, what is the reason these com- panies have not got any credit, and canT get new money. Commissioner Lucey: I say to you, the hypothetical question that you have propounded is not based on any evidence which is in the record before you now. Mr. Cleveland: Not in this hearing. It is in the rec- ord in the surface lines case, I think. Commissioner Lucey: Of course, those questions an- swer themselves. You can state questions to which there can be no dispute, or about which there can be no dis- pute. Mr. Cleveland : I would like to have Mr. Insull answer it. The Witness : Suppose you read that question again, please f Would you mind reading it again? (Last question read.) A. It is impossible for me to answer a question of that kind, Mr. Wilkerson. I can’t assume a fact that is not a fact. I can’t assume that these properties are only worth $129,000,000, when I believe they are worth a good deal more than that. Commissioner Wilkerson: You have not studied in our school of logic, Mr. Insull, long enough. Mr. Cleveland: I am asking just the question; I am asking you, Mr. Insull, whether, assuming — ^we claim these are the facts — ^I am asking you to assume that ; as- sume those are the facts, the company would have no chance to get a loan or to get an investment in their prop- erties, would it? 200 A. Of course it would not. Commissioner Wilkerson : If you had a house worth $1,000, with a $2,000 mortgage on it, and you wanted to borrow a thousand more, on that house — could you! A. No. Mr. Cleveland: Now, as a matter of fact, it is a basis of all financing, or all loans, taking the loans at present, that there shall be a reasonable margin of security to pro- tect the principal, isn’t that so, Mr. Insull? A. No, not always. That is not so. That was not so in the case of the securities placed on the Chicago Surface Lines, the security given to the bondholders who took the Chicago Surface Lines bonds was the amount of prop- erty as valued by experts of the City of Chicago, and as recognized by ordinance of the City of Chicago; and it was a further security of the good faith of the City of Chicago that it would carry out the obligations of that ordinance — Q. Yes. A. — I think that was a very important point, and part of the security given. It had a distinct value as long as that good faith was not attacked. Q. That is to say, that the value of these securities depended upon the contracts between the city and the companies being carried out in good faith! A. In good faith. Q. What would you have said, Mr. Insull, as to the good faith of the city if it had, say four or five years ago, come before this Commission — even before this Commis- sion was created, and attempted to reduce the rates of fare therein provided! A. The city has no control over that subject. Q. Before they did! A. According to the Supreme 201 Court of the state. Excuse me, I am not a lawyer, but I understand that, sir. Q. Do you think, or is it your idea, that the city alone is bound to carry out these contracts in good faith? A. Oh, no. Q. Is it a clear obligation on the part of the compa- nies to comply with their obligations? A. Absolutely. Q. Do you object — A. Might I ask a question, if you will excuse me? Q. I am not testifying. A. Is it their obligation — are you assuming it is their obligation to carry out that contract even when it is impossible to pay operating ex- penses of the property at the fare provided? Q. I will answer your question by asking this : — A. If you want a general discussion of the street railway sit- uation, we might as well have it here, if the Commission will indulge us, but I think Mr. Cleveland is far exceed- ing the purpose of this inquiry, as I understand it. I do not think I am a witness in the street car case. Q. You testified about that, did you not? A . I testi- fied generally about the subject of utilities. Q. You mentioned the surface lines in particular. A. I could not help myself. Q. Now we are taking it up. Now, Mr. Insull, is it your idea that where a contract is made for a period of twenty years, and the utility has had the benefit of the contract for twelve years, and we will assume has reaped great benefits out of it, do you then think it is fair and just when the hard times or the lean years come, to change the contract so as to guarantee the return? A. I would not presume to sit here even as a witness to 202 criticize the decisions of this Commission unless the Com- mission instructs me to. Q. They wonT. Commissioner Wilkerson: I might say, about this cross-examination, or this examination, that any other person who may desire to participate may do so, and it is the hope of the Commission that the examination be lim- ited to the subject in the hearing; and that witnesses will be cross-examined about matters which they testified upon, points on which they testified on direct, mat- ters which are pertinent to the inquiry before the Com- mission. We trust it will not be necessary to announce a time limitation upon the time of cross-examination, but the docket of the Commission is in such condition that an extended cross-examination of several days will not be practicable ; and if we are compelled, we will impose a time limitation on the cross-examination. Mr. Cleveland: Now, Mr. Insull, take the case of the Chicago Surface Lines; is it your understanding that they can or cannot get new money as matters now stand ? A. They can’t get it; that is my judgment. Q. Now they, as you understand it — the service at present is inadequate? A. Very bad in my judgment. Q. And they need new capital to make extensions and enlargements to catch up with the growth of the city? A. Very badly, sir. Q. What is your view ; — is it your view that the rates should be imposed upon the public to produce the new capital to make these extensions? A. To a limited ex- tent, so far as the interests of the community require it Q. So that I won’t misunderstand you; for instance, we will say on a certain street they need an extension of 203 five miles of tracks to serve a given community; then you think that the rates should be imposed to get money enough to make that extension; is that right? A. Yes, and no. I would consider that in the present condition of the cost of money and the cost of labor and the cost of material that that should be — there should be a very great hesitation as to extending five miles of track in any one particular spot in the City of Chicago. Q. Supposing — A. Would you mind my getting through ? Q. All right. Go ahead. I thought you were through. A. I think a matter of that kind should be settled by an expert body such as the Public Utilities Commission. Q.’ But assuming that it is settled, that the extension should be made, do you think then that rates should be imposed on the people to get the capital to make that ex- tension? A. Well, now, if that is in a direction where certain real estate operators are more greatly profited, or to be greatly profitable by the extension of that track into that territory, I would say the burden should rest largely upon them. I would do it more by special assess- ment if I had the power than by assessing the whole com- munity. Q. But assuming it is for the benefit of the people at large to make this extension, is it your view that rates should be imposed to provide capital to make the exten- sion? A. I canh assume that because I do not know of any one spot where five miles of track built in the City of Chicago would be for the benefit of the community at large. Q. Well, all right; let us take another basis. Sup- pose they need more cars, more equipment, to accommo- 204 date the public, would you say they should have that im- posed upon them — A. I should say yes, then, yes. Q. The rate should be imposed to provide money to buy cars? A. Yes, sir. Q. Then who would the cars belong to ? A. The cars would belong to the company with the right to the city, under the 1907 ordinance to acquire. I may be in error. I am giving it from memory. I have not that ordinance before me, but I think they would not have to pay one penny for those cars. Q. That is to say, you would not add^ — your idea is to not add the cost of these extensions that are to be made from the proceeds of the rates, to the purchase price or the capital account — A. I would say that would be paid in this case, just as it is when the case did come up before this Commission for investigation. If investment is made out of the surplus funds, in the case of a corpo- ration here, you have a pretty hard time to get a return on that money from this Commission. Q. You know they have a capital account, Mr. Insull, and a purchase price under the ordinance I A. There is not a dollar charged against that capital account with- out being approved by the engineers of the city. Q. Well, the board of supervising engineers? A. Yes. Q. They are not of the city; one is appointed by the city and represents the city — A. Under the ordinance. Q. — under the ordinance. Now, then, that is added to the purchase price in the case of extensions, approved by the Board of Supervising Engineers? A. Yes. Q. Now, supposing there are a lot of cars purchased at that time, — would you say that the cost of those cars 205 should be added to the purchase price, even if they are to be paid out of the rates! A. No ; I have said I do not think that is a fair proposition. Q. Now, isn’t it a fact that the surface lines, as you understand it, are in a position where they must get new capital in order to remove the present inadequacy of the service! A. Yes, they need new capital. Q. Do you know of any other way to get capital, ex- cept to get it out of the rates! A. Not with their credit in the condition it is. Q. Do you not think, Mr. Insull, that if the security holders, or the holders of the securities, would consent to have a prior lien put on the property to raise what they needed, these six or eight million dollars, that they could get that money! A. I think that is a ridicu- lous question, Mr. Cleveland. Q. Assuming it is, Mr. Insull, could it be done! A. No. You could not get that. Why should a man who has bought the bonds — those bonds are scattered from Maine to California — why should a man, or a woman, or an es- tate, that has bought a bond partly upon the security of the street railways and partly upon the security of the good faith of the City of Chicago, why should that man surrender his right to a prior lien on that property! Q. Possibly because there has not been good faith on the part of the company now. Commissioner Lucey : It seems to me, Mr. Cleveland, this is cross-examination based on the valuation of the street car companies. Now, that is not the purpose of this hearing. Mr. Cleveland: We are trying to get the facts. Commissioner Lucey: Try to confine yourself to the 206 general situation. That arises because of the settlement ordinance, is a question which is peculiar to that situa- tion, and it is of no benefit as to the other utihties, and your questions should be as general as the hearing is. Otherwise it is of no value to any of the other utilities. The 1907 ordinance does not help us here. Mr. Cleveland : It does have an application here, how- ever. Commissioner Lucey: Make your question as general as the direct examination; how does that apply to the telephone company? Mr. Cleveland: But, Mr. Commissioner, you allowed them on their direct examination to segregate these properties, and it is not fair to us to make us go in gen- erally. Commissioner Lucey: Your cross-examination is de- voted peculiarly to this one utility. We are considering the utilities in Cairo and Gralena, just the same as we are the ones in Chicago. Mr. Cleveland: The witness has testified specifioally about the surface lines, the elevated railroad, and the telephone — The Witness: Generally — Mr. Cleveland : His testimony was he did testify about it. Commissioner Lucey: Very well, I do not care. Mr. Cleveland: Now, Mr. Insull, it has frequently happened, in your experience, has it not, that where a company was unable to meet its interest charges, and to live up to its contracts, that a receiver has been appointed to act, and by means of receiver’s certificates has been able to get money which may be needed to carry out its 207 obligations to the public. Hasn’t that frequently hap pened? A. In my experience? Q. Not in your particular companies, but of your knowledge? A. To my knowledge it has happened, yes. Q. You stated that the elevated railroads were in de- fault on $12,000,000? A. Yes, sir. Q. Of their notes? A. Yes. Q. And practically in the hands of a receiver? A. Practically. Q. Are the individual elevated railroad companies in default on any of their obligations? A. No, none of their obligations. Q. The default is with respect to the notes issued by the holding company? A. The holding company. Q. Is it possible, under existing conditions, for the elevated railroad. company to get new loans or to procure additional investments in the property? A. No; neither in this holding company itself, which is in default, nor in its subsidiary companies, which are not in default, owing to the very bad repute of the City of Chicago as a result of the attitude of the administration towards the surface railroads. Q. That is, you mean — A. That is my judgment. Q. Now, Mr. Insull, you are familiar with the elevated railroads in particular ? A. Yes. Q. Is or is not their service and their equipment in- adequate? A. Absolutely inadequate. They need bigger platforms, longer trains, and vastly increased equip- ment. Q. Is there any way that you know of to get this in- 208 creased capital, except by imposing rates upon the pub- lic? A. I do not know of any other one. Of course, in the situation — Q. You mean — A. — of the elevated railroads there is no question of the property. There is vastly more property there than there are prior lien obligations outstanding. That is generally conceded. I think even you would concede that, but their situation is precisely the same as far as the possibility of raising capital is concerned, as that of the surface lines. They have a lack of income to carry the securities, although they have a tremendous margin of property over prior securities issued. Q. Now, what rate would you think that the elevated would have to have in order to enable them to get this necessary capital? A. Well, they need two things — three things. Fundamentally they need more gross rev- enue. Next they need a different attitude of the city ad- ministration towards the transportation proposition. The third thing involved would be the question of the ruling rate for money, and they would have to pay, of course, whatever rate is going. Q. Now, might I not add a fourth element, and that is the absolute lack of confidence of the public in these utili- ties? A. Well, what has brought that about? Q. Are you asking me what has brought that about? A. That is what I meant when I stated that one of the difficulties of the situation was the making of utilities the football of politics. Q. Yes. A. That is what I meant by that. Q. Yes. A. Yes. Q. That is to say, it has been made the matter of pub- 209 lie consideration and discussion? A. Hardly. That is hardly fair, Mr. Cleveland. Q. What? A. That is hardly fair. Q. Isn’t it? A. Was the 70-cent gas ordinance of Carter Harrison ’s time a mere public consideration of a public utility question? Was the $50,000,000 valuation of the People ’s Gas Light & Coke Company in Chairman O’Connell’s time of the Public Utilities Commission a fair consideration of a utility question? These are the things I mean when I talk about the utilities being made political footballs. Q. Mr. Insull, do you think it was a fair valuation of the Chicago Surface Lines to include in it from forty- four million in the capital account, — from $44,000,000 to $75,000,000 that represented no property at all? A. Wasn’t that in the 1907 ordinance? Q. Yes. A. Wasn’t that approved by the city coun- cil? Q. Yes. A. Wasn’t it approved by the people of Chicago ? Q. Yes. A. Sir? Q. Yes, and wasn’t it repudiated by the surface lines? Now, Mr. Insull, as a matter of fact, don’t you recog- nize — A. Why did you drop the elevated roads? Wliy not come back to the elevated roads? Q. I am willing to come back to the elevated roads. A. I am more familiar with that. Q. Now, will you answer the question, Mr. Insull, that I put to you? A. Yes, I will try to. Q. I asked you what rates you think are necessary in order to get you the capital that is required to remove the inadequacy of the elevated railroads’ service and equipment? A. What rates are necessary? 210 Q. Yes, sir? A. I think you have got to restore their credit before you can have — Q. You asked me not to get otf of the subject. I am asking you about the rate. A. I am right on the sub- ject. Commissioner Lucey: Let him answer. A. We have got to restore the credit and earning ca- pacity of those properties before it is possible for them to go into the money market of this city or ally other city to raise money. Q. How are you going to do it? What is the rate you want to do it? A. Do you mean the rate of fare? Q. Yes? A. Oh, I thought you were talking about the cost of money. I don’t know. I am not competent to answer that. Q. Would it require a considerably higher rate than you are getting now? A. It depends entirely upon the cost of labor and material. Q. Suppose the cost of labor and material continues as at the present time? A. They are more likely to go up in the case of the elevated and surface lines. Q. Would you require as high a rate of fare then as now, if it goes up ? A. Require higher. Q. Higher? A. Yes. Q. That is what we want to know, — a rate of how much, Mr. Insull? A. They need a higher rate now; they are running behind, both the surface and elevated lines. Q. How much higher do you say they should have? A. I don’t know. Q. Take the telephone company, it can get money, 211 can’t it, if it pays the rate they ask? A. I don’t know. Why not ask Mr. Sunny? He is the president. Q. You testified about it. I want to ask you. You gave your views about it the other day. A. They can get money at the rate — Q. And the Commonwealth Edison Company can get money at the rate ? A. At the rate, yes. Q. That is because you have security to offer for the principal, isn’t it? A. But the elevated has ample se- curity to offer for the principal. Q. I am asking you — A. They have got just as much security so far as property is concerned relatively as the Edison Company and Telephone Company. Q. Why can’t the elevated company get the money? A. Because the revenue that they earn based upon the present rate of fare is insufficient to pay the cost of operation plus their present fixed charges. Q. Then the revenue in the telephone case, I take it, in your view, is sufficient for those purposes? A. Oh, yes. To pay the present fixed charges. Q. Yes. A. Yes. Chairman Wilkerson: Do you mean the telephone or the Edison? A. What? Chairman Wilkerson: Do you mean the telephone or the Edison? A. Both. Mr. Cleveland: That is all, Mr. Insull. Chairman Wilkerson : Call your next. 212 B. E. Sunny resumed the stand: (Colloquy omitted.) Mr. Binger: We simply stated we did not care to cross-examine Mr. Sunny and gave you the reasons why, because his direct examination presented a situation which did not require any cross-examination. Chairman Wilkerson : Very well ; call the next witness then. Henry A. Blair, recalled for cross-examination by Mr. Cleveland, and testified as follows: Q. Mr. Blair, do you think that the Chicago Surface Lines ought to be taken out of politics! 1 understand you approved that statement, did you! Mr. Sheean: That is objected to as not cross-exam- ination. A. I did not know — Mr. Sheean: Just a moment. That is objected to as not cross-examination. Mr. Cleveland: He said he approved what the others said on the subject. He said the trouble is they are made the football of politics. Mr. Sheean : The statement is, ‘ ‘ The statements made by the two witnesses, by Mr. Sunny and Mr. Insull on the general situation I concur in in full,^’ and that gen- eral situation is the one covered and prescribed by the order of the Commission as to what they desire to be heard upon. Chairman Wilkerson: What is the question! 218 (Question read.) Chairman Wilkerson: Did you approve it? A. I think it should be taken out, if it is in. Mr. Cleveland: Mr. Blair, don’t the Chicago Sur- face Lines maintain in the city hall a gentleman by the name of Bogy, whose only business is to keep the surface lines in politics ? A. I don’t know. I cannot answer that. Q. Do you keep a man or men at Springfield for the same purposes? A. Not that I know of. Q. When the 1918 ordinance was before the people did you not maintain a bureau, — I mean by you, the surface lines, — for the purpose of carrying on a political pro- paganda in favor of that ordinance? Mr. Sheean: That is objected to. Commissioner Lucey: Sustained. Mr. Cleveland : Exception. Q. And did you not in that connection, and was it not in connection with that campaign that the question as to the validity of your contracts with the city and the valuations thereunder was first brought before the people? Mr. Sheean: Objected to as having no materiality or relevancy to anything within the scope of this inquiry. Chairman Wilkerson: Objection sustained. Mr. Sheean : Or being cross-examination of anything that has been adduced by any witness. Chairman Wilkerson : Objection sustained. Mr. Cleveland : Exception. Q. Mr. Blair, is the service of the Chicago Surface 214 Lines and its equipment at the present time inadequate for the public service! A. I think it is. Q. Do you know of any way that you can get money to remove that inadequacy! A. Not at present, under present conditions. Q. Have you made any effort to get that money from your stockholders! A. No, sir. Q. Have you made any effort to get the security holders, the holders of the outstanding indebtedness of the company, to waive their claims to the extent of allow- ing you to raise money on the properties for that pur- pose! A. No, sir. Q. Have you made any effort — what effort have you made to get this money except^ — well, what effort have you made to get this money! A. I have been in touch with the bankers who have financed the property since 1908 up to 1917, the period in which the war started, and we have been refused. Q. You have tried to borrow the money! A. Yes, sir. Q. By a lien that would be a junior lien to the exist- ing encumbrances! A. No, sir. Q. How! A. By a lien on the property; the money actually would go into the property and bonds issued for that purpose. Q. Would the bonds be secured in any way! A. Would be secured by the valuation that goes into the property, — the additional amount that goes into the prop- erty. Q. No mortgage or trust deed! A. Yes, first mort- gage. Q. First mortgage on what! A. On the entire prop- 215 erty. There is an equity in the properties of $50,000,000 in the surface lines today. Q. On what basis — now, do you mean to say that your mortgage that you would give, that you offered to these bankers, was a mortgage that would be ahead of the existing mortgages on the property? Mr. Sheean : I think the Commission understands that the first mortgage there is an open mortgage under which all bonds that are issued become part of it. Chairman Wilkerson : That is part of the record. Mr. Sheean: Yes, that is part of the record that we have been over. A. It is part of the record. Mr. Cleveland: That don’t answer my question. Q, What I want to know is this, was the mortgage that you were going to give to secure the bonds to be a new mortgage ahead of the existing mortgage? A. No, sir, it was not. Q. You proposed to issue more bonds under the pres- ent mortgage? A. Open mortgage. Q. Yes. A. Yes. Q. Now, you say there is an equity of $50,000,000 there, Mr. Blair? A. Yes, sir. Q. Over and above your mortgages? A. First mort- gage. Q. How much are the first mortgages outstanding? A. On both properties ? Q. On all properties ? A. About one hundred million dollars. Q. How much is the indebtedness outstanding? A. « 216 About one hundred forty-four or forty-five million dol- lars. Q. How is the forty-four million dollars secured? A. That is a junior mortgage. Q. Junior mortgage? A. Yes, sir; what is known as the Consolidated mortgage. Q. How much of the mortgage, of the one hundred million dollar mortgage, represents money procured by the companies, actual new money procured by the com- panies that went into the properties after the contracts of 1907 were made? A. All of it. Q. All of it? A. Yes. Q. How much of the forty-four million dollars was used for that purpose? A. That was obligations that existed in the parent companies at the time of the 1907 ordinance. Q. All of this forty-four million dollars indebtedness existed prior to 1907 ? A. Yes, sir. Q. This forty-four million dollars was to take care of the — A. I think there is one mortgage there in 1907, what is known as the Consolidated mortgage, representing purchase money property. The ordinance of 1907 re- quired the Chicago Eailways Company to take over within two years the Consolidated system, in 1910', I think it was. That was taken over, and there is $4,073,000 represented for that company that went in in 1910'. Q. But with the exception of that, the forty-four mil- lion dollars was to take care of the old claims that existed prior to the contracts of 1907 under the plan of reorgani- zation that was affected at that time, is that so? A. Well, there was some of the Calumet & Southern Kailway included in that. The Chicago Railways Company, 217 as I recall, amoanted to about thirty-seven million dol- lars. There is about seven million dollars in excess of the valuation. I think that is all a matter of record. Q. Now, on what valuation, — on what basis do you say that there is a fifty million dollars equity? I mean, what valuation do you take for the basis of that state- ment? A. The ordinance of 1907 put a valuation on those properties of fifty million dollars, which went as part of the credit, or really was the credit with the ordi- nance for our making the extensions which has amounted to one hundred million dollars. Q. Is it or not true that in your statement that there is a fifty million dollars equity, that you are accepting as the valuation of these properties the amount of the purchase price? A. Yes. Q. Under the ordinances? A. That is right. Yes, that is right. Q. That is what you rely on, is it? A. Yes. Q. Have you taken into consideration any elements that enter into that purchase price that are no longer in the service ? A. I have not. Q. You took the full purchase price? A. Yes, sir. Q. You know, as a matter of fact, that there is in- cluded in there ten million dollars for the franchise, that is, the right to run on the streets, Mr. Blair? A. Yes, sir. Q. That is true, is it not? A. Yes, sir. Q. There is included in there some six million dollars for power houses that are dismantled and no longer in use in the public service, isn’t that true? A. Yes, sir. Q. There is included in there three million dollars 218 and more for organization expense, that is true, isn^t it! A. I am not positive about that, no sir; the organization, about the three million dollars on organization. I think that is true. Q. You know there is a large amount for organization expense! A. I think that is true. Q. Those organization expenses were incurred prior to the contracts of 1907, were they not! A. No, I think not. Q. Are you sure of that! A. Yes, I am quite sure. Q. Isn’t it a fact during the period of rehabilitation there was a net disappearance of physical property amounting to over fourteen million dollars! A. I don’t remember just the figures. I think that is in the record before the Commission. Q. Mr. Snyder testified $14,700,000! A. That is probably correct, if that is his statement. Q. Yes. In this purchase price there is also included several million dollars for pavement! A. Yes, sir. Q. That the city claims title to! A. Yes, sir. Q. Also over $1,000,000, or about $1,000,000 for bridges that belong to the city, that is true, isn’t it! A. Yes, the amount of money that we put into this — Mr. Sheean: Tf the Commission please — Chairman Wilkerson: If it is not cross-examination, object. Mr. Cleveland: Now, are the facts, Mr. Blair, that these matters, — these elements that I have mentioned, are they taken into consideration, so far as you know in determining whether or not loans would be made to you! A. The valuation of the properties as existing today is 219 considered of course, as the valuation of the property as represented on the books, is $158,000,000 or $160,000,000. Q. Now, in your discussion, in regard to making your other loans, was the question of the length of time that your franchises have yet to run, taken into considera- tion? A. The bankers are familiar with that. Q. They know that provision? A. Yes. Q. That was considered? A. Yes, sir. Q. Now, what you need at the present time is addi- tional capital, isn’t it? A. Yes, sir. Q. And what you are asking the Commission to do is to give rates that will produce that additional capital and enable you to make the extensions? A. No, I am not doing that at all. Q. What are you doing, what is your position? A. We are asking the Commission to give a credit on which we can go to the bankers and borrow money and put it into the property, and a rate that is sufficient to take care of the fixed charges for the new money. Q. Merely want a rate to cover the increased rate of interest providing you can get the money? A. Yes, actual cost. Q. You made the statement, you concurred in the state- ment made by these other gentlemen. You know that the money conditions, that the money tightness is some- thing that is in existence all over the country, isn’t it, Mr. Blair? A. Yes, sir. Mr. Cleveland: I think that is all, Mr. Blair. Chairman Wilkerson: Call the next witness. 220 Charles G. Dawes testified as follows : Mr. Dawes: Before I am examined I would like to make this statement to the Commission. I do not know what form this cross-examination of mine will take, whether it will take the form so familiar to you of chasing up a blind alley, and personalities on these questions, or not, but I want to state to the Commission I am ready to answer any questions in relation to my personal in- terest in the properties and in the situation, anything of that sort to the fullest extent. My statements, when I was on the stand here the other day that I would not submit or at any rate would not desire to submit to ques- tions designed to show personal interest was simply be- cause I did not think it was material and I did not want my personal matters to interfere with this matter, but I will say I hope they do go into personal matters in reference to this, and I will say I want to have the priv- ilege of making a statement as to the effect upon this business proposition of the injection of politics and demogogy, and I want to make another statement in con- nection with it. Chairman Wilkerson : All right, proceed. Cross-Examination by Mr. Cleveland. Q. General, how long since you are in politics? A. About twenty years. ’ Q. You graduated from that to be a banker and pro- moter and owner of public utilities, is that right? A. Yes, that is right. Q. As a banker, is it your opinion that one of the prime requisites of getting a loan is to have property that will secure the principal? A. That is one of the prime requisites, yes, sir. 221 Q. And good title to the property is another, is it not? A. Yes, sir, freedom from demogogic attacks and others. Q. Yes. Even by representatives of banks and public utilities? A. Yes, that is right. Mr. Cleveland: That is all. General. A. I would like the privilege of just reading a state- ment along that line, because I have been putting in some time this week investigating just what was the financial effect of the dragging of this question into politics. This is a business question and I am interested as a citizen as well as a small owner of bonds. Chairman Wilkerson: You may proceed. Mr. Cleveland: I might suggest — Is this an argu- ment ? A. This is argument based upon figures, and I want to be cross-examined on the argument. Mr. Cleveland: I think the argnment of the general ought to take place among other counsel. A. I don’t care. Let us get at the truth. Let me be called counsel without compensation, which is a dif- ferent situation from that which the gentlemen on the other side represent. It does not make any difference what you call me. Let us get at the facts. Mr. Cleveland: Let us finish up with the witnesses. Why should the general make a speech ? Chairman Wilkerson: You are here all the time. We can hear you. He is only here infrequently. A. I want you to cross-examine me because I put some work in on this thing. Mr. Cleveland: I hope you will say something this time that is worth cross-examining you about. A. I hope so. Let us see if I have. The serious situation as to street railway transporta- 222 ton into which the politicians of the City of Chicago have thrust its people by demagogery, claimed to be in the people’s interests., is difficult to overstate. The time is approaching when business men must give some atten- tion to unmasking political hypocrites and carry the fight of reason against them to a public which they are misrep- resenting. It should not be difficult to explain to the ordinary man that a great business like the transporta- tion of a city should be settled as the business interests of the city demand and not in the political interests of those who temporarily happen to be in control of the administration. If he understands in addition what is the fact that under a plea of saving him money on street car fares, the methods advocated by the city will greatly increase the cost and lessen the efficiency of the service, he will be more apt to retain a permanent inter- est in the matter. The fare grabbers, plutocrats, and sinister interests in the Chicago street car situation, using the vernacular of the city politicians, are the unfortunate scattered holders of the secondary obligations of the surface lines which represent an agreed upon valuation arrived at after long negotiations between the roads and the city in 1907. The market value of these secondary obligations before the city administration put the blight of politics upon a busi- ness question was $65,935,025 which, even at those fig- ures, represented a large loss upon the securities of the old street car systems, which they were issued to repre- sent. But now that this great business question of trans- portation has been dragged into politics, the market value of the secondary securities is $24,487,810, representing a Fall in the market of $41,447,215. The annual income, 223 out of $43,000,000 gross income, now paid the holders of these secondary securities of the Chicago Surface Lines, is about $3,200,000 per year, Chicago Railways Company $2,069,188, and the Chicago City Railway Company, $ 1 , 200 , 000 . According to the reports of the experts employed by the city to testify before this Commission, as I noticed in the Daily News of May 7th— I don’t know whether these figures take in the Chicago City and Connecting Railroad or not, it does not make any difference, I draw my state- ment broad enough to cover that — according to the re- ports of the experts employed by the city to testify be- fore this C/ommission, as T noticed in the Daily News of May 7th, they estimate that the valuation of the roads should be cut $43,546,409, which surprisingly approxi- mates the value which the city once agreed was inherent in the secondary securities. But by whatever process it may be attempted, let us assume that the politicians have succeeded in destroying all the interest of the pres- ent secondary security holders s.o that they will no longer be able to run this business question up a blind alley in the minds of unthinl^ing people by demagogic attacks upon the secondary security holders. With this $3,200,000 per year income wiped out, it would be no longer possible to represent these unfortun- ate security holders as fare grabbers, plutocrats, and sinister interests and as responsible for everything with which the people are dissatisfied in the street car service. Let us, therefore, mthout discussing any question of public policy or public morals which is involved in this attempt, consider the situation which the public con- fronts now in regard to improving the city transporta- tion, remembering that the ruin of the secondary security 224 holders, if accomplished, will only intensify the distrust of new capital when invited to contribute the means nec- essary to rehabilitate the roads. Even now, under these political attacks, the first mort- gage bonds of the surface lines, which is the only source of the new money supply for rehabilitation, are selling on about a 14 to 15 per cent, basis. In these times of credit stringency the railroads and other public utilities, not being attacked by the demagogues, are having to pay as high as seven and eight per cent, for their money, and much of it is not as well secured actually as are the first mortgage bonds of the Chicago Surface Lines. The dif- ference between a seven per cent, interest rate and about a 14 per cent, interest rate, to wit: seven per cent., is the financial measure of the effects of the fight of the demagogues upon the street car situation. The testimony of Mr. Blair and the experts is that the Chicago Surface Lines need $10,000,000 to $15,000,000 immediately, and probably $10,000,000 per year for the next 10 years, to keep them in shape to properly per- form the service which the public demands. In other words, even if the income of the secondary security hold- ers of the Chicago Surface Lines, amounting to $3,200,000 annually, were confiscated, an extra annual charge of $700,000 to $1,000,000 in addition to ordinary rates for money, would have to be imposed upon the people to get the means immediately necessary for the roads, and $700,000 additional each year thereafter to provide the money necessary to keep them up. Within about four years the entire annual income forced away from the secondary security holders would have been dissipated in the extra cost of capital to the roads alone. And this would be done in the name of the interests of the people. 225 Let no one deceive themselves as to this. You pos- sibly might confiscate the old property of the Chicago Surface Lines, but old property will not rehabilitate the lines. New money must be invited into the enterprise. In a city where political attacks have brought the mar- ket price of the Chicago Surface Lines first mortgage bonds down from 98 and 99 to between 60 and 65 in a few years, new capital will not consent to put its neck into the noose a second time without charging heavily for it. I do not believe that even a 15 per cent, rate would secure this money based upon conditions which have existed for the last two years in the City of Chicago. The question is immediately raised whether the politic- ians have not already made it impossible for the Chicago public ever to have a satisfactory street car service which, at the same time, will operate under a reasonable expense to them. The political slogan of a five cent fare is too popular to be readily abandoned. Having made the operation by private companies un- der reasonable rates impossible, it would seem to be the policy of the city government to take over the property at confiscatory prices if possible, and then to conceal the inevitable increase in the cost of transportation to the public by taking a part of it from them in the shape of a five cent fare and the balance in the shape of heavier gen- eral or special taxes. The total confiscation of the in- terest of the secondary security holders, with the moral injury to the community ignored, would not, in my judg- ment, save the public one-half what these politicians and their methods will lose it. The proper solution of the question, of course, would be the restoration of the general credit of Chicago public 226 utilities under the State Commission which would enable new capital to be secured for the roads upon a reasonable basis so that under the control of the Commission they would be operated at the least possible cost to the public with the best possible service. But the restoration of credit, even with a strong* Commission as this one is, can never occur until the attacks of the city demagogues cease, and I, for one, see little hope for such an occur- rence in the City of Chicago. I can only reaffirm my statement in my former examination that the dema- gogues who have brought into politics this great question of city transportation, are the real enemies of the people who would place under heavy sacrifice the interests of their city and the public for their own petty and tempo- rary political advantage. That is all. Mr. Cleveland : General, where do you live ? A. I live most of my time down here in the loop and part of the time in Evanston. I am a non-resident of Evanston, Illinois, mixing in this question because I hap- pen to be in business in the City of Chicago and travel on its lines, and I put some money in the Street Rail- ways Company and would like to get it back. Q. How many securities do you own directly! A. $10,000 of the Chicago Railway Company bonds, which I paid $5,000 for, and I think they are worth $2,000. Q. Is your bank interested in any bonds! A. Yes. I brought over a list to show just whaf the bank has got here. Shall I read this out! Q. Yes, please. A. Well, we have got in the banks that stand on our books, $728,150 of all kinds of these securities, mostly the first mortgage. That is what we 227 carry them at. Unfortunately that is not what they cost. I would like to see them increased in price too. We invested the money on a business basis at a reasonable assurance, we thought, of having it safe. Q. Yes. At the time you bought those bonds you supposed that the contracts of 1907 were valid and bind- ing contracts! A. Oh, we supposed we were buying them simply subject to the ordinary risk, and not a raid on the properties by politicians. Q. Well, you assumed that the contracts were valid and binding contracts, did you not! A. We assumed the security was good security. Yes we assumed that the contracts were valid and binding. Q. You assumed that the contracts of 1907, were valid and binding contracts, didn’t you! A. I assumed so, yes. Yes, we assumed that. Q. Before you took these bonds didn’t you have a legal opinion to the effect that these contracts were valid and binding contracts! A. No, we bought them in the open market. We were not relying on the bond sellers and so forth. Q. Yes. Now, these contracts were known as the settlement ordinances, were they not! A. Yes. Q. The Surface Lines were taken out of politics then, were they not, and stayed out of politics until the sum- mer of 1918, didn’t they! A. Well, I was away in 1918. I don ’t know. i Q. Well, Mr. Joseph E. Otis was connected with your bank at that time! A. Yes. Q. Do you know he was named as one of the trustees under that ordinance of 1918! A. No, I did not. Q. You did not know that! A. I did not know that. 228 Q. Did you know that the first start to bring this ques- tion into politics was in connection with the submission of that ordinance to a referendum vote before the people in November, 1918! A. No, I was in Prance in Novem- ber, 1918, and did not know anything about it. Some- thing happened, I noticed, to the bonds in the two years I was away. Q. Yes. But you know that that matter was submitted to the people! Y^ou have learned that, that ordinance! A. Well, I am very sorry to say I never knew it was sub- mitted to the people. I did not know anything that went on over here. Q. You do not know that the Surface Lines maintained a political bureau for the purpose of getting the ap- proval of the people to that ordinance, you did not know that! A. No, I did not know that. Mr. Sheean: There has no proof been offered at any time in any hearing of that. Mr. Cleveland: Of what! Mr. Sheean: Of what you say is a fact. Mr. Cleveiand: Oh, yes, there is. Mr. Sheean: At what page! Mr. Cleveland: We had a man from the Association of Commerce. He testified that the Surface Lines paid $8,000 or $9,000. Mr. Sheean: And what was your question, sir, that the Chicago Surface Lines maintained a bureau! Mr. Cleveland: Yes. Mr. Sheean : And now you say that you meant to say that we contributed a small sum to the Chicago Assoc- iation of Commerce, total expense! 229 Mr. Cleveland: I proved by one of the witnesses this morning Mr. Sheean: If that is what you mean by this state- ment — A. That is the trouble with the whole question, you run up a blind alley. What have I to do with that I Mr. Cleveland: You are talking about bringing it in politics, and I am trjdng to show you it was brought in by the Surface Lines. A. My argument is, take it out of politics. You are spending $400,000 a year, as I understand it. Q. Is it your idea that these Surface Lines and Ele- vateds should be in their respective spheres, should be monopolies? A. Sure they should be, natural monop- olies. Q. Not natural monopolies, governmental monopolies, are they not? A. Yes, they should be governmental mo- nopolies. In my judgment you have a condition in force now where the only solution of this thing is for the peo- ple to take them over. Q. Do you think public ownership is the only solu- tion? A. It seems to me that is the tremendous pen- alty that is going to be put on the people because you have attacked these properties. Even the Commission could not pay any set of rates permanently with these attacks continuing, and you could not set a basis of rates high enough and still the people would travel. You have attacked these roads until now to get new money into it costs 14 per cent. How can the Commission under those attacks raise the fares to the people of Chicago high enough to pay for themselves. If you take it and impose taxation, that is the way you will have to do it, and you 230 mil say to the people you have a five cent fare. That is the scheme, so far as I can see. Q. This being a matter of public regulation, being a monopoly, do I understand you agree it should be a matter of public regulation. A. Certainly. Q. Now, being a matter of public regulation, the manner and method would be a matter of public dis- cretion? A. Certainly, reasonable and sensible public discretion, not personalities. Get it down, if you want to talk about it on a business basis, let us go ahead and talk about it. Put me down as interested, a sinister, a preacher of Wall street, anything you please. Mr. Cleveland: I will tell you what I will do for you, I will arrange for a debate before the people Chairman Wilkerson: Well, not here. Mr. Cleveland: I quite approve of that. Q. Now, General, on the subject, as long as the mat- ter is fairly discussed and the facts are stated to the people, that you would consider as properly legitimate discussion, wouldn’t 3^ouf A. M^hy, certainly, an argu- ment on the square. Q. On the square? A. Yes. Q. On the square? A. Yes. Q. And in that sense and in any sense these utilities necessarily must be in politics so long as they are sub- ject to public regulation, isn’t that true? A. Not poli- tics in the sense that you use the word and act upon it. Q. I use politics in the sense of serving the people? A. Yes. Q. You may disagree with us as to whether we are doing it but that is what we think we are doing. lu 231 that sense, it is proper they should be in politics! A. In that sense it is proper everything should be in poli- tics — ^with the public interests. Q. With the public interests! A. Yes sir, absolutely. Q. Now, you have been in utility business a great deal. Isn’t it a fact that throughout the history of this state, there has been public ownership of public utilities of one kind or another ! A. Do you mean where the municipalities own them. Q. Yes, sir. A. I do not know as to Illinois. Q. You know in Chicago they own the water works, don’t they! A. Oh, yes. I thought you meant street railways. Q. Yes. You know recently in Lake Forest they changed from private ownership of water works to pub- lic ownership of water works, do you not! A. Yes. Q. You know that it has frequently happened through- out that gas light companies, that electric light compa- nies and power companies have been owned by the munic- ipalities! A. Yes. Seattle has just taken over the street car lines. Q. Yes. A. I would like to put in here, if I could, what Ole Hansen says about it. Q. If you will let me put in what other people said I will be glad to let you put in what Ole said, because Ole seems to be on the minority of the subject, according to the reports we get from Seattle. A. He won’t be long if they lose as much next year as this. Q. The question of public or municipal ownership is not a question of a general rule, is it, so much as a ques- tion to be applied in reference to the particular utility and locality, isn’t that true! A. Certainly. 232 Q. So that each utility would have to be taken up on its own merits, and in view of the peculiar circumstances surrounding it. A. Absolutely, yes, sir. Q. Now, do you know what rate of fare they have at Seattle! A. I do not, no. Q. Have you investigated into the situation there more than to read what Ole said, and to get the quota- tions of their bonds! A. Yes, I investigated the situa- tion there in connection with the securities of the road prior to the time the city took them over and knew some- thing of the difficulty they were having. It is something similar to the difficulties of our street car system. Some- body told me today, I do not know who it is, that the deficit this year that the city has to pay is $900,000. I will look that up. Q. Now, General, as a matter of fact. A. They put that in the general taxation, whatever the deficit is. They have credit for a lower fare among some people, I suppose. Q. The question of the money conditions that are prevailing now are not local to Chicago! A. Not at all, and I covered that in putting eight per cent, rate there, and I tell you now that I put that seven per cent, too low for this street car situation here. I do not believe you can get it at all. You have ruined the credit. Q. You think they are about at the end of the rope, so far as getting money is concerned! A. I think they are about at the end of the rope. If you are going to help the people by taking them over, let us see, that is unless the Commission can save them. Q. What would you suggest the Commission can do! A. I am a pessimist. The Commissioners certainly 233 could not raise fares high enough to put new capital on the road. It is a question of fact. It is a business con- dition. Where are you going to get it? Will you get our bank and the Illinois Trust and Savings Bank and the other banks which have had a 33 per cent, reduction in the price of the first mortgage bonds, take chances of buying at 15 per cent., at which they would have to be put out, subject to the attacks as to the five cent fare and this and that that a hostile city administration want to bring up all the time? You have run these roads into that condition where it may be necessary for the City of Chicago, or the people, to take them over and put into the general taxation what should come out of reasonable and proper business administration. Q. You will get me swelled up and burst if you attrib- ute to me so much power. A. You spent $400,000 last year out of the traction fund to put the road in this shape at the expense of the people. A man can take a dynamite bomb and put it under a building and swell up because it blows up. Q. Now, General, do the same conditions that you have stated about the surface lines apply to the elevated rail- road? A. I do not know so much about the elevated rail- road. I do not pose as an expert on elevated railroads, or the telephone company. I have not looked into that. I have looked into the Chicago Surface Lines. I worked about three years trying to get this railroad situation into shape, and I incidentally will say I was paid I think out of that three years work, I got $5,000, then I was trus- tee of the Chicago Railways for three years, and gave up a contract for $5,000 at the end of two years, because I did not think I could give service, but I have some in- 234 formation from three years’ work, practically without compensation, on this Chicago Surface Lines situation. I was trjdng to build up something, not tear it down. Q. The Surface Lines have got to have new capital, don’t they? A. They certainly have. Q. As you understand it, the service at the present time is absolutely inadequate to meet the needs of the people? A. Yes, sir. Mr. Cleveland: I think that is all. Commr. Lucey : Just one question so that we will clear the decks here a little, general. You said the only solu- tion you saw was the taking over by the municipality of the roads? A. Unless the credit of these roads can be established in some way, re-established under this Commission. It would be the greatest calamity to the people of the City of Chicago, to put these street car systems into the hands of these people with every member of the City Council constituting himself a committee of one to have an ex- tension into his section of the town. Why, look at the expense they are at now out of their traction fund, in connection with fighting these properties, and all this sort of thing? Look at the losses. I have here, if you would like to see it, what money they are paying to ex- perts and counsel. Chairman Wilkerson: We have that. A. Yes. Imagine this business proposition in the hands of such men. Commr. Lucey: I just wanted I Mr. Cleveland: Just pardon me. A. Somebody has to pay for it. 235 Q. Do you happen to know, general, how much the Chicago Surface Lines paid their experts for giving the reproduction new valuation without depreciation of their property? A. No, I do not know that. Q. You might he interested to know that it is $166,000. A. From these figures I have here you are paying some- thing like $400,000 to carry on this thing for special coun- sel and special commission and so on. Q. How much has been spent! A. I do not know. That is estimated. Somebody says this goes for that amount and this amount, for what I consider indifferent service, but what is the use I What on earth has that got to do with this question of reasonable settlement of this business question! Q. You said I was giving such indifferent service, just a little while ago you dragged me way up. A. You are doing very good service as a destructive agent. Q. I do not want you to minimize my service, gentle- men, I would not like that. Commr. Lucey : I wanted to ask again, following your statement, Greneral, that the meaning of the question was that if the plant was taken over by the municipality, that it would result in some of these payments being made out of general taxation, and not all from the fare, which Mr. Cleveland insists that the contract calls for, at the five cent fare. • A. Yes. Commr. Lucey : There would be no possibility of oper- ating these roads in your opinion under municipal owner- ship in a more economical manner than operated now! A. In more economical manner, certainly not, mercy! 236 Mr. Cleveland: General, you studied this plan about municipal ownership a great deal, haven’t you? A. What particular plan ? Q. The pending plan. A. No, I have not studied the pending plan, except in a very general way. Q. You understand that the city is going to do this work, don’t you? A. Why the only — I am just back; and the only discussion I had of the plan, which was upon a reasonable basis, that is, where men get down to talk like man to man, was a talk to Mr. Keehn going to New York the other night. Q. Mr. Sheean, do you mean? A. No, Mr. Keehn of the Hearst paper. Q. Oh, yes. A. Mr. Keehn explained something of the plan of the city administration in connection with the taking over of these properties. Have a five cent fare and make up the balance by general and special taxation. Q. What did Mr. Keehn think about it? A. He said he did not know. He thought it might be a good thing and I explained to him it might be the only thing that was possible. Q. Yes. A. With the credit and the service ruined with these political attacks. Q. You and Mr. Keehn had an enjoyable visit? A. Yes, I always enjoy talking about these things in a busi- ness way with a reasonable man. Mr. Cleveland : Come over some time. General, and we will talk them over. A. I will be delighted. Mr. Cleveland: All right, that is all. Chairman Wilkerson : Call your next, Mr. Bangs. 237 Mr. Cleveland: Before he takes it up, there is one mo- tion I think I ought to make here. I ask that the evidence of each and every witness that has appeared here today, including Mr. Wheeler and those that have been cross- examined, be taken and considered as evidence on behalf of the city in the surface lines case. Mr. Sheean: We join in the motion. Chairman Wilkerson: Make that motion in the sur- face lines case and we will rule on that in this case. Mr. Cleveland: Don’t we have to make it in the rec- ord here! Chairman Wilkerson : It may be noted here, and then when you bring it up in the surface lines case we will consider the question. Mr. Ringer: As I understand the needs of the tele- phone company, as made apparent by the testimony of Mr. Sunny in this present hearing, involved the expenditure of about $10,000,000', and you were told that the cost of that was about 9 per cent, per annum, and our attitude is simply this, that the telephone com- pany is in such financial condition, as far as its present assets and incomes are concerned, that there is absolutely no need for the raising of any additional capital, in order to meet the requirements for increased plans, and there- fore that question has no pertinence or bearing upon the present hearing. The question of politics does not enter into it, so far as I am concerned, does not concern me, I do not happen to know what precinct I live in, and I do not suppose anybody cares. I have listened with a great deal of attention to the existing evils. I cannot see how this Commission can cure 238 the ills of politics, and as far as meeting the general eco- nomic conditions of the world, as reflected by the present rate of exchange, or the present cost of money, with all due deference to the omnipotence of this Commission I would say they would have about as much influence on that as old King Kanute had in settling the seething tur- bulence of the waves, so that that question need not in- terest us as far as the commission is concerned. I do believe the telephone company is exhibiting brazen effrontery in coming in here and telling you un- less it gets this $10,000,000, its subscribers are going to suffer very beneficially, and it should not take very long to present the whys and wherefores of it. The situation with reference to the Chicago Telephone Company is peculiar. There is no large body of outside stockholders, and the same stockholding interest that in- dulged in the early profits and secured the benefit of the early advantages is still the stockholding body of that institution. Some witness here testified as to the gross iniquities of bringing before you various elements in or- der to fix rates. I doubt whether in your experience you have ever had or will have as flagrant a presentation of that element, reproduction cost new as we have here in the telephone case a few days ago, when a serious demand was made that you allow a return on $32,000,000 of outstanding stock apportioned to the City of Chicago upon the basis of property values of $134,000,000 working out by an expert engineer of some standing and some renown in the engineering world upon that fantastic cost of reproduc- tion new plan which contemplated the rebuilding of the plant, the destruction of the old plant, and added the munificent item of $32,000,00 for going value. 239 Mr. Bangs: I will have to object to this. I do not understand we are going to argue the rate case on any theories of valuation. I will object to any continuance of argument not confined to this general hearing. Mr. Ringer: Mr. Sunny stated in this hearing before you that during the last ten years there had been added by way of new capital $53,000,000, or as he put it, at the rate of $5,300,000 per annum. Now, this $53,000,000, as far as we know from all the evidence in this case, came from the following sources. By way of new capital $13,000,000 By way of bond flotations during that period. 14,000,000 In other words 27,000,000 of new money, capital, by way of bonds and actual cap- ital investment. Now, we all know where the rest of this came from, and it is coming from the same source today. It came from that fictitious — to a very large extent — from that fictitious depreciation reserve account. Mr. Forgan tes- tified here that that was largely a bookkeeping proposi- tion. It is not by any means. We all know better than that. We all have sat here. We know that that income month after month which is coming to the Chicago Tele- phone Company — Mr. Bangs : I will have to renew my objection. This is no time or place to discuss the case of the Chicago Telephone Company. (Colloquy omitted.) Commissioner Lucey: Would Mr. Bangs have to an- swer you f Mr. Ringer: I presume he would, but I cannot tell you in the matter of a few minutes where they can get the $3,000,000 per annum. 240 Mr. Bangs : Of course, by not charging any deprecia- tion; that is his theory, but let us discuss that when we come to the rate case. Mr. Ringer: No; my contention is if you charge your actual depreciation which your witnesses have proved here, and if you hold out part of that money which you are handing over to the A. T. & T. Company every year, possibly we might be deprived of some very illuminating monographs of the effect of woodpeckers on telephone poles, and things of that kind — Mr. Bangs : I will have to object to this. The last time the commission had this matter under discussion there were five thousand pages of testimony and several hundred pages of briefs, and I do not want to go over that again. Mr. Ringer : I am going to contend with all serious- ness the income of the telephone company at this time is ample to take care of the financial needs, including the needs of the growing plant, leave them adequate return upon their invested capital, and that is all they can ask for. Chairman Wilkerson : I think these arguments, so far as they relate to the telephone case, surface lines case and gas case are more proper to be made in those cases. Any suggestion which may be made on the general prop- osition involved, will be helpful. It semes to me this is a rather inappropriate time to argue it. Mr. Ringer: I am looking at it from the lawyer’s view point. My contention is if you will take the monthly report of the Chicago Telephone Company, and if you will consider in connection with those reports the knowl- edge that is already within your brain on the subject- matter, that you must find that the Chicago Telephone 241 Company at this time is not in need of any assistance toward plant increase. That is the only point I make out about it all. Chairman Wilkerson : Do you desire to cross-examine any of the other witnesses! Mr. Cleveland: There are only two more, aren’t there! Yes, I would like to. Chairman Wilkerson: Do you have any more testi- mony to offer, Mr. Bangs! Mr. Bangs : The only thing I had in mind, Mr. Chair- man, was the fact that Mr. Mitchell and Mr. Reynolds, presidents of two large banks, have been continually out of Chicago, and it may be that they will want to testify, or the Commission will want to hear their views on the matter. 1 think the Commission itself can decide that bet- ter than we could. Chairman Wilkerson : Well, we will take an adjourn- ment in this hearing until the 26th of May. There is a continuation at Springfield next week. 242 Chicago, Illinois, May 26, 1920. Parties met pursuant to adjournment. Present: Same as before. Chairman Wilkerson: You may proceed, Mr. Dun- baugh, with the general hearing, if you have any further evidence. Mr. Dunbaugh : Mr. Reynolds is here, Mr. Chairman, and he wants to make a statement. George M. Reynolds, being first duly sworn, testified as follows : Chairman Wilkerson : Give your full name to the re- porter, please? A. George M. Reynolds. Q. Residence, Chicago, Illinois? A. Chicago, Illinois. Mr. Dunbaugh : State your connection with the Conti- nental & Commercial Bank, Mr. Reynolds, and then pro- ceed to answer the questions which you have seen, that have been asked of the other bankers. A. I am president of the Continental & Commercial National Bank. I had not seen those questions until I came in here, and they were handed to me a moment ago. Answering the first question, I should say at the pres- ent time it is almost an impossibility to secure funds for the use of public utilities due to two distinct causes. One is because of the tightness of money to begin with; we are passing through a period of overextension of credit, — and are trying to retrench and reduce the loans of the country. That, of course, makes one serious handicap, and it applies alike to the public service corporations or 243 other kinds of corporations that need to borrow money at this time. In other words, to amplify, — as a result of the war there is such an overextension of credit that the Federal Eeserve Bank at Washington is making very strenuous efforts to reduce loans. To make it more clear, I can say from the first of June of last year to the 30th of April, this year, there has been an increase in the loans made by the banks of the United States to the various commercial enterprises of the coun- try of approximately $2,000,000,000, and that already on top of what was then regarded as a very large amount of loans, a rather over extended condition. I amplify that for the reason that I want to impress upon you the fact that just so far as the conditions for the moment are concerned, they apply alike to all kinds of borrowers, and banks are obliged under these conditions to restrict their loans to the things that must be taken care of to further commerce and prevent failures and maintain public con- fidence. However, so far as the first question is concerned rela- tive to rates, will say that seven per cent, rate is current in the best short time commercial risk, with occasionally six and one-half per cent, quoted. The borrowers of large amounts of money, whether it be for public utility purposes or otherwise, if they are able to get it, if their credit is such they can get it, would have to pay an enormous premium for that money now, and I do not think that I would be far out of line if I should say 10 per cent, would probably be the cost to the borrower who wanted to go into the market now and get several million dollars of money, no matter whether it was for public utilities or packing business or what not. 244 Even under ordinary conditions where current interest rates are 5 per cent, on commercial requirements, an 8 per cent, cost or an 8| per cent, cost is not far out of line for these large flotations, no matter what they may he, and of course the less promising they are as to profit yielding and the less hopeful they are as to ability to succeed and prosper and be able to pay their obligations, of course the rate increases proportionately, provided they find a lender at all. Answering the other questions as to whether living con- ditions and general business conditions in the City of Chicago would be affected by the inability of public utili- ties to secure capital for extensions and betterments, I should say if that condition were permanent, it would prevent the city from functioning to its fullest ex- tent, because what makes a city is the fact that we have transportation facilities whereby men can assemble in the urban districts and live in moderately expensive homes and still be transported to their business promptly and quickly and thereby come into the cities and thereby earn very much greater compensation in salaries than would he the case if they had to stay in the country ; and it seems to me if anything should happen whereby the public utilities generally would be broken up you would break the city up, stop everything, because it is so inter- woven in the furnishing of light, power and transporta- tion, and everything. I cannot conceive of the picking up and taking out of the utilities over night. It seems to me it would so seriously handicap the city it is unthinkable almost. I do not know what your plan of procedure is, whether you want me to go ahead and express my opinions in a general way or whether you want to catechise me. 245 I want to say that personally I am not here as a di- rector or stockholder of any public utility corporation. Personally I do not have a dollar of stock or a dollar of bonds, and have never had. The institutions with which I am connected have a very slight holding of some of the securities of the surface lines; but it is so slight I might properly say that even they have no direct inter- est in this proposition other than we have in mind the general good of the city, consequently I am not here from any personal motives, or to find fault with what has been done, or criticise anybody, because I recognize that the conditions that now exist are the outgrowth of condi- tions that have developed during a period of years, and that probably people who have — I was going to say perse- cuted the public utilities, have done so in good faith. At least I am willing to assume they have meant well, but when I take into consideration the handicaps imposed upon Chicago’s business and commercial interests by the lack of adequate transportation facilities, it seems to me that in relation to the City of Chicago, we are in exactly the same position with reference to these public utilities that the nation is in its relationship to the rail- roads today. Being a director of the Federal Reserve Bank of this city, I was invited by the Federal Reserve Board at Washington to attend a meeting called by that body a few days ago, the purpose of which was to ascertain, if they could, the most direct cause of this congestion which has existed for the past 60^ or 90 days, and concerning which you men know so much there is no need of repeat- ing it here, — an interchange of views of about 50 men coming from the 12 Federal Reserve Districts of the ,246 United States and covering the total geography of the country. It was the consensus of opinion that 60 or 65 per cent, or a greater per cent, of our trouble now is due to the fact that people who produce commodities have been unable to get them to market. In our own case we have loaned $50,000,000 to our bank correspondents, and I think, without a single exception to the rule, in their application for money they have accompanied it with a statement that if they could only get cars to move their grain and live stock they would not have to borrow this money. Other big manufacturers and jobbers tell us, in a similar manner, they are unable to get their money out of products because they are unable to deliver them where they have been sold, and therefore the whole scheme of business has been tied up in this congestion, and it can only be relieved by a more efficient use of the railroad facilities of this country. Now, I only cite that because it seems to me that so far as our city welfare is concerned, the same thing applies except in a different way, because that is all finan- cial, whereas, this city affair would be both financial and physical. If a man lived 15 or 18 miles out of the city and the facilities have been provided by which Ife gets down to his work and they are taken away from him, and that applies to hundreds of thousands of people in the city, it interrupts and interferes with the functioning of the city as a whole and seriously impairs the situa- tion. Of course, I can recognize how a man who has seen a street car run down the street in front of his house from the time he was born, and how every time he has gone downtown during his entire life, he has run out of the front door and made a run for the car and grabbed the 247 rail, and jumped on, — comes to feel after a while that that is a God given right, and that it should not be in- terfered with and there' should not be any change in the charges, yet it seems to me that the crux of this whole question and all other questions of this kind must ultimately involve this one principle, namely, that the public will have to learn that it must pay for the kind of service that it exacts from any public utility corpora- tion. Now, that, to my mind, is the whole principle upon which the solution of all these differences of opinion rests as they apply both to public utilities in cities and public utilities in the whole country. I think every man who is in business appreciates how much retarding of business has been caused by this con- gestion of products at the source, and the inability of people to deliver what has been finished to where it will be sold and consumed. As a banker, it is our province to loan money, but one of the fundamental principles involved is the loaning of that money to people and corporations whom you believe are sufficiently prosperous to justify the belief that they are going to make money enough not only to maintain themselves and not have deterioration in the property, but also to pay the carrying charges and what they borrow. It seems to me that is fundamental. It is not a question whether it is a public utility or a gas company or what not. When a company borrows money it must have pros- pects to pay back that money and carrying charges and maintain its physical condition, so there is a fair meas- ure of efficiency, whether it is a railroad or gas com- pany, or an electric light company, or whether it is a 248 manufacturing concern, or a coal company. That prin- ciple must be applied. Now the trend of events in the last few years has been such that in most every other line, these questions of in- creasing cost of operation, increased wages and all that sort of thing can be easily and quickly adjusted in a pri- vate enterprise, but unfortunately in public affairs af- fecting public utilities these changes are brought about so slowly, and necessarily slowly because they must come before commissions of this kind and be given proper con- sideration, that, naturally, there is much delay, until very often a concern that starts a year on a fairly good basis, may, before the year is over, if there are sudden changes in its operating account and suddenly large increases in its cost of labor, find its borrowing ability impaired even in a few months. Now, if you are a stockholder and manager of a busi- ness and you allow your business to get in such condi- tion that you impair the capital employed, you know that in the end it means disintegration and failure, and you will immediately begin to set about to correct those conditions. Unfortunately in public matters we have to go about it in this round-about way, and I do not see how it could be otherwise, but that puts upon the commission who sits upon these questions an enormous responsibility. I am not unmindful of the fact that the members of this Commission are, figuratively speaking, between the “devil and the deep sea,’’ because I know no matter what their opinions may be there is going to be a cer- tain percentage of people who will criticise them. A man in accepting public office subjects himself to attack, — be it just or unjust, — and that is one of the unfortunate penal- 249 ties that attaches to the holding of public office in this country, but if he is so constituted that he cannot stand criticism, he had better resign from that office. Commissioner Lucey: You do not know of any com- missioners who have resigned, do you? A. I have not heard of any yet, all of which argues . they are pretty good fellows and willing to do right and willing to take the gaff and do their duty as they see it. Now, I know how difficult it is in a body of this kind to get these things correct. I am not here with any sta- tistics or figures, and know nothing about the details of these roads. I could not tell you how much they owe or how much stock they have, but I do know a great deal of the general situation, and I know the tendency has been in the direction of shearing them of their power to exist and power to borrow money to hold their income down to a minimum. We pay three times as much for a pair of shoes as before the war and we smile ; we pay twice as much for a suit of clothes, and we do not groan. We go about our own business and pay one hundred per cent more for our general living conditions and do not complain very much, yet if we have to pay four cents a thousand more for our gas or one cent more for our street car fare, which, after all constitutes an infinitesimal part of the expense of our living, we are up in arms. We think that because we have paid that for years and years, it should stay that way. We have had a world war and are entering into a new era of things, entering into a new condition of things, and unless public sentiment changes so that we can change from some of the old-time conditions and tradi- tions, we are going to find ourselves very seriously handi- 250 capped in the promotion of the welfare of our people in the future, as it has been provided for in the past. I do not think we are ever going back to the old times, normal days, so-called. I cannot analytically prove it, but I think any man who is a man of affairs and has had to do with these things in a general way, appreciates that we have entered a new era of things, and because we paid five cents for a ride on the street cars five years ago, that is no reason that five cents is the proper amount today; because we paid so much for gas five years ago, it is no reason why that is the proper amount today. If we can get back and find out what the cost is for the service that the public demands and then through propa- ganda have the public understand that under the law of economics and simple arithmetic they must pay at least for the cost of the service they exact, a fair return for the capital used, I think we will get along pretty well. Now, I have not had much to do with these concerns except on the side of having them apply to me for money, and almost invariably when applications for credit came, particularly during the last two or three years, we have had to close our eyes and turn deaf ears to things which we knew seriously needed help. I do not know whether I violate any confidence or not, I do not think I do, but I will tell you a little incident which will illustrate this better than any explanation of mine, by saying about two years ago Mr. Insull of the Gas Company came to me and he said the Gas Company was up against it ; we owe one million dollars of personal property tax; we either are going to be compelled to borrow enough to pay that tax and help the city out and thereby help the general funds of the county and the city, all down the line, or we are going to have to default. K we have to default 251 on it, I do not know what the consequence is going to be, but we are in this attitude, if we cannot get one million dollars, it looks to us as though we are very close to bankruptcy. I went over the affairs of the company, spent four or five days going into it with different officers of the com- pany, with the result I called together five or six of the leading bankers of Chicago and explained the situation and told them the gas company had already defaulted on its dividends on its stock, pointed out the fact there were forty-eight or fifty million dollars outstanding held by the investors of Chicago, and those investors are people in the middle classes, they are not the rich people, they are people, women and children and orphans, whose guar- dians and whose business managers have put this money in these bonds for the sake of income. Now, if we cannot get this help and this company has to go into the hands of a receiver, we have to default on these fifty million dollar bonds. As I understand it, the interest has been kept up up to this time, and it means a great deal to this community. We had at that time the Surface Lines troubles, the Chicago, Milwaukee and elec- tric troubles, but it seemed to us as bankers if on top of it all the Cas Company should go into the hands of a receiver, it would muddy the water very much so far as public service corporation credit was concerned. AVell, the five or six bankers present declined collective- ly to furnish the million dollars, although it was to be se- cured by chattel mortgage on things that were tangible, things which I would not call the highest class of security, — ^but they were secured by a mortgage on property of different kinds and things that were tangible to the ex- tent I felt there was no real danger in making the loan. 252 Wliile I was willing to take my share of the loan, among the five or six banks, as assembled, I eventually had to call together, I think it was sixteen banks, in order to reduce the amount so that each of these banks could take a small enough amount, that if anything happened it would not be a serious blow to them. Now, those are facts and it means more in hearings of this kind than mere statements or generalities and beliefs of individuals injected into the situation. I do not know what the trouble is. We think we know. We think there is a close relationship between politics and all these public utility corporations. I am not offering this in the na- ture of a criticism, however. I came here twenty-three years ago, and I know the Gas Company was subject to attacks at Springfield, at- tacks of legislation. I can remember how their stock, upon which they were paying seven per cent, was re- garded as good as gold. I can remember how many bankers would have recommended it to a widow or orphan for investment funds because they felt it was secure, yet I can recall how that fluctuated in value from $135 down to 85 or 86. I had at that time a personal friend who speculated almost entirely in stock of the Peoples Gas Light & Coke Company, and when some attack was made on it at Springfield and had brought the stock down fifteen or eighteen or twenty points, this Hebrew friend would come in and try to borrow all the money we would let him have. One day I said to him, ‘‘What do you do with this money!” He replied, “They attack the Peoples Gas Light & Coke Company. I buy its stock again and put it away and go to Europe, and maybe next year or in two years I shall come back and sell it.” That was the situation twenty-three years ago, and I re- 253 member that these public utilities were then used, as was commonly said, as the football of politics, and twen- ty-three years ago, the same measures applied in a sim- ilar situation. I speak of this specifically because I want to emphasize the fact I am not here to speak of any in- dividual or any individual administration, because I think this whole thing has been cumulating, as far as I can see, over a period of years, and probably going back to be- fore I came to Chicago. That they have been able to hold them together at all under these conditions and maintain their integrity and solvency is the accomplishment of a greater feat than I would like to undertake in a business of my own, and I do not know where the end is to be, un- less we can find some way to have the same rules applied to these public utility corporations that you apply to every other thing that requires capital invested, and which reflects the benefit of convenience and comfort to the public. I do not know what will be the effect on the •value of property ten or twelve or fifteen miles south or north or west of the loop if over night these things could be taken up. Someone says they cannot take them out, they are here. Of course that is true, but it certainly is a well established principle of economics they cannot long be run at a loss to them and the people whom they repre- sent, which are the stockholders. I do not imagine the officers and directors of these public utility corporations have any considerable amount of the stock of these con- cerns. I do not mean by that they haven T stock which entails an obligation on them, I do not mean that in a critical sense, but I do mean that the principal owners of these public utilities are the people themselves. Now, generally, they have to come to the court of last resort, which is this Commission, as I understand it. They 254 have to plead their cause and I know there are two sides to it. I know there will be opposition from the other side, they will take the position they ought not to have any increase, but it is up to you gentlemen in the last analysis. You have got to do your duty as you see it, and you have got to submit to criticism, whatever your decision may be. I have nothing further to say. I did not come here in any personal sense at all. I was asked to come and make my statement, which I have done gladly, which I think I ought to do as any citizen having the public wel- fare in mind and at heart. Chaieman Wilkerson : What is your best judgment as to the probable duration of the present condition as to interest rate? A. Well, Mr. Chairman, I cannot see much reaction soon in the interest rate. When you take into considera- tion there has been three hundred billion of property de- stroyed as results of the war you can be sure, as an economic principle, it is bound to leave its impress and effect upon every human being in the world. That is true. We cannot measure the expense and the influence it has been to us, but it is there nevertheless. These ex- treme rates that apply here, the seven per cent rate I think will pass just as quickly as the products in the coun- try can be brought to the market, and the credits arising from one to the other begin to offset credits so we can get the loans of the banks down to a normal basis, and maintain a little larger excess reserve, then the rates here likely will go back to what has been a normal rate, in my judgment, and I would say five and one-half to six per cent for current rates, but I would not say that would mean an ability on the part of corporations, I mean 255 either public utility or any other kind, to borrow money in large amounts, and by that I mean twenty, thirty, fortv or fifty million dollars, at less than probably eight or eight and one-half per cent. They paid that right along even years ago. I do not think I mis-state it, when current rates were four and a half and five, it cost eight per cent very largely for big corporations to assemble this money, because underwriters who fake the risk of promis- ing over their signature to give a corporation fifty million dollars assume an enormous liability. They assume when they do that that they can sell the liabilities to the pub- lic, and in the first place an underwriting syndicate takes a very small profit, maybe one-half per cent or one per cent, then another syndicate is formed, taking in as many selling agencies as they can, and they will have two to two and a half per cent for distributing these se- curities. Now, for that profit these men assume these obliga- tions, and as I say sometimes humorously, they bet they can sell the securities, and very frequently they lose, and under the law of averages every little while when one of these blocks of securities does not go, they have to be held sometimes a year or two or three years, and that is the reason they cannot get these large amounts of money at current rates. Of course, it is more difficult for a public utility to get money than for a man whose assets are all liquid. Take a packer, somebody who is creating things that must be consumed in everyday life, naturally that is much more liquid, and those people can borrow money a little cheaper than railroads, and particularly is that true in the last three or four or five years, since the credit of railroads and public utilities have been affected by the public senti- ment toward it. 256 This whole question is one of public sentiment and the public must learn it must pay for the character of the service it demands or it must be content with a very much less efficient and less luxuriant service. One of the two must come. It is up to the public to say, and I believe if the public understood thoroughly the situation, there would be a preponderance of opinion in favor of trying to arrive at a conclusion of what is right. I do not want to see public utilities have more than they ought to have, any more than anybody else, because that in turn would he an improper economic principle, and one which would do harm and do damage, hut if you expect concerns to live they at least must be allowed to have an income that will pay their expense and carrying charge', even if you do not give them anything for profit to the stock- holders, and the man who operates a company and who borrows money and doesn’t keep up the physical condi- tion of the plant, and thereby the efficiency of it, his credit wanes very rapidly at any bank. These problems involve in this way principles that are general in their character and apply alike to all concerns of every kind. Chairman Wilkerson : One of the principal problems with which we have to deal here is that of the valuation of the property for rate making purposes. We must de- termine under the law the fair value of the property and in determining that we are obliged to give consideration to what it would cost to reproduce the property today. What is your opinion as to the probable duration of the present scale of high values, how long in the future will that last? A. That is merely a guess. Chairman Wilkerson : It is a guess on the part of anybody. 257 A. My opinion is of no more value than anybody else’s, but I think it is here for some little time, because it can be cured, according to my judgment, in only one of two ways, — either by having the country blow up, fac- tories close and men thrown out of employment, which is so drastic no intelligent human being wants to see that, and that is what we have been fighting against all the time, — and the other way is to increase production. Now, I sometimes express it this way, Mr. Chairman, that the proper method of correcting these high values, is to speed up production, so that you have got competi- tion in the commodities themselves. Now, I mean by this simply this : You go to a store today and buy a pair of shoes and they tell you yes they have the kind of shoes you wear, and you look about and unfortunately they have not your size, all of which means they are selling shoes as fast or faster than they can get them; but if, on the other hand the production of shoes is speeded up so that every shoe merchant in Chicago can buy all the shoes he wants, and it develops collectively they have bought each in their individual capacity more than they can sell, it does not take them many days to find out they are overstocked, and the commodities themselves in one store, as against the commodities in another will create a condition that will induce price cutting quickly, because the man who finds he is overstocked is going to do what he finds is necessary in the way of price to get rid of it. Let me follow that principle a little further, and I am glad to do it, because I think there is some misappre- hension as to what the bankers feel. Here and there you have seen notices of price cutting of fifteen, twenty, twenty-five and even thirty per cent. There are some' people who generally believe that is the beginning of the lowering of prices. 258 Now, gentlemen, the scientific method of lowering of prices, and the only real lowering of prices that will be effective and permanent, must begin at the factory where the value of the raw material and labor enters into it. This man in the store here, or Kansas City or Omaha, because he is overbought and overborrowed and knows he must meet his obligation in the bank, feels he must sacri- fice a little of the profit he hoped to get and puts a good sale price on it. It helps a little bit and gives heart to the man who buys it, but knowing that the world is dependent on us I do not see any hope of material reduction for some little time. It may be a year or two or more, I can- not tell, but I do not look for any rapid reaction because labor and efficiency of labor enters into it. I am not criticising labor, but after all there is this to be borne in mind, when you discuss these questions, all during the war we accomplished wonders because everybody took his coat off and and went to work and worked as one man. We learned that efficiency and co-operation were the watchwords of the day and how great could be our ac- complishments when there was co-operation between cap- ital and labor, and we resolved that efficiency and co- operation should henceforth be our watchword, but gen- tlemen, it is a sad commentary, that from the day the armistice was signed, that co-operative spirit has dis- integrated practically every day to the present time. I do not know all of the direct causes for this disintegra- tion, but that is the situation, Mr. Chairman. That an- swers in part your question, and if this growing ineffi- ciency continues it will be very much longer before prices go down than it will if we can get efficiency and co-opera- tion. When we will get that you know as well as I do. Chairman Wilkerson : Looking ahead as we have to 259 in these valuation cases for a period of say five to ten years, is there in your opinion any probability that there will be a return to the pre-war scale of values in that period? A. Not within the next five years. I doubt if we will ever get back to the pre-war scale. That is only an opinion, but when you see what has been accomplished, you see how much greater comfort and how many more luxuries people enjoy than they used to have, I think you can rea- sonably calculate you will never be able to go back. I do not think the thinking man and the man of affairs, the man who controls capital wants to go back, and I think the world is filled with people who feel as I do. I want to do what is fair, and I want my institution to do what is fair. I only want what is fair and I want to be fair to the other fellow, and I do not think there was ever a time in the history of the world when men who control capital were as anxious, if they can do it in fairness and reason, to be fair as they are today. That sentiment prevailing, and the higher order of living that has prevailed with certain classes in the last five years, will prevent us from ever getting back to the low basis of pre-war times. Three or four years ago, I regarded, in making my estimates, in forming my book of statistics, I regarded five per cent interest during a period of five years, as being the commercial rate, I do not mean investment business such as stocks and bonds, but in our loans to our commercial houses; we figured one year we might get more than five; another year under five, but for over a five year period up to 1915, we concluded about five per cent average was the current rate of interest. Now, in 1915, the war having begun in 1914, Europe 260 having ordered such an enormously large amount of goods from this country, and our trade balance having run up to ten billion dollars that year, with a consequent vast accumulation of funds, interest rates in this coun- try ran down and it may he a surprise to some of you gentlemen to know that the institution over which I pre- sided averaged only three and ninety-five hundredths per cent on all its investments in the year 1915. 1916 it picked up ; it was a little better. The reason foi that was we had such an infiux of gold and business from Europe, that under the law of supply and demand the more plentifully you got money the cheaper it was, and the cheaper money is the higher things go by inverse ratio. We have about two billion and a half expansion in our circulating medium since we went into the war. We have had approximately one billion and a half increase in gold supply. We have today, in this country at least thirty-three and one-third per cent of the gold supply of the world. We have forty-two per cent gold reserve against our credit, and yet for the last sixty days, as bankers, we have been put in the attitude of declining loans to business houses because we have had to retrench. The very thing that created a rate of 3.95% in 1915, being an over supply of money in circulation, no question about it in my mind, has been our salvation since because in the expansion it has been necessary for us to accomplish what we have in the war, and the expansion that has gone on since the armistice was signed, has used all of that gold as reserve, until we now are down to only two or three per cent above our requirement under the Federal reserve system. For- tunately, however, we are doing business on a gold basis. 261 and the rest of the world, aside from England, are on a paper basis, or at least in part. Now, with the whole of Europe crying for help, there is not a man that goes to Europe and meets any man of prominence that does not come back and get busy to see if he cannot dig up a loan somewhere, somehow, but we have not the money at the present time, or the sentiment apparently at this time, to help those people with loans. Personally I think the policy this country has followed in declining to help them and helping them resuscitate their industries, is a detriment in the long run. We are feeling that right now. It is reflected in the fact the pound sterling was $3.87 yesterday as against $4.86 ordi- narily, and it is reflected in the further fact our exports last month dropped off 175 million dollars, and as time goes by that is hound to get worse unless we can correct that industrial situation. Those are all things that enter into the question how long these prices are going to be kept up. If you made a commodity that was sent to Europe you would not send more than one shipment be- cause you could not get the dollars back without loss. You could not compete with the rest of the world because you would have to stand the discount on the pound ster- ling, and that absorbs your profit and more, too. There is not a man in the world who can tell when that is going to be corrected. If we knew on the first of July or August the pound sterling would go back and the manufacturer could run his factory and load the boats and send them back there and finance himself, the situation would revive here very rapidly and the process of increasing the sup- ply of things would take place very rapidly. Now, with the world bereft of foodstuffs, in Germany a pound of butter today costs twenty-two and twenty- 262 four marks, and to the Germans the mark is still a mark, it has not gone down there. Under the normal value the pound of butter would cost between five and six dollars a pound. If you bought a mark over here at one or two cents you would say it did not cost so much, but those German people do not have money over here ; and in the French currency, a franc which is worth normally twenty cents has sold recently as low as 16.55 francs for a dollar. Those are all conditions that enter into this question of rates, Mr. Chairman, and I believe that the minute that we square away here, and the minute we get our peace treaty out of the way, I think you will find the average business man in America will appreciate it is to the interest of America in dollars and cents to do all we can to help finance those people over there, and if we un- dertake to do that, I cannot see any cheap money in this country. Over three hundred billion has been destroyed and taken out of existence, and it is going to take a long, long time to replace it. Chaikman Wilkekson : Do you care to ask him now? Mr. Cleveland: Yes. Cross-Examination hy Mr. Cleveland Q. Mr. Reynolds, what institutions are you connected with besides the Continental & Commercial National Bank! A. The Continental & Commercial Trust & Savings Bank. Q. That is the Hibernian? A. The Hibernian business was turned over and con- solidated with the trust and savings bank fifteen months ago. 263 Q. The trust and savings bank carried savings ac- counts ? A. They do, yes sir. Q. What is the rate of interest on savings accounts? A. Three per cent. Q. Has there been any change in that since before the war? A. There has not, no sir. Q. In the spring of this year, did your bank make a bid for deposits of city money? A. It did, yes sir. Q. What rate of interest did you bid? A. I cannot tell you offhand, because I have not the record. Q. Less than three per cent, wasnT it? A. I think three per cent on the time and probably two and one-half per cent on the active account. Q. Do you know how much savings accounts there are in the city banks today? A. No sir, I don’t. I could not tell you offliand. Q. A very large amount? A. A very large amount, yes sir. Q. Four hundred million or more, isn’t it? A. Yes, I should judge it is fully that, about that. Q. The rate you are paying is what the other banks are paying? A. They are all paying the same as far as I know. Q. The same thing is true of the city money? A. Yes sir. 264 Q. How much of that city money have you on deposit now? A. Well, the city money will run from two hundred thousand to sometimes, for instance, when the city treas- urer, if we have an active account, he may have three or four or five million dollars today and two hundred thou- sand dollars tomorrow. They do not carry a large bal- ance because they have use for the money and pay it out. Q. They have various accounts that are rather perma- nent in the banks, haven’t they? A. No, not now. They used to have large traction funds and such that used to be kept in the bank and they are invested in bonds and city warrants largely. Q. Do you know whether or not it is true that the city now has an average of deposits of about twelve million dollars ? A. I think they have, yes, with all the banks. Q. That is drawing three per cent or a little less ? A. Yes, and you probably would better couple with that the fact that they owe the banks approximately fif- teen million dollars at five per cent. Q. Yes ; that is money that the city has borrowed on tax anticipation warrants? A. On tax anticipation warrants, yes sir. Q. At what rate? A. Five per cent. Q. It is a fact, is it not, that the county treasurer now has on deposit with the banks approximately fifty million dollars of accounts collected this year for the taxes that have become due this year? 265 A. Well, he has moneys. I do not know how much because he has it in all the hanks in town. Q. A large amount? A. Yes sir. Q. You have some of it? A. Yes. Q. How much are you paying him? Mr. Dunbaugh : I am wondering if this is vital to this particular matter? Mr. Cleveland: It bears on the rate of interest, I think. Chairman Wilkerson : If the witness has no objec- tion, we have none. A. We are paying two and one-half per cent on the active account. Mr. Cleveland : Do you happen to know how much you have? A. I do not, no. Q. Do you think that for the city and Board of Edu- cation fifty million dollars would he an overestimate? A. Do you mean on hand now? Q. Yes. A. I could not answer that ; I do not know. Chairman Wilkerson: I suppose there are accurate records somewhere? Mr. Cleveland: I can state that there is upwards of fifty million dollars. A. I think he is accurate in his amount. Mr. Cleveland: I got those figures from the comp- 266 troller and I will ask that to be taken as a statement unless someone objects, and we can bring him over. Chairman Wilkerson : We will take your statement. Mr. Clrvetand: That is the Board of Education and the city. A. Let me amplify a little since that has been injected into it by saying there are practically fifty million dol- lars due the banks of the City of Chicago that they have borrowed from them on a five per cent basis out of last yearns taxes and unpaid. The banks of the City of Chi- cago are to meet this afternoon with a view to seeing what they can do to finance the city. They want in the neighborhood of fifteen to twenty million dollars, and so far as I can figure they are behind something like thirty million dollars on this yearns work. In other words, the amount borrowed from the traction fund is twenty-one million odd; plus the amount they owe banks would be about thirty-three million dollars, and their balance against it is around eleven million dollars, as I understand it. Q. Mr. Reynolds, you know it. is a fact that if the County Treasurer would pay over to the city at this time moneys that he has already collected for taxes, that the city would be able immediately to take up these loans? A. I do not know that. Q. On these old tax anticipation warrants? A. I do not know that because I do not know what is due the city. I have not any knowledge of that definitely. Mr. Cleveland : I will state that is a fact too. Q. Now, you spoke about the case of the Gas Com- pany. Now, you finally loaned them money through the 267 bankers to protect the credit of the various institutions in the city. You would not say that was a good loan? A. I did not say to protect the credit of the various institutions of the city, but to protect the credit of the bonds of the gas company which were approximately forty-six or forty-eight million, that is what I mean to say. Q. That loan was secured by a chattel mortgage? A. Yes. Q. Was that chattel mortgage a first lien on the prop- erty? A. It was on a good deal of personal property. It was not what you would call a first class loan, because if it had been they would not have had to go to sixteen differ- ent banks to get it. Q. Now, you mentioned some of the elements that are to be considered in the making of a loan. Is it one of the elements that is vital, the security that the borrower has to otfer? A. Certainly it is. Q. Assuming a utility company, a public utility whose assets are mortgaged for substantially all or more than their worth, would that kind of a utility be able to get money at any rate of interest? A. I do not think it would, no. Q. The remedy for that kind of a case, is to get more capital in, isnT it? A. If they are mortgaged for more than they are worth, yes, certainly. Q. Without getting more capital in the only way they could borrow money to use for capital purposes would 268 be by somehow or other putting a lien on the property that is ahead of the existing lien, wouldn^t it? A. You could not very well do that. A man who has bought a first mortgage bond, secured by first mortgage on a public utility would not let them come in and make a first loan ahead of his. He might have had a good credit at the time he made it. Q. I am speaking from the banker’s point of view, if these people who have the mortgages came to you in a case such as I state and would consent to putting a prior lien on the property, then the bankers would make the loan ? A. I would answer that yes, but let me amplify it a little by saying: You must not get confused in the ques- tion of rates on these things by what the banker said. You must take into consideration also the fact that the banker does not take those to keep. He is the agent. He forms a syndicate that sells them to the public, and in the analysis the public passes judgment upon whether the security is such that it can sell. The average banker knows in a general way what the character of that se- curity must be in a general way, when he goes into it, but sometimes he guesses wrong even then, and you must remember this : Those funds deposited in banks are sub- ject to check of other people and a well managed bank does not buy a large amount of securities to carry long. They may go in a syndicate and invest six or eight or ten million dollars until they can be distributed and placed in investors’ hands, and a bank that has public money, saving and every kind, if we invest all that money in long time securities, we would be regarded as a very poor banker so that if we go into a deal to buy say ten million dollars of long term bonds, it is not our purpose to carry those bonds. 269 Q. You sell them out? A. We sell them out. We have got to conform in the security we get very largely to what the public demands, because here again public opinion becomes the potent factor, and it makes no difference whether it is right or wrong, it has the same effect. Q. You said you want to be fair and I want to be fair. A. Yes. Q. Speaking as an individual, if somebody came to you and asked your advice about buying a security, and it appeared that security was not backed by sufficient assets, you would not advise anybody to buy it, would you? A. We would not take it and not ask our friends to lake it. We would advise them against it Q. It is an impossible situation, isn’t it? A. That is right. Q. Suppose a public utility company gets in a position where bankers won’t let it have any more money and it cannot borrow any more money, and needs more capital to go in, what is the remedy? A. Receivership, I guess. I do not know of anything else. Q. Is it your idea that the Commission here should increase rates to provide capital? A. No, I do not say that, I do not say that. I say it is the duty of the Commission here to find out what the situation is and be fair with reference to rates and in- come. I do not know what that is and do not pretend to know and cannot know. Q. Is it not your idea that the rates should be raised so as to provide capital? 270 A. No, I would not say that, hut if, however, their capital had been impaired by operating at a loss while under the influence of the Commission’s rates, then I should not think you would be out of line by putting back in the treasury in rates what they have lost by reason of that. I do not know that is a fact. Q. You spoke somewhat of the method of banking. The people deposit the money in the bank, and your busi- ness is to reloan that money and make money on it I A. That is the purpose, yes. Primarily the bank is organized for the same object any other business is, — for profit. A bank receives the idle funds of the public. They are deposited in the bank and under the law of averages the banks can loan those funds back, and my idea of a banker’s obligation is to do all he can consistently and safely, and along proper economic principles in the loan- ing of those funds, to help upbuild the community; in other words, help loan that to industries and commerce in a way to do the most it can safely. Q. What is the rule in the banks in Chicago about pay- ing interest on ordinary deposits! A. Everybody has their own rule. There is no hard and fast rule on that. Q. What is the maximum rate, would you say! A. Well, three per cent, as far as I know. Q. That would have to be a very large and rather permanent balance to get that much, wouldn’t it! A. Yes, I should say it would. Q. Ordinarily you would not get anything, any inter- est on anything up to a thousand dollars! A. You would not at our place, and we do not pay 271 interest on accounts generally except say railroad ac- counts, public accounts, public moneys and things of that kind. Of course, out of the earnings we make, first of all we have to stand losses, if we have any; secondly, we have to maintain our own equipment and our own ex- penses, and the successful banker is the man who in handling those funds, does all he can to have them placed, for instance, where they will help factories employ labor, if it can be done consistently. Q. Now, Mr. Eeynolds, in your opinion, would the ability of a utility to get money or to get capital or credit be affected by its ability to make a binding contract with the municipality by which it would secure its rights for a term of years? A. I do not think that would go a long ways because there are so many contentions arising over those things, there is a difference of opinion on that. That is the sit- uation right here, as I understand it. Q. Yes. Supposing that the utility has its main rights in the street and the franchise is about to expire and there was doubt as to whether or not it could get the franchise renewed, would that affect the ability to get credit or capital? A. Anything that would militate against its pros- pects for future success would necessarily militate against it. Q. Now, as a matter of making loans to a utility or to any other concern, each particular case would have to be taken up and considered on its own bottom! A. Certainly. There is no rule that could be hard and fast that could apply to any class of business. Every business of every class is a law unto itself. Q. Do you know whether or not the Chicago Surface Lines can borrow money at the present time? Mr. Sheean: That is objected to as immaterial on this general inquiry. Chairman Wilkerson: Sustained. Mr. Cleveland : Exception. A. I ask you the same question in regard to the ele- vated railroad. Mr. Dunbaugh: That is objected to. Chairman Wilkerson: Sustained. Mr. Cleveland: Exception. / Q. Now, you spoke about the different kinds of ser- vice. Is it or not true that in your view the amount that is charged for service should depend somewhat on the kind of service that is rendered? A. Yes, upon the class of the service, surely. Q. Well, would it depend upon the question of service that is rendered? A. Well, I would not say so unless it had to do with cost, because this question of cost is a question of income and outgo, it seems to me. Q. Supposing the company is obligated to furnish ade- quate service and it furnishes only grossly inadequate service, would you think that the people that use ^ that service ought to pay as much for inadequate service as adequate service? A. That is part of such a complex situation I would not want to try to answer that because I am not sure I could do it fairly to either side. Q. You spoke about the inflation of the currency, of expansion of the currency. Is it right to say inflation of the currency, at the present time? A. Yes, but what I meant more particularly was the over extension of credit, although I did say the currency itself had expanded two and one-half billion, but the big over expansion and credit is the thing that has occupied our attention in the last two or three months. Q. Is there a prospect of there being a deflation in the currency ? A. It depends on how the things go. I would answer that yes, there is a prospect but it won’t be done rapidly. Q. What do you mean by that, in time ! A. Let me amplify it a little. You want the answer right Q. Yes. A. as I want to give it. The moment it seemed necessaiy for banks to begin the policy of retrenchment and refuse to grant credit where it was not absolutely necessary to take care of industry, we were confronted with public opinion of this kind. If you ask a man to defer taking that million dollars they rather laugh at you, and say it is not any trouble to take that million dollars over to the Federal Reserve Bank, and you can turn it into a credit and serve your purpose. Now, the crux of the trouble, as I see it, during the last two or three months, I won’t say trouble, substitute the word ‘‘situation” there, has been that the public had come to feel, up to perhaps 30 days ago, that the supply of credit, at least which the Federal Reserve Bank could issue was without limit. They honestly believed any man whose note was good, any corporation who showed two to one over liabilities of quick assets, that his paper 274 was eligible at the Federal Eeserve Bank and he conld go over there and get the money. Everybody in dis- cussing the Federal Eeserve system from the time of its inception had pointed out how much credit it could ex- tend until the public got the viewpoint there was no bottom to its stopping, so to speak. When it was necessary and the reserve got to 42 per cent, against 40 per cent., and it was necessary for the Federal Eeserve Bank to hold up a little to protect their reserves and the structure of credit, we began to say to our customers, you must get along with a little less money, you must reduce your obligations. Our thought was if everybody co-operated moderately well, it would not hurt anybody, but at first those men believed we could just as well as not loan them the money and get it over there. They know better now. It is to convince that thing called ‘‘public opinion^’ which after all is the crux of most everything we do. Q. What I mean was about when do you think defla- tion, — if it comes, — ^will start to set in? A. Whenever the public appreciates the necessity of curtailing their lines a little bit and co-operating with the Federal Eeserve Board at Washington in reducing the loans. Q. In case there is deflation in the currency would that have any effect on the situation such as we are deal- ing with here, in your opinion? A. Yes, I think it would. The trouble is now I think there has been a little strained condition, and anything that eases that off, is bound ^to take this pressure off of credit to a certain extent. In other words, interest rates in Chicago would go back to six per cent. 275 Now, I believe myself that this deflation will set in whenever the railroads begin to move the products from the west so these people who borrowed this money can pay it back, and big jobbers and manufacturers in Chi- cago and other big cities can deliver the stuff they have already made, and have in their warehouses. They can- not get credit to offset until it gets to its destination, and I think this whole thing, so far as the over-extension of credit and deflation is concerned, is very largely a transportation problem. Q. I do not quite understand what you said about the pre-war scale of wages and other expenses. You said, as I understood you, it would not go back to the pre-war basis, but you did not indicate your view as to whether it would remain at the present scale? A. I do not think it will remain at the present scale. I think it will go back somewhere to approximately near the old basis, but I do not think we will get down to the old basis. Q. You do not think it will go back to the old basis? A. No. Q. When do you look for a decline? A. If I could ‘answer that truthfully I would captalize it. Chairman Wilkerson: You would quit the banking business? A. Yes. Mr. Cleveland: That is a question that could not be arswered? A. No. Q. Not even approximately? 276 A. T do not think so. You ha,ve got the public senti ment and the condition of the whole world entering into it. You and I think we know to some extent the condi- tion in Europe. We do not know much about it, and those are all factors that enter into it, and I do not think one man’s opinion is Avorth more than another man’s opinion. Chairman Wilkerson: Have you seen these charts chat have been prepared by some of the economists based upon comparison of the conditions following the Napole- oni'c wars and the Civil War which show at least 50 per cent, of that effect is for 10 years. Q. I have not seen the chart but I know this : Follow- ing the Napoleonic Avar in Europe, the prices in food stuffs in England ran up to such extent that Parliament established an investigating commission and they ran it doAvn and said that it Avas due to the fact that the Bank of England had put out so many unsecured, I mean uncovered Bank of England notes; and history shows just in proportion as they retired those notes there was reaction in the value of the cost of living, and we had a somewhat similar situation in this country, following the Civil War. You Avill recall that the greenback, which is how as good as any other money, sold as low as 36 cents, as I remember, possibly a fraction more, and in those days it took a world of money to buy anything, and just in proportion as money gets cheap the commodity which you have to buy with it, by inverse ratio goes up. That is the trouble here. We have had to increase cir- culation. That was the beginning before the Avar af- fected it. I remember in March, 1917, making a speech out in California and trying to show that a good deal of the 277 then high cost of living, which was not high, as we look back at it, was due to the over supply of the circulating medium which we then had. I say the influx of one bil- lion and a half dollars, and the organization of the Fed- eral Reserve system, and all those things entered into it. Q. Now, you take the matter of government bonds. Liberty bonds, they are way down! A. They are. Q. The principal bonds, they are comparatively hold- ing their own, aren’t they? A. Yes. You would say, in comparison with them, yes. Q. How do you account for that ditference? A. Well, I think the government bonds were floated at too low a rate of interest. The same law of credit must in the last analysis apply to nations or common- wealths or municipalities that applies to a corporation or individual. If you borrow one million dollars, if you are a corporation it is easier to get it than fifty million. Our country borrowed twenty billion, or twenty-five billion as a point of fact, and they borrowed it at a rate which was below a proper ratio with other investments. I can say, as I think every other banker can say — ^we bankers did all we could to have the rates put higher at the time. We contended that the secretary of the treasury could have sold at any rate under the impulse of patriotism, and everybody wanted to do his duty. Everyone was willing to offer his property and himself to win the war and the result was it was a very easy matter for the secre- tary of the treasury to sell these bonds, particularly through the use of the Federal Reserve bank, and that is one of our troubles today, that half of the loaning power 278 of the Federal Reserve Bank is taken np by carrying a billion and a half dollars of these bonds and treasury cer- tificates or government securities that should have been disseminated and be in the hands of the people. Now, if those bonds had been sold at a high rate of interest, they would have been disseminated and in the hands of the people and this billion and a half dollars in the banks that are now there as collateral would not be there and the Federal Reserve banks under existing con- ditions would still have a billion and a half security which they could extend to commerce, which they cannot do now, because they have to carry these bonds. Q. What is the prevailing rate, if you know, of munic- ipal bonds? A. I cannot answer that. I am not personally familiar with the details of any of those investment facts. Mr. Abbott would be much better able to answer these tech- nical questions that I because he comes in direct contact with it. Q. You say these borrowers pay 8 or 10 per cent, interest ; they do not on the face of things pay that much, do they? A. No, it is in commissions. Q. Commissions. It doesn’t go above the legal rate of seven per cent, on the face of it? A. We cannot in this state. Q. Now, just one other thing I wanted to ask, as a matter of personal satisfaction. I understood you were trying to get along with your old shoes and I was wonder- ing if you got in the position where you had to buy new shoes. A. I did have to buy some the other day and I paid 279 three times as much as usual and I smiled too. I am not buying many, however. Mr. Einger: Mr. Reynolds, you regard the immediate present as critical or emergent as far as public service corporations are concerned, do you not? A. Yes, I do as to everything that requires credit. I would not limit it to that particularly, although I think it is more potent to them than probably other things. Q. Do you think any rate making body is justified in using the immediate present day prices and condi- tions as representative of normal or basic price in fixing rates! A. Probably not, but you must remember your pay- rolls are going on today, just the same, and other ex- penses are going on and they have to be met in some way, and if it is to be a loss somebody has to find some w^ay to protect it, otherwise they would lose the money just the same. Q. What I had in mind was using them as a basis for a permanent rate. If they are to be used at all shouldn’t they be used for the purpose of temporarily meeting the situation ! * A. Yes, I should say it ought to apply to anything, world conditions will change, and if a rate established to- day should prove to be too much it should be reduced, of course. But the great difficulty in that situation is, you must remember you are months behind the changes in getting the rates changed. In the meantime, to keep the men w^ho wait on you and say if you do not pay increased salaries by tomorrow night they will walk out, and you have to pay it, and every time you have a hearing it is that way, and their losses are cumulative it comes to amount to a great deal of money. 280 Q. Do you think, if the stockholders are and have been the recipients of very heavy returns on their in- vestments, it would not he a great injustice to ask them to give slightly in point of return I A. I do not know. You do not ask the merchant from whom you buy a suit of clothes to give you a reduction because you think prices are high, you do not ask the butcher to do that on a beefsteak. I do not know why the man who operates the car to ride on should do it then. Q. If an industrial corporation came to your bank for operating requirements and told you his normal re- quirements, and you were aware of the fact that to main- tain the same high dividend rate that he had in the past, wouldn’t you ask him, before you granted that additional loan, to reduce it. A. If we thought the dividend rate was too high, yes, we would ask him to reduce it, certainly. In other, words, we would ask him to do what is necessaxy to assure us of the solvency of his concern, whatever it would be. Q. You would ask him to help in raising the money! A. Yes, he is in a position where he is helpless. If he has to have one million dollars, if he can do what is required of him, he probably will, but sometimes they get in a position where they cannot do it. Q. Do you think that the Public Utility Commission at this time, in these strenuous times in fixing rates, should in any way fix a rate which would help the capital account for future capital requirements! A. No. I would not say that, but that is a big ques- tion. That would entail a big discussion to arrive at what is capital account. No, I would not think so. 281 Q. I mean increase additions to the plant, for future growth. A. I think every public service company like every business ought to be allowed to make profit enough so that there could be a normal amount left over and above proper dividends to keep the physical condition of their property in good shape. Beyond that I say no. Q. 100 per cent, efficiency would be called good shape, wouldn’t itl A. Yes, it would. Q. If on account of the growth of its demands it needed expansion physically, to be evidenced by new buildings and new plant, would you regard it as reason- able that the owners of that property, whether it is pub- lic service or industrial, should go out and help raise that. A. If they could raise it. If they could not raise the money the people would have to do without the service. That is all. Mr. Ringer : That is all. Commissioner Lucey: I heard you answer Mr. Cleve- land, Mr. Reynolds, in his theoretical question as to a cor- poration mortgaged for more than it is worth, and being unable to function and the only remedy was to get new capital, and I wms wondering under what process you would get new capital in an institution of that kind. A. I do not know of any process except receivership and reorganization and scaling of assets or securities, and a new organization. I do not know of anything else because I do not think there is anybody in this room who would invest his capital, any new capital in an 282 organization that was mortgaged for more than it was worth to begin with. I do not think they would. Commr. Lucey: That is my idea. I was wondering if you understood his question right. That is all. Mr. Dunbaugh : Mr. Henry P. Chandler, representing a large group of citizens, has a brief statement to make. I do not understand it is in the nature of testimony. Mr. Cleveland: Cannot you finish up this evidence first? Mr. Dunbaugh: We have Mr. Henry P. Chandler here who will inform the Commission of what has taken place in the Association of Commerce with respect to a group of citizens, just to make a report, as it were, on what has taken place and what has been done. Mr. Chandler : It won’t take but just a minute. The Chairman: You may proceed if it will only take a minute. Mr. Chandler: Mr. Chairman, and gentlemen of the Commission : A short time ago a number of the leading organizations of this city, civic organizations like the Union League Club and Municipal Voters’ League, held a meeting and decided that this matter was of vital in- terest to the citizens of Chicago, to the prosperity and growth of the city, and action was taken recommending that each appoint a member to serve on a committee to consider this question as soon as possible, to formulate their recommendations, and if it seemed advisable to present them to this Commission. That committee has been appointed, and in the near future, Mr. Chairman, we hope to come in here and make a report. Mr. Cleveland: Is there any arrangement made so there can be a hearing before the committee, so we can have both sides there presented? 283 Mr. Chandler: All the gentlemen who are appointed on this committee will he disinterested persons, persons with some acquaintance of the subject, and they will make a disinterested examination and use such methods as seem to them proper. Mr. Cleveland: That includes an opportunity to the representatives of the city to present their side of the case? Mr. Chandler : Probably that committee would under- take to ascertain the position of the city. It is just being constituted, and we expect to hold a meeting in the course of a few days. Mr. Cleveland: I suppose that is in the nature of a motion to refer the case to this public Commission as a sort of a master in chancery in bulk, to make a report to the Commission as to what the Commission ought to do, but I don ’t see how it could be of any assistance to an outside body. If they are going to have outside bodies that are going to meet and formulate things, why, we will get up some outside bodies to make investigations and report our side of it, too. Mr. Chandler: We are interested as citizens and we simply hope to exercise the privilege of citizens to present our views on the matter. The Chairman : We will dispose of that question when it arises. Mr. Chandler: That is all, Mr. Chairman. 284 David R. Forgan, a witness herein, having been previ- ously duly sworn, testified as follows: Cross-Examination by Mr. Cleveland. Q. Mr. Forgan, are you connected with any other in- stitutions than the National City Bank? A. No other financial institutions. Q. Is your bank interested in any of the securities of these utilities? A. Yes, sir. Q. Sir? A. Yes. Q. To what extent? A. Well, in round figures we have $250,000 of their Connecting Lines bonds, which we paid 91 and 92 for. They are now worth 40, I think. Q. What is the name of those bonds? A. The Chi- cago City Connecting Lines. I think I am giving it the proper title. Is that the right title, Mr. Blair, Chicago City Connecting Lines? What is the correct title of the bonds? Mr. Blair: Yes, the Chicago City Connecting Lines. A. We have $250,000 of them. . Mr.. Blair: Collateral? A. Yes, collateral trust bonds. Then we have in the neighborhood of $200,000 of bonds of various utilities, but that is just a sort of stock on hand. We don’t have any line on them. We buy them and sell them, but we do have at present a considerably less shrinkage in market value, at least on these connecting lines. Q. Is that all? A. That is all. Q. Now, Mr. Forgan, you heard Mr. Reynolds’ cross- examination, heard the questions I asked him? 285 A. Yes, sir. Q. If I were to go through the same questioning with you, you would answer substantially the same as he did? A. I would, yes. Q. I think that is all. A. I would be glad to have Mr. Reynolds’ statement taken as mine. The Chairman : Call your next witness. Mr. Cleveland: I am willing to agree, to save time, that each and all of these witnesses on cross-examination would testify substantially the same as Mr. Reynolds testified. The Chairman: I don’t know that we have the power to agree to that, except the witness himself. Mr. Cleveland: All right. Harry A. Wheeler, a witness herein, having been pre- viously duly sworn, testified as follows : Cross-Examination by Mr. Cleveland. Q. Mr. Wheeler, do you hold any of the bonds of any of these companies? A. Personally I do not. Q. Your bank? A. Yes, the bank has some. Q. What ones, Mr. Wheeler? A. I think we have some Metropolitan, some Chicago Elevated debentures, some Series B City Railway. Q. What amounts, approximately? A. Very small, I should say an aggregate of less than a hundred thousand dollars. Very much less, probably. 286 Q. Did you hear Mr. Reynolds’ cross-examination? A. Yes. Q. If you were asked in detail would you concur sub- stantially in what he said? A. I would not care to have the record show that I accepted Mr. Reynolds’ testimony as an entire exposition of this question, nor any other man’s testimony. There are shades of opinion that we may have, and I don’t pro- pose to go on record as accepting anyone’s testimony but my own. I am sorry, Mr. Cleveland, not to be able to shorten the time of the Commission in that way, but I can’t do it. Q. Does your bank have savings accounts ? A. Yes. Q. What rate do you pay? A. The same as he stated. Q. Three per cent.? A. Yes. Q. And you have deposits by the city? A. We do. Q. You bid on those at the beginning of the year? A. Yes. Q. What rate do you pay? A. I presume the same rate that was stated, from two and a quarter to three, probably, two and a half to three, varying upon the activity or dormancy of the ac- count. Q. Have you any of the taxes, any of the money on de- posit by the county treasurer now in your bank? A. I think so. 287 Q. What rate are you paying him? A. I think two and a half. Q. That is the taxes that were collected? A. It is money recently coming in, Mr. Cleveland. I will also say we have a good deal more owing to us by the city that we would like to get. Q. That is on the tax anticipation warrants that you loaned last year? A. Partly. Mr. Cleveland: I think that is all. Commissioner Luoey : That is all. The Chairman: Have you any further examination? Mr. Bangs : There are two more witnesses here — Mr. Schweppe and Mr. Corey. Chester Corey, a witness herein, having been previously duly sworn, testified as follows: Cross-Exammation hy Mr, Cleveland. Q. Mr. Corey, have you got any of these bonds, your concern? A. Wily, the Harris Trust & Savings Bank has been very closely identified with the first mortgage issue of the Chicago Railways Company, Series A, some of the first mortgage bonds of the City Railway. Just how many we own I don T know. A great many of them have passed through our hands. Q. Any other? A. Just what do you mean by ‘‘any other’ ^? Q. Other bonds than those? 288 A. The Surface Lines, you mean? Q. Surface Lines, or the elevated, or the telephone company? A. We have been closely identified with the financing — by that I mean the bond issues — of the telephone com- pany and the first mortgage bonds of the Chicago Eail- ways. We have some of the A bonds, we have some of the first mortgage bonds of the City Railway, and at one time we were owners of some of the junior bonds of the Chi- cago Railways, but they have been disposed of long since. Our main identification is simply the two first mortgage issues. Q. You heard Mr. Reynolds’ testimony? A. I only heard the last part of it, Mr. Cleveland. Q. You carry savings? A. Yes. Q. What rates do you pay? A. Three. Q. What do you pay on checking accounts? A. That is usually a matter of special arrangement. A great many checking accounts we pay no interest on; others we pay some. I am not familiar with the detail of that, Mr. Cleveland. Q. Do you know the maximum amount? A. No, I do not. Q. Did you bid for city money? A. I assume we did. I don’t know. Q. Do you know how much you get of the county treasurer’s money? A. No, I do not. 289 Q. Do you know what the prevailing rate of interest is on municipal bonds? A. Of course it varies according to the size and credit of the municipality, hut I think around 5 per cent. Mr. Cleveland : That is all. The Chairman: Call the next. Chaeles a. Schweppe, a witness herein, having been pre- viously duly sworn, testified as follows: Cross-Examination by Mr. Cleveland. Q. Mr. Schweppe, you are an investment banker? A. Yes. Q. What are the prevailing rates on municipal bonds ? A. We do not deal in many municipal bonds, but I should say, to make an estimate, 5 to 6 per cent. Mr. Cleveland: That is all. The Chairman : Call your next witness. Mr. Dunbaugh : Mr. Hulbert was due here at a quar- ter to twelve. He will be here any minute. Mr. Cleveland: I am willing to agree Mr. HulberCs cross-examination will be substantially the same. Mr. Dunbaugh : We can’t agree for Mr. Hulbert. Mr. Cleveland: You can agree for the purpose of this ease. It isn’t a question of binding the witness at all. Mr. Ringer : Will that conclude this hearing? Mr. Bangs : Yes. The Chairman : We will take a recess. (Whereupon a short recess was taken.) 290 E. D. Hulbert, a witness herein, having been previously duly sworn, testified as follows : Cross-Examination by Mr. Cleveland. Q. Mr. Hulbert, your banks own how many of the se- curities of the elevated and surface lines? A. I don^t know, I could not say. Quite an amount, but I don’t know how much. Q. You mean by ‘‘quite an amount” hundreds or thousands or millions of dollars ? A. Well, I should say probably a million altogether. Q. You were one of the trustees appointed under the proposed ordinance that was submitted to the people in 1918, were you not? A. Yes, sir. Q. And were you on there to represent the bondhold- ers, or what particular interest, if any, did you have? A. To tell you the truth I don’t know who got me on there. Q. Does your bank have savings accounts? A. Yes, sir. Q. What rate of interest do you pay? A. Three per cent. Q. Has there been any change in that rate since the war began? A. No, sir. Q. How long has that rate prevailed? A. Well, all the time practically, as far back as I know. 291 Q. Did you bid in the beginning of the year for city deposits? A. Yes, sir. Q. What rate? A. I am not sure about city deposits, I think the bid was for county deposits. I think it was two and a half per cent. Q. And for the county treasurer? A. The same. Q. Two and a half per cent.? A. Two and a half per cent. Q. That is the money that the treasurer has collected for taxes, is it not? A. Yes, sir. Q. What is the prevailing rate of interest on munici- pal bonds? A. Well, I should say they are selling around a 6 per cent, basis. I think that is what you can get for munici- pal bonds. Q. What is the prevailing rate in Chicago on deposits, general deposits? A. Two per cent., 2 to 3 per cent. Q. How much of a balance would there have to be carried to get that? A. There is no rule among the banks ; each bank has its own methods of doing that. Q. Now, assuming that a utility is mortgaged for all it is worth, all its property is worth, would it be possible to get any further loans from the banks ? A. If it was mortgaged for all it was worth? 292 Q. All its property was worth, yes. A. I think it would he difficult. Q. Would it he y3ossihle, is it within the possibilities of g-etting any loans ? A. I should say not, no. Q. Assuming that the people that are interested in the prior lien would consent, and the stockholders would consent to a first mortgage on the property, then it would be possible to get money, would it not? A. You are speaking of public utilities in general? Q. Any one. That is, if you can get a first lien, in order to get money you would have to have new money, in such a situation as I have described, you would have to have somehow or other a first lien to displace what is already on there. A. What is already on there? Q. Yes. A. Well, of course if you could displace the first lien that is already on there you would have no trouble in getting more money. Q. That is the only way it could he done? A. I think so. Understand what I say, you would have to displace not only the junior certificate, but the prior lien also. Q. Yes, so as to make the new mortgage the first mortgage ? A. For the amount of the new mortgage, yes. Q. Yes. A. I think that would be necessary. Q. As I understand your direct testimony, I am not 293 quite sure that I remember it, taking the case of a public utility that has abundant assets, that company can get money necessary for its business provided it pays the rate that is required, isn’t that true? A. Yes, I think it would be true. The rate would be very high, of course. Mr. Cleveland: Yes. I think that is all. The Chairman : That is all. Mr. Dunbaugh: Mr. Chairman, at the last Chicago hearing in this matter Mr. Richberg made a statement in the record. I have prepared a short reply to Mr. Richberg’s statement which I don’t care to read, but which I would like to tile here, which is in the nature of argument, legal argument. (Colloquy omitted.) The Chairman: You may file that. The Chairman: Let the record show that this hear- ing is adjourned subject to the further order of the Com- mission. The Chairman : Leave has been given Mr. Dunbaugh to file that. If you care to file anything in reply to it you may bring it in and leave will be given to you when presented. Mr. Bangs: Mr. Chairman, I understand the civic organizations are going to make some report. The Chairman : If there is any further hearing notice will be given to all parties. Mr. Cleveland: I want to put in evidence here that the evidence otfered in the Surface Lines case by Ex- Congressman Wharton to the effect that the companies themselves made a political issue of the Surface Lines 294 and the Elevated, at the time that this ordinance of 1918 was submitted, be considered in this hearing. (Colloquy omitted.) The Chairman: Is there any objection to this record showing that Mr. Cleveland offers to introduce the same testimony that he offered to introduce in the Surface Lines case, and that the testimony is rejected? The Chairman : The record may so show. The state- ment which was made here about politics and their rela- tion to the utilities of this state was made with reference to the utility companies. The evidence as to what a particular utility may have done in the way of attempt- ing to secure the passage of some ordinance is no more material than would be the testimony brought in here tending to show the New York Central or Rock Island Railroad have maintained a lobby in Washington. The point of the testimony was that as a result of these con- ditions, however they may have arisen, there would be difficulties affecting credit in the way of obtaining money. Let the record so show. Now, is there anything further? Mr. Cleveland: I haven’t anything further in this general hearing at this time. (Colloquy omitted.) (Whereupon the further hearing of the above entitled matter was continued generally subject to the further order of the Commission.) 295 Chicago, Illinois. Friday, June 18, 1920, 10 :00 o ’clock a. m. Hearing met pursuant to adjournment. Present : Same as before. Commissioners: J. H. Wilkerson, presiding; Walter A. Shaw, P. J. Lucey. Chairman Wilkerson: You have some matter, Mr. Poole? Mr. Poole : Mr. Chairman, and Members of the Com- mission, it will only take a few minutes to explain that we wish to present a memorial on the public utilities sit- uation in Chicago. This memorial was prepared and has been endorsed by eight of the leading civic associa- tions in this city, representing in membership, over 15,000 citizens, and I believe it fairly represents a major part of the public opinion of this city. I have prepared three copies, Mr. Chairman, thinking you might wish to have one copy for the use of Mr. Cleve- land, who represents the city administration in these mat- ters. Unfortunately, he is not present. Chairman Wilkerson : Did you advise him that you in- tended to present it? Mr. Poole: No, I did not. Mr. Roberts : Mr. Cleveland is over before Judge Hol- dom this morning. I did not know this matter was com- ing up. I am here trying the Tegtmeier case. Chairman Wilkerson : At the time of the general hear- 296 iiig Mr. Poole stated that at some time he might desire to present something of that kind. I suggested when it was presented that a copy be prepared for the use of your office, so that you can have it and if you care to make any response, or take any action with reference to it, you have the opportunity. Mr. Roberts : We have no objection to the receiving of the document. Mr. Poole: There are three copies, Mr. Chairman. Mr. Roberts : I want to explain I do not know any- thing about this case. I came here on the Tegtmeier case, and that is how I happened to be here. Mr. Poole: Most of the gentlemen present are repre- sentatives of the various organizations and will say the signing is proper. Chairman Wilkerson : Let the record show in this gen- eral hearing this statement is received and filed. (Which said document, last above referred to, so offered and received in evidence, as aforesaid, is in the form following, to wit:) ^^To the Honorable, ‘‘The State Public Utilities Commission of the “State of Illinois. “There are now pending before the honorable body many applications by public utilities operating throughout the state for increases in rates and for other financial relief. “It is a matter of common knowledge and expe- rience that the utilities operating in Illinois, and es- pecially those in the City of Chicago, have been un- able to fully meet the demands of the public for extensions and betterments to their properties and that with few exceptions, the quality of the service rendered is unsatisfactory. “Our information is that conditions now obtain- 297 iiig will increasingly become worse unless immediate relief is afforded. “The financial status and need of the various utili- ties are well known to your honorable body, as well as the present state of the money market, which pre- vents even the stronger companies from obtaining additional capital in large amounts except at exceed- ingly high rates of interest. These conditions, as a matter of business judgment, will cause the utili- ties to make only the absolutely necessary extensions and leaves them totally unable to anticipate future needs. “This inability to comply with the demands for public service is not only a serious and continuing menace to the commercial development of Chicago but some of our citizens are in imminent danger of being deprived of necessary light and heat in their homes and transportation to and from their places of business or where they are employed. “Under the law the State Public Utilities Com- mission is vested with the general supervision of all our public utilities, including full responsibility for service, adjustment of rates, and the finances of the operating companies. “We are well aware of the grave character of the questions with which the Utilities Commission has to deal and of the great injury, not only to the private interests but to the public at large, that may result from errors. “The rates for service established by the commis- sion must be reasonable both to the public and to the utilities, and a just and reasonable rate is neces- sarily a question of sound business judgment rather than one of legal formula. The real test of the jus- tice and reasonableness of any rate is that it should be as low as possible and yet sufficient to induce the investment of capital in the business. Such rate must often be tentative since exact results cannot be foretold, “We realize full well that the case of every utility must rest upon its own facts. ^‘We shall not enter into the realm of controversy as to the causes underlying the present condition 298 of public utilities in Illinois, neither shall we offer any plan or plans for the solution of the many diffi- cult problems continuously presented to this com- mission. We do, however, earnestly urge the neces- sity of immediate relief, for we confidently believe that unless prompt action is taken even the present unsatisfactory public service cannot be maintained. ‘‘We respectfully suggest that in all cases where it is impossible for the commission to give the case presented such an exhaustive consideration as will enable the commission to determine and prescribe a permanent rate or plan respecting the utility under consideration, that tentative orders be entered cov- ering experimental or temporary periods until such time as the experience of the commission or further investigation and deliberation will enable your hon- orable body to do complete and full justice in the premises.’’ “E. J. Kane, President, Chicago Association of Credit Men; “Moses Greenebaum, President, Citizens Association of Chicago; ■ “Howard Elting, President, ' Commercial Club ; “Wm. Nelson Pelouze, President, Illinois Manufacturers Association; “Eobert F. Carr, President, Industrial Club of Chicago; “William W. Baird, President, Chicago Chamber of Commerce ; “E. E. Dolton, President, Traffic Club; “John Fletcher, President, Union League Club.” Chairman Wilkerson: Is there anything to be added to the statement which has been made by Mr. Poole, by any gentleman present? You may indicate, Mr. Eoberts, if you care to file anything in response to it. Mr. Eoberts : In the absence of Mr. Cleveland, I would not want to make any statement at all relative to this 299 matter. It is not within province to do so. The mat- ter is a general subject and I do not know whether or not it will or will not have any effect or bearing upon the cases we are interested in. We can determine it only by examining the document. If it does, and these gen- tlemen who have signed this are willing to subject them- selves to the ordinary cross-examination that we give the other witnesses who appear in cases, we will be glad to take that matter up at that time. If it has no bearing upon any particular ease we are not interested in it. If it has any bearing on any of the three or four cases that the city is primarily interested in, then, of course, we desire to cross-examine the gentlemen who have signed this document. Mr. Poole: Some of the gentlemen here have asked that we give the names of the various organizations that have signed and approved the document. Chairman Wilkerson: You may do that, for the pur- pose of the record. Mr. Poole: Thank you. They are : R. J. Kane, president of the Chicago Association of Credit Men, with 3,057 members; Moses Greenebaum, president of the Citizens Asso- ciation of Chicago, with 1,050 members ; Howard Elting, president of the Commercial Club, with 120 members; Wm. Nelson Pelouze, president of the Illinois Manu- facturers Association, with 2,300 members; Robert F. Carr, president Industrial Club of Chi- cago, with 89 members ; Wyllys W. Baird, president of the Chicago Associa- tion of Commerce, with 6,586 members ; E. R. Dolton, president of the Traffic Club, with 1,150 members ; John Fletcher, president Union League Club, with 1,900 members. 300 Chairman Wilkerson: Very well, the statement may be filed, and the hearing will be adjourned subject to fur- ther order of the Commission. Hearing adjourned, subject to further order of Commission. \ SPRINGFIELD HEARINGS State of Illinois. Public Utilities Commission. Springfield, Illinois, May 3, 1920. In the matter of proposed general hearings concerning the ability of Utilities to meet the demands icr service and to make the necessary enlargements and extensions therefore. Present : James H. Wilkerson, Chairman. Prank II. Funk, Commissioner. ■ Walter A. Shaw, Commissioner. Thos. PI. Dempcy, Commissioner. P. J. Lucey, Commissioner. Appearances : B. P, Alschuler, Atty., On Behalf of the Utilities. Ralph J. Monroe, Corp. Counsel, On Behalf of the City of Decatur. Chairman Wilkerson: Pt’oceeding with this general hearing. The order providing for the hearing is a com- paratively short one, and in order that the exact scope of the inquiry may be understood, so that those who have representations to make to the Commission may keep within the limits of the' order, it would be well to call attention to the main provisions of the order. The order refers to the requirments of the Public Util- ities Act that the Commission shall have general super- 300 & vision of public utilities, and shall keep itself informed as to the manner and method in which their business is conducted, and shall examine them as to the manner in which their plants are operated, in respect to the ade- quacy of their service. In connection with hearings now pending before the commission, representations have been made as to the necessity for the enlargements and extensions of the plants and equipment of certain utilities, in order that they may be able to keep up with the demands of the public for service rendered by them. Representations have also been made to the commission in connection with those hearings as to the economic and financial con- ditions which it is alleged make it difficult to provide the money necessary for such enlargements and extensions. It is claimed that the problems confronting public utilities are general in their nature, and that the ability of these utilities to meet the future demands of the public is de- pendent upon the prompt solution of those problems. The order further represents that it is desirable that specific facts relative to the financial difficulties which are encountered by these utilities in making extensions and enlargements shall be presented in order that the commission may have such facts before them to aid in the solution of these problems. For that purpose two hearings were appointed, one in Chicago and the other in Springfield. The one in Chi- cago was held on Thursday of last week, and the purpose of these hearings is to afford an opportunity to the pub- lic utilities, civic associations and municipalities who may be interested in the situation, to present to the commis- sion evidence and suggestions relative to the necessity for enlargements and extensions of plants; what part 300 c of those enlargements and extensions are now absolutely indispensable and what may be postponed to some better time, the difficulties with which the utilities are con- fronted in making provision for these necessary enlarge- ments and extensions and suggestions to the commission as general plans, general policies, which should be fol- lowed in dealing with what is generally conceded to be a serious situation as to the future operation of public utilities in this state. It perhaps will be in the interest of an orderly and sys- tematic presentation of these matters to the commission for parties who have statements to make to be permitted to complete their statements without interruptions. We followed that plan in Chicago, and it worked out very well. An arrangement will then be made, either later today, or at some other date, if necessary, for any desired further examination of the parties who have made state- ments by any one interested in the inquiry. We will take a list of those who desire to be heard at this hearing. I understand, Mr. Alschuler, you have the names of some who desire to be heard. Will you give them to the re- porter? Mr. Alschuler: Edgar S. Bloom, W. H. Sawyer, B. J. Denman, and Marshall E. Sampsell. Chairman Wilkerson: Any other interested parties who desire to be heard? You may give your names to the reporter. A good many are present at this hearing and it will be necessary to insist upon the observance of the rule against smoking. Are there any civic associations or municipalities who are represented at this hearing who desire to make any suggestions to the commission? (No response.) You may proceed. 300 Mr. Alschuler: Mr. Chairman, in view of what has been stated by yourself with respect to the proceeding, we have the same question we intend to propound to these gentlemen as we did to the gentlemen who appeared in the Chicago hearing. That will be all the question we will have today. I take it that will be agreeable. Chairman Wilkerson: We found that a good way to conduct a hearing of this kind in Chicago, and I think it will work well here. Mr. Alschuler : I suggest that the witnesses whose names I mentioned be sworn. Chairman Wilkerson: The witnesses may arise and be sworn. (Witnesses sworn.) Edgar S. Bloom, called as a witness on behalf of the utilities, having been first duly sworn, was examined in chief by Mr. Alschuler, and testified as follows : Q. State your name, Mr. Bloom, your residence and your occupation and business experience? A. Edgar S. Bloom, Chicago, Illinois. I am presi- dent of the Central Union Telephone Company, of the Indiana Bell Telephone Company, and the Cleveland Telephone Company. I might state those three com- panies operate the Bell System properties throughout the states of Ohio, Indiana and Illinois, with the excep- tion of Chicago and Cincinnati. I have been in the tele- phone business about twenty-four years, since graduat- ing from college. I first started with the New York Tele- phone Company. I then was superintendent of the New York and New Jersey Telephone Company in Long Island and New Jersey. I then went to the Pacific Tele- 300 e phone and Telegraph Company, on the Pacific Coast, as general superintendent. That was about 1909. I then came back with the American Telephone and Telegraph Company in New York, and had general charge of the supervision of plant operations all over the United States. I then went with the Southwestern Telephone and Tele- graph Company as operating vice president, and then to my present position of the three companies I have named. Commissioner Shaw: What is your present position? A. President of the Central Union Telephone Com- pany. Mr. Alschuler: We have prepared a question, which I will read : Will you tell us the situation of your com- pany with regards to its normal growth and present de- mand for extensions and enlargements, your ability to meet this demand, the amount of new capital which this company would need to build the necessary extensions to its plant, and what experience you have had in at- tempting to secure new capital? A. If I may be permitted, in answering that question I want to go back a little just prior to the time when this country got into the European War, to give an idea of one of the very important contributing factors to our present situation. About five months before we got into the war there had been a meeting in Washington between the chief engineer of the American Telephone and Tele- graph Company and the heads of the Army and Navy Staffs. At that meeting there had been a demonstration given to these officials as to what could be done in the way of telephonic communication with the various navy yards throughout the United States, and within the space of thirty minutes the chief of staff in Washington had talked to the commandant of various navy yards in the 300/ United States, and had talked by wireless telephone to two warships. After this demonstration Chief Engineer Carty of the American Company suggested that the tele- phone and telegraph companies form signal corp com- panies, selecting the officers and men. This work was started and in forming these companies it took the best class of men that we had. The companies were hardly formed before war was declared, and in a few months a number of the companies went to France and the year we got into the war we lost so many men our force was seriously depleted. Turning from that to the other side, to the action of the governmental authorities as to our company and their general suggestions, on August 1, 1917, we got our first instructions. We had been planning for this shutdown, and those instructions, which were carried out through- out the United States by the Bell System, and I think, in a similar degree by the independent companies, estab- lished the follomng policy : While the nation is at war, all the efforts and resources of the companies constituting the Bell Sys- tem will be directed toward assisting in the effective prosecution of the war. The construction program for 1918 will be planned to meet : (1) Direct military requirements. (2) Urgent commercial needs which are auxili- ary to direct military requirements. (3) Requirements for public health and safety. We also believe that we should not at present plan to make substantial plant extensions for: (1) Ordinary commercial requirements not con- nected with military or public requirements. (2) Personal or social demands. (3) Improving the commercial status of the com- panies in ways that are not necessary to meet mili- tary or other public needs. 301 In other words, we absolutely cut out everything except the public necessity and the military necessity. That was followed in October, 1917, by a letter from Secretary of War Baker to Will H. Hays, Chairman of the Indiana State Council of Defense, and this letter I think it is worth while to read to get the general pic- ture of the situation. This letter is dated October 1, 1917. “Dear Mr. Hays : The Council of National Defense has considered the question you raise in your recent letter as to the attitude which should be taken relative to im- provements, public and otherwise, which involve large construction work, and recommends as follows : Every effort that this countr^^ is capable of mak- ing should be applied to bring the war to a speedy and successful conclusion. The resources of the coun- try in a general w^ay may be said to consist of men, money and material, and during the period of the war any new enterprise or undertaking should be tried and justified by the test: Will the men, money and material so applied best contribute in this way to the winning of the war? New enterprises which are not fundamental to the efficient operation of the country’s necessary activities should not be undertaken. This will not result adversely upon business or conditions of em- ployment because every man and every resource will be needed during the war. All effort should be centered to help win the war. Very truly yours, NEWTOif D. Baker, Secretary of War and Chairman, Council of National BefenseN We in the meantime had anticipated that very particular situation set forth by Secretary of War Baker, but the matter was put in a still more concrete shape on January 302 16, 1918. The situation had been tightening up, and it was impossible to get anything delivered unless you got priority orders. The Priority Committee of the Council of National Defense^ — Judge Lovett, I think, was Chair- man — I want to read the original letter^ — this letter was sent to Theodore N. Vail, president; N. C. Kingsbury, operating vice president of the American Telephone and Telegraph Company; to Newcom.b Carlton, president Western Union Telegraph Company, and to F. B. Mac- Kinnon, president of the Independent Telephone Associa- tion of the United States; representing substantially all of the wire using companies ‘ of the United States. They had recommended that they be given priorities for material as essential industries and in connection with materials that were needed for war requirements, and in reply to their letter, Judge Lovett said: “We approve the program with respect to prior- ity to telephone and telegraph companies outlined in your letter, paragraphs 1 and 2, and the subdivisions of the latter ; and will upon application from time to time issue certificates accordingly.” That covered merely imperative needs, it was impos- sible to get anything for other needs. That was fol- lowed on April 4, 1919, by requirements set forth by the Federal Beserve Board with respect to finances, and these requirements, these conditions, were laid down, among other important ones that affected our situation. “If the issue is to be made for war purposes or to raise capital in connection with war contracts or war supplies, or to provide equipment, buildings, or facilities of any kind for war work, full descrip- tion thereof and amounts needed therefor should be stated. In all cases full reasons should be given why the proposed issues cannot be postponed until after the war, or why the necessity is greater than the para- 303 mount need of the National Government in conserv- ing the financial resources, materials and labor of the country for the war/’ Just prior to that time the War Industries Board passed the following resolutions : ‘‘Now, THEKEFORE, BE IT RESOLVED by the War In- dustries Board that in the public interest, all new undertakings not essential to and not contributing either directly or indirectly toward winning the war, which involves the utilization of labor, material and capital required in the production, supply or distri- bution of direct and indirect war needs, will be dis- couraged, notwithstanding they may be of local im- portance and of a character which should in normal times meet with every encouragement. Be it FURTHER RESOLVRD that in fairness to those interested therein notice is hereby given that this Board will withhold from such projects priority as- sistance, without which new construction of the char- acter mentioned will frequently be found imprac- ticable, and that this notice shall be given wide pub- licity, that all parties interested in such undertakings may be fully appraised of the difficulties and delays to which they will be subjected and embark upon them at their peril.’’ On August 1, 1918, the Bell Telephone System went un- der the control of the Federal Government, and we were again made — it was again made clear to us that nothing must be done except what was necessary in winning the war, and Post Master General Burleson in August, 1918, issued the first service connection charge, which was designed to be a prohibitive charge order, fixing the installation charge at $15 on a telephone where the rental was $4.00 a month or over; $10 on a telephone where the rental was from two to four dollars a month; and $5.00 where the rental was under two dollars a month. It was an absolutely repressive measure. 304 In August, 1918, General Squires of the Signal Coi-ps notified us that much of our material might be com- mandeered, with the result from the date that was sug- gested we restricted the use of our supplies to the ut- most up to the time of the armistice. That gives a gen- eral picture of how this situation developed in ways abso- lutely beyond the control of the public utilities. After the armistice was signed, we could not immedi- ately start up again. Our men, a great many of them, of our important men, were overseas. We didnT have the men to start plans; we had no plans for financing. By February or March, 1919, we were about ready to start on a considerable program. Every other industry in the country was ready to go ahead, and we found that we were immediately competing with unregu- lated industrial concerns in new enterprises requiring labor and material, with the result, mth our lim- ited resources, and no way of changing it rapidly to meet the situation, we were forced to sit idly by to a certain extent and see these people take away these mate- rials and take our forces at prices that we could not af- ford to pay. It has come to my attention time and again — I will take as a concrete example the case of a cigar concern in one of the large cities of Ohio, which had found it impossible to get labor, and moved to a town of 20,000 population where we had fifty operators. The day before they opened they circularized the town, offer- ing much higher wages than we were paying our op- erators. We had to largely increase our wages or lose the entire force. It took nearly five months to get relief in that situation. We had to raise wages overnight or the town would have had no service. That has been re- peated in degrees, not only with us, but with all other 305 concerns all over the country. Unregulated concerns, could pay any price for labor and materials and pass it on to the consumer. We couldn’t do that without a long and laborious proceeding and expensive hearings. With our rather indifferent financial showing it made it difficult for us to go into the money markets. In coming to that phase of the situation I have had prepared here from the commercial and financial Chroncile, which is a well-known publication, published in New York City, the security issues of the last three or four months, show- ing the sort of money market into which we are going for money. I will mention just a few of them to give a picture of just the sort of a market we are going into, where we are all after money. The In- ternational Products Steamship Company, equipment trust gold notes, net 7 per cent. The net earnings of this company are estimated over twenty times the total inter- est requirements on these bonds. It is a gilt edge secur- ity and sold at 7 per cent. The National Plate Glass Company, serial gold notes, sold at over 7 per cent; average earnings 3f times the interest requirements. The Ohio Traction Company of Cincinnati, collateral trust, three year gold notes, sold net to the public on the basis of 7.2 per cent. Their total net earnings were 6^ times the interest charges. The Cincinnati Gas and Electric Company, three year secured gold notes, 7 per cent. This was some months ago. The net earnings were 3| times the interest charges. The Brooklyn Edison Company, over 7 per cent. Those were bonds, ten year bonds, on a 7 per cent basis. They are the direct obligation of the Brooklyn Edison Company. The income for the last three years averaged more than 306 3J times the interest on the company's entire funded debt. Commissioner Shaw : What are these other securities, notes or short term bonds! A. Some of both, but mostly for three, five or ten years, very few bonds being issued. I won’t read the others, they are all of the same general character, but that money was secured by pledging the best credit of the company. Chairman Wilkerson: Have you a more comprehen- sive list! A. Yes, sir. Chairman Wilkerson: It may be of interest and in- formation to file that with the commission without taking the time to read it. Mr. Alschuler : I was going to suggest it be put into the the record. The Witness : In answer to Commissioner Shaw’s ques- tion, I have a circular from Brokaw & Company, which shows short term and long term industrial and railroad securities, with a description of each, and shows the rate at which they are being offered to the public at rates from seven to eight per cent. Commissioner Lucey: What date is that circular! A. April of this year, the latest date. Those matur- ing in 1921, of the short term securities, a large number of notes vary from 7 to 8.6 per cent return to the public. 1922 — the Canadian Railway securities, guaranteed by the Canadian Government, 6.7 to 8.7 per cent. There is quite a long list — Bloom Exhibit No. 3 — General Hearing at Springfield, 111., May 3, 1920. CENTRAL UNION TELEPHONE COMPANY ILLINOIS DIVISION. COMPARISON OF REVENUES, EXPENSES AND NET EARNINGS FOR THE YEARS 1916 AND 1919. Increase 1919 over 1916 1916 1919 Amount % Revenues $ 2,648,640 $ 3,908,713 $1,260,073 48 Expenses 2,170,971 3,448,804 1,277,833 59 Net Earnings 477,669 459,909 17,760* Property 12,912,396 15,969,019 3,056,623 24 % Net Earnings 3.7 2.7 ♦NOTE — Black type indicates deficit. ADDITIONS AND BETTERMENTS 1912 to 1919 $11,258,000 ESTIMATED EXPENDITURES REQUIRED FOR ADDI- TIONS AND BETTERMENTS DURING NEXT THREE YEARS $10,000,000 to $15,000,000 STATION GAIN. Sta. Removals Gross Disc. Net and Changes 1915 19,073 14,290 4,783 $85,172.51 1916 21,729 13,485 8,244 86,490.98 1917 26,170 ' 16,706 9,464 94,106.26 1918 20,604 19,660 944 98,744.90 1919 27,455 21,146 6,309 101,554.27 Total 115,031 85,287 29,744 $466,068.92 TOTAL STATIONS DECEMBER 31, 1919 114,193 307 ’ Mr. Alschuler : I think perhaps you had better put that in the record. (Documents so far referred to, filed and marked Exhibits Nos. 1, 2, and 3, of this date, respectively.) The Witness : This is a general summary. Chairman Wilkerson: Call attention to some typical issues. A. American Telephone and Telegraph Company, three year, 6 per cent notes, fifty million issue, issued two years ago. They are selling on an 8 per cent basis. Here are some industrials, Kennecott Copper, ten years, selling on a 7.8 per cent basis. Commissioner Lucey: American Telephone and Tele- graph Company, 8 per cent! A. 8 per cent basis, due in 1922. Commissioner Lucey: They Avere 7.7 in Chicago the other day. A. That may have been another note. I can’t vouch for these figures. This is what the broker says he Avill sell them for. I think they were very close to it at the time. Western Electric Company, five year convertible bonds, now selling at 7.25. Bell Telephone Company of Canada — I was familiar with that company. They are a high grade security. They are selling on a 7^ per cent basis, due in 1925. Southwestern Bell Telephone Company, five year 7 per cent convertible gold notes, just recentty issued — I know that company; I was vice-presi- dent of it. They are selling on a 7.6 per cent basis. To show you how good a security that is, and what we have been 308 paying for the money, that is a $25,000,000 issue, and is- sued against property valued on the books at $102,000,- 000 — they conservatively estimate the cost to replace it — I don^t find the figures — ^but it is very much higher than that; and the net earnings are equivalent to three times the interest charges, and I know that money cost the company over 8 per cent after taking care of the brokerage fees. As a concrete example of our financing problem take a company that is a million dollar cor- poration. We estimate that with our rates we will make 8 per cent, $80,000 a year. We go out to the public to finance that property. We first issue $500,000 in bonds and secured notes, being a first mortgage on the property. If we get that money at 7 or 8 per cent, what are we going to pay on the second $500,000, which is speculative? We can’t get that for 7 or 8 per cent. That is the position we are in today. We can’t show earnings that will attract people to the least secured part of our securities, and we have already issued securities which are a first mortgage on the property. I have had figures made up here for the Illinois division of the Central Union Telephone Company, covering prac- tically the entire state of Illinois, except the section op- erated by the Chicago Telephone Company. There are a few things here which illustrate the general situation. Perhaps you may like to look at this, which we will put in the record, (Handing papers to the Commissioners.) To show you what difficulties we have in financing, this compares the year 1916 with the year 1919. The figures at the top show the revenues, expenses and net earnings of the properties, and the per cent net earnings. For 1916 the per cent net earnings were 3.7 per cent ; for 1919, 309 2.7 per cent net earnings. The net earnings in 1916 were about $478,000 ; in 1919 they were only $460,000, in round numbers, notwithstanding that we added, as shown on the next line, three millions of dollars to our property, and so in spite of the fact that we got a rather material increase in rates under the Post Master General, which was effective about the first of last July, and was later approved substantially by this commission ; in spite of all that, we are worse off today at the end of 1919 than we were in 1916, which was the year before we got into the war, and for this reason we couldnT market any securi- ties ; on any such showing as that it would be impossible. Chairman Wilkerson: In the line entitled ‘‘property’^ for 1916 you have approximately $13,000,000, and in your line entitled ‘‘property’^ for 1919 you have approximate- ly $16,000,000, does that indicate $3,000,000 representing new equipment, or does it represent any modification of the basis on which the valuation was made ? A. No, no; this is the net additions at actual cost as they went on the books, what we actually paid, net additions at actual value. Q. It does not involve any inflation of values, or any new theory of valuation? A. No; these are book figures, which we can demon- strate are one or two millions less than original cost, and several millions less than reproduction cost. Q. The point I wanted to bring out was whether they represented any readjustment in values? A. No, sir; none whatever. We are not permitted to readjust our values under the Interstate Commerce Com- 310 mission. The new additions and betterments from 1912 to 1919 were $11,258,000. Our total property at the end of 1919 was $16,000,000. In other words, three-quarters of our property has been built new since 1912. That is one very important phase of the telephone situation, our growth is so rapid from year to year that we are continually in the market for new capital if we really are to keep pace with the growth of the various cities and the demands for service. We are behind, way behind, now, as our plant is pretty well congested. This two and a half or three years’ restriction has absolutely put us way behind in our needs, and there has not been much opportunity to build for the future. At the present time we have held up in the state of Illinois 1,500 orders for telephones, that is as of March 1st, just taking Illinois alone. In the entire territory of the company with which I am con- nected there are 8,000 orders held up, and there is not any prospect of connecting a great many of them in the near future. The plant that we should have today should have been planned for back in 1917. It takes us about three years for any large program of additions, between the time we begin the engineering, planning our finances, and by the time the backbone plant is available so we can connect up the telephones with drop wires from day to day. To show that situation and what we need to get back, we should spend in Illinois within the next three years $10,000,000. If we are to attempt to materially bring the service to the basis it was on in 1915 we should spend $15,000,000 — $15,000,000 at today’s prices will not^ pro- vide any more property than was provided by the 12 mil- 311 lion we spent from 1912 to 1915. I will give an example of this. In 1915 or ^16 we had planned to erect a new central office building, install equipment, in a certain town in Illinois. We figured the cost of the building would be $28,000. We got into the war and couldn’t get a priority for that and the job was dropped. We are now figuring going ahead with it, and we have an approximate esti- mate today of $60,000 for the same identical building, and there is no guarantee that we will get it for that. I am confident we will not, because it is on a cost plus basis, and that is always over and not under. In another city we figured on a $140,000 addition. We completed our figures recently and the figure was $350,- 000, two and half times as much. The building end of the proposition is extreme, but in all our lines of work the material costs are from 100 to 125 and 150 per cent higher than the pre-war prices. Labor is from 75 to 100 per cent higher. So it is a serious problem as to how far we should go. If prices go down within the next few years, it would be obviously unwise to burden these two particular cities with this relatively large investment at the present high costs, but they are demanding service, and we are up against it. We have crowded, we have temporized ever since the war orders came out, and there is nothing to do but to refuse to take orders or go ahead on this high price basis. To come to the next proposition, the gain in sta- tions added to this property. This sheet shows our sta- tion gain by years from 1915 to 1919. I want to point out one very burdensome situation of the telephone com- panies in that connection, the large number of discon- nections. During the period from 1915 to 1919 the 312 Central Union Telephone Company in Illinois discon- nected 85,287 telephones. That was practically the entire number that we had on January 1, 1915. In other words, the average life was two and a half years. During that period on that one item alone, due to the disconnec- tions, which we call the station moves and changes ac- count, which just takes account of the physical loss, was $466,000. This is only a part of the cost. There is the other cost, operating expense, directory cost, the cost of handling the new connections in the commercial office, which runs it much higher. We are now burdened with this tremendous expense in a great many cases. Every time we take out a telephone it is an absolute loss to us, which loss should be assumed by the short term subscriber, and is now assumed by all the subscribers as a whole. With our labor and material at the point it is today, that is one of the very im- portant things that ought to be considered in this general situation, the wasteful use of the telephone service. In one of the companies two years ago they had no removal charge for inside moves. They put in that removal charge, and in the first year they had the charge the cost was $3,000, and in the years there was no charge it averaged $15,000. When the public had to pay for it, they did not want to have all these unnecessary frills that are nothing but a parasite on the business, and on the net earnings of the company. Now, Mr. Alschuler points out that I have left out the question of finances. In my experience I have had this sit- uation to deal with : Our Indiana property, and all of the Indiana properties of the Bell Company — formerly operated by four or five separate corporations; there was 313 the property operated by the Central Union Company, which was a distinct company, being an Illinois corpora- tion ; there was the Southern Indiana and several others. It was proposed to combine these companies into one concern under the jurisdiction of the Indiana Commis- sion, involving $28,000,000 of property. In connection with the financing of that company I en- deavored to issue $6,000,000, three-year 7 per cent notes. This was started last October. I had a tentative bid in October 964. Finally we got an order through the commis- sion, and those bankers were offering us 95. That is $6,- 000,000 7 per cent notes against $28,000,000, appraised on a very conservative basis. That meant we would have to pay nearly 9 per cent for the money. It would have been issued to the public at a price that would net the public 7.3 per cent, but with the brokerage it would cost us near- ly 9 per cent for those notes. If that first 6 million out of 28 million of property costs 8 to 9 per cent in these times, how are we going to obtain the balance of the money needed necessary to extend the property? I think that is all. Mr. Alschuler: Mr. Bloom, I want to ask one question. These details which you have handed the reporter to be inserted in the record do not include the cost of the money to the companies? A. Oh, no, that is net to the public. All brokerage, of course, is paid by the company, and the cost of issuing the securities and all that sort of thing, the engraving and so forth, is additional, and the cost to the company would be much higher. Commissioner Lucey: I don’t hear any suggestion as to the remedy. What do you say in that regard? 314 A. The first remedy in my mind about that is to do just what Mr. Burleson did at the beginning of the war ; put on restrictive measures to be sure that we do not get a lot of people added onto our system, and when the break comes, as it must come, it will not leave ns with a heavy investment. That is, our additions should be kept to absolutely the imperative needs. The second remedy is this, to my mind, when the commission laws all over the country were put on the statute books nobody ever con- templated a situation such as exists today. Conditions change now more in a month than they changed in years before. We today figure on a rate schedule we think is just and right, and in a month from now it is all wrong, because wages go up overnight. Nobody can forecast what the situation is going to be one month or two months from now. The second remedy, if we are going to add to our plant and go ahead, is immediate relief in rate in- creases, similar to that in Ohio. There it is contained in a provision of the statute, we can file a rate and in thirty days it goes into effect. If there is a complaint, the com- mission suspends the rates and we file a bond, so we are not imperilled and the public is protected. The case is tried later by the commission. If the rate is too high, we refund to the subscriber. I think a great deal of the opposition to rate increases is to satisfy the political desires of somebody, and some city solicitors have fought us whether or no, because they thought that was their job. In some cases they have not, because we have gone to the substantial business interests of the city and we haven’t had any difficulty in showing them that our need was serious. If we go to the commission with long drawn out hearings, it may be months before we get an answer, and in the meantime our situation is such 315 that we are being wrecked from day to day. That is the second j)i*oposition, some kind of quick relief, put our schedules in and put them in with a reparation clause. Commissioner Lucey: This commission has answered that by emergency relief orders. A. Take our own situation, before we got through with our last state rate cases, which are expensive to pre- pare^ — ^we put them in good shape, it means a lot of work and effort — before we were through with them we knew they were obsolete. We realized last December and Jan- uary as well as we do now that they were obsolete. What does that mean? It means that the best men of the or- ganization are working on this all the time. It has been true with us for the last year or so that our best men are giving all their time and attention to the rate increases, outside of the time they give to the increase in wages. I know that is true in my case as I am largely occupied passing on wage increases, and then figuring how and where, we are going to get the rates to pay the wage increases. The other point is restrictive measures to be certain we donT get people on our lines and get loaded up with a lot of expensive property, and then when the slump comes leave us with the property and without the sub- scribers. Commissioner Lucey: You mean you should be per- mitted to discriminate to whom you should give the serv- ice? A. Make the installation charges and the service con- nection charges such as to prevent people taking the service who really don’t need it. There are a great many who don’t need it, because they take it for a few months 316 and then drop it. It is a burden to the company and to the subscriber. I don’t think you could restrict it and say that Smith needs the service and Jones doesn’t need it, but make it restrictive; make the charge $5.00. The situation is serious. Q. Have you any idea that an installation charge of that kind would deter any one really wanting the tele- phone from getting it? A. No, that is just the point; if they wanted it, but there are a great many people who will not pay five or ten dollars who only want it two or three months. If they want the service they will pay almost any price. That illustrates the situation; the public will pay anything within reason. Every business man will pay it, and we ought to have enough to pay the wage rate and have enough earnings to enable us to attract new capital into the enterprise. In connection with the question of net earnings you can’t go and say to the investor, want to sell you stock in this company for $100 at par. It is approved by the Illinois Public Utilities Commission.” And he says, ^‘What rate dividends does it pay?” ‘‘Well, it was 8 per cent last year.” “What did you earn?” “It just earned 8 per cent.” Do you think he is going to invest in a public utility that promises to earn 8 per cent, that has no extra earning, when he can invest his money at 10 per cent with a margin of safety? Here is the other end. The investor, if he knows anything about it, says, “that one hundred dollars is to be used to purchase new plant. If three years later some city solicitor who want^ to be governor or state senator, starts a rate case, what would happen to that one hundred dollar plant of mine?” 317 I don’t know, the commission may say it is worth $100; the commission may say it is worth $60, it has depreci- ated in value. How am I to say to the investor that he will get 8 per cent on the hundred dollars. That is the difficulty of the situation. The investor wants a private enterprise where he is safeguarded. Commissioner Lucey: The trouble is you are in com- petition with concerns which are unregulated? A. That is correct. Q. Reference was made to the Associated Simmons Hardware Company, 7 per cent gold notes, secured, of- fered at 71 — A. Probably the net earnings are three times — Commissioner Shaw: Four times. Commissioner Lucey: That was putting the trade mark, including the Keen Kutter trade-mark at one dollar for everything. Of course, the Central Union Company’s securities are good, but the man in the street who is look- ing for investments is looking toward these industrials that are paying high prices and can pay high prices, higher prices, of course, than you can pay. A. You say our securities are good? Q. Yes. A. You and I wouldn’t buy them. Q. I mean fundamentally good ; they should be. A. Yes, they should be. Q. I don’t mean on the market proposition. Chairman Wilkerson: Theoretically they are all right even though you may have to go through a lawsuit for them. 318 Commissioner Lucey: There is no question in your mind or in my mind but these securities are fundament- ally good. There is solid property basis back of them, but you are handicapped by the conditions under which you are laboring at the present time. A. Yes, sir; we have to issue them at higher prices. Q. All of that comes back to the public in the end! A. Absolutely. There must be more of a possible re- turn or the investor will not buy. Chairman Wilkerson: Having in mind that in times of depression or panic times, the securities of a public utility are in a way protected by the legal requirements that they shall receive a fair return upon the value of the property, while industrials have no such protection, it would hardly be expected there would have to be so wide a margin as if the same condition obtained for both! A. As a matter of fact, it is not a protection, it is a privilege. For instance, you fix our rates; we make a showing and on the final decision you say these rates will produce 7^ or 8 per cent return. They are figured on the general experience and the expenses for the past three or four years. The past three years I think has been a most exceptional time in the history of our company. We have had no hail storms, no wind storms, to destroy our property. We get the rates fixed and a storm comes that might cost us half a million dollars. Where is our protection of the property! We have to go through a long rate case. The commission is unable to act — Commissioner Lucey: You have the protection, it is there. A. How long will it take us to go through the courts ! If we had to wait three or four years to get the last de- cision we would have been ruined. 319 Q. The commission was reasonably prompt in the emergency orders, giving you all you were entitled to expect until you got a hearing! A. Yes, sir. I wouldn’t say I wouldn’t want the com- mission to be conservative, but things are changing so rapidly from day to day we can’t go through the long routine of the ordinary rate case. We usually have a case take six months or a year. The thing is quick action, make us file a bond for reparation and make full investi- gation later; and then the question of restrictive meas- ures should be considered. Q. You said a while ago there is antagonism of the utility properties on the part of the public. They haven’t been educated to it any more than they have been edu- cated to the value of the securities, which we think have a real value back of them. I think one of the troubles, as you outlined it a while ago, was before the commis- sion regulation the utilities were regulated in a measure by municipalities, rough and tumble! A. Raw politics in it. Q. And the public still have the same viewpoint of that kind in their mind. I think along with other mat- ters we have got to pursue a policy of public education, not only of the counsel for the cities, but of the people in the cities. I think in Illinois that Mr. Burgess or your- self with some of the cities have taken the course outlined and have gone to the chambers of commerce and city councils and laid the cards right on the table. A. Absolutely. Q. That has been reflected before the commission in less vicious fights. They have come here but they come with a better and clearer understanding. They don’t put the burden on the commission. 320 Comimssioner Shaw: I have a letter addressed to one of OUT state senators. I won^t mention the community from which it comes or to whom it is sent. This came from an alderman of a city in this state. I donT read the whole letter, but he urges the senator to abolish the com- mission and states that the utilities board is worse than the Supreme Court of the United States. (Discussion had outside of the record). The Witness: Every time they criticize the commis- sion for increasing rates they are criticising the strength of the fire and life insurance companies. Securities of the railroads and public utilities are largely held by the life and fire insurance companies. The man on the street donT realize that. Commissioner Lucey: The man on the street doesnT think of that ? A. No, also the newspaper men, a lot of editors. Q. He may think of it, but that don’t detain him. A. I doubt it. (Witness excused.) 0. F. Berey, called as a witness on behalf of the utilities, having been first duly sworn, was examined in chief by Mr. Alschuler, and testified as follows: Q. Will you please state your name, residence and your business experience? A. 0. F. Berry, Carthage, Illinois. I am president of the Mississippi Valley Telephone Company, which oper- ates eleven exchanges in Hancock and adjoining coun- ties; and also president of the Independent Telephone and Telegraph Company in Nauvoo, Illinois, in Hancock 321 County. I am and have been for a number of years general counsel for the Independent Telephone Associa- tion of Illinois, and have for the last five years engaged almost entirely in advising and preparing and presenting to the commission applications for rates, bonds, issues of stock, purchase of properties, and so forth. Q. Senator, you have seen the question? A. Yes, sir; I have. Q. Without reading it, will you give your answer? A. It will not be necessary, it seems to me, for me to go into any great detail in the presentation of the inter- ests of the Independent Association, in view of the very elaborate and able statement just made. I would add that in the conclusions reached by the representative of the Bell people our people are in hearty sympathy along all of those lines. The history of the Independent Telephone Association, or, rather the independent telephone inter- ests, of Illinois, have an equally interesting organization. They began a good many years ago, and they began in a cheap way in every particular, cheap in construction, cheap in rates, and having but little value at the start. That we may get some idea of the elements that enter into this financial question I want to mention the tre- mendously rapid growth in the last few years of the telephone business. One illustration will show that, and a man generally knows more about his own company with which he is connected than others. The Mississippi Valley Telephone Company in Carthage when I purchased it ten years ago had 99 telephones ; today it has over 800. That shows the very rapid growth of the telephone interests all over the state of Illinois. There are 800 independent telephone operating companies in Illinois alone. They have about 650,000 telephones. They have 80,000 or a little better stockholders. 322 Commissioner Lucey: Are you only speaking for the ones that belong to the association? A. Yes, sir. Q. There are some that do not belong? A. Yes, sir; there are some that do not belong, hut all of the principal ones belong. Q. Your statement did not cover those that do not belong? A. It may cover some of them also. It may cover some of them, but not all of them — 80,000 stockholders and about 30,000 employes. Another condition, for fear I forget it, which I regard as very important in the relief that the companies must have, a great many of the inde- pendent companies have been built and put in operation — from beginning about twelve years ago a great many were built and in the following five or six years. They were built when material was cheap, when rates were cheap, when there was not protection by a commission, and I want to add another thing, for fear I might forget it, in my estimation our telephone business in Illinois would have been in a great deal worse condition had it not been for the Illinois commission. I think that is the universal opinion of the telephone men of the state of Illinois. Prior to that time the securities of the telephone companies had no standing. You couldn’t talk to a banker before that time, as a rule, about telephone stocks and bonds. Since they feel, and as we feel, we have a certain protection, it has increased the value of the bonds and stock, and it has made the financing of the independ- ent companies prior to the last year or so very much easier. I mean by that, conditions and not the commis- sion, have made it hard for the last few years. The Independent Association lost their men, just as 323 well as the Bell interests, lost their best men, and while we undertook to operate with less operators and men, when the war was over and the men came hack, the conditions, as have been mentioned, and the prices, were such that we could not get them and didn’t get them. Out of five or six men in our county that went to the war we only got one when he came back, we couldn’t afford to pay the others what they wanted. As to the operators, you can go out and at some price hire a bank clerk, or hire a stenographer, but you can’t with any kind of money get a telephone operator until they are trained. When the telephone operator strikes, or goes into some other industry, they must be replaced by people wholly without experience, and instead of increasing the operat- ing force you decrease it, because a good operator has to sit down by the learner and teach them and stay right by them until they get to be good operators. I mention that because they say, ^ ^ Give us good service and we will pay the price.” We have got to have the price, then we can render the service, as I view it. The rate of return is the first element entering into the success of a telephone business, or any other public util- ity. Comparatively few of the telephone companies dur- ing the war came before the commission in Illinois for a raise. They felt, as I felt, that in view of the stress and the extraordinary demands made upon the public in their communities, that we would let the rates remain if we could, hoping that the war would be over in a year or so, and were led to believe, as many people believed, that as soon as the war was over things would drop. The result is that instead of going down they went up ; wages went up, prices went up. The telephones that at the beginning of the war we in 324 the country were paying $10 for, we are now paying, and have paid for a year or so, $17. We would never have been able to finance many of the independent telephone companies in the state of Illinois had it not been for the personnel of the men who operated them. I mean by that that local bankers and local capi- talists lent us money simply because they had confidence in the management of the company, in the men that were operating them. There are comparatively few companies in Illinois that can make a showing that would put the bonds and the stocks of the company on the market in competition, successful competition, with industrial con- cerns. I want to emphasize the fact that we are limited by this commission as to our return. We can only see one remedy, that the independent companies need, as I view it, a liberal valuation of their properties and an increased rate. Now, what has happened in the inde- pendent companies is this, which we will Chairman Wilkerson: By liberal valuation you mean in arriving at the conclusions we should give greater weight to the element of present conditions where it costs more to replace properties! A. Yes, sir ; I think we should be given credit for what it has cost and what it is costing. Of course, there are two schools, one claiming you should not have anything more for a thing than you paid for it, no matter how much higher it is now. In the valuation of the ap- praisements I think that the commission should take into consideration the valuation of the entire thing with- out reference to what it cost. In other words, with a liberal valuation we can much more easily finance our properties. I know of nothing else to save an utility but to value it a great deal higher than it has in the past. 325 Chairman Wilkerson : I suppose what you mean is this, that goes to the very point of the big question before the commiesion. If this had been the situation over the country, that the values had gone up at the outbreak of the war, had gone up suddenly, and then at the close of the war they dropped, it would hardly be contended that during the period of the war properties valued for pur- poses like this should be valued at those extremely high prices. But what has happened is that there has not been a decrease in value, but that the increase has been con- tinued, and you are arguing that we should give added force to the increasing value of the property if this scale of high prices should be projected for a long time in the future? A. Yes, sir; they have operated and continued long enough to disprove the fact it is not simply up and then down. I would agree with the commission, Mr. Chairman, if they had simply ran a year or so on the high basis and then started down hill, but that is not true. What we are doing, — a great many companies, when going un- der these circumstances to the commission even for an increase that has been given, like Mr. Bloom, we did not ask for enough. They have been using, for the purpose of maintaining themselves, their surplus and their depre- ciation funds. I am sure that is true, that is, in a large number of companies, all over this state. It ought not to be. I believe every telephone man in this room will agree with me. We have not suffered from wind and sleet storms in Illinois which usually hurt our telephone companies. The Lord has been good to us for five years. Chairman Wilkerson: There is one about due now? 'A. Yes, sir; that is what we are anxious about. An- other matter. I say this for this reason, these companies 326 that have been running eight, ten and twelve years, like other public utilities, going without any repairs, are about ready to go over, and they must be very soon rebuilt, or great damage result therefrom. We haven ^t a deprecia- tion fund to take care of this. Many of the company’s funds have been used to pay wages, have been used to buy material and keep our plants running as best they could, and they justified themselves on that score. All work was stopped almost universally in Illinois when the war began, as I have said, and the one thing I would like to emphasize before I close : I think I have said all I need to say along these lines, what the telephone utili- ties need is action just as quick as possible. Personally I am heartily in favor of a temporary order. I believe this commission can do much for the telephone interests of Illinois by granting us upon a fair financial showing, — I think the regular monthly reports of many will be sufficient; I think you will find red enough in many of them to justify the temporary orders. Chairman Wilkerson: You mean in advance of the relief which has been granted already? A. Yes, sir; for companies that are just filing now. I have in mind five or six quite large companies — the Bureau County company is in here, the Pekin company is in here, the Mississippi Valley Telephone Company is in here, and more are coming in, merely because they are driven to it. I believe that a temporary order upon such a showing as they can make, with the understanding — the same provision you have put in in the one or two we have got Chairman Wilkerson: Reparation clause? A. Reparation clause in case we don’t make a case. Commissioner Shaw: On the point of reparation it 327 has been the almost universal practice of the commission not to require any bond or any guarantee. What Mr. Bloom alluded to was the practice of the state law in Ohio. What is your notion about that, that we should continue trusting to the credit of the company on the reparations 1 A. Yes, I think so. I think we ought to pay it in service. If a man has five dollars coming to him, we should be ordered by the commission to give him five dollars additional service. Q. We may say we will grant the increase with the reparation clause, but in order to properly protect the customers, we will require you to file some kind of a bond or guarantee ? A. It seems to me that the public is thoroughly pro- tected under the order, under our law, that we shall refund a certain amount of service. Q. In other words, the commission considers you solvent? A. Yes, sir; solvent and honest, and we do the same with the commission. I think that would meet it. I Have had it from other men for the last year and a half or two years that these men have given their personal obli- gations, the managers I referred to a moment ago, have given their personal notes for the money loaned a great many companies. A number of independent companies are being offered for sale, simply because they cannot make both ends meet. Some of those needs are caused, as was stated, sometimes by bad management, but that is not true of many of them. I feel we need relief. I have personal knowledge of it. I have business relations with at least 150 to 200 companies in this state; I am present at the meetings of the association members; I 328 feel that they all need what they are asking for in a large measure. If the commission can see their way clear after this hearing to grant temporary orders at this time it will be a very big help to the companies needing it. Commissioner Shaw; Senator, isn’t it a fact when your company, or any other company, when they go to market their securities, the thing uppermost in the mind of the banker or the broker purchasing these securities is the relation of the net earnings to the carrying charges'? A. Yes, sir; absolutely; that is true nearly every- where. The showing must be that we have sufficient earn- ings that ought to be — our net earnings ought to be dou- ble our amount of interest and fixed charges. Q. Whether under normal times, senator, is that not the fact, that the utilities, generally speaking, enjoying a monopoly, make their securities in better standing, as compared with the industrials with competition, and sometimes sharp competition? A. Possibly that would be one of the elements of worth; I think it is. I think, however, we are not a monopoly by a long ways, unless we have a commission to keep us that way. That is one of the elements that enter into the telephone business. Q. Under the existing statutes, as far as the operation of the Illinois commission is concerned, you are prac- tically a monopoly, except the modification you may have under the municipal ownership statute? A. Absolutely. I want to emphasize this; WThen the people — when you get down to the people in Illinois, the people are not opposing reasonable rates, or the mainte- nance of the rates in their particular communities of the utilities. During all of the stir that was furnished in Bureau County — I am going to mention this because it 329 is public — with all the stir, when we had the hearing we had a hall that would seat 250 or 300 people, and there was not over 50 at any time there in the hall. The people are not interested. It was for some reason, personal or otherwise, that he stirred up the opposition to the com- mission and the opposition to the rates. Chairman Wilkerson : Of course, everybody who thinks about it knows there is only one of two ways of handling regulation ; one dealing with the municipalities, and then if the issue arises they thrash it out in a suit in the federal courts, where the claim is made that the order is confiscatory. So there are only two methods of regu- lation ; one is to have it done by some kind of a commis- sion, as has been done generally throughout the country, following the precedent of the Interstate Commerce Com- mission, and the other, to go back to the antiquated method of having them regulated in the federal courts on this question of confiscation. Intelligent people under- stand that. A. I sent out before I made application recently to this commission for an increase in rates 3,500 letters, telling them what we were going to do, the cause for the increase, and inviting their suggestions, and I got two letters from the 3,500. One was from a woman who said she was sorry, but she couldn’t atford to pay any more; and the other was from a man, who said, ‘‘Why in the world didn’t you do it long ago?” So the people are not hostile when they get the facts. Mr. Alschuler: I was wondering what your experi- ence has been in reference to the small company. As a matter of fact, whatever credit they have had has been due to the fact that the men behind them have loaned them their own credit, isn’t that it? 330 A. Almost entirely, in a large measure. Chairman Wilkerson: You think that the time has come where the issue might be met directly whether the property of this state shall be confiscated, and let the people stand up and be counted? A. Yes, sir. Chairman Wilkerson : I agree with you. We will now take a short recess. (Witness excused.) (Recess taken.) Chairman Wilkerson : You may proceed, Mr. Alschuler, with your next witness. W. H. Sawyer, called as a witness on behalf of the util- ities, having been first duly sworn, was examined in chief by Mr. Alschuler, and testified as follows : Q. Will you state your name and your experience? A. W. H. Sawyer. I started in the street railway business in 1890 in Lincoln, Nebraska ; followed through the car barn and all phases of the working man up to the general operating, designing and construction end. I spent a number of years in consulting engineering work and the last five years have been vice president of the E. W. Clarke Management Corporation. Since January 1, 1919, I have been president or vice president of the group of properties on the east side of the river at East St. Louis and vicinity. There are seven of those prop- erties. Q. Now, Mr. Sawyer, you have seen this question that is written; it has been submitted to you, hasn’t it? A. Yes, sir. Q. In so far as your experience enables you to do, will you please answer that question? 331 A. I will answer that question from our local situa- tion. In the East St. Louis group of properties, the stock is owned by a holding company, the East St. Louis and Suburban Company. These seven companies are all in different stages, different financial situations, but the group last year just barely earned the interest on its bonded indebtedness. The total capital stock of the group is $24,000,000, one-half bonds and one-half stock. The gross earnings were about five million, and they earned less than $100,000 over and above the bond interest, fig- uring it at five, per cent. To come to your question, our growth down there is normal, that is, the growth in business. As to the exten- sions, in the broad sense of the word we have not made any, and are not contemplating any in the near future, although there are extensions in that territory that are a necessity to the civic life of the community or its devel- opment. We are, in regard to the reconstruction, putting in new rail and tearing out old, as must be done in order to continue the present service. I haven’t any figures as to the new capital which the companies would need to build the necessary extensions. Last year and this year we made no budgets, something which has al- ways been done before, the understanding being that we would simply meet the situation from month to month as it stood, taking what we had and doing the best we could with it. The previous practice had been to finance our compa- nies through the holding company purchasing the bonds and stocks which were issued for capital improvements. Last year we financed only through our companies. That is, I mean no one has advanced us money; they lost con- fidence in us; the six-cent pieces that we take through 332 our street railway and the electric light money is the only money we had for capital expenditures and everything else. The Alton, Granite & St. Louis Traction Company, one of the seven companies, the interurban portion, went into the federal court something like two years ago on the ground of confiscation. The city lines are now getting a rate of fare as high, I think, as they should have at present. They have only had half enough. I feel that they should have had it before. No question of valuation was ever entered into on that company, as we accepted for temporary purposes the so-called actual cost ap- praisal of the commission. We did that because so far we have not been able to earn in excess of a fair return on that amount. That company defaulted on its bond interest a year ago last August and has paid its bond interest six months late up until last February. At the present time it owes taxes, with no money to pay them, and with no money for bond interest. Receiver suits are filed, and the only reason the bondholders have not taken over the property which belongs to them and have allowed me to continue to operate it, is because they simply seemed to feel we were doing the best that could be done, and there was nothing to be gained by taking the property over. The bondholders seem to realize what we are up against. I talk to large interests every month, trying to keep them posted on the last increase in labor and when we hope to get an increase in rates. The trouble with the property to a certain extent, is that we overbuilt at the start, and since then, especially during the last five years, our operating expenses have simply increased out of bounds to the revenue. The Alton Gas & Electric Company is a sister company in that it guarantees a portion of the bonds. The two companies 333 together are running two thousand dollars a month be- hind on their bond interest, and we expect to see wages go up the first of May. To divert just a moment on the question of wages. Take the motormen and conductors ; in May, 1918, we were paying those men 31 cents ; today we are paying 51 cents, and have for one year, and we are entering into arbitra- tion now on a change of wages due May 1st. Unques- tionably we are going to pay more. Within four years, and practically within five years, the wages have been doubled. That is true very largely of everybody outside of the clerical force, and their wages have been very materially and largely increased. Another one of these companies is the East St. Louis and Suburban Kailway Company, whose passenger de- partment is now under the federal court ; went there last September. At the time we went I presented a statement for the first seven months of 1919, which showed that after paying operating expenses and taxes we had $25,000 left. The only reason we had $25,000 is because we didn’t spend the money that should have been spent in maintaining the property. We presented an outside ap- praisal, showing the so-called minimum original cost value to be — I think it was three million dollars and a half. The freight department of that company has for the last couple of years made some money. Three or four years ago we were not hauling practically any coal. The East St. Louis Railway Company has been getting a six-cent fare since August, 1918. It is a company where the riding is good. The people in that town are perfectly willing to spend their money. The East St. Louis Railways could earn an unfairly high return upon 334 an unfairly high valuation. It is one of those properties where the people could pay it, and would. This property has 36 miles of track, not properly laid out for the city to develop. There has been no increase in track mileage in ten years. We are giving exceptionally good service, always have, the cars are in good shape. We have bought only five new cars within the last five years, and it was quite a bit before that since any had been bought, that is, for additional capacity. We have rebuilt some fifty. East St. Louis needs better street car facilities, par- ticularly rail extensions. There is one group of manufac- turers who have no street car facilities. The people feel they ought to have a cross-town line, an outer belt, as it were, to connect the factories together, so that a man living in one place would not have to come clear dowm town to go to work, when he works also in the outer belt. The city has got to the point where it has absorbed that overbuilding, and it is going ahead with manufactories, as it is admirably situated to do. The general situation of our company is such that we can’t do anything today. What I am hoping for is a better condition so that we can tend to restore confidence and get back some day where we can actually do things again that need to be done. It is our desire to do this in that community. It is our desire to do this on any practical basis that can be done. I often refer to the fact when I took the presidency of this company it was with the understanding that anybody outside would have absolutely nothing to do with it. I was to go down there, devote my time to it, live on the job and solve the diffi- culties as I thought best. Before there had been some question of management. All questions I settled 335 locally, after detailed investigation, except the question of the spending of somebody else’s money that they won’t give us. That I can’t do. The people down there are saying — I think there is really a different situation today than there has been before. They now say, We have got to have the extensions.” I think they have at least got to the point that they recognize what I have been telling them for a year or two, or three, must he true. It would do some good if somebody outside of a railroad man would tell them that, too. What we have been stating is we couldn’t spend this money. They need these exten- sions and they have talked to us about it. In general they are willing that we should be given enough money if we could make the extensions. I told them that we couldn’t get the money which it would take to operate and restore confidence with the men who have money, the investors. Our past records do not give confidence today. In connection with the details on valuations that have been brought up. I will digress just for a moment on that. I don’t know as we all understand when we refer to actual cost valuations and the present day price valu- ation — I don’t know as we all understand each other on that. I would like to illustrate that by our own condi- tions down there. Frankly, I think the term actual cost valuation as we have used it before the commission, and as the commission’s engineers have used it, has been a misnomer so far as the public is concerned, in that it didn’t represent the actual cost. There are many other elements that enter into that cost that have not been con- sidered in my opinion. What is the actual cost? We know what it is and what it has been since 1902 or ’03, or since these companies were formed. They were not all formed at the same time ; they were paid for in stocks and bonds. 336 Since then we have kept our books in accordance with the Interstate Commerce Commission's classification and know what has been done. That is for fifteen or twenty years, but the original actual cost of the property we donT know, but we are in pretty good position to know from those who have been there during that period. I have given a great deal of thought to the actual cost in these cases, and every time it was in excess of the actual cost found, leaving out the going value and limiting the so-called overheads to 10 and 12 per cent, as has been the case in most cases of ours. In regard to the present day cost, in our case at least that is not the peak. We called in Mr. Hagenah to make that, and he gave very considerable thought to it. We talked it over after he had made his report on what he had done, and he said that his valuation was not based on present day peak prices. It was based on the new high 'level as compared with the pre-war level, it is not the new prices of today; it is lower by ten per cent, but it is made more nearly to reflect the 1918 to 1923 prices, and the price average that will continue in 1922 and ^23, based on the studies economists have made. I speak of that because this present day cost was entered into, and I donT feel that is understood. Getting down to the rate increases and the labor in- creases; as the situation is today we are at Springfield and Chicago and on court work with our engineers so much that we are not doing what we really could do if we could really devote more of the time to the operating. Now, as to the question of rate of return, we have no experience down there to guide us. We had one witness on the stand down there in regard to that who said that to get money from investment bankers we should earn upwards of ten per cent. Another witness said he didn^t know how much we should earn, he wouldn’t have any- thing to do with the securities, yet he was a man who used to handle public utility securities. We down there have got to get a return proportionate to what other people get. In the meantime our only means of financing will be from our earnings. We must take in a sufficient amount of money to pay the bond interest if we can, and what money, if any, there is left over, we put in recon- struction and capital expenditures, and if there is any money left that is sent to the stockholders. We keep it before they get it, they don’t loan it to us. Money that has to be spent has to be spent, and we just spend it. In other words, this emergency still exists, and I feel in the last month to a greater degree than ever. The increases and the problems that we have been confronted with in the last sixty days have been more abnormal than they have been within the last two years. The labor problem has become even more abnormal than before, in spite of what we have been through. There is nothing hurts us any more in regard to the labor question than the belief that the company really down at the bottom is making money somewhere. We are not and any statement that we are, if it gets any semblance of officialdom hurts us. In regard to the plans spoken of by the telephone com- pany of protecting the public, that would not be prac- tical in so far as the street railways are concerned. That has been done, but I wouldn’t want to see coupons issued. I think in our own case down there if the commission in their wisdom should give us the money they might re- strict the uses to which we should put that money. If a six-cent fare is not enough for a street car rate give 338 those companies enough money from a manufacturing standpoint. Now, we have got to have an increase. If we could have a higher rate, you could protect the pub- lic, by giving us instructions not to pay but a certain amount of the money out to the stockholders. In other words, no one would suffer by it. Chairman Wilkerson: In other words, create some fund then and use it for the purpose of adjusting rates'? A. Yes, sir, and see that your stockholders didnH get over blank per cent on blank dollars. In our local case we have got to get some money somewhere. That is the only place we have been able to get it. We have got to make improvements this year that should have been made, but which we are not making. We are going to do it as time goes on. The very least we can do there in the town is to spend 75 to a 100 thousand dollars. Beahy a lot more ought to be spent. Now, in our case down there, I don’t think we should go ahead with radical extensions. We have one little community down there, Belleville, that believes we should spend a half million in railway exten- sions. They gave me a list of detailed extensions, and because I didn’t think very seriously of it at first, I was brought up before the council, and I figured it out seri- ously with them. We discovered that the first item meant a hundred thousand dollars, and it paid something less than 11/lOOths of one per cent on the new investment, after we had paid the operating expenses. There are some additions that should be made eventually, but at the present time we can’t make any extension that won’t stand on its own bottom, and those that can we can’t make if we can’t get some money. Commissioner Lucey : Is that condition really local to 339 yourself or is it typical to your line of business through- out the state? A. As vice president of the management corporation I have more or less to do with a considerable number of public utilities. The East St. Louis companies were what we call pretty sick babies, and I came down there to take the presidency and live on the job, therefore I am not in as close touch with the others, but generally speaking, our condition is typical of the street railway situation. I could spend a little time on the national street railway conditions. It is deplorable. People are just commencing to get to the point where they are appreciating that. The President came out during the war and told them, Mc- Adoo told them, later any number of people told them, the War Labor Board told them that when they gave the men 40 per cent increase in wages, and said we must have relief. We have never got relief. People are finding out that it has hurt us more than it has helped them. They canT hurt us any more, we are down and out. Conditions have just got to the point where the commission must give us money. We can’t spend the money if we can’t get it. People are commencing to appreciate that street rail- ways and the civic communities are going down together or going up together; you can’t separate them. Down there we have got along because we started ahead of the community. They have caught up with us, however. They need the service, and if we could give it to them they would be mlling to pay for it, in spite of records to the contrary, written records to the contrary. The light and power situation is not, generally speak- ing, as deplorable as the street railways. Generally speaking, the power and light companies were profitable 340 from their standpoint, which does not mean profitable as non-controlled industries by any means, but they are making enough money so that they ought to be able to finance themselves. They are, generally speaking, in com- munities that need enlargements, more enlargements, which means putting in a lot of money. They are up against it, they can’t get the money, yet the investment looks good. I am indirectly associated with properties around Akron, which is growing by leaps and bounds. The growth is tremendous, of course, the operating ex- penses are, too. What they need is money. They had some three-year notes they wanted to refinance to the stock- holders on an 8 per cent basis, who ought to have taken them, but they didn ’t. They made some arrangements to string them out for another year, hoping for a better condition. The light and power situation is a big problem as to getting money, but the street railways is a bigger problem. We have got ourselves in a condition where we can’t get the money, and it must be changed so that some time in the future we can get the money. Commissioner Lucey: Did you say your capital was 24 millions, divided half stock and half bonds 1 A. Yes, sir. Q. And your net income was five millions ? A. No, sir; our gross income. I am approximating 12 million bonds. Five per cent on that would be $600,000 and we had less than $100,000 after taking care of that. The coal mines have made us some money in the last year or so because we have been hauling some coal, yet the Alton, Granite & St. Louis, and the Alton Gas & Electric Company haven’t met their bond interest. 341 Q. Can the street car company in East St. Louis make any money? A. Yes, sir; particularly in that kind of a community. It is a workingman ^s community. They are good spend- ers. In other words, that traffic will not fall oft, as the rate increases, to any appreciable extent. Q. Well, aren’t you charging more than six cents? A. No, sir. Chairman Wilkerson: Application asking for more? A. We have an application asking for more. That is held up at the present time, awaiting the report of the commissioner’s engineers. Q. The application is for eight cents? A. The application is for eight cents. Of course, what is a fair return on that property comes down in the end to a fair valuation. What that is Commissioner Lucey. Your property is interwoven down there? A. Yes, sir; our property is interwoven, and we have to stand on some general basis rather than a particular local basis. If a man wants to know what is a fair rate of return on a fair valuation, a fair rate of fare, it must be in the end what will encourage a fair-minded man to invest in the enterprises. If they don’t do that you have put the rate too low. Chairman Wilkerson: We will take a recess now until 2 o’clock. (Whereupon a recess was taken until 2 o’clock p. m. of the same day.) 342 . Monday, May 5, 1920, 2 p, m. Hearing reconvened: Pursuant to adjournment. Parties present : Same as before. Chairman Wilkerson : You may proceed, Mr. Alschuler. Mr. Alschuler: I would like to recall Mr. Bloom for one question. He prepared an exhibit this morning which I would like to offer in evidence. Chairman Wilkerson: Very well. Edgak S. Bloom, a witness on behalf of the utilities, re- called, resumed the stand for further examination by Mr. Alschuler, and testified as follows : The Witness : I find in looking over my papers I neg- lected to present one paper which compares tax free and taxable bonds, which is one of the factors in the sale of securities today. The column headed ^ ‘ income, ’ ’ with the figures 3^ per cent, 4 and on up to 7, are the rates of return on a tax free bond. Immediately beneath it is given the rates of return that investors would have to receive from bonds that are not tax free in order to get the same net income. For example, a man has an income of ten thousand dollars a year, that is from tax free bonds on a five per cent basis ; he would have to get 5.62 per cent in the case of a bond subject to the income tax. Now, if the investor’s income was one hundred thousand dollars a year clear with five per cent tax free bonds, he would have to get 11.36 per cent on a bond subject to 343 taxation. The real result of that is that it restricts the field for the sale of securities which are not tax free. The large investors do not invest as they did before in taxable securities, because the net return is so small when they pay the income tax. Mr. Alschuler : This gives no consideration to the taxes they have to pay to states and municipalities ! A. No; purely on the basis of the income tax figures for the year 1919. Commissioner Shaw : Securities might be exempt from state taxes, however? A. Yes, this takes into account only the federal in- come tax, which is the most important. Mr. Alschuler : That is all. (Witness excused.) B. J. Denman, called as a witness on behalf of the utili- ties, having been first duly sworn, was examined in chief by Mr. Alschuler, and testified as follows : Q. State your name and your business experience. A. B. J. Denman. I am president of the Tri-City Bailway & Light Company, a company operating the street and interurban railways, gas and electric utilities in the group of communities commonly known as the Tri- Cities. That particular company covers all the communi- ties in a radius of about thirty miles within the radius of that group. I am also vice president of the United Light & Railways Company, operating interurban and street railways, gas, electric and heating utilities in eight addi- 344 tional communities in Iowa, also in Tennessee and in In- diana and Michigan. Commissioner Lucey: By Tri-Cities you mean Eock Island, Moline and Davenport? A. Yes, sir; the Eock Island, Moline and Davenport group. Mr. Alschuler: How long have you been in this in- dustry ? A. I have been in the utility business about twenty- five years. As vice president of the United Light & Eail- way Company I am in charge of what might be called the operations ; that is, the operating matters, engineering and construction, purchasing, preparation of annual budgets, and so forth. I am president of the Illinois Electric Association for this year. Q. Mr. Denman, you have seen this question that has been submitted to you, have you not! A. I have. Q. AYill you proceed to answer that question in so far as you can! A. In answering that question I would like to begin at the last portion of the question : ^‘Tell us what experi- ence you have had in attempting to secure new capital!’’ As I use the term new capital we have not been able to secure any new capital for about four years. The only way we have been able to raise money is through the sale of short term notes. These notes are secured by 33 per cent excess collateral, and I think that method of obtain- ing money is quite different from getting new capital into an industry. I have here a statement showing the net cost of obtaining money for the United Light & Eailways Company from November 1, 1917, to date. The first issue. 345 a million and a half, 24-year notes; second issue — those are six per cent notes. Commissioner Lucey: What did you sell them for? A. Those were sold to the public on a little over seven per cent basis. The net cost to the company, however, including the company’s expense and commissions, was 104 per cent. The second five-year, series of 7 per cent notes were sold to the public around 74 per cent. The net cost, including all expenses, was 9f per cent. Q. When were those sold? A. The date of the issue, April 1, 1919. Then there was a one-year note dated December 1, 1919, in the amount of a million and a half, sold to the public on a 74 per cent basis; the cost to the company net was IO 4 per cent. We have just finished the sale of two million two-year notes to the public around 7.6 per cent, which will cost the company 12 per cent. I might state that these notes are secured by a deposit of 133 per cent of bonds. Those bonds can only be taken down in the amount of 75 per cent of the construction expenditures. The result of that sort of financing is that we are using up our equity in our property, just as we are using up our surplus in an operating way. It is impossible to sell bonds unless we can show that we are earning the interest at least approximating two times, and the only way we can preserve our equity in the property is by selling junior securities. In fact, the only reason we have been able to do this financing is due to the fact that around 1915 or T6 we were able to sell a large amount of pre- ferred stock and a large amount of unsecured debentures. That gave us an equity which we are fast absorbing. The reason that we are paying this price was pointed out fully this morning, so I will not dwell upon it — that 346 we are in competition with industrials which are earning very high rates of return, and in addition are setting up, very large amounts for depreciation, and building up big surpluses, and we have got to meet that competition. As was just pointed out, the field has been restricted on ac- count of the flood of tax exempt securities that are com- ing on the market. That has cut out entirely a large field of investment. In addition to that we have the feeling among the public that the utility investment is not as secure as it should be. That has been brought about largely through the ranting of ambitious politicians. As Mr. Lucey was saying, they are ambitious to break into this building and similar buildings. Also on the part of greedy lawyers who are more concerned in the large fee they can obtain instead of determining the facts, so that is an additional handicap which we have got to over- come. Our bankers formerly specialized — Bonb right & Com- pany — they formerly specialized in public utility securi- ties. At present they will not take on additional clients. They only will take care of old customers because they feel they have an obligation both to the company and the investors. It is very fortunate for us we do have a con- nection that takes that view of it. In fact, when we sold these notes — this same company had participated in the Texas notes ; they sold those notes all over the phone ; in contrast to that they say they have to go out and almost club their customers into taking utility securities. The selling expense is so high they would rather not be called upon to take care of our requirements. -Of course, we all realize that this is an economic and not a political question. Mr. Alschuler: Tell what the Texas company is. 347 A. Mr. Alschuler has suggested I tell what the Texas company is for the record. That is one of the strongest oil companies, and if my memory serves me correctly, these securities which were* recently sold went to the public in excess of 74 per cent, I believe pretty close to an 8 per cent basis. One of the conditions of that sale was that the company retire some 15 million or more of outstanding securities at quite a premium, I believe 115, so that the net cost to the company, so far as we are able to determine, was pretty close to 10 per cent, and that is one of the strongest oil companies in the country. So this shows the competition that we are up against, and that competition secures no new capital in the business, but merely loans us money on a 100 per cent excess col- lateral. As Commissioner Lucey mentioned this morning, and later modified and corrected the statement, that there was opposition on the part of the public to increases in public utility rates. Our experience has been rather, I think, somewhat fortunate, and somewhat contrary to that, and the only opposition, as the commissioner says, was from ambitious politicians and people of that type. We have had several experiences before this commission, and I believe in almost every case the city attorneys stated they were willing to rest their case entirely in the hands of the commission, but they wanted the companies to se- cure reasonable rates. We had one exception in the city of Eock Island. The former mayor came out for renom- ination on a five-cent fare platform, but he did not even secure the nomination, so that issue was not as popular as he apparently deemed it would be. We had an experience in the last thirty days before the Indiana commission. We made application for a $2.10 gas rate. There was no opposition whatever. Several 348 manufacturers stated all they wanted was that the rate should be just and reasonable and the city attorney stated that was all that he desired, and he let the case rest entirely in the hands of the commission, and he didn’t take the trouble to go to Indianapolis when the hearing was finally completed. In the city of Iowa City we have recently, within sixty days, raised the gas rates to $1.70. We haven’t received a single complaint. That is a town of 12,000 people. In the City of Ottumwa we had a $1.10 gas rate. Within the last 18 months we have increased it successively to $1.25, $1.35 and $1.50. I am going there tonight and we will make application and unquestionably secure $1.75. Commissioner Lucey. Common council! A. Common council. In Iowa the rates are under the jurisdiction of the council. The point I wanted to bring out was these rates are being secured practically without protest, on showing of necessity. We secured 13 or 14 months ago a six-cent fare in the city of Cedar Rapids, Iowa, by a popular vote. I believe that was the first large city — I say large city. Cedar Rapids has a popula- tion of a little less than fifty thousand; but those cases indicate that the public is not especially concerned, not unduly concerned, about utility rates. They appreciate, apparently, that the cost of utility service is a very small portion of their budget. In fact, I should say, in my opinion, that including all utility services, gas, electric and railway, it would not exceed five per cent of the av- erage family’s budget. Taking that into account, if our rates were increased in proportion to the decreased power of the dollar, they would still be almost negligible in the average family’s budget. In view of the compar- atively small increases in the past, they have been, I be- 349 lieve, really negligible. So much for the cost of money and the effect of increased rates to the public. This mat- ter has been discussed so fully I think I need only give my opinion as to the necessary relief. We have got to have the money if the people are to be served. They are more interested in service than in rates, and we feel that the only thing necessary to restore confidence in public utility securities is an adequate rate, and an adequate rate is one which will attract the necessary money to the busi- ness. If there is to be an error on the part of the com- mission, I think the commission might better err in fixing a rate too high rather than too low, because we believe that surplus is ab^lutely necessary to tide us over the peri- ods which we experience of having frequently and very rapidly increasing costs. We have been paying in the Tri-Cities what we felt was a top-notch wage in our rail- way, sixty cents an hour. The newspaper reports in the last day or so indicate that the men are going to demand 82 cents an hour. The contract expires the first of next month. There must be some way to meet those expenses, those increasing expenses, promptly and adequately, and if there is to be any delay, personally we believe that an emergency relief, as was suggested this morning, would be a desirable way to meet it. If it is not met that way it might be met through an adequate surplus to give us slack through some considerable period, to allow us to meet the new conditions. I don’t think any commission need fear the companies will be paid too much, because all the money companies can get nowadays is a neces- sary return to the property to take care of the necessary extensions. We are facing, and I hope we will be able to postpone them, some very large expenditures in Moline, Rock Is- land and East Moline. These expenditures, if they are 350 required this year, and they require $400,000 as I recall, are due almost entirely to prospective paving. I believe we will be able to convince the cities that those paving projects should be abandoned. If they go through it means we shall have to spend a very large amount of money, and there will be no increase in revenue from that. It will take all the money out of our depreciation reserve ; in fact, I can’t say whether it will be big enough, and increase the capital charges without any increase in earn- ings. That is one of the serious things that faces the railway company. In addition to that is the very great increase, or rather request for increase on the part of the trainmen. Commissioner Lucey: Do you find in your experience that the streets on which the street car tracks ejctend are often paved which would not be paved if the street car tracks were not there 1 A. Our universal experience is that the first streets to be paved are the streets on which the tracks are lo- cated, because with a double track we pave eighteen out of the thirty feet. That is almost our universal experi- ence. That is a burden from which we should be relieved, but it is not probably within the power of the commis- sion to give us that relief, but I do believe that the city officials are somewhat — are right alive to the seri- ousness of the situation, and these paving projects may possibly be postponed ; we certainly hope so. We believe if we are to go on we must receive a rate which will attract the investor, and it must be a rate which the investor believes to be just and reasonable, and which will be a rate to give us enough to attract capital to the business, if we are going to grow. We are not only using up the surplus, but we are using up the 351 capacity in our plants, because property in Illinois today is working at 100 per cent capacity pins. It keeps an operating man on the verge of nervous collapse because we do not know wbat minute we are going to have some trouble, and we have some pride in giving uninterrupted service, but it has certainly got to the point where we can’t continue. It does mean that rates, utility rates, have got to be measured in the future more in the light of the purchasing power of the dollar. That dollar today as a wholesale commodity is worth about 42 cents of the pre-war value. We have found in communities where we are putting up our gas rates the necessity of putting them at a point which approximates the value of the dollar today as compared with the value of the pre-war dollar, if we are to keep the plants. The big problem, as mentioned this morning, is a financial one. That is our main problem today. Many of us have been operating — we have been at an advantage in operating in having long term contracts, which are expiring, and which the oil and coke companies are trying to live up to. Those are ex- piring, and they have got to be met. There are additional points which would be of value ; that is, in the matter of extensions. Personally I am of the opinion that under the present conditions there should not be any railway extensions ordered in the communities in which we are operating, with the present costs of ma- terial and labor. In fact, when we start a project nowa- days we never know whether it is ultimately going to be finished. It is impossible to get shale and paving brick; it is impossible to get sand. None of our communities would expect us to, because we are serving the communi- ties along there very well, indeed. In fact, we have very little requests for extensions; none, in fact, except one minor one, which should be postponed, and which, we 352 trust, will be, but we believe railway extensions should be at least postponed until we know whether or not this condition is going to be permanent. It does not do any good to go into the market and bid for labor and mate- rials ; it does not do any one any good, it does not do the big fellow any good, it just boosts the price. Take the matter of gas service. Cast iron pipe in pre- war times we bought for $23 a ton. The last quotation we had was, 4-inch pipe, $83, and 3-inch pipe, $89.90, something like that. So that analysis shows that with ma- terial at that price it is almost impossible to take on addi- tional customers under existing regulations. Those mat- ters, of course, are before the commission at the present time. We have all gotten to the point where I think the public has benefited very largely in keeping the rates down, particularly the small user of service, because we have been using up our resources ; most of us have used them all up. It seems to me absolutely essential that this in- crease and everything else be reflected more nearly in the — on the order of the present purchasing power of the dollar. I believe that is all I have. Commissioner Shaw: I believe you stated you are chairman of the Illinois Electric Association? A. Yes, sir. Q. When the war was actually on it was represented to the commission by a good many companies operating in this state that they were then running at full capacity, or really had an overload, that they were unable to in- crease their capacity by reason of the government com- mandeering the material necessary to increase capacity? A. Yes, sir. Q. Also by reason of the scarcity of men and material the maintenance was not kept up, there was deferred maintenance I A. Yes, sir. Q. Now, taking the electric companies of Illinois as a whole, what is the situation ; are the plants running at very much overload; is there deferred maintenance as a general proposition! Those are the things we would like to have light on. A^. I would say that today the plants are more over- loaded than they were during war times, because the companies are — there was a period during the immediate adjustment period it was impossible to get equipment, and deliveries have been slow ever since. Money has been almost impossible to obtain. As a result the exten- sions of the plants have not been anywhere near normal. Now, as applied to the company with which I am directly concerned in this state, we went into the war better equipped than the average. In fact, it was brought out in the senatorial investigation that Chicago and the Tri- Cities were the only places wliere available electric ca- pacity could be obtained. As a result of that the Rock Island arsenal increased its employes from 1,200 to 18,000. Jn addition there was a large Davenport plant employing some 30 or 35 hundred. The Davenport Man- ufacturing Company was just starting and altogether there was some ten thousand kilowatt of additional busi- ness brought to our community. Now, since the conclu- sion of the war these factories have gotten onto a peace basis, and their demand on us is as great as it was. Their consumption has dropped because they are not working nights, not employing as many men, and the load factor on the electric and gas plants is not as great, but answer- ing the question directly, I would say from my general 354 \ knowledge of the situation — I know it is true in our prop- erties — that there is less reserve than there was at that time. Q. Directly to the question, is there not a need at this time for a large amount of funds — I am speaking of the state outside of Chicago — for the raising of funds for the enlargement of the plants for the purpose of bringing the properties up so that the proper re- lation exists between the load and the demands made upon that, and the capacity, and also to anticipate future demands made upon the company f A. Any figure I might make on that would be a guess. I would say in the state, outside of Chicago, there would be requirements of 25 millions, anyway, immediate and insistent. Chairman Wilkerson: Does that cover all important utilities? Commissioner Shaw: My question was directed to electricity. I didn’t cover gas. The Witness : I don’t think that would cover them all. As to the matter of deferred maintenance, I think that applies with greater force to street railways properties than it does to the gas and electric. I know our railway properties are not being maintained near to the standard we would like to maintain them, because of the fact it is absolutely impossible to get men to. We have got in Mo- line, East Moline, Rock Island and Silvis a track force of not to exceed ten men. They can’t be obtained. We otfer them 75 cents an hour, and the factories otfer them a dollar an hour. We can’t meet the competition. We have a few old men who appreciate steady employment who stay with us. We are getting on the best we may. Commissioner Shaw: You gave an approximate fig- 355 nre of the amount of funds necessary to the electric prop- erties; covering others, such as water, heat, gas an,d street railways, have you in mind any figure? A. As a very rough approximation I should say that the total requirements must be on the order of fifty millions anyway. I know we need just in our own little group — our budget for this year for our own little group on the Illinois side of the river, is approximately one million dollars ; if that is any criterion of the state, and I believe it is. Commissioner Lucey: That might include Chicago! A. Not Chicago proper, but I would include in that such companies as the Public Service companies that come around Chicago. Commissioner Funk: Do they have the same difficul- ties in getting men as you stated you have to keep up the maintenance! You stated it was hard for you to get men enough to keep up the tracks ! A. Yes, Ave would have difficulty in making these ex- tensions. Q. The difficulties are not all financial! A. That is the biggest one. Q. It might be a question if you could get the men if you got the money! A. That is the biggest difficulty. It is difficult to get the workingmen on account of the shortage of labor. I never saw a time when conditions approximated today. Unless these conditions are met one of two things must happen; either discontinue additional business, in Rock Island, East Moline and Moline. If we don’t install addi- tional capacity we must drop some very large customers, because we are exceeding the safe capacity of the plant 356 from the operating end. We are proceeding to enlarge the plant. Chairman Wilkerson : That is all, Mr. Denman. Mr. Alschuler: Do any of the commissioners wish to ask any questions of Mr. Sawyer? Have you anything further you desire to state to the commission, Mr. Sawyer? (Witness excused.) W. H. Sawyek, a witness on behalf of the utilities, re- called, resumed the stand for further examination by Mr. Alschuler, and testified as follows : The Witness: Just a word. Our conditions down there, as I stated, are local. As to this feeling regarding the commission, I doubt whether there is any one in that territory who questions the advisability of a regulatory body such as this commission. I donT think there is any- body in that territory who believes that the commission has unduly favored the companies. In this view I con- cur. With no other spirit than a desire to get some help I feel we need, there is one point locally that I feel that the commission in the past, if they had sufficient help, hadn T so much work to do, could have helped us ; that is more haste. We have had to wait too long when that condition was too serious, and to a large extent we had had to rely upon past records. In other words, we have got into this bad condition in order to prove our case. We must get the rates I feel we are entitled to because in the end the people have got to pay the price. We can keep that price over a term of years in better shape if we can have more prompt help. I didnT answer the question this morning in regard to the rate of return. I should 357 like to state in my opinion these companies must be al- lowed to earn as a minimum 12 per cent. I mean just what I said, ^‘allowed to earn.’’ That is not necessarily the cost of money, but taking that and everything into consideration. I believe on this question of valuation that we should be put upon the same basis as other indus- tries are put as to what they are worth, put the same kind of a measuring stick on it in so far as prac- ticable, come at this from a fearless standpoint. The people, I believe, down our way are ready to follow with the commission. They have faith in you, they believe in you. If you tell them that we need this money down there today, they will believe you, follow with you. If you feel that we need it, I will say Commissioner Lucey: Do you think 12 per cent will put you on about a fair basis with the ordinary industry? A. In our local case, I am trying to be fair there, that is the least I can say. We don’t care how you figure it, whether it is 9 per cent actual cost of the money, plus 3 — there should be a contingent reserve in order to establish confidence. Q. Twelve per cent would be to cover depreciation as well as return? A. No, sir. Q. What have you in mind that you ought to be allowed to earn for rate of return and for maintenance and depreciation? A. From my experience there is no possibility of ob- taining money at less than nine per cent, actual cost to the company. There should be a contingent reserve allowed to make over and above that to preserve the equality so that he may keep his cost of money at nine per cent. In speaking of depreciation I don’t believe 358 we should grab a per cent out of the air. It varies in different companies, according to the kind of the com- pany. If you have a power house with long life that changes the basis. Q. Would you say three per cent was a fair average! A. No, sir; I would not. In our railway case Mr. Hagenah gave us it in a sum of money approximating four per cent. However, after he was on the stand he said to us: ^‘I am conservative, it is too low.” Q. They should earn 16 per cent at least! A. Yes, sir. Commissioner Funk: You say the cost of money is nine per cent. That is only for the amount of money they need at this time. You are not saying the commis- sion should put a high rate to cover nine per cent on the money already had at a low rate! A. They are maturing all the time. A. As these mature — most of the companies have long term obligations at the Chicago hearing the sugges- tion was made in every case they should have 14 to 16 per cent on the theory those unmatured securities were ma- turing. Certainly it should not be suggested that this commission establish a schedule of rates for nine per cent on money in the property ten or fifteen years. That is what I thought you stated. A. I think you understood correctly. Q. Suppose your bonds had fifty years to run, or twenty years — A. We haven’t any such thing. Q. And your theory is when these things mature the scheme of rates should be such as to allow a return on the money borrowed at the market rates now, plus your operating expenses, and a reasonably liberal allowance 359 for maintenance. It seems absurd to talk about a rate of return to take care of the obligations outstanding and unmatured, some running twenty or thirty years. I think we should talk facts and we would get closer together and understand each other better. A. If on the showing of the bonds, on the value of the bonds and stocks you are making only six per cent for return, you can^t induce some other man to put new money into that property. Now what is the dividing line I don’t know, but the measuring stick has got to be, what have you earned in the past, what are you earning today, and what are the probabilities as to what you will earn tomorrow in ^mur whole property! That is what the in- vestor is going to look at. Commissioner Lucey: Do you think the cost of money should be the final test! A. No, sir; it is not the final test, but we should be allowed enough money that new money should readily flow in. We should not be allowed any more. Chairman Wilkerson: Don’t you get involved in a little confusion when you give any consideration to out- standing stocks and bonds in speaking of a rate of re- turn! What you are entitled to under the law is a fair return on the fair value of your property. It is immate- rial how much stock you have outstanding, it is immate- rial how many bonds you have oustanding. What the law gives is a fair return on the fair value of the property. Of course, if the company is bonded for more than you can stand, that is not a remedy before this commission A. Yes, sir. Q. If I understand your testimony, it is your position 360 if you are granted a fair rate of return, by a fair rate of return you mean a return which is comparable with the returns which come to capital otherwise invested in your community, if you are granted fair rates of return upon a fair value you will be able to do the things you have outlined ? A. Yes, sir, which we want to do and which the com- munities want us to do. Commissioner Lucey : In comparing yourself with the industrials, who have many difficulties which you don^t have, of other kinds than yours, don’t you think there 'Should be taken into account the practical monopoly that your company enjoys in that field, the practical security of the permanency of the business, and the probably certainty that there will be a fair rate of return which must come under this method and which could not be kept from you by anybody so disposed; that should be taken into consideration, shouldn’t it, and some allow- ance made for that, as compared with a manufacturing business, retail trade or wholesale trade, or anything else of that kind? A. I think as of today that is a liability and not an asset to the company. Q. You do? Chairman Wilkerson: The fact you are subject to regulation? A. The fact we are subject to regulation? Not the term — that term ‘^subject to regulation” — I be- lieve we should be subject to regulation; the people be- lieve we should be subject to regulation. Q. Do you think that works against you on marketing securities? A. I think the times. have been so abnormal nobody can keep up with them. We have got to the point where we have got to have more to keep step with busi- ness properties. Helying on the past records of these 361 utilities you will get what appears to be an abnormal return, but it is necessary to get confidence back and you must get confidence back before you can attract the amount of money which is necessary. I believe the day will come when the regulated monopoly will be looked upon with favor, when they can go into the money market with lower rates of return than industries subject to hazard. Q. That was pointed out in a number of cases. In the Wilcox case in the United States supreme court it was pointed out that one of the elements to be considered was the fact in time of financial depression, business panic, general disorder, an utility had its return in a measure protected by its legal right to receive a fair return on a fair value of its property. So if you look far enough ahead we will have periods of depression. The fact is that the law when it gives a fair return upon the fair value of your property did something which would make a security of that kind appeal to the investors. A. It should be and in the end it will be. Q. Even if the rate of return is somewhat lower than you will get in undustrial enterprises, which in times of depression and panic he might not only lose his return but lose his capital? A. Yes, sir. Commissioner Lucey: In answer to my question you said regulation was a liability and not an asset, didn’t you? A. Excuse me, Mr. Commissioner, I didn’t mean to say that. I don’t like that phraseology, ^‘regulation”. In our situation of today as compared with industrials, not regulation, but the fact that we are a monopoly, oper- 362 ating under the conditions we have, is and has been a lia- bility. Chairman Wilkerson : You mean your investor is not looking a good many years ahead! A. I believe that we are in the safest and soundest business there is. Q. He is looking at the immediate future! A. He is sore; he has lost confidence. Commissioner Lucey: You are getting off the track. I asked you a certain question. You said you thought liability was — that regulation, rather, was a liability in- stead of an asset. What I am trying to get at, I don’t think you have elucidated it, I was wondering if you meant as far as the utility itself was concerned it would get along better without the regulation, or get along better with the regulation it had before the state regula- tion, or whether that remark you made refers to some- body else’s thought about it. A. I believe in regulation. I believe we are better off to be regulated as a monopoly. We would have no meas- uring stick to compare with ourselves unless we had some- thing like yourselves. We would not be satisfied, the people would not be satisfied, unless we were regulated. Q. Of course, you were always regulated by the municipalities! A. Yes, sir; before that, about twenty years ago we were regulated by competition. I believe we are operating under the correct methods today. I believe the conditions are such, today, not only in the state of Illinois, but elsewhere, that the conditions under which we have to operate, and with our financial condi- tion, it is a liability instead of an asset, as compared with industrials. 363 Q. In that sense it is a liability, as compared ^with industrials, in that it can’t fix its prices in accordance with the cost of operation and the cost of production. I was wondering what you meant when you said regula- tion was more of a liability than it was an asset. Of course, you have always had regulation, either through the municipalities attempting to regulate you, or you regulating the municipalities, I don’t know which, but it had an effect of that kind. A. State regulation has helped us in some places so far as getting advanced rates goes. Q. I don’t care so much about your getting advanced rates as I do the opportunity which you have to present your necessities and secure the relief in accordance with what you claim you are entitled to. You haven’t been able to get that in Illinois to the extent you think you might have, but you have this consolation to otfer to the stockholders, to the holders of the bonds, wherever he may be, whether in New York, San Francisco or New Orleans, that there was a state regulatory body which would see that you got a rate of return which would be a fair return upon the value of your property, plus the cost of operations and the depreciation, and a legitimate cost of doing business. At least you could hold that out to the gentleman who was carrying your bonds, whether you are paying his interest — A. I can’t offer any inducement to those people. If you are not paying the interest you can’t do much talk- ing. Q. Whose fault do you think that is! A. I suppose I am partially to blame. I have offered to step out. They don’t see it that way. They say, as long as you are willing to stick on the job, we will keep you 364 there. I have many letters asking me, ^^what is the matter with the Illinois commission, when are you going to do this, when are you going to do that T ’ I have told them we are going ahead and working along those lines. Eventually things are going to be a great deal better. I haven’t lost faith in human nature or in anybody else. Q. Of course, the Illinois commission does not stand to guarantee any rate of return on any certain amount of your stocks and bonds. A. No, sir ; I have never been here before on the stocks and bonds. Q. All the law provides is you shall have a fair rate of return on the fair value of your property. If you haven’t got that I want to accept some share of the re- sponsibility. If you have got what the commission thinks is a fair rate of return on a fair value of the property, and you are still not paying interest on the bonds, then I think that the fault is on the other side of the table. A. I think we have got to bear it all between us a little bit. Q. I w^ouldn’t carry much of that. A. You take the Alton properties. The Alton, G-ran- ite and St. Louis Traction Company was appraised at something over $3,100,000, by the commission’s engineers, testified to as a minimum valuation. They bluntly stated that the original cost was in excess of that. Our bond issue is under that valuation, and we are not paying the bond interest. It is possible that more efficient methods might have been employed here and there — the exact amount is beyond every one of us if we had had on the city lines of the company in Alton more prompt re- 365 lief there, which would not exceed a fair return on the fair value, it would have helped that situation. Q. What do you get there now? A. Eight cents, down to a seven-cent ticket fare, an average of cents; ought to have had it a year ago. That is what I mean. With no spirit of meanness, if you could have helped in the question of haste, it would have helped us. As to the question of valuation. No question of valuation entered into that. We stated we accepted it for the purpose of this rate. There was no showing we were making over six per cent on that. We wanted it and we needed it. Q. Well, I don’t know just what the situation may be relative to the incident you cite. I have very distinct recollection one morning when two very estimable gentle- men from a neighboring city came here on a water rate, and they indulged in a quarrel whether the continuance should be for one week or two. That was about two months ago, and the counsel representing the utility wanted two weeks continuation, and the corporation coun- sel insisted he would not stand for more than a week. They have been a dozen times and that case has not yet been presented to the commission, not through any fault of the commission, but through the fault of themselves. It is still an open and pending question. There are many of those instances that might be cited. I am not finding fault with this Alton situation. Perhaps we do err once in a while on the side of being careful, but there are many things the commission must take into consideration. As Mr. Bloom suggested, under the Ohio law you have the right to file your rate and to have them become ef- fective, right away. You can’t do that here. A. I might clear up one thing. I am up around here 366 a good deal, and I see considerable of your assistants. I don^t know of anybody approaching the amount of work that is done by utility engineers every day any more than the commission’s engineers. I brought it out with- out any meanness, as something which can’t be over- come. Your men have stacks of work around them all the time. Q. Don’t misunderstand me. I am not finding fault with any criticism. Chairman Wilkerson: That is because the legislature misconceived the work of this commission and gave us $100,000 to do the work that other states gave one-half to a million dollars for. Commissioner Lucey: I might enlarge on the chair- man’s remarks. They gave us $100,000 after he made a protest. They gave us $2,000 to start with. Commissioner Funk: I think it ought to be clearly understood, Mr. Sawyer — ^you say that one of the diffi- culties in getting money for these utilities is because oftentimes they are not able to earn twice their interest charges. I presume that is good business upon the part of the bankers, and so forth, but that is not a factor that correlates with what we are charged under the law, so we even couldn’t allow a rate which would permit an utility to earn twice its interest charge. As everyone knows, our duty is to try and ascertain a rate which will bring a fair return upon the value of the property, which may be a separate and distinct thing from the bonded indebtedness, so the company’s difficulty in some instance in securing money is not always chargeable to the com- mission. A. It certainly wouldn’t be if the bonded indebted- ness is in excess of fair value. 367 Chairman Wilkerson: Mr. Alschuler, one of the im- portant things which we desired to gather at this hearing was specific information as to the needs of these utilities in the way of enlargements and extensions to take care of the public demands of the immediate future. In other words, what is the minimum amount of work or enlarge- ments and extensions which can be done under these ab- normal conditions so as to make anything like reason- able provisions for the demands of the future. If we have another hearing tAvo weeks from today, it would be a help to the commission if you would have filed some specific information in addition to what you have had in the general statements. Mr. Alschuler : I Avill say we have prepared a ques- tionnaire along that line and sent it to the companies throughout the state. We knew it was impossible to get the information for this hearing, but we are hopeful of getting it in before another hearing. Chairman Wilkerson : I am glad you are doing that. Mr. Alschuler: It appears that about all Ave could do, the companies being from all parts of the states, was to ask the operators to come down here and make general statements. When Ave are through some of us who are here today are going to try and get together and map out a program to get that definite information for the commission, although some of us have already started to work preparing that questionnaire. Commissioner Shaw: This might be a help also, Mr. Alschuler, if the commission knew the needs, Avhich would be the needs embodied in the chairman’s question, in the next two years, by years; then your demands for re- financing for the next two years, by years. Mr. Alschuler : We will be very glad to compile all that data. 368 Commissioner Funk: What the rates are on those issues that are expiring or about to expire, and that rate contrasted witli what the probable new rate will be for the refunding money. Mr. Alschuler: We will be glad to have that informa- tion compiled. We have one more operator here, and that will be all we have. That is all with Mr. Sawyer. Chairman Wilkerson: Proceed. (Witness excused.) Mahshaul. E. SAMPSELi,, called as a witness on behalf of the utilities, having been first duly sworn, was ex- amined in chief by Mr. Alschuler, and testified as fol- lows : Q. State your name, residence and your business ex- perience? A. Marshall E. Sampsell, I am president of the Central Illinois Public Service Company, and five sub- sidiary companies of that company; president of the Eastern lUinois Utility Company, also an Illinois cor- poration; president of seven public utility corporations in the state of Wisconsin ; and president of one gas com- pany in Iowa, and one unfortunate railway company in the city of Seattle. I have been president of the Cen- tral Illinois Public Service Company since 1910. Q. Mr. Sampsell, you have had submitted to you this question which has been answered by the other witnesses, have you not? A. I have ; yes, sir. Q. Will you proceed to answer the question? A. So far as the question relates to the Central Illi- nois Public Service Company, if the Commission please, I think it well to point out at the outset that the Central Illi- nois Public SerAuce Company has been going through a de- velopment period during this whole time which has been discussed in Chicago and at the hearing today. In other words, in 1912 the Central Illinois Service' Company operated in 13 communities in Illinois, and had an an- nual gross income of approximately $155,000. Today that company operates in 181 communities in the state of Illinois, and had at the end of the year last past, 1919, a gross income of four million, a hundred and sixty-seven thousand dollars. I outline this so as to show that, of course, such a growth, such a development, which has been made possible by the expenditure of great amounts of money, has been made during this time with the greatest diffi- culty, but, having undertaken it, it was necessary that the development be carried through, for the reason that the whole situation redounded, as it must always redound, to the benefit of the communities served by this com- pany, as well as to the large loads which the company also serves — such loads as some sixty thousand acres of drainage land along the Illinois River, and thirty-nine distinct coal mines, which bring to the surface annually approximately eight million tons of coal ; and other large industries that lie without the city limits of certain of these communities. It is our belief that if a public utility fails to function properly, then chaos must follow in so far as the- -in so far as every industry served by that utility is concerned, in so far as other public entities are con- cerned, such as the municipalities themselves, and in so far as the business and social life of the terri- 370 tory served by that utility are concerned, and it is there- fore necessary in times such as have confronted utility companies, not only in Illinois, hut throughout the United States, both during and since the war, that relief be given to those utilities as early after it is apparent re- lief is necessary as possible. Now, in listening to the discussion, it strikes me it should be emphasized that one of the things which has tended to make the investors in public utilities suspicious of the future intrinsic value of those securities is the fact that these utilities have had to suffer a certain delay in the matter of securing relief. Much of this delay, it may be conceded, has been necessary, but nevertheless, in- vestors have been unable to understand the reasons there- for. So they feel, if a public utility must go through cycles such as we have gone through, imposing a tardiness in getting relief, to the end that securities fall as to their value, so far as the ability to sell the same is concerned, everything being equal they had better put their funds in other directions, such as industries. Now, I feel it is due this commission ; it is due the public ; it is due the com- panies represented here, and the companies throughout the state, that just consideration be given to the facts which have confronted the commission, to the facts that have confronted the companies, and to the facts that the public have had to be confronted with, before any wholesale criticism is made, either against the commis- sion or against the public as a whole in objecting to rates, or against the companies for seeking these rates. It has been pointed out that when it was apparent the com- panies must have help or sink, many of them came to this commission with applications that were prepared necessarily very hastily, and each company, of course, considered that its particular case was the one that should 371 be decided right off the bat, and that it should have the relief sought in its application. I plead guilty to that attitude. I think it is a proper attitude, because the men responsible for these utilities realized keenly the direc- tion in which they were drifting, and they knew that, unless they got that measure of relief, to which they hon- estly believed their companies were justly entitled, these utilities would be unable to properly function for any length of time. In our case, we never came in until about June, 1918, although the war broke out, as you know, in 1914, and this country entered the war prior to the time I have mentioned. We came to this commission for relief, and we didnl ask for enough. We asked for all we thought we could get, because we were not unaware of what we thought was the general attitude of this commis- sion with regard to the question of the valuation of the properties of the utilities, the general attitude of the com- mission with respect to the rates of return which has been discussed, and the general attitude of the commission with regard to all the other essentials that enter into rate situations. I say, we did not ask for enough, but we got what we asked for, and we got it with rea- sonable promptness ; I should say, very promptly. Commissioner Shaw : About thirty days 1 A. Yes, sir; and we were exceedingly pleased that we did get it so promptly. I think I can speak from ex- perience as to that, because the Central Illinois Public Service Company for a long while has been on almost every call of this commission’s calendar, and has had, so far as the company’s general routine commission mat- ters are concerned, the kind of treatment that brings con- fidence. Now, then, the order of the commission in that rate 372 case held, as the commission had to, a string on the ulti- mate outcome of tlie company's rate case. As time went on evidence was presented by the company, and other facts and figures were given than those that were imme- diately presented when the original order was asked for. In turn the commission, through its agency, the engineer- ing department, presented a valuation of unit prices of the units presented in our appraisal, and presented in the record exhibits made up independently of our company. I want to say, gentlemen of this com- mission, frankly and honestly, because I think that is what we are here for, that after studying the testimony of your engineers, and after getting my mind fixed as well as I was able on what I thought was the general tendency of this commission with regard to rates and rate making, I was gun shy on what the opinion and the final order would be in that case, and I set about to effect a compromise with a committee of attorneys represent- ing the 148 towns then served by us. Commissioner Lucey: As I remember, you got 15 per cent increase? A. Yes, sir. Q. Pending final order of the commission you entered into a stipulation with counsel representing the 148 towns whereby you reduced that amount to 7^ per cent? A. I reduced it in some respects. Q. Then you asked that the commission undo what you stipulated to do in the case at the time it was pending? A. You are quite right. I also agreed with those gentle- men to ask this commission, and the record shows I did ask it, to permit us to reduce our commercial rates 7^ per cent. Commissioner Shaw: I might state, Mr. Sampsell, one reason why the municipalities settled with you is that the municipalities were gun shy. 373 A. I might say that the communities had a feeling of more gravity than with regard to what would be done, because there was a great discrepancy between the fig- ures presented by us and those prepared and presented by the Commission’s engineers — we put in operating figures and a forecast of the year to come, based on what our actual experience showed. Your agents put in operating figures whereby they would un- dertake to operate this property for the same period, one year, at something like $200,000 less money, although during all the time these hearings were going on in- creases were coming in leaps and bounds. I stated I was gun shy, and I believe Commissioner Shaw correctly states the attitude of the counsel for the municipalities and, if that reflected their clients’ belief, they were also probably gun shy. Commissioner Lucey: That is usually what results in stipulations! A. That is true. Chairman Wilkerson : In other words, both sides were afraid the commission would follow the law; isn’t that it! A. No, sir; I was afraid that the commission would stick too closely to the well beaten path of the Interstate Commerce Commission. That was the path of most of the state commissions in reaching their findings, merely findings covering the property that was easily apparent, and not on the basis of what was contended at the com- pany’s rate hearing, or what I contend should always be allowed, namely; rates permitted on what are known as hidden values, values of property not easily ascertain- able. In other words, our companies were all the time right against the buzz saw and we knew the tremendous increases in operating costs that were going on. It was not possible for this commission to clearly understand our serious situation — you were not operating the prop- 374 erties, but you are charged with a responsibility almost as great as those who operate the properties. Neverthe- less, I felt that this commission (and I don’t disbelieve in the commission, I am trying to impress that on you), I felt that this commission would fail to see the actual condition of the company, and would fail to exercise that liberality and broad policy which I think they ought to exercise, and therefore I felt the company might fail to get the relief to which it was entitled. Furthermore, it was in your minds that because the armistice was then signed, the war was over; I knew while the war was over the emergencies were still on, and that instead of experi- encing falling prices we were undergoing steady in- creases in every direction. Chairman Wilkerson: You thought that? A. I knew it; I thought it. Q. There were many that thought when the war was over, the war was over ? A. I was afraid that the commission would think so. Now, as to the company’s necessities. The company has spent since 1912 between 10 and 11 millions of dollars, and that does not include one dollar spent for the acqui- sition of any properties. Chairman Wilkerson: We will take a recess for five minutes. (Short recess taken.) Chairman Wilkerson : You may proceed The Witness : At the recess I stated that the Central Illinois Public Service Company between the year 1912 and the present time has spent ten and a half millions of dollars, roughly, on its properties, and not one dollar of this expenditure was included in acquisition of new com- panies, so that that money has all gone into the physical property making up the company’s entire system. 375 Commissioner Lucey. What do you mean by the ex- penditure of ten and a half million without acquiring new property? A. The Central Illinois Public Service Company, for instance, bought in 1912 63 public utility properties, gas, electrio light, ice, and so forth, in 63 towns in the state of Illinois, and conveyed their physical property to the Central Illinois Public Service Company, keeping alive such of the underlying companies that had to be kept alive because there were underlying bonds out, assumed by the Central Illinois Public Service Company. Chairman Wilkerson: You took the property, how- ever? A. We took the property, and that property was not a part of the property that was created by the $10,500,- 000 ; in other words, the work orders of the company evi- dence these expenditures. It is not a question of how much capital, either in bonds or stocks, is set up on the books during this period. Now, as to that part of the inquiry, Mr. Alschuler, which goes to the question of the company’s future ex- tensions and enlargements, it is my most conservative judgment that the Central Illinois Public Service Com- pany will spend in the next two years not less than three millions of dollars, if it lives up even in a minimum way to what should be spent to do full justice to the com- munities served, and other large customers served by the company. The company has at present a fairly large floating debt, over two millions of dollars, and I don’t know now how that floating debt is to he taken care of. Fortunately, three-quarters of a million of that is owing to the holding company, which is very largely interested in the ultimate equity of the Central Illinois Public Serv- ice Company, and will be the last fellow to be paid. Chairman Wilkerson : Which fellow is that? A. Middle West Utilities Company. The Middle West Utilities Company has loaned the Central Illinois Public Service Company two millions of dollars, for which the Middle West took the common stock of the Central Illi- nois Public Service Company at par. So this $10,500,000 — I am answering now how we got some of the money — that money went into the property without any profit to an outsider. That money was borrowed 25 and 50 thou- sand at a time, as much as I could get at a time, and it aggregated finally two millions, and that debt was liqui- dated with the consent of this commission by two million of common stock of the Central Illinois Public Service Company. At the end of this last year, also with the consent of this commission, the Central Illinois Public Service Com- pany acquired from the Middle West Utilities Company for $1,250,000 of common stock certain public utility properties in Illinois, namely, the Central Illinois Utility, Hamilton Utilities, Hoopeston Gas & Electric Company and a small eastern Illinois ice company. These newly acquired properties will annually bring to the Central Plinois Public Service Company $500,000 gross incom^e. There is another million and a quarter of value, in my judgment, which has been put behind our prior lien se- curities. Now, as to the question of the rate of return, I appre- ciate that to say a definite percentage is merely a recital automatically of an individual opinion, but I can’t escape this conclusion that if the commission operating along the lines indicated by me earlier today have found seven and eight per cent rate of return on the fair and reason- able value of the property to be equitable and just in normal times, that it is not necessary to go into a discus- 377 sion of how many bonds are out, because it has nothing to do with it, or how much stock is out, because that has nothing to do with it, because you are looking at the value of the property involved. Any reasonable man must con- clude if seven or eight per cent in nominal lines is found repeatedly fair and equitable, certainly a greater percent must be found to be equitable in the situation at present, involving all of the conditions with which we are all thor- oughly familiar, and which has been recited from every angle at the hearing in Chicago and here. My own per- sonal judgment is it should never be less in these times than ten per cent, from there to twelve per cent, depend- ing on certain peculiar conditions that might exist in one case and not in another. I can’t go into any detail in regard to that, I have no defense for that. It is my de- liberate opinion if public utilities are to go into the money market, where money like every other commodity, is high or low in accordance with the law of supply and demand, and be successful in seeking that utility’s fair share of the money so required, that it must pay the price and it can’t pay the price on any basis of seven or eight per cent return on a fair value of the property. Commissioner Funk: Mr. Sampseli? A. Commissioner Funk. Q. Would there be any difference in your judgment as to the advantage in utilities over what might be termed two theories ; namely these, a rather low but fair valua- tion, coupled with a high rate of return, or a more lib- eral valuation with somewhat lower rate of return, assum- ing that the multiplication in both cases would bring back the same dollars per year? I don’t know whether I make myself clear to you or not. A. I think I understand exactly what you mean. An- swering it as a hypothetical proposition, if one or the 378 other of those theories were taken, and then adhered to, I, at the moment, don’t see where there would be any great difference, because you would come to the same mathematical conclusion in dollars and cents. I do feel, however. Commissioner Funk, that the safest way is to find all the property, to seek and find all of the property, and in that there should be included, of course, the esti- mates and findings of the engineers of the commission, because, after all, they are the men that have to check the company’s work. Having found that property, a generous margin should be given to that property for hidden values, and omissions. It is better to find the aggregate property liberally and then permit a rate of return which has some sort of consistent relationship to tlie prevailing conditions and the value of money at the time that such values and prices are made up. Q. That is the point I had in mind. In order to do that, isn’t the easiest way and the best way, and the most equitable way, to take what you might term a lower valu- ation, and have the varying factor be somewhat in pro- portion, corresponding to the money market as it varies from year to year. A. If you mean by taking a lower valuation, taking a valuation of the kind I have referred to in our case, where it was admitted by the engineer that it was so con- servative that it could not have been successfully at- tacked, and if you mean by low value such a low base, that there is a reasonable certainty that the subject has been fairly treated, then I think the fluctuating element being in the rate of return would not only be the better way, but the only equitable way to work it out. I would also want to be sure that all of the property that the com- pany has paid its money for, should be found, be returned and be accounted for on an exceedingly liberal basis. 379 I would like to say just one word, if I may, on the way that I personally view this present situation so far as it relates to the Commission, not in the exercise of its duties, but in its general standing, as viewed by the par- ties most directly concerned, namely, the companies, and the public, who are, of course, also concerned, hut more indirectly. Now, I have a very close acquaintanceship with a great number of different people, people in different walks of life throughout the 4,500 square miles served by this company, and such an acquaintanceship as I think should give me the right to speak about this subject with more or less reasonableness, and it is my opinion that the greatest stir and the most criticism, such as we have discussed today, arises in the first instance from the poli- ticians; and in the second instance, does not get very far from them. In other words, it is my deliberate opin- ion that the public as such, that the better thinking ele- ment in the town, is not adverse to what has been done by this Commission. This opinion is substantiated by the fact that at the last hearing in that rate case, with 148 communities directly involved, there was present only one representative of any city. It may be contended that was because those rates did not immediately affect the street lights or the municipal pumping — but I know from what information I have been able to obtain from my travels throughout our territory, that the public citizen- ship, that part of the citizenship which has a right to speak upon constructive measures, looks upon the things done by this Commission in Illinois as necessary. I want to say frankly I have an awful lot of sympathy for my- self as president of these companies. I could quit if I could be absolutely false to my opinion, if I threw away my individual holdings. I have just as much sympathy for the individual members of this Commission, or any 380 other Commission, that has had to go through the period of trials that we have all been confronted with since the war. Nevertheless, we can’t escape the fact that there is existing, both to the man who runs the utility, and to the man who sits on the Commission, a responsibility from which he can ’t escape. As I look at the question of credit, the question of whether or not we can successfully bring back to us the big and little investors, both in our primary and junior securities, I feel confident if this Commission adopts as a basis of action a method of procedure such as I feel sure they will adopt and are adopting, as we go along in working out these difficulties, which must be worked out, there will be a return of confidence in public utilities which will in turn reflect itself in their securities. Public utilities must continue to function, and function prop- erly. The man Avho says we will quit does not realize his public responsibility. As we go along, I believe that, if the utilities, on the one side, present the facts fairly and squarely to the Commission, and the Commission, on the other side, performs its duties as it sees them, without regard to what any man may say, whether he is the owner of an utility or a professional politician, we will soon see the time when our securities will have the place among the securities of this country to which they are entitled because they have advantages, and because they are regu- lated and are a monopoly. There will be times when large industries will probably close their doors. The period of the empty dinner pail will come. It must come. It is the evolution of affairs. Then public utility securi- ties will come to the top, and come to the top with greater confidence on the part of those who held them during this struggle, and who were lucky enough to get them since. 381 There are one or two little matters I expected to talk about, inasmuch as I thought this was a field day and I might never get another such opportunity. One has to do with what seems to he a tendency on the part of the Commission to penalize the utility that is down, be- cause at the moment in a particular spot he can’t give good service and because of this tendency that utility cannot have rate relief. I can’t see that. I am not here to make an argument, but I do want to say that this is tending in a direction and to a place where we will have to find out whether that is the law. Another angle is the somewhat similar attitude of compelling companies to make extensions, per se, where they are wholly unprofit- able, because the company may have in the whole of its property profitable returns. One case I have in mind is that of a particular utility that only earns two per cent on what the Commission has found to be the value of the property. In other words, the whole property’s profit was two per cent on the Commission’s value of that prop- erty, and the company was ordered to spend money to make further extensions, which pay, I suppose, a frac- tion of a per cent return. The operating expenses were 90 per cent of the gross income. It was a small matter. Of course, in the interest of harmony, if an operator is smart, he forgets those things, but I do think that when incidents of this kind arise in a hundred directions and requests for similar unprofitable extensions come which, in the aggregate, • mean thousands of dollars, that we should not pass by without protesting, especially when such an opportunity as this is presented, in which to call such facts to the attention of this Commission. Chairman Wilkerson: Did you have any particular case in mind? A. I do, yes. 382 Q. What was that? A. The last one is the Oarbondale case, where we were compelled to extend a thousand feet of water main costing $2,000, returning $300, and the operating ex- penses at the present time are 90 per cent of the gross, and the return on the whole property at Carbondale is two per cent. Q. When was that ? Commissioner Shaw: I remember the case, and the facts stated in the order do not correspond with what Mr. Sampsell is telling. Either you are wrong or this Commission A. If I am wrong, I Commissioner Shaw: Some hydrant rentals you are losing track of. A. I wish to mention further the fact that the mu- nicipality that pays the hydrant rental owes us about $12,000, and hasnT paid or will not pay, as I remember it. That is not a matter that concerns the Commission, that is true. If we do get it we are lucky. Since that time our local man states he has had five or six different applicatioiiis for extensions. We simply can’t do it. At the outside Commissioner Lucey: Why don’t you collect your money? Commissioner Shaw : Why don’t you appeal the order? You have your redress in the courts. Why don’t you appeal the order? A. Because I disbelieve in that policy. I think you will search the records in vain to find any appeal from this Commission by the Central Illinois Public Service Company. 383 Commissioner Shaw: I don’t think you will hurt the feelings of the Commission by an appeal. A. I don’t think that is the way to do. I believe in education, and that it is two-fold: we have to be edu- cated in our duties toward the Commission, and we try in our humble way to show where the Commission is wrong. I don’t believe in trying out our Commission difficulties by law-suit. This seems to be a particular art, a particular business that we ought to be able to run without going to the courts, for the most part. Mr. Alschuler : I think of nothing else. Commissioner Lucey: I asked you why you didn’t collect the money! A. I beg your pardon. We have tried. We usually try by a friendly suit to get the money from our munici- palities that is uncollectible. Once in a while we get city warrants which we trade to the local tax collectors, where we have no money to pay the taxes. But really, frankly and seriously, this company has, I think, $200,000 tied up in much the same way. You say, ‘‘why don’t we collect it!” We have to do business with those people. While we should collect it — ^we try to collect it — ^we have to live there, we have to maintain the best public relations we can where they are. All the time the company goes on serving these towns and getting its payments from them, it has to get them gradually, and in the meantime create no opportunity to give any politician a chance to be mayor or county judge or something else, because of our water situation or light situation. Mr. Alschuler : That is all, Mr. Sampsell. Chairman Wilkerson: Is there anybody else that de- sires to be heard today! (No response.) Is there anyone who desires to ask any of the witnesses who testified 384 today any questions at some further hearing? If you will indicate that fact, we will make arrangements for opportunity for such examination. Mr. Monroe: I don’t care to make any cross-examina- tion at this time. I don’t know whether any municipali- ties care to go into it or be heard in it or not. How long does this Commission expect to hold this matter open? Chairman Wilkerson: It was the request, I think, of the applicants, that there he at least one additional hear- ing in order that the record might be supplemented by some facts which were not present today. Therefore, at another hearing two weeks from today or tomorrow — two weeks from today, probably, there will be an oppor- tunity for further hearing. Did you desire to submit something today? Mr. Monroe: No. Chairman Wilkerson: We would be pleased to hear you on anything by the way of testimony or suggestions. Mr. Alschuler: I wish to suggest if there is any desire on the part of the gentlemen representing the municipalities to cross-examine, to advise the commission or some of us, so that we can have these gentlemen come back here. We don’t want to bring them hack here if there is no cross-examination. Chairman Wilkerson: No request made so far. If any such request is made you will be given information in apt time to arrange for the production of the witnesses. If there is nothing further to be presented today, the hearing will stand adjourned until Monday, the 17th of May, ten o’clock a. m. Whereupon this hearing adjourned until May 17, 1920, 10:00 a. m.) State of Illinois Public Utilities Commission. Springfield, Illinois, May 17, 1920. General hearing concerning ability of utili- ties to meet the demands for service and to make the necessary enlargements and extensions therefor. Present : J. H. Wilkerson, Chairman; P. J. Lucey, Commissioner; T. E. Dempcy, Commissioner; H. B. Dakin, Reporter. Appearances ; Same as before. Parties met pursuant to adjournment. Chairman Wilkerson: We are now ready to proceed with the general hearing which was continued until this morning week before last. Are the parties here ready to proceed? Mr. Alschuler: The utilities companies, and I under- stand some representatives of the chambers of commerce and some city officials. I don’t know who they all are. Chairman Wilkerson : Very well. Have you any more • parties who desire to be heard, Mr. Alschuler? Mr. Alschuler: Yes. Chairman Wilkerson : You may call your first witness, Mr. Alschuler: Mr. Hagenah. 386 William J. Hagenah, called as a witness on behalf of the ntilities, having been first duly sworn, was examined in chief by Mr. Alschuler, and testified as follows: Q. State your name, your residence and your profes- sion or occupation. A. William J. Hagenah, member of the firm of Hage- nah & Erickson, located in the First National Bank Building, Chicago. Our business is that of public utility analysts, appraisers and investigators. We have a staff of accountants, engineers and rate experts, and are or- ganized to perform investigations along the lines of the practice of public service commissions on behalf of cor- porations, cities and states. Q. State generally, Mr. Hagenah, your education along those lines and your experience. A. I am a graduate of the University of Wisconsin, where I spent six years in university work. I have been engaged in specializing in public utility investigation work for the last 17 years. From 1905 to 1907 I was appointed deputy commissioner of labor and industrial statistics of Wisconsin and thus made investigations of public utility properties before there was any public util- ity law in that state. In 1907, when the public utilities law was passed, I was appointed to the position of chief of the accounting and rate department of the Railroad Commission and there had charge of the investigations of all the public utility companies embracing over 1,060 in number. I held this position with the Wisconsin Commission until June, 1910, when I was given a leave of absence for one year to engage in special employment with the City of Chicago calling for an investigation embracing a cost 387 analysis and rate study of the Chicago Telephone Com- pany. Before that investigation was completed I was further engaged by the City of Chicago to make an ap- praisal and rate study of the Peoples Gas Light & Coke Company property. Both of these investigations were completed and the results embodied in reports which have been printed. In July, 1911, I severed my connection with the City of Chicago and also from the Eailroad Commission of Wisconsin where I was retained in a consulting capacity. I then engaged in private practice alone until May, 1916, when I was joined by Halford Erickson, who at that time was the chairman of the Railroad Commission of Wiscon- sin. Since May, 1916, we have practiced under the firm name of Hagenah & Erickson. We have made, — that is, the firm and the members of the firm, — investigations embracing appraisals, cost an- alyses and rate studies of gas, electric light, street rail- way, water and telephone utilities in most of the larger cities of the United States and in Canada and some work in Mexico. The value of the public utility properties so analyzed by our firm and its members exceeds eight hun- dred million dollars in value. The amount of railroad property which we have appraised or for which we have made cost investigations and rate studies exceeds six hun- dred million dollars, making approximately fourteen hun- dred million dollars of property which we have investi- gated in matters coming before public service commis- sions, the Interstate Commerce Commission, the Fed- eral Trade Commission and similar bodies in Canada. We have made appraisals, cost analyses and rate studies of one or more public utilities and in some instances all the public utilities in many large cities. I can give the names of those in excess of fifty thousand population; I will not 388 mention those in cities of smaller population. Our work has been in New York City, Chicago, St. Louis, Cleve- land, Detroit, Milwaukee, Buffalo, Washington, D. C., Montreal, Toronto, Los Angeles, Portland, Oregon, In- dianapolis, Columbus, Akron, Dayton, Eichmond, Vir- ginia, Memphis, Louisville, Birmingham, Charleston, Grand Rapids, Duluth, Salt Lake City, Butte, Des Moines, Tulsa, Wichita, Topeka, Niagara Falls, Flint, Spring- field, Mass., Springfield, Illinois, Rockford, East St. Louis, Peoria, Racine, and quite a number of properties in cities of about fifty thousand population. I have been connected with the Public Service Com- mission of the State of New York for special investiga- tions, have represented for nearly two years the Railroad Commission and Public Utility Commission of North Da- kota, making appraisals and rate studies of utility prop- erties in that state for the state authorities, and we are now acting for the Railroad and Public Utility Commis- sion of Tennessee in making rate studies and appraisals of the gas and electric properties in Memphis. We have also represented a large number of cities throughout the United States and Canada. Q. Mr. Hagenah, as a result of the studies that you have made, will you give us your observation as to the causes, effects and possibly period of time in which the effects will be manifest surrounding present day condi- tions in the public utility field? A. I have for a number of years been engaged in making studies of an economic and financial nature of the forces at work throughout the world leading to in- creases in the level of commodity prices, wages and the cost of money. These studies have been based upon fun- damental conditions as they existed prior to the Euro- 389 pean War and further as these conditions have been af- fected or aggravated by the European War. In my tes- timony this morning I will confine myself to the treat- ment of these conditions in the broad, underlying way in which they have affected all classes of industry and especially public utilities both from their own stand- point and with respect to other industries and as they have affected the particular problem of public utilities in the United States. I do not want to be influenced by the experience of any particular utility as the result of local conditions, nor by any single incident which has affected the public utility business, but rather to confine myself to general conditions. The treatment of this subject lends itself to a division into two general subjects; first, the fundamental con- ditions which were operative prior to 1914, and secondly, the conditions as they have developed from the war. In treating the conditions which were effective prior to 1914 it is possible to approach the subject from a considera- tion of conditions in the United States following the Civil War to 1914, because the economic and financial history of the United States assumed an entirely differ- ent character after the Civil War, creating a different economic epoch in the development of this country. Dur- ing the period from 1861 to 1914 there were effective conditions which vitally determined the course of indus- try generally but more particularly public utilities, with the result that prior to the opening of the European War conditions were at work which were bringing the public utilities and the railroads face to face with so des- perate a condition as to make necessary extensive legis- lation and special consideration from public service com- missions. The first of these was what economists refer to as the 390 great increase in the gold supply, which was operating to increase very substantially the cost of living and the cost of money. There is a close relationship between the supply of gold and the pric& level. As the amount of gold in the world increases, the level of prices, wages and interest rates advances. This is well indicated by com- paring the amount of gold produced each year from 1861 to 1914 with the price level which prevailed. Without going into a discussion of the details it is sufficient to say that during the period from 1861 to 1896, which was a period of generally declining prices, there was a rela- tive and absolute decline in the amount of gold pro- duced. Following 1896 the increase in gold production was very marked and since 1896 the increase in the price level has been very rapid. It would follow, therefore, that so long as the production of gold is increasing at a very rapid rate there must be a very rapid rise in the level of prices and interest rates. It had resulted in a high level of prices and interest rates even prior to 1914. Industrial corporations were able to adapt themselves to this rise of price level by increasing their prices, but the railroads and public utilities were unable to do so, so that for a period of nearly 10 years prior to the war it was indicated by the statistics and testified by those making special studies on this subject that the railroads and public utilities, unless special conditions and legis- lation were created, would soon find themselves in a se- riously embarrassed condition. The credit of the rail- roads was failing year by year prior to 1914; that of the public utilities was failing for fundamental reasons even more so than in the railroad business, but the situa- tion was saved by the fact that the great growth of the cities in population made it possible for the utilities to develop their business very rapidly. The industry was 391 new, it was flexible and could adapt itself to this con- dition with the result that there were economies prior to 1914 in the public utility business not present in the railroad business, so that the public utility business as a whole, although approaching an embarrassment, was in a somewhat better position in 1914 than was the rail- road business. Along with the constant rise in price level, and the constant rise in interest rates, which I will refer to later in connection with some charts, there developed the great movement of population from the country districts to the cities, bringing about a congestion of traffic in all lines of public utilities resulting in a much greater growth of public utilities than in any other class of business, driv- ing them into the money market for larger sums of money than other classes of business and keeping them in the market constantly because of the expansion pro- grams on extensive scales each year. This condition put an especially strained situation on the public utilities, and with that condition of strained credit which pre- vailed in 1914 and which had been growing steadily worse for the 10 year period preceding 1914, the European War developed, which created a complete upheaval of economic conditions to the extent that a bad situation for the public utilities and railroads was made infinitely worse. The effect of the war on prices has been very marked in three directions; first, through the vast destruction of material which has directly resulted in a very high cost of capital, in the destruction of lives and in the re- moval of lives from productive enterprise through the wounding of men, and lastly through the pronounced in- flation of the currency. Official statistics show that there 392 were fifty-eight million men in arms for a period of over four years, that ten million five hundred thousand were killed and the total casualties were twenty-four million five hundred and sixty-two thousand. This large number of men killed and wounded has completely upset the eco- nomic machinery so that at the present time industry and finance is unable to function normally with the result that production is far below normal, prices are high and in- terest rates are exceedingly high, making it especially difficult for those classes of business charged with a pub- lic interest which cannot increase their rates without pub- lic consent to meet this particular condition, and finding it increasingly difficult. While there has been this tremendous destruction in property and in lives and inflation, the result of which is almost beyond the power of the imagination to under- stand, the utilities have suffered most of all the classes of business. I have prepared here for your considera- tion a table or chart based on the statistics compiled by the British authorities showing the price level which has prevailed in England over a period of more than one hundred years. This is the most complete comparative study of prices which have been compiled by reliable au- thorities, and by an examination of this price movement it is possible to understand something about the extraor- dinary conditions which have brought railroads and pub- lic utihties to the present strained situation. Mr. Alschuler: Let’s mark that Hagenah Exhibit 1. Chairman Wilkerson. It may be admitted. Whereupon said document, so marked for identifi- cation ‘‘Hagenah Exhibit 1” is hereby made a part of the record in this case. '\ w Hagenah Exhibit 1. 393 The Witness : This blue print shows a curve made up of parallel lines, each representing the price level for a period being the average of 10 years. The significant thing about this century of prices is the effect which war has had on prices. Beginning with 1817 there is a very high level of prices resulting from the Napoleonic wars. Commissioner Lucey: These parallel lines, do they represent certain commodities or do they represent wheat, coal or what? A. They represent a large number of commodities in the average including wheat, coal, steel, copper, wool, gold, practically all the elements entering into the cost of living and production. It is what is known as the Sauer- beck service. The Napoleonic wars extended over a period of nearly fifteen years in which nearly every great power of the world was engaged. The destruction of lives and prop- erty and wealth at that time is comparable in terms of loss to the destruction at the present time, although relatively it is infinitely greater now. I want to call at- tention to the very slow rate at which prices declined after this war. The second period of high prices was in the middle of the century and prices rose from 1849 to 1873 as the result of great wars, the Crimean war, the Austro-Italian wars, the Austro-Prussian war and the American Civil war and the Franco-Prussian war. This has resulted in a very high price level. Again, I call attention to the very slow decline in prices following these wars until 1896, when with the large in- crease in the amount of gold, the development of the pres- ent large scale production industrial system in the United States and the great increase in wealth and world com- 394 merce, there was a steady rise in prices throughout the world until 1914. During some years this increase was as high as 2.5 to 3 per cent in the index number. It was on this already steadily advancing price level that the world war opened, bringing with it the most violent increase in prices in history. You will note that the parallel line representing the 10-year average of prices prior to 1919 is the highest in the history of the world. The dotted line which is superimposed on these 10-year averages shows the price level by months. That is so high that it runs far off this blue print. It has been brought back in a second section, but between those lines there is a large space which is not shown here at all. In connection with this table so that you may better understand the operation of the fundamental laws grow- ing out of wars as affecting price level, wages and in- terest rates, I call attention to this interesting fact that from the high period following the Napoleonic wars to the high period following the Civil War is exactly fifty years, from the high price level in the middle of the cen- tury to the exceedingly high price level at the present time is again fifty years. From the low price level fol- lowing the Napoleonic wars, which level was not reached until about 1846, to the low price level reached in the early 90 ’s, is again approximately 50 years, and it is therefore interesting to speculate whether these several instances in which the major cycle has each time been approximately 50 years indicates that about 50 years will pass before we again experience the price level which cor- responds to the low level of 1896. Approximately one- half of such 50-year cycle has passed, so that on this the- ory the decline in prices as was true in previous instances, will be spread over a period of possibly 25 years. If his- tory is to be repeated, a relatively high price level for Hagenab Exbibit 2. /S/^l ■ ir-^' ;l- : , 395 commodities, wages and interest rates will be with us for so long a period of time that for all practical purposes those engaged in the operation and regulation of public utilities at the present time may accept it as substantially a permanent situation. As opposed to the conditions in England which, how- ever, are typical of the world in general, I submit an- other blue print which shows particularly the price move- ment in the United States. Mr. Alschuler: Hagenah Exhibit 2. Chairman Wilkerson: It may be received. Whereupon said document, so marked for identifi- cation ‘‘Hagenah Exhibit 2^^ is hereby made a part of the record in this case. 396 The Witness : Let me call attention to the violent in- crease in prices brought about by the Civil War from 1861 to 1864, and the very slow rate at which prices, in- terest rates and wages decreased and declined. Note that while the great increase in prices developed during a period of three years, it was not until 1883 that the price level definitely returned to where it was before the de- velopment of the Civil War; and then followed a long period of depression, non-employment and business dis- tress. While the public cannot expect conditions of this char- acter to repeat themselves exactly, yet there is a re- markable similarity between the price movement brought about through this war and the conditions which devel- oped during the Civil War. Note the almost exact char- acteristics of the curve in prices which followed from 1914 to 1919. The angles which appear in the curve of the Civil War are almost exactly reproduced in the price movement growing out of the present war. If it took over fifteen years for prices to get down to the so-called normal following the Civil War, it is reasonable to sup- pose that it will take at least 10 years for prices to go down following this war. Commissioner Lucey: There is a very marked and rapid decline from the high point following the Civil War. While it doesn’t get all the way down, yet it drops say 50 per cent., — would you say 50 per cent, in three years ? A. Not quite 50 per cent., hut it takes over three years to go down as much as it went up in one year. Q. Well, it is down in this chart roughly say 45 per cent. I A. Approximately. 397 Q. Do you anticipate any such situation now? A. No; for this reason. You have touched on a most significant feature of this price movement. In 1864 when it became evident that the purpose of the South was to be defeated, prices began to decline. In 1917 when it became evident that the purpose of the Central Empires would fail prices did not decline. In 1865 when peace was declared in the Civil War prices were well on their way downward. A year and a half after the armistice was signed in this war prices are still advancing. Prices started to decline a year before the Civil War was over. A year and a half after this war was ended prices reached the highest point in history and they are still advancing. Chairman Wilkerson : That was because there was no such complete disruption in the greater part of the United States at the close of the Civil War as there is in Europe today? A. That is right; and just because our machinery for transportation, inter-communication and everything else was less disturbed in 1864 than it is today, it was in so much better position that it could begin economic reconstruction and adjustment a year before peace was declared, whereas the situation now is growing more seri- ous each month and a year and a half after the war is closed our price level is still rising. Q. That is, the victor in the Civil War had its ma- chinery practically undisturbed? A. That is right. Q. While in the European war, — A. There is no victor. Q. — the victors, if there were any, had their machin- ery so much disturbed, — 398 A. In an economic sense every nation was defeated. The destruction was so great that the reconstruction work is now only seriously begun. In connection with this chart number two I have prepared a third chart from govern- ment statistics which is of great interest at the present time since it shows that while prices of commodities tended downward after the Civil War as indicated by the Commissioner's question, the prices of labor actually continued to rise. Mr. Alschuler: Hagenah^s Exhibit 3. Whereupon said document, so marked for identifi- cation ‘‘Hagenah Exhibit 3^ Ms hereby made a part of the record in this case. Hagenah Exhibit 3. httci •S£cr/of^,J3jy er PL/tNN/N&Or SrjrrisTicS i/s iv^ft /NCusrntES bemho 399 The AVitness: Table 3 is an enlargement or a sub- division of the data shown in the Civil War period in table 2. It shows wholesale prices, retail prices and wages. The complete disturbance and violent upheaval of conditions in 1865, — from 1864 to 1865, is shown by the peak in wholesale prices. The responsiveness of retail prices to wholesale prices is also shown. It also shows that there is less fluctuation, but the significant thing is this, that while prices declined after the Civil War, wages, which experienced in all classes of work a tremendous increase, just as they have in this war, com tinned to rise after the Civil War just as they are rising at the present time. The only way it was possible to reduce prices and to secure a reduction in interest rates was through the rapid development of machinery, inventions in industry and the speeding up of operations which made it possible for men receiving high wages to produce so much larger amounts of goods thah the unit cost of labor even on the higher wage basis was lower than it had been prior to the Civil War, If that condition is to be repeated, and it is fol- lowing perfectly at the present time, for wages are still advancing in this country, then while prices of commodi- ties may go downward in the next 10 years, the cost of labor will not go downward. This is of special signifi- cance to public utilities. Chairman Wilkerson : Pardon me just a moment, may I ask a question ? A. Yes. Q. Do you think that any significance is to be given to the fact that the loss of life in this country in the Civil War was such that the loss of life in this country in the late war was really negligible, so far as the de- struction of man power was concerned? 400 A. As far as the destruction of lives was concerned you are absolutely right. The statistics show that our loss of lives in this war was not nearly so great as in the Civil War. Q. I know I was rather surprised to find out in checking the figures roughly that the loss of life in this country as a result of the Civil War was comparable, for instance, with the loss of life in Prance during the late war. A. Roughly I think that would be comparable. Q. I think you will find that within a few per cent, that is true, that this country suffered in the destruction of life in the Civil War as much as Prance has sulfered in the late war. A. There is this element, however, to be taken into consideration and that is that during the Civil War we gained very largely from immigration from Europe, while during this war we have lost several million men, — Q. Yes, that is your counter-balancing element. A. Yes. While we have lost no considerable number of lives in this war, we have lost thousands of able-bodied men who returned to Europe, and we have received no great immigration, so the loss of man power to the coun- try is relatively the same. The manufacturer can speed up his machinery and can introduce methods for quan- tity production, but the public utility can not. The labor element in the public utility business is largely of a fixed and supervisory character. The street car must have a motorman and conductor; the street car can not run any faster than it is running at the present time. The same is true of gas, electric and telephone apparatus. The spinning machine, the knitting machine, the machine tools, steel and woodworking and printing apparatus 401 and machinery can all be operated at a much higher speed through the introduction of automatic machinery. One man getting eight dollars a day can produce pos- sibly three times as much as the man before the war on a three dollar a day basis, but that is not true in the public utility business. The labor there is .largely fixed ; the element of quanity production is not present, so that during the period following the war, even though prices of commodities should decline, which has not yet occurred in this country, the wage level will continue to rise, and that will hit the public utility harder than any other class of business, because just as it can not increase its rates to take care of the rising price level neither can it readjust its wage conditions to get quantity re- sults on increasing wage levels. In connection with these various prints and charts which I have presented showing a large increase in the price level, it is interesting to note what has been the ruling cause which has brought about this high level of prices, wages and interest rates. The most important of these in its immediate aspects is the tremendous demands for money from the Government. This Government has borrowed in the form of Liberty Bonds and in various forms of treasury evidences of indebtedness over twenty- four billion dollars, which has been taken out of the chan- nels of trade. We have shipped abroad and destroyed many billion dollars worth of goods which have been taken out of productive and consumptive channels. In its broader aspects and of a more permanent character we have created a rather serious degree of inflation in our currency. We have so largely increased the amount of money that its purchasing power has been very much reduced. In Europe we see the extreme of it where the purchasing power has almost been destroyed, the worst 402 being in Russia. There is no country except Argentine Republic where money is at anything like its old purchas- ing power in the terms of international exchange. I have here a table which shows the extent to which this condition has been operative in the United States. It is taken from treasury statistics and government re- ports, showing the amount of money in circulation. Mr. Alschuler: Hagenah Exhibit 4. Whereupon said document, so marked for identifi- cation ‘‘Hagenah Exhibit 4’’ is hereby made a part of the record in this case. July 1896 1897 1898 1899 1900 1901 1902 1903 1904 1905 1906 1907 1908 1909 1910 1911 1912 1913 1914 1915 1916 1917 Hagenah Exhibit 4 MONEY IN CIRCULATION United States Gold Silver Gold Certificates Silver Certificates Notes (Greenbacks) National Bank Notes Federal Federal Reserve Reserve Notes Bank Notes Miscellaneous Currency Total Money in Circulation Circulation per Capita $ 454,905,064 $ 112,321,355 $ 42,198,119 $ 330,657,191 $ 224,249,868 $ 215,168,122 ? $ $ 126,935,247 $1,506,434,966 $21.44 517,589,688 111,556,690 37,285,339 357,849,312 245,954,622 226,318,003 144,429,517 1,640,983,171 22.92 657,950,463 122,539,886 35,811,589 390,126,510 284,569,022 222,990,987 123,871,437 1,837,859,894 25.19 679,738,050 130,547,250 32,655,919 402,136,617 308,351,842 237,805,439 112,836,764 1,904,071,881 25.62 610,806,472 142,050,334 200,733,019 408,465,574 313,971,545 300,115,111 79,008,942 2,055,150,997 26.93 629,790,765 146,156,537 247,036,359 429,643,556 330,045,406 345,110,800 47,524,538 2,175,307,961 27.98 632,394,289 154,468,577 306,399,009 446,557,662 334,291,722 345,476,516 29,802,776 2,249,390,551 28.43 617,260,739 165,117,934 377,258,559 454,733,013 334,248,567 399,996,709 19,076,648 2,367,692,169 29.42 645,817,576 166,842,169 465,655,099 461,138,698 333,759,425 433,027,835 12,902,057 2,519,142,859 30.77 651,063,589 175,022,043 485,210,749 454,864,708 332,420,697 480,028,849 9,272,018 2,587,882,653 31.08 668,655,075 188,630,872 516,561,849 471,520,054 335,940,220 548,001,238 7,337,320 2,736,646,628 32.32 561,697,371 203,487,845 600,072,299 470,211,225 342,270,055 589,242,125 5,975,535 2,772,956,455 32.22 613,244,810 200,506,822 782,976,619 465,278,705 339,396,322 631,648,680 4,963,530 3,038,015,488 34.72 599,337,698 204,319,698 815,005,449 477,717,324 340,118,267 665,538,806 4,203,415 3,106,240,657 34.93 590,877,993 208,016,245 802,754,199 478,597,238 334,787,870 683,659,535 3,662,525 3,102,355,605 34.33 589,295,538 210,867,772 930,367,929 453,543,696 338,989,122 687,701,283 3,237,256 3,214,002,596 34.20 610,724,154 215,373,772 943,435,618 469,224,400 337,697,321 705.142,259 2,915,570 3,284,513,094 34.34 608,400,799 226,585,263 1,003,997,709 469,128,592 337,215,180 715,754,236 2,656,670 3,363,738,449 34.56 611,544,681 230,266,183 1,026,149,139 478,601,977 337,845,647 715,180,037 2,427,763 3,402,015,427 34.35 590,133,619 223,913,111 1,072,847,819 481,970,395 332,342,246 785,393,047 80,374,650 2,244,687 3,569,219,574 35.44 , 637,250,272 237,864,783 1,413,823,289 489,910,937 341,719,547 719,400,794 182,062,780* 2,098,165 4,024,130,567 39.29 . 690,574,527 265,677,472 1,737,652,359 477,184,842 335,961,233 697,448,551 544,412,775 12,693,790 1,970,078 4,763,575,632 45.74 . 1,114,077,426 294,503,829 818,353,349 379,211,468 340,042,812 703,056,066 1,713,074,255 15,257,105 1,851,114 5,379,427,424 50.81 . 984,924,231 312,620,354 630,738,364 216,103,387 333,814,578 661,139,198 2,475,284,532 136,643,850 1,779,240 5,753,047,734 54.79 . 919,564,330 377,415,019 387,203,974 128,571,523 328,573,277 657,328,165 2,999,690,207 198,753,714 1,686,292 5,998,786,501 57.13 ♦Includes Federal Reserve Bank Notes, first issue in January, 1916. ♦♦March 1, 403 The Witness : This table is designed to show the effect of the economic rule which is generally accepted, that as the amount of money in circulation increases in the absolute and per capita, so does the cost of living in- crease. These columns show the different classes of money in circulation. The last column shows the circula- tion per capita. Note that from 1896 to 1917 the per capita circulation of money more than doubled. The Bu- reau of Labor statistics show that during this same pe- riod the increase in the cost of living embracing all elements going into the cost of living has more than dou- bled, that this rate of inflation has increased more rapidly during the last three years than at any period in Amer- ican history since the Civil War, just as the increase in the price level has been so exceedingly rapid as is shown in blue print chart No. 2. Let me call attention specifically to the form of money in which there has been the greatest increase, and that is particularly in the issue of federal reserve notes, paper money. Prior to 1914 we had no paper of this character in existence. On March 1, 1920, we had $2,999,000,000 of federal reserve notes and $198,000,000 of federal reserve bank notes. Note that during the same time while this tremendous increase of paper currency was taking place there was an actual reduction in the amount of gold and a very marked decrease in the gold certificates in circula- tion , — n condition which -must absolutely in the most ele- mentary and primary form result in a very high interest rate and cost of money for a long period of time, which has a most severe effect on every class of industries and perhaps especially utilities which by reason of their legal status are unable to adapt themselves to this condition. The best students of finance in this country and in Europe give no hope, on this quantity theory of money, of 404 any substantial decline in the cost of living until the government brings about a deflation. Deflation can be brought about in two ways : first, by so increasing inter- est rates and discount rates as to bring about a forced liquidation and this must be accompanied by more or less business depression and panic, but a panic would bring about general distress of so serious a character as to out- weigh the advantages which it would bring through defla- tion. The other way in which deflation can be brought about is the slow process of maintaining substantially the pres- ent circulating medium until business in this country has expanded and grown to that stage where we can show sub- stantially the same relationship between money in circu- lation and business performance as prevailed prior to 1914. Commissioner Lucey: Won’t the issue of money keep pace with that increase? A. No; money will not be increased at that rate. If it did there would be nothing but disaster ahead for this country just as there is in Russia and some other conti- nental countries. The work of deflation is now being undertaken by the slow process of raising interest rates by the federal banks, and that must be done with great cau- tion so as not to bring about a great business disturbance, for it is naturally a slow process which must come through a discontinuance of the rate of issue, the recall of a certain amount of this class of paper, liquidation of loans and a steady reconstruction of business which will take a period of possibly 10 or 15 years. Q. Is it your theory that this issue of federal reserve notes and bank notes was caused simply by the war? Wouldn’t that situation have resulted from the passage of the act and the facility then afforded, — 405 A. To some extent. Q. — to liquidize the currency! A. To some extent, yes, your suggestion is absolutely right. The difficulty which has arisen is not from the introduction of this form of security but the issuance of the tremendous amount of it, which was necessary to finance the war. Just as we had to raise immense armies to meet the physical needs, so we had to raise a tremendous amount of circulating medium in order to finance the war, but we can’t demobilize finances as fast as we can demobilize man power, and as long as this tre- mendously large amount of circulation per capita pre- vails there will be a high price level and a high interest level. That has been true every time in the history of the world over the entire period over which financial sta- tistics are available. The subject is very exhaustively treated by such men as Irving Fisher of Yale, Dr. Norton and Professor Clark. I will not quote from their works, but the record can show that they are authorities who have treated this subject very extensively. Chairman Wilkerson: What significance is to be at- tached to the fact in your judgment that in 1917, for in- stance, referring to table No. 4, the gold part of the cir- culation was in round figures $690,000,000, and in that year the total outstanding is $4,700,000,000 in round num- bers ; now, in 1920 the gold circulation is in round num- bers $920,000,000 and the total circulation is $6,000,000,- 000 ; there is a slight decrease in the percentage of gold, but not a very marked, — A. But note the third column. The gold certificates during that same period did suffer tremendous shrink- age. Q. From $477,000,000 to $128,— 406 A. No — Q. You think, — A. No, the gold certificates column, which is the third column there. There was a decline from $1,737,000,000 to $387,000,000. Q. So is it your idea to get the direct relation you have to take into consideration that $1,4000,000 which is represented by the shrinkage in gold certificates? A. Yes. The calling in by the government of the gold circulation to give temporarily greater protection to the entire currency system has been one of the items that has contributed to increasing the inflation and greatly in- creasing the circulation per capita. We have accom- plished but little, if anything, in the way of correcting this problem. Through this great inflation we have built up a very extended credit structure, the loans being so extensive that they are causing serious concern to our greatest bankers. Each step in the building up of this inflation and extended credit position has tended to in- crease the price level and compel individuals and busi- ness generally to adjust themselves to this new level. We have all been compelled to pay increased prices for coal, clothing, rents, labor and other commodities and services, the compensation being based on this inflated currency. The difficulties in which the utilities find themselves are the result of the inconsistency of all classes of business and individuals except utilities being permitted freely to adjust themselves to this level, while this one class of business, which is experiencing the same hardships that have come to every other class of business, is being de- prived of the privilege of a full adjustment for itself. The continuation of this inconsistency can lead to no other result than the disruption of the public utility busi- ness, with a great impairment of public utility service and 407 credit. Much of our present inflation is traceable to the form in which our government set about to mobilize it>^ financial resources. Commissioner Lucey: That theory is on a sort of a paper basis instead of a gold basis, is it, then? A. Dangerously near it. To show we are by no means as bad oft as the other countries of the world, I have pre- pared a table which shows the extent to which this in- flating process has been carried on in other countries of the world, which through the close inter-relationship of commerce at the present time is bound to have a very seri- ous effect even on our own country. Whereupon said document, so marked for identi- fication ‘^Hagenah Exhibit 5’’ is hereby made a part of the record in this case. Hagenali Exhibit 5 NATIONAL DEBTS AND INTEREST RATES 'l Gross Debt Aug. 1, 1914 Gross Debt Jan. 1, 1920 Per Cent. Cost of Burden Interest Paid Wealth 1913 1920 United States. $ 1,000,000,000 $ 26,000,000,000 8.4 $ 23,000,000 $ 1,100,000,000 Great Britain . 3,500,000,000 42,000,000,000 44.4 122,500,000 2,300,000,000 France 6,500,000,000 33,000,000,000 46.1 257,300,000 2,000,000,000 Russia 4,600,000,000 30,000,000,000 45.0 212,200,000 1,600,000,000 Italy 2,800,000,000 13,000,000,000 40.0 93,300,000 600,000,000 German Emp. and States . Austria- 5,200,000,000 45,000,000,000 47.0 200,000,000 2,500,000,000 Hungary . . . 3,700,000,000 26,000,000,000 60.0 161,700,000 1,500,000,000 Total Gr. Debts . . 27,300,000,000 215,000,000,000 31.1 1,070,000,000 11,600,000,000 Total Net Debts .. 25,000,000,000 200,000,000,000 Average Interest Rate 975,000,000 3.9% 11,000,000,000 5.5% CHANGES IN PERCENTAGE OF GOLD RESERVE TO NOTE ISSUES July, 1914 Nov., 1918 Dec., 1919 Austria-Hungary 54.8 .7 .5 France 62.0 11.2 9.6 Germany 43.2 15.0 3.5 Great Britain 134.6 25.6 22.9 Italy 70.0 9.8 7.5 United States -99.6 63.2 52.3 408 The Witness: This table shows the extent to which notes in circulation have been increased in the greatest banking institutions in the world. The table is in terms of British pounds sterling and compares the notes issued prior to the war with those in issue at the close of 1919. Note the tremendous increase in this form of circulation and then note the very small comparative increase and actual increase in the amount of gold holdings. Prior to the war the leading banks of these great commer- cial countries had 1,252,000,000 notes in circulation; in 1919 they had 7,069,000,000, an increase of £5,815,000,000 during that period of only five years, against which there was a net increase of gold holdings of all these countries of the world of only £358,000,000. The extent of the in- flation is evident from the fact that the face value of the paper currency which was issued during the four years of the war was greater than the value of all the gold and sil- ver produced on the face of the globe from the period of the discovery of America down to the close of the war. The significance of that statement is so far-reaching that it is difficult for the imagination to grasp it, and why such a situation should not completely upset the basis of all interest rates and cost of money is equally beyond human understanding. It never has occurred before in the history of the world and it certainly is not true at the present time. Under these conditions it is natural for prices and interest rates to rise and for business to ad- just itself accordingly. Commissioner Lucey : You say our country shows the best situation? A. Yes, decidedly; and our situation is bad as com- pared with 1914, but compared with Europe it is splendid, for the interest rates in Europe are above what they are in this country, and the price level also is far above what it is in this country. In chart No. 1 we see the statistics 409 shown ill tliG London Statist as to tho pricG IgvgI Tvhich prevailed in April, 1919, as compared with the price level in this country. It is far beyond. If people who com- plain about the high cost of living in this country would make a comparison of what the price level is in Euro- pean countries they would consider this a paradise in comparison. It is bad here, admittedly bad, but the con- dition which has brought about that high cost of living and commodity prices, and in turn a high wage level, has also brought about a high cost of capital. That situation is further shown by a table I have here which sets forth the national debts before the war and the national debts of the great countries at the present time, the ratio of such debts to public wealth, and lastly the in- terest rate and the amount of interest which each of these countries must now pay. Whereupon said document, so marked for identi- fication ^‘Hagenah Exhibit 6’’ is hereby made a part of the record in this case. Hagenah. Exhibit 6 NOTES IN CIRCULATION OF WORLD’S GREATEST BANKS Bank of 1919 Pounds Sterling Prior to War Pounds Sterling Increase Pounds Sterling Increase or Decrease in Gold Holdings Pounds Sterling Denmark . . . 25,312,000 8,693,000 16,619,000 6,316,000 England . . . 83.705,000 29,317,000 54,388,000 46,082,000 Currency Notes . . . .. 338,436,000 338,436,000 28,500,000 Total England . .. 422,141,000 29,317,000 392,824,000 74,582,000 Austria-Hungary ...1,883,467,000 88,740,000 1,794,727,000 —77,878,000 Belgium ... 187,718,000 64,594,000 123,124,000 228,000 France ...1,471,977,000 236,476,000 1,235,501,000 58,817,000 Germany ...1,489,205,000 94,545,000 1,394,660,000 —7,831,000 Holland . . . 84,648,000 25,870,000 58,778,000 39,172,000 Italy ... 414,091,000 66,445,000 347,646,000 —11,784,000 Japan 31,254,000 71,567,000 53,556,000 Norway . . . 24,468,000 6,658,000 17,810,000 5,269,000 Spain . .. 151,676,000 76,760,000 74,916,000 74,667,000 Sweden , . . 39,540,000 11,456,000 28,084,000 10,784,000 Switzerland . . . 36.897,000 10,716,000 26,181,000 11,730,000 United States (Federal Reserve! 500,985,000 233,472,000 120,456,000 Total ...7,068,418,000 1,252,509,000 5,815,909,000 358,084,000 Russia ...1,836,217,000 163,411,000 1,672,806,000 185,879,000 410 The Witness: In 1914 the debt of these seven great countries was twenty-five billion; January 1, 1920, it was two hundred billion. And while the debt in some cases is from 44 to 60 per cent, of the total national wealth in European countries, in this country our debt as com- pared with 1914 is only 8.4 per cent, of the national wealth. Our interest on the public debt in 1913 was $23,000,000 a year; today it is $1,100,000,000. In other words, our annual interest charge now is $100,000,000 a year more than our total national debt before we entered into this war. The average rate of interest being paid on these government war debts in 1913 was 3.9 per cent. It is now 5.5 per cent., and every one of these issues has suffered a very large decline in its market value because the interest rate no longer reflects the purchasing power and the actual cost of money. Our own Liberty Bonds, regarded as the highest grade security in the world, have declined on the long issues from 12 to 15 per cent, and the market is exceedingly weak at the present time. The actual cost of money for the government today is 54 per cent., and this on treasury certificates, the highest rate ever paid in our history except the darkest days of the Civil War; and when the government is paying 54 per cent, for its money as compared with 3 per cent, ten years ago, it is natural that the private corporations, especially utilities, cannot exist on interest rates founded on eco- nomic conditions prior to 1914. At the bottom of this same table. No. 6, I show, as further bearing on the subject of inflation which has taken place, the changes in percentage of gold reserve to note issues, comparing for six great countries the ra- tio in 1914 to 1918, and then at the close of 1919. Here the United States makes relatively a good showing, but only relatively so. In the absolute the showing is not 411 good and in the absolute it has resulted in a high interest rate and a high price level which must necessarily con- tinue for a long period of time. We may have panics, we may have one in the autumn of this year, when the interest rates will be very high superimposed on the present strained credit situation, but the rebound will be very quick, quicker than it was in 1907, because of this large inflation, this immense amount of money in circulation. The war has resulted in an expansion of paper currency of the world from seven and a quarter billion dollars in 1914 to nearly $40,000,000,000 in November, 1918, and between the time when the armistice was signed and December, 1919, there was a further expansion of $11,000,000,000, and the rate of expansion for the first four months of 1920 has been almost as great as it was in 1919, showing that the credit situation of the world is not growing better and that in- terest rates are showing no tendency to decline, but rather to remain on this relatively and absolutely high level. Chairman Wilkerson: From where did you compile this last table, Mr. Hagenah, with these percentages? A. That was taken from a publication issued by the Mechanics and Metals Bank of New York City in its an- nual review of January, 1920. Q. I was wondering wdiat your basis was for deter- mining the wealth of the respective countries. Those percentages are significant only as we have their defini- tion of wealth. A. They are based on the government estimates which are obtained in the files of the Treasury Department, and while they are not published down to 1920 at the present time, the latest figures available in the statistical abstract are of 1918, but I assume, — 412 Q. The situation might he worse than it is here de- picted. In estimating the total wealth, credits and prop- erty, there might he a duplication of real value! A. Yes; hut they have taken fundamental wealth, eliminating all duplications. But if you take the super- imposed credits these percentages would he considerahly worse. So far I have discussed interest rates in their broadest significance. I have here a chart which I have compiled from data supplied hy Dow & Jones Company of New York, financial statisticians. This chart shows the etfect on interest rates in the United States of these conditions which I have discussed as particularly world-wide. Whereupon said document, so marked for identi- ‘ fication ^‘Hagenah Exhibit 7” is hereby made a part of the record in this case. Hagenahi Exhibit 7. W.J Hagenah 413 The Witness: The table does not show bond quota- tions but an index of bond prices just as tables 1 and 2 show an index of commodity prices. These indices have been compiled from the yields of average prices of bonds for each day of the month, the average yield for the bonds of each class being capitalized at 4 per cent, to get the index. The comparison of these indices shows the rela- tive credit of the different groups. The first curve at the top of the table is a curve of the highest grade of railroad bonds, those which have been made legal for savings banks by large investment states of this country. The dotted line, which is the second curve at the left, shows the second grade railroad bonds, those which are in the form of junior issues. The solid line, which is the third curve beginning at the left, shows the public utility issues, and the fourth line, namely, the dot and dash line, shows the industrial bonds. This table extends from January, 1915, by months to the close of March, 1920. Note that all bond prices have tended downward for the reason that bonds carr\^ fixed incomes, and as money has been expensive, as interest rates have been high, the value of a bond with a 4 or 5 per cent, income per year is less because the purchasing power is reduced in terms of commodities, labor and other investment securities. The significance of this chart, however, is not in the fact that all bonds have tended downward but that some bonds have tended downward at a different rate than others. Industrial bonds have tended downward the least for the reason that the industrial companies have been able to adjust their credit situation by increasing prices whenever commodities and labor advance. The next in the order, — 414 Commissioner Lucey: I want to follow that indus- trial, — A. The ‘‘industrial bonds’^ is the dot and dash line which is the lowest in 1915 and second from the top in 1920. Q. Well, it stays normal from the beginning to the end, doesn’t it? A. Yes, reflecting their ability to adapt themselves to changing conditions which has made them a very desir- able form of security. Q. It has been fluctuating during these years, but it has gone back to where it was in 1915? A. Showing ability to get back to its foraier level. There has been a decline in the index of the average in- dustrial bonds of only 6.2 per cent. Second grade rail- road bonds which were already low in 1915 because of the coming troubles for the railroads declined further only 7.7 per cent. The highest grade railroad bonds, those legal for savings banks, trust funds and purchase by in- surance companies declined 20 per cent., while public utility bonds, which had experienced the most rapid growth during the period of 20 years preceding the war, suffered a decline actually of over 25 per cent, in the in- dex figure. That condition is shown in another table which, instead of showing the prices at which the bonds sold in forms of index shows the changes in the interest rates in terms of average yield of bonds. Whereupon said document, so marked for identi- fication “Hagenah Exhibit 8” is hereby made a part of the record in this case. Hagenah Exhibit 8. BOND PR/CDS I90/-/9ZO (T/?e Sca/es o/ y/a/ds dee-n Ini^erted to conform #v///7 fhe direcNon of Price Mo\r6ments) supp//cd t>y SrooAmire Economic Service, inc 415 The Witness : The data for this table have been sup- plied by the Brookmire Economic Service', and for the purpose of making comparison the table is inverted. The scale of yields is so shown that it conforms with the di- rection of the price movement. Here again we notice that the industrial bonds have been able to weather the storm the best of all securities. The municipal bonds have been able to weather the storm because they have been exempt from taxation. The railroad bonds have suffered very heavily, and again public utilities have suf- fered the largest decline. There has been an increase in the average yield or in- come on industrial bonds of eight-tenths of 1 per cent. Municipal bonds have had their average yield increased 1.35 per cent. On railroad bonds the yield has increased 1.7 per cent., while on public utility bonds the yield has in- creased 2.54 per cent. It is of greatest significance in this connection that the public utility bonds used in this table are bonds of very high grades. Most of the public utility financing during the last ten years has not been in the fonn of first mort- gages which have been closed, but rather in junior secur- ities on w^hich basis of financing the public utility industry must most largely proceed. The decline in the credit structure and the increase in the average yield has been substantially in excess of 24 per cent., in fact, being ap- proximately 3 per cent, on the class of securities most frequently issued. Rrior to 1914 it was quite generally held by public util- ity commissions that a return of 7 per cent, and in some instances 8 per cent, on the fair value of the property was not unreasonable. Stated conversely, it was often held and was generally construed, that, therefore, a re- turn of from 7 to 8 per cent, was reasonable. If, during 416 the last five years because of this complete upset in eco- nomic conditions the actual cost of money has risen from 2 to 3 per cent., according to the different grades of util- ity sucurities, over and above the level which prevailed when these authorities stated that from 7 to 8 per cent, was a reasonable return, it would follow that without a very exhaustive investigation the utilities could be given such an addition to what was considered proper in pre- war days as will recognize these added costs of money which have since developed. Even an increase in the rate of return to approximately 9 or 9.5 per cent, would not give the owners of the property an income of the same purchasing power as these authorities were ready to give them prior to 1914. While the cost of money has there- fore risen from 2 to 3 per cent, of par on the average public utility interest bearing security, the cost of money to individual utilities because of local or extraordinary conditions has been even greater. It is of interest to inquire in this connection that since there has been this tremendous increase in the cost of money, whether conditions are now operative which will tend to keep the cost of money high. On this subject it is important to consider the present demands in the money market with which the public utilities, whose de- mands for money are now very urgent because of the great growth of the cities, must compete. At the convention in the close of 1919 of the New Eng- land Brick Manufacturers Association, statistics were compiled showing that because of suspended construction and development in the United States there was at the close of 1919 a shortage of 1,300,000 residences in this country, 450,000 factory buildings, 6,000 hotels, 5,000 schools and public institutions, 55,000 apartment build- ings of those rated as average and large size, 20,000 417 theaters, churches and public meeting halls, 120 railroad terminals complete and 14,000 railroad stations. With this demand for buildings in order to house and provide shelter and for business expansion, it can readily be seen that the public utilities are brought face to face with a demand for public funds which is of stag- gering proportions. At the same time the demand for funds from the railroads is also large. The statis- tics which have been compiled from railroad re- ports showing the amount of equipment which it is necessary for the railroads to have in order to have the same carrying capacity with respect to the commerce of the country today which they had prior to the war necessitate a construction during the next three years of 13,000 locomotives, 24,500 passenger, baggage and sleeping cars and 712,000 freight cars. The budget of the railroads for reconstruction and expansion to the present trade situation calls for from $1,000,000,000 to $1,500,000,000 a year, a sum of money which must be made and obtained in the open market in which the public utili- ties must compete. This demand for money from the railroads is at the present time well under way and it is interesting to note the interest rates at which that money is being obtained by the strongest railroad systems. The following rail- roads during the last four months have issued securities at from 7 to 74 per cent, to the investor and a cost to them of from to over 8 per cent, as the actual cost of the money. I give only the railroads of the highest credit standing. New York Central, Pennsylvania, Delaware & Hudson, Northern Pacific, Union Pacific, and such great industrial corporations as the Western Electric, Texas Oil and Goodrich Rubber Company. A large number of railroads and corporations who are not considered of the 418 highest credit standing have issued securities on this level of interest rates or higher interest rates during the last four months. Along with this demand for money from private indi- viduals for homes and factories and from the transporta- tion industry of the country is a great demand for better roads in this state and practically every state. Hun- dreds of counties throughout the United States have is- sued large blocks of bonds for building roads, all of which have been thrown on the market and caused a decrease in the price of municipal securities so that the yield from that class of tax exempt bonds has been increased 1.35 per cent, per year. At the same time there is no evidence of a lowering in our public taxation. There is now a treasury deficit of over $5,000,000,000 and the government expend- itures are running in excess of revenue. This condition of government extravagance, of public extravagance ev- erywhere and of individual extravagance, is reflected in the high tax rate and the low yield of securities and, therefore, the high money rate. The inability of business to adapt itself quickly to these changed conditions makes it impossible for interest rates to quickly return to the normal. Hundreds of thousands of men are still in some form of military service. "While large numbers have been demobilized, they have not yet gone back to the centers of employment and residences from which they were taken by the government, and until they are returned to the factories and smaller cities and homes, the demobili- zation process is not complete. We have lost hundreds of thousands of laborers through emigration; we are receiving no satisfactory immigrants from Europe. There are methods on foot in European countries to prevent the leaving of their best class of citizens. There are movements in this coun- 419 try to prevent their entrance even if they want to come, and under those conditions we have a complete upset of industrial relations. Because of these situations, which are world-wide in their significance, all of which are present in various de- grees in the United States, we have today the highest level of prices, the highest level of wages and the highest level of interest rates which have prevailed with possi- bly one or two exceptions during the Civil War in the en- tire history of the country. The entire basis on which the public utility was constructed, operated and financed prior to 1914 has been upset, the credit situation is dis- turbed, and according to the fundamental conditions as they now exist and are still developing and based on the experience of readjustment following other wars, unless there is substantial provision made for increased rate of return to public utility properties and they thereby be permitted to adapt themselves to these changing condi- tions as other industries are with which they must com- pete in the open market, the public utility industry can- not meet the demands for service from the public and will cease to function as a necessary institution in pub- lic and private life. Commissioner Lucey: Is this condition, Mr. Hage- nah, at all local to Illinois ? A. No, sir; it is nation-wide. The situation from which these public utilities are suffering in Illinois is sub- stantially the same from which they are suffering every- where. Q. Then what you say in your testimony here is ap- plicable to the country at large? A. It is, modified in this respect, that those cities and those states in which population has grown more rapidly 420 the situation is aggravated. Where cities have grown slowly and utilities are not face to face with very urgent demands for expanding their plants they can probably struggle along for some time with minimum financial re- quirements, but in a state like Illinois, which has shown a very large increase in wealth and population for prac- tically every city for which census statistics have been published, in which there is a consequent shortage of util- ity facilities, the public demands cannot be met until money so invested receives the same wages based on this level of prices as labor is receiving and as being paid for commodities entering into construction expenses and op- erating expenses. Q. But where is the stop, where is the period to be, if the utility has got to go into the open market and com- pete with these industrials who have no regulation for money? There isn’t anything to prevent one of the big industrial corporations from paying 10 or 12 per cent. Do we have to keep up with that procession? A. No; because the economics of that will adjust it and is beginning to adjust it now. The great demand for money and the ability to pay these high money costs grew out of the extravagant prices for munitions and for luxuries during the war and following the war. Whatever cost they had to pay for money they added to the price of the goods. Either the govern- ment paid it when it got the goods or individuals have paid it for luxuries and extravagances. There is now a turn in those conditions. Cancellations are being report- ed by many concerns. The strike situation has so re- duced production and has so put fear and caution into the public that the wild, extravagant buying which was so marked for the last year is beginning to subside. The day of caution is here. Many industries are planning 421 retrenchments. Leading New England textile mills are now operating only four days a week. Many automobile companies have reduced the number of their employes from 10 to 20 per cent. There is comparatively little holi- day and overtime work being done in factories. In some cities there is beginning to be talk of unemployment. As the industrial pace is slackened bank loans will be re^ duced. Stocks of goods in warehouses are being liquidat- ed. This is being brought about through the efforts of the Federal Reserve banks in advancing discount rates. With the curtailment of orders from the public, manu- facturing companies will be less disposed and less able to pay high rates for loan accommodations, and interest rates should decline with this deflation of the loan account until we meet the large seasonal demand for money in November. Wliile these conditions justify the belief that the willingness to pay high interest rates on the part of prosperous industrial companies is practically at an end, it does not mean that public utilities will be able to bor- row as cheaply as they did in 1914. The public has for the time being lost faith in utility investments and capital can be secured for this industry only by offering an at- tractive yield. The interest rates for public utilities will probably be very high for another year and then will gradually tend downward, for we are undoubtedly being brought face to face with an industrial depression of some considerable severity. We will hear much more about that in 60 days than is public at the present time. For the next year and possibly two years the public utility situation will be urg- ent, but for practically a decade the interest rates on pub- lic utilities must be on a much higher level than they were prior to 1914. 422 Commissioner Lucey: Is the only remedy which you have in mind the increase in the rate of return? A. I can see no other remedy which would go far enough to correct the situation. The saturation of the territory which has been under way during the last three or four years has had a very marked and beneficial effect which would be more noticeable if we had not had this tremendous increase in prices during the same period. It has been lost in the violent change in prices. It will become manifest more in two or three years if things set- tle down to the normal process of readjustment which, however, will be drawn out over a long period of years. Chairman Wilkerson : Does this probability of a high range of prices for a great many years have anything to do in your opinion with the extent of the consideration which should be given to present prices in valuing prop- erties for rate making purposes? A. Yes ; I think the Commission should take the pres- ent price level into consideration. I would not go so far as to say that the sole evidence of present value was the price level which prevails at the present time, because to some extent we all admit that is abnormal and brought about by war conditions. The utility situation today com- pared with that of 1914 is revolutionary. For over 15 years before the opening of the late war prices moved through more or less well defined cycles of from four to six years. Under those conditions it was entirely proper for commissions to base appraisals on the five-year aver- age of labor and material prices. Even though the trend of prices during this period was steadily upward, the utilities were expanding their business and instituting economies on so large a scale that these economies readily absorbed the increased operating expenses resulting from the rising trend of prices. At the present time, however. 423 conditions are not comparable with those prior to 1914, and it is therefore difficult to see how an average of pre- war prices can reflect the fair value of any property at the present time. Court decisions say that the actual cost of the property shall be taken into consideration, but these decisions were announced at a time when there was no great ditference between original cost and reproduction cost new. I be- lieve the present price level will not be long maintained since the definite change in the trend is apparently near at hand. The present price level is to me a matter of greater significance than an average of pre-war prices or the original cost of the property, and while I would not base an appraisal entirely on present day prices, I would give considerable weight to them. If, however, original cost is to be considered in making valuations today, I would say that the present price level is entitled to much greater consideration. The machinery of regulation moves slowly. Values should not be increased or reduced because of any single important advance or decline in prices. The commission should attach greater weight to the average of such move- ments and the well established trend. Under the trend which has developed and been in operation for a number of years the pre-war cost data are of relatively small im- portance. We cannot compare such costs with present day prices because the yard stick of measurement is ma- terially changed, for we are dealing with a new kind of dollar. It means little from a valuation standpoint today to say that a certain piece of property cost $100,000 ten years ago and therefore such amount should be given great weight in determining its value today. All forms of business are trying to adjust themselves in the free play of economic forces to these new conditions and if 424 the public utility industry is to be held down by an ar- bitrary pinning to historical conditions it must naturally through the economic forces which no commission can control, be working to a position where it will wholly fail to meet the public necessities and the public will be denied the value of those services which are not luxuries but ab- solute necessities to metropolitan life. Q. In other words, it is your view that the more logical remedy is one in which the effect of these conditions is re- flected in the rate of return to be fixed rather than in a large increase in the valuation which is placed upon the property of the utility? A. I would not quite agree with that. I think that, if I understand your question, — Q. Well, I am asking you, — A. It is rather a broad one. Q. These conditions to which you have referred, if- I make myself clear, affect two questions which are be- fore the Commission? A. Yes. Q. As you know in every case. A. Values and costs. Q. The first thing which the Commission must do is to place upon the property of the utility a fair value at the time it is employed in the public service. The next thing is to allow a fair rate of return upon that fair value. Now, obviously these conditions to which you have re- ferred have affected one of the elements which the courts say must be given some consideration. A. Yes. Q. In determining the fair value of the property and the cost to reproduce the property? 425 A. Yes. Q. The elements also affect the other question, name- ly, the rate of return which is to be allowed? A. Yes. Q. I ani asking you what your view is as to whether or not the etf ect of these conditions should be shown in the orders to be made by the Commission in allowing a higher rate of return or in placing a large valuation on the prop- erty which reflects to a very great extent present costs? A. I think that would be a rather dangerous way to recognize the present situation. What constitutes a rea- sonable rate of return is an economic question wholly apart from the appraisal. What is a fair value of the property in terms of those forces which make for value is quite different from the question of what is a reason- able rate of return. I donT believe that the valuation should be increased or reduced because of any corre- sponding change in the rate of return, nor should the rate of return be made to reflect changes in economic conditions which are not at the same time recognized as affecting the question of value. We live in a new era, a new economic epoch, and just as commissions found fair values of property on the basis of conditions as they were known to exist prior to 1914 and found what was then a reasonable rate of return each without special consideration of the other, so in this epoch in which we now live, the forces of which are making for values and costs, the Commission should find the fair value of the property from a consideration of the cost to the extent that the law requires it to be considered and the reproduction cost new over a reasonable period and then should consider the cost of money which the com- pany has to pay, so that the cost of money and the value 426 will be expressed in the medium of exchange and on the basis of values as they are found in economic conditions which exist today. There should be just as much inde- pendence between those two factors today as there was prior to 1914. To some extent that increases the value and increases the rate of return on the value. Q. I think my question resolves itself into this, — ^the extent to which these increased prices are to be given consideration in arriving at a conclusion as to what is the fair value of the property. Now, during the period before the late war that was largely a theoretical matter ; there was not very much difference between the original cost of the property and the cost to reproduce it; in the prices between 1904 and 1914 there was not that wide dif- ference. A. In some cases there was no wide difference. Q. It was largely, — A. Because the great growth of utilities came at the time of advancing prices and their costs would prac- tically reflect the then prevailing price level. In individ- ual cases there was quite a large difference. Q. Yes, but for a period of ten years, during that period from 1904 to 1914, there was not a radical differ- ence? A. Not a radical difference, no. Q. But now you have radical differences, — A. Yes, sir, decidedly. Q. — in price levels. The courts say consideration must be given to the original cost and to the cost to repro- duce, without indicating just what consideration is to be given to each one, whether one is to have 80 per cent, con- sideration and the other 20 or one 50 and the other 50. A. That is a matter for the judgment of the court. 427 Q. They say it is a matter of judgment for the com- missions and for the courts; but having in mind the fact that in all probability the trend in prices will begin to be downward, would you say that in determining the rate of return which is to be allowed, for instance, for the year 1920 or 1921, any greater consideration was to be given to the present abnormal conditions than is to be given in valuing the property where you are endeavoring to in- ject into the solution the effect for a number of years to come of the high scale of prices? A. Yes, I think you should because the money rate is much more sensitive and responds much quicker to the demands than property values. They swing more slowly. Q. That is, we might be justified in giving full effect or substantially full effect to these abnormal conditions temporarily? A. Yes, sir. Q. A high rate of return? A. Yes. Q. Whereas, we would not be justified in giving full effect to the price of today in placing a double valuation on the property? A. I think that is true. It would be, — in fact very few utilities would be able to earn the present cost of money on the property capitalized on the present level of prices. That is impossible. Q. That is a theoretical question. A. Prices have been rising for a long time and give no indications, so far as the basic commodities are con- cerned, of soon returning to the pre-war level, but in a historical sense we know they must and eventually will return definitely from the present level. For this reason 428 there is some justice in using the average of prices if such average is extended to include the large increases which have more recently developed. It should not be extended so far into the past as to enable the low prices over a long period of years prior to 1914 to outweigh the increases which are now concrete facts. There is con- siderable merit in a valuation on the basis of 1916 or 1917 prices, for that basis is substantially in excess of pre- war prices, but is very much below the present level and may be a fair estimate of the average price level for the next ten-year period. This of course is problematical, for it may easily be atfected one way or another, at least temporarily, by extraordinary developments. Where, however, the utility has made large additions to its plant during the war period and had to meet the war prices then prevailing, I think it should be given the benefit of such actual costs. Those expenditures were matters of public necessity and I think the public should bear them until they have been consumed in service or the excess cost amortized. There are always a great many local conditions which can modify any general rule, but in fixing the basis for a rate case I would be opposed to giving serious weight to costs or prices prior to 1914 to the exclusion of evidence as to the present costs. These pre-war prices and original cost data represent a ditfer- ent economic period, and unless we can meet the condi- tions as they are today there will be no further invest- ment money available for public utilities. The rate of return, however, is a far more sensitive matter and is subject to very frequent changes. Nothing would be gained by trying to average interest rates at a time like this. The Commission is in this admirable situation, that it 429 can protect the public and the investors by reason of the fact that it is a permanent body. It has authority to open a case on its own motion, to institute an investigation on its own motion, and while it must grant higher interest rates and grant higher rates to meet expensive labor con- ditions, it is a permanent body, and as long as that condi- tion prevails they can see that the public utility is pro- tected and when a lower price level is established they can act for the benefit of the public as then seems advis- able. Therein is the great value of the public utility com- mission, that it is a continuing body. Q. Why I asked you that question, — it seemed to be an easy task for a commission to give effect to these ele- ments in awarding a rate of return in which they would be reflected, but under the present extraordinary condi- tions having in mind the uncertainty as to the length of time during which the effect of the war will be projected and having in mind the fact that if you want to repro- duce a utility today at all, you couldn’t reproduce it, — A. You can’t do it. Q. — it would seem to be a very difficult task for any- one to undertake to assign to the property of any utility a fair value as of today. A. Yes, I would agree with you there. Q. It seems almost impossible to do it. A. Yes, I would agree with you that for rate making purposes I don’t think that the present level of prices is the controlling factor. Q. And it is just a guess to attempt to arrive at a conclusion as to the extent to which effect is to be given to it? A. Yes, but I do think that it should be considered, and is probably of just as much significance and maybe more than the price level that prevailed prior to 1914. Q. It probably has more significance than the prices in 1904. A. Yes. Q. Because we had an upheaval in between? A. Yes. I don’t think that any economist would say that the price level as of the spring of 1920 was a per- manent level because there are forces working today that are going to correct it, just as they always do in the eco- nomic play of forces. Prices must tend downward be- fore long and there is evidence that these forces are now at work to bring this about. The provision you make for rate of return should recognize the cost of money at the present time because our national credit structure is still very much inflated and under a great strain. The value of the property may be founded on more stable condi- tions, such as prices averaged over a period which will recognize the new cost level which now prevails and is likely to prevail for some period in the future. This is no more than applying general business principles to the public utility industry. Q. Do you think, then, that justice would be done and the necessities of the situation would be met if conserva- tism were used when it came to valuing properties and liberality were used in connection with the rate of return? A. Well, conservatism and liberality are both within that range where the Commission has the right to vary. Q. That is, the exercise of discretion where discre- tion may be used? A. Yes. Q. What I mean is, if there would be some hesitation about adopting these high reproduction values. 431 A. If you are going to be conservative anywhere I would rather be conservative on the valuation than the rate of return. As already explained, interest rates are more sensitive than commodity prices generally, for which reason the value can safely be based on an average of prices. It is important, however, in determining the period over which- the prices are to be averaged that the owner of the property shall not be deprived of the un- earned increment which has been the principal induce- ment in many of our great development undertakings. If a plan is to be adopted whereby the owner is to be de- prived of this unearned increment, while such increment is granted to other forms of investment, it would be rather imprudent from an investment standpoint for a man to place his money in public utilities, and investors would soon discover that fact. Q. To put a simple illustration, here is a question that we have and all commissions have now in literally hundreds of cases, — A. Yes. Q. The question is presented. Let us take the historic cost, call it back in 1904 or 1905, whenever that property and isn’t that dependent upon the probability with ref- happened to be constructed, — suppose we have in the rec- ord evidence that on the basis of prices in 1916, or an average price from 1912 to 1917, the cost of the property would be a million dollars for illustration, and we have evidence in the record that on that basis of prices for sometime in 1919 it cost two million dollars, and on a record of that kind the question was put up as to the value which was to be assigned to that property for rate making purposes, and the question is the extent to which the prices of 1919 are to be given consideration, admitting 432 now that some consideration is to be given to them, be- cause the courts say that some consideration shall be given to them, — how much consideration shall we give erence to the duration of this period of high prices ? A. That is true. Q. And in order to determine how much weight we must give to it we must arrive at a conclusion along the line as to the probability of the extent and duration of the high scale of prices? A. Yes, if you think that prices are going to decline very rapidly after the first of June then you would be justified in not attaching any very great consideration to the price level of May, 1920. But if you were going to follow economic and financial history on the basis that the future may be judged from what has happened every time in the past when the same forces were at work which are operative now, you would probably not say that the price level of May, 1920, is the one to be considered but an average of several years prior to that time, which will probably reflect the average prices for four or five years in the future. If it developed subsequently that an error had been made, the commission with its present powers could promptly correct it. Q. Would you say as the result of your studies, look- ing forward for a period of 10 years, at least 50 per cent, of the effect of this abnormal increase in prices will persist? A. I think so. I think that is perfectly safe from the history of the past in England and this country. Individ- ual cases will be greater than that. For instance, food prices are going to be higher next year than this year. Labor prices will in some industries tend downward and in some others they must necessarily be high because 433 they must earn enough to buy their food and clothing at the prevailing prices. Many industries like the automo- bile concerns and automobile accessories will experience a sharp decline in their business before very long. The cotton and woolen business, the shoe industry, the mill- ing business and the lumbering industry and iron and steel will remain very active. The average level of wages will probably not go down for 10 years. Judging by the period following the Civil War, wages will remain on a relatively high level for a considerable period of years. In fact, such level will probably be retained until we have a severe and long drawn out business depression, of the early coming of which there is as yet no evidence. Commissioner Lucey : Of course, as long as wages stay high and the returns in the industrial field remain as much as they are now, whatever the ultimate cost of the product may be, if there is a lot of money coming in, these increases will not attract the attention that they will attract when labor prices go down or whether as the result of an industrial depression men are out of em- ployment and are unable to secure it. If under those circumstances from a restriction of the credit circulation money remains as valuable as it is today the utility will require virtually the same rate of return to keep step with the restricted value of the money. The necessity of the increased prices on utilities especially in the large cities, it seems to me, is going to produce a decided industrial disturbance. For instance, take a city like New York. While the street car rates may be eight cents there in New York, while men are making five or six or seven or ten dollars a day they won’t pay any attention to the fact that the rate has gone up from five to eight cents on the street cars. A. That is true. 434 Q. But if those men are out of work and can’t get their seven or eight dollars per day or any other price per day, won’t they watch those street cars go by and* think of the day when they paid only five cents and be dis- satisfied with paying eight? A. Before they do that they will think of the thousands of dollars thrown away on non-essentials during the past few years ; but there is nothing to indicate that 'wages are going down. There is going to be a shifting of em- ployment. Those men will be thrown out of employment where they are engaged in luxury industries. There is a demand for labor on the small farms and in the small cities which runs into the thousands simply because the whole labor structure of the country was upset by war conditions. The great bulk of the labor is in the wrong place, and the only way to get them to go back again where they economically and socially belong is to make it impossible through these economic forces to employ them in the luxury industries where they are an over- head expense on the whole public. And if they are out of employment and have no income in the large cities but income enough awaits them in the small cities, they will in the course of a year or two years gradually go back, and the movement of population before long will be away from the large manufacturing centers, back to the small towns and the farms. Those who are still working in the large cities will continue to draw large pay, and at the same time will greatly increase their efficiency in order to retain their positions. Wlien street railway costs are reduced, the reduction in street car fares may also be expected. Such reduction, however, should not be made merely because of complaints which are not justi- fied by the facts. Q. Has there ever been any return of what population 435 lias Hocked to the large centers for industrial ^rea- sons, has there ever been any record of any return to the rural sections and the smaller cities? A. Not in the United States because this country is still too new, unsettled and undeveloped economically. That has been true in several European centers where . there are several well marked movements. Those swings come probably only once in a century. We are experienc- ing it now. Our cities are over-developed as compared with the farms. We will have an acute shortage of food products according to all indications this fall, because there is not enough labor to produce, — there are not enough acres being put under production, there are not enough men and we have an excess supply in the cities. The best way to bring them back is through the play of economic forces. The community which can offer em- ployment and food will take men from the larger com- munities which can not. Just as the cities took the men away from the country, so the country will now have the weapon and take the men away from the cities, and each will be benefited by the change. Q. Will that change come about in an orderly man- ner? A. I am afraid not. It was not developed in this coun- try in an ordinary manner, and I would not be at all surprised if there were some unpleasant features and dis- turbances in our large cities before that movement is fully under way. Men don’t like to go back to the small to’wns. It is pleasanter in the big cities. It is a slow process but nevertheless it will be done because in the last analysis economic forces will govern regardless of individual wishes and inclinations. Chairman Wilkerson : Did you have any further ques- tions, Mr. Alschular? 436 Mr. Alschuler: No, sir. Chairman Wilkerson: Does any one else have any questions to ask Mr. Hagenah? (No answer.) You may call your next witness. R. V. Prather, called as a witness on behalf of the utili- ties, having been first duly sworn, was examined in chief by Mr. Alschuler, and testified as follows: The Witness: B. V. Prather, secretary Illinois Gas & Railway Association. At the former hearing of this matter before the Commission in Springfield estimates were made by some of the witnesses as to the require- ments of utilities for the next two years. Since that time a questionnaire was prepared and sent to the 168 electric companies, 71 gas companies, 71 electric railway companies and 46 water companies. Mr. Alschuler: Mark that Prather’s Exhibit 1, — Whereupon said document, so marked for identifi- cation ^‘Prather Exhibit 1” is hereby made a part of the record in this case. Prather Exhibit 1. The information requested will not be made public as to your Company, but will be added in grand total of all Illinois companies. Questionnaire. ILLINOIS STATE ELECTRIC ASSOCIATION ILLINOIS ELECTRIC RAILWAYS ASSOCIATION ILLINOIS GAS ASSOCIATION 1. What is the amount of expenditures made by your Company up to April 1, 1920, for which bonds, stocks, notes ot other se- curities have not been sold! In other words, what amount of financing would be necessary as of April 1, 1920, to take care of all past capital expenditures! $ 437 2. (a) What is the total amount of refinancing between April 1, 1920, and December, 31 1921? $ (b) What was interest rates on securities to be refunded ? % 3. What are the minimum requirements for additional capital expenditures between April 1, 1920, and December 31, 1921, in order to continue present service? $ 4. Providing you are able to finance yourselves, what capital expenditures should be made between April 1, 1920, and December 31, 1921, in order to give the proper kind of service and put the property in such shape as would ordinarily be considered practica- ble, provided satisfactory means for financ- ing could be found? $. 5. What additional capital expenditures be- tween April 1, 1920, and December 31, 1921, desired by communities would you be wil- ling to make, if your return on present in- vestment and means of financing were sat- isfactory? $ Note, — Where data is asked above covering period April 1, 1920, to December 31, 1921, please divide if prac- ticable, giving data for period from April 1, 1920, to De,- cember 31, 1920, and from January 1, 1921, to December 31, 1921. Name Company. By The Witness (continuing) : — in the state outside of Chicago requesting certain information as to the amount of expenditures that had been made for which bonds, stocks or other securities had not been sold, the amount of refinancing and the minimum requirements for addi- tional capital expenditures to December 31, 1921. We at- tempted to get this separate as to 1920 and 1921, but the data didn’t come in so it could be separated. The 438 amount of financing necessary to give the proper kind of service and put the property in such shape as would be ordinarily considered practicable and what additional capital expenditures desired by communities the compa- nies w^ould be willing to make if satisfactory financial arrangements could be made, and the rate of interest on securities to be refunded. We didn’t get as many answers possibly as we should have. We got about 40 from all of them. From these answers, from 40 gas and electric companies, 12 electric railway companies and five water companies I have made a tabulation showing the requirements to December 31, 1921, as to the companies reporting only, minimum re- quirements which absolutelv must be met, $60,640,524.21. Mr. Alschuler: Have you stated here how many of these questionnaires you sent out, how many ditferent companies? A. Yes, sir. If you will recall, Mr. Denman, presi- dent of the Electric Association, made an estimate that there was fifty million required for the electric compa- nies alone. From the forty electric companies answering this questionnaire it shows $54,411,000. The amount of financing necessary for continued normal operation is $106,501,120.50. The amount the companies would be willing to spend if satisfactory financial arrangements could be made, — this only including what the operators recommend spending, not all that the communities re- quest,-— $124,823,275. The tabulation also shows that the interest rates on securities to be refunded during this time run from 5 to lOi per cent., with an average of approximately 7 per cent. None of these figures include anything for tele- phone companies. That has been compiled separately. Also at a former hearing reference was made as to 439 the amount of utility securities other than railroads held by insurance companies, and from the latest data we are able to get any information on in this matter, insurance companies hold approximately $370,000,000, national banks approximately $296,000,000. We were unable to secure any data as to the amount held by state, private or savings banks or by trust companies or large es- tates. Commissioner Lucey: Is that in the country at large! A. That is in the United States. Q. You don’t specify as to what kind of securities those banks and trust companies hold! A. I was unable to secure any information other than the totals of the securities held other than railroads. • Q. The total is something over five hundred million! A. About $646,000,000. That does not include savings banks. We couldn’t get any information on that. Mr. Alschuler: That’s all. Chairman Wilkerson : Call your next witness. J. G. Mitchell, called as a witness on behalf of the utilities, having been first duly sworn, was examined in chief by Mr. Alschuler, and testified as follows: Q. Your name is, — A. J. G. Mitchell. Q. You are the secretary of what association! A. Illinois Independent Telephone Association. Q. Mr. Mitchell, have you made a compilation, or rather compiled statistics of information you have re- ceived in response to a questionnaire sent out by the telephone companies! A. I have. 440 Q. Will you give us the result of that? A. In co-operation with the work of the office of Mr. Prather, an identical questionnaire was sent out on the mailing list of the Illinois Independent Telephone Asso- ciation, and it was also sent to the Bell companies in the State of Illinois. The questions are identical with the questions sent to the electric light companies. Approxi- mately 200 questionnaires were mailed and 51 answers were received. The tabulation of the answers is as follows: Mini- mum requirements for new capital consisting of the sums reported in answer to questions two and three on the questionnaire for all telephone companies reporting, $35,- 468,241 ; necessary for continued normal operation, being the sum of the answers to questions one, two and three on the uniform questionnaire, $86,467,940; amount com- panies are willing to spend, being the sum of the answers received to questions one, two, four and five, $122,990,- 640; amount required for expenditures for service de- sired by comi^unities which operating companies would recommend,' being the sum of the answers to question No. 5, is $36,522,700. The latter amount is the sum of the answers given to a question which calls for the ad- ditional amount of money that would be expended to meet the requirements of the communities served and which would be recommended by the operating companies in- volved. About 200 of these questionnaires were mailed and 51 were returned. Q. Is that all you have to say, Mr. Mitchell? A. Yes, sir. Mr. Alschuler: Any questions from the Commission? Chairman Wilkerson: Any questions? That’s all. This exhibit is introduced by Mr. Mitchell. Whereu^non said document, so marked for identifi- cation ‘‘Mitchell’s Exhibit 1,” is hereby made a part of the record in this case. 441 Edwin E. Jones, the mayor of Bloomington, made the fol- lowing statement: Mr. Jones: Gentlemen of the Commission, — Chairman Wilkerson : Your full name for the record, Mr. Jones? Mr. Jones: Edwin E. Jones. My purpose, gentlemen, in appearing before your Commission is to say a word AAuth regard to service of public utilities. I take it that the public are willing to pay a fair price for good serv- ice. They have built up their home conditions upon the service of public utiliti(^ and are willing to pay it, but the public mind is not in position to meet what you gen- tlemen have had given to you this morning from the first gentleman that appeared before you, and it is for that reason that the utilities are appealing to you for better conditions than they are being allowed at the present time. I personally have been opposed to this great proposi- tion of most of the city officials of the state in regard to home rule, for municipal control of public utilities because I believed tliat the public were not in position to know the real facts and were not willing to weigh them as they should be weighed, and I am sure you gen- tlemen get the real facts before you, and when that proposition has been brought up I have defended the public utility commissioners because I knew that they knew the facts; and I am not here to tell you anything about what you should do, but I am here to say to you that you are in position, better than the public can be, in knowing what should be the conditions and what should be allowed public utilities in the operation of their plants. What the public are insisting upon is good service 442 at a fair rate of compensation. That, I take it, is the purpose of these hearings. You hear the one side, you hear the complaints of the public. I am just here to say in your behalf that you are in position to know what should be done and that I as a public official am here to stand back of you in doing what you believe is your duty from the facts before you and from the presentation of the statistics. I don’t know that I have much more to say, only that the one thing that the public wants is service and that is what they are insisting upon, and it is only fair that a utility should be given a fair compensation for the rendering of that service. Commissioner Lucey: Your belief, Mr. Mayor, is that the public would take these increased rates, if increased rates are necessary, with much better grace if the service was kept up in first class condition I A. Every time, yes, sir. Q. Wliich is theoretically, as a matter of fact, what the public are entitled to. A. Yes, sir. Q. The question of home rule that you speak of is un- doubtedly the trend that the municipal opinion takes when they find that service is not up to the standard which it thinks it should be, and they see the increasing cost of the commodity going on and their natural conclu- sion is, something is wrong and they don’t know just what that something is and they would like to take ahold of it in order to adjust it themselves. A. From my experience as a city official I know that the utility board can handle those questions a great deal better than the public can knowingly. I don’t want to take your time any further. 443 Q. The character of these questions, as you see them here, Mr. Mayor, are such, are they not, to indicate to you that the public scattered through the vast number of municipalities in this state vdth different ideas, differ- ent interests and sometimes with one utility operating in 148 communities, doesn’t it impress you as an almost absolute impossibility that the idea of home rule can be made applicable to utilities in that condition! A. That it can be! Q. Is it your idea that it can be made applicable to those, — A. No, sir, I don’t think so. Q. But, as a matter of fact, it requires a state com- mission or some kind in order to do so! A. It certainly does. I think in the smallest com- munity it requires it to be fair between the utilities and the public. That has been my position all the time. Chairman Wilkersoii: Have you given any thought to any method which might be used to give to the public ac- curate information on a subject as to which they have had practically nothing but misrepresentations for a good many years! A. Only the thoroughest investigation. Q. I mean by that, have you given any thought as to whether or not there is any practical way of making the people understand just what the facts are about this sit- uation! A. No, it is a very difficult thing to make the public understand those things which they don’t want to un- derstand. There are so many of the people are biased in their opinion, — so biased in their opinion that they will believe sometimes a statement that is not based on facts, 444 is the trouble. So the public is appealing to you, that is, the business public is appealing to you, to this com- mission, to do the right thing. Q. Is there anything that could be done in the cities themselves to bring accurate information on these sub- jects before the people? A. Publicity is all. Commissioner Lucey: The publicity, Mr. Mayor, that would tend to show the necessities of the utility in that community and its desperate condition for funds with which to pay increased wages and increased operating expenses and to capitalize its business, the publicity which would try to be of any value, would have little weight against the arguments of some fellow who was going out on the stump every night and talking in the different wards and making his campaign on the simple fact that the rates had been raised and, of course, from improper motives according to his argument. It is hard to get the real facts to a public that are being misled by somebody who is seeking to profit by the misleading information which he is peddling. A. I know that is the truth, and I say, by the most thorough investigation, that is, reports and valuations and everything to be presented to the public, it could not be denied, — the only facts that could go to the public, and then they would be denied, I realize that too. Q. But they would be strenuously denied? A. They certainly would. Q. And in our day and generation the newspaper which was designed to be the director and educator of the public as to information rather falls in the wake instead of being out in front? 445 A. Yes, sir, I know that. Chairman Wilkerson : Do you think that the people in this state who are opposed to confiscation have lost all their influence with the newspapers? A. I don’t think so. Q. They appear to have lost a good deal of it with some of them. Q. That is certain. I wouldn’t appear here if I was among that crowd. Q. Do you think if they would really try to bring their influence to hear on newspapers that persist in not telling the truth they would have some influence! A. They certainly would. Commissioner Dempcy: There are places manifestly in this state where by rabid agitation people have been misled to some extent as to the real conditions, isn’t that true! A. That is certain, yes, sir. Q. Outside of those localities, from your knowledge of the people over the state generally, you say they are willing to pay for the service. Do you think that they are alive to a reasonable extent to the real situation and the demands that will have to he made upon them before this situation eases down! A. No, I don’t think the public are educated to just the exact conditions. Q. You don’t think so! A. I do not. Q. I believe you said in answer to one of the Com- missioners, you have no suggestion to make as to how the people might be informed, might be advised as to how 446 this real situation might be brought to. them as a live matter. Did you make any suggestions along that line at all? A. I have heard more this morning, that is, in a real, practical way, as you men have heard, and I only got part of it, but if the public today could have heard what you have heard this morning, I think they would do more thinking than they have ever done along these lines. It is just simply because they don’t know conditions thoroughly. Q. Personally I think if some means could be adopt- ed and effectively carried out it would be a very im- portant step, and would result in a great asset to the pub- lic utilities and those who are trying honestly to give the best service within their power in the different communi- ties. A. It was during the war period when rates were advanced without thorough investigation that the public in general got an idea that the utilities board and the utilities in general were being favored and the board were not paying as much attention to the rates as they should. They thought they were getting beaten in what was being done and they got rather a bad impression. It is those things we have got to overcome. I realize those con- ditions as thoroughly, I think, as anybody and it is those things that have brought the public up to where it is now, and it is only by thorough education and knowing the exact conditions that the public would submit to these things, that is, the public in general, but the business public are demanding that they have service, and serv- ice, I take it, is one of the great arguments that any utility is going to have. If they are put in the position where they can’t give service they are going to be con- demned continually. 447 Mr. Alschuler: Mr. Jones, you, of course, realize in the matter of giving service there are a great many troubles that utility companies now face. For instance, the matter of the difficulty in obtaining coal, the difficulty of obtaining money! A. I realize that. Q. And with those difficulties removed, of course serv- ice can be bettered. A. A good deal better, yes, sir. Chairman Wilkerson : Do you not think that in every municipality in this state there are business men of the community who are interested in the fact that there shall be no breakdown in the service, and they would do a very good work if they would take it upon themselves, if they would see to it that accurate information is brought be- fore the people in their respective communities! A. It is very important and they could do a very good work along that line. Q. If the men who know the facts and who know what it would mean to the community if there were a break- down in the service would take it upon themselves to do that and do it systematically, — A. Yes, sir, I believe that is true. Q. You think that would be a good plan! A. Yes, sir, I do certainly. Q. After all it is really their problem, isn’t it! It is the problem of the business men themselves who ap- preciate what would happen if there should be a break- down in the service rendered by these utilities! A. Yes, sir, it is their community problem. Q. And they ought to handle it! 448 A. They ought to handle it, yes, sir. Q. And they should deal with these gentlemen who are misrepresenting the facts and they should see that accurate information is brought home to their people? A. Yes, sir, and they should sustain you gentlemen in whatever your position is in regard to the utilities ; I believe that. Chairman Wilkerson: I believe that is all. We will take an adjournment until 1 :45. Whereupon the hearing was suspended till 1 :45 p. m., same day, same place. Springfield, Illinois, May 17, 1920. Monday, 1 :45 p. m. Hearing reconvened. Parties present: Same as before. Chairman Wilkerson : Proceed with the hearing. Mr. Alschuler: I understand that Mr. Hodges, the mayor of Granite City, is here and desires to get away. Chairman Wilkerson: Very well. Bert E. Hodges, the mayor of Granite City, made the fol- lowing statement :‘ Mr. Alschuler: You are the mayor of Granite City? Mr. Hodges: Yes, sir. Chairman Wilkerson : Give your full name to the Ee- porter. Mr. Hodges : Bert E. Hodges. I was selected as one of a committee from the commercial club to come before your honorable body and give a brief outline of the ne- cessity for utility extensions and service there. We 449 wanted to submit a brief and a plat showing the inade- quacy of the service that we are receiving from the pub- lic utilities. Granite City, as you probably know, is the heart of an industrial district. It is probably one of the largest and possibly the fastest growing cities in this section of the country, and it has outgrown the service we get from the public utilities. Now, there is under construction at this time a coke plant there, about possibly a $10,000,000 plant, which will employ 2,500 people, that is practically without any serv- ice in the way of transportation and light, that is, electric and gas, and as you will see on this plat,— this is an older plat, however ; we are having a new plat made now that we will submit to the Commission within a short time. These outlying districts are all built up in the, — into home sites and these people are always complain- ing for service, water, gas and electric, and they are wholly without any transportation facilities at all out in this section as well as over in this part of town (in- dicating on plat), and I as a public official have come, — they have come to me for service and I in turn go to the utility companies and they tell me that they are not in a position to serve. Now, we are not here to suggest a remedy but we are here merely to give a brief outline of what we need and to say to you gentlemen that the commercial club repre- sents the business interests, — it is made up of men that are representative of the business interests of that sec- tion of the country down there and they are willing and anxious to co-operate in any way possible with this body and with the utility corporations to relieve this condition there of the inadequate service. We realize that it is a town that is growing and has grown so rapidly in the last 10 years that it is absolutely essential at this time that 450 we have these extensions made for the future growth and industrial development of our city especially in that sec- tion of the city alone, that industrial district on the east side of the river, what we call the great east side. Commissioner Lucey: You need additional facilities, Mr. Mayor! That is what you want! A. Yes, sir. As I say, this part of the map where you see these different plats of grounds, is all built up into homes, and is now in most cases without, — Q. Isn’t there a street car line up here on Madison avenue ! A. Yes, but that is a one track interurban line and it has practically no service. Q. That is the only thing you have in here! A. That is the only thing we have in there. Q. That is the road out to, — where does that lead to from there ! A. Madison avenue! That goes into Alton. I have with me on this committee Mr. Masserang and Mr. Bar- ney, who I would like to have go into details with your board here. They can give you probably a better idea of the inadequate housing conditions we have there and the inadequacy of the service that our homes are receiving from these utility corporations. Chairman Wilkerson: We would be pleased to hear from those gentlemen. Mr. Alschuler: I was going to state, they are not in such a hurry to get away and there are some other gentle- men we would like to present first, and Mr. Hodges wanted to get away. We have some other gentlemen here who are anxious to get away and we would like to put them on at this time. 451 Chairman Wilkerson: Very well. This may be ad- mitted as Hodges’ Exhibit 1, and this map as Hodge’s Exhibit 2. Whereupon said documents, so marked for identifi- cation respectively Hodge Exhibit 1” and ‘‘Hodge Exhibit 2” are hereby made a part of the record in this case. V William R. Compton, called as a witness on behalf of the utilities, having been first duly sworn, was exam- ined in chief by Mr. Alschuler, and testified as fol- lows : Q. State your name, residence and your business or occupation. A. William R. Compton, St. Louis, president of the William R. Compton Company, investment bankers, pres- ident of the American Trust Company, St. Louis. Q. How long have you beeii engaged in the bonding and banking business! A. Thirty years. Q. Mr. Compton, liave you had exhibited to you this question in the questions to bankers! A. I have a copy before me. Q. And that is the general question wliich was sub- mitted to bankers previously at this hearing, — at the pre- vious hearings! A. Yes, sir, I believe so. Q. Will you please give your answers to those ques- tions, Mr. Compton! A. What is the situation with reference to the de- mand for capital by industrial concerns and public utili- ties! There is hardly a public utility company in the country, I presume, that is not earnestly seeking for more capital. During the war they were prohibited from seek- ing for capital and the population has grown consider- ,ably in the interval and now comes the time when they should adopt a program of expansion and where the cost of money is almost prohibitive. I was very much interested last Saturday in listening to an address of Daniel Willard of railroad fame, an argument that he presented for increased tariffs for rail- roads. He mentioned an issue of securities which has been recently offerred in this country by American bank- ers, that of the Canadian Pacific Railroad. He stated that he was somewhat startled to note that the Canadian Pacific Railroad was able to obtain capital in America at a less rate of interest than American railroads, but after thinking this over he realized the reason. The Canadian' government during the war had allowed its railroads to increase their taritfs to a point where they could not only take care of operation and maintenance, interest on obligations, but also enabled the railroads to pay the same dividend rates which they had been accus- tomed to paying in pre-war times. As against that American railroads had not been allowed by our gov- ernment, either wisely or unwisely, similarly increased tariff rates, the deficit having been paid by our govern- ment and the costs saddled on the American people, the net result being that the Canadian railroads had their credit maintained and the credit of the American rail- roads was destroyed. Therefore the American people believed that the Canadian railroads would be able not only to take care of their interest charges but create a margin of safety for the protection of the principal. I think somewhat similar conditions could be applied to our public utility companies in America. They have 453 not been able to earn a fair rate on the invested capital and I might say along that line that the idea of issuing credits for capital, that is, evidences of debt, notes, bonds, mortgages and so forth, is all right up to a cer- tain point, but capital should be invited in as partners. In other words, additional stock should be issued and sold to the public, and it can only be sold if that stock is entitled to and does earn a fair interest return. As to the cost of present day financing much testi- mony has been submitted to you. My own would only be a repetition. I can, however, recite a number of illus- trations of the cost of financing of important industries in the last month or two. The Western Electric Com- pany with 25,000,000 7 per cent, notes maturing in 1925. They were offered on a 7.35 basis or a price of 984. Now, on financing of this character it is necessary to find some group of bankers who will take the commit- ment, and that group of bankers must, of course, be paid a profit. Moreover, in the distribution it is necessary to organize a sub-syndicate consisting of the dealers through- out the country and they must be paid and paid well for their services. It is fair to assume from my experi- ence in financing of this character that the Western notes did not bring the company over 944, possibly not over 94, which would bring the cost of the money to 8.40 per cent. The Anglo-American Oil Company, 15,- 000,000 financing cost about 8.60 per cent.; the Union Electric Light & Power Company, two and a half million, cost about 8.80 per cent. ; the B. F. Gfoodrich Tire Com- pany, thirty million, cost about 8.70 per cent. ; the Asso- ciated Simmons Hardware Company of St. Louis, seven and a half million, about 8.80 per cent. Commissioner Lucey: You are not giving now the re- turns to the investor? • ' 454 A. No, sir, I am giving the cost to the company. The Southwestern Bell Company, which is a case in point, a syndicate in which I was largely interested, their financ- ing cost about 8.75 per cent. These are all well-known companies. The lesser companies are finding it extreme- ly difficult to obtain money on any basis at all, and some financing of smaller and less well-known concerns is cost- ing as much as 10' and 11 per cent. During my business life I have been a very extensive dealer in municipal bonds. They have enjoyed great popularity during the war period on account of their freedom from the income tax. As an illustration, how- ever, of the cost of financing to municipalities I have numbers and numbers of issues of municipal bonds which I could offer to yield 6 per cent, and they are practically going begging on this market. As against that but a short year ago these same securities would have prob- ably been selling on a 5 per cent, basis. I have obliga- tions of as great a state as the State of Minnesota which I can offer to yield 5.40 per cent. I don’t think there is much else that I have to say at the present time. My mind reverts to an old quoted statement by a railroad man many long years ago in which he was said to have said at least : ^^The public be damned.” And I am of the opinion that now it comes to the point where the public is saying to the utility companies that they he damned ; and until the two crowds get together and realize that invested capital has rights and that capital can not be attracted except it be shown that it is safely employed and has more than a rea- sonable chance of a safe investment, — not only the pay- ment of interest but principal as well. The public utility companies can not expand. The mayor of Bloomington, I believe, was here this morning 455 and said that what the people wanted was better service. That is true. That is what they want and what they should have and what they demand, but I believe on the other hand the public utility companies in general are trying to be good, that they are trying with the service that they are able to give to do well by the public. If they are to give better service they must have more money for betterments and for expansion, and this can only be obtained at a considerable cost and it can only be obtained if the public service commissions are willing to protect that capital through the advancement of rates from time to time as the cost of operation and the cost of capital increases. I am a firm believer, moreover, in something that spells a perpetual franchise. I don’t believe that capital to any extent can be drawn into public service companies where franchises are limited to a term of years. This is a matter that will have to be very carefully worked out Commissioner Lucey: You know they have that pro- vision in Wisconsin and in Indiana in a modified form? A. Yes, I know they have. Of course, we have the same troubles in Missouri that you have here. I might say that I am not directly or indirectly connected with any public service corporation in the State of Illinois, nor do I know that I have been largely instrumental in financing any of them, so my testimony is simply gen- eral in character. If there is no question you would like to ask me, — Q. In your statement about the cost of financing these different institutions, your mentioning that some were utilities and some were industrial companies, in your mind simply proves the fact that the utility, if it is going to be financed at all, must meet the competition of the industrials for money in the money market? 456 A. That is exactly it. You pick up a statement or a circular describing an issue of industrial bonds and most bankers like to state in those circulars that the interest charges are earned three or four or five or seven times over. Q. At least they want to say twice over? A. At least twice over and twice is a very, very small margin. I know of one industrial company that we have financed to some extent, — they need a million or two dol- lars more of capital now and they can’t show interest returns on that capital of more than two times, and we feel that it is, or was utterly impossible to provide them the capital, that there is so much competition by indus- tries who can show two and a half and three or more times that it would be impossible to secure that money for them. Now, the public service corporations are barely ex- isting, simply taking care of their interest charges and struggling to do that. It is not very attractive to the investor and we can’t compel capital to undertake any particular form of investment. There seems to be in the public mind some thought that the owners of public utility corporations are possessors of colossal fortunes and they are eager and anxious to dump more money into the properties. They forget that those securities have to be sold to the investor. As a matter of fact, they are not a class of security which is inviting to savings banks, to large estates or to life insurance companies. It is an attack on an army of rather modest size investors and they are discerning like any one else and when they dis- cover that the attacks are being brought on these prop- erties, that they are not earning their interest charges, that many of them are going into the hands of a receiver, it naturally causes a great distrust. Chairman Wilkerson: Call your next. Bkeckeneidge Jones, called as a witness on behalf of the utilities, having been first duly sworn, was examined in chief by Mr. Alschnler, and testified as follows : Q. Will yon please state your name, your residence and your business^ A. Breckenridge Jones, St. Louis, president of the Mississippi Valley Trust Company. Q. How long have you been engaged in banking, Mr. Jones? A. 30 years. Q. Mr. Jones, you have had submitted to you this question entitled, ‘ ^ Questions to bankers, ’ ’ have you not? This was prepared with special reference to the City of Chicago and they changed Chicago to St. Louis, and if you will please answer that and make such other state- ments concerning the situation as you may care to? A. There are a few general statements that I should like to make. When I Avas invited to come here I noted down some suggestions I wanted to make. Q. Go ahead, Mr. Jones. A. Your first question refers to industrial concerns and the demand for capital by industrial concerns and public utilities. This brings at once to my mind the dis- tinction between them, as to why it has been more diffi- cult to get money for public utilities than to get it for industrial enterprises. One of the reasons why securities of public utilities are discriminated against is that in individual enterprises the amount of earnings is not fixed. The price at which the product may be sold is not fixed. The selling price 458 of the product can respond to the cost of production. This response can be along natural lines and at natural times. The individual enterprise is not the football of politics, nor is it the subject of attack by organized and individual self-constituted public critics and sensational newspapers. The individual enterprise does not have the scope of its activities and the period of its extensions fixed in a franchise. In an individual enterprise the investor has some chance to get his principal repaid. In the case of public utilities the courts and commis- sions will place the maximum rate of return on the value of the property now in use by the public. There is no assurance that the investor will get this maximum, which has never been more than the ordinary reasonable rate of return that an investor can get in a real estate mortgage or other open market investment. This maximum rate is subject to all the contingencies of the business, strikes, damage by mobs, explosions, radical or unusual improve- ments or discoveries, for example the change that comes from a horse car system to cables with their conduits and steam power houses, then the change from cables to the trolley system with the electric power houses, the abandonment of the old conduits and the revolutionary changes in the power house. Then there may come a change from the central power house to a storage battery, from an electric power house to water power. The al- lowed depreciation charge does not take care of these ex- traordinary obsolescences. This maximum return is but a reasonable interest return and provides for no amorti- zation of principal. Some time ago I glanced through Whitten’s valuation of public utilities containing the decisions of the courts and commissions, and I do not recall that in a single 459 instance was there even a reference to amortizing the principal, and yet in most of the states the public utility is operating under a franchise that limits as to time the number of years that the company can operate under the franchise. At the end of the franchise what has become of the principal! The company is not allowed enough to pay interest and provide for a reduction of the debt from year to year. In real estate mortgages and industrial enterprises serial payments are frequently required and the security is becoming better from year to year. And then the investor usually prefers a closed mortgage. In a real estate or industrial plant mortgage the debtor has provided all the money that he expects to borrow. He can measure the extent of his needs. Who can measure the financial requirements, — capital requirements of a public utility! If it doesn’t need money for extensions and betterments it is either in dead hands or is located in a dead community. And even if there be a closed mortgage on the public utility that very restriction usually throttles the company. There then comes along first mortgages on separate extensions, unified and consoli- dated and refunding mortgages, and so on and so forth, and when the company can not meet some of the under- lying liens and can not sell its consolidated or its refund- ings because for some reason, bad management or an attack on the property by reason of an approaching municipal election or a reason connected with that par- ticular corporation or possibly by reason of some out- side general situation in no way connected with that par- ticular property, such as war or other conditions which produce a panic or a monetary stringency, a receiver is appointed, and the bonds are foreclosed and the property covered by the mortgage is sold. 460 Now, the system must be preserved. The public in- terest comes first. The bondholder must take his chances in reorganization. I mention these matters not to show in various instances they are wrong but to show that there are considerations that make the investors at times shy about buying public utility securities, and to demon- strate that if the public is to get the service the Com- missioners must grant rates that will produce sufficient return to enable the companies to raise the money. You can fix the price of labor but you can T make a man labor and you can fix the price of capital but you canT make the capitalist invest. The public want the service, that is true. Many times we have had low rates, but it is not the low rate so much as the service that the public want. The government took hold of the railroads. We have had an Interstate Commerce Commission in charge of them for years fixing rates and presumed to make them fair, but as soon as the government came to operate them and they realized the situation they found that they couldnT be operated for what the Interstate Commerce Commission had allowed; it is estimated now that the loss of the government in the operation of the railroads will be about $2,350,000,000. It is the same with the public utility. It has become known and well known as to the railroads, but the public utilities have been starving just the same as the steam railroads were starving. The government came to the relief of the one. It has not come to the relief of the other, and your public utilities have not been enabled to make the extensions, have not been enabled to make their improvements and they have been going through this pe- riod of very high prices, high cost of production, higher everything that they had to buy, on a fixed rate, and that rate has not responded readily. It is not like the indus- 461 trial plant, in that when the owner finds his cost of pro- duction is going up he can put the price of his finished product up and compensate himself. The public utilities have been going through a term of years during which in comparatively few instances have they had relief by an increase in rates, but have been dependent upon the reserve that they may have accumulated through other years, and they have gotten in this position, to use a Biblical illustration, where the lean cattle have eaten up the fat cattle, and now you are still in the period of star- vation and there are no more fat cattle for the lean cattle to eat, and the public will not get the service. Commissioner Lucey: Maybe they didn’t store up in those fat years. A. No, they didn’t because the public utility com- missions don’t allow them to store up. The decisions of the courts allow them only enough to live on and do not allow them to store up anything. I am glad you made the suggestion because there is a perfectly good reason why, and I don’t know of any public utility that has had seven fat years that it could make enough to carry it over seven lean years. Q. In the comparison, Mr. Jones, with the industrials, the fact should not be lost sight of, and I don’t imagine you have, that the industrial companies are subject to many conditions that the theory of regulation is supposed to protect the utility from. A. Yes. Q. That the utility has virtually a perpetual license although it has got apparently a limited franchise; the commission is supposed to furnish it a fair rate of return and allow it operating expenses and depreciation aud so forth. There isn’t anybody guaranteeing that to the 462 industrial. The industrial may go down in a panic and lose not only its investment but the whole institution may be lost. Now, the law provides for the protection of the utility. Maybe it isiiT getting the protection it is en- titled to but it is protected by the law against that con- dition of atfairs. A. I am glad you have suggested the theory of a pub- lic service commission, and the presumption, — I think you are right in both instances, but I submit. that the theory has not been carried out and the presumption is not justified by the results. Speaking generally now as a proposition, and I don’t mean, of course, anything re- flecting personally on this Commission, and you may take the illustration of what occurred with the Interstate Com- merce Commission of which by reason of its prominence and continuation in office so long, ought to be the best reg- ulated of them all, and yet after it had had charge of the railroads for a term of years, when the government came to operate them it found that it could not operate them two years and a half without a loss of two and a quarter billions of dollars. If the public service commissions acted as in theorjq and could respond promptly to conditions as they arise, all right, but I take it, — I presume in the very nature of the case that you are flooded with special requests each one of which would require an enormous amount of work, and all put together would take you years to work out. In the meantime your seven lean cattle have starved to death after eating up the seven fat cattle, and the very point that I raised there is that in a private enterprise there is an immediate response, a natural response, in- creased cost of the product when increased cost of pro- duction comes, but it takes years to bring it about with a public utility. It would take you immeasurable time if 463 you had to take up every individual utility in the state and pass on its individual merits. No. 69 or 129 would be dead before you got half way to it. Q. Well, now, without interrupting you, in the last year or two this Commission has handled nearly every utility in this state and with most of them has granted relief. We anticipated the situation before the cases finally arrived at a final settlement. We operate under temporary orders, so-called, by which we grant relief as things go on, as times goes on, until the case is finally settled. I say, we have stepped into the breach, this Commission has, and I think nearly all the com- missions throughout the country have met the situation by granting so-called emergency relief measures until the facts could be determined. I don’t mean that the utilities have been satisfied with the relief granted, but they are not in the same position, of course, as the in- dustrials that can change their rates over night to meet the shifting and varying economic conditions. The utili- ties have taken longer it is very true, but I think without the protection of the utility commissions throughout the states, throughout this state and throughout other states, that the troubles that the utilities are suffering from would have been passed by and they would have been laid away at rest and their troubles would be over. A. I agree with you entirely. General, and I am a hearty endorser of the public utility commission which is the only thing that gives the public utility any protection. I am making no reflection on your situation here, I am simply making a general statement of what the public generally finds. They find a big public utility in one of the large cities. The public see it in print that it takes a year to make a valuation. In the meantime the investors 464 in that enterprise are anxious, they don’t know where they stand. As a banker, I am only giving you the kind of things that I come in contact with where I handle pub- lic utility securities, and it is material. We can sell indus- trial bonds much quicker because this maximum allow- ance that you are allowing, — if that was a guarantee it might be one thing, but it is not, and, as I said, all of these extraordinary things, all the obsolescences that come from great improvements in the art are not cared for by your depreciation charge. I know that has been the experience of the public utilities I have been connected with. Q. Of course, you found too that as testified by some of the bankers in Chicago last week that you have bought public utility bonds at par or at close to par in the times when conditions were normal and now when some of the customers come in to realize on them they find that they are worth 60 or 70 or 80 or some such percentage way below what you sold it to them for. Now, the trouble is, of course, that the cities have grown so rapidly that the utility companies sometimes are unable to keep up with them, and the other conditions which you suggested make the utility corporations unpopular by reason of the at- tacks made on them, and naturally prejudice the public against their securities. But do you not think that those securities, Mr. Jones, have the same value back of them, that they are just as good as when you bought them! That is, as a concrete proposition, you can’t sell them, and in that test, of course, they are not as good as when you bought them, but when you bought them you thought they were worth the money you paid for them. As a matter of fact, looking at them now you don’t see that they are Avorth any less money, you think the underlying 465 securities are as good and should be as good in the mind of the public as when you bought those securities ! A. Yet when it comes due you can’t collect it. Q. No. A. You can’t enforce your security. It goes into a general reorganization plan and you are scaled down. It isn’t like a real estate mortgage or an industrial bond, and I think that is a great advantage the industrial bond has over it. I am only giving you from the standpoint of the dealer the kind of things why the public say that they don’t want the public utility securities. Now, I would like to say one other thing if you will permit me. The suggestion was made here this morning as to how you could get the public to understand these things. Now, if you will allow me, in all courtesy I think that is exactly what we have got public utility commissions for. Say I am a business man, and that I have a newspaper and notice that you are attacking the local gas or Union Electric or railways or something and I go to talk to them. What do I know about them? I can’t get the details, but we have a public utility com- mission made up of men of standing and character that hears all sides of the discussion. If the public utility commission when it passes on those companies will make an adequate report as it is usual for them to do and we can get those reports before the public, or if we could get the public utility commission, if it were prac- tical, to go into the various counties where the public utilities are located about which they are passing and have the hearings there, you will have a means of educat- ing the public that does not exist if your hearings are all in the large cities or if your findings are not fully rea- soned out and presented to the public. I believe the pub- 466 lie utility commission is the greatest protection we have and it is your findings as impartial people after hearing all sides, it is your findings we can use as business men in going before the press and helping to educate our pub- lic ; but we are almost entirely dependent upon the public utility commission. Chairman Wilkerson : Assuming that the Commission does these things in the way of assigning reasons for its findings, whose fault is it in your opinion that the situa- tion as to the railroad companies is so generally under- stood by the people that they now view with calmness and equanimity the proposed increase of 30' per cent, in freight rates whereas the situation is not understood as to other utilities? A. Because the public have had it so seriously im- pressed upon them by this condition during the war. The fact that the government has operated the railroads had made it a matter of greater publicity, and the public have found that the government could not do it, that it didn’t have rates enough, and noAv we are suffering from it. We have poor facilities. The railroads haven’t enough equipment, nor sufficient terminals, and if it is tied close up that way now, what is it going to mean to a great agricultural state like Illinois when your crops come to be moved this fall! The public understand that. They have had it harpooned into them, but they don’t feel the same way, — it is rather like the man out in the small town with the public utilities, like the man in Cleveland who wanted to know if he was in favor of the three cent fare instead of five. He said yes. Why! ‘ ‘ Because it is less than five.” All the man at home knows about his local utility is whether the rates are up or down. He wants them down, and we can’t lease that to the general impression of the public any more than I can in my bank in regard to the rate on loans, whether it should go up or 467 down. Every man that deposits money with me says, allow more interest on your deposits. Put the rate up, but the other fellow that borrows says just the opposite. It is the managers of the companies that have got to come in and make the difference, make the line of demar- kation that protects them ; so the public utility commission is the only body we have that would come in, and if it can make its stand positively and fully and fearlessly because it knows more about it than the public and would give its reasons for it, I believe the public as a rule mean to be fair and they will follow the decision of you and support you. There is a disposition on the part of the public generally to support the public utility commis- sions. Commissioner Lucey: Of course, when these commis- sions were created, all along about 1914, they came into power and found divergent conditions and it resulted from the investigations they made they were enabled to lower rates somewhat, which, of course, made them pop- ular with the gentlemen who live in the towns where those utilities operate, but since the war came on the converse has been true. This and other commissions found it necessary to elevate rates and do it rather rapidly and necessarily as the condition of the utility required. That has resulted in this attack on the utility regulatory body, which is a reflection of a prejudice which was in the pub- lic mind against the utility in the first place. They carry that prejudice to the utility commission, and the utility commissions as well as the utilities are still suffering from what for lack of a better term I might say, want of public confidence. A. I might say, if you will allow me, General, that the public utility commission is the one to decide. It has all the information and it can decide what is right and wrong. It does not depend upon whether it has the 468 plaudits of the man in the street and the general public who don ’t pretend to understand it. The intelligent pub- lic will support and follow your position. Q. We have gone on that theory so far. A. There is one other phase, if you will allow me. The question is, how long this is going to last and wheth- er your relief should be temporary or permanent. I think there are certain great fundamental problems, or fundamental abnormalities that are in the situation now that are so distinct and so marked that they make it per- fectly clear that it can not be a temporary situation. We have our government fixed up now spending on the basis of about $7,000,000,000 a year, seven times what it was be- fore the war. That keeps up your high excess profit taxes and income tax. You know that is not going to be changed in any reasonably short time. The government has got out, outside of what it loaned to Europe, $23,000,000,000 of bonds. You know they can’t be retired in a short time. We know that our foreign exchange situation is all to pieces. We had last year four billions of dollars balance of trade in our favor, and we have had a heavy bal- ance of trade in our favor for several years and yet an abnormal situation still exists. We have four billions of dollars owing to us, the balance in our favor and we are losing gold ! That is aifecting the money market and af- fecting prices. Now, rents are high everywhere. You know that it isn’t going to be quickly relieved. The labor situation is all out of shape and though the war is over and we brought four million men back into productive life it is presumed, but the facts are that the physical products it is estimated were 10 per cent, less in 1919 than they were in 1918, and I might go on freely to show you the 469 abnormal situations. Money, — just as much money as we ever had, yes, but it is all used up in credits. Banks, — the situation in the New York clearing house banks is that they have loans and investments of a billion dollars more than their net demand deposits. They have three-quar- ters of a billion dollars loaned out more than all their demand and time deposits put together, — to the extent of about 20 per cent., and it is about the same thing in Phila- delphia and in Boston, and I know of it in St. Louis. Now, those things canT be righted in a short time. We have got our banks loaded up with government securities. It will take time for them to get out and it is not a month’s question or a six month’s question, or a year or two years’ question, it is a great long swing that has got to be made, and these abnormalities can not be straight- ened out in a short time. I don’t want to go into any more detail on that situation and I am sorry that I have taken up so much of your time. Mr. Alschuler: That’s all. Chairman Wilkerson : Call your next witness. Mr. Alschuler: I believe now Mr. Barney of the Granite City commercial club desires to be heard. R. C. Barney of Granite City made the following state- ment : Chairman Wilkerson: You have something to submit relative to the situation in Granite City! Mr. Barney: Yes, sir. Chairman Wilkerson: Give your full name for the record. 470 Mr. Barney: E. C. Barney. I believe it was as to the extension of the electric service and the street car lines and the gas lines in the interest of the commercial club. Chairman Wilkerson : What have you to say as to the necessity for those extensions? A. On account of the growth of the city many new additions are being built up and houses are being built and they are not able to get accommodations from the street car service, electric light service and gas service. I believe those services ought to be granted to them. Commissioner Lucey: You have a street car system there now, Mr. Barney? A. Yes. Q. What fare do you pay on the street? A. There is a service to St. Louis, interurban service altogether. Q. You haven’t an independent street car line in the city? A. No, just a loop around, — ^well, around several blocks one way and several the other way. Q. Do you use that as a street car? A. Yes. Q. What fare do you pay? A. I really don’t know. Q. If you get on the street car and ride five or' six blocks what do you pay the conductor? A. I think it is a nickel, though. Chairman Wilkerson: You had an increase, didn’t you ? 471 A. I really don know. Commissioner Lucey: Do you know, Mr. Prather, what that is ? Mr. Prather : Five cents. Chairman Wilkerson: Wasn’t there some kind of an increase granted in Granite City? Mr. Barney: That was the bridge fare to St. Louis. Chairman Wilkerson: I have a recollection here that they had an increase in fare in Granite City. Mr. Prather : I think he was talking about the trac- tion system, Mr. Chairman. Commissioner Lucey: What do you want in Granite City? Mr. Barney: Extending the loop farther out. Q. In other words, you want to make of this inter- urban street car system, you want to make it a local street oar system? A. Yes, sir, more so than what it is. . Q. No question about the city and citizens being willing to pay a fare that would pay a rate of return and so forth? A. I believe for the service they would be only too glad to pay it. Q. Have you taken that up with the street car com- pany ? A. No, I haven’t. That is from the outlying districts or new additions that have no connection at present. Q. Did you take it up with the street car, — with the utility that will have to take the extension? . A. No, I haven’t taken it up. 472 Q. Yonr commercial club might talk it over with them. Maybe they will put it in for you without getting an order. Chairman Wilkerson: Anything further that you de- sire to submit in addition to the necessity for these ex- tensions? A. There is nothing further. I think Mr. Hodges has submitted about all I know of. Chairman Wilkerson: Any other questions of this witness? If not call the next witnes, Mr. Alschuler. Mr. Alschuler: I believe now Mr.-Masserang desires to make a statement. John B. Massekang, of Granite City, made the following statement : Chairman Wilkerson: Give your full name for the record. Mr. Masserang: John B. Masserang. Q. You are interested in the Granite City situation? A. Yes, sir. Q. Whom do you represent? A. I am manager of the Granite City Realty Company. Q. What have you to submit to the Commission rela- tive to the necessity for extensions to the plants of the utilities in Granite City? A. I am here in behalf of the commercial club and the city in general asking if this commission could be of any assistance to any of the utility companies about making some extensions for Granite City. Granite City has outgrown the extensions we have now such as water. light, gas and street car service. You have got a plat here, but this is an old plat from 1911. It is unfortunate we couldn’t get our new plat done in time to have sent you a copy, but you will see the necessity of getting the extensions made for these districts. Q. Is it the opinion of those whom you represent that if necessary in order to put the companies in posi- tion where they can make the extensions that the rates should be advanced? A. Well, normally, yes, I would, and I think that the people at large would be willing to pay an additional rate so as to get the service. They have no service now at all. They have come before the commercial club many a time for assistance to try and have the commercial club help get behind these various companies and make these extensions. The company tells us they can’t do it under the present condition, and I feel, — I am almost sure, that they would be willing. Of course, it is for this Commis- sion to work out. Q. If you had to choose between a continuation of low rates and an advance in rates with the extensions, which would your people select? A. I would say, give us higher rates and get the ex- tensions. Q. Higher rates and service rather than lower rates? A. Yes, sir. Mr. Alschuler : What company were you referring to? A. I mean now the various companies, — I mean all of them. They are all interested in the same thing. There is no water, no gas ; they have never had street car serv- ice, no light service. It has been all in the same shape. 474 Q. What street oar company is it you want service from? A. Well — Q. The Illinois Traction Company? A. The Illinois Traction Company, I think, would be the proper street car line to make the loop through there as they have already done. I might just show the Com- mission how, — Commissioner Lucey: What is your population there now, Mr. Messerang, in Granite City? A. We haven T got that altogether, but we ought to have about 21,000, and we haven’t had any additional street car service for the last 12 years. Now, then, that is the same thing you see and hear ; the town is growing. W^e are way out here ; this is all grown up here and you can see the position we are in. Our manufactories in Granite City employ about 21,000 people. You can see wdiere these factories are located, and these people from out there have no way of getting to town almost without walking or the interurban, and they don’t stop only over here and that is every two hours, so you can see the posi- tion of the people in the outskirts of the city there. Commissioner Dempcy: The Illinois Traction is the only system that furnishes you with any transportation? A. The East St. Louis & Suburban comes in part of the way, but they don’t come in here out to these people unless they would extend their track out here, but the Illinois Traction System runs way out in here. It would be easier for them to make a loop and come along on their right of way, and also in here in the city loop up to 23d street. You see they have a loop here which they could extend very easily farther up in the north end of town, where the East St. Louis & Suburban only comes 475 to 21st street, and the Illinois Traction runs to 23d street, but from 23d street, and again on out here we have no street car service at all. Chairman Wilkerson : Is there anything further rela- tive to this situation that you desire to submit? A. No; that’s all I think. Chairman Wilkerson: Any further questions from this witness? Mr Alschuler: That’s all. Chairman Wilkerson : Call your next. J. H. Holbrook, called as a witness on behalf of the utili- ties, having been first duly sworn, was examined in chief by Mr. Alschuler, and testified as follows : Q. Will you state your name, your residence and busi- ness? A. J. H. Holbrook, Springfield, Illinois, vice-presi- dent of the Springfield Marine Bank. Q. How long have you been engaged in business as a banker? A. Fifteen or eighteen years. Q. Have you had any connections with any other banks other than the Springfield Marine? A. Yes. Q. What? A. National City Bank of New York. Q. In what capacity were you connected with the Na- tional City Bank of New York? A. Assistant vice-president. Q. Mr. Holbrook, have you had submitted to you this 476 question, entitled ‘^Questions to bankers” that has been submitted to other bankers previously? A. Yes, I had some questions submitted to me which I haven’t before me now. Q. But you have in mind the statement which you desire to make, I take it, in connection with this general hearing we are having here? A. Yes. Q. Will you please make that statement? A. Will you please let me have the first question? Q. Yes. (Handing paper to witness.) A. This first question* refers to the amount of capital demanded by industrial concerns and by public utilities. That demand is unlimited at the present time and has been for a considerable length of time past. Industrial concerns are seeking new capital all the while. They are also endeavoring to transfer their borrowed money obli- gations into fixed capital. Probably this is occasioned to quite an extent by the uncertain conditions of the time, and those that are cautious are seeking to convert that kind of obligation into a fixed capital obligation. The public utility companies have been, seeking cap- ital for a great length of time, and the demand comes from all over the country. When I was in New York, where I was until a couple of weeks ago, we used to come in contact with them to quite an extent. Many applica- tions for funds were presented, but general conditions, affecting these companies made the business unattractive as a rule. One loan was brought out, — on notes, — shortly before I left there, and the rate to the investor was 8^ per cent., and it was attractive. The attraction about it was that the company was in the traction business and 477 the electric business and had considerable business in the way of selling power to private concerns, so that it made it desirable. Those concerns which are doing strictly a utility busi- ness find it very difficult indeed to get any money. In fact, it is almost impossible. They are not showing the earnings that are necessary and the public is not inter- ested in the bonds. There has been a good deal of talk about what the pres- ent interest rates for permanent financing are. In some instances those rates have been to the companies ap- proximately 9 per cent., but unfortunately too many of the companies couldnT get any financing done even if they did pay a 9 per cent. rate. There was no one who would buy the bonds, and it doesn’t make much difference what the rate is if their securities lack a market. The next question is, what rate of return must utility properties earn in order to attract new capital? My view of that, of course, is that they should average at least approximately double the amount of the interest charges, and that is after taking care of the proper de- preciation. That rate of return your Commission would have to fix. It would seem to me that there is a way out of this difficulty. It is true that the utility companies have suf- fered from political attacks of various kinds and a senti- ment has been created against them. Perhaps they de- serve it for some things that occurred in the past, but at any rate the attitude of mind does exist in the invest- ing public that such securities are not safe investments, and that something is liable to happen to them further affecting the values. 478 It has always seemed to me that just such a commis- sion as this one here has it in their power to change that condition of affairs. If it. can get the idea to the public, and it can, that the State Public Utilities Commission is going to regulate rates so that the companies can earn a living income, that is about all the answer that is nec- essary in regard to the securities. If, on the other hand, the State Public Utilities Commission does not arrange for that and the companies are subject to competition and persecution of various kinds, chiefly political, the public does not want to come in and buy the bonds. But I believe as much as I believe anything that the State Public Utilities Commission of Illinois can change the whole situation in regard to utility companes financing, and that, of course, is what I would be glad to see done. The next question is, would living conditions and the general business situation in the City of Springfield be affected by the inability of public utililties to secure cap- ital for extensions and betterments? Of course, there is no question about that. We are all of us dependent upon the public utilities for much of the business we do. When we want an additional telephone or want a new telephone, whether it is in an office or a residence, we don’t want to wait until the company can get the money to build a new switchboard to. put in the additional or new telephone. We want it immediately. It is an impor- tant thing to have the service when you need it. The same way with the street cars. If the properties are al- lowed to depreciate because the money for upkeep is lacking, it affects seriously every part of the city, and its people. I don’t know that there is anything more that I care to say. Commissioner Lucey: You think, Mr. Holbrook, that 479 the public would be willing to pay for the cost of the service if it got the right kind of service? A. I think it would. I think, however, before it is willing to do that, it needs to have something that it feels that it can depend upon as being honest and authoritative in regard to the necessity. In other words, I think it needs the consideration of just such a commission as this to establish the fact, that the increase is needed. You spoke a few moments ago with Mr. Jones in re- gard to the increase in railroad rates. The government did operate the railroads for a period of time during the war. and it was well advertised that the rates were not sufficient to take care of the increased cost. People, whether they want to pay more rates or not, know that it is inevitable and must come, and they accept the in- formation that comes from the government and with the stamp of government authority on it. Now, then, in the State of Illinois, if that information is given out, whether it is the company in Springfield or whether it is the com- pany in Chicago, or wherever it is, that that company must have higher rates in order to take care of the ordi- nary requirements of the business it will carry with it authority and it seems to me that that is an answer on that. Chairman Wilkerson: Any further questions from this witness? Mr. Alschuler: No. Chairman Wilkerson : Call your next. 480 C. P. Summers, called as a witness on behalf of the utili- ties, having been first duly sworn, was examined in chief by Mr. Alschuler, and testified as follows : Q. Please state your name, your residence and your business, Mr. Summers? A. C. P. Summers, residence Springfield, Illinois; treasurer of the John Bressmer Company, a department store corporation in this city. Q. Mr. Summers, you are familiar with the scope of this hearing, are you not! A. Yes, sir in a general way. Q. Will you please state what you have to state con- cerning this matter from your standpoint as a business man! A. Well, there have been submitted to me three ques- tions which from their tenor I assume I am supposed to answer from the standpoint of the commercial interests as well as I can. The first question they have here is, — what is the situation with reference to a demand for pub- lic utility service such as extensions of electric, gas, rail- way and telephone service! Of course, there has always been a demand for extensions and betterments of the service of those utilities which I think it has in normal times taxed the companies to meet, and equally of course at this time, when the difficulties are enhanced by the possible war conditions, the demand is considerably greater than it normally would be; In every community with which I have had any experi- ence the development of the community has been very largely dependent upon the wholesome development of the utilities. It is true in this community that the very 481 bad housing conditions which exist here would be ma- terially improved if the utilities were available to a great many tracts of land fit for development that the utilities are not now available to. I have in mind particularly a large tract of land which lies in the north part of this city which is suffering badly for want of water, gas, street railway and electric facilities. I know owners of land in that tract who would be very glad to build at this time five or six room houses on it if those utilities could be made available in it. It is obvious that if the utilities were, — if there was ever any demand for extensions and betterments of utilities that that demand is now very great indeed. The second question is, would living conditions and the general business situation in your city be affected by the inability of public utilities to secure capital for exten- sions and betterments? The only answer is, of course, living conditions and business conditions would be very seriously handicapped if utility companies should not be provided with capital enough for extensions. The serv- ice furnished by the utility companies is essential to the welfare and the comfort and convenience of the people, and if any substantial number of the people are pre- vented from having those comforts and conveniences not only the welfare of the people but the general business conditions of any community would be pretty badly re- duced, pretty seriously handicapped. The third question is, do you believe that the matter of high class efficient service is paramount with the com- mercial interests of the state to that of rates? I don’t think there is any question in the world about that, and I think the general attitude of the commercial interests of the state and of every community in it is that there 482 has been very much too much harping about the rates which the utility companies charge. Personally, I have never had any patience with that thing at all, and I think the average, — I know in the average business, and I know that in every household the amount of money which is paid out for utility services is such a small proportion of the total amount of expense of operation .of a business or such a small proportion of the general household budget that it is very difficult to understand why all the clamor has been made about rates. I think if the Commission could bring to the attention of whoever it is that is objecting to the rates the right kind of a perspective and a strong sense of what a small amount of money they were actually paying for the very great benefits that are being given to them, that some of the people who are making, — who might make such a clamor about the rates would be rather mortified to realize that they had made such a noise about such a very little thing and I think that is the attitude of the commercial interests in general, that the rates charged is of second- ary importance, that what is wanted is continuous, high- class, efficient service, and I think the commercial inter- ests are well aware that at the present time it is requir- ing from two and a half to three times the amount of capital to operate any business, including the utility busi- ness, that it cost prior to the war and that it is necessary for utility companies to raise that capital from some source. So far as I know there are only three sources from which capital can be raised. One is invested capital, an- other is to borrow the capital and the third is from the sales or profits of the operation of the business. Of course, it is obvious that capital will not invest unless there is 483 assurance of a reasonable and fair return, and that money cannot be borrowed unless the borrower is reasonably as- sured of a fairly profitable operation. And I am quite of the opinion that the commercial interests of this state would be greatly relieved if the utility question could be entirely divorced from politics and the utility companies and the utility securities could be placed on a firm finan- cial footing. That is about all I want to say. Mr. Alschuler : That’s all I have. Chairman Wilkerson: Any further questions? Commissioner Lucey: That opinion that the public would be willing to pay the cost of the extensions and bet- terments if they received the service also applied in your opinion to the City of Spring'field? A. I am quite sure that with the necessity for the pay- ment being properly submitted to the people that they would be perfectly willing to pay for it, yes, sir. , Q. Have you j^aid any attention to that in the city here in the last few years? A. To what, general? Q. That situation. A. Yes, sir. Q. You know the City of Springfield is one of the cit- ies especially that has been stirring up the opposition to the utility corporations in general, and utility commis- sions in general, this one in particular? A. Are you speaking of the City of Springfield with respect to its populace or with respect to its government? Q. I don’t know. That is the only thing I know of the city, is by the result of, — A. I am of the opinion with respect to the local situa- 484 tion that some of the people of the community have been misled with respect to the utility company, that they have not understood at all its necessity for increased rates, that they have voted and talked on personalities and not at all on reason. Q. Your statement as you made it here was a rather interesting and lucid, clear exposition of the situation and about as my own judgment of the people of Spring- field indicated was the truth, but I was wondering if you had ever made that other than as you made it today in this room. A. Made what, sir ? . Q. The statement you made here. A. No, sir, I never made it. Q. DonT you think some responsibility rests on the business element of the city to see that the proper news is spread? A. A very great deal, sir. Chairman Wilkerson: To what extent have the busi- ness men interested in the maintenance of the service devoted their energies to seeing that the truth is known about these things and that error is contradicted? A. Little or none. Q. What do you think about the necessity for their giving some time to it? A. I think they could be of very material assistance to the public utility commission in educating the people of this and every other community in the state to the conditions as they exist. Commissioner Lucey: Not to the Commission, Mr. Summers, but to themselves? 485 A. Equally to themselves, yes, sir. Q. To the state at large, donT yon think! A. Undoubtedly, sir. Q. This is a pretty good town to start that in, donT you think so! A. Yes, sir. Q. And you are representing one of the big commer- cial interests in the city, probably one of the biggest re- tail merchants in centr^il Illinois ! A. I suspect that I didnT understand your inquiry when I said I hadnT said this thing before. Q. Yes, — A. I have said things similar to that many times, both publicly and privately, but I have been rather lonesome in my effort. Q. Much misunderstanding of the utility situation is due, in fact, I might say all of it, to misunderstanding of the facts ! A. Yes, sir; and in many instances to a wilful misun- derstanding by leaders, and the public utilities of this state and I think of every state in the Union have been viciously attacked and unfairly attacked by demagogues who have perpetuated themselves in office solely by in- flaming people wrongfully against utility companies, and they have created bad political situations in many cities in this state which ought to be corrected at this time. Q. Do you think if the public knew of the, — by the public I mean the public in general, the man who rides on the car and pays the nickel or who pays for his electric light or pays for gas or pays for water, the holdings of banks, of insurance companies and other of the larger 486 institutions in public utility securities, bonds and some- times stocks, of how much they were dependent for the safety of many investments like life insurance and other- wise, that they would have a clearer idea of what should be fair and just to these institutions? A. I am quite sure they would, provided that infor- mation were given to them in words of one syllable and were not given to them as a mass of statistics. It is very difficult for the average person to assimilate and under- stand figures running into the hundreds of millions of dol- lars, particularly where those figures are in large num- ber, — I mean where there are a great many large figures. But if the people can understand that banks and insur- ance companies, savings banks and that the modest in- vestors in general are largely interested in these securi- ties and that because of the fact that the rates have been beaten down and the costs have greatly increased those securities have shrunk in value, I am quite sure that the people would be quite willing to have that condition cor- rected. I am sure they would because it is right that it should be. Commissioner Lucey: That’s all. Mr. Alschuler: That’s all. C. B. Cheadle, called as a witness on behalf of the utili- ties, having been first duly sworn, was examined in chief by Mr. Alschuler, and testified as follows : Q. Please state your name and residence, Mr. Chea- dle? A. C. B. Cheadle, Joliet, Illinois. Q. What is your business, Mr. Cheadle? 487 A. I am secretary and treasurer of a number of inde- pendently owned telephone companies. Q. How long have you been connected with the inde- pendent telephone companies? A. I have been quite actively connected with them for at least 15 years. Q. Have you had submitted to you the question that was propounded to operators, — perhaps I had better read it into the record again. 1. Will you state the sit- uation of the companies which you represent here with regard to the normal growth of each one of the compa- nies? 2. The present demand for extensions and enlarge^ ments? 3. The ability to meet that demand? 4. The amount of new capital which the company would need to build the necessary extensions to its plant? 5. The ex- perience which you have had in attempting to secure new capital, — and make such other observations as you may care to in connection with the present discussion? A. I think instead of answering the questions ser- iatum I might answer them comprehensively by, — Q. By in a general way? A. I assume one reason why at least I have been asked to testify at this hearing is that I represent in a way a class of public utilities that are to some extent at least separate and distinct from other classes which have re- ceived a larger share of attention at this proceeding and preceding hearings than the particular class I represent. I assume that what the particular facts might be regard- ing the particular companies that I represent would be of little importance in this hearing but I do believe that if those companies are typical of a large number of other companies and the conditions affecting them are similar 488 in character to the conditions aiTecting a large number of other companies, then a discussion of the matters af- fecting the particular companies with which I am con- nected would be of interest to this Commission. Commissioner Lucey : What is the nature of the com- panies you are interested in, Mr. Cheadle! A. The companies that I am interested in are the smaller independently owned telephone companies. First, I think, just in a preliminary way it might be well to state into the record that those companies, the small com- panies, — by that I mean companies operating, we will say, up to three thousand stations, — comprise the great bulk of the telephone business of the United States, at least that portion of the telephone business designated as the independent telephone business, which as a class represents, I would say, at least one-half or more of the entire business of the country. Taking our own state as an illustration, there are five hundred or more of these independently owned prop- erties belonging to the class to which I refer operating in the aggregate a very large majority of all of the tele- phone stations throughout the state if we shall leave Chicago and Cook county out of consideration. It is of those interests that I would speak particularly in this hearing. Those companies have depended for their finan- cial existence upon the individual efforts of the men di- rectly connected and concerned with the companies rather than through any financial organizations engaged in the business of handling securities. Nearly all the companies that have been represented directly in these hearings have been those of such financial magnitude and sur- rounded with such conditions as have enabled them to obtain funds in the past and presumably in the present or 489 future through recognized tinancial agencies. That is not true of the companies that I refer to, that I represent. I have organized, — I have at least been one of the prime factors in the financing of these five or six hundred tele- phone properties in Illinois, companies representing at least a million and a half of capital invested. In no sin- gle instance has any portion of that capital been realized through large financial organizations, but it has come directly from the people, so that I think I may say without misstatement that ' these properties are essentially the properties of the people, of the communities in which the businesses are established. They have been organized and their organization has been made possible through the standing and the personal influence of the men who have organized the companies and have stood back of them in their management and direction. I believe these companies are the very sinew and bone of the utility businesses of this state. They have secured their capital, they have established their businesses and they have operated them more economically and more efficiently and to a larger tneasure in the interest, — directly in the interest, — of the public than any other class of public util- ity businesses. Even Mr. Vail, who has so recently died, and Mr. Kingsbury, another splendid type of utility man who has also recently passed beyond, told me personally repeatedly that the smaller independently owned tele- phone properties know the needs and can supply those needs in the local communities, the smaller cities and towns and the rural districts more efficiently, more eco- nomically and more satisfactorily than the Bell Company can do. I have stated that the ability of the companies to which I refer to secure the funds with which to acquire, extend. 49Q enlarge and develop their several businesses has been due to the standing of the individuals connected with them. The ability of those men to secure the funds has also been controlled and is controlled, of course, by the market value of money as a commodity. Their ability to secure the funds at all has been due to the standing, or moral backing at least, of these men. Without that they could not have obtained the funds at all. In securing the funds I wish to make it clear that moral backing has not enabled them to get the money on better terms than those more favorably situated companies who could deal through large financial organizations such as the Mississippi Val- ley Trust Company whose representative has testified so interestingly here today. These companies have felt possibly more acutely the restrictions and limitations placed upon their development during the years since the war began than those larger companies whose capital has run into the millions. The demands of the rural sections and of the smaller cities and towns and villages has been proportionately greater, the demand for development, than I believe has been true in the larger centers. In my own companies at least we have been and are at this moment confronted with large demands. My work has been largely that of reorganization. A number of years ago I conceived the idea that the second- ary stage in the devolpment of the telephone business would be one of reorganization, of betterment, of sub- stitution of the better for the less efficient equipment that was originally installed. So I have been engaged with my associates in acquiring run down, poorly developed, poor- ly managed and poorly operated telephone properties with the view of their enlargement, the extension of their facilities, the betterment of their service and the develop- ment of their business along commercial lines. 491 We have, I believe, well constructed properties, gen- erally speaking. I have found this to be true, that even before the coming into existence of this Commission wherever we took over and acquired a poorly operated property and installed efficient service and injected into it efficient management with consequent efficient service, that the question of rates was a very secondary one. We largely increased our rates without any serious opposi- tion, even before the days of the utilities commission. Since the coming into existence of this Commission we have found the same conditions, and I emphasize the fact that in my .opinion any company that will adequately and efficiently serve need have little concern as to the public attitude toward that company as to any charges or exorbitant rates or anything of that sort. What the public wants is service and they are willing to pay any- thing that is fair and right. I have had city officials and representatives of busi- ness organizations appear and testify before this Com- mission in application for rate increases. I have one case in mind particularly where that was true. As to the ability of the class of companies to which I refer to obtain funds I wish to say that since the first of this year the companies that I represent have secured in round numbers $100,000 for the purpose of extensions, enlargements and development of their properties. It has cost us from ten to twelve per cent to obtain those funds. The properties I represent will need, — should have this year, urgently demand for this year, twice that much more. We expect it will cost us anywhere from eight to twelve per cent to obtain that money. We expect to have serious difficulty in obtaining it at those figures. We could use a great deal more than that and 492 use it to advantage and to the interest of the public, but our policy has been and will be until conditions radically change to get along with just as little as we can consist- ently with the maintenance and operation of our prop- erty and the serving of the public adequately and effi- ciently. Commissioner Dempcy: Just what do you mean by independently owned telephone companies 1 I gather gen- erally what it is but I want it more specific than that. A. There are two great systems of telephones in the United States, the so-called Bell system consisting of thirty-five or forty or more companies owned or con- trolled directly or indirectly by the American Telephone & Telegraph Company constituting one system, popular- ly known as the Bell Telephone System, and the other which I have designated as the independently owned properties consisting of that large number of generally small organizations in which the Bell Company or its subsidiaries own no interest or a minor interest, and the ownership of which is lodged in a large majority of cases among the citizens of the communities which the com- panies serve respectively. I suppose in the state of Illinois there are fifty thou- sand investors residing in Illinois who have an interest in the so-called independently owned telephone properties to which I refer. Commissioner Lucey: What is your basis for that estimate, Mr. Cheadle ? A. Figures that have been compiled by the Illinois Independent Telephone Association. We at various times have undertaken to ascertain the number of in- vestors and our best information is that that estimate is not very far wrong. 493 Mr. Alschuler: Mr. Cheadle, let me ask you a ques- tion. When you say that you have raised a hundred thousand dollars for the companies that you have been connected with, has that been raised entirely on the credit of those companies 1? A. Yes, I would say that is true with the moral back- ing of the men connected with them. Q. It has been largely raised, hasn’t it, right in the communities where the companies are located? A. In the communities in which those particular com- panies were located or in other communities in which the men identified with those companies have also telephone interests. To be specific, I am interested with Mr. Ster- rett, with whom I am associated, and other men in prob- ably twenty or twenty-five different separate communi- ties. We have secured these funds from those twenty or twenty-five communities although the funds themselves perhaps have been invested in three or four of those communities. As a matter of information and as showing what the conditions are confronting our particular group of com- panies I will just say this, that I have made a compilation of the revenues of those companies for the year 1919, and I find that the net return upon the values of the prop- erties as fixed by this Commission for rate making pur- poses, or in cases where such values have not been fixed, then by a fair estimate of what would be such a rate mak- ing base, that the net return during the past year was almost exactly 3%, after allowing approximately the amount of depreciation that the Commission has set up and indicated should be set up in the various cases. I would modify that by saying after setting up approxi- mately 75% of the amount of the depreciation that the 494 Commission in its various findings has indicated should be set up as a reasonable amount for depreciation pur- poses. I might add to that, that on the basis of what we may term the present unrealized expense that has ac- crued during the year 1919 and up to the present time of 1920, while I have not made an accurate estimate, my best information, and belief, is that on the basis of the rates under which the revenues for 1919 were realized that we would not break even in the matter of expense, taking into account the advanced cost of labor and ma- terials that has occurred and which I have designated as unrealized expense. I want it understood that what I have said I have attempted to say not with regard to my own companies so much as giving consideration to conditions which I believe are general and as affecting all companies in the class to which I have referred. I believe that this Com- mission has done a great deal in the matter of stabiliz- ing investments in this particular class of companies. I believe it is capable of doing a great deal more in that direction. I believe that it should give particular atten- tion, and I believe the companies themselves should give much more attention to the matter of public education as to the facts about the business than has heretofore been done. I believe this series of hearings is of great profit. I believe that similar opportunities for public investiga- tion should be utilized in the future. I believe the find- ings of this Commission should be given wider publicity. I believe the facts developed in these hearings should be given much currency, to the end that the people may be informed. I was an admirer of Theodore Roosevelt. His policy was publicity, and I believe that is largely the solution 495 of the misunderstanding, the misapprehension and the misjudgment on the part of the public in the operation and the administration of the utilities law by this Com- mission. Mr. Alschuler : Mr. Cheadle, I just want to ask you one question. Will you please name the principal towns in which the companies that you are interested in operate? A. Dixon, Illinois; Abingdon, Illinois; Henry, Illi- nois; Chillicothe, Washington, Clinton and a group of exchanges adjacent thereto, Sullivan, Illinois; Carlin- ville, Virden, Girard, Gillespie. Those are perhaps the most important. Mr. Alschuler: That’s all. Chairman Wilkerson: Any further questions of Mr. Cheadle? That is all, Mr. Cheadle. Have you any other witnesses? Mr. Alschuler: There are some other gentlemen here who wish to be heard. Chairman Wilkerson : Very well, we will take a recess of just five minutes. (Informal recess continuing as follows:) Chairman Wilkerson : The hearing may be resumed. W. H. Colean, called as a witness on behalf of the utili- ties, having been first duly sworn, was examined in chief by Mr. Alschuler, and testified as follows: Q. Mr. Colean, will you give the Eeporter your name and your residence and business? A. W. H. Colean, Peoria, Illinois.. Q. What is your business, Mr. Colean? 496 A. My business, investment security business. Q. Have you ever had any connection, Mr. Colean, with any civic organization in Peoria? A. Yes, sir, the Peoria Association of Commerce; I was president of it in 1917. Q. And what is the Peoria Association of Commerce ? A. It is an association of business and professional men with 1,400 or 1,500 members. Q. And has that association taken any action what- ever regarding public utilities? A. Yes, sir, they have repeatedly. They did in 1918 and I think they passed a resolution at that time re- questing the Utility Commission to grant an increase in fare for the street railway of Peoria, and again last week the matter of street car fares came up, the increased fares for public service corporations was brought up be- fore the board of directors and a resolution was passed at that time. Q. A resolution to the effect, — or have you that reso- lution? A. I have a copy of the resolution here and I would be glad to read it. This resolution was passed on the 13th of May, 1920. The resolution without the pream- ble reads as follows : Whereas, it is the earnest desire of the business interests of this City, as represented by the Asso- ciation of Commerce, that the public utilities should receive for their service in Peoria and vicinity, rates which mil provide sufficient revenues to meet oper- ating charges, including an adequate wage scale for its employes, and thereafter a fair return upon the value of its property, said value to be decided by the utility commission, so as to enable them to obtain ad- ditional capital necessary to extend the facilities to 497 meet the demands of the community for additional and efficient service. Therefore be it resolved, that without committing ourselves as to the reasonableness of the rates pro- posed, that if after a full investigation it shall be found that the representations of the public service corporations are correct, it is the recommendation of Peoria Association of Commerce that the Illinois Public Utilities Commission authorize a schedule of rates sufficient to meet the above conditions. Be it further resolved, that this association is opposed to any increase in such rates unless such investigation discloses that an increase is fair and equitable according to the terms and spirit of this resolution.’’ That resolution was brought about primarily by the fact that Peoria at that time was in the midst of a strike of the employes of the street railway company. The operating men went out on a strike on the morning of the 13th and since that time we have not had a street car in operation in the City of Peoria. Q. The 13th of this month? A. The 13th of this month. Consequently, from the effect of the strike both business and labor is suffering terribly in Peoria at this time. The Association of Com- merce in Peoria have every confidence in the world in the Illinois Utilities Commission and we felt that this matter should be passed on by the Commission. We, however, feel, and it was brought out in the investigation made by a committee of the association of which I was a mem- ber, that the street car company in Peoria is absolutely unable to grant any further increase in wages to their men without a corresponding increase in fare to the com- pany. The figures submitted to us by the company indi- cated, while we had no way of proving the reliability of the figures, that the company’s books now show a deficit 498 of something like $145,000. During the period of time from May 1st, 1918, to May 1st, this year, the company lost in operating in their lines in the city something over $13,000 regardless of the fact that your Commis- sion granted them an increase of 20 per cent, last year. The public there feel that the public service corpora- tion should be allowed to charge a sufficient rate to enable them to meet the requirements of labor and also to earn for themselves a reasonable income upon the capital in- invested in the business, and the Association of Com- merce have taken that stand as is indicated by the resolu- tion which I have just read, and that resolution was drafted and was voted on by the directors and also will be the policy of that association from now on. That is the position the Association takes in regard to all public service corporations in the City of Peoria. Commissioner Lucey: Is your strike still on I A. The strike is still on and we don’t know when it will be over. There is no indication at the present time of the company and the men getting together on the situation. The company has made several different propositions to the men in the way of increase of wage. Their proposition, however, has always had a string to it in the way of any increase in wage granted would depend entirely upon the action of the Utilities Commis- sion in granting the railway company an increased fare that would enable them to pay this increased wage. The men are not willing to accept that. They are not willing to wait for the Commission to pass upon the merits of the case, and they demand an increase of about 85 per cent over their present wage scale which, of course, the company is absolutely unable to pay, and the public are not willing that they should, but the public are willing that the employes should receive a living wage. 499 Q. What are they getting now, Mr. Colean! A. My recollection is that they are getting now, one year men I think 41 cents, two and three year men 43 cents, and the men that have been in the service longer, 46 cents. Q. What are they asking! A. They are demanding now a flat increase of 85 per cent. Q. Has the company made them any offer! A. Well, I am not in a position to answer that. I think the company has intimated to them that they would pay them 57^ cents, hut it was not a clean cut otfer. The offer of the company was dependent entirely upon se- curing a further increase in fare. Q. They couldn’t have this Commission grant them any rate on fares in order to pay wages. They have to come down here after they get through with their contracts. A. That is the position that the company took and also the position of the committee from the Association took in trying to bring the two parties together in an ad- justment of this controversy. We tried to get them to continue operations and present their case to the Com- mission after deciding upon a wage scale by arbitration, but the men were not willing to accept that situation and would not do it and ordered a strike. The utilities in Peoria, — the street railway company has made no money, one of the telephone companies has been in the hands of a receiver. The receiver has been recently discharged which would indicate that the public utilities in our city at least were not making the money that they should make. 500 Q. Do they work on the eight-hour day up there? A. Nine, I think. Chairman Wilkerson : Somebody handed me an article from a newspaper that appears to he published in Peoria dealing with this strike situation in which I find the fol- lowing : ^ ‘ The public utility commission may have served some useful purpose, but thus far it is not apparent to the people of Peoria. It has usually operated to stand between public service corporations and the people.’’ Do you think that fairly represents the sentiment of the peo- ple of Peoria ? A. No, sir, I do not. I think in the matter of the Public utility Commission in Peoria you would find upon investigation that the business people of Peoria would stand squarely behind the rulings of this Com- mission. Q. Wlio do you think is responsible for the publication of stuff of that kind? A. I am very sorry to say that I am unable to an- swer. It was a very unfair publication. It does not reflect the sentiment of the citizens of Peoria, particu- larly those that I have been brought in close touch with and that is the business men of the city. Q. I don’t know what paper it is. A. May I look at it just a minute? (Looking at clip- ping.) I couldn’t testify positively, but I think it was printed in the Peoria Star, the administration paper of the city. Q. Nobody is quoted there ; it is just merely an expres- sion editorially, I presume. A. I think there is this about the Utility Commission, as has been testified to by one or two here today. I be- 501 lieve that you gentlemen can, if you will have a hearing say on the controversy that is at Peoria right now and have the hearings in Peoria where you could reach the public that it would go a long ways toward educating the public and give them a better understanding of the sit- uation. There is not enough publicity in the findings of this Commission or your method of procedure. The average man is absolutely ignorant as to what is done. Q. Well, of course, we are circumscribed a little in that respect by the provisions of the act creating the Commission. The statute prescribes the manner and method of our hearings and our findings are subject to judicial review. It is not, therefore, always possible to deal with the concrete situation without gloves as it should be dealt with. You have at least to preserve the formalities of judicial proceeding. A. I understand that, but I think such associations as w*e have in Peoria, for instance, have a great infill ence on the public mind. Our association passed this resolu- tion and it was immediately given to the press and the public know just where the association stands and the resolution speaks for itself. I think it shows confidence in this Commission. The last paragraph there of the resolution was, I am sorry to say, insisted upon by a hair-splitting attorney who happened to be a director of the association, but the resolution proper voices the sentiment of the business interests of Peoria and I think the general public, and I can say that in regard to the in- creased fare that was granted by this Commission last year to the street railway company, I never heard any criticism of the Commission whatever. Commissioner Lucey: It is six cents up there now? A. Six cents. In fact, our association recommended 502 that increase and gave that publicity the same as we have this resolution here. Chairman Wilkerson : Do you think it would be help fill when the time comes for a hearing in that mattei to have the hearing in Peoria if possible? A. I think so, just simply for the information of the public. I didn’t know myself the condition of the street car company till I was mixed up in the matter by serv- ing on that committee. Q. Of course, it is fair to say we have always ap- preciated the desirability of having hearings whenever possible in the community which is concerned in the out- come of the litigation, but in that we are also limited by time at our disposal and by the number of cases on the • docket, and particularly in the last year by the tremen- dous volume of work which has made that almost pro- hibitive except in exceptional cases. A. I understand that, but still these utilities are up against a hard proposition. The utilities all over this country have been the political footballs and will con- tinue to be political footballs if we get back to the old home rule proposition. The organization of the public utilities commission is one of the best things that the State of Illinois ever did. Q. I have no doubt that the Commission would be very glad to give the situation in Peoria when the time comes most careful consideration. A. I wish it could be done. It would enlighten the public there more than anything that could be done. The average man will not read the findings of this Commis- sion or any other commission if they are not really in- terested in the matter that is under controversy. 503 Commissioner Lucey : We didn’t know anything about that strike, not that it made any difference to us, but we didn’t know the facts as to the strike. Chairman Wilkerson: There has been no application made to the Commission yet touching on the situation. A. The railways company has notified the mayor and the city council that they intend to make application to the Commission for an increase in rates and that will come before you before very long undoubtedly because it is very doubtful whether the situation can be cleared up there until such a time as there is a hearing in that con- troversy. The men claim that they will not go to work and are picketing the carbarns. The public is walking while the strike is going on and business is suffering as well as labor. Chairman Wilkerson: Any further questions? Mr. Alschuler : That is all I have. Chairman Wilkerson : Call your next witness. F. A. Tissier, called as a witness on behalf of the utili- ties, having been first duly sworu, was examined in chief by Mr. Alschuler, and testified as follows: Q. Will you give your name to the Reporter, Mr. Tissier? A. F. A. Tissier. Q. What is your residence, Mr. Tissier? A. East St. Louis. Q. And your business or occupation? A. Secretary of the retail merchants’ association. Q. Of what, — j 504 A. Of Illinois and the local secretary at East St. Louis. Q. Mr. Tissier, you are familiar to a greater or less extent with the purpose of this hearing before the Com- mission and what its nature is, are you not? A. Yes, sir. Q. Will you make such statement as you care to make to the Commission concerning this particular hearing and anything you may care to state concerning its local ap- plication to East St. Louis? A. East St. Louis with its present facilities, — street cars, has got to the point where it is absolutely necessary that some relief be given in the matter of increased serv- ice. We have a city that is stretched out in three di- rections, easterly, southeasterly and northerly. We real- ize the necessity and have realized it for some time of having a cross town car line put through there. We have through our organizations taken the question up with the street car officials, and they have always come back with the plea that they are not financially able to make the needed improvements. A short time ago we had a new organization that sprung up to do some city planning among other things. The report is just about completed and I understand Mr. Bartholomew, the St. Louis engineer, has made quite extensive plans for improving the street car system re- lieving the congestion. On the point of congestion I might say that practically all the, — ^in fact all the car lines must go down one street to reach the City of St. Louis, their terminus, and in the planning that he has done, which is very extensive, he makes provisions for relief on certain line^ to come down on certain streets, and 505 we ask the Commission to carefully consider these things and particularly the cross town car line. Now, we have in the northern end of the city people residing there having their own little homes and also in the extreme eastern end. They are compelled to come all the way downtown at a transfer point and go probably half the distance out towards their home in another direc- tion to reach their place of employment. We believe and we know with a cross-town car line in there that it is possible to get people to work in perhaps half or less time. In some instances it is taking from thirty to forty- five minutes, where the time could be cut down almost half, and as far as the rates are concerned, the business men of East St. Louis are particularly interested in serv- ice, and we believe in the judgment of this Commission, that they are capable of determining what should be a fair rate. We believe after you make a thorough survey of all the properties that you will arrive at a fair valua- tion and we will be well satisfied with whatever rates you place. That is all. Q. Have you anything to say, Mr. Tissier, or has your attention ever been called to the situation with respect to other utilities in East St. Louis as to their needs? A. The water companies and others, you mean? Q. Gas and telephone and electric. A. No ; they have not been called to my attention as strongly as the street car situation. Mr. Alschuler : I think that is all I care to ask. Chairman Wilkerson : Any further questions from this witness? If not, you may call your next witness. 506 A. T. Spivey, called as a witness on behalf of the utilities, having been first duly sworn, was examined in chief by Mr. Alschuler, and testified as follows: Q. Will you state your name for the record, Mr. Spivey ? A. A. T. Spivey. Q. And what is your residence and business, Mr. Spivey ? A. East St. Louis, Illinois. Q. What is your business? A. Publisher. Q. Newspaper publisher? A. Yes, sir. Q. Do you hold any official position in any organiza- tion of newspaper men ? A. I am president of the Illinois Editorial Associ- ation. Q. You are familiar, are you not, Mr. Spivey, in a general way with the scope of this hearing? A. Yes, sir. Q. You also, I take it, are familiar with the situation regarding utilities in your home city? A. Yes, sir. Q. Have you any opinions that you care to express generally or with respect to the application of the situa- tion in East St. Louis, regarding all or any of the utili- ties? A. Well, I don’t know that I have any suggestions to make except as relates to the street car service there. 507 Q. The street car service, I take it, is A. I think the water company and the telephone com- pany have recently gotten some relief from the Commis- sion, but the street car company is operating now under a temporar}^ increased fare. Q. What is the present fare there? ' A. Six cents. Q. And when was it granted, do you remember? A. I think about 1918 sometime, two years ago. Q. Do you know what the present population of East St. Louis is? A. No, I do not, except I have had an intimation from the census enumerator it is about 68,000. Q. Does that show an increase? A. Yes. Q. Of how much? A. Well, about 10,000. That does not include the im- mediate neighborhoods which are supplied by the street car company, perhaps a total of about 75,000, taking in the immediate suburbs. Q. Well, generally, what is the situation there at East St. Louis regarding the service and the necessity for extensions or improvements and so forth? A. Well, the street car service in East St. Louis is not sufficient. Mr. Tissier has told you something about the survey of Mr. Bartholomew which was made, I think, at the suggestion of one of the civic organizations in which he recommends a cross-town line. The four street car lines in East St. Louis run from the various portions of the .city, from various directions, all run to the Eads Bridge, perhaps better described as running into the neck 508 of the bottle. The principal industries of the city lie out away from the bridge. In order to get from one part of the. city to the other they must come down town and transfer from the particular transfer center and go back out. The survey shows the need of this cross-town line. As publisher of a newspaper there I have been insisting upon this being done. The street car company insist that they can’t make an improvement of that kind without additional revenue. They tell me that they can’t bor- row the money for an improvement of that kind. They can only borrow in what they call short loans and can’t make improvements with that kind of money. The city is making some extensive improvements in the way of paving streets and re-surfacing, which necessitate the street car company rebuilding their trackage. Some of these improvements can’t be carried out for the reason that the street car company contends they have no money to make these improvements. Those are the two prin- cipal handicaps in the street car service. The equipment they have is in fairly good condition but they don’t have enough cars for the busy hours in the mornings and even- ings. Q. Is there any considerable construction or growth in the factories in East St. Louis? A. The secretary of the chamber of commerce told me a f^w days ago that there were enough new factories and additions to old factories to employ about 6,000 men now under construction to be completed some time this summer. Q. This, of course, would require additional public utility facilities, would it not? A. Yes, sir, and require additional labor and more people to move into the community. 509 Q. Let me ask you with respect to the attitude of the people of East St. Louis, that is, as you judge it. In your opinion are they more deeply concerned with service or with rates? A. I think service. Of course, there are people in our community opposed to any increase in street car fares. They would be opposed to it under any circumstances, but as a general proposition I think the people in our community would be perfectly agreeable to any rate of fare sufficient to make these extensions and allow the company a fair return on the reasonable valuation of their property. I think one thing perhaps that has hindered an agreement upon rates has been the fact that they have not been able to agree upon a fair valuation of the property. The Utilities Commission, I think, at one time made a valuation and the company made one, but as far as I know they have not been able to agree and fix a valuation on the property. Chairman Wilkerson: There is a case now on hearing. A. I think so. That is what I understand. Mr. Alschuler: Is there anything further you care to state, Mr. Spivey? A. No. I think if they could agree upon that propo sition that the people there generally speaking would gladly approve any rates sufficient to permit the com- pany to make these improvements and pay a reasonable margin of profit on their investment. Mr. Alschuler : That is all I have to ask. Chairman Wilkerson: Any further questions to be put to Mr. Spively? You may call your next witness, Mr. Alschuler. 510 Charles A. Noble, called as a Avitiiess on behalf of the utilities, having been ,tirst duly sworn, was examined in chief by Mr. Alschuler, and testified as follows : Q. Will you give the reporter your name, your resi- dence and your business or occupation? A. Charles A. Noble, Joliet, real estate dealer and broker; also a holder of a county office, county auditor, at the present time. Q. Do you hold any official position with any asso- ciation ? A. I am president of the Joliet Real Estate Board, have been president since its organization. Q. Mr. Noble, you are familiar, are you not, with the nature of this hearing; you have been in this room all day? A. Been here all day and been very much interested in this discussion, yes, sir. Q. Will you state, Mr. Noble, what your views are concerning the questions under discussion? A. It seems to me that the most urgent need of the hour is a publicity department to acquaint the people with the real truth of the situation. I believe that the public generally are disposed to be fair toward public utilities but they have not the correct information. I might add also that promulgating the real truth in this matter is the most difficult form of advertising. You will note, of course, that an unfavorable report about a utility does not need or require any expense to circulate throughout the community, while it is extremely difficult to circulate the truth which people don’t want to hear. I don’t know 511 just how you can hande that proposition. I have heard some suggestions here today about the business men taking hold of this subject. My observation of men in commercial business is that they are somewhat reluctant about taking sides in a disputed controversy on public questions. In other words, there is more or less cowardice. I think you have had some witnesses here today who have shown their pubic-spiritedness by coming to the fornt and stating to you just how they felt on tnis public question. I don’t know whether it is a common occur- rence with this Commission or not. I trust that it is. Commissioner Lucey: It is the exception. A. I have been engaged in the buying and selling of real estate in our city forty years and upwards, have seen our city grow from eight or ten thousand to sixty thousand, together with its immediate suburbs and I have had some occasion to observe and know the reasons for this growth and success, and I attribute a very con- siderable part of the success of our community to its public utilities, and I think it is extremely important that our public utilities be permitted to live and to serve the people in the best possible manner, and I think that when the public understand what the situation is that they will be willing to support our public utilities more cheerfully than they have on all occasions. Mr. Alschuler: Well, you believe, then, Mr. Noble, I take it, that there is some real need for relief to be af- forded to utility companies! A. Now, I am not posted as an expert on the tech- nical questions involved in this hearing. I take it that this board has very complete data and information on all of the questions involved, and personally I have great confidence that they will exercise good judgment together 512 with a certain amount of courtesy and do their duty to the public as well as to the public utilities. Q. You do appreciate, do you not, that the prime necessity of rendering adequate service is a fair and adequate income! A. Oh, certainly, yes, sir. Q. Is it your observ^ation that there would be any serious complaint on the part of the public provided proper service were rendered to the payment of a fair rate either of street car fare or gas rates or telephone rates or electric light rates! A. Oh, I think as relates to all public utilities that the people would rather pay an increased price for real good service than to pay a low price for inferior service, if the proposition was put to them just that way. We had a case recently where an interurban railway extending from Joliet to Chicago Heights, a distance of about 25 miles, suspended operations. Their employes demanded more wages and the management simply said, we can’t do it, the income will not warrant it, and they quit. Mr. Alschuler: Have you anything further that you care to say, Mr. ISfoble! A. I think that covers about everything. Commissioner Lucey: What street car fare are you paying in Joliet! A. We are paying ten cents. Chairman Wilkerson: It is the highest in the state, isn’t it! A. I don’t know as to that, no, sir. Q. I think it is. A. I guess they are not asking any more, are they! 513 Q. I think not. Mr. Cheadle : Mr. Noble, may I ask you a question? A. Certainly. Q. In your long experience in the real estate business, what would you say as to the effect upon real estate values of the extension of utility facilities into newly developed territory? A. Oh, it enhances the value very materially. Of course, among real estate men we are glad to call atten- tion to the fact that property in residence districts and homes we have for sale have the advantages of the public utilities, transportation, electric light and gas and all of those things. It is a very important factor and it does enhance the value very materially of property. Mr. Blackball : Have you heard much complaint about the street car fare in Joliet, or have you noticed any material decrease in traffic on account of the increased fare? A. I heard some complaint when you increased your fare from five cents to seven cents, but when you in- creased it from seven cents to ten cents I didn’t hear so much murmuring about it. I think perhaps there is a little decrease in traffic from my observation at the time you made your first increase, and I would say now that from my observation the traffic is increasing again, the patronage of the car line. Now, I don’t know whether that is a fact or not. That would be simply an observa- tion. Mr. Alschuler : I have no further witnesses, but I have a certified copy of a resolution I would like to present to the Commission for this record. Chairman Wilkerson : What is it? 514 Mr. Alschuler : It is a resolution of the chamber of commerce of the City of Aurora, certified to by the sec- retary and passed on May 12th. If the Commission cares to have me read it now Chairman Wilkerson: You may state the substance of it. Mr. Alschuler: After the preamble, I presume I can best state the substance of it by reading it. Chairman Wilkerson: Very well. Mr. Alschuler: (reading) ‘‘Resolved, that it is the sense of this organiza- tion that the welfare and continued growth of the City of Aurora is very largely dependent upon the successful operation and continued enlargement and growth of the utility companies which serve this city, and it is further the opinion of this organization that service as rendered by such utilities at a fair rate is of prime importance to the people of this city ; and be it further “Resolved, that the Public Utilities Commission of Illinois be advised that it is the desire of this organization that the public utilities operating in the City of Aurora be permitted to earn a fair and adequate rate of return on their respective invest- ments by the establishment of fair and adequate rates for the services and commodities furnished by them, so that they may be enabled to properly meet the increased costs of labor and rhaterials employed and used by them and to properly finance themselves so that as a natural consequence thereof they will be enabled to properly and adequately serve the public and provide improvements and extensions to their plants and facilities to meet the demands made upon them ; and be it further Resolved, that a copy of these resolutions, duly certified, be forwarded to the secretary of the Com- mission at Springfield.’^ 515 That is all, may it please the Commission, we have to offer. Chairman Wilkerson : Is there anyone else who desires to be heard on the questions which the Commission now has under consideration! The order appointing a date for these hearings recited that interested utilities, civic associations and municipalities would be accorded the opportunity of presenting evidence and suggestions to the Commission. If there is anyone else who desires to submit any facts for the consideration of the Commis- sion or to submit any suggestions, the Commission will now be pleased to receive them. Mr. Alschuler: I would like to state into the record that the chamber of commerce of Aurora comprises about eleven hundred people, approximately. Mr. Berry: Mr. Chairman. Chairman Wilkerson: Senator Berry. Mr. Berry : I would hate to see these two meetings in this city before the Commission adjourn without all of the utilities, and I think I speak for all of them in this matter, voicing their appreciation of the action of the Commission in giving us an opportunity to be heard. It was initiated by your board and I think we all feel that it has very materially assisted in causing us to gather to- gether and assimilate a great deal of this information that has been brought out by this hearing, and I wish to speak for the interests present^ — I assume that so far as the car lines are concerned, I see they all nod — and we appreciate very much this opportunity given the utilities of the state to present the views of their experts and of their people to the Commission and we thank you for this opportunity to do so. 516 Chairman Wilkerson: Before closing the record in this case, I desire on behalf of the Commission to express our appreciation of the work of those who have collected and analyzed the information which has been submitted. The questions under consideration have been general ones as to which we are supposed as a matter of law to know many of the facts, but I can assure you that the careful work which has been done in collecting and analyzing the facts will tend to lighten the labors of the Commission when it comes to deternime the concrete questions which arise from time to time. A great deal has been said during the progress of this hearing relative to alleged popular disapproval of utili- ties and of any acts which have to do with the increase of rates. This Commission has had occasion in a number of cases to point out that after all the question w^hich is really involved is one of the confiscation of property. It is a question which wiU have to be squarely made and will have to be squarely met in this State, and I venture the assertion that when that question is, as it will have to be, submitted to the acid test of popular approval that repudiation and confiscation will today receive as little favor at the hands of the people of this State as they have in the past. Let the record show that the hearing is closed as far as Springfield is concerned. Adjourned. r I V. 1 ' ( ItirJ